Tesco, Tesco House, Delamare Road, Cheshunt, Hertfordshire: Tesco PLC Annual Report and Financial Statements 2000

TESCO PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2000
CONTENTS
1 2 7 9 12
Financial highlights Operating and nancial review Directors report Corporate governance Report of the Directors on Remuneration Statement of Directors responsibilities Auditors report
17
Accelerating growth through our customer focused strategy

18 19
Group prot and loss account Statement of total recognised gains and losses Reconciliation of movements in shareholders funds
Strong UK core business continues to grow Non-food growing market share Following the customer providing new products and services such as e-commerce and Tesco Personal Finance International business achieving real scale
20 21 22 24 40
Balance sheets Group cash ow statement Accounting policies Notes to the nancial statements Five year record
This publication includes the operating and financial review, the Directors report, the corporate governance statement, the accounts and the auditors report for the 52 weeks ended 26 February 2000. The Chairmans statement and review of the business are contained in a separate statement entitled Annual Review and Summary Financial Statement 2000. These Annual Accounts together with the Annual Review and Summary Financial Statement 2000 comprise the full Annual Report and Accounts of Tesco PLC for 2000, in accordance with the Companies Act 1985. Copies may be obtained, free of charge, by writing to the Company Secretary, Tesco House, Delamare Road, Cheshunt, Hertfordshire EN8 9SL. Telephone 01992 632222.
TESCO PLC 1
GROUP SALES
17,447*
18,546
20,358
2000
m *52 weeks pro forma
nancial highlights
Group sales Group prot before tax Earnings per share Dividend per share up 9.8% up 8.4% up 8.6% up 8.7%
1996
13,028
1997
14,984
1998
1999
GROUP PROFIT BEFORE TAX

m
955
2000
681
750
817*
881
*52 weeks pro forma
(before integration costs, goodwill amortisation and net loss on disposal of xed assets) 1996 1997 1998 1999
EARNINGS PER SHARE
Group operating prot

(prior to integration costs and goodwill amortisation) (m)
1,043 955 13,591 10.18 4.48 845 24,039
965 881 13,528 9.37 4.12 821 21,353
895 817
(adjusted diluted)
Prot on ordinary activities before tax (m) Group enterprise value

(market capitalisation plus net debt) (m)
12,556 8.70 3.87 781 18,254
1996
7.30
Group sales (including value added tax) (m)
20,358
18,546
17,447
1997
7.83
1998
8.70*
1999
9.37
2000 52 weeks
1999 52 weeks
1998* 52 weeks (pro forma)
10.18
2000
Pence *52 weeks pro forma
Adjusted diluted earnings per share (p) Dividend per share Number of stores Retail selling area (000 sq ft)
(p)
OPERATING CASH FLOW AND CAPITAL EXPENDITURE
* 1998 was a 53 week year. For comparison purposes a pro forma 52 week prot and loss account has been used.
1,046
1,156
Adjusted diluted.
1,219
1,321
Excluding net loss on disposal of xed assets, net loss on disposal of discontinued operations, integration costs and goodwill amortisation.
1,513
1,488 2000
758
1,067
operating cash ow capital expenditure
666
1996
1997
1998
841
1999
TESCO PLC 2
operating and nancial review

Group summary
Group sales (including value added tax) Group operating prot (prior to integration costs and goodwill amortisation) Prot on ordinary activities before tax Adjusted diluted earnings per share Dividend per share
Excluding net loss on disposal of xed assets, integration costs and goodwill amortisation 2000 m 1999 m Change %
20,358
18,546
9.8
1,043 955 10.18p 4.48p
965 881 9.37p 4.12p
8.1 8.4 8.6 8.7
This operating and nancial review analyses the performance of Tesco in the nancial year ended 26 February 2000. It also explains certain other aspects of the Groups results and operations including taxation and treasury management.
Group performance
GROUP PERFORMANCE m
Group sales including VAT increased by 9.8% to 20,358m

20,358
17,447*
18,546
(1999 18,546m). Group prot before tax rose by 10.8% to 933m. Excluding the net loss on disposal of xed assets, goodwill amortisation and integration costs, Group prot before tax increased 8.4% to 955m. Group capital expenditure was 1,488m (1999 1,067m) with 989m in the UK, including 579m on new stores and 182m on extensions and rets. Total international capital expenditure was
*52 weeks pro forma
13,028
14,984
15,799*
12,430
14,024
Group sales UK retail sales
17,070
18,331
499m including 186m in Asia. In the year ahead we see Group capital expenditure increasing to 1.6bn. Group net debt in the year increased by 340m to 2,060m (1999 1,720m), with gearing increasing to 43% (1999 39%).
1996
1997
1998
1999
2000
CAPITAL EXPENDITURE
Group interest and taxation

1,488
Net interest payable was 99m (1999 90m). Interest on our additional borrowings, reecting the cost of our investment plans, was partially offset by lower interest rates. Corporation tax has been charged at an effective rate of 27.8% (1999 28.1%). Prior to accounting for the net loss on disposal of xed assets, integration costs and goodwill amortisation, our underlying tax rate was 27.4% (1999 27.8%).
608
682
757
848
UK 1996 1997 1998 1999 2000
989
Group
666
758
841
1,067
Shareholder returns and dividends

Adjusted diluted earnings per share (excluding the net loss on disposal of xed assets, integration costs and goodwill amortisation) increased by 8.6% to 10.18p (1999 9.37p).
TESCO SHARE PRICE
The Board has proposed a nal net dividend of 3.14p giving a total dividend for the year of 4.48p (1999 4.12p). This represents an increase of 8.7% and dividend cover has been maintained at 2.27 times.
Pence
177.0
Mar 99
Jun 99
Oct 99
Dec 99
Feb 00
169.0
TESCO PLC 3
Shareholders funds, before minority interests, increased by 387m. This was due to retained prots of 372m and issue of new shares less expenses of 51m, offset by losses on foreign currency translation of 36m. As a result, return on shareholders funds was 20.9%. Total shareholder return, which is measured as the percentage change in the share price plus the dividend, has been 19.4% over the last ve years, compared to the market average of 18.9% and
TOTAL SHAREHOLDER RETURN

%
18.3
19.4
15.4
18.9
8.5
has been 18.3% over the last three years, compared to the market average of 15.4%. In the last year, total shareholder return in Tesco has been (0.5)% compared to the market average of 8.5%.
(0.5)
Tesco market
one year
three years
ve years
UK
UK sales (excluding property development sales) grew by 7.4% to 18,331m (1999 17,070m) of which 4.2% came from existing stores and 3.2% from net new stores. entirely to duty increases on petrol, tobacco and alcohol. Through our signicant price investment we have seen volume gains and deation in our core business. This year we experienced tough trading conditions. In this Ination in our UK business totalled 1.0% for the year due
SALES GROWTH
%
19.8
*52 weeks pro forma
12.7* 8.0
12.8
7.4
total UK growth 7.5 6.1 8.9 4.0 4.2 UK like-for-like sales growth
environment Tesco continues to perform well above the market and was one of the very few major retailers to deliver continued prot growth. UK operating prot was 8.1% higher at 993m (1999 919m) with an operating margin held broadly at at 5.9%. Store development and capital expenditure UK capital expenditure included 579m on opening 38 new stores comprising one Extra, 13 Superstores, 14 Compact stores and ten Express stores. We also spent 182m on our ret and extension programmes.
1996
1997
1998
1999
2000
UK SALES AREA
685
similar amount in the current year.
603
In total we opened 1.2m sq ft of new space and expect to open a
680
837
1,216
1996 1997 1998 1999 2000
000 sq ft
UK sales area opened including Express
UK fact le
POPULATION MARKET SHARE NUMBER OF STORES SQUARE FOOTAGE 000s STORES OPENED/SQ FT ADDED CAPITAL EXPENDITURE m TURNOVER m OPERATING PROFIT m 59m 15.5% 659 16,895 38 / 1,216,500 989 18,331 993
UK performance
Retail sales (including value added tax) Operating prot
2000 m
1999 m
Change %
18,331 993
17,070 919
7.4 8.1
TESCO PLC 4
continued
Europe
Rest of Europe performance
Retail sales (including value added tax) Operating prot
2000 m 1999 m Change %
In the Rest of Europe total sales rose by 18.8% to 1,527m (1999 1,285m) and contributed an operating prot of 51m up from 48m last year. Retail sales in the Republic of Ireland in local currency grew by 6.1%. We have now re-branded nearly 50 stores and our customers continue to benet from the extended range, improved service and
1,527 51
1,285 48
18.8 6.3
Rest of Europe fact le

POPULATION NUMBER OF STORES SQUARE FOOTAGE 000s STORES OPENED/SQ FT ADDED CAPITAL EXPENDITURE m TURNOVER m OPERATING PROFIT m 68m 167 4,887 11 / 1,264,000 313 1,527 51
better value. In Central Europe total sales at constant exchange rates were up 76.8%. This represents strong growth from our increasing number of hypermarkets in the region. We opened 11 new hypermarkets in the year giving us 19 in total with 2m sq ft.
Asia
Asian performance
Retail sales (including value added tax) Operating loss
2000 m 1999 m Change %
Our Tesco Lotus business in Thailand now comprises 17 hypermarkets and has shown strong sales growth of 96% on last year to 357m. We currently have 2.1m sq ft of selling space in Thailand which will increase to 2.8m sq ft by the end of 2000. On 23 March 1999 we announced we had formed a partnership with the Samsung Corporation to develop hypermarkets in South
497 (1)
170 (2)
192 50
Asian fact le
POPULATION NUMBER OF STORES SQUARE FOOTAGE 000s STORES OPENED/SQ FT ADDED CAPITAL EXPENDITURE m TURNOVER m OPERATING LOSS m 130m 19 2,257 5 / 502,000 186 497 (1)
Korea. Tesco has now invested a total of 142m, including costs of 4m, for an 81% controlling interest. In the 32 weeks to 31 December 1999 the two acquired trading stores contributed 140m to Group sales. In 1999, our Asian businesses contributed sales of 497m, nearly 200% up on the previous year and made a small loss of 1m (1999 2m loss). However, we anticipate Thailand moving into prot in 2000 with the region as a whole being protable soon after as our development programme gathers pace. We are continuing with our research in Taiwan and Malaysia and plan to open our rst stores in Taiwan in 2001. New research projects are also underway in China and Japan.
TESCO PLC 5
Joint ventures
Our total share of prots from joint ventures was 11m compared to 6m last year. Within this,Tesco Personal Finance has made good progress. We have increased the offer and value for our customers and incurred a small loss of 4m (1999 12m loss). Other joint ventures contributed an operating prot of 15m this year.
Liquidity and interest rate risk

