20-F

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 20-F

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended:	30 June 2003
Commission file number:	1-10691

DIAGEO plc

(Exact name of Registrant as specified in its charter)

England
(Jurisdiction of incorporation or organisation)

8 Henrietta Place, London W1G 0NB, England
(Address of principal executive offices)

Securities registered or to be registered pursuant to Section 12(b) of the Act:

Title of each class	Name of each exchange on which registered
American Depositary Shares		New York Stock Exchange
Ordinary shares of 28 101/108 pence each		New York Stock Exchange*
9.42% Cumulative guaranteed preferred securities, series A**		New York Stock Exchange

* Not for trading, but only in connection with the registration of American Depositary Shares representing such ordinary shares, pursuant to the requirements of the Securities and Exchange Commission.

** Issued by Grand Metropolitan Delaware, LP, of which the Registrant is the sole general partner, and guaranteed as to certain payments by the Registrant.

Securities registered or to be registered pursuant to Section 12(g)of the Act:	None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:	None

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the Annual Report: 3,099,593,537 ordinary shares of 28 ^101/108 pence each.

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

Yes [X]          No [•]

Indicate by check mark which financial statement item the Registrant has elected to follow.

Item 17 [•]  Item 18 [X]

This document comprises the annual report on Form 20-F and the annual report to shareholders for the year ended 30 June 2003 of Diageo plc (the 2003 Form 20-F). Reference is made to the cross reference to Form 20-F table on page 144 here of (the Form 20-F Cross reference table). Only (i) the information in this document that is referenced in the Form 20-F Cross reference table, (ii) the cautionary statement concerning forward-looking statements on page 18 and (iii) the Exhibits, shall be deemed to be filed with the Securities and Exchange Commission for any purpose, including incorporation by reference into the Registration Statements on Form F-3 (File Nos. 333-10410 and 333-14100) and Registration Statements on Form S-8 (File Nos. 333-08090, 333-08092, 333-08094, 333-08096, 333-08098, 333-08100, 333-08102, 333-08104, 333-08106, 333-09770, 333-11460 and 333-11462), and any other documents, including documents filed by Diageo plc pursuant to the Securities Act of 1933, as amended, which purport to incorporate by reference the 2003 Form 20-F. Any information herein which is not referenced in the Form 20-F Cross reference table, or the Exhibits themselves, shall not be deemed to be so incorporated by reference.

TABLE OF CONTENTS

EXHIBIT 4.6

EXHIBIT 4.10

EXHIBIT 4.11

EXHIBIT 4.12

Exhibit 4.13

EXHIBIT 12.1

EXHIBIT 12.2

EXHIBIT 13.1

EXHIBIT 13.2

EXHIBIT 14.1

Contents

2	Five year information
7	Business description
7	Overview
7	Strategy
7	Premium drinks
14	Other businesses
15	Discontinued operations
15	Risk factors
18	Cautionary statement concerning forward-looking statements
19	Operating and financial review
19	Introduction
20	Operating results — 2003 compared with 2002
32	Operating results — 2002 compared with 2001
43	Trend information
44	Liquidity and capital resources
47	Risk management
49	Critical UK GAAP accounting policies
49	New accounting standards
50	Discussion of US GAAP differences
52	Directors and senior management
55	Directors’ remuneration report
63	Corporate governance report
68	Directors’ report
69	Independent auditor’s report
70	Consolidated profit and loss account
72	Consolidated balance sheet
73	Consolidated cash flow statement
74	Consolidated statement of total recognised gains and losses
74	Note of consolidated historical cost profits and losses
75	Accounting policies
77	Notes to the consolidated financial statements
127	Company balance sheet
128	Notes to the company balance sheet
130	Principal group companies
131	Unaudited computation of ratio of earnings to fixed charges and preferred share dividends
132	Additional information for shareholders
132	Legal proceedings
132	Material contracts
134	Related party transactions
134	Share capital
136	Memorandum and articles of association
138	Exchange controls
138	Documents on display
139	Taxation
142	Signatures
143	Exhibits
144	Cross reference to Form 20-F
145	Glossary of terms and US equivalents

 

This is the annual report on Form 20-F of Diageo plc for the year ended 30 June 2003.

The market data contained in this document is taken from independent industry sources in the markets in which Diageo operates.

The reporting format has been revised to separate goodwill amortisation from exceptional items. Goodwill amortisation is now included in the ‘before exceptional items’ column of the profit and loss account.

This document contains forward-looking statements that involve risk and uncertainty. There are a number of factors that could cause actual results and developments to differ materially from those expressed or implied by these forward-looking statements, including factors beyond Diageo’s control. For more details, please refer to the cautionary statement concerning forward-looking statements on page 18.

This report includes names of Diageo’s products, which constitute trademarks or trade names which Diageo owns or which others own and licence to Diageo for use. In this report, the term ‘company’ refers to Diageo plc and the terms ‘group’ and ‘Diageo’ refer to the company and its consolidated subsidiaries, except as the context otherwise requires. A glossary of terms used in this report is included at the end of the document.

Diageo’s consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United Kingdom (UK GAAP), which is the group’s primary reporting framework. Unless otherwise indicated all other financial information contained in this document has been prepared in accordance with UK GAAP. The principal differences between UK and US GAAP are discussed in the operating and financial review and set out in the consolidated financial statements.

 

2 Diageo Annual Report 2003

Five year information

The following table presents selected consolidated financial data for Diageo for the five years ended 30 June 2003 and as at the respective year ends. The UK GAAP data for the five years ended 30 June 2003 and the US GAAP data for the three years ended 30 June 2003 have been derived from Diageo’s consolidated financial statements, which have been audited by Diageo’s independent auditor. The US GAAP data for the two years ended 30 June 2000 has been extracted from Diageo’s US GAAP audited consolidated financial statements.

	Year ended 30 June
	2003			2002			2001			2000			1999
Profit and loss account data(1)	£ million			£ million			£ million			£ million			£ million
UK GAAP
Turnover:
Premium drinks		8,961			8,704			7,580			7,117			7,163
Discontinued operations(2)		479			2,578			5,241			4,753			4,632
Total turnover		9,440			11,282			12,821			11,870			11,795
Operating profit before exceptional items:(3)(4)
Premium drinks		1,976			1,766			1,430			1,285			1,240
Discontinued operations(2)		53			340			671			678			659
Total operating profit before exceptional items		2,029			2,106			2,101			1,963			1,899
Exceptional items charged to operating profit(4)		(168	)		(453	)		(228	)		(181	)		(382	)
Operating profit		1,861			1,653			1,873			1,782			1,517
Other exceptional items(4)		(1,334	)		758			(4	)		(166	)		86
Profit for the year		76			1,617			1,207			990			937
US GAAP(2)
Sales		9,153			10,760			11,868			11,015			11,579
Gains/(losses) on disposals of businesses		16			1,843			(8	)		75			(35	)
Net income		487			2,554			758			798			392
Per share data	pence			pence			pence			pence			pence
UK GAAP
Dividend per share(6)		25.6			23.8			22.3			21.0			19.5
Earnings per share:
Basic		2.4			48.8			35.7			29.2			26.5
Diluted		2.4			48.7			35.7			29.1			26.4
Earnings before exceptional items per ordinary share:
Basic		49.0			43.2			41.6			37.3			33.5
Diluted		49.0			43.1			41.6			37.3			33.3
US GAAP
Basic earnings per ordinary share		15.6			77.0			22.4			23.5			11.1
Diluted earnings per ordinary share		15.6			77.0			22.4			23.5			11.0
Basic earnings per ADS		62.4			308.0			89.6			94.0			44.4
Diluted earnings per ADS		62.4			308.0			89.6			94.0			44.0

3 Diageo Annual Report 2003

	As at 30 June
	2003			2002			2001		2000			1999
Balance sheet data(1)	£ million			£ million			£ million		£ million			£ million
UK GAAP
Net current (liabilities)/assets(7)		(392	)		(32	)		226		(115	)		(941	)
Total assets		16,197			18,493			17,644		16,089			16,216
Net borrowings(7)		4,870			5,496			5,479		5,545			6,056
Shareholders’equity		4,954			6,001			5,123		4,664			3,964
Called up share capital(8)		897			930			987		990			992
US GAAP
Total assets(9)		24,071			26,153			25,955		24,868			25,586
Long term obligations(7)		3,149			3,892			4,029		3,753			3,431
Shareholders’equity		9,226			11,316			11,880		11,802			11,690
	million			million			million		million			million
Number of ordinary shares(8)		3,100			3,215			3,411		3,422			3,428

Notes to the selected consolidated financial data

1 Seagram The results and balance sheets for the two years ended 30 June 2003 have been affected by the acquisition of the Seagram spirits and wine businesses on 21 December 2001. See ‘Operating and financial review — Operating results’.

2 Discontinued operations Included within UK GAAP discontinued operations are the quick service restaurants business (Burger King sold 13 December 2002) and the packaged food businesses (Pillsbury sold 31 October 2001). The quick service restaurants and packaged food businesses have been included in continuing operations under US GAAP. There are no discontinued operations under US GAAP.

3 Brands and goodwill amortisation An analysis of goodwill amortisation charged to UK GAAP operating profit is as follows:

	Year ended 30 June
	2003			2002			2001			2000			1999
	£ million			£ million			£ million			£ million			£ million
Continuing operations — premium drinks		(2	)		(2	)		(2	)		(1	)		–
Discontinued operations		(2	)		(10	)		(24	)		(16	)		(4	)
		(4	)		(12	)		(26	)		(17	)		(4	)

An analysis of brands and goodwill amortisation charged to US GAAP operating income is as follows:
	Year ended 30 June
	2003		2002		2001			2000			1999
	£ million		£ million		£ million			£ million			£ million
Premium drinks		–		–		(220	)		(222	)		(230	)
Quick service restaurants		–		–		(70	)		(40	)		(39	)
Packaged food		–		–		(145	)		(130	)		(123	)
		–		–		(435	)		(392	)		(392	)

The group adopted the requirements of SFAS No. 141 and SFAS No. 142 for the first time on 1 July 2001. Accordingly amortisation of intangible assets with indefinite useful lives ceased from that date. In addition, in the year ended 30 June 2002 an impairment in the carrying value of goodwill attributable to the group’s quick service restaurants business of £135 million was recognised.

4 Diageo Annual Report 2003
Five year information

4 Exceptional items An analysis of exceptional items before taxation under UK GAAP is as follows:
	Year ended 30 June
	2003			2002			2001			2000			1999
	£ million			£ million			£ million			£ million			£ million
Exceptional items charged to operating profit
Continuing operations — premium drinks:
Seagram integration costs		(177	)		(164	)		–			–			–
Guinness/UDV integration costs		(48	)		(48	)		(74	)		–			–
GrandMet/Guinness merger integration costs		–			–			–			(83	)		(262	)
Other integration and restructuring costs		–			–			(79	)		–			–
Bass distribution rights		57			–			–			–			–
José Cuervo settlement		–			(220	)		–			–			–
Share option funding costs		–			–			–			–			(43	)
		(168	)		(432	)		(153	)		(83	)		(305	)
Discontinued operations:
Restructuring, reorganisation and other net costs		–			(21	)		(75	)		(98	)		(77	)
		(168	)		(453	)		(228	)		(181	)		(382	)
Other exceptional items
Charged to associates		(21	)		(41	)		–			(3	)		(8	)
(Losses)/gains on disposal of fixed assets		(43	)		(22	)		19			5			(10	)
(Losses)/gains on disposal and termination of businesses		(1,270	)		821			(23	)		(168	)		104
		(1,334	)		758			(4	)		(166	)		86

Exceptional items under UK GAAP do not represent extraordinary items under US GAAP.

5 Unusual items An analysis of unusual (charges)/income, excluding gains/(losses) on disposal of businesses and (losses)/gains on disposal of fixed assets, included in, and affecting the comparability of, US GAAP operating income, is as follows:
	Year ended 30 June
	2003			2002			2001			2000			1999
	£ million			£ million			£ million			£ million			£ million
Seagram integration costs		(154	)		(82	)		–			–			–
Other integration and restructuring costs		(48	)		(48	)		(169	)		(115	)		(272	)
Bass distribution rights		57			–			–			–			–
José Cuervo settlement		–			(194	)		–			–			–
Derivative instruments in respect of General Mills shares		(4	)		166			–			–			–
Burger King impairment charges and transaction costs		(750	)		(135	)		–			–			–
Other impairment charges		–			–			–			–			(74	)
		(899	)		(293	)		(169	)		(115	)		(346	)

5 Diageo Annual Report 2003

6 Dividends The Diageo plc board expects that Diageo will pay an interim dividend in April and a final dividend in October of each year. Approximately 40% of the total dividend in respect of any financial year is expected to be paid as an interim dividend and approximately 60% as a final dividend. The payment of any future dividends, subject to shareholder approval, will depend upon Diageo’s earnings, financial condition and such other factors as the Diageo plc board deems relevant.

The table below sets out the amounts of interim, final and total cash dividends paid by Diageo plc on each ordinary share. The dividends are translated into US dollars per ADS (each ADS representing four ordinary shares) at the noon buying rate on each of the respective dividend payment dates.

		Year ended 30 June
		2003		2002		2001		2000		1999
		pence		pence		pence		pence		pence
Per ordinary share	Interim		9.9		9.3		8.9		8.4		7.8
	Final		15.7		14.5		13.4		12.6		11.7
	Total		25.6		23.8		22.3		21.0		19.5

		$		$		$		$		$
Per ADS	Interim		0.61		0.54		0.51		0.53		0.50
	Final		1.06		0.90		0.78		0.72		0.76
	Total		1.67		1.44		1.29		1.25		1.26

7 Definitions Net current (liabilities)/assets is defined as current assets less current liabilities. Net borrowings is defined as total borrowings (i.e. short term borrowings and long term borrowings plus finance lease obligations) less cash at bank and liquid resources, interest rate and foreign currency swaps and current asset investments. Long term obligations is defined as long term borrowings and capital lease obligations which fall due after more than one year.

8 Share capital The called up share capital represents the number of ordinary shares in issue. During the year ended 30 June 2003 the group repurchased for cancellation 116 million ordinary shares at a cost of £852 million (2002 — 198 million ordinary shares, cost of £1,658 million; 2001 — 18 million ordinary shares, cost of £108 million; 2000 — 10 million ordinary shares, cost of £54 million; 1999 — 175 million shares, cost of £1,211 million (including £15 million for ‘B’ shares)).

9 Burger King Under UK GAAP, the sale of Burger King has been accounted for as a disposal and the results prior to disposal are presented within discontinued operations. Under US GAAP, the transaction is not accounted for as a disposal due to the size of the investment made by the buyer and Diageo’s continuing involvement through the guarantee provided by Diageo in respect of the acquisition finance. Under US GAAP, the results of Burger King prior to 13 December 2002 (the completion date) are presented as continuing operations in the income statement and, on the completion of the transaction, a charge for impairment has been recognised rather than a loss on disposal. Following the completion date, Diageo does not recognise profits of Burger King in its income statement but will, generally, reflect losses as an impairment charge against the assets retained on the balance sheet. In the US GAAP balance sheet, the total assets and total liabilities of Burger King at 30 June 2003 (including consideration deferred under US GAAP) classified within ‘other long term assets’ and ‘other long term liabilities’ were each £1.3 billion. The transaction will be accounted for as a disposal when the uncertainties related to the guarantee provided in respect of the acquisition finance have been substantially resolved and/or the buyer’s cumulative investment meets or exceeds minimum levels.

6 Diageo Annual Report 2003
Five year information

10 Exchange rates A substantial portion of the group’s assets, liabilities, revenues and expenses is denominated in currencies other than pound sterling, principally US dollars. For a discussion of the impact of exchange rate fluctuations on the company’s financial condition and results of operations, see ‘Operating and financial review — Risk management’.

The following table shows, for the periods indicated, information regarding the US dollar/pound sterling exchange rate, based on the noon buying rate, expressed in US dollars per £1.
	Year ended 30 June
	2003		2002		2001		2000		1999
Period end		1.65		1.52		1.41		1.51		1.58
Average rate (a)		1.59		1.45		1.45		1.59		1.64

(a) The average of the noon buying rates on the last business day of each month during the year. These rates have been provided for your convenience. They are not necessarily the rates that have been used in this document for currency translations or in the preparation of the financial statements. See note 2 (i)(c) to the consolidated financial statements for the actual rates used.

The following table shows period end and average US dollar/pound sterling noon buying exchange rates by month, for the period to 31 October 2003, expressed in US dollars per £1.
													2003
	October		September		August		July		June		May		April
Period end		1.70		1.66		1.58		1.61		1.65		1.64		1.60
Average rate		1.68		1.62		1.59		1.62		1.66		1.62		1.57

The average rate for the period 1 to 14 November 2003 was £1=$1.68 and the noon buying rate on 14 November 2003 was £1=$1.68.

7 Diageo Annual Report 2003

Business description

Overview

Diageo is one of the world’s leading beverage alcohol businesses with a portfolio of international brands. Diageo was the eleventh largest publicly quoted company in the United Kingdom in terms of market capitalisation on 14 November 2003, with a market capitalisation of approximately £22.6 billion.

     Diageo was formed by the merger of Grand Metropolitan Public Limited Company and Guinness PLC that became effective on 17 December 1997. As a result of the merger, Grand Metropolitan Public Limited Company became a wholly owned subsidiary of Guinness PLC, and Guinness PLC was renamed Diageo plc. Diageo is incorporated as a public limited company in England and Wales. Diageo’s principal executive office is located at 8 Henrietta Place, London W1G 0NB and its telephone number is +44 (0) 20 7927 5200.

     Diageo is a major participant in the branded beverage alcohol industry and operates on an international scale. It brings together world-class drinks brands and a management team committed to the maximisation of shareholder value. The management team expects to invest in global brands, expand internationally and launch innovative new products and brands.

     Diageo’s premium drinks business is the world’s leading branded premium spirits business by volume, sales revenue and operating profit. Diageo also brews and markets beer and produces and sells wine. It produces and distributes a wide range of premium brands, including Smirnoff vodka, Johnnie Walker Scotch whiskies, Guinness stout, Baileys Original Irish Cream liqueur, JεB Scotch whisky, Captain Morgan rum and Tanqueray gin.

Strategy

Diageo has now completed the strategic transition to a focused premium drinks company. Since announcing the planned realignment of its business focus in 2000, Diageo has exited the food business, selling Pillsbury to General Mills in October 2001 and divesting of Burger King in December 2002. Over the same period, it enhanced its premium drinks business with the purchase of parts of the Seagram spirits and wine businesses in December 2001. The completion of these transactions and the integration of the Seagram brands has strongly enhanced Diageo’s position in the premium drinks industry, and furthered its strategic objectives of building strength and focus in its core business.

     Diageo’s brand portfolio is essential to its strategy. The company owns eight of the top 20 brands in the top 100 premium distilled spirits brands worldwide as defined by Impact. The international nature of these brands enables Diageo to operate as a global business, with local sensitivity in its markets, while remaining focused on its target of being the number one premium drinks player in every market.

     Diageo’s position in premium drinks enables the company to attract and develop talented people with the capabilities to achieve Diageo’s performance goals. Key to this success is promoting diversity and ensuring Diageo is regarded as the best place to work.

     Diageo’s strategy is executed at three levels, market participation, product offering, and business effectiveness. The common themes which run through each of these levels, serve as crucial drivers of Diageo’s current and future success.

Market participation Diageo targets its geographical priorities in terms of major, key and venture markets. The major markets are amongst the biggest premium drinks markets in the world. They account for the majority of operating profit, and serve as the primary drivers for Diageo’s business. Key markets are those where Diageo has a high relative market share and they further enhance growth, while the innovative and entrepreneurial venture markets support the long term reach of Diageo’s business.

Product offering At the brand level, Diageo manages its brands in terms of global priority brands, local priority brands, and category brands. Acting as the main focus for the business, global priority brands are Diageo’s primary growth drivers across markets. At the individual market level, local priority brands are those which drive growth on a significant, yet more limited geographic scale. Category brands comprise the smaller scale brands in Diageo’s portfolio.

Business effectiveness Diageo’s size provides an opportunity for significant scale efficiencies in operations and marketing effectiveness. Strategically, Diageo is focused on using this scale to maximise cost efficiencies, and to enable the dissemination of consumer insight across its portfolio.

     Over the long term, Diageo’s strategy will be continually focused on driving growth and increasing shareholder value.

     Diageo has completed a number of acquisitions and disposals consistent with its strategy of focusing on its premium drinks business. Between the merger in December 1997 and 30 June 2003 the group has received approximately £8.5 billion from disposals (including £4.3 billion from the sale of Pillsbury and £0.6 billion from the sale of Burger King) and spent approximately £4.4 billion on acquisitions. On 21 December 2001, Diageo and Pernod Ricard S.A. (Pernod Ricard) completed the acquisition of the spirits and wine businesses of The Seagram Company Ltd (Seagram) from Vivendi Universal SA (Vivendi) for $8.15 billion (£5.62 billion) in cash subject to certain debt, working capital and other adjustments. Diageo’s share of the purchase price after adjustment was £3.7 billion.

Premium drinks

Diageo is engaged in a broad range of activities within the beverage alcohol business. Its operations include producing, distilling, brewing, bottling, packaging, distributing, developing and marketing a range of brands in approximately 180 territories around the world. Diageo markets a portfolio of widely recognised beverage alcohol brands including a number of the world’s leading spirits and beer brands. The brand ranking information below, when comparing volume information with competitors, has been sourced from data published during 2003 by Impact, a publication which compiles volume statistics for the international drinks industry. Market data information is taken from industry sources in the markets in which Diageo operates. Seventeen of the group’s owned brands were among the top 100 premium distilled spirits brands worldwide in calendar year 2002.

8 Diageo Annual Report 2003
Business description

References to ready to drink products below include flavored malt beverages. Ready to drink products are sold throughout the world, but flavored malt beverages are currently only sold in the United States. References to Smirnoff ready to drink include Smirnoff Ice, Smirnoff Black Ice, Smirnoff Twisted V, Smirnoff Mule, Smirnoff Spin and Smirnoff Caesar. References to Smirnoff Black Ice include Smirnoff Ice Triple Black in the United States.

     In the year ended 30 June 2003, Diageo sold 95 million equivalent units of spirits (including ready to drink), 2 million equivalent units of wine and 22 million equivalent units of beer. In the year ended 30 June 2003, ready to drink products contributed 6.7 million equivalent units of total premium drinks volume of which Smirnoff Ice accounted for 5.0 million equivalent units. Volume is measured on an equivalent units basis to nine litre cases of spirits. Equivalent units are measured as follows — wine in nine litre cases is divided by five, ready to drink in nine litre cases is divided by 10, beer in hectolitres is divided by 0.9. An equivalent unit represents approximately 272 servings. A serving comprises 33ml of spirits; 165ml of wine; or 330ml of ready to drink or beer.

     Turnover of premium drinks for the year ended 30 June 2003 was £8,961 million and operating profit before exceptional items was £1,976 million.

     The premium drinks portfolio comprises brands owned by the company as a principal, and brands the company holds under agency agreements. The portfolio includes:

Global priority brands

Smirnoff vodka and Smirnoff ready to drink products
Johnnie Walker Scotch whiskies
Guinness stout
Baileys Original Irish Cream liqueur
JεB Scotch whisky
Captain Morgan rum
José Cuervo tequila (agency brand in North America and many European and international markets)
Tanqueray gin

Other spirits brands include:
Crown Royal Canadian whisky
Buchanan’s De Luxe whisky
Gordon’s gin and vodka
Windsor Premier whisky
Bell’s Extra Special whisky
Dimple/Pinch whisky
Seagram’s 7 American whiskey
Old Parr whisky
Seagram’s VO Canadian whisky
Bundaberg rum Wine brands include:
Beaulieu Vineyard wine
Sterling Vineyards wine
Blossom Hill wine
Piat D’Or wine Other beer brands include:
Harp Irish lager
Smithwick’s ale
Malta non-alcoholic stout
Red Stripe lager

Diageo’s agency agreements vary depending on the particular brand, but tend to be for a fixed number of years. There can be no assurances that Diageo will be able to prevent termination of distribution rights or rights to manufacture under licence, or renegotiate distribution rights or rights to manufacture under licence on favourable terms when they expire. See ‘Acquisitions and disposals/ termination of businesses and distribution rights’ for information in respect of José Cuervo and Bass Ale in the United States and Brown-Forman brands in the United Kingdom. Diageo’s principal agency brands are José Cuervo in North America and many European and international markets and Grand Marnier liqueur in the United States.

     Diageo also brews and sells other companies’ beer brands under licence, including principally Budweiser and Carlsberg lagers in Ireland, Heineken lager in Jamaica and Tiger beer in Malaysia. In addition, Diageo held distribution rights to Bass Ale in the United States but these rights were relinquished as of 30 June 2003.

Global priority brands Diageo has eight global priority brands that it markets worldwide. Diageo considers these brands to have the greatest current and future earnings potential. Each global priority brand is marketed consistently around the world, and therefore can achieve scale benefits such as global media campaigns. The group manages and invests in these brands on a global basis. In the year ended 30 June 2003, global priority brands contributed 58% of premium drinks total volume and achieved turnover of £5,121 million.

     Figures for global priority brands include related ready to drink products, unless otherwise indicated.

     Smirnoff is Diageo’s highest volume brand and achieved sales of 23.0 million equivalent units in the year ended 30 June 2003. Smirnoff is ranked, by volume, as the number one premium vodka and the number two premium spirit brand in the world.

     Johnnie Walker Scotch whiskies comprise Johnnie Walker Red Label, Johnnie Walker Black Label and several other brand variants. During the year ended 30 June 2003, Johnnie Walker Red Label sold 6.9 million equivalent units and was ranked, by volume, as the number one premium Scotch whisky and the number four premium spirit brand in the world. Johnnie Walker Black Label sold 3.6 million equivalent units and the remaining variants sold 0.3 million equivalent units in the year ended 30 June 2003.

     Guinness is the company’s only global priority beer brand, and for the year ended 30 June 2003 achieved volume of 11.4 million equivalent units.

     Captain Morgan was acquired as part of the Seagram acquisition on 21 December 2001. Captain Morgan is ranked as the number two premium rum brand in the world and contributed 5.3 million equivalent units in the year ended 30 June 2003.

     Other global priority brands were also ranked, by volume, among the leading premium distilled spirits brands by Impact. These include Baileys, ranked the number one liqueur in the world;JεB Scotch whisky (comprising JεB Rare, JεB Select, JεB Reserve and JεB Jet), ranked the number two premium Scotch whisky in the world; José Cuervo, ranked the number one premium tequila in the world; and Tanqueray, ranked the number four premium gin brand in the world. During the year ended 30 June 2003, Baileys, JεB, José Cuervo and Tanqueray sold 6.2 million, 6.0 million, 4.2 million and 1.9 million equivalent units, respectively.

9 Diageo Annual Report 2003

Other brands Diageo manages its other brands by category, analysing them between local priority brands and category brands.

     Local priority brands represent the brands, apart from the global priority brands, that make the greatest contribution to operating profit in an individual country, rather than worldwide. Diageo has identified 30 local priority brands. Diageo manages and invests in these brands on a market by market basis and, unlike the global priority brands, may not have a common marketing strategy around the world for such brands. For the year ended 30 June 2003, local priority brands contributed 19% of premium drinks total volume (in nine litre equivalent units) and turnover of £1,946 million. Examples of local priority brands include Bell’s Extra Special whisky in Great Britain, Dimple/Pinch whiskies in South Korea, Beaulieu Vineyard wines in North America, Smithwick’s ale in Ireland, Budweiser and Carlsberg lagers in Ireland, and Gordon’s gin in Great Britain and North America. From 1 July 2002, Diageo has replaced seven local priority brands from the original list with seven brands acquired in the Seagram spirits and wine businesses. These include Crown Royal Canadian whisky in North America and Windsor Premier whisky in South Korea, Seagram’s VO Canadian whisky and Seagram’s 7 American whiskey in North America.

     The remaining brands are grouped under category brands. Other spirits achieved volume of 21.4 million equivalent units and contributed £1,263 million to Diageo’s turnover in the year ended 30 June 2003. Examples of category brands are Gordon’s gin (all markets except Great Britain and North America in which it is reported as a local priority brand), Gordon’s vodka, The Classic Malt whiskies and White Horse whisky.

     In the year ended 30 June 2003, Diageo sold 4.6 million equivalent units of other beers, achieving turnover of £365 million.

Approximately 30% of other beer volume was attributable to owned brands, such as Harp Irish lager (all markets except Ireland), Kilkenny Irish beer, Malta non-alcoholic stout (all markets except Africa) and Smithwick’s ale (all markets except Ireland). The remainder was attributable to beers brewed and/or sold under licence, including Bass Ale in the United States (distribution rights for which expired in June 2003), Tiger beer in Malaysia and Heineken lager in Jamaica.

     In addition, Diageo produces and markets a wide selection of wines. These include well known labels such as Blossom Hill in the United States, and Barton & Guestier and Piat D’Or in Europe. For the year ended 30 June 2003, other wine volume was 1.8 million equivalent units, contributing turnover of £266 million.

Production Diageo owns production facilities including maltings, distilleries, breweries, packaging plants, maturation warehouses, cooperages, vineyards and distribution warehouses. Production also occurs at plants owned and operated by third parties and joint ventures at a number of locations internationally.

     Approximately 75% of total production (including third party production) is undertaken in five Diageo production centres, namely the United Kingdom, Baileys, Guinness, Santa Vittoria and North America centres. The majority of these production centres have several production facilities. The locations, principal activities, products, production capacity and production volume in 2003 of these principal production centres owned throughout 2003 are set out in the following table:

					Production
			Production		volume in
			capacity*		2003*
Production centre	Location	Principal products	million		million
United Kingdom	United Kingdom	Scotch whisky, gin, vodka, rum, ready to drink		58		37
Baileys	Ireland	Irish cream liqueur, vodka		12		7
Guinness	Ireland, United Kingdom	Beers, ready to drink		13		10
Santa Vittoria	Italy	Vodka, ready to drink		8		5
North America	United States, Canada	Vodka, gin, tequila, rum, Canadian whisky, American whiskey, ready to drink		75		33

*In equivalent units.

Diageo has invested in additional capacity for Baileys and other cream liqueurs by building a new facility in Northern Ireland (capacity of 5 million equivalent units) costing £40 million in order to support future growth of this product category. Production at the new facility commenced in May 2003.

     Diageo is currently restructuring its production operations in Canada to reduce excess capacity following the acquisition of the Seagram spirits and wine businesses, and the associated enforced sale of the Malibu brand. The facility in Toronto, Ontario (capacity 5 million equivalent units) was closed in March 2003. The facility in LaSalle, Quebec (capacity of 10 million equivalent units) is planned to close in the year ending 30 June 2004.

     Spirits are produced in distilleries located worldwide. The principal owned distilleries are 29 whisky distilleries in Scotland, a whisky distillery in Canada and gin distilleries in the United Kingdom and the United States. Diageo produces Smirnoff vodka internationally, Popov vodka and Gordon’s vodka in the United States and Baileys in the Republic of Ireland. Rum is blended and bottled in the United States, Canada and the United Kingdom and is distilled, blended and bottled in Australia and Venezuela. All of Diageo’s maturing Scotch whisky is located in warehouses in Scotland.

     Diageo’s principal wineries are in the United States, France and Argentina. Wines are sold both in their local markets and overseas.

     Diageo produces a range of ready to drink products mainly in the United Kingdom, Italy, South Africa, Australia, the United States and Canada.

     Diageo’s principal brewing facilities are at the St James’s Gate brewery in Dublin and in Kilkenny, Waterford and Dundalk in the Republic of Ireland, Park Royal in London, England and in Nigeria, Kenya, Malaysia, Jamaica and Cameroon. Ireland is the main export centre for the Guinness brand. In other countries, Guinness is brewed under licence arrangements. Guinness Draught in cans and bottles, which uses an in-container system to replicate the taste of Guinness Draught, is packaged at Runcorn in England.

