directors report and accounts 2006 - Directors' report

 
 

 Directors' report

The Directors present their report and the audited financial statements for the Group for the year ended 31 December 2006. A report from the Directors on corporate governance is set out in Corporate governance statement and the Remuneration Committee report is Remuneration report.

Business review
Section 234ZZB of the Companies Act 1985 requires British American Tobacco p.l.c. (the Company) to produce a business review. The information that has been prepared to a standard which fulfils the requirements of that business review can be found in the Operating and Financial Review (OFR) of the Annual Review, those pages being incorporated by reference into this Directors’ Report. The preparation of the OFR also took into account, where considered appropriate, the best practice set out in the UK Accounting Standards Board’s ‘Reporting Statement: Operating and Financial Review’. The OFR reports on the Group’s development and performance during the past year together with its strategy and prospects, with particular reference to stated Key Performance Indicators (KPIs) and Business Measures (see Our strategy). The OFR also includes information in respect of financial and other risks under the heading of ‘Key Group Risk Factors’, research and development and employee involvement and employee practices.

The Annual Review is issued to all shareholders. The Directors’ Report and Accounts is issued to shareholders who have elected to receive it together with an Annual Review.

Principal activities
British American Tobacco p.l.c. is a holding company which owns, directly or indirectly, investments in the numerous companies constituting the British American Tobacco Group of companies. The principal subsidiaries and associates are listed in Principal subsidiary undertakings and Principal associate undertakings. All subsidiary undertakings are involved in activities related to the manufacture, distribution or sale of tobacco products.

Group results and dividends
The Group results are dealt with fully in the Financial Statements and in the OFR. The Board has recommended to shareholders a final dividend of 40.2p per ordinary share for the year ended 31 December 2006. If approved, this dividend will be paid on 3 May 2007 to shareholders on the register at the close of business on 9 March 2007. Full details of dividends in respect of 2006 are given in note 8.


Annual General Meeting
The Annual General Meeting will be held at The Mermaid Conference & Events Centre, Puddle Dock, Blackfriars, London EC4V 3DB at 11.30am on 26 April 2007. Details of the business to be proposed at the meeting are contained in the Notice of Annual General Meeting which is sent to all shareholders and is also published on our bat.com website.

Directors
The following persons are the current Directors of the Company:

Chairman
Jan du Plessis

Deputy Chairman and Senior Independent Non-Executive Director
Kenneth Clarke

Executive Directors
Paul Adams (Chief Executive)
Paul Rayner (Finance Director)
Antonio Monteiro de Castro (Chief Operating Officer)

Non-Executive Directors
Piet Beyers
Robert Lerwill
Dr Ana Maria Llopis
Rupert Pennant-Rea
Anthony Ruys
Sir Nicholas Scheele
Thys Visser

Anthony Ruys was appointed to the Board as a Non-Executive Director on 1 March 2006 and he was reappointed by shareholders at the 2006 Annual General Meeting. In 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:

Paul Adams
Robert Lerwill
Sir Nicholas Scheele
Thys Visser

Biographical and related information about the Directors is given in the Annual Review and will also be given in the Secretary’s letter in the Notice of Annual General Meeting for those Directors who are offering themselves for reappointment.


Directors’ interests and indemnities
The interests of the Directors of the Company in the issued share capital of the Company (including interests in share options and deferred shares) are shown in the Remuneration Report.

No Director had any material interest in a contract of significance (other than a service contract) with the Company or any subsidiary company during the year. Details of the Executive Directors’ service contracts and the letters of appointment for the Non-Executive Directors, their emoluments and share interests (including interests in share-based payments) are given in the Remuneration Report.

The Company’s practice has always been to indemnify its Directors in accordance with the Company’s Articles of Association and to the maximum extent permitted by law. As at the date of this report, indemnities are in force under which the Company has agreed to indemnify the Directors, in accordance with the Company’s Articles of Association and to the maximum extent permitted by law, in respect of all costs, charges, expenses or liabilities, which they may incur in or about the execution of their duties to the Company, or any entity which is an associated company (as defined in Section 309A of the Companies Act 1985) or as a result of duties performed by the Directors on behalf of the Company or any such associated company.

Directors’ responsibilities in relation to the financial statements
The following statement sets out the responsibilities of the Directors in relation to the financial statements of both the Group and the Company. The report of the independent auditors set out their responsibilities in relation to those financial statements.

