Mothercare plc Annual Report 2006

FY2006 Annual Report · Mothercare plc

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Our mission is to meet the needs
and aspirations of parents for their
children, worldwide

1 Performance highlights, Mothercare at a glance
2 Company performance overview
4 Chairman and chief executive’s statement
5 Business review:
5 Our business
9 Financial review

14 Corporate responsibility
20 Board of directors
21 Directors’ report
24 Corporate governance
28 Directors’ remuneration report

36 Statement of directors’ responsibilities
36 Independent auditors’ report
38 Consolidated income statement
38 Consolidated statement of recognised income and expense
39 Consolidated balance sheet
40 Consolidated cash ﬂow statement
41 Notes to the consolidated ﬁnancial statements
69 Company ﬁnancial statements
76 Five year record
ibc Shareholder information

Performance highlights

Group sales up 5.6%
to £482.7 million
(2005: £457.2 million)

Proﬁt before taxation up
56.1% to £24.2 million
(2005: £15.5 million)

International revenue up
21.4% to £68.1 million
(2005: £56.1 million)

UK gross margin up
0.4 percentage points

Final dividend 6.15p
(2005: 5.3p)

Basic earnings per share 25.5p
(2005: 16.6p)

Mothercare at a glance

Sales breakdown

Product breakdown

Stores at year end

International

Total

£m

414.6

68.1

482.7

UK out-of-town

UK in town

UK total

International

Total

Number

158

231

266

497

Home and travel
Clothing
Toys and gifts
Other

47%
40%
12%
1%

Mothercare plc Annual report and accounts 2006 1

Company performance overview

How have we been doing

Our progress of growth, in the three areas of specialism,
efﬁciency and reach, are summarised below:

Specialism

Improvement in customer
service and satisfaction
Mystery shopper scores showing
beneﬁt of investment in specialist
training.

Growing our proposition
UK sales per square foot. (Full year
UK store sales on a 52 week basis
compared to year end UK store
square footage.)

Reach

04
58%

05
66%

06
75%

£216

£219

£205

Mystery shopper tests our customer
service against deﬁned parameters.
It is our aim to be best in class for
our sector.

UK stores

new stores in 2006

Target 2006/07

new stores

Mothercare
Direct

14 million page
views per month

International

countries

266

stores

26% sales growth

Target 2006/07

new International
stores

2 Mothercare plc Annual report and accounts 2006

Efﬁciency

Improving clothing product
purchasing
Sourcing. We are well on our way
to our target for directly sourced
clothing products.

04
10%

05
31%

06
38%

Reducing UK store distribution
costs as a percentage of sales
Supply chain efﬁciency.

8.1

6.5 6.4 6.1

Operating margin
Proﬁt before tax and exceptionals
as a percentage of sales.

05 06

04
3.7%

05
4.3%

06
4.4%

Environment

Reducing CO2 emissions
Logistics initiatives reducing costs
and helping the environment.

Saved in 2006:
1,311,000 miles

3,392 journeys

440,000 litres of fuel

Long term target:

50%

Long term target:

Percentage of total:
25%

16%

43%

Mothercare plc Annual report and accounts 2006 3

Chairman and chief executive’s statement

Ian Peacock Chairman

Ben Gordon Chief executive

Dear shareholder

The strength of Mothercare as a global brand has enabled the
Company to deliver a resilient performance in what was a tough
year in the UK for all retailers. Despite these conditions sales
are up in the UK, our Direct business is growing rapidly, and our
International business continues to perform strongly and grow.

Over the last three years the business has been transformed and
we are now focused on our growth strategy under a roadmap of
Specialism, Efﬁciency and Reach. Details of this strategy are set
out in the business review on pages 5 to 19.

The three strands of our growth strategy will consolidate
Mothercare’s position as a world-class, speciality brand enabling
us to grow our business worldwide through the multi-channel
retailing opportunities of Stores, Direct and International. The
balance of our business is now radically different to three years
ago. We now have more stores overseas than within the UK, and
the Mothercare brand continues to travel well, with the concept
readily accepted by parents internationally. We have a vibrant
Direct business with access to Mothercare product and services
through the web and by catalogue.

Against this backdrop we are working hard to drive innovation,
design and value in all of our products and have invested
signiﬁcantly in our design team to ensure that we can provide
great choice for our customers across all of our product ranges.

A key platform of our success has been and will continue to be the
dedication, commitment and enthusiasm of our people around
the world. Without this we would be unable to deliver the specialist
service that our customers rightly expect. Consequently we were
particularly delighted that the high standards of customer service
in our stores has been recognised in a number of UK national
retailing surveys during the year. Our investment in training has
enabled us to grow and differentiate our service and this is key
to our continued success.

Furthermore we received a great national accolade by being
placed ninth in the Sunday Times Top 20 Best Big Companies to
work for, 2006 awards based on the opinions of our UK employees
and were also presented with a special ‘Well Being’ award
underlining our commitment to our employees.

Much progress has been made during the year and whilst there
are risks both domestically and internationally to the achievement
of our global ambitions for the Mothercare brand, we are looking
forward to the challenges that the new year will bring.

Ian Peacock
Chairman

Ben Gordon
Chief executive

4 Mothercare plc Annual report and accounts 2006

Business review

Cross stitch top £6/£7

Our new maternity brand

Improvement in customer service

Best in class customer service

04
58%

05
66%

06
75%

Our business
Mothercare is a global brand providing parents and parents-to-be
with a one-stop-shop offering high quality innovative products for
their children. For more than 40 years the brand has been part of
the process of parenting.

Mothercare understands the highs and lows of parenting. From
pregnancy through to childhood, our experts provide specialist
help and advice through stores, the internet, by post and by phone.

We offer our customers a compelling mix of strong design,
exceptional quality and great value for money in the areas of
clothing, furniture and home furnishings, bedding, feeding, bathing,
travel equipment and toys.

Underpinning this goal lies a commitment to developing the
infrastructure that will support the delivery of world-class product.
With the latest systems and processes we aim to ensure seamless
sourcing and delivery from supplier to customer.

Our markets
The strength of the Mothercare brand is universally recognised.
We opened 46 stores overseas through the development of new
markets and consolidation of our position in those countries outside
the UK where we already have a presence.

In the UK over 80 per cent of pregnant mothers walk through
our doors and continue to visit Mothercare as their children grow.
Some 75 per cent of mothers with 0-2 year olds and 60 per cent
of mothers with 3-6 year olds also visit our stores on a regular
basis (source: April 2006 Exit Survey). As our stores, products and
customer service continue to improve we are increasingly better
placed to enhance our strong brand position.

Our long term commitment to offering our customers a multi-
channel solution to access Mothercare product and services is
paying dividends. In addition to our stores worldwide, catalogue

This business review should be read in conjunction with the performance highlights, the
company performance overview, the directors’ report and the corporate governance
report set out on pages 1, 2 and 3, 21 to 23 and 24 to 27 respectively and has been
prepared in accordance with the business review requirements under the Companies
Act 1985.

and website sales continue to grow with the awareness and usage
of the website and catalogue. Our analysis shows that 70 per cent
of Mothercare shoppers are aware of these facilities and that
many of these shoppers have used our website and/or catalogue.

In the UK our catalogue works well to complement the website and
our stores. Over 60 per cent of catalogues in the hands of website
users were picked up in store. We also know that over 30 per cent
of Mothercare website users subsequently go into a Mothercare
store to look at our product.

Strategic development
2005/06 was the third year of our three-year turnaround
programme designed to rebuild shareholder value at Mothercare
and lay the foundations for longer term growth. Since the start of
the programme, a pre-tax loss of £24.8 million has been turned into
a pre-tax proﬁt of £24.2 million. Total group sales have increased
by 11.8 per cent. Over the last three years we have generated over
£80 million of cash before capital expenditure. Cash in the balance
sheet is now £35.9 million. The total shareholder return of £100
invested at the start is now worth £325.

We are now developing Mothercare’s full potential, focusing more
aggressively on growth through our Specialism, Efﬁciency and Reach
strategies. These will build Mothercare into a world-class speciality
brand enabling us to grow our business through the multi-channel
retailing opportunities of Stores, Direct and International.

Specialism
We are working to establish Mothercare as the leading specialist
brand worldwide. The combination of the best, most innovative
products, with great stores and outstanding service will ensure
that Mothercare remains truly differentiated from our competitors.

Product
Our focus on the quality, design and value of our ranges has
continued to show beneﬁts. Mothercare’s innovative and design

Mothercare plc Annual report and accounts 2006 5

Business review continued

New out-of-town store in Basingstoke

Phil & Teds E3 £299.99

Pushchair wall

Opening a new store

led range of own brand pushchairs continues to improve in both
quality and value. Our own brand ‘Urban Detour’ range won
the Mother & Baby award, ‘Best Pushchair’ for the third year in
succession. We have also introduced new lines, including branded
pushchairs such as Bugaboo, Phil & Teds, Jané, and Mutsy.

In clothing, we have made signiﬁcant progress in the development
of our own brand MODA range of maternity wear and this is now
featured in 54 stand-alone areas in our larger stores. MODA has
been successful in addressing the needs and aspirations of the
more fashion conscious shopper for maternity wear within our
stores and is also successful in our overseas markets. We believe
MODA has considerable scope for further growth.

During the year we continued to improve the quality, design and
value of our baby and childrenswear ranges and have seen a
further increase in market share in our children’s clothing, building
on the performance of the past two years.

Last year we introduced a new gift offer which focused on our core
market of birth to age 2. During the year, the range was extended
to all stores and added to our internet gift service, and is showing
strong growth.

Stores
With the substantial completion of the High Street reﬁt programme
our attention has now turned to the out-of-town stores. We have
reﬁtted two out-of-town stores with a new trial concept designed
to enhance the shopping experience, increase sales densities,
expand our successful home and travel ranges and maximise the
beneﬁt from concessions.

Early indications are that the performance of the reﬁtted stores
has been encouraging and we plan to extend the trial to at least
a further ten out-of-town stores in 2006.

We continue to optimise our store portfolio to ensure we have the
best size and location wherever we trade. We opened ten stores
and closed ten stores in the year, four of which were direct resites

to smaller sized units and/or more suitable locations in the same
town. In each case the rightsizing of the portfolio increased sales
per square foot and reduced the operating costs of those units.
Further optimisation of the portfolio will take place during 2006.

Service and people
We continue to invest in further developing the expertise and
specialism of our staff. We were particularly pleased that the high
standards of customer service in our stores have been recognised
in various national retailing surveys during the year. This underpins
the results of our independent mystery shopper programme. In
the results for the quarter to 1 April 2006 we achieved a score
consistent with the best in class customer service scores of other
service orientated multiple retail chains in the UK.

Mothercare was also placed ninth in the Sunday Times Top 20
Best Big Companies to work for, 2006 awards. The Company was
presented with a special ‘Well Being’ award, recognising its efforts
in supporting its employees.

Efﬁciency
Mothercare is building a highly efﬁcient operating platform,
including a new cost effective supply chain and state-of-the-art
sourcing capability that will enable Mothercare to operate as a
world-class speciality retailer.

Sourcing
Continued progress has been made with our sourcing initiatives,
allowing us to grow our UK margin over the year by 0.4 percentage
points (and by 8.3 percentage points over the last three years).

We continue to consolidate our direct sourcing activities in India,
China and Europe. Some 38 per cent of our clothing and 12 per cent
of our home and travel ranges are now sourced directly. We are
on track to achieve our aim to increase directly sourced clothing
to 50 per cent. The establishment of our Indian sourcing ofﬁce will
be completed in this ﬁnancial year and we expect to see further
beneﬁts to gross margin and efﬁciency.

6 Mothercare plc Annual report and accounts 2006

Mothercare plc Annual report and accounts 2006 7

Business review continued

Palm tree t-shirt £7/£8

Large tubs £9.99

Improved visual merchandising

8.1 6.5

6.4 6.1

Reducing UK distribution costs as a
percentage to sales

Supply chain
In November 2004 we announced our new distribution strategy
and the plan to move the bulk of our operation to a new National
Distribution Centre. At that time we indicated that the completion of
the transition would take place in the summer of 2006. This transition
is both on plan and budget.

We continue to make signiﬁcant progress on product availability.
Through the efﬁciency of our overall distribution operations,
availability is now around 90 per cent up from 85 per cent last year
and from 65 per cent three years ago. The completion of the move
to the National Distribution Centre will give us the opportunity to
drive further efﬁciencies from our distribution operations and
reduce the distribution cost as a percentage of sales.

Infrastructure
During the year we successfully completed the roll out of our new
EPOS system to all UK stores. All stores now have new till systems
that have reduced transaction times for our customers, and give
us the opportunity to implement a number of other in-store
efﬁciencies; releasing more store staff hours into customer facing
activities. All tills are web-enabled, providing a platform for our
Web in Store offer.

To address the industry wide issue of rising occupancy, energy
and fuel costs we are focusing on controllable aspects of our
overheads. For example, we are mitigating increases in occupancy
costs by measures including store resiting, resizing and closures,
while inﬂation in fuel costs is being offset by reﬁning the frequency
and timing of deliveries to stores.

Reach
With the foundations of specialism and efﬁciency ﬁrmly in place,
we can really drive our third priority which is about expanding
our reach to parents here in the UK and around the world. This is
supported by a world-class franchisee network and an integrated
multi-channel catalogue and internet operation.

UK stores
We have a signiﬁcant opportunity over the next ﬁve years to
relocate and resize a number of our stores where leases fall
for renewal. We have also identiﬁed at least 40 additional high
street and 20 out-of-town locations where Mothercare could trade
successfully. This gives us the opportunity to build a proﬁtable UK
store portfolio for the future and achieve our target of 80 per cent
of the UK population within easy reach of a Mothercare store.

Mothercare Direct
Over the last few years, we have grown a very successful multi-
channel business through Direct. Mothercare Direct comprises
Direct in Home (Web in Home and telephone catalogue ordering)
and Direct in Store (web-enabled stores). Overall sales from our
Direct channel grew by 26.1 per cent to £41.1 million during the
year. With the completion of the EPOS roll out to all stores, enabling
all tills to access the internet, we have been able to extend the
Web in Store ordering service and this has grown very strongly
during the year.

Mothercare.com is the number one parenting site in the UK.
We estimate that two-thirds of pregnant mothers use our site
and we have 14 million page views each month. Our investment
in the Direct business, which includes the extension of the Web in
Store facility provides the Company with a powerful opportunity
to exploit both the in-store and in-home based internet retailing
opportunities. We believe that our Direct business has signiﬁcant
potential for future growth worldwide.

International
Our International business continues to provide a substantial
growth opportunity. We now trade in 37 countries through 266 stores.
Total retail sales made by our franchisees were £169.4 million.
Overall, franchisee like-for-like sales grew by an estimated 7 per cent.
Our income from franchisees increased by 21.4 per cent during the
year to £68.1 million.

8 Mothercare plc Annual report and accounts 2006

Indonesia – Taman Angrek

Seraﬁ – Jeddah

India – Mumbai

190 220 266

Growth in numbers of International
stores

During the current ﬁnancial year we expect to open at least 50
new stores, the majority of which will be in existing markets. Our
ﬁrst stores in India opened in April 2006. We now have two stores
in Mumbai, one in Pune, one in Hyderabad and one in Bangalore.
We expect to have ten stores open and trading in India by the end
of the ﬁnancial year.

There are considerable opportunities to expand in the Middle
East, South Asia and the Far East as well as to add to our portfolio
of countries within Europe. To support this growth we have invested
further in the supply chain for our International business by opening
distribution centres in India to complement those in Singapore
and Dubai.

Outlook
We are conﬁdent that the underlying strength of the Mothercare
brand together with the actions we are taking to improve the
specialism, efﬁciency and reach of our business will help us to
continue to grow in the UK and we are also conﬁdent that the
UK Direct business and the International business will continue
to develop strongly during the year.

We will provide a trading statement for the ﬁrst quarter on 20 July
2006, the date of our AGM.

Ben Gordon
Chief executive

Financial review
Results summary
Total group sales have increased by 5.6 per cent to £482.7 million
(2005: £457.2 million). Proﬁt before tax and exceptional items
improved by 8.7 per cent to £21.3 million from £19.6 million last
year. After an exceptional proﬁt of £2.9 million (2005: exceptional
loss of £4.1 million) which arose from the disposal of property
interests, pre-tax proﬁt was up by 56.1 per cent to £24.2 million
(2005: £15.5 million).

The results can be summarised as follows:

Income statement

Revenue
Proﬁt from operations before
exceptional items
Investment income and ﬁnance costs

Proﬁt before exceptional items and taxation
Exceptional items
Taxation

Proﬁt after taxation

Earnings per share
Dividend per share

53 weeks
1 April
2006
£m

52 weeks
26 March
2005
£m

482.7

457.2

17.9
3.4

21.3
2.9
(6.7)

17.5

16.7
2.9

19.6
(4.1)
(4.2)

11.3

25.5p
9.0p

16.6p
8.0p

53rd week in 2006
The year ended 1 April 2006 contained 53 weeks compared with
52 weeks last year and the ﬁnancial statements have therefore
been prepared on this basis.

Mothercare plc Annual report and accounts 2006 9

10 Mothercare plc Annual report and accounts 2006

447 457 483

4.0 8.0 9.0

16.5 19.6 21.3

Group sales growth
£ million

International income growth
£ million

Total dividend
pence

Growth in proﬁt before interest, tax
and exceptionals
£ million

For information, on a more comparable, 52 weeks basis:

• group sales up 3.7 per cent to £474.2 million (2005: £457.2 million);

• UK sales up 1.5 per cent to £407.3 million (2005: £401.1 million)
(including Direct in Store sales up 31.4 per cent to £20.5 million)
and Direct in Home sales up 15.9 per cent to £19.7 million;

• International revenue up 19.3 per cent to £66.9 million;

• group proﬁt before exceptional items and taxation up 4.1 per cent

to £20.4 million (2005: £19.6 million); and

• group proﬁt after tax up 49.6 per cent to £16.9 million.

£ million 2006

UK
International
Corporate

£ million 2005

UK
International
Corporate

Revenue

Proﬁt
(old basis)

Proﬁt
(new basis)

414.6
68.1
–

482.7

401.1
56.1
–

457.2

8.9
9.0
–

17.9

9.4
7.3
–

16.7

19.3
5.3
(6.7)

17.9

19.6
4.4
(7.3)

16.7

IFRS
We have fully adopted International Financial Reporting Standards
(IFRS) and prior period comparatives have been restated. The impact
of IFRS on proﬁt after tax for 2004/05 was an increase of £0.2 million.
A full reconciliation was issued at our AGM on 15 July 2005, and
can be found on our website at www.mothercare.com/investorinfo.

Two of the new standards adopted, IAS 19 (Employee Beneﬁts)
and IAS 39 (Financial Instruments: Recognition and Measurement)
give rise to non-cash adjustments to the income statement, some of
which could be highly volatile, and not reﬂective of the underlying
proﬁt of the business.

The proﬁt from operations in the year would be £1.2 million higher
(2005: £1.5 million higher) and proﬁt after tax would be £0.5 million
lower (2005: £0.2 million higher) if the effect of these volatile non-
cash elements of IFRS are excluded.

Results by segment
The primary segments of Mothercare plc are the UK (which
includes the Direct business) and International businesses. We
have adjusted the way that we report the profit from operations
before exceptional items of our business segments. In the past,
we reported the International business on a contribution basis,
only apportioning direct costs. In accordance with IAS 14 we now
also apportion certain shared costs to the International business.

Costs previously allocated to the UK and now allocated to
International amount to £3.7 million (2005: £2.9 million) being mostly
buying, merchandising, certain distribution and management costs.
Corporate expenses not allocated to UK or International represent
head ofﬁce costs, board and senior management costs, insurance,
annual and interim reporting costs and audit and professional fees.

Results by category and channel
Sales in the year have increased in each of our key product
categories and also across each channel to market. Sales from UK
stores were up 2.7 per cent, International stores up 21.4 per cent
and Direct in Home up 18.8 per cent.

Like-for-like sales are defined as sales growth on the previous
year for stores that have been trading continuously from the same
selling space for at least a year. UK like-for-like sales were down
0.3 per cent in the year in a difficult retail market, but were up an
encouraging 0.4 per cent in the second half and an estimated
1.2 per cent in the final quarter. International franchisee like-for-like
sales were up 7.0 per cent in the year. Our Direct business, which
is wholly within the UK, is growing rapidly. It comprises Direct in
Home (home shopping by catalogue or internet) and Direct in
Store (orders placed in store with the product delivered directly
to the customer’s home). In total, sales from the Direct business
increased by 26.1 per cent to £41.1 million.

Mothercare plc Annual report and accounts 2006 11

Business review continued

Embroidered t-shirt £8/£9

Dungarees £10

Girls’ dresses £18/£19

Polo shirt £5/£6

Proﬁt from operations before exceptional items
Proﬁt from operations increased by 7.2 per cent to £17.9 million
in the year. The key drivers of proﬁt were the increase in UK store
sales and margin percentage together with the smaller, but more
rapidly growing, International and Direct businesses, which together
more than offset rises in the cost base.

The UK gross margin improved by 0.4 percentage points as a
result of better buying, an increase in direct sourcing (particularly
in clothing) and greater volumes. The overall gross margin was
0.1 percentage point lower however, due to the rapid growth of
the International business which, although proﬁt enhancing, is
dilutive at the gross margin level.

In line with other retailers, Mothercare is experiencing an increase
in store operating costs in the UK – particularly occupancy, staff
and energy costs. As a percentage of UK sales, store costs were
up by 1.2 per cent in the year; however, the total UK cost increase
was reduced to 0.5 per cent of sales through tighter management
of controllable costs.

We would expect the upward pressure on occupancy, staff
and energy costs to continue in the current year. However, we
expect this to be mitigated by a further focus on controllable
costs. In addition, we will continue to work on reducing operational
gearing in the UK through optimising the store portfolio (rightsizing
and relocating stores to reduce rent and increase sales densities),
growing the gross margin through more direct sourcing and better
buying, expanding the Direct business, improving store productivity
and focusing closely on all other costs.

Exceptional items
The operating exceptional proﬁt of £2.9 million in the current year
relates to the net gain associated with the disposal of stores at
Aberdeen, Swansea, Durham and Windsor.

Investment income, ﬁnance costs and taxation
Net investment income and ﬁnance costs increased to £3.4 million
from £2.9 million last year largely as a result of the net investment
income on retirement beneﬁt schemes.

The tax charge of £6.7 million, representing an effective tax rate of
31.5 per cent, mainly reﬂects utilisation of tax losses. The group still
has unused tax losses of £17.7 million (2005: £22.6 million) available
for offset against future proﬁts.

Pensions
We continue to operate deﬁned beneﬁt pension schemes for our
staff. The total net cost of the pension schemes in the year was
£2.8 million (2005: £2.7 million).

The valuation of the schemes under IAS 19 at 1 April 2006
gave rise to a reduction in the net pension deﬁcit of £4.9 million
to £17.5 million (2005: deﬁcit of £22.4 million) or £12.3 million (2005:
£15.7 million) after deferred taxation. IFRS requires that we value
pension scheme liabilities using a high quality corporate bond
yield, and this has proven to be an extremely volatile measure.
For example, if all other assumptions were equal, we estimate that
the change in bond yields between 18 January 2006 and 26 April
2006 would have led to a movement in the deﬁcit of approximately
£30 million before deferred taxation, had the schemes been valued
on these dates. The overall downward trend in the deﬁcit over time,
however, reﬂects the actions we have taken, including £15.3 million
of special contributions to the scheme over the last two years,
and we are comfortable with the current level of funding in the
schemes. We will continue to keep the structure and level of
beneﬁts of the group’s pension schemes under active review.

Balance sheet and cash ﬂow
The group had a net cash inﬂow of £4.2 million before the special
pension contribution of £5.3 million, leading to a cash balance at
the end of the year of £35.9 million (2005: £37.0 million).

The working capital outﬂow in the year was £10.7 million. £4.0 million
of this is due to increased inventory levels resulting from the growth
of International and Direct, together with the increase in direct
sourcing (stock ownership is taken earlier in the supply chain).
Receivables growth of £3.0 million arises mostly from the growth
of International. The total overseas receivables balance at 1 April
2006 was £14.3 million. Bank guarantees and/or insurance is in
place to mitigate risk.