The objective is to ensure continuity of funding at low cost and to avoid signicant exposure to changes in interest rates.The strategy is to maintain a portfolio of debt that is commensurate with future cash generation and complements the Groups trading operations by reducing overall business risk. Operating subsidiaries are nanced by a combination of retained prots, bank borrowings, commercial paper, medium term notes, long-term debt market issues and leases. Exposure to debt renancing risk is managed through modest gearing and adequate interest cover ; by arranging for short-term borrowings and commercial paper issuance to be fully backed by committed bank facilities; by limiting the amount of debt repayable in any one year; and by smoothing the debt maturity prole and extending it in line with increased gearing levels. At the year end, undrawn committed bank facilities amounted to 765m (1999 510m) of which 110m (1999 25m) expire within one year, 55m (1999 210m) between one and two years and 600m (1999 275m) in more than two years. Derivatives, predominantly forward rate agreements and interest rate swaps and caps, are used to establish our desired mix of xed and oating rate debt.The policy is to x or cap between 30% and 70% of the interest cost on outstanding debt although a higher percentage may be xed within a 12 month horizon. The average rate of interest paid during the year was 6.8% (1999 7.1%). A 1% rise in interest rates would reduce prot before tax by less than 2%.
Treasury management and nancial instruments

Group Treasury is formally authorised by the Board to manage the Groups treasury operations.The authority establishes the objectives of Group Treasury and the strategies and policies to be applied. It also denes limits to those operations, which are reviewed at least annually by the Board and formally monitored. Group Treasury activity is routinely reported to members of the Board and is subject to review by the internal and external auditors. In accordance with Group policy, Group Treasury does not engage in speculative activity. The main nancial risks faced by the Group relate to credit, liquidity, interest rates and foreign exchange. Objectives, strategies and policies for managing these risks are summarised below.These objectives, strategies and policies are consistent with those in the previous year.The balance sheet positions at 26 February 2000 are representative of the positions throughout the year.
Credit risk
The objective is to reduce the risk of loss arising from default by dealing counterparties.The strategy is to avoid high exposure to any single counterparty by spreading such risk across a number of banks or similar institutions of high credit quality. For each dealing counterparty, exposure limits, established normally by reference to the major credit rating agencies and by deal type, are reviewed at least annually by the Board. Mandates, dening the Groups dealing practices are agreed with these institutions prior to deals being arranged.
Foreign currency risk

The objective is to reduce the risk to short-term prots of exchange rate volatility. Relevant short-term transactional currency exposures are therefore hedged. The Group also seeks to mitigate the effect of structural currency exposures by borrowing, where cost effective, in the functional currencies of its main overseas operating units. In managing its structural currency exposures, the Groups objectives are to maintain a low cost of borrowing and retain some potential for currency related appreciation while partially hedging against currency depreciation. Financial instruments used for these purposes are predominantly foreign currency borrowings, forward exchange rate transactions and swaps.
TESCO PLC 6
continued
Year 2000
Tesco has been working on the Year 2000 issue for over three years and we achieved our key objective of Shopping as Normal for our customers over the millennium period. Additionally, there were no signicant issues surrounding the recognition of the leap day at the end of February 2000. The actual spend on the Year 2000 programme of 30m over three years was in line with the original budget.
Economic Monetary Union

Our aim is for all the relevant parts of the Group to be able to handle business in euros when required. Project teams continue to address the issues arising from EMU and current progress is in line with the timetable set by the Group. We are gaining valuable experience of the EMU process from Tesco Ireland. We will draw upon this learning if and when other Group companies are impacted by the introduction of the euro.
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 nancial 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.
TESCO PLC 7
directors report
Acquisitions
The Directors present their annual report to shareholders on the affairs of the Group together with the audited consolidated nancial statements of the Group for the 52 weeks ended 26 February 2000. During the year, Tesco acquired for a consideration of 142m, a majority holding in a newly incorporated company in South Korea. Details of this acquisition are set out in note 32 to the nancial statements.
Principal activity and business review

The principal activity of the Group is the operation of food stores and associated activities in the UK, Republic of Ireland, France, Hungary, Poland, Czech Republic, Slovakia, South Korea and Thailand. A review of the business is contained in the Annual Review which is published separately and, together with this document, comprises the full Tesco PLC Annual Report and Financial Statements.
Share capital
The authorised and issued share capital of the company, together with details of the shares issued during the period, are shown in note 23 to the nancial statements.
Companys shareholders
The company is not aware of any ordinary shareholders with interests of 3% or more.
Group results
Group turnover excluding VAT rose by 1,638m to 18,796m, representing an increase of 9.5%. Group prot on ordinary activities before taxation, integration costs, loss on disposal of xed assets and goodwill amortisation was 955m compared with 881m for the previous year, an increase of 8.4%. Including integration costs, loss on disposal of xed assets and goodwill amortisation, Group prot on ordinary activities before taxation was 933m. The amount allocated to the employee prot-sharing scheme this year was 41m as against 38m last year. After provision for tax of 259m and dividends, paid and proposed, of 302m, prot retained for the nancial year amounted to 372m.
Directors and their interests

The names and biographical details of the present Directors are set out in the separately published Annual Review. Mr J A Gardiner, Mr D E Reid, Mr R S Ager, Mr A T Higginson and Mr J W Melbourn retire from the Board by rotation. Mr J M Wemms and Baroness OCathain will retire from the Board on15 June 2000 and will not offer themselves for re-election. The service contracts of Mr D E Reid, Mr R S Ager and Mr A T Higginson are terminable on two years notice from the company. Mr J A Gardiner and Mr J W Melbourn do not have service contracts. 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 12 to 16. At no time during the year did any of the Directors have a material interest in any signicant contract with the company or any of its subsidiaries.
Dividends
The Directors recommend the payment of a nal dividend of 3.14p per ordinary share to be paid on 30 June 2000 to members on the Register at the close of business on 25 April 2000. Together with the interim dividend of 1.34p per ordinary share paid in December 1999, the total for the year comes to 4.48p compared with 4.12p for the previous year, an increase of 8.7%.
Tangible xed assets

Capital expenditure amounted to 1,488m compared with 1,067m during the previous year. In the Directors opinion, the properties of the Group have a market value in excess of the book value of 6,969m included in these nancial statements.
TESCO PLC 8
directors report
continued
Employment policies
The Group depends on the skills and commitment of its employees in order to achieve its objectives. Company staff at every level are encouraged to make their fullest possible contribution to Tesco success. A key business priority is to provide First Class Service to the customer. Ongoing training programmes seek to ensure that employees understand the companys 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 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 staff magazine called Tesco Today, videos and staff brieng sessions. Staff attitudes are frequently researched through surveys and store visits, and management seeks to respond positively to the needs of employees. Employees are encouraged to become involved in the nancial performance of the Group through a variety of schemes, principally the Tesco employee prot-sharing scheme, the savings-related share option scheme and the prot-related pay scheme.
Auditors
PricewaterhouseCoopers have expressed their willingness to continue in ofce. In accordance with section 384 of the Companies Act 1985, a resolution proposing the reappointment of PricewaterhouseCoopers as auditors of the company will be put to 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 15 June 2000. This report was approved by the Board on 10 April 2000. By Order of the Board Rowley Ager Secretary 10 April 2000 Tesco PLC Registered Number: 445790
Political and charitable donations

Contributions to community projects and to charity amounted to 1,485,000 (1999 1,301,000). There were no political donations.
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 timely basis which varies according to the type of product and territory in which the suppliers operate.
TESCO PLC 9
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 Section 1 of the Combined Code on Corporate Governance which have been incorporated in the Listing Rules of the London Stock Exchange. Appointments to the Board for both Executive and Non-executive Directors are the responsibility of the Nominations Committee which is chaired by Mr J A Gardiner and whose members are set out in the table on page 11. As exemplied by the section on Directors and their interests within the Directors Report on pages 7 and 8, the companys Articles of Association ensure that on a rotational basis Directors resign every three years and, if so desire and being eligible, offer themselves for re-election. The Board has also established a Compliance Committee whose purpose is to ensure that the Board discharges its obligations to avoid civil and criminal liability. The Committee, comprising two Executive Directors and three members of senior management, normally meets four times a year.
Directors
The Board of Tesco PLC comprises nine Executive Directors and six independent Non-executive Directors. The Board is chaired by Mr J A Gardiner, an independent Non-executive Director, who has primary responsibility for running the Board. The Chief Executive, Mr T P Leahy, has executive responsibilities for the operations, results and strategic development of the Group. Clear divisions of accountability and responsibility both exist and operate effectively for these positions. In addition, Mr G F Pimlott is the senior Nonexecutive Director. The Board structure ensures no one individual or group dominates the decision-making process. The full Board meets ten times a year and, in addition, 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 by the schedule of matters reserved for its decision. Insofar as corporate governance is concerned, these include the approval of nancial statements, major acquisitions and disposals, authority levels for expenditure, treasury policies, risk management policies and succession plans for senior executives. In order that the Board is able to make considered decisions, a written protocol exists and has been communicated to senior managers ensuring that relevant information is presented to all Board members ve days before 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. The Board delegates day-to-day and business management control to the Executive Committee which comprises the Executive Directors. This meets formally 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. The Executive Committee conducts a risk assessment to the achievement of the Groups objectives at least annually which is then discussed with the full Board and any appropriate actions taken.
Directors remuneration
The Board has a long-established Remuneration Committee, composed entirely of Non-executive Directors, now chaired by Mr C L Allen, with effect from 10 April 2000, in succession to Baroness OCathain.The members are set out in the table on page 11. 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 12 to 16.
Relations with shareholders

