BRITISH AMERICAN TOBACCO DIRECTORS’ REPORT AND ACCOUNTS 2000
BRITISH AMERICAN
TOBACCO
Contents 1 Directors’ report 5 Remuneration report
10 Corporate governance statement
12 Statement of Directors’ responsibilities
13 Report of the independent auditors
14 Accounting policies
16 Group profit and loss account
17 Statement of total recognised
gains and losses
17 Interest of British American Tobacco’s
- shareholders
18 Group balance sheet
19 Group cash flow statement
20 Segmental analyses of turnover,
profit and assets
21 Notes on the accounts
46 Five year summary
47 Quarterly analyses of profit
48 Principal subsidiary undertakings
50 Associates and joint ventufes
Financial statements —
British American Tobacco p.l.c.
53 8alance sheet
54 Notes on the accounts
This document contains the Directors” report, the annual accounts
. and the report of the independent auditors for the year ended
!
31 December 2000. The Chairman’s statement, the Managing Director’s i
review and the Finance Director’s review are contained in a separate
booklet - the Annual Review and Summary Financial Statement.
The Annual Review and Summary Financial Statement together with the Directors’ Report.and Accounts comprise the full annual report and accounts of British American Tobacco p.l.c. for 2000 in accordance with the Companies Act 1985.
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1 Directors’ Report and Accounts 2006
Directors’ report
The Directors present their Report logether with the audited Group
accounts for the year ended 31 December 2000.
Sritish American Tobacco p.l.c. (the “Company’) is 2 holding company which
owns, directly or indirecily, investments in the numerous companies constituting the British American Tobacco Group of companies. The principal subsiciaries, associates and joint ventures are listed on pages 48 to 50.
The Chairman's Statement, Managing Director's review and Finance Director’s review on pages 2 1o 24 of the Annual Review and Summeary Finencial Statement report the progress made in the financial year under review, with details of the Group's overall pesformance, and outlines future developrments.
Changes in the Group Imperial Tobacco Canada/imasco Following the agreement with Imasco announced in 1999, the acquisition of the shares of that company not already owned by the Group, representing 2pproximately S8 per cent of its shares, was completed on 1 February 2000. This was followed immediately by the completion of the sale of imasco’s CT Financial Services Inc. business to Toronto Dominion Bank. The proceeds from this sale of C37.85 billion were used in part to satisfy the consideration of C$10.4 billion payable for the Imasco shares. Imasco’s retailing business, Shoppers Drug Mart, was sold on 4 February 2000. On 27 june 2000, Imperial Tobacco disposed of the US operations of Genstar, Imasco’s land development company, while the disposal of the Canadian operations of Genstar was completed on
15 |anuary 2001. Genstar’s results since 1 February 2000 were not consolidated given the intended disposal
The Group’s resteuctured business in Canade, from 1 February 2000, comprises the tobacco business of the wholly-owned Imperial Tobacco
Canada Limited.
The results from Canada for the year ended 31 December 2000 comprise the Group’s share of the results of imasco for January and the consolidated results of Imperial Tobacco for the 11 months to 31 December 2000. The resuits for the year ended 31 December 1999 represent the Group’s share of the results of its associated company, Imasco.
The impact of this acquisition is more fully described on page 21 of the Annual Review and Summary Financial Statement and note 21 (page 37} of this Directors’ Report and Accounts.
Rothmans internationai British American Tobacco p.l.<. issued ordinary shares and convertible redeemable preference shares in cansideration for the acquisition of Rothmans International in 1999. In accordance with the terms of the convertible redeemable preference shares, the holder of such shares gave notice of the redemption of 50 per cent of the preference shares, at a price of 575p per share. An amount of £695 million was paid on 7 June 2000 to redeem these preference shares. The remaining preference shares
are redeemable on 7 June 2004 at a price of 675p each, unless previously redeemed or converted.
On 3 February 2000, the Group sold its entire shareholding in Rothmans Inc., Canada for C$13.35 per share. As the intention to dispose of these
operations was announced at the ouitset of the merger, the resutts and assets of that business were not consofidated. The investment was included as 2 current asset at net realisable value and therefore the sale did not generate a gain or loss in these resulis.
$.C.A. Tobocco Corporation (SCAT) On 31 March 2000, the Group completed the purchase of SCAT, which distributes the Group's products in Japan, from Sumitorna Corporation of Japan. Consequently, its results are consolidated from 1 April 2000 and the amartisation of the goodwill of £63 million commenced from that date. The impact of this acquisition is more fully descrioed in note 21 (page 38) of this Directors’ Report and Accounts.
FPost balanice sheet eveni — BAT Ausiralasia
On 30 January 2001, it was announced that the Group had entered intc an agreement with BAT Australasia under which it proposes to acquire
the remaining 40.5 per cent shareholding of that company that it does
not already own, at an estimated cost of Aus$1.1 billion (£415 million). The proposal is subject to the approval of BAT Australasia’s shareholders as well as of various regulatory budies. This acquisition is anticipated to be completed in May 2001 (page 43 note 26).
Accounting policies As described above, during the year a transaction was completed whereby the holding in Imasco, an associated company in Canada, was effectively replaced by shares in @ wholly-owned subsidiary comprising only the
tobacco interests of Imasco. When an associate becomes a subsidiary the method for calculating goodwill differs between the Companies Act 1985 and FRS2. In order to give a ‘“true and fair” view, the Group has complied with FRS2 in arriving at the figures shown below. If the Act had been followed the gondwill arising on acquisition would have been sorme £1.63 billion iower, as it would have been net of the revaluation surpluses on the disposed businesses and the share of accumulated profits while Imasco had been an associated company.
Following this acquisition, the results of the Canadian operations are included within the America-Pacific region in the segmental analyses and
the comparative information has been restated accordingly. Previously, the results of Imasco as an associate were shown as a separate segment
As a result of a reorganisation following the merger with Rothmans, profit from the manufacturing operations located in Southampton in the UK is included within the Europe region, with effect from 1 January 2000. Previously it was included in Asia-Pacific. The comparative information in the segmental analyses has been restated accordingly.
2 irectors’ Report and Accounts 2000
Directors’ report continued .
Two recently issued accounting standards, being FRS17 on Retirement Benefits and FRS19 on Deferred Tax, were not mandatory for 2000 and
the effects are not reflected in these resuits.
During the year two new accounting standards were implemented being FRS15 on tangible fixed assets and FRS16 on current taxation, but they have no significant impact on the Group accounts.
Directors The names of the current Directors f the Company are shown on pages
26 and 27 of the Annual Review and Summary Financial Statement.
Directors’ interests The interests (all of which are beneficially held) of the Directors of the Company in the issued share capital of the Company, according to the register maintained under Section 325 of the Companies Act 1985 (which is open to inspection at the registered office) are shown below, Their interests in share options are shown on page 9 of the
remuneration report.
The following table shows thei interests over ordinary shares for the
period 1 January and 31 December 2000 and the date of this report.
8ritish American Tobacco p.L.c. Ordinary Shares of 25p
AUl January At 31 December Changes from At 28 February
2000 2000 31 December 2000 2001
MF Broughton 176,115 178,602 4,056 182,658 KH Clarke 4,091 4,091 - 4,091 UGV Herter 26,902 32,310 50 32,360 W P Ryan 20,000 31,737 - 31,737 K 5 Dunt 7,686 12,264 1,652 13,916 H Einsmann - - - - W A Owens - - - - RLPennant-Rea 3,023 3,023 - 3,023 JP du Plessis - - - -
J P Rupert - - - - K s Wong - - - -
Notew: (1) i actdition to the shaces shawn above, during the year the executive Directors were granied the following interests in the ordinary shares of the Company which are feid in trust pursuant to the British American Tobacco Deferred Share Bonus Scheme as at 3iDecermber 2000 and at the date of Ihis renort: Ordinary shares of 25p
M § Broughton 111,356 UGV Herter 82,784 WP Ryan 70,958 K5 Dunt 55,189
The cast of these shares has been included a5 Directors’ emoluments in the prior year. Details of the Deferred Share Bonus Scheme are given in the remunetation report on page 6.
(2) The changes in the Directors’ interests since 31 December 2000 relate to the exercise of aptions granted under the BAT Industries Savings-Related Share Option Scheme and the purchase of shares pursuant to the Company’s Partnership Share Scheme.
{3)6n 31 December 2000, the Group's employee share Gwnership trusts referred to on page 8 of the remuneration report held a total of 30,647,059 ordinary shares in the Company. Ail participating empiayees, inclucing the executive Oirectors, are deered 10 have a beneficiat interest in these shares.
No Director has had any material interest in a contract of significance (other than service contracts) with the Company or with any subsidiary company during the year,
Directors proposed for reappointment tn accordance with the articles of association, the Directors named below retire from the Board at the forthcoming Annual General Meeting and, being eligible, offer themselves for reappointment. Biographical information on each of these Directors is contained in the Secretarys Jetter which accompanies the Notice of Annual Generai Meeting of the Company; information on the Board of Directors (as at the date of this report) is also set out on pages 26 and 27 of the Annual Review and Summary Financial Statement.
Name K H Clarke K S Dunt W A Owens K S Wong P N Adams (appointed from 1 March 2001) M H Visser (appointed from 1 April 2001)
Annual General Meeting The next Annual General Mesting of the Company will be held on 2 May 2001. Details of the business to be proposed at the meeting
are contained in the Notice of Annual General Meeting.
Dividends Details of dividends in respect of 2000 are given on page 25 note 6.
The Board has recommended to sharcholders a final dividend of 20.0p per ordinary share for the year to 31 December 2000. If approved, this dividend will be paid on 8 May 2001 to shareholders registered in the books of the Company on 9 March 2001.
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3 Directors’ Report and Accounts 2000
Analyses of shareholders
At 31 December 2000 there were 2,178,087,590 ordinary shares in
issue held by 87,149 shareholders.
These shareholdings are analysed as follows by category of sharcholder and size of shareholding:
Percentage Category of Numberof Percentage of Numberof of issued sharcholder holders total holders ordinary shares share capital
Individuals 73,021 83.79 96,656,561 4.43
Banks 50 0.06 334,507 0.02
Nominee companies 11,924 13.68 1,368,970,091 6285
Insurance companies 14 0.02 34,255,700 157
Pension funds 13 0.01 138191 0.01 Other corporate
holders 2,126 2.44 73,395,913 337
R&R Holdings S.A. 1 - 604,336,627 27.75
87,149 100.00 2,178,087,590 100.00
percentage Number of o issued Size of shareholding holders share capital
1-1,999 67,604 1.89
2,000 - 9,999 16,887 287
10,000 - 199,999 2,075 3.64
200,000 - 499,999 261 3.84 500,000 and over 322 87.76
87,149 100.00
Substantial shareholdings At 28 February 2001, the foliowing persons had notified an interest in the ordinary shares of the Company that s required to be recorded in the register of substantial interests maintained by the Company pursuant to the Companies Act 1985.
Nurmber of Percentage Size of shareholding ordinary shares of issue
R & R Holdings SA. 12 604,336,627 2775 Brandes Investment Partners, LP. 144,266,310 6.62
Notes: (1) Pursuart to the Standstill Agreement dated 11 January 1995 entered into between the Company and R & R Holdings $.A. (then named Rothmans International Holdings 5.4, Compagnie Financiére Richemont AG and Rembrzndt Group Limited {now named VenFin Limitec), (together ‘the R and R Parties’), the R and R Perties gave certain undertakings to the Company including the foflowing: (a) that the R and R Parties and persons acting in concert with any of them will not exercise at any general meeting of the Company more than 25 per cent of the voting rights attached te shares of 2 class carrying rights to vote in
ail circumstances at general meetings of the Company and {b) the interests of the & and R Parties and persons acting in concert with any of them in the issved ordinary share capital of the Company will not exceed 27.8 per cent except in certain specified circumstances .9, the Company making a purchase of its own shares or othenwise having reduced its issued share capital.
(2) Compagrie Financiére Richemant AG, Rembrandt Group Limited (row named Venfin Limited), British American Tobacco p.Lc. and R&R Hoidings S.A. (then named Rothmans Intemational Holdings 5.4 are parties to an agreement dated 11 January 1999 (‘the Agreement’) to which Section 204(2) of the Companies Act 1985 applies oy virtue of the acquisition on 7 June 1999 of shares in British American Tobacco p.i.c. The number of such shares is 604,336,627 ordinary shares and 120,867,326 preference shares (as deiined in the Agresment) following the redemption of preference shares as referred to in rote 33 (page 58)
Purchase of own shares At the Annual General Meeting of the Company held on 27 April 2000 the Company was given authority to purchase up ta 217,000,000 of its ordinary shares. This authority will expire at the Annual General Meeting 10 be held on 2 May 2001. Although no ordinary shares have been purchased by the Company during the period from 27 April 2000 to the dale of this report, the Directors at the Annual General Meeting on 2 May 2007 will be seeking fresh authority for the Company to purchase its ordinary shares.
Stock market listings The Company’s ordinary shares are listed on the London Stock Exchange. They are also traded on the American Stock Exchange, New York, in the form of American Depositary Receipts.
Auditors Resolutions will be proposed at the Annual General Meeting for the reappointment of PricewaterhouseCoopers as auditors and Lo authorise
the Directors to determine their remuneration.
Charitable and political contributions Details of payments for charitable purposes made by the Group during
the year ended 31 December 2000 are given on page 25 of the Annual
Review and Summary Financial Statement.
The Company and its subsidiaries gave no money for political purpases in the UK during the period under review.
Employees Details of the Group’s employment policies are given on page 25 of the
Annual Review and Surmmmary Financial Statement.
Research and development
The Group’s research and development activities are concentrated on
the development of new products, new processes, quality improvement of existing products and cost reduction programmes.
Research is also undertaken into various aspects of the science and
behavioural science related to smoking, and the Group continues to provide significant funding for independent studies.
4 Directors’ Report and Accounts 2000
Directors’ report continued
Creditor payment policy
Given the internationai nature of the Group’s operations, there is not
a Group standard code in respect of payments to suppliers. Operating subsidiaries are sesponsible for agreeing terms and conditions for their business transactions when orders for goods and services are placed, ensuring that suppliers are aware of the terms of payment and including the refevant terms in contracts where appropriate. These arrangements are adhered to provided that suppliers meet their contractual commitments.
Creditor days have not been calculated for the Company as it is an investment holding Company and had no trade creditors at 31 December 2000.
OECD Guidelines The Group recognises its responsibilities to the countries in which it
operates and in this context notes the O£CD Guidelines for Multinational Enterprises in their current farm.
Intea Group pricing The prices agreed between Group companies for intemational sales of materials and manufactured goods are based on normal commercial oractices which would apply between independent businesses. Intra group charges for royalties, commissians, services and fees are aiso based an the principles of normal commercial practice belween independent businesses.
European Monetary Union
The Company, as a matter of policy, activefy supports Economic and Monetary Union as a means of delivering increased stability and prosperity. The Group's European companies including those in the UK have been capabie of transacting business in the euro foltowing its introduction in efeven European countries on 1 January 1999. The ability
of the Group Lo conduct business in national currencies will be retained as long as necessary. The decision as to when to adopt the euro as 2 subsidiary’s functional currency will be a local dacision for each subsidiary in the European Union, having regard to the speed of transition to the
euro in the individual economy.
£ach operating subsidiary has prepared a business impact plan assessing the risks and uncertainties associated with the euro, with all end-market activity in the euro being coordinated through a European Regional Support Team.
Department of Trade and Industry On 30 Octaver 2000, the UK Secretary of State for Trade and Jndustry
announced the commencement of a confidential investigation under Section 447 of the Companies Act 1985. The Company stated at that
time that it would be co-operating fully with the investigators but would
be making no further comments during the course of their work. Bl matd g On behalf of the Board Alleen E McDonald, Secretary 28 February 2001
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S Directors’ Report and Accounts 2000
Remuneration report
This report has been prepared by the Board in accordance with the requirements of the Combined Code as appended to the Listing Rules of the UK Listing Authority. It covers the level and make-up of Directors’ remuneration, the remuneration policy and a number of formal
disclosures relating to individual Directors’ remuneration.
The Remuneration Committee The Remnuneration Committee is responsible for the following key areas:
+ Recommending to the Board the Company’s policy an the terms of employment, including remuneration, of executive Directors and other members of the Management Bozrd and their specific remuneration packages;
+ Reviewing the overall performance of the Chairman and the Managing
Director on an annual basis.
The Committee comprises all the non-executive Directors and is chaired
by Kenneth Clarke. The Board continues to consider that ail the nonexecutive Directors on the Remuneration Committee are independent for these purposes. The Secretary to the Committee is the Company Secretary.
The Chairman and the Managing Director may be invited to attend meetings of the Committee when their own remuneration is not under consideration. The Chairman and the Managing Director are consulted in
respect of the remuneration of the Deputy Managing Director, the Finance
Director and other members of the Management Board. The Committee
has access to professional advice from both internal and external sources
in order to develop the Company’s policy.
Remuneration policy The remuneration policy is designed to reflect the highly international and competitive nature of the Group's operations so that high quality executives with proven business experience can be recruited, motivated
and retained. This is fundamental to the Group’s declared vision to be the world’s leading internationat tobacco group. The Company aims to follow
best practice in relation to its remuneration policy and, in particular,
complies with the relevant Principles set out in the Combined Code.
The implementation of this policy has resulted in a structured and balanced remuneration package for each executive Director and member of the Management Board, the main. elements of which are as follows:
* The establishment of base salary fevels for each of the executive Directors and members of the Management Board having regard to the market levels paid for equivalent positions in other leading
international companies based in the UK. In arriving at its conclusions
on these matters, the Committee takes account of the performance
of the business and the performance of the individual executive in
the geographical or functional area for which he is responsible.