10 Diageo Annual Report 2003
Business description

Property, plant and equipment Diageo owns or leases land and buildings throughout the world. The production facilities are described above. As at 30 June  2003, Diageo’s land and buildings were included in the group’s consolidated balance sheet under UK GAAP at a net book value of £774 million. Diageo’s largest individual facility, in terms of net book value of property, is St James’s Gate brewery in Dublin. Approximately 97% by value of the group’s properties were owned and approximately 3% are held under leases running for 50 years or longer. Diageo’s properties primarily are a variety of manufacturing, distilling, brewing, bottling and administration facilities spread across the group’s worldwide operations, as well as vineyards in the United States. Approximately 49% and 22% of the book value comprises properties located in the United Kingdom and the United States, respectively.

Raw materials The group has a number of contracts for the forward purchasing of its raw material requirements in order to minimise the effect of raw material price fluctuations. Long term contracts are in place for the purchase of significant raw materials including glass, other packaging, tequila, neutral spirits, cream, rum and grapes. In addition, forward contracts are in place for the purchase of other raw materials including sugar and cereals to minimise the effects of short term price fluctuations.
     Cream is the principal raw material used in the production of Irish cream liqueur and is sourced from Ireland. Grapes are used in the production of wine and are sourced from suppliers in the United States, France and Argentina. Other raw materials purchased in significant quantities for the production of spirits and beer are tequila, neutral spirits, molasses, rum, cereals, sugar and a number of flavours (such as juniper berries, agave, chocolate and herbs). These are sourced from suppliers around the world.
     The majority of products are supplied to customers in glass bottles. Glass is purchased from suppliers located around the world, the principal supplier being the Owens Illinois group.
     On 4 February 2002, Diageo entered into a supply agreement with Casa Cuervo S.A. de C.V., a Mexican company, for the supply of bulk tequila used to make the José Cuervo line of tequilas and tequila drinks in the United States. The supply agreement will expire on 30 June 2013.
     On 22 May 2002, Diageo entered into a long term supply agreement with Destiléria Serrallés, Inc (Serrallés), a Puerto Rico corporation for the supply of rum that is used to make the Captain Morgan line of rums and rum drinks in the United States. The supply agreement will last for 10 years from the time of its signing in 2002, with a three year notice requirement coming into effect once the original 10 year term has expired.

Marketing and distribution Diageo is committed to investing in its brands. £1,185 million was spent worldwide on marketing on premium drinks brands in the year ended 30 June 2003. Marketing was focused on the eight global priority brands, which accounted for 68% of total marketing expenditure on premium drinks products.
     Diageo has four major markets — North America, Great Britain, Ireland and Spain. In the year ended 30 June 2003, these markets contributed 60% of premium drinks operating profit before exceptional items. In addition, there are 15 key markets which are considered to be individually important, and these contributed 26% of premium drinks operating profit before exceptional items. The remaining geographic markets are reported as venture markets and these accounted for 14% of premium drinks operating profit before exceptional items in the year ended 30 June 2003.

North America North America is the largest market for Diageo, and the largest premium drinks market in the world. Currently, in North America, Diageo markets its products through 14 business teams or clusters (previously five separate spirits in market companies (IMCs)), Diageo Chateau & Estates Wines (DC&E), DIAGEO — Guinness USA (DG-USA), a Canadian IMC and a 50% distribution joint venture with Moët Hennessy —Schieffelin & Somerset (S&S).
     The 14 geographic business units or clusters are managed as three hubs: major states, key states and control states. National brand strategy and strategic accounts marketing are managed at the corporate North America level. The clusters market the majority of Diageo’s spirits portfolio (including Smirnoff vodka, Baileys Irish Cream liqueur, José Cuervo tequila, Captain Morgan rum, Crown Royal Canadian whisky, Seagram’s 7 American whiskey and Seagram’s VO Canadian whisky) across the United States. DG-USA distributes Diageo’s US beer portfolio (Guinness stout, Harp lager, Kaliber non-alcoholic lager, Red Stripe lager and formerly Bass Ale on an agency basis) as well as the group’s flavored malt beverages (Smirnoff Ice and Smirnoff Ice Triple Black). DC&E markets all Diageo’s wine brands (such as Beaulieu Vineyard and Sterling Vineyards) across the United States. The Canada IMC distributes the group’s spirits, wine and beer portfolio across all Canadian territories. In the United States, S&S markets a number of Diageo’s Scotch whisky brands, including Johnnie Walker Scotch whiskies, JεB Scotch whisky, The Classic Malt whiskies and Buchanan’s De Luxe whisky along with Cîroc vodka, Tanqueray gin and Tanqueray Sterling vodka, and Moët Hennessy’s brands such as Moët & Chandon and Dom Pérignon champagnes and Hennessy cognac. S&S has an agreement with Marnier-Lapostolle, Inc and with Ruffino, which grants S&S the exclusive rights to market, distribute, and sell their products among which are Grand Marnier and certain Chilean wines, including Casa Lapostolle, in the United States.
     Within the United States, there are two types of regulatory environments, open states and control states. In open states, spirits companies, are allowed to sell spirits, wine and beer directly to independent distributors. In the majority of the open states within the United States, Diageo trades through a three tier distribution system, where the product is initially sold to distributors, which then sell it to on and off premise retailers. In some states, such as Texas, Diageo sells its products on premise through a four tier system, whereby Diageo sells to large distributors, which then sell to off premise retailers, and off premise retailers with special Class B licenses sell to on premise retailers. In most control states, Diageo markets its spirits products to state liquor control boards through the bailment warehousing system, and from there to state liquor stores. There are variations, for example certain states control distribution but not retail sales. Generally, wines are treated in the same way as spirits, although some states that are control states for spirits are open states for wines. Beer distribution follows open states regulation across the entire United States. In Canada, spirits distribution laws are similar to those of control states in the United States. In Canada, beer distribution laws are generally similar to those for spirits. Diageo, however, has some licences to direct-deliver keg beer to licensed accounts, which account for approximately 52% of Diageo’s beer business in Canada.
     The completion of the Seagram acquisition provided Diageo with the scale to pursue consolidation of its distributors in a strategy called Next Generation Growth (NGG). Building on the Seagram integration, the strategy focuses on consolidating the distribution of Diageo’s US spirits and wine, S&S and former Seagram brands into a single distributor in each state wherever possible. The strategy provided sufficient economies of scale to support the distributor changes, a consolidated network limiting duplication of activities between Diageo and the distributor, increased Diageo and distributor selling capabilities and employs a number of alternative approaches to optimise product distribution.

11 Diageo Annual Report 2003

Diageo has made excellent progress with the NGG initiative. Since the beginning of this calendar year, Diageo has signed distributor or broker agreements in 14 more states, bringing the current total to 34 states. These 34 states, together with Washington DC, represent nearly 80% of Diageo’s US spirits and wine volume. Across the United States, Diageo has nearly 2,000 dedicated sales people focused on selling Diageo’s and S&S’s spirits and wines brands. In future, Diageo’s focus will be on helping build the capabilities and selling tools of the distributors’ dedicated sales force and creating a more efficient and effective value chain. When the distributors and brokers are resourced to the target level, Diageo expect to have nearly 3,000 people selling its brands.
     It is expected that the implementation of the NGG strategy will be completed by December 2004. As part of the strategy, risk mitigation plans have been developed for each state. These plans identify the financial, sales, marketing and operations activities that must be implemented to move Diageo’s business to a new distributor without significant loss of business. While sales disruptions may occur during the distributor move process, the risk mitigation plans are expected to minimise the sales risk. However, consolidation has given rise, and is likely to continue to give rise, to legal actions, none of which is currently expected to be material to the group.

Great Britain In the Great Britain market, Diageo has the largest brand, by volume, in a number of spirit categories including vodka with Smirnoff, whisky with Bell’s and gin with Gordon’s. Smirnoff and Bell’s are also the top two distilled spirit brands, by volume, in the United Kingdom. Products are distributed both via wholesalers and directly to the major grocers, convenience and specialist stores. In the on trade (for example, licensed bars and restaurants), products are sold through the major brewers, multiple retail groups and smaller regional independent brewers and wholesalers.

Ireland Ireland comprises the Republic of Ireland and Northern Ireland, which together is an important market for Diageo. The Guinness, Smirnoff and Baileys brands are market leaders in their respective categories of long alcoholic drinks, vodka and cream liqueurs, respectively. Budweiser and Carlsberg lagers, also major products in the Diageo portfolio, are brewed and sold under licence in addition to the other local priority brands of Smithwick’s ale and Harp lager. In both countries, Diageo distributes directly to both the on trade and the off trade (for example, retail shops and wholesalers). Diageo also brews and packages a range of beers in Ireland for export to the United Kingdom, the United States and other international markets.

Spain Spain is an important Scotch whisky market for Diageo, and Diageo owns two of the top five Scotch whisky brands by volume in Spain, with JεB at number one and Johnnie Walker Red Label at number five. This is Diageo’s most important JεB market, contributing 47% of Diageo’s JεB total volume. With the addition of Cacique, a former Seagram brand, to its existing brand Pampero, Diageo Spain is leading the dark rum segment, which is the fastest growing segment in Spain. Distribution in Spain is primarily through Diageo’s own distribution company.

Key markets There are 15 key markets. These are markets which make a significant contribution in their own right, but still rely on Diageo’s global functions to support their businesses. Key markets are: Africa (excluding North Africa), Australia/New Zealand, Brazil/Paraguay, Colombia, France, Germany (a key market from 1 July 2003), Greece/Turkey, Japan, South Korea, Mexico, Taiwan, Thailand, Uruguay, Venezuela and Global Duty Free. Portugal was a key market until 30 June 2003.
     In Latin America, distribution is achieved through a mixture of Diageo companies and third party distributors.
     Africa (excluding North Africa) is one of the longest established and largest markets for the Guinness brand, with the brewing of Guinness Foreign Extra Stout in a number of African countries either through subsidiaries or under licence. Diageo has a wholly owned subsidiary in South Africa and in Cameroon and also has majority owned subsidiaries in Nigeria, Ghana, Kenya, Uganda, Réunion and the Seychelles.
     Global Duty Free is Diageo’s sales and marketing organisation which targets the international duty free consumer in duty free outlets such as airport shops, airlines and ferries around the world. The global nature of this organisation allows a co-ordinated approach to brand building initiatives and builds on shopper insights in this trade channel where consumer behaviour tends to be different from domestic markets.
     In European key markets, Diageo distributes its spirits brands primarily through its own distribution companies. However, in France, Diageo sells its spirits and wine products through a joint arrangement with Moët Hennessy, and its beer products through Interbrew.
     In Thailand, Japan and Taiwan Diageo distributes its spirits and wine brands through joint arrangements with Moët Hennessy. In Australia, Diageo has its own distribution company and also has licensed brewing arrangements with Carlton-United Breweries, while in New Zealand it operates through third party distributors and has licensed brewing arrangements with Lion Nathan. In South Korea, Diageo’s own distribution company distributes the majority of Diageo’s brands. The remaining brands are distributed through third party distributors. In Japan, Guinness is distributed through an associated company of the group.
     Generally the remaining markets are served by third party distribution networks monitored by regional offices.

Venture markets This grouping comprises all other markets, with the largest being North Africa, the Middle East, Jamaica, Central America, the Caribbean, the Canary Islands, Malaysia, Italy, Belgium, Portugal (a venture market from 1 July 2003), Netherlands and the Nordics. In these markets there is a focus on fewer brands and lean but flexible organisation structures are deployed whilst global best practices in areas such as consumer marketing, customer management and people development are applied. Germany was a venture market until 30 June 2003.
     In the European venture markets, Diageo distributes its brands primarily through its own distribution companies. In Asia Pacific, Diageo works with a number of joint venture partners. For Diageo’s spirits and wine brands, the most significant of these is Moët Hennessy with operations in Malaysia, Singapore, China and Hong Kong. In Malaysia and Singapore, Diageo’s own and third party beers are brewed and distributed through Diageo’s business with Asia Pacific Breweries Limited. In addition, Diageo owns a controlling interest in Desnoes & Geddes Limited, the Jamaican local brewer of Red Stripe lager. In general, the remaining markets are served by third party distribution networks controlled by regional offices.

12 Diageo Annual Report 2003
Business description

Seasonal impacts Christmas provides the peak period for premium drinks sales. Historically, approximately 30% of premium drinks sales volume occurs in the last three months of each calendar year.

Employees Diageo’s goal is to be an ‘Employer of Choice’ offering an energising work environment, personal growth, and recognition and attractive rewards for the performance contribution its people make to the group. Its employee policies are designed to support these goals and to do so in a manner that is fair and equitable to all employees. These policies take account of external legislation, internal codes of conduct, as well as Diageo’s values as an organisation.
     Diageo is a multi-cultural community operating in an increasingly diverse business world and is committed to active equality and diversity practices. The group offers people with disability the same opportunities for employment, training and career progression as other employees. It is also committed to attracting and retaining talented people. Diageo invests in the growth and development of its people, which contributes directly to the performance and results of the business. Where practical, Diageo encourages flexible ways of working to enable employees to take some control over the balance between work and home life. Diageo’s reward systems recognise the contribution employees make to success and reflect the value of the role they are performing.
     Diageo is committed to the safety and wellbeing of employees at work. It promotes responsible drinking behaviour among all its people. Diageo is committed to open and continuous dialogue with its employees as a way to inform and engage them in the company’s strategy and business goals as well as harnessing the ideas employees will have on improving broad areas of business performance. Each senior manager is responsible for supporting the Diageo Executive and the senior leadership community in delivering against these communication and employee engagement goals. The group has an intranet web site from which employees with access to a computer can obtain timely and accurate news and information.
     The group has entered into numerous collective bargaining agreements and believes that its employee relations are satisfactory. Diageo’s average number of employees during each of the three years ended 30 June 2003 was as follows:

	2003						2002						2001
	Full time		Part time		Total		Full time		Part time		Total		Full time		Part time		Total
Premium drinks		23,427		1,134		24,561		22,841		1,078		23,919		21,363		628		21,991
Discontinued operations		8,965		5,429		14,394		25,734		12,471		38,205		37,747		11,785		49,532
		32,392		6,563		38,955		48,575		13,549		62,124		59,110		12,413		71,523

Premium drinks includes ex-Seagram employees from 21 December 2001. Discontinued operations include employees for the quick service restaurants business prior to 13 December 2002 and packaged food prior to 30 October 2001, reflecting the periods in which the group owned the businesses.

Competition Diageo competes on the basis of consumer loyalty, quality and price.
     In spirits and wine, Diageo’s major global competitors are Pernod Ricard, Allied Domecq, Bacardi-Martini Inc, and Brown-Forman, each of which has several brands that compete directly with Diageo brands. Diageo believes, based on its analysis of data compiled by Impact, that Diageo and these four other major international companies account for approximately 62% of the volume of the top 100 premium distilled spirits in the world. In addition, Diageo faces competition from local and regional companies in the countries in which it operates.
     In beer, the Guinness brand competes in the overall beer market with its key competitors varying by market. These include Heineken in Ireland and several markets in Africa, Coors Brewing (Carling) in the United Kingdom and Carlsberg in Malaysia.
     Diageo aims to maintain and improve its market position by enhancing the consumer appeal of its brands through consistent high investment in marketing support focused around the eight global priority brands. Diageo makes extensive use of magazine, newspaper, point of sale and poster and billboard advertising, and uses radio, cinema and television advertising where appropriate and permitted by law. Diageo also runs consumer promotional programmes in the on trade (for example, licensed bars and restaurants).

Research and development The overall nature of the group’s business does not demand substantial expenditure on research and development. However, the group has ongoing programmes for developing new drinks products. In the year ended 30 June 2003, the group’s research and development expenditure amounted to £15 million (2002 — £28 million; 2001 — £71 million). Research and development expenditure is written off in the year in which it is incurred.

Trademarks Diageo produces and distributes branded goods and is therefore substantially dependent on the maintenance and protection of its trademarks. All brand names mentioned in this document are trademarks. The group also holds numerous licenses and trade secrets, as well as having substantial trade knowledge related to its products. The group believes that its significant trademarks are registered and/or otherwise protected (insofar as legal protections are available) in all material respects in its most important markets.

Regulations and taxes In the United States, the beverage alcohol industry is subject to strict federal and state government regulations covering virtually every aspect of its operations, including production, marketing, sale, distribution, pricing, labelling, packaging and advertising.
     Spirits, wine and beer are subject to national import and excise duties in many markets around the world. Most countries impose excise duties on beverage alcohol products, although the form of such taxation varies significantly from a simple application to units of alcohol by volume, to advanced systems based on imported or wholesale value of the product. Several countries impose additional import duty on distilled spirits, often discriminating between categories (such as Scotch whisky or bourbon) in the rate of such tariffs. Within the European Union, such products are subject to different rates of excise duty in each country, but within an overall European Union framework, there are minimum rates of excise duties that can be applied.
     Import and excise duties can have a significant impact on the final pricing of Diageo’s products to consumers. These duties have an impact on the competitive position versus other brands. The group devotes resources to encouraging the equitable taxation treatment of all beverage alcohol categories and to reducing government-imposed barriers to fair trading.

13 Diageo Annual Report 2003

Advertising, marketing and sales of alcohol are subject to various restrictions in markets around the world. These range from a complete prohibition of alcohol in certain countries and cultures, through the prohibition of the import of spirits, wine and beer, to restrictions on the advertising style, media and messages used. In a number of countries, television is a prohibited medium for spirits brands, through regulation, and in other countries, television advertising, while permitted, is carefully regulated.
     Spirits, wine and beer are also regulated in distribution. In many countries, alcohol may only be sold through licensed outlets, both on and off premise, varying from government or state operated monopoly outlets (for example, Canada, Norway, and certain US states) to the common system of licensed on premise outlets (for example, licensed bars and restaurants) which prevails in much of the western world (for example, most US states and the European Union). In about one-third of the states in the United States, price changes must be filed or published 30 days to three months, depending on the state, before they become effective.
     Labelling of beverage alcohol products is also regulated in many markets, varying from health warning labels to importer identification, alcohol strength and other consumer information. Specific warning statements related to the risks of drinking beverage alcohol products are required to be included on all beverage alcohol products sold in the United States. Following the end of the voluntary restrictions on television advertising of spirits in the United States, Diageo and other spirits companies have been advertising products on the air on local cable television stations. Expressions of political concern signify the uncertain future of beverage alcohol products advertising on network television in the United States. Further requirements for warning statements and any prohibitions on advertising and marketing could have an adverse impact on sales of the group.
     In addition, indications that regulatory bodies in the United States may change standards regarding the alcohol content and proper categorisation of flavored malt beverages such as Smirnoff Ice could have an adverse impact on the sales of the group. Regulatory decisions and changes in the legal and regulatory environment could increase Diageo’s costs and liabilities or impact its business activities.

Business services Diageo has committed to re-engineer its key business activities with customers, consumers, suppliers and the processes that summarise and report financial performance. In that regard, global processes are being designed, built and implemented in North America, Great Britain, Ireland and segments of global supply.
     A new business service centre in Budapest, Hungary opened in April 2002 and now performs various process tasks for Great Britain, Ireland and global supply. Additional processes currently located in Great Britain and other European countries are scheduled to transfer to Budapest during the next few years.

Associates Diageo’s principal associate in the premium drinks segment is Moët Hennessy. It also owns shares in a number of other associates. In the year ended 30 June 2003, premium drinks share of profit of associates before interest and exceptional items was £191 million, of which Moët Hennessy accounted for £177 million.

Moët Hennessy Diageo owns 34% of Moët Hennessy, the spirits and wine subsidiary of LVMH Moët Hennessy Louis Vuitton SA (LVMH). LVMH is based in France and is listed on the Paris Stock Exchange. Moët Hennessy is also based in France and is a producer and exporter of a number of brands in its main business areas of champagne and cognac. Its principal products include champagne brands, Moët & Chandon(including Dom Pérignon), Veuve Clicquot and Mercier, all of which are included in the top 10 champagne brands worldwide by volume, and Hennessy which is the top cognac brand worldwide by volume.
     Since 1987, a number of joint distribution arrangements have been established with LVMH, principally covering distribution of Diageo’s premium brands of Scotch whisky and gin and Moët Hennessy’s premium champagne and cognac brands in the Asia Pacific region, the United States, and France. S&S was established as a joint venture in the United States and distributes a number of Diageo’s Scotch whisky brands along with Cîroc vodka, Tanqueray gin and Tanqueray Sterling vodka as well as Moët Hennessy brands — see ‘Marketing and distribution — North America’. Diageo and LVMH have each undertaken not to engage in any champagne or cognac activities competing with those of Moët Hennessy. The arrangements also contain certain provisions for the protection of Diageo as a minority shareholder in Moët Hennessy.

Acquisitions and disposals/termination of businesses and distribution rights Diageo has made a number of strategic acquisitions and disposals of brands, equity interests in premium drinks businesses and distribution rights.

Seagram On 21 December 2001, Diageo and Pernod Ricard completed the acquisition of the Seagram spirits and wine businesses from Vivendi for $8.15 billion (£5.62 billion) in cash, subject to certain debt, working capital and other adjustments. Diageo’s share of the purchase price after adjustments was £3.7 billion.
     The transaction was structured such that each of Diageo and Pernod Ricard would acquire certain businesses and related assets for integration into their respective global premium drinks businesses, with other businesses and related assets being acquired and held jointly pending their disposal. The spirits and wine businesses comprised a number of separate legal entities and assets which were acquired by either Diageo, Pernod Ricard, or both parties jointly, but the effect was that the purchase consideration was funded in the overall proportions of 60.9% and 39.1% between Diageo and Pernod Ricard, respectively.
     Diageo has accounted for the transaction as an acquisition, reflecting profits and losses arising from those businesses and related assets acquired for its own use, consolidated from the acquisition date. For those businesses and assets acquired and/or held jointly pending their disposal (disposal assets), Diageo and Pernod Ricard shared the net proceeds of disposal in the proportion 60.9% and 39.1% respectively. Accordingly the results of these brands have been excluded from the group consolidation. Diageo accounted for its share of the net disposal proceeds as businesses held for resale. The disposals of these businesses were substantially completed within 12 months of the original acquisition.

14 Diageo Annual Report 2003
Business description

The sales of the largest disposal assets were achieved in the year ended 30 June 2002. These included the UK based off-licence chain Oddbins to the Castel Frères Group of France; the Four Roses bourbon business to Kirin Brewery Co, Ltd of Japan; the Mumm Sekt sparkling wine business to Rotkäppchen Sektkellerei GmbH & Co KG of Germany; the Seagram’s Mixers business to The Coca-Cola Company; the Sandeman port and sherry business to Sograp Holding SGPS SA of Portugal; and the Mumm Cuvée Napa sparkling wine business to Allied Domecq. In the year ended 30 June 2003, a number of smaller disposals were made, including Maschio sparkling wines and OVD, Woods and VAT 19 rums. Diageo’s share of net cash proceeds received totalled £268 million which have been accounted for in the two years ended 30 June 2003.

Other In September 2002, Diageo announced that it would relinquish its 1998 US Importation and Distribution Agreement rights for Bass Ale to Bass’ parent company, Interbrew, effective 30 June 2003 for a consideration of $105 million (£69 million). Under the 1998 agreement, Diageo had the right to continue selling and marketing the brand in the United States until July 2016. The consideration included $10 million as a contribution to inventory management costs during the year ended 30 June 2003, and this element of the consideration has been accounted for as operating income. The balance of the consideration, net of provisions and legal expenses, of £57 million has been accounted for as an exceptional operating item.
     In December 2002 East African Breweries Limited (EABL), a Diageo subsidiary, acquired 20% of the issued share capital of Tanzania Breweries Limited from SABMiller Africa in exchange for 20% of the issued share capital of Kenya Breweries Limited. EABL also disposed its entire holding of shares in Kibo Breweries Limited and acquired Castle Brewing Kenya Limited.
     Diageo’s distribution rights in relation to certain Brown-Forman brands, including Jack Daniels and Southern Comfort in the United Kingdom, terminated on 1 August 2002. In the year ended 30 June 2002, these brands contributed £14 million to operating profit.
     On 15 August 2003 it was announced that Diageo and Brown-Forman had resolved their dispute over the termination of these rights and that Diageo would receive £9 million as settlement.
     In May 2002, Diageo completed the disposal of the Malibu brand to Allied Domecq for a consideration of £554 million. The disposal of Malibu was a condition for obtaining regulatory clearance for the acquisition of the Seagram spirits and wine businesses.
     In May 2002, Diageo disposed of the Glen Ellen and MG Vallejo wines to a company managed by The Wine Group, Inc. for a consideration of $83 million.
     On 5 February 2002, Diageo and José Cuervo SA (José Cuervo) agreed to terminate their litigation in respect of a change of control issue which José Cuervo claimed arose as a result of the merger of GrandMet and Guinness, and new arrangements were formalised for the distribution rights for the José Cuervo brand in the United States. These arrangements now extend to 2013. The settlement in favour of José Cuervo included the return of Diageo’s 45% equity stake it held in José Cuervo and a net cash payment of £85 million. Diageo and José Cuervo also agreed to terminate José Cuervo’s distribution of certain Diageo brands in Mexico and for José Cuervo to transfer to Diageo its 49% interest in the Smirnoff trademark in Mexico. The settlement resulted in a charge before taxes of £220 million to exceptional items in the profit and loss account for the year ended 30 June 2002, and a reduction in operating profit of £8 million in the period ended 30 June 2002. Further, effective 1 October 2002, the distribution rights to José Cuervo 1800 were transferred to a third party. José Cuervo 1800 contributed £13 million to operating profit in the year ended 30 June 2002.
     In September 2001, Diageo disposed of its Croft and Delaforce port and sherry businesses to a consortium of Gonzalez Byass S. A. and Taylor Fonseca S. A. for a consideration of €82 million (£50 million).
     In July 2001, Diageo disposed of its Guinness World Records business to Gullane Entertainment plc for £50 million.
     In January 2001, Diageo acquired additional shares in East African Breweries Limited which as a result became a subsidiary. In October 2000, Diageo acquired the remaining 50% share of Bundaberg rum, Australia’s second largest spirit brand. The annualised turnover of these two acquisitions is approximately £320 million and their annualised contribution to operating profit is approximately £40 million.
     In January 2001, Diageo disposed of UDV Indústria E Comércio Ltda, the Brazilian entity that produces and markets local brands Dreher, Old Eight and Drurys to Campari.
     During the year ended 30 June 2001, the distribution rights for Stolichnaya vodka in the United States ended. In the year ended 30 June 2001, Stolichnaya in the United States contributed approximately £32 million to operating profit.

Other businesses

General Mills, Inc Following the disposal of Pillsbury and a subsequent sale of shares in General Mills, the group currently holds an equity stake of 79 million ordinary shares (21%) in General Mills. The following business description is based on publicly available information about General Mills filed with the SEC. General Mills is a global consumer foods company based in the United States. General Mills owns a number of brand names and its primary objective is to build the equity of these brands with strong consumer directed advertising and innovative merchandising. The principal businesses owned by General Mills are Big G ready-to-eat cereals, Betty Crocker dessert, baking, dinner mix and snack products, Yoplait and Colombo yoghurt and former Pillsbury brands such as Pillsbury’s refrigerated dough and other dough based goods, Old El Paso Mexican foods, Progresso soup, Green Giant vegetables and a foodservice business.
     During the year ended 30 June 2003, the equity stake contributed £287 million to share of profits of associates before exceptional items, £73 million to interest expense and £69 million to tax expense. The group’s share of General Mills’ exceptional items before taxation amounted to a charge of £18 million. During the year ended 30 June 2003 the group received dividends of £54 million from General Mills.
     General Mills has options to purchase 29 million of Diageo’s holding of General Mills ordinary shares for $51.56 per share until 28 October 2005 subject to certain limitations.

15 Diageo Annual Report 2003

Discontinued operations

Quick service restaurants Diageo completed the disposal of Burger King on 13 December 2002. See ‘Operating and financial review — Off-balance sheet arrangements’. Burger King is a leading company in the worldwide quick service restaurant industry. In the year ended 30 June 2003, Burger King contributed turnover of £479 million and operating profit of £53 million to Diageo.

Packaged food Diageo completed the disposal of Pillsbury to General Mills on 31 October 2001. Pillsbury contributed turnover of £1,455 million and operating profit before exceptional items of £184 million in the year ended 30 June 2002. As a division of Diageo, Pillsbury produced and distributed leading food brands including Pillsbury’s refrigerated dough and other dough based goods, Old El Paso Mexican foods, Progresso soups, Green Giant vegetables and Häagen-Dazs ice cream, and, in addition, operated a foodservice business.
     In connection with the disposal of Pillsbury Diageo has guaranteed the debt of a third party up to an amount of $200 million (£121 million).

Risk factors

Diageo faces competition that may reduce its market share and margins Diageo faces competition from several international companies as well as local and regional companies in the countries in which it operates. Diageo competes with drinks companies across a wide range of consumer drinking occasions. Within a number of categories, consolidation or realignment is taking place. Consolidation is also taking place amongst Diageo’s customers in many countries. Increased competition and unanticipated actions by competitors or customers could lead to downward pressure on prices and/or a decline in Diageo’s market share in any of these categories, which would adversely affect Diageo’s results and hinder its growth potential.

Diageo may not be able to derive the expected benefits from its strategy to focus on premium drinks or its change and cost-saving programmes designed to enhance earnings On 17 July 2000, Diageo announced the integration of its spirits, wine and beer businesses to create a premium drinks business as part of an integrated strategy to be a focused premium drinks company. In line with this strategy, Diageo acquired on 21 December 2001 certain of the Seagram spirits and wine businesses. There can be no assurance that Diageo’s strategic focus on premium drinks will result in better opportunities for growth and improved margins.
     Following the acquisition of the Seagram spirits and wine businesses, Diageo has been consolidating the Diageo and former Seagram brands into a single distributor in each US state. This consolidation has given rise and could continue to give rise to legal actions. See ‘Business description — Premium drinks — Marketing and distribution — North America’.
     It is possible that the pursuit of this strategic focus on premium drinks could give rise to further acquisitions. There can be no guarantee that any such acquisition would deliver the benefits intended.
     Certain change programmes have been initiated (especially in the United States, Ireland and Great Britain) designed to improve the effectiveness and efficiency of end-to-end operating, administrative and financial systems and processes. This includes moving transaction processing from a number of markets to shared service centres. There can be no certainty that these programmes will deliver the expected benefits. There is likely to be disruption caused to production processes and possibly to administrative and financial systems as these changes are effected. They could also lead to adverse customer or consumer reaction. Any failure of information systems could adversely impact Diageo’s ability to operate.

Regulatory decisions and changes in the legal and regulatory environment could increase Diageo’s costs and liabilities or limit its business activities Diageo’s operations are subject to extensive regulatory requirements regarding production, product liability, distribution, marketing, labelling, advertising and labour and environmental issues. Changes in laws, regulations or governmental policy, could cause Diageo to incur material additional costs or liabilities that could adversely affect its business. In particular, governmental bodies in countries where Diageo operates may impose new labelling, product or production requirements, limitations on the advertising activities used to market beverage alcohol, restrictions on retail outlets or other restrictions on marketing and distribution. Regulatory authorities under whose laws Diageo operates may also have enforcement power that can subject the group to actions such as product recall, seizure of products or other sanctions, which could have an adverse effect on its sales or damage its reputation.
     In addition, beverage alcohol products are the subject of national import and excise duties in many countries around the world. An increase in import or excise duties could have a significant adverse effect on Diageo’s sales revenue or margin, both through reducing overall consumption and by encouraging consumers to switch to lower-taxed categories of beverage alcohol.
     Companies in the beverage alcohol industry may also be exposed to class action or other litigation relating to alcohol abuse problems or health consequences from the misuse of alcohol. If the industry were to be involved in such litigation, Diageo’s business could be materially adversely affected.
     US regulatory authorities are considering possible changes to the regulation of flavored malt beverages. Discussions are taking place in respect of possible rule changes related to the alcohol content in flavored malt beverages. Revised rules could result in changes in the methods by which Diageo currently produces flavored malt beverages and therefore increase the costs of production and/or distribution of these products. In addition, possible regulatory changes could impose adverse federal tax consequences on the import and sale of flavored malt beverages. Flavored malt beverages form a component of Diageo’s growth strategy within the United States and it is possible that the implementation of any regulatory changes by the US authorities could have an adverse effect on Diageo’s future profitability.
     Diageo’s reported after tax income is calculated based on extensive tax and accounting requirements in each of its relevant jurisdictions of operation. Changes in tax law (including tax rates), accounting policies and accounting standards could materially reduce Diageo’s reported after tax income.

