Final Results - Part 3

British American Tobacco PLC
28 February 2001


BRITISH AMERICAN TOBACCO PLC

PART THREE  


  NOTES                                                        17.
 
 ACCOUNTING POLICIES AND BASIS OF PREPARATION
 
 As described below, during the year a transaction was completed
 whereby the holding in Imasco, an associated company in Canada, was
 effectively replaced by shares in a 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 goodwill
 arising on acquisition would have been some £1.63 billion 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.
 
 Following this change, the results of the Canadian operations 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.
 
 As a result of a reorganisation following the Rothmans merger, profit
 from the Southampton manufacturing operations in the UK was 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.
 
 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 results.
 
 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 approximately 58 per cent of its shares, was completed on
 1 February 2000.  This was followed immediately by the completion of
 the sale of Imasco's subsidiaries CT Financial Services Inc. and
 Shoppers Drug Mart.  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
 January 2001. Genstar's results since 1 February 2000 were not
 consolidated given the intended disposal.
 
 The Group's restructured business in Canada, 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 its associate for January and the
 consolidated results of Imperial Tobacco for the eleven months to 31
 December 2000.  The results for the year ended 31 December 1999
 represent the Group's share of the results of its associated company,
 Imasco.
 
  Imperial Tobacco Canada/Imasco cont...                       18.
 
 During 2000, Imasco's discontinued non-tobacco operations contributed
 £112 million of turnover and £16 million of profit, while for the
 period the tobacco operations were a wholly-owned subsidiary they
 contributed £757 million of turnover and £364 million of profit before
 goodwill amortisation.  In 1999 the discontinued non-tobacco
 operations contributed £1,286 million of turnover and £155 million of
 profit for the year.
 
 The goodwill arising on the acquisition of Imasco amounted to
 £2,143 million and will be amortised over a period of 20 years.  In
 addition, the statement of total recognised gains and losses for the
 period includes £1,248 million principally in respect of the surplus
 on revaluing Imasco's non-tobacco businesses prior to their disposal.
 As a result of this revaluation, the profit and loss account does not
 include any gain on these disposals.
 
 ROTHMANS INTERNATIONAL
 
 British American Tobacco p.l.c. issued ordinary shares and convertible
 redeemable preference shares in consideration for the acquisition of
 Rothmans International in 1999.  In accordance with the terms of the
 convertible redeemable preference shares, the holders 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 in 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.  As the intention to dispose of these operations was
 announced at the outset of the merger, the results and assets of that
 business were not consolidated.  The investment was included as a
 current asset at net realisable value and therefore the sale did not
 generate a gain or loss in these results.
 
 S.C.A. TOBACCO CORPORATION (SCAT)
 
 On 31 March 2000, the Group completed the purchase of SCAT, which
 distributes the Group's products in Japan.  Consequently, its results
 are consolidated from 1 April 2000 and the amortisation of the
 goodwill of £63 million commenced from that date.
 
 EXCHANGE RATE EFFECTS
 
 The results of overseas subsidiaries and associates have been
 translated to sterling for the purpose of this report at average rates
 of exchange.  Results were influenced by generally stronger average
 rates against sterling, especially the US dollar, and operating profit
 before exceptional items benefited by approximately £67 million.
 
 EXCEPTIONAL ITEMS
 
 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 £119 million for early retirement
 and redundancies and the write-down of fixed assets were charged in
 2000 as an exceptional item.
 
  Exceptional items cont.                                      19.
 
 As part of the SCAT acquisition, 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 against operating
 profit to remove the gross contribution previously recognised by the
 Group.
 
 Integration costs of £126 million in 2000 (1999 £357 million) are the
 costs incurred in integrating Rothmans into the British American
 Tobacco Group.  The costs of this integration to date at £483 million
 are above the £400 million estimate referred to in the Circular to
 Shareholders issued for the merger.  However, synergy savings are
 being achieved well ahead of schedule and reduced operating costs in
 2000 by approximately £230 million.
 
 US tobacco settlement costs comprised the one-off settlement
 compliance costs and liquidated legal fees in respect of the US
 cigarette companies' agreement with the Attorneys General in 46 US
 States to settle outstanding Medicaid recovery suits.  Other
 settlement costs are charged as ongoing costs and amounted to
 £777 million in 2000 (1999 £746 million).
 
 The Imasco restructuring costs of £71 million in 2000 relate to the
 Group's share of pre-tax costs to Imasco of buying out share options
 together with other employee deferred compensation and severance
 arrangements consequent upon a fundamental change of control.
 
 GOODWILL AMORTISATION
 
 The goodwill amortisation of £376 million (1999 £162 million) has
 arisen from the Imasco transaction and the SCAT acquisition, together
 with the earlier Rothmans transaction, described above.
 
 SALE OF BRANDS
 
 This comprised the profit on the sale of certain of British American
 Tobacco's brands during 1999 in Australasia.
 
 INTEREST AND INTEREST COVER
 
 Net interest rose by £82 million to £278 million and now includes
 Imperial Tobacco Canada as a wholly-owned subsidiary for the eleven
 months to December 2000, during which period it incurred a net
 interest charge of £38 million.  The net interest charge in 2000 also
 reflects the impact of financing the redemption of the convertible
 redeemable preference shares and the acquisition of SCAT.
 