12 Mothercare plc Annual report and accounts 2006

Gold sparkle dress £28/£30

Velour all-in-one £10

The Sunday Times award – ninth

Wellies £8

Capital expenditure
Capital expenditure in the year was £16.7 million. £8.9 million was
invested in UK stores, including upgrades to the existing high street
stores and ten new stores. £3.1 million was invested in systems
infrastructure including new EPOS tills in all stores, and £2.9 million
was invested in the distribution network.

Earnings per share and dividend
Basic earnings per share were 25.5p for the period (2005: 16.6p).
Adjusted earnings per share before exceptional items and after
taxation were 21.3p (2005: 19.9p).

The directors are pleased to recommend a 16.0 per cent increase
in ﬁnal dividend for the year to 6.15p (2005: 5.3p). The total dividend
for the year is 9.0p compared with 8.0p last year, an increase of
12.5 per cent.

The ﬁnal dividend will be payable on 27 July 2006 to shareholders
registered on 16 June 2006. The latest date for election to join the
dividend reinvestment plan is 7 July 2006.

Treasury policy and ﬁnancial risk management
The board approves treasury policies and senior management
directly controls day-to-day operations within these policies.

The major ﬁnancial risks to which the group is exposed relate to
movements in exchange rates and interest rates. Where appropriate,
cost effective and practicable the group uses ﬁnancial instruments
and derivatives to manage these risks. No speculative use of
derivatives, currency or other instruments is permitted.

Foreign currency risk
All export sales to franchise operations are invoiced in sterling.
Export sales represent approximately 14 per cent of group sales.
The group therefore has no currency exposure on these sales.

The group purchases product in foreign currency, representing
some 13 per cent of purchases. The group policy is that all material
exposures are hedged by using forward currency contracts.

Interest rate risk
The group does not anticipate incurring substantial sustained
levels of debt in the short term. Consequently, interest rate hedging
is not considered necessary.

The board will keep this situation under review.

Shareholders’ funds
Shareholders’ funds amount to £131.7 million, an increase of
£12.7 million in the year. This is equivalent to £1.81 per share
compared to £1.66 per share at the previous year end.

Accounting policies and standards
The principal accounting policies used by the group are shown
on page 41.

For the 53 weeks ended 1 April 2006, the group adopted International
Accounting Standards and International Financial Reporting
Standards (IFRS) as issued by the International Accounting Standards
Board and endorsed by the European Union. Consequently the
date of transition to IFRS for the group was 28 March 2004.

The group elected to apply the exemption to the general principle
of retrospective application in relation to ﬁnancial instruments
and therefore there was no impact on accounting for ﬁnancial
instruments on the results for the 52 weeks ended 26 March 2005.
In the preparation of the ﬁnancial statements for the 53 weeks
ended 1 April 2006, the group implemented the ﬁnancial
instruments requirements under IAS 32 and IAS 39 in full.

The group published its results for the 52 weeks ended 26 March
2005 restated for IFRS, with a reconciliation between its ﬁnancial
statements under UK GAAP and IFRS, with the Annual General
Meeting statement in July 2005. The disclosures required by IAS 1
‘ﬁrst time adoption’ concerning the transition from UK GAAP to
IFRS are given in note 34.

Neil Harrington
Finance director

Mothercare plc Annual report and accounts 2006 13

Business review continued

Blossom duvet cover £24.99

Nursery furniture display

Prairie shirt £28

Bibs £ various

Corporate responsibility
The Company recognises that corporate social responsibility is
an integral part of its ongoing daily operations. Mothercare is
committed to the welfare of its customers, employees, suppliers
and the communities in which it operates.

People
Reward and beneﬁts
The Mothercare website (www.mothercare.com) includes
details of the beneﬁts of working for the Company. These include
extensive training and development programmes, bonus and
pension schemes, other ﬂexible beneﬁts, work/life balance
schemes, job share, career breaks and retirement policies.

All Mothercare employees have access to an independent
and free helpline offering support on ﬁnancial, legal and
personal issues. A conﬁdential hotline has been established
so that employees can report concerns about fraud, theft and
breaches of security.

We are proud to have been awarded ninth place in the Sunday
Times’ survey of the 20 Best Big Companies to work for in the
UK 2006, based on the opinions of a cross section of our UK
employees. This is the second year in succession that we have
appeared on the list.

During 2006 we also won a special award for ‘Best for Well Being’
in the same survey. This award is presented to the organisation
which provides the most supportive working environment, with an
emphasis on relieving stress and improving the work/life balance.
We were also nominated for the special award of Best for Work
and Home Balance.

Communication
Employees continue to be fully engaged in the Company’s growth
strategy and the key strategic priorities of Specialism, Efﬁciency
and Reach. The Company’s short and long term goals have been
communicated and discussed through conferences, roadshows,
quarterly updates, workshops and newsletters.

Our two employee forums providing the framework for consultation
in the retail and central support functions continue to take place
with four meetings held since its formation in June 2005. Each
forum is comprised of elected employee and management
representatives.

Customer service
The Career Development Framework was introduced in 2005
to provide a structured career path for all store employees.
The framework is supported by customer-focused training
programmes and provides progressive pay bands, rewarding
people for reaching agreed levels of competence in product
knowledge, customer service and leadership.

Disability
The Company has progressed with its work on the new provisions
of the Disability Discrimination Act 2004. Store and website
accessibility audits are continuing. Employees have now been
trained on identifying and dealing with potential barriers to
disabled customers and colleagues.

Suppliers
Ethics
The ongoing appraisal of all our suppliers’ factory standards,
manufacturing capabilities and overall quality performance has
continued. We aim to ensure that our products are made to a
consistently high standard and in full compliance with Mothercare’s
Ethical Code of Practice. To this end we continue to be an active
member of the Ethical Trading Initiative (ETI). The ETI is an alliance
of businesses, non-governmental organisations and trade unions
committed to working together to promote Ethical Trade.

14 Mothercare plc Annual report and accounts 2006

Mothercare plc Annual report and accounts 2006 15

Business review continued

Texan check shirt £8/£9

Infant carrier £49.99

Green tea print dress £16/£17

Mumbai store interior

Quality
We continue to focus on the safety, quality and legality of all
our products. Our ongoing programme to evaluate, update
and implement new quality initiatives includes the audit of
all factories used to manufacture our Mothercare branded
products. We have established an independent supplier welfare
committee. This committee will oversee an extensive quality audit
programme covering manufacturing controls and processes and
the implementation of management systems.

During the year, we have won awards for our products including
the Mother & Baby Gold Award for the Urban Detour range of
pushchairs.

Use of chemicals and harmful substances
In keeping with the environmental policy, ﬁrst published in
February 2003, we have continued to pursue our pledge to
phase out the use of materials that ‘may pose an unacceptable
risk to our customers, the people making our products, or the
environment’, worldwide.

Environment
The Company manages the impact of its business activities
on the environment by making efficient use of raw materials,
optimising energy consumption and by encouraging recycling
and sustainability.

Raw materials/logistics initiatives
We maintain an active interest in the environmental impact and
performance activities and efﬁciencies of our logistics partners.

All delivery drivers are trained in the Government-sponsored safe
and efﬁcient driving scheme. Since last year, the combined logistic
initiatives have so far saved 1,311,000 miles, 440,000 litres of fuel,
3,392 journeys and reduced the number of our vehicles on the
road by 12.

This was achieved through:

• redirecting all inbound import containers into the rail head

adjacent to our warehouse;

• transferring all Scottish store deliveries from road to rail; and

• using a dynamic transport scheduling tool for our combined

collection and delivery ﬂeet.

We are currently trialling the use of double-deck trailers on
deliveries and collection within the UK mainland and Northern
Ireland and are aiming to save a further 350 vehicle movements
and 100,000 miles next year.

Energy consumption
Energy management systems are installed in all our stores to
control the time switching of lighting and heating, ventilation
and air conditioning plant to reduce wastage.

A contract for greener electricity supply was retendered in
September 2005 based on 100 per cent green energy. In
conjunction with our energy consultants, the electricity provider is
compiling regular monitoring and targeting reports on metered
sites which is allowing us to benchmark and keep a close control
of energy usage.

The Carbon Trust have been appointed to carry out energy audits
at a number of our sites to establish if there are any further areas
where we can reduce consumption.

Recycling
Packaging from our warehouses is recycled and 50 per cent of
cardboard and other waste is recycled where we are responsible
for collecting trade waste. We participate in recycling schemes
operated by the shopping centres in which we are represented.

16 Mothercare plc Annual report and accounts 2006

Noddy £6.99

Stripe jumper £14/£15

Canvas £24.99

Swim set £8/£9

All delivery vehicle oils, batteries and tyres are sent for reprocessing
and/or reclamation of materials.

At our Watford ofﬁce, paper and cardboard are being recycled.

We are registered under the Hazardous Waste Regulations 2005
to ensure we can dispose of materials such as ﬂuorescent tubes,
computer monitors, NiCad batteries and any plant containing
CFCs or HCFCs in a speciﬁc way.

Together all these actions will help reduce our general waste
volume, which in turn will save costs associated with Landﬁll Tax.

Community
The Mothercare Charitable Foundation was founded in March
2004 and gained charitable status in June the same year. It
receives funding from Mothercare plc and other staff fund-raising
activities. During 2005/06 we took steps to improve our community
programmes, as set out below.

Charitable donations
The Foundation’s aim is to help parents in the UK and worldwide
meet the needs and aspirations for their children and to give their
children the very best chance of good health, education, well-being
and a secure start in life.

The Foundation welcomes applications from charities and research
organisations that are focused on:

• ensuring the good health and well-being of mums-to-be, new

mums and their children;

• special baby-care needs and premature births; and

• other parenting initiatives related to family well-being.

The four Foundation trustees, chaired by Karren Brady, meet
quarterly to review requests from charities and community groups
for funding. It is also the route through which funds raised from
employees’ charitable activities are channelled to appropriate
causes. A Foundation working party oversees the applications
presented to the trustees and ensures they are appropriate to
our aims and objectives.

The Foundation is funded by donations from group proﬁt and
interest on cash balances retained in the Fund account. During
the year the Company gave £100,000 to the Foundation.

A number of donations were made in the ﬁnancial year 2005/06,
with the focus primarily on medical research, information resources
and education. Following an initial donation of £35,000 made
in 2004/05, the decision was taken to fund the second year of
Action Medical Research’s ‘Touching Tiny Lives’ campaign, with
a donation of £40,700 to further their research into the causes of
pre-term labour.

A second donation of £30,000 was made to BLISS, to sponsor the
third edition of its Parent Information Guide, an invaluable resource
for the parents of premature babies, and their extended families.
Feedback on the Guide to date has been very positive.

In addition, the Trustees have also approved the following donations:

• £5,000 to the charity WellBeing of Women, which will fund ﬁve

‘Mothercare Student Elective Bursaries’. These will be awarded
in June 2006 to students going on a formal elective as part of
their training, whose projects are within the areas of obstetrics,
gynaecology or midwifery;

Mothercare plc Annual report and accounts 2006 17

18 Mothercare plc Annual report and accounts 2006

Action For Kids: Recipient of a donation from the Mothercare Charitable Foundation

• £10,000 to the Meningitis Research Foundation, to fund their

‘Baby Watch’ leaﬂets. The leaﬂets will help to raise awareness
of the early warning signs/symptoms of both meningitis and
septicaemia in babies, and are inserted into 95 per cent of all
Primary Care Trust Child Health Record books, which are given
to every new mum in the UK; and

• £2,174 to Action For Kids, to fund a specialist car seat and

petite-style trike for disabled children. The charity aims to provide
relief for children and young people with physical disabilities
and/or learning difﬁculties, by assisting them to lead full and
independent lives.

The annual Chairman’s Fund of £10,000 was awarded in the
run up to Christmas and was split equally between two charities
nominated by Mothercare employees. As such, £5,000 was
donated to the Foundation for the Study of Infant Deaths (FSID)
to help fund their ‘Care of Next Infant’ scheme – which supports
bereaved parents when they go on to have another baby – and
a research project into anaphylaxis in infants. A further £5,000 was
given to the DAYA School for the Differently Abled in Kerala, India,
enabling the purchase of a minibus to transport the children to
and from school.

Having identiﬁed the need to support charities on a local
level, as well as nationally, for this ﬁnancial year each area was
allocated an Area Manager’s Fund of £2,000 in gift vouchers. As
such, stores receiving requests from local registered charities for
small donations can direct these to the relevant Area Manager
for consideration, provided the charity’s objectives match those
of the Foundation.

The Foundation is also focusing its attention on the area of Tirupur
in India, with which Mothercare has strong direct sourcing links. A
proposal is being put together to improve conditions at the local
hospital’s maternity wing, and further funds are expected to be
raised from employee-led activities this summer.

Community activities
To promote the Company’s practical involvement in the community,
where possible we provide activities in some of our stores for
local groups to carry out parenting, baby and childcare advisory
sessions. For example, we offer, in a few stores, coffee mornings on
sleep, feeding and weaning, expectant parents advisory evenings
and music sessions for babies and toddlers.

Mothercare provides professional training days for our buyers,
technologists and customer care advisers to continually increase
our specialist and expert knowledge across our business. We work
with doctors, paediatricians, psychologists, midwives and health
visitors to obtain the latest information about pregnancy, baby
and childcare.

Mothercare annually supports the Department of Health’s
National Breastfeeding Awareness Week when store managers
invite local professionals into their stores to discuss all aspects of
breastfeeding with expectant parents.

We support midwives and health visitors nationally by taking
stands at their annual conference promoting Mothercare products
and services. Mothercare buyers and technologists gather the
latest information and advice about pregnancy and baby care
from these professionals to develop even better products.

Mothercare plc Annual report and accounts 2006 19

Board of directors

Neil Harrington

Ian Peacock

Ben Gordon

Karren Brady

Bernard Cragg

David Williams

Neil Harrington
Finance director
Appointed ﬁnance director in January 2006. Formerly ﬁnance
director of George Clothing UK, a division of Asda Stores Limited,
chief ﬁnancial and admin ofﬁcer of Global George, a division of
Wal-Mart Stores Inc. Prior to joining Wal-Mart, Neil was ﬁnance
director of Barclaycard International, a division of Barclays Bank plc
and group ﬁnancial controller of French Connection Group plc.
Chartered accountant. Aged 42.

Ian Peacock ●
Non-executive chairman
Appointed chairman on 1 November 2002 having joined the board
as chairman elect on 1 August 2002. Chairman of MFI Furniture
Group plc, deputy chairman of Lombard Risk Management plc
and a Trustee of the WRVS. Formerly held senior management
positions in the banking industry in London, New York and Asia,
including BZW and Kleinwort Benson. From 1998–2000 was a
special adviser to the Bank of England. Aged 58.

Ben Gordon
Chief executive
Appointed chief executive in December 2002. Formerly senior vice
president and managing director, Disney Store, Europe and Asia
Paciﬁc. Has also held senior management positions with the
WH Smith Group in Europe and the USA and L’Oreal S.A., Paris.
Aged 46.

Karren Brady ● ● ●
Non-executive director
Appointed in July 2003. Managing director of Birmingham City
Football Club plc. Chairman and non-executive director of
Kerrang! Radio (West Midlands), a non-executive director of
Channel 4 and of Sport England. Aged 37.

Bernard Cragg ● ● ●
Senior non-executive director. Appointed in March 2003.
Chairman of Datamonitor, chairman of Imate plc and a non-
executive director of Bank of Ireland UK Financial Services,
Bristol & West plc, Workspace Group Plc and of Astro All Asia
Networks Plc. Formerly group ﬁnance director and chief ﬁnancial
ofﬁcer of Carlton Communications plc and a non-executive
director of Arcadia plc. Chartered accountant. Aged 51.

David Williams ● ● ●
Non-executive director
Appointed in August 2004. Chairman of Accantia Limited. Non-
executive director of DX Services plc, Avebury Group Limited,
Avanti Screen Media Group plc and The Royal London Group.
Is also an operating partner of Duke Street Capital. He has also
held a number of senior management roles in Diageo plc,
PepsiCo Restaurants International and Whitbread plc. Aged 59.

Key
● Audit committee
● Remuneration committee
● Nomination committee

20 Mothercare plc Annual report and accounts 2006

Directors’ report

The directors present their report on the affairs of the group,
together with the ﬁnancial statements and auditors’ report for
the 53 weeks ended 1 April 2006.

Business review
The principal companies within the Mothercare group for the
period under review were Mothercare plc (the Company) and
Mothercare UK Limited. The Companies Act 1985 requires the
directors’ report to contain a fair review of the business and a
description of the principal risks and uncertainties facing the
group. A review of the business strategy and a commentary
on the performance of the Mothercare business is set out in the
performance highlights, the company performance overview, the
chairman’s and chief executive’s statement and the business review
on pages 1, 2 and 3, 4 and 5 to 19 respectively. In addition, the
principal risks facing the business are detailed in the governance
report at page 24. These disclosures form part of this report.

The directors’ report is prepared for the members of the Company
and should not be relied upon by any other party or for any other
purpose. Where the directors’ report (including the performance
highlights, the company performance overview, the business review
and the corporate governance report) contain forward-looking
statements these are made by the directors in good faith based on
the information available to them at the time of their approval of this
report. Consequently such statements should be treated with caution
due to the inherent uncertainties, including both economic and business
risk factors, underlying such forward-looking statements or information.

Dividend
The directors recommend a ﬁnal dividend of 6.15p per share. An
interim dividend of 2.85p was paid in February 2006 (2005: 2.7p per
share) making a total of 9.0p per share, (2005: total of 8.0p per share).

Substantial shareholdings
As at 24 May 2006, the Company has been advised by the following
companies of notiﬁable interests in its ordinary share capital:

Holder

Fidelity Management & Research Co.
M&G Investment Management
Aberdeen Asset Management PLC
Aegon Asset Management UK

Number of
shares

Percentage of
issued capital

10,106,195
8,836,948
7,325,944
4,409,713

13.91%
12.12%
10.08%
6.07%

Directors
The following directors served during the 53 weeks ended 1 April 2006.

Name

Appointment

Ian Peacock

Chairman and independent non-executive
director, chairman of the nomination committee

Karren Brady

Independent non-executive director

Bernard Cragg

Independent non-executive director and
chairman of the audit committee

Name

Appointment

Steven Glew

Executive director (resigned 29 December 2005)

Ben Gordon

Executive director

Neil Harrington

Executive director (appointed 30 January 2006)

David Williams

Independent non-executive director and
chairman of the remuneration committee

Having been appointed since the last Annual General Meeting,
Neil Harrington, offers himself for election in accordance with
the Company’s articles of association. Ian Peacock, Karren Brady
and Bernard Cragg retire by rotation from the board following the
conclusion of the Annual General Meeting (AGM) on 20 July 2006
and stand for re-election at the AGM. Biographical details of the
directors, indicating their experience and qualiﬁcations, are set
out on page 20.

Details of directors’ service arrangements are set out in the
remuneration report on page 28.

A statement of directors’ interests in the shares of Mothercare plc
and of their remuneration is set out on pages 28 to 35.

Employees
The group communicates, and reviews with all its employees, its
corporate objectives, performance and economic activity relevant
to its business. This is achieved through the company magazine,
brieﬁngs, bulletins, e-mail and video presentations.

The capabilities of the group’s employees are measured, their
development needs ascertained and programmes designed to
ensure that the critical skills required for the development of both
the individual and the group are attained. The group’s remuneration
strategy is set out in the remuneration report. That report includes
details of the various incentive schemes and share plans operated
by the group.

Mothercare is an equal opportunities employer and ensures that
recruitment and promotion decisions are made solely on the basis
of suitability for the job. Disabled people are given due consideration
for employment opportunities and, if employees become disabled,
every effort is made to retain them by providing relevant support.

Pensions
The group operates deﬁned beneﬁt pension schemes for those of its
employees that wish to participate. The introduction of International
Accounting Standard 19, coupled with the changing demographic
assumptions used in calculating pension liabilities has had the effect
of increasing the cost of pensions to companies. Further details
of the pension charge are set out in note 32 to the consolidated
ﬁnancial statements. The group made a further special contribution
of £5.3 million to the Mothercare Staff Pension Scheme on 24 March
2006 and has agreed to make additional ongoing contributions to
further address the deﬁcit in the scheme of £1.5 million per annum
over the next ten years. These contributions, allied with the expected

Mothercare plc Annual report and accounts 2006 21

Directors’ report continued

investment returns in the scheme, are anticipated to remove the
deﬁcit within the next ten years although this cannot be guaranteed.
This issue will be regularly reviewed by the board with the independent
trustees of the pension scheme.

Re-election of auditors
In accordance with section 385 of the Companies Act 1985 a resolution
proposing the re-election of Deloitte & Touche LLP as auditors to the
Company will be put to the AGM.

Payment of suppliers
Payments to merchandise suppliers are made in accordance
with the general conditions of purchase, which are communicated
to suppliers at the beginning of the trading relationship. It is the
group’s policy to make payments to non-merchandise suppliers,
unless otherwise agreed, within the period set out in the supplier’s
invoice or within 45 days from the date of invoice.

The amount owed to trade creditors at the end of the ﬁnancial year
represented nil days (2005: nil days) of average daily purchases
during the year for the Company.

Property, plant and equipment
Changes in property, plant and equipment are shown in note 14
to the accounts. A valuation of the group’s freehold and long
leasehold properties, excluding rack rented properties, was carried
out by external valuers, primarily Messrs Cushman & Wakeﬁeld as
at 1 April 2006. The basis of the valuation is existing use value in
respect of properties primarily occupied by the group and on the
basis of market value in respect of investment properties, both
bases being in accordance with the Practice Statements contained
in the RICS Appraisal and Valuation Manual. This adjusted valuation
of the properties resulted in a surplus over their net book value of
£14.7 million.

Corporate citizenship
The board recognises that corporate citizenship, or social responsibility,
is an important factor in managing the reputation of a business such
as Mothercare.

Further details are set out on pages 14 to 19.

Disclosure of information to auditors
In the case of each of the persons who were directors of the Company
at the date when this report was approved:

• so far as each of the directors is aware, there is no relevant audit
information of which the Company’s auditors are unaware; and

• each of the directors has taken all the steps that he or she ought to
have taken as a director in order to make himself or herself aware
of any relevant audit information (as deﬁned) and to establish that
the Company’s auditors are aware of that information.

This conﬁrmation is given and should be interpreted in accordance
with the provisions of section 234ZA of the Companies Act 1985.

Charitable and political donations
The Company made a further donation to the Mothercare Charitable
Foundation during the year of £100,000. Total charitable donations
for the 53 weeks ended 1 April 2006 were £100,000 (2005: £250,000).
During the year, £20,000 was donated to the British Red Cross Asian
Earthquake appeal.

It is the Company’s policy not to make political donations and none
were made during the year.

Going concern
After making appropriate enquiries, the directors have a reasonable
expectation that the Company and the group have adequate
resources to continue in operational existence for the foreseeable
future. The ﬁnancial statements are therefore prepared on a going
concern basis.

Annual General Meeting
The 2006 Annual General Meeting will be held on Thursday 20 July
2006 at 10.30am at the Hilton National Hotel, Elton Way, Watford
WD25 8HA.

The notice of the meeting and a pre-paid form of proxy for the use
of shareholders unable to come to the AGM but who may wish to
vote or to put any questions to the board of directors are enclosed
with this annual report. Shareholders may also submit questions
via the Company’s website at www.mothercare.com/investorinfo.
The chairman will respond in writing to questions received.

As in previous years a copy of the chairman’s opening statement
to the meeting, together with a resumé of questions and answers
given at the meeting, will be prepared following the AGM. This
will be made available to shareholders on request to the company
secretary at the Company’s head ofﬁce.

The following paragraphs give explanatory notes on the business
to be proposed at the meeting:

Resolution 1: To receive the Company’s annual accounts together
with the directors’ report, the directors’ remuneration report and
the auditors’ report upon the accounts for the 53 weeks ended
1 April 2006. The directors will present the report and accounts
and shareholders may raise any questions on them at the meeting.

Resolution 2: To declare a ﬁnal dividend of 6.15p per ordinary
share payable 28 July 2006 to those shareholders on the register
on 16 June 2006.

22 Mothercare plc Annual report and accounts 2006

Resolution 3: To approve the directors’ remuneration report.