The Committee recognises that the requirements of recruitment or retention may on occasion justify the payment of a salary outside the range regarded as appropriate to a particular position;
+ The award of bonuses (both in cash and shares) which are specifically linked to measured performance against demanding objectives set annually;
o The award of ordinary shares in the Company under the Long Term Incentive Plan;
« The provision of retirement benefits through the Group’s pension plans.
Further details on the individual elements of the remuneration packages of the executive Directors are given on the next page.
Executive Directors’ service contracts With the exception of Bill Ryan, reference to whose service contract with the Company is made below, each service contract for the executive Directors can be terminated by the Company on giving two years’ notice.
However, the Company has reserved the right to terminate without notice provided it makes a severance payment equivalent to one year's salery,
bonus and benefits. Executive Directors are entitled to refuse such a payment and instead demand a payment based upon strict notice rights, in which event the Director concerned will be expressly required to mitigate his loss. Accordingly, the Company would not expect to pay the full value of the two year notice period in the event of the termination of a Director’s employment.
Bilf Ryan has a two year fixed period service contract which expires at his retirement from the Board on 7 June 2001.
Directors’ remuneration An audited analysis of the remuneration paid by the Group i respect of 2000 to the Directors of British American Tobacco p.Lc. is shown in table 1 on page 6.
The remuneration paid to the executive Directors was totally in refation to their services as managers.
Executive Directors' performance related bonus plans The executive Directors participate in an annual Incentive Bonus Scheme. Under the scheme, a Directors bonus depends on the performance of the business. Demanding targets are set at the beginning of each year and are measured in terms of both financial and business performance. The financial element includes profit, cash flow and earnings per share. The business elements are related to a variety of marketing and strategic goals, most of which are normally of long term nature or specifically linked to project success. Bonus entitlements are determined by the Remuneration Committee and carry a value which, under the scheme, may range from nil to & maximum of 75 per cent of base salary for the Chairman and to 50 per cent of base salary for the other executive
6 Directors’ Repor. and Accounts 2060
Remuneration report continued
Table 1. Directors’ remuneration
Performance Perfermance related pay - related pay - Benelits 2000 1995 Salary/fees annual bonus. deferred bonus in kind Total Total
13 £ £ £ £ £
M F Broughton 786,176 340,200 283,500 23,275 1,433,151 1,355,701
K H Clarke 100,000 - - - 100,000 100,000 UGV Herter 607,626 218,750 218,750 19,603 1,064,729 957,582 W P Ryan 461,154 157,500 157,500 5,997 782,151 571,154 K S Dunt 388,234 140,000 140,000 13,893 682,127 618,645 H Einsmann 35,000 - - - 35,000 26,250 W A Owens 46,064 - - - 46,064 41,796
R L Pennant-Rea 35,000 - - - 35,000 33,750 1P du Plessis 30,000 - - - 30,000 17,077 | P Rupert 35,000 - - - 35,000 19,923 K S Wong 35,000 - - - 35,000 35,000
Total remuneration 2,559,254 856,450 799,750 62,768 4,278,222 3,776,878
Noze: The remuneration shown ir the above tabls for 1999 in respect of Bill Ryan, Harald Einsmane, Jan du Plessis and Johann Rupert s for the period since their respective dates of appointment
Directors. Bonus payments are charged in the year to which they relate, and provision is made accordingly.
In tandem with the Incentive Bonus Scheme, the executive Directors and senior management also participate in the Deferred Share Bonus Scheme (the ‘Deferred Scheme’). Awards made under this scheme are made annually in the form of free ordinary shares in the Company. An award is calcuiated on the same basis and in respect of the same performance periad to which the annual Incentive Bonus Scheme awards relate with such bonus entitlements ranging from ril to a maximum of 50 per cent of base salary for all the executive Directors. The shares awarded under the Deferred Scheme are held in trust normally for three years and no further performance conditions apply in that period. Participants will normally forfeit the shares if they resign in this period. Similarly as with the Incentive Bonus Scheme, the payments are charged to the year to which they relate, and provision is made accordingly.
Executive Directors’ pensions benefits The executive Directors with the exception of Bill Ryan are, fike other employess, eligible for membership of the B.A.T Pension Scherne which covers employees in the UK. Upon completion of the merger with Rothmans in June 1999, ill Ryan elected to take an early retirement pension from the Rothmans International UK Pension Fund.
The B.A.T Pension Scheme is a non-contributory defined benefit scheme and includes provision for spouse benefits on death in service or after retiremnent equal to half of the member’s pension. The early reticement rules in the Pension Scheme permit members to draw the accrued
retirement pension within 5 years of normal retirement age without actuarial reduction subject to the emplaying company's agreement.
Accruat rates differ according to individual circumstances but do not exceed one-fortieth of salary for each year of pensionable service. Pensionable pay covers basic safary anly with bonus awards and the value of benefits in kind not being pensionable,
Ulrich Herter joined the Pension Scheme after 1989 and is subject to the Inland Revenue cap on earnings (currently £91,800) which may be pensioned through an approved scheme. Accordingly, he has an
unfunded promise of a supplemental pension benefit from the Company on an equivalent basis in respect of earings above the cap. He also has an unfunded preserved pension benefit in respect of his service with British-American Tobacco (Germany) GmbH prior to his maving to the UK in fanuary 1992. As a former employee of Rothmans in Germany, he also has a retained promise from British American Tobacco (Hamburg
International) GmbH (formerly Rothmans Germany GmbH). The unfunded commitments are included in the provisions referred to on page 41 note 24 to the accounts.
Table 2. Executive Directors’ pension entitlements Pension p.a. Total accrued Ageat accruingduring pension p.a. as
31 Dec 2000 20001 at 31 Dec 2000 -
£ £
M F Broughton 53 54,312 453,633 UG V Herter 3 58 64,607 329,150 X $ Dunt 53 31,915 216,841
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7 Directors’ Repart and Accounts 2000
Notes: (1) The increase in accrued pension during the year excluding any increase for inflation. (2) The pension entitiernent shown is that which would be paid annually on retirement besed on service 1o the end of the year, (3) Ulrich Herter's pension entitlement inclucies the effect of the relative exchange rate movement between sterling and the DM/euro. & also includes pension accruing under the unfunded promise of a supplemental pension benefit referred to above. (4) Members of the B.A T Pension Scheme have the option of paying additional voluntary contibutions; neither the contribctions nor the resulting benefits are included in the table. (5) The normal retirement age for Martin Broughton and Keith Dunt is 59. The rormat retiremnent age for Ulrich Herter is 60,
Share options and share incentive schemes The executive Directors are eligible to participate in the following employee share schames which are designed to incentivise employees of the Group: the Share Participation Scheme, the Sharesave Scheme, the Partnership Share Scheme, the Share Option Scheme and the Long Term Incentive Plan. Under his service contract Bill Ryan is only entitied to paricipate in the Sharesave Scheme and the Share Participation Scheme.
The Board and/or the Remuneration Committee selects from time to time
which of these schemes will be operated and since 1999 it has been the
policy that executive Directors and other members of the Management Board will normally participate in the Long Term Incentive Plan rather than the Share Option Scheme.
Al benefits under the empioyee share schemes are non-transferable and non-pensionable.
Share Participation Scheme UK employees, including executive Directors, may participate in the Company’s Share Participation Scheme which is an approved profit- sharing scheme under Schedule 9 of the Income and Corporation Taxes Act 1988. An appropriation of shares was made on 3 April 2000 up to a maximum value of £6,000 to each UK-based employee under the Scheme. Under the Finance Act 2000 the iast zppropriation that may be made under this Scheme will be in 2002.
Sharesave Scheme Eligible employees, including executive Directors, have been granted employee savings-related share optians to subscrie far ordinary shares in the Company. In November 2000 the Company made a further grant
of options under the British American Tobacco Sharesave Scheme {the
“Sharesave Scheme’) which aliows for options granted to be exercisable in conjunction with either a three year or five year savings contract. Options are narmally granted at a discount of 20 per cent to the market
price at the time of the invitation, as permitted under the rules of the
Sharesave Scheme.
Prior to the demerger of B.AT Industries p.l.c. in 1998, options were granted under the BA.T Industries Savings-Related Share Option Scheme (the ‘ESRQ Scheme’).
£mployee Share Ownership Plan
In November 2000, the Company launched the Partnership Share Scheme
as the initial constituent part of its new (nland Revenue approved all employee share plans. The Partnership Share Scheme is open Lo afl eligible
employees, including executive Directors. Employees can aflocate part of their pre-tax salary to shares in British American Tobacco without paying
tax or national insurance contributions. The maximum amount that can be allocated In this way is £1,500 in any year. The first purchase of shares under the Partnership Share Scheme took place in Janvary 2001 and the shares are held in a UK based trust, normally being transferred to participants tax free after 2 five year holding period.
Share Option Scheme The British American Tobacco Share Option Scheme (the ‘Scheme’) comprises an Inland Revenue approved part and an unapproved part, Under the approved part of the Scheme, options may be granted over ordinary shares up to 2 total market value of £30,000 on the date of
the grant whilst any amount over and above that limit would be made under the unapproved part of the Scheme. All employees, inciuding the executive Directors (but with the exception of Bill Ryan), are eligible to
participate in the Scheme. The Scheme is aperated by the Remuneration
Committee in relation to the grant of options to Martin: Broughton,
Ulrich Herter and Keith Dunt and the remaining members of the Management Board although options are not normally granted in any
year to individuals whe receive an award under the Long Term Incentive
Plan referred to below. Under normal circuimstances, the Remuneration Committee considers whether to make a grant of options only once a year. The value of options which may be granted on each occasion
is limited to a percentage of base salary.
Options granted under the Scheme are not issued at a discount to the market price at the time of grant. Options are normally exercisable after the third anniversary of the date of the grant and lapse ten years after the date of their original grant, subject to a performance condition based on earnings per share growth. For options to be exercisable, the Company's published adjusted earnings per share growth has to exceed inflation by an average of 3 per cent per annum over any consecutive three year period during the ten year life of the options.
Long Term incentive Plan
The Long Term incentive Plan (the “Plan’} provides for awards of free
ordinary shares to senior employees, including the executive Directors (but with the exception of Bill Ryan), provided certain demanding performance
conditions are met. The Plan is operated each year by the Remuneration
Committee in relation to awards to the executive Directors and members of the Management Board. The value of the award which may be granted on each occasion is limited to @ percentage of base salary which cannot exceed 100 per cent for any single award. The award made in March 2000 was based Lpon a market price of 253.67p and the appfication of 100 per cent of salary for the executive Directors and other members of the Management Board.
8 Directors’ Report and Accaunts 2000
Remuneration report continued
Two performance conditions attach to an award of ordinary shares made under the Plan. These reiate to an apportionment between measures
relating to Totai Shareholder Return (‘TSR') and earnings per share based criteria with reference to a three year performance period beginning
1 January in the year the award is made. In more detail these are:
Earnings per share This measure applies to SO per cent of the award and relates to eamings per share growth relative to inflation. 50 per cent of the award will vest if earnings per share growth over the three year performance perod is an average of at least 9 per cent per annum in excess of inflation; 10 per cent will vest if the same figure is at least 3 per cent in excess of inflation and an award will vest on a pro rata basis between these two points.
TSR
TSR performance combines both the share price and dividend performance of the Company during the performance pericd as set against two comparator groups. The first of these is the constituents
of the London Stock Exchange’s FTSE100 Index at the beginning of the
performance period whilst the second is a peer group of international 'FMCG (fast moving consumer goods) companies. 25 per cent of
the total award is based upon each of these two separate measures. 25 per cent of the total award vests in fuli in the event of upper quartile periormance by the Company relative to one of the comparator groups,
7.5 per cent of the total award will vest in the event of median
performance and then pro rata between these two points.
To the extent that the performance conditions have been satisfied, awards are narmally exercisable between three and ten years after they have been granted. It is possible for some of the shares in an award to be released
if one of the performance conditions has been met, even if the other performance conditions have not been met. An award of shares lapses
to the extent that the performance conditions are not satisfied in
accordance with the measures set out above at the end of the three year performance period.
B.AT Industries Employee Share ‘E' and ‘D’ Option Schemes Prior to the demerger, options were granted under the B.A.T Industries Share *E’ Option Scheme (the 'E' Scheme). Options granted under the ‘&’ Scheme, as with the B.A.T Industries Employee Share ‘D" Option Scheme (the ‘D' Scheme) which it replaced in 1994, were not issued at a discount to the market price at the time of grant.
Options granted under the ‘E’ Scheme and the ‘D’ Scheme are normally exercisable between the third and the tenth anniversary of the date of grant.
Af the time of the demerger, British American Tobacco p.l.c. made an offer of replacement options of equivalent value over ordinary shares in the Company to continuing employees of the Group, including the executive
Directors of the Company, who did not exercise their ‘E’ or ‘D’ Options. The replacement option price and associated number of replacement
options were calculated to ensure that the total monetary vaiue of the
replacement opticns was equal (as nearly as possible) to the total monetary
value of the ordinary shares in B.A.T Industries p.l.c. Replacement options conlinue to be governed under the rules of the 'E’ or D’ Schemes, as applicable.
Options and awards outstanding To satisfy the future exercise of options or awards under the Group's employee share schemes, ordinary shares are acquired in the market by two separate Employee Share Ownership Trusts (‘ESOTs). New ordinary shares are issued by the Company only in relation to the ESRO Scheme, the Sharesave and the 'D* Option schemes.
Under the ESRO Scheme and Sharesave Scheme, a total of 6,844,722 options over ordinary shares in the Company were outstanding at 31 December 2000. These options are exercisable until june 2006 at option prices ranging from 233.33p to 418p.
Under the ‘D Option Scheme, a total of 104,880 options over ordinary shares in the Company were outstanding at 31 December 2000. These options are exercisable until September 2004 at prices ranging from 215.1p to 315.6p.
The first ESOT, the B.A.T Industries Employee Share Ownership Plan, was set up with an interest-free loan from B.AT Industries p.l.c. o satisfy
the future exercise of options under the ‘E’ Scheme. The loan from
B.A.T Industries p.|.c. amounted to £24.6million at 31 December 2000 (1999 £26.5 million).
The second ESOT, the British American Tobacco Group Employee Trust, was set up with an interest-free loan from the Company in September 1998 to satisfy the future exercise of options under the Scheme, The loan
to the trust amounted to £47.2million at 31 December 2000 (1999
£37.3million). Both loans will be repaid from the proceeds of the exercise of options o, if the options lapse, ordinary shares may be sold by the ESOTs to cover the loan repayment. In addition, this trust was set up to satisfy the exercise of awards of ordinary shares made under the Deferred Scheme and the Plan. As the release of awards under the Plan and the Deferred Scheme do not involve a payment from the participant to the Company, the Company funds the purchases of ordinary shares by the trust by way of a gift in accordance with the terms of the applicable Trust Deed. The ESOTs waive dividends on the ordinary shares held by them. As at 31 December 2000, the two ESOTs held 30,647,059 ordinary shares (1 January 2000 15,581,616 ordinary shares). Both ESOTs waived payment
of the final dividend for 1999 of £2,789,109 in May 2000 and the interim
dividend for 2000 of £2,841,812 in September 20C0.
Executive Directors’ options and awards Audited information in respect of options and awards, held by the executive Dirsctors of British American Tobacco p.l.c. during the year ended 31 December 2000 is contained in Table 3 on page 9.
The table shows the aptions and awards heid by, or granted to, executive Directors of the Company over ordinary shares in the Company during the period from 1 January to 31 December 2000, No oplions or awards over ordinary shares held by executive Directors lapsed during that period.
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1 i
[ ST PR WV O I [P S O T N O O Ur S R el b e e b | I PR
9 Directors' Report and Accounts 2000
Table 3 - Executive Directors’ options and awards over ordinary shares of 25p Granted in 2000
Weighted Weighted Weighted At average average At average Tjan grant grant 31 Dec grant Expiry 2000 price Number price 2000 price dates
M F Broughton 4 328,269 333.9p - - 328,269 333.9p 2002-2005 ESRO 6,960 247.6p - - 6,960 247.6p 2001-2002
Sharesave Scheme - - 2,620 386.4p 2,620 386.4p 2006
Share Option Scheme 149,700 434.2p - - 149,700 434.2p 2008 [hild 123,456 526.5p 279,891 253.7p 403,347 337.2p 2009-2010
UGV Herter E 121,839 330.8p - - 121,839 330.8p 2003-2005 ESRO 3,671 265.4p - - - - - Share Option Scheme 110,548 434.20 - - 110,548 434.2p 2008
Lmp 91,168. 526.5p 206,961 253.7p 298,129 337.1p 2009-2010
K S Dunt E 103,058 327.8p - - 103,058 327.8p 20022005 ESRO 2 7,397 2329p - - 4,556 242.0p 2001-2002
Sharesave Scheme 1,920 316.4p 601 386.4p 2,521 333.1p 2004-2005 Share Option Scheme 55,274 434.2p - - 55,274 434.2p 2008 LTIP 45,732 526.5p 137,974 253.7p 183,706 321.6p 2009-2010
Notes: 1) Ulrich Herter exercised 3,671 options held under the ESRO Scheme on 13 December 2000 at 265 37p per share when the mid-market price of Brtish American Tobacco ordinary shares was 488.25p, realising a gain on exercise of £8,182 (2) Keith Dunt exercised 2,841 options held under the ESRO Schemme on 18 May 2000 2t 218.34p per share when the mid-market price of British American Tobacco ordinary shares was 389.75p, realising a gain on exerclse of £4,870. (3) The closing mid-market price of ordinary shares in British American Tobacco p.L.c. an 29 December 2000, the last day of dealing in the Company's shares in 2000, was 509.7p and the range duting the year was 234.7p to $36.0p, The market price on 29 December 2000 exceeded the grant price of all the options detalled in Table 3 abave,
10 Directors’ Repart and tecounts 2000
Corporate governance statement
The Company has continued to commit itself to the achievement of high standards of corporate governance. This has been defined as ‘the system by which companies are directed and controlled” and the Board is
accountable for it to shareholders.