16 Diageo Annual Report 2003
Business description

Demand for Diageo’s products may be adversely affected by changes in consumer preferences and tastes Diageo’s portfolio includes certain of the world’s leading beverage alcohol brands as well as brands of local prominence. Maintaining Diageo’s competitive position depends on its continued ability to offer products that have a strong appeal to consumers. Consumer preferences may shift due to a variety of factors, including changes in demographic and social trends, changes in travel, vacation or leisure activity patterns and a downturn in economic conditions, which may reduce consumers’ willingness to purchase premium branded products. In addition, concerns about health effects due to negative publicity regarding alcohol consumption, negative dietary effects, regulatory action or any litigation or customer complaints against companies in the industry may have an adverse effect on Diageo’s profitability.
     The competitive position of Diageo’s brands could also be affected adversely by any failure to achieve consistent, reliable quality in the product or service levels to customers.
     In addition, both the launch and ongoing success of new products is inherently uncertain especially as to their appeal to consumers; the failure to launch a new product successfully can give rise to inventory write offs and other costs and can affect consumer perception of an existing brand. Growth in Diageo’s business has been based on both the launch of new products and the growth of existing products. Product innovation remains a significant aspect of Diageo’s plans for growth. There can be no assurance as to Diageo’s continuing ability to develop and launch successful new products or variants of existing products or as to the profitable lifespan of newly or recently developed products.
     Any significant changes in consumer preferences and failure to anticipate and react to such changes could result in reduced demand for Diageo’s products and erosion of its competitive and financial position.

If the social acceptability of Diageo’s products declines, or if litigation is directed at the beverage alcohol industry, Diageo’s sales volume could decrease and the business could be materially adversely affected In recent years, there has been increased social and political attention directed to the beverage alcohol industry. Diageo believes that this attention is the result of public concern over problems related to alcohol abuse, including drink driving, underage drinking and health consequences from the misuse of alcohol. If the social acceptability of beverage alcohol were to decline significantly, sales of Diageo’s products could materially decrease. Similarly, recent litigation against the tobacco industry has directed increased attention to other industries, including the beverage alcohol industry. If the drinks industry were to become involved in litigation of the type brought against other industries, such as tobacco, Diageo’s business could be materially adversely affected.
     Diageo learned on 20 November 2003 that a purported class action lawsuit, Hakki v. Adolph Coors Company et al., was commenced against a number of alcohol beverage companies on 14 November 2003, including Diageo, in the Superior Court of Washington, D.C. Diageo has not been served with a lawsuit. The complaint asserts claims under the District of Columbia Consumer Protection Procedures Act (DCCPPA) and the common law of the District of Columbia that the defendants specifically targeted the US advertising and marketing of certain of their products to individuals below the 21 year-old legal purchase age. The complaint alleges that ‘at least 15-20% of all alcoholic beverages sold in the United States are consumed by underage drinkers’. The complaint further alleges that profits earned by the defendants from the alleged illegal sales to underaged drinkers ‘greatly exceed $1 billion per year’.
     The lawsuit seeks certification as a class action on behalf of (a) parents and guardians whose funds were used by their children under 21 from 1982 to the present without their knowledge to purchase alcohol beverages marketed by the defendants, on whose behalf monetary recovery is sought and (b) the parents and guardians of all children under 21, on whose behalf the complaint requests that the Court enter an injunction prohibiting the defendants from marketing alcohol beverages to underage persons.
     The prayer for relief in the complaint seeks, among other matters, (i) that defendants each disgorge to the purported class all amounts by which they have been allegedly unjustly enriched, plus costs and interest; (ii) rescission of the alleged transactions whereby defendants allegedly obtained revenues from the illegal sale of alcoholic beverages to underage consumers and ordered to pay such monies to the purported class; and (iii) to assess all defendants jointly and severally for all alleged actual damages sustained by the purported plaintiff class plus treble damages or $1,500 per violation, whichever is greater, punitive damages, attorneys fees, costs of suit, and interest.
     Diageo intends to strenuously defend this purported action.
     See ‘Additional information for shareholders — Legal proceedings’ for further detail.

Diageo’s operating results may be adversely affected by increased costs or shortages of raw materials or labour or disruption to production facilities The raw materials which Diageo uses for the production of its food and beverage products are largely commodities that are subject to price volatility caused by changes in global supply and demand, weather conditions, agricultural uncertainty or governmental controls. If commodity price changes result in unexpected increases in raw materials cost or the cost of packaging materials, Diageo may not be able to increase its prices to offset these increased costs without suffering reduced volume, revenue and operating income. Diageo may be adversely affected by shortages of such raw materials or packaging materials.
     Similarly, Diageo’s operating results could be adversely affected by labour or skill shortages or increased labour costs due to increased competition for employees, higher employee turnover or increased employee benefit costs. Diageo’s success is dependent on the capability of its employees. There is no guarantee that Diageo will continue to be able to recruit, retain and develop the capabilities that it requires to deliver its strategy, for example in relation to sales and marketing capability within markets or in its senior management.
     Diageo would be affected if there were a catastrophic failure of its major production facilities. See ‘Business description — Premium drinks — Production’ for a listing of Diageo’s principal production sites. In addition, the maintenance and development of information systems may result in systems failures which may adversely affect business operations.
     Diageo has a substantial inventory of aged product categories, principally Scotch whisky and Canadian whisky, which mature over periods of up to 30 years. As at 30 June 2003, the historical cost of Diageo’s maturing inventory amounted to £1,409 million. The maturing inventory is stored primarily in Scotland, and the loss through contamination, fire or other natural disaster of all or a portion of the stock of any one of those aged product categories could result in a significant reduction in supply of those products, and consequently, Diageo would not be able to meet consumer demand for these products as it arises. In addition, there can be no assurance that insurance proceeds would cover the replacement value of Diageo’s maturing inventory or other assets were such assets to be lost due to contamination, fire or natural disasters or destruction resulting from negligence or the acts of third parties.

Diageo’s business may be adversely impacted by unfavourable economic conditions or political or other developments and risks in the countries in which it operates Diageo’s business is dependent on general economic conditions in the United States, Great Britain and other important markets. A significant deterioration in these conditions, including a reduction in consumer spending levels, could have a material adverse effect on Diageo’s business and results of operations. In addition, Diageo may be adversely affected by political and economic developments in any of the countries where Diageo has distribution networks, production facilities or marketing companies. Diageo’s operations are also subject to a variety of other risks and uncertainties related to trading in numerous foreign countries, including political or economic upheaval and the imposition of any import, investment or currency restrictions, including tariffs and import quotas or any restrictions on the repatriation of earnings and capital. Current examples of such potential upheaval are currency restrictions and potential further disruption to movement of goods into and out of Venezuela, affecting both imports of goods (principally Scotch whisky into Venezuela) and export of rum (Cacique, especially to Spain), unrest in the Middle East, and the impact on tourism and travel of both terrorist threats and ongoing fears of global pandemics, such as SARS. These disruptions can affect Diageo’s ability to import or export products and ability to repatriate funds as well as the levels of consumer demand (for example in duty free outlets at airports or in on trade premises in affected regions) and therefore on Diageo’s levels of sales or profitability.
     Diageo may also be adversely affected by movements in the value of, and returns from, the investments held by its pension funds.
     Diageo may be adversely affected by fluctuations in exchange rates. The results of operations of Diageo are accounted for in pounds sterling. Approximately 35% of sales in the year ended 30 June 2003 were in US dollars, approximately 21% were in sterling and approximately 22% were in euros. Movements in exchange rates used to translate foreign currencies into pounds sterling may have a significant impact on Diageo’s reported results of operations from year to year.
     Diageo may also be adversely impacted by fluctuations in interest rates, mainly through an increased interest expense. To partly delay any adverse impact from interest rate movements, Diageo maintains approximately 50% of its debt at fixed interest rates. See ‘Operating and financial review — Risk management’.

17 Diageo Annual Report 2003

Diageo’s premium drinks operations may be adversely affected by failure to renegotiate distribution and manufacturing rights on favourable terms Diageo’s premium drinks business has a number of distribution agreements for brands owned by it or by other companies. These agreements vary depending on the particular brand, but tend to be for a fixed number of years. There can be no assurance that Diageo will be able to renegotiate distribution rights on favourable terms when they expire or that agreements will not be terminated. Failure to renew distribution agreements on favourable terms could have an adverse impact on its revenues and operating income. In addition, Diageo’s sales may be adversely affected by any disputes with distributors of its products.

Diageo may not be able to protect its intellectual property rights Given the importance of brand recognition to its business, Diageo has invested considerable effort in protecting its intellectual property rights, including trademark registration and domain names. Diageo’s patents cover some of its process technology, including some aspects of its bottle marking technology. Diageo also uses security measures and agreements to protect its confidential information. However, Diageo cannot be certain that the steps it has taken will be sufficient or that third parties will not infringe on or misappropriate its intellectual property rights. Moreover, some of the countries in which Diageo operates offer less intellectual property protection than Europe or North America. Given the attractiveness of Diageo’s brands to consumers, it is not uncommon for counterfeit products to be manufactured. Diageo cannot be certain that the steps it takes to prevent, detect and eliminate counterfeit products will be effective in preventing material loss of profits or erosion of brand equity resulting from lower quality or even dangerous counterfeit product reaching the market. If Diageo is unable to protect its intellectual property rights against infringement or misappropriation, this could materially harm its future financial results and ability to develop its business.

Diageo remains exposed to factors affecting the US food industry While Diageo’s strategy is to focus on premium drinks, it remains exposed to factors affecting the US food industry through its equity interest in General Mills and its residual exposure to Burger King. Following the disposal of Pillsbury to General Mills, Diageo now holds approximately 21% of General Mills’ outstanding share capital. The market value of this interest may be affected adversely by a variety of factors, including the performance of General Mills and the extent to which that performance meets investors’ expectations, economic conditions in the United States, including the US financial markets, and the dilution of our holding as a result of future issues of shares by General Mills. On 15 October 2003, General Mills announced that it had received a formal request from the US Securities and Exchange Commission (the SEC) concerning its sales practices and related accounting. General Mills stated that the SEC had advised the company that it had not reached any conclusions related to the information request.
     In connection with the disposal of Burger King, Diageo has retained $212 million (£129 million) of subordinated debt, with a 10 year maturity, from the entity owning Burger King. In addition, Diageo has guaranteed up to $850 million (£515 million) of borrowings of the Burger King company. These loans have a term of five years although Diageo and Burger King have structured their arrangements to encourage refinancing by Burger King on a non-guaranteed basis prior to the end of the five years. There are no assurances, however, that such refinancing will occur or that no liability will arise with respect to the financing of the Burger King disposal. Both General Mills and Burger King may also be subject to factors affecting the food industry generally, including increased competition, changes in consumer preferences and concerns over obesity and the potential for related litigation or regulation. These factors could also affect Diageo’s ability over time to reduce its equity interest in, or affect the price it receives for, General Mills shares. They could also result in Diageo not fully recovering the book value of its subordinated debt due from Burger King and/or having to make payments under the guarantee of Burger King’s debt.

It may be difficult to effect service of US process and enforce US legal process against the directors of Diageo Diageo is a public limited company incorporated under the laws of England and Wales. The majority of Diageo’s directors and officers, and some of the experts named in this document, reside outside of the United States, principally in the United Kingdom. A substantial portion of Diageo’s assets, and the assets of such persons are located outside of the United States. Therefore, it may not be possible to effect service of process within the United States upon Diageo or these persons in order to enforce judgements of US courts against Diageo or these persons based on the civil liability provisions of the US Federal Securities laws. There is doubt as to the enforceability in England and Wales, in original actions or in actions for enforcement of judgements of US courts, of civil liabilities solely based on the US Federal Securities laws.

18 Diageo Annual Report 2003
Business description

Cautionary statement concerning forward-looking statements

This document contains statements with respect to the financial condition, results of operations and business of Diageo and certain of the plans and objectives of Diageo with respect to these items. These forward-looking statements are made pursuant to the ‘Safe Harbor’ provisions of the United States Private Securities Litigation Reform Act of 1995. In particular, all statements that express forecasts, expectations and projections with respect to future matters, including trends in results of operations, margins, growth rates, overall market trends, the impact of interest or exchange rates, the availability of financing to Diageo and parties or consortia who have purchased Diageo’s assets, actions of parties or consortia who have purchased Diageo’s assets, anticipated cost savings or synergy and the completion of Diageo’s strategic transactions, are forward-looking statements. By their nature, forward-looking statements involve risk and uncertainty because they relate to events and depend on circumstances that will occur in the future. There are a number of factors that could cause actual results and developments to differ materially from those expressed or implied by these forward-looking statements, including factors that are outside Diageo’s control.

These factors include, but are not limited to:

• increased competitive product and pricing pressures and unanticipated actions by competitors that could impact Diageo’s market share, increase expenses and hinder growth potential;

• the effects of business combinations, partnerships, acquisitions or disposals, existing or future, and the ability to realise expected synergy and/or costs savings;

• Diageo’s ability to complete future acquisitions and disposals;

• legal and regulatory developments, including changes in regulations regarding consumption of, or advertising for, beverage alcohol, changes in accounting standards, taxation requirements, such as the impact of excise tax increases with respect to the premium drinks business and environmental laws;

• changes in the food industry in the United States, including increased competition and changes in consumer preferences;

• changes in consumer preferences and tastes, demographic trends or perceptions about health related issues;

• changes in the cost of raw materials and labour costs;

• changes in economic conditions in countries in which Diageo operates, including changes in levels of consumer spending;

• levels of marketing and promotional expenditure by Diageo and its competitors;

• renewal of distribution rights on favourable terms when they expire;

• termination of existing distribution rights in respect of agency brands;

• technological, developments that may affect the distribution of products or impede Diageo’s ability to protect its intellectual property rights; and

• changes in financial and equity markets, including significant interest rate and foreign currency rate fluctuations, which may affect Diageo’s access to or increase the cost of financing.

All oral and written forward-looking statements made on or after the date of this document and attributable to Diageo are expressly qualified in their entirety by the above factors and the ‘Risk factors’ contained in this document for the year ended 30 June 2003.
     Past performance cannot be relied upon as a guide to future performance.

19 Diageo Annual Report 2003

Operating and financial review

Introduction

Information presented Diageo’s strategy is to focus on its branded drinks businesses with international potential. Diageo completed the disposal of its quick service restaurants business on 13 December 2002 and the combination of its packaged food business with General Mills on 31 October 2001.
     The consolidated information for the year ended 30 June 2003 presented in this annual report includes the results of the quick service restaurants business for the five and a half months ended 13 December 2002. In accordance with UK GAAP, the results of the quick service restaurants and, in the comparative periods, the packaged food businesses have been included within discontinued operations.
     The following discussion is based on Diageo’s UK GAAP results for the year ended 30 June 2003 compared with the year ended 30 June 2002, and the year ended 30 June 2002 compared with the year ended 30 June 2001.
     There are a number of accounting differences between UK and US GAAP. A reconciliation of net income from UK to US GAAP and an explanation of the differences between UK and US GAAP are set out in the US GAAP information in note 32 of the consolidated financial statements, with a further explanation of significant reconciling items between UK and US GAAP net income which is included in ‘Discussion of US GAAP differences’ below.

Presentation of information in relation to the premium drinks business In addition to describing the significant factors impacting on the profit and loss account compared to the prior year for both of the years ended 30 June 2003 and 30 June 2002, additional information is also presented on the operating performance of the premium drinks segment.

Volume Volume has been measured on an equivalent units basis to nine litre cases of spirits. Equivalent units are calculated as follows: beer in hectolitres divide by 0.9, wine in nine litre cases divide by five, ready to drink in nine litre cases divide by 10. An equivalent unit represents approximately 272 servings. A serving comprises 33ml of spirits, 165ml of wine, or 330ml of ready to drink or beer.
     Reference is made to information regarding the premium distilled spirits market segments from Impact and other independent industry sources in the markets in which Diageo operates. Impact collects information on the premium distilled spirits market from a variety of sources, including brand owners, import and export enterprises, trade associations and government agencies such as the US Commerce Department. Impact is aware of, and has consented to, being named in this document. Market data information is taken from industry sources in the markets in which Diageo operates. Diageo believes that all of the information in this document that is based on statements from Impact and other industry sources is reliable.

Non-GAAP measures Organic movement in volume, net sales (after deducting excise duties) and operating profit before exceptional items are measures not specifically used in the consolidated financial statements themselves (non-GAAP measures). The performance of the premium drinks segment is discussed using these measures.
     Since overall performance is the result of a number of factors, breaking these down into broad categories and discussing each of these categories assists management and the reader in understanding the overall picture. Once factors such as the effect of currency movements, excise duties and acquisitions and disposals have been discussed, the above measures enable the reader to focus on the performance of the premium drinks brand portfolio which is common to both periods. Organic movement measures also most closely reflect the way in which the business is managed, for the same reasons of achieving comparability between periods. Diageo’s strategic planning and budgeting process is based on organic movement in volume, net sales (after deducting excise duties) and operating profit before exceptional items, and these measures closely reflect the way in which operating targets are defined and performance is monitored by the group’s management. These measures are chosen for planning, budgeting and reporting purposes since, as explained further below, they represent those measures which local managers are most directly able to influence and they enable consideration of the underlying business performance without the distortion caused by fluctuating exchange rates, excise duties, acquisitions and disposals. In addition, management bonus targets are set based on the performance of the business as measured by organic operating profit growth before exceptional items.
     The group’s management believe these measures provide valuable additional information for users of the financial statements in understanding the group’s performance since they provide information on those elements of performance which local managers are most directly able to influence and focus on that element of the core brand portfolio which is common to both periods. However, whilst these measures are important in the management of the business, they should not be viewed as replacements for, but rather as complementary to, the comparable GAAP measures such as turnover and reported (rather than organic) movements in individual profit and loss account captions. These GAAP measures reflect all of the factors which impact the business and the discussion in relation to premium drinks should be read in the context of the discussion of the overall group performance.
     In the discussion of the performance of the premium drinks segment, net sales (after deducting excise duties) is presented in addition to turnover, since turnover reflects significant components of excise duties which are set by external regulators and over which Diageo has no control. Diageo incurs excise duties throughout the world. In some countries, such as the United States and Canada, excise duties are based on sales and are separately identified on the face of the invoice to the external customer. In others, such as the United Kingdom and Ireland, it is effectively a production tax, which is incurred when the spirit is removed from bonded warehouses. In these countries it is part of the cost of goods sold and is not separately identified on the sales invoice. Changes in the level of excise duties can significantly effect the level of reported turnover and cost of sales, without directly reflecting changes in volume, mix or profitability that are the variables that impact on the element of turnover retained by the group.
     Also in the discussion of the performance of the premium drinks segment, certain information is presented using sterling amounts on a constant currency basis. This strips out the translation effect of foreign exchange and enables an understanding of the underlying performance of the market that is most closely influenced by the actions of the group’s management. The risk from foreign exchange translation is managed centrally and is not a factor over which local managers have any control.
     During the last two years the group has undergone a major restructuring which has resulted in the disposal of its food businesses (Pillsbury and Burger King) and its Malibu rum brand and the acquisition of the Seagram spirits and wine businesses. As a consequence results are not comparable from period to period and require additional explanation. For this reason it is necessary to separate the effects of acquisitions and disposals on the sales and profit of brands acquired or disposed of in order to provide information on the underlying performance of individual markets.

20 Diageo Annual Report 2003
Operating and financial review

Adjusting for these items enables group management to monitor performance over factors which local managers are most directly able to influence in relation to the core ongoing brand portfolio. The underlying performance on a constant currency basis and excluding the impact of acquisitions and disposals is referred to as ‘organic’ performance, and further information on the calculation of organic measures as used in the discussion of the premium drinks segment is included below.
     In order to assist the reader of the financial statements, the comparisons of both 2003 with 2002 and 2002 with 2001 include tables which present the exchange, disposal, acquisition and organic components of the year on year movement for each of turnover, net sales (after deducting excise duties) and operating profit before exceptional items.

Calculation of organic movement Where a business, brand distribution right or agency agreement was disposed of, or terminated, in the current year, the group, under organic movement calculations, adjusts the results for the prior year to exclude the amount the group earned in that period that it could not have earned in the current period (i.e. the period between the date in the prior period, equivalent to the date of the disposal in the current period, and the end of the prior period). As a result, the organic movement numbers reflect only comparable performance. Similarly, if a business was disposed of part way through the equivalent prior period then its results would also be completely excluded from that prior period’s performance in the organic movement calculation, since the group recognised no contribution from that business in the current year.
     For acquisitions, a similar adjustment is made in the organic movement calculations. For acquisitions in the current period, the post acquisition results are excluded from the organic movement calculations. For acquisitions in the prior period, post acquisition results are included in the prior period but are only included from the anniversary of the acquisition date in the current period.
     A further adjustment in organic movement is made to exclude the effect of exchange rate movements by recalculating the prior period’s results as if they had been generated at the current period’s exchange rates.
     Organic movement percentages are calculated as the organic movement amount in £ million, expressed as the percentage of the prior period results at current year exchange rates and after adjusting for disposals. The basis of calculation means that the results used to measure organic growth for a given year will be adjusted when used to measure organic growth in the subsequent year.

Operating results — 2003 compared with 2002

Summary consolidated profit and loss account
	2003									2002
	Before									Before
	exceptional			Exceptional						exceptional			Exceptional
	items			items			Total			items			items			Total
	£ million			£ million			£ million			£ million			£ million			£ million
Turnover		9,440			–			9,440			11,282			–			11,282
Operating costs		(7,411	)		(168	)		(7,579	)		(9,176	)		(453	)		(9,629	)
Operating profit		2,029			(168	)		1,861			2,106			(453	)		1,653
Share of profits of associates		478			(21	)		457			324			(41	)		283
Disposal of fixed assets and businesses		–			(1,313	)		(1,313	)		–			799			799
Interest payable (net)		(351	)		–			(351	)		(399	)		–			(399	)
Profit/(loss) before taxation		2,156			(1,502	)		654			2,031			305			2,336
Taxation		(539	)		52			(487	)		(511	)		(121	)		(632	)
Profit/(loss) after taxation		1,617			(1,450	)		167			1,520			184			1,704
Minority interests		(91	)		–			(91	)		(87	)		–			(87	)
Profit/(loss) for the year		1,526			(1,450	)		76			1,433			184			1,617

Note: Exceptional items under UK GAAP represent items which, in management’s judgement, are material items that arise from events or transactions that fall within the ordinary activities of the group and, by virtue of their size or incidence, should be separately disclosed if the financial statements are to properly reflect the results for the period. Exceptional items under UK GAAP do not represent extraordinary items under US GAAP.

Turnover
Overall Turnover decreased by £1,842 million (16%) from £11,282 million in the prior year to £9,440 million in the year ended 30 June 2003, following the disposals of Pillsbury in October 2001 and Burger King in December 2002, both of which are accounted for as discontinued operations and which contributed £479 million to turnover in the year ended 30 June 2003 compared with £2,578 million in the prior year.

Continuing operations — premium drinks For continuing operations, which now represents Diageo’s premium drinks business, turnover increased by £257 million (3%) from £8,704 million in the year ended 30 June 2002 to £8,961 million in the year ended 30 June 2003. The Seagram spirits and wine businesses, which were acquired on 21 December 2001, contributed £1,214 million to turnover during the year, compared with £573 million in the six month period ended 30 June 2002. This increase attributable to the acquired Seagram business was partly offset by the impact of brands which were disposed of during the two year period ended 30 June 2003 of £327 million, principally due to Malibu (impact of £107 million), North American wine brands (£42 million) which were sold in May and April 2002 respectively, and the loss of the distribution rights of Jack Daniels and Southern Comfort in Great Britain effective August 2002 (£108 million). Turnover was also adversely impacted by the effect of exchange rate movements, primarily the US dollar, which reduced turnover by an estimated £329 million. The remaining £272 million increase in turnover reflects the underlying performance of the ongoing brand portfolio which saw volume increase by 1%.

Discontinued operations Burger King contributed £479 million to turnover in the year ended 30 June 2003 compared with £1,123 million, in the year ended 30 June 2002 following the disposal of Burger King in December 2002. Turnover in the year ended 30 June 2002 also included £1,455 million from Pillsbury which was sold on 31 October 2001.

21 Diageo Annual Report 2003

Operating costs
Overall Operating costs decreased by £2,050 million (21% on a reported basis) from £9,629 million in the year ended 30 June 2002 to £7,579 million in the year ended 30 June 2003. This decrease was caused by the disposals of Pillsbury in October 2001, which had £1,271 million operating costs in the prior year, and Burger King in December 2002, whose operating costs fell by £562 million reflecting the reduction in the period of ownership by the group. Operating costs of premium drinks decreased by £217 million.

Continuing operations — premium drinks For continuing operations, which now represents Diageo’s premium drinks business, operating costs decreased by £217 million (3% on a reported basis) from £7,370 million in the year ended 30 June 2002 to £7,153 million in the year ended 30 June 2003. Operating exceptional costs for continuing operations decreased by £264 million from £432 million in the prior year to £168 million (these are discussed under exceptional operating costs below).
     Excluding the exceptional operating costs, continuing operating costs increased by £47 million (1%) from £6,938 million in the year ended 30 June 2002 to £6,985 million in the year ended 30 June 2003. There were increases in operating costs compared with the prior period arising from the acquisition of the Seagram spirits and wine businesses in December 2001 and from organic increases in marketing and other costs. These were almost fully offset by reductions in costs from the movements in exchange rates (£291 million), principally the US dollar, and from disposals (£254 million), principally the loss of the distribution rights for Jack Daniels and Southern Comfort in Great Britain (£99 million) and Malibu (£67 million).
     Marketing investment for premium drinks increased by £58 million (5% ) to £1,185 million. Marketing investment on the global priority brands grew 5%, to £803 million. The major drivers of the increase were higher spend on the Johnnie Walker, Baileys and Smirnoff brands and behind the launch of Smirnoff Ice in key and venture markets. Marketing spend on JεB declined and spend on Guinness was down as a result of a reduction in spend in Great Britain and in Ireland.

Operating profit before exceptional items
Overall Operating profit before exceptional items decreased by £77 million from £2,106 million to £2,029 million. The decrease reflects an increase attributable to premium drinks of £210 million, offset by a reduced contribution of £287 million from discontinued operations.

Continuing operations — premium drinks Operating profit before exceptional items for premium drinks increased by £210 million (12%) from £1,766 million to £1,976 million. The Seagram businesses, in the six months ended 31 December 2002, contributed £211 million, but this was offset by a £73 million impact of businesses disposed, primarily Malibu (impact of £40 million) and North American wine brands (£5 million) which were sold in May and April 2002 respectively, and the loss of the distribution rights of Jack Daniels and Southern Comfort in Great Britain effective August 2002 (£9 million). £110 million of the increase in operating profit before exceptional items is attributable to the organic performance of the brand portfolio, discussed in more detail below. Exchange rate movements, net of the effect of currency hedging, had an adverse impact on operating profit before exceptional items of £38 million.

Discontinued operations The results for the year included an operating profit contribution of £53 million from discontinued operations (Burger King only), compared with £340 million in the year ended 30 June 2002 (Burger King and Pillsbury).

Exceptional operating costs
Overall The operating profit for the year ended 30 June 2003 is after exceptional operating charges of £168 million compared to £453 million (including £21 million in respect of discontinued operations) for the year ended 30 June 2002. This comprised integration and restructuring costs of £225 million, offset by £57 million received on the termination of Bass distribution rights in the United States.

Continuing operations — premium drinks In the year ended 30 June 2003, £177 million was incurred in respect of the integration of the Seagram spirits and wine businesses, acquired in December 2001 (year ended 30 June 2002 — £164 million). Approximately £43 million of these costs were employee related, £7 million were in respect of write downs of tangible fixed assets, £57 million were incurred in putting in place new distributor and broker agreements as part of the Next Generation Growth programme in the United States, and the balance included consultancy and systems costs. The majority of these costs were incurred in North America and the United Kingdom. It is expected that the total programme cost of restructuring and integrating the business will be approximately $700 million (£460 million) of which $590 million (£390 million) is expected to be cash. The majority of the balance of the cost will be incurred in the year ending 30 June 2004 as an operating exceptional item. As a result of the amount charged to the profit and loss account in the two years ended 30 June 2003, it is anticipated that approximately 2,200 jobs will be lost of which some 1,800 had been terminated by 30 June 2003. On completion of the programme it is anticipated that some 2,500 jobs will be lost and that integration synergy will reduce Diageo’s annual cost base by approximately £115 million in the year ending 30 June 2005. The above merger synergy represents the latest management estimate and, as a forward-looking statement, involves risk and uncertainty. The expected level of synergy is based on a number of assumptions, including certain expectations concerning: the integration of back offices and sales forces in subsidiary regional offices resulting in headcount reductions and rationalisation of facilities; headcount reductions in central and regional offices; and procurement savings through improvement of supplier terms.
     £48 million (2002 — £48 million; 2001 — £74 million) was incurred in respect of the restructuring of the UDV (spirits and wine) and the Guinness (beer) businesses. Approximately £28 million of the costs were employee related and the balance included legal and professional costs. Total costs of this integration totalled £170 million charged to the profit and loss account over the three years ended 30 June 2003, and no further costs are expected. As a result of the restructuring charge in the three years ended 30 June 2003, it is anticipated that approximately 750 jobs will be lost, of which approximately 600 had been terminated at 30 June 2003.
     Effective 30 June 2003, Diageo relinquished its distribution rights for Bass Ale in the United States. Under the distribution agreement, Diageo had the right to continue selling and marketing the brand in the United States until July 2016. Consideration of £57 million received has been accounted for as an exceptional operating item.
     In the year ended 30 June 2002, exceptional operating costs in relation to the premium drinks business included £164 million in respect of the integration of the Seagram spirits and wine businesses, £48 million in respect of the restructuring of the UDV and Guinness businesses and £220 million in respect of a settlement with José Cuervo following the termination of litigation and the formalisation of new arrangements for the distribution by Diageo of José Cuervo brands in the United States.

Discontinued operations There were no exceptional operating costs in relation to discontinued operations in the year ended 30 June 2003. In the prior year, exceptional operating costs for discontinued operations comprised £21 million in relation to the restructuring of franchisee loan financing arrangements in anticipation of the disposal of the Burger King business.

22 Diageo Annual Report 2003
Operating and financial review

Associates
The group’s share of profits of associates before exceptional items was £478 million for the year compared with £324 million for last year. The 21% equity interest in General Mills contributed £287 million (£143 million in the eight months ended 30 June 2002). Exceptional items for associates comprise £18 million for Diageo’s share of General Mills’ exceptional costs incurred on its restructuring of the acquired Pillsbury business, and £3 million in respect of restructuring within Moët Hennessy.

Interest
The net interest charge decreased by 12% from £399 million in the prior year to £351 million in the year ended 30 June 2003. The net benefits of £76 million in respect of the disposal of businesses, of £27 million from exchange rate related movements, and of £44 million from the reduction in interest rates were offset by other factors. These factors included an increase of £14 million in the amount relating to the share of General Mills’ interest charge, the effect of business acquisitions, principally the Seagram spirits and wine businesses, of £60 million and the funding of the share repurchases which increased the interest charge by £43 million.

