Final Results

17 October 2002 WH SMITH PLC PRELIMINARY RESULTS ANNOUNCEMENT FOR THE TWELVE MONTHS ENDED 31 AUGUST 2002 KEY POINTS Total sales up 7% to Â£2.9 billion * UK Retail sales up 6% to Â£1,501m * Publishing sales up 5% to Â£138m * News Distribution sales up 4% to Â£1,069m * ASPAC proforma sales up 7% to Â£138m * US Travel Retail sales down 12% to Â£216m Profit before tax, goodwill and exceptional items down 8% to Â£122m * UK Retail profits up 7% to Â£97m * Publishing profits up 19% to Â£19m * News Distribution profits up 17% to Â£27m * ASPAC profits of Â£5m * US Travel Retail trading losses of Â£16m Exceptional charges of Â£28m largely reflect asset impairment in the US Â£27m EPS before exceptional items and goodwill down 7% to 34.6p Final dividend maintained at 13p (Total dividend for the year unchanged at 19p) GROUP CHIEF EXECUTIVE'S COMMENTS Commenting on the results, Richard Handover, Group Chief Executive said: 'Strong performance and continued operational progress across the Group has been overshadowed by a material loss in the US business. Profits excluding the US are up 13% to Â£138m.' 'UK Retail has had its fifth consecutive year of profit growth. Market share gains were made in key categories. The continuing focus on improving the customer offer, driving internal efficiencies and delivering new store growth is now providing real momentum.' 'Hodder Headline has had another successful year and News Distribution has recovered strongly. Our ASPAC retail businesses in Australia and New Zealand have made a good first time contribution following their acquisition in May, 2001.' 'The US Travel business has had a very difficult year due to severe market conditions. Nevertheless, management action has been taken to reduce the extent of the losses.' 'The continued focus on operational improvements that are being made across the Group and the prospects of recovery in the US, mean we remain optimistic about our future trading prospects.' Enquiries: WH Smith PLC Richard Handover Group Chief Executive 020 7409 3222 John Warren Group Finance Director 020 7409 3222 Richard Manhire Investor Relations 020 7514 9686 Louise Evans Media Relations 020 7514 9624 Brunswick Timothy Grey/Katya Reynier 020 7404 5959 CHIEF EXECUTIVE'S REVIEW OVERVIEW The UK Retail, Publishing, News Distribution and ASPAC Retail businesses have all performed well during the year and as a result, profit before tax, exceptional items and goodwill amortisation for the Group excluding the US Travel business is up 13% to Â£138m. This good performance has been overshadowed by a disappointing result from the US, which has had a significant negative impact on the Group's overall performance. UK RETAIL The UK Retail business has had its fifth consecutive year of profit growth with like for like sales up 4%. A continued focus on differentiation of product and customer offer, saw market share gains across all key categories with, in particular, an increase in book market share of more than 0.5 percentage points. For the year, gross margin was held broadly flat despite the 0.7 percentage points fall in the first half of the year. A significant improvement in the gross margin in the second half of the year of 0.7 percentage points was driven by deliberate management action to focus on driving contribution through better initial purchase margins of more profitable products and through more focussed promotions for example the 2 for Â£10 book promotion. The latter part of the year also saw a continued recovery in stationery sales following a disappointing first six months. Management will continue to focus on driving the sales of the more profitable products. Significant capital investment of Â£46m has been made in the business in the year, including the ongoing implementation of a new systems infrastructure, Retek, which will provide a platform for further growth. For the second year in succession, retail space was increased by 2% with the addition of 22 new stores including six of the larger `edge of town' format. This rate of expansion will continue in 2002/03. Alongside this space growth, UK Retail has continued with its store refurbishment programme. Nearly 300 stores have been refurbished since 1996/97 with 40 more planned for the new financial year. ASPAC RETAIL ASPAC Retail, in its first full year following acquisition, has traded well with a particularly strong result in New Zealand. Two WHSmith branded stores were opened in Sydney in the year and another is due to open in Canberra. The success of these test stores will determine the potential for future store expansion in Australia. US TRAVEL RETAIL The US Travel business incurred material losses as a result of the severe deterioration in travel market conditions following September 11th, exacerbated by the continued slowdown in the US economy. Like for like sales declined by 13% and, in a highly operationally geared business such as this (with the major elements of the cost base being largely fixed), the result was a rapid move from profit to loss. Action has been taken to control the fixed cost base as far as practicable, withdrawing from loss making Hotel stores where possible and minimising capital expenditure. However, a return to profitability is dependent on recovery in passenger volumes in airports and occupancy levels in hotels. Although this recovery will occur, the pace remains uncertain, but we expect a material reduction in losses for the current year. To equip ourselves best to benefit from the upturn when it comes, we have restructured the management of the business into separately focussed Airport and Hotel teams. PUBLISHING Hodder Headline had another excellent year and continues to gain market share in key markets. The consumer division had a particularly strong second half and market share in UK fiction is now up to 17%. Best selling titles included books by Jean Auel, Martina Cole, Wendy Holden, Stephen King and James Patterson. The education division also had a good performance and market share in the secondary education market has increased to 19%. Future prospects for the Hodder educational publishing division have been further strengthened by the acquisition of the John Murray and Robert Gibson. These well-established imprints will complement the existing business and enhance Hodder's strong market positions. NEWS DISTRIBUTION News Distribution also had a good year. The new management team has focussed on raising the standard of service to its retail customers and strengthening publisher relationships. The benefits of this focus have been borne out both by improved customer satisfaction and some small contract gains in the year. At the same time, the benefits of our investment in the SAP computer system implemented in 2001 are now driving cost efficiencies, with waste levels down by 40% year on year. PENSIONS In common with many companies, WHSmith is suffering from the effect of weak stockmarkets on its defined benefit pension funds. The adverse effect to the company is mitigated by the decision we made 7 years ago to close the main scheme to new entrants, but there will nevertheless be a substantial adverse impact on cash flow in 2002/03, during which we expect company contributions to rise from Â£4m in 2001/02 to nearly Â£20m. In addition, there will be a material impact on reported profits. In 2001/02, under SSAP 24, there was a nil pension charge. On the adoption of FRS17, 2001/02 will be restated to reflect a Â£5m charge and, in 2002/03, under FRS17, this charge will increase to Â£16m. DIVIDEND Despite the fall in Group profits in 2002 and the material increase in the pension charge, which will follow the adoption of FRS17 in 2002/03, the Board is recommending that the dividend should be maintained - a strong signal of our confidence in the potential of the business. CURRENT TRADING In the 6 weeks to 12 October 2002, total UK Retail like for like sales are up 1% with the high gross margin categories, books and stationery up 2% and sales of lower margin categories showing declines versus a strong promotion-driven sales performance in 2001/02. As a consequence, gross margin in the period is 1 percentage point higher than last year, continuing the trend in the second half of 2001/02. In the US Travel business, like for like sales are up 13% with hotels up 8% and airports up 15%. On a two-year view, the US business is down 15% on a comparable basis. ASPAC Retail's like for like sales for the period are up 7%. News Distribution's comparable sales are up 2% and Publishing's sales are up 8%. FINANCIAL REVIEW OVERVIEW The financial performance of all the businesses with the exception of the US travel business has been strong. UK Retail had another year of sales and profit growth. Hodder Headline has produced another good result and News Distribution has rebounded strongly after a disappointing performance in the previous year. In its first full year following acquisition, the ASPAC retail business has traded ahead of expectations. The US travel business was severely impacted following September 11th and recovery, particularly in the hotel businesses, has been slower than anticipated. This has had a material effect on overall group profitability. Earnings per share were 21.1p whilst adjusted earnings before exceptional items and amortisation of goodwill were 34.6p. The company generated Â£39m of free cash flow and the balance sheet remains robust. In common with many companies, the financial condition of the Company's defined benefit pension schemes has deteriorated with the substantial world-wide decline in the value of equities. This will have a material effect in the coming year on the Company's reported profits and cashflows. A full explanation of the anticipated impact is given in this Review and its associated Appendix. Trading results The trading results can be summarised as follows: Comparable Sales Growth Â£m 2002 2001 Growth % % ________________________________________ ________ ________ _________ __________ Sales UK Retailing 1,501 1,415 6% 4% International Retailing 354 284 ________________________________________ ________ ________ _________ __________ Total Retailing 1,855 1,699 9% 2% Publishing Â¹ Â² 138 131 5% 4% WHSmith News Distribution Â¹ 1,069 1,024 4% 4% Internal Sales (126) (119) ________________________________________ ________ ________ _________ __________ Total 2,936 2,735 7% 4% ________________________________________ ________ ________ _________ __________ Operating profit UK Retailing 97 91 7% International Retailing (11) 9 ________________________________________ ________ ________ ________ Total Retailing 86 100 -14% Publishing Â³ 19 16 19% WHSmith News Distribution 4 27 23 17% ________________________________________ ________ ________ ________ Total Trading Profit 132 139 -5% Support Costs (14) (12) -17% Internal Rents 4 3 33% ________________________________________ ________ ________ ________ Total Operating Profit 122 130 -6% Exceptional Items (28) (16) -75% Goodwill amortisation (5) (3) 67% ________________________________________ ________ ________ ________ Total 89 111 -20% ________________________________________ ________ ________ ________ Â¹ includes sales to other WHS businesses Â² includes Helicon sales Â£1m (2001; Â£3m) Â³ includes Helicon loss of Â£1m (2001; Â£2m) 4 includes Connect2U loss of Â£2m (2001; Â£3m) RETAILING The results for retailing businesses comprise: Comparable Â£m 2002 2001 Growth % Sales Growth % ________________________________________ ________ ________ __________ _____________ Sales High Street 1,189 1,120 6% 4% UK Travel Retail 306 287 7% 4% WHSmith Online 6 8 -27% -27% ________________________________________ ________ ________ __________ _____________ UK Retailing 1,501 1,415 6% 4% USA Travel Retail 216 245 -12% -13% ASPAC Retail 138 39 - - ________________________________________ ________ ________ __________ _____________ International Retailing 354 284 - - ________________________________________ ________ ________ __________ _____________ Total Retailing 1,855 1,699 9% 2% ________________________________________ ________ ________ __________ _____________ Operating profit High Street 79 77 3% UK Travel Retail 21 20 5% WHSmith Online (3) (6) 50% ________________________________________ ________ ________ __________ _____________ UK Retailing 97 91 7% USA Travel Retail (16) 11 ASPAC Retail 5 (2) ________________________________________ ________ ________ __________ _____________ International Retailing (11) 9 ________________________________________ ________ ________ __________ _____________ Total Retailing 86 100 -14% ________________________________________ ________ ________ __________ _____________ UK Retailing UK Retail sales grew by 6% to Â£1,501m (2001 - Â£1,415m), with like for like sales up by 4%. The business is continuing to focus on improving the retail offer through product differentiation where relevant, efficiency improvements in both supply chain management and store operations and finally through a commitment to new store openings and refurbishment of the existing portfolio. The High Street business increased