Resolutions 4 to 7: Reappointment of directors. The Company’s
articles of association require that (a) one third of the directors that
are required to retire by rotation must retire and (b) that directors
who have been appointed since the last AGM must offer themselves
for re-election. Separate resolutions will be proposed on each of
these appointments.

Resolution 8: Reappointment of auditors. Deloitte & Touche LLP
has indicated its willingness to act as auditors to the Company and
accordingly an ordinary resolution to reappoint them will be proposed.

The meeting will also be asked to consider the following matters
of Special Business:

As Special Business
Resolution 9: New articles of association. The members will be
asked to approve the adoption of new articles of association
for the Company in substitution for the existing articles. Details
of the principal changes are set out in the circular sent with the
report and accounts. A copy of the proposed new articles of
association will be available for inspection at the Company’s
registered ofﬁce and are set out on the Company’s website at
www.mothercare.com/investorinfo.

Resolution 10: Purchase of own shares. The Company was authorised
at the 2005 AGM to purchase up to 10 per cent of its shares in the
market. This authority has not been used and expires at the conclusion
of this year’s AGM. This resolution seeks to renew the authority for
a further year. Shares purchased (if any) will be cancelled or where
appropriate held in Treasury pursuant to the Companies (Acquisition

of Own Shares) (Treasury Shares) Regulations 2003. The directors
have no present intention of using this authority, but wish to be in a
position to act quickly in the interests of the Company and shareholders
generally if circumstances so warrant.

Resolution 11: Increase in the shares held by the Mothercare Employee
Trust. This resolution seeks authority to increase the number of shares
that the employee trust may hold from 5 per cent to a maximum of
10 per cent of the issued share capital.

Resolution 12: Approval of the Mothercare 2006 Performance Share
Plan. The main features of the plan are set out in the circular sent with
the report and accounts.

Resolution 13: Approval of the Mothercare 2006 Executive Incentive
Plan. The main features of the plan are set out in the circular sent with
the report and accounts.

Resolution 14: Extension of share plans to overseas employees. This
resolution seeks authority to establish future share plans for overseas
employees.

By order of the board

Clive E Revett
Company secretary
24 May 2006

Mothercare plc Annual report and accounts 2006 23

Corporate governance

The Company aspires to achieve high standards of corporate
governance in order to promote the interests of investors, customers,
staff and other stakeholders. The Company considers that it has
complied during the 53 weeks ended 1 April 2006 with the Code
provisions set out in Section 1 of the Combined Code on Corporate
Governance published by the Financial Reporting Council in July
2003, ‘the Code’.

• successfully addressing the operational gearing characteristics

of the business;

• continuing the growth of the International division and the Direct

mail order and internet businesses; and

• pension scheme funding requirements and investment returns

volatility.

The board
The board provides the leadership of the Mothercare plc business.
It operates on a unitary basis and comprises the chairman, three
independent non-executive directors, and two full time executive
directors, being the chief executive and the ﬁnance director. The
board has overall responsibility for the Company’s system of
internal control and for reviewing its effectiveness. The Company
has maintained a system of internal control within an executive
management structure with deﬁned lines of responsibility and
delegation of authority within prescribed ﬁnancial and operational
limits. The Company’s system of internal control is based on ﬁnancial,
operational, compliance and risk control policies and procedures
together with regular reporting of ﬁnancial performance. Planning,
budgeting and forecasting procedures are also in place together
with formal capital investment and appraisal arrangements.

Risk management
This section covers the principal risks and uncertainties which forms
part of the business review requirements.

The board recognises that the management of risk in accordance
with both the Turnbull Guidance and the Code is key to ensuring
that a robust system of internal control is monitored by the business.

The annual review sets out progress made during the year against
the challenges that the board has set for the business as it has
transitioned into the growth phase. The retail market environment
within which the Company operates remains challenging with
continued strong competitive pressures, volatility and price deﬂation.
Against this background, the system of internal control is designed
to manage rather than eliminate risks. It also recognises that there
are inherent risks in the failure to deliver the expected beneﬁts of
the programmes set out below:

• completion of the internal ﬁt out, systems, commissioning and

phased transfer of operations to the National Distribution Centre
in Daventry;

• obtaining the planned further supply chain improvements thereby
delivering greater efﬁciencies, product availability and a lower
cost base;

• promoting the quality and value of our merchandise to our customers
by highlighting the beneﬁts of sourcing, particularly in India and
Asia, design and innovation, quality and value;

• reshaping and resizing the store portfolio and achieving greater

efﬁciency and productivity from investments made in store systems,
staff training and space optimisation;

Other risk management activity involves the executive committee
having overall responsibility for ensuring that a rolling programme
of structured risk assessments of those areas having a signiﬁcant
effect on the future of the business is carried out. The programme
ensures so far as practicably possible, that the appropriate risk
management processes are identiﬁed, appropriate controls
established, residual risks evaluated and that the necessary action
and risk avoidance measures taken or monitoring undertaken.
Elements of the programme are reviewed by the internal audit
function during the year. The board also considers and reviews
at each board meeting key business performance indicators.

In addition to the evaluation of business risk referred to above,
the programme of speciﬁc risk management activity continued
during the year with individual stores being tested against a risk
assessment model that emphasises health and safety, disability
discrimination, ﬁre safety and internal process compliance.
The internal audit function (a combination of internal resources
and external resource provided by PricewaterhouseCoopers LLP)
supplements the risk-based approach set out above. Furthermore,
the Company has adopted procedures to ensure auditor
independence, the details of which are set out in the section below
detailing the work of the audit committee.

The board believes that the system of internal control described
can provide only reasonable and not absolute assurance against
material misstatement or loss. The audit committee periodically
reviews the system of internal control on behalf of the board.

The principles of good governance are brieﬂy commented on below:

The board and directors
The board of Mothercare plc meets regularly and maintains overall
control of the group’s affairs through a schedule of matters reserved
for its decision. These include setting the group strategy, the approval
of the annual budget and ﬁnancial statements, major acquisitions
and disposals, authority limits for capital and other expenditure and
material treasury matters. Details of the terms of reference of the
board’s committees are also set out in the corporate governance
section of the Company’s website at www.mothercare.com/investorinfo.

The non-executive directors are independent and free from any
business or other relationship that could interfere materially with
their judgement. The non-executive directors do not participate in
any bonus, share option or pension scheme of the Company. Ian
Peacock’s equity based incentive (details of which are set out on
page 30 of the remuneration report) ﬁnished in November 2005.

24 Mothercare plc Annual report and accounts 2006

This incentive scheme was designed to ensure that in the total
remuneration of the chairman, an element was deferred and payable
in shares so as to ally fully the chairman’s and shareholders’ interests.
To enable this to be effective, a contract of employment was
required. Given that Ian Peacock fulﬁlled all remaining requirements
of independence under Code provision A.3.1, he is considered by the
board to be independent. The chairman’s other commitments are set
out in the biographical details on page 20 and there have been no
signiﬁcant changes during the period relating to these commitments.

The board considers that the balance achieved between executive
and non-executive directors during the period was appropriate and
effective for the control and direction of the business.

The board is assisted by committees that it has established with
written terms of reference. The roles of the remuneration, audit and
nomination committees are set out below. The audit, remuneration
and nomination committees are comprised of the three non-executive
directors. A record of the meetings held during the year of the board,
its committees and the attendance by individual directors is set out
at page 27.

The board has delegated day-to-day and business management
control of the Mothercare business to the executive committee.
The executive committee consists of the directors of Mothercare
UK Limited and the company secretary.

Throughout the period the board has been supplied with
information and papers submitted at each board meeting which
ensures that the major aspects of the group’s affairs are reviewed
regularly in accordance with a rolling agenda and programme
of work. All directors, whether executive or non-executive, have
unrestricted access to the company secretary and executives within
the businesses on any matter of concern to them in respect of their
duties. In addition new directors are given appropriate training on
appointment to the board. Appropriate time is made during the year
for continuing training on relevant topics concerning the functioning
of the board and the obligations of directors. The Company has
undertaken to reimburse legal fees to the directors if circumstances
should arise in which it is necessary for them to seek separate,
independent, legal advice in furtherance of their duties. In accordance
with the Articles of Association, one third of the directors are required
to offer themselves for re-election every year.

The remuneration committee, chaired during the year by David
Williams, establishes the remuneration policy generally, approves
speciﬁc arrangements for the executive directors and reviews and
comments upon the proposed arrangements for senior executives
so as to ensure consistency within the overall remuneration policy.
Full disclosure of the Company’s remuneration policy and details
of the remuneration of each director are set out in the remuneration
report on pages 28 to 35. During the period no director was, and
procedures are in place to ensure that no director is, involved in
deciding or determining his or her own remuneration.

The nomination committee, chaired during the period by Ian
Peacock, comprises all of the non-executive directors. The terms of
reference of the committee is set out on the Company’s website. The
committee makes proposals on the size, structure, composition and
appointments to the board. It carries out the selection process and
agrees the terms of appointment of non-executive directors. It also
reviews succession planning on an annual basis.

Neil Harrington was appointed as ﬁnance director during the year.
An external search consultancy was used to identify candidates
and Neil Harrington was selected from the candidates put forward.
The nomination committee was, when appointing Neil Harrington
and remains, of the opinion that his breadth of skills and experience
in the retail environment will be of considerable beneﬁt to the
Company’s future development as it seeks to grow the business for
the beneﬁt of all stakeholders. The board is of the opinion that the
remaining directors seeking re-election at the AGM have continued
to give effective counsel and commitment to the Company and
accordingly should be reappointed.

During the period the board carried out a further evaluation of its
effectiveness and operation. This evaluation was based upon the
substantial exercise carried out in 2005/06. It was again carried out
by an external facilitator and comprised principally the use of face to
face interviews with individual directors and the company secretary.
It was subsequently followed up by a review of the ﬁndings by the
whole board. The review found that the balance within the board
between executive and non-executive directors remained appropriate
but recognised that as the business developed in complexity and
challenge, it may be appropriate to appoint further directors in due
course. The review further conﬁrmed the need for the remuneration
committee’s review of the executive’s incentive and retention packages
details of which are set out in the remuneration report at page 28.

A review was also held of the effectiveness of the audit committee
and the auditors during the year. It was considered that the work
of the audit committee during the year was effective measured
against its terms of reference and general audit committee practice.
In respect of the auditor effectiveness review, it was considered that
the auditors had carried out their obligations in an effective and
appropriate manner.

The company secretary acts as secretary to the board and its
committees.

Shareholder relations
The Company maintains regular dialogue with institutional shareholders
following presentation of the ﬁnancial performance of the business
to the investing communities. This dialogue takes place at least four
times a year following the announcement of the interim and full
year results and trading statements at the AGM and post Christmas.
During such meetings the board is able to put forward its objectives
for the business and discuss performance against those objectives
and develop an understanding of the views of major shareholders.
Mindful always of its obligations to the investing community as a

Mothercare plc Annual report and accounts 2006 25

Corporate governance continued

whole, the Company reaches a wider audience by the use of its
website (at www.mothercare.com/investorinfo) and, with a view to
encouraging full participation of those unable to attend the AGM,
provides an opportunity for shareholders to ask questions of their
board by the provision of a reply-paid postal question service and
web-mail facility to the chairman. Approximately 50 letters were
received and responses sent last year.

The main activities of the audit committee in the 53 weeks ended
1 April 2006
During the year the audit committee reviewed in detail the proposed
approach of the Company to the ﬁrst-time adoption principles for
International Accounting Standards and those policies that would be
adopted on an ongoing basis. Those policies are set out in note 2 to
the consolidated ﬁnancial statements.

The outcome of meetings with major shareholders is reported by
the chief executive at board meetings on a periodic basis.

The audit committee
The audit committee was chaired during the year by Bernard Cragg,
the senior non-executive director. The remit of the audit committee
is to review the scope and issues arising from the audit and matters
relating to ﬁnancial control. It also assists the board in its review of
corporate governance and in the presentation of the Company’s
ﬁnancial results through its review of the interim and full year accounts
before approval by the board, focusing in particular on compliance
with accounting principles, changes in accounting practice and
major areas of judgement. The full terms of reference are set
out under the corporate governance section of the website at
www.mothercare.com/investorinfo.

The audit committee comprises the three non-executive directors.
The company secretary acts as secretary to the committee.
Bernard Cragg is a chartered accountant with considerable
technical ﬁnancial experience and, in common with the remainder
of the committee, wide and varied commercial experience.

The committee met ﬁve times during the period. No speciﬁc
remuneration of the non-executive directors is ascribed to
membership of the audit committee other than a supplement
of £5,000 paid to Bernard Cragg in respect of his chairmanship
of the committee.

Given the importance of good corporate governance, the board
agreed last year to establish a corporate governance sub-committee
of the audit committee under the chairmanship of Bernard Cragg,
the senior non-executive director. This sub-committee, which is
comprised of the independent non-executive directors, provides
assistance to the board and its committees by reviewing corporate
governance developments and implementing best practice. The
sub-committee met during the year and amongst others reviewed
the Company’s compliance with the Code, corporate reporting and
proposed changes to the Turnbull Guidance on Internal Control.

In addition, the audit committee’s review of the ﬁnancial statements
is structured to ensure, so far as is reasonably practicable, that the
ﬁnancial statements as published at the full year and interim results
present a true and fair view of the Company’s affairs and the results
for the period.

In preparing the accounts, the continued appropriateness and
consistent application of the accounting policies adopted by the
Company are reviewed in both the interim and ﬁnal accounts for
the period. The committee also reviews the reasonableness of the
judgements and estimates that have been used by management
in the preparation of those accounts and the application of the
relevant accounting standards.

Following the completion of the audit of the accounts, the committee
reviews with the auditors the report of their ﬁndings and the contents
of any management letter. An assessment of the effectiveness of the
audit process and the auditors is also carried out.

Whilst the board has overall responsibility for the Company’s
system of internal control and for reviewing its effectiveness, the
audit committee addresses internal ﬁnancial control on behalf of
the board at least twice annually through reviewing the output of
the internal audit function and risk management activities.

The audit committee reviews annually the independence of the
external audit ﬁrm and the individuals carrying out the audit by
receiving assurances from, and assessing, the audit ﬁrm against
best practice principles. The committee seeks to balance the
beneﬁts of continuity of audit personnel and the need to assure
independence through change of audit personnel by agreeing
with the audit ﬁrm staff rotation policies. In addition, a policy
in respect of non-audit work by the audit ﬁrm has also been
implemented, the general principle being that the audit ﬁrm
should not be requested to carry out non-audit services on any
activity of the Company where they may, in the future, be required
to give an audit opinion. The Company has, however, recognised
that taxation advice is an acceptable derogation from this principle.

The audit committee has approved a work plan for the internal audit
function and received during the year reports upon investigations
carried out. The committee meets with the internal audit team
leaders without management present at least once each year.

26 Mothercare plc Annual report and accounts 2006

Director attendance statistics for the 53 week period ended 1 April 2006

Director

Maximum number of meetings

Ian Peacock
Karren Brady
Bernard Cragg
Steven Glew (resigned 29 December 2005)
Ben Gordon
David Williams
Neil Harrington (appointed 30 January 2006)

Board

Audit

Nomination

Remuneration

Committee

Corporate
governance
sub-
committee

10
5
9
6
10
8
2

5
4
5
4
5
5
1

2
1
2
–
–
2
–

5
4
6
3
5
6
1

1
1
1
1
1
1
1

Notes:
Ian Peacock, Ben Gordon and Neil Harrington (and previously Steven Glew) attended meetings of the audit and remuneration committees and corporate governance
sub-committee upon the invitation of the respective chairmen.
The board meetings above included both meetings and telephone conference meetings. There were also three ad hoc board meetings to approve the interim and full year
report and accounts and approve the IFRS statements issued in July 2005. These meetings are constituted by the board from those members available at that time having
considered the views of the whole board beforehand.

Mothercare plc Annual report and accounts 2006 27

Directors’ remuneration report

This report for the 53-week period ended 1 April 2006 has been
prepared in accordance with Schedule 7A of the Companies Act 1985,
the Directors’ Remuneration Regulations 2002 (the ‘Regulations’),
the requirements of the Listing Rules of the UK Listing Authority and
Schedule B to the Combined Code relating to directors’ remuneration.
At the AGM on 20 July 2006 shareholders will be asked to approve
this report.

The Regulations require the auditors to report on the ‘auditable
part’ of the directors’ remuneration report and to state whether in
their opinion that part of the report has been properly prepared
in accordance with Schedule 7A of the Companies Act 1985 (as
amended by the Regulations). The directors’ share options, long
term incentive plan and share matching scheme conditional awards
(including the performance criteria set out in Appendix A), equity
incentive awards, emoluments and compensation payments as set
out in Table 1 and pension arrangements set out in Table 2 have
therefore been audited.

The remuneration committee
Composition of the remuneration committee
The remuneration committee is comprised of the independent
non-executive directors of the Mothercare plc board. David Williams
is chairman of the committee and with Karren Brady and Bernard
Cragg served throughout the year. Ian Peacock attended meetings
at the invitation of the committee.

The committee, which determines the remuneration for the executive
directors and approves the pay and beneﬁts of the members of
the executive committee, met six times during the year. Its terms
of reference are available on the Mothercare website at
www.mothercare.com/investorinfo.

Advisors to the remuneration committee
The organisations below, none of whom are connected to the
group, have provided material assistance to and were appointed
by the remuneration committee. The committee also consulted the
chief executive, human resources director and company secretary
as appropriate.

Person or organisation

Services provided

Kepler Associates

Lane Clark & Peacock
DLA Piper Rudnick Grey Cary LLP

Executive remuneration
and incentive design
Pensions advice
Legal services principally in
respect of employment contracts

Remuneration policy statement
The Company’s policy is to provide competitive remuneration
packages that will recruit, retain and motivate directors and
individuals of the required calibre to meet the Company’s objectives.
The intent is to ensure, that the remuneration policy is in line with

market practice, appropriate to the Company’s needs and rewards
executives for enhancing shareholder value. The committee monitors
the Company’s compliance with the Revised Combined Code
provisions for directors’ and senior management remuneration and
with best practice in applying performance-related remuneration.

The remuneration policy aims to appropriately balance the ﬁxed
salary and performance related elements of remuneration. The latter
element is achieved through an annual bonus scheme and longer-
term incentives. The bonus plan rewards primarily the achievement
of group proﬁt before tax, a measure which the board believes is a
suitable measure of annual performance for a retail business. Other
measures captured include free cash ﬂow and personal/strategic
performance objectives. Longer term performance remuneration is
delivered through equity-based incentives including the Long Term
Incentive Plan (LTIP) and the Share Matching Scheme (SMS). Subject
to shareholder approval at the forthcoming AGM the committee
intends to replace these schemes with sharper, more tailored incentives,
details of which are set out below under the Performance Share Plan
and the Executive Incentive Plan and in the circular that accompanies
this annual report and accounts. The remuneration policy is structured
such that variable, performance-related remuneration potentially
represents more than half of total remuneration.

The committee normally reviews the executive directors’ remuneration
annually, against a policy that positions base salaries around the
median of companies, similar in sector focus, size and complexity.
Variable elements of the package, designed to attract and motivate
outstanding performance and delivery, give executive directors the
opportunity to earn an overall upper quartile total remuneration
package, for top quartile performance. Details of the individual
executive directors’ remuneration, are described below.

In line with the previous year, participants in the LTIP and SMS have
not received awards under the executive share option schemes
during the year.

In last year’s report the committee indicated its intention to conduct
a full review of its executive remuneration policy during 2005/06 to
ensure that it reﬂects the Company’s needs, shareholder views and
developments in market practice. Having carried out this review, the
committee believes that the introduction of new plans linked to proﬁt
growth and TSR outperformance will help maintain the momentum
of the development of the business and the achievement of strategic
priorities. Full details of the proposals are set out in the circular that
accompanies this annual report and accounts. The main aspects of
the proposals are as follows:

The Performance Share Plan (PSP)
Under the PSP, conditional awards of shares may be made to
approximately 40 executives each year. In 2006/07, the maximum PSP
award would be 75 per cent of salary (chief executive 100 per cent).

28 Mothercare plc Annual report and accounts 2006

Shares would vest on the group’s three-year growth in PBT. 20 per cent
of an award would vest if Mothercare’s three-year PBT growth is
5 per cent pa. 100 per cent of an award would vest if Mothercare’s
three-year PBT growth is 15 per cent pa, with straight-line vesting in
between. If a threshold is not met the award would lapse. PBT was
chosen as the remuneration committee believes that PBT is a good
measure of Mothercare’s ﬁnancial performance, as it is highly visible
internally, and is regularly monitored and reported.

The Executive Incentive Plan (EIP)
Under the EIP, approximately ten executives would receive a
percentage of surplus value created over a three-year performance
period. Surplus value created would be deﬁned as an increase in
market capitalisation plus net equity cash ﬂows to shareholders over
and above median performance in line with the FTSE All-Share General
Retailers Index. The remuneration committee believes this performance
condition provides very strong alignment with shareholders and will
help retain a high performing management team.

Performance graph
The performance graph below shows the Company’s total shareholder
return against the return achieved by the FTSE Small Cap Index. The
graph shows the ﬁve ﬁnancial years to 1 April 2006.

The index was chosen on the basis that Mothercare is a constituent
of the FTSE Small Cap Index.

Total shareholder return
31 March 2001 to 1 April 2006
Source: Datastream

Mothercare plc
FTSE SmallCap

200

150

100

y/e Mar 01

y/e Mar 02

y/e Mar 03

y/e Mar 04

y/e Mar 05

y/e Mar 06

Directors’ remuneration
The executive directors’ ﬁxed annual remuneration comprises
a base salary, which is normally reviewed in April each year, and
beneﬁts. The variable remuneration element is achieved through
an annual bonus scheme, participation in the long term incentive
plan and share matching scheme and (prior to 2003) executive
share option scheme. With the exception of the Save As You Earn
share option scheme, which is open to all employees including
executive directors, and the share incentive awards made to Ian
Peacock and Ben Gordon, the Company operated no other long
term incentive schemes.

The remuneration of the non-executive directors comprises ﬁxed
annual fees. Expenses incurred on Company business are reimbursed
when claimed.

Salary
Each executive director’s salary is considered individually by the
remuneration committee following advice from the independent
remuneration consultants. Base salary is the only element of
remuneration used in determining pensionable earnings under
the Mothercare Executive Pension Scheme.

Annual bonus
The annual bonus scheme for executive directors is paid upon
the achievement of Company ﬁnancial targets set annually by the
remuneration committee. In addition, personal targets linked to key
business objectives must also be met if an executive director is to
achieve the maximum bonus. The maximum annual bonus that may
ordinarily be paid to an executive director is 85 per cent of base
salary (100 per cent for the CEO), although the maximum bonus
would be payable only in the event of exceptional performance. For
the ﬁnancial year 2005/06 only however, the remuneration committee
felt it appropriate to increase the annual bonus opportunity for
executive directors by up to 50 per cent subject to the executives
deferring any bonus over 25 per cent of salary into Mothercare
shares for one to two years. The purpose of this was to maintain
the momentum of the turnaround and to support retention. The long
term incentive awards made in July 2005 were adjusted so that the
total fair value of incentives remained unchanged from 2004/05.

For the 53 weeks ended 1 April 2006 Ben Gordon received a
performance related bonus of £302,344 of which £208,594 is deferred
in shares, half payable in May 2007 and half payable in May 2008
subject to his continued employment. Neil Harrington received a
performance related bonus of £21,771 of which £13,694 is deferred
in shares and is payable on the same basis as for Ben Gordon.
Steven Glew did not receive a performance related bonus for the
same period.

Proﬁt share scheme
In addition to the annual bonus scheme, the Company operates a
proﬁt share scheme. All Company employees (other than participants
in the annual bonus scheme) with at least six months’ service are
eligible to participate in this scheme.

The LTIP and SMS
Subject to AGM approval of the new long term incentive proposals
no further conditional awards under the LTIP, SMS, or Executive Share
Option Scheme will be made to EIP or PSP participants.

The LTIP
Under the LTIP, conditional awards of shares may be made to
executives each year. In 2005/06, the maximum anticipated LTIP
award was 67 per cent of salary.

Mothercare plc Annual report and accounts 2006 29

Directors’ remuneration report continued

The extent to which LTIP awards will vest will depend partly upon
the Company’s TSR performance relative to all general retailers in
the Mid 250 and SmallCap indices, and partly upon the achievement
of EPS targets shown in the table at Appendix A. The targets are
measured over a three-year period. If the performance criteria
are not met over the three-year period the award lapses. The
performance targets for the awards made to date are shown in
Appendix A. No part of the award subject to EPS will vest unless the
Company’s TSR performance is above median relative to general
retailers in the Mid 250 and SmallCap indices.

