Final Results part 2

Smiths News PLC 12 October 2006 Group Income Statement for the year ended 31 August 2006 ______________________________________________________________________________ 2006 2005 ______________________________________________________________________________ Â£m Note _________________________________________________________ ______________ Continuing operations Revenue 2 1,095 1,074 _________________________________________________________ ______________ Operating profit 2,3 34 33 Finance costs (2) (1) _________________________________________________________ ______________ Profit before tax 32 32 Income tax expense 5 (6) (7) _________________________________________________________ ______________ Profit after tax from continuing operations 26 25 Profit for the year from discontinued operations 13 32 22 _________________________________________________________ ______________ Profit for the year 58 47 ============================================================================== Note Earnings per share Basic - continuing operations 7 15.1p 14.2p Diluted - continuing operations 7 15.0p 14.0p Basic 7 33.7p 26.6p Diluted 7 33.5p 26.3p ______________________________________________________________________________ Non GAAP measures Equity dividends per share(1) 4.0p ______________________________________________________________________________ (1) Dividend per share is the final proposed dividend Group Balance Sheet at 31 August 2006 _____________________________________________________________________________ Â£m Note 2006 2005 _____________________________________________________________________________ Non-current assets Goodwill - 15 Other intangible assets 3 18 Property, plant and equipment 19 219 Deferred tax assets 16 57 _____________________________________________________________________________ 38 309 _____________________________________________________________________________ Current assets Inventories 12 162 Trade and other receivables 70 111 Cash and cash equivalents 8 11 46 _____________________________________________________________________________ 93 319 _____________________________________________________________________________ Total assets 131 628 _____________________________________________________________________________ Current liabilities Trade and other payables (118) (303) Current tax liabilities (15) (27) Obligations under finance leases 8 (1) (6) Bank overdrafts and other borrowings 8 - (45) Short-term provisions - (5) _____________________________________________________________________________ (134) (386) _____________________________________________________________________________ Non-current liabilities Bank loans and other borrowings 8 (50) (37) Retirement benefit obligation 4 (49) (103) Deferred tax liabilities (2) (16) Long-term provisions (1) (12) Obligations under finance leases 8 (2) (14) Other non-current liabilities - (8) _____________________________________________________________________________ (104) (190) _____________________________________________________________________________ Total liabilities (238) (576) _____________________________________________________________________________ Total net (liabilities)/assets (107) 52 _____________________________________________________________________________ Group Balance Sheet at 31 August 2006 (continued) _____________________________________________________________________________ Â£m Note 2006 2005 _____________________________________________________________________________ Total equity Called up share capital 11 9 660 'B' Share reserve 11 - 2 'C' Share reserve 11 - 8 ESOP reserve (7) (34) Revaluation reserve - 3 Other reserve (280) (278) Retained earnings 171 (309) _____________________________________________________________________________ Total equity (107) 52 _____________________________________________________________________________ Group Cash Flow Statement for the year ended 31 August 2006 _____________________________________________________________________________ Â£m Note 2006 2005 _____________________________________________________________________________ Net cash inflows/(outflows) from operating activities 10 105 (22) Investing activities Interest received 2 4 Proceeds on disposal of property, plant and equipment 10 2 Proceeds on disposal of subsidiary - 222 Proceeds on settlement of loan notes 11 - Non-operating disposal costs (3) (10) Net cash in subsidiaries disposed (66) - Purchase of property, plant and equipment (26) (29) Purchase of intangible assets (5) (3) _____________________________________________________________________________ Net cash (outflows)/inflows from investing activities (77) 186 _____________________________________________________________________________ Financing activities Interest paid (7) (6) Dividend paid (25) (21) Repayments of obligations under finance leases (6) (6) New bank loans raised (net of financing costs) 49 61 Repayments of borrowings (76) - Derivative cash movements (1) - 'C' share dividend paid on capital - (143) reorganisation Purchase of shares for employee share schemes - (12) Money returned to ESOP Trust after share capital reorganisation - 5 Issue of shares to satisfy employee share schemes 6 2 Repurchase of equity component of 'C' shares (3) (62) _____________________________________________________________________________ Net cash outflows from financing activities (63) (182) _____________________________________________________________________________ Net increase / (decrease) in cash and cash equivalents - continuing operations 4 (6) Net increase / (decrease) in cash and cash equivalents - discontinued operations 27 (12) Net cash in subsidiaries disposed - discontinued operations (66) - _____________________________________________________________________________ Net decrease in cash and cash equivalents in year (35) (18) _____________________________________________________________________________ Opening net cash and cash equivalents 46 64 _____________________________________________________________________________ Closing net cash and cash equivalents 11 46 _____________________________________________________________________________ Â£m Note 2006 2005 _____________________________________________________________________________ Reconciliation of net cash flow to movement in net (debt) / funds _____________________________________________________________________________ Net (debt) / funds at beginning of the year (56) 35 IAS 39 - 'B' and 'C' shares reclassified as financial liabilities (7) - Decrease in cash and cash equivalents (35) (18) Decrease / (increase) in debt 39 (63) Net movement in finance leases 17 (10) _____________________________________________________________________________ Net debt at end of the year 8 (42) (56) _____________________________________________________________________________ Group Statement of Recognised Income and Expense for the year ended 31 August 2006 _____________________________________________________________________________ Â£m 2006 2005 _____________________________________________________________________________ Exchange differences arising on translation of foreign operations (2) - Loss on cash flow hedges (2) - Actuarial losses on defined pension schemes (Note 4) (33) (42) UK deferred tax attributable to pension scheme liabilities 7 (27) UK current tax attributable to the additional pension scheme contributions 4 39 _____________________________________________________________________________ Net expense recognised directly in equity (26) (30) Profit for the year 58 47 _____________________________________________________________________________ Total recognised income and expense for the year 32 17 _____________________________________________________________________________ Total recognised income and expense for the year is fully attributable to the equity holders of the parent company. Reconciliation of movements in equity for the year ended 31 August 2006 Â£m Share 'B' 'C' Share Other Capital Revaluation ESOP Translation Retained Total Capital Share Share Premium Reserve Reserve Reserve Reserve & Hedging Earnings Reserve Reserve Reserve _____________________________________________________________________________________________________________ Balance at 1 September 2004 139 2 - 93 - 156 3 (27) - (105) 261 Capital reorganisation and pro forma restatement 519 - 70 (93) (278) (156) - - - (62) - _____________________________________________________________________________________________________________ Balance at 1 September 2004 restated 658 2 70 - (278) - 3 (27) - (167) 261 _____________________________________________________________________________________________________________ Total recognised income and expense for the year - - - - - - - - - 17 17 Dividends paid - - - - - - - - - (164) (164) Repurchase of non-equity share capital - - (62) - - - - - - - (62) Purchase of own shares for employee share scheme - - - - - - - (12) - - (12) Money returned to ESOP Trust after share capital reorganisation - - - - - - - 5 - - 5 Employee share schemes 2 - - - - - - - - - 2 Recognition of share based payments - - - - - - - - - 5 5 _____________________________________________________________________________________________________________ Balance at 31 August 2005 660 2 8 - (278) - 3 (34) - (309) 52 Cumulative adjustment for implementation of IAS 39 - (2) (5) - - - - - - - (7) _____________________________________________________________________________________________________________ Balance restated at 1 September 2005 for adoption of IAS 39 660 - 3 - (278) - 3 (34) - (309) 45 Total recognised