Capital Structure and Funding

Johnson Matthey's balance sheet remains strong. The group's gearing (% net borrowings : shareholders' funds and minority interests) at the end of the year was 45%, while interest cover for the year (operating profit : net interest) remained at 15 times.

In 1997 the Board took the decision to sell the group's former head office at 78 Hatton Garden. The property had been fully let to other tenants and was revalued to current market value in September 1997. It was sold in April 1998 for £21 million to Prestbury Group PLC. The price represented a gain compared with the historic cost of £6.4 million.

During the year Johnson Matthey also completed the triennial revaluation of its main UK pension fund (see note 10a on page 54). The revaluation resulted in a largely unchanged actuarial surplus and a reduction in the annual credit of £0.7 million.

The group's net borrowings are largely in the form of foreign currency loans, primarily US dollars, to fund overseas operations. We have over £300 million of facilities from a group of high quality international banks with maturities of up to five years. These facilities have been separately negotiated with each bank and are not linked.

At 31st March 1998 just over one quarter of the group's net borrowings were represented by long term fixed rate US dollar bonds which carry an interest coupon of 6.36%.

Treasury Hedging

Fluctuations in currency exchange rates and precious metal prices can have a significant impact on Johnson Matthey's financial results. Our policy for all our manufacturing businesses is to limit this exposure by hedging wherever possible against future price changes where such hedging can be done at acceptable cost. The group does not take speculative foreign exchange positions or material exposures on metal trading and our Treasury is run as a service centre not a profit centre.

In line with our policy, we hedge most of our foreign currency sales revenues into local currency. Overseas earnings in foreign currency have not been hedged. All the group's stocks of gold and silver are fully hedged by leasing or forward sales. Currently the majority of the group's platinum group metal stocks are unhedged because of the lack of liquidity in the platinum metal markets.

Millennium and Euro Compliance

In September 1996, following a detailed review, we established a programme to ensure that our business systems are millennium compliant. An incentive scheme was introduced to secure retention of key IT staff. Significant progress has been made against the plan with all critical financial, commercial, manufacturing and process control systems due to be compliant by the end of the year. The programme also includes embedded systems typically found in analytical equipment and other technical applications which are critical to customer service and production operations.

The group makes extensive use of current packaged software from JD Edwards for the key business applications worldwide. The current software release is millennium compliant and this has considerably reduced the scale of the problem within the group. Other non-compliant applications have been subject to a rigorous analysis of the repair or replace options. Where cost effective, the opportunity has been taken to bring forward normal replacement projects such that additional business benefits are achieved. A number of specific custom designed applications have been repaired with enhancements added where appropriate. The costs incurred fall evenly over the two year period to the end of the 1998/99 financial year. Costs are capitalised where systems are enhanced. Such projects have been included in the group's capital expenditure plans and amount to £3 million over the two year period of the programme. Modifications to existing systems which bring no additional business benefit are expensed, although significant incremental expenditure in this category is not anticipated.

The group is co-operating with major customers seeking assurances on our millennium compliance programme. Our businesses have also assessed supply chain issues and are in contact with key suppliers so as to avoid potential external influence on our activities.

During the year we have undertaken an internal awareness programme on the implications of the Euro and the timetable for introduction. General policy guidelines have been established. Given that many of our European businesses are in countries that will be included in the first wave, a range of projects has been established at a local level to ensure compliance with statutory and fiscal requirements and to meet the needs of our customers. There are implications across a range of functional disciplines and alternative ways of doing business which may present opportunities. However at this stage the overall impact on the business is not considered significant. Compliance costs will be expensed within the appropriate accounting period but are not material.

John Sheldrick

Group Finance Director