sales by 6% to Â£1,189m, up 4% on a like for like basis. Book sales grew by 5%, with a very strong performance in July and August as a result of a 2 for Â£10 book promotion. Stationery sales grew by 3% with a much improved performance in the second half of the year. News and Express categories grew by 6%, with magazines up by 7% offsetting the continuing decline in phonecard sales. Total entertainment sales grew by 11% with particularly strong performances from multimedia and DVDs. Own brand and exclusive sales grew by 15% and these now represent 16% of the sales mix. As a result of these strong sales performances, market share gains were achieved in the majority of key categories with books share increasing by over 0.5 percentage points (source: Booktrack). UK Travel Retail grew sales by 7% to Â£306m and were up by 4% on a like for like basis. Sales growth has nevertheless been slightly lower than our expectations at the start of the year due to the impact of September 11th on volumes in London airports and stations. The Online sales performance was down year on year, however higher intake margins due to sourcing from our main UK warehouse at Swindon and restructuring of the fixed cost base meant overall costs were Â£3m lower. The strong sales performance across UK Retail resulted in a Â£31m increase in gross contribution, with a small 0.2% decline in the gross margin percentage being due to the strong sales performance from the lower margin entertainment category, particularly in the first half of the year. Total expenses as a proportion of sales declined by 0.3 percentage points due to good cost control in the second half of the year. As a consequence, overall net margin for the UK Retail business increased by 0.1 percentage points to 6.5%. We have now implemented two of the three stages of the new systems platform in the UK retail business, Retek. The problems experienced in the run up to Christmas, following the implementation of the Warehouse Management System in spring 2001 have now been resolved. The Sales Forecasting System was implemented in April 2002 and is beginning to have a beneficial impact on availability within store. The final stage, the Stock Replenishment and Merchandising System, has completed its build phase and is now in test, although it will not be implemented until next summer. The UK Retail business now operates from 736 stores which occupy 3.3 million square feet. 22 new stores were opened in the year including six edge of town stores (Kinnaird Park, Fosse Park, Greenford, Tamworth Venture Park, Manchester West One and Fforestfach) and one large destination store in Belfast. US Travel Retail The US Travel Retail business has had a very difficult year due to the impact of September 11th and the economic downturn in the US. Sales decreased by 12% to Â£216m and were down by 13% on a like for like basis. Sales in the airport business declined by 8% on a like for like basis, due to lower enplanements, and were down by 19% in the hotels business due to low hotel occupancy rates. Gross contribution decreased by Â£26m and gross margins fell by 4.1 percentage points largely due to product mix movements towards lower margin product categories in both businesses. As a result of action taken to reduce the fixed cost base, and in particular the fixed rental commitments in airport stores, overall costs, excluding depreciation, decreased by Â£2m. An increase in administration costs of Â£4m was offset by a reduction in rent and staff costs of Â£6m. The increase in administration costs included Â£2m of one-off costs relating to restructuring and legal costs as a result of the re-engineering of the business. 39 hotel stores operated on short-term lease arrangements were closed during the year, leaving 354 remaining hotel stores and 174 airport stores. Depreciation increased by Â£3m as a result of investment prior to September 11th. Overall cost increases were therefore contained to Â£1m but, as a result of the sales and contribution decline, the business has suffered a material reduction in profitability and a Â£16m loss was incurred in the year. ASPAC Retail In its first full year since the acquisition of the operations in Australia and New Zealand, ASPAC Retail's sales grew on a proforma basis by 7% to Â£138m, up 7% on a like for like basis. Gross contribution increased by Â£5m with gross margins improving by 1.1 percentage points. Good cost control also improved net margins to 3.8%, pushing profits ahead by Â£4m to Â£5m on a proforma basis. The business consists of retail operations in New Zealand and Australia, under the Whitcoulls and Angus and Robertson brands respectively, and travel stores in Hong Kong, Singapore and Australia. In addition, 3 WHSmith format stores have been opened on a trial basis in Australia. Publishing Publishing has had another successful year. Sales increased by 5% to Â£138m (2001 - Â£131m) with a particularly strong performance in the second half, which showed a 16% improvement. Internal sales increased by Â£3m to Â£19m (2001 - Â£16m) due mainly to effect of sales to our Australia and New Zealand businesses being classified as internal following the ASPAC acquisition. Gross contribution increased by Â£3m with the gross contribution percentage broadly level year on year. Operating costs were flat and therefore profits increased by Â£3m to Â£19m. Overall net margin increased to 13.8% (2001 - 12.2%). Following the acquisition of the John Murray business in June for Â£17m, Â£2m of exceptional cost relating to reorganisation has been incurred. Post acquisition profits were Â£0.5m. On 31 August, the Robert Gibson education publishing business was acquired for Â£2m. No post acquisition profits or exceptional costs on acquisition have arisen. During the year, Helicon Publishing was sold. Trading losses, including the net cost of exit, were Â£1m (2001 - Â£2m loss). WHSmith News Distribution Sales increased by 4% to Â£1,069m (2001 - Â£1,024m). Newspaper sales increased by 7% following cover prices rises earlier in the year. Magazine sales increased by 3%, and partworks and one shots were up by 30%. Phonecard sales decreased by 30%. Overall sales included Â£107m (2001 - Â£103m) of sales to WHSmith retailing business. Gross contribution increased by Â£4m, with a marginal decline in the overall gross margin percentage due to stronger sales of lower margin newspapers. Operating costs as a percentage of sales reduced by 0.4 percentage points, and as a consequence, net margin increased by 0.3 percentage points to 2.5% (2001 - 2.2%). Profits increased by Â£4m to Â£27m. Connect 2U, the B2B internet portal, incurred a loss of Â£2m (2001 - Â£3m loss) in the year including rationalisation and integration costs. As it now operates as an integral part of the News Distribution business, it will no longer be disclosed separately. Other profit items Centrally controlled support costs were Â£14m an increase of Â£2m on last year, due principally to increased training and development costs. Internal rents on the freehold property owned by the Company, which are charged to the businesses, were Â£4m, a Â£1m increase on last year, due to freehold property in ASPAC. Exceptional items Following the events of September 11th and their impact on our US operations, a review of the US Travel Retail business was undertaken at the half year and adjustments were made to reflect the impairment of asset carrying values that had arisen totalling Â£27m. The total adjustment made to stock was US$10m (Â£7m), to debtors and provisions US$9m (Â£6m), to tangible fixed assets US$8m (Â£5m) and to goodwill US$11m (Â£8m). Associated restructuring costs of US$1m (Â£1m) were also incurred. A further review has been undertaken at the full year and no further adjustment is felt to be necessary. Following the acquisition of the John Murray publishing business in May, exceptional charges of Â£2m relating to reorganisation costs were incurred. In July, 10 UK Retail stores were sold to TM Retail. The exceptional profit on disposal was Â£1m. Interest The results include interest income of Â£nil, compared with Â£3m in the previous year. The reduction of Â£3m arises principally from the impact of the trading performance of USA Travel Retail, the prior year acquisition of the Whitcoulls (New Zealand) and Angus & Robertson (Australia) bookstores and the reduction in interest rates year on year. Taxation The tax charge for the year is Â£37m, including Â£1m on international profits. The effective tax rate, excluding exceptional items, is 30% (2001 - 30%). This is in line with prevailing UK tax rates. The restated effective tax rate for 2000/01 of 30% has increased from 28% (see below) as a result of the introduction of FRS 19 and the consequential recognition of deferred tax liabilities previously unprovided under SSAP 15. Under FRS19, the Group is required to make full provision for deferred tax in respect of timing differences that have originated but not reversed by the balance sheet date. The Group's previous accounting policy in respect of deferred tax was to recognise deferred tax only to the extent that a liability or asset was likely to be payable or recoverable, in accordance with SSAP 15. The impact of adopting FRS 19 is to decrease profit after tax by Â£3m (2001 - Â£ 4m reduction) from Â£55m to Â£52m and to reduce opening shareholders' funds at 1 September 2001 by Â£12m from Â£626m to Â£614m. All prior year comparatives have been restated accordingly. Operating leases In common with other retailers, the Company's stores are held mainly under operating leases, which are not regarded as debt for accounting purposes. The UK High Street leases are on standard `institutional' lease terms, now typically with a 15 year term subject to five year upwards only rent reviews. The Travel Retail stores operate mainly through turnover related leases, usually with minimum rent guarantees, and generally varying in length from 5 to 10 years. The business has an annual minimum net rental commitment of Â£166m (net of Â£14m of external rent receivable). The total future rental commitment at the balance sheet date amounted to Â£1.1bn with the leases having an average life of 7 years. The net present value of these commitments is approximately Â£0.7bn. Although large, these commitments are characteristic of the retail sector and the risks associated with them depend on their liquidity which is mainly influenced by the quality and location of the sites. These are considered to be satisfactory. Fixed charges cover A key measure of financial strength for the businesses is fixed charges cover. The fixed charges comprise operating lease rentals, property taxes, other property costs and interest. These were covered 1.5 times by profits (excluding goodwill amortisation and exceptional items) before fixed charges (2001 - 1.6 times). Excluding the US business, fixed charges cover has been maintained at 1.7 times. Earnings per share Earnings per share were 21.1p (2001 - 30.1p) whilst adjusted earnings before exceptional items and amortisation of goodwill were 34.6p (2001 - 37.4p). Dividends The Company's dividend policy is that, over the long term, dividends should be covered two times by earnings. The Board is proposing a final dividend of 13 pence in line with last year. The final dividend will be paid on 31 January 2003 to shareholders registered at the close of business on 6 January 2003. This will give a dividend for the full year of 19 pence in line with last year. The total cost of the dividend will be Â£47m. Excluding goodwill amortisation and exceptional items, the proposed dividend is covered 1.7 times by earnings. Free cash flow and cash balances The operating free cash flow available for the payment of dividends (before acquisitions and financing items) amounted to Â£39m compared with Â£64m in the previous year. Â£m 2002 2001 _________________________________________________ ___________ __________ Profit before tax, goodwill and exceptional items 122 133 Depreciation 52 47 _________________________________________________ ___________ __________ Cash Profit 174 180 Working capital (28) (9) Capital expenditure (66) (68) Disposal of assets 2 2 Pension contributions (4) - Tax paid (36) (38) Provision spend (3) (3) _________________________________________________ ___________ __________ Free Cash Flow 39 64 _________________________________________________ ___________ __________ The movement in working capital is Â£19m worse than the previous year, due to the timing of payments to creditors at the year end, as shown below: Â£m 2002 2001 ______________________________________________ ___________ __________ Stock (7) (18) Debtors (9) (22) Creditors (12) 31 ______________________________________________ ___________ __________ Working Capital (28) (9) ______________________________________________ ___________ __________ We have continued to invest vigorously in the business and capital expenditure can be analysed as follows: Â£m ____________________________________________________________ __________ New stores 13 Refurbished stores 22 Systems 22 Other 9 ____________________________________________________________ __________ Total 66 ____________________________________________________________ __________ The movement in the net cash position is as follows: Â£m ___________________________________________________________ __________ Opening net cash 75 Free cash flow 39 Dividends (47) Acquisition of businesses (22) Cash in subsidiaries acquired 2 Purchase of shares for employee share schemes (3) Disposal of operation 2 Cashflow relating to exceptional items (3) Issues of shares 2 Currency translation differences (1) ___________________________________________________________ __________ Closing net cash 44 ___________________________________________________________ __________ Balance Sheet The net assets comprise: Â£m Â£m ________________________________________________ ____________ __________ Tangible assets 326 Goodwill 240 Investment 17 __________ 583 Stocks 254 Creditors less debtors (167) ____________ Working Capital 87 Provisions (28) Dividends (32) Corporation Tax (40) ________________________________________________ ____________ __________ 570 Net Cash 44 ________________________________________________ ____________ __________ Net Assets 614 ________________________________________________ ____________ __________ Tangible assets include Â£42m for the Company's interest in freehold and long leasehold property, comprising the Company's offices and depot in Swindon and certain small stores, which are not considered suitable for sale and leaseback. Return on Capital Employed Total capital employed and returns thereon are as follows: Operating ROCE % with Capital operating leases Employed Â£m ROCE % capitalised ______________________________________ ___________ ____________ _____________ High Street 224 35% 16% UK Travel Retail 28 75% 37% WHSmith Online 7 - - ______________________________________ ___________ ____________ _____________ UK Retailing 259 37% 18% International Retailing 86 - - ______________________________________ ___________ ____________ _____________ Total Retailing 345 16% 13% Publishing 263 7% 7% WHSmith News Distribution (9) - - ______________________________________ ___________ ____________ _____________ Trading Operations 599 17% 14% Central items and property (29) - - ______________________________________ ___________ ____________ _____________ Total Operating Assets 570 16% 13% ______________________________________ ___________ ____________ _____________ For the prior year, comparable average returns were 24% (17% after operating leases capitalised). Pensions The Company has continued to account for pensions in accordance with SSAP24. The company intends to adopt FRS17, Retirements Benefits, issued in November 2000, for 2002/03. Transitional disclosures are included in these accounts. The financial position of the Company is sensitive to the financial position of its main defined benefit pension fund which had Â£791m of assets as valued at 31 March 2000. These assets are held by a trustee administered fund to meet long-term pension liabilities to past and some present employees. The Company has undertaken to meet any shortfalls against the liabilities should they arise. The variable amount and length of defined benefit pension obligations inevitably gives rise to measurement issues in determining the financial position of the pension fund. As shareholders will undoubtedly be aware, the financial position of most defined benefit pension funds has deteriorated over the last two years, and the last few months in particular, due primarily to the world-wide decline in equity markets. WHSmith's fund is no different in this respect and this deterioration will adversely affect the results of the Company and its cashflows over the next year. The longer-term impact is more difficult to judge and will depend on a number of market related factors, particularly equity valuations. The change in accounting from SSAP24 to FRS17 will also have an impact on the way the results are reported and, in future, will result in increased volatility in the pre-tax profit result. The Company closed its main defined benefit scheme to new members in 1995 but continues to fund the benefits accruing in respect of the remaining 4,538 active members. Employees who have joined the Company since 1995 are able to benefit from a defined contribution pension arrangement. An explanation of the financial position of the pension fund and the accounting impact of FRS17 on the Company is set out in a separate Appendix to this Financial Review. Financing The Company has committed bank facilities of Â£200m available of which Â£67m mature in May 2003 and Â£133m mature in May 2007. Currency Approximately 10 per cent of the Company's turnover is earned in foreign currencies. The effect of fluctuations in exchange rates was to decrease sales by Â£2m, with no impact on profits. Currency exposures mainly relate to the translation of foreign income. The supply of products from outside the UK is mainly paid for in sterling. Accounting for goodwill Accounting for goodwill is regulated by Financial Reporting Standard 10, which requires goodwill on acquisitions to be capitalised and effectively permits the non-amortisation of goodwill if the value of goodwill is not less than the amount in the accounts, can be calculated, and is durable. The directors continue to take the view that these conditions apply to the goodwill on the original acquisition of Hodder Headline PLC and subsequent purchase of Wayland. Accordingly, no amortisation has been provided on this goodwill, which amounts to Â£175m. In the year Hodder Headline acquired the John Murray and Robert Gibson publishing businesses. The capitalised goodwill arising form these transactions was Â£15m and, in line with the goodwill policy applied to Hodder Headline and Wayland acquisitions, no amortisation has been provided. The goodwill generated on the acquisition of the Whitcoulls (New Zealand) and Angus & Robertson (Australia) bookstores, now part of WHSmith ASPAC, is regarded as having a useful life of 20 years. The goodwill generated on the acquisition of 8 stores from TM Retail, with associated goodwill of Â£2m is also regarded as having a useful life of 20 years. ESOP share purchase In April 2002 the Company purchased 0.5m of its own ordinary shares of nominal value of 55.55p each with an aggregate market value of Â£2.3m. These shares were held for the sole purpose of satisfying obligations under the employee share schemes. Pension Accounting - Appendix to the Financial Review Background During the last two years, a combination of declining stock market values, increasing liabilities due to lower annuity rates and a Company contribution holiday has pushed the Company's main defined benefit pension arrangements from surplus into deficit as the table below shows: Valuation Date 31 March 2000 31 August 2001 31 August 2002 _______________________ _______________ ________________ _________________ Market value of assets Â£791m Â£664m Â£572m Liabilities (Â£613m) (Â£658m) (Â£703m) Net surplus (deficit) Â£178m Â£6m (Â£131m) Percentage funded 129% 101% 81% * The valuation dated 31 March 2000 was the last full triennial actuarial valuation of the fund. The figures for 31 August 2001 and 2002 are those prepared for the purpose of FRS17. The main impact on the valuation of assets has of course been the significant decline in world stock markets over the last two years. SSAP24 Under SSAP24 the pension cost recognised in the accounts is based on the latest triennial actuarial valuation of the fund as at 31 March 2000. It showed a strong position with assets exceeding liabilities by 29%. The Company has recognised the benefits of this surplus by way of a Â£13 million credit through the profit and loss account, providing a full offset to the regular cost of defined benefit pensions. FRS17 For the year ending 31 August 2003, the Company will account for the cost of pensions under FRS17. The year to 31 August 2002 will be restated under this new accounting policy. The effect of the adoption of FRS17 and the restatement will be as follows: 2002 2002 2003 Restated Â£m SSAP24 FRS17 FRS17 _____________________________________________ ________ __________ ________ Regular Cost 13 13 13 SSAP24 variation (13) - - _____________________________________________ ________ __________ ________ Charge to operating profit - 13 13 _____________________________________________ ________ __________ ________ Interest - expected return on assets (47) (38) - interest on pension liabilities 39 41 _____________________________________________ ________ __________ ________ Charge to profit before taxation 5 16 _____________________________________________ ________ __________ ________ Under FRS17, the profit and loss charge for pensions will be Â£5 million higher than stated under SSAP24 in 2001/02. For 2002/03, on a comparable FRS17 basis, the charge will be Â£11 million higher. On the balance sheet, FRS17 requires the immediate recognition of any surplus or deficit in the pension fund as a pension asset or liability, with a corresponding effect on shareholders' funds. The restatement of the balance sheet at 31 August 2002 will have the following effects: Â£m 2002 ________________________________________________________ ____________ Net assets excluding pension liability 614 Pension liability (143) Related deferred tax asset 43 ________________________________________________________ ____________ Net assets including pension liability 514 ________________________________________________________ ____________ Profit and loss reserve excluding pension liability 215 Pension reserve (100) ________________________________________________________ ____________ Profit and loss reserve 115 ________________________________________________________ ____________ Cash Impact In addition to the profit and loss account and balance sheet effects identified above, the deterioration in the financial position of the pension fund will impact the Company's cashflows. For many years, the surplus in the fund has allowed the Company to take a full contributions holiday. However, recognising the reduction in the surplus at 31 August 2001, the Company renewed contributions during the year to August 2002, contributing Â£4 million. In the current year ending 31 August 2003, the Company has agreed with the Trustees of the Pension Trust to increase the rate of cash contributions to cover the regular cost plus an element of the current deficit. It is anticipated that cash contributions to all the Company's defined benefit pension schemes will total about Â£20 million in the year. Group Profit and Loss Account For the 12 months to 31 August 2002 2002 2001 __________ __________ _______ ___________ __________ ________ Before Before exceptional Exceptional exceptional Exceptional items & items & items & items & goodwill goodwill goodwill goodwill amortisation amortisation Total As Â£m Note amortisation amortisation Total As restated As restated restated ____________________________________ ____ __________ __________ _______ ___________ __________ ________ Sales - Continuing operations 2,933 - 2,933 2,735 - 2,735 - Acquisitions 3 - 3 - - - ____________________________________ ____ __________ __________ _______ ___________ __________ ________ Total Sales 1 2,936 - 2,936 2,735 - 2,735 ____________________________________ ____ __________ __________ _______ ___________ __________ ________ ____________________________________ ____ __________ __________ _______ ___________ __________ ________ Operating profit - Continuing 1 122 (33) 89 130 (19) 111 operations - Acquisitions 1 - - - - - - ____________________________________ ____ __________ __________ _______ ___________ __________ ________ Total operating profit 122 (33) 89 130 (19) 111 Interest 5 - - - 3 - 3 ____________________________________ ____ __________ __________ _______ ___________ __________ ________ Profit on ordinary activities before 122 (33) 89 133 (19) 114 taxation Tax on profit on ordinary activities 6 (37) - (37) (40) 1 (39) ____________________________________ ____ __________ __________ _______ ___________ __________ ________ Profit on ordinary activities after 85 (33) 52 93 (18) 75 taxation Minority interests - - - (1) - (1) ____________________________________ ____ __________ __________ _______ ___________ __________ ________ Profit attributable to shareholders 85 (33) 52 92 (18) 74 Dividends 7 (47) - (47) (47) - (47) ____________________________________ ____ __________ __________ _______ ___________ __________ ________ Retained earnings 38 (33) 5 45 (18) 27 ____________________________________ ____ __________ __________ _______ ___________ __________ ________ Earnings per share 8 21.1p 30.1p Diluted earnings per share 8 21.0p 29.8p Adjusted earnings per share 8 34.6p 37.4p Dividends per share 7 19.0p 19.0p Net Assets per share 246p 250p Fixed charges cover - times 9 1.5x 1.6x Dividend cover - times 7 1.1x 1.6x Dividend cover before exceptional 7 1.7x 1.9x items - times Tax rate - before exceptional items 6 30.0% 30.0% and goodwill amortisation as restated