Final Results

13th Oct 2005 07:01

Smith WH PLC13 October 2005 WH Smith PLC Preliminary Results Announcement For the twelve months ended 31 August 2005 SUBSTANTIAL IMPROVEMENT IN PROFITABILITY; RECOVERY PLAN ON TRACK KEY POINTS • Profit before tax, goodwill amortisation and exceptional items on continuing operations, up 59% to £73m (2004: £46m); High Street Retail(1) up 87% to £43m • Total Group profit before tax is £64m (2004: loss of £135m) • Total sales of continuing operations down 1% to £2.5bn - Retail like-for-like (LFL) sales down 2% - News Distribution LFL sales flat • Target cost savings delivered faster than planned; additional cost savings of £18m over next 3 years identified • Strong free cash generation of £78m - increased from £12m last year • Returned £205m to shareholders in September 2004 following completion of the sale of Hodder for £224m(2) • Headline earnings per share(3) from continuing operations up 121% to 31.6p (2004: 14.3p) • Earnings per share of 26.0p (2004: loss per share 60.7p) • Final dividend up to 9.2p (2004: 8.0p) making 13.7p (2004:12.0p) for the full year - an increase of 14% (1)High Street Retail profit is stated before defined benefit pension servicecosts, exceptional items, goodwill amortisation, interest and taxation (2)£210m in cash and assumption of the Hodder Headline net pension deficit of£14m (3)Headline earnings per share: before exceptional items, goodwill amortisationand FRS17 pension interest - undiluted Commenting on the results, Kate Swann, Group Chief Executive said: "This is a good performance for the Group with a substantial improvement inprofitability. One year into our plan to deliver value to shareholders we are ontrack, despite the challenging trading environment. "In High Street Retail we have improved profitability by 87% versus last year.Our staff have worked hard to manage costs tightly and implement initiatives toincrease product availability and choice and to raise store standards. "Travel Retail has had another strong year delivering good sales and profitgrowth. "News Distribution has made steady progress over the year delivering profitgrowth of 6%. "Trading conditions on the high street remain challenging. As we approachChristmas, we remain cautious about consumer spending and have plannedaccordingly." Enquiries: WH Smith PLCLouise Evans Media Relations 020 7851 8850Mark Boyle Investor Relations 020 7851 8820 Brunswick Tom Buchanan 020 7404 5959Pam Small CURRENT TRADING In the 6 weeks to 8 October 2005, Retail LFL sales were down 2% and gross marginwas up on last year. News Distribution sales were down 1%. FINANCIAL REVIEW Operating activities The Group's profitability has recovered significantly with strong performancesfrom all businesses, despite the tough trading climate, particularly in thesecond half of the year. High Street Retail's profitability recoveredsubstantially compared with the prior year. The focus in High Street Retail hasbeen on good category mix management and tight cost control. Travel Retaildelivered a strong performance through sales growth, margin growth and costcontrol and News Distribution delivered another solid result. The Group generated a profit before tax, exceptional items and goodwillamortisation from continuing businesses of £73m (2004: £46m), an increase of 59%on the prior year. Profit before tax, after exceptional items and goodwillamortisation, was £64m (2004: loss of £135m). During the year High Street Retail has delivered £18m of the 3-year cost savingprogramme, £3m more than the announced £15m target for this year. The businessis on track to deliver the total £30m target over three years. We haveidentified a further £18m of cost savings, in support areas such as sharedinformation systems, logistics and store efficiencies. We have delivered £2m ofthese new savings in 2004/05 and the remainder will be delivered over the nextthree years. We expect the total cost savings broadly to mitigate inflationarypressures in 2006 and 2007. Headline earnings per share(3) from continuing operations increased by 121% to31.6p (2004: 14.3p) with earnings per share from continuing operations of 30.5p(2004: loss per share of 20.5p). Given the improvement in the Group's trading position, the Board has proposed anincreased final dividend of 9.2p per share (2004: 8.0p), making a full yeardividend of 13.7p (2004: 12.0p). Cash generation was strong due to the improved trading performance in thebusinesses and good stock and debtor control. Group free cash flow was £78m(2004: £12m). The reduction in net assets to £42m (2004: £256m) reflects thereturn of cash to shareholders and an increase in the pension deficit as aresult of falling bond yields. Non-operating activities In September 2004, the Group completed the disposal of Hodder Headline for £224m(2) and returned £205m to shareholders. Following the disposal, the Group made a £120m cash contribution to the WHSmithPension Trust. This payment was financed from the Group's own resources and newbanking facilities. In September 2005, the Trustees of the WHSmith Pension Trust adopted a newinvestment policy in order to limit the volatility in the underlying investmentperformance and reduce the risk of a significant increase in the deficit in thefund. A Liability Driven Investment approach has been adopted with 94% of theassets now invested in inflation and interest rate hedged investments (whichchange in value in line with changes in the underlying liabilities). The balanceis in equity options designed to enable the fund to continue to benefit from anypotential higher returns from the equity markets. Following this change in the investment policy, the Board and the Trustees haveagreed a new deficit funding agreement. This agreement provides the Company withgreater predictability over the level of future pension deficit payments. Theagreement replaces that reached last year and will result in pension deficitfunding payments of £15m in 2005/06, £17m in 2006/07, £20m in 2007/08 andincreasing by RPI (capped at 5%) thereafter until the deficit (as calculatedunder FRS17) is repaid. GROUP PROFIT AND LOSS ACCOUNT Group sales summary £m 2005 2004 Growth % LFL Sales Growth %----------------------- ------- -------- -------- ---------SalesRetail 1,423 1,453 (2%) (2%)News Distribution 1,187 1,182 - ------------------------ ------- -------- -------- ---------Sales - continuing 2,610 2,635 (1%) (1%)Internal sales (113) (115) (2%) (2%)----------------------- ------- -------- -------- ---------Total sales 2,497 2,520 (1%) (1%)Discontinued businesses 11 314----------------------- ------- -------- --------Reported sales 2,508 2,834 (12%)----------------------- ------- -------- -------- Continuing like for like sales were down 1% year on year. Retail like for likesales were down 2% in the first half of 2004/05 and were down 1% for the secondhalf. News distribution sales were flat for the full year, with like for likesales up 2% in the first half and down 1% in the second half. Overall totalsales including discontinued businesses were down 12%. Group trading results£m 2005 2004 Profit Growth %------------------------ ------- -------- --------Operating profit(4)Retail 69 44 57%News Distribution 37 35 6%------------------------ ------- -------- --------Trading profit(4) 106 79 34%Central costsSupport functions (16) (15) (7%)Pension service costs (10) (14) 29%Internal rents 1 1 ------------------------- ------- -------- --------Operating profit(4) - continuing 81 51 59%Net finance charges - continuing (8) (5) (60%)------------------------ ------- -------- --------Profit(4)before taxation - continuing 73 46 59%------------------------ ------- -------- --------Discontinued businesses - 21 ------------------------- ------- -------- --------Profit(4) before taxation 73 67 9%------------------------ ------- -------- -------- (4) Stated before exceptional items and goodwill amortisation Trading profit was up 34% to £106m. Pension service costs were reduced by £4m compared to last year, as a result ofthe introduction of employee contributions, a reduction in certain schemebenefits such as early retirement terms and an overall reduction in pensionablesalaries following the organisation review in 2004. Group operating profit from continuing operations before exceptional items andgoodwill amortisation was up 59% to £81m. OPERATIONAL REVIEW Retail£m 2005 2004 Growth % LFL Sales Growth % ------------------- ------- -------- ------- -------SalesHigh Street Retail 1,112 1,152 (3%) (3%)Travel Retail 311 301 3% 4%------------------- ------- -------- ------- -------Total divisional sales 1,423 1,453 (2%) (2%)------------------- ------- -------- ------- -------Divisional profitHigh Street Retail 43 23 87%Travel Retail 26 21 24%------------------- ------- -------- -------Total divisional profit 69 44 57%------------------- ------- -------- ------- NB: All divisional profit and loss figures in this section are stated beforedefined benefit pension service costs, exceptional items and goodwillamortisation, interest and taxation. High Street Retail numbers incorporate theresults of WHSmith Online, which has been integrated. Retail sales fell by 2% to £1,423m (2004: £1,453m) with like for like sales down2%. Gross margin increased by 240 basis points to 40.5%. Retail divisionalprofit increased 57% to £69m (2004: £44m). Stationery sales were up 3% in the year, with sales up 4% in the first half andup 1% in the second half, as the anniversary of last year's initiatives wasreached. Book sales for the full year fell by 2%. Book sales in the first halffell by 3% as we did not repeat the previous year's unprofitable promotions. Inthe second half sales were down by 1% year on year, with a strong performancefrom sales of Harry Potter and the Half-Blood Prince. News and Impulse saleswere up 1% on last year; excluding the decline in sales of phone cards, salesgrew 2%. In Entertainment, sales fell by 12% versus last year as a result ofcontinued intense competition in the category and our focus on switching salesfrom low to high margin categories. Despite difficult trading conditions, profit in the year increased by £25m to£69m with gross contribution increasing by £23m to £576m. Gross margin growth of240 basis points reflected the shift from lower margin entertainment products tohigher margin stationery products and improved buying terms. High Street Retail has delivered £18m of the 3-year cost saving programme duringthe year, £3m more than the announced £15m target for this year. The business ison track to deliver the total £30m target over three years. During the course ofthe year, we identified a further £18m of cost savings, in support areas such asshared information systems, logistics and store efficiencies. We have delivered£2m of these savings in 2004/05 and the remainder will be delivered over thenext three years. We expect the total cost savings broadly to mitigateinflationary pressures in 2006 and 2007. As a result of these initiatives, net margin for Retail increased by 180 basispoints to 4.8 per cent. The Retail business now operates from 669 stores, which occupy 3.3m square feet(2004: 3.3m square feet). We opened five new stores in the year and closed ninestores. News Distribution Total sales of £1,187m (2004: £1,182m) were flat for the year. Newspapers saleswere up 1%, with price increases and book promotions offsetting volume declines.Magazine sales were flat, with a steady weeklies market, fuelled by a number ofnew product launches, offsetting a slower monthly market. The number of partworks and one-shots declined by 15%, following an exceptionally strongperformance last year, including Euro 2004. Gross contribution reduced by £1m, due to a shift in relative sales frommagazines to newspapers. With a clear focus on tight cost control, profit grew by £2m to £37m. Net marginimproved to 3.1% (2004: 3.0%). The OFT published their draft opinion into newspaper and magazine distributionin May this year. In it, they recognised the unique nature of the news supplychain and suggested current exclusive arrangements are likely to be seen