The Board attaches a high importance to maintaining good relationships with all shareholders and, primarily through the Investor Relations department, ensures that shareholders are kept informed of signicant company developments. During the year, Directors have met with more than 65 of our leading shareholders representing over 45% 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 as in accordance with London Stock Exchange requirements. The Board regards the Annual General Meeting as an opportunity to communicate directly with private investors and actively encourage participative dialogue. The Chairman, Executive Directors and chairpersons of the Audit and Remuneration Committees attend the Annual General Meeting and are available to answer questions from shareholders present.
TESCO PLC 10
corporate governance
continued
Relations with shareholders
continued
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 companys website (www.tesco.co.uk).
The Group has an established framework of internal nancial controls, the key features of which are as follows: Organisational structure The responsibilities of the Board set out above are designed to ensure effective control over strategic, nancial and compliance issues. Financial framework The Group operates a comprehensive system
Accountability and audit

The Group has an Audit Committee, chaired by Mr J W Melbourn and consisting entirely of Non-executive Directors, which meets a minimum of three times a year. Membership of the Audit Committee is set out in the table on page 11. Its terms of reference represent current best practice. The Audit Committees primary responsibilities include monitoring internal control throughout the Group, approving the Groups accounting policies and reviewing the interim and annual nancial statements before submission to the Board. In terms of nancial reporting, an assessment of Group performance is set out in the Operating and Financial Review on pages 2 to 6.
of nancial reporting to the Board and senior management, based upon an annual budget and regular forecasts. Weekly and periodic reports of actual results together with key performance indicators are produced. The Group monitors nancial performance along with other non-nancial objectives through a balanced scorecard approach ensuring overall alignment of goals and objectives. Policies and procedures The Group employs 220,000 people including over 1,500 senior managers. Management control is formalised at all levels and is regulated by cascading limits of authority. Formal policies and procedures also exist for areas that are identied, by their nature, as being signicant risk areas. Policies and procedures are regularly subject to compliance audits. Quality and integrity of personnel The Group attaches high importance to the values of trust, honesty and integrity of personnel in responsible positions and operates a policy of recruiting and promoting suitably experienced personnel with clearly dened accountabilities. Investment appraisal The capital investment programme is subject to formalised review procedures with key criteria requiring to be met. All major initiatives require business cases to be prepared, normally covering a minimum period of ve years. Post investment appraisals are also carried out. Control monitoring Our external auditors, PricewaterhouseCoopers, contribute an independent perspective on certain aspects of the internal nancial control system arising from their audit work and annually report their ndings to the Audit Committee. The Group also maintains an internal audit function whose work is focused on areas of perceived high risk, as identied by risk analysis, and who regularly provide reports to the Audit Committee.
Internal nancial control

The Combined Code introduced a requirement upon Directors that they report on the effectiveness of the whole system of internal control, including nancial and all other controls together with the risk management process. As permitted by the London Stock Exchange letter of 27 September 1999, the Board has decided to adopt the transitional arrangements in respect of principle D.2 of the Code. As a result, the Board will continue to report on internal nancial control in accordance with the guidance to Directors issued by the Rutteman Working Group in December 1994. However, the Directors are of the view that they have established the procedures necessary to implement the requirements of the Combined Code relating to internal control as reected in the September 1999 guidance Internal Control: Guidance for Directors on the Combined Code. The Board has overall responsibility for the systems of internal nancial control. Implementation and maintenance of the internal nancial control system is the responsibility of executive management. The Board, through the Audit Committee, has reviewed the effectiveness of the systems of internal nancial control for the accounting year and the period to the date of approval of the nancial statements. It should be understood that such systems are designed to provide reasonable but not absolute assurance against material misstatement or loss.
TESCO PLC 11
Pension fund
The assets of the pension funds established for the benet of the Groups employees are held separately from those of the Group. Both the Tesco PLC Pension Scheme and the Tesco PLC Money Purchase Pension Scheme are managed by a trustee company. Its Board comprises one Executive Director, four senior managers and four members appointed from staff and pensioners. Management of the assets of the Tesco PLC Pension Scheme is delegated to a number of independent fund managers. Contributions to the Tesco PLC Money Purchase Pension Scheme are paid into insurance policies administered by the Equitable Life Assurance Society. There has been no self-investment in Tesco shares or property occupied by the Tesco Group. Details of pension commitments are set out in note 26 to the nancial statements on page 37.
BOARD COMMITTEE MEMBERSHIP
Nominations Committee
Remuneration Committee
Audit Committee
Compliance Committee
Independent Directors Mr J A Gardiner Mr G F Pimlott Mr J W Melbourn Baroness OCathain Mr C L Allen Dr H Einsmann Executive Directors Mr T P Leahy Mr R S Ager Mr P A Clarke * * * * * * * * * * * * * * * * * *
Statement of compliance with the Code Provisions in the Combined Code

Throughout the year ended 26 February 2000 the Group has been in compliance with all the Code Provisions set out in Section 1 of the Combined Code on Corporate Governance, except as with regard to provision B.1.7 on the length of Directors service agreements. The Remuneration Committee considers that the current length of two years is both appropriate and necessary although it reviews the matter every year.
TESCO PLC 12
report of the directors on remuneration
Directors remuneration policy

The remuneration packages, including contract periods, of Executive Directors are determined by the Remuneration Committee (the Committee). It ensures that the remuneration package is appropriate for their responsibilities, taking into consideration the overall nancial and business position of the Group, the highly competitive industry of which the Group is part and the importance of recruiting and retaining management of the appropriate calibre.The remuneration of the Non-executive Directors is determined by the Board as a whole on the recommendation of the Executive Committee after considering external market research.
Executive incentive scheme

The company operates performance-related award schemes designed to provide a growing element of variable reward to reect the performance of the Group. The executive incentive scheme introduced in March 1993 was designed and introduced for this purpose. Long-term share bonuses are awarded annually, based on improvements in earnings per share, achievement of strategic corporate goals and comparative performance against peer companies including total shareholder return.The maximum longterm bonus is 50% of salary. 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, based on improvements in earnings per share and on the achievement of strategic corporate goals.The maximum short-term bonus payable is 25% of salary, which is augmented by up to a further 12.5% of salary if the participants elect for the trustees of the scheme to retain the fully paid ordinary 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 Committee sets performance targets annually for the incentive scheme for each of the criteria noted above, 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 the Group Board executive incentive scheme to a wider body of senior executives within the Group.The scheme rules and awards of this extension are administered on a consistent basis as previously set out for the Executive Directors. The holding period for both the long-term and short-term shares may be extended to seven and ve years respectively by the scheme members. During this holding period, the shares held are increased by 12.5% at the beginning of each year based on the scheme shares held. This holding period may be extended only subject to personal shareholding targets set by the Committee being met by the scheme members and conditional upon continuous employment with the company.
Compliance
The Committee is constituted and operated throughout the period in accordance with the principles outlined in the Stock Exchange Listing Rules derived from Schedule A of the Combined Code. 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 17 covers the disclosures referred to in this report that are specied for audit by the London Stock Exchange. Details of Directors emoluments and interests, including executive and savings-related share options, are set out on pages 13 to 16. The following summarises the remuneration packages for Executive Directors. Copies of the Executive Directors contracts of employment are available for inspection by shareholders as required.
Base salary and benets

The base salary, contract periods, benets (which comprise car benets, life assurance, disability and health insurance) and other remuneration issues of Executive Directors and other senior executives, are normally reviewed annually by the Committee, having regard to competitive market practice supported by two external, independent surveys.
Prot-sharing
The Group operates an approved employee prot-sharing scheme for the benet of all employees, including Executive Directors, with over two years service with the Group at its 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.
Share options
Executive Directors are included in an approved executive share option scheme (ESOS), and are eligible to join the employees savings-related share option scheme (SAYE) when they have completed one years service. Executive options granted since 1995 may be exercised only subject to the achievement of performance criteria related to growth in earnings per share, in accordance with ABI guidelines.
TESCO PLC 13
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.
Non-executive Directors
Non-executive Directors do not have contracts but each appointment is subject to review every three years. Non-executive Directors receive a basic fee plus an additional sum in respect of committee membership. Mr J A Gardiner and Baroness OCathain each have the benet of the use of a company car.
Service agreements
Executive Directors have service contracts with entitlement to notice of 24 months.This notice period is renewed annually by the Remuneration Committee and is regarded as an essential part of the remuneration package, designed to retain key executives within the company.
TABLE 1
Directors emoluments
Incentive scheme Salary 000 Prot sharing 000 Benets 000 Short-term 000 Long-term 000 Total 2000 000 Total 1999 000
Mr J A Gardiner Mr T P Leahy Mr D E Reid Mr R S Ager Mr C L Allen Mr P A Clarke Dr H Einsmann (a) Mr J Gildersleeve Mr A T Higginson Mrs L James (b) Dr M G Jones (c) Mr T J R Mason Mr J W Melbourn Baroness OCathain Mr G F Pimlott Mr D T Potts Mr J M Wemms
300 648 557 379 35 249 24 504 378 303 381 38 33 38 314 422 4,603
8 8 8 6 8 8 8 8 62
5 41 65 18 23 66 46 4 22 7 13 48 358
231 195 131 95 174 134 134 104 146 1,344
245 228 162 61 212 86 135 66 177 1,372
305 1,173 1,053 698 35 434 24 964 644 307 680 38 40 38 505 801 7,739
300 901 836 590 3 85 782 553 427 10 567 37 44 30 116 658 5,939
a Dr H Einsmann was appointed to the Board on 1 April 1999. b Mrs L James retired from the Board on 30 April 1999. Included in her salary is a payment of 258,000 upon retirement. c Former Director.
TESCO PLC 14
continued
TABLE 2
Gains made on share options

Number of shares at exercise price (pence) Price at exercise (pence) Value realisable 2000 000 1999 000
61.7
90.3
104.0
Total
Mr T P Leahy Mr D E Reid Mr R S Ager Mr P A Clarke Mr J Gildersleeve Mr A T Higginson Mrs L James Mr T J R Mason Mr D T Potts Mr J M Wemms
Date of grant
11,058
27 May 1993
194,835
27 April 1995
557,712 566,603
13 October 1995
763,605 566,603
181.5 188.5
623 479
386 153 781 466 594 410 232
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 and sold the shares, the price at exercise shown represents an average of the prices on these dates weighted to the number of options exercised.The market price of the shares at 26 February 2000 was 169p. The share price during the 52 weeks to 26 February 2000 ranged from 156p to 197p.
TABLE 3
Pension details of the Directors