In accordance with the Listing Rules of the UK Listing Autherity, the
Company must report to shareholiciers on how it has performed in relation
to the corporate governance criteria of the Combined Code. This is in two parts - Principles and Provisions. The report must state how the Principles have been apgiied, giving enough explanation to enable shareholders to
evaluate the statement, and whether the Provisions have been complied with. If not, the Company must provide an explanation.
The ways in which the Company has applied the Principies set out in
the Code are descried in this stalement and in the remuneration report. With the exception of the notice periods under the service contracts of
executive Directors, the Company has fully complied with the Provisions throughout the year
Directors The Board of the Company currently has eleven Ditectors, comprising the Chairman, three other execulive Directors and seven non-executive Directors. The key functions of Chairman and Managing Directar clearly defined. The majority of the non-executive Directors are
independent as set out in the Code. In this context, two of the nonexecutive Directors, Jan du Plessis and Johann Rupert, are not considered
to be independent for all purposes because of the shareholdings they represent. All the non-executive Directors provide a considerable depth of knowledge and experience collectively gained from a variety of public and private companies. As non-executive Deputy Chairman, Kenneth Clarke is the senior independent director called for in the Code.
The Board meets at least six times during the year and has reserved to itself key matters on which it alone may make decisions. Responsibility for implementing the Group’s strategy s delegated to the Management Board, which meets at least eight times a year. This cusrently comprises the executive Direclors and twelve senior Group executives. The Board has afso established three Board Committees, each of which has clear terms of reference. These are:
The Remuneration Committee, whose composition and terms of reference
are set out in Lhe remuneration report on page 5.
The Audit Committee, which comprises all the non-executive Directors (other than Johana Rupert) and is chaired by Rupert Pennant-Rea. The Managing Director and Finance Director attend meetings of the
Committee but are not members. The Committee meets regularly with
management and with the internal and external auditors to review the effectiveness of internal controls, other matters raised in regular reports
to the Committee and the full year financial staternents prior to their
submission to the Board. The Audit Committee receives reports from the
Group’s regional audit committees, which monitor the effectiveness of business and financial controls across the Group. The Audit Committee s satisfied that the Company’s auditors, PricewaterhouseCoopers, continue to be objective and independent of the Company. The firm does perform non-audit services for the Company but the Audit Commiltee is satisfied that such work is best handled by PricewaterhouseCoopers because of its knowledge of the Group and that the auditors' objectivity is not impaired by reason of this further work.
The Nominations Committee, which is responsible for nominating, for approva! by the Board, candidates for appointment to the Board and the Management Board. It is chaired by Martin Broughton and its other members are all the non-executive Directors and Ulrich Herter.
There is open cammunication between senior executive management and 2oard members. The Board and its committees are supplied with high
quality, up-to-date information for review prior to each meeting to enable them to discharge their responsibilities. All Directors have access to the advice and services of the Company Secretary and a procedure is in
place for Directors to take independent professional advice, should this
be required.
The Company’s articles of association provide that one-third of Directors
must submit themselves for re-glection each year at the Annual General Meeting. Further, any Director appointed during the year also has to seek re-election at the next Annual General Mesting. In practice this normaily
means that the Directors submit themselves for re-election every three years, as required by the Code. The Company is taking the opportunity to formalise the Code provision by recommending a change in the articles of association at the forthcoming Annual General Meeting. The Directors
who retire and offer themselves for re-election at this year's Annual
General Meeting are set out on page 2.
In accordance with the Code, each new non-executive Director is
appointed for a specified term, being an initial period to the next Annual General Meeting afler appointment and, subject Lo reappaintment at that
meeting, for a further period ending at the Annual General Meeting held three years thereafter. Subsequent reappointment will be subject to
endorsement by the Board and the approval of shareholders. Directors are given appropriate training on appointment and subsequently as necessary.
Directors’ remuneration
The Remuneration Committee, which is chaired by Kenneth Clarke, and comprised exclusively of non-executive Directors, has responsibility
for executive remuneration. The remuneration of the non-executive Directors s determined by the Board. information about the Company’s remuneration policies and, in particular, the executive Directors’ service contracts, is in the remuneration report on page 5.
The Code states that there is a case for service contracts to be for one year or less. The contractual position of the Company’s four executive Directors
alls! - - M1 o m ™ il Tie Ml
1
71 b id wad e hew B W B i b o el e aes b [ RN VRN SR I W
11 Directors’ Repont and Accounts 2000
is explained in the remuneration report. The Remuneration Committee is unanimous that, in the context of truly multinational group seeking to attract the best talent from around the werlc, this contractual position is appropriate to meat the interests of shareholders, the Company and the individual Directors concered.
Relations with shareholders The Principles encourage diaiogue with institutional shareholders and use of the Annual General Meeting to encourage participation by private investors. The Company has regular dialogue with institutional shareholders. The Annual General Meeting provides the opportunity for
a similar dialogue with private investors and procedures at such meetings are in compliance with the Code. The availabiity of information about the
Company to its shareholders has been extended by the development of its internet website at www.bat.com
Accountability and audit
The Board has reviewed in detail the contents of the Annual Review and
Summary Financial Statement and the Directors’ Report and Accounts,
Itis satisfied that the assessment given of the Company’s position and prospects is balanced and understandable,
A summary of the Directors” responsibilities in respect of the financial statements s given on page 12. The system of internal control designed to safequard shareholders' investments and the Company’s assets s set out below, The Audit Commitiee, whose composition and functions are descrived above, has considered in conjunction with the extemal auditors, the accounting policies adopted in the Group accounts and has examined the internal controls which have been put in place in the Group.
Internal control The Combined Code requires listed companies to maintain a sound system of internal control to safeguard shareholders’ investments and the Company’s assets. The Turnbul! Report, adopted by the UK Listing
Authority, provides guidance for compliance with that part of the Code.
Set out below is the Group statement on internal control in accordance with the guidance provided by the Turnbull Report.
The Board is responsible for the overall system of internal control for the Company and its subsidiaries and for reviewing the effectiveness of these controls. The system is designed to manage risks that may impede the achievernent of the Company’s business objectives rather than to eliminate these risks. The internal control system can therefore only provide reasonable assurance, not absolute assurance, against material
misstatement or loss.
There is an ongoing process for identifying, evaluating, and managing the significant risks faced by the Compary and its subsidiaries. This process is regularly reviewed by the Board, which includes on its agenda matters relating to significant risks that mzy impede meeting business objectives,
and it has been in place throughout the year under review and up to the date of this report. In addition, internal control and business risk issues have been regularly reviewed by the six regional audit committees (chaired by an execulive Director) and the Audit Committee as set out above. Regional and end-market management, along with internal audt, support the Board in its role of ensuring a sound internal control environment.
The Board, with advice from the Audit Committee, has completed its
annual review of the system of internal control in accordance with the
Turnbull Report for the period since 1 january 2000 and is satisfied that
it is in accordance with that guidance, The assessment included consideration of the effectiveness of the Board's ongoing process for identifying, evaluating, and managing the risks of the business and review
of the work of regional audit committees in examining annual reports of internai control and business risks completed by operating companies.
12 Directars’ Report and Accounts 2000
Statement of Directors’ responsibilities
The following Statement sets out the responsibilities of the Directors in relation to the financial statements. The report of the independent auditors, shown on page 13, sets out their responsibilities in relation
to the financial staterrients.
Company law requires the Directors to prepare financial statements for
each financial year which give a true and fair view of the state of affairs of the Company and the Group as at the end of the financial year and of the profit or loss for the financial year. I preparing those financial statements, the Directors are required to:
» select appropriate accounting policies and apply them consistently,
subject to any material departures being disclosed and explained;
« make judgements and estimates that are reasonable and prudent;
« state whether applicable accounting standards have been followed;
« prepare the financial statements on the going concern basis, unless they consider that to b inappropriate.
The Directors are responsible for ensuring that the Company keeps sufficient accounting records to disclose with reasonable accuracy the financial position of the Company and the Group and to enable them to ensure that the financial statements comply with the Companies Act 1985. They are also respansible for taking reasonable steps to safeguard the assets of the Company and the Group, and in that context to have proper regard to the establishment of appropriate systems of internal control with
a view to the prevention and detection of fraud and other irregularities.
The Directors are required to prepare the financiaf statements and to provide the auditors with every opportunity to take whatever steps and undertake whatever inspections they consider to be appropriate for the purpose of enabling the to give their audit report.
The Directors consider that they have pursued the actions necessary to meet their responsibilities as set out in this statement.
e cal e B S o s T B o o B e B B T B B B B e B ] m - -
REAERIRIER
“t - i ed e [NERY SO O VP ) [ [T o e i e b b B M e b b e
13 Directors’ Report and Accounts 2000
Report of the independent auditors
to the members of British American Tobacco p.l.c.
We have audited the financial statements which comprise the profit and loss account, the balance sheet, the cash flow statement, the statement of total recognised gains and fosses and the related notes including the segmental analyses, the principal subsidiary undertakings and the
associates and joint ventures.
Respective responsibilities of Directors and auditors The Directors responsibilities for preparing the annual report and the financial statements in accordance with applicable United Kingdorm law
and accounting standards are set out in the statement of Directors’ responsibilities.
Our responsibility s to audit the financial statements in accordance with relevant legal and reguiatory requirements, United Kingdom Auditing Standards issued by the Auditing Practices Board and the Listing Rules of the Financial Services Authority.
We report to you our opinion as to whether the financial stalements give @ true and fair view and are properly prepared in accordance with the United Kingdom Cormpanies Act 1985. We also report to you if, in our opinian, the Directors’ report is not consistent with the financial
statements, if the Company or Group has not kept proper accounting records, if we have not received ati the information and explanations we require for our audit, or if information specified by law or the Listing Rules regarding Directors’ remuneration and transactions is not disclosed
We read the other information contained in the annual report and consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the financial statements. The other information comprises only the Directors” report,
the remuneration report, the corporate governance statement, the statement of Directors’ responsibilities, the five year summary, the quarterly analyses of profit, highlights of the year, the chairman’s
statement, the Managing Director’s review and the Finance Director's review.
We review whether the corporate governance statement reflects the Company’s compliance with the seven provisions of the Combined Code specified for our review by the Listing Rules, and we report if it does not. We are not required to consider whether the Board's statements on internal control cover all risks and controls, or to form an opinion on the efiectiveness of the Company’s or Group's corporate governance procedures or its risk and control procedures.
Basis of audit opinion We conducted our audit in accordance with Auditing Standards issued oy the Auditing Practices Board. An audit includes examination, on & test basis, of evidence relevant to the amounts and disclosures in the financial statements. It akso includes an assessment of the significant estimates and judgements made by the Directors in the preparation of the financial statements, and of whether the accounting policies are appropriate
10 the Company’s and Group’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 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 financial statements.
Opinion
In our opinion the financial statements give a true and fair view of the
state of affairs of the Company and the Group at 31 December 2000 and
of the profit and cash flows of the Group for the year then ended and havgbeen properly prepared in accordance with the Companies Act 1985.
PricewateroueeCoopers Chartered Accountants and Registered Auditors 1 Embankment Place Lordon WC2N 6RH 28 February 2001
14 Directors’ Keport and Accounts 2000
Accounting policies
1 Basis of accounting The Group accounts have been prepared under the historical cost convention and in accordance with the Companies Act 1985 and applicable UK accounting standards.
2 Basis of consolidation
The consolidated financial information includes the accounts of British American Tobacco and its subsidiary undertakings together with the
Group's share of the results of its assoclates and joinl ventures. Associates and joint ventures comprise investments in undertakings, which are not
subsidiary undertakings, where the Graup's interest in the equity capital i long term and over whose operating and financial poiicies the Group exercises a significant influence. They are accounted for using the equity
method.
The results of subsidiary undertakings acquired during the period are incluced from Lhe date of acquisition of a contralling inzerest at which date, for the purposes of consolidation, the purchase consideration is allocated between the underlying net assets acquired, other than goodwill, on the basis of their fair value.
The results of subsidiary undertakings which have been sold during the year are included up to the date of disposal. The profit or loss on sale is calculated by reference Lo the net assel vaiue at the date of disposal, adjusted for purchased goodwill previously written off to reserves on acquisition.
3 Goodwill on acquisitions prior to 1 January 1998 has been eliminated during the year of purchase against reserves. Goodwill on acquisitions from 1 jandary 1998 is capitaiised and amortised over its useful economic life. Adjustments to provisional fair vaiues of assets acquired in the preceding period are reflected as adjustments to goodwilt.
4 Foreign currencies Tumover, profits and cash flows expressed in currencies other than sterling
are wanslated to sterling at average rates of exchange in each year. Assets and liabilities are translated at rates of exchange at the end of each year. For high inilation countries, the translation from focai currencies to sterfing rmakes ailowance for the impact of inflation on the focal currency resuits.
The differences between retained profits of overseas subsidiary and associated undertakings translated at average and closing rates of exchange
are taken to reserves, as are differences arising on the retranslation to sterling (using ciosing rates of exchange) of overseas net assets at the beginning of the year, after taking into account related foreign currency borrowings. Other exchange differences, incluing those on remitzances, are reflected in profit.
5 Revenue represents turnover of subsidiary undertakings and the Group's share of associates’ turnover. Group turnover comprises sales
to exterral customers and includes duty, excise and other taxes.
6 Pensions and post retirement benefits The costs of providing pensions and post retirement health care benefits, calculated by reference to actuarial valuations, are charged against profits on a systematic basis with surpluses and deficils arising allocated over the expected average remaining service lives of current employees. Differences between the amounts charged in the profit and loss account and payments made to pension schemes are treated as assets o liabilities in the balance sheet
The Group has not yet adopted the requirements of the recently issued Financial Reporting Standard 17 on Retirement Benefits, which is not mandatory for the period being reported.
7 Research and development revenue expenditure is charged against profits as incurred.
8 Taxation provided is that chargeable on the profits of the pericd, together with deferred taxation.
The Group’s deferred tax is calculated as indicated below:
() Deferred taxation is provided for on timing dilferences using the
liability method to the extent that it is probable that the liability will erystallise. Timing differences arise on items of income and expenditure that are recognised for tax purposes in different periods from those i which they are recognised in the profit and loss account. Deferred
taxation is accounted for in full on long term timing differences in respect of post retirement schemes.
(b) No account is taken of tax which may be payable on the realisation of investments held by Group companies. Deferred taxation is not provided on the undistributed profits retained by subsidiary and associated undertakings as such profits are considered to be permanently invested in those businesses.
The Group has not yet adopted the requiremants of the recently issued Financial Reporting Standard 19 on Deferred Tax, which is not mandatory for the period being reported
9 Tangible fixed assets are stated at cost less depreciation, Depreciation
is calculated on a straight-line basis to write off the cost of tangible fixed
assets over their useful lives. Freehold and long leasehold land and suildings are depreciated at rates between 2.5 per cent and 4 per cent
per annum, and plant, machinery and equipment at rates between 7 per cent and 25 per cent per annum. No depreciation is provided
on freeheld land.
"'!.’"1 Tl e T T R I e B T B P pe [ ee em P g g
I i
15 Directors’ Repor: and Accounts 2000
10 Other investments are stated at cost less provisions, consistent with the concept of prudence.
11 Stocks are velued at the lower of cost and net realisable value.
The method used in calculating cost, which includes raw materials, direct labour and overheads where appropriate, is average cost.
12 Leased assets Assets held under finance leases are included under Langible fixed assets at their capital value and depreciated over their estimated useful lives. Leasing payments consist of capital and finance charge elements and the finance element is charged to the profit and loss account. The annual payments under operating leases are charged to the profit and loss account.
13 Geographical analyses are presented on the basis of five regions, which reflect the principaf segmentation of the Group operations.
Royalty income, less related expenditure, is included in the region in which the licensor is based.
14 Financial instruments The Group utilises a number of differing derivative instruments as part of
its interest rate and exchange rate risk management. These instruments
include interest rate swaps, swaptions, caps and collars and forward rate agreements as well as cross-currency swaps, tax equalisation swaps and forward foreign currency contracts.
Interest rate risk management Interest differentials are recognised on an accruals basis and adjusted against interest payable. Initial premiums and discounts are amortised over the lives of the instruments. Where instruments are terminated early, gains and losses are amortised over their original lives if the underlying exposure remains in place or atherwise recognised immediately.
Exchange rate risk management Cross-currency swaps are revalued at the balance sheet date and utilised to adjust the book values of the related foreign currency borrowings. Where forward foreign currency contracts are used to hedge existing assets and liabilities, the contract rates are used to value the related assets and liabilities. Gains and losses arising on hedges of future transactions are not recognised until the transactions occur.