asacceptable under EC competition law. For magazines, the draft opinion suggestedthat exclusive contracts would remain but would need to allow for passive sales. We believe having different arrangements for newspapers and magazines may leadto inefficiencies in the market. However, the investments we have made in recentyears in service and systems leave us better placed to adapt to any changes thatmay occur in the market and we are carefully assessing the possible implicationsas we await the final opinion. Central costs Centrally controlled support costs were £16m (2004: £15m) and internal rents onfreehold property owned by the Group remained at the prior year level of £1m. Pension service costs were reduced by £4m compared with the prior year, as aresult of the introduction of employee contributions, a reduction in certainscheme benefits such as early retirement terms and an overall reduction inpensionable salaries following the organisation review in 2004. Exceptional items In the first half, the Group booked pre-tax exceptional charges of £8m, whichrelated to discontinued businesses. Of this amount, £7m related to an impairmentreview of the loan notes received as deferred consideration in respect of thedisposal of the Group's USA businesses in the prior year. The balance related tofurther closure and exit costs. On 25 September 2004, the Group completed the disposal of its publishingbusiness, Hodder Headline Ltd. The business was sold to Hachette Livre S.A. for£210m cash and the assumption of the Hodder Headline Ltd net pension deficit of£14m. Net finance charges The results include net interest of £8m (2004: £5m). The increase in the netfinance charges from last year is primarily due to the drawdown of the termdebt. Net finance costs of the pension fund under FRS 17 were £2m (2004: £4m).This represents the difference between interest earned on pension scheme assetsand interest charged on pension scheme liabilities. Taxation The tax charge for the year before tax on exceptional items and goodwillamortisation was £18m (2004: £23m). The effective tax rate on continuingactivities, excluding exceptional items and goodwill amortisation, was 25%(2004: 30%). The Group made significant progress in settling prior year corporation taxliabilities with the Inland Revenue. We expect our effective tax rate to beapproximately 25% for some years. Earnings / (loss) per share The Group generated Headline earnings per share(3) from continuing operations of31.6p (2004: 14.3p) while earnings per share from continuing operations were30.5p (2004: loss of 20.5p per share). Dividends The Board is proposing an increased final dividend of 9.2p per ordinary share(2004: 8.0p). The final dividend will be paid on 7 February 2006 to shareholdersregistered at the close of business on 6 January 2006. This will give a fullyear dividend of 13.7p (2004: 12.0p). The total cost of the dividend is £23m.Excluding exceptional items and goodwill amortisation, the equity dividend iscovered 2.4 times by earnings. As part of the capital reorganisation in October 2004, the Group paid a specialdividend of £143m. Fixed charges cover Fixed charges, comprising operating lease rentals, property taxes, otherproperty costs and interest, were covered 1.4 times by profit before fixedcharges, excluding exceptional items and goodwill amortisation (2004: 1.3 timescover). FREE CASH FLOW AND CASH BALANCES The operating free cash flow amounted to £78m compared with £12m in the previousyear. £m 2005 2004---------------------------- ------------ ---------- Profit before tax, exceptional items and goodwill 73 67Depreciation & amounts written off tangible fixed assets 42 46---------------------------- ------------ ----------Cash profit 115 113Working capital 4 (27)Capital expenditure (32) (49)Tax (4) (21)Net provisions (5) (4)---------------------------- ------------ ----------Free cash flow 78 12---------------------------- ------------ ---------- The movement in working capital for continuing businesses was £25m favourable tothe previous year, principally as a result of the strong focus on stock levelsand improved control of debtors. This can be further analysed as follows: £m 2005 2004-------------------------- ------------ ---------- Stock 6 (16)Debtors 10 -Creditors (2) 5-------------------------- ------------ ----------Working capital - continuing 14 (11)Discontinued businesses (10) (16)-------------------------- ------------ ----------Working capital movement 4 (27)-------------------------- ------------ ---------- Capital expenditure£m 2005 2004-------------------------- ------------ ----------New stores 4 8Refurbished stores 14 16Systems* 23 13Other 4 6Discontinued businesses - 6-------------------------- ------------ ----------Total 45 49-------------------------- ------------ ---------- * Within systems expenditure are assets funded by finance leases of £13m (2004:£nil) which is a non-cash movement We have continued to invest in maintaining our retail properties. In High StreetRetail we have invested £17m in upgrading our stores and our business systemsinfrastructure, including installing electronic point of sale (EPOS) systems inall stores. Net Funds The movement in the net funds position is as follows: £m--------------------------------- --------Opening net funds 45Free cash flow 78Equity dividends paid (21)Cash returned to shareholders (205)Net purchase of own shares (7)Pension deficit funding (130)Net disposals 203Finance leases (13)Financing fees (2)Premium on issue of shares 2Sale & leaseback proceeds 2--------------------------------- --------Closing net debt (48)--------------------------------- -------- The amount shown for pension deficit funding of £130m represents the differencebetween the cash contributions to the defined benefit pension scheme of £142mand the associated profit and loss charge, which comprised £10m for operatingcosts and £2m for financing. The net disposals of £203m includes gross proceeds of £222m from Hodder Headlineand WHSmith ASPAC disposals, less £10m of disposal transaction costs and £9m ofadvisory fees in respect of the bid approach received last year. GROUP BALANCE SHEET £m £m--------------------------------- --------- --------Goodwill 14Fixed assets 231 -------- 245Stock 162Creditors less debtors (192) ---------Working capital (30)Deferred tax asset 20Corporation tax (27)Provisions (31)Dividends (16)--------------------------------- --------- --------Operating assets employed 161Net debt (48)--------------------------------- --------- --------Net assets excluding pension liabilities 113--------------------------------- --------- -------- Net pension liability (71)--------------------------------- --------- --------Total net assets 42--------------------------------- --------- -------- The movement of net assets over the year is as follows: £m £m--------------------------------- --------- --------Opening net assets 256 Pre-tax profit before exceptional items and goodwill 73Tax on above (18) --------- 55Return of cash to shareholders (205)Money returned to ESOP Trust after capital reorganisation 5Dividends (23)Increase in pension scheme deficit (30)Purchase of own shares for employee share schemes (12)Employee share schemes 5--------------------------------- --------- --------Net assets before exceptional items 51 Goodwill amortisation (1)Provision for discontinued businesses (8) (9) ------------------------------------------ --------- --------Closing net assets 42--------------------------------- --------- -------- Following the return of cash to shareholders and the increase in the pensionscheme deficit as a result of falling bond yields, the Group's net assetsdeclined substantially from £256m at the end of 2004 to £42m this year. Return on Capital Employed (ROCE) Total capital employed and ROCE were as follows: Operating ROCE % ROCE % with Capital operating Employed leases £m capitalised---------------------- --------- --------- ---------- High StreetRetail 187 23% 13%Travel Retail 24 108% 32%---------------------- --------- --------- ----------Retail 211 33% 16%News Distribution (25) - -Central itemsand property (19) - ----------------------- --------- --------- ----------Operating assetsemployed -continuing operations 167 48% 19%---------------------- --------- --------- ---------- For the prior year, comparable average returns were 37 per cent (14 per cent -after capitalised operating leases) Pensions During the year, the Group made significant cash contributions of £142m to itspension scheme. The payments have been funded from the Group's own resources andnew banking facilities, now partially repaid. The gross deficit has reduced to£94m from £205m, a total reduction of £111m, with falling bond yields adverselyimpacting during the year. In September 2005, the Trustees of the WHSmith Pension Trust adopted a newinvestment policy in order to limit the volatility in the underlying investmentperformance and the risk of a significant increase in the deficit in the fund. The assets in the investment fund were restructured in order to adopt thispolicy. This involved the expected liabilities of the scheme being matched byassets that will alter in value as interest and inflation rates change, matchingthe movements at the same rate as the pension liability changes ("a LiabilityDriven Investment 'LDI' policy"). The key features of this fund restructuring are as follows: - 94% of the fund's assets are invested in an LDI structure with aleading international institutional fund manager - 6% of the fund's assets have been used to purchase a portfolio oflong-dated equity Call options. These represent a notional exposure tounderlying equities of some £350m. The impact of this change in investment policy is to limit the volatility in thefund and the resultant risk of a significant increase in the overall deficitwhilst enabling the fund to continue to benefit from any potential higherreturns in the equity markets. The overall expected rate of return from theportfolio under the new arrangements is 5% in the 2005/06 financial year. Following this change in the investment policy the Board and the Trustees haveagreed a new deficit funding agreement that gives the Company significantlygreater predictability over the level of future deficit reduction payments. Thisagreement replaces that reached last year and, subject to certain limitedconditions, will result in deficit funding payments of £15m in 2005/06, £17m in2006/07, £20m in 2007/08 and increasing by RPI (capped at 5%) thereafter untilthe deficit (as calculated under FRS17) is repaid. Return of Cash to Shareholders On 27 September 2004 the Company undertook a capital reorganisation wherebyexisting ordinary shareholders received 18 new ordinary shares and 25 newnon-cumulative preference shares of nominal value 85p ('C' shares) for every 25existing ordinary shares. The new ordinary shares have a nominal value of 2 13/81p each. This capital reorganisation was effected by a bonus issue ofapproximately £78m, using the share premium account to pay up fully undesignatedshares of 31p each, which were then allocated to shareholders on the basis ofone undesignated share for every existing share held. The existing ordinaryshares and undesignated shares were then consolidated and split, resulting inthe issue of new ordinary shares with a nominal value of £4m and 'C' shares witha nominal value of £213m. In accordance with the terms of the capital reorganisation, shareholders couldelect to sell 'C' shares to the Company at 85p per share following which allsuch 'C' shares would be cancelled by the Company or to receive the initial 'C'share dividend of 85p per 'C' share following which all such 'C' shares would beconverted into deferred shares. On 27 October 2004, as a result of theseelections, the Company repurchased 73,182,358 'C' shares for their nominal valueof 85p each, a total repurchase amount of £62m and paid an initial 'C' sharedividend of £143m in respect of 167,686,994 'C' shares. The remaining 10 million 'C' shares may be purchased by the Company (subject tothe provisions of the Companies