Group Balance Sheet As at 31 August 2002 Â£m Note 2002 2001 As restated __________________________________ _______________ ______________ ______________ Fixed assets Goodwill 12 240 236 Fixed assets 13 326 326 Investments 13 17 14 __________________________________ _______________ _______________ ______________ Total fixed assets 583 576 __________________________________ _______________ _______________ ______________ Current assets Stock 14 254 255 Debtors 14 196 185 Cash at bank and in hand 16 98 138 __________________________________ _______________ _______________ ______________ 548 578 Creditors due within one year Debt 16 (13) (37) Other 14 (432) (447) __________________________________ _______________ _______________ ______________ (445) (484) __________________________________ _______________ _______________ ______________ Net current assets 103 94 __________________________________ _______________ _______________ ______________ Total assets less current 686 670 liabilities __________________________________ _______________ _______________ ______________ Creditors due after more than one year Debt 16 (41) (26) Other (3) (2) __________________________________ _______________ _______________ ______________ (44) (28) Provisions for liabilities and 15 (28) (23) charges __________________________________ _______________ _______________ ______________ TOTAL NET ASSETS 614 619 __________________________________ _______________ _______________ ______________ Share capital 17 139 139 Share premium 18 91 89 Capital redemption reserve 18 156 156 Revaluation reserve 18 8 8 Profit and loss account 18 215 220 __________________________________ _______________ _______________ ______________ Equity shareholders' funds 609 612 Non equity share capital 17 2 2 __________________________________ _______________ _______________ ______________ Shareholders' funds 611 614 Minority interests 3 5 __________________________________ _______________ _______________ ______________ TOTAL EQUITY 614 619 __________________________________ _______________ _______________ ______________ Memorandum - Analysis of net cash (Â£m) __________________________________ _______________ _______________ ______________ Cash at bank 98 138 Debt less than one year (13) (37) Debt greater than one year (41) (26) __________________________________ _______________ _______________ ______________ Net cash 44 75 __________________________________ _______________ _______________ ______________ Group Cash Flow Statement For the 12 months to 31 August 2002 Â£m Note 2002 2001 ________________________________________________________ _______ ______ _______ Cash inflow from operating activities 19 136 165 Returns on investment and servicing of finance - 3 Taxation (36) (38) Purchase of fixed assets (66) (68) Purchase of shares for employee share schemes (3) (13) Disposal of tangible fixed assets 2 2 ________________________________________________________ _______ ______ _______ Cash outflow from capital expenditure and financial (67) (79) investment ________________________________________________________ _______ ______ _______ Proceeds on disposal of operation 2 - Acquisitions - cash consideration (22) (51) ________________________________________________________ _______ ______ _______ Cash outflow from acquisitions and disposals (20) (51) ________________________________________________________ _______ ______ _______ Equity dividends paid (47) (48) ________________________________________________________ _______ ______ _______ Cash outflow before use of liquid resources and (34) (48) financing ________________________________________________________ _______ ______ _______ Issue of shares 2 3 Repurchase of own shares - (9) (Decrease)/increase in debt 16 (9) 34 ________________________________________________________ _______ ______ _______ Cash (outflow)/inflow from financing (7) 28 ________________________________________________________ _______ ______ _______ Decrease in cash (41) (20) ________________________________________________________ _______ ______ _______ Reconciliation of net cash flow to movement in net cash _______________________________________________________ ______ ______ Net cash at the start of the period 75 123 Decrease in cash in the period (41) (20) Cash outflow/(inflow) from decrease/(increase) in debt 9 (34) Cash in subsidiaries acquired 2 6 Currency translation differences (1) - _______________________________________________________ ______ ______ Net cash at the end of the period 44 75 _______________________________________________________ ______ ______ Consolidated Statement of Total Recognised Gains and Losses For the 12 months to 31 August 2002 Â£m Note 2002 2001 As restated ___________________________________________________ _____ _______ _________ Profit attributable to shareholders 52 74 Currency translation differences (10) - ___________________________________________________ _____ _______ __________ Total recognised gains for the financial period 42 74 ___________________________________________________ _____ _______ __________ Prior year adjustment 6 (12) ___________________________________________________ _____ _______ __________ Total recognised gains since last annual report 30 ___________________________________________________ _____ _______ __________ Reconciliation of Movements in Consolidated Shareholders' Funds For the 12 months to 31 August 2002 Â£m Note 2002 2001 __________________________________________________ _____ _______ _________ Shareholders' funds at beginning of period as 626 601 previously stated __________________________________________________ _____ _______ _________ Prior year adjustment 6 (12) (8) __________________________________________________ _____ _______ _________ Shareholders' funds at beginning of period as 614 593 restated __________________________________________________ _____ _______ _________ Retained earnings 5 27 Issue of shares 2 3 Repurchase of shares - (9) Currency translation differences (10) - __________________________________________________ _____ _______ _________ Net (deductions) / additions to shareholders' (3) 21 funds __________________________________________________ _____ _______ _________ Shareholders' funds at end of period 611 614 __________________________________________________ _____ _______ _________ 1 SEGMENTAL ANALYSIS OF RESULTS 1(a) Analysis of Retailing Stores and Selling Space Number of stores 1 Sept Opened Closed 31 Aug 2002 2001 _________________________________ __________ ___________ ___________ ___________ WHSmith High Street 539 16 (2) 553 UK Travel Retail 189 6 (12) 183 _________________________________ __________ ___________ ___________ ___________ UK Retailing 728 22 (14) 736 USA Travel Retail 573 18 (63) 528 ASPAC Retail 207 5 (12) 200 _________________________________ __________ ___________ ___________ ___________ Total Retailing Businesses 1,508 45 (89) 1,464 _________________________________ __________ ___________ ___________ ___________ Retail selling square feet 1 Sept Opened Closed 31 Aug 2002 (000's) 2001 _________________________________ __________ ___________ ___________ ___________ WHSmith High Street 2,965 91 (11) 3,045 UK Travel Retail 208 16 (12) 212 _________________________________ __________ ___________ ___________ ___________ UK Retailing 3,173 107 (23) 3,257 USA Travel Retail 570 10 (50) 530 ASPAC Retail 794 20 (36) 778 _________________________________ __________ ___________ ___________ ___________ Total Retailing Businesses 4,537 137 (109) 4,565 _________________________________ __________ ___________ ___________ ___________ WHSmith High Street acquired eight stores during the period (note 11) of which three were refurbished and opened by 31 August 2002. 1(b) Segmental Analysis of Sales Â£m Base Business Acquisitions Total Sales _______________________________________________ ____________ ____________ ___________ _________ 2002 2002 2002 2001 _______________________________________________ ____________ ____________ ___________ _________ Retailing (note a) WHSmith High Street 1,189 - 1,189 1,120 UK Travel Retail (note b) 306 - 306 287 WHSmith Online 6 - 6 8 _______________________________________________ ____________ ____________ ___________ _________ UK Retailing 1,501 - 1,501 1,415 USA Travel Retail 216 - 216 245 ASPAC Retail (note c) 138 - 138 39 _______________________________________________ ____________ ____________ ___________ _________ Total Retailing Businesses 1,855 - 1,855 1,699 Publishing Businesses - Total sales (note d) 135 3 138 131 - Internal sales (19) - (19) (16) _______________________________________________ ____________ ____________ ___________ _________ Publishing Businesses 116 3 119 115 WHSmith News Distribution - Total sales 1,069 - 1,069 1,024 - Internal sales (107) - (107) (103) _______________________________________________ ____________ ____________ ___________ _________ WHSmith News Distribution 962 - 962 921 Total Sales 2,933 3 2,936 2,735 _______________________________________________ ____________ ____________ ___________ _________ a) Comparable sales growth in the period for UK Retailing was 4% (consisting of WHSmith High Street; 4% and UK Travel Retail; 4%), for ASPAC Retail was 7% on a proforma 12 month basis. In USA Travel Retail comparable sales declined by 13%. b) UK Travel Retail includes sales of Â£6m (2001; Â£7m) generated in continental Europe. c) ASPAC Retail includes sales generated in Australia Â£64m (2001; Â£18m), New Zealand Â£62m (2001; Â£11m) and Hong Kong and Singapore Â£12m (2001; Â£10m). d) Sales from Publishing Businesses include sales from Hodder Headline and Helicon Publishing. In the 12 months to 31 August 2002, Hodder Headline made external sales of Â£115m (2001; Â£112m) and Helicon Publishing made external sales of Â£1m (2001; Â£3m). Sales from acquisitions of Â£3m represent John Murray (Publishers) Limited (acquired 8 May 2002). Publishing includes sales of Â£18m (2001; Â£16m) generated in Australia and New Zealand. 1(c) Segmental Analysis of Operating Profits 2002 2001 ____________ _______________ _____________ ____________ ______________ ____________ Exceptional Exceptional Total items items & goodwill Total & goodwill Operating Operating Â£m Base amortisation Profit Base amortisation Profit Business Business ________________________________ ____________ _______________ _____________ ____________ ______________ ____________ Retailing WHSmith High Street 79 - 79 77 (1) 76 UK Travel Retail (note a) 21 - 21 20 - 20 WHSmith Online (3) (1) (4) (6) (1) (7) ________________________________ ____________ _______________ _____________ ____________ ______________ ____________ UK Retailing 97 (1) 96 91 (2) 89 USA Travel Retail (16) (29) (45) 11 (1) 10 ASPAC Retail (note b) 5 (1) 4 (2) - (2) ________________________________ ____________ _______________ _____________ ____________ ______________ ____________ Total Retailing Businesses 86 (31) 55 100 (3) 97 Publishing Businesses (note c) 19 (2) 17 16 (8) 8 WHSmith News Distribution (note 27 - 27 23 (8) 15 d) ________________________________ ____________ _______________ _____________ ____________ ______________ ____________ Trading profit 132 (33) 99 139 (19) 120 Support Costs (14) - (14) (12) - (12) Internal Rents (note e) 4 - 4 3 - 3 ________________________________ ____________ _______________ _____________ ____________ ______________ ____________ Operating profit 122 (33) 89 130 (19) 111 ________________________________ ____________ _______________ _____________ ____________ ______________ ____________ a) UK Travel Retail includes profits of Â£1m (2001; Â£1m) generated in continental Europe. b) ASPAC Retail includes profits of Â£3m (2001; Â£nil) generated in Australia, Â£ 3m (2001; Â£nil) in New Zealand and losses of Â£1m (2001; Â£2m loss) in Hong Kong and Singapore. c) In the 12 months to 31 August 2002, Hodder Headline generated profits of Â£ 20m (2001; Â£18m) and Helicon Publishing generated losses of Â£1m (2001; Â£2m). John Murray (Publishers) Limited had profits of Â£0.5m in the period since acquisition. Publishing includes profits of Â£1m (2001; Â£1m) generated in Australia and New Zealand. d) Profits from WHSmith News Distribution relate to WHSmith News Distribution and Connect2U. In the 12 months to 31 August 2002, WHSmith News Distribution made a profit of Â£29m (2001; Â£26m) and Connect2U made a loss of Â£2m (2001; loss of Â£3m). e) The results for Retailing Businesses are reported after an internal arm's length market rent on freehold and long leasehold properties owned and occupied by the Company. The internal income generated of Â£4m (2001; Â£3m) is shown as a separate credit to the profit and loss account giving a nil net effect to operating profit. Exceptional items incurred during the year were Â£28m (2001; Â£16m) and are analysed in Note 2. Goodwill amortisation of Â£5m (2001; Â£3m) represents WHSmith High Street Â£1m (2001; Â£1m), WHSmith Online Â£1m (2001; Â£1m), USA Travel Retail Â£2m (2001; Â£1m) and ASPAC Retail Â£1m (2001; Â£nil). 