16 Directors’ Report and Accounts 2000
Group profit and loss account
for the year ended 31 December
2000 1999
Notes. £m £m
Revenue
Subsidiary undertakings (2000 comprises: continuing £22,213 million and acquisitions £1,365 million) 1 23,578 18,798 Share of associates and joint ventures page 51 1 1,253 2,873
24,831 21,671
Profit Subsidiary undertakings Turnover including duty, excise and other taxes (2000 comprises: continuing £22,213 million and
acquisitions £1,365 million) 23,578 18,798 Duty, excise and other taxes (12,663) (9,726)
Turnover excluding duty, excise and other taxes 1 10,915 9,072 Other operating income 100 150 Operating charges 1 (9.276) (8,123)
Operating profit (2000 comprises: continuing £1,476 million and acquisitions £263 million) 1 1739 1,099
after charging: US restructuring costs 1 (19) acquired stock 1 (83) US tobacco settlements 3 24 integration costs 3 (126) 3s7) goodwill amortisation l (376) (162)
Share of associates and joint ventures page 57 1 61 380
after charging: Imasco restructuring costs page 51 on
Total operating profit 1,800 1,479
Sale of brands 2 88
Profit on ordinary activities before interest 1,800 1,567 Subsidiary undertakings: investment income 3 214 195 interest payable 4 (483) (365)
Share of associates’ interest paid less received page 51 (&) 6)
Profit on ordinary activities before taxation 1,522 1,371 Taxation on ordinary activities 5 (683) (673)
Profit on ordinary activities after taxation 839 698
Equity minority interests (169) (142)
Profit for the year page 17 670 556 Dividends and other appropriations: - ordinary shares s (623) (546) - convertible redeemable preference shares 6 (57) 09
Retained loss o) (64)
Earnings per share: basic - unadjusted 7 28.50p 25.25p
diluted - unadjusted 7 28.63p 27.02p
~ adjusted ? 57.87p 52.33p
As explained on page 20 the 2000 results include Imperial Tobacco Canada as a wholly-owned subsidiary from 1 February 2000. Prior to that date the results included the Group’s share of the Imasco Group. The retained profit, with the exception of income from the non-tabacco businesses of the associate tmasco prior to its acquisition as a subsidiary on 1 February 2000 (detailed on page 52), arises entirely from continuing operations, The results
for 1999 include the acquired Rothmans businesses for the period from 7 june 1999 to 31 December 1999, whereas 2000 includes a full year's
contribution.
There is no difference between the profits on ordinary activities before taxation and the retained profits for the year stated above and their historical cost equivalents.
Notes are shown on pages 21 1o 45.
i T B B e B Bl BB Bl e | Mmoo — - e R A -
17 Divectors’ Report and Accounts 2000
Statement of total recognised gains and losses
for the year ended 31 December
2000 1999 Notes £m £m
Profit for the year page 16 670 556
Differences on exchange 15 (213) (268)
Revaluation of associated company 15 1,248
Total recognised gains refated to the year beiow 1,705 288
Interest of British American Tobacco’s shareholders for the year ended 31 December
2000 1999 Notes £m £m
Balance 1 January is 4,821 64 Total recognised gains related to the year above 1,705 288
Issue of shares: share options 3 3 Rothmans merger 5,089 Redemption of convertible redeemable preference shares page S note 33 (695) idends and other appropriations: page 76 ordinary shares (623) (546) convertible redeemable preference shares @35) (54) amortisation of discount on preference shares page 55 note 33 (22) 20) Other 24 3)
Balance 31 December 15 5178 4,821
Notes are shown on pages 21 to 45.
A
18 Directors’ Report and Accounts 2000
Group balance sheet
31 December
2000 1995 Notes £m m
Assets
Fixed assets
Intangible assets 8 7,158 5,338
Tangible assets 9 2,600 2,456
investments in associates and joint ventures 10 201 636 Other investments and long term loans. " 527 210
10,486 8,640
Current assets
Stocks 12 3,053 2,850
Debtors 13 2,267 2,000 Acquired businesses awaiting disposal 2 57 123
Current investments 14 221 768
Short term deposits and cash 1,667 1,853
7,265 7,594
Total assets 17,751 16,234
Liabilities Capitat and reserves
Share capital 575 60S Share premium account 7 4
Merger reserves 4,475 4,726 Capital redemption reserve 30
Other reserves 511 503 Profit and loss account (420) (1.017)
Shareholders funds: 15 5,178 4,821
equity 4,422 3,347 non-equity 756 1,474
Minority shareholders’ equity interest 418 455
5,596 5276
Other liabilities
Provisions for liabiiities and charges 16 1,390 1,251
Borrowings 7 6,151 5,676
Creditars 19 4,614 4,031
12,155 10,958
Total funds employed 17,751 16,234
On behalf of the Board Martin Broughton, Chairman 28 February 2001
Notes are shown on pages 21 to 45.
e Tte Bl B B T W ol o B o B B BB B B B I m - — . -
[
19 Directors” Report and Accounts 2000
Group cash flow statement
for the year ended 31 December
2000 1959 Notes £m m
Net operating cash flow from subsidiary undertakings 27 2,758 1,995
Dividends from associates 30 90
Net cash inflow from operating activities 2,788 2,085 Returns on investments and servicing of finance £ (530) (206)
Taxation (598) (334) Capital expenditure and financial investment 2 (346) (281)
Net cash generation 1314 1,264 Dispasals less acquisitions 2 88 (216) Equity dividends paid (580) (530)
Cash flow before use of liquid resources and external financing 822 518
Management of liquid resources 28 761 {1,340y
Financing ~ proceeds from issue of shares 3 3 ~ redemption of preference shares 3 (695)
- (decrease)/increase in debt 28 (915) 853
(1,607) 856
(Decrease)/increase in cash in the year below (24) 34
Reconciliation of net cash flow 1o movement in net debt 29 (Decrease)fincrease in cash ir the year above (24) 34 Decrease/(increase) in debt 915 (853)
(Decrease)/fincrease in fiquid resources (761) 1,340
Change in net debt resutting from cash flow 130 521
Net debt acquired on purchase of subsidiaries (798) (754)
Net funds disposed of on sale of subsidiaries (23) Other changes (203) a3y Differences on exchange (337) a9y
Movement in net debt in the year (1,208) (480) Net debt at 1 January (3,055) (2,575)
Net debt at 31 December (4,263) 3,055)
Notes are shown on pages 21 to 45.
20 Directors’ Repart anc: Accounts 2000
Segmental analyses
of turnover, profit and assets for the year ended 31 December
Subsidiaries Associates Total
Turnover excluding duty, 2000 1999 2000 1999 2000 1999 excise and other taxes £m £m £m £m £m £m
America-Pacific 4,111 3,328 135 1,600 4,246 4,928
Asia-Pacific 1,144 783 1 1,144 784
Latin America 1,593 1,425 1 1 1,594 1,426
Europe 3,252 2,813 356 315 3,608 3128
Amesca 815 723 208 193 1,023 916
10,915 9,072 700 2110 11,615 11,182
Total operating profit Total operating profit {before goodwil (after goodvi amortisation and amortisation and Subsidiaries Assaciates exceptionals} exceplionals)
2000 1999 2000 1999 2000 1999 2000 1999 Operating profit £m £m £m £m £ £n £m £m
America-Pacific 853 544 25 304 878 848 500 803
Asia-Pacific 361 235 361 235 253 12
Latin America 425 333 425 333 424 EEL
Europe 509 315 32 23 541 338 329 24
Amesca 295 215 75 53 370 268 294 209
2,443 1,642 132 380 2,575 2,022 1,800 1,479
Total operating assets Total cperating assets (excluding unamortised (incluging unamortised Subsidiaries Associates goodwill) ‘goodwil)
2000 1999 2000 1999 2000 1999 2000 1999 Operating assets £m £m £m £m £m £m £m £m
America-Pacific 763 684 487 763 17 2,999 1,253
Asia-Pacific 487 594 6 487 600 1,748 1,897
Latin America 1,039 905 2 2 1,041 907 1,059 925 Europe 1,942 1,934 62 36 2,004 1,970 4,468 4,496
Amesca 384 407 137 105 521 512 1,700 1,927
4,615 4,524 201 836 4,816 5,160 11,974 10,498
Foflowing the acquisition of Imperial Tobacco Canada (page 37 note 21), the segmental analyses of turnover and operating profit in 2000 includes the results of Imperial Tobacco from 1 February 2000 to 31 December 2000 as a subsidiary. For the period prior to 1 February 2000 the Group’s share of tusnover and operating profit of Imasco was included as an associate. The results of Imperial Tobacco Canada are included within the America-Pacific
region in the segmental analyses. Previously, the results of Imasco as an associate were shown as a separate segment and the comparative information has been restated accordingly.
The segmental analyses of turnover and operating profit for 1999 include the results of the acquired Rothmans businesses from 7 June 1999 to 31 December 1999.
As a result of a reorganisation following the acquisition of Rothmans, profit from the manufacturing operations located in Southampton in the UK is included within the Europe region with effect from 1 January 2000. Previously it was included in Asia-Pacific and the comparative information in the segmental analyses has been restated accordingly.
The associates figures above reflect the Group's share of the associates' turnover (excluding duty, excise and other taxes), operating profit and net assets, including the Group’s share of the joint ventures.
The goodwill amortisation and exceptional items are explained in note 1 on pages 22 to 24.
-~ | 2 30en Mo Bl B Bnce B B B s B M B o
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21 Directors’ Report and Accounts 2000
Notes on the accounts
Segmental analyses
(a) Turnover excluding duty, excise and other taxes analysis for subsidiaries is based on lacation of manufacture. Figures based on external saies in each region are as follows
2000 1599
£m im
America-Pacific 3,957 3,204 Asia-Pacific 1,405 1,207 tatin America 1,614 1,460 Europe 2,548 2,044 Amesca 1,391 1,157
10,915 9,072
(b) Revenue including Group’s share of associates is as follows:
2000 1999
m £m
including duty, excise and other taxes 24,831 21,671 Duty, excise and ather taxes (13,216) (10,489)
Excluding duty, excise and other taxes 11,615 1,182
(¢) The operations of subsidiaries are entirely related to tobacco. The Group’s share of the operations of assaciates comprise the following businesses:
Tumover excluding duty, excise and other taxes Operating profit
2000 1999 2000 1999 £m im £m £m
Tobacco 588 824 16 225
Financial services 69 761 12 103 Other trading activities 43 525 4 52
700 2,110 132 380
Operating profit in 2000 is before charging Imasco restructuring costs of £71 million. Further details relating to associates and joint ventures are set out on page S1.
{d) Operating assets 2000 1999 £m £m
Total assets page 18 17,751 16,234 Less: goodwill (7,158) (5,338) investments in associates and joint ventures 201y (636) non-operating assets note (e} (2.344) (2,723) operating creditors rote () (3,433) (3,013}
page 20 4,615 4,524
(e) Non-operating assets Acquired businesses awaiting disposal 57 123
Other investments and long term loans 527 210
Current investments 221 768 Short term deposits 1,196 1,403
Taxation recoverable 266 131
Interest 77 88
note (d) 2,344 2,723
{f) Operating creditors Total creditors 4,614 4,031 Less: dividends payable (454) (433) UK and overseas taxation on profits (423) (248) interest (304) (337)
note (d) 3,433 3,013
22 Girectors’ Report and Accounts 2000
Notes on the accounts continued Profit and loss account
1 Operating profit Continuing operations Discontinued Continuing ~ Discontinued Acquisitions operations Total operations operations Total 2000 2000 2000 2000 1999 1999 1999 £m £m &m m m m tm
Revenue
Subsidiary undertakings 22,213 1,365 23,578 18,798 18,798 Share of assaciates page 51 1,141 1z 1,253 1,587 1,286 2,873
23,354 1,365 nz 24,831 20,385 1,286 21,671
Profit Subsidiary undertakings Turnover including duty, excise and
other taxes 22,213 1,365 23,578 18,798 18,798
Duty, excise and other taxes (12,055} (608) (12,663) (9,726) (9,726)
Turnover excluding duty, excise and
other taxes 10,158 757 10,915 9,072 9,072
Other operating income 100 100 150 150 Operating charges:
Raw materials and consumables (2,419) (166) (2,585) {1,980) (1,980) Changes in stacks of finished goods
and work in progress {125) (1) (126) (69) (69)
Staff costs note (a) (1,403) (94) (1,497) 1,251) (1,251)
Depreciation note (¢) (385) 16) (401) (350) (350) Goodwill amortisation note (i) 273) (103) (376) (162) (162)
Other operating charges note (d} 4177 (114) (4,291) 4,311) (4,311)
Operating profit before associates 1,476 263 1,739 1,099 1,099
after charging: US restructuring costs note (&) (119) 119)
acquired stock note (f) (83) (83) US tobacco settlements note (g} 24) @4 integration costs nate (h) (126) (126) 357) 357 goodwill amortisation note (i} (273) (103) (376) 162) (162)
Share of associates and joint ventures page 51 45 16 61 225 i85 380
after charging: Imasco restructuring
costs page 52 [¢a)] @
Total operating profit 1,521 263 16 1,800 1,324 155 1,479
The aperations classified as acquisitions ace the tobacco operations of the imasco Group. The discontinued operations are the non-tabacco businesses of the Imasco Group. These comprise CT Financial Services Inc, Shoppers Drug Mart and Genstar, its land development company.
2000 1999
£m £m
(a) Staif costs comprise: Wages and salaries 1,209 998 Sacial security costs 150 147 Other pension and post retirement benefit costs note (b) 138 106
1,497 1,251
The Group has taken advantage of the exemption on UITF Abstract 17 (Revised) from the need to apply the provisions of that Abstract to UK Inland Revenue approved SAYE schemes.
(b) Other pension and post ratirement benefits costs comprise: Funded plans - defined contribution 18 28 ~ defined benefit 57 24 Unfunded plans - defined benefit 63 54
138 106
(¢) Depreciation includes:
Depreciation in respect of assets held under finance leases 33 26
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1
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23 Directors’ Report and Accounts 2000
1 Operating profit continued
2000 1999
£m im
(d) Other operating charges include: Research and development expenses 59 58 Rent of machinery and equipment (operating leases) 34 39 Rent of land and buildings (operating leases) 68 65 finance charges in respect of finance leases 6 5 Auditors’ fees 6 6 Fees paid to PricewaterhouseCoopers for advisory and consultancy services -UK 20 3.0 - overseas 43 3.7
(e) On 20 September 2000 Brown & Williamson announced a major cost cutting programme in order to improve its financial position and enable it
to remain competitive. The costs of this programme are shown as additional information on the face of the profit and loss account and comprise:
Staff-related costs 72 Depreciation 46
Other 1
19
n addition to these costs, £43 million of surpluses existing in Brown & Williamson post retirement schemes and unrecognised in compliance with SSAP24: Accounting for pension costs, were utilised to fund certain post retirement scheme costs resulting from the programme. Consequently
no charge for these costs has been made in the year ended 31 December 2000.
() As part of the SCAT acquisition (page 37 note 21), the Group acquired cigarette stocks which had previously been sold to that business by the Group. A one-off accounting adjustment of £83 million is charged in other operating charges to remove the gross contribution previously recognised by the Group on those cigarette sales.
2000 1999
£m £m
(g) US Tobacco settlements: Initial costs 24 Ongoing costs 777 746
To the extent that payments arising under settiements reached in the USA in respect of litigation against the major tobacco companies are not subject to future sales, Brown & Willamson’s share of the industry payments is charged as initiai Costs in the year of settlement. Other costs are shown as ongoing costs in the year to which they relate.
During the fourth quarter of 1998 agreement was reached with Attorneys General in 46 US states (‘the Settling States’) to settle the outstanding Medicaid recovery suits. The initiat costs in respect of this agreement, together with the initial costs arising from the earlier settlement between the US cigarette companies and the State of Minnesota and Blue Cross and Blue Shield of Minnesota, were charged in 1998. This included initial payments to those parties, together with legal fees, and also included the impact of Most Favoured Nation Clauses which increased amounts due under previous state settlements and advances on legal fees. In addition the four leading US tobacco manufacturers have agreed to make annual payments, commencing i 1999 for 12 years, 1o states with tobacco grower communities to compensate them for any adverse effect of the settiement agreements. During 1999 there was a further charge of £24 million in respect of one-off settiement compliance costs and liquidated legal fees. These initial costs are shown as
additional information on the face of the profit and foss account.
The US tobacce industry will incur ongoing costs under the agreement with the Settiing States. The US tobacco manufacturers who entered into the
agreement (‘the Settling Companies’) have agreed to make payments ta the Settling States in perpetuity. The nominal value of payments by the four original Settling Companies over the first 25 years of the agreement was estimated at approximately US$219 billion. The actual payments will be adjusted annually Lo reflect changes in industry volume, inflation: and other factors. Additionally the Settling Companies will pay fees of the Settling States' attorneys, and the amounts payable will be set by arbitration (with a US$500 million annual cap for the first five years which rises o US$750 million in years 6 to 10 inclusive, less amounts previously paid as liquidated fees) or by agreement.
These payments will be allocated among the Settling Companies based on their relative annual market share in each year, which in 2000 was approximately 12.4 per cent for Brown & Willarnson (1999 13.9 per cent).
24 Directors’ Report and Accounts 2000
Notes on the accounts continued
Profit and loss account
1 Operating profit continued (h) Operating charges include integration costs which are the costs incurred in integrating the Rothmans businesses into the British American Tobacco Group and the consequential restucturing of the enlarged Group. These costs are shown as additional information on the face of the profit and loss
account and comprise:
2000 1999
£m £m
Staff-refated costs 31 180 Depreciation 10 74 Other 85 103
126 357
integration costs incurred by 31 December 2000 resulted in synergy savings which reduced operating costs by approximately £230 million in 2000.
() Goodwill has mainly arisen from the Imasco transaction and the SCAT acquisition described on page 38 note 21, tagether with the initial acquisition of Rothmans and subsequent local restructurings of the enlarged Group's publicly listed subsidiaries in Singapore, Australia and South Africa in 1999. The goodwill arising on these transactions is being amortised over a period of 20 years. The amortisation charge is shown as additional information on the face of the profit and loss account and for 2000 inciudes £103 million in respect of Imasco, £2 million in respect of SCAT and £271 million i respect of the initial acquisition of Rothmans and the subsequent restructurings.
