Annual Report and Accounts 2002 -...

Annual Report and Accounts 2002

Scottish &

New

castle plcA

nnual Report and A

ccounts 2002

A27371 S&N A/Rep Cover 5/7/02 12:33 pm

Contents1 Operating and Financial Review9 Report of the Directors

10 Corporate Governance12 Board Remuneration Report17 Statement of Directors’ Responsibilities18 Independent Auditors’ Report20 Group Profit and Loss Account21 Group and Company Balance Sheets22 Group Cash Flow Statement23 Statement of Total Recognised Gains and Losses23 Note on Historical Cost Profits and Losses23 Reconciliation of Movement in Shareholders’ Funds24 Notes to the Accounts43 Five Year Record44 Shareholder Information

Designed and produced by Tayburn Corporate

A27371 S&N A/Rep Cover alts 15/7/02 4:13 pm

1 Scottish & Newcastle Annual Report and Accounts 2002

Operating and Financial Review

Group SummaryIn the last two years the Group has changed shape substantially as it has moved to focus on both domestic and international beerbusinesses and growth sectors in UK pub retailing. As a result,direct comparisons with the previous year are clouded. In this periodthe Brasseries Kronenbourg, Alken Maes and Centralcer businesseswere included for their first full year, but the previous year includedcontributions from the Leisure businesses and nearly 1,200 retailoutlets which have been sold this year. Overall, turnover fell by 3·6%to £4,199m and operating profits fell by 5·1% to £538·9m.However, profit before tax for the year rose by 3·5% to £442·3mdue to a reduction in financial expenses and earnings per shareincreased by 1·6% to 43·7p.

If we restate the previous year to show the ongoing businesses for a full year and exclude disposals, turnover increased by 3·2% to£4,091m and operating profit increased by 7·3% to £519·4m. Thisshows the strength of the underlying businesses.

The proposed final dividend of 19·41p represents an increase of4·0% on last year’s level. With the interim dividend of 9·88p, totaldividends of 29·29p per share will have increased by 1·13p and arecovered 1·5 times.

Our businesses continued to focus on brand development, thepursuit of profitable sales and investment in customer service andefficiency. Scottish Courage performed well throughout the year,increasing turnover, operating profit and margins, despite the market being affected by significant discounting in the off trade,particularly before Christmas. Outside the UK, our International Beerbusinesses performed strongly, increasing turnover, operating profitand margins, as they focused on premium brands and gained fromintegration synergies. In Managed Retail the retained estate alsoperformed well with an improving return on assets and moved closerto meeting its overall target of 10% earnings growth. Uninvested likefor like sales on the retained managed estate increased by 1·6%.Invested like for like sales increased by 4·1%.

The Group announced several significant transactions as it continuedto pursue its strategy of focusing on domestic and international beerbusinesses and the growth sectors in UK pub retailing.

• In July 2001 we confirmed the disposal of 646 managed outlets(for net proceeds of £243m) of which 432 outlets were sold toEnterprise Inns and 214 to Noble House Leisure.

• In December 2001 we completed the disposal of 456 leasedpubs to a wholly owned subsidiary of the Royal Bank of Scotlandfor £260m.

• In January 2002 we announced two investments in India, £35m in United Breweries, the market leader, and £25m for a 40%share in a joint venture with United Breweries to develop andacquire brewing businesses. These investments await regulatoryapproval in India.

• In February 2002 we announced the acquisition of Hartwall for£1·2bn. Hartwall is the market leader in Finland and owns 50% of Baltic Beverages Holding, the market leader in Russia and theBaltic countries and number three in the Ukraine. The transactionbecame unconditional on 16 May 2002.

• In March 2002 we announced the acquisition of a 46% stake inMythos Breweries SA, the number two beer company in Greece,for £16m. The transaction is subject to regulatory approval and is expected to be completed in August 2002.

The restructuring of the Group and certain rationalisation andreorganisation initiatives in our UK Beer business resulted inexceptional costs of £38·8m. Further details of these exceptionalcosts can be found on page 27.

Footnote: All references to operating profit, profit before tax and earnings per share in the Operating and Financial Review are stated before amortisation of goodwill and exceptional items.

4,353·9

2001

Turnover (£m)As reported

Operating profit (£m)As reported

Turnover (£m)Ongoing business

Operating profit (£m)Ongoing business

568·0

2001

538·9

2002

3,965·9

2001

4,091·0

2002

427·5

2001

442·3

2002

Profit before tax (£m)

Dividends per share (p)

28·16

2001

29·29

2002

484·1

2001

519·4

2002

4,199·2

2002

% change–3·6

% change+3·2

% change–5·1

% change+7·3

% change+3·5

% change+4·0

A27371 S&N A/Rep alts Web only 15/7/02 4:33 pm Page 1


UK Beer£m 2002 2001 % change

Turnover 2,002·4 1,977·2 1·3

Operating profit 204·3 194·1 5·3

The UK market grew slightly for the first time in several years, withvolume growth of over 4% in the off trade more than offsetting ontrade volume decline of less than 2%.

During the first half of the year we maintained share in the on tradebut were not prepared to dilute our brand equities by matching thesteep discounting in the off trade so, overall, we lost market share.In the second half of the year the strength of our brands camethrough and we gained market share overall, gaining share in the on trade and maintaining share in the off trade.

Brand strengthTurnover increased by 1·3% and operating profits by 5·3% asScottish Courage continued to focus on value growth through its five key brands – Foster’s, Kronenbourg, John Smith’s, Miller and Beck’s. We also continued our commitment to the five keybrand equities with a significant increase in marketing investment.Operating profit is stated after deducting a royalty payment toDanone of £9m in relation to the Kronenbourg volumes, which will cease after the end of September 2002 when the Danone put is exercised. Please see notes 37 and 38 to the accounts on page 42 for further information.

The key brands performed very strongly over the year; total volumes increased by 3·7% and revenue by 3·3% and their share of total branded volumes increased to 83%, against 80% last year.They all increased share against their market segment. Kronenbourgvolumes were particularly strong, increasing by 11·8%.

Cost efficiency and productivityWe continued to implement the reorganisation of the supply chainwithin the UK Beer business that we announced last year and havemade substantial progress. Two out of the three regional distributioncentres have been completed, at Livingston and Wakefield. We havealso restructured the on trade sales force and support functionsand, as a result, the associated rationalisation of our depot structurehas begun.

We successfully updated our information systems software to SAP R3, which should lead to greater efficiency and better customerservice, and outsourced our information technology function on along-term contract to EDS. Both of these initiatives should improve our capability in this specialist area allowing us to focus on coreactivities and will facilitate greater flexibility and support for the new organisation as it evolves.

We incurred an exceptional charge of £38·8m in the Group profitand loss account relating to reorganisation activities.

–0·7

John Smith’s

+3·8

Foster’s

+1·9

Miller

+11·8

Kronenbourg

+6·8

Beck’s

+3·7

Total

Scottish Courage – growth in key brands 2002 vs 2001 (% change)Scottish Courage – top 5 brands’ share of volumes (%)

74

8083

2002200120001999199819971996

47

55

62

68



International Beer£m 2002 2001 % change

Turnover 1,099·4 779·8 41·0


The results for the current year benefit from the inclusion ofBrasseries Kronenbourg, Alken Maes and Centralcer for their first full year. In the comparative numbers for 2001, BrasseriesKronenbourg and Alken Maes were only included from July andCentralcer was only included from December.

If we restate the comparative numbers as if those businesses hadbeen included for the whole of the previous year, turnover wouldhave increased by 2·9% and operating profit by 9·5%. This is anexcellent performance which strongly shows the benefit of focusingon the development of premium brands across all our markets. As with Scottish Courage, operating profit is stated after deductingroyalty payments to Danone on the Kronenbourg volumes, in thiscase £22m, which will cease after the end of September 2002when the Danone put is exercised. Please see notes 37 and 38 to the accounts on page 42 for further information.

We are well advanced in achieving cost synergies from theintegration of the Brasseries Kronenbourg and Alken Maesbusinesses, being two years into a three year programme, and are on track to achieve the synergy benefits of £25m per year we indicated at the time of the acquisition. Of these synergies, we would expect about two thirds to arise in Brasseries Kronenbourgand Alken Maes and one third in Scottish Courage. In addition, we are implementing brand synergies with the harmonisation of theKronenbourg brand internationally, the launch of Foster’s in France,Belgium and Portugal and Beamish in France and the production of Foster’s in France and Portugal.

FranceThe French domestic market grew by 1·1% due to volume growth of 3·1% in the off trade offset by a 2·8% fall in the on trade.The off trade accounts for over 60% of the total market. BrasseriesKronenbourg continued to adopt a value strategy, focusing onimproving the proportion of its sales from premium products. Total branded volumes increased by 0·1%, premium brandsincreased by 7·8% and mainstream brands by 2·6%.

Particularly strong performances were recorded by Grimbergen, up 19·1%, Brugs, up 14·4%, and Kronenbourg 1664, up 7·1%. The mainstream Kronenbourg brand also recorded volumes up3·2%, an extremely good performance for a market leader in amature market. The overall proportion of volumes arising frompremium brands increased to 22·3% from 20·5% last year. Premium and speciality brands also retained an average 50% price premium to the mainstream brands.

During the year the success of our value strategy began to show.Having lost market share in the first half of the year there was a strong recovery in the second half.

Beamish and Foster’s were successfully launched in the on trade in October 2001 followed by Foster’s in the off trade in January2002. Production of Foster’s also began in Strasbourg.

Brasseries Kronenbourg continues to improve productivity and efficiency. This year it is investing in a new packaging line inStrasbourg and planning is well advanced for the implementation of SAP R3 in autumn 2002.

BelgiumIn Belgium, Alken Maes volumes grew by 3·0% in the off trade and held in the on trade leading to an increase in volumes of 0·9% and to an increase in market share. The Belgian market fell by 1·2%, with on trade volumes falling 2·8% and off tradegrowth of 1·2%.

The company continued to pursue a value strategy, increasing sales volumes of Grimbergen by 4%. Grimbergen maintained a 60% price premium to Maes Pils. In addition, the value propositionwas enhanced by the launch of Foster’s in Belgium in February2002.

Brasseries KronenbourgCentralcer Alken MaesS&N International

Geographic split of turnover (%)

8

12

73

7

779·8

2001

1,099·4

2002

% change+41·0


Turnover* (£m)Ongoing business

1,068·3

2001

1,099·4

2002

% change+2·9

70·5

2001

107·3

2002

% change+52·2


Operating profit* (£m)Ongoing business

98·0

2001

107·3

2002

% change+9·5

* Prior year adjusted to show comparable position



International Beer continued

PortugalIn Portugal S&N has a 49% stake in Centralcer.

In the current year Centralcer’s total volumes increased by 7·9%,growing market share and increasing exports. Volume growth wasled by the Sagres brand which grew volumes by 9·7%. Net salesprices increased by 2·6%. Centralcer continued to invest in itsbrands with marketing investment up 12%.

Since S&N acquired its stake, Centralcer has been able to pursue a value strategy, broadening and enhancing its portfolio with theaddition of Kronenbourg 1664, San Miguel, John Smith’s andGrimbergen and most recently with the launch of Foster’s inFebruary 2002. Production of Foster’s began in May 2002. Sagres is the core mainstream national brand with volumes of more than 2·7 mhl.

In a move to improve cost efficiency the plant at Coimbra wasclosed.

S&N InternationalS&N International, which is our export business, had another strongyear. Sales of Newcastle Brown Ale in the USA continued to growstrongly with a 15% increase over the previous year. This was well ahead of the market for imported brands which grew at 9%.Kronenbourg 1664 is due to be launched in the USA in autumn2002 taking advantage of the same distribution network.

In the last year S&N International has taken over Danone’s beerexport business. Switzerland and Spain are now S&N International’ssecond and third largest markets in terms of value behind the USA.In Switzerland, S&N International increased its share of the marketfrom 3·9% to 4·4%.

Managed Retail£m 2002 2001 % change

Retained estate

Turnover 989·2 920·4 7·5


Disposals

Turnover 76·6 336·0 (77·2)

Operating profit 6·0 46·9 (87·2)

Total

Turnover 1,065·8 1,256·4 (15·2)


The results for the current year are distorted by the disposals thathave taken place.

At the end of April 2001 we had 2,331* managed pubs but by the end of April 2002 this number had fallen to 1,492 as wesuccessfully completed the disposal programme announced at thestart of 2001. Turnover of the 1,492 managed outlets we retainedincreased by 7·5% and operating profit by 8·0%.

Sales grew in all parts of the retained estate. Uninvested like for like sales increased by 1·6%, a strong recovery from the decline of 1·9% in the previous year. Growth was weaker in the third quarterdue to a fall in tourism and business activity after the events of 11 September, particularly in London, but sales trends showed a good recovery in the fourth quarter.

Invested like for like sales increased by 3·7% in the first half and by 4·6% in the second half showing the importance of quality assetsin difficult times and giving us confidence that we will be able tomeet our target of 10% earnings growth.

*Including 99 Premier Lodge sites located next to pub restaurants which are counted as separate sites.

100

1997

126

1998

149

1999

170

2000

186

2001

214

2002

Newcastle Brown Ale volumesIndex: 1997 = 100

1,256·4

2001

1,065·8

2002

% change–15·2


Turnover† (£m)Ongoing business

920·4

2001

989·2

2002

% change+7·5

244·9

2001

219·8

2002

% change–10·2


Operating profit† (£m)Ongoing business

198·0

2001

213·8

2002

% change+8·0

†Current and prior years adjusted to exclude disposals



Managed Retail continued

We had strong performances from our drive brands, particularlyChef & Brewer and Barras, which saw uninvested like for like salesup 8·7% and 5·0% respectively and invested like for like sales up17·0% and 8·7% respectively.

Within the retained estate we also had 126 Premier Lodge sites atthe year end, up from 113 last year, of which 103 are located nextto a pub restaurant. The business continued to grow strongly withREVPAR (revenue per available room) increasing by 8% to £32·08(2001 – £29·57) and the average room rate by 5% to £46·36(2001 – £44·21). Occupancy also increased to 72% on a like for like basis from 68% last year.

Operating profit growth of 8·0% was only slightly ahead of salesgrowth of 7·5% due to the impact of the national minimum wageand other legislation. We would normally anticipate operating profitsgrowth to be notably faster than sales growth.

We continued our investment programme spending £41m on acquisitions and £66m on developments during the year. We opened 13 new Premier Lodges, 17 new Chef & Brewers and 41 new pub concepts. Of the total retained estate nearly 1,200 have been developed and another 300 remain to bedeveloped.

Investment is focused on brands and formats with strong market positions especially Chef & Brewer and Premier Lodge. The results of this focus are good; on the 400 sites that comprisethese drive brands, returns exceed 17% and overall returns onhistorical investment exceed 15% and are showing continuing steady improvement.