1(d) Segmental Analysis of Sales and Profits Businesses acquired in prior year ASPAC Retail Proforma comparative financial information in the table below for the 12 months to 31 August 2001 is presented as if the businesses had been owned for the full 12 months. Proforma Â£m 2002 2001 __________________________________________________ ____________ _________ Sales ASPAC (note a) 120 113 Asia Travel Retail (note b) 18 16 __________________________________________________ ____________ _________ Total sales 138 129 __________________________________________________ ____________ _________ Operating profit ASPAC (note a) 5 3 Asia Travel Retail (note b) (1) (2) __________________________________________________ ____________ _________ Operating profit 4 1 __________________________________________________ ____________ _________ a) Represents the sales and profits of the Angus & Robertson business in Australia and Whitcoulls in New Zealand acquired on 14 June 2001. b) Represents stores operated by the company before the acquisition. 2 EXCEPTIONAL ITEMS a) Exceptional items in the current year Impairment and write down of USA Travel Retail assets The tragic events in the USA on 11 September 2001 and their aftermath have had a material adverse effect on the trading of WHSmith USA Travel Retail. The business has undertaken a review of WHSmith USA Travel Retail operations and made adjustments to reflect the effect on asset carrying values of the events of 11 September 2001. The adjustment made to stock was US$10m (Â£6.9m), to debtors was US$1.6m (Â£1.1m), to provisions was US$7.5m (Â£5.2m), to tangible fixed assets was US$7.5m (Â£5.2m) and to goodwill was US$11.3m (Â£7.8m). Associated restructuring costs of US$1.1m (Â£0.8m) have also been incurred. Disposal of WHSmith High Street stores On 22 July 2002 WHSmith High Street sold ten of its stores based in hospitals to TM Retail. The total proceeds for the fixed assets and stock were Â£1.8m. The related profit on disposal was Â£1.2m. John Murray post-acquisition exceptional costs John Murray (Publishers) Limited was acquired on 8 May 2002. Following the acquisition a distribution contract, that was no longer required, was terminated at a cost of Â£1.1m. In addition, associated reorganisation and redundancy costs were incurred at a cost of Â£0.6m. b) Exceptional items in the prior year Write off of tangible and intangible fixed assets Following an impairment review at 31 August 2001, the directors considered the goodwill and associated tangible fixed assets in respect of Helicon Publishing and Connect2U to be impaired by Â£8m and Â£3m respectively. Transaction costs associated with terminated disposal of WHSmith News Distribution On 4 October 2001 WHSmith News Distribution was withdrawn from sale. The professional fees of Â£5m incurred during the year in connection with the disposal process were charged to the profit and loss account as an exceptional operating cost. 3 PENSIONS The Group operates a number of pension plans in a number of countries around the world. Pension arrangements for UK employees are operated through two defined schemes (the WHSmith Pension Trust and Hodder Headline Staff Retirement Benefits Plan) and a defined contribution scheme, WHSmith Pension Builder. The most significant is the defined benefit WHSmith Pension Trust for the Group's UK employees. In other countries, benefits are determined in accordance with local practice and regulations and funding is provided accordingly. There are defined benefit arrangements in the UK and the United States of America with the remainder being either defined contribution or state sponsored schemes. The assets of the pension plans are held in separate funds administered by Trustees, which are independent of the Group's finances. a) Pension costs Pension costs are determined in accordance with SSAP 24 with supplementary disclosures in accordance with the transitional arrangements of FRS 17 'Retirement Benefits'. For the 12 months to 31 August 2002, the aggregate regular cost of pensions under the principal schemes was Â£13m (2001; Â£14m). The aggregate variation to regular cost, which is spread over the average remaining lives of current employees, is estimated at Â£13m (2001; Â£14m). The net aggregate result is therefore a pension cost of Â£nil charged to the profit and loss account in the current year for the schemes. The WHSmith Pension Trust The latest full actuarial valuation of the Scheme was carried out as at 31 March 2000 by independent actuaries, William M Mercer Ltd, using the market value basis. A full actuarial valuation of the Scheme is carried out every three years with interim reviews in the intervening years. This scheme was closed in September 1995 and under the projected unit method the current service cost would be expected to increase as members approach retirement. The principal actuarial assumptions used for SSAP 24 purposes were as follows: Rate of return on 5.80% per annum investments Earnings inflation 4.25% per annum Pension increases 2.50% per annum Price inflation 2.50% per annum The market value of the fund's assets at this date was approximately Â£791m and the actuarial value of the assets was sufficient to cover 129 per cent of the benefits that had accrued to members after allowing for expected future increases in wages and salaries. The surplus of the actuarial value of the assets over the benefits accrued to members has been taken into account when determining future employers' contributions. The decline in stock market values since the valuation of the fund of 31 March 2000 and the increase in accrued liabilities as a result of changes in financial conditions have eliminated the surplus in the fund at 31 August 2002. Under current accounting policies these matters would have been reflected in the Group's accounts following completion of the next triennial valuation at 31 March 2003. However, it is the Company's intention to fully adopt FRS17 (see below) in the year commencing 1 September 2002 and the pension charge for that year will reflect the circumstances of the fund at that date. The Group contributed Â£4 million during the year. Hodder Headline Staff Retirement Benefits Plan The latest full actuarial valuation of the Scheme was carried out as at 1 July 2001 by independent actuaries, William M Mercer Ltd, using the projected unit method. A full actuarial valuation of the Scheme is carried out every three years with interim reviews in the intervening years. The principal actuarial assumptions used for SSAP 24 purposes were as follows: Rate of return on investments 7.00% per annum Earnings inflation 4.25% per annum Pension increases 3.00% per annum Price inflation 2.50% per annum The market value of the fund's assets at this date was approximately Â£32m and the actuarial value of the assets was sufficient to cover 96% per cent of the benefits that had accrued to members after allowing for expected future increases in wages and salaries. The decline in stock market values since the valuation of the fund of 1 July 2001 and the increase in accrued liabilities as a result of changes in financial conditions have increased the deficit in the fund at 31 August 2002. WHSmith Pension Builder The pension cost for the defined contribution scheme and related supplements charged to the profit and loss account is Â£3m (2001; Â£2m). 3 PENSIONS (cont'd) b) FRS 17 Retirement Benefits The valuation of the Group's defined benefit pension schemes used for the FRS 17 disclosures are based upon the most recent actuarial valuations. These have been updated by professionally qualified actuaries to take into account the requirements of FRS 17 and to assess the liabilities of the scheme at 31 August 2002. Scheme assets are stated at their market value at 31 August 2002. The weighted average principal long term assumptions used by the actuaries were: earnings inflation 4.2 per cent (2001; 4.3 per cent), pension increases 2.4 per cent (2001; 2.5 per cent), price inflation of 2.4 per cent (2001; 2.5 per cent) and a discount rate of 5.6 per cent (2001; 5.8 per cent). The aggregate fair values of the assets in the Group's defined benefit schemes, the aggregate net pension liabilities and their expected weighted average long-term rates of return at 31 August 2002 were: 2002 2001 __________ _________ _________ _________ Â£m % Â£m % _________________________________________ __________ _________ _________ _________ Equities 372 7.5 475 8.0 Bonds 219 4.5 213 4.8 Cash 5 4.2 5 5.7 _________________________________________ __________ _________ _________ _________ Total market value of assets 596 693 Present value of scheme liabilities (739) (693) _________________________________________ __________ _________ _________ _________ Deficit in the scheme (143) - Related deferred tax liability 43 - _________________________________________ __________ _________ _________ _________ Net pension liability (100) - _________________________________________ __________ _________ _________ _________ FRS17 - Transitional Profit and Loss Account Disclosures Analysis of the amount that would be charged to operating profit Â£m 2002 _______________________________________________________ __________ Service cost 13 Past service cost - _______________________________________________________ __________ Total operating charge 13 _______________________________________________________ __________ Analysis of net return on pension scheme Â£m 2002 _______________________________________________________ __________ Expected return on pension scheme assets 47 Interest on pension liabilities (39) _______________________________________________________ __________ Net return 8 _______________________________________________________ __________ Amount that would be recognised in the statement of total recognised gains and losses (STRGL) Â£m 2002 __________________________________________________________ __________ Actual return less expected return on assets (117) Experience gains and losses on liabilities (19) Changes in assumptions (6) __________________________________________________________ __________ Actuarial loss recognised in STRGL (142) __________________________________________________________ __________ Movement in surplus/(deficit) during the year Â£m 2002 __________________________________________________________ __________ Surplus at 1 September 2001 - Total operating charge (13) Contributions 4 Net return 8 Actuarial loss recognised in STRGL (142) __________________________________________________________ __________ Deficit at 31 August 2002 (143) __________________________________________________________ __________ 3 PENSIONS (cont'd) b) FRS 17 Retirement Benefits (cont'd) History of the weighted average experienced gains and losses 2002 2001 __________________________________________________ ___________ ________ Difference between actual and expected returns on assets: Amount (Â£m) (118) (180) % of scheme assets -20% -26% Experience gains and losses on scheme liabilities: Amount (Â£m) (19) - % of scheme assets -3% - Total amount recognised in STRGL: Amount (Â£m) (143) (215) % of scheme assets -20% -31% If the above numbers had been recognised in the financial statements, the Group's net assets and profit and loss reserve as at 31 August 2002 would have been as follows: Net assets Â£m 2002 2001 ___________________________________________________________ _____________ _________ Net assets excluding net pension liability 614 619 Pension provision under SSAP 24 - - Net pension liability (100) - ___________________________________________________________ _____________ _________ Net assets including net pension liability 514 619 ___________________________________________________________ _____________ _________ Reserves Â£m 2002 2001 ___________________________________________________________ _____________ _________ Profit and loss reserve excluding net pension liability 215 220 Pension provision under SSAP 24 - - Net pension liability (100) - ___________________________________________________________ _____________ _________ Profit and loss reserve including net pension liability 115 220 ___________________________________________________________ _____________ _________ 4 OPERATING LEASE COMMITMENTS The total annual commitment for continuing businesses of Â£167m (2001; Â£161m), comprises Â£12m (2001; Â£10m) expiring within one year, Â£76m (2001; Â£66m) between two and five years, and Â£79m (2001; Â£85m) over five years. The annual net rental is further analysed as follows: 2002 2001 ______________ _______________ ________________ __________________ Annual Future Annual cumulative Net rental net rental Average lease net rental Commitment commitment term commitment Â£m Â£m (years) Â£m _______________________________________________ ______________ _______________ ________________ __________________ WHSmith High Street 78 773 10 71 UK Travel Retail 39 119 5 36 _______________________________________________ ______________ _______________ ________________ __________________ UK Retailing 117 892 8 107 USA Travel Retail 37 132 4 47 ASPAC Retail 14 57 4 11 _______________________________________________ ______________ _______________ ________________ __________________ Total Retailing Businesses 168 1,081 7 165 Publishing Businesses 3 22 8 3 WHSmith News Distribution 3 33 10 3 Property sublet to third parties 10 76 8 10 _______________________________________________ ______________ _______________ ________________ __________________ Gross rental commitment 184 1,212 7 181 Less - external rent receivable (14) (67) 5 (17) - internal rent receivable (3) (41) 14 (3) _______________________________________________ ______________ _______________ ________________ __________________ Total 167 1,104 7 161 _______________________________________________ ______________ _______________ ________________ __________________ (i) WHSmith High Street rental commitments include internal rent of Â£3m (2001; Â£2m) relating to those properties which are owned by the Company. The cumulative future costs of internal rent are taken as the book value of those properties in the balance sheet at Â£36m, all of which relates to WHSmith High Street. (ii) External rent receivable relates to properties which are let by the Company to third parties. Of the total external rent receivable, Â£5m (2001; Â£ 8m) relates to USA Travel Retail which sublets retail space in airports where it operates a master contract and Â£9m (2001; Â£9m) represents income on subletting surplus property. Of the future cumulative external rent receivable, Â£20m (2001; Â£29m) relates to USA Travel Retail. (iii) Outstanding contingencies under previous assignments of leases where the liability would revert to the Company if the lessee defaulted are estimated at Â£17m per year with a future cumulative rental commitment of approximately Â£ 149m, and an average lease term of around 9 years. (iv) For those leases that are turnover related leases, the annual net rental commitment is calculated using the minimum rental liability. The aggregate rental liability for these stores with minimum guaranteed rents is Â£70m (2001; Â£76m) and relates to UK Travel Retail and USA Travel Retail stores. 5 INTEREST Â£m 2002 2001 ______________________________________________________ __________ ___________ Interest payable on bank loans and overdrafts (3) (2) Interest receivable 3 5 ______________________________________________________ __________ ___________ - 3 ______________________________________________________ __________ ___________ 6 TAXATION Â£m 2002 2001 As restated ____________________________________________________________________ _________ __________ Tax on profit before exceptional items and goodwill amortisation 37 35 - Standard rate of UK corporation tax 30% (2001; 30%) Adjustment in respect of prior year UK corporation tax (4) - Foreign tax 1 1 ____________________________________________________________________ _________ __________ Total current tax charge 34 36 Deferred tax - origination and reversal of timing differences 3 4 ____________________________________________________________________ _________ __________ Tax on profit on ordinary activities before exceptional items and 37 40 goodwill amortisation Tax on exceptional items and goodwill amortisation - (1) ____________________________________________________________________ _________ __________ Tax on ordinary activities after exceptional items and goodwill 37 39 amortisation ____________________________________________________________________ _________ __________ Effective tax rate before exceptional items and goodwill 30% 30% amortisation Financial Reporting Standard (FRS) 19 'Deferred Tax' has been adopted with effect from 1 September 2001. Under FRS19, the Group is required to make full provision for deferred tax in respect of timing differences on provisions and capital allowances for period in excess of depreciation that have originated but not reversed by the balance sheet date. The Group's previous accounting policy in respect of deferred tax was to recognise deferred tax only to the extent that a liability or asset was likely to be payable or recoverable, in accordance with SSAP 15. The impact of adopting FRS 19 is to decrease profit after tax by Â£3m (2001; Â£4m reduction) from Â£55m to Â£52m and to reduce opening shareholders' funds at 1 September 2001 by Â£12m from Â£626m to Â£614m. All prior year comparatives have been restated accordingly. Reconciliation of the taxation charge Â£m 2002 2001 _________________________________________________________________________________ ________ ________ Tax on profit on ordinary activities before exceptional items and goodwill 37 40 amortisation at standard rate of UK corporation tax, 30% (2001; 30%) Capital allowances for period in excess of depreciation (3) (3) Movement on provisions and liabilities (2) (3) Depreciation for which no tax relief is available 2 2 Losses not available for group relief 7 2 Adjustment in respect of prior years (4) - Other (3) (2) _________________________________________________________________________________ ________ ________ Total current tax charge before exceptional items and goodwill amortisation 34 36 _________________________________________________________________________________ ________ ________ Tax on exceptional items and goodwill amortisation at standard rate of UK (10) (5) corporation tax of 30% (2001; 30%) Losses not available for group relief 8 - Goodwill 2 1 Write off of tangible and intangible assets - 3 _________________________________________________________________________________ ________ ________ Total current tax charge after exceptional items and goodwill amortisation 34 35 _________________________________________________________________________________ ________ ________ Other than an unprovided deferred tax asset in respect of overseas losses, there are no items, which are likely to materially affect ongoing tax charges in future years. 7 DIVIDENDS 2002 2001 __________________________________________________________________________ ________ ________ Interim 6.0p 6.0p Final - proposed 13.0p 13.0p __________________________________________________________________________ ________ ________ Total dividend per share 19.0p 19.0p __________________________________________________________________________ ________ ________ Â£m __________________________________________________________________________ ________ ________ Interim 15 15 Final - proposed 32 32 __________________________________________________________________________ ________ ________ Total dividend 47 47 __________________________________________________________________________ ________ ________ Dividend cover - times 1.1x 1.6x __________________________________________________________________________ ________ ________ Dividend cover before exceptional items - times 1.7x 1.9x __________________________________________________________________________ ________ ________ The final dividend will, if approved, be paid on 31 January 2003 to shareholders registered at the close of business on 6 January 2003. At 31 August 2002, the Company had 249,890,474 ordinary shares in issue. 8 EARNINGS PER SHARE 8(a) Earnings Per Share 2002 2001 ______ __________ __________ _______ ________ __________ Â£m Basic Diluted Â£m Basic Diluted _________________________________________________ ______ __________ __________ _______ ________ __________ Profit attributable to shareholders as previously 52 21.1p 21.0p 78 31.7p 31.4p stated Prior year adjustment - - - (4) (1.6p) (1.6p) _________________________________________________ ______ __________ __________ _______ ________ __________ Profit attributable to shareholders as restated 52 21.1p 21.0p 74 30.1p 29.8p Exceptional items 28 11.4p 11.3p 15 6.1p 6.1p Amortisation of goodwill 5 2.1p 2.0p 3 1.2p 1.2p _________________________________________________ ______ __________ __________ _______ ________ __________ Adjusted earnings 85 34.6p 34.3p 92 37.4p 37.1p _________________________________________________ ______ __________ __________ _______ ________ __________ 8(b) Weighted Average Share Capital Millions 2002 2001 _________________________________________________________ ___________ ________ Weighted average shares in issue for earnings per share 246 246 Add weighted average number of ordinary shares under 2 2 option _________________________________________________________ ___________ ________ Weighted average ordinary shares for fully diluted 248 248 earnings per share _________________________________________________________ ___________ ________ The weighted average number of ordinary shares in issue is stated after excluding 3,883,154 shares held in the Employee Share Trust. 9 FIXED CHARGES COVER Â£m 2002 2001 _______________________________________________________ ___________ ________ Interest income - (3) Operating lease rentals 186 172 Property taxes 36 33 Other property costs 15 9 _______________________________________________________ ___________ ________ Total fixed charges 237 211 Profit before exceptional items, goodwill amortisation 122 133 and tax _______________________________________________________ ___________ ________ Profit before exceptional items, goodwill amortisation 359 344 and tax and before fixed charges _______________________________________________________ ___________ ________ Fixed charges cover 1.5x 1.6x _______________________________________________________ ___________ ________ Fixed charges cover is calculated by dividing profit before exceptional items, goodwill amortisation, tax and fixed charges by total fixed charges. 10 SEGMENTAL ANALYSIS OF OPERATING ASSETS EMPLOYED ROCE% after capitalised ROCE% after net operating capitalised net Return on leases Return on operating leases capital including 2001 capital including 2002 employed internal As restated employed internal rent rent Â£m % % Â£m % % _______________________________ ___________ ____________ ____________ ___________ _____________ _____________ WHSmith High Street 224 35% 16% 186 41% 17% UK Travel Retail 28 75% 37% 34 59% 34% WHSmith Online 7 - - 8 - - _______________________________ ___________ ____________ ____________ ___________ _____________ _____________ UK Retailing 259 37% 18% 228 38% 19% USA Travel Retail 64 - - 95 8% 12% ASPAC 22 18% 15% 26 - - _______________________________ ___________ ____________ ____________ ___________ _____________ _____________ Total Retailing Businesses 345 16% 13% 349 30% 17% WHSmith News Distribution (9) - - (1) - - _______________________________ ___________ ____________ ____________ ___________ _____________ _____________ Trading Operations 336 24% 15% 348 37% 20% (excluding Publishing Businesses) _______________________________ ___________ ____________ ____________ ___________ _____________ _____________ Publishing Businesses 263 7% 7% 235 7% 7% _______________________________ ___________ ____________ ____________ ___________ _____________ _____________ Trading Operations 599 17% 14% 583 24% 17% (including Publishing Businesses) Freehold property 45 42 Support functions (46) (58) Provisions for liabilities and (28) (23) charges _______________________________ ___________ ____________ ____________ ___________ _____________ _____________ Operating assets employed 570 16% 13% 544 24% 17% Net cash 44 75 _______________________________ ___________ ____________ ____________ ___________ _____________ _____________ Total net assets 614 619 _______________________________ ___________ ____________ ____________ ___________ _____________ _____________ a) Return on Capital Employed is calculated as the operating profit before exceptional items as a percentage of operating capital employed. b) Return on Capital Employed after capitalised net operating leases including internal rent is calculated as adjusted profit as a percentage of operating assets after capitalising leases. Adjusted profit is stated after adding back the annual net rent and charging depreciation on the value of capitalised leases. The value of capitalised leases is based on the net present value of future rent commitments. 