Final Results - Year Ended 31 Aug 1999, Part 4

SMITH (WH) GROUP PLC 28 Octobe 1999 Part 4 WH Smith Group PLC Notes to Preliminary Announcement For the 12 months to 31 August 1999 10. SEGMENTAL ANALYSIS OF OPERATING ASSETS EMPLOYED Return ROCE% Return ROCE% At on after At on after 31 Aug capital capi- 31 capi- capi- 1999 employ- talised Aug tal em-talised ed net 1998 ployed net operat- operat- ing ing leases leases include- includ- ing ing Inter- internal nal rent rent £m % £m % ------------------------------------------------------------------------ WHSmith High Street 207 29% 14% 194 27% 13% Travel Retail - Europe 20 65% 22% 29 35% 16% - USA 44 28% 21% 51 18% 11% ------------------------------------------------------------------------ WHSmith Retailing 271 31% 16% 274 26% 14% Businesses WHSmith News 5 - - (11) - - Distribution Internet Trading 8 - - 10 - - ------------------------------------------------------------------------ Continuing trading 284 44% 20% 273 43% 20% operations Freehold property 40 90 Support functions (77) (89) Provisions for (19) (28) liabilities and charges ------------------------------------------------------------------------ Continuing 228 50% 20% 246 43% 20% operations Helicon 6 - Hodder Headline 203 - ------------------------------------------------------------------------ Operating assets 437 246 employed Net cash 105 266 ----------------------------------------------------------------------- Total net assets 542 512 ======================================================================== (i) In the prior year, return on capital employed and return on capital employed after capitalised net operating leases including internal rent, have been restated on a proforma basis to include a full 12 months of operating profits for the former John Menzies Retail stores acquired. 11. ACQUISITIONS AND GOODWILL On 11 February 1999, the Company acquired Helicon Publishing Group PLC, which owns the Hutchinson Encyclopedia. The total consideration was £5.5m, with £5m paid in cash and £0.5m satisfied by the issue of 79,000 new WH Smith shares. The capitalised goodwill on the transaction is £6m and is being amortised in the profit and loss account over 20 years. In the last financial year to 31 March 1998, Helicon Publishing Group PLC had sales of £3m and incurred an operating loss of £0.1m. In the period since acquisition, Helicon Publishing Group PLC had sales of £2m and operating profits of £nil. On 27 May 1999, the Company acquired Hodder Headline Group PLC. The total consideration was £192m (including fees and expenses of £4m), with £165m paid in cash and £27m satisfied by the issue of loan notes which are repayable in 2008 and bear interest at a rate of 1% per annum below LIBOR. The capitalised goodwill arising on the transaction is £172m. The balance sheet of Hodder Headline, together with fair value adjustments is set out below: Book Fair Fair value value value Adjust ments £m £m £m ------------------------------------------------------------------------ Tangible fixed assets 5 (3) 2 Stock 15 (4) 11 Debtors 48 (5) 43 Creditors (25) (2) (27) Taxation payable (4) - (4) Net debt (5) - (5) ------------------------------------------------------------------------ Net assets acquired 34 (14) 20 Consideration paid - cash 165 - issue of loan notes 27 ------------------------------------------------------------------------ Capitalised goodwill 172 ------------------------------------------------------------------------ The adjustments to book value identified in the above table reflect accounting policy changes and valuation adjustments in respect of tangible fixed assets, changes in the method of calculating the realisable value of stock, write off of pension prepayments, and changes in the method of calculating the net realisable value of advances to authors carried forward. In the last financial year to 31 December 1998, Hodder Headline Group PLC had sales of £102m, operating profits of £10m and profit after interest and tax of £6m. In the five month period preceding acquisition from 1 January 1999 to 26 May 1999, Hodder Headline Group PLC's unaudited management accounts had sales of £40m (5 months to May 1998; £36m) and unaudited operating profits of £2.5m (5 months to May 1998; £2.1m) in a low seasonal period. The proforma result for the 12 months to 31 August 1999 was sales of £108m (1998; £102m) and operating profits of £12m (1998; £10m). In the period since acquisition, Hodder Headline had sales of £26m and operating profits of £4m. 12. GOODWILL John Menzies Internet Hodder Retail Bookshop Helicon Headline Total £m £m £m £m £m ------------------------------------------------------------------------ Cost At 1 September 1998 19 10 - - 29 Acquisitions - - 6 172 178 ------------------------------------------------------------------------ At 31 August 1999 19 10 6 172 207 ------------------------------------------------------------------------ Accumulated amortisation At 1 September 1998 - - - - - Amortised in period (1) (1) - - (2) ------------------------------------------------------------------------ At 31 August 1999 (1) (1) - - (2) ------------------------------------------------------------------------ Net book value At 31 August 1999 18 9 6 172 205 ------------------------------------------------------------------------ At 1 September 1998 19 10 - - 29 ------------------------------------------------------------------------ Purchased goodwill is capitalised as an asset and amortised against profits over its useful economic life. 