Non operating exceptional items
Non operating exceptional items before taxation comprise losses of £43 million on disposal of fixed assets and losses of £1,270 million on disposal of businesses in the year ended 30 June 2003 compared with losses of £22 million and gains of £821 million respectively in the prior year.
     Burger King was sold on 13 December 2002 for $1.5 billion (£0.9 billion).The sale resulted in a pre tax charge of £1,457 million, after writing back goodwill previously written off to reserves of £673 million. Diageo retained $212 million (£129 million) of subordinated debt, with a ten year maturity (2013), from the Burger King Company. In addition, Diageo has guaranteed up to $850 million (£515 million) of borrowings of the Burger King Company. These loans have a term of five years from December 2002, although Diageo and Burger King have structured their arrangements to encourage refinancing by Burger King on a non-guaranteed basis prior to December 2007. The loss on disposal of Burger King was partially offset by the receipt of £171 million additional consideration on the disposal of Pillsbury. Gains on disposals of businesses in the year ended 30 June 2002 principally related to the disposal of Malibu (£532 million) and Pillsbury (£322 million).

Taxation
The effective rate of taxation on profit before exceptional items for the year ended 30 June 2003 was 25.0% compared with 25.2% for the year ended 30 June 2002. After exceptional items the effective rate of taxation was 74.5% for the year ended 30 June 2003 compared with 27.1% for the year ended 30 June 2002. The effective rate of taxation for the year ended 30 June 2003 reflected the fact that the pre tax loss on the disposal of Burger King was £1,457 million reduced by tax relief of £80 million.

Premium drinks The following discussion provides additional commentary on the trading performance of the premium drinks business with the equivalent period in the prior year.
     In the discussion movements are segregated between ‘reported’ or ‘organic’ performance. ‘Reported’ means that the measure reflects movement in the number disclosed in the financial statements. ‘Organic’ represents the movement excluding the impact of exchange, acquisitions and disposals. In the discussion under ‘organic brand performance’ for each market, movements given for volume, turnover, net sales (after deducting excise duties) and marketing expenditure are organic movements. A further description of organic movement, how it is calculated and why it is considered useful for the reader is set out on pages 19 and 20.
     The organic movement calculations for turnover, net sales (after deducting excise duties) and operating profit before exceptional items for the year ended 30 June 2003 were as follows:

	2002										Organic			2003		Organic
	Reported		Exchange			Disposals			Acquisitions		movement			Reported		movement
	£ million		£ million			£ million			£ million		£ million			£ million		%
Turnover
Major markets:
North America		2,669		(238	)		(105	)		444		25			2,795		1
Great Britain		1,467		–			(135	)		17		80			1,429		6
Ireland		937		40			(15	)		1		(10	)		953		(1	)
Spain		380		15			(11	)		35		5			424		1
		5,453		(183	)		(266	)		497		100			5,601		2
Key markets		2,078		(113	)		(30	)		141		53			2,129		3
Venture markets		1,173		(33	)		(31	)		12		110			1,231		10
Total premium drinks		8,704		(329	)		(327	)		650		263			8,961		3

23 Diageo Annual Report 2003

	2002										Organic			2003		Organic
	Reported		Exchange			Disposals			Acquisitions		movement			Reported		movement
	£ million		£ million			£ million			£ million		£ million			£ million		%
Net sales(after deducting excise duties)
Major markets:
North America		2,230		(197	)		(95	)		373		24			2,335		1
Great Britain		896		–			(84	)		9		18			839		2
Ireland		625		27			(13	)		1		(2	)		638		–
Spain		298		12			(10	)		26		(4	)		322		(1	)
		4,049		(158	)		(202	)		409		36			4,134		1
Key markets		1,631		(93	)		(27	)		100		75			1,686		5
Venture markets		905		(33	)		(26	)		9		120			975		14
Total premium drinks		6,585		(284	)		(255	)		518		231			6,795		4
Excise duties		2,119													2,166
Turnover		8,704													8,961
Operating profit before exceptional items
Major markets:
North America		550		(2	)		(30	)		154		57			729		11
Great Britain		204		–			(17	)		4		28			219		15
Ireland		151		6			(2	)		–		(14	)		141		(9	)
Spain		94		1			(2	)		11		(5	)		99		(5	)
		999		5			(51	)		169		66			1,188		7
Key markets		524		(41	)		(12	)		39		12			522		3
Venture markets		243		(2	)		(10	)		3		32			266		14
Total premium drinks		1,766		(38	)		(73	)		211		110			1,976		7

Notes
(1) The exchange adjustments for turnover, net sales (after deducting excise duties) and operating profit before exceptional items are principally in respect of the US dollar.

(2) Disposal adjustments for turnover, net sales (after deducting excise duties) and operating profit before exceptional items respectively were in relation to the disposal of Malibu rum (£107 million, £93 million, £40 million); the termination of the distribution rights for Jack Daniels and Southern Comfort (£113 million, £70 million, £10 million) in the United Kingdom; the sale of Glen Ellen/MG Vallejo wines (£42 million, £38 million, £5 million); the transfer of distribution rights of Cuervo 1800 (£27 million, £22 million, £10 million); the sale of Croft Inns (£10 million, £10 million, nil); the sale of Gilbey’s Green and White Label whiskies in India (£9 million, £8 million, £1 million); the termination of distribution rights for Drambuie (£7 million, £4 million, £1 million); the sale of Croft and Delaforce port and sherry brands (£5 million, £4 million, £2 million); and other disposals (£7 million, £6 million, £4 million).

(3) Acquisition adjustments for turnover, net sales (after deducting excise duties) and operating profit before exceptional items respectively were in respect of the purchase of the Seagram spirits and wine businesses (£650 million, £518 million, £211 million).

(4) In the calculation of operating profit before exceptional items the overheads included in disposals and acquisitions were directly attributable to those businesses and do not result from subjective judgements of management.

(5) The organic movement percentage is the amount in the column headed organic movement in the table above expressed as a percentage of the aggregate of the first three columns. The basis of the calculation of the organic movement is explained on page 20.

24 Diageo Annual Report 2003
Operating and financial review

Organic brand performance
						Net sales
						(after
						deducting
	Equivalent		Volume			excise duties)
	units		movement			movement
	million		%			%
Smirnoff		23.0		6			8
Johnnie Walker		10.8		2			2
Guinness		11.4		2			6
Baileys		6.2		10			13
JεB		6.0		(5	)		(6	)
Captain Morgan*		2.5		(1	)		(12	)
José Cuervo		4.2		7			7
Tanqueray		1.9		3			7
Total global priority brands		66.0		3			5
Local priority brands		17.1		(1	)		4
Category brands		26.8		(3	)		1
		109.9		1			4
Acquisitions		9.4
Total in year ended 30 June 2003		119.3

*Captain Morgan included for second half only with first half volume included in acquisitions.

Analysis by individual market

North America

Key measures:
					Reported			Organic
	2003		2002		movement			movement
	£ million		£ million		%			%
Volume						15			1
Turnover		2,795		2,669		5			1
Net sales (after deducting excise duties)		2,335		2,230		5			1
Marketing		405		408		(1	)		(3	)
Operating profit before exceptional items		729		550		33			11

Reported performance Turnover in North America increased 5% from £2,669 million in the year ended 30 June 2002 to £2,795 million in the year ended 30 June 2003. Operating profit before exceptional items increased 33% from £550 million in the year ended 30 June 2002 to £729 million in the year ended 30 June 2003.

Organic performance The increase in turnover was primarily due to the turnover derived from the Seagram brands, acquired in the joint acquisition of the Seagram spirits and wine businesses in December 2001, which contributed £444 million in the six months ended 31 December 2002. The effect of brand disposals and of exchange rate movements in the US dollar reduced turnover in the year ended 30 June 2003 by £105 million and £238 million, respectively. The disposal impact is primarily attributable to the disposal of Malibu in May 2002 (£37 million), the Glen Ellen wine business in May 2002 (£37 million) and Cuervo 1800 in September 2002 (£24 million).
     The acquired Seagram brands were the main factor in growing operating profit before exceptional items in North America from £550 million last year to £729 million in the year ended 30 June 2003 contributing £154 million in the six months ended 31 December 2002.

\

25 Diageo Annual Report 2003

Organic brand performance:
				Net sales
				(after
				deducting
	Volume			excise duties)
	movement			movement
	%			%
Smirnoff		4			(2	)
Johnnie Walker		2			7
José Cuervo		10			9
Baileys		14			17
Tanqueray		2			7
Guinness		1			1
Captain Morgan		(6	)		(17	)
JεB		(6	)		(6	)
Total global priority brands		4			2
Local priority brands		1			4
Category brands		(7	)		(3	)
Total		1			1

• Smirnoff volume excluding ready to drink was up 9% and net sales (after deducting excise duties) were up 11%

• Excluding Captain Morgan Gold, volume of Captain Morgan was up 8% and net sales (after deducting excise duties) were up 10%

• Excluding ready to drink, total volume was up 3% and net sales (after deducting excise duties) were up 5%

Volume growth in North America was driven by the strong performance of the priority spirits brands. Global priority brand volume excluding ready to drink grew 7%. Ready to drink volume, which includes flavored malt beverages and ready to drink in the United States and ready to drink in Canada, was down 17%, representing a decline in Smirnoff ready to drink of 11% and the withdrawal of Captain Morgan Gold.
     Smirnoff had another strong year despite weakness in Smirnoff ready to drink. Excluding ready to drink, volume was up 9%, driven by strong growth in Smirnoff Red and the continued success of the Smirnoff Twist flavoured vodka range. Smirnoff Red increased its share to 23.1%. The brand’s volume growth was driven by the success of the ‘What’s your mix’ advertising campaign. In addition, Smirnoff Red continues to benefit from spend behind Smirnoff ready to drink and Smirnoff Twist.
     Smirnoff ready to drink volume was down 11%. The launch of Smirnoff Ice Triple Black in January 2003 partially offset softness in Smirnoff Ice.
     Volume of Johnnie Walker Red Label improved in the second half of the year. Johnnie Walker Black Label also gained share although volume growth slowed from the first half. Net sales (after deducting excise duties) for the total brand were up 7% due to volume growth of 2% and favourable price/mix variances of 5%, driven by a 3% price increase in certain markets.
     Baileys continued its impressive growth driven by national advertising around a very successful holiday programme, and the continued success of initiatives to broaden the appeal of the brand to new occasions. The launch of Baileys Minis in May also contributed incremental volume and revenue, as well as generating momentum for the brand.
     The strategy for JεB in North America is to maximise value and in the year operating profit from the brand increased as marketing expenditure was reduced.
     José Cuervo continues to be the leader in US tequila sales. The key drivers of its growth were high consumer visibility, the success of national advertising and an increased trial programme.
     The success of the ‘Distinctive Since’ campaign was a key driver of the growth in Tanqueray. Both Tanqueray and Tanqueray No. TEN increased their share of the category.
     Excluding Captain Morgan Gold ready to drink, Captain Morgan volume was up 8% and net sales (after deducting excise duties) were up 10% driven by increased advertising and media spending for Captain Morgan Original Spiced Rum.
     Guinness volume grew slightly in the year driven by strong performance by bottled Guinness Extra Stout and Guinness Draught in Bottles.
     Local priority brand volume was up 1% for the year, with net sales (after deducting excise duties) up 4%. Crown Royal showed strong gains, as did Sterling Vineyards, however these were partially offset by volume decline in Gordon’s Gin, Beaulieu Vineyard, and other smaller brands. Volume of category brands was down 7% for the year, with net sales (after deducting excise duties) down 3%. The decrease in volume was due to declines in Gordon’s vodka and other smaller category brands. Bass volume was down versus the prior year; distribution of the brand was returned to Interbrew as of 30 June 2003. There has been a mix improvement due to inclusion of the former Seagram brands and the launch of Cîroc.

26 Diageo Annual Report 2003
Operating and financial review

Other business performance drivers:

• Almost 80% of Diageo’s volume now distributed through dedicated sales teams

• Ready to drink segment under pressure

• Efficiencies generated savings of over 10% in media planning and buying

• Share of US spirits brands increased by 0.3 percentage points to 27.3%

Diageo North America continued to progress its strategic initiatives. In particular its Next Generation Growth programme has made excellent further progress. In the second half of the year, new distribution and brokerage agreements were reached in nine more states and additional distributors established dedicated sales forces. Distributors and brokers in 34 states and Washington DC, representing nearly 80% of Diageo’s volume, are now supporting Diageo’s brands with just under 2,000 sales personnel working in teams solely dedicated to Diageo and S&S brands.
     Following two years of rapid growth, flavored malt beverages in the United States have slowed considerably and volume in the segment was broadly level for the year. Of the new launches this year, Smirnoff Ice Triple Black was the most successful and it is now the second best selling flavored malt beverage in the United States behind Smirnoff Ice. Flavored malt beverages currently represent 2% of the beer category, of which Smirnoff ready to drink is estimated to constitute about a third.
     Diageo’s share of US spirits increased in the year to 27.3% as a result of share gains in most priority brands.
     Diageo has now consolidated to one media planning and buying agency resulting in a 10% reduction in media spend against prior year cost levels. In addition a 15% reduction versus prior year was achieved in media production costs. Marketing spend at £405 million was 3% below prior year while share of voice in the combined beer and spirits category increased.

Great Britain

Key measures:
					Reported			Organic
	2003		2002		movement			movement
	£ million		£ million		%			%
Volume						(2	)		5
Turnover		1,429		1,467		(3	)		6
Net sales (after deducting excise duties)		839		896		(6	)		2
Marketing		188		188		–			2
Operating profit before exceptional items		219		204		7			15

Reported performance Turnover in Great Britain was down 3% on a reported basis from £1,467 million last year to £1,429 million in the year ended 30 June 2003. Operating profit before exceptional items was up £15 million from £204 million in the year ended 30 June 2002 to £219 million in the year ended 30 June 2003.

Organic performance The principal reason for the decrease in turnover was the termination of the distribution rights for Jack Daniels and Southern Comfort in Great Britain in August 2002 which reduced turnover by £108 million. The acquired Seagram brands contributed £17 million to turnover in the six months ended 31 December 2002. The organic increase in the year was £80 million (6%).
     Increase in operating profit before exceptional items was due to organic growth of £28 million, partly offset by a net negative impact resulting from acquisitions and disposals of £13 million.

Organic brand performance:
				Net sales
				(after
				deducting
	Volume			excise duties)
	movement			movement
	%			%
Smirnoff		7			(1	)
Guinness		(1	)		(1	)
Baileys		29			30
Total global priority brands		6			2
Local priority brands		(3	)		(11	)
Category brands		14			14
Total		5			2

• Smirnoff volume excluding ready to drink was up 11% and net sales (after deducting excise duties) up 16%

• Excluding ready to drink total volume was up 6% and net sales (after deducting excise duties) up 7%

Great Britain has achieved solid volume growth in the year and again increased share driven by growth of the global priority spirits brands. Growth in the spirits brands offset the decline in volume in ready to drink and beer.
     Smirnoff Red retained its leadership position in terms of share. Excluding ready to drink, volume grew 11%. In addition, a 6% price increase was achieved in September 2002 against strong competition from the value end of the category.
     Smirnoff ready to drink volume fell 3% in the year and net sales (after deducting excise duties) declined by 11%. However, the brand grew share by 2 percentage points. The ready to drink segment has been significantly impacted by the duty increase in April 2002, with volume declining by 4% in the year ended 30 June 2003. Diageo absorbed the duty increase and as a result

27 Diageo Annual Report 2003

net sales (after deducting excise duties) value per equivalent unit reduced by 9%. In addition, the duty impact has been exacerbated by a move towards value offerings and by shifts in consumer drinking habits away from the on trade and city centre venues, which are the primary outlets for ready to drink occasions.
     Baileys continued its very strong growth. Share increased to 41% in the face of the introduction of two competing products into the category. The launch of Baileys Minis and continued media awareness contributed to this growth as did brand building activity focused on broadening consumer enjoyment of the brand into new occasions.
     Guinness performed well in a difficult beer market, with net sales (after deducting excise duties) down only 1%, compared with a 3% net sales (after deducting excise duties) decline in the beer category.
     Local priority brand volume declined 3%. Despite volume growth, net sales (after deducting excise duties) of Gordon’s, excluding ready to drink, declined by 2%, due to increased competitive pressure in the off trade.
     The blended whisky segment continues to be driven by aggressive pricing but Bell’s has maintained its lead in the segment.
     Archers had a disappointing year with both its schnapps and ready to drink products showing volume decline. Archers volume declined by 6%. Archers Aqua volume fell by 27% driven by the ready to drink segment downturn which was more pronounced in the fruit flavoured ready to drink segment.
     Diageo’s category brands performance has been driven by excellent growth from Pimm’s, Piat d’Or and Blossom Hill.

Other business performance drivers:

• Increased resources behind sales execution

A comprehensive restructuring of the customer sales force drove growth in Great Britain. The new structure both increased frequency of contact with customers and generated more effective sales promotions.

Ireland

Key measures:
					Reported			Organic
	2003		2002		movement			movement
	£ million		£ million		%			%
Volume						(6	)		(5	)
Turnover		953		937		2			(1	)
Net sales (after deducting excise duties)		638		625		2			–
Marketing		67		65		3			–
Operating profit before exceptional items		141		151		(7	)		(9	)

Reported performance In Ireland, turnover increased £16 million from £937 million in the prior year to £953 million in the year ended 30 June 2003. Operating profit before exceptional items was £10 million lower than the previous year at £141 million.

Organic performance Exchange rate movements increased turnover by £40 million, partially offset by an organic decline in turnover of £10 million. Operating profit before exceptional items was £10 million lower than the previous year at £141 million. Favourable exchange rate movements on the euro of £6 million were more than offset by the weaker performance of the brands compared to last year.

Organic brand performance:
				Net sales
				(after
				deducting
	Volume			excise duties)
	movement			movement
	%			%
Guinness		(4	)		–
Smirnoff		(5	)		(7	)
Baileys		(2	)		(1	)
Total global priority brands		(4	)		(1	)
Local priority brands		(5	)		(1	)
Category brands		(7	)		1
Total		(5	)		–

In a weakening market in Ireland, Diageo volume declined by 5% and Diageo Ireland lost some share. The loss of share is mainly driven by the shift to at home consumption where Guinness and spirits are under represented. In addition, over 50% of Diageo’s off trade volume is in premium beer which has been impacted by aggressive price discounting by competitors. There has also been a shift in consumption towards wine and away from spirits and ready to drink since the duty increase.
     Guinness held share in the year for the first time in 10 years despite volume decline of 4%. Net sales (after deducting excise duties) were level, benefiting from a price increase.
     The decline in spirits and ready to drink volume in the second part of the year reflects the impact of the duty increase of over 40% in spirits and nearly 100% in ready to drink implemented in December 2002. Smirnoff Red and Baileys both gained share. Smirnoff ready to drink volume declined 6%, however Diageo’s share of ready to drink was maintained.
     Volume in each of the local priority brands, Budweiser, Smithwicks and Carlsberg, all declined. The duty increase also impacted volume growth of the category brands, 45% of the volume of which is spirits. Volume of Diageo’s wine brands declined by 7%.

28 Diageo Annual Report 2003
Operating and financial review

Other business performance drivers:

• Continued decline in beverage alcohol market driven by a weakening economic environment

• Implementing a reorganisation to reduce costs and improve effectiveness

As previously described the beverage alcohol market in Ireland deteriorated further as a result of declining consumer confidence, the continuing slowdown in economic growth and the excise duty increase on spirits and ready to drink which led to retail price increases of around 20%. The social aspects of drinking are a significant issue in Ireland. As part of its ongoing social responsibility programme, Diageo has participated fully in the establishment of MEAS — a new independent association established as part of the social responsibility programme undertaken by the industry.
     In response to the changes in the beverage alcohol market in Ireland, Diageo is in the process of implementing a reorganisation which is expected to result in a less complex and lower cost operating model. The cost of achieving this is not expected to give rise to a charge to exceptional items.

Spain

Key measures:
					Reported			Organic
	2003		2002		movement			movement
	£ million		£ million		%			%
Volume						5			(1	)
Turnover		424		380		12			1
Net sales (after deducting excise duties)		322		298		8			(1	)
Marketing		70		71		(1	)		(9	)
Operating profit before exceptional items		99		94		5			(5	)

Reported performance Turnover in the Spanish market increased £44 million to £424 million in the year ended 30 June 2003 compared with the prior year. Operating profit before exceptional items was up £5 million to £99 million in the year ended 30 June 2003.

Organic performance The reasons for the increase in turnover are the favourable impact of exchange rate movements in the year (£15 million) and the benefit of the acquired Seagram brands, principally Cacique, which contributed £35 million to turnover in the six months ended 31 December 2002.
     Operating profit before exceptional items benefited from a £11 million contribution from the acquired Seagram brands, partially offset by an organic decline of £5 million.

Organic brand performance:
				Net sales
				(after
				deducting
	Volume			excise duties)
	movement			movement
	%			%
JεB		(3	)		(7	)
Baileys		(2	)		1
Johnnie Walker		(4	)		(14	)
Smirnoff		(8	)		(2	)
Total global priority brands		(4	)		(7	)
Local priority brands		25			16
Category brands		3			13
Total		(1	)		(1	)

Organic operating profit was down 5% as the volume increase in dark rum was partially offset by declines in Scotch. Marketing investment declined by 9% mainly due to the decision to reschedule the JεB advertising campaign originally planned for April to September 2003.
     The performance in the six months ended 30 June 2003 is in contrast to that of the first half of the year with volume up 14% having been 11% down in the first half. This was primarily driven by 9% growth in the volume of JεB in the second half and the inclusion of Cacique for the first time in organic growth in the second half.
     The decline in global priority brands in the first half was mainly driven by the poor economic environment and by the tough prior year comparison driven by the duty increase in January 2002. Volume declined by 4% in the full year against a 13% decline in the first half. Net sales (after deducting excise duties) decreased by 7% for the full year against a 11% decline in the first half.
     JεB volume was down 3% for the full year following a decline of 11% in the first half as volume in the second half grew 9%. Johnnie Walker volume was down 4% for the full year having been down 13% in the first half, an increase of 10% in the second half.
     The other major global priority brands in Spain, Smirnoff Red and Baileys, saw volume decline in the difficult environment of the first six months. Volume and net sales (after deducting excise duties) increased in the second half.
     Cacique continued to make share gains partially through increased distribution and, benefiting from its leading position in a growing category, volume was up 40%. In addition a price increase was implemented in May 2003. Cardhu volume grew 2%.

29 Diageo Annual Report 2003

Other business performance drivers:

• Market share gains on JεB, Baileys, Johnnie Walker Red Label and Cacique

In the Scotch segment Diageo’s brands gained share slightly with gains by JεB and Johnnie Walker Red Label partially offset by share decline in VAT69.

Key markets

Key measures:
					Reported		Organic
	2003		2002		movement		movement
	£ million		£ million		%		%
Volume						–		(2	)
Turnover		2,129		2,078		2		3
Net sales (after deducting excise duties)		1,686		1,631		3		5
Marketing		269		239		13		12
Operating profit before exceptional items		522		524		–		3

Reported performance In key markets, turnover increased £51 million from £2,078 million in the year ended 30 June 2002 to £2,129 million in the year ended 30 June 2003. Operating profit before exceptional items was down £2 million at £522 million for the year ended 30 June 2003.

Organic performance Turnover was boosted by the acquired Seagram brands which contributed £141 million in the six months ended 31 December 2002, and by an organic increase of £53 million. However, unfavourable exchange variances of £113 million (principally in respect of the Venezuelan Bolivar), and the impact of disposals of £30 million (principally Malibu £24 million) reduced turnover.
     Operating profit before exceptional items was down £2 million at £522 million for the year ended 30 June 2003. Exchange losses on the Venezuelan Bolivar of £30 million were more than offset by the impact of acquired Seagram brands which contributed £39 million to operating profit before exceptional items in the six months ended 31 December 2002.

Organic brand performance:
				Net sales
				(after
				deducting
	Volume			excise duties)
	movement			movement
	%			%
Johnnie Walker		(1	)		(3	)
Guinness		9			29
JεB		(10	)		(9	)
Smirnoff		2			11
Baileys		(2	)		2
Total global priority brands		1			5
Local priority brands		(3	)		15
Category brands		(5	)		(1	)
Total		(2	)		5

The volume growth in overall global priority brands was led by a continued strong performance of Guinness in Africa. Johnnie Walker volume declined as growth in Johnnie Walker Red Label, up 2%,was offset by a 6% decline in Johnnie Walker Black Label. Johnnie Walker Black Label was impacted by the tough trading environment in Latin America. Excluding Latin America, Johnnie Walker Black Label volume was up 4%. Ready to drink volume was up 26% driven by further strong performance of Diageo’s ready to drink brands in Australia and by the Smirnoff Ice launches in Taiwan, France, Japan and Global Duty Free.
     Local priority brand volume fell as strong performance on Bundaberg Rum, up 16%, and Guinness Malta, up 17%, only partially compensated for the decline in Buchanans in Venezuela and for the impact which the change of distributor arrangements for Dimple in South Korea had on sales of that brand in the first half. Volume of category brands fell by 5% driven by the decline in VAT69 in Venezuela and by the decline in Spey Royal in Thailand in the first half. This was partially offset by growth in category brand volume in Africa.
     While overall volume declined, net sales (after deducting excise duties) grew reflecting the benefit of strong price increases gained on the Guinness brand in Africa. Marketing investment grew by 12% driven by increased spend behind new brand launches and the relaunches of Johnnie Walker and Dimple in South Korea.

Other business performance drivers:

• Strong performance in Africa

• Strong volume growth in Australia

• Continued impact of difficult economic situation in Latin America

• Impact of SARS in Asia and Global Duty Free

• Competitor pricing in Portugal

30 Diageo Annual Report 2003
Operating and financial review

As previously noted, several of Diageo’s key markets are in geographies which have faced the most difficult challenges of the last year. The overall profitability of the key markets in Latin America declined. This was partially offset by growth in Africa and in South Korea while other key markets broadly maintained operating profit year on year.
     Africa, which is Diageo’s second largest market by volume, and its third largest market by operating profit, gained further momentum in the second half. Volume was up 6% and net sales (after deducting excise duties) up 18% for the full year. Guinness volume was up 10% driven by the continued success of the Michael Power campaign. Guinness Malta volume increased by 17% as distribution improved in Nigeria and Cameroon. Additional packaging and brewing capacity resulting from recent investment in Nigeria and Cameroon was also a major contributory factor behind the growth of both Guinness and Guinness Malta. Further capacity expansion projects are planned for the year to come. There was growth across all global priority spirits brands, with the exception of Smirnoff which was impacted by weak economic conditions in South Africa.
     In Latin America overall volume and operating profit declined by 16% and 30% respectively. This reflects a dramatic decline in the Venezuelan business and a 7% volume decline in other Latin American markets. Despite a tough environment all markets remain profitable and there have been successes for a number of brands. For example, Smirnoff Red volume in Brazil grew by 12% as the brand benefited from increased marketing investment. Mexico’s performance was also strong with volume up by 22%, driven by JεB and Baileys which were moved to in-house distribution during the year.
     In South Korea, Windsor, the leading Scotch whisky brand, gained share in the year and volume grew by 1% in the six months ended 30 June 2003. The structure of the acquisition of the Windsor brands has delivered an operating profit margin improvement. The in-house distribution arrangements for Dimple, the third largest Scotch whisky brand, are now fully operational. Dimple distribution was rebuilt from 53% to over 80% of target accounts. The performance of the Scotch whisky category slowed in the second half, impacted by the weaker economic environment.
     Global Duty Free volume was level despite the impact of the Iraqi conflict and the SARS outbreak on world travel. This reflects extremely strong customer and consumer activities and continued investment in priority brands in this high profile market. Smirnoff Ice was launched in the year in a number of duty free markets and Tanqueray No. TEN was launched with very strong impact.
     In Australia Diageo’s leadership position was reinforced as overall share of spirits grew by over 7 percentage points in the year as all the priority brands gained share. Diageo’s spirits business in Australia has benefited from focus on programmes to improve quality of serve in the on trade and to improve merchandising in both the on and off trade. Overall volume increased 16% and net sales (after deducting excise duties) were up 14%. Net sales (after deducting excise duties) per equivalent unit were slightly down due to the decision to reposition the prices of ready to drink brands to an appropriate price premium to beer. The strong volume growth was driven by Johnnie Walker up 35%, Baileys up 7% and Bundaberg up 16%. Diageo’s ready to drink business grew by 30%. Dark spirits ready to drink performed exceptionally well with both Johnnie Walker and Bundaberg Premix increasing their share of the total ready to drink category. Despite the strong volume performance, operating profit growth was constrained by higher marketing investment and higher pension costs.
     Despite a reduction in general consumer confidence the beverage alcohol market in Greece was stable and Diageo volume grew 3%. Volume growth was principally driven by Johnnie Walker Red Label up 5% and Johnnie Walker Black Label up 10%, as both gained share. Ready to drink volume grew 4% as growth in Smirnoff Ice up 8%, and Gordon’s Space up 5%, offset weakness in Archers Aqua and Smirnoff Mule. Marketing expenditure was up 5% to support the launch of new campaigns on a number of brands.
     In Taiwan the key driver of volume growth of 9% was again Johnnie Walker which increased 9%. Pricing remained flat in the year but net sales (after deducting excise duties) grew 16% due to mix improvements.
     In Japan overall volume declined 1%, with Johnnie Walker down 17% and Old Parr down 15%. The Scotch category is in decline and Diageo’s brands have also lost some share. This was offset by volume growth in Guinness, up 17%. Smirnoff Ice has sold 51,000 equivalent units since its launch in May.
     In Portugal Diageo’s strategy has been to maintain price and not follow the aggressive discounting policy of competitors. In addition a new route to market was introduced in the year which led to a reduction in stock held by distributors. Consequently volume was down 36% and net sales (after deducting excise duties) were down 39%. The change in market dynamics is considered to be long term and, as Diageo’s strategy is to maximise value not volume, Portugal has been managed as a venture market since 1 July 2003.

Venture markets

Key measures:
					Reported		Organic
	2003		2002		movement		movement
	£ million		£ million		%		%
Volume						2		6
Turnover		1,231		1,173		5		10
Net sales (after deducting excise duties)		975		905		8		14
Marketing		186		156		19		25
Operating profit before exceptional items		266		243		9		14

Reported performance Turnover in venture markets increased by £58 million from £1,173 million in the year ended 30 June 2002 to £1,231 million in the year ended 30 June 2003. Operating profit before exceptional items, at £266 million for the year ended 30 June 2003, was £23 million higher than in the previous year.

Organic performance The main factor for the improvement in turnover was the strong organic growth which added £110 million to turnover compared with the previous year. However, this was offset by unfavourable exchange movements of £33 million and the disposal of brands of £31 million (principally Malibu £17 million and Gilbey’s Green and White Label whiskies £9 million).
     The principal element of the increase in operating profit before exceptional items was organic growth of £32 million.