S&N Pub Enterprises£m 2002 2001 % change

Turnover 31·6 31·1 1·6


S&N Pub Enterprises operates approximately 1,100 tenanted pubs.The vast majority of these are now owned by the Royal Bank ofScotland. S&N manages these pubs on behalf of the Royal Bank,benefiting from an incentive based fee and beer supply. In future,S&N Pub Enterprises will cease to be reported as a separatedivision as its net contribution will be almost entirely represented by beer margin.

Managed Retail Uninvested like for like sales (% change)

Total Developed Undeveloped

–1·9

0·2

F01 F02

–4·6

1·62·0

0·5

Managed Retail Invested like for like sales (% change)

Total Developed Undeveloped

0·3

3·7

–4·6

4·1

5·1

0·5

F01 F02



Financial ReviewExceptional itemsBeer reorganisationIn early 2001 Scottish Courage announced a four year programmeof initiatives covering the reorganisation of all on trade operations,packaging at Fountain Brewery in Edinburgh and the supply chain.The programme is anticipated to cost £133m over four years, ofwhich £87·4m was charged last year and a further £25·6m hasbeen charged in the current year. When completed, the programmewill reduce costs by £50m per year. In addition, the restructuring ofour information technology function within the UK, incorporating theoutsourcing of all core activities to EDS and the introduction of SAPR3 software, is forecast to cost £22m. Of this amount, £13·2m hasbeen charged in the current year.

Property disposalsProperty losses in the year were £32·3m. This includes £14·1m of goodwill which had previously been written off to reserves. Thelosses were based on the net book value of the properties includingrevaluation surpluses. On an historical cost basis the loss wouldhave been £10·3m.

Interest payableInterest payable decreased by £43·9m to £96·6m. This decreasewas primarily due to lower average debt levels arising from theCenter Parcs disposal in the previous financial year and the majorpub disposals in July and December 2001. The interest charge also benefited from an overall reduction in underlying interest rates.Interest includes the charge in joint venture companies, principallyCentralcer and the Public House Investment Company. The Group’sshare of year end debt in these joint ventures was £85m.

TaxationThe tax charge, before exceptional items and amortisation ofgoodwill, of £123·9m represents an effective tax rate of 28·0%which is 2% lower than the standard rate of UK corporation tax. This is mainly caused by the release of prior-year provisions whichare no longer required.

FRS 19 (Deferred Tax) has been implemented in this financial year.The standard requires deferred tax to be provided on all timingdifferences which have originated but not reversed at the balancesheet date. Previously, deferred tax was only provided on timingdifferences which were expected to reverse in the future. Therefore,the introduction of the new standard increases the tax charge buthas no impact on cash flows.

As a result of the adoption of FRS 19, the tax charge on profitsbefore exceptional items and amortisation of goodwill has beenincreased by £18·5m, tax relief on exceptional items has beenincreased by £2·4m and a prior year adjustment has been made. This adjustment increased last year’s tax charge on profit beforeexceptional items and amortisation of goodwill by £33·1m,increased tax relief on exceptional items by £43·2m, decreased the costs of fundamental restructuring by £41·9m and decreasedshareholders’ funds by £81·4m.

Cash flowIn the year under review there was a net cash inflow of £537mresulting in a reduction in the level of borrowings to £1,186m.Gearing (net debt/equity shareholders’ funds) declined from 87% to 60% and interest was covered 5·6 times by operating profitbefore amortisation of goodwill and exceptional items.

Cash flow from ordinary operating activities decreased by £94m to £615m principally as a consequence of the sale of pubs duringthe year and the sale of the Leisure business in the previous year.The level of capital expenditure fell from £376m to £318m, mainlyas a result of these disposals. We invested £94m in our UK Beer business which includes capital costs associated with therestructuring announced last year. We also invested £40m in our International Beer business and £184m in our Pub business.The cash inflow from disposals was £642m relating principally to pub sales.



Financial Review continued

Interest paid fell substantially from £160m to £99m reflecting the fullyear impact of the Center Parcs disposal in March 2001 and the pubdisposals in July and December 2001.

The cost of dividends increased by £7m to £184m as a result of thehigher rate of dividend paid.

Foreign exchangeThe Group’s reported profits, net assets and gearing are all affectedby movements in foreign exchange rates, particularly the Euro. It isGroup policy to hedge exposure to cash transactions in foreigncurrencies for a range of forward periods but not to hedge exposureto the translation of reported profits. Assets denominated in currencyare fully matched by currency borrowings to protect shareholderfunds. At the year end 62% of gross debt was denominated inEuros with the remainder in Sterling.

During the year and at the year end Sterling remained fairly constantagainst the Euro.

Interest rate managementInterest rate exposure is managed within limits agreed by the Boardwhich stipulate that borrowings, where the rate of interest is fixed for a period in excess of 12 months, should account for no less than30% and no more than 70% of total borrowings. To achieve this theGroup enters into fixed rate loans, interest rate swaps and otherderivatives.

At 28 April 2002, 63% of borrowings were at rates fixed for periodsin excess of 12 months and 37% were at variable rates. The fixedrate borrowings had a weighted average interest rate of 6·1% and a weighted average maturity period of 9·5 years.

Treasury policy and capital structureTreasury policies are reviewed annually by the Board and aremanaged by the Group Treasury department which provides aservice to divisions including overseas subsidiaries. The policieshave as their key objective the management of financial risk throughinvestment, borrowing and foreign exchange activities in relationonly to the underlying business needs of the Group.

The Group Treasury department reports formally on a monthly basis to a Treasury Committee under the chairmanship of the GroupFinance Director and quarterly to the Board Committee on Treasurywhich also includes two non-executive directors. It is subject to regular compliance audits by the Group Review and Auditdepartment and an annual review by the Group’s external auditors.

The Group’s policy is to maintain a mix of bank and capital marketborrowings that provide sufficient resources to meet its financingrequirements over the medium term.

Accounting policiesFRS 19 (Deferred Tax) has been implemented in this financial year.The impact of FRS 19 was mentioned earlier in the section on taxation.

Pensions Pensions are accounted for in the financial statements under SSAP24 (Accounting for Pension Costs) but additional disclosures aregiven under the transitional rules of the new accounting standardFRS 17 (Retirement Benefits). The timetable for implementing FRS 17 is currently under review by the Accounting StandardsBoard and it is unclear when FRS 17 will be fully implemented.Additional disclosures, in line with the transitional rules, can befound in note 5 to the accounts on page 28.

The FRS 17 disclosures include a snapshot of pension schemeassets and liabilities using open market asset values and discountrates that applied on the last day of the financial year. As thissnapshot is based on conditions on a specific day, the netasset/liability is likely to be volatile. The net pension liability at 28 April 2002 was £187·6m. FRS 17 will also affect reportedprofits and if FRS 17 had applied in 2002 then the net pensioncharge would have increased by £29m.

FRS 17 has no impact on the cash contributions to the pensionschemes which are based on actuarial valuations prepared by ourexternal actuaries and take into account the long term nature ofpension schemes.



Financial Review continued

HartwallIn February 2002 we announced the acquisition of Hartwall for£1·2bn through a recommended share offer of 3·152 new Scottish& Newcastle shares for each share in Hartwall. Hartwall familyshareholders, who together represented 48·5% of the share capitaland 83·5% of the voting rights in Hartwall, had given irrevocableundertakings to accept the offer. We launched the exchange offeron 25 April 2002 and following an Extraordinary General Meeting of Scottish & Newcastle shareholders to approve the transaction,the acquisition was declared unconditional on 16 May 2002. Onclosure of the exchange offer on 28 May 2002, we had receivedacceptances representing 74·2% of Hartwall share capital.

On 31 May we launched a mandatory cash offer of Euro 28·5 perHartwall share and restated our share offer at the same exchangerate of 3·152 Scottish & Newcastle shares for each Hartwall share.The mandatory offer closed on 1 July 2002 and by that date we hadreceived acceptances representing 98·6% of the share capital and99·5% of the voting rights in Hartwall in exchange for 205·5 millionnew Scottish & Newcastle shares and Euro 1·7m cash.

DanoneIn July 2000 the Group acquired control of Danone’s beer business(Brasseries Kronenbourg and Alken Maes). Under the terms of theacquisition contract Danone had the option to sell its remaininginterests in the beer business, particularly the beer brands, toScottish & Newcastle. Upon exercise of the option Danone isrequired to sell to Scottish & Newcastle its entire interest in the Danone subsidiary, FAS.

On 28 June 2002 Danone gave notice that the put would beexercised at the end of September 2002. Accordingly, after the end of September 2002 Scottish & Newcastle will acquire Danone’sremaining interests in the beer business for Euro 2·1bn and FAS for Euro 229m.

In addition, on 18 July 2000, as part of the acquisition of BrasseriesKronenbourg and Alken Maes, Danone was issued with warrants tosubscribe for 25 million ordinary shares in Scottish & Newcastle at£6 per share. The warrants are exercisable at any time up to 18 July2003. During the year, we purchased rights over 14 million of thewarrants for £2·8m, effectively cancelling them and resulting in again through reserves of £11·4m.



Group results

A detailed analysis of the results for the year is provided in note 2 to the

accounts.

Dividends

The directors are recommending a final dividend of 19·41p per share to be

paid on 2 September 2002 to ordinary shareholders on the register at close

of business on 16 August 2002. This would make a total ordinary dividend

for the year of 29·29p per share.

Business review and future developments

The Report of the Directors should be read in conjunction with the

Operating and Financial Review on pages 1 to 8 and the Annual Review,

which contain details of the Group’s trading during the year and an

indication of likely future developments.

AGM special business

Details of the special business to be proposed at the AGM are contained

in the Circular Letter to shareholders accompanying the Company’s Annual

Review. Special business comprises a proposal to increase the maximum

annual remuneration for non-executive directors, the renewal of the directors’

allotment authority and permission to make non pre-emptive issues of ordinary

shares in limited circumstances and the renewal of the authority for the

market purchase of Company shares. It also includes proposals to approve

amendments to the Company’s executive share option schemes.

Share capital

Details of share movements during the year, including shares issued and

options granted under the employee share schemes and shares and options

held by the Scottish & Newcastle employee share trusts, are contained in

note 24 to the accounts.

Payment of suppliers

The Company agrees terms and conditions with suppliers before business

takes place. The Company’s policy and practice is to pay agreed invoices

in accordance with the terms of payment. At the year end the amount owed

to trade creditors by the Company was equivalent to 28 days of purchases

from suppliers.

Notifiable interests

As at 2 July 2002, the Company has been notified of the following interests

representing 3% or more of the issued ordinary share capital of the

Company:

AXA S.A. 3·7%

Anna Therman 3·3%

T. Hemmings Family Interests 3·2%

Peter Hartwall 3·1%

Hartwall Bolagen Ab 3·1%

CIE Gervais Danone SA 3·0%

Report of the Directors

Directors

The names of the current directors of the Company are set out in the

Annual Review.

Dr Iain Anderson, Dr Neville Bain, Mr Ian McAllister and Mr Franck Riboud

retire by rotation and, being eligible, offer themselves for re-appointment.

Mr Erik Hartwall, Mr Neville Isdell, Mr Bob Ivell and Mr Henrik Therman,

who have been appointed directors since the last AGM will, as required

by the Company’s Articles of Association, retire and offer themselves for

re-appointment at the AGM. Mr Ivell has a service contract which is

terminable on one year’s notice; none of the other directors proposed

for re-appointment has a service contract.

Mr Franck Riboud is Chairman and Chief Executive Officer of Groupe

Danone, which owns 3·0% of the Company’s issued ordinary share

capital and which has an interest in the Group’s UK and international

beer businesses pursuant to the agreement entered into on 18 May 2000

combining the beer interests of the Group with those of Groupe Danone.

Mr Erik Hartwall and Mr Henrik Therman are both Board members and former

shareholders of Oyj Hartwall Abp, which the Company acquired pursuant to

an exchange offer announced on 14 February 2002. Otherwise, no director

had, during or at the end of the year, any material interest in any contract of

significance in relation to the Group’s business.

The interests of the directors in the ordinary shares of the Company are set

out in the Corporate Governance Report on pages 10 to 17.

Employee relations and involvement

The Company is firmly committed to the principles of employee involvement.

A full range of briefing, consultation and bargaining arrangements have been

developed in all parts of the Group and these are subject to continuous

review and improvement.

Disabled persons

Full and fair consideration has been given to applications for employment

made by disabled persons and appropriate training, career development

and promotion have been provided in all cases.

Political and charitable contributions

During the financial year the Group made charitable contributions totalling

£525,000 (2001 – £524,000). The Group made no political contributions

during the year or in the previous financial year.

Auditors

A resolution to re-appoint Ernst & Young LLP as the Company’s auditors

and to authorise the Board to set their remuneration will be put to the

forthcoming Annual General Meeting.

By Order of the Board

Peter Kennerley

Secretary

2 July 2002



Compliance

The Company remains committed to high standards of corporate governance

and manages the affairs of the Company in accordance with the Principles

of Good Governance and Code of Best Practice (the ‘Combined Code’)

issued by the Financial Services Authority as an appendix to its Listing Rules.

The Combined Code was derived from the Cadbury, Greenbury and Hampel

Committee reports.

Developments during the year

On 28 June 2001, Mr John Dalgety, Chairman of the former Leisure Division,

stepped down from the Board but remained an employee until 31 October

2001 during which time he was responsible for a number of outstanding

issues relating to the former Leisure Division. On 13 July 2001, Mr Derek

Wilkinson retired as Group Finance Director and Mr Ian McHoul was

appointed in his place. On 27 September 2001 Mr Bob Ivell, Managing

Director of S&N Retail, was appointed to the Board as Chairman of

S&N Retail and on 3 December 2001 it was announced that Mr Graham

Kendrick, Chairman of Scottish Courage, would be retiring in September

2002. Mr Neville Isdell was appointed a non-executive director on

29 November 2001 and Mr Erik Hartwall and Mr Henrik Therman joined

the Board as non-executive directors on 16 May 2002 upon the Company’s

offer for Oyj Hartwall Abp becoming unconditional.

On 24 May 2002 it was announced that Mr Guy Dickson, Group Managing

Director, had indicated his intention to retire later in the year and that his

post would be filled with the appointment of a new Chief Executive. It was

also announced that Sir Brian Stewart would continue as Chairman, but

would assume a part-time role when the new Chief Executive is established

in the post.

The Board

The Board is headed by an Executive Chairman and comprises the Group

Managing Director, five further executive directors and eight non-executive

directors. The Board meets regularly throughout the year with ad hoc

meetings as necessary. Meetings are held at the head office in Edinburgh

as well as in divisional offices. There is an agreed list of matters which are

always dealt with by the Board, such as the approval of the group strategy

plan and group budget. Major acquisitions and disposals, as well as

major capital spend, are authorised by the Board and are also subsequently

monitored by the Board after authorisation. The Board approves the issue

of final and interim results and the annual and interim accounts.