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. In estimating the useful economic life of purchased goodwill, consideration is given to the durability of the goodwill. Goodwill arising on the purchases of John Menzies Retail, Internet Bookshop, and Helicon is regarded by the Directors as having a useful life of 20 years and is therefore amortised in the profit and loss account over that period. Goodwill arising on the purchase of Hodder Headline 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 Hodder Headline is expected to maintain its market share and profitability in UK publishing over a long period, and that the majority of its titles published and imprint names have significant lifespans due to copyright and licensing arrangement 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, relationship 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, it is not possible to quantify any amortisation which would be charged. The application of an impairment test (which will be 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 (A) Changes in Fixed Assets £m ------------------------------------------------------------------------ Net book value at 1 September 1998 312 ------------------------------------------------------------------------ Additions - tangible fixed assets 54 - investment in own shares (note a) 6 Disposals (57) Depreciation / amortisation (37) Cost of shares acquired for employee share schemes charged (4) to profits in year (note a) Acquisitions 2 Exchange (1) ------------------------------------------------------------------------ Net book value as at 31 August 1999 275 ------------------------------------------------------------------------ (a) On 3 August 1999, the Company purchased an investment in own shares of £6m in respect of 950,000 ordinary shares of 55.55p each with an aggregate nominal value of £0.5m. The total market value of these shares at 31 August 1999 was £6m. In accordance with UITF 13, the investment in own shares is recognised as an asset within tangible fixed assets and is amortised on a straight line basis through the profit and loss account over the life of the Employee Share Scheme. The shares are held by an employee trust for the sole purpose of satisfying obligations under the Company's Employee share scheme. (B) Analysis of Fixed Assets At At 31 Aug 31 Aug 1999 1998 £m £m ------------------------------------------------------------------------ Freehold and long leasehold 40 92 property Short leasehold 97 97 Fixtures, fittings and equipment 136 123 Investment in own shares (note a) 2 - ------------------------------------------------------------------------ Net book value 275 312 ------------------------------------------------------------------------ 14. WORKING CAPITAL At At 31 Aug 31 Aug 1999 1998 £m £m ------------------------------------------------------------------------ Stock - Continuing operations 189 200 - Acquisitions 14 - ------------------- 203 200 ------------------- Debtors - Continuing operations 96 92 - Acquisitions 47 - - ACT - 10 ------------------- 143 102 ------------------- Creditors - Continuing operations 281 295 - Acquisitions 26 - - Corporation tax 32 35 - Dividends payable 31 39 ------------------- 370 369 ------------------------------------------------------------------------ 15. PROVISIONS John Menzies Retail Acquisi- Non Post tion trading retirement Reorgan- property medical isation provi- benefits Provi- sions sions Total £m £m £m £m ------------------------------------------------------------------------ At 1 September 1998 17 5 6 28 ------------------------------------------------------------------------ Utilised in period (4) (1) (4) (9) ------------------------------------------------------------------------ At 31 August 1999 13 4 2 19 ------------------------------------------------------------------------ In the 12 months to 31 August 1999 the amount charged to non trading property provisions comprised £4m for vacant or surplus properties (including net rent paid of £3m) which will continue to be charged for around 7 years. The provision for post retirement medical benefits will continue to be utilised over the remaining lives of the relevant employees. The amount charged to John Menzies Retail acquisition reorganisation provisions principally related to redundancy costs (£2m), and store closure costs (£2m) and the provision is expected to be utilised in the period to 31 August 2000. 