 The net interest charge for 1999 benefited by £25 million, as the
 Group was able to recover interest on the amounts which form the basis
 for the sales tax recovery in Brazil in 1998.  Both 2000 and 1999
 benefited from the cancellation of swap contracts.
 
  Interest and interest cover cont.                            20.
 
 The Group's interest cover was distorted in 1999 and 2000 by goodwill
 amortisation and exceptional items in operating profit, as well as the
 profit on sale of brands in 1999.  On an adjusted basis, interest
 cover, based on profit before interest paid over interest paid,
 remains strong at 5.8x (1999: 5.9x).  On a similar adjusted basis,
 interest cover based on profit before net interest over net interest,
 was 9.5x (1999: 10.2x).
 
  TAXATION                                           
                                                     
                                                Year to
                                          31.12.00   31.12.99
                                             £m         £m
                                                     
  UK                                         20        (15)
  Overseas                                  751        434
                                           ----       ----
  Current taxation                          771        419
  Deferred taxation                        (113)       114
                                           ----       ----
  British American Tobacco p.l.c.                    
    and subsidiary undertakings             658        533
  Share of associates                        25        140
                                           ----       ----
                                            683        673
                                           ====       ====
Tax rate                                   44.9%      49.1%
                                           ====       ====
 
 The tax rate in 2000 was adversely affected by the goodwill
 amortisation arising mainly from the Rothmans and Imasco transactions.
 In the comparable figures for 1999 Rothmans was included for seven
 months.  The profit adjustment arising from the acquisition of SCAT,
 also increased the rate in 2000.
 
 The tax rate in 1999 was affected by charges accruing in 1999 for
 certain of the US tobacco settlements not being relieved for tax until
 the following year.  As future years were expected to show a similar
 pattern for such payments and tax relief, under UK accounting
 standards there was a material distortion to the tax rate shown in
 1999.
 
 EARNINGS PER SHARE
 
 Basic earnings per share are based on the profit for the period
 attributable to ordinary shareholders and the average number of
 ordinary shares in issue during the period (excluding shares held by
 the Group's two Employee Share Ownership Trusts).
 
 For the calculation of diluted earnings per share the average number
 of shares reflects the potential dilution effect of employee share
 schemes and from June 1999, the convertible redeemable preference
 shares.  The earnings are correspondingly adjusted to the amount of
 earnings prior to charging dividends and the amortisation of discount
 on the convertible redeemable preference shares.
 
  Earnings per share cont.                                     21.
 
 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 goodwill amortisation, adjusted diluted earnings per share
 are shown below:
 
                                     Diluted earnings per share
                                              Year to
                                        31.12.00    31.12.99
                                        (pence)     (pence)
  Unadjusted earnings per share          28.63       27.02
  Effect of US restructuring              3.55      
  Effect of acquired stock                3.55      
  Effect of goodwill amortisation        16.07        7.82
  Effect of US tobacco settlements                    0.73
  Effect of integration costs             4.02       11.27
  Effect of Imasco restructuring          2.05      
  Effect of sales tax recovery                       (0.63)
  Effect of sale of brands                           (2.53)
  Effect of US tobacco settlements                  
  on effective tax rate                               8.65
                                        ------      ------
  Adjusted earnings per share            57.87       52.33
                                        ======      ======
 
 Similar types of adjustments would apply to basic earnings per share
 which, on an adjusted basis, would be 60.31p (1999 52.54p) compared to
 unadjusted amounts of 28.50p (1999 25.25p).
 
 GROUP RESERVES
 
 The Group reserve movements are summarised on page 11.
 
 During 2000 there was a decrease in reserves of £213 million due to
 exchange, notably affected by the weakness of the South African Rand.
 However, the main item in 2000 is the gain on disposal of the non
 tobacco businesses of Imasco (see page 17), which has to be included
 as a revaluation rather than taken through the profit and loss
 account.  There is also a charge of £695 million for the redemption of
 50 per cent of the convertible redeemable preference shares (see
 page 18).  The £5,089 million in 1999 was in respect of shares issued
 for the Rothmans merger.
 
 Shareholders funds comprise £4,422 million (1999: £3,347 million) of
 equity interests and £756 million (1999: £1,474 million) of non-equity
 interests.
 
 The reduction in the share capital and the establishment of a capital
 redemption reserve, together with the reduction in the non-equity
 interest, reflects the redemption of the convertible redeemable
 preference shares.
 
  CASH FLOW                                                    22.
 
 The Group's cash flow is summarised on page 16 but the comparison of
 2000 with 1999 is distorted by the Rothmans merger, the Imperial
 Tobacco Canada transaction and the exceptional items noted above.
 
 The significant increase in operating cash flows to £2,788 million in
 2000 from £2,085 million in 1999, reflects the higher operating profit
 before exceptional items and improved working capital position.  These
 are partly offset by the exceptional items and the posting of the
 Engle bond in 2000, as well as the one-off benefit from the timing of
 certain ongoing US tobacco settlement payments in 1999.
 