There is an agreed procedure for directors to take independent legal advice.

The Company Secretary is responsible for ensuring that Board procedures

are followed and all directors have direct access to the Company Secretary.

Board agendas are agreed between the Chairman and all appropriate

directors and all Board members are free to raise other issues at Board

meetings. All directors bring their own independent judgement to all major

matters affecting the Group and the views of executive directors are not

limited to those operational or functional areas for which directors have

prime responsibility. Board papers are sent to directors in sufficient time

before Board meetings and any further back-up papers and information

are readily available to all directors on request to the Company Secretary.

The Chairman ensures that non-executive directors are properly briefed

Corporate Governance

on any issues arising at Board meetings and non-executive directors have

access to the Chairman at any time.

An introduction programme to the Group which covers, in particular, the

trading operations of the divisions and continues with visits to those divisions

throughout the year, is arranged for all new directors.

The roles of Chairman and Group Managing Director are separated.

The Chairman’s role includes maintaining the strategic impetus of the Group

and developing the appropriate organisational structure for an international

business. The Group Managing Director is responsible for day to day

operational affairs, particularly the challenges of integrating new acquisitions,

and chairs the Group Management Board.

The non-executive directors are independent of management. Mr Franck

Riboud is Chairman and Chief Executive Officer of Groupe Danone, which

owns 3·0% of the Company’s issued ordinary share capital and which has

an interest in the Group’s UK and international beer divisions pursuant to

the agreement entered into on 18 May 2000 combining the beer interests

of the Group with those of Groupe Danone. Mr Erik Hartwall and Mr Henrik

Therman are both Board members and former shareholders of Oyj Hartwall

Abp which was acquired by the Company pursuant to an exchange

offer announced on 14 February 2002. Otherwise, the non-executive

directors have no material business or other relationship with the Company.

Biographical details of the non-executive directors are set out in the Annual

Review. The Board believes that the complementary roles of executive and

non-executive directors, who all have considerable experience in senior

appointments in other companies, works well and allows for well informed

and broadly based debate. Mr McAllister has been designated the senior

non-executive director to whom any concerns can be conveyed.

Group Management Board

The Group Management Board is responsible for ensuring that each

of the Group’s businesses are managed effectively and that the operational

objectives of the Group as set by the Main Board are achieved. Its role

includes the preparation of the group budget for approval by the Main

Board, management of business performance to achieve the group

budget, establishing and maintaining reporting systems providing clear and

consistent information on all aspects of business performance and ensuring

that the necessary mechanisms are in place to achieve effective inter-

divisional co-ordination, for example in purchasing, beer brand marketing

and career development planning. It also approves major items of capital

expenditure within limits authorised by the Main Board. The Group

Management Board meets each month and is chaired by the Group

Managing Director. Its membership comprises the heads of the Group’s

major businesses and functions. Details of its current members are set

out in the Annual Review.

Nominations Committee

Appointments to the Board are approved by the Board as a whole. However,

it is the role of the Nominations Committee to make recommendations to the

Board in respect of the appointment of new executive or non-executive

directors. The Committee is a standing committee of the Board and

comprises a majority of non-executive directors. Dr Iain Anderson is

Chairman of the Nominations Committee. The process by which the



Corporate Governance continued

Nominations Committee may bring candidates to the Board has been agreed

by the Board. The Company Secretary acts as secretary to the Nominations

Committee.

Newly appointed directors are subject to election by shareholders at

the AGM following appointment. All directors must submit themselves for

re-election at least every three years, and in any event, excluding any newly

appointed directors, one third of the Board are subject to re-election at each

AGM and will be brought forward by rotation. Non-executive directors are

appointed by the Board for an initial term of three years, renewable with the

Board’s agreement for a further term of three years, but subject to re-election

by shareholders on the normal rotation basis.

Shareholders

The Company has a regular dialogue with institutional shareholders

throughout the year, other than during close periods. The Company also

encourages communication with private shareholders throughout the year

and welcomes their participation at shareholder meetings. In addition to the

Chairman’s Statement at the AGM, a trading presentation to shareholders

is given and details of the Company’s trading activities are on display at the

AGM. All Board members attend the AGM and, in particular, the Chairmen

of the Audit, Remuneration and Nominations Committees are available to

answer questions. Separate resolutions are proposed on substantially

separate issues and the agenda at the AGM includes a resolution adopting

the Annual Report and Accounts.

Notice of the AGM is sent to shareholders at least twenty working days

before the meeting and details of the proxy votes for and against each

resolution are announced after the result of the hand votes.

Accountability and audit

The Board acknowledges that it has overall responsibility for the Group’s

systems of internal control and for reviewing their effectiveness. While these

systems are intended to manage rather than eliminate the risk of failure to

achieve business objectives, it should be recognised that such systems

can only provide reasonable, not absolute, assurance against material

misstatement or loss.

As prescribed in the guidance of the Turnbull Committee on internal control,

an ongoing process has been established for identifying, evaluating and

managing the significant risks faced by the Group. This process has been

in place throughout the financial year and up to the date of the approval of

the financial statements. The process is regularly reviewed and discussed

at the Audit Committee and amended as required.

As part of the ongoing process each division reviews and evaluates the risks

to the achievement of its strategic objectives. The Board also identifies those

significant risks which might preclude achievement of corporate objectives.

Having recognised these risks, mitigating controls are then identified together

with any action necessary to enhance the effectiveness of those controls.

The profiles of significant risk at divisional and corporate level are subject

to regular review and update as an integral part of the Group’s integrated

performance management process.

The Board obtains its assurance on the effectiveness of the control system

from regular reports from the Chairman of the Audit Committee, management

reports and reports by the internal and external auditors.

The Group has an internal audit function, Group Review and Audit, which

reports to the Audit Committee. The annual audit plan, which is risk-based,

is approved by the Audit Committee and covers business processes and

internal controls in all divisions and functions. Reports are produced for each

audit undertaken and there is an effective follow-up system for ensuring the

implementation of agreed action. There is an audit function within the Retail

Division for monitoring controls at operating level and the Head of Group

Review and Audit provides a direct link between that divisional function

and the Audit Committee.

A comprehensive control self assessment exercise, conducted on an

annual basis, complements the work of Group Review and Audit. This

exercise is subject to regular enhancement and requires management to

assess the effectiveness of their fundamental operating controls over all

aspects of their operations, not just financial controls. Group Review and

Audit will test the validity of the latest responses on their next visit to the

location. At the end of the financial year heads of businesses/functions

sign a letter of representation confirming that controls have been applied

throughout the year.

The Board has not conducted a risk assessment or control self assessment

this year in Central de Cervejas SA, in which Scottish & Newcastle has a

minority shareholding.

Audit Committee and auditors

The Board Audit Committee consists entirely of non-executive directors and

comprises Dr Neville Bain (Chairman), Dr Iain Anderson, Sir Angus Grossart,

Mr Ian McAllister and Mr Henrik Therman. Its primary responsibility is to

monitor the quality and reliability of the financial information used by the

Board. The Audit Committee has written terms of reference and the findings

and recommendations of the Committee are reported directly to the Board

by the Chairman of the Committee. The external auditors are invited to attend

Committee meetings, along with the Group Finance Director and the

Head of Group Review and Audit. The external auditors have a standing

opportunity to meet with members of the Audit Committee alone if so

required. The Audit Committee, in addition to reviewing the annual financial

statements of the Group, also reviews the effectiveness of the systems

of accounting and internal control. It reviews the appointment and terms

of reference of the external auditors and their fees and also monitors

the effectiveness of the internal audit function. It keeps under review the

level of non-audit services provided for the Group by the external auditors.

The Company Secretary acts as secretary to the Audit Committee.

Going concern

After making enquiries the directors have a reasonable expectation that the

Group has adequate resources to continue operating for the foreseeable

future. For this reason, the going concern basis was adopted in preparing

the accounts.



Corporate Governance – Board Remuneration Report

Composition and role of the Remuneration Committee

The directors confirm that this report has been drawn up in accordance

with Schedule B of the Combined Code.

The Remuneration Committee consists entirely of non-executive directors

and comprises Mr Ian McAllister as Chairman, Dr Iain Anderson, Dr Neville

Bain and Mr Neville Isdell. It meets at least three times a year and is

responsible for setting all elements of executive directors’ remuneration

packages. The Committee is also responsible for establishing the annual

targets for the Company’s results-related bonus scheme and granting

options under the Company’s executive share option schemes. The

Company Secretary acts as secretary to the Remuneration Committee.

In setting the remuneration package for executive directors, the Committee

aims to ensure that the total package including benefits is competitive with

companies of similar size, activity and complexity and that accordingly it will

attract and retain executive directors with the skills to maximise returns for

shareholders. The Committee receives advice from independent remuneration

consultants including a comparability assessment against other companies

of a similar size and complexity. The Committee believes that it is important

that a significant part of the remuneration package should be clearly linked

to measurable company performance from which shareholders may benefit.

Accordingly, the package attempts to balance base salary with both short

and long term performance incentives. The Committee keeps the total

remuneration package and the balance of its various elements under

regular review. During the course of the year it undertook a thorough review

which has resulted in a change to the executive directors’ bonus level and

a proposal to shareholders to amend the executive share option schemes.

This review also took into account pay and employment conditions

throughout the Group as a whole.

The Committee consults with the Chairman and, where appropriate, other

members of the Board about its remuneration proposals. The Company

also maintains contact as necessary with its principal shareholders on

remuneration and benefit matters, as it does on other matters.

Remuneration package for executive directors

Base salary

Individual base salaries are reviewed annually by the Remuneration

Committee and take into account relative performance and any responsibility

changes, as well as external independent advice as to salary levels

appropriate to each director’s responsibilities within the Group in

the context of comparable organisations.

Results-related bonus scheme

The maximum bonus payable to executive directors under the scheme for the

year to 28 April 2002 is limited to 50% of base salary and the level of bonus

is related to the two objectives of achieved growth in earnings per share

and economic profit (operating profit net of tax less a charge for the use

of capital). For executive directors who are Divisional Chairmen, economic

profit relates in part to the relevant divisional economic profit as well as

that of the Group. Following the review by the Remuneration Committee

the maximum bonus of executive directors will be increased during the

forthcoming year to 75% of base salary with 50% of base salary paid for

target performance. Bonuses will, in future, be based solely on economic

profit performance against the target(s) set by the Remuneration Committee.

At Group level, for the maximum bonus to become payable, earnings

per share and economic profit were required to be 44·9p and £98·6m

respectively. The figures achieved for the year were 43·7p in respect of

earnings per share and £75·9m in respect of economic profit. The results

achieved led to a bonus, paid at Group level, of 66% of the maximum.

Directors may invest up to half of any bonus payable in the Company’s

shares and, provided a director remains with the Group for a further three

years, additional matched shares may be granted to him. The number of

matched shares will be dependent on the Group’s performance over the

three year period measured against two separate criteria. If total shareholder

return is in the top quartile of a comparator group of approximately

twenty companies, the Company will award matched shares equal to 75%

of the shares purchased by the director; if in the second quartile, 50%;

if in the third quartile, 25%; and if in the bottom quartile, nil. In addition

to any matched shares awarded under that criterion, if the Group’s growth

in earnings per share is greater than the increase in the RPI by more than

15%, the Company will award matched shares equal to 75% of the shares

purchased by the director; if by 15% or less but more than 9%, 50%; if by

9% or less but more than 3%, 25%; and if by 3% or less, nil.

Pension and life assurance

Executive directors participate in a Company funded pension plan which

provides a pension of 1/30th of salary at retirement for each year of service

up to a maximum of twenty years. Life assurance is provided at four times

salary.

Three executive directors, Mr Bob Ivell, Mr Ian McHoul and Mr John Nicolson

are subject to the earnings cap. In the case of Messrs. McHoul and Ivell

identical benefits above the earnings cap are provided through an unfunded

supplementary plan. Mr Nicolson has elected to opt out of the unfunded plan

from 1 May 2001 and the Company pays him an allowance to make his own

arrangements in excess of the earnings cap.

Normal retirement age is 60. In the event of earlier retirement, other than on

the grounds of ill-health, the pension is subject to a reduction by a factor

recommended by the scheme actuary to reflect the increased cost of an

immediate pension; no reduction is applied above age 58 provided retirement

is with Company consent. In line with the provisions previously in place

for Courage senior executives, no reduction will be applied for Mr Graham

Kendrick on retirement at age 55 or above. Upon the death of a director,

a pension is payable to his spouse of one half of his own pension (including,

in the case of death in service, allowance for prospective service to age 60).

In respect of that part of a pension in the course of payment attributable to

service after 5 April 1997, pension increases are guaranteed to be at the rate

of price inflation up to a maximum of 5% per annum. There is a practice of

discretionary pension increases from the scheme at the same rate for pension

in respect of earlier service. Directors make no contribution towards the cost

of a pension but may make additional voluntary contributions.



Pension entitlement is calculated by reference to base salary only and neither

annual bonuses nor benefits in kind are pensionable. All pension benefits are

subject to Inland Revenue limits and other statutory rules. The benefits for

Mr Kendrick and Mr Nicolson in respect of their service prior to 1 January

1996 reflect the pension arrangements previously operated by Courage

and differ in some respects from those described above.

Service as a non-executive director is not pensionable. The pension

entitlements of individual directors are shown later in this report.

Other benefits

Other benefits shown later in this report in the table of individual directors’

remuneration comprise the taxable values in respect of the provision of a

company car and fuel, medical insurance, a beer and wines and spirits

allowance, subscriptions to professional and trade bodies and the

appropriation of shares under the profit sharing scheme.

Share schemes

Executive directors may participate in the Company’s share incentive plan,

executive share option and savings-related share option schemes.

Executive directors participate in both the 1984 and the 1994 executive

share option schemes. The 1984 scheme expired in 1994 and no further

options can be granted under it but options may still be exercised under

the 1984 scheme for a period of ten years from the original date of grant.

A proportion of options under the 1984 scheme, granted between 17 January

1992 and 28 July 1994, were granted at a discount of 15% to the then market

price, but may only be exercised at this discounted price if growth in the

Company’s earnings per share is equal to or greater than the increase in the

RPI plus 10% over any five consecutive financial years of the Company prior

to exercise.

Options under the 1994 scheme are granted at the market price at the

date of grant and not at a discount. Options will not normally be exercisable

at the earliest before a period of three years from the date of grant. Options

granted before 1999 could be granted to executive directors up to a total

value of four times earnings. The initial grant of options would normally be

made over a three year period. Thereafter further options could be granted

to maintain the value of options at the date of grant at a figure equivalent

to four times earnings. Such options may only be exercised if the Company’s

growth in earnings per share is equal to or greater than the increase in the

RPI plus 6% over any three consecutive financial years of the Company

prior to exercise.

