Marks and Spencer 1998 Annual Report Download - page 38

Specific costs related to Year 2000 will be £25 million across the
Group (of which £3 million is included in the year under review).
The bulk of the work on IT systems is due to be completed by
December 1998, with some retesting to be per formed in 1999.
Our normal business programmes that are due to be completed
by the millennium, such as the roll out of the new Point of Sale
systems, will also ensure Year 2000 compliance.
ECONOMIC & MONETARY UNION
Although the United Kingdom will not be a member of the initial
phase effective on 1 January 1999, Marks & Spencer will by then
be trading, either directly or through franchise partners, in 10 of
the initial 11 participating countries. The Company has been fully
involved in discussions in Brussels and London about the practical
aspects of the introduction of the euro.
During the changeover period the new tills now being introduced
throughout Europe are capable of handling the necessary two
currencies. Important practical decisions for the dual display of
prices will be trialled in our Dutch stores before being ex tended
to the other member countries.
The additional costs associated with the introduction of the euro
in the Republic of Ireland and our Continental European stores are
not thought to be significant. It is too early to forecast accurately
the potential costs of the euroÕs introduction in the UK.
TA X
The effective rate of tax for the Group has decreased from 31.4%
last year to 29.0% this year reflecting the fall in the rate of
corporation tax in the UK from 33% to 31%. The rate also benefits
from prior year adjustments, the impact of tax jurisdictions
overseas and capital allowances in ex cess of depreciation offset by
losses and costs which are not deductible for tax purposes.
SURPLUSES ON REVALUATION OF INVESTMENTS
The revaluation surplus of £49.8 million shown in the statement of
total recognised gains and losses relates mainly to our investment
interest in the Gyle Shopping Centre. (See note 11C on page 60.)
TREASURY POLICY
Treasury policies are regularly reviewed by the Board, and day to
day operations are directly controlled by senior management.
There has been no material change to policies for investment,
borrowing and foreign ex change during 1997/ 98. The Group does
not hedge balance sheet and profit and loss account translation
ex posures. Where appropriate, borrowings are arranged in local
currencies and this provides a natural hedge against overseas
assets. Intra group purchases of merchandise by overseas
subsidiaries are covered by for ward foreign ex change contracts for
periods averaging 10-15 months.
The GroupÕs Treasury uses derivatives to manage risk by altering
the interest rate and currency ex posures on investment, funding
and foreign ex change contracts so that the resulting ex posures
give greater certainty of future costs. Contracts are only entered
into when there is underlying commercial justification and with
counterparties which fulfil predetermined credit criteria. The main
types of instrument used are interest rate swaps, for ward rate
agreements and forward currency contracts.
The A ccounting Standards Board has published an Ex posure
Draft (FRED13) on the Disclosure of Derivatives and Other Financial
Instruments. Notes 16, 19 and 22 to 24 provide an analysis of the
GroupÕs use of financial instruments, reflecting how treasur y
policies and objectives have been implemented.
FINANCING
The net debt of the Group was £319.3 million at the balance sheet
date. This figure is represented by retailing cash balances of
£947.7 million, after the deduction of the borrowings of the
Financial Ser vices companies of £1,267.0 million. Intra group
transactions between the parent company and the Financial
Ser vices companies are carried out on an armÕs length basis.
The promissory note for US$450 million was repaid on 29 April
1998, primarily from balances held in shor t-term US dollar assets.
CAPITAL STRUCTURE
The Group has announced a number of measures designed to
improve the efficiency of the CompanyÕs capital structure including:
a) Market purchase of shares for the profit sharing schemes.
b) Suspension of the scrip dividend scheme and replacement
with
a dividend reinvestment plan.
These measures will remove the element of earnings dilution
which has arisen in the past as a result of the issue of new shares
for these purposes.
The Company also intends to ask shareholders at the A nnual
General Meeting for authority to repurchase and cancel shares up
to
a max imum of 10% of the present issued share capital. Marks &
Spencer is unusual among large companies in not having this
ability, however the Board has no present intention to use such an
authority.
In the last three years, dividend cover has reduced from 2.2
times to 1.9 times on the basis of the dividend now proposed,
before this yearÕs exceptional item. The Board has decided to
maintain a dividend policy which may reduce cover fur ther until
recent investments allow a faster rate of earnings growth to be
resumed.
ACCOUNTING DEVELOPMENTS
We have par ticipated in discussions with the A ccounting Standards
Board (A SB) throughout the year.
We are par ticularly concerned by the ASBÕs proposals in respect
of the Measurement of Tangible Fix ed A ssets. While we support
regular valuations, we do not believe that the basis of valuation
proposed is appropriate to our circumstances. It is our ex perience
that Ex isting Use Value, as defined by the Royal Institute of
Char tered Surveyors, is invariably below the actual cost to acquire
properties of the size and in the location we require and is well
below the value of those properties to our business. In addition, we
do not believe that a well constructed and maintained shell building
depreciates to an ex tent which is wor th recognising in the
accounts.
GOING CONCERN
After making enquiries, the directors have a reasonable ex pectation
that the Group has adequate resources to continue in operational
ex istence for the foreseeable future. For this reason, they have
adopted the going concern basis in preparing the financial
statements.
FINAN CIAL REVIEW
36