31 Diageo Annual Report 2003

Organic brand performance:
				Net sales
				(after
				deducting
	Volume			excise duties)
	movement			movement
	%			%
Johnnie Walker		7			10
Smirnoff		25			82
Guinness		1			3
Baileys		11			10
JεB		4			4
Total global priority brands		11			22
Local priority brands		(3	)		10
Category brands		(2	)		(1	)
Total		6			14

• Smirnoff volume excluding ready to drink was up 4% and net sales (after deducting excise duties) was up 8%

• Excluding ready to drink, volume was up 2% and net sales (after deducting excise duties) up 4%

Volume growth reflected strong growth in global priority brands. In addition ready to drink was an important contributor to venture markets’ growth with further rollouts of Smirnoff Red and Black Ice as well as the full year benefit of last year’s launches.
     Johnnie Walker volume grew 7%, however growth slowed in the second half of the year due in part to the impact of the Iraqi conflict and the SARS outbreak on travel. Johnnie Walker Black Label volume was up 12% and Johnnie Walker Red Label grew 4% driven by strong performance across most of the venture markets with the exception of Germany where volume was constrained by competition from lower priced products.
     Smirnoff Red volume increased 4% as the brand continued to benefit from the improvement in brand equity which has resulted from the launch of Smirnoff Ice across venture markets. In addition, marketing investment behind Smirnoff Red rose by 7%. Net sales (after deducting excise duties) of Smirnoff benefited from the favourable mix impact of ready to drink.
     Guinness volume improved in the second half driven by strong performance in Malaysia. Volume of Red Stripe in Jamaica, venture markets’ only local priority brand, was impacted in the second half by the worsening economic conditions in Jamaica and excise duty increases, but net sales (after deducting excise duties) benefited from price increases in the second half.
     Baileys volume grew by 11%, as the brand benefited from an extremely strong holiday programme and continued marketing investment was increased by 15% versus the prior year.

Other business performance drivers:

• Marketing investment up 25% mainly behind ready to drink launches and longer term growth projects

• Operating profit growth led by the Caribbean, Middle East, Nordics and Germany

Marketing investment grew by 25% due to investment to support ready to drink launches as well as investment to support longer term growth behind Baileys in Germany, Italy, the Caribbean and venture markets in Latin America and Johnnie Walker in Asia and the Caribbean.
     The Caribbean and the Middle East markets performed strongly as a result of good performance across the global priority brands with volume up on these brands 20% and 10%, respectively.
     In Norway, Diageo’s business was successfully maintained by a third party distributor during the six month suspension of Diageo’s trading licence and volume grew. Diageo is now fully operational again in Norway following the reinstatement of the trading licence in February and Smirnoff, Bell’s and Gordon’s have all gained share in the off trade, a segment which is showing strong growth following a reduction in excise duty. Smirnoff Ice continues to perform well in the Nordics and full year volume was 100,000 equivalent units.
     In Germany ready to drink is currently the fastest growing segment in the spirits market and since its launch in February 2002, Smirnoff Ice has sold nearly 500,000 equivalent units. Germany has been managed as a key market since 1 July 2003. In the Netherlands the second half performance was adversely impacted by an 18% duty increase in January and volume was down 2%.
     In the venture markets across Asia, overall volume grew by 1% despite the impact of the SARS outbreak. In India the sale of the Gilbey’s Green and White Label whiskies in December 2002 has resulted in increased focus on the global priority brands. However strong volume growth in India was offset by weakness in the Philippines where the decline in travel as a result of the SARS outbreak impacted the duty free channel.

32 Diageo Annual Report 2003
Operating and financial review

Operating results — 2002 compared with 2001

Summary consolidated profit and loss account
	2002									2001
	Before									Before
	exceptional			Exceptional						exceptional			Exceptional
	items			items			Total			items			items			Total
	£ million			£ million			£ million			£ million			£ million			£ million
Turnover		11,282			–			11,282			12,821			–			12,821
Operating costs		(9,176	)		(453	)		(9,629	)		(10,720	)		(228	)		(10,948	)
Operating profit		2,106			(453	)		1,653			2,101			(228	)		1,873
Share of profits of associates		324			(41	)		283			203			–			203
Disposal of fixed assets and businesses		–			799			799			–			(4	)		(4	)
Interest payable (net)		(399	)		–			(399	)		(350	)		–			(350	)
Profit/(loss) before taxation		2,031			305			2,336			1,954			(232	)		1,722
Taxation		(511	)		(121	)		(632	)		(468	)		33			(435	)
Profit/(loss) after taxation		1,520			184			1,704			1,486			(199	)		1,287
Minority interests		(87	)		–			(87	)		(80	)		–			(80	)
Profit/(loss) for the year		1,433			184			1,617			1,406			(199	)		1,207

Note: Exceptional items under UK GAAP represent items which, in management’s judgement, are material items that arise from events or transactions that fall within the ordinary activities of the group and, by virtue of their size or incidence, should be separately disclosed if the financial statements are to properly reflect the results for the period. Exceptional items under UK GAAP do not represent extraordinary items under US GAAP.

Turnover
Overall Turnover decreased by £1,539 million (12%) from £12,821 million in the year ended 30 June 2001 to £11,282 million in the year ended 30 June 2002. Increased turnover of £1,124 million in the premium drinks business and £81 million at Burger King were more than offset by a decrease of £2,744 million attributable to Pillsbury.

Continuing operations — premium drinks Premium drinks generated turnover of £8,704 million in the year ended 30 June 2002, an increase of £1,124 million (15%) from the £7,580 million reported in the year ended 30 June 2001. The acquisition of the Seagram brands, which include Captain Morgan, Crown Royal, Seagram’s 7, Seagram’s VO, Cacique, Windsor Premier, Myers’s Rum and Sterling Vineyards, completed on 21 December 2001. The results for the year ended 30 June 2002 include the trading performance of that business for the six months ended 30 June 2002, and the acquired Seagram brands generated sales of £573 million in the year ended 30 June 2002 with no contribution in the prior period. Other minor acquisitions contributed £120 million of the increase in turnover, but this was more than offset by the impact of a number of disposals of non-core brands or the termination of distribution rights which reduced turnover by £196 million, principally attributable to the loss of the distribution rights of Stolichnaya in December 2000 (£94 million). Exchange rate movements had a small (£13 million beneficial impact on turnover. The remaining £614 million increase in turnover is attributable primarily to brands owned throughout the two year period ended 30 June 2002 and reflects strong volume performance of the global priority brands (which grew by 8%) and 2% volume growth in local priority brands, offset by a 4% volume decline in category brands (all brands other than global priority brands and local priority brands).

Discontinued operations The decrease in turnover at Pillsbury was primarily attributable to the disposal of the business, which was sold in October 2001, and for which turnover is only included for the four months up to the date of disposal in the year ended 30 June 2002 compared with a full year in the prior period. Pillsbury contributed £1,455 million in the year ended 30 June 2002 compared with £4,199 million in the prior year. Burger King contributed turnover of £1,123 million in the year ended 30 June 2002, compared with £1,042 million in the prior period, an increase of £81 million (8%) driven primarily by revenue generated by the increase in the number of Burger King owned restaurants. Both Pillsbury and Burger King, following its disposal in December 2002, are accounted for as discontinued operations under UK GAAP in the financial statements for the year ended 30 June 2003.

Operating costs
Overall Operating costs decreased by £1,319 million (12% on a reported basis) from £10,948 million in the year ended 30 June 2001 to £9,629 million in the year ended 30 June 2002. This decrease was caused by a fall of £2,439 million in costs in respect of Pillsbury, which was sold on 31 October 2001. Operating costs of premium drinks increased by £1,067 million. Operating costs in respect of Burger King increased £53 million to £988 million in the year ended 30 June 2002 due partly to a £44 million (15%) increase in staff costs.

Continuing operations — premium drinks Operating costs of premium drinks increased by £1,067 million (17% on a reported basis) from £6,303 million to £7,370 million in the year ended 30 June 2002. Operating exceptional costs for continuing operations increased by £279 million from £153 million in the prior year to £432 million in the year ended 30 June 2002 (this is discussed under exceptional operating costs below).
     Excluding the exceptional operating costs, continuing operating costs increased by £788 million (13% on a reported basis) from £6,150 million in the year ended 30 June 2001 to £6,938 million in the year ended 30 June 2002. The main reason for the increase was the effect of acquisitions, which contributed an additional £545 million to operating costs (principally Seagram £443 million). This was partially offset by reductions in costs from the movements in exchange rates of £44 million and from disposals of £138 million. Marketing investment increased by £147 million (15% on a reported basis) to £1,127 million. Marketing spend on

33 Diageo Annual Report 2003

the global priority brands grew by 10% to £764 million, particularly behind Smirnoff Ice in North America, the ‘Keep Walking’ campaign for Johnnie Walker, and continued investment behind the successful ‘Let Your Senses Guide You’ campaign for Baileys.

Operating profit before exceptional items
Overall Operating profit before exceptional items increased £5 million from £2,101 million to £2,106 million. Premium drinks operating profit before exceptional items increased by £336 million, offset by decreases in respect of Pillsbury and Burger King of £315 million and £16 million, respectively.

Continuing operations — premium drinks Premium drinks accounted for £1,766 million of the operating profit before exceptional items, compared with £1,430 million in the prior period, an increase of £336 million.
     Acquisitions represent £148 million of this increase, of which the Seagram spirits and wine businesses acquired on 21 December 2001 account for £130 million, whilst disposals adversely impacted profit by £58 million. Sales of Captain Morgan Gold did not meet original expectations and the product was subsequently withdrawn from the market, and therefore the total Seagram operating profit of £130 million before exceptional items earned in the period is after a provision of £24 million for the potential diminution in the value of product stock. Captain Morgan Gold was launched in May 2002 and in the period volume was 245,000 equivalent units, net sales (after deducting excise duties) were £27 million and marketing costs were £16 million.
     The balance of the increase in the premium drinks contribution to operating profit before exceptional items of £246 million was driven primarily by volume increases, an improvement in the operating margin before exceptional items which increased from 18.9% to 20.3%, and the beneficial impact of exchange rate movements of £57 million, comprising £26 million on translation of overseas profits and £31 million on transactions.

Discontinued operations Pillsbury contributed £184 million in operating profit before exceptional items for the four months prior to its disposal compared with £499 million in the year ended 30 June 2001. The decline in operating profit before exceptional items primarily reflecting the reduced period of ownership in the year ended 30 June 2002 (four months) compared to the prior year (12 months).
     Burger King contributed £156 million to operating profit before exceptional items compared with £172 million in the prior year. Worldwide comparable restaurant sales were flat for the year against a 4% decline in the prior year. Net restaurant numbers increased by 83 against an increase of 211 in the prior year.

Exceptional operating costs
Overall Operating profit was impacted in the year by exceptional charges which amounted to £453 million in the year ended 30 June 2002 compared with £228 million in the year ended 30 June 2001. These exceptional charges primarily relate to integration and restructuring costs, a settlement in relation to José Cuervo, and costs of the quick service restaurants business. This increase in exceptional charges of £225 million accounts for the majority of the decrease in operating profit of £220 million.

Continuing operations — premium drinks The restructuring cost for the year ended 30 June 2002 included £48 million (2001 — £74 million) in respect of the integration of the UDV (spirits and wine) and the Guinness (beer) businesses to create premium drinks. Approximately £18 million (2001 — £32 million) of the costs were employee related, principally redundancy,£9 million (2001 — £9 million) were legal and professional costs, £nil (2001 — £7 million) were asset write downs, and the balance included consultancy and systems costs. The £48 million (2001 — £74 million) integration cost comprised £15 million (2001 — £32 million) in respect of global corporate functions, £5 million (2001 — £15 million) on the integration of UDV and Guinness businesses in Great Britain, £12 million (2001 — £12 million) on business services and £16 million (2001 — £15 million) in other countries around the world. Incremental synergy achieved in the year, as a result of the integration of UDV and Guinness businesses amounted to £43 million. As a result of the amount charged to the profit and loss account in the two years ended 30 June 2002, it is expected that 680 jobs will be lost, of which 340 had been terminated by 30 June 2002. The total costs of this integration were £170 million with the remaining charge incurred in 2003 as an operating exceptional item.
     The restructuring cost for the year ended 30 June 2002 included £164 million in respect of the integration of the Seagram spirits and wine businesses. Approximately £72 million of the costs were employee related, principally redundancies, £10 million were legal and professional costs, £36 million were asset write downs, and the balance included consultancy and systems costs. Of the £164 million integration cost, £20 million was in respect of global corporate functions, £114 million on the integration of the Seagram businesses in North America, and £30 million in other countries around the world. As a result of the amount charged to the profit and loss account in the year ended 30 June 2002, it is expected that approximately 1,200 jobs will be lost of which some 1,050 had been terminated by 30 June 2002.
     On 5 February 2002, it was announced that Diageo and José Cuervo SA (José Cuervo) had agreed to terminate their litigation in respect of a change of control issue which José Cuervo claimed arose as a result of the merger of GrandMet and Guinness, and new arrangements were formalised for the distribution rights for the José Cuervo brands in the United States which now extend to 2013. The settlement in favour of José Cuervo involved the return of the group’s 45% interest in José Cuervo and a net cash payment of £85 million. The exceptional charge of £220 million (before tax) comprises the write off of the group’s investment in José Cuervo of £115 million, related goodwill previously written off to reserves of £20 million and the net cash payment to José Cuervo.
     In the year ended 30 June 2001, £79 million costs were incurred in the reorganisation of beer production facilities in England and Ireland and the restructuring of ownership and management within premium drinks. Included in the costs were £35 million of employee related costs, principally redundancy, and £26 million of tangible fixed asset write downs. The reorganisation included the closure of the Dundalk packaging plant in Ireland, the restructuring of the Dundalk brewery and Belfast packaging plant both in Ireland and the restructuring of the packaging plant in Runcorn in England. Jobs lost were approximately 550 of which 480 had been terminated by 30 June 2002.

34 Diageo Annual Report 2003
Operating and financial review

Discontinued operations During 2002, in anticipation of the disposal of the Burger King business, its franchisee loan financing arrangements were restructured. This resulted in an exceptional charge for credit enhancement, performance and service fees of £21 million. In 2001, the exceptional items in respect of Burger King comprised provisions of £49 million made against certain fixed assets, costs associated with litigation of £21 million, less £5 million of successor franchise fee income.
     During the year ended 30 June 2001, packaged food incurred restructuring costs of £10 million in respect of production facilities in Pillsbury’s Bakeries and Foodservice division that have been classified as exceptional operating costs.

Associates
The group’s share of profits of associates after exceptional items but before interest was £283 million for the year ended 30 June 2002 compared with £203 million for the year ended 30 June 2001. The group’s 22% equity interest in General Mills contributed £112 million in the eight months ended 30 June 2002. Share of the associates profits for the year ended 30 June 2002 was adversely impacted by exceptional charges of £41 million, including £31 million in respect of General Mills’ restructuring of the acquired Pillsbury business and of its cereal manufacturing operations and £10 million in respect of Moët Hennessy.

Interest
The interest charge in the year increased to £399 million from £350 million in the prior year. The net benefits of £45 million in respect of the disposal and acquisition of businesses and of £34 million from the reduction in interest rates were offset by other factors. These factors included the effect of exchange rate related movements of £35 million, the share of General Mills’ interest charge of £59 million (for the eight months ended 30 June 2002) and the funding of the share repurchases made during the year, which increased the interest charge by £20 million.

Non operating exceptional items
Non operating exceptional items include losses on disposals of fixed assets of £22 million compared with gains of £19 million in the prior year and net gains on the disposal of brands and businesses of £821 million in the year ended 30 June 2002 compared with net losses of £23 million in the year ended 30 June 2001.
     Exceptional items in respect of the disposal of fixed assets in the year ended 30 June 2002, included losses of £23 million relating to the disposal of tangible fixed assets in quick service restaurants.
     The disposal of the Malibu brand, which was a condition of the acquisition of the Seagram spirits and wine businesses, resulted in a gain before taxes of £532 million. Pillsbury was sold on 31 October 2001 and generated a gain before taxes of £322 million, after writing back goodwill previously written off to reserves of £1,671 million. Other disposals in the year ended 30 June 2002 included Glen Ellen wines in North America which resulted in a loss before tax of £52 million, Guinness World Records Ltd which resulted in a gain before tax of £35 million and others which resulted in a loss before tax of £16 million.
     In the year ended 30 June 2001, the disposals of premium drinks brands in Latin America resulted in a profit of £28 million. Professional fees, retention bonuses and other costs totalling £51 million were incurred in the year relating to the Pillsbury/General Mills transaction.

Taxation
The group complied with FRS 19 — Deferred tax for the first time during the year ended 30 June 2002. The effective rate of taxation on profit before exceptional items for the year ended 30 June 2002 was 25.2%, compared with 24.0% for the year ended 30 June 2001. The 2001 tax charge benefited from a two percentage point reduction, reflecting a low effective rate of taxation in respect of associated companies, which did not recur in 2002.
     The effective rate of taxation on profit after exceptional items for the year ended 30 June 2002 was 27.1% compared with 25.3% for the year ended 30 June 2001.

35 Diageo Annual Report 2003

Premium drinks
The following discussion provides additional commentary on the trading performance of the premium drinks business with the equivalent period in the prior year.
     In the discussion movements are segregated between ‘reported’ or ‘organic’ performance. ‘Reported’ means that the measure reflects movement in the number disclosed in the financial statements. ‘Organic’ represents the movement excluding the impact of exchange, acquisitions and disposals. In the discussion under ‘organic brand performance’ for each market, movements given for volume, turnover, net sales (after deducting excise duties) and marketing expenditure are organic movements. A further description of organic movement, how it is calculated and why it is considered useful for the reader is set out on pages 19 and 20.
     The organic movement calculations for turnover, net sales (after deducting excise duties) and operating profit before exceptional items for the year ended 30 June 2002 were as follows:

	2001										Organic			2002		Organic
	Reported		Exchange			Disposals			Acquisitions		movement			Reported		movement
	£ million		£ million			£ million			£ million		£ million			£ million		%
Turnover
Major markets:
North America		2,092		38			(134	)		431		242			2,669		12
Great Britain		1,304		–			(22	)		8		177			1,467		14
Ireland		942		8			(1	)		1		(13	)		937		(1	)
Spain		335		3			(1	)		18		25			380		7
		4,673		49			(158	)		458		431			5,453		9
Key markets		1,807		(37	)		(30	)		227		111			2,078		6
Venture markets		1,100		1			(8	)		8		72			1,173		7
Total premium drinks		7,580		13			(196	)		693		614			8,704		8
Net sales (after deducting excise duties)
Major markets:
North America		1,741		35			(119	)		362		211			2,230		13
Great Britain		797		–			(18	)		5		112			896		14
Ireland		627		5			(1	)		1		(7	)		625		(1	)
Spain		262		2			(1	)		13		22			298		8
		3,427		42			(139	)		381		338			4,049		10
Key markets		1,450		(27	)		(22	)		136		94			1,631		7
Venture markets		845		–			(7	)		6		61			905		7
Total premium drinks		5,722		15			(168	)		523		493			6,585		9
Excise duties		1,858													2,119
Turnover		7,580													8,704
Operating profit before exceptional items
Major markets:
North America		363		65			(39	)		95		66			550		17
Great Britain		162		–			(7	)		3		46			204		30
Ireland		155		(8	)		–			–		4			151		3
Spain		85		(2	)		–			7		4			94		5
		765		55			(46	)		105		120			999		16
Key markets		447		2			(10	)		41		44			524		10
Venture markets		218		–			(2	)		2		25			243		12
Total premium drinks		1,430		57			(58	)		148		189			1,766		13

36 Diageo Annual Report 2003
Operating and financial review

Notes

(1) The exchange adjustments for turnover, net sales (after deducting excise duties) and operating profit before exceptional items are principally in respect of the US dollar.

(2) Disposal adjustments for turnover, net sales (after deducting excise duties) and operating profit before exceptional items respectively were in relation to the termination of the distribution rights for Stolichnaya vodka in the United States (£94 million, £81 million, £32 million); the sale of Croft and Delaforce port and sherry brands (£18 million, £14 million, £7 million); the disposal of Malibu rum (£12 million, £11 million, £6 million); the sale of Glen Ellen wines (£15 million, £14 million, £2 million); the disposal of Guinness World Records (£22 million, £22 million, £4 million); the sale of Dreher brands in Brazil (£24 million, £16 million, £6 million); and other disposals (£11 million, £10 million, £1 million).

(3) Acquisition adjustments for turnover, net sales (after deducting excise duties) and operating profit before exceptional items respectively were in relation to the purchase of the Seagram spirits and wine businesses (£573 million, £451 million, £130 million); and the acquisition of further equity interests in former associated companies which are now subsidiaries (£120 million, £72 million, £18 million).

(4) In the calculation of operating profit before exceptional items the overheads included in disposals and acquisitions were directly attributable to those businesses and do not result from subjective judgements of management.

(5) The organic movement percentage is the amount in the column headed organic movement in the table above expressed as a percentage of the aggregate of the first three columns. The basis of the calculation of the organic movement is explained on page 20.

Organic brand performance:
						Net sales
						(after
						deducting
	Equivalent		Volume			excise duties)
	units		movement			movement
	millions		%			%
Smirnoff		21.8		21			42
Johnnie Walker		10.6		1			4
Guinness		11.1		–			5
Baileys		5.7		10			9
JεB		6.3		2			3
José Cuervo		4.2		(2	)		2
Tanqueray		1.9		–			1
Malibu (sold 22 May 2002)		2.2		7			6
Total global priority brands		63.8		8			13
Local priority brands		13.8		2			10
Category brands		26.6		(4	)		(1	)
		104.2		4			9
Acquisitions
Seagram brands		7.5
Other		2.0
Total		113.7

Analysis by individual markets

North America

Key measures:
					Reported		Organic
	2002		2001		movement		movement
	£ million		£ million		%		%
Volume						18		7
Turnover		2,669		2,092		28		12
Net sales (after deducting excise duties)		2,230		1,741		28		13
Marketing		408		302		35		15
Operating profit before exceptional items		550		363		52		17

Reported performance Turnover in North America increased 28% on a reported basis from £2,092 million in the year ended 30 June 2001 to £2,669 million in the year ended 30 June 2002. Net sales (after deducting excise duties), a non-GAAP measure, increased from £1,741 million to £2,230 million, an increase of 28%. Operating profit before exceptional items increased from £363 million to £550 million, an increase of £187 million.

37 Diageo Annual Report 2003

Organic performance These increases were primarily due to acquisitions, which contributed an additional £431 million to turnover, £362 million to net sales (after deducting excise duties) and £95 million to operating profit before exceptional items compared with the prior year. The increases, were principally generated by the brands acquired with Seagram. These were partly offset by the effect of disposals, which in the year ended 30 June 2001 contributed an incremental £134 million, £119 million and £39 million to turnover, net sales (after deducting excise duties) and operating profit before exceptional items, respectively. This disposal impact is primarily attributable to the termination of the distribution rights for Stolichnaya in the year ended 30 June 2001 (£94 million, £81 million and £32 million impact on turnover, net sales (after deducting excise duties) and operating profit before exceptional items, respectively) and to the disposal of the GlenEllen wine business which completed in May 2002 (£15 million, £14 million and £2 million impact on turnover, net sales (after deducting excise duties) and operating profit before exceptional items, respectively).
     The US dollar was relatively stable against sterling, with the average rate moving from £1 = $1.45 to £1 = $1.44. After taking account of the effect of the group’s hedges (see ‘Liquidity and capital resources — Currency risk’) exchange had a limited beneficial impact on reported turnover and net sales (after deducting excise duties) (£38 million and £35 million respectively). However, the beneficial impact on operating profit before exceptional items, affected by the losses arising from currency translation hedging arrangements in the year ended 30 June 2001, was more significant (£65 million).

Organic brand performance:
				Net sales
				(after
				deducting
	Volume			excise duties)
	movement			movement
	%			%
Smirnoff		34			68
Johnnie Walker		1			6
José Cuervo		–			3
Baileys		7			4
Tanqueray		(2	)		(1	)
Guinness		(1	)		9
JεB		(10	)		(7	)
Total global priority brands		14			22
Local priority brands		–			(3	)
Category brands		(5	)		(7	)
Total		7			13

• Volume of global priority brands up 14%

• Growth of new products and improvements in product mix

Global priority brands posted strong growth, with volume up 14% over the prior year. The growth principally comprised strong performances by Smirnoff, Baileys and Johnnie Walker Black Label. Volume of JεB, Tanqueray, Johnnie Walker Red Label and Guinness declined.
     Marketing spend increased over the prior year, by 15%, driven by investment in Smirnoff Ice as well as increases in Johnnie Walker Black Label, Malibu and Tanqueray.
     Smirnoff continued to lead the global priority brand growth with strong performance in the core brand, where volume was up 9%, and strong growth in Smirnoff Flavours and Smirnoff Ice. Total net sales (after deducting excise duties) growth was therefore 68%. Smirnoff Ice has continued to show strong growth since its launch in January 2001 and volume grew from 1.1 million equivalent units in the year ended 30 June 2001 to 2.8 million equivalent units.
     Guinness net sales (after deducting excise duties) grew 9% despite a 1% volume decline, due to price increases and a favourable product mix. In its first nine months in the market, Guinness Draught in Bottles represented more than 10% of total Guinness volume in the North American market.
     Johnnie Walker total volume grew 1%, whilst net sales (after deducting excise duties) grew 6% during the year due to a favourable mix between Johnnie Walker Black Label, which grew net sales (after deducting excise duties) 11%, and Johnnie Walker Red Label, where net sales (after deducting excise duties) declined 1%.
     Baileys volume grew by 7% during the year however net sales (after deducting excise duties) growth was impacted by the introduction of trial packaging formats and grew 4%.
     Volume of JεB declined 10% in the year and net sales (after deducting excise duties) were down 7% as a result of price increases. Contribution after marketing improved, mainly as a result of reduction in marketing spend.
     Tanqueray volume declined by 2% while net sales (after deducting excise duties) declined only 1% as a result of a change in product mix to more profitable product sizes and growing on-premise sales.
     José Cuervo volume was level for the year with net sales (after deducting excise duties) up 3% following the prior year’s price increases to cover the rising agave prices. Towards the end of the year, volume performance improved following selective price reductions.
     Volume of Captain Morgan, a former Seagram brand, was level in the year ended 30 June 2002 versus the year ended 30 June 2001, as a result of substantial de-stocking of the brand. On a depletion basis, against the six months ended 30 June 2001, volume was up 9%. Captain Morgan gained 0.4 market share percentage points in the growing US rum category. The brand is responding well to renewed distributor focus.

38 Diageo Annual Report 2003
Operating and financial review

Volume of Crown Royal, another former Seagram brand, declined 2% in the six months ended 30 June 2002, again as a result of de-stocking and depletions were up 1%.
     Some of the local priority brands showed weak performance with volume declines in Gordon’s gin and Goldschlager. Overall, volume was level and net sales (after deducting excise duties) declined 3% during the year. Category brands such as Popov and Gordon’s vodka also declined during the year, with volume down 5% and net sales (after deducting excise duties) down 7%.

Other business performance drivers Innovation continued to impact the North American performance positively. During the year, Smirnoff Ice volume showed strong selling growth, with the brand achieving a market share of approximately 1% of the US beer market and maintaining its position as the number one selling ready to drink brand. Smirnoff Ice now represents nearly one-third of the segment after just 18 months in the market. New product formats such as the 24-ounce format performed very well, as did the 16-ounce PET format that can be sold in sites where glass bottles are forbidden, such as sports arenas. The Smirnoff Ice six-pack is now number one in terms of dollar sales of premium beer in the grocery channel. Launched in September 2001, Guinness Draught in Bottles has exceeded initial targets for the brand with volume of over 100,000 equivalent units. Smirnoff Twist volume more than doubled to over 700,000 equivalent units.
     The former Seagram wine business was transitioned into a new business, Diageo Chateau & Estates Wines, combining the Seagram and existing Diageo wine businesses in North America.
     Diageo’s North American business has achieved substantial progress on its strategic agenda over the year. Most notably, the Next Generation Growth (NGG) strategy was launched in the year. See ‘Business description — Premium drinks — North America’ for further information.

Great Britain

Key measures:
					Reported		Organic
	2002		2001		movement		movement
	£ million		£ million		%		%
Volume						9		11
Turnover		1,467		1,304		13		14
Net sales (after deducting excise duties)		896		797		12		14
Marketing		188		169		11		13
Operating profit before exceptional items		204		162		26		30

Reported performance Great Britain showed a very strong performance in the year ended 30 June 2002. Turnover was up 13% on a reported basis from £1,304 million to £1,467 million. Net sales (after deducting excise duties), a non-GAAP measure, were up £99 million (12%) to £896 million and operating profit before exceptional items increased 26% on a reported basis from £162 million in the year ended 30 June 2001 to £204 million in the year ended 30 June 2002.

Organic performance The principal driver of this performance was organic growth, contributing £177 million to the turnover improvement, £112 million to the net sales (after deducting excise duties) growth and £46 million to the rise in operating profit before exceptional items.
     The impact of the Seagram brands acquired was minimal, although disposals, principally the Malibu brand in May 2002 and Guinness World Records in July 2001, adversely affected turnover, net sales (after deducting excise duties) and operating profit before exceptional items by £22 million,£18 million and £7 million, respectively. There was no impact from exchange rate movements.

Organic brand performance:
			Net sales
			(after
			deducting
	Volume		excise duties)
	movement		movement
	%		%
Smirnoff		15		15
Guinness		–		1
Baileys		27		18
Total global priority brands		9		9
Local priority brands		14		28
Category brands		12		18
Total		11		14

• Growth of global priority brands with volume up 9%

• 14% volume growth of the local priority brands

• Favourable product mix

39 Diageo Annual Report 2003

Key growth drivers were an increase in marketing spend, up 13% during the year and successful innovation. Three global priority brands, Smirnoff Red, Baileys and Johnnie Walker, continued to improve on the prior year’s strong performance.
     Smirnoff Red is the number one spirit in the GB market and volume was up 15% with net sales (after deducting excise duties) up 15%. Market share in the vodka category increased to 34%.
     Baileys showed net sales (after deducting excise duties) growth of 18%, suggesting that the brand is beginning to benefit from marketing aimed at reducing the seasonality of the product.
     Johnnie Walker, which sold over 50,000 equivalent units in Great Britain, had net sales (after deducting excise duties) growth of 16% during the year following an increase in marketing spend.
     Other brands also performed well. While Guinness volume was level due to weakness in the overall beer category, market share increased in the on trade beer sector. Bell’s volume grew 4% and Gordon’s grew 7%. Pimm’s, another local priority brand, showed strong growth, with volume up 18%, as innovation such as Pimm’s Draught broadened the reach of the brand. In addition, the Diageo wine portfolio had an excellent year, with Blossom Hill volume growing 45%.

Other business performance drivers Innovation was an important element of the overall growth. There were new Smirnoff Ice offerings, including new pack formats such as multi-packs and a larger 70cl bottle. Gordon’s Edge and Archers Aqua Raspberry were also launched in the year. Great Britain has shown great success in the ready to drink category. Smirnoff Ice volume was up 19% year on year, significantly outpacing the growing ready to drink category and market share grew to 28%. Archers Aqua volume grew 179,000 equivalent units, up from 41,000 equivalent units in the prior year. In April 2002, the excise duty rate for ready to drink products was increased and was passed through into an increase in retail prices. Subsequent market data suggests a negative impact on rate of sale in the on trade across the category as a consequence. Diageo has already responded to this new challenge with the launch in August of Smirnoff Black Ice, a new vodka-based ready to drink designed to appeal to male consumers, and increased marketing support behind Archers Aqua and Smirnoff Ice.

Ireland

Key measures:
					Reported			Organic
	2002		2001		movement			movement
	£ million		£ million		%			%
Volume						(1	)		–
Turnover		937		942		(1	)		(1	)
Net sales(after deducting excise duties)		625		627		–			(1	)
Marketing		65		63		3			3
Operating profit before exceptional items		151		155		(3	)		3

Reported performance Ireland’s performance was broadly in line with the prior year. Turnover was down £5 million (1%) on a reported basis, to £937 million and net sales (after deducting excise duties), a non-GAAP measure, were down £2 million at £625 million. Operating profit before exceptional items was down £4 million (3% on a reported basis) from £155 million in the prior year to £151 million in the year ended 30 June 2002.

Organic performance The impact of acquisitions and disposals was insignificant and the beneficial effect of exchange rate movements on the euro (£1 = €1.61 in the year ended 30 June 2002 compared with £1 = €1.63 in the prior year) was largely offset by organic performance of the brands at the turnover and net sales (after deducting excise duties) levels. However, there was an adverse effect of exchange rate movements (after the impact of the group’s hedges — see ‘Liquidity and capital resources — Currency risk’) of £8 million on operating profit before exceptional items, partly offset by organic growth of £4 million.