11 ACQUISITIONS AND GOODWILL The principal acquisitions during 2002 were: * On 8 May 2002 Hodder Headline Limited acquired the share capital of John Murray (Publishers) Limited a publisher. The total consideration was Â£17m including fees and expenses. The capitalised goodwill arising from the transaction was Â£14m. Since acquisition John Murray has had sales of Â£3.4m with associated profits of Â£0.5m stated before exceptional charges of Â£1.7m (note 2). In the year ended 31 December 2001, the acquired business had sales of Â£ 7.6m and operating profits of Â£0.5m. The balance sheet of this acquisition, together with fair value adjustments, is set out below: Book Fair Value Fair Â£m Value Adjustments Value __________________________________ _______________ ______________ ____________ Stock 2 - 2 Debtors 2 (1) 1 Creditors (1) - (1) Cash 1 - 1 __________________________________ _______________ ______________ ____________ Net assets acquired 4 (1) 3 Consideration paid - cash 17 __________________________________ _______________ ______________ ____________ Capitalised goodwill 14 __________________________________ _______________ ______________ ____________ The adjustments to book value identified in the above table are provisional as a result of the limited time available to determine the fair value of the assets and liabilities acquired. The adjustments made reflect changes in the method of calculating the realisable value of stock. * On 30 August 2002 Hodder Headline Limited made the smaller acquisition of Robert Gibson & Sons Glasgow Limited a publisher. The total consideration was Â£ 3m including fees and expenses. The capitalised goodwill arising from the transaction was Â£1m. * On 21 July 2002 WHSmith High Street acquired seven stores from TM Retail. An additional store was acquired on 26 July 2002. The total consideration paid was Â£2m with associated goodwill of Â£2m. 12 GOODWILL Â£m ____________________________________________________ ________ Cost: At 1 September 2001 251 Acquisitions 17 ____________________________________________________ ________ At 31 August 2002 268 ____________________________________________________ ________ Accumulated amortisation: At 1 September 2001 15 Amortised in period 5 Impairment charge in the period 8 ____________________________________________________ ________ At 31 August 2002 28 ____________________________________________________ ________ Net book value ____________________________________________________ ________ At 31 August 2002 240 ____________________________________________________ ________ At 1 September 2001 236 ____________________________________________________ ________ Purchased goodwill is capitalised as an asset and amortised against profits over its useful economic life. In estimating the useful economic life of purchased goodwill, consideration is given to its durability. Goodwill arising on the earlier acquisitions of John Menzies Retail, Internet Bookshop and WGL Retail Holdings Limited is regarded by the Directors as having a useful life of 20 years and is therefore amortised through the profit and loss account over this period. In accordance with FRS 10, where goodwill is regarded as having an indefinite life, it is not amortised but is subject to an annual test for impairment. As permitted under FRS 10, this represents a departure, for the purposes of giving a true and fair view, from the requirements of the Companies Act 1985, which requires goodwill to be amortised. Goodwill arising on the acquisitions of Hodder Headline (Â£172m), Wayland (Â£3m), John Murray (Â£14m) and Robert Gibson (Â£1m) is regarded as having an indefinite useful life and is therefore not amortised in the profit and loss account. It is considered that the purchased goodwill is durable because these businesses are expected to maintain their market share and profitability in UK publishing over a long period. The majority of titles published and imprint names have significant lifespans due to copyright and licensing arrangements and range and strength of backlist titles. It is also considered that the barriers to entry which exist (and are anticipated to continue) and the nature of competition in the publishing industry are such that scale, relationships with third parties, intellectual property rights and quality of branding will prove this goodwill to be durable. Since it is not possible to identify a finite useful life for goodwill on the purchase of Hodder Headline, Wayland, John Murray and Robert Gibson it is not possible to quantify any amortisation, which would be charged. The application of an impairment test (which is carried out annually) supports the value of goodwill and, as a result, no charge for impairment is required at the balance sheet date. 13 FIXED ASSETS AND INVESTMENTS 13(a) Changes in Fixed Assets and Investments Â£m Tangible Fixed Investments Assets ____________________________________________________ ________________ ________________ Net book value at 1 September 2001 326 14 ____________________________________________________ ________________ ________________ Additions 66 3 Disposals (6) - Impairment charge in the period (5) - Depreciation (52) - Currency translation differences (3) ____________________________________________________ ________________ ________________ Net book value at 31 August 2002 326 17 ____________________________________________________ ________________ ________________ 13(b) Analysis of Fixed Assets Â£m 2002 2001 ___________________________________________________ _______________ ________________ Freehold and long leasehold property 42 43 Short leasehold 109 114 Fixtures, fittings and equipment 175 169 ___________________________________________________ _______________ ________________ Net book value at 31 August 326 326 ___________________________________________________ _______________ ________________ 14 WORKING CAPITAL Â£m 2002 2001 _____________ ______________________________________ ________________ ________________ Stock - Continuing operations 252 255 - Acquisitions 2 - _____________ ______________________________________ ________________ ________________ 254 255 Debtors - Continuing operations 192 185 - Acquisitions 4 - _____________ ______________________________________ ________________ ________________ 196 185 Creditors - Continuing operations 358 373 - Acquisitions 2 - - Corporation tax 40 42 - Dividends payable 32 32 _____________ ______________________________________ ________________ ________________ 432 447 _____________ ______________________________________ ________________ ________________ 15 PROVISIONS FOR LIABILITIES AND CHARGES John Menzies Non Post Retail Businesss trading retirement Acquisition partner Deferred Property medical Reorganisation Â£m guarantees taxation Provisions benefits Provisions Total ________________________________ ________ ______ ________ _________ ___________ ______ At 1 September 2001 as - - 7 3 1 11 previously stated Prior year adjustment - 12 - - - 12 ________________________________ ________ ______ ________ _________ ___________ ______ At 1 September 2001 as restated - 12 7 3 1 23 Charged during the period 5 3 - - - 8 Utilised in period - - (2) - (1) (3) ________________________________ ________ ______ ________ _________ ___________ ______ At 31 August 2002 5 15 5 3 - 28 ________________________________ ________ ______ ________ _________ ___________ ______ In the 12 months to 31 August 2002, the amount charged to non trading property provisions comprised Â£2m net rent paid for vacant or surplus properties which will continue to be charged over a period of 2 to 12 years. The provision for post retirement medical benefits will continue to be utilised over the remaining lives of the relevant employees. The deferred tax liability relates to timing differences on provisions and capital allowances for period in excess of depreciation. At 31 August 2002, there is an unrecognised deferred tax asset of approximately Â£15m in respect of overseas losses, which have yet to be agreed with overseas tax authorities. The losses will be utilised when suitable taxable profits are made in the relevant territories. Business partner guarantees represent amounts guaranteed to USA business partner joint ventures and will be utilised over the partnership lease term. 16 FINANCIAL ASSETS AND LIABILITIES Â£m 2002 2001 __________________________________________________ _________ __________ Cash at bank and in hand 98 138 Repayable in one year or less or on demand (13) (37) Repayable in more than two years but not more than (17) - five years Repayable in more than five years (24) (26) __________________________________________________ _________ __________ Net cash 44 75 __________________________________________________ _________ __________ The Company has unutilised additional committed facilities of Â£170m available, of which Â£54m matures in May 2003 and Â£116m in May 2007. Cash in Currency subsidiaries translation Â£m 2002 Cashflow acquired differences 2001 ______________________________ _______ _______ __________ _____________ _______ Cash at bank and in hand (note 98 (41) 2 (1) 138 a) Debt - Sterling floating rate (52) 9 - - (61) (note b) - Sterling fixed rate (note c) (2) - - - (2) ______________________________ _______ _______ __________ _____________ _______ Net cash 44 (32) 2 (1) 75 ______________________________ _______ _______ __________ _____________ _______ a) Cash at bank is held on short-term deposit, bearing interest at an average rate of 3.9%. The only material foreign exchange exposure at 31 August 2002 relates to the financial assets and liabilities in USA Travel Retail and in ASPAC, in Australia and New Zealand. Cash at bank and in hand includes Â£16m (2001; Â£23m) worth of US dollars, Â£8m (2001; Â£nil) in Australian dollars, Â£8m (2001; Â£6m) in New Zealand Dollars and Â£1m (2001; Â£nil) in Singapore dollars. b) Floating rate debt represents loan notes and committed facility loans. The loan notes of Â£22m are repayable in 2008 and bear interest at a rate of 1% per annum below LIBOR. The committed facility loans bear interest rates of LIBOR plus 45 basis points on Â£13m repayable in May 2003 and LIBOR plus 50 basis points on Â£17m repayable in May 2007. c) Sterling fixed rate debt includes 5.125% redeemable unsecured loan stock of Â£2m (2001; Â£2m). d) In addition to the above, at 31 August 2002 the Group had unredeemed `B' shares of Â£2m which carry a net non-cumulative preferential dividend set at 75% of six month LIBOR. 17 SHARE CAPITAL 17(a) Authorised 2002 2001 ____________ _________ __________ __________ Number of Nominal Number of Nominal shares value shares Value (millions) Â£m (millions) Â£m __________________________________ ____________ _________ __________ __________ Ordinary shares of 55.55p each 333 185 333 185 `B' shares of 53.75p each 286 153 286 153 __________________________________ ____________ _________ __________ __________ At 31 August 338 338 __________________________________ ____________ _________ __________ __________ 17(b) Allotted and Fully Paid 2002 2001 ____________ _________ __________ __________ Number of Nominal Number of Nominal shares value shares Value (millions) Â£m (millions) Â£m __________________________________ ____________ _________ __________ __________ Ordinary shares of 55.55p each 250 139 249 139 `B' shares of 53.75p each 4 2 4 2 __________________________________ ____________ _________ __________ __________ At 31 August 141 141 __________________________________ ____________ _________ __________ __________ The number of shares issued in the year to 31 August 2002 was 571,000 ordinary shares with a nominal value of Â£0.3m (2001; 849,000 shares) relating to share options exercised for a cash consideration of Â£2m (2001; Â£3m). The `B' shares are redeemable at their nominal value at the shareholder's option during any period declared by the Company, at the Company's option or on maturity on 31 August 2008. At 31 August 2002 the number of options held under employee share schemes was 13.8 million shares (2001; 11.5 million). 18 RESERVES Capital Share premium redemption Revaluation Profit & loss Â£m account reserve reserve account ___________________________________________ _____________ ____________ __________ _________ At 1 September 2001 as previously stated 89 156 8 232 Prior year adjustment - - - (12) ___________________________________________ _____________ ____________ __________ _________ At 1 September 2001 as restated 89 156 8 220 ___________________________________________ _____________ ____________ __________ _________ Profit retained for the period - - - 5 Premium on the issue of shares 2 - - - Currency translation differences - - - (10) ___________________________________________ _____________ ____________ __________ _________ At 31 August 2002 91 156 8 215 ___________________________________________ _____________ ____________ __________ _________ The profit and loss account reserve at 31 August 2002 is stated after writing off previously acquired goodwill of Â£58m - including USA Travel Retail Â£39m. 19 NOTES TO THE CASH FLOW STATEMENT Reconciliation of operating profit to net cash inflow from operating activities Â£m 2002 2001 _________________________________________________________ ________ _______ Operating profit 89 111 Exceptional items 28 16 Depreciation of fixed assets 52 47 Amortisation of goodwill 5 3 Increase in stock (7) (18) Increase in debtors (13) (22) (Decrease) / increase in creditors (12) 31 Cash spend against provisions (3) (3) _________________________________________________________ ________ _______ Net cash inflow from operating activities before 139 165 exceptional items Cash outflow relating to exceptional items (note a) (3) - _________________________________________________________ ________ _______ Net cash inflow from operating activities after 136 165 exceptional items _________________________________________________________ ________ _______ a) Cash outflow relating to exceptional items consists of Â£0.8m restructuring costs incurred in USA Travel Retail, and the termination of a distribution contract of Â£1.1m and associated reorganisation and restructuring costs Â£0.6m following the acquisition of John Murray (Publishers) Limited. 