Act 1985) or converted into ordinary shares atthe Company's option and carry a net non-cumulative dividend set at a rate thatis the lower of 75 per cent of 6 month LIBOR and 20 per cent per annum. The 'C'shares have limited voting rights. Financing A three year £270m facility agreement was signed on 26 July 2004 between theGroup, Lloyds TSB Bank plc, HSBC Bank plc and Royal Bank of Scotland plc underwhich up to £120m was available by way of a term loan facility and where amountsrepaid or not drawn down may not be re-borrowed, and £150m is available by wayof a multicurrency revolving credit facility. The agreement contains provisions,obligations and certain financial covenants, which are customary in such anagreement. The Group drew down £90m of the term loan facility and repaid £25m inthe year, leaving a balance of £65m drawn down at the end of the year. Operating leases The Group's stores are held mainly under operating leases that are notcapitalised and therefore are not included as a debt for accounting purposes.The High Street Retail leases are on standard 'institutional' lease terms,typically with a 15-year term subject to five-year upwards-only rent reviews.The Travel Retail stores operate mainly through turnover related leases, usuallywith minimum rent guarantees, and generally varying in length from five to tenyears. The business has an annual minimum net rental commitment of £139m (net of £11mof external rent receivable). The total future rental commitment at the balancesheet date amounted to £0.9bn with the leases having an average life of sevenyears. The net present value of these commitments is approximately £0.6bn. Thisis considered to be a satisfactory situation for, although large, thesecommitments are characteristic of the retail sector and the risks associatedwith them depend on their liquidity, influenced mainly by the quality andlocation of the sites. Currency Currency exposures mainly relate to the supply of products from outside the UK.The effects of fluctuations in exchange rates on operating profit beforeexceptional items and goodwill amortisation were minimal in the year. INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) The Group is required to prepare its financial statements for the year ended 31August 2006 and all subsequent periods in accordance with IFRS. This willrequire an opening balance sheet as at 1 September 2004 together with the incomestatement and balance sheet for the year ended 31 August 2005 to be preparedunder IFRS for comparative purposes. The principal adjustments to the Group's financial statements will arise fromchanges to share based remuneration accounting, leases, pension assets,goodwill, accounting for financial instruments and the recognition of dividends.The net impact of the adjustments on the restated balance sheet as at 31 August2004 is expected to be broadly neutral. We plan to report our 2005 restated results under IFRS in late November 2005 andwe will provide an analysis of accounting adjustments at that time. WH Smith PLC Group Profit and Loss AccountFor the 12 months to 31 August 2005 2005 2004------------------ ------ ------- ------- -------- ------- ------- -------£m Note Before Exceptional Total Before Exceptional Total exceptional items & exceptional items & items & goodwill items & goodwill goodwill amortisation goodwill amortisation amortisation amortisation ------------------ ------ ------- ------- -------- ------- ------- ------- TurnoverContinuingoperations 2,497 - 2,497 2,520 - 2,520Discontinuedoperations 11 - 11 314 - 314------------------ ------ ------- ------- -------- ------- ------- -------Group Turnover 1 2,508 - 2,508 2,834 - 2,834------------------ ------ ------- ------- -------- ------- ------- -------Operating profit /(loss)Continuingoperations 81 (1) 80 51 (93) (42)Discontinuedoperations - - - 21 (10) 11------------------ ------ ------- ------- -------- ------- ------- -------Groupoperatingprofit /(loss) 1,2,3 81 (1) 80 72 (103) (31)Net loss onsale ofdiscontinuedoperations 4 - (8) (8) - (101) (101)Profit on saleof fixedassets -continuingoperations 5 - - - - 2 2------------------ ------ ------- ------- -------- ------- ------- -------Profit /(loss) onordinaryactivitiesbefore netfinancecharges 81 (9) 72 72 (202) (130)Net financecharges 9 (8) - (8) (5) - (5)------------------ ------ ------- ------- -------- ------- ------- -------Profit /(loss) onordinaryactivitiesbeforetaxation 73 (9) 64 67 (202) (135)Tax on profit/ (loss) onordinaryactivities 10 (18) - (18) (23) 10 (13)------------------ ------ ------- ------- -------- ------- ------- -------Profit /(loss) onordinaryactivitiesafter taxationfor thefinancial year 55 (9) 46 44 (192) (148)Dividends(equity andnon-equity) 11 (166) - (166) (24) - (24)------------------ ------ ------- ------- -------- ------- ------- -------Retained(losses) /earnings (111) (9) (120) 20 (192) (172)------------------ ------ ------- ------- -------- ------- ------- ------- Headline earningsper share(1)Basic -continuingoperations 12 31.6p 14.3pBasic 12 31.6p 19.2pDiluted 12 31.3p 19.2p Earnings / (loss)per share(2)Basic -continuingoperations 12 30.5p (20.5)pBasic 12 26.0p (60.7)pDiluted 12 25.7p (60.7)p Equitydividends pershare 11 13.7p 12.0pFixed chargescover - times 13 1.4x 1.3xEquitydividend cover- times 11 2.0x -Equitydividend coverbeforeexceptionalitems andgoodwillamortisation -times 11 2.4x 1.5x (1)Headline earnings per share excludes exceptional items, goodwill amortisationand FRS 17 pension interest(2)Earnings per share is calculated in accordance with FRS 14 (Earnings pershare) WH Smith PLC Group Balance SheetAs at 31 August 2005 £m Note 2005 2004-------------------- ----- ------------------ -------Fixed assetsIntangible assets - goodwill 15 14 164Tangible fixed assets 16 231 237-------------------- ----- ------------------ -------Total fixed assets 245 401-------------------- ----- ------------------ -------Current assetsStocks 162 184Debtors due within one year 17 111 187Debtors due after more than one year 17 21 25Cash at bank and in hand 18 46 64-------------------- ----- ------------------ ------- 340 460Creditors due within one yearDebt 18 (48) (17)Other creditors 19 (346) (397)-------------------- ----- ------------------ ------- (394) (414)-------------------- ----- ------------------ -------Net current (liabilities) / assets (54) 46-------------------- ----- ------------------ -------Total assets less current liabilities 191 447-------------------- ----- ------------------ -------Creditors due after more than one yearDebt 18 (46) (2)Other creditors 20 (1) (2)-------------------- ----- ------------------ ------- (47) (4)Provisions for liabilities and charges 21 (31) (38)-------------------- ----- ------------------ -------Net assets excluding pension liabilities 113 405Net pension liabilities 6 (71) (149)-------------------- ----- ------------------ -------Total net assets 42 256-------------------- ----- ------------------ ------- Capital and reservesCalled up share capital 22 4 139Share premium account 23 17 93Capital redemption reserve 23 218 156Revaluation reserve 23 3 3Other reserve 23 (34) (27)Profit and loss account 23 (319) (110)-------------------- ----- ------------------ -------Equity shareholders' (liabilities) / funds (111) 254Non-equity share capital 22 153 2-------------------- ----- ------------------ -------Total shareholders' funds 42 256-------------------- ----- ------------------ ------- Approved by the Board of Directors on 13 October 2005. Kate Swann Alan Stewart CA (SA)Chief Executive Finance Director WH Smith PLC Group Cash Flow StatementFor the 12 months to 31 August 2005£m Note 2005 2004------------------------------------ ------- -------- --------Net cash (outflow) / inflow from operating activitiesbefore exceptional operating items 24 (13) 61Net cash outflow from exceptional operating items 24 (9) (13)------------------------------------ ------- -------- --------Net cash (outflow) / inflow from operating activities 24 (22) 48Returns on investment and servicing of financeInterest received 4 1Interest paid (5) (1)Net charge on pension scheme (2) (4)------------------------------------ ------- -------- --------Net cash outflow from returns on investment andservicing (3) (4)of finance Taxation (4) (10) Capital expenditure and financial investmentPurchase of tangible fixed assets - owned (32) (49)Proceeds on disposal of tangible fixed assets 2 5------------------------------------ ------- -------- --------Cash outflow from capital expenditure and financialinvestment (30) (44)Acquisitions and disposalsProceeds on disposal of subsidiary undertakings 222 64Proceeds on disposal of associated undertakings - 1Non-operating disposal costs (10) (23)Net cash in subsidiaries disposed - (11)------------------------------------ ------- -------- --------Cash inflow from acquisitions and disposals 212 31 Equity dividends paid (21) (42)------------------------------------ ------- -------- --------Cash inflow / (outflow) before financing 132 (21)------------------------------------ ------- -------- --------FinancingPurchase of shares for employee share schemes (12) -Money returned to ESOP Trust after share capitalreorganisation 5 -Issue of shares to satisfy employee share schemes 2 -Non-equity dividend (143) -Repurchase of 'C' shares (62) -Increase / (decrease) in debt (net of financing costs) 61 (3)Capital element of finance leases (1) ------------------------------------- ------- -------- --------Cash outflow from financing (150) (3)------------------------------------ ------- -------- --------Decrease in cash (18) (24)------------------------------------ ------- -------- -------- Reconciliation of net cash flow to movement in netfunds ------- -------- --------------------------------------------£m 2005 2004------------------------------------ ------- -------- -------- Net funds at the start of the year 45 68Decrease in cash in the year (18) (24)(Increase) / decrease in debt (62) 3New finance leases (13) -Currency translation differences - (2)------------------------------------ ------- -------- --------Net (debt) / funds at the end of the year 18 (48) 45------------------------------------ ------- -------- -------- WH Smith PLC Group Statement of Total Recognised Gains and LossesFor the 12 months to 31 August 2005 £m Note 2005 2004 Profit / (loss) for the financial year 46 (148)Actuarial loss relating to the pension scheme 6 (42) (15)UK deferred tax attributable to the pension schemeliabilities (27) (3)UK current tax attributable to the additional pensionscheme contributions 39 7Currency translation differences - (7)Total recognised gains / (losses) for the financial year 16 (166) WH Smith PLC Group Note of Historical Cost Profits and LossesFor the 12 months to 31 August 2005 £m 2005 2004 Reported profit / (loss) on ordinary activities beforetaxation 64 (135)Realisation of property revaluation gains of the previous year - 1Historical costs profit / (loss) on ordinary activities beforetaxation 64 (134)Historical cost loss for the year retained after taxation,minority interests and dividends (120) (171) Reconciliation of Movements in Group Shareholders' FundsFor the 12 months to 31 August 2005 £m Note 2005 2004 Shareholders' funds at beginning of year 256 407Retained losses (120) (172)Repurchase of non-equity share capital (62) -Purchase of own shares for employee share scheme (12) -Money returned to ESOP Trust after share capitalreorganisation 5 -Employee share schemes 5 -Goodwill previously written off directly to reserves nowtransferred to profit and loss account for the year on saleof USA Travel Retail business 4 - 39Net gains and losses relating to pension scheme (30) (11)Currency translation differences - (7)Net reduction to shareholders' funds (214) (151)Shareholders' funds at end of year 42 256 1 Segmental analysis of results (a) Segmental analysis of group turnover £m 2005 2004-------------------------------- -------- -------Continuing operations:RetailingHigh Street Retail 1,112 1,152Travel Retail 311 301-------------------------------- -------- -------Total 1,423 