Organic brand performance:
				Net sales
				(after
				deducting
	Volume			excise duties)
	movement			movement
	%			%
Guinness		(3	)		–
Smirnoff		3			(2	)
Baileys		7			6
Total global priority brands		(1	)		–
Local priority brands		–			5
Category brands		7			(10	)
Total		–			(1	)

In Ireland, Diageo’s overall share of the beverage alcohol market has been maintained, with market share increases for most priority brands in their respective categories.
     The declining beer market and a continuing trend away from stout impacted Guinness sales, which account for 37% of Diageo’s volume in the market. Although Guinness volume decreased during the year, increased advertising and marketing slowed the decline, from 4% in the first half of the year to 2% in the second half. For the year, the brand had a 3% volume decline and net sales (after deducting excise duties) were level.

40 Diageo Annual Report 2003
Operating and financial review

Volume of Smirnoff increased by 3% overall and it gained share. Smirnoff Red delivered strong performance with volume up 6% while volume of Smirnoff Ice declined by 14% against a decline in the first half of 17%.Smirnoff Ice achieved virtually full distribution at launch and after the high initial level of consumer trial, sales have settled to more normal levels. The rate of consumption in the on trade was also impacted by aggressive trade price increases behind the brand’s number one market share and brand strength. A trial of Smirnoff Ice on Draught began in over 400 outlets which has been met with a very positive response.
     Baileys strong growth continued with volume up 7% with success in both the on and off trade.
     Budweiser and Carlsberg, which are agency brands, each grew volume by 2% and made further market share gains in the sector.

Spain

Key measures:
					Reported		Organic
	2002		2001		movement		movement
	£ million		£ million		%		%
Volume						8		4
Turnover		380		335		13		7
Net sales(after deducting excise duties)		298		262		14		8
Marketing		71		70		1		5
Operating profit before exceptional items		94		85		11		5

Reported performance Turnover in Spain was up £45 million (13%) on a reported basis to £380 million in the year ended 30 June 2002. Net sales (after deducting excise duties), a non-GAAP measure, grew £36 million (14%) to £298 million. Operating profit before exceptional items was up £9 million (11%) on a reported basis to £94 million in the year ended 30 June 2002.

Organic performance The principal drivers of growth in Spain were the impact of the Seagram brands acquired in December 2001 and organic growth of continuing brands. In the six months ended 31 December 2002 the Seagram brands contributed turnover, net sales (after deducting excise duties) and operating profit before exceptional items of £18 million, £13 million and £7 million, respectively. Underlying growth of continuing brands added £25 million, £22 million and £4 million, respectively.
     Operating profit before exceptional items was up 11% to £94 million on a reported basis despite higher marketing costs on JεB associated with preparation for the launch in June 2002 of JεB Twist and a year on year change in the basis of recharge of JεB production costs to Spain. Exchange rate movements on the euro had little impact on reported results.

Organic brand performance:
				Net sales
				(after
				deducting
	Volume			excise duties)
	movement			movement
	%			%
JεB		5			6
Baileys		11			13
Johnnie Walker		(1	)		9
Smirnoff		(2	)		14
Total global priority brands		6			9
Local priority brands		6			10
Category brands		(6	)		1
Total		4			8

• Volume and profit growth of priority brands

• Marketing spend on JεB up over 25%

Global priority brands showed strong performance with net sales (after deducting excise duties) growth of 9% and with many of the brands achieving market share gains. Performance in the year ended 30 June 2002 was somewhat softer than that achieved in the first half as a result of the retailer buy-in during December in anticipation of an 8% duty increase in January.
     JεB, which represents nearly half of Diageo’s volume in Spain, has been the only exception to the aggressive pricing policy pursued in Spain. The brand continues to build on its number one market position. Marketing spend increased 27%. As a result, volume grew by 5%, net sales (after deducting excise duties) grew by 6% and market share increased slightly to 26%.
     Johnnie Walker Black Label continued its positive trend with a 32% volume increase and a similar net sales (after deducting excise duties) increase. However, Johnnie Walker Red Label declined by 8% in volume and by 3% in net sales (after deducting excise duties) during the year after a price increase.
     Following a 10% price increase, Smirnoff Red volume was down 3% although net sales (after deducting excise duties) increased by 6%. Baileys volume grew 11% and net sales (after deducting excise duties) grew by 13%, supported by the ‘Let Your Senses Guide You’ campaign and off-premise marketing.
     Guinness, though still a relatively small proportion of Diageo’s business in Spain, showed a 33% increase in volume over the year. Similarly, José Cuervo, another relatively small brand in Spain, had very strong growth, with volume up 37% and net sales (after deducting excise duties) up 44%.

41 Diageo Annual Report 2003

Cardhu, a local priority brand, increased volume 6% and net sales (after deducting excise duties) 10%. In addition, volume of Cacique, a former Seagram brand, increased 13% in the year ended 30 June 2002 in the growing rum category. Cacique is the leader in this category by a clear margin and is making further share gains. Pampero showed continued strong growth, with volume up 22% and net sales (after deducting excise duties) up 34%.
     Diageo launched its first ready to drink products across Spain in the year. JεB Twist was test marketed during the year and launched in June 2002. Smirnoff Ice, targeted to tourist locations, delivered a very strong performance in the year contributing to a 14% increase in net sales (after deducting excise duties) of the Smirnoff brand overall.

Key markets

Key measures:
					Reported		Organic
	2002		2001		movement		movement
	£ million		£ million		%		%
Volume						3		–
Turnover		2,078		1,807		15		6
Net sales (after deducting excise duties)		1,631		1,450		12		7
Marketing		239		229		4		1
Operating profit before exceptional items		524		447		17		10

Reported performance In key markets, growth was based principally on the impact of the acquired Seagram brands and on strong organic performances from the other brands. Turnover was up £271 million (15%) on a reported basis from £1,807 million in the year ended 30 June 2001 to £2,078 million.
     Operating profit before exceptional items was up £77 million (17%) on a reported basis to £524 million in the year ended 30 June 2002.

Organic performance Turnover benefited from acquisitions by £227 million and from organic growth in continuing brands of £111 million. The effect of disposals reduced turnover by £30 million, principally due to the sale of the Dreher brand in Brazil in January 2001 (£24 million). Exchange rate movements, particularly the Venezuelan Bolivar, adversely affected turnover by £37 million. The drivers of net sales (after deducting excise duties) growth (up £181 million) were the same as those for turnover. Organic growth in key markets was the result of very strong performance by several markets, most notably Africa, Australia, Greece and Taiwan. Exchange rate movements had a positive effect of £2 million on operating profit before exceptional items.
     Operating profit benefited from acquisitions (£41 million) and organic growth (£44 million), offset by disposals (£10 million, including Dreher £6 million).

Organic brand performance:
				Net sales
				(after
				deducting
	Volume			excise duties)
	movement			movement
	%			%
Johnnie Walker		1			3
Guinness		6			21
JεB		3			7
Smirnoff		8			23
Baileys		7			9
Total global priority brands		4			10
Local priority brands		(1	)		10
Category brands		(5	)		1
Total		–			7

• Global priority brands volume up 4%

• Strong volume and profit growth in Africa, Australia and Taiwan

• Volume weakness in Latin America

Volume was level whilst net sales (after deducting excise duties) grew 7% over the period. This is a result of price and mix improvement. Marketing investment increased by 1%.
     Global priority brands accounted for more than half of key market volume and showed volume growth of 4% and net sales (after deducting excise duties) growth of 10% during the year. All of the global priority brands, with the exception of José Cuervo, grew net sales (after deducting excise duties) with Guinness, Smirnoff, Baileys and Johnnie Walker Black Label performing particularly well as a result of both volume growth and price increases. Ready to drink, including, but not limited to, Smirnoff Ice, also showed strong performance.

42 Diageo Annual Report 2003
Operating and financial review

Africa, representing nearly 40% of the key market volume, grew 7% in volume and 19% in net sales (after deducting excise duties) over the prior year. Guinness, which accounted for approximately a quarter of African volume, continued to perform well with volume up 6% and net sales (after deducting excise duties) up 23% due to price increases implemented to counter capacity constraints. Smirnoff, which accounts for 14% of the volume, grew 6% in volume terms and 25% in net sales (after deducting excise duties). Ready to drink products showed strong growth, with volume up 71%. Cameroon and Nigeria were impacted by capacity constraints and production was directed away from category management brands, towards the supply of higher margin Guinness. These capacity constraints have been addressed with the commissioning of two new production lines.
     In Australia, volume grew 7% as a result of robust priority brand performance. Volume of priority brands increased with Johnnie Walker volume up 11% and Baileys volume up 20%. Baileys market share grew by 4 percentage points as a result of successful marketing programmes such as consumer sampling and Baileys ‘Perfect Pour’. Bundaberg Rum, a local priority brand, increased its volume by more than 10% and net sales (after deducting excise duties) by more than 25%. Smirnoff Red volume was up 29% in the year. Innovation, particularly around ready to drink products, is still a major factor in Australia’s growth. Diageo’s ready to drink products grew volume 40%. Volume of Johnnie Walker Red Label & Cola and Bundaberg & Cola was up significantly. Volume of Smirnoff Baltik, however, was down 37% in the year as a result of reduction in marketing spend. Volume of Stoli Ruski was up 12%, with the launch of a new flavour range. New products such as Archers Aqua and UDL Fusion were launched towards the end of the year.
     Despite volatile economic and political conditions in Latin America, including economic crises in Brazil and Venezuela, operating profit increased year on year primarily as a result of growth in the first half. While overall volume declined across the region, Buchanan’s volume grew 31% during the year, driven by a focus on effective marketing spend and a new advertising campaign. In Venezuela, Johnnie Walker volume was up 17% and Buchanan’s was up 58% despite the challenging conditions. However, Johnnie Walker volume was down 12% across the region. One of the major factors in the volume decline was the performance of VAT 69 in Venezuela, with volume down 37%. During the year the price of VAT 69 was increased. In certain Latin American markets, Diageo mitigated risk by reducing stock levels and tightening credit terms. These actions, which substantially reduced exposure to debt risk and the possibility of stock write offs, did impact volume performance. Additionally, Diageo reduced promotional spending in certain Latin American countries while maintaining media spend.
     South Korea is now Diageo’s most profitable Asian market. Windsor Premier, previously owned by Seagram, continued to grow strongly with volume up 13% in the year ended June 2002. However, Dimple, a local priority brand that was previously distributed by a third party, declined by 22%. Since January 2003, Dimple has been distributed through Diageo’s own in-market company.
     In Taiwan, the continued success of the ‘Keep Walking’ campaign, together with the innovations in route to market, resulted in 40% volume growth in Johnnie Walker. Overall volume growth in the market was 33% and contribution after marketing was also up 33%.
     In Thailand, continued weakness in the economy led to volume decline of 8% although net sales (after deducting excise duties) were up 2%. Johnnie Walker, which represents nearly half of Diageo’s volume in Thailand, and other global priority brands, continued to perform well, whilst Spey Royal, a local priority brand, suffered, with volume down 24%. Following test marketing during the year, Johnnie Walker One, a ready to drink product, was launched and supported by an advertising campaign that was implemented in July 2002.
     In Greece, volume grew 8%. Johnnie Walker volume increased with both Johnnie Walker Red Label and Johnnie Walker Black Label showing strong off trade performance. Smirnoff delivered 15% volume growth due to increased marketing effectiveness, with marketing spend up 7%, and overall category growth. Baileys also showed a marked increase, driven by on trade sales. Smirnoff Ice volume nearly trebled, moving to the number two position in the Greek ready to drink segment, behind Diageo’s Gordon’s Space.
     The Global Duty Free market, which accounts for 8% of key market volume, was heavily impacted by the decrease in international travel following the September 11 attacks. Against this background, however, volume was down only 5% for the year which represents a strong relative performance, and contribution after marketing was in line with the prior year as a result of price and mix improvements.

Venture markets

Key measures:
					Reported			Organic
	2002		2001		movement			movement
	£ million		£ million		%			%
Volume						(1	)		–
Turnover		1,173		1,100		7			7
Net sales (after deducting excise duties)		905		845		7			7
Marketing		156		147		6			8
Operating profit before exceptional items		243		218		11			12

Reported performance In Diageo’s venture markets, turnover was up 7%, on a reported basis, from £1,100 million to £1,173 million in the year ended 30 June 2002.

Organic performance The principal driver of this performance was the organic growth of the brands (up £72 million). Growth in Asia, the Caribbean, the Middle East and across much of Europe was partially offset by a reduction in travel retail business and tough economic conditions in Latin America and Germany.
     The growth in net sales (after deducting excise duties) of £60 million (7%) and in operating profit before exceptional items of £25 million (11%) was due to the organic growth of the brands.

43 Diageo Annual Report 2003

Organic brand performance:
				Net sales
				(after
				deducting
	Volume			excise duties)
	movement			movement
	%			%
Johnnie Walker		1			4
Smirnoff		17			74
Guinness		(2	)		(3	)
Baileys		7			9
JεB		(2	)		(3	)
Total global priority brands		5			10
Local priority brands		(16	)		16
Category brands		(5	)		–
Total		–			7

• Volume of global priority brands up 5%

• Strong growth in the Caribbean markets

• Latin American markets negatively impacted by poor economic conditions

Volume was level during the year, though net sales (after deducting excise duties) increased by 7% principally as a result of volume growth in the global priority brands of 5%. In the year Smirnoff Ice was launched in Germany and contributed £9 million to net sales (after deducting excise duties).
     Across the venture markets, Diageo’s global priority brands, which accounted for more than half of the volume, performed well, with volume growth of 5% and net sales (after deducting excise duties) growth of 10%. Johnnie Walker Black Label volume increased 5% with strong performance in Asia and the Caribbean as a result of sharper focus on marketing and improved route to market. Baileys also continued its growth, with volume up 7% and net sales (after deducting excise duties) up 9% across the venture markets despite a decline in Germany. During the year, local priority brands showed a decline of 16% in volume but an increase of 16% in net sales (after deducting excise duties). There were only two local priority brands in the venture markets, Red Stripe in Jamaica and Gilbey’s whisky in India. While Red Stripe volume was up 6% and net sales (after deducting excise duties) up 8%, Gilbey’s volume was down 28%. Category brands showed a decline in volume of 5%, largely driven by declines in Gilbey’s Gin in the Philippines and secondary whisky brands in Latin America. However, as a result of strong performance by Pampero in Italy, Buchanan’s Deluxe in the Caribbean and Tiger in Malaysia, net sales (after deducting excise duties) was level for category brands.
     Marketing expenditure increased by 8% over the prior year, driven by heavy investment behind Smirnoff Ice in Switzerland, the Netherlands and Germany. Increases also occurred in Italy for Baileys and in the Caribbean market for Johnnie Walker Black Label.
     In Latin America, especially in Argentina in the face of the economic crisis there, prices were increased on early signs of currency devaluation, and overall volume declined over 25%.
     In Germany, volume of Johnnie Walker Red Label, Baileys and José Cuervo were all adversely impacted by price increases, resulting in an overall volume decline of 5% in that market. Smirnoff Ice was launched in the second half of the year and has performed well.
     In India, the global priority brands performed very well, with volume up 21%. Diageo is in the process of selling Gilbey’s Green Label and White Label whiskies, a local priority brand.
     The Philippines market showed weakness, with overall volume down approximately 20%, led by the 22% volume decline in Gilbey’s gin.

Trend information

The following comments were made by Paul Walsh on the current financial year at the Diageo AGM on 22 October 2003.

‘Looking to the future, while the outlook for a sustained recovery of world economies is still unclear Diageo has demonstrated its ability to generate growth even in challenging times. In addition, signs of improvement are evident in some markets particularly in the United States, which is now our most important market. Continued share gains, even in difficult markets such as those in Latin America, provide further evidence that Diageo is well positioned to achieve superior performance. Therefore, while recognising that we are only three months into the current financial year, we have not seen any trends emerging which would lead us to change our view of Diageo’s future prospects.’

44 Diageo Annual Report 2003
Operating and financial review

Liquidity and capital resources

Cash flow A summary of the cash flow and reconciliation to movement in net borrowings for the three years ended 30 June 2003 is as follows:
	Year ended 30 June
	2003			2002			2001
	£ million			£ million			£ million
Operating profit		1,861			1,653			1,873
Exceptional operating costs		168			453			228
Depreciation and other amortisation		276			314			403
Working capital		(227	)		(125	)		(54	)
Restructuring and integration		(185	)		(148	)		(144	)
Other items		77			(139	)		(30	)
Operating cash flow		1,970			2,008			2,276
Interest		(327	)		(360	)		(446	)
Dividends from associates		60			87			101
Dividends paid to equity minority interests		(28	)		(40	)		(31	)
Taxation		(105	)		(311	)		(230	)
Own shares purchased for employee share schemes		(65	)		(64	)		(54	)
Net capital expenditure		(361	)		(528	)		(396	)
Free cash flow		1,144			792			1,220
Acquisitions and disposals		833			1,508			(105	)
Equity dividends paid		(767	)		(758	)		(725	)
Issue of share capital		4			11			31
Own shares purchased for cancellation		(852	)		(1,658	)		(108	)
Redemption of guaranteed preferred securities		–			–			(39	)
Exchange		227			267			(229	)
Non-cash items		37			(179	)		21
Decrease/(increase) in net borrowings		626			(17	)		66

The primary sources of the group’s liquidity over the last three fiscal years have been cash generated from operations and cash received from disposals. A portion of these funds has been used to fund acquisitions, share repurchases, to pay interest, dividends and taxes, and to fund capital expenditure.
     Free cash flow is a non-GAAP liquidity measure that comprises the net cash flow arising from operating activities, dividends received from associates, returns on investments and servicing of finance, taxation, and capital expenditure and financial investment. Free cash flow as used by the company covers all the items that are required by FRS1 to be on the face of the cash flow statement down to, and including, capital expenditure and financial investment. It is therefore a natural sub-total but may not be comparable to similarly titled measures used by other companies. The group’s management believe the measure assists users of the financial statements in understanding the group’s cash generating performance as it comprises items which arise from the running of the ongoing business. Where appropriate, separate discussion is given for the impacts of acquisitions and disposals of businesses, equity dividends and purchase of own shares — each of which arises from decisions which are independent from the running of the ongoing underlying business. The management regards capital expenditure as ultimately non-discretionary since ongoing investment in plant and machinery is required to support the day-to-day operations, whereas acquisitions and disposals of businesses are discretionary. However, free cash flow does not necessarily reflect all amounts which the group either has a constructive or legal obligation to incur. The free cash flow measure is also used by management for their own planning, budgeting, reporting and incentive purposes since it provides information on those elements of performance which local managers are most directly able to influence.
     Free cash flow was £1,144 million, compared with £792 million in the year ended 30 June 2002 and £1,220 million in the year ended 30 June 2001. Cash inflow, in the year ended 30 June 2003, from operating activities was £1,970 million (2002 — £2,008 million; 2001 — £2,276 million). Discontinued operations contributed £76 million (2002 — £346 million; 2001 — £852 million) to operating cash flow. Operating cash flow included £185 million of restructuring and integration costs compared with £148 million and £144 million in the years ended 30 June 2002 and 30 June 2001 respectively. The increase in the year ended 30 June 2003 largely arose because of costs incurred on the integration of the Seagram spirits and wine businesses (up £64 million to £133 million) partly offset by a reduction in the GUDV integration and other reorganisation costs. Working capital increased by £227 million in the year ended 30 June 2003 compared to an increase of £125 million and £54 million in the comparative years. Interest payments including dividends paid to non-equity minority interests were £327 million compared with £360 million in the year ended 30 June 2002 and £446 million in the year ended 30 June 2001. Purchases of tangible fixed assets in the current year amounted to £382 million (2002 — £585 million; 2001 — £439 million) and were attributable to the following segments: premium drinks £315 million and discontinued operations of £67 million (2002 — £330 million, and £255 million, respectively; 2001 — £176 million and £263 million, respectively). There were no individually significant expenditures on tangible fixed assets during the three years ended 30 June 2003. The company spent £65 million on the purchase of its own ordinary

45 Diageo Annual Report 2003

shares for employee option schemes compared to £64 million in the prior year and £54 million in the year ended 30 June 2001. Tax payments were lower in the year ended 30 June 2003 than the comparable years at £105 million due principally to repayments of prior year corporation tax in the United Kingdom and United States. It is expected that tax payments will increase in the year ending 30 June 2004 as minimal tax refunds are anticipated. In the year ending 30 June 2004 it is anticipated that the group will make contributions of approximately £100 million to the UK Diageo pension fund.
     Sale of businesses generated £912 million (2002 — £5,100 million; 2001 — £31 million), including £642 million from the disposal of Burger King, and £173 million ($273 million) from the contingent value right received as final settlement from General Mills on the sale of Pillsbury. In addition,£58 million ($89 million) was received from the call option agreements granted to General Mills over 29 million of General Mills’ ordinary shares held by Diageo. The sale consideration received in the year ended 30 June 2002 arose principally from the disposal of Pillsbury and the subsequent sale of shares in General Mills to General Mills, the Malibu brand disposal and the subsequent sale of businesses acquired in connection with the Seagram acquisition. The sale consideration received in the year ended 30 June 2001 included the net proceeds in respect of the sale of UDV Indústria e Comércio Ltda in Brazil, less costs in respect of the combination of Pillsbury with General Mills.
     The consideration received in the year ended 30 June 2003 was offset by cash outflows in respect of acquisitions of £137 million (2002 — £3,592 million; 2001 — £136 million). The acquisition of the Seagram spirits and wine businesses in the year ended 30 June 2002 cost £3,533 million. The amounts spent on acquisitions in the year ended 30 June 2001 included £56 million on the remaining 50% equity interest in Bundaberg Distilling Investments Pty Limited in Australia.

Capital repayments The group’s management is committed to enhancing shareholder value, both by investing in the businesses and brands so as to improve the return on investment and by managing the capital structure so as to reduce the cost of capital, while maintaining prudent financial ratios. See ‘Risk management’ below.
     The company acquired, and subsequently cancelled,116 million (2002 — 198 million; 2001 — 18 million) ordinary shares during the year ended 30 June 2003 for a consideration including expenses of £852 million (2002 — £1,658 million; 2001 — £108 million). The group continues to review its capital structure and will continue to conduct share buy-backs when appropriate.

Borrowings In the year ended 30 June 2003 the group’s policy has been to maintain the proportion of borrowings maturing within one year at below 60% of total borrowings, and to maintain the level of commercial paper at below 50% of total borrowings. In addition, it is group policy to maintain backstop facility terms from relationship banks to support commercial paper obligations. In June 2003 the board reviewed and agreed changes to debt maturity and liquidity policies to be implemented during the year ending 30 June 2004 to limit the proportion of borrowings maturing within 12 months to 50% of gross borrowings less money market demand deposits and the level of commercial paper to 30% of gross borrowings less money market demand deposits.

The group’s net borrowings comprise the following:
	As at 30 June
	2003			2002			2001
	£ million			£ million			£ million
Total borrowings		(6,544	)		(7,429	)		(7,595	)
Finance leases		(1	)		(28	)		(41	)
Offset by:
Cash and bank deposits		1,191			1,596			1,842
Interest rate and foreign currency swaps		484			365			315
		(4,870	)		(5,496	)		(5,479	)

The group’s net borrowings (after the impact of foreign currency swaps) were denominated in the following currencies:
	Total			US dollar		Sterling			Euro		Other
	£ million			%		%			%		%
Net borrowings
2003		(4,870	)		87		(15	)		26		2
2002		(5,496	)		86		(9	)		21		2
2001		(5,479	)		81		(4	)		21		2

Cash and bank deposits were denominated in the following currencies (bank deposits represent amounts placed with financial institutions which require notice of withdrawals of more than 24 hours to avoid an interest penalty):
	Total		US dollar		Sterling		Euro		Other
	£ million		%		%		%		%
Cash and bank deposits
2003		1,191		53		14		15		18
2002		1,596		46		33		7		14
2001		1,842		43		29		11		17

The effective interest rate for the year ended 30 June 2003, based on average monthly net borrowings and interest charge, excluding the group’s share of associate interest was 5.3% (2002 — 7.4%; 2001 — 6.2%).
     The maturities of the borrowings due within one year (net of interest rate and foreign currency swaps) for 2003 were £3,079 million (2002 — £3,687 million; 2001 — £3,587 million) and due after five years were £795 million (2002 — £624 million; 2001 — £686 million).

46 Diageo Annual Report 2003
Operating and financial review

The following table summarises the group’s borrowings excluding overdrafts and net of interest rate, cross currency and foreign currency swaps:
					As at 30 June
	2003		2002		2001
	£ million		£ million		£ million
Global bonds		1,808		657		707
Yankee bonds		423		788		850
Zero coupon bonds		712		714		710
Guaranteed notes		242		263		497
Repurchase agreements		–		–		800
Preferred capital securities		455		493		532
Medium term notes		593		1,067		832
Commercial paper		863		1,600		1,310
Others (including swaps)		882		1,215		821
		5,978		6,797		7,059

During the year ended 30 June 2003 the group borrowed £1,258 million in the form of global bonds and £126 million in the form of medium term notes. The global bonds mature in 2007 and 2008. The medium term notes are repayable in 2018. During the year ended 30 June 2002 the group borrowed £500 million in the form of guaranteed bonds and £449 million in the form of medium term notes. The guaranteed bonds mature in December 2003 and the medium term notes were repaid during 2003. During the year ended 30 June 2001 the group borrowed £832 million in the form of preferred capital securities and repurchase agreements and £458 million in the form of medium term notes. The preferred capital securities (£532 million), and the repurchase agreements (£300 million) were repayable on demand (with 30 and 5 days’ notice, respectively). The medium term notes were repaid by 31 December 2002.
     The £626 million decrease in net borrowings from 30 June 2002 to 30 June 2003 reflects free cash flow (see Glossary of £1,144 million noted above, net receipts for sales/purchases of businesses of £833 million and decreases due to exchange movements of £227 million, less dividends paid of £767 million and own shares purchased for cancellation of £852 million. The £17 million increase in net borrowings from 30 June 2001 to 30 June 2002 reflected free cash inflow of £792 million noted above, net receipts for sales/purchases of businesses of £1,508 million and decreases due to exchange movements of £267 million, less dividends paid of £758 million and own shares purchased for cancellation of £1,658 million.
     At 30 June 2003, the group had available undrawn committed bank facilities of £1,970 million (2002 — £2,105 million; 2001 — £2,269 million). Of the facilities,£1,182 million expire in the period up to May 2004 and £788 million expire in the period up to May 2007. Commitment fees are paid on the undrawn portion of these facilities. Borrowings under these facilities will be at prevailing LIBOR rates plus an agreed margin, which is dependent on the period of drawdown. These facilities can be used for general corporate purposes and, together with cash and cash equivalents, support the group’s commercial paper programmes. The committed bank facilities are subject to a single financial covenant, being a minimum interest cover ratio of two times (defined as the ratio of operating profit before exceptional items aggregated with share of profits of associates to net interest). They are also subject to pari passu ranking and negative pledge covenants.
     Any non compliance with covenants underlying Diageo’s financing arrangements could, if not waived, constitute an event of default with respect to any such arrangements, and any non compliance with covenants may, in particular circumstances, lead to an acceleration of maturity on certain notes and the inability to access committed facilities. Diageo was in full compliance with all of its financial covenants throughout each of the periods presented.
     Capital commitments not provided for at 30 June 2003 were estimated at £62 million (2002 — £43 million; 2001 — £69 million).
     Diageo management believes that it has sufficient funding for its working capital requirements.

Contractual obligations
	Payments due by period
	Less than						More than
	1 year		1-3 years		3-5 years		5 years		Total
	£ million		£ million		£ million		£ million		£ million
Long term debt obligations		2,617		919		1,267		795		5,598
Operating leases		57		84		66		209		416
Purchase obligations		594		551		332		493		1,970
Provisions for liabilities and charges and creditors greater than one year		107		44		6		83		240
		3,375		1,598		1,671		1,580		8,224

Long term debt obligations comprise borrowings (before deducting interest rate and foreign currency swaps) with an original maturity of greater than one year. Purchase obligations include various long term purchase contracts entered into for the supply of certain raw materials, principally grapes, cans and glass bottles. The contracts are used to guarantee supply of raw materials over the long term and to enable more accurate predictions of future costs. It is expected that all contractual commitments be funded from future operating cash flows and no new borrowings will be required to meet these obligations. Provisions for liabilities and charges and creditors greater than one year exclude, £43 million in respect of vacant properties (included in operating leases), £119 million for an onerous contract (included in purchase obligations), post employment provisions and deferred taxation.
     In addition the group has £343 million of 9.42% cumulative guaranteed preferred securities which are included in non-equity minority interests on the consolidated balance sheet. The securities are redeemable only at the option of the company in or after 2004.

47 Diageo Annual Report 2003

Off-balance sheet arrangements
In connection with the disposal of non-core businesses the group has given guarantees of third party debt which were necessary to complete the disposals on the most favourable terms. The directors are not aware of any instances of default by the borrowers at present, but the ability of the borrowers to continue to be in compliance with the guaranteed debt instruments, and in particular remaining current on payments of interest and repayments of principal, is significantly dependent on the current and future operations of those borrowers and their affiliates. At 30 June 2003 Diageo had outstanding guarantees in respect of Burger King and International Multifoods Corporation. Diageo has guaranteed up to $850 million (£515 million) of external borrowings of Burger King. These loans have a term of five years from December 2002, although Diageo and Burger King have structured their arrangements to encourage refinancing by Burger King on a non-guaranteed basis prior to the end of five years. The primary covenants under the guarantee are pari passu ranking negative pledge. See ‘Additional information for shareholders — Material contracts — Agreement for the sale of Burger King Corporation’, for further information. In connection with the disposal of Pillsbury in October 2001, Diageo has guaranteed $200 million (£121 million) of International Multifoods Corporation’s debt, repayable in November 2009.
     In addition, certain of the acquired Seagram businesses had pre-existing guarantees at the date of the acquisition in relation to the solvency of a third party partnership. This partnership has outstanding loans of $100 million (£61 million). Vivendi has indemnified the group against any losses relating to these arrangements.
     The above guarantees are unrelated to the ongoing operations of the group’s premium drinks business.
     The group also has unrecognised gains and losses of £386 million and £298 million, respectively, in respect of financial instruments at 30 June 2003. For further disclosures with regard to financial instruments see note 18 to the consolidated financial statements.
     Save as disclosed above, neither Diageo plc nor any member of the Diageo group, has any off-balance sheet financing arrangements that currently have or are reasonably likely to have a material future effect on the group’s financial condition, changes in financial condition, results of operation, liquidity, capital expenditure or capital resources.

Risk management

The group’s funding, liquidity and exposure to interest rate and foreign exchange rate risks are managed by the group’s treasury department. The treasury department uses a combination of derivative and conventional financial instruments to manage these underlying treasury risks.
     Treasury operations are conducted within a framework of board-approved policies and guidelines, which are recommended and subsequently monitored by the finance committee (this committee is described in the corporate governance report). These include benchmark exposure and/or hedge cover levels for each of the key areas of treasury risk. The benchmarks and hedge cover levels are reviewed by the board as deemed appropriate following significant business or strategic changes. In June 2002 the board reviewed and approved changes to the group’s interest rate and foreign exchange risk management policies in the light of the group’s transition to a focused premium drinks company, its managing for value principles and recent trends in accounting standards. The transition to the revised policies, which are described below began during the year ended 30 June 2003. The framework provides for limited defined levels of flexibility in execution to allow for the optimal application of the board-approved strategies. Transactions giving rise to exposures away from the defined benchmark levels arising on the application of this flexibility are separately monitored on a daily basis using value at risk analysis. They are carried at fair value and gains or losses are taken to the profit and loss account as they arise. At 30 June 2003 gains and losses on these transactions were not material. In June 2003, the board reviewed and approved changes to the group’s liquidity risk management policies. Transition to the new policies, which are described below, will take place during the year ending 30 June 2004.
     The finance committee receives bi-monthly reports on the activities of the treasury department, including any exposures away from the defined benchmarks. The internal control environment is reviewed regularly.