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 of the Group for the financial year. In preparing those financial statements, the Directors are required to: (1) select appropriate accounting policies and apply them consistently; (2) make judgements and estimates that are reasonable and prudent; (3) state whether applicable accounting standards have been followed, subject to any material departures being disclosed and explained; and (4) prepare the financial statements on the going concern basis, unless they consider that to be inappropriate.

The applicable accounting standards referred to in (3) above are: (a) United Kingdom Generally Accepted Accounting Principles (UK GAAP) for the Company; and (b) International Financial Reporting Standards (IFRS) as adopted by the European Union and implemented in the UK for the Group.

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 to enable them to ensure that the financial statements comply with the Companies Act 1985. They are also responsible 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 financial statements and to provide the auditors with every opportunity to take whatever steps and undertake whatever inspections the auditors consider to be appropriate for the purpose of enabling them to give their audit report.

The Directors are responsible for the maintenance and integrity of the Annual Report and Accounts on the Company’s bat.com website in accordance with the UK legislation governing the preparation and dissemination of financial statements. Access to the website is available from outside the UK, where comparable legislation may be different.

The Directors consider that they have pursued the actions necessary to meet their responsibilities as set out in this Statement.

Directors’ declaration in relation to relevant audit information
Having made enquiries of fellow Directors and of the Company’s auditors, each of the Directors confirms that:

(1) to the best of his or her knowledge and belief, there is no relevant audit information of which the Company’s auditors are unaware; and (2) he or she has taken all steps that a Director might reasonably be expected to have taken in order to make himself or herself aware of relevant audit information and to establish that the Company’s auditors are aware of that information.

Going concern
After reviewing the Group’s annual budget and plans, the Directors consider that the Group has adequate resources to continue in operational existence for the foreseeable future and that it is therefore appropriate to continue to adopt the going concern basis in preparing the accounts.

Auditors
Resolutions will be proposed at the Annual General Meeting to reappoint PricewaterhouseCoopers LLP as the Company’s auditors and to authorise the Directors to agree their remuneration. The Audit Committee will recommend the appropriate level of fees to the Board.

Substantial shareholding

At 1 March 2007, the following person had notified an interest in the ordinary shares of the Company.

 Number of ordinary sharesPercentage of issue2
R&R Holdings S.A.1 604,336,627 29.20

Notes:
1 Pursuant to the Standstill Agreement dated 11 January 1999 entered into between the Company and R&R Holdings S.A. (then named Rothmans International Holdings S.A.), Compagnie Financière Richemont SA (then called Compagnie Financière Richemont AG) and Rembrandt Group Limited (together ‘the R and R Parties’), the R and R Parties gave certain undertakings to the Company including the following: (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 to shares of a class carrying rights to vote in all circumstances at general meetings of the Company; and (b) the interests of the R and R Parties and persons acting in concert with any of them in the issued ordinary share capital of the Company will not exceed 27.8 per cent except in certain specified circumstances e.g. the Company making a purchase of its own shares or otherwise having reduced its issued share capital. During the year ended 31 December 2006, the interests of the R and R Parties changed as a result of the Company continuing its share buy-back programme (see below). Further to a reorganisation of the Rembrandt Group in August 2000, the interest of Rembrandt Group Limited in R&R Holdings S.A. is now held by Remgro Limited, which company has become a party to the Standstill Agreement.

2 The interest of R&R Holdings S.A. is expressed as a percentage of the Company’s issued ordinary share capital before the proposed repurchase and cancellation of shares described under ‘Purchase of own shares’ below (the ‘Repurchases and Cancellations’). The interest of R&R Holdings S.A. immediately after the Repurchases and Cancellations will be 29.30 per cent.
Interim dividend 2006
For the first time, the Company needed to file interim accounts which were prepared to recognise additional dividend income during 2006. As a result of the Company not doing so, the interim dividend of £323 million paid on 13 September 2006 (the 2006 Interim Dividend) did not comply with the technical requirements of the Companies Act 1985. It is proposed that the appropriation of distributable profits to the payment of the 2006 Interim Dividend will be ratified by shareholders by way of a special resolution at the Annual General Meeting and that, if so approved by shareholders, any liability of the Company’s shareholders or Directors relating to the 2006 Interim Dividend should be released. Accordingly, the payment has been presented as a dividend payment in the Financial Statements.