During the transition to International Financial Reporting Standards,
EPS growth ﬁgures will be calculated on a consistent basis.

The SMS
Under this scheme, executives who invest in the Company’s
shares and retain those shares for at least three years may receive
matching shares if long term performance targets are achieved.

Executives may be invited to invest up to 100 per cent of pre-tax
basic salary in any year. This could include up to 50 per cent of pre-
tax salary via a payment under the long term incentive plan. Annual
bonus shares deferred may be invested in the Share Matching Scheme.

Executives’ investments will be matched on a 1:1 basis after three
years, provided executives retain the shares they purchased for
three years and performance targets (set out in Appendix A) are
achieved over a three-year period. The performance targets for
matching awards are the same as for the LTIP awards. If the
performance criteria are not met over the three-year period the
award lapses. The matching ratio is calculated using the pre-tax
value of the purchased shares in the case of sums derived from the
annual bonus deferred shares or the long term incentive plan, or the
actual value of the shares already owned that were pledged in 2003.

The conditional awards made to date to executive directors under
the LTIP, SMS and pledged shares are set out in Appendix A.

Executive Share Option Scheme
The Mothercare plc 2000 Share Option Plan
Options under the Mothercare 2000 Share Option Plan are granted
at market value. Options may be exercised by participating
executives if there is a signiﬁcant improvement in the Company’s
underlying performance.

The performance criteria that must be met before an option can be
exercised demand that EPS growth over a three-year performance
period must equal or exceed the growth in the Retail Prices Index by
9 per cent. If the performance criteria are not met over the performance
period, the option grant will lapse.

Annual option grants may be made to executive directors and senior
employees. Under the plan rules the normal maximum award is two
times salary with any award in excess of this subject to EPS growth
exceeding RPI + 20 per cent over the performance period.

Equity incentive awards
Following the appointments of the chairman and the chief executive
on 1 November and 2 December 2002 respectively, Ian Peacock
and Ben Gordon were awarded equity-based incentives, as
described below.

Ian Peacock was awarded 95,694 ordinary shares in the Company
which, in aggregate, amounted to £100,000 at the time the award
was made. The award vested in three tranches of 31,898 shares on
1 November in each year (or the nearest date following 1 November
if the Company is in a close period). The third and ﬁnal tranche vested
and was transferred on 18 November 2005. No payment was required
from Ian Peacock for the award.

Directors’ share options

Director

Ben Gordon

Total

Steven Glew

26 March
2005

312,500
5,9511

318,451

402,011
5,9511

Granted/
(lapsed)
during
year

–
–

–

Grant/(lapse)
date

Exercise
price
(pence)

First
exercise
date

Last
exercise
date

Gains on
exercise
2006

9 December 2002

104.00 9 December 2005 9 December 2012

(33,501)
(5,951)

(31 December 2005)
(31 December 2005)

99.5

31 March 2006

1 April
2006

312,500
5,951

318,451

–
–

–

–
–

–

993,381
–

993,381

Total

407,962

(39,452)

Notes:
1. Options granted under the three-year SAYE option scheme.
The options set out above are granted without payment from a participant.
Share price details are shown on the inside back cover.
Performance conditions are set out in the narrative above.
No variations have been made to the terms and conditions of existing options in the current or previous years.
Steven Glew exercised options under the terms of his compromise agreement dated 28 December 2005.

30 Mothercare plc Annual report and accounts 2006

Ben Gordon was awarded 500,000 ordinary shares in the Company,
for which no payment is required from him. The award vests in
respect of tranches of 100,000 shares, subject to the achievement of
the performance conditions. The vesting performance conditions for
three of the tranches of shares are share price growth. For each of
the tranches of shares to vest, the Company’s share price must have
remained at levels of, (1) 200p, (2) 300p and (3) 400p (respectively)
per share for at least three months. For the remaining two tranches of
shares to vest the performance conditions are: proﬁt before tax and
exceptional items of, (4) £15 million and (5) £30 million achieved by
the end of the Company’s ﬁnancial year in 2007.

Having vested on the achievement of a performance criterion, that
element of the award will be released to Ben Gordon in tranches
on the second, third, fourth and ﬁfth anniversaries of 2 December (as
appropriate) in proportions that release the entirety of any tranche
of shares attached to a performance condition achieved by the
ﬁfth anniversary. Varying proportions of the award will vest and be
released to the extent that performance conditions have been met,
if there is a change in control of the Company before 2 December
2007. Ben Gordon will also be able to retain that proportion of the
award that has vested, in the event that the Company terminate his
employment (other than for cause) or the Company is in fundamental
breach of his employment contract. Where any share price or share
price performance condition is not met generally within four years,
then that element of the award will lapse.

On the ﬁrst vesting date (2 December 2004) Ben Gordon had met
three of the ﬁve performance criteria. The table below sets out the
shares transferred on 2 December 2004 and 2005 and transferable
to Ben Gordon in the future (subject to, amongst others, his continued
employment). As at 2 December 2005 the remaining two performance
conditions had not been met.

Award

Number of shares released
(on 2 December each year)

Condition

Met No. of shares

2004

2005

2006

2007

1.
2.
3.
4.
5.

Yes
Yes
No
Yes
No

100,000
100,000
100,000
100,000
100,000

50,0001
50,0001
0
25,0001
0

25,0001
25,0001
0
25,0001
0

15,0001
15,0001
0
25,0001
0

10,0001
10,0001
0
25,0001
0

Total

500,000

125,000

75,000

55,000

45,000

1. For two performance conditions being met, 50 per cent vests on the second
anniversary, 25 per cent on the third anniversary, 15 per cent on the fourth anniversary
and 10 per cent on the ﬁfth anniversary subject to continued employment at the
relevant date. For any additional performance condition being met, 25 per cent vest
at each anniversary, subject to continued employment at the relevant date.

Shareholding guidelines
Executive directors are expected to build up a shareholding equal to
their basic salaries by retaining in shares at least half of the post-tax
gains made under any long term incentive.

Service contracts
Executive directors
Executive directors’ service contracts may be terminated by the
Company giving 12 months’ notice.

Ben Gordon’s service contract included an extended notice period
that has now expired. The current service contract provides for
liquidated damages on termination by the Company for basic salary
equivalent to the unexpired portion of the notice period and the fair
value of the beneﬁts to which he may be entitled, including pension
credits but not bonus or share options. Separate provisions govern
the entitlement to the equity incentive award and are described in
the section above.

Neil Harrington commenced employment with the Company on
30 January 2006. His service contract may be terminated upon
12 months’ notice. On joining, Neil Harrington was paid a bonus
of £50,000 conditional upon him investing at least 60 per cent of
the net of tax amount in shares in the Company. On 6 March 2006
this condition was met. Furthermore he is entitled to a guaranteed
bonus of £25,000 payable in June 2006.

Steven Glew commenced employment with the Company on
4 March 2003. His service contract, dated 28 February 2003 was
terminated by the Company on 31 December 2005. In consideration
of his contribution to the successful turnround of the business the
principal terms of the compensation paid to Steven Glew (inclusive
of the mitigation of his entitlements) are set out below:

• payment of 12 months’ salary and beneﬁts, six months of which

was paid on the termination date with two further payments each
equivalent to three months’ salary and beneﬁts payable in July and
October 2006 in the event that he has not secured employment on
the relevant dates;

• the retention of 368,510 of the 402,011 executive share options
granted on 26 March 2003, such options to be exercised by
31 March 2006;

• subject to the achievement of the performance conditions, the

transfer of up to a maximum of 96,492 of the 105,264 conditional
awards made under the LTIP in July 2003, all other LTIP awards
made in 2004 and 2005 lapsing on 31 December 2005; and

• subject to the achievement of the performance conditions, the
transfer to him of up to a maximum 55,000 conditional awards
under the SMS, all other conditional awards under the SMS
made in 2004 and 2005 lapsing on 31 December 2005.

Non-executive directors
Ian Peacock is entitled to three months’ salary on termination of
his employment contract dated 31 October 2002 by the Company.
Karren Brady, Bernard Cragg and David Williams have service
arrangements with the Company that may be terminated upon
one month’s notice. Their service arrangements were entered into
on 29 July, 31 March 2003 and 2 July 2004 respectively.

Mothercare plc Annual report and accounts 2006 31

Emoluments and compensation payments
The emoluments (including pension contributions) in the year ended
1 April 2006 are shown in Table 1A. In addition, the salaries paid to
the management level below the board are set out in Table 1B.

The fees of the non-executive directors are determined by the board,
with the non-executive directors abstaining from discussions on their
own arrangements. The non-executive directors do not participate
in the Company pension, annual bonus plan, share option or other
long term incentives. Fees are reviewed periodically and set at levels
to reﬂect the time, commitment and responsibilities of the individual
non-executive director.

Beneﬁcial interests of the directors
The beneﬁcial interests of the directors in the share capital of the
Company are set out in the table below. This table does not show
option or incentive awards. These are dealt with in the relevant
section of this report.

Ian Peacock
Ben Gordon
Karren Brady
Bernard Cragg
David Williams
Neil Harrington

Interest held at
1 April 2006
(number)

Interest held at
26 March 2005
(number)

169,860
269,362
4,500
20,000
6,800
5,000

120,462
231,862
2,500
20,000
3,300
–

Ian Peacock and David Williams are shareholders and directors
of Mothercare Employees’ Share Trustee Limited, which held 13,151
(2005: 13,151) Mothercare shares in trust on 1 April 2006. A separate
trust, The Mothercare Employee Trust, held 3,631,004 shares on 1 April
2006 (2005: 3,388,902).

The executive directors are technically deemed to be interested in all
of the shares held by Mothercare Employees’ Share Trustee Limited
and the Mothercare Employee Trust as potential beneﬁciaries.

There have been no movements in directors’ interests, beneﬁcial or
non-beneﬁcial, between 1 April 2006 and 24 May 2006.

Approved by the board on 24 May 2006 and signed on its behalf by:

David Williams
Chairman, remuneration committee

Directors’ remuneration report continued

External appointments and other commitments of the directors
The other business commitments of the directors are set out within
their biographical details on page 20. An executive director may
take one external appointment as a non-executive director, subject
to the approval of the board. The director may retain any fees from
such a role. Neither of the executive directors currently has such
an appointment.

Pension arrangements
Ben Gordon and Neil Harrington are members of the Mothercare
Executive Pension Scheme. Ben Gordon’s pension accrues at the
rate of 1/45th of pensionable salary for each year of pensionable
service up to Inland Revenue Limits. These limits are replaced by a
corresponding scheme cap from 6 April 2006. The normal retirement
age is 60 years. Contributions by Ben Gordon are 7 per cent of
pensionable salary. Neil Harrington participates in the pension
builder career average section of the Mothercare Executive Pension
Scheme. Pension accrues at 1/45th of pensionable earnings in each
ﬁscal year. The normal retirement age is 65 years. Contributions by
Neil Harrington are at 5 per cent of pensionable salary.

Steven Glew was a member of the Mothercare Executive Pension
Scheme until 31 December 2005 on the same basis as disclosed
for Ben Gordon. Steven Glew’s contributions were 7 per cent of
pensionable salary.

In addition to membership of the Mothercare Executive Pension
Scheme, pension beneﬁts on earnings in excess of the Inland Revenue
earnings cap for Ben Gordon and Steven Glew were provided during
the period through an individual Funded Unapproved Retirement
Beneﬁt Scheme. The contribution rate for both Ben Gordon and Steven
Glew was 33 per cent. Further pension detail is given in Table 2.

A new simpliﬁed tax regime for UK pensions came into force on
6 April 2006 (‘A-day’). The committee has reviewed the impact of
pension provision on key executives of the introduction of the lifetime
allowance and the abolition of the earnings cap. In order to control
the cost of pensions, the Company has agreed with the trustees of
the Executive Pension Scheme the introduction of a scheme earnings
cap, equivalent to the existing scheme earnings cap. In addition, given
tax changes to future FURBS arrangements, the Trustees agreed to
close the existing FURBS scheme from 31 March 2006. Those directors
and executives who participated in the FURBS arrangements will in
the future be awarded a cash salary supplement equivalent to the
former FURBS payment for investment in an investment vehicle of
their own choice.

For further details of the pension provision within the Company during
the year, see the directors’ report on page 21.

For further detail on the cost of pensions to the Company, including
the statements required by IAS 19, see note 32 to the consolidated
ﬁnancial statements.

32 Mothercare plc Annual report and accounts 2006

Table 1A
Directors’ emoluments
Total emoluments (including pension contributions) in the year ended 1 April 2006 were £1,664,000 (2005: £1,348,000).

Salary/fees
£000

Incentive
scheme vesting
£000

Performance
bonus
£000

Beneﬁts
£000

Compensation
for loss of ofﬁce
£000

Total remuneration
(excl. pensions)
£000

Pension scheme
contributions
£000

2006

2005

2006

2005

2006

2005

2006

2005

2006

2005

2006

2005

2006

2005

Executive directors
Ben Gordon
Steven Glew
Neil Harrington
Non-executive directors
Ian Peacock
Karren Brady
Bernard Cragg
Angela Heylin
David Williams

375
158
35

110
32
37
–
32

351
206
–

100
30
35
25
18

266
–
–

110
–
–
–
–

361
–
–

99
–
–
–
–

302
–
22

–
–
–
–
–

63
26
–

–
–
–
–
–

13
11
2

–
–
–
–
–

13
11
–

–
–
–
–
–

–
100
–

–
–
–
–
–

–
–
–

–
–
–
–
–

956
269
59

220
32
37
–
32

788
243
–

199
30
35
25
18

32
22
5

–
–
–
–
–

5
5
–

–
–
–
–
–

Notes:
Beneﬁts typically include a company car, medical and dental insurance and other similar beneﬁts.
Performance bonus is the cash element only, the share element being deferred until 2007 and 2008.

The salary for Ben Gordon was reviewed with effect from 1 April 2006 and is now £475,000 per annum. In addition, the sum of £82,170 is paid
as a salary supplement as referred to on page 32 following the discontinuance of the FURBS scheme for 2006/07.

The amounts shown as pension scheme contributions in 2006 reﬂect the scheme funding requirements following the actuarial valuation of the
scheme in 2005/06.

The details required by paragraph 1 of Schedule 6 part 1 of the Companies Act 1985 are as follows:

Aggregate directors’ remuneration
The total amounts for directors’ remuneration were as follows:

Emoluments
Compensation for loss of ofﬁce
Gains on exercise of share options
Amounts receivable under long term incentive schemes
Money purchase pension contributions

Total

2006
£000

1,129
100
993
376
82

2,680

2005
£000

878
–
–
460
109

1,447

Table 1B
The following table sets out the number of individuals within the salary bands for the management level directly below the board.

Salary band

£200,001–250,000
£150,001–200,000
£100,000–150,000

2006

2005

–
2
6

1
1
4

Mothercare plc Annual report and accounts 2006 33

Directors’ remuneration report continued

Table 2
Pensions
The disclosure of the directors’ beneﬁts accrued in the Mothercare Executive Pension Scheme and money purchase beneﬁts under the
appropriate funded unapproved retirement beneﬁts scheme are set out below:

Accrued beneﬁts in Mothercare Executive Pension Scheme

Transfer value as at* 1 April 2006

Deﬁned beneﬁts for Final Salary Scheme

Money
purchase

Company
contributions

At
26 March
2005

Change
during year

Ben Gordon
Neil Harrington

8
–

4
1

At
1 April
2006

12
1

Change
during
year net
of inﬂation

Transfer value
of change
in year net
of inﬂation

26 March
2005

Change
during year

Director
contributions

4
1

45
4

74
–

47
4

11
2

1 April
2006

132
6

82
–

*Calculation is consistent with applicable professional actuarial guidelines of accrued beneﬁt.

Note: The transfer values represent a liability to the Company and not a sum paid or due to be paid to the individual.

Appendix A
The conditional awards made to directors under the LTIP are as follows:

Director

Ben Gordon

Total

Steven Glew

Total

LTIP
Conditional
conditional
award date award number

Vested
2006

Lapsed
2006

Initial
share price

21 July 2003
1 June 2004
23 June 2005

402,477
103,236
86,193

591,906

105,264
51,500
41,087

197,851

–
–
–

–

–
–
–

–

–
–
–

–

8,772
51,500
41,087

101,359

Details of the directors’ shares pledged and matched under the SMS are as follows:

Director

Ben Gordon

Total

Steven Glew

Total

Conditional
award date

21 July 2003
1 June 2004
23 June 2005

Directors’
pledged
shares
and SMS
conditional
award

100,619
49,425
21,675

171,719

60,000
29,714
9,011

98,725

Vested
2006

–
–
–

–

–
–
–

–

34 Mothercare plc Annual report and accounts 2006

Performance period

01.04.03 – 31.03.06
27.03.04 – 26.03.07
27.03.05 – 26.03.08

Pledge period

01.04.03 – 01.04.06
27.03.04 – 26.03.07
27.03.05 – 26.03.08

161.5p
340.0p
291.5p

Lapsed
2006

–
21,675
–

21,675

5,000
29,714
9,011

43,725

Performance criteria for the Long Term Incentive Plan and Share Matching Scheme
The performance targets for the LTIP and SMS schemes granted in 2003, 2004 and 2005 in respect of total shareholder return (TSR) are as follows:

LTIP
Total shareholder return ranking percentage

Percentage of award vesting

Top 20%
Median
Median to top 20%
Below median

50%
10%
10% to 50% (pro rata, on a straight-line basis)
Nil

Note:
No part of the awards subject to EPS will vest unless the Company’s TSR performance has been above median relative to all general retailers in the FTSE Mid 250 and SmallCap indices.

SMS
Total shareholder return over three years ranking percentage
(relative to general retailers in Mid 250 and SmallCap)

Top 20%
Median
Median to top 20%
Below median

Ratio of free shares to purchased shares

5:10
1:10
1:10 to 5:10 (pro rata on a straight-line basis)
Nil

Note:
No part of the awards subject to EPS will vest unless the Company’s TSR performance has been above median relative to all general retailers in the FTSE Mid 250 and SmallCap indices.

The performance targets for the LTIP and SMS schemes in respect of Earnings Per Share (EPS) are as follows:

LTIP
Percentage of award vesting

EPS in 2005/06 for 2003 awards

EPS in 2006/07 for 2004 awards

EPS in 2007/08 for 2005 awards

50%
10%
10% to 50% (pro rata on a straight-line basis)
Nil

40p
20p
20p to 40p
Below 20p

42.1p
32.3p
32.3p to 42.1p
Below 32.3p

36.5p
31.7p
31.7p to 36.5p
Below 31.7p

Note:
EPS refers to pre-tax EPS.

SMS
Percentage of award vesting

EPS in 2005/06 for 2003 awards

EPS in 2006/07 for 2004 awards

EPS in 2007/08 for 2005 awards

5:10
1:10
1:10 to 5:10 (pro rata on a straight-line basis)
Nil

40p
20p
20p to 40p
Below 20p

42.1p
32.3p
32.3p to 42.1p
Below 32.3p

36.5p
31.7p
31.7p to 36.5p
Below 31.7p

Note:
EPS refers to pre-tax EPS.

Mothercare plc Annual report and accounts 2006 35

Statement of directors’ responsibilities

Independent auditors’ report

The directors are responsible for preparing the annual report
and the ﬁnancial statements. The directors are required to prepare
ﬁnancial statements for the group in accordance with International
Financial Reporting Standards (IFRS). Company law requires the
directors to prepare such ﬁnancial statements in accordance with
IFRS, the Companies Act 1985 and Article 4 of the IAS Regulation.

International Accounting Standard 1 requires that ﬁnancial statements
present fairly for each ﬁnancial year the Company’s ﬁnancial position,
ﬁnancial performance and cash ﬂows. This requires the faithful
representation of the effects of transactions, other events and
conditions in accordance with the deﬁnitions and recognition criteria
for assets, liabilities, income and expenses set out in the International
Accounting Standards Board’s ‘Framework for the Preparation and
Presentation of Financial Statements’. In virtually all circumstances, a
fair presentation will be achieved by compliance with all applicable
IFRS. The directors are also required to:

• properly select and apply accounting policies;

• present information, including accounting policies, in a manner

that provides relevant, reliable, comparable and understandable
information; and

• provide additional disclosures when compliance with the speciﬁc
requirements in IFRS is insufﬁcient to enable users to understand
the impact of particular transactions, other events and conditions
on the entity’s ﬁnancial position and ﬁnancial performance.

The directors are responsible for keeping proper accounting records
which disclose with reasonable accuracy at any time the ﬁnancial
position of the Company, for safeguarding the assets, for taking
reasonable steps for the prevention and detection of fraud and
other irregularities and for the preparation of a directors’ report and
directors’ remuneration report which comply with the requirements
of the Companies Act 1985.

The directors are responsible for the maintenance and integrity of
the Company website. Legislation in the United Kingdom governing
the preparation and dissemination of ﬁnancial statements differs
from legislation in other jurisdictions.

To the shareholders of Mothercare plc
We have audited the group ﬁnancial statements of Mothercare plc
for the 53 weeks ended 1 April 2006 which comprise the consolidated
income statement, the consolidated balance sheet, the consolidated
cash ﬂow statement, the consolidated statement of recognised income
and expense and the related notes 1 to 34. These group ﬁnancial
statements have been prepared under the accounting policies set
out therein. We have also audited the information in the directors’
remuneration report that is described as having been audited.

We have reported separately on the individual Company ﬁnancial
statements of Mothercare plc for the 53 weeks ended 1 April 2006.

This report is made solely to the Company’s members, as a body, in
accordance with section 235 of the Companies Act 1985. Our audit
work has been undertaken so that we might state to the Company’s
members those matters we are required to state to them in an auditors’
report and for no other purpose. To the fullest extent permitted by
law, we do not accept or assume responsibility to anyone other than
the Company and the Company’s members as a body, for our audit
work, for this report, or for the opinions we have formed.

Respective responsibilities of directors and auditors
The directors’ responsibilities for preparing the annual report, the
directors’ remuneration report and the group ﬁnancial statements
in accordance with applicable law and International Financial
Reporting Standards (IFRS) as adopted for use in the European
Union are set out in the statement of directors’ responsibilities.

Our responsibility is to audit the group ﬁnancial statements and
the part of the directors’ remuneration report described as having
been audited in accordance with relevant United Kingdom legal
and regulatory requirements and International Standards on
Auditing (UK and Ireland).

We report to you our opinion as to whether the group ﬁnancial
statements give a true and fair view in accordance with the relevant
ﬁnancial reporting framework and whether the group ﬁnancial
statements and the part of the directors’ remuneration report
described as having been audited have been properly prepared
in accordance with the Companies Act 1985 and Article 4 of the IAS
Regulation. We report to you if, in our opinion, the directors’ report is

36 Mothercare plc Annual report and accounts 2006

not consistent with the group ﬁnancial statements. We also report
to you if we have not received all the information and explanations
we require for our audit, or if information speciﬁed by law regarding
directors’ transactions with the Company and other members of the
group is not disclosed.

We report to you if, in our opinion, the Company has not complied
with any of the four directors’ remuneration disclosure requirements
speciﬁed for our review by the Listing Rules of the Financial Services
Authority. These comprise the amount of each element in the
remuneration package and information on share options, details
of long term incentive schemes, and money purchase and deﬁned
beneﬁt schemes. We give a statement, to the extent possible, of
details of any non-compliance.

We review whether the corporate governance statement reﬂects
the Company’s compliance with the nine provisions of the 2003 FRC
Combined Code speciﬁed for our review by the Listing Rules of the
Financial Services Authority, and we report if it does not. We are
not required to consider whether the board’s statement on internal
control covers all risks and controls, or form an opinion on the
effectiveness of the group’s corporate governance procedures
or its risk and control procedures.

We read the directors’ report and the other information contained
in the annual report for the above year as described in the contents
section including the unaudited part of the directors’ remuneration
report and we consider the implications for our report if we become
aware of any apparent misstatements or material inconsistencies
with the group ﬁnancial statements.