Currency risk The group publishes its financial statements in sterling and conducts business in many foreign currencies. As a result, it is subject to foreign currency exchange risk due to exchange rate movements which will affect the group’s transaction costs, and the translation of the results and underlying net assets of its foreign subsidiaries.
     The group hedges a substantial portion of its exposure to fluctuations on the translation into sterling of its foreign currency net assets by holding net borrowings in foreign currencies and by using foreign currency swaps and cross currency interest rate swaps. The group’s policy is to hedge currency exposure on its net assets before net borrowings at approximately the following percentages — 90% for US dollars, 90% for euros and 50% for other significant currencies where a liquid foreign exchange market exists. This policy leaves the remaining part of the group’s net assets before net borrowings subject to currency movements. During the year ended 30 June 2003, Diageo increased the proportion of US dollar currency exposure being hedged from 75% to approximately 90% in line with the revised policies agreed by the board in June 2002. Exchange differences arising on the retranslation of foreign currency net borrowings and foreign exchange swaps are recognised in the statement of total recognised gains and losses to match exchange differences on foreign equity investments, in accordance with SSAP 20.
     Following the June 2002 policy review, the group no longer undertakes profit translation hedging in respect of US dollar and euro forecast future profit before exceptional items and tax. The change in policy means that from 1 July 2003 the group’s profit before exceptional items and tax is exposed to the full impact of translation movements in exchange. During the year ended 30 June 2003 the group did have profit translation hedges in place against a proportion of its core premium drinks business at the profit before exceptional items and tax level.
     For currencies in which there is an active market, the group hedges between 80% and 100% of transactional foreign exchange rate risk, up to 18 months forward, using forward foreign currency exchange contracts. The gain or loss on the hedge is recognised at the same time as the underlying transaction.

Interest rate risk The group has an exposure to interest rate risk and within this category of market risk, is most vulnerable to changes in US dollar, sterling and euro interest rates. To manage interest rate risk, the group manages its proportion of fixed to variable rate borrowings within limits approved by the board, primarily through issuing long term fixed rate bonds, medium term notes and floating rate commercial paper, and by utilising interest rate swaps, cross currency interest rate swaps and swaptions. The profile of fixed rate to floating rate net borrowings is maintained such that projected net borrowings are targeted to be fully floating after five years, and are approximately 50% fixed and 50% floating on an amortising profile within five years. The floating element of US dollar net borrowings within five years is partly protected using interest rate collars. Following the June 2002 policy review, the level of interest rate collars will reduce. Remaining interest rate collars as at 30 June 2003 will take up to approximately three years to expire. In addition, where appropriate, the group may use forward rate agreements

48 Diageo Annual Report 2003
Operating and financial review

to manage short term interest rate exposures. Swaps, swaptions, forward rate agreements and collars are accounted for as hedges. Such management serves to increase the accuracy of the business planning process and to help manage the interest cover ratio. Diageo has a target range for cash interest cover (defined as operating profit before exceptional items, interest, tax, depreciation and amortisation and share of profits of associates, and after dividends received from associates over net interest cash flow including minority interest dividends) of five to eight times and under the current economic environment Diageo’s intention is to move towards the higher end of this range.

Liquidity risk The group’s strategy with regard to the maturity profile of borrowings has been to maintain the proportion of borrowings maturing within one year at below 60% of total borrowings, and to maintain the level of commercial paper at below 50% of total borrowings. In June 2003 the board reviewed and agreed changes to debt maturity and liquidity policies to be implemented during the year ending 30 June 2004 to limit the proportion of borrowings maturing within 12 months to 50% of gross borrowings less money market demand deposits and the level of commercial paper to 30% of gross borrowings less money market demand deposits. In addition, it is group policy to maintain backstop facility terms from relationship banks to support commercial paper obligations.

Credit risk A large number of major international financial institutions are counterparties to the interest rate swaps, foreign exchange contracts and deposits transacted by the group. Such transactions are only entered into with counterparties with a long term credit rating of A or better. The group monitors its credit exposure to its counterparties, together with their credit ratings.

Commodity price risk The group uses commodity futures and options to hedge against price risk in certain commodities. All commodity futures and options contracts hedge a projected future purchase of raw material. Commodity futures or options are then either closed out at the time the raw material is purchased or they are exchanged with the company manufacturing the raw material to determine the contract price. Commodity contracts are held in the balance sheet at fair value but any gains and losses are deferred until the contracts are closed out or exchanged. Open contracts at 30 June 2003 and gains and losses realised in the year or deferred at the balance sheet date were not significant. This activity has reduced following the disposal of the packaged food businesses in October 2001.

Employee share schemes Awards and option grants vesting under the various employee share schemes are generally satisfied by the transfer of existing shares. These awards and option grants are hedged through the purchase of shares or call options. Exceptions to this policy are in respect of exercises under certain GrandMet and international schemes that are satisfied by the issue of new equity.

Sensitivity analysis
For financial instruments held, the group has used a sensitivity analysis technique that measures the change in the fair value of the group’s financial instruments from hypothetical changes in market rates.
     The amounts generated from the sensitivity analysis are forward-looking estimates of market risk assuming certain adverse market conditions occur. Actual results in the future may differ materially from those projected results due to developments in the global financial markets which may cause fluctuations in interest and exchange rates to vary from the hypothetical amounts disclosed in the table below, which therefore should not be considered a projection of likely future events and losses.
     The estimated changes in the fair values of borrowings, the guaranteed preferred securities and the associated derivative financial instruments at 30 June 2003 are set out in the table below. The fair values of quoted borrowings and guaranteed preferred securities are based on year end mid-market quoted prices. The fair values of other borrowings, derivative financial instruments and other financial liabilities and assets are estimated by discounting the future cash flows to net present values using appropriate market rates prevailing at the year end. These are based on rates obtained from third parties.
     The estimated changes in fair values for interest rate movements are based on an instantaneous decrease of 1% (100 basis points) in the specific rate of interest applicable to each class of financial instruments from the levels effective at 30 June 2003, with all other variables remaining constant. The estimated changes in the fair value for foreign exchange rates are based on an instantaneous 10% weakening in sterling against all other currencies from the levels applicable at 30 June 2003, with all other variables remaining constant. Such analysis is for illustrative purposes only as in practice, market rates rarely change in isolation.

Sensitivity analysis table at 30 June 2003
	Fair value changes arising from:
				1% fall			10%
	Estimated			in interest			weakening
	fair value			rates			in sterling
	£ million			£ million			£ million
Borrowings		(6,974	)		(199	)		(680	)
Interest rate contracts		429			156			45
Foreign exchange contracts:
Transaction		24			–			(97	)
Balance sheet translation		119			–			(124	)
Guaranteed preferred securities		(370	)		(6	)		(41	)
Written call options re General Mills, Inc shares*		(70	)		(4	)		(2	)
Other financial net assets		69			7			7

*Diageo has sold call options to General Mills giving General Mills the option to purchase 29 million of General Mills’ shares held by Diageo subject to certain limitations. The call options have a strike price of $51.56 and expire in October 2005. The estimated fair value of the call options was derived using a Black Scholes model using market volatility, share price and interest rates as at 30 June 2003. It is estimated that a 15% increase in the share price of General Mills would increase the negative fair value by £40 million.

49 Diageo Annual Report 2003

Critical UK GAAP accounting policies

The preparation of financial statements requires management to make estimates and judgements. Diageo’s accounting policies are set out in the notes to the consolidated financial statements of the annual report. Of these policies, the board considers that policies in relation to the following areas are of greater complexity and/or particularly subject to the exercise of judgement.

Brands Acquired brands are held on the consolidated balance sheet at cost. Where brands are regarded as having indefinite useful economic lives, they are not amortised. Assessment of the useful economic life of an asset, or that an asset has an indefinite life, requires considerable management judgement. Impairment reviews are carried out to ensure that intangible assets, including brands, are not carried at above their recoverable amounts. In particular, the group performs a discounted cash flow analysis annually to compare discounted estimated future operating cash flows to the net carrying value of each acquired brand. Any impairment write downs identified are charged to the profit and loss account. The test is dependent on management estimates and judgements, in particular in relation to the forecasting of future cash flows, and the discount rate applied to these cash flows.

Post employment benefits Diageo accounts for post employment benefits under accounting standard SSAP 24, and provides additional disclosures in accordance with FRS 17. Application of SSAP 24 requires the exercise of judgement in relation to assumptions for future pay rises in excess of inflation, employee demographics and the future expected returns on assets. Diageo determines the assumptions to be adopted in discussion with its actuaries, and believes these assumptions to be in line with UK practice generally, but the application of different assumptions could have a significant effect on the amounts reflected in the profit and loss account and balance sheet in respect of post employment benefits.

Operating exceptional items Operating exceptional items are those that, in management’s judgement, are material items that arise from events or transactions that fall within the ordinary activities of the group and by virtue of their size or incidence, should be separately disclosed if the financial statements are to properly reflect the results for the period. The determination of which items should be separately disclosed as operating exceptional items requires a significant degree of judgement. Exceptional items under UK GAAP do not represent extraordinary items under US GAAP.

Financial instruments The group uses financial instruments to hedge its exposures to fluctuations in interest rates and foreign exchange rates. Instruments accounted for as hedges are structured so as to reduce the market risk associated with the underlying transaction being hedged and are designated as a hedge at the inception of the contract. While UK GAAP includes prescriptive disclosure requirements in relation to financial instruments, it does not include a standard on hedge accounting. Nevertheless, under UK GAAP, hedging principles are generally applied whereby the cash flows on hedge instruments are matched to the underlying hedged risks with hedging instruments held in the balance sheet at amortised cost. In the absence of detailed guidance under UK GAAP, judgement must be applied in the establishment and application of accounting policies in relation to financial instruments accounted for as hedges.

New accounting standards

The financial information included in this annual report complies, to the extent detailed below, with the following Financial Reporting Standard issued by the UK Accounting Standards Board. New US accounting standards that will impact the US GAAP information are also set out below.

United Kingdom FRS 17 — Retirement benefits This standard replaces the use of actuarial values for assets in a pension scheme in favour of a market-based approach. In order to cope with the volatility inherent in this measurement basis, the standard requires that the profit and loss account shows the relatively stable ongoing service cost, interest cost and expected return on assets. Fluctuations in market values and changes in actuarial assumptions are reflected in the statement of total recognised gains and losses. The group has continued to account for pensions and other post employment benefits in accordance with SSAP 24 but has complied with the transitional disclosure requirements of FRS 17 in its consolidated financial statements (see note 5 to the consolidated financial statements) and will adopt this standard in its primary financial statements from 1 July 2003.
     Under FRS 17, Diageo’s net deficit before taxation, as at 30 June 2003, for all defined benefit plans, is approximately £1.4 billion. It is estimated that as at the end of August 2003 the deficit is approximately £1.1 billion. The adoption of the accounting provisions of FRS 17 for the year ending 30 June 2004, in respect of the principal post employment plans, is currently estimated to result in a net charge to profit before exceptional items and taxation of approximately £120 million, compared to a restated £44 million net charge for the year ended 30 June 2003. In addition, in the year ending 30 June 2004 it is expected that there will be a charge of some £8 million (2003 — £8 million) in respect of other post employment plans around the world and £20 million in respect of the cost of augmenting pension benefits in Ireland.

United States In November 2002, the Financial Accounting Standards Board (FASB) issued FIN No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. The interpretation provides guidance on the guarantor’s accounting and disclosure requirements for guarantees, including indirect guarantees of indebtedness of others. The accounting guidelines are applicable to guarantees issued or amended after 31 December 2002 and require that a liability, at inception, be recorded for the fair value of such guarantees in the balance sheet. Subsequent to 31 December 2002 Diageo has not entered into or modified any guarantees.
     In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation — Transition and Disclosure — an amendment of FASB Statement No. 123. This statement amends SFAS No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation and requires certain additional disclosures in respect of stock-based compensation. The group has adopted the disclosure requirements of this standard.
     In January 2003, the FASB issued FIN No. 46, Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51. FIN No. 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN No. 46 is effective immediately for all new variable interest entities created or acquired after 31 January 2003. For variable interest entities created or acquired prior to 1 February 2003 the provisions of FIN No. 46 must be applied for the first interim or annual period beginning after 15 June 2003. Diageo does not expect the adoption of FIN No. 46 to have a material effect on the group.
     In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. This statement amends and clarifies reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities, and is effective for contracts entered into or modified after 30 June 2003.

50 Diageo Annual Report 2003
Operating and financial review

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity. The statement requires issuers to classify as liabilities (or assets in some circumstances) three classes of freestanding financial instruments that embody obligations for the issuer. Generally, SFAS No. 150 is effective for financial instruments entered into or modified after 31 May 2003 and is otherwise effective at the beginning of the first interim period beginning after 15 June 2003. The group did not enter into any financial instruments within the scope of the Statement during June 2003. The group has not yet completed its evaluation of the impact of SFAS No. 150 on its existing financial instruments entered into on or before 31 May 2003.

Discussion of US GAAP differences

Diageo’s consolidated financial statements have been prepared in accordance with UK GAAP, which is the group’s primary reporting framework. Reconciliations between UK and US GAAP are set out in the consolidated financial statements and this section explains the principal differences.
	Year ended 30 June
	2003			2002			2001
	£ million			£ million			£ million
Turnover — UK GAAP		9,440			11,282			12,821
— US GAAP		9,153			10,760			11,868
Effect on net income of significant differences between UK and US GAAP:
Net income in accordance with UK GAAP		76			1,617			1,207
Adjustments to conform with US GAAP:
Brands, goodwill and other intangibles		(7	)		(2	)		(442	)
Inventories		(46	)		(58	)		(74	)
Pension and other post employment benefits		37			19			28
Derivative instruments in respect of General Mills shares		(4	)		166			–
Other derivative instruments		(189	)		(100	)		(17	)
Burger King impairment charges and transaction costs		707			(135	)		–
Disposals of businesses		(171	)		1,022			–
Other items		46			99			(70	)
Deferred taxation		38			(74	)		126
Net income in accordance with US GAAP		487			2,554			758

Turnover
UK GAAP turnover (sales in US terminology) for the year ended 30 June 2003 was £287 million (2002 — £522 million; 2001 — £953 million) higher than turnover under US GAAP, as (i) following the adoption of EITF 01-09, £74 million (2002 — £306 million of which £217 million was in respect of Pillsbury; 2001 — £714 million of which £619 million was in respect of Pillsbury) of marketing expenditure has been reclassified from selling, general and administrative expenses to a reduction in sales under US GAAP, and (ii) the accounting treatment of joint arrangements (between the group and LVMH) is different. Under UK GAAP, the group includes in turnover its attributable share of turnover of joint arrangements, measured according to the terms of the arrangement and sales to joint arrangements by Diageo companies are eliminated on consolidation. Under US GAAP, joint arrangements are accounted for under the equity method of accounting and the group’s share of sales of the joint arrangements is not included as part of group sales. Sales to joint arrangements by Diageo companies are accounted for as part of turnover. All of the joint arrangements are included in the premium drinks segment.

Net income
The significant reconciling items in net income are as follows:

Brands, goodwill and other intangibles Under UK GAAP, all intangible assets acquired up to 30 June 1998, other than certain brands, have been written off direct to reserves in the period acquired. Intangible assets acquired since 1 July 1998 are capitalised on the balance sheet. Where the intangible assets are regarded as having limited useful economic lives, their cost is amortised over those lives; where they are regarded as having indefinite useful economic lives, they are not amortised but are subject to impairment reviews. From 1 July 2001, Diageo applied the requirements of SFAS No. 142, Goodwill and Other Intangible Assets to its US GAAP results. SFAS No. 142 requires that brands, goodwill and other intangible assets with indefinite lives should not be amortised but be reviewed at least annually for impairment. Application of SFAS No. 142 has resulted in a nil charge under US GAAP for amortisation of brands and goodwill for the years ended 30 June 2002 and 2003.

Inventories The fair value of the net assets under US GAAP of the Guinness Group was higher than the net assets under UK GAAP, primarily in respect of maturing whisky inventories. The fair value of the inventories at the date of acquisition (17 December 1997) was £601 million higher under US GAAP compared to UK GAAP. The increase in inventory values is unwinding over a number of years on the sale of the whisky to third parties. In the year ended 30 June 2003 £46 million (2002 — £58 million; 2001 — £74 million) of the fair trade value increase was realised.

Pension and other post employment benefits There are differences in the methods of valuation required under UK and US GAAP for valuing assets and liabilities of defined benefit pension plans. US GAAP is generally more prescriptive in respect of actuarial assumptions and the allocation of costs to accounting periods. These differences affect the group’s post employment costs under UK and US GAAP.

51 Diageo Annual Report 2003

Under current UK GAAP (SSAP 24), the assumptions that the group has used to calculate the post employment liabilities have been derived by taking a risk free guaranteed bond rate and adding a margin for the expected return on assets. For US GAAP, the discount rates are derived from AA rated corporate bond yields. The other main difference is that under UK GAAP, any surplus or deficit arising on the actuarial valuation is spread over the average service lives of the employees (generally 12 years) and credited or charged to the profit and loss account. Under US GAAP, a similar spreading occurs but it is only recognised when outside a 10% corridor.
     In the year ended 30 June 2003 under UK GAAP, the charge for post employment costs before taxation was £22 million (2002 – a credit of £12 million; 2001 – a credit of £13 million) compared to a credit of £15 million (2002 – £31 million; 2001 – £41 million) under US GAAP, excluding amounts in respect of disposals of businesses. Under US GAAP, applying the requirements of SFAS No. 88 in the year ended 30 June 2003, there was an additional credit of £18 million in relation to the disposal of Burger King (2002 – £49 million in respect of Pillsbury).

Derivative instruments in respect of General Mills’ shares Under the terms of the contingent value right received in connection with the disposal of Pillsbury, in the year ended 30 June 2003, Diageo received a cash payment from General Mills. Under UK GAAP, this was recognised in the profit and loss account as an exceptional gain on the disposal of businesses. However, under US GAAP, this has been recognised in the profit and loss account in the year ended 30 June 2002 as a derivative and has accordingly been held at its estimated fair value with changes in this fair value included in the profit and loss account.
     Under UK GAAP, the premium received from the sale of options to General Mills over 29 million ordinary shares of Diageo’s holding in that company is deferred in the balance sheet. The premium will be recognised in the profit and loss account on exercise or lapse of the options. Under US GAAP, the option premium represents a derivative and is accordingly held at its estimated fair value at the balance sheet date with changes in fair value included in the profit and loss account.

Other derivative instruments The group uses derivative financial instruments for risk management purposes. Under UK GAAP, changes in the fair value of interest rate derivatives, derivatives hedging forecast transactions and currency option cylinders are not recognised until realised. Changes in the fair value of derivatives hedging the translation of net assets of overseas operations are taken to the statement of total recognised gains and losses.
     Under US GAAP, all derivatives are carried at fair value at the balance sheet date. Certain of the group’s derivatives qualify for and are designated as hedges under US GAAP which defers the effect on net income from gains and losses arising from changes in their fair value to coincide with the timing of the recognition of the hedged item. Gains and losses arising from changes in the fair value of derivatives which do not qualify for US GAAP hedge accounting treatment are charged or credited in determining net income under US GAAP. In the year ended 30 June 2003, under US GAAP, losses of £148 million were recognised on foreign exchange derivatives (2002 – gains of £97 million; 2001 – losses of £8 million) and losses of £45 million were recognised on interest rate instruments (2002 – losses of £219 million; 2001 – losses of £7 million).The year on year movements are a product of the portion of the group’s hedging instruments for which mark-to-market movements are taken to net income under US GAAP but not under UK GAAP, and the movements in exchange and interest rates in each period. Other differences arising between UK and US GAAP on derivative instruments amounted to gains of £4 million (2002 – gains of £22 million; 2001 – losses of £2 million).

Burger King impairment charges and transaction costs Net income for the year ended 30 June 2003 reflects a pre tax charge in relation to the sale of Burger King of £1,457 million and £750 million under UK and US GAAP, respectively, representing £707 million of the total UK/US GAAP difference in net income. Under US GAAP, the transaction is not accounted for as a disposal due to the size of the investment made by the buyer and Diageo’s continuing involvement through the guarantee provided by Diageo in respect of the acquisition finance. However, a charge for impairment has been recognised rather than a loss on disposal. The charge for impairment under US GAAP was lower than the loss on disposal under UK GAAP principally because the goodwill and brands acquired on the original acquisition of the quick service restaurants business were being amortised over 40 years up to 30 June 2001 (prior to the adoption of SFAS No. 142), whereas no amortisation had been charged on the goodwill and brands under UK GAAP. By the date of disposal, Diageo had incurred additional cumulative amortisation (including related deferred tax) under US GAAP of £609 million on the goodwill and brands of Burger King. Other differences arising between UK and US GAAP, principally in respect of derivative instruments, reduced the charge under US GAAP by £98 million.
     As at 30 June 2002, under US GAAP, an impairment in the carrying value of goodwill attributable to the group’s quick service restaurants business of £135 million was recognised. Under UK GAAP, the goodwill to which the impairment related had already been written off to reserves.

Disposals of businesses Under UK GAAP, excluding the pre tax loss in respect of the disposal of Burger King of £1,457 million and the receipt under the terms of the contingent value right of £173 million described above, the group made gains on disposals of other businesses of £14 million compared with gains of £16 million under US GAAP in the year ended 30 June 2003.
     Net income for the year ended 30 June 2002 reflects pre tax gains on the disposals of businesses of £821 million and £1,843 million under UK and US GAAP, respectively, including £322 million and £1,279 million, respectively in respect of the disposal of Pillsbury. The gain arising on the disposal of Pillsbury under US GAAP, was £957 million higher than under UK GAAP principally because the goodwill and brands acquired in the original acquisition of Pillsbury were being amortised over 40 years up to 30 June 2001 (prior to the adoption of SFAS No. 142), whereas no amortisation had been charged on the goodwill and brands under UK GAAP. By the date of disposal, Diageo had incurred additional cumulative amortisation (including related deferred tax) under US GAAP of £871 million in respect of Pillsbury. In addition, under UK GAAP the cumulative exchange gains arising on the unhedged net assets of Pillsbury remain in reserves on the subsequent disposal of the business. Under US GAAP, the cumulative exchange gains on the unhedged net assets of £133 million, on disposal of the business have been credited to the profit and loss account. Other differences arising between UK and US GAAP increased the gain on disposal of Pillsbury under US GAAP by £47 million principally due to a guarantee given by Diageo to third parties.

Exceptional and extraordinary items Under UK GAAP, exceptional items are those that, in management’s judgement, are material items that arise from events or transactions that fall within the ordinary activities of the group and, by virtue of their size or incidence, should be separately disclosed if the financial statements are to properly reflect the results for the period. US GAAP does not have such a category. Under US GAAP, certain of these items are treated in accordance with paragraph 26 of APB 30 as a separate component of income from continuing operations, if appropriate. The group has had no extraordinary items under either UK or US GAAP for the three years ended 30 June 2003.

52 Diageo Annual Report 2003

Directors and senior management

	Age		Position (committees)
Directors
Lord Blyth of Rowington		63	Chairman, non-executive director3*
Paul S Walsh		48	Chief Executive, executive director and Chairman of the executive committee2*
Nicholas C Rose		46	CFO, executive director and member of the executive committee2
Rodney F Chase		60	Non-executive director1,3,4
Lord Hollick of Notting Hill		58	Non-executive director1,3,4
Maria Lilja		59	Non-executive director1,3,4
John K Oates		61	Non-executive director1*,3,4
William S Shanahan		63	Non-executive director1,3,4
Paul A Walker		46	Non-executive director1,3,4
Sir Robert Wilson		60	Senior non-executive director1,3,4*
Other members of the executive committee
Paul A Clinton		44	President, North America2
Stuart R Fletcher		46	President, key markets2
James N D Grover		45	Strategy Director2
Robert M Malcolm		51	President, global marketing, sales and innovation2
Ian K Meakins		47	President, European major markets and global supply2
Ivan M Menezes		44	President and Chief Operating Officer, North America2
Andrew Morgan		47	President, venture markets2
Timothy D Proctor		53	General Counsel2
Gareth Williams		50	Human Resources Director2
Officer
Susanne Bunn		44	Company Secretary

Key to committees:
1. Audit
2. Executive
3. Nomination
4. Remuneration
*Chairman

Information in respect of the directors and senior management is set out below:

Lord (James) Blyth retired as Chairman of The Boots Company PLC at the end of July 2000, having joined in 1987 as Chief Executive and become Chairman in 1998. He was formerly Group Chief Executive of the Plessey Company and Head of Defence Sales at the Ministry of Defence. He was appointed a non-executive director of Diageo plc in January 1999 and Chairman in July 2000. Lord Blyth is also a non-executive director of Anixter Inc., in the USA and, in October 2002, became a partner in Greenhill & Co., LLC (having previously been Senior Adviser).

Paul Walsh joined GrandMet’s brewing division in 1982 and became Finance Director in 1986. He held financial positions with Inter-Continental Hotels and the GrandMet Food Sector from 1987 to 1989 and was appointed Division Chief Executive of Pillsbury in 1990, becoming Chief Executive Officer of The Pillsbury Company in 1992. He was appointed to the GrandMet board in October 1995 and to the Diageo plc board in December 1997. He became Chief Operating Officer of Diageo in January 2000 and Chief Executive of Diageo in September 2000. He became a non-executive director of Centrica plc in March 2003 and in May 2003 was appointed a Governor of Henley Management Centre. He is also a non-executive director of Federal Express Corporation and General Mills, Inc., both in the USA.

Nicholas (Nick) Rose joined GrandMet in June 1992 initially as Group Treasurer, and became Group Controller in 1995. He was appointed Finance Director of International Distillers & Vintners in 1996 and became Finance Director of United Distillers & Vintners in December 1997. He was appointed to the Diageo plc board in June 1999 and became Chief Financial Officer in July 1999. He became a non-executive director of Scottish Power plc in March 2003 and is also a non-executive director of Moët Hennessy International S.N.C., in France.

Rodney Chase retired as Deputy Group Chief Executive of BP p.l.c. in April 2003. He is a non-executive director of Tesco PLC and will be appointed Deputy Chairman in March 2004. He is also a non-executive director of Computer Sciences Corporation, in the USA and became a Senior Adviser to the European Advisory Council of Lehman Brothers in May 2003. He was appointed a non-executive director of Diageo plc in January 1999 and became senior non-executive director and chairman of the remuneration committee on 23 October 2003.

Lord (Clive) Hollick of Notting Hill is Chief Executive of United Business Media p.l.c. He joined Hambros Bank in 1967 and was appointed a director in 1973. He was appointed Managing Director of J H Vavasseur & Co in 1974 which developed into MAI plc, a major international media and financial services group which in 1996 merged with United News and Media plc. He is a founding trustee of the Institute of Public Policy Research and Chairman of London’s South Bank Centre. In June 2003 he was appointed a non-executive director of Honeywell International Inc., in the USA. He was appointed a non-executive director of Diageo plc in December 2001.

Maria Lilja played a leading role in building Nyman & Schultz, a long-established Scandinavian travel management company, which was acquired by American Express in 1993. She served as Head of American Express Europe from 1996 to 2000. She is also non-executive Chairman of Mandator AB (formerly Cell Network AB) and a non-executive director of Bilia AB, Poolia AB, Intrum Justitia AB, Skandia AB, and with effect from September 2003, Observer AB, all in Sweden. She was appointed a non-executive director of Diageo plc in November 1999.

53 Diageo Annual Report 2003

John (Keith) Oates was Deputy Chairman of Marks and Spencer p.l.c. until 1999 and was the founder Chairman of Marks & Spencer Financial Services. His previous experience includes being a BBC Governor, a non-executive director of British Telecommunications plc, John Laing plc and the Financial Services Authority and Chairman of Quest. He was appointed a Senior Adviser to Coutts Bank, Monaco in September 2002. He became a non-executive director of Guinness PLC in June 1995 and was appointed a non-executive director of Diageo plc in December 1997. He was re-elected for a one year term at this year’s AGM and will retire at the 2004 AGM.

William Shanahan is President of The Colgate-Palmolive Company. He joined Colgate-Palmolive in 1965 as a sales assistant in the international sales department and subsequently held various positions within the company in general management and marketing roles. In 1983 he was appointed an officer of the corporation, in 1989 he became Chief Operating Officer, and in 1992, was appointed President. He was appointed a non-executive director of Diageo plc in May 1999.

Paul Walker is Chief Executive of The Sage Group plc. He joined Sage in 1984 and was appointed Finance Director in 1987, then Group Chief Executive in 1994. He is also a non-executive director of My Travel Group plc. He was appointed a non-executive director of Diageo plc in June 2002.

Sir Robert Wilson was Chairman of Rio Tinto plc and Rio Tinto Ltd, from which he retired at the end of October 2003. He joined the Rio Tinto Group in 1970 and became Executive Chairman of Rio Tinto plc (previously RTZ) in January 1997 and Rio Tinto Ltd in 1998. Prior to this he had been Chief Executive of RTZ since 1991 and Chief Executive of RTZ-CRA, following the merger of the two companies in 1995. He is Chairman of The Economist Group Limited and will become Chairman of BG Group plc in January 2004 and a non-executive director of GlaxoSmithKline plc in November 2003. He was appointed a non-executive director of Diageo plc in April 1998 and retired at this year’s AGM.

Paul Clinton was appointed President, North America in September 2000. He will leave Diageo on 31 December 2003 to return to his native Canada. He joined International Distillers & Vintners in 1988, and over the following decade held a series of senior management positions within its wines and spirits operations and became President and Chief Executive Officer in Canada from 1994 to 1996 and President, Wines in 1996. In 1997 he became President of United Distillers & Vintners’ in-market company in the North East United States and was appointed Chief Operating Officer for UDV North America, in June 1999.

Stuart Fletcher was appointed President, key markets in September 2000. He joined Guinness PLC in 1986 as Deputy Controller of Guinness Brewing Worldwide and was appointed Controller in 1987. He previously held a number of financial positions with Procter & Gamble in the United Kingdom, both in consumer goods and industrial products, and with United Glass. In 1988 he became Finance and Operations Director, United Distillers Japan and in 1990 Chief Financial Officer of Schenley Inc. In 1993 he was appointed Regional Finance Director for United Distillers’ Asia Pacific Region and was made Acting Regional Managing Director for United Distillers’ Pacific Region in January 1995. In August 1995 he became Finance Director of Guinness Brewing Worldwide and then served as President of Guinness’ Americas and Caribbean region based in the United States before becoming Managing Director of developing and seed markets for Guinness Limited in June 1999. He is also a non-executive director of Moët Hennessy International S.N.C., in France.

James (Jim) Grover was appointed Strategy Director in December 1997. He joined GrandMet in 1993, initially as the Strategic Development Director of GrandMet Food Sector (encompassing GrandMet’s worldwide packaged food and Burger King businesses), and subsequently, Strategic Development Director of The Pillsbury Company. He was appointed Group Strategy Director of GrandMet in March 1997. Previously he worked as a management consultant, initially with Booz-Allen & Hamilton, Inc and subsequently with OC&C Strategy Consultants. He was the partner responsible for their consumer goods practice at OC&C and advised a broad array of multinational food companies on a wide variety of strategic issues.

Robert (Rob) Malcolm was appointed President, global marketing, sales and innovation in September 2000. He joined UDV as Scotch Category Director in 1999 and was appointed Global Marketing Director later that year. Previously, he held various marketing positions with Procter & Gamble in the United States from 1975 until his appointment in 1988 as Vice President and General Manager Personal Cleansing Products, USA and in 1992 as Vice President and General Manager for the Arabian Peninsula. From 1995 to 1999 he was Vice President, General Manager Beverages, Europe Middle East Africa.