income and expense for the year - - - - - - - - (4) 36 32 Dividends paid - - - - - - - - - (25) (25) Employee share schemes 8 - - - (2) - - 5 - (5) 6 Recognition of share based payments - - - - - - - - - 6 6 Repurchase of non equity share capital - - (3) - - - - - - - (3) Reduction in capital (659) - - - - - - - - 659 - Dividend in specie - - - - - - (3) 22 4 (191) (168) _____________________________________________________________________________________________________________ Balance at 31 August 2006 9 - - - (280) - - (7) - 171 (107) _____________________________________________________________________________________________________________ 1. Basis of Preparation The consolidated Group financial statements have been prepared in accordance with International Financial Reporting Standards ('IFRS') as adopted by the European Union and with those parts of the Companies Act 1985 applicable to companies reporting under IFRS. These are those standards, subsequent amendments and related interpretations issued and adopted by the International Accounting Standards Board ('IASB') that have been endorsed by the European Union at the year end. The Group previously reported under UK Generally Accepted Accounting Principles ('UK GAAP'). The date of transition to IFRS is 1 September 2004. The consolidated Group financial statements have also been prepared in accordance with IFRS adopted for use in the European Union and therefore comply with Article 4 of the EU IAS Regulation. At the date of authorisation of these consolidated Group financial statements, the following Standards and Interpretations which have not been applied in these financial statements were in issue but not yet effective: International Financial Reporting Interpretations Committee ('IFRIC') IFRIC 4 Determining whether the arrangement contains a lease IFRIC 8 Scope of IFRS2 - Share Based Payments IFRIC 9 Reassessment of Embedded Derivatives International Accounting Standards ('IAS') Amendment to IAS 39 Cash Flow Hedge Accounting of Forecast Intragroup Transactions The directors anticipate that the adoption of these standards and interpretations in future years will have no material impact on the Group financial statements except for the additional disclosures on capital and financial instruments when the relevant standards come into effect for the financial year commencing on or after 1 September 2006. Accounting convention The financial statements are drawn up on the historical cost basis of accounting. The financial information is rounded to the nearest million, except where otherwise indicated. The principal accounting policies, which have been applied consistently throughout both years, have been set out below. Basis of consolidation The consolidated Group financial statements incorporate the financial statements of Smiths News PLC and all its subsidiaries up to the year end date. Subsidiary undertakings are all entities over which the Group has the power to govern the financial and operating policies generally accompanying a shareholding of more than one half of the voting rights so to obtain benefits from its activities. Goodwill arising on acquisition is recognised as an asset and initially measured at cost, being the excess of the cost of the business combination over the Group's interest in the net fair value of the identifiable assets, liabilities and contingent liabilities recognised. If, after reassessment, the Group's interest in the net fair value of the acquiree's identifiable assets, liabilities and contingent liabilities exceeds the cost of the business combination, after taking into account recognised goodwill, the excess is immediately recognised in profit and loss. The separable net assets, both tangible and intangible of the newly acquired subsidiary undertakings are incorporated into the financial statements on the basis of the fair value as at the effective date of control, if appropriate. Results of subsidiary undertakings disposed of during the financial year are included in the financial statements up to the effective date of disposal. Where a business component representing a separate major line of business is disposed of, or classified as held for sale, it is classified as a discontinued operation. The post-tax profit or loss of the discontinued operations is shown as a single amount on the face of the income statement, separate from the other results of the Group. All intercompany transactions, balances and unrealised gains on transactions between Group companies are eliminated. IFRS 1 First-time adoption These financial statements show the results for the year ended 31 August 2006 and 31 August 2005. The results for the year ended 31 August 2005 have been extracted from the consolidated WH Smith Group's financial statements for that year and have been adjusted for the effects of changes in accounting policies on transition to IFRS. These adjustments were set out in detail in the WH Smith Group's 'Restatement of financial information under International Financial Reporting Standards' document which was published in full on 29 November 2005 and is available on the WH Smith Group's website at www.whsmithplc.com/grp/WHSPLC-IR-Reports.htm. IFRS 1 First-time adoption of International Financial Reporting Standards sets out the requirements for the first time adoption of IFRS. The disclosures required by IFRS 1 - 'First-time Adoption of International Financial Reporting Standards' concerning the transition from UK GAAP to IFRS are given in the full set of financial statements. Adoption of IAS 32 and IAS 39 As permitted by IFRS 1, Smiths News PLC elected to defer implementation of IAS 32 'Financial Instruments: Disclosure and Presentation' and IAS 39 'Financial Instruments: Recognition and Measurement' until the year commencing 1 September 2005. The effect of the adoption of IAS 39 is to reduce net assets by Â£7 million resulting from the reclassification of non-equity share capital to financial liabilities. The Group has designated the majority of its foreign exchange derivatives as cash flow hedges as at 1 September 2005 and there was no effect on the balance sheet in respect of this. Reverse Acquisition Accounting During the year under review Smiths News PLC has undergone significant re-organisation in order to effect the demerger of the WH Smith PLC (containing the Retail Business) from Smiths News PLC. Smiths News PLC, formerly Brightway Services Limited, was incorporated on 2 August 2004. On 23 June 2006 the company re-registered as a public limited company. As part of the reorganisation of the Group prior to demerger Smiths News PLC was inserted as a new holding company over the listed parent company, WH Smith PLC, by way of a Scheme of Arrangement on 30 August 2006 and on that date the shares of Smiths News PLC were admitted to listing on The London Stock Exchange and the shares of WH Smith PLC were delisted. Smiths News PLC then reduced its share capital to create distributable reserves. Following this reduction of capital in Smiths News PLC, WH Smith PLC transferred Greenbridge News Limited (the immediate holding company of the News Business) to Smiths News PLC. This resulted in Greenbridge News Limited (and the News Business) becoming a direct subsidiary of Smiths News PLC. WH Smith PLC then paid a dividend to Smiths News PLC which was satisfied by a set-off against part of an intercompany loan owing from Smiths News PLC to WH Smith PLC. Smiths News PLC then used part of the Â£50 million drawn down under a Smiths News PLC Term Loan facility to settle the remaining intercompany loan owing from Smiths News PLC to WH Smith PLC. Finally, and in order to implement the demerger, on 31 August 2006 Smiths News PLC paid a dividend in specie to its shareholders of shares in New WH Smith PLC. The payment of the dividend was effected as follows: - existing shares in WH Smith PLC (which owned the Retail Business) were transferred by Smiths News PLC to New WH Smith PLC (a newly incorporated company) so that New WH Smith PLC became the holding company of the Retail Business; and - in exchange for such transfer, New WH Smith PLC allotted and issued to Smiths News PLC Shareholders one New WH Smith PLC Share, credited as fully paid, for each Smiths News PLC Share held. On 1 September 2006, WH Smith PLC changed its name to WH Smith Retail Holdings Limited. The shares of New WH Smith PLC were admitted to listing on The London Stock Exchange on 1 September 2006; on the same day New WH Smith PLC changed its name to WH Smith PLC and on 7 September 2006 reduced its share capital in order to create distributable reserves. The consequence of these reorganisation steps was that WH Smith Retail Holdings Limited (formally known as WH Smith PLC) shareholders received one Smiths News PLC share for each WH Smith Retail Holdings Limited share on 30 August 2006 and one WH Smith PLC share for each Smiths News PLC share on 1 September 2006. The accounts of Smiths News PLC have been prepared as if it had been in existence in its current group form since 1 September 2004. The following summarises the accounting principles that have been applied in preparing the accounts on a reverse acquisition accounting basis. - the income statements for Smiths News PLC have been prepared as if the continuing operations of Smiths News PLC were in existence the whole of the period from 1 September 2004 through to 31 August 2006. - share capital and reserves for the prior year consolidated balance sheet have been restated on a proforma basis including the capital reorganisation. Differences between these amounts and the previously reported share capital and reserves have been adjusted in the Other reserve, as set out in the Reconciliation of movements in equity. The proforma restated share capital at 1 September 2004 represents the nominal value of shares in issue as if Smiths News PLC had been in existence in its group form at this date. - as well as costs borne directly by Smiths News PLC (the News Business), the continuing results for the year ended 31 August 2006 and 31 August 2005 include Â£0.8 million of corporate head office costs of the former parent company, WH Smith PLC which have historically not been recharged to the business. Services provided by the former parent company WH Smith PLC included, but were not limited to, treasury, cash management, human resources, accounting, legal and professional services and IT services. These charges may not be representative of the costs that would have been incurred had the business been a standalone entity. 