16. FINANCIAL ASSETS AND LIABILITIES 31 Aug 1999 Addi- tional commit- ted facilities Avail- At able At 31 Aug not 31 Aug 1998 1999 utilised £m £m £m ------------------------------------------------------------------------ Cash at bank and in hand 174 - 366 Repayable in one year or less or (39) (165) (58) on demand Repayable in more than one year (1) - (39) but not more than two years Repayable in more than two years - (165) - but not more than five years Repayable in more than five (29) - (3) years ------------------------------------------------------------------------ Net cash 105 (330) 266 ------------------------------------------------------------------------ Hodder At Headline At 31 Aug Cashflow (note b) 31 Aug 1998 1999 £m £m £m £m ------------------------------------------------------------------------ Cash at bank and in 366 (192) - 174 hand (note a) Debt (24) 28 (32) (28) - Sterling floating rate (note c) - Sterling fixed rate (56) 25 - (31) (note d) - Sterling interest (20) 10 - (10) free loan (note e) ------------------------------------------------------------------------ Net cash 266 (129) (32) 105 ------------------------------------------------------------------------ (a) Cash at bank is held on short term deposit, bearing interest at an average rate of 5%. The only material foreign exchange exposure at 31 August 1999 relates to the financial assets and liabilities in USA Travel Retail. Cash at bank and in hand includes £7m worth of US dollars. (b) Includes debt acquired on acquisition of £5m and loan notes of £27m issued as part of the purchase consideration. (c) Floating rate debt represents loan notes repayable in 2008 and bearing interest at a rate of 1% per annum below LIBOR. (d) Fixed rate debt includes sterling bank loans and overdrafts of £25m (1998; £25m), repayable in May 2000 and bearing interest at a rate of 7.985%, £3m (1998; £7m) repayable in December 2000 and bearing interest at a rate of 8.375%, finance leases of £1m (1998; £1m), 5?% redeemable unsecured loan stock of £2m (1998; £2m) and US dollar bank loans and overdrafts of £nil (1998; £21m). (e) In connection with the sale of Do It All. (f) There is no material difference between the fair value and book value of the Group financial instruments at 31 August 1999. (g) Comparatives are not provided for FRS 13. An exemption to making FRS 13 disclosures for short term debtors and creditors has been taken. (h) Details of the unredeemed 'B' shares are given in note 17. The 'B' shares carry a net non cumulative preferential dividend set at 75% of six month LIBOR. 17. SHARE CAPITAL During the twelve month period to 31 August 1999 the Company repurchased and subsequently cancelled 4 million Ordinary shares, representing 1.6 per cent of the Company's called up share capital with an average price of approximately 480p per share. The total cost of these repurchases was £20m. At 31 August 1998, 11 million 'B' shares had not been redeemed. In the 12 months to 31 August 1999, 7 million 'B' shares were redeemed (in total 98% of those originally issued have now been redeemed), and the cost of the repurchase was £4m. The 'B' shares are redeemable by shareholders at their nominal value at the shareholder's option during any other period declared by the Company, at the Company's option or on maturity on 31 August 2008. Advanced Corporation Tax of £8m was paid during the year in relation to the share repurchases and will be recovered against taxes on profits. The cost of share repurchases in the year are summarised below: 12 months to --------------------- 15 months Proforma to 31 Aug 31 Aug 31 Aug 1999 1998 1998 £m £m £m ------------------------------------------------------------------------ On market purchases 20 20 20 Redemption of 'B' shares 4 147 147 ACT on share repurchases 8 - - ------------------------------------------------------------------------ Total 32 167 167 ------------------------------------------------------------------------ The following table summarises the impact of share repurchases to date: Average Cost of Ordinary purchase repurchase shares price s in issue £m m pence ------------------------------------------------------------------------ 1 June 1997 - 283 - ------------------------------------------------------------------------ 'B' share scheme - cash (to 31 August 147 (28) 538p 1998) - cash (to 31 August 4 1999) - 'B' shares 2 Market purchase - cash (to 31 August 20 (4) 505p 1998) - cash (to 31 August 20 (4) 480p 1999) Allotted under - 3 executive option scheme ------------------------------------------------------------------------ 31 August 1999 193 250 ------------------------------------------------------------------------ (i) Cost of repurchases is stated before ACT on share repurchases of £8m. (ii) Shares allotted under executive option schemes in the period since 1 June 1997 has generated £12m of cash. 17. SHARE CAPITAL (continued) Ordinary 'B' shares shares of of 53.75p 55.55p each each Total £m £m £m ------------------------------------------------------------------------ At 1 September 1998 141 6 147 ------------------------------------------------------------------------ Redeemed - (4) (4) Allotted under 1 - 1 executive option scheme On market purchases (2) - (2) ------------------------------------------------------------------------ At 31 August 1999 140 2 142 ------------------------------------------------------------------------ Number of Number of shares shares (millions) (millions) ------------------------------------------------------------------------ At 1 September 1998 253 11 ------------------------------------------------------------------------ Redeemed - (7) Allotted 1 - On market purchases (4) - ------------------------------------------------------------------------ At 31 August 1999 250 4 ------------------------------------------------------------------------ The number of shares issued in the year to 31 August 1999 was 1,368,000 shares (1998; 1,577,000 shares) with 125,000 shares relating to acquisitions and the remainder relating to share options exercised. At 31 August 1999 the number of options held under employee share schemes was 4.7 million shares (1998; 5.1 million). The proceeds due to the Company upon exercise of these options would be approximately £20m (1998; £20m). 18. RESERVES Share Capital Revaluati Profit & premium redemption on loss account reserve reserve account £m £m £m £m ------------------------------------------------------------------------ At 1 September 1998 80 149 14 121 ------------------------------------------------------------------------ Profit retained for the 12 - - - 51 months to 31 August 1999 Premium on issue of shares 4 - - - Repurchase of shares - 6 - (24) Realisation of property - - (6) 6 revaluation surplus Currency translation - - - (3) differences ------------------------------------------------------------------------ Reserves at 31 August 1999 84 155 8 151 ------------------------------------------------------------------------ The profit and loss account reserve at 31 August 1999 is after writing off previously acquired goodwill of £58m - including USA Travel Retail £39m. 19. NOTES TO THE CASH FLOW STATEMENT (A) Reconciliation of operating profit to net cash flow from operating activities 12 months to --------------------- Proforma 15 months to 31 Aug to 31 Aug to 31 Aug 1999 1998 1998 £m £m £m ------------------------------------------------------------------------ Operating profit before 120 135 139 exceptional items Depreciation of fixed 41 56 71 assets Amortisation of goodwill 2 - - Decrease/(increase) in 6 14 (15) stock (Increase)/decrease in (9) 6 (6) debtors (Decrease)/increase in (6) (19) 6 creditors Cash spend against (9) (13) (15) provisions ------------------------------------------------------------------------ Net cash inflow from 145 179 180 operating activities ------------------------------------------------------------------------ (B) Reconciliation of net cash flow to movement in net cash 12 months to -------------------- to 31 Proforma 15 months Aug to 31 Aug to 31 Aug 1999 1998 1998 £m £m £m ------------------------------------------------------------------------ (Decrease) / Increase in cash in (192) 293 226 the period Cash flow from decrease in debt 63 20 70 ------------------------------------------------------------------------ Change in net debt resulting from (129) 313 296 cash (out)/in flow Hodder Headline - debt acquired (5) - - - purchase consideration (27) - - satisfied by issue of loan notes Exchange movement - 1 1 ------------------------------------------------------------------------ Movement in net (debt)/cash in (161) 314 297 the period Net cash/(debt) at beginning of 266 (48) (31) period ------------------------------------------------------------------------ Net cash at end of period 105 266 266 ------------------------------------------------------------------------ 20. POST BALANCE SHEET EVENTS On 7 September 1999, Hodder Headline, a subsidiary of WH Smith Group PLC, purchased the business and assets of Wayland, a publisher of fiction and non- fiction books for school libraries in the UK. In the year ended 31 December 1998, Wayland had sales of £9m. The net asset value of the transaction was approximately £4m. PREPARATION OF PRELIMINARY ANNOUNCEMENT (a) Basis of Preparation The preliminary announcement for the 12 month period to 31 August 1999 has been prepared on the basis of the accounting policies set out in the Group's Annual Report and Accounts for the 15 month period to 31 August 1998. (b) Preliminary Announcement The results for the 12 months to 31 August 1999, proforma 12 months to 31 August 1998 and 15 months to 31 August 1998 do not comprise statutory accounts for the purpose of Section 240 of the Companies Act 1985 and have been extracted from the Group's accounts for the 12 months to 31 August 1999 which will be filed with the Registrar of Companies, and the 15 months to 31 August 1998, which have been filed with the Registrar of Companies. 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 1999.

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