Increase in accrued Transfer pension during value of increase Years of the year (a) during the year service 000 000 Accrued total pension at 26 Feb 2000 (b) 000
Age at 26 Feb 2000
Mr T P Leahy Mr D E Reid Mr R S Ager Mr P A Clarke Mr J Gildersleeve Mr A T Higginson (c) Mrs L James (d) Mr T J R Mason Mr D T Potts Mr J M Wemms (e)
a The increase in accrued pension during the year excludes any increase for ination.
44 53 54 39 55 42 50 42 42 60
21 15 14 25 35 2 15 18 27 28
38 34 18 4 24 14 18 17 5 23
407 508 274 39 379 138 283 166 47 240
229 247 180 76 281 28 82 127 96 276
b The accrued pension is that which would be paid annually on retirement at 60 based on service to 26 February 2000. c 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. d Mrs L James took early retirement on 30 April 1999 and is receiving her pension.Transfer values do not apply in these circumstances. The value of increase during the year has been calculated on a basis consistent with transfer values.The accrued total pension shown is her pension immediately after retirement. e Mr J M Wemms pension commenced on 8 February 2000 at his normal retirement age.
TESCO PLC 15
TABLE 4
Share options held by Directors and not exercised at 26 February 2000

Number of shares at exercise price (pence) 81.0 (a) 66.0 90.3 104.0 98.3 117.7 Sub-total 61.7 61.7 70.0 (a)
Executive share options schemes (1984), (1994) and (1996) Mr T P Leahy Mr D E Reid Mr R S Ager Mr P A Clarke Mr J Gildersleeve Mr A T Higginson Mrs L James (b) Mr T J R Mason Mr D T Potts Mr J M Wemms
Date exercisable (d)
62,211
29 October 1995
51,150 51,153
27 May 1996
417,144 11,427 75,714 87,141

10 June 1997
471,372
106,833 42,813
398,523
27 April 1998
248,256
13 October 1998
523,728 223,728 250,170 165,504 122,034 113,646 284,745 97,581 275,643

3 July 1999
94,335 50,994
17 April 2000
2,172,384 235,155 578,205 165,504 122,034 156,459 284,745 97,581 413,778
12 August 1997 29 September 1997
Sub-total b/f
151.7
160.3
176.7
164.0
178.0
179.4 (c)
173.0 (c)
Total
Mr T P Leahy Mr D E Reid Mr R S Ager Mr P A Clarke Mr J Gildersleeve Mr A T Higginson Mrs L James (b) Mr T J R Mason Mr D T Potts Mr J M Wemms
Date exercisable (d)
2,172,384 235,155 578,205 165,504 122,034 156,459 284,745 97,581 413,778
120,660 601,305 299,904 76,281 504,999 225,150 198,669 119,238 154,944
411,642 34,731
89,433 17,718 150,564 373,584 149,076 65,658
126,832 90,245 26,831 29,946 56,100 63,415 19,514 63,415 38,756
149,171 146,991 364,092 113,263 255,796 288,730

28 January 2002
425,827
228,901 117,920 36,994 277,170 73,988 76,301 87,861 199,827
2,648,777 1,470,452 1,180,538 713,610 1,271,777 924,942 514,386 1,039,562 744,132 669,111
7 October 2000 17 November 2000
21 May 2001 30 September 2001
24 May 2002 30 November 2002
a In the case of Mr T P Leahy 25% of the options, and in the case of Mr D E Reid and Mr R S Ager 100% of the options at 70.0p and 81.0p respectively may be exercised at 59.7p and 69.0p respectively as targets related to growth in earnings per share in accordance with ABI guidelines have been achieved. b Position as at Mrs L James retirement on 30 April 1999. c Options granted in the year. d Date of expiry is seven years from date exercisable, with the exception of the 98.3p, 117.7p, 151.7p and 160.3p options which expire four years from date exercisable.
TESCO PLC 16
continued
TABLE 5
Share options held by Directors and not exercised at 26 February 2000

Number of shares Granted Exercised As at 26 Feb 2000 Exercise price pence 2000 000 Value realisable 1999 000 As at 27 Feb 1999
Savings-related share option scheme (1981)
Mr T P Leahy Mr D E Reid Mr R S Ager Mr P A Clarke Mr J Gildersleeve Mr A T Higginson Mrs L James (a) Mr T J R Mason Mr D T Potts Mr J M Wemms
25,095 19,575 15,253 19,344 19,692 19,500 20,475 20,700 25,095
2,235 2,235 2,235 2,235 2,235 2,235 2,235 2,235
16,782 5,592 10,290 5,592 11,187 11,187 16,782
10,548 16,218 7,198 15,987 10,740 2,235 19,500 11,523 20,700 10,548
83.0-151.0 83.0-151.0 136.0-151.0 83.3-151.0 121.7-151.0 151.0 61.7-83.0 83.3-151.0 83.3 83.0-151.0
17 7 9 6 11 11 17
18 5 9
a This shows the movement of options up to the date of Mrs L James retirement on 30 April 1999.
The subscription price for the savings-related share option scheme granted during the year was 151.0p and the option matures in either 2003 (three-year scheme) or 2005 (ve-year scheme).The shares relating to options exercised in the year were all retained. Between 26 February 2000 and 10 April 2000 there have been no changes in the number of share options held by the Directors. For further details on the company share option schemes see note 25.
TABLE 6
Disclosable interests of the Directors, including family interests

26 Feb 2000 Options to acquire ordinary shares 27 Feb 1999 Options to acquire ordinary shares
TABLE 6
Disclosable interests of the Directors, including family interests
Ordinary shares
Ordinary shares
Mr J A Gardiner Mr T P Leahy Mr D E Reid Mr R S Ager Mr P A Clarke Mr J Gildersleeve Mr A T Higginson Mrs L James (a) Mr T J R Mason Mr J W Melbourn Baroness OCathain Mr G F Pimlott Mr D T Potts Mr J M Wemms
a Position at Mrs L James retirement on 30 April 1999.
496,848 1,527,914 1,689,528 995,063 103,553 1,009,829 179,595 847,948 623,396 9,690 46,473 26,724 212,503 983,456
2,659,325 1,486,670 1,187,736 729,597 1,282,517 927,177 533,886 1,051,085 764,832 679,659
353,325 1,233,415 1,418,418 797,067 65,145 771,244 60,512 737,681 452,596 6,570 46,473 26,134 157,588 765,054
2,444,971 1,709,885 1,158,797 455,784 1,217,481 848,641 533,886 972,176 565,005 1,260,809
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 25). Between 26 February 2000 and 10 April 2000 there were no changes in the number of shares held by the Directors.
TESCO PLC 17
directors responsibilities for the preparation of the nancial 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 18 to 39 the company has 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 keeps accounting records which disclose, with reasonable accuracy, the nancial position of the company and which enable them to ensure that the nancial statements comply with the Companies Act 1985. 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.
auditors report to the members of Tesco PLC

We have audited the nancial statements on pages 18 to 39 which have been prepared under the historical cost convention and the accounting policies set out on pages 22 and 23, and the information on Directors emoluments and share details included on pages 13 to 16. the Boards statements on internal control cover all risks and controls, or to form an opinion on the effectiveness of the companys or the Groups corporate governance procedures or its risk and control procedures.
Basis of audit opinion Respective responsibilities of Directors and auditors

The Directors are responsible for preparing the Annual Report. As described above, this includes responsibility for preparing the nancial statements, in accordance with applicable United Kingdom accounting standards. Our responsibilities, as independent auditors, are established in the United Kingdom by statute, the Auditing Practices Board, the Listing Rules of the London Stock Exchange and our professions ethical guidance. We report to you our opinion as to whether the nancial statements give a true and fair view and are properly prepared in accordance with the United Kingdom Companies Act. We also report to you if, in our opinion, the Directors report 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 or the Listing Rules 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. We review whether the statement on page 11 reects the companys compliance with the seven provisions of the Combined Code specied for our review by the London Stock Exchange, and we report if it does not. We are not required to consider whether Chartered Accountants and Registered Auditors London 10 April 2000 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. 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. 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 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 26 February 2000 and of the prot and cash ows of the Group for the year then ended and have been properly prepared in accordance with the Companies Act 1985.
TESCO PLC 18
group prot and loss account

52 weeks ended 26 February 2000 2000 m 1999 m
note
Sales at net selling prices Value added tax Turnover excluding value added tax Operating expenses Normal operating expenses Employee prot-sharing Integration costs Goodwill amortisation Operating prot Net loss on disposal of xed assets Share of operating prot of joint ventures Prot on ordinary activities before interest Net interest payable Prot on ordinary activities before taxation Prot before integration costs, net loss on disposal of xed assets and goodwill amortisation Integration costs Net loss on disposal of xed assets Goodwill amortisation Tax on prot on ordinary activities Prot on ordinary activities after taxation Minority interest Prot for the nancial year Dividends Retained prot for the nancial year
20,358 (1,562) 18,796 (17,712)
18,546 (1,388) 17,158 (16,155) (38) (26) (5) 934 (8) 6 932 (90) 842 881 (26) (8) (5) (237) 605 1 606 (277) 329
Pence
1/2
3 2 11 1/2
(41) (6) (7) 1,030 (9) 11 1,032 (99) 933 955 (6) (9) (7)
7 4
(259) 674 674
9 24
(302) 372
Pence
Earnings per share Adjusted for integration costs after taxation Adjusted for net loss on disposal of xed assets after taxation Adjusted for goodwill amortisation Adjusted earnings per share Diluted earnings per share Adjusted for integration costs after taxation Adjusted for net loss on disposal of xed assets after taxation Adjusted for goodwill amortisation Adjusted diluted earnings per share Dividend per share Dividend cover (times)
Accounting policies and notes forming part of these nancial statements are on pages 22 to 39.
10
10.07 0.06 0.13 0.10
9.14 0.27 0.12 0.06 9.59 8.93 0.26 0.12 0.06 9.37 4.12 2.27
10 10
10.36 9.89 0.06 0.13 0.10
10 9
10.18 4.48 2.27
TESCO PLC 19
statement of total recognised gains and losses