2. Segmental analysis of results For management purposes, the Group is currently organised into one continuing operating division - News Distribution. This division is the basis on which the Group currently reports its primary business segment information. Discontinued operations comprise the demerged WH Smith PLC retailing business (High Street and Travel) for both years and the Publishing business for the prior year. Segmental information for these businesses are presented as discontinued operations and can be found in Note 13. (i) Segmental analysis by business segments (a) Group revenue ________________________________________________________________________________ 2006 2005 ________________________________________________________________________________ Continuing Continuing operations - operations - Â£m News Distribution News Distribution ________________________________________________________________________________ Sales Total sales 1,211 1,187 Inter-segment sales to discontinued operations (116) (113) ________________________________________________________________________________ Sales to external customers 1,095 1,074 ________________________________________________________________________________ Inter-segment sales are between Smiths News PLC and WH Smith PLC which are traded at arm's length value. Discontinued revenue is shown in Note 13 of the financial statements. (b) Group Results ________________________________________________________________________________ 2006 2005 Continuing Continuing operations - operations - Â£m News Distribution News Distribution ________________________________________________________________________________ Profit Operating Profit 34 33 ________________________________________________________________________________ Segmental Result 34 33 ________________________________________________________________________________ Finance Costs (2) (1) Income tax expense (6) (7) Profit after tax from continuing operations 26 25 ________________________________________________________________________________ Profit for the year from discontinued operations 32 22 ________________________________________________________________________________ Profit for the year 58 47 ________________________________________________________________________________ Discontinued operations comprise the demerged WH Smith PLC for both years and the Publishing business in the prior year, which were all individual segments. Additional information on these segments is shown in Note 13. (c) Balance Sheet ____________________________________________________________________________________ 2006 2005 _____________________________ _____________________________________________________ Continuing Continuing Unallocated Discontinued Group operations - operations - operations News News Â£m Distribution Distribution _____________________________ _____________________________________________________ Assets Segment assets 131 91 - 502 593 Unallocated assets - - 35 - 35 _____________________________ _____________________________________________________ Consolidated total assets 131 91 35 502 628 _____________________________ _____________________________________________________ Liabilities Segment (238) (111) - (280) (391) liabilities Unallocated liabilities - - (185) - (185) _____________________________ _____________________________________________________ Consolidated total liabilities (238) (111) (185) (280) (576) _____________________________ _____________________________________________________ Net (liabilities)/assets (107) (20) (150) 222 52 _____________________________ _____________________________________________________ Segment assets include goodwill, other intangibles, property, plant and equipment, inventories, receivables and operating cash. Segment liabilities comprise of operating liabilities. Information on discontinued operations is shown in Note 13. (d) Other Segmental Items ______________________________________________________________________________________ 2006 2005 _______________________________ _____________________________________________________ Continuing Continuing Discontinued Group operations - operations - operations News News Â£m Distribution Distribution _______________________________ _____________________________________________________ Capital additions 2 4 28 32 Depreciation and amortisation of non-current assets (7) (6) (41) (47) _______________________________ _____________________________________________________ Information on discontinued operations is shown in Note 13. (ii) Segmental analysis by geographical area The total Group revenue and operating profits for both years originate from the UK region. The Directors consider this to be one segment. 3. Group Operating Profit _________________________________________________________________________________ Â£m 2006 2005 _________________________________________________________________________________ Turnover 1,095 1,074 Cost of sales (966) (943) Gross Profit 129 131 _________________________________________________________________________________ Distribution costs (63) (64) Administrative expenses (33) (34) Other income (1) 1 - _________________________________________________________________________________ Group Operating profit 34 33 _________________________________________________________________________________ (1) Other income relates to profits on disposals of freehold properties The operating profit is after charging:- _________________________________________________________________________________ Â£m 2006 2005 _________________________________________________________________________________ Cost of inventories recognised as an expense 1,035 1,010 Depreciation and amounts written off property, plant & equipment 4 3 Amortisation of intangible assets 3 3 Net operating lease charges - land and building 5 5 - equipment and vehicles 3 2 Other occupancy costs 2 2 Staff costs 77 76 Auditors' remuneration (see below) _________________________________________________________________________________ Fees payable in the continuing & discontinued operations to Deloitte & Touche LLP, the Group's auditors, included in the income statement related to: Audit fees 0.3 0.3 Non-audit fees 1.9 0.2 _________________________________________________________________________________ 2.2 0.5 _________________________________________________________________________________ Fees payable to Deloitte & Touche LLP, the Group's auditors, included in the income statement relating to audit fees amount to Â£0.3 million (2005: Â£0.3million) and non-audit fees Â£1.9million (2005:Â£0.2million) which comprise further assurance services associated with the demerger of WH Smith PLC Â£1.9 million (2005: Â£nil), tax compliance services Â£nil (2005: Â£0.1million) and IFRS preparation work Â£nil (2005: Â£0.1million). 4. Retirement benefit obligation The Group has operated a number of defined benefit and defined contribution pension plans. The main pension arrangements for employees are operated through a defined benefit scheme WHSmith Pension Trust ('Pension Trust'), and a defined contribution scheme, WHSmith Retirement Savings Plan. The most significant is the Pension Trust for the Group's UK employees which is described in note 4 a) (i). The scheme is independent of the Company and is administered by a Trustee. The Trustee of the Pension Trust has extensive powers over the pension plans' arrangements, including the ability to determine the levels of contribution. Segregation of assets and liabilities of each pension scheme into two sections On the date of demerger, the assets and liabilities of the defined benefit scheme have been split between the News business, (owned by Smiths News PLC) and the WH Smith Retail business (owned by WH Smith PLC) by way of a 'sectionalisation' of the defined benefit scheme into two different sections (i.e. the News business section and the WH Smith Retail business section). The two sections will remain within the defined benefit scheme. Similarly, the assets and liabilities of the defined contribution scheme will be separated (or 'sectionalised') into two different sections, a News business section and a WH Smith Retail business section, with each section only containing the accounts of members who are or were employed by the relevant business. The two sections will remain within the WHSmith Retirement Savings Plan. The demerged WH Smith Retail business section has been disclosed within discontinued operations within the income statement. Upon sectionalisation of the Pension Trust, the assets and liabilities of the defined benefit scheme will be allocated to the News business section and the WH Smith Retail business section in proportions that reflected