1,453-------------------------------- -------- ------- News DistributionTotal turnover 1,187 1,182Internal turnover (113) (115)-------------------------------- -------- -------Total 1,074 1,067-------------------------------- -------- --------------------------------------- -------- -------Turnover - continuing operations 2,497 2,520-------------------------------- -------- ------- Discontinuedoperations:RetailingUSA Travel Retail - 49Aspac Retail - 132-------------------------------- -------- -------Total - 181-------------------------------- -------- ------- PublishingBusinessTotal turnover 14 155Internal turnover (3) (22)-------------------------------- -------- -------Total 11 133-------------------------------- -------- --------------------------------------- -------- -------Turnover - discontinued operations 11 314-------------------------------- -------- --------------------------------------- -------- -------Group turnover 2,508 2,834-------------------------------- -------- ------- 1 Segmental analysis of results (continued) (b) Segmental analysis of group operating profits 2005 2004------------------- -------- -------- ------- -------- -------- -------£m Before Exceptional Total Before Exceptional Total goodwill operating exceptional operating items amortisation items and items and and goodwill goodwill goodwill amortisation amortisation amortisation ------------------- -------- -------- ------- -------- -------- -------Continuingoperations:RetailingHigh StreetRetail 43 (1) 42 23 (77) (54)Travel Retail(note a) 26 - 26 21 (5) 16------------------- -------- -------- ------- -------- -------- -------Total 69 (1) 68 44 (82) (38)NewsDistribution 37 - 37 35 - 35------------------- -------- -------- ------- -------- -------- -------Trading profit 106 (1) 105 79 (82) (3)Supportfunctions (16) - (16) (15) (11) (26)Pensionservice costs(note b) (10) - (10) (14) - (14)Internal rents(note c) 1 - 1 1 - 1------------------- -------- -------- ------- -------- -------- -------Operatingprofit /(loss) -continuingoperations 81 (1) 80 51 (93) (42)------------------- -------- -------- ------- -------- -------- ------- Discontinuedoperations:RetailingUSA TravelRetail - - - (5) - (5)Aspac Retail - - - 7 (1) 6------------------- -------- -------- ------- -------- -------- -------Total - - - 2 (1) 1PublishingBusiness - - - 20 (9) 11Pensionservice costs(note b) - - - (1) - (1)------------------- -------- -------- ------- -------- -------- -------Operatingprofit /(loss) -discontinuedoperations - - - 21 (10) 11------------------- -------- -------- ------- -------- -------- -------------------------- -------- -------- ------- -------- -------- -------Groupoperatingprofit /(loss) 81 (1) 80 72 (103) (31)------------------- -------- -------- ------- -------- -------- ------- a)Travel Retail includes profits of £1m (2004: £1m) generated inContinental Europe. b)The annual pension service costs in respect of the defined benefitscheme, if allocated between the businesses based on pensionable salaries, wouldbe as follows: High Street Retail £5m (2004: £8m), Travel Retail £1m (2004:£1m), Publishing £Nil (2004: £1m), News Distribution £3m (2004: £4m) and Supportfunctions £1m (2004: £1m). In addition to these pension costs, £3m ofcontributions has been charged to the individual businesses in respect of thedefined contribution pension scheme (see Note 6). c)The results for the Retailing Businesses are reported after chargingan internal arm's length market rent on freehold and long-leasehold propertiesowned by the Group. The internal net income generated of £1m (2004: £1m) isshown as a separate credit to the profit and loss account. d)Exceptional operating items and goodwill amortisation includesgoodwill amortisation for the following businesses: High Street Retail £1m(2004: £1m) and Aspac Retail £Nil (2004: £1m). e)On 1 September 2004 WHSmith Online was integrated into the WHSmithHigh Street Retail business, the comparable results for the year ended 31 August2004 were turnover: £7m, operating loss before exceptional items and goodwillamortisation: £2m, exceptional items and goodwill amortisation: £10m, operatingloss after exceptional items and goodwill amortisation: £12m. Exceptional operating items incurred during the prior year are analysed in Notes2 and 3. 1 Segmental analysis of results (continued) (c) Geographical split----------------------- --------------- ------------------------- ---------------- Turnover Profit / (loss) before taxation Net assets----------------------- --------------- ------------------------- ----------------£m 2005 2004 2005 2004 2005 2004----------------------- ------- ------- ------- -------- ------- -------- Continuingoperationsbeforeexceptionalitems 2,497 2,520 73 46 167 139and goodwillamortisation - UK /EuropeExceptionalitems andgoodwillamortisation (1) (91)----------------------- ------- ------- ------- -------- ------- --------Continuingoperations -UK / Europe 2,497 2,520 72 (45) 167 139----------------------- ------- ------- ------- -------- ------- --------Discontinued operationsbefore exceptionalitemsand goodwillamortisation:UK / Europe 9 110 - 16 - 205USA - 49 - (5) (6) 11Asia / Pacific 2 155 - 10 - 5----------------------- ------- ------- ------- -------- ------- -------- 11 314 - 21 (6) 221Exceptionalitems andgoodwillamortisation (8) (111)----------------------- ------- ------- ------- -------- ------- --------Discontinuedoperations 11 314 (8) (90) (6) 221----------------------- ------- ------- ------- -------- ------- --------Net (debt) /funds (48) 45Net pensionliabilities:Continuingoperations (71) (132)Discontinuedoperations - (17)----------------------- ------- ------- ------- -------- ------- --------Total Group 2,508 2,834 64 (135) 42 256----------------------- ------- ------- ------- -------- ------- -------- Turnover is disclosed by origin. There is no material difference in turnover bydestination. Net operating assets by division are analysed in Note 14. 2 Group operating profit ------------------------------------ --------------------------------------- 2005 2004 ------------------------------------ ---------------------------------------£m Continuing Discontinued Total Continuing Discontinued Total--------------------- -------- -------- -------- -------- -------- --------Turnover 2,497 11 2,508 2,520 314 2,834Cost of sales (1,790) (4) (1,794) (1,882) (146) (2,028)--------------------- -------- -------- -------- -------- -------- -------- - Pre-exceptional operatingitems (1,790) (4) (1,794) (1,836) (146) (1,982)- Exceptionaloperatingitems - - - (46) - (46)--------------------- -------- -------- -------- -------- -------- -------- Gross profit 707 7 714 638 168 806 Distributioncosts (501) (4) (505) (531) (99) (630)--------------------- -------- -------- -------- -------- -------- --------- Pre-exceptional operatingitems (501) (4) (505) (517) (90) (607)- Exceptionaloperatingitems - - - (14) (9) (23)--------------------- -------- -------- -------- -------- -------- -------- Administrativeexpenses (126) (3) (129) (149) (58) (207)--------------------- -------- -------- -------- -------- -------- --------- Pre-exceptional operatingitems andgoodwillamortisation (125) (3) (128) (116) (57) (173)- Exceptionaloperatingitems - - - (32) - (32)- Goodwillamortisation (1) - (1) (1) (1) (2)--------------------- -------- -------- -------- -------- -------- ----------------------------- -------- -------- -------- --- -------- -------- --------Groupoperatingprofit /(loss) 80 - 80 (42) 11 (31)--------------------- -------- -------- -------- --- -------- -------- -------- The exceptional operating items are detailed in Note 3. 2 Group operating profit (continued) Group operating profit before exceptional items and goodwill amortisation isstated after charging:--------------------- 2005 2004 -------- -------- -------- -------- -------- --------£m Continuing Discontinued Total Continuing Discontinued Total--------------------- -------- -------- -------- -------- -------- --------Depreciationand amountswritten offtangible 42 - 42 41 5 46fixed assetsNet operating leasecharges- land andbuildings 145 - 145 139 25 164- equipmentand vehicles 10 - 10 13 7 20Otheroccupancycosts 47 - 47 49 3 52Staff costs(Note 7) 273 2 275 278 58 336--------------------- -------- -------- -------- -------- -------- -------- Fees payable to Deloitte & Touche LLP, the Group's auditors, included in theprofit and loss account relating to audit fees amount to £0.3m (2004: £0.4m),and non-audit fees of £0.2m (2004: £2.0m) which comprise audit relatedregulatory work £nil (2004: £0.1m), further assurance services £nil (2004:£1.2m), tax compliance services £0.1m (2004: £0.3m), tax advisory services £nil(2004: £0.4m) and IFRS preparation work £0.1m (2004: £nil). In addition, ThePension Trust and WHSmith Retirement Savings Plan incurred another £0.1m inrespect of audit and other fees (2004: £0.1m). 3 Exceptional operating items Current yearNo exceptional operating charges have been made in the year ended 31 August2005. Prior yearIn the prior year, the following exceptional charges were made: a) UK RetailingAn exceptional operating charge of £81m was made relating to UK Retailing. Ofthis amount, £45m related to the carrying value of stock to reflect redundantand slow moving items. A fixed asset impairment charge of £20m was made inrespect of costs of research work on our concept store, systems development forTravel Retail, and an impairment charge covering goodwill and assets in relationto WHSmith Online. A charge of £12m related to the redundancy and associatedcosts relating to the internal restructuring of UK Retailing, which led to amaterial reduction in the number of staff at the London and Swindon locations. Afurther £4m was written off relating to other items. b) Corporate advisory costsIn responding to the Permira approach and implementing the consequent change tothe Group's structure, the Group incurred exceptional operating costs of £11m. c) Publishing unearned author advances provisionAn exceptional provision of £9m was charged relating to unearned author advancesin the Publishing business, to ensure that the balance sheet correctly reflectedan up-to-date view of the future sales prospects of backlist titles published inprevious years. The tax effect of the operating exceptional items is disclosed in Note 10 to theaccounts. 4 Net loss on sale of discontinued operations £m 2005 2004----------------------------------------------- ------ ------- Loss on sale of USA Travel Retail (note a, note d) (8) (62)Provision for loss on disposal on sale of Publishing Business(note b, note e) - (48)Profit on sale of Aspac Retail (note c, note d) - 10Other - (1)----------------------------------------------- ------ -------Net loss on sale of discontinued operations (8) (101)----------------------------------------------- ------ ------- 4 Net loss on sale of discontinued operations (continued) Current Year a) Provisions for discontinued businessesAn amount of £8m has been charged in the current year to the profit and lossaccount relating to the disposal of discontinued businesses. Of this amount, £7mrelates to an impairment review of the loan notes received as deferredconsideration in respect of the disposal of the Group's USA businesses. Thebalance relates to closure and exit provisions. b) Publishing Business disposalOn 25 September 2004, the Group completed the disposal of its PublishingBusiness, Hodder Headline Limited. A financial summary of the disposal is shownbelow: £m Total------------------------------------------------ ---------- Fixed assets 156Stock 17Debtors 80Creditors (30)Net pension liabilities (14)------------------------------------------------ ----------Net assets disposed 209------------------------------------------------ ---------- Cash consideration 210Cash received in respect of working capital adjustments 5Net assets disposed (209)Transaction costs and other charges (6)------------------------------------------------ ----------Net result on sale of the Publishing Business recognised in the -financial year ---------------------------------------------------------- The Group incurred a £5m cash outflow in respect of transaction costs and othercharges relating to the Publishing Business disposal. c) Aspac Retail During the year ended 31 August 2005, £7m was received for the Aspac Retaildisposal, which related to deferred consideration and working capitaladjustments. The tax effect of the non-operating exceptional items has been disclosed in Note10 to the accounts. 