Cash Flow
Cash flow before acquisitions and disposals, financial investment, dividends and the proceeds of debtor securitisation amounted to £21m compared to £105m in the previous year. This result reflects the positive impact of Argos' cash flow, an £86m non-recurring VAT repayment in the UK Home Shopping business offset by the costs of servicing the Group's debt. Capital expenditure of £272m (1998 £155m) represents a 75% increase over last year reflecting not only the effect of recent acquisitions but also continued investment in the infrastructure of existing businesses.

The Group experienced a net outflow of £2,231m in respect of acquisitions and disposals, on account of the Argos acquisition and payment of the consideration for Metromail (acquired on 31 March 1998 for £560m). Acquisitions were funded from a combination of the Group's own cash resources and bank borrowings.

Balance Sheet
The Group's balance sheet has been significantly affected by three major transactions completed during the year. Payment was made of the consideration for Metromail following its acquisition on 31 March 1998. The acquisition cost of Argos plc amounted to £1,702m net of its cash balances. This was funded largely by bank borrowings. Acquired goodwill of £1,555m has been capitalised in respect of Argos and is being amortised over 20 years.

In March 1999, General Guarantee securitised £414m of its debtor book, with the proceeds being used to reduce bank borrowings. A linked presentation has been adopted within debtors, showing securitised loans netted off against the securitised element of General Guarantee's receivables.

Equity shareholders' funds have increased from £2,311m to £2,409m, largely reflecting the retained profit for the year.

Treasury Policy and Borrowings
The Group's Treasury function seeks to reduce or eliminate financial risk, to ensure sufficient liquidity is available to meet foreseeable needs, and to invest cash assets safely and profitably. It operates policies and procedures which are periodically reviewed and approved by the Board.

The shape of the balance sheet has been significantly changed by the acquisition of Argos and by the securitisation of a significant portion of General Guarantee's debtor book. At 31 March 1999, the Group's gross debt was £2,356m (1998 £597m) including finance lease and securitised loan obligations. At the end of the year, the Group had net borrowings of £2,070m, including securitised loans of £400m. This compares with net cash of £285m at 31 March 1998. Bank borrowings were reduced by £380m following the securitisation of further loans within General Guarantee's debtor book in early June 1999. The Group has recently received a credit rating and is preparing to issue investment grade, interest bearing securities.

During the period from 31 March 1998 to the date of this Annual Report, the Group has taken significant steps towards refinancing the bulk of the short term debt taken on at the time of the Argos acquisition. Upon the completion of the securitisation and planned bond issues the refinancing of the Group will be largely complete with appropriate medium to long term funding in place to reflect the nature of the Group's assets and associated cash flows. Refinancing risk is addressed by limiting the amount of refinancing obligations arising on borrowings in any twelve month period.

The Group's interest rate exposure is managed by the use of fixed and floating facilities and by the use of interest rate swaps to hedge the exposure of these borrowings to interest rate movements. The Group also mixes the duration of its deposits and borrowings to hedge the impact of interest rate fluctuations.

Approximately 37% of the Group's trading profit generated in the year ended 31 March 1999 was earned in foreign currencies, with the result that the Group's reported profit was significantly affected by currency movements. The Group borrows in foreign currencies, principally US dollars and Euros, as well as in Sterling. This has the effect of hedging the Group's investment in overseas countries and of hedging the impact of currency movements on Group profits. The Group also has a policy of hedging foreign currency denominated transactions by entering into forward exchange sale and purchase contracts.

Taxation
The Group's effective tax rate on profit for the year before amortisation of goodwill was 24.4% compared to 30.2% in the previous year. This follows a corporate reorganisation which has enabled the Group to adopt a more efficient financial structure for both its recent acquisitions and existing subsidiaries.

Share Value
The share price of GUS ranged from a low of 549p to a high of 911.5p during the course of the year. On 31 March 1999, the share price was 675p giving a market capitalisation of £6.79bn at that date.

Year 2000 and The Euro
A steering group, which reports regularly to the Board, has been in place since January 1997 to oversee the work necessary throughout the Group's operations to address the Year 2000 issue. Each Division has its own Year 2000 programme in place to address the key risks without disrupting the underlying business.

Year 2000 compliance is being achieved through conversion or replacement of existing systems. The programme has also addressed the potential impact on the Group of possible Year 2000 related failures of suppliers, clients and customers, telecommunication networks and products for resale. The progress of our key trading partners on their readiness for Year 2000 is being monitored and assurances sought where appropriate. It is estimated that expenditure in respect of the Year 2000 issue, including that already incurred and including internal and staff costs, will amount to approximately £51m of which approximately £35m has been incurred to date. A very significant part of this sum relates to testing of systems.

The Group is well advanced in its plans for Year 2000 and it is the directors' intention that the programme of work will be completed in advance of the critical dates. However, given the complexity of the problem, it is not possible for any organisation to be certain that no Year 2000 problems will occur even if its own systems are Year 2000 compliant. Year 2000 programmes include a review of business continuity plans in the light of the unique risks posed by the date change.

Those Group companies affected by the launch of European Monetary Union have successfully addressed the operational and financial impact of this development. The costs involved were relatively modest compared to those involved in addressing Year 2000.

Accounting Policies and Standards
The details of the principal accounting policies used by the Group can be found in the notes to the financial statements.

Compared to last year and to this year's Interim Report there is only one change of note. In accordance with FRS 10 'Goodwill and Intangible Assets', goodwill arising on acquisitions has been capitalised and is being amortised over its estimated useful life. The most significant element of goodwill of £1,555m capitalised during the year relates to the acquisition of Argos. This is being amortised over 20 years, resulting in an annual charge of £78m, or £72m for the year ended 31 March 1999.

 
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