52 weeks ended 26 February 2000 Group 2000 m 1999 m 2000 m Company 1999 m
Prot for the nancial year Loss on foreign currency net investments Total recognised gains and losses relating to the nancial year
674 (36) 638
606 (19) 587
42 (3) 39
209 209
reconciliation of movements in shareholders funds

52 weeks ended 26 February 2000 Group 2000 m 1999 m 2000 m Company 1999 m
Prot for the nancial year Dividends Loss on foreign currency net investments New share capital subscribed less expenses Payment of dividends by shares in lieu of cash Net addition/(reduction) to shareholders funds Shareholders funds at 27 February 1999 Shareholders funds at 26 February 2000
674 (302) 372 (36) 30 21 387 4,382 4,769
606 (277) 329 (19) 147 22 479 3,903 4,382
42 (302) (260) (3) 54 21 (188) 2,699 2,511
209 (277) (68) 256 22 210 2,489 2,699
TESCO PLC 20
balance sheets
26 February 2000 Group note 2000 m 1999 m 2000 m Company 1999 m
Fixed assets Intangible assets Tangible assets Investments Investments in joint ventures Current assets Stocks Debtors Investments Cash at bank and in hand
14 15 16 11 12 13 13
136 8,140 79 172 8,527 744 252 258 88 1,342
112 7,105 102 234 7,553 667 151 201 127 1,146 (3,075) (1,929) 5,624 (1,230) (17) 4,377
5,200 124 5,324 1,183 21 1,204 (2,525) (1,321) 4,003 (1,492) 2,511
5,001 252 5,253 1,924 2 1,926 (3,292) (1,366) 3,887 (1,188) 2,699
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 Total net assets Capital and reserves Called up share capital Share premium account Other reserves Prot and loss account Equity shareholders funds Minority interest Total capital employed
17
(3,487) (2,145) 6,382
18 21
(1,565) (19) 4,798
23 24 24 24
341 1,650 40 2,738 4,769 29 4,798
339 1,577 40 2,426 4,382 (5) 4,377
341 1,650 520 2,511 2,511
339 1,577 783 2,699 2,699
Terry Leahy Andrew Higginson Directors Financial statements approved by the Board on 10 April 2000.
TESCO PLC 21
group cash ow statement

52 weeks ended 26 February 2000 2000 m 1999 m
note
Net cash inow from operating activities Returns on investments and servicing of nance Interest received Interest paid Interest element of nance lease rental payments Net cash outow from returns on investments and servicing of nance Taxation Corporation tax paid (including advance corporation tax) 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 for capital expenditure and nancial investment Acquisitions and disposals Purchase of subsidiary undertakings Disposal of subsidiary undertaking Net cash acquired with subsidiary undertaking Received from/(invested in) joint ventures Net cash inow/(outow) from acquisitions and disposals Equity dividends paid Cash outow before use of liquid resources and nancing Management of liquid resources Increase in short-term deposits Financing Ordinary shares issued for cash Increase in other loans New nance leases Capital element of nance leases repaid Net cash inow from nancing (Decrease)/increase in cash in the period Reconciliation of net cash ow to movement in net debt (Decrease)/increase in cash in the period Cash inow from increase in debt and lease nancing Loans acquired with subsidiary undertaking Cash used to increase liquid resources Amortisation of 4% unsecured deep discount loan stock Other non-cash movements Foreign exchange differences Increase in net debt Net debt at 27 February 1999 Net debt at 26 February 2000
31
1,513
1,321
58 (188) (1) (131)
34 (162) (1) (129)
(213)
(237)
(1,296) 85 (18) (1,229)
(1,032) 27 (1,005)
32
(61)
(184) (4) 2 (69) (255) (238) (543)
30
62 1 (262) (321)
(68)
(7)
20 322 29 (20) 351 (38)
42 719 (15) 746 196
(38) (331) 68 (4) (30) (5) (340)

33 33
196 (704) (19) 7 (3) (6) (529) (1,191) (1,720)
(1,720) (2,060)
TESCO PLC 22
accounting policies
Basis of nancial statements

These nancial statements have been prepared under the historical cost convention, in accordance with applicable accounting standards and the Companies Act 1985. The Group has adopted Financial Reporting Standard 15, Tangible Fixed Assets, and Financial Reporting Standard 16, Current Tax, during the year.
Fixed assets and depreciation

The Group has adopted Financial Reporting Standard 15, Tangible Fixed Assets, during the year. Following the adoption, interest paid on funds specically related to the nancing of assets in the course of construction, which was previously capitalised net of tax relief, is now capitalised gross. The impact of this change in accounting policy on the current and prior year is not material, and accordingly prior period gures have not been restated. Depreciation is provided on a straight line basis over the anticipated useful economic lives of the assets, at the following rates: Land premia paid in excess of the alternative use value on acquisition at 4% 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%.
Basis of consolidation
The Group prot and loss account and balance sheet consist of the nancial statements of the parent company, its subsidiary undertakings and the Groups share of interests in joint ventures. The accounts of the parent companys subsidiary undertakings are prepared to dates around 26 February 2000 apart from Global T.H., Tesco Polska Sp. z o.o., Tesco Stores C R a.s., Tesco Stores SR a.s., Samsung Tesco Co. Limited and Ek-Chai Distribution System Co. Ltd which prepared accounts to 31 December 1999. 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. The Groups interests in joint ventures are accounted for using the gross equity method.
Goodwill
Goodwill arising from transactions entered into after 1 March 1998 is capitalised under the heading Intangible assets and amortised on a straight line basis over its useful economic life, up to a maximum of 20 years. All goodwill from transactions entered into prior to 1 March 1998 has been written off to reserves.
Stocks
Stocks comprise goods held for resale and development properties, 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 the lower of cost and net realisable value.
Money market investments

Money market investments are stated at cost. All income from these investments is included in the prot and loss account as interest receivable and similar income.
Impairment of xed assets and goodwill

Fixed assets and goodwill are subject to review for impairment in accordance with Financial Reporting Standard 11, Impairment of Fixed Assets and Goodwill. Any impairment is recognised in the prot and loss account in the year in which it occurs.
TESCO PLC 23
Leasing
Plant, equipment and xtures and ttings which are the subject of nance leases are dealt with in the nancial statements as tangible assets and equivalent liabilities at what would otherwise have been the cost of outright purchase. 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.
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.
Financial instruments
Derivative instruments utilised by the Group are interest rate swaps and caps, 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 and forward exchange contracts are valued at closing 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.
Deferred tax
Deferred taxation is provided on accelerated capital allowances and other timing differences, only to the extent that it is probable that a liability will crystallise.
Pensions
The expected cost of pensions in respect of the 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.
Post-retirement benets 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.
TESCO PLC 24
notes to the nancial statements

NOTE 1
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, France, Hungary, Poland, Czech Republic, Slovakia, South Korea and Thailand.The results for South Korea,Thailand and continental European operations are for the year ended 31 December 1999.
2000 Sales including VAT m Turnover excluding VAT m Sales including VAT m Turnover excluding VAT m
1999
Prot m
Assets m
Prot m
Assets m
Continuing operations Retailing UK Property development Total UK Retailing Rest of Europe Retailing Asia 18,331 3 18,334 1,527 497 20,358 Integration costs Goodwill amortisation Operating prot Net loss on disposal of xed assets Share of operating prot from joint ventures Net interest payable Prot on ordinary activities before taxation Operating margin (prior to integration costs and goodwill amortisation) Capital employed Net debt (note 33) Net assets 11 (99) 933 5.5% 6,858 (2,060) 4,798 6 (90) 842 5.6% 6,097 (1,720) 4,377 16,955 3 16,958 1,374 464 18,796 993 993 51 (1) 1,043 (6) (7) 1,030 (9) 5,685 28 5,713 771 374 17,070 21 17,091 1,285 170 18,546 15,814 21 15,835 1,167 156 17,158 919 919 48 (2) 965 (26) (5) 934 (8) 5,392 32 5,424 522 151
The analysis of capital employed by geographical area is calculated on net assets excluding net debt. 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 sales in the joint ventures which is not included in the numbers above is 74m (1999 49m).
TESCO PLC 25
NOTE 2
Analysis of operating prot

2000 Continuing operations m Acquisitions m Total m Continuing operations m Acquisitions m 1999 Total m
Turnover excluding VAT Cost of sales Gross prot Administration expenses Operating prot/(loss)
18,666 (17,242) 1,424 (394) 1,030
130 (123) 7 (7)
18,796 (17,365) 1,431 (401) 1,030
17,002 (15,695) 1,307 (371) 936
156 (155) 1 (3) (2)
17,158 (15,850) 1,308 (374) 934
Cost of sales includes distribution costs and store operating costs. Integration costs, goodwill amortisation and employee prot-sharing are included within administration expenses. The charge made for integration costs relating to our Irish businesses is 6m (1999 26m).
NOTE 3
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 4
Prot on ordinary activities before taxation

2000 m 1999 m
Prot on ordinary activities is stated after charging the following: Depreciation Goodwill amortisation Operating lease costs (a) Auditors remuneration (b) Employment costs (note 5)
a Operating lease costs include 37m for hire of plant and machinery (1999 35m). b Auditors remuneration amounted to 0.8m (1999 0.7m) and includes 0.1m (1999 0.1m) for the company. The auditors also received 3.6m (1999 1.9m) in respect of non-audit services of which 2.0m (1999 1.1m) related to overseas operations. These fees were principally in respect of acquisitions, taxation advice and systems implementation and training.
428 7 158 1 1,865
401 5 159 1 1,736
NOTE 5
Employment costs
2000 m 1999 m
Employment costs during the year Wages and salaries Social security costs Other pension costs (note 26) 1,677 106 82 1,865 Number of persons employed The average number of employees per week during the year was: UK 169,500 (1999 164,471), Rest of Europe 24,665 (1999 19,497), Asia 11,051 (1999 6,133) and the average number of full-time equivalents was: UK 108,409 (1999 104,772), Rest of Europe 18,573 (1999 16,489) and Asia 7,914 (1999 5,653). 1,558 105 73 1,736
TESCO PLC 26