2 Sales of brands This comprised the £88 million profit on the sale in 1999 of certain British American Tobacco brands in Australasia. This profit has no effect on the taxation charge but increases the minority interests by £36 million. The cash inflow associated with this transaction is included within disposals less acquisitions, see page 45 note 28.
3 Investment income 2000 1999 £m £m
Long term loans 3 4
Current investments. 73 55
Short term deposits m 86 Gain on cancellation of swap contracts 27 18 Dividends from business awaiting disposal 7 Interest on Brazil sales tax recovery 25
214 195
4 Interest payable 2000 1999 m m
Bank loans and overdrafts 19 9
Other loans 364 246
483 365
5 Taxation on ordinary activities 2000 1999 £m £m
UK Corporation Tax at 30.00% 1999 30.25% 438 62 Double taxation relief (418) 77
UK taxation 20 18
Qverseas taxation 751 434
Current taxation keal 419 Oeferred taxation a3) 114
658 533 Share of associates and joint ventures page S1 25 140
683 673
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25 Directors' Report and Accounts 2000
6 Dividends and other appropriations 2000 1999 pence 2000 pence 1999 per share £m per share £m
(a) On ordinary shares: Interim — ordinary 2000 paid 18 September 2000 9.00 193 - special 1999 paid 1 July 1999 4.00 62 - ordinary 1999 paid 27 September 1999 4.30 94
Final ~ 2000 payabie 8 May 2001 20.00 430 - 1999 paid 3 May 2000 17.90 390
29.00 623 26.20 546
(b) On convertible redeemable preference shares: interim - 2000 paid 18 September 2000 5.00 1
- 1999 paid 27 September 1999 4.30 10
Final ~ 2000 payable 8 May 2001 2000 24
- 1999 paid 3 May 2000 17.90 44 Amortisation of discount page 56 note 33 22 20
29.00 57 22.20 74
7 Earnings per share
Basic earnings per share are based on equity earnings of £613 million 1992 £482 million and 2,150 million 1999 1,910 million ordinary shares of 25p cach, being the average number of shares in issue during the year. To comply with FRS14 the average number of shares in issue exclude shares held
by British American Tobacco and B.A.T Industries Employee Share Qwnership Trusts.
For diluted earnings per share the average number of shares in issue is increased to 2,340 million 1999 2,058 million to reflect the potential dilutive effect of the convertible redeemable preference shares and employee share schemes. The earmings are correspondingly adjusted to the amount of earnings prior to charging dividends and the amortisation of discount on the convertible redeemable preference shares.
The earnings have been affected by a number of exceptional items. To illustrate the impact of the principal distortions, as well as the effect of goodwiil amortisation, an alternative earnings per share is shown below:
Diluted Basic
2000 1999 2000 1999 pence pence pence sence per share per share per share per share
Unadjusted earnings per share 2863 27.02 28.50 25.25 Effect of US restructuring costs 355 3.86 Effect of acquired stock 3.55 386 Effect of goodwil amortisation 16.07 7.82 17.49 8.43 Effect of US tobacco settlements 073 0.79 Effect of integration costs 4.02 .27 437 1215 Effect of Imasco restructuring costs 208 223 Effect of sales tax recovery in Brazil (0.63) (0.68) Effect of sale of brands (2.53) 2.72) Effect of US tobacco settlements on effective Lax rate 8.65 9.32
Adjusted earnings per share 57.87 52.33 6031 52.54
26 Directors’ feport and Accounts 2000
Notes on the accounts continued Balance sheet
8 Intangible assets .
Cost 1 January 2000 5,498 Differences on exchange 5 Additions page 37 note 21 -~ Imperial Tobacco Canada 2,143
- other 57 Disposals page 43 note 25 10)
31 December 2000 7,693
Amortisation
1 January 2000 160 Differences on exchange m Charge for year page 24 note 1 376
31 December 2000 535
Net book value 31 December 2000 7,158
Net book value 31 December 1999 5,338
9 Tangible fixed assets Plant Freehold Leasehold machinery Assetsin land and land and and course of buildings buildings equipment <onstruction Total m £m £m £ m
Cost
1 January 2000 903 161 3721 168 4,953 Differences on exchange 62 122 8 192
Expenditure 14 7 225 163 409
Acquisitions. 4@ 2 237 14 294 Reaflocations 26 1 120 (147)
Disposals 97) @1 (501) {1 (620}
31 December 2000 949 150 3,924 205 5,228
Depreciation
1 January 2000 310 36 2,151 2,497
Diffarences on exchange 14 2 77 93 Acquisitions 13 1 120 139 Charge for year 19 6 379 404 Adjustments on disposals 36) (10) (459) (505)
31 December 2000 325 35 2,268 2,628
Net book values 31 December 2000 624 ns 1,656 205 2,600
Net book values 31 December 1999 593 125 1,570 168 2,456
2000 1990 £m £m
Cost of land on which no depreciation is provided 103 96
Leasehold land and buildings comprise:
Net book value of long leasehold 70 77
Net book value of short [easehold 45 48
15 125
Net book value of assets held under finance leases 113 72
Contracts placed for future expenditure 45 47
oY 4 {
o owd A owd e d ed [ SR RS R R N b G d o b [ [ VI SIS - | Y3 A
27 Directors’ Report and Accounts 2000
10 Investments in associates and joint ventures pages S0 (0 52 o
1 January 2000 {including loans of £32 millian) 636 Differences on exchange 18 Reteations %)
Change in status (481)
Other movements 35
31 December 2000 (including loans of £67 million} 201
2000 1999 m [
Listed overseas (market value £1,012 million 1999 £3,906 miilion) 133 594
Unlisted 68 42
201 636
The change in status relates principally to the Imasco Group, see page 37 note 21.
As at 31 December 2000, the Group's share of the gross assets and liabilities of the joint ventures are not material to the Group and are disclosed here
rather than on the face of the balance sheet. They totalled £13 million 1999 £11 million and £91 million 1999 £43 miillion respectively. During 2000
the Group subscribed for £35 million 1999 £28 million convertible loan stock.
11 Other investments and long term loans
Listed Unlisted Listed Unlisted equity equity fozns loans Total
£m £m £m £m £m
1 fanuary 2000 134 32 a4 210 Differences on exchange 1 3 5 ° Acquisitions 29 1 6 37 73 Additions and advances 153 15 3 171
Reclassifications 77 41 1 19 Disposals and repayments (10) [0 m (43) (55)
31 December 2000 384 91 B 47 527
2000 1999
£m £m
Market value of listed equity and oans 497 108
The listed equity investments inciude £123 million 1999 £76 miltion of shares in the Company owned by the British American Tobacco and BAT Industries Employee Share Ownership Trusts. Details are shown in the remuneration report of the Board of Directors on pages 5 10 9.
Other investments and long term loans with a book value of £233 mitlion included in the above table and having an estimated market vaiue of £404 million constitute assets pledged for security purposes 10 various post retirement schemes operated in Germany, see page 41 note 24. The reclassifications above principally reflect the transfer of current investments to form part of these pledged assets.
28 Directors’ Report and Accounts 2000
Notes on the accounts continued Balance sheet
12 Stocks
2000 1999
£m £m
Raw materials and consumables 2,033 1,898 Finished goods and work in progress 210 694 Goods purchased for resale 110 258
3,053 2,850
Current replacement cost of stocks 3,092 2,896
13 Debtors
Receivable within Receivable beyond Total one year one year
2000 1999 2000 1999 2000 1999
£m £m £m £m £m £m
Trade debtors 1,043 945 1,043 945 . Other debtors 404 302 286 267 18 35 Prepayments and accrued income 820 753 506 366 314 387
2,267 2,000 1,835 1,578 432 422
Prepayments and accrued income include £21 million 1999 £33 million deferred consideration in respect of an exchange of brands in 1993. The amounts are receivable up to the year 2003 and are related to Benson & Hedges sales in certain European markets.
Prepayments and accrued income also include a deferred tax asset of £266 million 1999 £100 million, together with pension prepayments of £167 million 1999 £230 million mainly resulting from the fair valuing of certain Rothmans pension schemes on the acquisition of Rothmans in 1999.
Other debtors receivable beyond one year include US$100 million (£67 million) representing a bond posted in connection with the Engle class
action litigation in the US, see page 39 note 23.
14 Current investments
2000 1599
£m £m
Listed - UK 46 19 ~ overseas 15 105 Unlisted - equity 1 40 — other 159 604
221 768
Market value of listed investments 66 276
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29 Directors’ Report and Accounts 2000
15 Shareholders’ funds Share Capital Share premium Merger redemtion Other Profit and apital account reserves reserve reserves 055 account Total £m m £m £m £m £m m
1 january 2000 605 4 4,726 503 1,017 4821 Differences on exchange 213) (213) Increase in share capital: share options 3 3
Transfers from profit and loss account 670 670
Revaluation of associated company 1,248 1,248 Realisation of revaluation of associated company (1,248) 1,248
Redemption of convertible redeemable preference shares (30) 30 14 (681) (695) Dividends and other appropriations: Ordinary shares (623) (623) Convertible redeemable preference shares @35) @3s) Amortisation of discount on preference shares (22) (22)
Other movements 251 22 253 24
31 December 2000 575 7 4,475 30 51 (420) 5178
2000 1995 m fm
Shareholders’ funds comprise: Equity 4,422 3,347 Non-equity below 756 1,474
5,178 4,821
Non-equity interests comprise:
Convertible redeemabie preference shares N 61
Amortisation of the discount arising on the issue
of these shares 28 20
Applicable merger reserve 697 1,393
756 1,474
Total recognised gains and losses during 2000 include £1,248 million in respect of the Group’s share of the surplus on revaluing Imasco’s non-tobacco businesses prior to their disposal, which is transferred to the profit and loss account on the disposal of these businesses, see page 37 note 21.
The reduction in the share capital and the establishment of a capital redemption reserve reflects the redemption of 50 per cent of the convertible
redeemable preference shares in June 2000. For further information in respect of share capital including the convertible redeemable preference shares, see page 55 note 33.
included in differences on exchange are exchange losses of £177 million 1999 £73 million gains arising on borrowings denominated in, or swapped into, foreign currencies designated as hedges of et investments overseas.
Cumulative goodwill written off as at 31 December 2000 (in respect of acquisitions up to 1 January 1998) amounted to £1,652 million
1999 £1,854 million; the movement arises from exchange differences less the disposal of Imasco’s non-tobacco businesses, see page 37 note 21.
30 Directors’ Report and Accounts 2000
Notes on the accounts continued
Balance sheet
16 Provisions for liabilities and charges
Other past Reorganisation
Unfunded retirement. Deferred of acquired Other pensions enefits taxation businesses provisions Total
£m £m £m £m £m
1 January 2000 581 185 70 102 23 1,251 Differences on exchange 8 15 @) 20 Acquisitions 33 a3 134 210 Provided in respect of the year 56 2 12) 57 62 189 Utilised during the year (45) 33) (104) (135) 317 Other movements 4 18 24 3 (12) 37
31 December 2000 637 254 182 58 259 1,390
The provisions in respect of unfunded pensions largely relate to the pension arrangements in Germany and these, together with the provisions
in respect of other post retirement benefits, are discussed further in note 24 on page 41.
The deferred taxation balances are further analysed in note 20 on page 36.
Provisions in respect of the reorganisation of acquired businesses mostly relate to those set up to cover the integration of the Rothmans businesses.
Other provisions comprise other balances set up in the ordinary course of general business that cannot be classified within the other categories.
is includes provisions for staff costs and the reorganisation of existing businesses.
T T I R T T T T I R T T T T R R R mom et alie Ll ~
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31 Directors’ Report and Accounts 2000
17 Borrowings
Currency
67%4% Notes due 2003 US dollars Medium term notes due 20012029 S dollars 5%% Eurobonds due 2006 Deutschmark Eurobonds due 2002/2009 Euro Eurobonds due 2002/2009 s dotlars Eurobonds due 2004/2009 Sterfing Euro medium term notes due 2001/2019 Various Yen medium term notes due 2001 Us dollars 6Y2% and 6%% Notes due 2003/2008 US dollars
5Y2% Notes due 2005
7Y% and 7%0% Notes due 2004/2007
8%9% to 10%9% Debentures due 2001/2003
Medium term notes due 2001/2005
Swiss francs Malaysian ringgit Canadian dollars
Canadian dollars
Syndicated bank loan US dollars
Other bank joans Various Commercial paper Various Finance leases Various
Miscellaneous Various
Term borrowings (including finance leases) Overdraits Various
Total
Amounts secured on Group assets including finance leases
Included in the finance ieases above are obligations of £31 million 1999 £26 million payable within one year, £26 million 1999 £19 million payahte between one and two years, £39 million 1999 £29 million payable between two and five years and £18 million 1999 £nif payable beyond five years.
Borrowings have been issued in a number of currencies and certain of these have been swapped into sterling, US dollars and Swiss francs and have been accounted for accordingly.
2000 1999
£m im
The borrowings are repayable as follows: Due beyond § years (non-instaiment) 1,821 1,931 Due between 2 and 5 years 2,133 2,506 Due between 1 and 2 years 1,112 206
Due beyond 1 year 5,066 4,643 Due within 1 year 1,085 1,033
6,151 5,676
32 Directors’ Report and Accounts 2000
Notes on the accounts continued Balance sheet
17 Borrowings continued 2000 1999
Borrowings failities Undrawn committed facilities expiring: within 1 year 2,037 385 beyond 1 year and within 2 years 1,879 beyond 2 years and within 5 years 7 1 beyond 5 years 50
2,108 2315
As explained on pages 23 and 24 of the Annual Review and Summary Financial Statement, the facilities include undrawn amounts in respect of the
syndicated bank loan facility of US$1.5 billion (£1 billion), reduced from US$3 billion in the previous year. In addition 2000 includes lmperial Tobacco
Canada’s facilities of C$1.5 billion (£0.7 billion).
18 Financial instruments The objectives and policies for holding or issuing financial instruments and similar contracts, the strategies for achieving the objectives, and the role that
financial instruments have had during the year in creating or changing the risks faced by the British American Tobacco Group in its activities are set out on pages 23 and 24 of the Annual Review and Summary Financial Statement.
Einancial liabilities The currency and interest rate exposure of financial liabilities, excluding finance leases, as at 31 December 2000 was as follows: ixed rate
Weighted Weighted average time Non-oterest Floating Fixed average for which Total bearing rate rate interest rate rate is fixed Currency & £m £m £m % years
Us dollar 3,217 60 1,899 1,258 6.6 56
UK sterling 1,180 761 419
Euro 1,190 2 463 725 48 5.0
Canadian doliar 474 224 250 7.5 25
Others 797 513 284 5.4 49
6,858 823 3,518 2,517 6.0 51
1999 7,165 1,563 2,532 3,070
The above analysis takes account of interest rate and cross-currency swaps and forward foreign currency contracts.
Floating rate financial liabilities principally bear interest at rates based on relevant national LIBOR equivalents.
The average interest rate for total borrowings is estimated to be 7.1 per cent 1999 6.8 per cent.
Non-interest bearing financial liabilities comprise the convertible redeemable preference shares (details of which are set out on page 56 note 33), noninterest bearing borrowings and certain creditors due after more than one year. The weighted average period until maturity for these creditors is 2.0 years 1999 3.0 years.
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33 Directors’ Report and Accounts 2000
18 Financial instruments continued
Financial assets
The currency and interest rate exposure of financial assets at 31 December 2000 was as follows: Fixed rate
Weighted Weighted average tme
Non-interest Fioating Fixed average for which Total bearing rate rate interest rate rate i fixed Currency £m £m £m £m % years
US dollar 1,075 184 731 160 6.2 3.0 UK sterling 257 57 154 46 73 8.2 Euro 406 286 19 1 57 3.0
Canadian dollar 92 60 32 5.0 1.5
Others 688 158 510 20 79 1.0
2,518 745 1,514 259 64 36
1999 2,964 698 2,199 67
Non-interest bearing financial assets comprise certain cash balances, equity investments, debtors falling due after more than one year and the businesses awaiting disposal. The £57 million 1999 £123 million for businesses awaiting disposal were realised in January 2001 and February 2000 respectively. Of the remainder, £666 million 1999 £501 million have no fixed date of repayment and for £22 mitlion 1999 £74 million the average period to maturity is 5.1 years 1999 11.9 years.
Floating rate financial assets principally earn interest based on relevant national LIBID equivaients or government bond rates.
Monetary assets
The currency exposure of net monetary assets at 31 December 2000 was as follows: Net foreign currency monetaty assets(labilities)
US dollar UK sterling Euro Others
£m £m £m £m
Functional currency of the Group’s operations: US dollar an 4 m UK sterling 88 @ 12 Euro 155 (40) 32 Others 99 ) 4 4
342 (142) 1 a7
The above table does not take account of forward foreign currency contracts and currency options held by the central finance company. In particular the US dollar exposure of Group companies operating in UK sterling and euro was approximately 60 per cent hedged at 31 December 2000.