Basis of audit opinion
We conducted our audit in accordance with International Standards
on Auditing (UK and Ireland) issued by the Auditing Practices Board.
An audit includes examination, on a test basis, of evidence relevant
to the amounts and disclosures in the group ﬁnancial statements and
the part of the directors’ remuneration report described as having
been audited. It also includes an assessment of the signiﬁcant estimates
and judgements made by the directors in the preparation of the
group ﬁnancial statements and of whether the accounting policies
are appropriate to the Company’s circumstances, consistently applied
and adequately disclosed.

We planned and performed our audit so as to obtain all the
information and explanations which we considered necessary in
order to provide us with sufﬁcient evidence to give reasonable
assurance that the group ﬁnancial statements and the part of the
directors’ remuneration report described as having been audited
are free from material misstatement, whether caused by fraud or
other irregularity or error. In forming our opinion we also evaluated
the overall adequacy of the presentation of information in the group
ﬁnancial statements and the part of the directors’ remuneration
report described as having been audited.

Opinion
In our opinion:

• the group ﬁnancial statements give a true and fair view, in accordance
with IFRS as adopted for use in the European Union, of the state of
the group’s affairs as at 1 April 2006 and of its proﬁt for the 53 weeks
then ended; and

• the group ﬁnancial statements and the part of the directors’

remuneration report described as having been audited have been
properly prepared in accordance with the Companies Act 1985
and Article 4 of the IAS Regulation.

As explained in note 2, the group, in addition to complying with
its legal obligation to comply with IFRS as adopted for use in the
European Union, has also complied with the IFRS as issued by
the International Accounting Standards Board. Accordingly, in
our opinion the ﬁnancial statements give a true and fair view,
in accordance with IFRS, of the state of the group’s affairs as at
1 April 2006 and of its proﬁt for the 53 weeks then ended.

Deloitte & Touche LLP
Chartered Accountants and Registered Auditors
London
24 May 2006

Mothercare plc Annual report and accounts 2006 37

Consolidated income statement
For the 53 weeks ended 1 April 2006

Revenue
Cost of sales
Reorganisation of distribution network (exceptional)

Gross proﬁt
Administrative expenses

Proﬁt from retail operations
Proﬁt on disposal of property interests (exceptional)

Proﬁt from operations
Proﬁt on disposal of subsidiary undertaking (exceptional)

Proﬁt before ﬁnancing and taxation
Investment income
Finance costs

Proﬁt before taxation

Analysed between:
Exceptional items
Proﬁt before exceptional items and taxation

Taxation

Proﬁt for the period attributable to equity holders of the parent

Earnings per share
Basic
Diluted

All results relate to continuing operations.

Consolidated statement of recognised income and expense
For the 53 weeks ended 1 April 2006

Actuarial losses on deﬁned beneﬁt pension schemes
IAS 39 transfers to income statement
Tax on items taken directly to equity

Net expense recognised directly in equity
Proﬁt for the period

Total recognised income and expense for the period attributable to equity holders of the parent

Changes in accounting policy to adopt IAS 32 and 39:
Attributable to equity holders of the parent

38 Mothercare plc Annual report and accounts 2006

53 weeks
ended
1 April
2006
£ million

482.7
(431.8)
–

50.9
(33.0)

52 weeks
ended
26 March
2005
£ million

457.2
(408.1)
(6.5)

42.6
(32.4)

17.9
2.9

20.8
–

20.8
12.7
(9.3)

24.2

2.9
21.3

(6.7)

17.5

10.2
–

10.2
2.4

12.6
10.9
(8.0)

15.5

(4.1)
19.6

(4.2)

11.3

25.5p
25.0p

16.6p
16.3p

Note

53 weeks
ended
1 April
2006
£ million

52 weeks
ended
26 March
2005
£ million

(0.8)
0.1
0.7

–
17.5

17.5

(9.3)
–
3.1

(6.2)
11.3

5.1

(0.1)

–

Consolidated balance sheet
As at 1 April 2006

Non-current assets
Property, plant and equipment
Intangible assets – software
Deferred tax asset

Current assets
Inventories
Trade and other receivables
Cash and cash equivalents

Total assets

Current liabilities
Trade and other payables
Current tax liabilities
Short term provisions

Non-current liabilities
Trade and other payables
Retirement beneﬁt obligations
Long term provisions

Total liabilities

Net assets

Equity attributable to equity holders of the parent
Called up share capital
Share premium account
Own shares
Retained earnings

Total equity

Approved by the board on 24 May 2006 and signed on its behalf by:

Ben Gordon
Neil Harrington

1 April
2006
£ million

26 March
2005
£ million

Note

83.7
4.0
8.5

96.2

50.8
32.0
35.9

118.7

214.9

(51.3)
(0.9)
(3.7)

(55.9)

(8.9)
(17.5)
(0.9)

(27.3)

(83.2)

84.3
2.7
13.6

100.6

46.8
28.8
37.0

112.6

213.2

(55.9)
–
(5.1)

(61.0)

(7.8)
(22.4)
(3.0)

(33.2)

(94.2)

131.7

119.0

36.3
2.2
(6.5)
99.7

35.8
1.3
(5.5)
87.4

131.7

119.0

Mothercare plc Annual report and accounts 2006 39

Consolidated cash ﬂow statement
For the 53 weeks ended 1 April 2006

Net cash ﬂow from operating activities

Cash ﬂows from investing activities
Interest received
Interest paid
Purchase of property, plant and equipment
Proceeds from sale of property, plant and equipment
Proceeds from sale of subsidiary undertaking

Net cash used in investing activities

Cash ﬂows from ﬁnancing activities
Equity dividends paid
Issue of ordinary share capital
Purchase of own shares

Net cash used in ﬁnancing activities

Net decrease in cash and cash equivalents

Cash and cash equivalents at beginning of period

Cash and cash equivalents at end of period

53 weeks
ended
1 April
2006
£ million

52 weeks
ended
26 March
2005
£ million

13.3

12.5

Note

1.8
(0.3)
(16.7)
6.0
–

(9.2)

(5.5)
1.4
(1.1)

(5.2)

(1.1)

37.0

35.9

1.8
(0.1)
(18.4)
1.1
3.4

(12.2)

(4.6)
1.0
–

(3.6)

(3.3)

40.3

37.0

40 Mothercare plc Annual report and accounts 2006

Notes to the consolidated ﬁnancial statements

1. General information
Mothercare plc is a company incorporated in the United Kingdom
under the Companies Act 1985. The address of the registered ofﬁce
is given in the shareholder information on the inside back cover.
The nature of the group’s operations and its principal activities
are set out in note 5 and in the business review on pages 5 to 19.

2. Signiﬁcant accounting policies
Basis of presentation
The Company’s accounting period covers the 53 weeks ended
1 April 2006. The comparative period covered the 52 weeks ended
26 March 2005.

Basis of accounting
The ﬁnancial statements have been prepared, for the ﬁrst time, in
accordance with International Financial Reporting Standards (IFRS),
IFRIC interpretations and those parts of the Companies Act 1985
that are applicable to companies reporting under IFRS. The 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 ﬁnancial statements, the following
standards and interpretations which have not been applied in these
ﬁnancial statements were in issue but not yet effective:

IFRS 6 ‘Exploration for and Evaluation of Mineral Resources’;

IFRS 7 ‘Financial Instruments: Disclosures’; and the related amendment
to IAS 1 on capital disclosures;

IFRIC 4 ‘Determining whether an Arrangement contains a Lease’;

IFRIC 5 ‘Right to Interests Arising from Decommissioning, Restoration
and Environmental Rehabilitation Funds’;

IFRIC 6 ‘Liabilities arising from Participating in a speciﬁc market –
Waste Electrical and Electronic Equipment’;

IFRIC 7 ‘Applying the Restatement Approach under IAS 29 Financial
reporting in Hyperinﬂationary Economies’;

IFRIC 8 ‘Scope of IFRS 2’; and

IFRIC 9 ‘Reassessment of Embedded Derivatives’.

The directors anticipate that the adoption of these standards and
interpretations in future periods will have no material impact on the
ﬁnancial statements of the group except for the additional disclosures
on capital and ﬁnancial instruments when the relevant standards
come into effect for periods commencing on or after 1 January 2007.

The disclosures required by IFRS 1 ‘First-time Adoption of
International Financial Reporting Standards’ concerning the transition
from UK GAAP to IFRS are provided in note 34.

The Company has elected to apply the exemption available within
IFRS 1 that permits the hedge accounting applied under the previous
Generally Accepted Accounting Principles (GAAP) to be used as a
comparative for IAS 39 ‘Financial Instruments: Recognition and
Measurement’. Hence the change in accounting policy has had no
impact on the results or ﬁnancial position of the prior period. The
impact on the opening balance sheet is set out in note 23.

The ﬁnancial statements have been prepared on the historical cost
basis, except for the revaluation of ﬁnancial instruments. The principal
accounting policies are set out below.

Basis of consolidation
The consolidated ﬁnancial statements incorporate the ﬁnancial
statements of the Company and entities controlled by the Company
(its subsidiaries) made up to 1 April 2006. Control is achieved where
the Company has the power to govern the ﬁnancial and operating
policies of an investee entity so as to obtain beneﬁts from its
activities.

On acquisition, the assets and liabilities and contingent liabilities of a
subsidiary are measured at their fair values at the date of
acquisition. Any excess of the cost of acquisition over the fair values
of the identiﬁable net assets acquired is recognised as goodwill. Any
deﬁciency of the cost of acquisition below the fair values of the
identiﬁable net assets acquired (ie discount on acquisition) is
credited to proﬁt and loss in the period of acquisition. The interest of
minority shareholders is stated at the minority’s proportion of the fair
values of the assets and liabilities recognised. Subsequently, any
losses applicable to the minority interest in excess of the minority
interest are allocated against the interests of the parent.

The results of subsidiaries acquired or disposed of during the
ﬁnancial year are included in the consolidated income statement
from the effective date of acquisition or up to the effective date of
disposal, as appropriate.

Where necessary, adjustments are made to the ﬁnancial statements
of subsidiaries to bring the accounting policies used into line with
those used by the group.

All intra-group transactions, balances, income and expenses are
eliminated on consolidation.

Mothercare plc Annual report and accounts 2006 41

Notes to the consolidated ﬁnancial statements continued

2. Signiﬁcant accounting policies continued
Exceptional items
Certain items do not reﬂect the group’s underlying trading performance
and due to their signiﬁcance and one-off nature, have been classiﬁed
as exceptional. The gains and losses on these discrete items, such
as proﬁts on the disposal of property interests, reorganisation costs
and other non-operating items, including the prior year disposal of
a subsidiary undertaking with capital tax losses attached, can have
a material impact on the absolute amount of and trend in the proﬁt
from operations and the result for the year. Therefore any gains and
losses on such items are analysed as exceptional on the face of the
income statement.

Goodwill
Goodwill arising on consolidation represents the excess of the cost of
acquisition over the group’s interest in the fair value of the identiﬁable
assets and liabilities of a subsidiary, associate or jointly controlled
entity at the date of acquisition.

Goodwill is recognised as an asset and reviewed for impairment at
least annually. Any impairment is recognised immediately in proﬁt or
loss and is not subsequently reversed.

On disposal of a subsidiary, associate or jointly controlled entity, the
attributable amount of goodwill is included in the determination of
the proﬁt or loss on disposal.

Goodwill arising on acquisitions before the date of transition to IFRS
has been retained at the previous UK GAAP amounts subject to being
tested for impairment at that date. Goodwill written off to reserves
under UK GAAP prior to 29 March 1997 has not been reinstated and
is not included in determining any subsequent proﬁt or loss on disposal.

Revenue recognition
Revenue is measured at the fair value of the consideration received
or receivable and represents amounts receivable for goods and
services provided in the normal course of business, net of discounts,
VAT and other sales related taxes.

Sales of goods are recognised when goods are delivered and title
has passed.

Interest income is accrued on a time basis, by reference to the principal
outstanding and at the effective interest rate applicable, which is the
rate that exactly discounts estimated future cash receipts through the
expected life of the ﬁnancial asset to that asset’s net carrying amount.

Leasing
Leases are classiﬁed as ﬁnance leases whenever the terms of the
lease transfer substantially all the risks and rewards of ownership
to the lessee. All other leases are classiﬁed as operating leases.

The group as lessor
Rental income from operating leases is recognised on a straight-line
basis over the term of the relevant lease.

The group as lessee
Rentals payable under operating leases are charged to income on
a straight-line basis over the term of the relevant lease.

Beneﬁts received and receivable as an incentive to enter into an
operating lease are also spread on a straight-line basis over the
lease term.

Foreign currencies
The individual ﬁnancial statements of each group company are
presented in the currency of the primary economic environment
in which it operates (its functional currency). For the purpose of the
consolidated ﬁnancial statements, the results and ﬁnancial position
of each group company are expressed in pounds sterling, which
is the functional currency of the Company, and the presentation
currency for the consolidated ﬁnancial statements.

Transactions in currencies other than pounds sterling are recorded
at the rates of exchange prevailing on the dates of the transactions.
At each balance sheet date, monetary assets and liabilities that
are denominated in foreign currencies are retranslated at the rates
prevailing on the balance sheet date. Non-monetary assets and
liabilities carried at fair value that are denominated in foreign currencies
are translated at the rates prevailing at the date when the fair
value was determined. Gains and losses arising on retranslation
are included in net proﬁt or loss for the period, except for exchange
differences arising on non-monetary assets and liabilities where the
changes in fair value are recognised directly in equity.

In order to hedge its exposure to certain foreign exchange risks, the
group enters into forward contracts (see below for details of the group’s
accounting policies in respect of such derivative ﬁnancial instruments).

On consolidation, the assets and liabilities of the group’s overseas
operations are translated at exchange rates prevailing on the balance
sheet date. Income and expense items are translated at the average
exchange rates for the period unless exchange rates ﬂuctuate
signiﬁcantly. Exchange differences arising, if any, are classiﬁed as equity
and transferred to the group’s translation reserve. Such translation

42 Mothercare plc Annual report and accounts 2006

differences are recognised as income or as expenses in the period in
which the operation is disposed of.

than in a business combination) of other assets and liabilities in a
transaction that affects neither the tax proﬁt nor the accounting proﬁt.

Retirement beneﬁt costs
Payments to deﬁned contribution retirement beneﬁt schemes are
charged as an expense as they fall due.

For deﬁned beneﬁt schemes, the cost of providing beneﬁts is
determined using the Projected Unit Credit Method, with actuarial
valuations being carried out at each balance sheet date. Actuarial
gains and losses are recognised in full in the period in which they
occur. They are recognised outside of the income statement and
presented in the statement of recognised income and expense.

Past service cost is recognised immediately to the extent that the
beneﬁts are already vested, and otherwise is amortised on a straight-
line basis over the average period until the beneﬁts become vested.

The retirement beneﬁt obligation recognised in the balance sheet
represents the present value of the deﬁned beneﬁt obligation as
adjusted for unrecognised past service cost, and as reduced by the
fair value of scheme assets. Any asset resulting from this calculation is
limited to past service cost, plus the present value of available refunds
and reductions in future contributions to the plan.

Taxation
The tax expense represents the sum of the tax currently payable and
deferred tax.

The tax currently payable is based on taxable proﬁt for the ﬁnancial
year. Taxable proﬁt differs from net proﬁt as reported in the income
statement because it excludes items of income or expense that are
taxable or deductible in other ﬁnancial years and it further excludes
items that are never taxable or deductible. The group’s liability for
current tax is calculated using tax rates that have been enacted or
substantively enacted by the balance sheet date.

Deferred tax is the tax expected to be payable or recoverable on
differences between the carrying amounts of assets and liabilities in
the ﬁnancial statements and the corresponding tax bases used in the
computation of taxable proﬁt, and is accounted for using the balance
sheet liability method. Deferred tax liabilities are generally recognised
for all taxable temporary differences and deferred tax assets are
recognised to the extent that it is probable that taxable proﬁts will
be available against which deductible temporary differences can be
utilised. Such assets and liabilities are not recognised if the temporary
difference arises from goodwill or from the initial recognition (other

Deferred tax liabilities are recognised for taxable temporary differences
arising on investments in subsidiaries and associates, and interests in
joint ventures, except where the group is able to control the reversal
of the temporary difference and it is probable that the temporary
difference will not reverse in the foreseeable future.

The carrying amount of deferred tax assets is reviewed at each
balance sheet date and reduced to the extent that it is no longer
probable that sufﬁcient taxable proﬁts will be available to allow all
or part of the asset to be recovered.

Deferred tax is calculated at the tax rates that are expected to apply
in the period when the liability is settled or the asset is realised.
Deferred tax is charged or credited in the income statement, except
when it relates to items charged or credited directly to equity, in which
case the deferred tax is also dealt with in equity.

Property, plant and equipment
Property, plant and equipment is carried at cost less accumulated
depreciation and any impairment losses.

Depreciation is charged so as to write off the cost or valuation of assets,
other than land and assets in course of construction, over their estimated
useful lives, using the straight-line method, on the following bases:

Freehold buildings
– 50 years
Fixed equipment in freehold buildings – 20 years
Leasehold improvements
Fixtures, ﬁttings and equipment

– the lease term
– 3 to 20 years

The gain or loss arising on the disposal or retirement of an asset is
determined as the difference between the sales proceeds and the
carrying amount of the asset and is recognised in income.

Intangible assets – software
Where computer software is not an integral part of a related item of
computer hardware, the software is classiﬁed as an intangible asset.
The capitalised costs of software for internal use include external direct
costs of materials and services consumed in developing or obtaining
the software and payroll and payroll-related costs for employees
who are directly associated with and who devote substantial time
to the project. Capitalisation of these costs ceases no later than the
point at which the software is substantially complete and ready for its
intended internal use. These costs are amortised over their expected
useful lives, which are reviewed annually.

Mothercare plc Annual report and accounts 2006 43

Notes to the consolidated ﬁnancial statements continued

2. Signiﬁcant accounting policies continued
Impairment of tangible and intangible assets
At each balance sheet date, the group reviews the carrying amounts
of its tangible and intangible assets to determine whether there is
any indication that those assets have suffered an impairment loss.
If any such indication exists, the recoverable amount of the asset is
estimated in order to determine the extent of the impairment loss
(if any). Where the asset does not generate cash ﬂows that are
independent from other assets, the group estimates the recoverable
amount of the cash-generating unit to which the asset belongs.

Recoverable amount is the higher of fair value less costs to sell and
value in use. In assessing value in use, the estimated future cash ﬂows
are discounted to their present value using a pre-tax discount rate
that reﬂects current market assessments of the time value of money
and the risks speciﬁc to the asset for which the estimates of future
cash ﬂows have not been adjusted.

If the recoverable amount of an asset (or cash-generating unit) is
estimated to be less than its carrying amount, the carrying amount
of the asset (or cash-generating unit) is reduced to its recoverable
amount. An impairment loss is recognised as an expense immediately.

Where an impairment loss subsequently reverses, the carrying
amount of the asset (or cash-generating unit) is increased to the
revised estimate of its recoverable amount, but so that the increased
carrying amount does not exceed the carrying amount that would
have been determined had no impairment loss been recognised
for the asset (or cash-generating unit) in prior years. A reversal of
an impairment loss is recognised as income immediately.

Inventories
Inventories are stated at the lower of cost and net realisable value.
Cost comprises direct materials and, where applicable, direct labour
costs and those overheads that have been incurred in bringing the
inventories to their present location and condition. Cost is calculated
using the ﬁrst-in, ﬁrst-out cost formula. Net realisable value represents
the estimated selling price less all estimated costs of completion and
costs to be incurred in marketing, selling and distribution.

Financial instruments
Financial assets and liabilities are recognised on the group’s balance
sheet when the group becomes a party to the contractual provisions
of the instrument.

Trade receivables
Trade receivables are measured at initial recognition at fair value,
and are subsequently measured at amortised cost using the

effective interest rate method. Appropriate allowances for estimated
irrecoverable amounts are recognised in proﬁt or loss when there is
objective evidence that the asset is impaired. The allowance recognised
is measured as the difference between the asset’s carrying amount
and the present value of estimated future cash ﬂows discounted at
the effective interest rate computed at initial recognition.

Cash and cash equivalents
Cash and cash equivalents comprise cash on hand and demand
deposits, and other short term highly liquid investments that are
readily convertible to a known amount of cash and are subject to
an insigniﬁcant risk of changes in value.

Financial liabilities and equity
Financial liabilities and equity instruments are classiﬁed according
to the substance of the contractual arrangements entered into. An
equity instrument is any contract that evidences a residual interest
in the assets of the group after deducting all of its liabilities.

Bank borrowings
Interest-bearing bank loans and overdrafts are recorded at the
proceeds received, net of direct issue costs. Finance charges,
including premiums payable on settlement or redemption and
direct issue costs, are accounted for on an accruals basis to the
income statement using effective interest method and are added
to the carrying amount of the instrument to the extent that they are
not settled in the period in which they arise.

Trade payables
Trade payables are initially measured at fair value, and are
subsequently measured at amortised cost, using the effective
interest rate method.

Equity instruments
Equity instruments issued by the Company are recorded at the
proceeds received, net of direct issue costs.

Adoption of IAS 32 and IAS 39
As permitted by IFRS 1, the Company has elected to apply IAS 32
‘Financial Instruments: Disclosure and Presentation’ and IAS 39
‘Financial Instruments: Recognition and Measurement’ prospectively
from 27 March 2005. Consequently, the relevant comparative
information for the 52 weeks ended 26 March 2005 does not reﬂect
the impact of these standards.

Derivative financial instruments
The group uses derivative ﬁnancial instruments, principally forward
foreign currency contracts to reduce its exposure to exchange

44 Mothercare plc Annual report and accounts 2006

rate movements. The group does not hold or issue derivatives for
speculative or trading purposes. Under UK GAAP, as used for the
2005 comparatives, such derivative contracts are not recognised as
assets and liabilities on the balance sheet and gains or losses arising
on them are not recognised until the hedged item is itself recognised
in the ﬁnancial statements.

From 27 March 2005 onwards, derivative ﬁnancial instruments are
recognised as assets and liabilities measured at their fair values at
the balance sheet date. Changes in their fair values are recognised
in the income statement and this is likely to cause volatility in situations
where the carrying value of the hedged item is either not adjusted to
reﬂect fair value changes arising from the hedged risk or is so adjusted
but that adjustment is not recognised in the income statement.
Provided the conditions speciﬁed by IAS 39 are met, hedge accounting
may be used to mitigate this income statement volatility.

The Company expects that hedge accounting will not generally be
applied to transactional hedging relationships, such as hedges of
forecast or committed transactions.

Where the hedging relationship is classiﬁed as a cash ﬂow hedge,
to the extent the hedge is effective, changes in the fair value of the
hedging instrument will be recognised directly in equity rather than
in the income statement. When the hedged item is recognised in the
ﬁnancial statements, the accumulated gains and losses recognised
in equity will be either recycled to the income statement or, if the
hedged item results in a non-ﬁnancial asset, will be recognised as
adjustments to its initial carrying amount.

Embedded derivatives
Under UK GAAP, as used for the 2005 comparatives, embedded
derivatives are not recognised in the ﬁnancial statements. From
27 March 2005 onwards, derivatives embedded in non-derivative host
contracts are recognised separately as derivative ﬁnancial instruments
when their risks and characteristics are not closely related to those of
the host contract and the host contract is not stated at its fair value
with changes in its fair value recognised in the income statement.

Provisions
Provisions are recognised when the group has a present obligation
as a result of a past event, and it is probable that the group will be
required to settle that obligation. Provisions are measured at the
directors’ best estimate of the expenditure required to settle the
obligation at the balance sheet date, and are discounted to present
value where the effect is material.

Share-based payments
The group has applied the requirements of IFRS 2 ‘Share-based
Payments’. In accordance with the transitional provisions, IFRS 2 has
been applied to all grants of equity instruments after 7 November
2002 that were unvested as of 1 January 2005.

The group issues equity-settled share-based payments to certain
employees. Equity-settled share-based payments are measured
at fair value at the date of grant. The fair value determined at the
grant date of the equity-settled share-based payments is expensed
on a straight-line basis over the vesting period, based on the group’s
estimate of shares that will eventually vest.

Fair value is measured by use of the valuation technique considered
to be most appropriate for each class of award, including Black-
Scholes calculations and Monte Carlo simulations. The expected
life used in the formula is adjusted, based on management’s best
estimate, for the effects of non-transferability, exercise restrictions,
and behavioural considerations.