NOTE 6
continued
Directors emoluments and interests
Details of Directors emoluments and interests are given in the Report of the Directors on Remuneration on pages 12 to 16.
NOTE 7
Net interest payable

2000 m m m 1999 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) 10 38% bonds 2002 834% bonds 2003 712% bonds 2007 5 8% bonds 2009 6% bonds 2029 Medium term notes Interest capitalised Share of interest of joint ventures
1
56 (73) (7) (9) (21) (17) (25) (19) (2) (15) 41 (8) (155) (99) (46) (8) (8) (21) (17) (21) (1) (17) 35 (8)
22
(112) (90)
a Interest payable on the 4% unsecured deep discount loan stock 2006 includes 4m (1999 3m) of discount amortisation.
NOTE 8
Taxation
2000 m 1999 m
UK taxation: Corporation tax at 30.1% (1999 31.0%) Share of joint ventures Prior year items Deferred taxation (note 21) current year prior year Overseas taxation: Corporation tax Deferred taxation (note 21) 10 3 259 7 237 287 (40) (1) 246 257 (2) (32) 5 2 230
NOTE 9
Dividends
2000 Pence per share 1999 Pence per share 2000 m 1999 m
Declared interim Proposed nal
1.34 3.14 4.48
1.25 2.87 4.12
90 212 302
83 194 277
TESCO PLC 27
NOTE 10
Earnings per share and diluted earnings per share
Earnings per share and diluted earnings per share have been calculated in accordance with Financial Reporting Standard 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 integration costs, net loss on disposal of xed assets and goodwill amortisation, is based on the prot for the nancial year of 674m (1999 606m). 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 6,693m (1999 6,627m). 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 consider 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.
2000
1999
Weighted average number of dilutive share options (million) Weighted average number of shares in issue in the period (million) Total number of shares for calculating diluted earnings per share (million)
124 6,693 6,817
153 6,627 6,780
NOTE 11
Intangible xed assets

2000 m 1999 m
Cost At 27 February 1999 Additions at cost At 26 February 2000 Amortisation At 27 February 1999 Charge for the period At 26 February 2000 Net carrying value At 27 February 1999 At 26 February 2000 112 136 112 5 7 12 5 5 117 31 148 117 117
Goodwill arising on the purchase of our businesses in South Korea and Thailand has been capitalised and amortised over 20 years in accordance with the provisions set out in Financial Reporting Standard 10, Goodwill and Intangible Assets. During the year, our Thailand business increased its share capital by rights issues and the Group purchased shares generating additional goodwill of 25m. As a result of this, the Group shareholding has increased from 75% to 93%.
TESCO PLC 28

NOTE 12
continued
Tangible xed assets

Plant equipment xtures and ttings and vehicles m
Land and buildings m
Total m
Cost At 27 February 1999 Currency translation Additions at cost (a) Purchase of subsidiary undertaking Disposals At 26 February 2000 Depreciation At 27 February 1999 Currency translation Charge for period Disposals At 26 February 2000 Net book value (b) (c) At 26 February 2000 At 27 February 1999 Capital work in progress included above (d) At 26 February 2000 At 27 February 1999
a Includes 40m 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 8.5%. In 1999 the amount of interest capitalised 24m is stated net of tax relief of 9m. b Net book value includes capitalised interest at 26 February 2000 of 319m (1999 288m). The 1999 net book value includes capitalised interest net of tax relief. Plant, equipment, xtures and ttings and vehicles subject to nance leases included in net book value are:
Cost m Depreciation m Net book value m
6,918 (32) 1,105 80 8,071 (66) 8,005
2,533 (22) 383 7 2,901 (93) 2,808
9,451 (54) 1,488 87 10,972 (159) 10,813
886 (3) 167 1,050 (14) 1,036
1,460 (10) 261 1,711 (74) 1,637
2,346 (13) 428 2,761 (88) 2,673
6,969 6,032
1,171 1,073
8,140 7,105
189 124
49 21
238 145
At 27 February 1999 Movement in the period At 26 February 2000
179 97 276
157 70 227
22 27 49
c The net book value of land and buildings comprises:

2000 m 1999 m
Freehold Long leasehold 50 years or more Short leasehold less than 50 years At 26 February 2000 d Capital work in progress does not include land.
6,022 553 394 6,969
5,130 557 345 6,032
TESCO PLC 29
NOTE 13
Fixed asset investments

Group Joint ventures (b) m Own shares (c) m Share in Group Loans to Group undertakings (a) undertakings m m Company Joint ventures (b) m
At 27 February 1999 Additions Share of prot of joint ventures Disposals At 26 February 2000
a
234 40 3 (105) 172
102 11 (34) 79
2,001 199 2,200
3,000 3,000
252 44 (172) 124
The companys principal operating subsidiary undertakings are:

Business Share of equity capital Country of incorporation
Tesco Stores Limited Tesco Property Holdings Limited Tesco Insurance Limited Tesco Distribution Limited Spen Hill Properties 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 Stores Hong Kong Limited
Retail Property Investment Insurance Distribution Property Development Retail Retail Retail Retail Retail Retail Retail Purchasing
100% 100% 100% 100% 100% 100% 99% 98% 100% 100% 81% 93% 100%
Registered in England Registered in England Guernsey Registered in England Registered in England Republic of Ireland Hungary Poland Czech Republic Slovakia South Korea Thailand Hong Kong
All principal subsidiary undertakings, none of which are owned directly by Tesco PLC, operate in their country of incorporation.
b
The Groups 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 Personal Finance Life Limited Tesco Personal Finance Investments Limited Tesco Home Shopping Limited
Property Investment Property Investment Property Investment Property Investment Personal Finance Personal Finance Personal Finance Mail Order Retail
50% 50% 50% 50% 50% 50% 50% 60%
Registered in England Registered in England Registered in England Registered in England Registered in Scotland Registered in Scotland Registered in Scotland Registered in England
The Groups share of gross assets and gross liabilities of the joint ventures is disclosed below:
2000 m 1999 m
Gross assets Gross liabilities
958 (786) 172
821 (587) 234
The investment in own shares represents 71 million 5p ordinary shares in Tesco PLC with a weighted average value of 1.11 each.These shares are held by a qualifying employee share 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 79m (market value 120m) 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 rights to dividends on these shares.
TESCO PLC 30

NOTE 13
continued
Fixed asset investments continued

2000 m 1999 m
The net funds/(borrowings) of the joint ventures, as at 26 February 2000, were as follows: Cash and deposits Debenture stock repayable 2001 Term bank loan repayable 2003 Other loans 1,445 (40) (135) (1,225) 45 979 (38) (134) (900) (93)
There is no recourse to Group companies in respect of the borrowings of the joint ventures, apart from 16m (1999 15m) which has been guaranteed by Tesco PLC (note 29). Details of transactions and balances with the joint ventures are set out in note 30.
NOTE 14
Stocks
Group 2000 m 1999 m 2000 m Company 1999 m
Goods held for resale Development property
636 108 744
595 72 667
Additions to development property include 1m (1999 2m) of interest capitalised. Accumulated capitalised interest at 26 February 2000 was 15m (1999 14m).
NOTE 15
Debtors
Amounts owed by Group undertakings Prepayments and accrued income Other debtors Amounts owed by undertakings in which the company has a participating interest
37 178 37 252
31 100 20 151
705 419 22 37 1,183
1,690 202 12 20 1,924
NOTE 16
Investments
Money market deposits Bonds and certicates of deposit (market value 2m, 1999 2m)
256 2 258
199 2 201
19 2 21
2 2
TESCO PLC 31
NOTE 17
Creditors falling due within one year

Bank loans and overdrafts (a) (b) Trade creditors Amounts owed to Group undertakings Other creditors Corporation tax (c) Other taxation and social security Accruals and deferred income (d) Finance leases (note 22) Proposed nal dividend
832 1,248 603 282 78 217 15 212 3,487
811 1,100 446 236 92 177 19 194 3,075
1,327 905 19 33 1 28 212 2,525
1,341 1,733 3 21 194 3,292
a Bank deposits at subsidiary undertakings of 746m (1999 767m) have been offset against borrowings in the parent company under a legal right of set-off. b Includes 11m (1999 9m) secured on various properties. c The prior year comparative includes relief for advance corporation tax recoverable within one year. d A gain of 45m, realised in a prior 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 include 6m (1999 6m) attributable to these realised gains with 6m (1999 12m) being included in other creditors falling due after more than one year (note 18).
NOTE 18
Creditors falling due after more than one year

4% unsecured deep discount loan stock 2006 (a) Finance leases (note 22) 10 8% bonds 2002 ( b) 834% bonds 2003 (c) 712% bonds 2007 (d) 5 8% bonds 2009 (e) 6% bonds 2029 (f ) Medium term notes (g) Other loans ( h) Accruals and deferred income (note 17)
1 3
90 51 200 200 325 350 200 127 16 1,559 6 1,565
87 8 200 200 325 150 226 22 1,218 12 1,230
90 200 200 325 350 200 127 1,492 1,492
87 200 200 325 150 226 1,188 1,188
a The 4% unsecured deep discount loan stock is redeemable at a par value of 125m in 2006. b The 1038% bonds are redeemable at a par value of 200m in 2002. c The 834% bonds are redeemable at a par value of 200m in 2003. d The 712% bonds are redeemable at a par value of 325m in 2007. e The 518% bonds are redeemable at a par value of 350m in 2009.
f The 6% bonds are redeemable at a par value of 200m in 2029.

g The medium term notes are of various maturities and include foreign currency and sterling denominated notes swapped into oating rate sterling. h Secured on various properties.
TESCO PLC 32