4 Net loss on sale of discontinued operations (continued) Prior Year d) Sale of USA Travel Retail and Aspac Retail businessesDuring the prior year, the Group disposed of its USA Travel Retail businessesand the Aspac Retail business. A financial summary of the disposals is detailedbelow:£m USA Travel Aspac Retail Total Retail--------------------------------- ---------- ---------- ---------Fixed assets 5 23 28 Stock 15 28 43Debtors 10 2 12Cash - 11 11Creditors (1) (27) (28)--------------------------------- ---------- ---------- ---------Total assets 29 37 66Minority interest (1) - (1)--------------------------------- ---------- ---------- ---------Net assets disposed 28 37 65--------------------------------- ---------- ---------- ---------Consideration:Cash 20 44 64Deferred consideration 19 6 25--------------------------------- ---------- ---------- ---------Total consideration 39 50 89 Net assets disposed (28) (37) (65)Net liabilities retained (28) - (28) Transaction costs (6) (3) (9)--------------------------------- ---------- ---------- --------- (Loss) / profit before goodwillpreviously written off directly toreserves (23) 10 (13) Goodwill previously written offdirectly to reserves (39) - (39)--------------------------------- ---------- ---------- ---------(Loss) / profit on sale ofdiscontinued operations (62) 10 (52)--------------------------------- ---------- ---------- --------- Deferred ConsiderationUSA Travel RetailDeferred consideration of £7m in respect of the Hotel business sale to TravelTraders LLC consists of a loan note, which is interest-bearing, with a 5 percent coupon conditional on the trading cash flows of that company. Deferredconsideration of £12m in respect of the Airport business sale to Hudson Groupconsists of an interest bearing loan note with a 5 per cent coupon, withinterest accruing from the second year. Aspac RetailThe profit on the disposal of Aspac Retail was calculated with reference to thedraft completion accounts. The deferred consideration of £6m, which was subjectto the finalisation of the completion accounts has been received during the yearended 31 August 2005. e) Provision for loss on sale of Publishing BusinessThe Group completed the sale of its Publishing Business on 25 September 2004. Aprovision of £48m was made for the loss on disposal of this business, of which£45m was shown as an impairment of goodwill, and £3m was included in accrualsfor associated disposal costs. f) OtherThe Group also disposed of associate undertakings Books and More NZ Limited,University Bookshop (Otago) Ltd and University Bookshop Canterbury Limited for atotal consideration of £1.3m. The total investments disposed and associatedcosts were £1.0m and there was a £0.3m profit on disposal. On 30 June 2004, the Group completed a trade and assets sale of its Singaporebusiness which resulted in a £nil profit on disposal. 5 Profit on sale of fixed assets In the current year, no profit or loss was recorded on sale of fixed assets. In the prior year, High Street Retail completed the sale and leaseback of sevenfreehold properties and sold a further six freehold properties. The profit onthe sale of these properties was £2m. 6 Pensions arrangements The Group's pension arrangements for employees are operated through a definedbenefit scheme (the WHSmith Pension Trust) and a defined contribution scheme(WHSmith Pensionbuilder). The most significant scheme is the defined benefitWHSmith Pension Trust. The assets of the pension plans are held in separatefunds administered by Trustees, who are independent of the Group's finances. Thetrustees have extensive powers over the pension plans' arrangements, includingthe ability to determine the levels of contribution. The WHSmith Pension Trust The latest full actuarial valuation of the Scheme was carried out as at 31 March2003 by independent actuaries, Mercer Human Resource Consulting, using themarket value basis. A full actuarial valuation of the Scheme is carried outevery three years with interim reviews in the intervening years. This scheme wasclosed in September 1995 and under the projected unit method the current servicecost would be expected to increase as members approach retirement and the agedprofile of members increases. Pension valuations The valuation of the Group's defined benefit pension scheme used for the FRS 17disclosures is based upon the most recent actuarial valuation, which, has beenupdated by professionally qualified actuaries (Mercer Human Resource Consulting)to take into account the requirements of FRS 17, and to assess the liabilitiesof the scheme at 31 August 2005. Scheme assets are stated at their market valueat 31 August 2005. The weighted average principal long-term assumptions used in the actuarialvaluation were: % 2005 2004 2003--------------------------------- ---------- ---------- ----------Rate of increase in salaries 3.7% 4.5% 4.4%Rate of increase in pensions payments anddeferred 2.7% 2.8% 2.7%pensionsDiscount rate 4.9% 5.6% 5.5%Inflation assumptions 2.7% 2.8% 2.7%--------------------------------- ---------- ---------- ---------- The aggregate fair values of the assets in the Group's defined benefit scheme,the aggregate net pension liabilities and their expected weighted averagelong-term rates of return at 31 August 2005 were:----------------------- ------------- ------------- ------------- 2005 2004 2003 £m % £m % £m %----------------------- ------- ------- ------- ------- ------- -------Equities 388 7.0 368 7.8 408 7.6Bonds 485 4.0 308 4.8 219 4.6Cash - 3.8 - 4.3 4 4.6Other - - 2 5.5 - ------------------------ ------- ------- ------- ------- ------- -------Total fair value of assets 873 678 631Present value of schemes (967) (883) (846)liabilities ------- ------- ------- ------- ------- ------------------------------Deficit in the schemes (94) (205) (215)Related deferred tax asset 28 61 64----------------------- ------- ------- ------- ------- ------- -------Net defined benefit schemes (66) (144) (151)liabilitiesNet retirement medical benefits (5) (5) (5)----------------------- ------- ------- ------- ------- ------- -------Net pension liabilities (71) (149) (156)----------------------- ------- ------- ------- ------- ------- ------- a) Defined benefit pension schemes Analysis of the amount charged to operating profit £m 2005 2004----------------------------------- ------------- --------Current service cost (10) (15)----------------------------------- ------------- -------- 6 Pensions arrangements (continued) Analysis of the amount (charged) / credited to net finance charges £m 2005 2004----------------------------------- ------------- --------Expected return on pension scheme assets 44 42Interest on pension scheme liabilities (46) (46)----------------------------------- ------------- -------- (2) (4)----------------------------------- ------------- -------- Analysis of the actuarial loss in the statement of total recognised gains andlosses £m 2005 2004----------------------------------- ------------- --------Actual return less expected return on pension schemeassets 71 (9)Experience gains and losses arising on the schemeliabilities (2) (8)Changes in assumptions underlying the present value ofthe scheme liabilities (111) 2----------------------------------- ------------- -------- (42) (15)----------------------------------- ------------- -------- Movement in scheme deficit during the year £m 2005 2004----------------------------------- ------------- --------At beginning of year (205) (215)Current service cost (10) (15)Contributions 142 44Net finance charge (2) (4)Settlement 3 -Disposal of subsidiary pension fund 20 -Actuarial loss (42) (15)----------------------------------- ------------- --------Deficit in scheme at end of year (94) (205)----------------------------------- ------------- -------- History of the weighted average experience gains and losses 2005 2004 2003 2002 2001-------------------------------- ------ -------- ------- ------- -------Difference between actual and expectedreturns on assets:Amount (£m) 71 (9) 6 (117) (180)% of scheme assets 8% (1%) 1% (20%) (26%)Experience gains and losses on schemeliabilities:Amount (£m) (2) (8) 3 (19) -% of present value of the schemeliabilities 0% (1%) 1% (3%) -Total amount recognised in Statement ofTotal Recognised Gains and LossesAmount (£m) (42) (15) (77) (142) (215)% of present value of the schemeliabilities (4%) (2%) (9%) (20%) (31%)-------------------------------- ------ -------- ------- ------- ------- 6 Pensions arrangements (continued) In September 2005, the Trustees of the WHSmith Pension Trust adopted a newinvestment policy in order to limit the volatility in the underlying investmentperformance and reduce the risk of a significant increase in the deficit in thefund. The assets in the investment fund were restructured in order to adopt thispolicy. This involved the expected liabilities of the scheme being matched byassets that will alter in value as interest and inflation rates change, matchingthe movements at the same rate as the pension liability changes ("a LiabilityDriven Investment 'LDI' policy"). The key features of this fund restructuring are as follows: - 94% of the fund's assets are invested in an LDI structure with a leadinginternational institutional fund manager. - 6% of the fund's assets have been used to purchase a portfolio of long-datedequity Call options. These represent a notional exposure to underlying equitiesof some £350m. The impact of this change in investment policy is to limit the volatility in thefund and the resultant risk of a significant increase in the overall deficitwhilst enabling the fund to continue to benefit from any potential higherreturns in the equity markets. The overall expected rate of return from theportfolio under the new arrangements is 5.0% in the 2005/06 financial year. Following this change in the investment policy the Board and the Trustees haveagreed a new deficit funding agreement that gives the Company significantlygreater predictability over the level of future deficit reduction payments. Thisagreement replaces that reached last year and, subject to certain limitedconditions, will result in deficit funding payments of £15m in 2005/06, £17m in2006/07, £20m in 2007/08 and increasing by RPI (capped at 5%) thereafter untilthe deficit (as calculated under FRS17) is repaid. Post retirement medical benefits WH Smith PLC provides retirement medical benefits to certain pensioners. Totalpremiums paid during the year in respect of those benefits were £0.4m (2004:£0.4m). The present value of the future liabilities under this arrangement havebeen assessed by independent actuaries (Buck Consultants (Healthcare) Limited)and this amount is included on the balance sheet, net of deferred taxation underpension and other post retirement liabilities, as follows: £m 2005 2004 ----------------------------------- --------- ---------Post retirement medical benefits (5) (5)----------------------------------- --------- --------- During September 2005, the members were offered the option to be bought out ofthis scheme. The financial effect of the proposed settlement of this scheme willbe included in the accounts for the financial year ending 31 August 2006. b) Defined contribution pension scheme The Group's pension cost charge to its defined contribution scheme, WHSmithPensionbuilder, for the year amounted to £3m (2004: £2m). 