 The inclusion of Rothmans and Imperial Tobacco Canada also affects
 returns on investments and servicing of finance (which include
 preference and minorities' dividends, as well as interest) and tax.
 In addition, interest is higher due to adverse timing effects in 2000
 compared to timing benefits in 1999, while tax also increases due to
 lower recoveries with the phasing out of foreign income dividends.
 
 With capital expenditure and financial investment also up on 1999, the
 impact of the above results in net cash generation of £1,314 million
 compared to £1,264 million in 1999.
 
 In 2000 net investing activities showed a net inflow of £88 million
 mainly due to the sale of Rothmans Canada and the positive net cash
 impact from the Imperial Tobacco acquisition and subsequent disposals
 of non tobacco businesses, less the cost of acquiring SCAT.  The 1999
 outflow of £216 million was mainly for Rothmans merger related
 transactions.
 
 Although 1999 dividend outflows were high due to the acceleration of
 payments, the outflows for 2000 have increased due to higher share
 capital after the Rothmans merger and higher dividends per share.
 
 As a result of the above the net cash inflow was £822 million compared
 to £518 million in 1999.  However, the Group's net debt position rose
 by £1,208 million to £4,263 million, as a result of the redemption of
 preference shares, debt acquired with the Imperial Tobacco Canada
 acquisition, the impact of exchange and the reclassification of
 certain investments.  Group debt rose £475 million to £6,151 million,
 while cash, deposits and current investments were £733 million lower
 at £1,888 million.
 
 CONTINGENT LIABILITIES
 
 There are contingent liabilities in respect of litigation, overseas
 taxes and guarantees in various countries.  Group companies, notably
 Brown & Williamson Tobacco Corporation ('B&W') as well as other
 leading cigarette manufacturers, are defendants, principally in the
 United States, in a number of product liability 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.
 
  Contingent liabilities cont....                              23.
 
 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, Australia, Brazil,
 Canada, Chile, Finland, France, Germany, Israel, the Netherlands,
 Pakistan, the Philippines, Republic of Ireland, Sri Lanka and Uganda.
 
 U.S. litigation
 The 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).  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 to result from illnesses
 associated with smoking.  Despite the almost uniform success of the
 industry's defence to these actions to date, the US Federal Government
 has filed a suit, which will probably not come to trial until 2003.
 
 (2)  Class actions.  As at 31 December 2000, B&W was named as a
 defendant in some 35 (31 December 1999, 38) separate actions
 attempting to assert claims on behalf of classes of persons allegedly
 injured by smoking.  The Engle case (Florida) is currently on appeal.
 At the end of the second phase of a three phase trial, the jury
 awarded compensatory damages totalling US $12.7 million to three class
 representatives (US$5.8 million of which was found to be time barred)
 and assessed US$17.6 billion in punitive damages against B&W and
 US$127 billion in total punitive damages against the other major
 companies in the US tobacco industry.  For numerous reasons, B&W
 remains confident that Engle will eventually be reversed on appeal.
 
 (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 class members;  (b) approximately one
 quarter are cases brought in consolidated proceedings in West
 Virginia;  and (c) less than eight per cent are cases filed by other
 individuals.  A jury verdict against B&W for US$750,000 (Carter) was
 recently re-instated by the Florida Supreme Court.  B&W is seeking
 review of that decision by the US Supreme Court.
 
 4)   Other Claims.  As at 31 December, 2000, 8 cases were pending on
 behalf of asbestos companies, seeking reimbursement for costs and
 judgements paid in litigation brought by third parties against them.
 One case (Falise), brought by a trust established to pay asbestos
 litigation claims, ended in a mistrial in January 2001.
 
  Contingent liabilities cont....                              24.
 
 As 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 government cases
 had been dismissed at 31 December, 2000.
 
 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 all these various
 claims are meritorious both 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 require 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 results 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 these matters, the Directors (i) do not consider it
 appropriate to make any provision in respect of any pending litigation
 and (ii) do not believe that the ultimate outcome of all this
 litigation will significantly impair the financial condition of the
 Group.
 
  POST BALANCE SHEET EVENT - BAT AUSTRALASIA                        
 
 On 30 January 2001, it was announced that the Group's Australian
 subsidiary had entered into an agreement under which the Group
 proposes to acquire the remaining 40.5 per cent shareholding of that
 company that it does not already own.  This transaction is subject to
 shareholder and court approval in Australia, but should be completed
 in May 2001 at a cost of Aus$1.1 billion (£415 million) and have a
 positive impact on the cash earnings of the Group.
 
  ANNUAL REPORT AND ACCOUNTS                                        
 
 The above figures have been extracted from the Group's full financial
 statements which, for the year ended 31 December 1999 have been
 delivered and for the year ended 31 December 2000, will be delivered
 to the Registrar of Companies.  Both carry an unqualified audit
 report.  The Annual General Meeting will be held on 2 May 2001 at
 11.30 a.m.
 
                                   ***
 
 The report and accounts will be posted to shareholders in late March
 2001.
 
                             Aileen McDonald
                             Secretary
                             28 February 2001