The currency exposure of net monetary assets at 31 December 1999 was as follows: Net foreign currency monetery assets ((liabllities)
US dollar UK sterling Euro. Others
£im £m £m £m
Functional currency of the Group's operations: s dollar 21 3) 3 UK sterling 36 79 a0 Euro 7 1 Others 15 24 (28)
st (52) (82) 34
34 Directors’ Report and Accounts 2000
Notes on the accounts continued Balance sheet
18 Finandial instruments continued Bock value Fair vaiue
2000 1999 2000 1999
Fair values £m Em £m £m
Primary financial instruments held or issued to finance the Group’s operations: Borrowings (5,965) (5,479) (5,471) 5,211y Other financial liabilities 821) (1,563) (846) (1,553)
Other investments and long term loans 404 134 594 151
Current investments 221 768 227 879
Other financial assets 226 209 226 209
Short term deposits and cash 1,667 1,853 1,667 1,853
Derivative financial instruments held to manage the interest rate and currency profile: Interest ate swaps ) (72) (33) Cross-currency swaps (134) (84) (180) (106) Forward foreign currency contracts 86 (39 102 39) Others 2 2 3 3
Derivative financial instruments held or issued to hedge the currency exposure on expected
future sales: Forward foreign currency contracts 39 a1
Other financial assets comprise loans to associates and joint ventures, the business awaiting disposal and certain long term debtors.
Other financial liabilit ies comprise the convertible redeemable preference shares and certain long term creditors.
The central hedging instruments referred to on page 33 have been included in the interest rate and currency profile section above.
Summary of methods and assumptions
Interest rate swaps, caps, collars, cross-currency swaps and forward foreign currency contracts
Fixed rate borrowings and loans and deposits
Other investments and current investments
Businesses awaiting disposal
Convertible redeemable preference shares
Fair value is based on market price of comparable instruments at the balance sheet date.
The fair value has been estimated using either market prices of comparable instruments
at the balance sheet date or discounted cash flow analysis.
The fair value is based on quoted market prices, market prices of comparable instruments
at the balance sheet date or discounted cash flow analysis.
The expected proceeds.
The fair value has been estimated by discounted cash flow analysis, assuming total redemption i June 2004.
[ ST Q- SO R GO RO S R [ Bl e b b e i
E |
il
35 Directors’ Repart and Accounts 2000
18 Financial instruments continued
Hedges As explained on pages 23 and 24 of the Annual Review and Summary Financial Statement, the Group's policy is to hedge the following exposures:
Interest rate risk Using interest and cross-currency swaps and interest rate agreements such as caps and collars.
Currency risk Using cross-currency swaps and forward foreign currency contracts to manage the currency risk on borrowings in order to hedge net investments overseas. Forward foreign currency contracts
are also used for currency exposures on unsettied trading transactions and future sales.
The table below shows the extent to which the Group has off-balance sheet (unrecognised) and on-balance sheet (deferred) gains and losses i respect of financial instruments used as hedges at the beginning and end of the year, It also shows the amount of suich gains and losses which have been included in the profit and loss account for the year and those gains and losses which are expected to be reflected in next year's ot later profit and loss accounts. Total net Gains Losses gains/losses) Unrecognised gains and lasses £m £m £m
Balances 1 January 2000 38 (206) (168) Differences on exchange 1 @) %) Brought forward balance recognised in current year @35) 56 21
Brought forward balance not recognised in current year 4 (158) (154) Current year items not recognised in current year 72 20 92
Balances 31 December 2000 76 (138) (62)
Expected to be dealt with next year, based
on 31 December 2000 exchange and interest rates 40 {43) 3)
‘The above balances reflect the value at 31 December of the derivatives which are being used to manage the financial risks arising from the underlying operations. However these balances do not take account of the unrecognised gains and losses in respect of related primary financial instruments.
Deferred gains and losses Balances 1 January 2000 7 12 () Brought forward balance recognised in current year %) 1 (6)
Balances 31 December 2000 an an
To be recognised in the profit and oss account for next year 2 (2)
Other financial assets and financial liabilities Certain short term assets and liabilities, as well as finance lease lizbilities are excluded from interest rate and fair value analysis. The fair value of such items is consiciered to approximate to their book values. There are no interest rates applicable to such items, with the exception of finance lezses which are not considiered to be material in the context of the Group's borrowings.
36 Directors’ Report and Accounts 2000
Notes on the accounts continued
Balance sheet
19 Creditors Total Payable within one year Payable beyond one year
2000 1999 2000 1999 2000 1999
£m £m £m £m £m £m
Trade creditors 528 456 528 456 Duty, excise and other taxes 1,130 1,030 1,126 1,026 4 4 Accrued charges and deferred income 1,025 910 889 790 136 120 Dividends payable asa 434 454 434 Taxation on profits - UK 13 12 13 12 - overseas 410 236 403 229 7 7 Other taxation and social security 40 47 40 47 Sundry creditors 1,014 906 964 873 50 33
4,614 4,031 4,417 3,867 197 164
Sundry creditors include £536 million 1999 £483 million for tobacco settlements, see page 23 note 1.
20 Deferred taxation Provided Unprovided
2000 1999 2000 1999
£m £m £m £m
Stock relief in respect of overseas stacks 13 22 207 184 Excess of capital allowances over depreciation 34 44 130 150 Losses available for set off against future taxable profit (28) (34 (56) 10) Capital gains 57 61 12 4 Other timing differences (160) (23) (196) (220)
84) 70 97 108
The deferred tax provision above is net of a deferred tax asset shown on page 28 note 13. Other timing differences include short term timing differences
as well as an asset of £82 million 1999 £36 million in respect of pensions and other post retirement benefits.
i T | [ I B T Ll I B T T R B T I [ e e i ~
1 i ' — wd - [V SV R P VI R ey Wy | Y ™
37 Directors’ Repot and Accounts 2000
Notes on the accounts
Other financial information
21 Acquisitions
(a) The Imasco group Following the agreement with Imasco announced on 3 August 1999, the acquisition of the shares of that company not already owned by the Group, representing approximately S8 per cent of Its shares, was completed on 1 February 2000. This was followed immediately by the completion of the sale of Imasco’s CT Financial Services Inc business and Imasco’s retailing business, Shoppers Drug Mart. The US operations of Genstar, Imasco’s land development company, were sold in June 2000 and its Canadian aperations in fanuary 2001. Given the intention to dispose of these businesses at the date of acquisition, their results have not heen consolidated. As a result of these transactions, the holding in Imasco, an associated company, was effectively replaced by shares in a wholly-owned subsidiary comprising only the tobacca interests of Imasco, Imperial Tobacco Canada. When an associate becomes a subsidiary the method for calculating goodwill differs between the Companies Act 1985 and FRS2. In order to give 2 ‘true and fal’ view, the Group has compiled with FRS2 in arriving at the figures shown below. If the Act had been followed the goodwill arising on acquisition would have been £1,634 million lower, as it would have been net of the revaluation surpluses on the disposed businesses and the share of accumulated profits while imasco had been an associated company.
The goodwill of £2,143 million arises s follows: Accounting policy Book value Reciassification Revaluation alignment Fair value
£m £m fm £m £m
Fixed assets 211 211 Discontinued operations - non-current assets 253 (253) Stocks 227 227 Debtors 128 (13) 1 116 Businesses awaiting disposal 2,180 2,436 4616 Short term deposits and cash 167 167 Discontinued operations - current assets 400 (400) Financial services assets - discontinued operations 21,427 (21,427) Provisions for liabilities and charges below (166) 3 €2} (200)
Borrowings (890) (890) Creditors below 214) 1 (20 an (250) Discontinued operations — current and other liabilities (152) 152 Financial services liabilities - discontinued operations (19,735) 19,735 Minority interests (22) 2
Fair value of net assets at acquisition 1,634 2417 59 3,997 Less: falr value of existing share of net assets (1,700)
fair value of assets acquired 2,207 Gooawil 2143
Consideration 4,440
Consideration satisfied by: Cash (C$10,356 million) 4,407 UK acquisition costs 33
4,440
Revaluation of associated company: Fair value of existing share of net assets of Imasco, as shown above 1,700 Less: carrying value immediately prior to the transaction, on an equity accounting basis (452)
1,248
Provisions for liabilities and charges and creditors in the table above include £105 million in respect of Imasco’s restructuring costs, see page 51.
The book values of the net assets acquired have been revalued to fair value as al the acquisition date, the major effect being the revaiuation to disposal value of the businesses to be disposed. The accounting poficy zlignment reflects the restatement of post retirement benefits other than pensions liabilities and deferred taxation balances to comply with the Group's accounting policies. The reclassification reflects the deconsolidation of the businesses subsequentiy sold.
The net assets 2t acquisition of £1,634 million include goodwill of £571 million relating to discontinued operations. In accounting for Imasco 2s an associated company, this goodwill was eliminated against reserves in accordance with the Group’s accounting policy.
The results of Imperial Tobacco Canada since acquisition are set out on page 22 note 1.
38 Directors’ Repart and Accounts 2000
Notes on the accounts continued Other financial information
21 Acquisitions continued
The cash flow of the acquired business since acquisition was as follows:
11 months to
31 December 2000
£m
Net cash inflow from operating activities 303 Returns on investments and servicing of finance (44)
Taxation 85) Capital expenditure and financial investment 16
Net cash generation: 190 Disposals less acquisitions 168 Equity dividends paid (123)
Cash inflow before use of liquid resources and external financing 235 Management of liquid resources 31 Financing (370)
Decrease in cash in the period @4
In the periods prior to the acquisition, the consolidated resuits of the Imasco Group prepared on the basis of their accounting policies, were net earnings of £379 million (C$913 millian) for the year to 31 December 1999 and an estimated net loss of £100 million (C$235 million) for the month of fanuary 2000.
(b) 5.C.A. Tobacco Corporation On 31 March 2000 the Group completed the purchase from the Sumitomo Corporation of 5.C.A. Tobacco Corporation (‘SCAT), which imports and distributes the Group's products in apan. The provisional goodwill arising on that acquisition comprises:
2000
£m
Cash consideration 202 Less: fair value of net assets acquired (139
Goodwill 63
The above includes the Group’s reacquisition of the cigarette stocks of £126 million held by the Sumitomo Corporation at 31 March 2000, see page 23 role 1.
The contribution of SCAT to the Group’s operating profit and cash flow for the period since acquisition to 31 December 2000 is not material. It is not practical to compite pre-acquisition results for SCAT as that business was previously integrated with certain other Sumitomo Corporation operations.
(€) Acquired businesses awalting disposal
On 3 February 2000 the Group sold its entire shareholding in Rothmans Inc., Canada. As the intention at the time of the Rothmans acquisiliofi in 1999
was to dispose of these operations, the investment had been included in 1999 as a current asset at net realisable value and therefore the sale did not generate a gain or loss in these results.
As at 31 December 2000 the business awaiting disposal was the Canadian operations of Genstar, fmasco’s tand development company. This was disposed of on 13 January 2001 for £57 millian, see page 43 note 26.
(d) Finalisation of the goodwill arising on the acquisition of Rothmans in 1999 The main provisional element of the fair value attributable to the Rothmans businesses relates to the provisions which were held by the former Rothmans businesses in Australia against potential franchise fee claims brought by retailers. There being no significant developments during 2000, f the retailers are ultimately unsuccessful in their claims, Lhe wiite-back of the Rothmans provisions included above will no longer be adjusted against goodwill.
o Bia M B e MR | [l B B T T B T T B o e M —r |
|5
e e b [SPRNE: R e Bod W b b b A e ke [“PI ST VO | “H ']
39 Directars’ Repon and Accounts 2000
22 Group employees
The average number of persons empioyed by the Group during the year was 86,805 1999 107,620
2000 1999
America-Pacific 10,083 7,440 Asia-Pacific 7,969 9,082 Latin America 14,746 16,442 Furope 16,729 18,304
Amesca 14,747 16,024
Subsidiary undertakings 64,274 67,292 Associates 22,531 40,328
86,805 107,620
The comparatives for the Asia-Pacific and Europe regions have been restated as a result of a reorganisation following the acquisition of Rothmans, where the manufacturing operations located in Southampton in the UK is included within the Europe region with effect from T January 2600 having previously been included in the Asia-Pacific region.
Details of Directors’ remuneration and share options are given in the remuneration report on pages 5 to 9.
23 Contingent liabilities and financial commitments There are contingent liabilities in respect of litigation, overseas taxes and guarantees in verious countries.
Group companies, notably Brown & Williamson Tobacco Corporation ('B&W"), as well es other ieading cigarette manufacturers, are defendants, principally in the United States, in a number of product fiability cases, including a substantial number of new cases filed in 2000, although a number of cases were discontinued by claimants (without payment by any defendants) in the year. In a number of these cases, the amounts of compensatory and punitive damages sought are significant.
Us fitigation Tne total number of Us product liability cases pending at year end involving Group companies was approximately 4,740 (31 December 1999 537 cases). UK based group companies were named as co-defendants in some 1,345 of those cases (1999 161 cases). Only perhaps a couple of dozen
cases or fewer are likely to come to trial in 2001 Since many of these pending cases seek unspecified damages, it is not possible to determine the total
amount of claims pending, but the aggregate amounts involved in such litigation are significant. The cases fall into four broad categories:
(1) Medical reimbursement cases. These civil actions seek to recover amounts spent by government entities and other third party providers on health
care and welfare costs claimed Lo result from illnesses associated with smoking,
Despite the almost uniform success of the industry’s defence to these actions, to date, the United States Department of Justice has fiied suit against the leading US cigarette manufacturers, certain affiliated companies (including parent companies), and others seeking reimbursement for Medicare and other health expenses incurred by the US federat government as well as various equitable remediies, including paying over of proceeds from alleged
unlawful acts. The court has dismissed the reimbursement claims but is allowing the government to proceed with its claims for equitable reiief. The
court has tentatively scheduled trial for july 2003. At 31 December 2000, similar reimbursement suits were pending against B&W amongst others by seven Indian tribes and by five county or other political subdivisions of certain states. The settlement of the states’ suits includes a cregit for any
amounts paid in suits brought by the states” political subdivisions; nevertheless, B&W intends to defend these cases vigorously.
Based on somewhat different theories of claim are some 34 non-governmental medical reimbursernent cases and health insurers claims, the majority of which were filed by labour union health and welfare funds on behalf of their members. To date, seven federal appellate courts have issued decisions dismissing this type of case entirely and some but not alf state courts have issued similar decisions. Only one union health fund case (Qhic Iron Workers) has been tried, resulting in a verdict for defendants, including B&W, in March 1999. Four third party reimbursement cases are currently scheduled for trial in 2001
(2) Class actions. As at 31 December 2000, B&W was named as a defendant in some 35 (31 December 1999 38) separate actions attempling to assert claims on behalf of classes of persons allegedly injured by smoking. While most courts refused to do 5o, ten courts have certified classes of tobacco claimants in cases involving B&W but five of these classes have subsequently been decertified. Even if the classes remain certified and the possibility of class-based lability is eventually established, it is fikely that individual trials will st be necessary to resolve any actual claims. If this happens, it s possible that many of the defences that have contributed to more than 600 individual cases being successfully disposed of over the years by BEW will be available.
in the first phase of the trifurcated trial in Engle (Florida), the jury returned a verdict that inciuded general findings that smoking causes several specified
diseases and other findings inciuding that the defendants’ conduct rose 1o a fevel that would permit a potential award of punitive damages. The second phase of the trial included two parts. The first portion of phase two was a triat of the three named class representatives’ compensatory damages claims.
in that portion, the jury awarded a total of $12.7 million to the three class representatives but found that one of the representatives’ claims ($35.8 million of that total) was time-barred. In the second partion of phase two, the jury assessed $17.6 billion in punitive damages against BEW and $127 bilion in
40 Directors’ Report and Accaunts 2000
Notes on the accounts continued Other financial information
23 Contingent liabilities and financlal commitments continued total punitive damages against the other major companies in the US tobacco industry. Although the trial court has entered a final judgement on those verdicts, B&W contends that that judgement was improperly entered. In any event, B&W continues to believe canfidently that the pending Engle decisions will eventually be reversed on appeal given the inappropriateness of class certification, the numerous errors committed during trial, and the significant constitutional issues involved in the case. lmmediate payment of punitive damages pursuant to the verdict is unlikely for numerous reasons that will be presented to the trial and appellate courts, including, among others, that the punitive damages cannot be final unil completion of a series of further individual trials for every member of the class (the so-called phase three of the Engle trial plan, which will take many years); that the jury's determination of punitive damages violates several provisions of Florida law; and that, pursuant to recently adopted legislation, in Florida any enforcement of punitive damages must be stayed upon the posting of a bond in an amount equal to the lower of 10 pes cent of the defendant’s net worth or $100 million. Although the Fiorida legislation s intended to apply to the Engle case, the outcome of any challenge to its application cannot be predicted. B&W has delivered 2 surety bond that meets the requirements of Florida’s legisiation to stay enforcemeat of punitive damages in class actions.
Trial of a class action in West Virginia (Blankenship), in which a class of smokers sought funding for medical monitoring of their health, ended in a mistrial. Another medical monitoring class action in Lovisiana (Scott) is currently scheduled for trial in june 2001.
(3) Individual cases. Approximately 4,637 cases were pending against B&W at 31 December 2000 (31 December 1999 421) filed by or on behalf of individuals in which it is contended that diseases or deaths have been caused by cigarette smoking or by exposure to environmental tobacco smoke (ETS). Of these cases: (a) approximately two thirds are ETS cases brought by flight attendants who were members of a class action (Broin) that was settled on terms that allow compensatory but not punitive damage claims by ciass members; (b) approximately one guarter of the individual cases against B&W are cases brought in consolidated proceedings in West Virginia; and (c) less than eight per cent are cases filed by other individuals.
A fury verdict against B&W for §750,000 (Carter) was recently reinstated by the Florida Supreme Court. B&W is currently seeking review of that
decision by the US Supreme Court.
(4) Other claims. At 31 December 2000, eight cases were pending on behalf of asbestos companies. Those companies sesk reimbursement for costs and judgements paid in litigation brought by third parties against them, These companies claim that but for the smoking of the claimants against then, their damages would have been less.