7 Staff costs-------------------- 2005 2004 ---------------------------------- ----------------------------------£m Continuing Discontinued Total Continuing Discontinued Total-------------------- -------- -------- -------- -------- --------- --------Wages andsalaries 240 2 242 243 52 295Socialsecurity 17 - 17 18 4 22Net pensioncost 13 - 13 17 2 19Employee shareschemes 3 - 3 - - --------------------- -------- -------- -------- -------- --------- -------- 273 2 275 278 58 336-------------------- -------- -------- -------- -------- --------- -------- 8 Operating lease commitments At the year end the Group had the following future commitments in respect ofoperating leases for the following year: 2005 2004 ------------------------------- -----------------------------------£m Land and Equipment Total Land and Equipment Total buildings and buildings and vehicles vehicles----------------- -------- -------- -------- -------- --------- --------Annual net leasecommitmentsexpiring:Within one year 10 2 12 8 1 9Within two tofive years 50 4 54 49 8 57In more thanfive years 73 - 73 76 - 76----------------- -------- -------- -------- -------- --------- -------- 133 6 139 133 9 142----------------- -------- -------- -------- -------- --------- -------- 9 Net finance charges ------------------------------------------ -------- --------£m 2005 2004 ------------------------------------------ -------- -------- Interest payable on bank loans and overdrafts (8) (1) Net charge on pension schemes (Note 6) (2) (4) Unwinding of discount on provisions (1) (1) Interest receivable 3 1 ------------------------------------------ -------- -------- (8) (5) ------------------------------------------ -------- -------- 10 Taxation ------------------------------------------ -------- --------£m 2005 2004 ------------------------------------------ -------- -------- Tax on profit before exceptional items and goodwill 24 20 amortisation - Standard rate of UK corporation tax 30% (2004: 30%) Adjustment in respect of prior year UK (5) (3) corporation tax Foreign tax - 3 ------------------------------------------ -------- -------- Total current tax charge before exceptional items and goodwill 19 20 amortisation -------- -------- ------------------------------------------ Deferred tax - current year (1) - Deferred tax - prior years - 3 ------------------------------------------ -------- -------- Tax on profit on ordinary activities before exceptional items 18 23 and goodwill amortisation Tax on exceptional items and goodwill - (10) amortisation -------- -------- ------------------------------------------ Tax on profit on ordinary activities after exceptional items 18 13 and goodwill amortisation -------- -------- ------------------------------------------ Effective tax rate on continuing activities before exceptional 25% 30% items and goodwill amortisation Reconciliation of the taxation charge £m 2005 2004------------------------------------------ -------- -------- Tax on profit on ordinary activities before exceptional itemsandgoodwill amortisation at standard rate of UK corporation tax 22 2030%(2004: 30%)Permanent differences 1 1Depreciation for which no tax relief is available 1 1Losses not available for Group relief - 2Adjustment in respect of prior years (5) (3)Other - (1)------------------------------------------ -------- --------Current tax charge before exceptional items and goodwillamortisation 19 20Tax on exceptional items and goodwill amortisation at standardrate of UK corporation tax of 30% (2004: 30%) (2) (62)Goodwill - 28Disposal of subsidiary undertaking - 7Other disallowable expenses - 7Write-off of tangible and intangible assets - 3Non-allowable provisions 2 7------------------------------------------ -------- --------Current tax charge after exceptional items and goodwillamortisation 19 10------------------------------------------ -------- --------Deferred tax (1) 3------------------------------------------ -------- --------Tax on profit on ordinary activities after exceptional itemsand 18 13goodwill amortisation -------- -------------------------------------------------- 11 Dividends----------------------------------------- ---------- ---------Equity dividend per ordinary share 2005 2004----------------------------------------- ---------- ---------Interim 4.5p 4.0pFinal - proposed 9.2p 8.0p----------------------------------------- ---------- ---------Total dividend per ordinary share 13.7p 12.0p----------------------------------------- ---------- ---------Non-equity dividend per share'C' share dividend paid on capital reorganisation (Note 85.0p -22) ----------------------------------------- ---------- --------- ----------------------------------------- ---------- ---------£m 2005 2004----------------------------------------- ---------- ---------Equity dividendsInterim 7 10Final - proposed 16 14----------------------------------------- ---------- ---------Total equity dividends 23 24----------------------------------------- ---------- ---------Non-equity dividends'C' share dividend paid on capital reorganisation (Note 143 -22) ---------- --------------------------------------------------Total non-equity dividends 143 ------------------------------------------ ---------- ---------Total 166 24----------------------------------------- ---------- -------------------------------------------------- ---------- --------- 2005 2004----------------------------------------- ---------- ---------Equity dividend cover - times 2.0x -Equity dividend cover before exceptional items andgoodwill 2.4x 1.5xamortisation - times ---------- -------------------------------------------------- The final dividend will be paid on 7 February 2006 to shareholders registered atthe close of business on 6 January 2006. As at 31 August 2005, the Group had180,887,036 (2004: 250,559,907) ordinary shares in issue. On 27 October 2004, the Group paid a 'C' share dividend of £142,533,945 to theholders of 167,686,994 'C' shares who had elected under the terms of the capitalreorganisation to receive the initial 'C' share dividend. On payment of thisdividend, these 'C' shares were converted to deferred shares. The Group paiddividends in respect of those 'C' shares not repurchased or converted todeferred shares on 28 February 2005 and 31 August 2005, at a rate of 75 per centof six month LIBOR, totalling £104,441 and £156,647 respectively. In addition,the Group paid dividends on the 'B' shares on 28 February 2005 and 31 August2005, at a rate of 75 per cent of six month LIBOR, totalling £44,914 and £45,192respectively. 12 Earnings / (loss) per share a) Earnings 2005 2004--------------------- ---------------------------------- ----------------------------------£m Continuing Discontinued Total Continuing Discontinued Total--------------------- -------- -------- ------- -------- -------- ------Headline earningsattributable toshareholders 56 - 56 35 12 47Pension interest net of relatedtaxation (1) - (1) (3) - (3)Exceptionalitems net ofrelatedtaxation - (8) (8) (81) (109) (190)Goodwillamortisation (1) - (1) (1) (1) (2)--------------------- -------- -------- ------- -------- -------- ------Profit / (loss)attributable toshareholders 54 (8) 46 (50) (98) (148)--------------------- -------- -------- ------- -------- -------- ------ 12 Earnings / (loss) per share (continued) b) Basic earnings / (loss) per share 2005 2004--------------------- ---------------------------------- ---------------------------------- Continuing Discontinued Total Continuing Discontinued Total--------------------- -------- -------- ------- -------- -------- ------Headline earnings pershare (note a) 31.6p - 31.6p 14.3p 4.9p 19.2pPension interest net of relatedtaxation (0.6)p - (0.6)p (1.2)p - (1.2)pExceptionalitems net ofrelated taxation - (4.5)p (4.5)p (33.2)p (44.7)p (77.9)pGoodwillamortisation (0.5)p - (0.5)p (0.4)p (0.4)p (0.8)p--------------------- -------- -------- -------- -------- -------- --------Earnings /(loss) per share (note b) 30.5p (4.5)p 26.0p (20.5)p (40.2)p (60.7)p--------------------- -------- -------- -------- -------- -------- -------- a) Headline earnings per share has been calculated using profit after tax butbefore exceptional items, goodwill amortisation, and FRS 17 net interest chargeson the defined benefit pension scheme. b) Basic earnings per share has been calculated using profit after tax,exceptional items and goodwill amortisation c) Diluted earnings / (loss) per share 2005 2004--------------------- ---------------------------------- ---------------------------------- Continuing Discontinued Total Continuing Discontinued Total--------------------- -------- -------- -------- -------- -------- --------Headline earnings per share 31.3p - 31.3p 14.3p 4.9p 19.2pPension interest net of relatedtaxation (0.6)p - (0.6)p (1.2)p - (1.2)pExceptionalitems net ofrelated taxation - (4.5)p (4.5)p (33.2)p (44.7)p (77.9)pGoodwillamortisation (0.5)p - (0.5)p (0.4)p (0.4)p (0.8)p--------------------- -------- -------- -------- -------- -------- --------Earnings /(loss) pershare 30.2p (4.5)p 25.7p (20.5)p (40.2)p (60.7)p--------------------- -------- -------- -------- -------- -------- -------- Diluted earnings per share takes into account various share awards and shareoptions, including SAYE schemes, which are expected to vest, and for which a sumbelow fair value at 31 August 2005 will be paid. In the prior year, as the Grouprecorded a loss from continuing operations, the diluted loss per share is thesame as the basic, as any dilutive shares reduce the loss per share forcontinuing operations. d)Weighted average share capitalMillions 2005 2004----------------------------------------- ---------- ---------Weighted average shares in issue for earnings per share 177 244Add weighted average number of ordinary shares under option 2 ------------------------------------------ ---------- ---------Weighted average ordinary shares for fully diluted earningsper share 179 244----------------------------------------- ---------- --------- The weighted average number of ordinary shares in issue is stated afterexcluding 8,999,860 (2004: 6,682,660) shares held solely for the purpose ofsatisfying obligations under employee share schemes. 13 Fixed charges cover----------------------------- ------- ---------£m 2005 2004----------------------------- ------- ---------Interest expense 8 5Net operating lease rentals 155 184Property taxes 37 37Other property costs 10 15----------------------------- ------- ---------Total fixed charges 210 241Profit before tax, exceptional itemsand goodwill amortisation 73 67----------------------------- ------- ---------Profit before tax, exceptional items,goodwill 283 308amortisation and fixed charges ----------------------------- ------- ---------Fixed charges cover - times 1.4x 1.3x----------------------------- ------- --------- Fixed charges cover is calculated by dividing profit before exceptional items,goodwill amortisation, tax and fixed charges by total fixed charges. 14 Segmental analysis of operating assets employed------------------ --------- -------- -------- -------- ------- -------- Operating Return on ROCE% after Operating Return on ROCE% after assets capital capitalised assets as capital capitalised as at 31 employed net operating at 31 employed net operating August leases August leases 2005 including 2004 including internal internal rent rent £m % % £m % %------------------ --------- -------- -------- -------- ------- --------Continuingoperations:High StreetRetail 187 23% 13% 187 12% 9%Travel Retail 24 108% 32% 25 83% 24%------------------ --------- -------- -------- -------- ------- --------UK Retailing 211 33% 16% 212 21% 12%NewsDistribution (25) - - (18) - ------------------- --------- -------- -------- -------- ------- --------Continuingtradingoperations 186 57% 21% 194 41% 17%Freeholdproperty 18 21Supportfunctions (13) (48)Provisions forliabilitiesand charges (24) (28)------------------ --------- -------- -------- -------- ------- --------Operating assetsemployedcontinuingoperations 167 48% 19% 139 37% 14%------------------ --------- -------- -------- -------- ------- --------Discontinuedoperations:USA TravelRetail 1 21Aspac Retail - -Publishing - 210 9% 9%Provisions forliabilitiesand charges (7) (10)------------------ --------- -------- -------- -------- ------- --------Operating assetsemployeddiscontinuedoperations (6) 221------------------ --------- -------- -------- -------- ------- --------Total operatingassetsemployed 161 50% 19% 360 20% 19%Net (debt) /funds (48) 45------------------ --------- -------- -------- -------- ------- --------Net assetsexcludingpensionliabilities 113 405Net pensionliabilities:Continuingoperations (71) (132)Discontinuedoperations - (17)------------------ --------- -------- -------- -------- ------- --------Total netassets 42 256------------------ --------- -------- -------- -------- ------- -------- a) Return on capital employed is calculated as the operating profit beforeexceptional items and goodwill amortisation as a percentage of operating capitalemployed. b) Return on capital employed after capitalised net operating leases includinginternal rent is calculated as the adjusted profit as a percentage of operatingassets after capitalising operating leases. Adjusted profit is stated afteradding back the annual net rent and charging depreciation on the value ofcapitalised leases. The value of capitalised operating leases is based on thenet present value of future rent commitments. 