The Company has drawn the attention of HM Revenue & Customs (HMRC) to the circumstances surrounding the payment of the 2006 Interim Dividend and to the steps described above that are now proposed to rectify the legal position of the Company. HMRC has confirmed that the tax position of UK shareholders is not affected by any irregularity in the original dividend and that UK shareholders should therefore include this dividend in their tax returns on the basis of the information shown in the original dividend certificates in respect of 13 September 2006 as a dividend received on that day. HMRC has further confirmed that, if shareholders approve the resolution submitted for their approval, this will have no effect either on the amount of their taxable income or on the period for which it is assessable to UK tax. UK resident shareholders need therefore take no further action. If any non-UK resident shareholders have any doubt about their tax position, they should consult their own professional advisers.

Purchase of own shares
From March 2006, the Board continued its on-market programme of buying back the Company’s ordinary shares of 25p each in order to enhance its earnings under the authority granted by shareholders in 2005. At the 2006 Annual General Meeting, the Company was given authority to purchase up to 209,600,000 of its ordinary shares.

During the year ended 31 December 2006, the Company made on-market repurchases totalling 28,330,000 of its own ordinary shares, representing 1.37 per cent of the issued share capital, for an aggregate consideration of £400 million. The repurchased shares were cancelled.

Between 22 September 2006 and 4 December 2006, the Company sought to repurchase 6,927,790 shares for an aggregate consideration of £100 million. As a result of the technical infringement of the Companies Act 1985 noted above, the repurchase and cancellation of these shares was invalid. These shares will be repurchased on 1 March 2007 from their present holders, the Company’s brokers, at the same prices agreed between 22 September 2006 and 4 December 2006. Accordingly, the payments have been included in the cost of share buy-backs in the Financial Statements.

The present authority for the Company to purchase its own shares will expire at the 2007 Annual General Meeting. The Directors will be seeking fresh authority for the Company to purchase its ordinary shares as part of the planned continuation of the share buy-back programme.

It is expected that any shares purchased pursuant to the share buy-back programme will automatically be cancelled and the number of shares in issue reduced accordingly. However, the Company may, in appropriate circumstances, wish to hold and deal with the shares purchased as treasury shares in connection with the operation of employee share schemes.

Continuation of the Company’s share buy-back programme may result in the shareholding of R&R Holdings S.A. (the Company’s largest shareholder – see above) increasing to over 30 per cent. This would trigger an obligation on the part of R&R Holdings S.A. to make a general offer for the remainder of the entire issued share capital of the Company under the City Code on Takeovers and Mergers. Approval of shareholders will therefore be sought, by means of an ordinary resolution at the Annual General Meeting, for a waiver of this offer obligation. The Panel on Takeovers and Mergers has indicated, subject to final approval, that it is prepared to waive this requirement, if the independent shareholders approve such a waiver at the Annual General Meeting. Full details of the waiver will be set out in a circular to shareholders which will accompany the Notice of Annual General Meeting.

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 for which the Company has unlisted trading privileges. None of its securities are listed on any United States securities exchange or registered pursuant to the securities laws of the United States.

Charitable and political contributions
Payments for charitable purposes in 2006 amounted to £17.6 million (2005: £15.2 million), £3 million of which was paid in the UK (2005: £3.5 million). No donation was made to any political party registered in the UK under the Political Parties, Elections and Referendums Act 2000. Subsidiaries of the Company in Canada, Australia, the Solomon Islands and Fiji made contributions to non-EU political parties in their respective countries of incorporation totalling £87,570 (2005: £148,782).

Creditor payment policy
Given the international nature of the Group’s operations, there is not a global standard code for the Group in respect of payments to suppliers. In the UK, the operating subsidiaries have signed up to the Better Payment Practice Code under which each company undertakes to: (1) seek agreement on payment terms with its suppliers at the outset of each transaction; (2) explain its payment procedures to its suppliers; (3) pay bills in accordance with the agreed terms and all legal requirements; and (4) inform suppliers without delay when contesting an invoice and settle disputes quickly. Details of the Code are available on the website, payontime.co.uk

Non-UK operating subsidiaries are responsible 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 relevant 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 2006.

OECD Guidelines
The Group recognises its responsibilities to the countries in which it operates and in this context, notes the OECD Guidelines for Multinational Enterprises in their current form.

Intra-group pricing
The prices agreed between Group companies for intra-group sales of materials, manufactured goods, charges for royalties, commissions, services and fees are based on normal commercial practices which would apply between independent businesses.

On behalf of the Board

Nicola Snook
Secretary

1 March 2007