A reimbursement case brought by a trust established to pay asbestos litigation claims (Falise) ended in mistrial in January 2001 because the jury was unable to reach a unanimous decision. According to press reports, 10 jurors favoured the tobacco company defendants while two would have found
for plaintiffs.
At 31 December 2000, B&W was named as defendant in 18 US cases brought by foreign government entities seeking reimbursement of medical costs which they incurred for treatment for persons in their own countries who are alleged to have smoked imported cigarettes including those manufactured
by B&W. Four foreign govemnment cases had been dismissed at 31 December 2000. One foreign government case (Marshall Islands) is set for trial in 2001.
In addition, conduct-based claims, including antitrust and RICO claims, have been filed in the US. Among these are some 37 class action antitrust cases brought by wholesalers or retailers alleging that B&W and other major US cigaratte manufacturers conspired to fix prices for cigarettes. Although plaintiffs in these class actions have not specified the damages they claim, the amounts could be significant. None of these conduct-based claims is considered to be meritorious.
B.A.T Industries has been named a5 a co-defendant in the US in most of the medical reimbursement cases, in a quarter o fewer of the class actions and even fewer of the individual cases. t is contesting the jurisdiction of the US courts since it is a ‘holding’ company not transacting business in the United States. In the 53 cases that have decided this issue to date, 30 courts have dismissed them prior ta trial. In the balance of 23 cases, there has been no adverse ruling on the issue of jurisdiction affirmed on the merits through appeal. Some 135 plaintitfs have voluntarily agreed to drop the Company (or 8.A.T Industries) or substitute the Company’s indirectly held subsidiary British American Tobacco (Investments) Limited (formerly called ritish-American Tobacco Company Ltd.), as a co-defendant.
Legal matters outside the United States At year end, there were no active claims against Group companies in respect of health-related claims outside Argentina, Austrafia, Brazil, Canada, Chite,
Finland, France, Germany, Israel, the Netherlands, Pakistan, the Philippines, Republic of freland, Sri Lanka and Uganda.
Conclusion While it is impossible to be certain of the outcome of any particular case or of the amount of any possible adverse verdict, the Company believes that the defences of the Group companies to ail these various claims are meritorious bath on the law and the facts, and a vigorous defence is being made everywhere. If an adverse judgement were entered against any of the Group companies in any case, an appeal would be made. Such appeals could requiire the posting of appeal bonds or substitute security by the appellants in amounts which could in some cases equal or exceed the amount of the judgement. At least in the aggregate and despite the quality of defences available to the Group, it is not impossible that the rescits of operations or cash flows of the Group in particular quarterly or annual periods could be materially affected by this and by the final outcome of any particular litigation.
Having regard to all these matters, the Directors (i) do not consider it appropriate to make any provision in respect of any pending litigation and (i) do not believe that the ultimate outcome of all this fitigation will significantly impair the financial condition of the Group.
L T e B B e I e T T T T B T B T R - t
[ N N R B b B b bt led Bot Med o b e bad e el e bt Bl Bl Wed v e [ N
41 Directors’ Report and Accounts 2000
23 Contingent liabilities and financial commitments continued Guarantees Performance guarantees given to third parties in respect of Group companies were £123 million 1999 £76 million.
2000 1999 Operating leases £m m
Annual commitments under operating leases comprise leases which expire:
Land and buildings
Within 1 year 17 10 Between 2 and 5 years 23 20 Beyond 5 years 18 12
58 42
Others Within 1 year 8 1 Between 2 and 5 years 19 24 Beyond 5 years 3 12
30 47
24 Post retirement schemes 2000 1999 m £m
Total pension costs 106 93 Total post retirement (non-pension) benefit costs 32 13
Total pension and post retirement benefit casts 138 106
Regular annual cost of pension schemes 130 123
Following completion of the acquisition of Imperial Tobacco Canada, its post retirement schemes have been brought into the balance sheet on a fair
wvalue basis, which has been reflected in this note, see page 37 note 21.
Of the 2000 total pension and post retirement benefit costs £17 million relates to the imperial Tobacco Canada schemes. The total regular annual cost
for 2000 includes £9 million for the Imperial Tobacco Canada pension schemes.
The Group's subsidiary undertakings operate over 100 active retirement benefit arrangements worldwide. These arrangements have been developed in accordance with local practices in the countries concerned. The majority of employees belong to defined benefit schemes, most of which are funded externally, although the Group also operates a number of defined contribution schemes.
The contributions to the defined benefit schemes are determined in accordance with the advice of independent, professionally qualified actuaries. Pension commitments are financed according to accepted current practices in cach country which for the material arrangements means using the projected unit credit method with surpluses or deficits being amortised over the average expected remaining service fives of the respective memberships. All schemes are formally valued at least every three years.
Defined contribution schemes provide benefits based upon contributions paid plus investment return,
In certain countries, pension benefits are provided on an unfunded bass. In such cases provisions are included in the Group balance shest. These amounted to £637 million 1999 £581 million, see page 30 note 16. The maost significant components of these provisions are the schemes in Germany, which are discussed further below
The total market value of assets in the valuation of the externally funded defined benefit schemes exceeded the total vakue of projected accrued benefits at the same dates. Any deficit or surplus in individual schemes is being eliminated by increased o reduced company contributions, enhancement to scheme benefits or a combination of both. Certain schernes show deficits on a current funding level basis but these are not material in the context of the whole Group.
The total market value of scheme assets was £3.9 billion at the dates of the most recent valuations and this was not less than the value of the accrued abligations of all funded schemes
a2 Directors’ Repart urvi Accounts 2600
Notes on the accounts continued Other financial information
The current actuarial assumptions used for accounting purposes, asset values, funding level, allowance for future salary increases and pension costs for the Group's most significant funded schemes are summarised in the following tables. These schemes accounted for approximately 73 per cent of the Group’s total pension obiigations:
Rothmans Brown & Williamson BAT pension International qualified retirement scheme pension scheme schemes Country UK UK s
Actuarial method Projected unit credit Projected unit credit Projected unit credit Main actuarial assumptions:
investrnent return 8.0% 8.0% 8.5%
salary increases 5.5% 5.5% 5.5%
pensior increases. 3.5% 3.5% Nil
Asset value on market basis £711 million £874 million US$1,909 million
Funding level 111% 146% 124% Amortisation method Percentage of safary Percentage of salary Straight fine Period over which surplus amortised 13 years 10 years 12 years
Date of tast formal valuation 31 March 1999 31 March 1999 31 October 2000
Imperial Tobacco BAT pension pension scheme scheme Country Canada Switzerland
Actuariai method Projected unit credit Projected unit credit
Main actuarial assumptions:
investment return 7% - 8% 5.5%
salary increases 4% - 4.7% 2.5% pension increases Nl 2%
Asset value on market basis €$1,082 million SFr 514 million
Funding level 102% 120% Amortisation method Straight line Percentage of salary Period over which surplus amortised 13 years 13 years
Date of last formal valuation 30 September 2000 31 December 2000
The impact of *he benefit enhancement associated with the US restructuring during the year has been taken into account in the above funding level, see page 23 note 1.
In additian, unfunded retirement schemes in Germany represent a further 10 per cent of the Group’s total pension obligations. A total provision of
£421 million was held in the balance sheet at the end of 2000, 1999 £418 million in respect of these obligations. The annual cost was £33 million
1999 £33 miiion. At 31 December 2000, investments in fixed interest securities, shares and property with an estimated market value of £404 million were pledged! «: r2spect of the liabilities, see page 27 note 11. The liabilities and annual costs for the schemes have been determined using a 6 per cent iavestment retur~ with allowance for safary and pension increases, in line with or more conservative than normal local practice.
For the remaining schemes, typical assumplions used for accounting purposes are that real investment returns will be 2 per cent to 4 per cent per annum, and that real salary increases wili be 1 per cent to 4 per cent per annum. Pension increases are generally assumed to be in line with inflation.
Other post retirement schemes The Group also operates significant plans in the United States, Canaca and South Africa which provide employees with certain post retirement benefits olher than pensions. The liabilities in respect of these benefits are assessed by qualified independent actuaries, applying the projected unit credit method. The current year and prior year provisions are shown on page 30 note 16.
The assumptions which have the most significant effects on the valuations of the schemes are summarised in the table below:
us Canada South Africa
Discount rate 7.5% 7.0% 14.5% Healthcare infiation 7.5% reducing by 0.5% per 8.5% reducing to 5.5% 10.0% annum, to 5.5% for by 2004
beneficiaries over 65
ry ~§ - [ e B B Bl [l T I T T B B I il sl s e lalinil e Balalial.) - R
B 9
71
|
1
1
1
a
1
3
1
1
k|
|
i |
1
1
1
1
1
1
1
|
F |
1
k|
4
F |
4
d
d
43 Directors’ Report and Accounts 2000
25 Related party disclosures The Group has a number of transactions and relationships with related parties, as defined in FRS8 on Related Party Disclosures, all of which are
undertaken in the normal course of trading. Details of these are set out below.
Transactions anc balances with associates relate mainly to sale and purchase of cigarettes and tobacco leaf. Transactions and balances with joint ventures relate mainly to sponsorship fees and the provision of financing.
2000 1999
£m £m
Transactions - revenue 32 9 — purchases and sponsorship fees (62) 73) - other et income 16 8 Amounts receivable at 31 December 5 4 Amounts payable at 31 December [&3) 3
In addition, the Group made a further investment of US$53 million in the form of convertible loan stock in British American Racing, in which the Group has 2 50 per cent interest, see page 27 note 10.
The Directors of British American Tobacco p..c. had no maleriai transactions with the Group. The term Director in this context includes members
of their households.
Other than the transactions undertaken in connection with the acquisition of Rothmans in 1999, and subsequently in their capacity as shareholders, there have been no material transactions with Compagnie Financiére Richemont AG, Rembrandt Group Limited (now named VenFin Limited) and Remgro Limited, who together indirectly own 31.5 per cent 1999 35 per cent of the fully diluted ordinary share capital of British American Tobacco p.Lc.
Prior o 1 February 2000 the material transactions betwezn the British American Tobacco Group and the imasca Group are included within the above table.
©On 14 November 2000 the Group’s Canadian subsidiary Imperial Tobacco Canada announced the sale of its cigar trademarks to ST Cigar Group Holding BV, a subsidiary of Skandinavisk Tobakskompagni AS. The transaction is not considered to be material to either the Group or Skandinavisk Tobakskompagni AS in which the Group has a 26 per cent interest, see page 50.
26 Post balance sheet events (@) On 15 January 2001 the Group disposed of the Canadian operations of Genstar, imasco’s lend development company in Canada, for C$128 million (£57 million). As the intention at the time of the Imasco acquisition in 2000 was to dispose of these operations, the investment had been included
25 a current asset at net realisable value and therefore the sale did not generate a gain or loss in these resuilts.
{by On 30 January 2001 the directors of the Group’s Australian subsidiary British American Tobacco Austratasia Limited ('BAT Australasiz’) announced that BAT Australasia had entered into an agreement under which the Group proposes to acquire the 40.5 per cent of the company that it does not already own for A17.75 cash per share. The proposal is subject to BAT Australasia‘s shareholders’ as well as various regulatory badies’ approval in Australia. Taking account of the company's proposed final dividend of 43 cents per share, this values the offer to the company’s minority shareholders at approximately A$1,109 million (£415 million).
{0 On 10 January 2001 it was announced that the Group's pipe tobacco business in South Africa would be sold to Swedish Match. The sale was completed on 1 February 2001. The business does not constitute a material part of the Group’s operations in South Africa.
44 Directors' fleport and Accouats 2000
Notes on the accounts continued Cash flow statement
27 Net operating cash flow from subsidiary undertakings
2000 1999
£m £m
Operating profit 1,739 1,099 Depreciation 401 350 Goodwill amortisation 376 162 Decrease in stocks 122 3 Decrease in debtors 27 82 Increase in creditors 206 180 (Decrease)/increase in provisions 114 83 Other 1 8
Net operating cash flow from subsidiary undertakings 2,758 1,995
Operating profit includes charges in respect of US settiement costs, integration costs, US restructuring costs and acquired stock referred to in note 1 an page 22. These are also reflected in the movements in stocks, debtors, creditors and provisions above. The cash outflow in respect of US settlement casts was £742 million (including £679 million ongoing costs) 1999 £543 million (including £373 million ongoing costs). The cash outflow in respect of integration costs was £219 million 1999 £103 million. The cash outflow in respect of US restructuring costs was £4 million. The cash outflow in respect of the acquired Sumitomo Corporation stocks was £135 million and is included within disposals less acquisitions, see page 45 note 28(a).
The net cash flow above also includes £105 million in respect of Imasco’s restructuring costs.
28 Analysis of items netted in the cash flow statement
2000 1999
£m £m
Investment income 196 193 Interest paid (488) (256)
Non-equity dividends paid (54) (10)
Interest element of finance lease rental payments (S “@
Dividends paid to minorities (180) 29
Returns on investments and servicing of finance (530) (206)
Capital expenditure (362) (340) sale of fixed assets 120 87 Other investments — purchases (158) 30) - sales 54
Capital expenditure and financial investment (346) (281)
Subsidiary and associated undertakings — purchases (4,583) (278) - sales 4,706 2 Sale of brands 83 Loans to joint ventures (35) 28)
Disposals less acquisitions note (a) 88 (216)
Short term deposits 372 (841) Current investments 389 (499)
Management of liquid resources note (b) 761 (1,340)
Commercial paper (333) (864) Medium term notes (80) 140 Bonds 2,780 Acceptance credits (35) Syndicated bank loans (138) (782) Bank and other ioans (330) (360)
Capital element of finance lease rental payments (G4 (26)
Financing - (decrease)/increase in debt (915) 853
o e e e I T P R IRl i o i B BB NI N T I P o ee e — - N
] 45 Directors’ Report and Accounts 2000
1
—] 28 Analysis of items netted in the cash flow statement continued | . in 2000 commercial paper and £96 million within bank and other loans comprise the part repayment of debt acquired with Imperial Tobacco Canada.
} Also included within bank and other loans is the issue of £198 million in connection with the acquisition of SCAT, Medium term notes include issues of £250 million and repayments of £330 million. In 1999 medium term notes comprise issues of £242 million and repayments of £102 million and bank § and other oans includes repayment of £400 milion of debt acquired with Rothmans.
(2) Disposals less acquisitions 1 10 2000 the cash outflow in respect of the purchase of subsidiary and associated undertakings principally reflects the acquisition of imperial Tobacco Canada, £4,365 million, and SCAT, £194 million; these amounts are net of cash within the acquired entities on acquisition of £75 million and £8 million respectively. The cash inflow in respect of the sales of subsidiary and associated undertakings principally reflects the disposal of Rothmans Inc, Canada, 1 £128 million, and the non-tobacco businesses of Imperial Tobacco Canada, £4,575 millon.
The net cash outflow in respect of the purchase of subsidiary and associated undertakings in 1999 principally refiects the effect of the local restructurings
resulting from the acquisition of the Rothmans group. The outflow of £509 million (including the £38 million acquisition costs) is reduced by £37 million
disposal praceeds for certain Rothmans’ Austraiasian brands. It is further reduced by the cash within the Rothmans group on acguisition of £200 million.
o
(b) Net cash flow from liquid resources Liquid resources include current investments, together with short term deposits and cash other than cash and deposits repayable on demand.
—
(c) Cash flow attributable to Imperial Tobacco Canada since its acqui: 1 See page 37 note 21.
"7 29 Analysis of net debt
7 jan Cash Net debt Other Difterences 31 Dec
2000 flow acquired changes on exchange 2000
! £m £m £m £m £m £m
Cash and bank balances 450 471
3 Overdraits Moy (142 340 (24) 13 329 3 Term borrowings (5,492) 881 (890) 39) (355) (5,895) Finance lease obligations 74) 34 (69) 5) 4y 915 I Geniem deposits 1,403 (372) 92 16 57 1,19 Current investments 768 (389) 1y “7) 221 1 761)
] (3,055) 130 (798) (203) (337) (4,263)
__ The amount in other changes for current investments represents a reclassification of assets, see page 27 note 11, L O e I ™ I "I Sy )
46 Diractors’ Report and Accounts 2000
Five year summary
For the years ended 31 December 2000 1999 1998 1997 1996 r
£m £m £m £m £m Revenue F Continuing operations 24,719 20,385 16,015 16,285 12,219 Discontinued operations 12 1,286 1,361 1,549 1568
24,831 21,671 17,376 17,834 18,787 E_
Profit J Qperating profit (before goodwill amortisation and exceptionals) 2,575 2,022 1,550 1,591 17a §
Operatiag profit - continuing operations 1,784 1,324 893 1,200 1,598 - discontinued operations 16 155 18 103 s L
Operating profit 1,800 1,479 1,01 1,303 ) 1,716 [
. Profit on ordinary activities before interest 1,800 1,567 965 1,094 1,798
Profit before taxation 1,522 1,371 738 875 1,626
Profit alle( taxation 839 698 461 518 1,106 E
Prafit for the year 670 556 346 412 988
pence pence pence pence pence
Earnings per share — basic unadjusted 28.50 25.25 2217 26.59 6387
- diluted unadjusted 28.63 2702 21.98 26.32 63.21
- diluted adjusted 57.87 52.33 46.12 45.07 58.36 l
At 31 December 2000 1999 1998 1997 1996 {
£m £m £m £m £m
Balance sheet l Fixed assets 10,486 8,640 2,639 2,645 2,366
Current assets 7,265 7,594 4,813 5,905 5,726 r
Total assets 17,751 16,234 7,452 8,550 8,092 r
Shareholders’ funds (including non-equity interests) 5,178 4,821 64 (97) 701
Interest of minority shareholders a8 455 323 342 327 a
5,596 5,276 387 245 1,028
Barrowings 6,151 5,676 3,730 4,566 3,393 L Provisions and other creditors 6,004 5,282 3,335 3,739 3,671
12,155 10,958 7,065 8,305 7,064 L
Total funds employed 17.751 16,234 7,452 8,550 8,092
The information included in the five year summary has been restated, where applicable, to reflect changes in the Group and its accounting policies. [
"1 i bei D i oed ee e e [ e S " I T b it Bl B R b b e led B
47 Directors’ Report and Accounts 2000
Quarterly analyses of profit
The figures shown below have been produced using average rates of exchange for the years ended 31 December 2000 and 1999 respectively, with the previously reported figures for 2000 restated using average rates for the full year.
