The Summary Financial Statement is a summary of information in the Annual Report and Accounts and should be read with the Operating and Financial Review. Reference should also be made to the Summary Remuneration Report.
The Annual Review and Summary Financial Statement does not contain sufficient information to allow for as full an understanding of the results of the Group and the state of affairs of the Company, or of the Group, and their policies and arrangements concerning Directors’ remuneration, as would be provided by the full Annual Report and Accounts. Shareholders requiring more detailed information have the right to obtain, free of charge, a copy of the full Annual Report and Accounts for 2006, or for future years, by contacting British American Tobacco Publications as set out on the inside back cover.
Report of the auditors
The auditors’ report on the full annual accounts of the Group for the year ended 31 December 2006 is unqualified and does not contain any statement concerning accounting records or failure to obtain necessary information and explanations.
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.
From 1 January 2005, the Group has prepared its annual consolidated financial statements in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union and implemented in the UK.
Changes in accounting policies are as described in Changes in accounting policies.
Dividends and share buy-back
The dividends are as described in Adjusted diluted earnings per share
and Dividends per share declared
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 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 interim dividend will be ratified by shareholders by way of a special resolution at the Annual General Meeting. Accordingly, the payment has been presented as a dividend payment the Group statement of changes in total equity.
Between 22 September 2006 and 4 December 2006, the Company sought to repurchase 6,927,790 shares for an aggregate consideration of £100 million, which are included in the purchase of own shares in the Group statement of changes in total equity. However, as a result of the technical infringement of the Companies Act 1985, the repurchase and cancellation of these shares was invalid and accordingly, their nominal value is included within the Company's share capital as at 31 December 2006. 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.
There are contingent liabilities in respect of litigation, overseas taxes and guarantees in various countries.
Product liability litigation
Group companies, notably Brown & Williamson Holdings, Inc. (B&W), as well as other leading cigarette manufacturers, are defendants, principally in the US, in a number of product liability cases. In a number of these cases, the amounts of compensatory and punitive damages sought are significant.
On 30 July 2004, B&W completed transactions combining its US tobacco business assets, liabilities and operations with R.J. Reynolds Tobacco Company. A new company called R.J. Reynolds Tobacco Company (RJRT) was created as a result of the combination transactions. As a result of these transactions: (a) B&W discontinued the active conduct of any tobacco business in the US; (b) B&W contributed to RJRT all of its assets other than the capital stock of certain subsidiaries engaged in non-US businesses and other limited categories of assets; (c) RJRT assumed all liabilities of B&W (except liabilities to the extent relating to businesses and assets not contributed by B&W to RJRT and other limited categories of liabilities) and contributed subsidiaries or otherwise to the extent related to B&W’s tobacco business as conducted in the US on or prior to30 July 2004; and, (d) RJRT agreed to indemnify B&W and each of its affiliates (other than Reynolds American Inc. and its subsidiaries) against, among other matters, all losses, liabilities, damages, expenses, judgments, attorneys’ fees, etc, to the extent relating to or arising from such assumed liabilities or the assets contributed by B&W to RJRT (the RJRT Indemnification). The scope of the RJRT Indemnification includes all expenses and contingent liabilities in connection with litigation to the extent relating to or arising from B&W’s US tobacco business as conducted on or prior to 30 July 2004, including smoking and health tobacco litigation, whether the litigation is commenced before or after 30 July 2004 (the tobacco litigation).
Pursuant to the terms of the RJRT Indemnification, RJRT is liable for any possible judgments, the posting of appeal bonds or security, and all other expenses of and responsibility for managing the defence of the tobacco litigation. RJRT has assumed control of the defence of the tobacco litigation involving B&W. Affiliates of B&W have retained control of the defence in certain tobacco litigation cases with respect to which such affiliates are entitled to indemnification.
1. Medical reimbursement cases
These civil actions seek to recover amounts spent by government entities and other third party providers on healthcare and welfare costs claimed to result from illnesses associated with smoking. As at 31 December 2006, a reimbursement suit brought by an Indian tribe and two non-governmental reimbursement suits were pending against B&W. The vast majority of other such claims have been dismissed on legal grounds.
As at 31 December 2006, B&W was named as defendant in two US cases brought by foreign government entities (São Paulo and Panama) seeking reimbursement of medical costs. In July 2006, the Delaware Superior Court granted defendants’ motion to dismiss these cases. Plaintiffs appealed to the Supreme Court of Delaware, which heard oral argument in December 2006 and reserved decision.
2. Class actions
As at 31 December 2006, B&W was named as a defendant in some 15 separate actions attempting to assert claims on behalf of classes of persons allegedly injured by smoking. In the Engle case (Florida), one jury awarded compensatory damages totalling US$12.7 million and assessed US$17.6 billion in punitive damages against B&W. The intermediate appellate court reversed the trial court’s judgment. In July 2006, the Florida Supreme Court upheld the intermediate appellate court’s decision to decertify the class, and vacated the jury’s punitive damages award. In Scott, the jury returned a verdict of US$591 million on the class’s claim for a smoking cessation programme. Defendants’ appeal to the Louisiana Fourth Circuit Court of Appeal resulted in the reduction of the award by US$312 million. In the Schwab class action complaint, the court granted plaintiffs’ motion for class certification. By order in November 2006, the Second Circuit Court of Appeals granted defendants’ motion to stay proceedings in this case, and further granted defendants’ petition for leave to appeal the class certification order.
3. Individual cases
Approximately 3,471 cases were pending against B&W at 31 December 2006, 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).
4. Consolidated claims
In the West Virginia consolidated smoking and health cases, the court so-ordered the parties' stipulation dismissing B.A.T Industries p.l.c. from the action, with prejudice, on 12 December 2006. This is a significant decision as B.A.T Industries p.l.c. was previously a defendant in around 1,000 consolidated individual cases in West Virginia. British American Tobacco (Investments) Limited has been dismissed from those West Virginia consolidated smoking and health cases in which it was a defendant.
5. Conduct-based claims
In 1999, the US Department of Justice brought an action against various industry members, including RJRT and B&W. British American Tobacco (Investments) Limited is a co-defendant in the action. The trial of this claim was completed in June 2005. In August 2006, the District Court issued its final judgment, finding in favour of the Government, and against certain defendants, including B&W and British American Tobacco (Investments) Limited. The court also ordered a wide array of injunctive relief, including a ban on the use of ‘lights’ and other similar descriptors. Defendants filed a motion to stay enforcement of the judgment shortly after the judgment was issued. The court denied the stay motion, but defendants filed a notice of appeal and an emergency motion to stay the judgment before the Washington DC Circuit Court of Appeals in September 2006. In October 2006, the Court of Appeals granted defendants’ motion to stay enforcement of the judgment pending the outcome of the appeal.