With effect from August 1999, the 1994 scheme was amended so that

grants of options can be made on an annual basis at a grant figure equal to

a director’s gross annual salary, but excluding any bonuses or other benefits.

Options may only be exercised if the Company’s growth in earnings per share

is equal to or greater than the increase in the RPI plus 9% over three

consecutive financial years of the Company within the five financial years

beginning with the year during which the grant is made. Options which have

not satisfied the performance condition within the five year period will lapse.

Options granted before 1999 have a full period of ten years in which to

achieve the performance condition.

It is proposed that the rules of the 1994 scheme be amended to increase

the maximum annual grant of options to three times a director’s gross annual

salary with a revised performance condition for exercise. This performance

condition is that 100% of the options may be exercised if, over the three

years following the grant, growth in earnings per share is equal to or greater

than the increase in the RPI plus 15%. If growth in earnings per share is

greater than RPI plus 9% then one third of the options may be exercised

with a linear scale in between. Subsequent retests will be made over four

and five years if 100% of the options have not already vested. The Company

will be seeking the approval of shareholders to these amendments at the

Annual General Meeting.

Options granted under the savings-related share option scheme are not

subject to a performance condition but require a savings contract to be

entered into for three or five years and for options to be exercised within

six months of the termination of that savings contract. Options under the

savings-related share option scheme are available generally to all eligible

employees and can be granted at a discount of up to 20% of the market

price at the time of grant. There is a current maximum limit on savings of

£250 per month.

Under the share incentive plan, in which all eligible employees participate,

shares may be appropriated to executive directors up to a current maximum

initial market value in a tax year of £3,000. These shares are held by the

Trustees of the scheme and can be transferred tax free to participants

after a period of three years. The Company plans to introduce a savings

and matching element to the share incentive plan during the course of the

next financial year, which will apply to executive directors. Employees will

be able to contribute up to £1,500 per annum to buy shares and will receive

a free share from the Company for every two shares they buy.

Service contracts

Notice periods contained in the service contracts of all continuing and

future executive directors are one year. In the case of the recruitment of

an executive director from outside the Group, the Board may, if necessary,

offer an initial contract period of two years after which the notice period

would revert to the standard one year’s notice. Where an appointment to

the Board is made from within the Group, and the director concerned has

an existing service contract with a notice period of greater than one year,

the notice period will be reduced to one year, but expiring not earlier than

the end of the notice which applied to the director at the time of his

appointment.

In the event of the termination of any service contract or appointment, the

Board would ensure that legally appropriate mitigation factors would be fully

applied to any compensation that may be payable. There are no provisions

for pre-determined compensation in service contracts.

Non-executive directors are appointed for an initial term of three years,

renewable for a further term of three years.

Shareholder approval

Resolutions will be proposed at the Company’s Annual General Meeting

seeking shareholder approval of this report and, separately, the amendments

to the Company’s executive share option schemes referred to above.

Corporate Governance – Board Remuneration Report continued




Directors’ remuneration and interests

For the financial year ended 28 April 2002

Total emoluments2002 2001£000 £000

Fees to non-executive directors 183 147

Salaries and other benefits 2,748 2,400

Results-related bonuses 755 482

3,686 3,029

Individual emolumentsSalaries and fees Bonuses Other benefits Total emoluments

2002 2001 2002 2001 2002 2001 2002 2001Notes £000 £000 £000 £000 £000 £000 £000 £000

Chairman

Sir Brian Stewart 629 566 208 113 32 24 869 703

Sir Alistair Grant (to 22/01/2001) – 54 – – – 1 – 55

Executive directors

J A Dalgety (to 28/06/2001) 1 132 279 33 109 6 16 171 404

G G Dickson 461 413 152 92 26 17 639 522

J H W Fairweather 254 242 84 47 23 13 361 302

I G Hannah (to 29/12/2000) – 220 – – – 15 – 235

R L Ivell (from 27/09/2001) 164 – 65 – 5 – 234 –

G D Kendrick 304 120 64 44 25 8 393 172

I P McHoul (from 13/07/2001) 228 – 75 – 7 – 310 –

J R Nicolson 2 359 109 74 21 19 6 452 136

D M Wilkinson (to 13/07/2001) 61 282 – 56 13 15 74 353

Non-executive directors

Dr J I W Anderson 37 34 – – – – 37 34

Dr N C Bain 37 34 – – – – 37 34

Sir Angus Grossart 3 36 29 – – – – 36 29

E N Isdell (from 29/11/2001) 14 – – – – – 14 –

I G McAllister 4 31 29 – – – – 31 29

F R M Riboud 28 21 – – – – 28 21

Totals 2,775 2,432 755 482 156 115 3,686 3,029

Notes

1. J A Dalgety Salaries and fees include £85,000 received as compensation for loss of office.

2. J R Nicolson During the year Mr Nicolson elected to opt out of the unfunded supplementary pension plan and instead received an allowance of

£87,000 to make his own arrangements for pensions in excess of the earnings cap. This payment is included in salaries and fees.

3. Sir Angus Grossart Emoluments paid to Noble Grossart Ltd.

4. I G McAllister Emoluments paid to Ford Motor Company Limited to 28 February 2002.




Pension entitlements

The pension entitlements earned by the current directors during the year were as follows:Accumulated total

accrued pensionIncrease in accrued Accumulated total (after adjusting for pension during the accrued pension inflation at 1·7%)

Complete years of year to 28 April 2002 at 28 April 2002 at 29 April 2001Note Age service at 28 April 2002 £000 £000 £000

Sir Brian Stewart 57 25 36 419 383

G G Dickson 56 23 29 307 278

J H W Fairweather 55 32 9 169 160

R L Ivell 1 50 9 16 85 69

G D Kendrick 55 26 24 207 183

I P McHoul 1 42 3 10 29 19

J R Nicolson 48 9 6 57 51

Note

1. The pensions shown for Mr Ivell and Mr McHoul are those for the year rather than the period as an executive director.

Mr Wilkinson retired on 13 July 2001 with a pension of £187,000 per annum which included an adjustment for early retirement prior to age 58.

Mr Dalgety retired on 31 October 2001 with a pension of £172,000 per annum which included a benefit from special contribution from the company

of £318,000.

Shares

The beneficial interests of the directors in the 20p ordinary shares in the Company at 28 April 2002 and 29 April 2001 or later date of appointment are

shown below.Fully paid ordinary shares

2002 2001

Dr J I W Anderson 3,188 3,188

Dr N C Bain 6,000 6,000

G G Dickson 70,266 68,746

J H W Fairweather 181,614 177,044

Sir Angus Grossart – –

E N Isdell – –*

R L Ivell 2,753 2,286*

G D Kendrick 8,384 6,893

I G McAllister 378 316

I P McHoul 23,630 13,510*

J R Nicolson 18,441 15,172

F R M Riboud – –

Sir Brian Stewart 210,083 201,913

* From date of appointment.

Certain of the interests in the fully paid ordinary shares include shares held as participants in the profit sharing scheme. Included in the 2002 figures above

are 2,732 shares purchased by Mr Fairweather, 4,601 shares purchased by Mr McHoul and 6,550 shares purchased by Sir Brian Stewart through the

results-related bonus scheme.

Executive directors also have an interest as potential beneficiaries, along with other employees, in 2·6 million ordinary shares held by the Trustees of the

Scottish & Newcastle employee share trusts at 28 April 2002.




Executive and savings-related share optionsOptions held Options exercisable

at 28 April 2002 at 28 April 2002

Weighted Weightedaverage averageexercise Dates exercisable exercise

Number price (pence) Earliest Latest Number price (pence)

Option holdings

G G Dickson 346,888 571 16/12/96 11/07/11 109,195 603

J H W Fairweather 192,046 584 17/08/98 11/07/11 43,999 651

R L Ivell 119,943 553 28/07/97 11/07/11 21,322 581

G D Kendrick 213,719 590 17/08/98 11/07/11 78,278 632

I P McHoul 140,315 593 12/10/01 11/07/11 – –

J R Nicolson 191,315 576 17/08/98 11/07/11 73,455 633

Sir Brian Stewart 465,906 568 16/12/96 11/07/11 128,522 579

Options grantedduring the year

Savings- Options OptionsOptions Executive related exercised lapsed Optionsheld at share option share option during during held at

29 April 2001 scheme scheme year year 28 April 2002

Movement in option holdings

J A Dalgety 226,353 – – – 3,248 223,105†

G G Dickson 264,031 82,857 – – – 346,888

J H W Fairweather 147,052 46,190 455 352 1,299 192,046

R L Ivell 119,150* – 793 – – 119,943

G D Kendrick 158,481 55,238 – – – 213,719

I P McHoul 140,315* – – – – 140,315

J R Nicolson 145,040 49,523 – – 3,248 191,315

Sir Brian Stewart 351,621 114,285 – – – 465,906

D M Wilkinson 220,060 – – – – 220,060†

* From date of appointment.† At date of retirement.

Options granted to directors during the year under the executive share option scheme were granted at an option price of 525p which was the market value

at the date of grant. Options were granted during the year to Mr Fairweather and Mr Ivell under the savings-related share option scheme at an option price

of 417p. The market price at the date of grant was 553p.

The aggregate gains made by directors on the exercise of options during the year totalled £14 (2001 – £33,825).

The market price of the Company’s ordinary shares at 28 April 2002 was 618·00p. The highest and lowest market prices during the year to 28 April 2002

were 628·00p and 481·50p respectively. The Register of Directors’ Interests, which is open to inspection, contains full details of directors’ shareholdings

and options.




Share interest disclosure

Save as disclosed above, no director had an interest in any other shares

or debentures of the Company or its subsidiaries and no change occurred

in the interests of directors between 28 April 2002 and 2 July 2002.

External appointments

The Company encourages its executive directors to become non-executive

directors of other leading companies as it believes that the exposure to other

companies and the wider knowledge and experience gained benefits the

Company. Subject to there being no conflict of interest and to the time spent

being reasonable, executive directors are permitted with Board agreement to

take up two such appointments. The fees for appointments may, at the

discretion of the Board, be retained by the director.

Non-executive directors

Non-executive directors receive a fee only plus their expenses for attending

Board and other Company meetings. Small additional fees are paid where

a non-executive director is a member of, or chairs, a Board Committee.

They do not receive any other benefits from the Company and their fees are

set by the Board (excluding non-executive directors) within the aggregate

limit agreed by shareholders.

Statement of Directors’ Responsibilities

The directors are required by law to prepare financial statements which give

a true and fair view of the state of affairs of the Company and of the Group

as at the end of the financial year and of the profits for that year. They are

also responsible for ensuring that proper and adequate accounting records

have been kept and that appropriate procedures have been followed

for safeguarding Group assets and preventing and detecting fraud and

other irregularities. Appropriate accounting policies which follow generally

accepted accounting practice have been applied consistently in the

preparation of the financial statements and reasonable and prudent

judgments and estimates have been made. The financial statements

have been prepared on a going concern basis.



We have audited the Group’s financial statements for the year ended

28 April 2002 which comprise the Group Profit and Loss Account, Group

Balance Sheet, Company Balance Sheet, Group Cash Flow Statement,

Statement of Total Recognised Gains and Losses, Note on Historical Cost

Profits and Losses, Reconciliation of Movement in Shareholders’ Funds and

the related notes 1 to 38. These financial statements have been prepared on

the basis of the accounting policies set out therein.

Respective responsibilities of directors and auditors

The directors’ responsibilities for preparing the Annual Report and the

financial statements in accordance with applicable United Kingdom law

and accounting standards are set out in the Statement of Directors’

Responsibilities.

Our responsibility is to audit the financial statements in accordance with

relevant legal and regulatory requirements, United Kingdom Auditing

Standards and the Listing Rules of the Financial Services Authority.

We report to you our opinion as to whether the financial statements

give a true and fair view and are properly prepared in accordance with the

Companies Act 1985. We also report to you if, in our opinion, the Report of

the Directors is not consistent with the financial statements, if the Company

has not kept proper accounting records, if we have not received all the

information and explanations we require for our audit, or if information

specified by law or the Listing Rules regarding directors’ remuneration

and transactions with the Group is not disclosed.

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 form an opinion on the effectiveness

of the Group’s corporate governance procedures or its risk and control

procedures.

We read other information contained in the Annual Report and consider

whether it is consistent with the audited financial statements. This other

information comprises the Report of the Directors, Operating and Financial

Review, Corporate Governance Statement, Five Year Record and

Shareholder Information. We consider the implications for our report if we

become aware of any apparent misstatements or material inconsistencies

with the financial statements. Our responsibilities do not extend to any

other information.

Independent Auditors’ ReportTo the members of Scottish & Newcastle plc

Basis of audit opinion

We conducted our audit in accordance with United Kingdom Auditing

Standards issued by the Auditing Practices Board. An audit includes

examination, on a test basis, of evidence relevant to the amounts and

disclosures in the financial statements. It also 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 to the 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 of the Group as at 28 April 2002 and of the

profit of the Group for the year then ended and have been properly prepared

in accordance with the Companies Act 1985.

Ernst & Young LLP

Registered Auditor

Edinburgh

2 July 2002

Notes

The maintenance and integrity of the Scottish & Newcastle plc web site

is the responsibility of the directors; the work carried out by the auditors

does not involve consideration of these matters and, accordingly, the

auditors accept no responsibility for any changes that may have occurred

to the summary financial statement since it was initially presented on the

web site. Legislation in the United Kingdom governing the preparation

and dissemination of financial statements may differ from legislation

in other jurisdictions.