15 Goodwill------------------------------ ---------- £m------------------------------ ----------Cost:At 1 September 2004 226Disposals (195)------------------------------ ----------At 31 August 2005 31------------------------------ ---------- Accumulated amortisation:At 1 September 2004 62Amortised in year 1Impairment charge in the year -Disposals (46)------------------------------ ----------At 31 August 2005 17------------------------------ ---------- Net book value------------------------------ ----------At 31 August 2005 14------------------------------ ----------At 1 September 2004 164------------------------------ ---------- Goodwill arising on the earlier acquisitions of John Menzies Retail and TMRetail is regarded by the Directors as having a useful life of 20 years and istherefore amortised through the profit and loss account over this period. At 30August 2005, the balance of goodwill is £2m in respect of the acquisition of TMRetail and £12m in respect of John Menzies. The net book value of the goodwill disposed during the year of £149m relates tothe disposal of the Publishing Business, which was completed on 25 September2004. 16 Tangible fixed assets Land and Buildings -----------------------------------£m Freehold Long-term Short-term Fixtures Equipment Total Properties Leasehold Leasehold and Fittings and Vehicles-------------------- -------- -------- -------- -------- -------- --------Cost or valuation:At 1 September2004 28 1 168 162 122 481Additions - - 7 12 26 45Disposals (1) - (1) (3) (5) (10)Disposal ofsubsidiaryundertakings - - (4) (1) (4) (9)-------------------- -------- -------- -------- -------- -------- --------At 31 August 2005 27 1 170 170 139 507-------------------- -------- -------- -------- -------- -------- -------- Accumulateddepreciation:At 1 September 2004 7 1 89 89 58 244Depreciation charge 1 - 10 14 16 41Impairmentlosses - - - - 1 1Disposals - - (1) (2) (4) (7)Disposal ofsubsidiaryundertakings - - (1) (1) (1) (3)-------------------- -------- -------- -------- -------- -------- --------At 31 August 2005 8 1 97 100 70 276-------------------- -------- -------- -------- -------- -------- -------- Net book value-------------------- -------- -------- -------- -------- -------- --------At 31 August 2005 19 - 73 70 69 231-------------------- -------- -------- -------- -------- -------- --------At 1 September 2004 21 - 79 73 64 237-------------------- -------- -------- -------- -------- -------- -------- a) The Group's property portfolio (of freehold and long-leasehold properties)was last revalued in 1990. Following the implementation of FRS 15 'Tangiblefixed assets' the Group has adopted a policy of not revaluing tangible fixedassets. The carrying amounts of tangible fixed assets, previously revalued, havebeen retained at their book amount in accordance with the transitionalprovisions of FRS 15. b) Freehold properties include assets not depreciated at cost orvaluation of £9m (2004: £10m). c) Assets held under finance leases, with a cost of £12.6m (2004: £nil)and depreciation of £0.4m (2004: £nil), are included within Equipment andVehicles. Freehold and long-leasehold land and buildings £m 2005 2004---------------------------------- -------- --------(i) The net book value of freehold and long-leaseholdproperties comprises:Properties - at cost 2 2- at valuation 17 19---------------------------------- -------- --------Net book value 19 21---------------------------------- -------- --------(ii) If shown on an historical cost basis, properties would bestated at:Cost 27 28Depreciation (11) (10)---------------------------------- -------- --------Net book value 16 18---------------------------------- -------- -------- 17 Debtors--------------------------------- ----------- ----------£m 2005 2004--------------------------------- ----------- ----------Amounts falling due within one year:Trade debtors 37 87Other debtors 43 74Prepayments and accrued income 31 26--------------------------------- ----------- ---------- 111 187Amounts falling due after more than oneyear:Other debtors 21 25--------------------------------- ----------- ---------- 132 212--------------------------------- ----------- ---------- A deferred tax asset of £20m has been recognised at 31 August 2005 (2004: £nil),of which £15m has been included in other debtors falling due within one year and£5m in other debtors due after more than one year. This relates to tax lossesresulting from the significant company contributions paid to the WHSmith PensionTrust. The directors are of the opinion, based on recent and forecast tradingthat the level of profits in future periods will exceed the tax losses incurredas a result of the company's contribution to the WHSmith Pension Trust. Debtors falling due after more than one year include deferred consideration inrespect of the disposal of businesses. 18 Financial assets and liabilities £m 2005 2004----------------------------- ---------- ----------Cash at bank and in hand 46 64Debt repayable in one year or less or on demand (48) (17)Debt repayable between two to five years (44) -Debt repayable in more than five years (2) (2)----------------------------- ---------- ----------Net (debt) / funds (48) 45----------------------------- ---------- ---------- After taking into account various interest rate swaps, the net debt structure ofthe group was: £m 2005 Cashflow Non-cash 2004 ---------------------------- --------- --------- -------- ---------- Cash at bank and in hand 46 (18) - 64 Debt - Sterling floating rate (50) (33) - (17) - Sterling fixed rate (32) (30) - (2) - Obligations under finance leases (12) 1 (13) - ---------------------------- --------- --------- -------- ---------- Net (debt) / funds (48) (80) (13) 45 ---------------------------- --------- --------- -------- ---------- 19 Other creditors (amounts falling due within one year)--------------------------------- --------- -------£m 2005 2004--------------------------------- --------- -------Trade creditors 176 209Corporation tax 27 30VAT, payroll taxes andsocial security 16 17Other creditors 56 58Accruals and deferredincome 55 69Proposed dividends 16 14--------------------------------- --------- ------- 346 397--------------------------------- --------- ------- 20 Other creditors (amounts falling due after more than one year)--------------------------------- --------- ----------£m 2005 2004--------------------------------- --------- ----------Other creditors 1 2--------------------------------- --------- ---------- 21 Provisions for liabilities and charges ------------------------ -------- -------- -------- --------£m Disposal Deferred Non trading Total provisions taxation property provisions ------------------------ -------- -------- -------- -------- Gross Provision At 1 September 2004 10 15 18 43 Charged /(released) during the year 1 (1) 1 1 Utilised in the year (4) - (5) (9) ------------------------ -------- -------- -------- -------- 7 14 14 35 ------------------------ -------- -------- -------- -------- Discount At 1 September 2004 - - (5) (5) Unwinding of discount utilisation - - 1 1 ------------------------ -------- -------- -------- -------- At 31 August 2005 - - (4) (4) ------------------------ -------- -------- -------- -------- Net provision 3 ------------------------ -------- -------- -------- -------- At 31 August 2005 7 14 10 31 ------------------------ -------- -------- -------- -------- At 1 September 2004 10 15 13 38 ------------------------ -------- -------- -------- -------- Disposal provisions of £7m arise from commitments in respect of the disposal ofthe USA Travel Retail businesses. The provisions will be predominantly utilisedover the next few years. The non-trading property provision is the estimated future cost of the Group'sonerous leases based on known and estimated rental subleases. The costs includeprovisions for required dilapidation costs and any anticipated future rentalshortfalls. This provision has been discounted at 10 per cent and this discountwill be unwound over the respective lives of the leases, which range from theyear 2006 through to 2016. The deferred tax balance comprises the following: £m 2005 2004-------------------------- ----------- --------Accelerated capital allowances 16 17Short term timing differences (2) (2)-------------------------- ----------- -------- 14 15-------------------------- ----------- -------- 22 Called up share capital (a)Authorised 2005 2004-------------------- ---------------------------- ---------------------- Number of Nominal Number of Nominal shares value shares value (millions) £m (millions) £m-------------------- ----------- ----------- --------- ---------Equity:Ordinary shares of 2 13/81p each 2,305 50 - - Ordinary shares of55.55p each - - 333 185-------------------- ----------- ----------- --------- --------- 50 185-------------------- ----------- ----------- --------- ---------Non-Equity:'B' shares of 53.75p each 286 153 286 153 'C' shares of 83 70 - -85p eachDeferred shares of 168 143 - -85p each -------------------- ----------- ----------- --------- --------- 366 153-------------------- ----------- ----------- --------- ----------------------------- ----------- ----------- --------- ---------Total 416 338-------------------- ----------- ----------- --------- --------- (b)Allotted and fully paid 2005 2004 ------------------------ ---------------------- Number of Nominal Number of Nominal shares Value shares value (millions) £m (millions) £m-------------------- ----------- ----------- --------- ---------Equity:Ordinary shares of 2 13/81p each 181 4 - - Ordinary shares of 55.55p each - - 251 139-------------------- ----------- ----------- --------- --------- 4 139-------------------- ----------- ----------- --------- ---------Non-Equity:'B' shares of 53.75p each 4 2 4 2'C' shares of 85p each 10 8 - -Deferred shares of 85p each 168 143 - --------------------- ----------- ----------- --------- --------- 153 2-------------------- ----------- ----------- --------- ----------------------------- ----------- ----------- --------- ---------Total 157 141-------------------- ----------- ----------- --------- --------- (c)Movement in share capital Equity Non-Equity ----------------------------- ------------------------------------------ Ordinary Ordinary Deferred £m shares of shares of 'B' shares of 'C' shares shares Total 2 13/81p each 55.55p each 53.75p each of 85p each of 85p each------------ --------- --------- -------- --------- --------- ---------At 1 September2004 - 139 2 - - 141Capitalreorganisation 4 (139) - 213 - 78Converted - - - (143) 143 -Cancelled - - - (62) - (62)------------ --------- --------- -------- --------- --------- ---------At 31 August2005 4 - 2 8 143 157------------ --------- --------- -------- --------- --------- --------- The number of ordinary shares of 55.55p issued in the year to 31 August 2005(during the period 1 September 2004 to 26 September 2004) was 2,593 (2004:122,477) with a nominal value of £0.001m (2004: £0.068m). Of these, nine wereissued in connection with the capital reorganisation and 2,584 were issued onthe exercise of share options for a cash consideration of £0.007m (2004: £0.4m). 