NOTE 19
continued
Net debt
Due within one year : Bank and other loans Finance leases 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 wholly or in part by instalments after ve years: Finance leases Due otherwise than by instalments after ve years: Bank and other loans Gross debt Less: Cash at bank and in hand Money market investments and deposits Net debt
832 15 266 13 272 11 27 970 2,406 88 258 2,060
811 19 137 4 477 4 596 2,048 127 201 1,720
1,327 127 272 1,093 2,819 21 2,798
1,341 127 465 596 2,529 2 2,527
NOTE 20
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 6. Other than where these items have been included in the currency risk disclosures, short-term debtors and creditors have been excluded from the following analyses. 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 26 February 2000 after taking into account the effect of interest rate and currency swaps were:
Floating rate liabilities m Fixed rate liabilities m 2000 Total m Floating rate liabilities m Fixed rate liabilities m 1999 Total m
Currency Sterling Euro Thai baht Other Gross liabilities 1,186 104 235 222 1,747 512 147 659 1,698 251 235 222 2,406 1,172 16 190 21 1,399 487 162 649 1,659 178 190 21 2,048
Fixed rate nancial liabilities Weighted average interest rate 26 Feb 2000 % 2000 Weighted average time for which rate is xed Years Weighted average interest rate 27 Feb 1999 % 1999 Weighted average time for which rate is xed Years
Currency Sterling Euro Weighted average 6.7 5.8 6.7 15 3 12 9.0 5.9 8.2 6 4 5
Floating rate liabilities bear interest at rates based on relevant national LIBOR equivalents. Borrowing facilities are shown in the Operating and Financial Review on pages 2 to 6. The interest rate prole of the Group has been further managed by the purchase of interest rate caps with an aggregate notional principal of 100m (1999 100m), an average strike price of 8.3% and a two year maturity. The current value of these contracts, if realised, is nil (1999 nil).
TESCO PLC 33
NOTE 20
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 26 February 2000 were:
Cash at bank and in hand m Short-term deposits m 2000 Total m Cash at bank and in hand m Short-term deposits m 1999 Total m
Other m
Other m
Sterling Other Total nancial assets
88 88
75 183 258
37 37
112 271 383
62 65 127
49 152 201
20 20
131 217 348
Other nancial assets are in respect of amounts owed by undertakings in which the company has a participating interest, which attracts a rate of interest of 6.7%. 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 non interest bearing cash and cash in transit. 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 into account hedging transactions, there were no signicant balances on these exposures at year end. Rolling hedges of up to one years duration are maintained against the value of investments and long-term intercompany borrowings in overseas subsidiaries, and to the extent permitted in SSAP20, differences on exchange are taken to the statement of total recognised gains and losses. Fair values of nancial assets and nancial liabilities
2000 Book value m Fair value m Book value m 1999 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 Swap prot crystallisation (9) (12) (2,081) 4 (9) (12) (2,081) (4) (18) (1,742) 24 (4) (18) (1,835) (847) (1,559) 258 88 (847) (1,563) 258 88 (830) (1,218) 201 127 (830) (1,335) 201 127
Other signicant nancial instruments outstanding at the year end are 44m (1999 222m) nominal value forward foreign exchange contracts hedging the cost of foreign currency denominated purchases. On a mark-to-market basis, these contracts show a prot of nil (1999 nil). The fair values of the interest rate swaps, forward foreign currency contracts and long-term sterling denominated 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 Unrecognised gains and losses on instruments used for hedging and those recognised in the year ended 26 February 2000 are as follows:
Unrecognised Gains m Total net Losses gains/(losses) m m Deferred Gains m Total net Losses gains/(losses) m m
At 27 February 1999 Arising in previous years and recognised in the year ended 26 February 2000 Arising in the period to be recognised in future years At 26 February 2000 (a) Expected to be recognised in the year ended 24 February 2001 (a) a Gains and losses to be recognised through the prot and loss account.
58 (17) (27) 14 (3)
(34) 15 9 (10) 2
24 (2) (18) 4 (1)
18 (6) 12 (6)
18 (6) 12 (6)
TESCO PLC 34

NOTE 21
continued
Provisions for liabilities and charges

Deferred taxation m
At 27 February 1999 Amount charged in the year At 26 February 2000
17 2 19
Potential amount for deferred tax on timing differences 2000 m 1999 m
Amount provided 2000 m 1999 m
Deferred taxation Excess capital allowances over depreciation Capital gains deferred by rollover relief Short-term timing differences 1 18 19 Deferred taxation balances relate principally to short-term timing differences. Where possible, taxation on capital gains has been or will be deferred by rollover relief under the provisions of the Taxation of Chargeable Gains Act 1992. 17 17 358 (6) 18 370 315 (8) 12 319
NOTE 22
Leasing commitments
Finance leases The future minimum nance lease payments to which the Group was committed at 26 February 2000 and which have been guaranteed by Tesco PLC are: Gross rental obligations Less: nance charges allocated to future periods
m
81 (15) 66
2000 m
1999 m
Net amounts payable are: Within one year Between one and ve years After ve years 15 24 27 66 Operating leases
2000 m 1999 m
19 8 27
Group commitments during the 52 weeks to 24 February 2001, in terms of lease agreements expiring, are as follows: Within one year Between one and ve years After ve years 4 18 147 169 4 10 135 149
TESCO PLC 35
NOTE 23
Called up share capital

Ordinary shares of 5p each Number m
Authorised at 27 February 1999 Authorised during the year Authorised at 26 February 2000 Allotted, issued and fully paid: Issued at 27 February 1999 Scrip dividend election Share options exercised Issued at 26 February 2000
9,200,000,000 9,200,000,000
460 460
6,770,197,098 11,286,890 41,535,371 6,823,019,359
339 2 341
During the year, 52.8 million shares were issued for an aggregate consideration of 75m, which comprised 21m for scrip dividend and 54m for share options. Between 26 February 2000 and 10 April 2000, options on 5,131,917 ordinary shares and 6,616,704 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 26 February 2000 the Directors were authorised to purchase up to a maximum in aggregate of 682,301,935 ordinary shares.
NOTE 24
Reserves
Share premium account At 27 February 1999 Premium on issue of shares less costs Bonus issue on 3 July 1998 Scrip dividend election At 26 February 2000 Other reserves At 26 February 2000 and 27 February 1999 Prot and loss account At 27 February 1999 Loss on foreign currency net investments Issue of shares Retained prot for the nancial year At 26 February 2000 2,426 (36) (24) 372 2,738 2,225 (19) (109) 329 2,426 783 (3) (260) 520 851 (68) 783 40 40 1,577 52 21 1,650 1,528 248 (221) 22 1,577 1,577 52 21 1,650 1,528 248 (221) 22 1,577
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 accounts. The cumulative goodwill written off against the reserves of the Group as at 26 February 2000 amounted to 718m (1999 718m). During the year, the qualifying share ownership trust (QUEST) subscribed for 21 million shares from the company. The amount of 24m shown above represents contributions to the QUEST from subsidiary undertakings.
TESCO PLC 36

NOTE 25
continued
Share options
Company schemes The company had ve 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 month. 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 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. iii 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. iv 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. v The international executive share option scheme 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 as derived from the London Stock Exchange Daily Ofcial List 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. The company has granted outstanding options in connection with the ve schemes as follows: Savings-related share option scheme (1981)
Date of grant Number of executives and employees Shares under option 26 Feb 2000 Subscription prices (pence)
22 October 1993 26 October 1994 27 October 1995 31 October 1996 30 October 1997 29 October 1998 28 October 1999 Executive share option scheme (1984)
Date of grant
5 1,903 15,288 12,943 33,377 51,763 55,501
14,136 5,513,787 32,043,763 30,222,135 43,007,253 63,999,669 49,059,538

Shares under option 26 Feb 2000
53.7 61.7 83.3 83.0 121.7 136.0 151.0
Number of executives
Subscription prices (pence)
17 May 1991 29 May 1992 29 October 1992 27 May 1993 10 June 1994 12 August 1994 29 September 1994
4 72 2 3 137 1 9
60,000 2,772,503 78,663 184,425 3,117,726 471,372 346,242
91.3 92.3 72.3 72.3 70.0 81.0 77.3
TESCO PLC 37
Share options continued Executive share option scheme (1994)

NOTE 25
Date of grant
27 April 1995 13 October 1995 Executive share option scheme (1996)

Date of grant
7 312
741,954 7,924,787
90.3 104.0
3 July 1996 23 September 1996 17 April 1997 7 October 1997 17 November 1997 21 May 1998 30 September 1998 28 January 1999 24 May 1999 9 November 1999 30 November 1999 International executive share option scheme
Date of grant
22 593 1,012 40 2 1,287 36 1,358 8 43 8
2,624,106 16,018,351 19,760,589 4,662,588 446,373 21,859,618 1,521,695 22,025,669 882,044 2,356,085 1,098,962
98.3 99.7 117.7 151.7 160.3 176.7 164.0 178.0 179.4 184.0 173.0
7 October 1997 21 May 1998 28 January 1999 24 May 1999
117 284 359 18
1,869,690 2,775,000 3,727,500 520,746
151.7 176.7 178.0 179.4
NOTE 26
Pension commitments
The Group operates a funded dened benet pension scheme for full-time employees in the UK, the assets of which are held as a segregated fund and administered by trustees.The total cost of the scheme to the Group was 60m (1999 55m). An independent actuary, using the projected unit method, carried out the latest actuarial assessment of the scheme at 5 April 1999. The assumptions that have the most signicant effects 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: Rate of return on investments Rate of increase in salaries Rate of increase in pensions 7.25% 4.50% 2.75%
At the date of the latest actuarial valuation, the market value of the schemes assets was 1,297m and the actuarial value of these assets represented 96% of the benets that had accrued to members, after allowing for expected future increases in earnings.The actuarial shortfall of 53m will be met via increased contributions over a period of 11 years, being the expected average remaining service lifetime of employed members. The Group also operates a dened contribution pension scheme for part-time employees which was introduced on 6 April 1988. The assets of the scheme are held separately from those of the Group, being invested with an insurance company. The pension cost represents contributions payable by the Group to the insurance company and amounted to 19m (1999 17m). There were no material amounts outstanding to the insurance company at the year end. The Group operates a number of pension schemes worldwide, most of which are dened contribution schemes.The contributions payable for non-UK schemes of 3m (1999 1m) have been fully expensed against prots in the current year. A dened benet scheme operates in the Republic of Ireland. At the latest actuarial valuation carried out at 1 April 1998, the market value of the schemes assets was 42m and the actuarial value of these assets represented 129% of the benets that had accrued to members, after allowing for expected future increases in earnings.
TESCO PLC 38