20 Group Profit and Loss Account21 Group and Company Balance Sheets22 Group Cash Flow Statement23 Statement of Total Recognised Gains and Losses23 Note on Historical Cost Profits and Losses23 Reconciliation of Movement in Shareholders’ Funds24 Notes to the Accounts43 Five Year Record44 Shareholder Information


20012002 Restated

Before Beforeamortisation Amortisation amortisation Amortisation

of goodwill of goodwill of goodwill of goodwilland excep- and excep- and excep- and excep-

tional items tional items Total tional items tional items TotalNotes £m £m £m £m £m £m

Turnover: Group and share of joint ventures 2 4,199·2 – 4,199·2 4,353·9 – 4,353·9

Share of joint ventures (81·0) – (81·0) (28·7) – (28·7)

Group turnover 4,118·2 – 4,118·2 4,325·2 – 4,325·2

Continuing operations 4,118·2 – 4,118·2 4,015·8 – 4,015·8

Discontinued – – – 309·4 – 309·4

Net operating costs 4 (3,598·2) (61·6) (3,659·8) (3,768·9) (110·2) (3,879·1)

Group operating profit 520·0 (61·6) 458·4 556·3 (110·2) 446·1

Continuing operations 520·0 (61·6) 458·4 509·1 (110·2) 398·9

Discontinued – – – 47·2 – 47·2

Share of operating profit in joint ventures 18·9 (1·4) 17·5 11·7 (0·5) 11·2

Operating profit of the Group and joint ventures 2 538·9 (63·0) 475·9 568·0 (110·7) 457·3

Profit /(loss) on disposal of fixed assets 3 – (32·3) (32·3) – 1·9 1·9

Costs of fundamental restructuring 3 – – – – (548·9) (548·9)

Profit/(loss) on ordinary activities before interest 538·9 (95·3) 443·6 568·0 (657·7) (89·7)

Interest payable:

Group 7 (90·2) – (90·2) (132·7) – (132·7)

Joint ventures (6·4) – (6·4) (7·8) – (7·8)

Profit/(loss) on ordinary activities before taxation 442·3 (95·3) 347·0 427·5 (657·7) (230·2)

Taxation on profit/(loss) on ordinary activities 8 (123·9) 8·6 (115·3) (133·6) 80·8 (52·8)

Profit/(loss) on ordinary activities after taxation 9 318·4 (86·7) 231·7 293·9 (576·9) (283·0)

Minority interest on non-equity shares (35·2) – (35·2) (18·2) – (18·2)

Profit/(loss) attributable to ordinary shareholders 283·2 (86·7) 196·5 275·7 (576·9) (301·2)

Ordinary dividends on equity shares 10 (229·8) – (229·8) (181·7) – (181·7)

Profit/(loss) retained 53·4 (86·7) (33·3) 94·0 (576·9) (482·9)

Earnings/(loss) per share 11 Pence Pence Pence Pence

Basic 30·4 (47·1)

Diluted 30·3 (47·0)

Diluted excluding amortisation of goodwill and exceptional items 43·7 43·0

Group Profit and Loss AccountYear ended 28 April 2002



Group Company

2001 2001 20012002 2002 Restated Restated 2002 Restated

Notes £m £m £m £m £m £m

Fixed assets

Intangible assets 12 418·6 431·5 – –

Tangible assets 13 2,890·8 3,390·7 58·4 62·0

Investments in joint ventures:

Share of gross assets 263·9 311·8

Share of gross liabilities (126·5) (175·7)

14 137·4 136·1 17·4 17·4

Loans to joint ventures 14 – 13·2 – –

Other investments 15 298·1 284·8 2,622·8 2,617·3

3,744·9 4,256·3 2,698·6 2,696·7

Current assets

Stocks 16 183·3 192·0 – 0·1

Debtors 17 888·7 842·8 1,771·6 1,895·2

Cash and short term deposits 18 221·5 65·2 148·1 9·6

1,293·5 1,100·0 1,919·7 1,904·9

Creditors amounts falling due within one year 19 1,776·6 1,514·6 2,379·5 1,614·5

Net current assets/(liabilities) (483·1) (414·6) (459·8) 290·4

Total assets less current liabilities 3,261·8 3,841·7 2,238·8 2,987·1

Less:

Creditors amounts falling due after more

than one year 20 996·8 1,573·9 830·6 1,357·5

Provisions for liabilities and charges 22 143·2 130·8 2·0 –

2,121·8 2,137·0 1,406·2 1,629·6

Capital and reserves

Equity share capital 24 129·6 129·5 129·6 129·5

Equity reserves

Share premium account 25 986·2 983·2 986·2 983·2

Revaluation reserve 26 205·1 223·3 0·1 0·1

Capital redemption reserve 27 72·4 72·4 72·4 72·4

Other reserves 28 78·4 92·4 127·3 141·8

Profit and loss account 29 498·5 484·3 90·6 302·6

Equity shareholders’ funds 1,970·2 1,985·1 1,406·2 1,629·6

Minority interests – non-equity 151·6 151·9 – –

2,121·8 2,137·0 1,406·2 1,629·6

The financial statements on pages 20 to 42 were approved by the Board on 2 July 2002 and signed on its behalf by:

Sir Brian Stewart

Chairman

I P McHoul

Group Finance Director

Group and Company Balance SheetsAt 28 April 2002



2002 2001

Notes £m £m £m £m

Net cash inflow from operating activities 34 615·3 709·5

Dividends received from joint ventures 24·0 –

Returns on investments and servicing of finance

Interest received 6·4 6·7

Interest paid (98·6) (160·5)

Dividends paid to minorities (35·1) (9·2)

Net cash outflow for returns on investments and servicing of finance (127·3) (163·0)

Taxation (84·2) (96·8)

Capital expenditure and financial investment

Purchase of tangible fixed assets (318·2) (375·6)

Purchase of investments (106·3) (94·1)

Sale of tangible fixed assets 642·2 113·7

Realisation of investments 91·7 86·6

Net cash inflow/(outflow) for capital expenditure and financial investment 309·4 (269·4)

Acquisitions and disposals

Purchase of businesses (24·1) (72·7)

Net cash acquired with businesses 0·2 (171·4)

Disposal of businesses 9·7 633·7

Net cash disposed of with businesses – (68·1)

Purchase of and loans to joint ventures (1·5) (97·4)

Net cash inflow/(outflow) for acquisitions and disposals (15·7) 224·1

Equity dividends paid (184·3) (176·8)

Net cash inflow before use of liquid resources and financing 537·2 227·6

Management of liquid resources

Movement in short-term deposits with banks (139·2) 8·1

Financing

Issues of ordinary share capital 3·1 3·7

Purchase of warrants (2·8) –

Proceeds of loan capital 416·9 809·9

Repayment of loan capital (728·5) (938·5)

Net cash outflow from financing (311·3) (124·9)

Increase in cash in the year 35 86·7 110·8

Liquid resources comprise term deposits of less than one year.

Group Cash Flow StatementYear ended 28 April 2002



20012002 Restated

£m £m

Profit/(loss) for the financial year

– parent and subsidiary undertakings 189·1 (303·8)

– joint ventures 7·4 2·6

Impairment – (23·3)

Revaluations – joint ventures 3·8 7·1

Purchase of warrants 11·4 –

Exchange adjustments and related tax 0·5 (13·6)

Total recognised gains and losses for financial year 212·2 (331·0)

Prior year adjustment (81·4)

Total recognised gains and losses since last annual report 130·8

Statement of Total Recognised Gains and LossesYear ended 28 April 2002

20012002 Restated

£m £m

Reported profit/(loss) on ordinary activities before taxation 347·0 (230·2)

Realisation of property revaluation gains of previous years 22·0 4·8

Historical cost profit/(loss) on ordinary activities before taxation 369·0 (225·4)

Historical cost loss for the year retained after taxation and dividends (11·3) (478·1)

Note on Historical Cost Profits and LossesYear ended 28 April 2002

20012002 Restated

£m £m

Total recognised gains/(losses) for the year 212·2 (331·0)

Ordinary dividends (229·8) (181·7)

New share capital issued 3·1 122·4

Warrants issued – 25·4

Purchase of warrants (14·2) –

Contribution to employee share trust (0·3) –

Goodwill on disposals 14·1 160·0

Net movement in shareholders’ funds (14·9) (204·9)

Shareholders’ funds at 29 April 2001 (originally £2,066·5m before deducting prior year adjustment of £81·4m) 1,985·1 2,190·0

Shareholders’ funds at 28 April 2002 1,970·2 1,985·1

Reconciliation of Movement in Shareholders’ FundsYear ended 28 April 2002



1 Accounting policies

(a) Basis of preparation

The accounts are prepared in accordance with applicable accounting standards.

FRS 19 (Deferred Tax) has been adopted in the current year. As a result of the adoption of FRS 19 the tax charge on profits before amortisation of goodwill

and exceptional items has been increased by £18·5m, tax relief on exceptional items has been increased by £2·4m and a prior year adjustment has been

made. The prior year adjustment increased the tax charge on profit before amortisation of goodwill and exceptional items by £33·1m, increased tax relief

on exceptional items by £43·2m, decreased the costs of fundamental restructuring by £41·9m and decreased shareholders’ funds by £81·4m.

Except for the adoption of FRS 19 the accounting policies are unchanged from those which applied in 2000/2001.

The accounts are prepared under the historical cost convention except that certain properties are included at valuation. Prior to the introduction of FRS 15

(Tangible Fixed Assets) professional valuations were undertaken on a regular basis and any net surpluses were taken to the revaluation reserve. Following the

introduction of FRS 15 surpluses from prior valuations will continue to be reflected in the accounts but no further valuations will be undertaken.

(b) Basis of consolidation

(i) The Group accounts consolidate those of the Company and its subsidiary undertakings for the period of 52 weeks (53 weeks when necessary) ending

on the Sunday nearest 30 April.

(ii) On the acquisition of subsidiary undertakings or businesses or joint ventures, fair values are attributed to the underlying net assets acquired.

Goodwill represents the excess of the consideration over the fair values. Prior to 4 May 1998 goodwill was written off to reserves in the year of acquisition.

The profit or loss on the disposal of a business acquired before 4 May 1998 takes account of any purchased goodwill previously written off through reserves.

Goodwill acquired after 3 May 1998 is capitalised and amortised on a straight line basis over its estimated useful life.

Results of subsidiary undertakings acquired during the year are included from the date of acquisition.

(iii) Entities which the Group holds long-term and which are jointly controlled by the Group and other parties are treated as joint ventures. The Group accounts

include the appropriate share of the results and reserves of joint ventures.

(iv) No profit and loss account is presented for Scottish & Newcastle plc as provided by S.230 of the Companies Act 1985.

(c) Depreciation

Depreciable fixed assets are written off on a straight line basis over their estimated useful lives as follows:

(i) Freehold land is not depreciated.

(ii) Freehold buildings are depreciated to their estimated residual values over the following periods:

Industrial buildings – 30 to 50 years

Licensed buildings – 50 years

(iii) Buildings held on lease are depreciated to their estimated residual values over the shorter of 50 years or the unexpired term of the lease.

(iv) Other tangible assets are written off over their estimated useful lives as follows:

Fittings:

Licensed and related properties – 5 to 15 years

Vehicles, plant and equipment:

Brewing plant – 15 to 30 years

Kegging, bottling and canning plant – 5 to 20 years

Commercial vehicles and private cars – 3 to 8 years

Containers and other equipment – 3 to 15 years

Notes to the Accounts



1 Accounting policies (continued)

(d) Stock valuation

Stocks are stated at the lower of cost or net realisable value. The cost of raw materials and consumables is actual cost. The cost of finished goods and work

in progress comprises materials, excise duty where appropriate, labour and attributable production overheads.

(e) Deferred taxation

Deferred taxation is provided, without discounting, on all timing differences which have originated but not reversed at the balance sheet date except for those

which should not be recognised under FRS 19, calculated at the enacted rates at which it is estimated that tax will be payable. Deferred tax assets are only

recognised to the extent that it is more likely than not that they will be recovered.

(f) Foreign currencies

Revenues and costs of overseas companies are included in the consolidated profit and loss account at average rates of exchange during the year with the

year end adjustment to closing rates being taken to reserves. Assets and liabilities in foreign currency are translated at year end rates of exchange.

Exchange differences on the retranslation of investments in, and opening net assets of, foreign subsidiary undertakings are dealt with through reserves

net of differences on related foreign currency borrowings and swaps. Other gains and losses arising from foreign currency transactions are included in

the consolidated profit and loss account.

(g) Retirement benefits

The expected cost of pensions in respect of defined benefit pension schemes is charged to the profit and loss account so as to spread the cost of pensions

over the expected remaining service lives of employees in the scheme.

(h) Leases

Operating lease rentals are charged to the profit and loss account on a straight line basis over the term of the lease.

(i) Turnover

Turnover is sales, including recovery of duty where appropriate, rents receivable and other trading income of the Group, after eliminating intra-Group

transactions and excluding VAT and property disposals.

(j) Financial instruments

(i) Debt instruments are stated at the amount of net proceeds adjusted to amortise the finance cost of debt evenly over the term of the debt.

(ii) Interest rate swap agreements are used to manage interest rate exposures and are accounted for under the hedge accounting method. Amounts payable

or receivable under such agreements are recognised as adjustments to interest payable over the period of the agreements.

When interest rate swaps and underlying debt are terminated together, the net gain or loss is taken to the profit and loss account as interest payable.

When interest rate swaps are terminated but the underlying debt is retained then the gain/loss is deferred and is amortised to interest payable over the

remaining life of the underlying debt.

(iii) Forward foreign currency contracts are used to manage exposure to fluctuations in currency rates and are accounted for under the hedge accounting

method. Gains or losses arising under these contracts are taken to the profit and loss account in line with the transactions which they are hedging.

If the underlying commitment does not occur and the instrument ceases to be a hedge, a gain or loss is recognised in the profit and loss account.

Notes to the Accounts continued



2 Segmental analysis2002 2001

Net NetOperating operating Operating operating

Turnover profit assets Turnover profit assets£m £m £m £m £m £m

Class of business

Beer 3,101·8 311·6 1,505·7 2,757·0 264·6 1,480·8

Retail 1,097·4 233·3 2,128·5 1,287·5 262·2 2,607·5

Profit share allocation – (6·0) (6·0) – (6·0) (6·0)

4,199·2 538·9 3,628·2 4,044·5 520·8 4,082·3

Leisure – discontinued – – – 309·4 47·2 26·0

4,199·2 538·9 3,628·2 4,353·9 568·0 4,108·3

Exceptional charges against operating profit – continuing (38·8) (92·2)

Amortisation of goodwill (24·2) (18·5)

475·9 457·3

Amortisation of goodwill splits £19·2m Beer (2001 – £13·5m) and £5·0m Retail (2001 – £5·0m).

2002 2001

Net NetOperating operating Operating operating

Turnover profit assets Turnover profit assets£m £m £m £m £m £m

Geographical area of operation

UK 3,131·0 445·7 2,847·3 3,424·7 490·9 3,393·6

Rest of Europe 1,068·2 99·2 786·9 929·2 83·1 720·7

Profit share allocation – (6·0) (6·0) – (6·0) (6·0)

4,199·2 538·9 3,628·2 4,353·9 568·0 4,108·3

Exceptional charges against operating profit (38·8) (92·2)

Amortisation of goodwill (24·2) (18·5)

475·9 457·3

The exceptional charges against operating profit are analysed in note 3 and split £38·8m UK (2001 – £87·4m) and nil Rest of Europe (2001 – £4·8m).

The amortisation of goodwill splits £5·6m UK (2001 – £5·6m) and £18·6m Rest of Europe (2001 – £12·9m).