The group also provides employees with the ability to purchase the
group’s ordinary shares at 80 per cent of the current market value.
The group records an expense based on its estimate of the 20 per cent
discount related to shares expected to vest on a straight-line basis
over the vesting period.

Proﬁt from retail operations
Proﬁt from retail operations represents the proﬁt generated from
normal retail trading, prior to any gains or losses on property
transactions. It also includes the volatility arising from accounting
for derivative ﬁnancial instruments under IAS 39, as the Company
has not adopted hedge accounting.

3. Critical accounting judgements and key sources of
estimation uncertainty
In the process of applying the group’s accounting policies, which are
described in note 2, management has made the following judgements
that have the most signiﬁcant effect on the amounts recognised in
the ﬁnancial statements.

The key assumptions concerning the future, and other key sources
of estimation uncertainty at the balance sheet date, that have a
signiﬁcant risk of causing a material adjustment to the carrying
amounts of assets and liabilities within the next ﬁnancial year, are
also discussed below:

Mothercare plc Annual report and accounts 2006 45

Notes to the consolidated ﬁnancial statements continued

3. Critical accounting judgements and key sources of
estimation uncertainty continued
Inventory provisions
The Company reviews the market value of and demand for
its inventory on a periodic basis to ensure recorded inventory is
stated at the lower of cost or net realisable value. In assessing the
ultimate realisation of inventories, the Company is required to make
judgements as to future demand requirements and compare these
with the current or committed inventory levels. Factors that could
impact estimated demand and selling prices are the timing and
success of seasonal clothing ranges.

Pension and other post-retirement beneﬁts are inherently long term,
and future experience may differ from the actuarial assumptions used
to determine the net charge for ‘pension and other post-retirement
charges’. Note 32 to the consolidated ﬁnancial statements describes
the principal discount rate, earnings increase, and pension retirement
beneﬁt obligation assumptions that have been used to determine
the pension and post-retirement charges in accordance with IAS 19.
The calculation of any charge relating to ‘retirement beneﬁts’ is clearly
dependent on the assumptions used, which reﬂects the exercise of
judgement. The assumptions adopted are based on prior experience,
market conditions and the advice of plan actuaries.

Retirement benefits
Retirement beneﬁts are accounted for under IAS 19 ‘Employee
Beneﬁts’. For deﬁned beneﬁt plans, obligations are measured at
discounted present value whilst plan assets are recorded at fair value.

At 1 April 2006, the group’s pension liability before deferred tax was
£17.5 million, compared with £22.4 million as at 26 March 2005.

Further details of the accounting policy on retirement beneﬁts are
provided in note 2.

Because of changing market and economic conditions, the
expenses and liabilities actually arising under the plans in the
future may differ materially from the estimates made on the basis of
these actuarial assumptions. The plan assets are partially comprised
of equity and ﬁxed-income instruments. Therefore, declining returns
on equity markets and markets for ﬁxed-income instruments could
necessitate additional contributions to the plans in order to cover
future pension obligations. Also, higher or lower withdrawal rates
or longer or shorter life of participants may have an impact on the
amount of pension income or expense recorded in the future.

The interest rate used to discount post-employment beneﬁt
obligations to present value is derived from the yields of senior,
high-quality corporate bonds at the balance sheet date. These
generally include AA-rated securities. The discount rate is based on
the yield of a portfolio of bonds whose weighted residual maturities
approximately correspond to the duration necessary to cover the
entire beneﬁt obligation.

Impairment of stores’ property, plant and equipment
Stores’ property, plant and equipment are reviewed for impairment
on a periodic basis, and whenever events or changes in circumstances
indicate that the related carrying amounts may not be recoverable.
Such circumstances or events could include: a pattern of losses involving
the store asset; a decline in the market value for a particular store
asset; and an adverse change in the business or market in which
the store asset is involved. Determining whether an impairment
has occurred typically requires various estimates and assumptions,
including determining what cash ﬂow is directly related to the
potentially impaired asset, the useful life over which cash ﬂows will
occur, their amount and the asset’s residual value, if any. Estimates
of future cash ﬂows and the selection of appropriate discount rates
relating to particular assets or groups of assets involve the exercise
of a signiﬁcant amount of judgement.

Further details of the accounting policy on the impairment of stores’
property, plant and equipment are provided in note 2.

46 Mothercare plc Annual report and accounts 2006

4. Revenue
An analysis of the group’s revenue, all of which relates to continuing operations, is as follows:

Revenue – sales of goods
Investment income

Total revenue

53 weeks
ended
1 April
2006
£ million

482.7
12.7

495.4

52 weeks
ended
26 March
2005
£ million

457.2
10.9

468.1

5. Segmental information
For management purposes, the group is currently organised into two primary operating segments: Mothercare UK and International.
Mothercare UK comprises the UK store operations, catalogue and web sales. The International business comprises the group’s franchise
operations outside of the UK. These two segments are distinguished by the different nature of their risks and returns. It is considered that
there are no secondary segments as all business originates in the UK.

Segmental information about the Mothercare UK and International businesses is presented below.

Mothercare UK
£ million

International
£ million

53 weeks ended 1 April 2006

Unallocated
corporate
expenses Consolidated
£ million

£ million

Revenue
External sales

Result
Segment result before exceptional items
Proﬁt on disposal of property interests (exceptional)

Proﬁt before ﬁnancing and taxation

Investment income
Finance costs

Proﬁt before taxation
Taxation

Proﬁt for the period

414.6

68.1

–

482.7

19.3
2.9

22.2

5.3
–

5.3

(6.7)
–

(6.7)

17.9
2.9

20.8

12.7
(9.3)

24.2
(6.7)

17.5

Mothercare plc Annual report and accounts 2006 47

Notes to the consolidated ﬁnancial statements continued

5. Segmental information continued

Revenue
External sales

Result
Segment result before exceptional items
Reorganisation of distribution network (exceptional)
Proﬁt on disposal of subsidiary undertaking (exceptional)

Proﬁt before ﬁnancing and taxation

Investment income
Finance costs

Proﬁt before taxation
Taxation

Proﬁt for the period

Mothercare UK
£ million

International
£ million

52 weeks ended 26 March 2005

Unallocated
corporate
expenses
£ million

Consolidated
£ million

401.1

56.1

–

457.2

19.6
(6.5)
–

13.1

4.4
–
–

4.4

(7.3)
–
2.4

(4.9)

16.7
(6.5)
2.4

12.6

10.9
(8.0)

15.5
(4.2)

11.3

Corporate expenses not allocated to UK or International represent head ofﬁce costs, board and senior management costs, insurance, annual
and interim reporting costs and audit and professional fees.

53 weeks ended 1 April 2006

Mothercare UK
£ million

International Consolidated
£ million

£ million

16.7
12.8

–
–

16.7
12.8

159.1

19.9

76.5

6.7

179.0

35.9

214.9

83.2

–

83.2

Other information
Capital additions
Depreciation and amortisation

Balance sheet
Assets
Segment assets

Unallocated corporate assets

Consolidated total assets

Liabilities
Segment liabilities

Unallocated corporate liabilities

Consolidated total liabilities

48 Mothercare plc Annual report and accounts 2006

Other information
Capital additions
Depreciation and amortisation

Balance sheet
Assets
Segment assets

Unallocated corporate assets

Consolidated total assets

Liabilities
Segment liabilities

Unallocated corporate liabilities

Consolidated total liabilities

52 weeks ended 26 March 2005

Mothercare UK
£ million

International
£ million

Consolidated
£ million

18.4
12.0

–
–

18.4
12.0

160.6

15.6

88.6

5.6

176.2

37.0

213.2

94.2

–

94.2

Corporate assets not allocated to UK or International represent cash at bank and in hand.

6. Exceptional items
Due to their signiﬁcance and one-off nature, certain items have been classiﬁed as exceptional, such as proﬁts on the disposal of property
interests and subsidiary undertakings and reorganisation costs.

Reorganisation of distribution network
Proﬁt on disposal of property interests
Proﬁt on disposal of subsidiary undertaking

Exceptional items

53 weeks
ended
1 April
2006
£ million

52 weeks
ended
26 March
2005
£ million

–
2.9
–

2.9

(6.5)
–
2.4

(4.1)

Reorganisation of distribution network
During the 52 weeks ended 26 March 2005, costs of £6.5 million were charged to gross proﬁt to provide for the direct revenue costs associated
with the reorganisation of the distribution network as a result of the move to the new national distribution centre. The tax effect of this charge
to gross proﬁt was a credit of £1.9 million.

Profit on disposal of property interests
During the 53 weeks ended 1 April 2006, a credit of £2.9 million has been recognised in proﬁt from operations relating to the disposal of
freehold and leasehold property interests in closed stores. There was no tax effect as a result of the proﬁt on disposal of property interests,
due to the availability of capital losses brought forward from earlier periods.

Profit on disposal of subsidiary undertaking
During the 52 weeks ended 26 March 2005, income of £2.4 million was credited to proﬁt before taxation relating to the sale of a subsidiary
undertaking. The group has capital tax losses signiﬁcantly in excess of likely future requirements and one of the group’s subsidiary undertakings
with capital tax losses attached was sold to a third party for £2.4 million net of costs.

Mothercare plc Annual report and accounts 2006 49

Notes to the consolidated ﬁnancial statements continued

7. Proﬁt from retail operations
Proﬁt from retail operations has been arrived at after charging/(crediting):

Cost of inventories recognised as an expense
Depreciation of property, plant and equipment
Amortisation of intangible assets – software
Net rent of properties
Hire of plant and equipment
Auditors’ remuneration:

Audit services
Further assurance services
Tax services

Staff costs (including directors):

Wages and salaries (including bonuses)
Social security costs
Other pension costs (see note 32)

53 weeks
ended
1 April
2006
£ million

52 weeks
ended
26 March
2005
£ million

245.3
12.1
0.7
50.6
1.5

0.3
0.1
–

54.7
3.4
4.7

231.7
11.8
0.2
47.4
1.9

0.2
0.1
0.3

52.6
3.2
3.9

The policy for the approval of non-audit fees, together with an explanation of the services provided, is set out on page 26.

An analysis of the average monthly number of full and part-time employees throughout the group, all of whom are employed in the United
Kingdom, including executive directors, is as follows:

Number of employees
Full time equivalents

53 weeks
ended
1 April
2006
number

5,255
3,174

52 weeks
ended
26 March
2005
number

5,149
3,051

Details of directors’ emoluments, share options and beneﬁcial interests are provided within the remuneration report on pages 28 to 35.

For the 53 weeks ended 1 April 2006, proﬁt from retail operations is stated after charging a net gain of £0.2 million to cost of sales as a result
of the group’s decision not to adopt hedge accounting under IAS 39. As this net gain results from the ﬁrst time application of IAS 32 and IAS 39,
as discussed in notes 2 and 25, there is no comparative ﬁgure for the prior period.

8. Investment income

Interest on bank deposits
Retirement beneﬁt schemes – return on assets

Investment income

9. Finance costs

Interest on bank loans and overdrafts
Retirement beneﬁt schemes – interest on liabilities

Finance costs

50 Mothercare plc Annual report and accounts 2006

53 weeks
ended
1 April
2006
£ million

1.8
10.9

12.7

53 weeks
ended
1 April
2006
£ million

0.3
9.0

9.3

52 weeks
ended
26 March
2005
£ million

1.8
9.1

10.9

52 weeks
ended
26 March
2005
£ million

0.1
7.9

8.0

10. Taxation
The charge for taxation on proﬁt for the period comprises:

Current tax:

Current year
Adjustment in respect of prior periods

Deferred tax (see note 16):

Current year
Adjustment in respect of prior periods

Charge for taxation on proﬁt for the period

53 weeks
ended
1 April
2006
£ million

52 weeks
ended
26 March
2005
£ million

0.5
0.4

0.9

5.8
–

5.8

6.7

–
–

–

4.5
(0.3)

4.2

UK corporation tax is calculated at 30 per cent (2005: 30 per cent) of the estimated assessable proﬁt for the period.

The charge for the period can be reconciled to the proﬁt for the period before taxation per the consolidated income statement as follows:

Proﬁt for the period before taxation

Proﬁt for the period before taxation multiplied by the standard rate of corporation tax in the UK of 30% (2005: 30%)
Effects of:

Expenses not deductible for tax purposes
Utilisation of tax losses not previously recognised
Utilisation of tax losses not previously recognised against capital gains
Adjustment in respect of prior periods

Charge for taxation on proﬁt for the period

53 weeks
ended
1 April
2006
£ million

52 weeks
ended
26 March
2005
£ million

24.2

7.3

0.6
(0.3)
(0.9)
–

6.7

15.5

4.7

0.5
–
(0.7)
(0.3)

4.2

In addition to the amount charged to the income statement, deferred tax relating to share-based payment arrangements amounting to
£0.7 million (2005: £3.1 million relating to share-based payment arrangements and to the revaluation of retirement beneﬁt obligations) has
been credited directly to equity.

11. Dividends

Amounts recognised as distributions to equity holders in the period
Final dividend for the 52 weeks ended 26 March 2005 of 5.3p per share (2005: ﬁnal dividend
for the 52 weeks ended 27 March 2004 of 4.0p per share)
Interim dividend for the 53 weeks ended 1 April 2006 of 2.85p per share (2005: interim dividend
for the 52 weeks ended 26 March 2005 of 2.7p per share)

53 weeks
ended
1 April
2006
£ million

52 weeks
ended
26 March
2005
£ million

3.6

1.9

5.5

2.7

1.9

4.6

The proposed ﬁnal dividend of 6.15p per share for the 53 weeks ended 1 April 2006 was approved by the board after 1 April 2006, on 24 May 2006,
and so, in line with the requirements of IAS 10 ‘Events After the Balance Sheet Date’, the related cost of £4.3 million has not been included as
a liability as at 1 April 2006. This dividend will be paid on 27 July 2006 to shareholders on the register on 16 June 2006.

Mothercare plc Annual report and accounts 2006 51

Notes to the consolidated ﬁnancial statements continued

12. Earnings per share

Weighted average number of shares in issue
Dilution – option schemes

Diluted weighted average number of shares in issue

Earnings for basic and diluted earnings per share
Exceptional items:

Costs of reorganisation of distribution network
Proﬁt on disposal of property interests
Proﬁt on disposal of subsidiary undertaking
Tax effect of exceptional items

Earnings before exceptional items

Basic earnings per share
Basic earnings per share before exceptional items
Diluted earnings per share
Diluted earnings per share before exceptional items

53 weeks
ended
1 April
2006
million

68.5
1.5

70.0

52 weeks
ended
26 March
2005
million

68.0
1.2

69.2

£ million

17.5

–
(2.9)
–
–

14.6

11.3

6.5
–
(2.4)
(1.9)

13.5

pence

25.5
21.3
25.0
20.9

16.6
19.9
16.3
19.5

13. Subsidiaries
A list of the group’s signiﬁcant investments in subsidiaries, all of which are wholly owned, including the name and country of incorporation is
given in note 4 to the Company ﬁnancial statements. All subsidiaries are included in the consolidation.

52 Mothercare plc Annual report and accounts 2006

14. Property, plant and equipment

Cost
As at 27 March 2004
Transfers
Additions
Disposals

As at 26 March 2005
Transfers
Additions
Disposals

As at 1 April 2006

Accumulated depreciation and impairment
As at 27 March 2004
Charge for year
Disposals

As at 26 March 2005
Charge for year
Disposals

As at 1 April 2006

Net book value
As at 27 March 2004

As at 26 March 2005

As at 1 April 2006

Properties including
ﬁxed equipment

Freehold
£ million

Leasehold
£ million

Fixtures,
ﬁttings,
equipment
£ million

Assets in
course of
construction
£ million

Total
£ million

18.3
–
0.2
–

18.5
–
–
(2.7)

15.8

1.9
0.1
–

2.0
0.1
–

2.1

16.4

16.5

13.7

103.2
–
2.9
(1.1)

105.0
–
2.6
(1.4)

106.2

62.4
4.8
(0.6)

66.6
4.8
(0.2)

71.2

40.8

38.4

35.0

136.1
2.1
11.6
(1.5)

148.3
2.0
10.1
(1.9)

158.5

115.3
6.9
(1.3)

120.9
7.2
(2.6)

125.5

20.8

27.4

33.0

2.1
(2.1)
2.0
–

2.0
(2.0)
2.0
–

2.0

–
–
–

–

2.1

2.0

259.7
–
16.7
(2.6)

273.8
–
14.7
(6.0)

282.5

179.6
11.8
(1.9)

189.5
12.1
(2.8)

198.8

80.1

84.3

83.7

The net book value of leasehold properties includes £34.8 million (2005: £38.2 million) in respect of short leasehold properties.

At 1 April 2006, the group had entered into contractual commitments for the acquisition of property, plant and equipment amounting to
£6.4 million (2005: £5.3 million).

Mothercare plc Annual report and accounts 2006 53

Notes to the consolidated ﬁnancial statements continued

15. Intangible assets – software

Cost
As at 27 March 2004
Additions

As at 26 March 2005
Additions

As at 1 April 2006

Accumulated depreciation
As at 27 March 2004
Charge for year

As at 26 March 2005
Charge for year

As at 1 April 2006

Net book value
As at 27 March 2004

As at 26 March 2005

As at 1 April 2006

Total
£ million

1.2
1.7

2.9
2.0

4.9

–
0.2

0.2
0.7

0.9

1.2

2.7

4.0

16. Deferred tax asset
The following are the major deferred tax liabilities and assets recognised by the group and movements thereon in the current and prior
reporting period.

As at 27 March 2004
Charge to income
Credit to equity

As at 26 March 2005
Charge to income
Credit to equity

As at 1 April 2006

Accelerated
tax
depreciation
£ million

Short term
timing
differences
£ million

Retirement
beneﬁt
obligations
£ million

Share
based
payment
£ million

Tax
losses
£ million

Total
£ million

(4.8)
0.1
–

(4.7)
(1.6)
–

(6.3)

4.3
(0.4)
–

3.9
(0.9)
–

3.0

3.8
–
2.9

6.7
(1.5)
–

5.2

0.7
–
0.2

0.9
(0.3)
0.7

1.3

10.7
(3.9)
–

6.8
(1.5)
–

5.3

14.7
(4.2)
3.1

13.6
(5.8)
0.7

8.5

Certain deferred tax assets and liabilities have been offset. The following is the analysis of the deferred tax balances (after offset) for ﬁnancial
reporting purposes:

Deferred tax assets
Deferred tax liabilities

1 April
2006
£ million

26 March
2005
£ million

14.8
(6.3)

8.5

18.3
(4.7)

13.6

At the balance sheet date, the group has unused tax losses of £17.7 million (2005: £22.6 million) available for offset against future proﬁts.
A deferred tax asset of £5.3 million (2005: £6.8 million) has been recognised in respect of £17.7 million (2005: £22.6 million) of such losses.

54 Mothercare plc Annual report and accounts 2006

17. Inventories

Finished goods and goods for resale

18. Trade and other receivables

Trade receivables
Prepayments and accrued income
Other receivables
Currency derivative assets

1 April
2006
£ million

26 March
2005
£ million

50.8

46.8

1 April
2006
£ million

26 March
2005
£ million

14.5
14.3
3.0
0.2

32.0

11.9
13.8
3.1
–

28.8

The average credit period taken on sales of goods is 77 days. No interest is charged on trade receivables, however the right to charge
interest on outstanding balances is retained. An allowance has been made for estimated irrecoverable amounts from the sale of goods
of £0.6 million (2005: £0.8 million).

The directors consider that the carrying amount of trade and other receivables approximates their fair value.

19. Cash and cash equivalents
Cash and cash equivalents comprise cash held by the group and short term bank deposits with an original maturity of three months or less.
The carrying amount of these assets approximates their fair value.

20. Credit risk
The group’s principal ﬁnancial assets are cash and cash equivalents and trade and other receivables.

The group’s credit risk is primarily attributable to its trade receivables. The amounts presented in the balance sheet are net of allowance
for doubtful receivables. An allowance for impairment is made where there is an identiﬁed loss event which, based on previous experience,
is evidence of a reduction in the recoverability of the cash ﬂows.

The credit risk on liquid funds and derivative ﬁnancial instruments is limited because the counterparties are banks with high credit ratings
assigned by international credit rating agencies.

The group has no signiﬁcant concentration of credit risk, with exposure spread over a large number of counterparties and customers.

21. Borrowing facilities
The group had no outstanding borrowings as at 1 April 2006 and 26 March 2005.

Overdraft
The group has an overdraft facility of £10 million which bears interest at 1.00 per cent above bank base rates. None of this facility was drawn
down at 1 April 2006.

Committed borrowing facilities
The group had £15 million of committed borrowing facilities available at 1 April 2006 in respect of which all conditions precedent have been
met. The ﬁnal maturity date of this facility is 30 November 2008. None of this facility was drawn down at 1 April 2006. If the facility were to be
drawn upon it would bear interest at 0.65 per cent above LIBOR.

Mothercare plc Annual report and accounts 2006 55

Notes to the consolidated ﬁnancial statements continued

22. Derivative ﬁnancial instruments
Adoption of IAS 32 and IAS 39
As permitted by IFRS 1, the Company has elected to apply IAS 32 ‘Financial Instruments: Disclosure and Presentation’ and IAS 39 ‘Financial
Instruments: Recognition and Measurement’ prospectively from 27 March 2005. The IAS 39 transition balance sheet is detailed in note 23 below.

Forward foreign exchange contracts
The group uses forward foreign currency contracts to reduce its exposure to exchange rate movements, primarily on the US dollar. The group
does not hold derivatives for speculative or trading purposes, however, the group has not hedge accounted for its forward foreign currency
contracts under the requirements of IAS 39. Therefore, from 27 March 2005 onwards, derivative ﬁnancial instruments have been recognised
as assets and liabilities measured at their fair values at the balance sheet date and changes in their fair values have been recognised in the
income statement.

These arrangements are designed to address signiﬁcant exchange exposures on forecast future purchases of goods for the following year
and are renewed on a revolving basis as required.

Embedded derivatives
From 27 March 2005 onwards, derivatives embedded in non-derivative host contracts have been recognised separately as derivative
ﬁnancial instruments when their risks and characteristics are not closely related to those of the host contract and the host contract is not
stated at its fair value with changes in its fair value recognised in the income statement.

The total amounts of outstanding forward foreign currency contracts to which the group has committed is as follows:

At notional value

At fair value

Fair value of forward foreign currency contracts:

Included in trade and other receivables

Currency derivative assets

1 April
2006
£ million

26 March
2005
£ million

22.3

0.2

11.1

0.2

–

Treasury policy and ﬁnancial risk management
The board approves treasury policies and senior management directly controls day-to-day operations within these policies. The major ﬁnancial risks
to which the group is exposed relate to movements in exchange rates and interest rates. Where appropriate, cost effective and practicable the
group uses ﬁnancial instruments and derivatives to manage these risks. No speculative use of derivatives, currency or other instruments is permitted.

Foreign currency risk
All export sales to franchise operations are invoiced in sterling. Export sales represent approximately 14 per cent of group sales. The group
therefore has no currency exposure on these sales.

The group purchases product in foreign currency, representing approximately 13 per cent of purchases. The group policy is that all material
exposures are hedged by using forward currency contracts.

Currency analysis of ﬁxed assets
The group’s net assets of £131.7 million (2005: £119.0 million) are all denominated in sterling except for £1.2 million (2005: £4.8 million)
denominated in US dollars.

23. IAS 39 transition balance sheet
The group adopted IAS 32 ‘Financial Instruments: Disclosure and Presentation’ and IAS 39 ‘Financial Instruments: Recognition and Measurement’
from 27 March 2005. In the preparation of its ﬁnancial statements in accordance with IFRS for the 52 weeks ended 26 March 2005, the group
continued to apply the hedge accounting rules of UK GAAP, taking advantage of the exemption available within IFRS 1 ‘First-time Adoption
of International Financial Reporting Standards’.

The group is required to recognise transitional adjustments in accounting for its ﬁnancial instruments in accordance with the measurement
requirements of IAS 39 at 27 March 2005.

Although the group has taken the decision not to hedge account for its foreign exchange contracts, it is deemed to have hedge accounted
under UK GAAP until 26 March 2005 and discontinued hedge accounting prospectively thereafter. IFRS 1 requires the group to recognise
various transitional adjustments to account for those hedging relationships in place on 27 March 2005.