the liabilities of active, deferred, pensioner and orphan members belonging to the respective businesses. Orphan members are members (or spouses of members) whose employer had left the Group prior to the split but were classified as either News or Retail for the purpose of the sectionalisation. The proportions are currently expected to be 35 per cent, for the News business and 65 per cent, for the WH Smith Retail business. The participating employers of the News business will contribute to the News business section, and the participating employers of the WH Smith Retail business will contribute to the WH Smith Retail business section. Assets apportioned to one section of the Pension Trust will not be able to be used for the purposes of the other section. There will be no cross-subsidy or cross-guarantee between the sections of the Pension Trust. However, for administrative and investment purposes the Pension Trust will operate generally on a unified basis, except that the principal employer will be replaced with a sponsor for each section. On 1 September 2006, a one-off contribution of Â£25 million was made to the Pension Trust by the Company. The amounts recognised in the balance sheet within non-current liabilities in relation to these plans are as follows: _________________________________________________________________________________ Â£m 2006 2005 _________________________________________________________________________________ Present value of the obligations (334) (967) Fair value of plan assets 285 871 _________________________________________________________________________________ Deficit (49) (96) _________________________________________________________________________________ Retirement medical benefit liability - (7) _________________________________________________________________________________ Retirement benefit obligation recognised in the balance sheet (49) (103) _________________________________________________________________________________ Deferred taxation 15 30 _________________________________________________________________________________ Net retirement obligation (34) (73) _________________________________________________________________________________ 4. Retirement benefit obligation a) Defined benefit pension scheme (i) The WHSmith Pension Trust ('Pension Trust') A full actuarial valuation of the Scheme is carried out every three years with interim reviews in the intervening years. The latest full actuarial valuation of the Pension Trust was carried out as at 31 March 2006 by independent actuaries, Mercer Human Resource Consulting, using the projected unit basis, and, as with each such triennial valuation, the valuation currently remains subject to the formal approval of the Pension Trust Trustee. The scheme was closed in September 1995 and under the projected unit method the current service cost would be projected to increase as members approach retirement and the age profile of members increases. On an ongoing basis, the actuarial gross defined benefit pension deficit was approximately Â£63 million (approximately Â£44 million net of related deferred taxes) for the Smiths News PLC's section of the WHSmith Pension Trust. The ongoing deficit is greater than the IAS 19 deficit primarily due to the different assumptions and calculation methodologies. In September 2005, the Pension Trust Trustee adopted a new investment policy in order to substantially reduce the volatility in the underlying investment performance and reduce the risk of a significant increase in the deficit in the fund. The assets in the investment fund were restructured in order to adopt this policy. This involved the assets being invested such that they are expected to alter in value in line with changes in the pension liability caused by changes in interest and inflation ('a Liability Driven Investment 'LDI' policy'). The key features of the new investment policy were that: - 94% of the Pension Trust's assets was invested in an LDI policy with a leading international institutional fund manager; and - 6% of the Pension Trust's assets was used to purchase a portfolio of long-dated equity call options. These represented a notional exposure to underlying equities of some Â£350 million. The impact of this change in investment policy is to substantially reduce the volatility in the fund and the resultant risk of a significant increase in the overall deficit whilst enabling the fund to continue to benefit from any potential higher returns in the equity markets. The valuation of the defined benefit pension scheme used for the account disclosures are based upon the most recent valuation. Scheme assets are stated at their market value at the relevant reporting date. The principal long-term assumptions used to calculate scheme liabilities under IAS 19 are: ________________________________________________________________________________ % 2006 2005 ________________________________________________________________________________ Rate of increase in salaries 4.00% 3.70% Rate of increase in pension payments and deferred pensions 3.00% 2.70% Discount rate 5.10% 4.90% Inflation assumptions 3.00% 2.70% ________________________________________________________________________________ The amounts recognised in the income statement were as follows: ________________________________________________________________________________ Â£m 2006 2005 Current service cost (9) (10) Interest cost (47) (46) Expected return on scheme assets 42 44 ________________________________________________________________________________ (14) (12) ________________________________________________________________________________ The charge for the current service costs has been included in administrative costs. Movements in the present value of the defined benefit scheme obligations in the year were as follows: ________________________________________________________________________________ Â£m 2006 2005 At 1 September (967) (830) Current service cost (9) (10) Interest cost (47) (46) Actuarial losses (18) (113) Benefits paid 33 32 Subsidiaries disposed 674 - ________________________________________________________________________________ As at 31 August (334) (967) ________________________________________________________________________________ Movements in the fair value of defined benefit scheme assets in the year were as follows: ________________________________________________________________________________ Â£m 2006 2005 ________________________________________________________________________________ At 1 September 871 645 Expected return on scheme assets 42 44 Net actuarial (losses) / gains (15) 71 Contributions from the sponsoring companies 28 143 Benefits paid (33) (32) Subsidiaries disposed (608) - ________________________________________________________________________________ As at 31 August 285 871 ________________________________________________________________________________ An analysis of the defined benefit scheme assets at the balance sheet date is detailed below: ________________________________________________________________________________ Â£m 2006 2005 ________________________________________________________________________________ Equities - 386 Bonds - 485 Cash 275 - Inflation swaps (7) - Equity call options 17 - ________________________________________________________________________________ 285 871 ________________________________________________________________________________ An analysis of the expected rate of return on the defined benefit scheme assets at the balance sheet date is detailed below: ________________________________________________________________________________ 2006 2005 ________________________________________________________________________________ Equities - 7.0% Bonds - 4.0% Cash (1) - 3.8% Inflation swaps (1) - - Equity call options (1) - - ________________________________________________________________________________ ________________________________________________________________________________ (1) The expected rate of return on these investments was calculated as a weighted average of the expected return on the LDI fund and the equity call options was 5.01 per cent at 31 August 2006. Prior to 22 September 2005, the overall expected rate of return on the Trust's assets was calculated as a weighted average return based on the distribution of the assets (between equities, bonds and cash, at the accounting date). On 22 September 2005, the investment strategy was altered to invest in a Liability Driven Investment (LDI) fund and a number of equity call options. The mortality assumptions (in years) underlying the value of the accrued liabilities are:- ________________________________________________________________________________ Male Female Life expectancy at age 65 Member currently aged 65 20.1 22.9 Member currently aged 45 21.4 24.1 ________________________________________________________________________________ Life expectancy at age 60 Member currently aged 60 24.9 27.7 Member currently aged 45 25.9 28.7 ________________________________________________________________________________ The mortality assumptions are based on the standard PA92 medium cohort tables (as published by the Institute of Actuaries). The mortality rates underlying the table have been increased by 25% to reflect the Trust's actual experience. The history of experience adjustments is as follows: ________________________________________________________________________________________ Â£m 2006 2005 2004 2003 2002 ________________________________________________________________________________________ Present value of defined benefit obligations (334) (967) (883) (846) (740) Fair value of scheme assets 285 871 678 631 596 ________________________________________________________________________________________ Deficit in the scheme (49) (96) (205) (215) (144) ________________________________________________________________________________________ Experience adjustments on scheme liabilities Amount (Â£m) (18) (113) Percentage of scheme liabilities (%) (5%) (12%) _______________________________________________________ Experience adjustments on scheme assets Amounts (Â£m) (15) 71 Percentage of scheme assets (%) (5%) 8% _______________________________________________________ b) Defined contribution pension scheme The pension cost charged to income for its defined contribution scheme, WHSmith Retirement Savings Plan, amounted to Â£3million for the year ended 31 August 2006 (2005: Â£3 million). c) Post retirement medical benefits The Group provides retirement medical benefits to certain pensioners. Total premiums paid by the Group during the year in respect of these benefits were Â£0.1 million (31 August 2005: Â£0.4 million). The present value of the future liabilities under this arrangement at each reporting date has been assessed by independent actuaries Mellon Human Resources & Investor Solutions (Actuaries & Consultants Limited) and this amount was included on the balance sheet within retirement benefit obligations. In September 2005, the members were offered the option to be bought out of this scheme, which was accepted by the majority of the members. The impact of the settlement was a Â£5 million reduction in the net deficit and this has been disclosed within discontinued operations. A small number of members opted to remain in the scheme and the present value of the remaining future liabilities relating to Smiths News PLC is valued at Â£0.1 million net of deferred taxation. d) Disposals and Post Retirement Medical Benefit Settlement Year ended 31 August 2006 Retailing Business On 31 August 2006, the assets and liabilities of the defined benefit scheme, WHSmith Pension Trust were divided into two different sections (the Smiths News PLC and the WH Smith PLC business section). The gross deficit at the date of disposal was Â£66 million. On demerger, the post retirement medical benefits of Â£0.1million were transferred to New WH Smith PLC, which changed its name on 1 September 2006 to WH Smith PLC. The amounts recognised as current liabilities for the WH Smith PLC's proportion of the defined benefit scheme is as follows: ________________________________________________________________________________ Â£m 2006 2005 ________________________________________________________________________________ Present value of defined benefit obligations (674) (651) Fair value of scheme assets 608 598 ________________________________________________________________________________ Deficit (66) (53) ________________________________________________________________________________ Year ended 31 August 2005 Publishing Business On 25 September 2004, the Group completed the disposal of the Publishing business, including the disposal of that business' pension fund. The gross deficit at the date of disposal was Â£20 million. USA Business The Group made a settlement of Â£3 million in respect of the US businesses. 5. Income tax expense ___________________________________________________________________ Â£m 2006 2005 ___________________________________________________________________ Tax on profit 10 10 Standard rate of UK corporation tax 30% Adjustment in respect of prior year UK corporation tax (4) (2) ___________________________________________________________________ Total current tax charge 6 8 ___________________________________________________________________ Deferred tax - current year - (1) ___________________________________________________________________ Tax on profit 6 7 ___________________________________________________________________ Discontinued operations 12 9 ___________________________________________________________________ Total tax on profit 18 16 ___________________________________________________________________ Effective tax rate on continuing activities 20% 23% When the profit before tax and the tax charge figures are rounded to the nearest Â£million the effective tax rate for the year ended 31 August 2006 appears to be 19%. However, the actual detailed figures do result in an effective tax rate of 20%. Reconciliation of the taxation charge ___________________________________________________________________ Â£m 2006 2005 Tax on profit at standard rate of UK corporation tax 30% 10 9 Tax effect of items that are not deductible or not taxable in determining taxable profit - 1 Adjustment in respect of prior years (4) (2) ___________________________________________________________________ Current tax charge 6 8 ___________________________________________________________________ 6. Dividends Amounts recognised as distributions to shareholders in the year are as follows: ______________________________________________________________________________ Â£m Note 2006 2005 ______________________________________________________________________________ Dividends Final - paid 16 14 Interim - paid 9 7 ______________________________________________________________________________ 25 21 ______________________________________________________________________________ 'C' share dividends 'C' share dividend paid on capital reorganisation - 143 ______________________________________________________________________________ 25 164 ______________________________________________________________________________ ______________________________________________________________________________ Dividend in specie relating to the demerger of WH Smith PLC 13 168 - ______________________________________________________________________________ The proposed dividend of 4.0p is subject to approval by shareholders at the Annual General Meeting and has not been included as a liability in these financial statements. The proposed dividend will be paid on 9 February 2007 to shareholders on the register at close of business on 12 January 2007. The Group also paid a dividend in respect of 'C' shares during the year to 31 August 2006 of Â£282,688 (2005: Â£156,647) and paid dividends on the 'B' shares during the year to 31 August 2006 of Â£81,555 (2005: Â£45,192). 7. Earnings per share a) Earnings _______________________________________________________________________________ 2006 2005 _____________________________ ______________________________ Â£m Continuing Discontinued Total Continuing Discontinued Total _____________________________ ______________________________ _______________________________________________________________________________ Profit attributable to shareholders 26 32 58 25 22 47 _______________________________________________________________________________ b) Basic earnings per share _______________________________________________________________________________ 2006 2005 _____________________________ ______________________________ Continuing Discontinued Total Continuing Discontinued Total _____________________________ ______________________________ _______________________________________________________________________________ Earnings per 15.1p 18.6p 33.7p 14.2p 12.4p 26.6p share (note i) _______________________________________________________________________________ (i) Basic earnings per share has been calculated using profit after tax. c) Diluted earnings per share _______________________________________________________________________________ 2006 2005 _____________________________ ______________________________ Continuing Discontinued Total Continuing Discontinued Total _____________________________ ______________________________ _______________________________________________________________________________ Earnings per share 15.0p 18.5p 33.5p 14.0p 12.3p 26.3p _______________________________________________________________________________ Diluted earnings per share takes into account various share awards and share options including SAYE schemes, which are expected to vest, and for which a sum below fair value will be paid. d) Weighted average share capital _______________________________________________________________________________ millions 2006 2005 _______________________________________________________________________________ Weighted average shares in issue for earnings per share 172 177 Add weighted average number of ordinary shares under option 1 2 _______________________________________________________________________________ Weighted average ordinary shares for diluted earnings per share 173 179 _______________________________________________________________________________ 8. Analysis of net debt Movements in net debt can be analysed as follows: _____________________________________________________________________________________ Â£m At 31 Aug Cash Subsidiaries IAS 32 and 39 At 31 Aug 2006 flow disposed reclassification 2005 _____________________________________________________________________________________ Cash and cash equivalents 11 (35) - - 46 Debt - Sterling floating rate (50) (6) 13 (7) (50) - Sterling fixed rate - 32 - - (32) Obligations under finance leases (3) 6 11 - (20) _____________________________________________________________________________________ Net debt (42) (3) 24 (7) (56) _____________________________________________________________________________________ _____________________________________________________________________________________ Â£m At 31 Aug Cash Non- At 31 Aug 2005 flow cash 2004 _____________________________________________________________________________________ Cash and cash equivalents 46 (18) - 64 Debt - Sterling floating rate (50) (33) - (17) - Sterling fixed rate (32) (30) - (2) Obligations under finance leases (20) (6) (4) (10) _____________________________________________________________________________________ Net debt (56) (87) (4) 35 _____________________________________________________________________________________ Analysed by maturity: _____________________________________________________________________________________ 2006 2005 __________________________________________________ ________________________________ Less Between After Total Less Between After Total than two to five than one two to five one five years year five years Â£m year years years __________________________________________________ ________________________________ Cash and cash equivalents 11 - - 11 46 - - 46 Debt - Sterling floating rate - (50) - (50) (30) (20) - (50) - Sterling fixed rate - - - - (15) (15) (2) (32) - Obligations under finance leases (1) (2) - (3) (6) (14) - (20) __________________________________________________ ________________________________ Net debt 10 (52) - (42) (5) (49) (2) (56) __________________________________________________ ________________________________ Set out below is a comparison by currency and interest price profile of the net debt: _____________________________________________________________________________________ Â£m 2006 2005 ____________________________________________ ____________________________________ Floating Fixed Non-interest Total Floating Fixed Non-interest Total Rate Rate bearing Rate Rate bearing ____________________________________________ ____________________________________ Currency Sterling (39) (3) - (42) (50) (7) - (57) US dollars - - - - 1 - - 1 ____________________________________________ ____________________________________ Total (39) (3) - (42) (49) (7) - (56) ____________________________________________ ____________________________________ 9. Contingent liabilities and Capital Commitments _____________________________________________________________________________________ Â£m 2006 2005 _____________________________________________________________________________________ Bank and other loans guaranteed 2 11 _____________________________________________________________________________________ 2 11 _____________________________________________________________________________________ Other potential liabilities that could crystallise are in respect of previous assignments of leases where the liability could revert to the Group if the lessee defaulted. Pursuant to the terms of the Demerger Agreement, any such contingent liability which becomes an actual liability will be apportioned between Smiths News PLC and WH Smith PLC in the ratio 35:65 (provided that the actual liability of Smiths News PLC in any 12 month period does not exceed Â£5 million). The company's share of these leases have an estimated future cumulative gross rental commitment at 31 August 2006 of Â£55 million (2005: Â£181 million). Contracts placed for future capital expenditure approved by the directors but not provided amount to Â£nil (2005: Â£4 million). 10. Net cash inflow / (outflow) from operating activities _____________________________________________________________________________________ Â£m 2006 2005 _____________________________________________________________________________________ Operating profit from continuing operations 34 33 Operating profit from discontinued operations 53 47 _____________________________________________________________________________________ 87 80 _____________________________________________________________________________________ Operating exceptional items 7 - Adjustment for pension funding (19) (133) Depreciation of property, plant and equipment 34 39 Profit on sale of property, plant and equipment (6) - Impairment of property, plant and equipment 3 - Amortisation of intangible assets 7 8 Share based payments 8 5 Decrease in inventories 7 6 (Increase) / decrease in receivables (7) 1 Increase / (decrease) in payables 1 (9) Income taxes paid (6) (4) Cash spend against provisions (3) (6) _____________________________________________________________________________________ Net cash inflow / (outflow) from operating activities before exceptional items 113 (13) Cash outflow relating to exceptional operating item (8) (9) _____________________________________________________________________________________ Net cash inflow / (outflow) from operating activities 105 (22) ____________________________________________________________________________________ 11. Called up share capital a) Authorised ______________________________________________________________________________________ 2006 ____________________________ Number of Nominal shares value (millions) Â£m ______________________________________________________________________________________ Equity: Ordinary shares of 5p each 300 15 ______________________________________________________________________________________ 300 15 ______________________________________________________________________________________ Non-Equity: 'B' shares of 53.75p each - - 'C' shares of 85p each - - Deferred shares of 85p each - - ______________________________________________________________________________________ - - ______________________________________________________________________________________ ______________________________________________________________________________________ Total 300 15 ______________________________________________________________________________________ b) Allotted and fully paid _________________________________________________________________________________________ 2006 2005 Proforma _________________________ ___________________________ Number of Nominal Number of Nominal shares value shares value (millions) Â£m (millions) Â£m _________________________________________________________________________________________ Equity: Ordinary shares of 5p each 183 9 - - Ordinary shares of 365p each - - 181 660 _________________________________________________________________________________________ 183 9 181 660 _________________________________________________________________________________________ Non-Equity: 'B' shares of 53.75p each - - 4 2 'C' shares of 85p each - - 10 8 _________________________________________________________________________________________ - - 14 10 _________________________________________________________________________________________ _________________________________________________________________________________________ Total 183 9 195 670 _________________________________________________________________________________________ c) Movement in share capital _________________________________________________________________________________________ Ordinary Ordinary shares Ordinary Total shares of 5p of 365p each shares of 55p Â£m each each _________________________________________________________________________________________ At 1 September 2004 - - 139 139 Capital reorganisation and proforma restatement - 658 (139) 519 _________________________________________________________________________________________ At 1 September 2004 restated - 658 - 658 Employee share schemes - 2 - 2 _________________________________________________________________________________________ At 31 August 2005 - 660 - 660 _________________________________________________________________________________________ _________________________________________________________________________________________ At 1 September 2005 - 660 - 660 Employee share schemes - 8 - 8 Capital reduction - (659) - (659) Capital reorganisation 9 (9) - - _________________________________________________________________________________________ At 31 August 2006 9 - - 9 _________________________________________________________________________________________ _________________________________________________________________________________________ Non-Equity ________________________________ Â£m 'B' shares 'C' shares Deferred Total of of 85p shares 53.75p each of 85p each each _________________________________________________________________________________________ At 1 September 2004 2 - 143 145 Capital reorganisation and proforma restatement - 70 (143) (73) _________________________________________________________________________________________ At 1 September 2004 restated 2 70 - 72 Cancelled - (62) - (62) _________________________________________________________________________________________ At 31 August 2005 2 8 - 10 _________________________________________________________________________________________ _________________________________________________________________________________________ At 1 September 2005 2 8 - 10 Restatement for adoption of IAS 39 (2) (5) - (7) _________________________________________________________________________________________ Balance restated at 1 September 2005 - 3 - 3 Cancelled - (3) - (3) _________________________________________________________________________________________ At 31 August 2006 - - - - _________________________________________________________________________________________ Authorised and issued share capital is shown on a pro forma basis for the year ended 31 August 2005. On 2 August 2004, the Company was incorporated with authorised share capital of Â£1,000 divided into one thousand ordinary shares of Â£1 each. At incorporation one ordinary share was subscribed and fully paid. On 23 June 2006, the authorised share capital of Smiths News PLC was increased by the creation of one redeemable preference share of Â£50,000 