3 months to
31.3.00 306.00 309.00 311200
£m £m £m £m
Subsidiary undertakings 304 508 579 348
after charging: US restructuring costs (G
acquired stock (83) integration costs 18y 26) Gn N goodwill amortisation (86) (96) (96) (98)
Share of associates and joint ventures Qas) 15 30 31
after charging: Imasco restructuring costs (69) @
Operating profit and profit on ordinary activities before interest 289 523 609 379
Net interest - subsidiary undertakings (63) (39 97) (70) Share of associates’ net interest 3) m [©) @)
Profit before taxation 223 483 511 305
3 months to
31399 30659 30999 311299
£m Em £m £m
Subsidiary undertakings 244 322 400 133
after charging: US tobacco settiements a3 ©) 5 @]
integration costs (81) (276)
goodwill amortisation on on
Share of associates 96 73 113 98
Operating profit 340 395 513 FEY] Sale of brands 8
Profit on ordinary activities before interest 340 395 601 231 Net interest - subsidiary undertakings @7 G7) (45} (61) Share of assaciates’ net interest S %] @) [
Profit before taxation 308 351 552 160
48 Directors’ Report and Accounts 2000
Principal subsidiary undertakings
9% equity shares held Europe
Great Britain B.A.T Industries p.l.c.
B.AT (U.K. and Export) Ltd. B.AT. International Finance p.l.c. BAT (CI) Finance Ltd. BATMark Ltd. British-American Tobacco (Holdings) Ltd. British American Tobacco (1998) Ltd. British American Tobacco (Brands) Ltd. British American Tobacco (Investments) Ltd. Rothmans Finance p.l.c. Rothmans International Tobacco (UK) Ltd. Tobacco Insurance Co. Ltd. Weston Investment Co. Ltd.
Belgium British American Tobacco Belgium SA Tabacofina-Vander Elst NV
Bulgaria British American Tobacco Bulgarla Ecod
Cyprus BAT (Cyprus) Ltd.
Finland
British American Tobacco Nordic Oy
Germany BATIG Gesellschaft fur Beteifigungen m.b.H. British-American Tobacco (Germany) G.m.b.H. British American Tobacco Industrie GmbH British American Tobacco (Hamburg International) GmbH
Hungary BAT Pecsi Dohanygyar Kft
British American Tobacco Magyarorszag Dohany
Kereskedelmi Kft
Netherlands
B.A.T Finance BV
British American Tobacco International (Holdings) BV
British American Tobacco The Netherlands BV British American Tobacco Holdings (The Netherlands) BY
British American Tobacco Manufacturing BV
British American Tobacco Exparts BY
Rothmans Central & Eastern Europe BV
Rothmans Far East BY Theodorus Niemeyer BY
Poland
British-American Tobacco Polska SA
Repubiic of Ireland P Carroll & Co. Ltd. Hamburg Investment & Trading Co.
Romania British-American Tobacco (Romania) Trading SRL
100
100
100*
100
100"
100
100*
100
100
100
100
100
100
100
100
100
100
100
100
100
100 100
100
100
100
100
100
100
100
100
100
100
100
96
100
100
100
Russia
British American Tobacco - STF
0JSC British American Tobacco - Yava
Spain B.A.T Espana S.A.
Switzerland
British American Tobacco International Ltd.
British American Tobacco Switzerland S.A.
Ukraine
A/T BAT - Prilucky Tobacco Co.
America-Pacific
Canada Imperial Tobacco Canada Ltd.
United States of America B.AT Capital Corporation BATUS Holdings Inc. British American Tobacco (Brands) inc. Brown & Williamson Tobacco Corporation
Asia-Pacific
Australia
British American Tobacco Australasia Ltd.
Cambodia
B.A.T. Cambodia Ltd.
China 8.A.T China Ltd. (incorporated in the United Kingdom)
British-American Tobacco Co. (Hong Kong) Ltd.
Indonesia PT BAT Indonesia Tbk. PT Rothmans of Pall Mall Indonesia
Malaysia British American Tobacco (Malaysia) Berhad
New Zealand
British American Tobacco (New Zealand) Ltd.
Papua New Guinea British American Tobacco (PNG) Ltd.
Singapore
British-American Tobacco {Asia-Pacific) Ltd.
Rothmans Industries Ltd.
Vietnam B.AT Vietnam Ltd. (incorporated in the United Kingdom)
Latin America
Argentina Nobleza-Piccardo SAICYF
% equity shares held
99
90t
100
100
100
75
100
100*
100
100
100
59
51
100
100
ral
100
50
100
100
100
95
o1
(59)
9
e Bl | - = - [anlias T o I B T B I e I e S - -
I
i o [ ROV SV L L R | Bt Mo W W b B e b s et e b b [ PR .
49 Directors’ Report and Accounts 2000
% equity shares held
Barbados
British-American Tebacco Co. (Barbados) Ltd.
Brazil Souza Cruz SA Souza Cruz Trading SA
Chile
Compania Chilena de Tabacos SA
Costa Rica Republic Tobacco Co.
€l Salvador Cigarreria Morazan SA de CV
Guatemala
Tabacalera Nacional SA
Guyana Demerara Tobacco Co. Ltd.
Honduras
Tabacalera Hondurena SA
Jamaica Carreras Group Ltd. A&
Mexico
Cigarrera La Moderna SA de CV
Nicaragua Tabacalera Nicaraguense SA
Panama
Tabdcaiera Istmena SA
Surinam Tobacco Company of Suriname NV
Trinidad & Tobago The West indian Tobacco Ce. Lid.
Venezuela CA Cigarrera Bigott Sucs
Amesca
Bangladesh
British American Tobacco Bangladesh Co. Ltd.
100
75
100
70
80
75
94
70
80
50
100
60
100
100
50
100
65
75)
% equity shares held
Cameroon
British American Tobacco Cameroun SA
Congo Tabacongo SARL
Ghana
British American Tobacco Ghana Ltd.
Kenya
British American Tobacco Kenya Lid.
La Reunion
B.A.T La Reunion SARL
Malawi BAT (Malawi) Ltd.
Mauritius British-American Tobacco (Mauritius) p.l.c. (incorporated in the United Kingdom)
Mozambique Sociedade Agricola de Tabacos Lda
Nigeria
British American Tobacco (Nigeria) Ltd.
Pakistan
Pakistan Tobacco Co. Ltd.
South Africa
British American Tobacco Holdings South Africa (Pty) Ltd.
Sri Lanka
Ceylon Tobacco Co. Ltd.
Uganda British American Tobacco Uganda Ltd
Uzbekistan
UZBAT AQ
Zambia
Rothmans of Pall Mall (Zambia) plc
Zimbabwe British American Tobacco Co. Zimbabwe (Holdings) Ltd,
Export Leaf Tobacco Co. of Africa (Pvt) Lid. Tobacco Processors Zimbabwe (Pyt) Lid.
99
100
55
60
100
75
100
95
100
94
100
84
90
96
55
57
100
70
34
Subsidiary undertakings held directly by British American Tobacco p.L.c. are indicated s thus *, all other subsidiary undertakings are held by sub-holding companies and British American Tobacco p.l.c.’s interest is shown in brackets where this differs from that of the sub-holding company. The country of
incorperation is stated and, uniess otherwise stated, is also the country of operation. Subsidiary undertakings are involved in activities related to the
manufacture, distribution and sale of tobacco products.
All companies’ shares are ordinary shares or common stock except for those indicated as thus ¥, which include preference shares.
A This company has a financial year different from 31 December, being 31 March. This is a former Rothmans Inteational B.V. company and is in the process of changing to 31 December.
In addition, and as described in note 21 on page 37, Genster’s Canadian land development business acquired as part of the Imasco transaction has
not been consolidated.
A complete list of investments in subsidiary and associate undertakings will be attached to the British American Tobacco p.l.c. Annual Return made 1o the Registrar of Companies.
50 Directors® Report and Accounts 2000
Associates and joint ventures
Principal investments
L e B | Associates Latest Total issued % publishedt capital shares information 2 held
Europe
Denmark
Skandinavisk Tobakskompagni AS Class | Ordinary 30.06.00
tobacco Class Il Ordinary 3 26 r
Amesca
India r
1C d. A Ordinary 31.12.00 35 33
tobacco paper and packaging E
hotels E
VST industries Ltd. A Ordinary 31.12.00 3 32
tobacco [
Joint ventures Latest Total issued % published capital shares information £m et [
Great Britain . British American Racing (Holdings) Ltd, Class A shares 30.11.99 n 100 [,
Forrnula One Grand Prix racing car team Class B shares 3
Class C shares 8
Ciberion Ltd. Ordinary L] 0.2 26 software development consultancy services
A Listed overseas.
@ Not available as the company commenced trading during 2000.
Py e e e
e ek ek i R R b b b Bed b o b b K ke el e b B el ke el b ks id L o
ISR
51 Direclors’ Report and Accounts 2000
Assoclates and joint ventures continued
Results for the year ended 31 December
Profit and loss account Group's Total share Tol share 2000 2000 1999 1999 £m £m m m
Turnover
Commercial activities 3,869 1,184 6,073 2,112
Financia! services life and investment business 265 69 1,793 761
Turnover including duty, excise and other taxes 4,134 1,253 7,866 2,873 Duty, excise and other taxes (1,882) (553) (2,358) 76%
Turnover excluding duty, excise and other taxes 2,252 700 5,508 2,110
Profit
Commercial activities 220 49 756 277 Financial services life and investment business 37 12 243 103
Operating profit page 16 257 61 999 380
after charging: Imasco restructuring costs (167 o1
Interest paid less received (22) ) 62) (26)
Profit before taxation 235 52 937 354
Taxation 94 s (€] (140)
Profit after taxation 141 27 576 214
Attributable to minority shareholders @ @
Attributable to British American Tobacco's shareholders 25 206 Dividends — fisted investments an (68) — unlisted investments @1 (22)
Retentions @ 116
The operating profit above includes losses of £9 million 1999 £20 million in respect of the joint ventures.
The Imasco restructuring costs refate to the Group's share of pre-tax cost to Imasco of buying out share options together with other employee deferred compensation and severance arrangements consequent upon a fundamental change of control.
52 Directors’ Report and Accounts 2000
Associates and joint ventures continued
Results for the year ended 31 December
The amounts shown overleaf for the Group's share include the foliowing amounts relating to Imasco: 2000 1999 £m m
Turnover including duty, excise and other taxes 153 1,857 Operating (loss)/profit (46) 304 (Loss)/profit before taxation (48) 287 Taxation 14 (108) (Loss)/profit after taxation 3 179
The segmental analysis of the operating profit of Imasco is as follows:
Tobacco 9 149
Financial services 12 103 Other 4 52
imasco restructuring costs n
Totai (46) 304
Following completion of the restructuring of Imasco, from 1 February 2000 Imasco is no longer included in the resuits of the Group’s associated
companies. As explained in note 21(a) on page 37, the tobacco operations became a wholly-owned subsidiary of the Group while the non-tobacco interests were sold, see page 22 note 1.
Statement of total recognised gains and losses 2000 1999 m £
Attributable profit 25 206
Differences an exchange 19 30
Total recognised gains related to the year a4 236
o B e B TR T P i T T T R T B T L ] [ e TR S u 1 T 2 B
3 [ bl b b e owd o e b e
53 Directors’ Report and Accounts 2000
Balance sheet - British American Tobacco p. 31 December
Assets
Fixed assets Investments in Group companies
Other investments
Current assets
Debtors
Cash and bank
Total assets
Liabilities Capital and reserves Share capital Share premium account Capital redemption reserve Other reserves Profit and loss account
Shareholders’ funds: equity non-equity Other liabilties Creditors
Total funds employed
On behalf of the Board Martin Broughton, Chairman 28 February 2001
Notes are shown on pages 54 to 56
54 irectors’ Report and Accounts 2000
Notes on the accounts Balance sheet
30 Investments in Group companies &m
Cost
1 January 2000 393
Additions 10
31 December 2000 403
The Company’s directly owned subsidiaries at 31 December 2000 were 8ritish American Tobacco (1998) Limited, B.A.T. International Finance p.l.c.,
B.A.T Capital Corporation, BATMark Limited and British American Ventures Limited.
The Directors are of the opinion that the investment in the subsidiary undertakings has a value not less than the amount at which it is shown in the
balance sheet.
31 Other investments Other investments are listed equity investments being shares in the Company owned by the British American Tobacco Employee Share Ownership Trust.
The market value of these shares at 31 December 2000 was £129 million 1999 £34 million.
32 Debtors
2000 1999
£m £m
Amounts due from subsidiary undertakings 1,423 2,004 Taxation recoverable 3l Other debtors 1
Prepayments and accrued income 4 s
1,427 2,045
All the above amounts are due within one year.
i N e T sl o T o B T B B o e B B T B T T T T T I o — e
3
1
1
] [
b
]
1
b1
3
i
i
E
i
i
4
d
55 Directors’ Report and Accounts 2000
33 Shareholders’ funds Share Capital Share premium redemption Other Profit and capital account reserve reserves loss account Totat £ m £m &m m £m
1 fanuary 2000 605 4 20 1,368 1,997 Increase in share capital 3 3
Transfer from profit and loss account 702 702 Redemption of convertibie redeemable preference shares (30) 30 (14) (681) (695) Dividends and other appropriations: Ordinary shares (623) (623) Convertible redeemable preference shares (35) 35) Amortisation of discount on preference shares (22) (22)
Other movements 22 2 24
31 December 2000 575 7 30 28 7 1,351
2000 1999 £m im
Shareholders’ funds comprise: Equity 1,292 1916 Non-equity below 59 81
1,351 1,997
Non-equity Interests comprise:
Convertible redeemable preference shares 31 61
Amortisation of the discount arising on the issue of these shares 28 20
59 81
As permitted by Section 230 of the Companies Act 1985, the profit and loss account of the Cumpany has not been presented in these financial
statements. The profit for the year ended 31 December 2000 was £702 million 1999 £1,728 million.
Convertible redeemable Qrdinary preference Share capital No. of shares. Ne. of shares m
Authorised
7 fanuary 2000 and 31 December 2000 2,858,265,349 241,734,651 775.00
Allotted, called up and fully paid
1 fanuary 2000 2,176,902,616 241,734,651 604.66 Changes during the year were:
7 June 2000 ~ redemption of convertible redeemable preference shares of 25p each (120,867,325) (30.22)
Share option schemes 1,184,974 0.30
2,178,087,590 120,867,326 574.74
Share premium The increase in the year of £3 million relates sofely to ordinary shares issued under the Company's share option schernes.
56 Directors’ Report and Accounts 2000
Notes on the accounts continued
Balance sheet and profit and loss account
33 sharcholders’ funds continued
Convertible redeemable preference shares
On 7 June 1999 the Company issued 604,336,627 ordinary shares of 25p each and 241,734,651 convertible redeemable preference shares of 25p each
in consideration for the acquisition of the entire issued share capital of Rothmans international 8.V.
In accordance with the terms of the convertible preference shares, the holders of such shares gave notice of the redemption of 50 per cent of the
preference shares, at a price of 575 pence per share, An amount of £695 million was paid on 7 June 2000 to redeem the preference shares. On the fifth anniversary of the date of issue of the convertible redeemable preference shares, the Company will be required to redeem all such shares not previously redeemed or converted into ordinary shares. The redemption price will be 675 pence per share.
Each convertible redeemable preference share wili automatically convert into an ordinary share on 2 one for ane basis on aay disposal of such a share to a third party not under the contral of the sharehoiders. The holders of convertible redeemable preference shares may at any time require the Company to convert such shares into ordinary shares on a one for one basis, provided that such conversion will not result in such holders having an aggregate holding of more than 25 per cent of the entire issued ordinary share capital of the Company.
The shares will rank uniformly with ordinary shares for distribution of profits. On a return of capital on a winding-up, the assets will be applied in priority 10 2 payment to the hoiders of any other class of shares in paying the holders of convertible redeemable preference shares the sum of 675 pence per share.
Holders of convertible redeemable preference shares will only be entitled to vote at general meetings on a resolution for the winding-up of the Company; or on any resolution varying, modifying, or abrogating any of the rights or provisions attaching to their shares.
The amortisation of discount an convertible redeemable preference shares reflects the difference between the share price at 7 June 1999 and the redemplion price in 2004, which is being amortised over the period Lo the redemption date.
34 Creditors 2000 1999 £m £m
Dividends payable 454 234
Amounts due to subsidiary undertakings. 123 55 Sundry creditors 2 1
579 490
All the above amounts are cue within one yeer.
35 Audit fees 2000 1999
Auditors’ fees £30,000 £30,000
Fees paid to PricewaterhouseCoopers for advisory and accountancy services - UK £nil £nil
36 Contingent liabilities and financial commitments gritish American Tobacco p.l.c. has guaranteed borrowings by subsidiary undertakings of £4,808 million 1999 £4,707 million and total borrowing facilities of £12,302 million 1999 £10,886 miflion
Performance Guarantees given to third parties in respect of Group companies were £97 miliion 1999 €49 mitlion.
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