20 PREPARATION OF PRELIMINARY ANNOUNCEMENT 20(a) Basis of Preparation The preliminary announcement for the 12 months to 31 August 2002 has been prepared on the basis of the accounting policies set out in the Company's Annual Report for the 12 months to 31 August 2001with the exception of the adoption of the new accounting standard on deferred tax. Details of this change in accounting policy are set out in note 6. 20(b) Preliminary Announcement The results for the 12 months to 31 August 2002 and 12 months to 31 August 2001 do not comprise statutory accounts for the purpose of Section 240 of the Companies Act 1985, and have been extracted from the Company's accounts for the 12 months to 31 August 2002. The statutory accounts for the 12 months to 31 August 2001 have been filed with the Registrar of Companies and those for the 12 months to 31 August 2002 will be filed following the Company's annual general meeting. The auditors' reports on these accounts were unqualified and did not include a statement under Section 237 (2) or (3) of the Companies Act 1985. The annual report and accounts will be posted to shareholders in November 2002. 12 months to ____________ ___________ ____________ ____________ ____________ 31 August Proforma 31 August 2001 31 August 31 August 31 August Â£m 2002 Restated 2000 1999 1998 ______________________________________________ ____________ ___________ ____________ ____________ ____________ Sales - Continuing operations 2,933 2,735 2,584 2,391 2,175 - Acquisitions 3 - - - - ______________________________________________ ____________ ___________ ____________ ____________ ____________ 2,936 2,735 2,584 2,391 2,175 - Discontinued operations - - - - 643 ______________________________________________ ____________ ___________ ____________ ____________ ____________ Total sales 2,936 2,735 2,584 2,391 2,818 ______________________________________________ ____________ ___________ ____________ ____________ ____________ ______________________________________________ ____________ ___________ ____________ ____________ ____________ Operating profit - Continuing operations 122 130 137 122 88 - Acquisitions - - - - - ______________________________________________ ____________ ___________ ____________ ____________ ____________ 122 130 137 122 88 - Discontinued operations - - - - 37 - Exceptional items & goodwill amortisation (33) (19) (2) (2) - ______________________________________________ ____________ ___________ ____________ ____________ ____________ Operating profit 89 111 135 120 125 Profit on sale of operations - - 1 - 122 Amount written off investment in own shares - - (2) - - ______________________________________________ ____________ ___________ ____________ ____________ ____________ Profit on ordinary activities before interest 89 111 134 120 247 and taxation Interest - 3 6 14 7 ______________________________________________ ____________ ___________ ____________ ____________ ____________ Profit on ordinary activities before taxation 89 114 140 134 254 Tax on profit on ordinary activities (37) (39) (39) (38) (39) ______________________________________________ ____________ ___________ ____________ ____________ ____________ Profit on ordinary activities after taxation 52 75 101 96 215 Minority interests - (1) (1) - (4) ______________________________________________ ____________ ___________ ____________ ____________ ____________ Profit attributable to shareholders 52 74 100 96 211 Proforma dividend apportioned to 12 months (47) (47) (48) (45) (43) ______________________________________________ ____________ ___________ ____________ ____________ ____________ Retained earnings 5 27 52 51 168 ______________________________________________ ____________ ___________ ____________ ____________ ____________ Earnings per share 21.1p 30.1p 40.2p 38.4p 76.5p Diluted earnings per share 21.0p 29.8p 40.0p 38.1p 76.2p Adjusted earnings per share 34.6p 37.4p 41.3p 38.9p 35.5p Proforma dividend per share apportioned to 12 19.00p 19.00p 19.00p 18.20p 16.60p months Net assets per share 246p 250p 242p 217p 202p Fixed charges cover * 1.5x 1.6x 1.7x 1.8x 1.7x Proforma dividend cover * 1.7x 1.9x 2.1x 2.1x 2.1x Tax charge * 30.0% 30.0% 28.0% 28.0% 28.0% * before exceptional items Note: The 2002 and 2001 figures above have been presented after adjustment for the adoption of FRS19 Deferred Tax. It has not been practicable to restate comparative years 1998 to 2000. 31 August Proforma 31 August 2001 31 August 31 August 31 August Â£m 2002 Restated 2000 1999 1998 _______________________________________________ ____________ _____________ _____________ __________ _____________ Fixed assets Goodwill 240 236 222 205 29 Tangible assets 326 326 294 273 312 Investments 17 14 1 2 - _______________________________________________ ____________ _____________ _____________ __________ _____________ Total fixed assets 583 576 517 480 341 _______________________________________________ ____________ _____________ _____________ __________ _____________ Current assets Stock 254 255 216 203 200 Debtors 196 185 160 143 102 Creditors (432) (447) (394) (368) (366) _______________________________________________ ____________ _____________ _____________ __________ _____________ Net current operating assets/(liabilities) 18 (7) (18) (22) (64) _______________________________________________ ____________ _____________ _____________ __________ _____________ Long term creditors (3) (2) (4) (2) (3) Provisions for liabilities and charges (28) (23) (14) (19) (28) _______________________________________________ ____________ _____________ _____________ __________ _____________ Operating capital employed 570 544 481 437 246 Net cash 44 75 123 105 266 _______________________________________________ ____________ _____________ _____________ __________ _____________ Total equity 614 619 604 542 512 _______________________________________________ ____________ _____________ _____________ __________ _____________ Return on capital employed 16% 24% 29% 29% 40% Average number of shares in issue (millions) 250 249 250 250 253 Note: The 2002 and 2001 figures above have been presented after adjustment for the adoption of FRS19 Deferred Tax. It has not been practicable to restate comparative years 1998 to 2000. 12 months to Proforma 31 August 31 August 31 August 31 August 31 August Â£m 2002 2001 2000 1999 1998 _______________________________________________ ____________ ____________ ____________ ____________ _____________ Cash flow from operating activities 136 165 163 145 179 Returns on investments and servicing of finance - 3 6 14 7 Taxation (36) (38) (27) (37) (5) Purchase of fixed assets (66) (68) (60) (60) (56) Purchase of shares for employee share schemes (3) (13) - - - Disposal of tangible fixed assets 2 2 3 54 8 _______________________________________________ ____________ ____________ ____________ ____________ _____________ Cash flow from capital expenditure and (67) (79) (57) (6) (48) financial investment _______________________________________________ ____________ ____________ ____________ ____________ _____________ Cash flow for acquisitions and disposals (20) (51) (22) (171) 385 _______________________________________________ ____________ ____________ ____________ ____________ _____________ Equity dividends paid (47) (48) (47) (55) (44) _______________________________________________ ____________ ____________ ____________ ____________ _____________ Cash flow before use of liquid resources and (34) (48) 16 (110) 474 financing _______________________________________________ ____________ ____________ ____________ ____________ _____________ Issue of shares 2 3 2 5 6 Repurchase of own shares - (9) - (24) (167) Increase/(Decrease) in debt (9) 34 (40) (63) (20) _______________________________________________ ____________ ____________ ____________ ____________ _____________ Cash flow from financing (7) 28 (38) (82) (181) _______________________________________________ ____________ ____________ ____________ ____________ _____________ (Decrease) / increase in cash (41) (20) (22) (192) 293 _______________________________________________ ____________ ____________ ____________ ____________ _____________ 12 months to ____________ ___________ ____________ ____________ ___________ Proforma Analysis of free cash flow (before dividends) 31 August 31 August 31 August 31 August 31 August Â£m 2002 2001 2000 1999 1998 ____________________________________________________ ____________ ___________ ____________ ____________ ___________ Profit before tax and exceptional items 117 130 140 134 142 Depreciation / amortisation of goodwill 57 50 44 43 56 Movement in working capital (32) (9) (10) (9) 1 Capital expenditure on fixed assets (66) (68) (60) (60) (56) Disposal of tangible fixed assets 2 2 1 8 8 Tax paid (36) (38) (27) (29) (5) Cash spend against provisions (3) (3) (5) (9) (13) ____________________________________________________ ____________ ___________ ____________ ____________ ___________ Free cash flow (before dividends and investment 39 64 83 78 133 activity) Dividends (47) (48) (47) (55) (44) Issue of shares 2 3 2 5 6 Proceeds on disposals 2 - 3 46 465 Acquisitions (22) (51) (23) (198) (80) Purchase of own shares and ACT on repurchases (3) (22) - (32) (167) Cash outflow relating to exceptional items (3) - - - - ____________________________________________________ ____________ ___________ ____________ ____________ ___________ Cash movement in debt (32) (54) 18 (156) 313 ____________________________________________________ ____________ ___________ ____________ ____________ ___________ Opening net cash / (debt) 75 123 105 266 (48) Cash/(debt) in subsidiaries acquired 2 6 - (5) - Currency translation movements (1) - - - 1 ____________________________________________________ ____________ ___________ ____________ ____________ ___________ Closing net cash / (debt) 44 75 123 105 266 ____________________________________________________ ____________ ___________ ____________ ____________ ___________ 12 months to ____________ ___________ ____________ ____________ ____________ Proforma Sales 31 August 31 August 31 August 31 August 31 August Â£m 2002 2001 2000 1999 1998 _________________________________________________ ____________ ___________ ____________ ____________ ____________ Retailing WHSmith High Street 1,189 1,120 1,058 1,033 894 UK Travel Retail 306 287 265 242 172 WHSmith Online 6 8 7 5 1 _________________________________________________ ____________ ___________ ____________ ____________ ____________ UK Retailing 1,501 1,415 1,330 1,280 1,067 USA Travel Retail 216 245 192 178 171 ASPAC Retail 138 39 12 8 4 _________________________________________________ ____________ ___________ ____________ ____________ ____________ Total Retailing Businesses 1,855 1,699 1,534 1,466 1,242 Publishing Businesses 138 131 119 30 - - Less Internal (19) (16) (14) (2) - _________________________________________________ ____________ ___________ ____________ ____________ ____________ Publishing Businesses 119 115 105 28 - WHSmith News Distribution 1,069 1,024 1,047 995 1,025 - Less Internal (107) (103) (102) (98) (92) _________________________________________________ ____________ ___________ ____________ ____________ ____________ WHSmith News Distribution 962 921 945 897 933 _________________________________________________ ____________ ___________ ____________ ____________ ____________ Continuing Operations 2,936 2,735 2,584 2,391 2,175 Disposals - - - - 643 _________________________________________________ ____________ ___________ ____________ ____________ ____________ Total Sales 2,936 2,735 2,584 2,391 2,818 _________________________________________________ ____________ ___________ ____________ ____________ ____________ 12 months to Proforma Operating Profit 31 August 31 August 31 August 31 August 31 August Â£m 2002 2001 2000 1999 1998 ________________________________________ __________ __________ ___________ __________ ___________ Retailing WHSmith High Street 79 76 69 60 49 UK Travel Retail 21 20 17 14 7 WHSmith Online (4) (7) (7) (3) - ________________________________________ __________ __________ ___________ __________ ___________ UK Retailing 96 89 79 71 56 USA Travel Retail (45) 10 12 13 9 ASPAC Retail 4 (2) - - (2) ________________________________________ __________ __________ ___________ __________ ___________ Total Retailing Businesses 55 97 91 84 63 Publishing Businesses 17 8 16 4 - WHSmith News Distribution 27 15 37 39 45 ________________________________________ __________ __________ ___________ __________ ___________ Continuing Operations 99 120 144 127 108 Support costs (14) (12) (12) (12) (13) Internal rents 4 3 3 5 6 Net pension costs - - - - (3) ________________________________________ __________ __________ ___________ __________ ___________ Operating Profit before Discontinued 89 111 135 120 98 Operations Discontinued Operations - - - - 37 ________________________________________ __________ __________ ___________ __________ ___________ Operating Profit 89 111 135 120 135 ________________________________________ __________ __________ ___________ __________ ___________

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