which was issued as fully paid up. In accordance with IAS32 'Financial Instruments: disclosure and presentation', this amount is presented within liabilities. On the same date Smiths News PLC issued a second ordinary share which was fully paid. On 6 July 2006, the authorised share capital was increased by Â£1,094,999,040 through the creation of a further 1,094,999,000 ordinary shares of Â£1 each and 40 deferred shares of Â£1 each. All of the deferred shares and 144 ordinary shares were then issued fully-paid to the existing shareholders. The issued and unissued ordinary shares were then consolidated on a 73:1 basis into ordinary shares of Â£73 each and then subdivided on a 1:20 basis into ordinary shares of Â£3.65 each. Following this consolidation and subdivision, the authorised share capital was Â£1,095,050,040 divided into 300,000,000 ordinary shares of Â£3.65, 40 deferred shares of Â£1 each and 1 redeemable preference share of Â£50,000, of which 40 of the ordinary shares, the redeemable preference share and all of the deferred shares were issued and fully paid-up. On 30 August 2006, Smiths News PLC was inserted as a new holding company over the listed parent company, WH Smith PLC and by way of a Scheme of Arrangement on that date the shares of Smiths News PLC were admitted to listing on The London Stock Exchange and the shares of WH Smith PLC were delisted. In return for cancellation of WH Smith PLC shares, shareholders in WH Smith PLC received shares in Smiths News PLC, pro rata to existing holdings in WH Smith PLC. The share capital of WH Smith PLC as at 31 August 2006 was 182,919,930 shares. On 31 August 2006 Smiths News PLC issued 182,919,930 ordinary shares with a nominal value of Â£3.65 per share. On 31 August 2006, Smiths News PLC reduced its share capital by Â£659 million to Â£9 million effected by a written resolution of the company dated 30 August 2006, which was confirmed by a Court Order in accordance with the Companies Act 1985. This effectively reduced Smiths News PLC ordinary shares nominal value to Â£0.05 per share. On 1 March 2006, the deferred shares were transferred to the Group for a total consideration of one pence. On 29 August 2006, the 'B' shares and 'C' shares were repurchased for a total consideration of Â£10 million and subsequently cancelled. 12. Post Balance Sheet Events Financing Facilities On 1 September 2006, Smiths News PLC drew down Â£20 million under the Smiths News PLC revolving credit facility to makes its share of the cash contribution to the Smiths News PLC's section of the WH Smith Pension Trust. WH Smith Pension Trust Smiths News PLC announced on 31 August 2006 that following the demerger of WH Smith PLC, it would make a contribution of Â£25 million to the Smiths News PLC's section of the WH Smith Pension Trust. This amount was paid on 1 September 2006. 13. Discontinued operations Year ended 31 August 2006 At the Extraordinary General Meeting on 2 August 2006 the shareholders of the former WH Smith PLC approved the demerger of the Retailing Businesses. On demerger, the Company declared a dividend in specie, in which the existing shares in the former WH Smith PLC (which owned the Retail Business) were transferred by Smiths News PLC to New WH Smith PLC (a newly incorporated company) so that New WH Smith PLC became the holding company of the Retail Businesses. In exchange for this transfer, New WH Smith PLC allotted and issued to Smiths News PLC Shareholders, one New WH Smith PLC share, credited as fully paid, for each Smiths News PLC Share held. On 1 September 2006, New WH Smith PLC changed its name to WH Smith PLC. Year ended 31 August 2005 Publishing Business Disposal On 25 September 2004, the Group completed the disposal of its Publishing business, Hodder Headline Limited. USA Travel Retail An amount of Â£8 million was charged to the income statement relating to the disposal of discontinued businesses. Of this amount, Â£7 million relates to an impairment review of the loan notes received as deferred consideration in respect of the Group's USA businesses. The balance relates to closure and exit provisions. Aspac Retail During the year ended 31 August 2005, Â£7 million was received for the Aspac Retail disposal, which related to deferred consideration and working capital adjustments. (a) The Revenue from discontinued operations were as follows: ________________________________________________________________________________ Â£m 2006 2005 ________________________________________________________________________________ Revenue Retailing businesses High Street 1,021 1,112 Travel 319 311 ________________________________________________________________________________ 1,340 1,423 Publishing business Total revenue - 14 Internal revenue - (3) ________________________________________________________________________________ Total revenue - 11 ________________________________________________________________________________ ________________________________________________________________________________ Total revenue - discontinued operations 1,340 1,434 ________________________________________________________________________________ (b) The results of the discontinued operations were as follows:- ________________________________________________________________________________ 2006 2005 ___________________________________________ __________________________________ Retailing USA Travel Retailing Total Â£m Businesses Retail Businesses ___________________________________________ __________________________________ Profit before tax and before exceptional items 51 - 39 39 Income tax expense (10) - (9) (9) ___________________________________________ __________________________________ Profit after tax and before exceptional items and impairment of discontinued operations 41 - 30 30 ___________________________________________ __________________________________ Exceptional items (note 13e) (7) - - - Impairment of discontinued operations - (8) - (8) Income tax expense on exceptional items (2) - - - ___________________________________________ __________________________________ Exceptional items and impairment of discontinued operations after tax (9) (8) - (8) ___________________________________________ __________________________________ Profit/ (loss) for the year from discontinued operations 32 (8) 30 22 ___________________________________________ __________________________________ (c) The group operating profit from discontinued operations comprise:- ________________________________________________________________________________ Â£m 2006 2005 ________________________________________________________________________________ Turnover 1,340 1,423 Cost of sales (761) (847) ________________________________________________________________________________ Gross Profit 579 576 Distribution costs (434) (437) Administrative expenses (97) (92) Other income (1) 5 - ________________________________________________________________________________ Group Operating profit 53 47 ________________________________________________________________________________ (1) Other Income relates to profit on disposal of property, plant and equipment. (d) The group profit from discontinued operations is after charging:- ________________________________________________________________________________ Â£m 2006 2005 ________________________________________________________________________________ Cost of inventories recognised as an expense 786 854 Writedown of inventories in the period 12 17 Depreciation and amounts written off property, plant & equipment: 33 37 Amortisation of intangible assets 4 4 Net operating lease charges - land and building 147 140 - equipment and vehicles 1 2 Other occupancy costs 50 45 Staff costs 192 201 Auditors' remuneration 2 1 (e) Within the results from discontinued operations, certain exceptional charges were made as follows:- ________________________________________________________________________________ Â£m 2006 2005 ________________________________________________________________________________ Post retirement medical benefits settlement 5 - Demerger costs (12) - Impairment and loss on sale of USA Travel Retail - (8) ________________________________________________________________________________ (7) (8) ________________________________________________________________________________ Year ended 31 August 2006 Post retirement medical benefits settlement WH Smith PLC provides retirement medical benefits to certain pensioners. Total premiums paid by WH Smith PLC during the year in respect of these benefits were Â£nil (2005: Â£0.4 million). The present value of the future liabilities under this arrangement at each reporting date have been assessed by independent actuaries Mellon Human Resources & Investor Solutions (Actuaries & Consultants Limited) and this amount was included on the balance sheet, retirement benefit obligation. In September 2005, the members were offered the option to be bought out of this scheme, which was accepted by the majority of the members. The impact of the settlement was a Â£5 million reduction in the net deficit and has been disclosed as an exceptional item in discontinued operations. A small number of members opted to remain in the scheme and the present value of the remaining future liabilities is valued at Â£0.2 million net of deferred taxation. Demerger costs The costs associated with the Retailing Business demerger of Â£12 million were charged against discontinued operations in the Group Income Statement. Year ended 31 August 2005 An amount of Â£8 million was charged to the income statement relating to the disposal of discontinued businesses. Of this amount, Â£7 million