22 Called up share capital (continued) The number of ordinary shares of 2 13/81p issued in the year to 31 August 2005(during the period 27 September 2004 to 31 August 2005) was 482,036 (2004: nil)with a nominal value of £0.01m (2004: £nil). These were issued on the exerciseof share options for a cash consideration of £1.5m (2004: £nil). Other movementsin ordinary shares in the year, due to the restructuring of share capital, arenoted in further detail below. At 31 August 2005, the number of options held under employee share schemes was17.9 million shares (2004: 16.5 million). The proceeds due to the Company uponexercise of these options would be £47.7m (2004: £59.4m). On 27 September 2004 the Company undertook a capital reorganisation wherebyexisting ordinary shareholders received 18 new ordinary shares and 25 newnon-cumulative preference shares of nominal value 85p ('C' shares) for every 25existing ordinary shares. The new ordinary shares have a nominal value of 2 13/81p each. This capital reorganisation was effected by a bonus issue of £78m,using the share premium account to fully pay up undesignated shares of 31p each,which were then allocated to shareholders on the basis of one undesignated sharefor every existing share held. The existing ordinary shares and undesignatedshares were then consolidated and split, resulting in the issue of new ordinaryshares with a nominal value of £4m and 'C' shares with a nominal value of £213m. In accordance with the terms of the capital reorganisation, shareholders couldelect to sell 'C' shares to the Company at 85p per share following which allsuch 'C' shares would be cancelled by the Company or to receive the initial 'C'share dividend of 85p per 'C' share following which all such 'C' shares would beconverted into deferred shares. On 27 October 2004, as a result of theseelections, the Company repurchased 73,182,358 'C' shares for their nominal valueof 85p each, a total repurchase amount of £62m and paid an initial 'C' sharedividend of £143m in respect of 167,686,994 'C' shares. The remaining 10m 'C'shares may be purchased by the Company (subject to the provisions of theCompanies Act 1985) or converted into ordinary shares at the Company's optionand carry a net non-cumulative dividend set at a rate that is the lower of 75per cent of six month LIBOR and 20 per cent per annum. The 'C' shares havelimited voting rights. On a return of capital on winding up or otherwise, theholders of the 'C' shares shall be entitled in priority to any payment to theholders of the ordinary and deferred shares, and ranking pari passu with theholders of the 'B' shares, to repayment of the nominal capital paid up on the'C' shares held, together with a sum equal to any outstanding dividend. The deferred shares may be purchased by the Company (subject to the provision ofthe Companies Act 1985), at the Company's option for not more than 1p for allthe shares and carry no dividend or voting rights. On a return of capital onwinding up or otherwise, the holders of the deferred shares shall be entitledafter firstly paying to the holders of the 'B' and 'C' shares any amounts owingto them and, secondly, paying to the holders of the ordinary shares the nominalcapital paid up plus £100,000 on each ordinary share held, to repayment of thenominal capital paid up on the deferred shares held. The 'B' shares are redeemable at their nominal value at the shareholders' optionduring any period declared by the Company, or at the Company's option, or atmaturity on 31 August 2008. The 'B' shares carry a net non-cumulative dividendset at a rate that is the lower of 75 per cent of six month LIBOR and 20 percent per annum and have limited voting rights. On a return of capital on windingup or otherwise, the holders of the 'B' shares shall be entitled in priority toany payment to the holders of the ordinary and deferred shares, and ranking paripassu with the holders of the 'C' shares, to repayment of the nominal capitalpaid up on the 'B' shares held, together with a sum equal to any outstandingdividend. On a return of capital on winding up or otherwise, the holders of the ordinaryshares shall be entitled after paying to the holders of the 'B', 'C' anddeferred shares any amounts owing to them, to the repayment of any furtheramount rateably according to the amounts paid up in respect of each ordinaryshare. At 31 August 2004, the Group had 169,072 authorised, allotted and fully paid5.75 per cent cumulative preference shares in issue, on which dividends werepaid half yearly. These preference shares were repurchased and cancelled in fullon 20 May 2005. 23 Reserves---------------------- -------- -------- -------- -------- --------£m Share Capital Revaluation Other Profit premium redemption reserve reserve & loss account reserve account---------------------- -------- -------- -------- -------- --------Reserves at 1September 2004 93 156 3 (27) (110)Loss retainedfor the year - - - - (120)Bonus issue(Note 22) (78) - - - -Employee shareschemes 2 - - - 3Repurchase ofshares (Note22) - 62 - - (62)Purchase ofown shares foremployee shareschemes - - - (12) -Money returnedto ESOP Trustafter sharecapitalreorganisation - - - 5 ----------------------- -------- -------- -------- -------- --------Reservesexcludingcurrent yearpensiondeficitadjustment 17 218 3 (34) (289)Current yearnet pensiondeficitadjustment - - - - (30)---------------------- -------- -------- -------- -------- --------Reserves at 31August 2005 17 218 3 (34) (319)---------------------- -------- -------- -------- -------- -------- The profit and loss reserve at 31 August 2005 is stated after writing offpreviously acquired goodwill of £19m (2004: £19m). The opening capital redemption reserve was created from the repurchase ofordinary and 'B' shares. The addition during the year relates to the repurchaseof 'C' shares after the capital reorganisation (see Note 22). The 'W H Smith Employees' Share Trust 1999 (the "Trust") holds ordinary sharesin WH Smith PLC which may be used to satisfy options and awards granted underthe Company's share schemes. The Trustee, which is an independent professionaltrust company based in Jersey, purchases the shares in the open market withfinancing provided by the Group as required, on the basis of regular reviews ofthe anticipated share liabilities of the Group. In accordance with UITF 38, which requires shares held by the Trust to be shownas a deduction in arriving at shareholders' funds, the other reserve comprises8,999,860 shares (2004: 6,682,660) with a nominal value of £194,441 (2004:£3,712,218) and a market value at 31 August 2005 of approximately £33m (2004:£20m). Dividends are waived for all ordinary shares held by the Trust. The reserves before and after net pension liabilities are: £m 2005 2004-------------------------------------- ------------ ----------Profit and loss reserve excluding net pension (248) 39liabilitiesAmount relating to pension liabilities, net of relateddeferred tax (71) (149)-------------------------------------- ------------ ----------Profit and loss reserve (319) (110)-------------------------------------- ------------ ---------- 24 Notes to the cash flow statement Reconciliation of operating profit / (loss) to net cash (outflow) / inflow fromoperating activities £m 2005 2004 ------------------------------- --------- --------- Operating profit / (loss) 80 (31)Adjustment for pension funding (note a) (130) (25)Operating exceptional items - 101Depreciation and other amounts written off tangible fixed 42 46assetsAmortisation of goodwill 1 2Decrease / (increase) in stock 6 (17)Decrease / (increase) in debtors 1 (1)Decrease in creditors (7) (9)Cash spend against provisions (6) (5)------------------------------- --------- ---------Net cash (outflow) / inflow from operating activities beforeexceptional operating items (13) 61Corporate advisory costs (9) -Internal restructuring of UK Retailing - (11)Other items - (2)------------------------------- --------- ---------Cash outflow relating to exceptional operating items (9) (13)------------------------------- --------- ---------Net cash (outflow) / inflow from operating activities afterexceptional operating items (22) 48------------------------------- --------- --------- a) For the year ended 31 August 2005, £142m (2004: £44m) cashcontributions have been made to the pension scheme. The associated profit andloss charge comprises £10m (2004: £15m) for operating costs and £2m charge(2004: £4m charge) for financing. The Group has made an additional contributionof £130m over and above the required profit and loss charge (2004: £25madditional contribution). 25 Contingent liabilities-------------------------------------- ------------ ---------£m 2005 2004-------------------------------------- ------------ ---------Bank and other loans guaranteed 11 20-------------------------------------- ------------ --------- No amount has been included above for taxation that would arise in the event ofcertain international subsidiaries distributing the balance of their reserves. Other potential liabilities that could crystallise are in respect of previousassignments of leases where the liability could revert to the Group if thelessee defaulted. These leases have an estimated future cumulative gross rentalcommitment of approximately £181m (2004: £201m). 26 Capital commitments Contracts placed for future capital expenditure approved by the directors butnot provided for in these financial statements amounts to £4m (2004: £33m). 27 Analysis of Retail Stores and Selling Space------------------------- -------- ------- ------- ------- ------- Number of stores------------------------- -------- ------- ------- ------- ------- 1 Sept Opened Closed Disposed 31 Aug 2004 2005------------------------- -------- ------- ------- ------- -------High Street Retail 544 2 (4) - 542------------------------- -------- ------- ------- ------- -------Travel Retail (note a) 129 3 (5) - 127------------------------- -------- ------- ------- ------- -------Total RetailingBusinesses 673 5 (9) - 669------------------------- -------- ------- ------- ------- -------------------------------- -------- ------- ------- ------- ------- Retail selling square feet (000's) 1 Sept Opened Closed Disposed 31 Aug 2004 2005------------------------- -------- ------- ------- ------- -------High Street Retail 3,056 10 (31) - 3,035------------------------- -------- ------- ------- ------- -------Travel Retail 214 8 (6) - 216------------------------- -------- ------- ------- ------- -------Total RetailingBusinesses 3,270 18 (37) - 3,251------------------------- -------- ------- ------- ------- -------------------------------- -------- ------- ------- ------- ------- (a) Travel Retail store numbers have been restated to reflect the number ofstores rather than the number of units. 28 Preparation of the Preliminary Announcement (a) Basis of preparation The preliminary announcement for the 12 months to 31 August 2005 has beenprepared on the basis of the accounting policies set out in the Company's AnnualReport for the 12 months 31 August 2004. (b) Preliminary announcement The financial information for the 12 months to 31 August 2005 and 12 months to31 August 2004 do not comprise statutory accounts for the purpose of Section 240of the Companies Act 1985 and have been extracted from the Company'sconsolidated accounts for the year to 31 August 2004 and the year to 31 August2005. The statutory accounts for the 12 months to 31 August 2004 have been filedwith the Registrar of Companies and those for the 12 months to 31 August 2005will be filed following the Company's annual general meeting. The auditors'reports on both those accounts were unqualified and did not include a statementunder Section 237 (2) or (3) of the Companies Act 1985. The Annual Report and Accounts will be posted to shareholders in November 2005. This information is provided by RNS The company news service from the London Stock Exchange

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