56 Mothercare plc Annual report and accounts 2006

Foreign exchange contracts that were previously accounted for as cash ﬂow hedges of forecasted transactions under UK GAAP were not
previously measured at fair value. The difference between the derivative’s fair value and its previously reported carrying value has been
recognised directly in equity as at 27 March 2005.

Additionally the group has recognised the fair value of embedded derivatives found within certain of its supply contracts in opening retained earnings.

All derivative instruments will continue to be recognised on the balance sheet at fair value with future gains and losses being recognised
immediately in earnings, except when the hedging requirements of IAS 39 are met.

Reconciliation between the IFRS restated balance sheet as at 26 March 2005 applying prior hedge accounting and the balance sheet after
the adoption of both IAS 32 and IAS 39

Net assets as at 26 March 2005 as per the IFRS restated balance sheet under prior hedge accounting
Adoption of IAS 32 and IAS 39:
Currency derivative assets
Currency derivative liabilities

Net assets as at 27 March 2005 after the adoption of IAS 32 and IAS 39

24. Trade and other payables

Current liabilities
Trade payables
Payroll and other taxes including social security
Accruals and deferred income
Lease incentives

Non-current liabilities
Lease incentives

£ million

119.0

0.1
(0.2)

118.9

1 April
2006
£ million

26 March
2005
£ million

27.6
1.7
21.1
0.9

51.3

29.8
1.2
24.2
0.7

55.9

8.9

7.8

Trade payables and accruals principally comprise amounts outstanding for trade purchases and ongoing costs. The average credit period
taken for trade purchases is 39 days.

The directors consider that the carrying amount of trade payables approximates to their fair value.

25. Provisions

Current liabilities
Property provisions
Distribution provisions
Other provisions

Short term provisions

Non-current liabilities
Property provisions
Distribution provisions
Other provisions

Long term provisions

Property provisions
Distribution provisions
Other provisions

Total provisions

1 April
2006
£ million

26 March
2005
£ million

0.9
2.5
0.3

3.7

0.1
0.5
0.3

0.9

1.0
3.0
0.6

4.6

1.4
3.4
0.3

5.1

0.1
2.2
0.7

3.0

1.5
5.6
1.0

8.1

Mothercare plc Annual report and accounts 2006 57

Notes to the consolidated ﬁnancial statements continued

25. Provisions continued
The movement on total provisions is as follows:

Balance at 26 March 2005
Utilised in year
Charged in year

Balance at 1 April 2006

Property
provisions
£ million

Distribution
provisions
£ million

Other
provisions
£ million

Total
provisions
£ million

1.5
(0.5)
–

1.0

5.6
(2.6)
–

3.0

1.0
(0.7)
0.3

0.6

8.1
(3.8)
0.3

4.6

Property provisions principally represent the costs of store disposals. The timing of the utilisation of these provisions is variable dependent
upon the lease expiry dates of the properties concerned.

Distribution provisions principally represent the costs of the reorganisation of distribution network, of which the main components relate
to lease provisions on vacant property and start up costs. It is expected that substantially all of the distribution provisions will be utilised
by March 2007.

Other provisions principally represent provisions for uninsured losses, hence the timing of the utilisation of these provisions is uncertain.

26. Called up share capital

Authorised
Ordinary shares of 50p each:
Balance at beginning and end of year

Allotted, called up and fully paid
Ordinary shares of 50p each:
Balance at beginning of year
Issued under the Mothercare 2000 Executive Share Option Plan
Issued under the Mothercare Sharesave Scheme

Balance at end of year

Further details of employee and executive share schemes are given in note 31.

53 weeks
ended
1 April
2006
number of
shares

52 weeks
ended
26 March
2005
number of
shares

53 weeks
ended
1 April
2006

52 weeks
ended
26 March
2005

£ million

95,767,413

47.9

71,615,737
1,043,707
6,105

71,062,086
226,472
327,179

72,665,549

71,615,737

35.8
0.5
–

36.3

35.5
0.1
0.2

35.8

58 Mothercare plc Annual report and accounts 2006

27. Reserves

As at 27 March 2004
Premium arising on issue of equity shares
Actuarial losses on retirement beneﬁt obligations
Credit to equity for share-based payments
Tax on items taken directly to equity
Dividends paid
Proﬁt for the ﬁnancial year

As at 26 March 2005
IAS 39 transition balance sheet adjustments
IAS 39 transfers to income statement
Premium arising on issue of equity shares
Actuarial losses on retirement beneﬁt obligations
Credit to equity for share-based payments
Purchase of own shares
Shares transferred to employees on vesting
Tax on items taken directly to equity
Dividends paid
Net proﬁt for the ﬁnancial year

As at 1 April 2006

Share
premium
account
£ million

Own
shares
£ million

Retained
earnings
£ million

0.6
0.7
–
–
–
–
–

1.3
–
–
0.9
–
–
–
–
–
–
–

2.2

(5.5)
–
–
–
–
–
–

(5.5)
–
–
–
–
–
(1.1)
0.1
–
–
–

(6.5)

86.1
–
(9.3)
0.8
3.1
(4.6)
11.3

87.4
(0.1)
0.1
–
(0.8)
0.5
–
(0.1)
0.7
(5.5)
17.5

99.7

The own shares reserve represents the cost of shares in Mothercare plc purchased in the market and held by Mothercare Employee Trust
to satisfy options under the group’s share option schemes (see note 31). The total shareholding is 3,644,155 (2005: 3,402,053) with a market
value at 1 April 2006 of £10,707,962.

28. Reconciliation of cash ﬂow from operating activities

Proﬁt from retail operations
Adjustments for:
Depreciation of property, plant and equipment
Amortisation of intangible assets – software
Losses on disposal of property, plant and equipment
Gain on currency derivatives
Cost of employee share schemes
Charge to proﬁt from operations in respect of costs of reorganisation of distribution network
Utilisation of provision for costs of reorganisation of distribution network
Utilisation of property provisions
Utilisation of other provisions
Payments to retirement beneﬁt schemes
Charge to proﬁt from operations in respect of service costs of retirement beneﬁt schemes

Operating cash ﬂow before movement in working capital
Increase in inventories
Increase in receivables
Decrease in payables

Net cash ﬂow from operating activities

53 weeks
ended
1 April
2006
£ million

52 weeks
ended
26 March
2005
£ million

17.9

12.1
0.7
0.3
(0.2)
0.5
–
(2.6)
(0.5)
(0.4)
(8.5)
4.7

24.0
(4.0)
(3.0)
(3.7)

13.3

10.2

11.8
0.2
0.7
–
0.8
6.5
(0.9)
(1.1)
(0.3)
(12.4)
3.9

19.4
(1.8)
(3.3)
(1.8)

12.5

Mothercare plc Annual report and accounts 2006 59

Notes to the consolidated ﬁnancial statements continued

29. Analysis of cash and cash equivalents

Cash at bank and in hand

Cash and cash equivalents

30. Operating lease arrangements
The group as lessee

Amounts recognised in cost of sales for the period:
Minimum lease payments paid
Contingent rents
Minimum sublease payments received

Net rent expense for the period

1 April
2006
£ million

35.9

26 March
2005
£ million

37.0

53 weeks
ended
1 April
2006
£ million

52 weeks
ended
26 March
2005
£ million

51.8
1.0
(0.7)

52.1

48.1
1.9
(0.7)

49.3

Contingent rents relates to store properties where an element of the rent payable is determined with reference to store turnover.

At the balance sheet date, the group had outstanding commitments for future minimum lease payments under non-cancellable operating
leases, which fall due as follows:

Within one year
In the second to ﬁfth years inclusive
After ﬁve years

Total future minimum lease payments

1 April
2006
£ million

26 March
2005
£ million

56.0
196.4
312.4

564.8

54.7
193.1
326.5

574.3

At the balance sheet date, the group had total future minimum sublease payments expected to be received under non-cancellable
operating subleases of £6.7 million (2005: £6.6 million).

31. Share-based payments
An expense is recognised for share-based payments based on the fair value of the awards at the date of grant, the estimated number
of shares that will vest and the vesting period of each award.

The charge for share-based payments under IFRS is £0.5 million (2005: £0.8 million) across the following schemes:

A: Equity incentive awards
B: Long term incentive plan and share matching scheme
C: Executive share option scheme
D: Save As You Earn schemes

Details of the share schemes that the group operates are provided in the directors’ remuneration report on pages 28 to 35.

For each scheme, expected volatility was determined with reference to the 90-day volatility of the group’s share price over the previous three
years. The expected life used in the model has been adjusted, based on management’s best estimate, for the effects of non-transferability,
exercise restrictions and behavioural considerations.

60 Mothercare plc Annual report and accounts 2006

A. Equity incentive awards
The number of shares outstanding under the chairman’s equity incentive award is as follows:

Balance at beginning of year
Vested during year

Balance at end of year

The number of shares outstanding under the chief executive’s equity incentive award is as follows:

Balance at beginning of year
Vested during year

Balance at end of year

53 weeks
ended
1 April
2006
Number
of shares

31,898
(31,898)

52 weeks
ended
26 March
2005
Number
of shares

63,796
(31,898)

–

31,898

53 weeks
ended
1 April
2006
Number
of shares

52 weeks
ended
26 March
2005
Number
of shares

375,000
(75,000)

500,000
(125,000)

300,000

375,000

The fair value of each market based condition of the chief executive’s equity incentive award is calculated using a binomial model with the
following assumptions:

Grant date

Share price at award date
Expected volatility
Risk free rate
Expected dividend yield
Time to expiry
Number of shares awarded
Share price condition
Fair value

December
2002

104p
20.0%
4.75%
3.00%

5 years
100,000

400p
50.9p

100,000

200p
261.6p

300p
153.5p

B. Equity awards under the long term incentive plan and the share matching scheme
The number of shares outstanding under the long term incentive plan and the share matching scheme is as follows:

Balance at beginning of year
Awarded during year
Lapsed during year
Vested during year

Balance at end of year

53 weeks
ended
1 April
2006
Number
of shares

52 weeks
ended
26 March
2005
Number
of shares

1,655,794
362,067
(486,518)
–

1,205,598
512,156
(61,960)
–

1,531,343

1,655,794

Mothercare plc Annual report and accounts 2006 61

Notes to the consolidated ﬁnancial statements continued

31. Share-based payments continued
The fair value of the long term incentive plan and the share matching scheme awards is calculated using a Monte Carlo model to determine
the present economic value, with the following assumptions:

Grant date

Number of shares awarded
Share price at award date
Expected volatility
Expected dividend yield
Time to expiry
Correlation to comparators
TSR element fair value
EPS element fair value

June 2005

June 2004 October 2003

July 2003

362,067

512,156

108,736

1,137,915

292p
30.0%
3.00%

340p
30.0%
3.00%

277p
40.0%
2.60%

162p
40.0%
2.60%

3.25 years

15.0%
151p
186p

15.0%
185p
232p

15.0%
155p
186p

15.0%
90p
108p

Under IFRS 2, the fair value of the EPS element of the award is calculated assuming that the TSR of the Company will be at least median
within the comparator group.

C. Executive share option scheme
Share options may be granted to executives and senior managers at a price equal to the average quoted market price of the group’s shares
on the date of grant. The options vest after three years, conditional on the group’s share price exceeding 3 per cent per annum compound
growth over the vesting period. If the options remain unexercised after a period of ten years from the date of grant, they expire. Furthermore,
options are forfeited if the employee leaves the group before the options vest.

The number of options outstanding under the executive share option scheme is as follows:

Balance at beginning of year
Granted during year
Forfeited during year
Exercised during year
Expired during year

Balance at end of year

53 weeks
ended
1 April
2006
Number
of shares

52 weeks
ended
26 March
2005
Number
of shares

2,003,493
205,000
(110,773)
(1,043,707)
–

1,892,077
485,000
(147,112)
(226,472)
–

1,054,013

2,003,493

The weighted average share price at the date of exercise for share options exercised during the period was 361p. The options outstanding
at 1 April 2006 had a weighted average exercise price of 245p and a weighted average remaining contractual life of 7.4 years.

The fair value of executive share options granted during the year is calculated based on a Black-Scholes model with the following
assumptions:

Grant date

Number of options granted
Share price at grant date
Exercise price
Expected volatility
Risk free rate
Expected dividend yield
Time to expiry
Fair value of option

June
2005

November
2004

June
2004

March
2003

January
2003

December
2002

205,000

20,000

465,000

402,011

275,863

312,500

284p
284p
25.0%
4.75%
2.60%

299p
299p
19.0%
4.75%
2.60%

335p
335p
18.0%
4.25%
2.60%

99p
99p
41.0%
3.75%
1.90%

87p
87p
56.0%
4.00%
1.90%

104p
104p
67.0%
4.00%
1.90%

3.25 years

54.3p

46.1p

47.2p

29.0p

33.3p

46.2p

62 Mothercare plc Annual report and accounts 2006

D. Save As You Earn schemes
The employee Save As You Earn schemes are open to all employees and provide for a purchase price equal to the daily average market price
on the date of grant, less 20 per cent.

The shares can be purchased during a two-week period each year and are placed in the employee Save As You Earn trust for a three-year period.

The number of shares outstanding under the Save As You Earn schemes is as follows:

Balance at beginning of year
Granted during year
Forfeited during year
Exercised during year
Expired during year

Balance at end of year

53 weeks
ended
1 April
2006
Number
of shares

696,947
373,584
(125,961)
(6,105)
–

52 weeks
ended
26 March
2005
Number
of shares

1,150,488
–
(126,362)
(327,179)
–

938,465

696,947

The weighted average share price, less 20 per cent, of the shares awarded in August 2003 was 155p and November 2005 was 282p.

The fair value of Save As You Earn share options is calculated based on a Black-Scholes model with the following assumptions:

Grant date

Number of options granted
Share price at grant date
Exercise price
Expected volatility
Risk free rate
Expected dividend yield
Time to expiry
Fair value of option

November 2005

August 2003

373,584

774,364

282p
282p
25.0%
4.50%
2.60%

155p
155p
48.0%
3.50%
1.90%

3.25 years

53.0p

51.3p

32. Retirement beneﬁt schemes
The group has operated two deﬁned beneﬁt pension schemes for its employees during the year.

On 28 March 2004, the ﬁnal salary scheme was closed to new entrants and a ‘career average’ scheme was introduced to replace it. Existing
members were asked to either increase their contributions from an average of 4.8 per cent to an average of 6.8 per cent or accrue future
beneﬁts on a ‘career average’ basis.

For the protection of members’ interests, the group has appointed three trustees, two of whom are independent of the group. To maintain
this independence, the trustees and not the group are responsible for appointing their own successors.

The most recent full actuarial valuations were carried out as at 31 March 2003 and 31 March 2005 and the next full actuarial valuation will
be carried out as at 31 March 2008. The most recent full actuarial valuations were updated as at 26 March 2005 and 1 April 2006 for the
purpose of these disclosures. The present value of the deﬁned beneﬁt obligation, the related current service cost and the past service cost
were measured using the projected unit credit method.

Mothercare plc Annual report and accounts 2006 63

Notes to the consolidated ﬁnancial statements continued

32. Retirement beneﬁt schemes continued
The major assumptions used in the updated actuarial valuations were:

Discount rate
Future pension increases
Expected rate of salary increases
Expected return on schemes’ assets:

Equities
Bonds
Property
Alternative assets
Other assets
Special contributions

Amounts expensed in the income statement in respect of the deﬁned beneﬁt schemes are as follows:

Current service cost
Interest cost
Expected return on schemes’ assets
Past service cost

1 April
2006
per cent

26 March
2005
per cent

5.0
2.8
4.3

8.3
5.0
7.2
6.5
4.3
7.7

5.5
2.8
4.3

8.5
5.5
7.5
–
4.5
8.0

53 weeks
ended
1 April
2006
£ million

52 weeks
ended
26 March
2005
£ million

4.7
9.0
(10.9)
–

2.8

3.9
7.9
(9.1)
–

2.7

Current service cost has been included in administrative expenses. Actuarial gains and losses have been reported in the statement of
recognised income and expense.

The actual return on scheme assets was £30.6 million (2005: £12.5 million).

The amount included in the balance sheet arising from the group’s obligations in respect of its deﬁned beneﬁt retirement beneﬁt schemes
is as follows:

Present value of deﬁned beneﬁt obligations
Fair value of schemes’ assets

Deﬁcit in schemes
Past service cost not yet recognised in balance sheet

Liability recognised in balance sheet

Movements in the fair value of scheme assets were as follows:

At beginning of year
Actual return on schemes’ assets
Company contributions
Members’ contributions
Beneﬁts paid

At end of year

64 Mothercare plc Annual report and accounts 2006

1 April
2006
£ million

197.9
(180.4)

17.5
–

17.5

26 March
2005
£ million

165.8
(143.4)

22.4
–

22.4

53 weeks
ended
1 April
2006
£ million

52 weeks
ended
26 March
2005
£ million

143.4
30.5
8.5
1.8
(3.8)

180.4

119.6
13.1
12.4
1.7
(3.4)

143.4

The analysis of the fair values of the schemes’ assets and the expected rates of return at each balance sheet date were:

Equities
Bonds
Property
Alternative assets
Other assets
Special contributions1

1 April
2006
per cent

1 April
2006
£ million

26 March
2005
per cent

26 March
2005
£ million

8.3
5.0
7.2
6.5
4.3
7.7

112.5
24.5
31.3
6.5
0.3
5.3

180.4

8.5
5.5
7.5
–
4.5
8.0

88.4
19.5
25.0
–
0.5
10.0

143.4

1. The special contribution of £5.3 million (2005: £10.0 million) received from the Company was held in cash at the balance sheet date and subsequently invested in line with the
scheme’s investment asset allocation policy.

The history of experience adjustments is as follows:

Present value of deﬁned beneﬁt obligations
Fair value of schemes’ assets

Deﬁcit in the schemes

Experience adjustments on scheme liabilities

Percentage of schemes’ liabilities

Experience adjustments on scheme assets

Percentage of schemes’ assets

53 weeks
ended
1 April
2006

52 weeks
ended
26 March
2005

£197.9m
(£180.4m)

£165.8m
(£143.4m)

£17.5m

£22.4m

£19.8m

£12.7m

10.0%

7.7%

£19.7m

£3.4m

10.9%

2.4%

In accordance with the transitional provisions for the amendments to IAS 19 issued in December 2004, the disclosures above are determined
prospectively from the 52 weeks ended 26 March 2005.

The estimated amount of cash contributions expected to be paid to the schemes during the 52 weeks ending 31 March 2007 is £4.8 million.

33. Related party transactions
Transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation and are not
disclosed in this note.

Remuneration of key management personnel
The remuneration of the operating board (including 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’. Further information about the remuneration of individual
directors is provided in the audited part of the directors’ remuneration report on pages 28 to 35.

Short term employee beneﬁts
Post employment beneﬁts
Termination beneﬁts
Share-based payments

53 weeks
ended
1 April
2006
£ million

52 weeks
ended
26 March
2005
£ million

2.4
0.4
0.1
0.4

3.3

2.0
0.2
–
0.6

2.8

Mothercare plc Annual report and accounts 2006 65

Notes to the consolidated ﬁnancial statements continued

34. Explanation of transition to IFRS
This is the ﬁrst year that the group has presented its ﬁnancial statements under IFRS. The following disclosures are required in the year of transition.
The last ﬁnancial statements under UK GAAP were for the 52 weeks ended 26 March 2005 and the date of transition to IFRS was 28 March 2004.
Further details of the restatement and reconciliations of the UK GAAP ﬁnancial information for the 52 weeks ended 26 March 2005 can be
obtained from the group’s website, download the document ‘Adoption of International Financial Reporting Standards’ in the ‘news releases’
section at www.mothercare.com/investorinfo

Reconciliation of equity at 28 March 2004 (the date of transition to IFRS)

Note

UK GAAP
£ million

Effect of
transition
£ million

IFRS
£ million

Non-current assets
Property, plant and equipment
Intangible assets – software
Deferred tax asset

Current assets
Inventories
Trade and other receivables
Cash and cash equivalents

Total assets

Current liabilities
Trade and other payables
Short term provisions

Non-current liabilities
Trade and other payables
Retirement beneﬁt obligations
Long term provisions

Total liabilities

Net assets

Equity attributable to equity holders of the parent
Called up share capital
Share premium account
Own shares
Retained earnings

Total equity

3, 5

81.3
–
6.4

87.7

45.0
27.6
40.3

112.9

200.6

(60.1)
(2.9)

(63.0)

(1.2)
–
(0.7)

(1.9)

(64.9)

135.7

35.5
0.6
(4.2)
103.8

135.7

(1.2)
1.2
8.3

8.3

–
–
–

–

8.3

2.8
–

2.8

(7.3)
(22.8)
–

(30.1)

(27.3)

(19.0)

–
–
(1.3)
(17.7)

(19.0)

80.1
1.2
14.7

96.0

45.0
27.6
40.3

112.9

208.9

(57.3)
(2.9)

(60.2)

(8.5)
(22.8)
(0.7)

(32.0)

(92.2)

116.7

35.5
0.6
(5.5)
86.1

116.7

Notes to the reconciliation of equity at 28 March 2004 (the date of transition to IFRS)
1. Standalone computer software of £1.2 million has been reclassiﬁed from tangible assets under UK GAAP to intangible assets under IFRS.
2. The UK GAAP deferred tax asset of £6.4 million has been reclassiﬁed from current assets under UK GAAP to non-current assets under IFRS. The UK GAAP deferred tax asset of
£6.4 million has increased by £8.3 million to £14.7 million as a result of the following transition adjustments. Firstly, the recognition of the retirement beneﬁt obligation (see note 6
below) has increased the deferred tax asset by £6.8 million. Secondly, the reinstatement of lease incentives (see note 5 below) has increased the deferred tax asset by £0.9 million.
Finally, changes in the accounting for share-based payments (see note 7 below) have increased the deferred tax asset by £0.6 million.

3. Under UK GAAP the dividend of £2.7 million was accrued in the period it was proposed, under IFRS it is accrued in the period when it is approved.
4. In the UK GAAP presentation format there is one separate balance sheet item line for provisions but under IFRS provisions are separated and presented as either current or

non-current.

5. Under UK GAAP lease incentives were written off over the period to the ﬁrst rent review, under IFRS they are written off over the whole of the lease term. This has resulted in a

net £7.2 million write back of lease incentives, increasing non-current liabilities by £7.3 million and reducing current liabilities by £0.1 million.

6. The retirement beneﬁt schemes’ deﬁcit of £22.8 million has been recognised in the balance sheet under IFRS.
7. The own shares reserve has been adjusted by £1.3 million under IFRS so it represents the cost of shares in Mothercare plc purchased in the market and held by the Mothercare

Employee Trust to satisfy options under the group’s share option schemes. The costs associated with the share schemes are now included in retained earnings.

8. The net effect of the transition to IFRS on brought forward retained earnings is £17.7 million, mainly due to the retirement beneﬁt schemes and deferred tax.

66 Mothercare plc Annual report and accounts 2006

Reconciliation of equity as at 26 March 2005 (the date of the last UK GAAP ﬁnancial statements)

Note

UK GAAP
£ million

Effect of
transition
£ million

IFRS
£ million

Non-current assets
Property, plant and equipment
Intangible assets – software
Deferred tax asset

Current assets
Inventories
Trade and other receivables
Cash and cash equivalents

Total assets

Current liabilities
Trade and other payables
Short term provisions

Non-current liabilities
Trade and other payables
Retirement beneﬁt obligations
Long term provisions

Total liabilities

Net assets

Equity attributable to equity holders of the parent
Called up share capital
Share premium account
Own shares
Retained earnings

Total equity

2, 3

87.0
–
2.0

89.0

46.8
38.8
37.0

122.6

211.6

(59.5)
(5.1)

(64.6)

(0.5)
–
(3.0)

(3.5)

(68.1)

143.5

35.8
1.3
(3.2)
109.6

143.5

(2.7)
2.7
11.6

11.6

–
(10.0)
–

(10.0)

1.6

3.6
–

3.6

(7.3)
(22.4)
–

(29.7)

(26.1)

(24.5)

–
–
(2.3)
(22.2)

(24.5)

84.3
2.7
13.6

100.6

46.8
28.8
37.0

112.6

213.2

(55.9)
(5.1)

(61.0)

(7.8)
(22.4)
(3.0)

(33.2)

(94.2)

119.0

35.8
1.3
(5.5)
87.4

119.0

Notes to the reconciliation of equity as at 26 March 2005 (the date of the last UK GAAP ﬁnancial statements)
1. Standalone computer software of £2.7 million has been reclassiﬁed from tangible assets under UK GAAP to intangible assets under IFRS.
2. The UK GAAP deferred tax asset of £2.0 million has been reclassiﬁed from current assets under UK GAAP to non-current assets under IFRS. The UK GAAP deferred tax asset of
£2.0 million has increased by £11.6 million to £13.6 million as a result of the following transition adjustments. Firstly, the recognition of the retirement beneﬁt obligation (see note 7
below) has increased the deferred tax asset by £9.7 million. Secondly, the reinstatement of lease incentives (see note 6 below) has increased the deferred tax asset by £1.0 million.
Finally, changes in the accounting for share-based payments (see note 8 below) have increased the deferred tax asset by £0.9 million.