relates to an impairment review of the loan notes received as deferred consideration in respect of the Group's USA businesses. The balance relates to closure and exit provisions (f) The cash flows of discontinued operations comprise: ________________________________________________________________________________ Â£m 2006 2005 ________________________________________________________________________________ From operating activities 82 (23) From investing activities (10) 188 From financing activities (45) (177) ________________________________________________________________________________ Net increase/(decrease) in cash and cash equivalents 27 (12) ________________________________________________________________________________ (g) The taxation from discontinued operations was as follows: ________________________________________________________________________________ Â£m 2006 2005 ________________________________________________________________________________ Tax on profit before exceptional items 4 14 Adjustment in respect of prior year UK corporation tax (7) (3) ________________________________________________________________________________ Total current tax charge before exceptional items (3) 11 ________________________________________________________________________________ Deferred tax - current year 13 (2) ________________________________________________________________________________ Tax on profit before exceptional items 10 9 Tax on exceptional items 2 - ________________________________________________________________________________ Tax on profit after exceptional items 12 9 ________________________________________________________________________________ (h) On 31 August 2006, WH Smith PLC was demerged from the Group. The summary balance sheet of WH Smith PLC and its subsidiaries at the date of demerger was:- Â£m ___________________________________________________________________________________ Goodwill 15 Intangible assets 15 Property, plant and equipment 184 Deferred tax assets 29 Inventories 143 Trade and other receivables 74 Cash and cash equivalents 66 Trade and other payables (215) Current tax payable (20) Other current liabilities (20) Deferred tax liabilities (13) Other non-current liabilities (90) ___________________________________________________________________________________ Group's share of net assets of WH Smith PLC on demerger 168 ___________________________________________________________________________________ On demerger, Smiths News PLC paid a dividend in specie of Â£168 million representing the net assets demerged. The costs associated with the demerger of WH Smith PLC of Â£12 million were charged as an exceptional item against the discontinued operations in the Group Income Statement. (2) Prior Year Publishing business disposal During the prior year, the Group completed the disposal of its Publishing business, Hodder Headline Limited. A financial summary of the disposal is shown below: ___________________________________________________________________________________ Â£m Total ___________________________________________________________________________________ Fixed assets 156 Stock 17 Debtors 80 Creditors (30) Net pension liabilities (14) ___________________________________________________________________________________ Net assets disposed 209 ___________________________________________________________________________________ Cash consideration 210 Cash received in respect of working capital adjustments 5 Net assets disposed (209) Transaction costs and other charges (6) ___________________________________________________________________________________ Net result on sale of the Publishing business recognised in the financial year to 31 August 2005 - ___________________________________________________________________________________ The Group incurred a Â£5 million cash outflow in respect of transaction costs and other charges relating to the Publishing business disposal. Aspac Retail During the year ended 31 August 2005, Â£7 million was received for the Aspac Retail disposal, which related to deferred consideration and working capital adjustments. 14. Related party transactions Transactions between businesses within this Group which are related parties have been eliminated on consolidation and are not disclosed in this note. WH Smith PLC During the year, Group companies entered into the following transactions with the Retailing business, which on 31 August 2006 was demerged from Smiths News PLC, and is now controlled by WH Smith PLC. Purchases were made on an arm's length basis. The amounts outstanding are unsecured and will be settled in cash. No guarantees have been given or received. No provisions have been made for doubtful debts in respect of the amounts owed by related parties. _________________________________________________________________________________ Â£m 2006 2005 _________________________________________________________________________________ Sales of goods to WH Smith PLC 116 - Trading amounts owed to WH Smith PLC at end of year 6 - Amounts owed to WH Smith PLC in respect of prior years corporation tax 15 - _________________________________________________________________________________ Prior to demerger on 31 August 2006, trading between WH Smith PLC & Smiths News PLC was not classified as a related party transaction as they were both part of the WH Smith Group. Amounts owed to WH Smith PLC at end of the year are in respect of tax balances that are expected to be recovered from HMRC and repaid. Transitional services agreement on demerger On 7 July 2006, WH Smith PLC and Smiths News PLC entered into a transitional services agreement whereby WH Smith PLC has agreed, with effect from the demerger , to supply certain transitional services to Smiths News PLC. These services include, amongst other things, payroll, tax, and property administration. It is expected that the services will be provided for a transitional period of up to 12 months plus such time as is required to complete the 2005/2006 year end tax computation, following which Smiths News PLC will make its own arrangements for the provision of these services. The consideration payable by Smiths News PLC to WH Smith PLC under this agreement from the 12 month period is likely to be approximately Â£800,000 although this could increase depending on the length of time that the services are provided to Smiths News PLC. USA Travel Retail - Hotels The CEO of Travel Traders LLC is Sean Anderson who was Chairman of WH Smith Airports Inc., WH Smith PLC's US subsidiary until September 2003 and he holds a 30 per cent stake in Travel Traders LLC. The total consideration of Â£7 million for the USA Travel Retail hotel business was satisfied by way of an interest bearing loan note with a 5 per cent coupon, conditional on the trading cash flows of Travel Traders LLC. Additionally, WH Smith Group Holdings (USA) Inc. holds a 15 per cent equity interest in Travel Traders LLC and is also providing a loan facility of up to Â£4 million to the new company, of which Â£3 million is drawn down as at 31 August 2006. (31 August 2005: Â£3 million). Remuneration of key management personnel The remuneration of the executive and non-executive directors, who are the key management personnel of the Group, is set out below in aggregate for each of the categories specified in IAS 24 Related Party Disclosures. ________________________________________________________________________________ Â£000 2006 2005 ________________________________________________________________________________ Short-term employee benefits 2,407 3,048 Post-employment benefits 39 38 ________________________________________________________________________________ 2,446 3,086 ________________________________________________________________________________ The directors and non-executive directors of Smiths News PLC were appointed to the board of Smiths News PLC following close of business on 31 August 2006. For future remuneration commitments, refer to the Remuneration Report. Directors' transactions There are no other transactions with directors. 15. Preparation of the Preliminary Announcement a) Basis of preparation The preliminary announcement for the 12 months to 31 August 2006 has been prepared on the basis of the accounting policies set out in the Smiths News prospectus issued on 7 July 2006. While the financial information included in this preliminary announcement has been computed in accordance with International Financial Reporting Standards (IFRS), this announcement does not itself contain sufficient information to comply with IFRS. The Company expects to publish full financial statements that comply with IFRS in November 2006. b) Preliminary announcement The financial information for the 12 months to 31 August 2006 and 12 months to 31 August 2005 do not comprise statutory accounts for the purpose of Section 240 of the Companies Act 1985 and have been extracted from the Company's consolidated accounts for the year to 31 August 2006. The statutory accounts for Smiths News PLC (formerly Brightway Services Limited) for the period from incorporation on 2 August 2004 to 31 August 2005 have been filed with the Registrar of Companies and those for the 12 months to 31 August 2006 will be filed following the Company's annual general meeting. The prior year accounts did not require to be audited and the auditors' report on the accounts for the 12 months to 31 August 2006 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 2006. This information is provided by RNS The company news service from the London Stock Exchange

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