The segmental analysis by class of business above includes the Group’s share of the results of joint ventures as follows:2002 2001

Operating OperatingTurnover profit Turnover profit

£m £m £m £m

Beer 75·3 13·3 19·5 2·6

Retail 5·7 5·6 9·2 9·1

81·0 18·9 28·7 11·7

Amortisation of goodwill – (1·4) – (0·5)

81·0 17·5 28·7 11·2

The Beer joint ventures were in Rest of Europe and the Retail joint venture was in the UK.

The analysis of turnover by destination is not materially different from that presented above. Beer turnover is after eliminating UK inter segment sales

of £163·8m (2001 – £222·0m).




2 Segmental analysis (continued)2002 2001

£m £m

Net operating assets comprise:

Net assets 2,121·8 2,137·0

Adjusted for: net debt 1,186·1 1,724·6

dividends 165·9 120·4

taxation 154·4 126·3

Net operating assets 3,628·2 4,108·3

3 Exceptional items2002 2001

Notes £m £m

Operating profit exceptional charge a (38·8) (92·2)

Profit/(loss) on disposal of fixed assets b (32·3) 1·9

Costs of fundamental restructuring c – (548·9)

Exceptional loss before taxation (71·1) (639·2)

a. The operating profit exceptional charge in both years relates to a series of restructuring initiatives in the Beer Division including depot closures and in

2002 comprises redundancy and other cash costs £28·4m, asset write downs £3·3m and onerous leases £7·1m.

b. The loss on disposal of fixed assets includes £14·1m of goodwill which had previously been written off through reserves.

c. In 2001 there was a significant change in the structure of the Group with the acquisition of International Beer businesses, the change in focus and

scale of the Retail Estate and the disposal of the Leisure Division. The costs of this restructuring were the write down of the Retail units which were sold,

£84·0m; redundancy and related costs in the Retail Division, £29·6m; loss on disposal of Center Parcs, £344·1m; loss on disposal of Pontin’s, £72·1m;

and costs of debt restructuring £19·1m. The losses on disposal included £160·0m of goodwill which had previously been written off through reserves.

Tax relief on the exceptional charge against operating profit was £10·4m (2001 – £28·0m). Tax on the loss on disposal of fixed assets was £1·8m

(2001 – nil). Tax relief on the costs of fundamental restructuring in 2001 was £52·8m.

Further information on the exceptional items is given in the Operating and Financial Review.

4 Net operating costs2002 2001

ContinuingTotal operations Discontinued Total

£m £m £m £m

Change in stocks of finished goods and work in progress 9·1 17·7 0·3 18·0

Own work capitalised (6·9) (5·2) (1·6) (6·8)

Raw materials and consumables 1,145·4 1,045·5 50·3 1,095·8

Custom and excise duties 813·9 814·3 – 814·3

Employee costs (note 5) 691·5 732·0 91·2 823·2

Depreciation 153·0 182·2 32·1 214·3

Amortisation of goodwill 22·8 18·0 – 18·0

Operating lease rentals – plant and machinery 25·1 22·9 1·1 24·0

– land and buildings 64·1 73·4 0·1 73·5

Income from investments (14·4) (12·9) – (12·9)

Other operating charges 756·2 729·0 88·7 817·7

3,659·8 3,616·9 262·2 3,879·1

Exceptional items included in the above are employee costs £11·2m (2001 – £55·6m), depreciation £3·3m (2001 – £20·2m), operating lease rentals £7·1m

(2001 – £5·7m) and other operating charges £17·2m (2001 – £10·7m).

The auditors’ remuneration was £1·1m (2001 – £1·2m) for audit services and £3·3m (2001 – £3·0m) for non-audit services (principally transactional

support on acquisitions).




5 Employee costs and numbers2002 2001

£m £m

(i) Employee costs

Wages and salaries 598·6 707·6

Social security costs 75·1 83·5

Other pension costs 11·8 26·1

Employee profit sharing scheme 6·0 6·0

691·5 823·2

2002 2001

(ii) Number of employees

The average number of employees during the year was:

Beer 12,472 10,718

Retail 32,273 41,614

Leisure – 10,458

Group central functions 228 276

44,973 63,066

(iii) Pension commitment

The Group funds a number of pension schemes which are administered through independent trusts. The total pension costs for the Group, which are

assessed in accordance with SSAP 24 (Accounting for Pension Costs), were £11·8m (2001 – £26·1m).

The main Group schemes are defined benefit schemes and pension costs relating to these schemes are assessed in accordance with the advice of qualified

actuaries using the projected unit method. The latest actuarial valuations used a market related approach and were made at 31 October 2000. The

valuations assumed a real long-term interest rate yield of 4·0% per annum and real earnings growth of 2·0% per annum. At 31 October 2000 the market

value of the assets of the main Group schemes was £1,753m and the assets were sufficient to cover 116% of the benefits that had accrued to members.

Surpluses are spread over the remaining service lives (12 years) of employees in the schemes.

FRS 17 disclosures

A new accounting standard – FRS 17 (Retirement Benefits) – will replace SSAP 24. However, the timetable for fully implementing FRS 17 is currently under

review by the Accounting Standards Board and it is unclear when FRS 17 will be fully implemented. In the transition period certain disclosures are required

which are included below.

The latest valuations have been updated to 28 April 2002 by independent actuaries to take account of the requirements of FRS 17.

The principal assumptions were:%

Rate of increase in salaries 4·0

Rate of increase in pensions 2·5

Discount rate 6·0

Inflation rate 2·5

The values of the assets and liabilities and the expected rates of return at 28 April 2002 were as follows:Expectedlong-term

rate of return£m %

Equities 1,211·7 8·0

Corporate bonds 32·5 5·8

Gilts 258·0 5·0

Other 3·8 6·0

Total market value of assets 1,506·0

Present value of scheme liabilities (1,774·8)

Deficit in the schemes (268·8)

Related deferred tax asset 81·2

Net pension liability (187·6)

If FRS 17 had been adopted in the financial statements, the net assets and the profit and loss reserve of the Group at 28 April 2002 would be reduced by

£228·3m. This reduction has been calculated after taking account of currently recognised prepayments and accruals net of deferred tax.

The expected long term rate of return is net of an adjustment for expenses.




6 Directors’ remuneration

Information concerning directors’ emoluments, pension entitlements, long term incentive scheme interests, shareholdings and options is shown in the

Corporate Governance Report on pages 10 to 17.

7 Group interest payable2002 2001

£m £m

Bank loans and overdrafts 5·0 88·0

Other 92·9 52·3

97·9 140·3

Deposit and other interest receivable (7·7) (7·6)

90·2 132·7

8 Taxation on profit/(loss) on ordinary activities

(i) Tax charge2001

2002 Restated£m £m

Corporation tax – current year 77·3 71·2

– prior year adjustments (28·8) (29·0)

Overseas taxation 21·3 16·1

Joint ventures – current taxation 4·0 0·8

Total current taxation 73·8 59·1

Deferred taxation – origination and reversal of timing differences 42·5 (7·0)

Joint ventures – deferred taxation (1·0) 0·7

115·3 52·8

(ii) Tax reconciliation2002 2001

£m £m

Profit/(loss) on ordinary activities before taxation 347·0 (230·2)

Notional tax charge at UK corporation tax rate of 30% 104·1 (69·1)

Expenses not deductible for tax purposes (including amortisation of goodwill) 21·6 52·1

Fixed asset and other timing differences (37·5) (11·4)

Tax rates on overseas earnings 4·8 4·8

Adjustments relating to prior year’s corporation tax (27·6) (34·8)

Capital losses not attracting tax relief at standard rate 8·0 112·5

Other items 0·4 5·0

73·8 59·1

9 Profit/(loss) on ordinary activities after taxation 2002 2001

£m £m

Parent company (17·6) (42·2)

Subsidiary undertakings 241·9 (243·4)

Joint ventures 7·4 2·6

231·7 (283·0)




10 Ordinary dividends on equity shares2002 2001

£m £m

Interim 9·88p per share (2001 – 9·50p) 63·9 61·3

Proposed final 19·41p per share (2001 – 18·66p) 165·9 120·4

229·8 181·7

The cost of the proposed final dividend takes account of the Scottish & Newcastle ordinary shares issued as part of the consideration for Hartwall.

11 Earnings per share

Basic earnings per share have been calculated by dividing the earnings attributable to ordinary shareholders by the weighted average number of ordinary

shares in issue during the year, excluding own shares held in the employee share trusts which have been treated as cancelled.

Diluted earnings per share adjusts for share options granted to employees and warrants where the exercise price is less than the average price of the

Company’s ordinary shares during the year.

Diluted earnings per share before exceptional items and amortisation of goodwill have also been calculated since, in the opinion of the directors, this is a

more representative indicator of the trading performance of the Group.

Earnings per share are calculated as follows:2002 2001

Weighted Weightedaverage average Earnings/number Earnings Earnings/ number (loss)

Earnings of shares per share (loss) of shares per share£m million pence £m million pence

Basic 196·5 645·5 30·4 (301·2) 639·0 (47·1)

Dilution impact:

– options – 2·5 (0·1) – 1·9 0·1

– warrants – – – – – –

Diluted 196·5 648·0 30·3 (301·2) 640·9 (47·0)

Exclude exceptional items and amortisation of goodwill 86·7 – 13·4 576·9 – 90·0

Diluted excluding exceptionals and amortisation of goodwill 283·2 648·0 43·7 275·7 640·9 43·0

12 Intangible assetsGoodwill

£m

Cost

At 29 April 2001 452·1

Businesses acquired 11·9

Exchange adjustments (1·9)

At 28 April 2002 462·1

Amortisation

At 29 April 2001 20·6

Provided during the year 22·8

Exchange adjustments 0·1

At 28 April 2002 43·5

Net book value at 29 April 2001 431·5

Net book value at 28 April 2002 418·6

Goodwill is amortised over 20 years.




13 Tangible assetsBreweries,

Licensed warehouses Vehicles,and related and other plant andproperties properties equipment Total

£m £m £m £m

Group

Cost or valuation

At 29 April 2001 3,106·0 384·4 1,116·4 4,606·8

Businesses acquired 3·1 1·0 4·5 8·6

Additions 165·7 15·7 131·0 312·4

Disposals (727·8) (13·6) (183·1) (924·5)

Recategorisation – (1·0) 1·0 –

Exchange adjustments (0·2) (0·4) (1·8) (2·4)

At 28 April 2002 2,546·8 386·1 1,068·0 4,000·9

Depreciation

At 29 April 2001 500·6 106·0 609·5 1,216·1

Businesses acquired 1·7 0·8 3·1 5·6

Provided during the year – normal 56·9 6·9 85·9 149·7

– exceptional – 0·6 2·7 3·3

Disposals (136·3) (5·2) (122·0) (263·5)

Recategorisation – (0·1) 0·1 –

Exchange adjustments – (0·2) (0·9) (1·1)

At 28 April 2002 422·9 108·8 578·4 1,110·1

Net book value at 29 April 2001 2,605·4 278·4 506·9 3,390·7

Net book value at 28 April 2002 2,123·9 277·3 489·6 2,890·8

Company

Cost or valuation

At 29 April 2001 7·2 48·5 38·0 93·7

Additions – 9·8 1·6 11·4

Transfers to subsidiary undertakings – (3·0) (2·9) (5·9)

Disposals – (8·6) (21·9) (30·5)

At 28 April 2002 7·2 46·7 14·8 68·7

Depreciation

At 29 April 2001 1·1 5·4 25·2 31·7

Provided during the year – 0·7 2·6 3·3

Disposals – (4·6) (20·1) (24·7)

At 28 April 2002 1·1 1·5 7·7 10·3

Net book value at 29 April 2001 6·1 43·1 12·8 62·0

Net book value at 28 April 2002 6·1 45·2 7·1 58·4




13 Tangible assets (continued)

The net book value of properties comprises:Group Company

Breweries, Breweries,Licensed warehouses Licensed warehouses

and related and other and related and otherproperties properties properties properties

£m £m £m £m

Freehold 1,778·2 260·4 6·1 45·2

Leasehold over 50 years 200·6 0·7 – –

Leasehold under 50 years 145·1 16·2 – –

2,123·9 277·3 6·1 45·2

For those properties included at cost or valuation,

the equivalent historical cost figures at 28 April 2002 are:

Historical cost 2,359·0 386·0 7·2 46·6

Depreciation based on cost 422·9 108·8 1·1 1·5

Net historical cost value 1,936·1 277·2 6·1 45·1

Group Company£m £m

Cost or valuation of properties comprises:

Valuation at May 1993 9·9 3·5

Valuation at April 1997 671·8 2·0

At cost 1,719·5 45·8

2,401·2 51·3

At 27 April 1997 the Group’s principal licensed properties were valued by various specialist firms of chartered surveyors. The basis of valuation was open

market for existing use.

14 Investments in and loans to joint venturesGroup Company

Share Investment Loans Investmentof net in joint to joint in joint

assets Goodwill ventures ventures ventures£m £m £m £m £m

At 29 April 2001 (restated) 109·1 27·0 136·1 13·2 17·4

Transfers 13·2 – 13·2 (13·2) –

Acquisitions (0·1) 1·6 1·5 – –

Share of revaluation surpluses in the year 3·8 – 3·8 – –

Share of retained loss in the year (15·2) – (15·2) – –

Amortisation of goodwill – (1·4) (1·4) – –

Exchange adjustments (0·5) (0·1) (0·6) – –

At 28 April 2002 110·3 27·1 137·4 – 17·4

The principal joint ventures are a 50% holding of the equity shares in The Public House Company Limited, the parent company of a property investment group

which operates in the UK and a 49% holding in the equity shares of Centralcontrol, the parent company of a brewer which operates in Portugal. The share

of net assets at 29 April 2001 has been restated from £112·7m as a result of a prior year adjustment following the introduction of FRS 19 (Deferred Tax).




15 Other investmentsShares insubsidiary Other Trade

undertakings investments loans Total£m £m £m £m

Group

At 29 April 2001 73·1 211·7 284·8

Businesses acquired 0·3 0·3 0·6

Additions 16·1 90·5 106·6

Disposals, repayments and provisions (10·5) (82·9) (93·4)

Exchange adjustments (0·1) (0·4) (0·5)

At 28 April 2002 78·9 219·2 298·1

Company

At 29 April 2001 2,596·4 20·2 0·7 2,617·3

Additions – 7·8 – 7·8

Disposals, repayments and provisions – (5·5) – (5·5)

Transfers from subsidiary undertakings 3·2 – – 3·2

At 28 April 2002 2,599·6 22·5 0·7 2,622·8

Other investments in both the Group and the Company include £14·0m (2001 – £12·3m) in respect of 2·6 million ordinary shares of 20p each in Scottish &

Newcastle plc. These shares are held by the Scottish & Newcastle employee share trusts (note 24).