3. Under UK GAAP SSAP 24 a prepayment of £10.0 million was recognised in relation to the special contribution paid to the pension scheme. Under IFRS this is written off against

the pension deﬁcit.

4. Under UK GAAP the dividend of £3.6 million was accrued in the period it was proposed, under IFRS it is accrued in the period when it is approved.
5. In the UK GAAP presentation format there is one separate balance sheet item line for provisions but under IFRS provisions are separated and presented as either current or

non-current.

6. Under UK GAAP lease incentives were written off over the period to the ﬁrst rent review, under IFRS they are written off over the whole of the lease term. This has resulted in

a £7.3 million write back of lease incentives.

7. The retirement beneﬁt schemes’ deﬁcit of £22.4 million has been recognised in the balance sheet under IFRS.
8. The own shares reserve has been adjusted by £2.3 million under IFRS so it represents the cost of shares in Mothercare plc purchased in the market and held by the Mothercare

Employee Trust to satisfy options under the group’s share option schemes. The costs associated with the share schemes are now included in retained earnings.

9. The net effect of the transition to IFRS on brought forward retained earnings is £22.2 million, mainly due to the retirement beneﬁt schemes and deferred tax.

Mothercare plc Annual report and accounts 2006 67

Notes to the consolidated ﬁnancial statements continued

34. Explanation of transition to IFRS continued
Reconciliation of proﬁt for the 52 weeks ended 26 March 2005

Revenue
Cost of sales
Reorganisation of distribution network

Gross proﬁt
Administrative expenses

Proﬁt from retail operations

Proﬁt from operations
Proﬁt on disposal of subsidiary undertaking

Proﬁt before ﬁnancing and taxation
Investment income
Finance costs

Proﬁt before taxation
Taxation

Proﬁt for the period attributable to equity holders of the parent

Note

UK GAAP
£ million

Effect of
transition
£ million

2, 3

457.2
(408.0)
(6.5)

42.7
(31.3)

11.4

11.4
2.4

13.8
1.8
(0.1)

15.5
(4.4)

11.1

–
(0.1)
–

(0.1)
(1.1)

(1.2)

(1.2)
–

(1.2)
9.1
(7.9)

–
0.2

0.2

IFRS
£ million

457.2
(408.1)
(6.5)

42.6
(32.4)

10.2

10.2
2.4

12.6
10.9
(8.0)

15.5
(4.2)

11.3

Notes to the reconciliation of proﬁt for the 52 weeks ended 26 March 2005 (date of last UK GAAP ﬁnancial statements)
1. Under UK GAAP lease incentives were written off over the period to the ﬁrst rent review, under IFRS they are written off over the whole of the lease term. This has resulted in a

£0.1 million increase in cost of sales.

2. Under IFRS the service costs, investment income and ﬁnance costs of retirement beneﬁt schemes are all recognised gross. This resulted in an increased charge to administrative

expenses of £1.5 million in respect of current service costs, and recognition of investment income of £9.1 million and ﬁnance costs of £7.9 million.

3. Changes in the calculation of charges in relation to share-based payments also resulted in a credit of £0.4 million to administrative expenses under IFRS.
4. The net effect on the current year tax charge of the transition to IFRS is a reduction in the charge of £0.2 million.

Explanation of material adjustments to the cash ﬂow statement for the 52 weeks ended 26 March 2005 (date of last UK GAAP ﬁnancial statements)
The adoption of IFRS does not affect the group’s cash ﬂows. However, the IFRS presentation of cash ﬂows differs from that required under UK GAAP.
IFRS requires that the cash ﬂows of the group be split between three categories – operating activities, investing activities and ﬁnancing activities.

Under IFRS, liquid investments with maturities of less than three months at acquisition are classiﬁed with cash and cash equivalents. Under UK GAAP,
these amounts were presented as time deposits within liquid resources.

To comply with IFRS, cash ﬂows relating to retirement beneﬁt obligations (including the prepayment of the special contribution of £10.0 million
to the pension scheme which has been derecognised under IFRS) have been reclassiﬁed.

68 Mothercare plc Annual report and accounts 2006

Company ﬁnancial statements

70 Statement of directors’ responsibilities for the Company ﬁnancial statements
70 Independent auditors’ report on the Company ﬁnancial statements
72 Company balance sheet
73 Notes to the Company ﬁnancial statements

Mothercare plc Annual report and accounts 2006 69

Statement of directors’ responsibilities
for the Company ﬁnancial statements

Independent auditors’ report on the
Company ﬁnancial statements

The directors are responsible for preparing the annual report and
the ﬁnancial statements. The directors have chosen to prepare the
accounts for the Company in accordance with United Kingdom
Generally Accepted Accounting Practice (UK GAAP).

Company law requires the directors to prepare such ﬁnancial
statements for each ﬁnancial year which give a true and fair view in
accordance with UK GAAP of the state of affairs of the Company and
of the proﬁt or loss of the Company for that period and comply with
UK GAAP and the Companies Act 1985. In preparing those ﬁnancial
statements, the directors are required to:

• select suitable accounting policies and then apply them consistently;

• make judgements and estimates that are reasonable and prudent;

• state whether applicable accounting standards have been

followed; and

• prepare the ﬁnancial statements on a going concern basis unless
it is inappropriate to presume that the Company will continue in
business.

The directors are responsible for keeping proper accounting records
which disclose with reasonable accuracy at any time the ﬁnancial
position of the Company and to enable them to ensure that the
ﬁnancial statements comply with the Companies Act 1985. They are
also responsible for safeguarding the assets of the Company and
hence for taking reasonable steps for the prevention and detection
of fraud and other irregularities.

To the shareholders of Mothercare plc
We have audited the individual Company ﬁnancial statements of
Mothercare plc for the 53 weeks ended 1 April 2006 which comprise
the balance sheet and the related notes 1 to 10. These individual
Company ﬁnancial statements have been prepared under the
accounting policies set out therein.

The corporate governance statement and the directors’ remuneration
report are included in the group annual report of Mothercare plc
for the 53 weeks ended 1 April 2006. We have reported separately
on the group ﬁnancial statements of Mothercare plc for the 53 weeks
ended 1 April 2006 and on the information in the directors’ remuneration
report that is described as having been audited.

This report is made solely to the Company’s members, as a body, in
accordance with section 235 of the Companies Act 1985. Our audit
work has been undertaken so that we might state to the Company’s
members those matters we are required to state to them in an
auditors’ report and for no other purpose. To the fullest extent
permitted by law, we do not accept or assume responsibility to anyone
other than the Company and the Company’s members as a body,
for our audit work, for this report, or for the opinions we have formed.

Respective responsibilities of directors and auditors
The directors’ responsibilities for preparing the annual report and
the individual Company ﬁnancial statements in accordance with
applicable law and United Kingdom Accounting Standards (United
Kingdom Generally Accepted Accounting Practice) are set out in the
statement of directors’ responsibilities.

Our responsibility is to audit the individual Company ﬁnancial
statements in accordance with relevant United Kingdom legal and
regulatory requirements and International Standards on Auditing
(UK and Ireland).

70 Mothercare plc Annual report and accounts 2006

We report to you our opinion as to whether the individual Company
ﬁnancial statements give a true and fair view in accordance with the
relevant ﬁnancial reporting framework and whether the individual
Company ﬁnancial statements have been properly prepared in
accordance with the Companies Act 1985. We report to you if, in
our opinion, the directors’ report is not consistent with the individual
Company ﬁnancial statements. We also report to you if the Company
has not kept proper accounting records, if we have not received
all the information and explanations we require for our audit, or if
information speciﬁed by law regarding directors’ remuneration and
other transactions is not disclosed.

We read the directors’ report and the other information contained
in the annual report for the above year as described in the contents
section including the unaudited part of the directors’ remuneration
report and consider the implications for our report if we become
aware of any apparent misstatements or material inconsistencies
with the individual Company ﬁnancial statements.

Basis of audit opinion
We conducted our audit in accordance with International Standards
on Auditing (UK and Ireland) issued by the Auditing Practices Board.
An audit includes examination, on a test basis, of evidence relevant
to the amounts and disclosures in the individual Company ﬁnancial
statements. It also includes an assessment of the signiﬁcant estimates
and judgements made by the directors in the preparation of the
individual Company ﬁnancial statements, and of whether the
accounting policies are appropriate to the Company’s circumstances,
consistently applied and adequately disclosed.

We planned and performed our audit so as to obtain all the
information and explanations which we considered necessary
in order to provide us with sufﬁcient evidence to give reasonable
assurance that the individual Company ﬁnancial statements are
free from material misstatement, whether caused by fraud or other
irregularity or error. In forming our opinion we also evaluated the
overall adequacy of the presentation of information in the individual
Company ﬁnancial statements.

Opinion
In our opinion:

• the individual Company ﬁnancial statements give a true and fair
view, in accordance with United Kingdom Generally Accepted
Accounting Practice, of the state of the Company’s affairs as at
1 April 2006; and

• the individual Company ﬁnancial statements have been properly

prepared in accordance with the Companies Act 1985.

Deloitte & Touche LLP
Chartered Accountants and Registered Auditors
London
24 May 2006

Mothercare plc Annual report and accounts 2006 71

Company balance sheet
As at 1 April 2006

Fixed assets
Investments in subsidiary undertakings

Current assets
Debtors
Cash at bank and in hand and time deposits

Creditors – amounts falling due within one year

Net current liabilities

Total assets less current liabilities

Net assets

Capital and reserves attributable to equity interests
Called up share capital
Share premium account
Own shares
Proﬁt and loss account

Equity shareholders’ funds

1 April
2006

Note

£ million

26 March
2005

restated*
£ million

108.8

5.1
44.7

49.8
(86.9)

(37.1)

71.7

36.3
2.2
(6.5)
39.7

71.7

4.9
50.0

54.9
(86.7)

(31.8)

77.0

35.8
1.3
(5.5)
45.4

77.0

*Comparative ﬁgures have been restated. Details are provided in note 9.

The notes to the Company ﬁnancial statements on pages 73 to 75 and the accounting policies described therein form an integral part of this
balance sheet.

Approved by the board on 24 May 2006 and signed on its behalf by:

Ben Gordon
Neil Harrington

72 Mothercare plc Annual report and accounts 2006

Notes to the Company ﬁnancial statements

1. Signiﬁcant accounting policies
Basis of presentation
The Company’s accounting period covers the 53 weeks ended 1 April 2006. The comparative period covered the 52 weeks ended 26 March 2005.

Basis of accounting
The separate ﬁnancial statements of the Company are presented as required by the Companies Act 1985. They have been prepared under
the historical cost convention and in accordance with applicable United Kingdom law and United Kingdom generally accepted accounting
standards. The principal accounting policies are presented below and have been applied consistently throughout the 53 weeks ended
1 April 2006 and the preceding 52 weeks ended 26 March 2005, except where changes have been made to previous policies on the adoption
of new accounting standards during the year.

The Company has adopted FRS 21 ‘Events After the Balance Sheet Date’. The adoption of this standard represents a change in accounting
policy and the comparative ﬁgures have been restated accordingly. The Company has also adopted FRS 20 ‘Share-based Payment’ which
supersedes UITF 17 ‘Employee Share Schemes’ and the UITF 17 charge credited to the own shares reserve in prior years has also been restated.
Details of the effect of the prior year adjustments are given in note 9 to the Company ﬁnancial statements. There has been no impact of
the adoption of FRS 20 in the current year as the Company has no employees. FRS 17 ‘Retirement Beneﬁts’, FRS 22 ’Earnings per share’,
FRS 23 ‘The Effects of Changes in Foreign Exchange Rates’, FRS 25 ‘ Financial Instruments: Disclosure and Presentation’, FRS 26 ‘Financial
Instruments: Measurement’ and FRS 28 ‘Corresponding Amounts’ have also been adopted with no impact.

Investments
Fixed asset investments are shown at cost less provision for impairment.

Taxation
Current tax, including UK corporation tax and foreign tax, is provided at amounts expected to be paid (or recovered) using the tax rates and
laws that have been enacted or substantively enacted by the balance sheet date.

Cash ﬂow statement
The Company is exempt from the requirement of FRS 1 (revised) to include a cash ﬂow statement as part of its Company ﬁnancial statements
because it prepares a consolidated cash ﬂow statement which is shown on page 40.

2. Proﬁt and loss account
As permitted by section 230 of the Companies Act 1985, no separate proﬁt and loss account is presented for the Company. The Company loss
for the 53 weeks ended 1 April 2006 was £0.1 million (2005: proﬁt of £2.6 million as restated). The audit fees for the Company were borne by
another group company. The Company did not incur any non-audit fees, have any employees or incur any directors’ emoluments during the
current or the preceding ﬁnancial year.

3. Taxation
The Company has tax losses carried forward of £nil (2005: £1.5 million) on which no deferred tax asset has been recognised.

4. Investments in subsidiary undertakings
Investments in the Company’s balance sheet consist of its investments in subsidiary undertakings.

The Company’s signiﬁcant subsidiaries, all of which are wholly owned, are as follows:

Mothercare UK Limited
Storehouse Finance plc*

*Direct subsidiary of Mothercare plc

The Company’s investment in its subsidiary undertakings is as follows:

Cost of investments (less amounts written off £153.0 million (2005: £153.0 million))
Loans to subsidiary undertakings

Country of incorporation

United Kingdom
United Kingdom

1 April
2006
£ million

43.3
65.5

26 March
2005
£ million

43.3
65.5

108.8

Mothercare plc Annual report and accounts 2006 73

Notes to the Company ﬁnancial statements continued

5. Debtors

Amounts due from subsidiary undertakings
Other debtors

*Comparative ﬁgures have been restated for the adoption of FRS 20 ‘Share-based Payment’. Details are provided in note 9.

6. Creditors – amounts falling due within one year

Amounts due to subsidiary undertakings
Accruals and deferred income

*Comparative ﬁgures have been restated for the adoption of FRS 21 ‘Events After the Balance Sheet Date’. Details are provided in note 9.

7. Called up share capital

Authorised
Ordinary shares of 50p each:
Balance at 1 April 2006 and 26 March 2005

Allotted, called-up and fully paid
Ordinary shares of 50p each:
Balance at 26 March 2005
Issued under the Mothercare 2000 Executive Share Option Plan
Issued under the Mothercare Sharesave Scheme

Balance at 1 April 2006

1 April
2006

£ million

26 March
2005

restated*
£ million

5.1
–

5.1

4.8
0.1

4.9

1 April
2006

£ million

86.4
0.5

86.9

26 March
2005

restated*
£ million

86.3
0.4

86.7

Number of
shares

£ million

95,767,413

47.9

71,615,737
1,043,707
6,105

72,665,549

35.8
0.5
–

36.3

Further details of employee and executive share schemes are provided in note 31 to the consolidated ﬁnancial statements.

8. Reserves

Balance at 26 March 2005 (as previously stated)
Prior year adjustment – FRS 21
Prior year adjustment – FRS 20

Balance at 26 March 2005 (as restated)
Net premium on shares issued
Purchase of own shares
Shares transferred to employees on vesting
Dividends
Retained loss for the ﬁnancial year

Balance at 1 April 2006

Share
premium
reserve
£ million

Own shares
reserve
restated*
£ million

1.3
–
–

1.3
0.9
–
–
–
–

2.2

(3.2)
–
(2.3)

(5.5)
–
(1.1)
0.1
–
–

(6.5)

Proﬁt
and loss
reserve
restated*
£ million

41.8
3.6
–

45.4
–
–
(0.1)
(5.5)
(0.1)

39.7

*Comparative ﬁgures have been restated for the adoption of FRS 21 ‘Events After the Balance Sheet Date’ and FRS 20 ‘Share-based Payment’. Details are provided in note 9.

74 Mothercare plc Annual report and accounts 2006

9. Prior year adjustments
Comparative ﬁgures have been restated for the adoption of FRS 21 ‘Events After the Balance Sheet Date’ and FRS 20 ‘Share-based Payment’.
Under FRS 21 it is no longer appropriate to recognise proposed dividends in creditors at the balance sheet date. Under FRS 20 no charge
arises as the Company has no employees and accordingly the UITF 17 charge previously credited to the own shares reserve has been restated.

Balance at 26 March 2005 as previously stated
Prior year adjustment – FRS 21:

Proposed dividends

Prior year adjustment – FRS 20:

Share-based payment charges

Balance at 26 March 2005 as restated

10. Reconciliation of equity shareholders’ funds

Equity shareholders’ funds brought forward as previously stated
Prior year adjustment – FRS 21
Prior year adjustment – FRS 20

Equity shareholders’ funds brought forward as restated
Dividends
Shares issued
Purchase of own shares
Retained (loss)/proﬁt for the year as restated

Equity shareholders’ funds carried forward

Debtors
£ million

Creditors
£ million

ESOP
reserve
£ million

Proﬁt
and loss
reserve
£ million

(7.2)

90.3

(3.2)

41.8

–

(3.6)

2.3

(4.9)

–

86.7

–

(2.3)

(5.5)

3.6

–

45.4

53 weeks
ended
1 April
2006

£ million

52 weeks
ended
26 March
2005

restated*
£ million

75.7
3.6
(2.3)

77.0
(5.5)
1.4
(1.1)
(0.1)

71.7

76.4
2.7
(1.1)

78.0
(4.6)
1.0
–
2.6

77.0

*Comparative ﬁgures have been restated for the adoption of FRS 21 ‘Events After the Balance Sheet Date’ and FRS 20 ‘Share-based Payment’. Details are provided in note 9.

Mothercare plc Annual report and accounts 2006 75

Five year record

Summary of consolidated income statements
Revenue

Proﬁt/(loss) from retail operations before interest and exceptional items
Exceptional items
Interest (net)

Proﬁt/(loss) before taxation
Taxation

Proﬁt/(loss) for the ﬁnancial year

Prepared under IFRS

Prepared under UK GAAP

2006
£ million

2005
£ million

2004
£ million

2003
£ million

2002
£ million

482.7

457.2

446.9

431.7

426.9

17.9
2.9
3.4

24.2
(6.7)

17.5

16.7
(4.1)
2.9

15.5
(4.2)

11.3

15.8
7.4
0.7

23.9
7.3

31.2

(19.7)
(5.2)
0.1

(24.8)
10.0

(14.8)

3.0
(4.1)
1.2

0.1
–

0.1

Basic earnings/(loss) per share

25.5p

16.6p

46.5p

(22.0p)

0.2p

Summary of consolidated balance sheets
Deferred tax asset
Other non-current assets
Net current assets
Retirement beneﬁt obligations
Other non-current liabilities

8.5
87.7
62.8
(17.5)
(9.8)

13.6
87.0
51.6
(22.4)
(10.8)

6.4
81.3
52.8
–
(4.8)

–
85.6
27.0
–
(6.9)

–
88.6
37.3
–
(5.5)

Total net assets

131.7

119.0

135.7

105.7

120.4

Other key statistics
Share price at year end

Net cash/equity

Capital expenditure

Depreciation and amortisation

Rents

Number of UK stores

UK selling space (000’s sq ft)

Average number of employees

Average number of full time equivalents

314.75p

277.0p

354.0p

101.5p

232.5p

27.3%

31.1%

29.7%

7.0%

9.8%

16.7

12.8

50.6

231

1,857

5,255

3,174

18.4

12.0

47.4

231

1,858

5,149

3,051

8.5

13.0

46.0

233

1,863

5,005

3,033

13.4

11.6

45.7

241

1,922

5,032

3,109

10.7

11.6

44.1

245

1,927

5,201

3,111

The net assets for 2003 and 2002 have been restated where necessary in accordance with UITF 38 ‘Accounting for ESOP Trusts’.

An analysis of the adjustments that were made to restate the group’s ﬁnancial position as at 26 March 2005 and its results for the period then
ended in accordance with IFRS is presented in note 34. If the ﬁnancial information presented above for earlier periods was to be restated in
accordance with IFRS, the adjustments that would be necessary would be similar in nature to, although may differ in magnitude from, those
outlined in note 34.

76 Mothercare plc Annual report and accounts 2006

Shareholder information

Shareholder analysis
A summary of holdings as at 16 May 2006 is as follows:

Financial calendar

Mothercare ordinary shares

Number of shares
million

Number of
shareholders

Annual General Meeting
Announcement of interim results

Banks, insurance companies and
pension funds
Nominee companies
Other corporate holders
Individuals

1.1
67.0
0.2
4.4

72.7

109
654
12
25,496

26,271

Payment of interim dividend
Preliminary announcement of results for
the 52 weeks ending 31 March 2007
Issue of report and accounts
Annual General Meeting
Payment of ﬁnal dividend

2006

20 July
mid November

2007

February

end May
mid June
mid July
end July

As can be seen from the above analysis, many shares are
registered in the name of a nominee company as the legal owner.
The underlying holder of shares through a nominee account is the
beneﬁcial owner of these shares, being entitled to the capital value
and the income arising from them. An analysis of these nominee
holdings shows that the largest underlying holders are pension
funds, with unit trusts and insurance companies the other major
types of shareholder.

Individual shareholders owning 500 or more Mothercare shares
are entitled to a 10 per cent discount in deﬁned denominations
on up to £500 of merchandise in Mothercare stores. If an individual
shareholding of 500 or more shares is not on the share register but
is held through a nominee or trustee, the book of vouchers can
nevertheless be obtained by contacting the company secretary
at the registered ofﬁce.

Share price data

Share price at 31 March 2006
(24 March 2005)
Market capitalisation
Share price movement during the year:

High
Low

2006

2005

314.75p
£228.7m

277.0p
£198.4m

383.0p
264.0p

374.0p
277.0p

All share prices are quoted at the mid-market closing price. For
capital gains tax purposes:

• the market value on 31 March 1982 of one ordinary share in
British Home Stores PLC is 155p and of one ordinary share in
Habitat Mothercare PLC is 133p; and

• the market value of each Mothercare plc 50p ordinary share

immediately following the reduction of capital and consolidation
for the purpose of allocating base cost between such shares and
the shares disposed of as a result of the reduction is 135p.

Registrars and transfer office
Lloyds TSB Registrars, The Causeway, Worthing, West Sussex BN99 6DA.

Registered office and head office
Cherry Tree Road, Watford, Hertfordshire WD24 6SH
Telephone 01923 241000
www.mothercare.com
Registered number 1950509

Company secretary
Clive E Revett

Registrars
Administrative enquiries concerning shareholders in Mothercare plc
for such matters as the loss of a share certiﬁcate, dividend payments
or a change of address should be directed, in the ﬁrst instance, to
the registrars:

Lloyds TSB Registrars
The Causeway, Worthing, West Sussex BN99 6DA
Telephone 0870 600 3965
www.lloydstsb-registrars.co.uk

Low cost share dealing service
A postal share dealing service is available through the Company’s
stockbrokers for the purchase and sale of Mothercare plc shares.
Further details can be obtained from:

JPMorgan Cazenove Limited
20 Moorgate, London EC2R 6DA
Telephone 020 7155 5155

ShareGift
Shareholders with a small number of shares, the value of which
makes it uneconomic to sell them, may wish to consider donating
them to charity through ShareGift, a registered charity administered
by The Orr Mackintosh Foundation. The share transfer form needed
to make a donation may be obtained from the Mothercare plc
registrars, Lloyds TSB Registrars.

Further information about ShareGift is available from
www.sharegift.org or by telephone on 020 7337 0501.

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Mothercare plc
Cherry Tree Road
Watford
Hertfordshire
WD24 6SH

T 01923 241000
F 01923 240944
www.mothercare.com

Registered in England number 1950509