NOTE 27
continued
Post-retirement benets other than pensions
The company operates a scheme offering post-retirement healthcare benets.The cost of providing for these benets has been accounted for on a basis similar to that used for dened benet pension schemes. The liability as at 24 February 1996 of 10m, which was determined in accordance with the advice of qualied actuaries, is being spread forward over the service lives of relevant employees and 1m (1999 1m) has been charged to the prot and loss account. An amount of 4m (1999 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 28
Capital commitments
At 26 February 2000 there were commitments for capital expenditure contracted for but not provided of 303m (1999 260m).
NOTE 29
Contingent liabilities
Certain bank loans and overdraft facilities of joint ventures have been guaranteed by Tesco PLC. At 26 February 2000, the amounts outstanding on these facilities were 16m (1999 15m). 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.
NOTE 30
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 eight joint ventures: Shopping Centres Limited, BLT Properties Limited, Tesco British Land Property Partnership, Tesco BL Holdings Limited, Tesco Personal Finance Group Limited, Tesco Personal Finance Life Limited, Tesco Personal Finance Investments Limited and Tesco Home Shopping Limited.The main transactions during the year were: i Equity funding of 42m (41m in Tesco Personal Finance Group Limited and 1m in Tesco Home Shopping Limited). ii The sale of nine properties formerly held in the British Land Property Partnership to subsidiaries of Tesco BL Holdings Limited, a limited company owned 50:50 by Tesco PLC and British Land PLC. A bank loan of 210m was raised against the properties and the company received 105m, reducing the aggregate investment by Tesco in the Property Partnership and the new joint venture to 63m. Additionally, the Group made rental payments of 16m (1999 13m) to Tesco British Land Property Partnership. iii The Group made rental payments of 3m (1999 3m) and 11m (1999 11m) to Shopping Centres Limited and BLT Properties Limited respectively. iv The Group has charged Tesco Personal Finance Limited (a 100% subsidiary of Tesco Personal Finance Group Limited) an amount totalling 12m in respect of services, loan interest and assets transferred, of which 2m was outstanding at 26 February 2000. Tesco Personal Finance Limited received fees totalling 3m from the Group for managing certain nancial products. In addition, an amount of 4m, the majority of which relates to group relief was outstanding at 26 February 2000. v The Group has charged Tesco Home Shopping Limited an amount totalling 3m in respect of services, loan interest and assets transferred, of which 1m was outstanding at 26 February 2000. vi The Group made loans totalling 17m (10m to Tesco Personal Finance Group Limited and 7m to Tesco Home Shopping Limited).
TESCO PLC 39
NOTE 31
Reconciliation of operating prot to net cash inow from operating activities

2000 m 1999 m
Operating prot Depreciation and goodwill amortisation Increase in goods held for resale (Increase)/decrease in development property Increase in debtors Increase in trade creditors Increase/(decrease) in other creditors Decrease/(increase) in working capital Net cash inow from operating activities
1,030 435 (47) (40) (45) 156 24 48 1,513
934 406 (69) 13 (12) 81 (32) (19) 1,321
NOTE 32
Acquisitions
Effective 1 May 1999, Tesco acquired a 51% controlling interest in a newly incorporated company, Samsung Tesco Co. Limited for a cash consideration of 81m and incurred fees of 4m. Subsequently the company paid 57m to increase its holding in Samsung Tesco Co. Limited to 81% on 30 June 1999. Net assets amounted to 138m. A subsequent fair value adjustment revised this to 136m. The impact of this acquisition on the results for the year was immaterial.
NOTE 33
Analysis of changes in net debt

At 27 Feb 1999 m Cash ow m Other non cash changes m Exchange movements m At 26 Feb 2000 m
Cash at bank and in hand Overdrafts
127 (31) 96
(34) (4) (38) 68 (19) 4 (15) (303) (13) (316) (301)
(4) (4) (30) (30) (34)
(5) (5) (11) 6 6 5 5 (5)
88 (35) 53 258 (797) (15) (812) (1,508) (51) (1,559) (2,060)
Money market investments and deposits Bank and other loans Finance leases Debt due within one year Bank and other loans Finance leases Debt due after one year
201 (780) (19) (799) (1,210) (8) (1,218) (1,720)
TESCO PLC 40
ve year record
Year ended February 1996 1997 1998
1
1999
2000
notes 1 53 week period. 2 Excludes integration costs and goodwill amortisation. Operating margin is based upon turnover exclusive of VAT. 3 Underlying prot, adjusted and adjusted diluted, earnings per share excludes net loss on disposal of xed assets, loss on disposal of discontinued operations, Ireland integration costs and goodwill amortisation. 4 Represents loss on disposal of discontinued operations. 5 Total capital employed at the year end. 6 Underlying prot divided by weighted average shareholders funds. 7 Operating prot divided by average capital employed. 8 Based on number of shares at year end. 9 Based on turnover exclusive of VAT, operating prot and total staff cost per full-time equivalent employee. 10 Based on weighted average sales area and turnover inclusive of VAT excluding property development. Store sizes exclude lobby and restaurant areas. Based on Tesco food, grocery, nonfood and drink sales and Institute of Grocery Distribution/Ofce for National Statistics data for the year to the previous December. Average store sizes exclude Metro and Express stores. Based on average number of fulltime equivalent employees in the UK.
Financial statistics m Turnover excluding VAT UK Rest of Europe Asia Operating prot 2 UK Rest of Europe Asia
11,560 534 12,094 713 11 724
13,118 769 13,887 760 14 774 5.8% 1.8% 5.6% (24) 750 750 (230) 520 7.83p 8.03p 3.45p 3,890 20.1% 17.1% 60p 146,326 8,478 14,222 19.74 14.2% 568 14,036 26,300 89,649 758 16,747 98,463 123 88 116
14,971 1,481 16,452 875 37 912 5.8% 2.5% 5.5% (6) (74) 832 (63) (8) (1) 760 (228) 532 8.84p 9.05p 3.87p 3,903 21.3% 18.7% 59p 149,799 8,755 15,079 20.48 14.8% 618 15,215 26,600 99,941 781 18,254 119,127 180 113 172
15,835 1,167 156 17,158 919 48 (2) 965 5.8% 4.1% (1.3)% 5.6% 6 (90) 881 (26) (5) (8) 842 (237) 1 606 9.37p 9.59p 4.12p 4,377 21.3% 17.2% 65p 151,138 8,771 15,271 21.05 15.4% 639 15,975 26,654 104,772 821 21,353 126,914 202 157 177
16,958 1,374 464 18,796 993 51 (1) 1,043 5.9% 3.7% (0.2)% 5.5% 11 (99) 955 (6) (7) (9) 933 (259) 674 10.18p 10.36p 4.48p 4,798 20.9% 16.1% 70p 156,427 9,160 15,600 21.43 15.5% 659 16,895 27,720 108,409 845 24,039 134,896 197 156 169
Operating margin 2 UK 6.2% Rest of Europe 2.1% Asia Total Group 6.0% Share of prot /(loss) from joint ventures Net interest payable (43) Underlying prot 3 681 Ireland integration costs Goodwill amortisation Net loss on disposal of discontinued operations 4 Net loss on disposal of xed assets (6) Prot before taxation 675 Taxation (209) Minority interest Prot for the nancial year 466 Adjusted diluted earnings per share 3 7.30p Adjusted earnings per share 7.50p Dividend per share 3.20p Net worth m 5 3,588 Return on shareholders funds 6 20.4% Return on capital employed 7 16.9% Net assets per share 8 56p UK retail productivity Turnover per employee 9 143,3359 Prot per employee 9 8,841 Wages per employee 9 13,948 Weekly sales per sq ft 10/11 18.31 UK retail statistics Market share in food and drink shops 12 13.4% Number of stores 545 Total sales area 000 sq ft 11 13,397 Average store size (sales area sq ft) 13 25,600 Full-time equivalent employees 14 80,650 Group statistics Number of stores 734 Total sales area 000 sq ft 15,114 Full-time equivalent employees 84,918 Share price (pence) Highest 113 Lowest 82 Year end 90
11 12
13 14
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TESCO PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2000

Accelerating growth through our customer focused strategy

m *52 weeks pro forma

GROUP PROFIT BEFORE TAX

*52 weeks pro forma

EARNINGS PER SHARE

Group operating prot

1,043 955 13,591 10.18 4.48 845 24,039

965 881 13,528 9.37 4.12 821 21,353

Prot on ordinary activities before tax (m) Group enterprise value

12,556 8.70 3.87 781 18,254

Group sales (including value added tax) (m)

1998* 52 weeks (pro forma)

Pence *52 weeks pro forma

OPERATING CASH FLOW AND CAPITAL EXPENDITURE

operating cash ow capital expenditure

operating and nancial review

1,043 955 10.18p 4.48p

965 881 9.37p 4.12p

8.1 8.4 8.6 8.7

Group sales including VAT increased by 9.8% to 20,358m

*52 weeks pro forma

Group sales UK retail sales

Group interest and taxation

UK 1996 1997 1998 1999 2000

Shareholder returns and dividends

TOTAL SHAREHOLDER RETURN

*52 weeks pro forma

similar amount in the current year.

In total we opened 1.2m sq ft of new space and expect to open a

UK sales area opened including Express

operating and nancial review

Rest of Europe fact le

Liquidity and interest rate risk

Treasury management and nancial instruments

Foreign currency risk

operating and nancial review

Economic Monetary Union

Principal activity and business review

Directors and their interests

Tangible xed assets

Annual General Meeting

Political and charitable donations

Supplier payment policy

Relations with shareholders

Relations with shareholders

Accountability and audit

Internal nancial control

BOARD COMMITTEE MEMBERSHIP

Statement of compliance with the Code Provisions in the Combined Code

report of the directors on remuneration

Directors remuneration policy

Executive incentive scheme

Base salary and benets

231 195 131 95 174 134 134 104 146 1,344

245 228 162 61 212 86 135 66 177 1,372

report of the directors on remuneration

Gains made on share options

386 153 781 466 594 410 232