Trade loans in the Group are net of provisions of £29·6m (2001 – £31·8m). During the year £1·1m was credited (2001 – £2·0m) through the profit and loss

account, £1·2m (2001 – £2·4m) was written off against provisions and £0·3m was acquired with businesses and there were exchange adjustments of

£0·2m.

Scottish & Newcastle plc, the principal company, is incorporated in Great Britain and registered in Scotland. The subsidiary undertakings contributing

significantly to the results and assets of the Group are as follows:

Country of Country of % of equityBusiness incorporation operation holding

Scottish Courage Ltd Beverages Registered in Scotland Great Britain 100

Cleveland Place Holdings PLC Public houses Registered in England Great Britain 100

The Chef & Brewer Group Limited Public houses Registered in England Great Britain 100

Huggins & Company Limited Public houses Registered in England Great Britain 100

S&N Retail Limited Public houses Registered in England Great Britain 100

Elidis Holdings SA Beverages Registered in France France 100

Brouwerijen Alken Maes NV Beverages Registered in Belgium Belgium 99

Brasseries Kronenbourg SCA Beverages Registered in France France *

Scottish Courage Ltd, Cleveland Place Holdings PLC and S&N Retail Limited are held directly by Scottish & Newcastle plc.

*Brasseries Kronenbourg SCA is a French partnership limited by shares of which a subsidiary of Scottish & Newcastle plc is the general partner.

Consequently the operations of Brasseries Kronenbourg SCA are controlled by the Group.

16 StocksGroup Company

2002 2001 2002 2001£m £m £m £m

Raw materials and consumables 68·3 67·8 – –

Work in progress 11·0 10·7 – –

Finished goods and goods for resale 104·0 113·5 – 0·1

183·3 192·0 – 0·1




17 DebtorsGroup Company

2002 2001 2002 2001£m £m £m £m

Trade debtors 480·9 453·7 2·4 1·4

Other debtors 139·1 145·9 33·8 57·2

Prepayments 247·6 214·0 65·3 31·4

Corporation tax 3·5 3·4 – –

Amounts owing by joint ventures 1·6 2·6 – 1·1

Amounts owing by subsidiary undertakings – – 1,670·1 1,784·1

Deferred tax (note 23) 16·0 23·2 – 20·0

888·7 842·8 1,771·6 1,895·2

Trade debtors include nil (2001 – £1·1m), other debtors £5·1m (2001 – £3·6m) and prepayments £7·9m (2001 – £0·9m) due after more than one year.

The deferred tax is recoverable after more than one year.

18 Cash and short term depositsGroup Company

2002 2001 2002 2001£m £m £m £m

Cash 81·7 64·7 8·4 9·6

Short term deposits 139·8 0·5 139·7 –

221·5 65·2 148·1 9·6

19 Creditors: amounts falling due within one yearGroup Company

2002 2001 2002 2001£m £m £m £m

Loan capital (note 21) 415·3 158·5 363·7 144·1

Bank overdrafts 50·5 120·0 1,363·5 640·4

Trade creditors 348·6 357·6 2·3 8·7

Current taxation 92·9 105·0 78·7 48·9

Other taxes and social security costs 200·8 175·1 8·0 5·5

Dividends 165·9 120·4 165·9 120·4

Other creditors 160·8 173·2 30·8 43·7

Accruals and deferred income 341·3 304·8 40·3 53·7

Amounts owing to joint ventures 0·5 – – –

Amounts owing to subsidiary undertakings – – 326·3 549·1

1,776·6 1,514·6 2,379·5 1,614·5

Bank overdrafts are unsecured.

20 Creditors: amounts falling due after more than one yearGroup Company

2002 2001 2002 2001£m £m £m £m

Loan capital (note 21) 941·8 1,511·3 830·6 1,357·5

Corporation tax 4·2 6·4 – –

Other creditors 48·0 53·0 – –

Accruals and deferred income 2·8 3·2 – –

996·8 1,573·9 830·6 1,357·5




21 Financial instruments

The information in this note should be read in conjunction with page 7 of the Operating and Financial Review which discusses the management of foreign

exchange and interest rate risk. Short term debtors and creditors have been excluded from the disclosures in this note.

(i) Loan capitalGroup Company

2002 2001 2002 2001£m £m £m £m

Not wholly repayable within five years

Repayable by instalments 1·0 1·3 – –

Repayable otherwise than by instalments 64·0 30·9 32·4 0·9

Wholly repayable within five years 1,292·1 1,637·6 1,161·9 1,500·7

1,357·1 1,669·8 1,194·3 1,501·6

Instalments not due within five years 0·1 0·2 – –

Amounts due are repayable as follows:

Bank loans

Less than one year (note 19) 83·6 82·6 82·6 78·2

Between one and two years 68·1 28·7 68·0 28·7

Between two and five years 251·4 899·8 251·2 899·7

More than five years 1·3 0·1 – –

404·4 1,011·2 401·8 1,006·6

Other loans

Less than one year (note 19) 331·7 75·9 281·1 65·9

Between one and two years 151·6 281·3 150·7 237·7

Between two and five years 409·6 273·4 328·3 190·5

More than five years 59·8 28·0 32·4 0·9

952·7 658·6 792·5 495·0

Loan capital – more than one year (note 20) 941·8 1,511·3 830·6 1,357·5

Other loans comprise

9·75% unsecured bonds 2006 15·1 15·1 15·1 15·1

6·9% private placements 2004 14·0 14·1 14·0 14·1

7·9% redeemable debenture stock 2008 26·0 26·5 – –

Floating unsecured bonds 2002-2005 149·0 149·4 75·5 75·9

Medium term floating unsecured bonds 2002-2012 686·2 389·0 686·1 389·0

Others 62·4 64·5 1·8 0·9

952·7 658·6 792·5 495·0

Bank loans

Currency bank borrowings are £204·4m of which £1·0m is repayable by instalments with final instalments due between 2002 and 2008. The remaining

£203·4m is repayable by lump sum between 2002 and 2015. Interest rates, after taking account of interest rate swaps, ranged between 2·0% and 7·5%.

Sterling bank borrowings are £200·0m and are repayable by lump sum between 2002 and 2004. Interest rates, after taking account of interest rate swaps,

ranged between 3·4% and 6·1%.

Other loans

The 7·9% redeemable debenture stock 2008 was fair valued at acquisition on 1 November 1993. The nominal value is £21·5m and the nominal rate of interest

is 12·125%.

Loan capital

Borrowings of £29·5m are secured on fixed and other assets.




21 Financial instruments (continued)

(ii) Interest rate risk

Financial liabilities

The profile of the financial liabilities was as follows:2002 2001

Total Floating Fixed Total Floating FixedCurrency £m £m £m £m £m £m

Sterling 537·1 167·2 369·9 1,004·5 634·3 370·2

Euro 870·5 355·0 515·5 785·3 328·6 456·7

1,407·6 522·2 885·4 1,789·8 962·9 826·9

The fixed rate interest profile was as follows:2002 2001

Weighted Weighted Weighted Weightedaverage average average average

interest rate period interest rate periodCurrency % years % years

Sterling 6·6 14·7 6·6 15·6

Euro 5·8 5·7 5·5 6·7

6·1 9·5 6·0 10·7

The floating rate financial liabilities comprise bank borrowings with interest rates set between one day and twelve months. The reference rate for floating rate

liabilities is determined by the benchmark rate for the relevant country (e.g. Libor) or by the eligible bill discount rate for certain Sterling borrowings. The figures

shown in the tables above take account of interest rate swaps used to manage the interest rate profile of financial liabilities.

The Group has entered into £225m and Euro 420m of interest rate swaps where the Group is paying a fixed rate of interest maturing between 2005 and

2014. Under these swaps the bank has the option to terminate or vary the rate of interest on the swap. The weighted average maturity as disclosed above

assumes that these swaps run to final maturity. The earliest dates at which the bank can exercise their option ranges from September 2002 to August 2005.

Financial assets2002 2001

The Group held the following financial assets: £m £m

Interest bearing:

Sterling cash 75·0 57·7

Euro cash 6·7 7·0

Sterling deposits 139·7 –

Euro deposits 0·1 0·5

Sterling trade loans 147·4 142·5

Euro trade loans 71·8 69·2

440·7 276·9

Cash and deposits are placed on short term maturities up to a maximum of three months at relevant market rates for the maturity concerned.

In common with other major brewers the Group makes trade loans to publicans who purchase the Group’s beer. The interest rate, terms of loan and supply

terms for beer purchases are all inter related and vary among customers. The benefit of trade loans should, therefore, not be viewed solely in terms of interest

rates. The interest rate profile of trade loans was as follows:

2002 2001£m £m

Fixed 147·6 151·8

Floating 71·6 59·9

219·2 211·7

The fixed rate trade loans had a weighted average interest rate of 5·0% (2001 – 5·0%) and a weighted average period of 4·6 years (2001 – 4·7 years).

The reference rate for floating rate trade loans is mainly United Kingdom base rates.





(iii) Currency risk

After taking account of forward foreign currency contracts the net transactional currency exposure on monetary assets and liabilities was not material.

(iv) Maturity of financial liabilities

The maturity profile of the Group’s financial liabilities was as follows:2002 2001

£m £m

Within one year 465·8 278·5

Between one and two years 219·7 310·0

Between two and five years 661·0 1,173·2

After five years 61·1 28·1

1,407·6 1,789·8

(v) Borrowing facilities

The Group has various borrowings available to it. The undrawn committed facilities were as follows:2002 2001

£m £m

Expiring within one year 17·4 136·8

Expiring between one and two years 507·0 21·3

Expiring after two years 1,246·8 750·3

1,771·2 908·4

In addition to the above undrawn facilities, the Group also has a Euro 2·2bn facility currently drawn as a Letter of Credit which will be utilised for the exercise

of the Danone option referred to in note 37.

(vi) Fair values

Set out below is a comparison, by category, of book values and fair values for financial assets and liabilities:

2002 2001

Book value Fair value Book value Fair value£m £m £m £m

Primary financial instruments:

Short term borrowings and current portion of long term borrowings (465·8) (465·6) (278·5) (279·2)

Long term borrowings (941·8) (937·2) (1511·3) (1,518·9)

Cash and deposits 221·5 221·5 65·2 65·2

Trade loans 219·2 219·2 211·7 211·7

Derivative financial instruments held to manage the interest rate and currency profile:

Interest rate swaps – (40·9) – (18·2)

Derivative financial instruments held to hedge the currency exposure on

expected future sales/purchases:

Forward foreign currency contracts – (1·4) – (0·9)

Market values have been used where possible to determine the fair value of swaps, forward foreign currency contracts and debt instruments. As described

in (ii) above trade loans are linked to customer terms of trade for the supply of beer. The fair value of trade loans cannot be viewed solely in terms of interest

rates and the fair value is considered to be in line with the book value. The fair values of other items, including minority interest non-equity shares, have been

calculated by discounting expected future cashflows at prevailing interest rates.





(vii) Hedges

As explained in the Operating and Financial Review, it is the Group’s policy to hedge interest rate risk and transactional currency exposures. Gains and

losses on hedging instruments are not recognised until the exposure that is being hedged is itself recognised. Unrecognised gains and losses on instruments

used for hedging are as follows:2002 2001

Gains Losses Net Gains Losses Net£m £m £m £m £m £m

Gains and losses on hedges at 30 April 2001 18·3 (37·4) (19·1) 11·2 (20·5) (9·3)

Arising in previous years included in 2001/02 income (0·5) 15·9 15·4 (5·7) 18·7 13·0

Gains and losses not included in 2001/02 income:

Arising before 30 April 2001 17·8 (21·5) (3·7) 5·5 (1·8) 3·7

Arising after 29 April 2001 (3·5) (35·1) (38·6) 12·8 (35·6) (22·8)

Gains and losses on hedges at 28 April 2002 14·3 (56·6) (42·3) 18·3 (37·4) (19·1)

Of which:

Gains and losses expected to be recognised in 2002/03 9·1 (26·7) (17·6) 0·8 (9·6) (8·8)

Gains and losses expected to be recognised in 2003/04 or later 5·2 (29·9) (24·7) 17·5 (27·8) (10·3)

(viii) Minority interest non-equity shares

The minority interest non-equity shares’ fair value is not materially different from the book value at 28 April 2002 of £142·9m. The shares have a fixed

dividend of 6·5% and a variable dividend of up to 0·75% and do not have a fixed maturity.

22 Provisions for liabilities and chargesOnerous Deferred

contracts Reorganisation tax Total£m £m £m £m

Group

At 29 April 2001 9·6 79·7 41·5 130·8

Transfer from debtors – – (23·2) (23·2)

Profit and loss account 7·1 28·4 42·5 78·0

Utilised during year (2·7) (55·7) – (58·4)

Transfer to debtors – – 16·0 16·0

At 28 April 2002 14·0 52·4 76·8 143·2

Company

At 29 April 2001 – – – –

Transfer from debtors – – (20·0) (20·0)

Profit and loss account 1·6 0·8 20·4 22·8

Utilised during year – (0·8) – (0·8)

At 28 April 2002 1·6 – 0·4 2·0

The reorganisation costs relate to the Beer Division and Retail Division reorganisation costs charged as exceptional items in 2001 and 2002.

The majority of the reorganisation provision will be utilised within 1 year and the majority of the onerous contracts will be utilised within 5 years.




23 Deferred taxationGroup Company

£m £m

At 29 April 2001 (as previously reported) (59·5) (8·7)

Prior year adjustment 77·8 (11·3)

At 29 April 2001 (restated) 18·3 (20·0)

Profit and loss account 42·5 20·4

At 28 April 2002 60·8 0·4

Debtors (16·0) –

Provisions 76·8 0·4

60·8 0·4

The prior year adjustment arises following the introduction of FRS 19 (Deferred Tax).Group Company

2002 2001 2002 2001£m £m £m £m

Accelerated capital allowances 95·8 70·1 (13·2) (19·0)

Other timing differences (35·0) (51·8) 13·6 (1·0)

60·8 18·3 0·4 (20·0)

Unprovided deferred taxationGroup Company

2002 2001 2002 2001£m £m £m £m

Rolled over gains 85·6 76·7 – –

Revaluation of fixed assets 62·3 56·9 – –

147·9 133·6 – –

No provision has been made for deferred tax on gains recognised on revaluing property to its market value or on the sale of assets where potentially taxable

gains have been rolled over into replacement assets. Such tax would only be payable if the assets were sold without it being possible to claim rollover relief.

24 Share capitalAuthorised Issued and fully paid

2002 2001 2002 2001£m £m £m £m

Equity share capital

Ordinary shares of 20p each 180·0 180·0 129·6 129·5

(i) During the year 0·6 million ordinary shares were issued at a consideration of £3·1m pursuant to options exercised under the employee share option

schemes.

(ii) At 28 April 2002 options granted and outstanding under the savings-related share option schemes amounted to 9·8 million ordinary shares.

These options are exercisable at varying dates up to 1 September 2007 at prices ranging from 325p to 691p per share. As permitted by UITF 17,

no compensation expense is recognised on savings-related share option schemes.

(iii) At 28 April 2002 options granted and outstanding under the executive share option schemes amounted to 8·9 million ordinary shares. These options are

exercisable at varying dates up to 6 December 2011 at prices ranging from 351p to 742p per share.

(iv) At 28 April 2002 the Scottish & Newcastle employee share trusts held 2·6 million ordinary shares (2001 – 2·4 million) with a market value of £16·1m

(2001 – £12·1m). The trusts have waived their rights to receive dividends on 2·6 million shares. The trusts are used to acquire shares which will, at a

later date, be allocated to employees through one of the employee benefit schemes.

(v) At 28 April 2002 2·6 million ordinary shares (2001 – 2·4 million) were held for employees by the Trustees of the employee profit sharing scheme.

(vi) On 18 July 2000 as part of the acquisition of Danone’s beer business, Danone was issued with warrants to subscribe for 25 million ordinary shares

at £6 per share. The warrants are exercisable at any time up to 18 July 2003. During the year, rights over 14 million of the warrants were purchased

for £2·8m resulting in a gain of £11·4m.




25 Share premium accountGroup Company

£m £m

At 29 April 2001 983·2 983·2

Premium on shares issued – employee options 3·0 3·0

At 28 April 2002 986·2 986·2

26 Revaluation reserveGroup Company

£m £m

At 29 April 2001 223·3 0·1

Revaluations arising in joint ventures 3·8 –

Transferred to profit and loss account (note 29) (22·0) –

At 28 April 2002 205·1 0·1

27 Capital redemption reserveGroup Company

£m £m

At 29 April 2001 and 28 April 2002 72·4 72·4

28 Other reservesGroup Company

£m £m

At 29 April 2001 92·4 141·8

Purchase of warrants (14·2) (14·2)

Exchange adjustments – on assets (3·2) –

– on borrowings 4·0 –

Tax on exchange adjustments (0·3) –

Contribution to employee share trust (0·3) (0·3)

At 28 April 2002 78·4 127·3

29 Profit and loss accountGroup Company

£m £m

At 29 April 2001 (as previously reported) 565·7 291·3

Prior year adjustment (81·4) 11·3

As restated 484·3 302·6

Loss for year retained (33·3) (223·4)

Transferred from revaluation reserve (note 26) 22·0 –

Gain on purchase of warrants 11·4 11·4

Goodwill on disposals 14·1 –

Exchange adjustment – –

At 28 April 2002 498·5 90·6

The cumulative amount of positive goodwill written off, net of goodwill on disposals, was £430·8m (2001 – £444·9m).

30 Capital commitmentsGroup Company

2002 2001 2002 2001£m £m £m £m

Expenditure committed 26·7 28·3 – 3·6




31 Operating lease rentalsLand and buildings Other

2002 2001 2002 2001£m £m £m £m

Group annual commitments under non-cancellable operating leases were:

Leases expiring

within one year 3·6 5·0 2·6 3·8

within two to five years 8·4 11·4 5·0 9·5

in over five years 44·4 57·0 0·8 1·7

56·4 73·4 8·4 15·0

32 Contingent liabilities

At 28 April 2002 there were contingent liabilities in respect of guarantees to third parties amounting to Group £27·8m (2001 – £23·5m) and Company

£16·5m (2001 – £18·5m). Danone has indemnified the Group for any fines which may be imposed by the European Commission on the business acquired

from Danone in respect of any breach of Articles 81 or 82 of the EU Treaty prior to completion of the acquisition in July 2000. Consequently no contingent

liability has been included for any such fines.

33 Joint ventures2002 2001

£m £m

Transactions with joint ventures were:

Sales to joint ventures 2·9 2·8

Purchases from joint ventures 9·9 18·6

During the year a loan of Euro 21·2m to Centralcer was converted to zero coupon preference shares with no fixed maturity. During the year fixed assets were

sold to The Public House Company Limited for £24·2m.

34 Net cash inflow from operating activities2002 2001

£m £m

Group operating profit 458·4 446·1

Exceptional charges against operating profit 38·8 92·2

Depreciation – normal 149·7 194·1

Amortisation of goodwill 22·8 18·0

Provisions against investments (1·1) (2·0)

Decrease in stocks 10·2 4·0

(Increase)/decrease in debtors (70·5) 96·6

Increase/(decrease) in creditors 65·4 (104·5)

Net cash inflow from ordinary operating activities 673·7 744·5

Reorganisation and onerous contract costs (58·4) (35·0)

Net cash inflow from operating activities 615·3 709·5

35 Reconciliation of net cashflow to movement in net debt2002 2001

£m £m

Increase in cash in the year 86·7 110·8

Cash outflow from change in loan capital 311·6 128·6

Cash (inflow)/outflow from change in liquid resources 139·2 (8·1)

Change in net debt resulting from cashflows 537·5 231·3

Loans acquired with businesses (3·0) (70·7)

Exchange 4·0 (41·2)

Decrease in net debt 538·5 119·4

Net debt at 29 April 2001 (1,724·6) (1,844·0)

Net debt at 28 April 2002 (1,186·1) (1,724·6)




36 Analysis of net debtLoans

acquiredAt 29 April with At 28 April

2001 Cashflow businesses Exchange 2002£m £m £m £m £m

Cash 64·7 17·2 – (0·2) 81·7

Bank overdrafts (120·0) 69·5 – – (50·5)

Net cash (55·3) 86·7 – (0·2) 31·2

Short term deposits 0·5 139·2 – 0·1 139·8

Loan capital (1,669·8) 311·6 (3·0) 4·1 (1,357·1)

Net debt (1,724·6) 537·5 (3·0) 4·0 (1,186·1)

37 Acquisitions

The fair value of acquisitions during the year was £0·4m and the consideration was £12·3m giving goodwill of £11·9m. The results and cash flow of these

acquisitions were not material.

In July 2000 the Group acquired Danone’s beer business.

Under the terms of the acquisition contract Danone has the option to sell its remaining interests in the beer business, particularly the beer brands,

to Scottish & Newcastle for a total of Euro 2·0bn in cash, plus a premium calculated at the rate of 3% per annum on that amount, calculated from

17 March 2000. This option may be exercised in up to four tranches of not less that Euro 0·4bn (net of premium). Until the earlier of 31 December 2002

or full exercise of the option, Danone receives an agreed income of Euro 91m for the year ended 31 December 2000 increasing by 5% per annum for each

of the two following calendar years. Upon full exercise of the option, Danone will be required to sell its entire interest in the Danone subsidiary, FAS, to

Scottish & Newcastle for Euro 229m.

If by March 2003 Danone has not fully exercised its option then the combined beer businesses of Scottish & Newcastle and Danone will be merged into a

single joint venture company to be managed by Scottish & Newcastle in which Scottish & Newcastle will own not less than 75% of the issued share capital

with Danone owning the balance.

In certain circumstances the Group can be required to purchase Danone’s Spanish beer business for Euro 442m.

38 Post balance sheet events

(i) Acquisition of Hartwall

On 13 May shareholders approved the acquisition of Oyj Hartwall Abp (Hartwall). The offer periods expired on 1 July and at that date the Group had received

acceptances representing 98·6% of the share capital of Hartwall for consideration of 205·5 million shares in Scottish & Newcastle plc and cash of Euro 1·7m.

Further details on Hartwall are given in the Operating and Financial Review and the Annual Review.

(ii) Danone put

On 28 June 2002 Danone gave notice that the put would be exercised at the end of September 2002. Accordingly, at the end of September 2002

Scottish & Newcastle will acquire Danone’s remaining interest in its beer business for Euro 2·1bn and FAS for Euro 229m.





2002 2001 2000 1999 1998£m £m £m £m £m

Assets employed

Fixed assets 3,744·9 4,256·3 4,518·9 3,472·4 3,407·4

Net current liabilities (483·1) (414·6) (966·0) (659·0) (608·6)

Loan capital (over one year) (941·8) (1,511·3) (1,228·1) (481·4) (509·7)

Creditors (over one year) and provisions (198·2) (193·4) (134·8) (143·8) (212·4)

2,121·8 2,137·0 2,190·0 2,188·2 2,076·7

Financed by

Share capital 129·6 129·5 124·7 135·5 196·4

Share premium and reserves 1,840·6 1,855·6 2,065·3 2,052·7 1,880·3

Minority interests – non-equity 151·6 151·9 – – –

2,121·8 2,137·0 2,190·0 2,188·2 2,076·7

Turnover: Group and share of joint ventures 4,199·2 4,353·9 3,581·9 3,328·9 3,393·1

Operating profit of the Group and joint ventures before

exceptional items and amortisation of goodwill 538·9 568·0 500·4 475·9 486·4

Exceptional items charged to operating profit (38·8) (92·2) (108·7) (63·5) –

Amortisation of goodwill (24·2) (18·5) (2·4) – –

Profit/(loss) on disposal of fixed assets (32·3) 1·9 (35·5) 3·0 (0·7)

Loss on disposal of business – – – (18·0) –

Costs of fundamental restructuring – (548·9) – – –

Profit/(loss) on ordinary activities before interest 443·6 (89·7) 353·8 397·4 485·7

Interest payable (96·6) (140·5) (91·8) (73·7) (63·7)

Profit/(loss) before taxation 347·0 (230·2) 262·0 323·7 422·0

Taxation (115·3) (52·8) (55·2) (82·4) (120·6)

Profit/(loss) after taxation 231·7 (283·0) 206·8 241·3 301·4

Minority interest on non-equity shares (35·2) (18·2) – – –

Preference dividends on non-equity shares – – (0·4) (0·7) (0·7)

Profit/(loss) attributable to ordinary shareholders 196·5 (301·2) 206·4 240·6 300·7

Ordinary dividends on equity shares (229·8) (181·7) (172·1) (156·5) (144·9)

Profit/(loss) retained (33·3) (482·9) 34·3 84·1 155·8

Basic earnings/(loss) per 20p ordinary share – pence 30·4 (47·1) 33·4 39·0 48·9

Diluted earnings per 20p ordinary share, excluding exceptional items and amortisation of goodwill – pence 43·7 43·0 47·9 47·1 48·6

Dividends per 20p ordinary share – pence 29·29 28·16 27·07 25·30 23·52

Dividend cover excluding exceptional items and amortisation of goodwill – times 1·5 1·5 1·8 1·9 2·1

Prior year figures have been restated to take account of current accounting policies and accounting standards.

Five Year Record



Scottish & Newcastle Individual Savings Accounts and Personal Equity Plans

An Individual Savings Account (ISA) for Scottish & Newcastle shares is available to existing and prospective eligible UK shareholders from the

Bank of Scotland.

Personal Equity Plans (PEPs) that were in existence at 5 April 2000 and were administered by the Bank of Scotland are continued. If you would like further

information on ISAs, PEPs or an ISA brochure, please contact the Bank of Scotland, PEP and ISA Department, 600 Gorgie Road, Edinburgh EH11 3WA.

Telephone 0131 442 8271. Fax 0131 442 8290.

Scottish & Newcastle share dealing service

Low cost postal service:

A low cost postal service is available through stockbrokers Hoare Govett – telephone 0207 678 8300; fax 0207 678 7645.

Telephone:

The following companies have telephone numbers applicable for S&N share dealings:

Halifax – 0870 600 9966; Stocktrade – 0845 300 2221; The Share Centre – 0800 800 008.

Further information:

If you would like further information on share dealing please contact the Company at its registered office.

Shares

The closing prices of our ordinary shares during the course of the year were:

30 April 2001 497·50p

14 May 2001 (low) 481·50p

24 April 2002 (high) 628·00p

26 April 2002 618·00p

Capital gains tax information

The sale of shares by a UK shareholder may give rise to a capital gains tax liability. The Taxation of Chargeable Gains Act 1992 charges only gains made

since 31 March 1982. At 31 March 1982, the capital gains value for an ordinary share was 52·5p and was 164·4p adjusted. The adjusted price of 164·4p

is for shareholders who subscribed for their full entitlement under the rights issues in October 1993 and May 1995.

Dividends – payment direct to banks

Dividends can be paid direct to your bank or building society account using the Bankers’ Automated Clearing Service (BACS). This means that your dividend

will be in your account on the same day the Company makes the payment. Your tax voucher will be posted directly to your own address. Shareholders who

have not yet arranged to use and wish to use this method of payment, please telephone the registrars on 0870 601 5366. The Company encourages you

to have your dividends paid direct to a bank or building society.

Dividends – S&N ShareBuild Dividend Re-Investment Plan

The company has introduced S&N ShareBuild which is a dividend re-investment plan. The S&N ShareBuild rules brochure and application form can be

obtained from the registrars, the Company Secretary’s office or the website.

Registrars – Shareview website

The registrars provide an on-line service that enables shareholders to access details of their S&N shareholdings. A shareholder wishing to view the

information, together with additional information such as indicative share prices and details of recent dividends, should visit www.shareview.co.uk

Registrars

Lloyds TSB Registrars Scotland, PO Box 28448, Finance House, Orchard Brae, Edinburgh, EH4 1WQ. Fax 0870 900 0030. Telephone Shareholders’

Helpline 0870 601 5366. Brokers’ Helpline 0891 105 366.

Registered office

33 Ellersly Road, Edinburgh EH12 6HX.

Registered in Scotland: number 16288.

Telephone 0131 528 2000. Fax 0870 333 2121. E-mail: [email protected]

Website

You may wish to view the Company website containing details of Group activities and investor information, including the Annual Review and the full Annual

Report and Accounts. The address is: www.scottish-newcastle.com

Shareholder Information


Contents1 Operating and Financial Review9 Report of the Directors

10 Corporate Governance12 Board Remuneration Report17 Statement of Directors’ Responsibilities18 Independent Auditors’ Report20 Group Profit and Loss Account21 Group and Company Balance Sheets22 Group Cash Flow Statement23 Statement of Total Recognised Gains and Losses23 Note on Historical Cost Profits and Losses23 Reconciliation of Movement in Shareholders’ Funds24 Notes to the Accounts43 Five Year Record44 Shareholder Information

Designed and produced by Tayburn Corporate

A27371 S&N A/Rep Cover alts 15/7/02 4:13 pm Page 2

Annual Report and Accounts 2002

Scottish &

New

castle plcA

nnual Report and A

ccounts 2002

Scottish & Newcastle plc33 Ellersly RoadEdinburgh EH12 6HXTelephone +44 (0) 131 528 2000Fax +44 (0) 870 333 [email protected]

A27371 S&N A/Rep Cover alts 15/7/02 4:13 pm Page 1

Annual Report and Accounts 2002 -...

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