Ian Meakins was appointed President, European major markets and global supply in September 2000. He joined United Distillers in 1991 as Marketing Director, White Spirits, Europe Region having worked for Procter & Gamble and Bain & Co and been a founding partner of the Kalchas Group, strategic management consultants in 1988. From 1992 he was Managing Director of United Distillers Boutari (then a joint venture between United Distillers and Boutari) in Greece. He was appointed United Distillers Marketing Director Worldwide in September 1994 before being appointed United Distillers, Managing Director Europe in July 1997. From December 1997, he was UDV, Deputy Managing Director, Europe and then UDV, Managing Director, venture markets. In December 1999 he became Global Operations Managing Director for UDV. He is also a non-executive director of mmO₂ plc.

Ivan Menezes was appointed Chief Operating Officer, North America in July 2002. He will become President and Chief Executive Officer of Diageo North America on 1 January 2004. He previously served as both Managing Director and then President, venture markets of Guinness United Distillers & Vintners. Before these appointments, he served as Global Marketing Director for United Distillers & Vintners in the United Kingdom from September 1998 and as Group Integration Director for Diageo plc from May 1997. Previously he worked across a variety of sales, marketing and strategy roles with Nestlé in Asia, Booz-Allen & Hamilton, Inc in North America and Whirlpool in Europe.

54 Diageo Annual Report 2003
Directors and senior management

Andrew Morgan was appointed President, venture markets in July 2002. He joined United Distillers in 1987 and held various positions in Europe regions, including General Manager, Greece and Regional Director for Southern Europe. He was appointed United Distillers, Managing Director of International Region in January 1995 and UDV, Regional Managing Director, International in 1997. He was appointed Group Chief Information Officer and President New Business Ventures for Guinness United Distillers & Vintners in September 2000 having previously been Director Global Strategy and Innovation for UDV.

Timothy (Tim) Proctor was appointed General Counsel of Diageo in January 2000, having been Director, Worldwide Human Resources, Glaxo Wellcome since 1998. Prior to this, he was Senior Vice President, Human Resources, General Counsel and Secretary for Glaxo’s US operating company. He has over 20 years’ international legal experience, including 13 years with Merck and six years with Glaxo Wellcome.

Gareth Williams was appointed Human Resources Director in January 1999. He joined the GrandMet Brewing Division in 1984 and moved through a number of personnel positions to become Director of Management Development and Resourcing for the division in 1987. From 1990 to 1994 he held a series of human resources positions in IDV’s North American spirits and wine division, before returning to the United Kingdom to become Group Organisation and Management Development Director of GrandMet. In 1996 he became Human Resources Director for IDV’s global business and in January 1998 took the same title in UDV, following the merger of Guinness and GrandMet. Prior to joining GrandMet, he spent 10 years with Ford of Britain in a number of personnel and employee relations positions.

Susanne Bunn was appointed Company Secretary of Diageo plc in March 2003. She joined the group in February 1989 as Assistant Secretary in the GrandMet UK Foods division and since then has held various company secretarial positions within the group. She was appointed joint Deputy Secretary in December 1997 and became sole Deputy Secretary at the end of 2000.

55 Diageo Annual Report 2003

Directors’ remuneration report

This report to shareholders for the year ended 30 June 2003 covers:

• the policies under which executive and non-executive directors were remunerated; and

• tables of information showing details of the remuneration and share interests of all the directors.

The report was approved by a duly appointed and authorised committee of the board of directors on 3 September 2003 and was signed on its behalf by Sir Robert Wilson, senior non-executive director and chairman of the remuneration committee as at that date. As required by The Directors’ Remuneration Report Regulations 2002 (the Regulations), this report was subject to an advisory shareholder vote at the Annual General Meeting. The report is intended to be in full compliance with the requirements of the Regulations. KPMG Audit Plc have audited the contents of the report to the extent required by the Regulations (sections 7 to 10, excluding the scheme details in section 9). Certain information has been updated to 14 November 2003.

1 The remuneration committee
The remuneration committee is responsible for making recommendations to the board on remuneration policy as applied to Diageo’s senior executives (including executive directors). It consists wholly of independent non-executive directors: Sir Robert Wilson (Chairman), RF Chase, Lord Hollick, M Lilja, JK Oates, WS Shanahan and PA Walker. The Chairman and the Chief Executive may, by invitation, attend remuneration committee meetings, except when their own remuneration is discussed. No director is involved in determining his or her own remuneration. The full committee met five times during the year and there was one sub-committee meeting.

2 Advice
During the year ended 30 June 2003, Diageo’s Human Resources Director and Director of Performance and Reward were invited by the remuneration committee to provide their views and advice. The company, with the agreement of the remuneration committee, appointed the following independent and expert consultants:

• Towers Perrin provided external market data on levels of senior executive remuneration. They also provided other employee remuneration survey data.

• Kepler Associates reviewed and confirmed the total shareholder return of Diageo and the peer group companies for the 2000 TSR plan, the performance cycle for which ended on 31 December 2002. They provided no other services to Diageo during the year.

• Additional remuneration survey data published by Monks Partnership was presented to the committee. They provided no other services to Diageo during the year.

3 Remuneration policy
Diageo’s current policy on executive directors’ remuneration is to:

• set total remuneration with regard to competitive practice in the markets in which Diageo operates;

• reward individual, team and business performance through short and long term incentives based on challenging targets; and

• align executives’ interests with those of shareholders through performance based incentives and shareholding requirements.

The details of the application of this policy during the year ended 30 June 2003 are set out in the sections below. The remuneration committee will be undertaking a full review of the future application of the policy during the year ending 30 June 2004.
     The relative importance of performance and non performance-related remuneration elements for both executive directors is explained in the chart below which illustrates the policy for on-target performance for the year ended 30 June 2003:

56 Diageo Annual Report 2003
Directors’ remuneration report

3 Remuneration policy continued
Diageo’s policy on non-executive directors’ remuneration is that:

• within the limits set by the shareholders from time to time, remuneration should be sufficient to attract, motivate and retain world-class non-executive talent;

• remuneration practice should be consistent with recognised best-practice standards for non-executive directors’ remuneration; and

• non-executive directors should not be granted share options by the company.

The fees of non-executive directors are normally reviewed every two years. Following a review, increased annual fees were approved by the Chairman and the executive directors as from 1 January 2003.

	To 31 December 2002		From 1 January 2003
Base fee		£35,000		£50,000
Senior non-executive director		£10,000		£20,000
Chairman of audit committee		£10,000		£20,000
Chairman of remuneration committee		£10,000		£10,000
Overseas attendance allowance (a)		–		£3,000

Note
(a) This allowance is payable each time an overseas based non-executive director is required to travel to attend board and committee meetings to reflect the additional time commitment involved.

4 Components of executive remuneration
The remuneration of executive directors is currently made up of the following components:

Basic salary Basic salaries are reviewed annually, usually in October, and any increases are determined according to the competitive market for executive directors, taking into account individual experience, contribution and performance.

Annual performance bonus Bonus payments are primarily based on improvements in profit on ordinary activities before exceptional items and tax of Diageo and its businesses for the year in question, based on information reported in the financial statements. This reflects Diageo’s objective of driving organic growth. The targets for profit and for the level of bonus are determined by the remuneration committee at the commencement of each year.

Long term incentive plans The executive directors are also eligible to be considered for participation in long term incentive plans. These comprise the Total Shareholder Return (TSR) plan and the Senior Executive Share Option Plan (SESOP).For executive directors, the TSR plan and SESOP each comprise 50% of the expected value of their long term incentives for each year.
     Executive directors are required to hold shares in Diageo to qualify for the full benefits of the long term incentive plans. This is consistent with Diageo’s belief that its senior managers should also be shareholders. Required shareholdings are specified as a percentage of the executive director’s basic salary. They were required to hold shares equivalent to 150% of their basic salary by 1 January 2003, rising to 225% by 1 January 2005.

(i) TSR plan Under this plan, the executive directors are granted a conditional right to receive shares. The awards to executive directors for the 2003-2005 cycle are for a number of shares equivalent to 150% of their basic salaries. The rights are awarded with effect from 1 January each year, and vest after a three year period (the ‘performance cycle’) subject to achievement of performance tests. The primary test, as detailed below, is comparative total shareholder return. In addition, the remuneration committee will not recommend the release of awards if it considers that there has not been an underlying improvement in Diageo’s financial performance.
     The primary performance test is a comparison of the percentage growth in Diageo’s share price (assuming all dividends and capital distributions are re-invested), known as total shareholder return, with the TSR of a defined peer group of companies over a three year period. As previously reported, mergers and acquisitions have resulted in the peer group being reduced to 18 companies. For all current performance cycles, the peer group consists of Diageo and: Allied Domecq, Altria (formerly Philip Morris), Anheuser-Busch, Campbell Soup, Carlsberg, Coca-Cola, Colgate-Palmolive, Gillette, Heineken, Heinz, Kelloggs, McDonald’s, Nestlé, PepsiCo, Procter & Gamble, Unilever and Yum! Brands. TSR calculations for performance cycles commencing up to 1 January 2001 are made in local currencies; calculations for cycles commencing on or after 1 January 2002 are converted to a common currency (US dollar) on a daily basis when determining the peer group rankings.
     The following table shows the percentage of each award that will normally be released at the end of the relevant performance cycle, depending on the ranking achieved in the peer group:

							Ranking in peer group
	1-2	3	4	5	6	7		8	9		10-18
% of award released	150	142	114	94	83	72		61	50	nil

57 Diageo Annual Report 2003

4 Components of executive remuneration continued
(ii) SESOP Under SESOP, an annual grant of options is made to participants. The remuneration committee decides the level of grants each year in the light of market practice. The share option grants made to executive directors in the year ended 30 June 2003 had a total face value of 375% of their basic salaries at the date of grant.
     Options granted under SESOP may not normally be exercised unless a performance condition is satisfied. The performance condition applicable to the options granted to date under SESOP is linked to the increase in Diageo’s basic earnings per share before goodwill amortisation and exceptional items (EPS), based on information reported in the financial statements, and is initially applied over a three year period. If the increase in EPS is at least 15 percentage points greater than the increase in the RPI over the same period,then all the options can be exercised. If the EPS increase is at least 12 percentage points greater than that of the RPI but less than 15 percentage points, half of the options can be exercised. If all or half of the options fail the initial performance condition, the three year assessment period will be rolled forward by a year and a retest carried out at that time. However, the performance condition can only be rolled forward a maximum of three times.

Share incentive plan For most UK employees, including executive directors, Diageo operates a tax favoured share plan under which shares can be appropriated to individuals annually up to the value of 10% of salary, subject to a cap of £3,000. Shares that have been appropriated are held in trust for the individual for a minimum three year period. If the shares are transferred to the individual after five years from the date of appropriation, no income tax is payable.
     In addition, the company provides matching shares, to a maximum annual value of £750, to UK employees who make monthly share purchases. These shares are subject to holding requirements similar to those described above.

Savings-related share option schemes Diageo has established savings-related share option schemes which provide a savings and investment opportunity for employees in the United Kingdom, including the executive directors, the United States and many other countries. The UK scheme options may normally be exercised after three or five years, at a price equivalent to not less than 80% of the market value of the shares at the time of grant.

Pre-merger long term incentive plans Diageo’s current incentive plans have replaced the previous incentive arrangements within GrandMet and Guinness, which were approved by their respective shareholders and were described in previous annual reports. Whilst awards and options granted under some of these plans (none of which are performance-related) continue to be held and exercised, no further grants will be made under them.

(i) Executive share option schemes Options were granted at market value at the date of grant, generally exercisable between a minimum of three or five years, and a maximum of 10 years, after grant. The last grants were made in 1997.

(ii) Senior Executive Phantom Share Option Scheme (SEPSOS) This share price related bonus scheme was established for a small number of GrandMet senior executives including executive directors. The last grants were made in 1996 and all payments will have been made within 10 years from the date of grant.

5 Service contracts
The Chairman has a letter of appointment for an initial five year term from 1 July 2000. On 3 September 2003, the board of directors resolved that this be extended for a further two years, to 30 June 2007. It is terminable on six months notice by either party or, if terminated by the company, by payment of six months fees in lieu of notice.
     The executive directors have service agreements which provide for six months notice by the director or 12 months by the company and contain non-compete obligations. In the event of early termination by the company without cause, the agreements provide for predetermined compensation to be paid, equivalent to 12 months basic salary for the notice period and an equal amount in respect of all benefits. Mr Walsh’s service contract with the company is dated 7 October 1999. Mr Rose’s service contract with the company is dated 1 October 2000.
     The non-executive directors do not have service contracts.

6 Performance graph
The graph below shows the total shareholder return for Diageo and the FTSE 100 Index since 30 June 1998. The FTSE 100 Index reflects the 100 largest UK quoted companies by market capitalisation and has been chosen because it is a widely recognised performance benchmark for large UK companies. The graph shows that Diageo outperformed the FTSE 100 Index over this five year period.

58 Diageo Annual Report 2003
Directors’ remuneration report

7 Directors’emoluments and other payments
	2003											2002
						Share
		Basic		Performance		incentive		Other
		Salary		bonus		plan		benefits (c)		Total		Total
		£000		£000		£000		£000		£000		£000
Chairman – fees
Lord Blyth (b)			450		–		–		35		485		404
Executive directors
NC Rose			453		616		3		35		1,107		1,259
PS Walsh			788		1,112		3		26		1,929		2,278
JMJ Keenan (retired 30 October 2001)			–		–		–		–		–		779
			1,691		1,728		6		96		3,521		4,720
Non-executive directors – fees
RF Chase			43		–		–		1		44		36
Lord Hollick			43		–		–		1		44		20
M Lilja			52		–		–		1		53		36
JK Oates			58		–		–		1		59		46
WS Shanahan			52		–		–		1		53		36
PA Walker			43		–		–		1		44		3
Sir Robert Wilson			68		–		–		1		69		56
			359		–		–		7		366		233
Total (a)			2,050		1,728		6		103		3,887		4,953

Notes
(a) In addition to the above emoluments, the executive directors received payments and made gains under long term incentive plans totalling £1,898,000 (2002 – £2,872,000 including £951,000 for JMJ Keenan).These payments and gains were in respect of NC Rose £215,000 (2002 – £535,000) of which £196,000 related to the release of awards from the 2000 TSR plan and £19,000 related to SEPSOS payments spread forwards from previous exercises; PS Walsh £1,683,000 (2002 – £1,386,000) of which £448,000 related to gains on the exercise of share options, £1,081,000 related to the release of awards from the 2000 TSR plan and £154,000 related to SEPSOS payments spread forwards from previous exercises.

(b) As reported in the 2002 directors’ remuneration report, Lord Blyth’s remuneration was increased on 1 January 2002 to £450,000. Of this amount, £150,000 must be used for monthly purchases of Diageo plc ordinary shares, which have to be retained by Lord Blyth until he retires or ceases to be a director.

(c) Other benefits include company cars, private use of chauffeur, fuel, product allowance, financial counselling, spouse travel, medical insurance and life insurance premiums.

Former director The company entered into a two year consultancy agreement with a company owned by JMJ Keenan, who retired as a director of Diageo plc on 30 October 2001. Under the terms of the agreement, Mr Keenan’s company provides advice and assistance to the board for which it received £199,846 (2002 – £265,039) during the year ended 30 June 2003. During the year Mr Keenan also made gains from long term incentive plan awards that he was entitled to retain after his retirement in accordance with the plan rules. Mr Keenan received 145,418 shares under the 2000 TSR plan and £675,812 from the exercise of options under SESOP.

59 Diageo Annual Report 2003

8 Directors’ interests in long term incentive plans
The following table shows the directors’ interests in the TSR plan and in SEPSOS. Details of executive share options are shown separately in section 10. The performance tests that apply to awards under the TSR plan are described in section 4.

						Awards made				Awards released
		30 June 2002				during year (c)				during year
		Target		Maximum		Target		Maximum				Price in		30 June
	Date of award	award (a)		award (b)		award (a)		award (b)		Number (d)		pence (e)		2003 (f)		Performance cycle (g)
NC Rose
TSR Plan	25 Feb 00		27,543		41,315						31,371		625		nil	Jan 00 – Dec 02
	23 Feb 01		99,303		148,954										148,954	Jan 01 – Dec 03
	22 Feb 02		89,958		134,937										134,937	Jan 02 – Dec 04
	21 Feb 03						86,574		129,861						129,861	Jan 03 – Dec 05
			216,804		325,206		86,574		129,861		31,371				413,752
PS Walsh
TSR Plan	25 Feb 00		151,869		227,804						172,978		625		nil	Jan 00 – Dec 02
	23 Feb 01		182,927		274,390										274,390	Jan 01 – Dec 03
	22 Feb 02		156,903		235,354										235,354	Jan 02 – Dec 04
	21 Feb 03						150,564		225,846						225,846	Jan 03 – Dec 05
SEPSOS	4 Jan 96				30,000										30,000
			491,699		767,548		150,564		225,846		172,978				765,590

Notes
(a) This number reflects 100% of the shares initially awarded under the TSR plan. Only half this number of shares would be released for achieving position nine and no shares would be released for achieving a position of 10 or below.

(b) This number reflects that 150% of the shares initially awarded under the TSR plan would be released for achieving position one or two. For SEPSOS this number reflects the outstanding number of phantom options. These are fully exercisable until January 2006 at an exercise price of 459 pence.

(c) The price on 21 February 2003, the award date, was 625 pence.

(d) The three year performance cycle for the 2000 TSR award ended on 31 December 2002. Diageo’s EPS over the performance cycle exceeded the rise in the RPI. This was determined to represent an underlying improvement in financial performance which permitted release of the awards. The number of shares released was determined by the remuneration committee at 114% of the original target award based on a ranking at position four in the peer group at the end of the performance cycle. This ranking was confirmed by Kepler Associates.

(e) The price on 21 February 2003, the release date. The market price when the award was made on 25 February 2000 was 478 pence.

(f) The directors’ interests at 14 November 2003 are the same as at 30 June 2003.

(g) The period over which the TSR performance is measured. The remuneration committee will normally approve the release of awards in the February following the end of the performance cycle.

9 Pension provision
Scheme details NC Rose and PS Walsh are members of the Diageo Pension Scheme. They accrue pension rights at the rate of one-thirtieth of basic salary per annum subject only to Inland Revenue limits. No actuarial reduction is applied to pensions payable from the age of 57, subject to company consent. Bonus payments and other benefits are not included in pensionable pay. Their pensions are guaranteed to increase in line with inflation up to a level of 5% per annum, and they have guarantees that such increases will not be lower than 3% per annum and that their pensions at normal pension age of 62 will not be less than two-thirds of basic salary in the 12 months prior to retirement. On death in service, a lump sum of four times pensionable salary is paid, along with a spouse’s pension of two-thirds of the member’s prospective pension. When an executive director dies after retirement, a spouse’s pension of two-thirds of the member’s pension is paid. None of the executive directors are required to make pension contributions and no company contributions were paid during the year.
     For executives who entered service after 31 May 1989, the benefits which can be provided from the Diageo Pension Scheme are restricted by the operation of the Inland Revenue earnings cap. Such executives, including any directors, receive total pension benefits of the same value as if the earnings cap did not apply. All benefits earned during the year in respect of earnings above the cap will be provided by the company on an unfunded basis.

Executive directors’ pension benefits Details of the accrued pension to which each director is entitled had they left service on 30 June 2003 and the transfer value of those accrued pensions are shown in the following table. The accrued pensions shown represent the annual pension to which each executive director would be entitled at normal retirement age of 62. The transfer value is broadly the cost to Diageo if it had to provide the equivalent pension benefit. The method of calculating transfer values changed in the year. The transfer values shown in the following table have been calculated in accordance with the Guidance Note published by the Institute and Faculty of Actuaries (GN11).

60 Diageo Annual Report 2003
Director’s remuneration report

9 Pension provision continued

Additional

pension

Transfer

Increase in

Pensionable

Accrued

accrued

Accrued

value at

transfer value

Transfer

Age at

service at

pension at

during the

pension at

30 June 2002

during

value at

30 June 2003

30 June 2003

30 June 2002

year (a)

30 June 2003

(b)

the year

30 June 2003

Years

Years

£000 pa

£000 pa

£000 pa

£000

£000

£000

NC Rose

45

11

135

26

161

1,177

402

1,579

PS Walsh

48

21

449

57

506

4,517

1,214

5,731

Notes
(a) Of the additional pension accrued in the year, the increases attributable to factors other than inflation were £24,000 for NC Rose and £49,000 for PS Walsh.

(b) The transfer values at 30 June 2002 as calculated in accordance with the method used at that time were £1,079,000 for NC Rose and £4,142,000 for PS Walsh. The executive directors made no contributions in the year.

10 Executive share options and savings-related share options
The following table shows, for the directors who held office during the year, the number of options held under all executive share option schemes and savings-related schemes.
     US options were granted over ADSs at dollar prices (one ADS is equivalent to four ordinary shares); the option holdings and prices in the table are stated as ordinary share equivalents in pence. The mid-market price of the ordinary shares at 30 June 2003 was 647 pence (30 June 2002 – 852 pence; 14 November 2003 – 727 pence).The highest mid-market price during the year was 851 pence and the lowest mid-market price was 582 pence. ‘Exercisable’ options are those that had vested and could be exercised in the option period; ‘not exercisable’ are those options where the minimum holding period was not then completed. The ‘option period’ starts from the earliest month any options could have been, or may be, exercised under their terms and ends with the month in which the last options lapse.

	30 June 2002			Granted (a)		Exercised			Market price		30 June 2003		Option price		Option period
UK options
NC Rose
Exercisable		11,069										11,069		402	Jun 98 – Jun 05
		136,548										136,548		518	Dec 02 – Dec 09
Not exercisable		242,760	(b)									242,760		587	Sep 03 – Sep 10
		3,450										3,450		489	Dec 04 – May 05
		234,716										234,716		687	Sep 04 – Sep 11
					212,450							212,450		759	Oct 05 – Oct 12
					18,292							18,292		615	Mar 06 – Mar 13
		628,543			230,742							859,285
PS Walsh
Exercisable		470,559										470,559		518	Dec 02 – Dec 09
Not exercisable		447,189	(b)									447,189		587	Sep 03 – Sep 10
		3,341										3,341		505	Dec 05 – May 06
		409,389										409,389		687	Sep 04 – Sep 11
					370,553							370,553		759	Oct 05 – Oct 12
					30,487							30,487		615	Mar 06 – Mar 13
		1,330,478			401,040							1,731,518
US options
PS Walsh
Exercisable		198,232					(158,232	)		745		40,000		462	Jan 99 – Jan 06
		1,528,710			401,040		(158,232	)				1,771,518

Notes
(a) Options granted during the year were options granted under SESOP, which are subject to performance conditions.

(b) After 30 June 2003, the performance conditions in respect of the 2000 grant were measured. Growth in Diageo’s EPS before goodwill amortisation and exceptional items (EPS) over the three years ended 30 June 2003 was 29.9% compared with an RPI increase over the same period of 6.0%.Consequently,Diageo’s EPS increase comfortably exceeded the test (RPI plus 15 percentage points) and these options will become exercisable in full in September 2003.

61 Diageo Annual Report 2003

10 Executive share options and savings-related share options continued
(c) On 10 October 2003, PS Walsh and NC Rose were granted 479,584 options and 274,461 options respectively over ordinary shares under SESOP at an option price of 649 pence, and with an option period from October 2006 to October 2013.

(d) On 14 November 2003, PS Walsh exercised US options over 20,000 ordinary shares at an option price of 462 pence. The market price at the date of exercise was 734 pence.

11 Share and other interests The beneficial interests of the directors in office at 30 June 2003 in the ordinary shares of the company are shown in the table below.
	Ordinary shares
	14 November		30 June		30 June
	2003		2003		2002
Chairman
Lord Blyth		34,958		28,620		15,443
Executive directors
NC Rose		127,017		123,711		88,308
PS Walsh		592,775		591,172		440,071
Non-executive directors
RF Chase		11,610		11,355		10,986
Lord Hollick		5,000		5,000		–
M Lilja		4,532		1,507		1,507
JK Oates		3,271		3,208		3,116
WS Shanahan		16,000		16,000		8,000
PA Walker		44,250		7,250		–
Sir Robert Wilson		–		8,263		8,263
Total		839,413		796,086		575,694

Notes
(a) At 30 June 2003, NC Rose and PS Walsh also had an interest in 16,528 shares and 447,580 shares subject to call options (30 June 2002 — 28,528 and 447,580; 14 November 2003 — 16,528 and 447,580) held by a trust to satisfy grants made under ex-GrandMet incentive plans; and they also had an interest in 8,316,116 shares (30 June 2002 — 6,038,078; 14 November 2003 — 9,430,444) held by trusts to satisfy grants made under Diageo incentive plans and savings-related share option schemes.

(b) At 30 June 2003, WS Shanahan also had an interest in 850 9.42% cumulative guaranteed preferred securities, series A issued by Grand Metropolitan Delaware, LP (30 June 2002 — nil; 14 November 2003 — 850).

(c) Sir Robert Wilson retired from the board on 22 October 2003.

12 Additional information
Lord Blyth is a partner in Greenhill & Co., LLC, which during the year ended 30 June 2003 received fees of $8 million (£5 million) for its advice to Diageo in respect of the disposal of Burger King. Lord Blyth did not participate in the selection of advisers, nor did he advise Greenhill & Co., LLC in relation to this transaction.
     As reported last year, Diageo had an outstanding forward foreign currency transaction at 30 June 2002 with PS Walsh in connection with his relocation from the United States to the United Kingdom. This transaction matured on 21 March 2003 and Diageo bought US$0.5 million from him for £0.34 million. The transaction was hedged with a third party on identical terms and involved no cost to the group.
     In May 2003, the company granted rolling indemnities to the directors, uncapped in amount, in relation to certain losses and liabilities which they may incur in the course of acting as directors of the company or of one or more of its subsidiaries. The company secretary was granted an indemnity, on similar terms, covering her role as company secretary of the company and company secretary or director of one or more of its subsidiaries.
     During the year, Lord Hollick and PS Walsh informed the company that they had purchased seasonal developments at Gleneagles from a subsidiary of the company, Gleneagles Resort Developments Limited. The transactions were priced on the same basis as all the external seasonal development transactions and were at arm’s length. The values of the transactions were: Lord Hollick — £25,000; PS Walsh — £43,000.
     The total emoluments for the year ended 30 June 2003 of the directors and senior management (members of Diageo’s Executive Committee and the company secretary) of Diageo plc comprising basic salary, annual performance bonus, share incentive plan and other benefits were £10,468,575. The aggregate amounts of gains made by the directors and senior management from the exercise of share options and from the vesting of awards during the year was £3,321,254 and payments under other long term incentive plans was £786,161. In addition, they were granted 1,967,814 options during the year at a weighted average share price of 749 pence, exercisable by 2013. They were also initially awarded 710,944 shares under the TSR Plan in February 2003, which will vest in three years subject to the performance tests described in section 4.

62 Diageo Annual Report 2003
Directors’ remuneration report

12 Additional information continued At 14 November 2003, the directors and senior management had an aggregate beneficial interest in 1,507,862 ordinary shares in the company and in the following options:
			Weighted
			average
	Number		exercise price		Option period
Options over ordinary shares
NC Rose		1,133,746		645	Jun 98 – Oct 13
PS Walsh		2,231,102		632	Jan 99 – Oct 13
Other members of the executive committee and company secretary		5,999,099		640	Apr 97 – Oct 13
		9,363,947
SEPSOS phantom options
PS Walsh		30,000		459	Jan 01 – Jan 06
Other members of the executive committee and company secretary		29,442		423	Jan 99 – Jan 05
		59,442

Other than disclosed in this report, no director had any interest, beneficial or non-beneficial, in the share capital of the company. The register of directors’ interests (which is open to shareholders’ inspection) contains full details of directors’ share interests. Save as disclosed above, no director has or has had any interest in any transaction which is or was unusual in its nature, or which is or was significant to the business of the group and which was effected by any member of the group during the financial year, or which having been effected during an earlier financial year, remains in any respect outstanding or unperformed. There have been no material transactions during the last three years to which any director or officer, or 3% shareholder, or any relative or spouse thereof was a party. There is no significant outstanding indebtedness to the company by any directors or officer or 3% shareholder.

63 Diageo Annual Report 2003

Corporate governance report

Combined Code
Diageo’s board and executive committee are committed to achieving the highest standards of corporate governance, corporate responsibility and risk management in directing and controlling the business. They are pleased to report that the company has complied throughout the year with the provisions of section 1 of the Combined Code on Corporate Governance issued in 1998 by the Hampel Committee and annexed to the Listing Rules by the Financial Services Authority. The way in which the principles of good governance are applied is described below.

Board of directors
Diageo’s board consists of its non-executive Chairman, Chief Executive, CFO and seven independent non-executive directors. The non-executive directors are all experienced and influential individuals from a range of industries and geographies. Their mix of skills and business experience is a major contribution to the proper functioning of the board and its committees, ensuring matters are fully debated and no individual or group dominates the board’s decision-making processes. The senior non-executive director is Sir Robert Wilson, Chairman of Rio Tinto plc. The biographical details of the directors, together with their committee memberships, are given in ‘Directors and senior management’ above.
     Diageo plc’s articles of association provide that at each Annual General Meeting (AGM) of Diageo one-third of the directors shall retire from office by rotation and are then eligible for re-election by the shareholders. The number of directors, and the requirement of the company’s articles in relation to rotation, result in each director standing for re-election not less frequently than every three years. Any new director appointed by the board must be elected at the next AGM to continue in office. New directors receive orientation training in relation to the group and its business, for example in relation to its assurance processes, environmental policies and social responsibility policies and practices.
     The board meets six times a year, in addition to an annual strategy conference held off-site with the full executive committee for two days at which the group’s strategy is reviewed in depth. The board receives detailed financial information and regular presentations from executives on the business’ performance, in addition to items for decision and minutes of board committees in advance of each board meeting. This enables the directors to make informed decisions on corporate and business issues under consideration.
     There is a formal schedule of matters reserved to the board for decision to ensure that key policy and strategic decisions are made by the full board. Otherwise, the board has delegated authority for day-to-day management of the group’s affairs to the Chief Executive, Paul Walsh, who is supported by the executive committee. The biographical details of the executive committee’s members are given in ‘Directors and senior management’ above.

The board makes decisions and reviews and approves key policies and decisions of the company in particular in relation to:

• Corporate governance;

• Compliance with laws, regulations and the company’s code of business conduct;

• Corporate citizenship, ethics, environment;

• Group strategy and operating plans;

• Business development including major investments and disposals;

• Financing and treasury;

• Appointment or removal of directors;

• Remuneration of directors;

• Risk management;

• Financial reporting and audit;

• Pensions.

The Chairman, Lord Blyth, is principally responsible for the effective operation and chairing of the board and for ensuring that information that it receives is sufficient to make informed judgements. He also provides support to the Chief Executive, particularly in relation to external affairs. He spends between two and three days each week on the company’s affairs and, because of the closer relationship he has with the company as Chairman, he is not considered to be an independent director.
     The company secretary is responsible for ensuring that board processes and procedures are appropriately followed and support effective decision-making and governance. SM Bunn was appointed company secretary on 1 March 2003 upon the retirement of RH Myddelton. She is appointed by, and can only be removed by, the board. She is also responsible for ensuring that new directors receive appropriate training and induction into Diageo. All directors have access to the company secretary’s advice and services and there is also a formal procedure for directors to obtain independent professional advice in the course of their duties, if necessary, at the company’s expense.

64 Diageo Annual Report 2003
Corporate governance report

Board committees
The board has established several committees, each with clearly defined terms of reference, procedures, responsibilities and powers.

Audit committee The audit committee is chaired by JK Oates and consists of all the independent non-executive directors. The company secretary is secretary to the committee. The CFO, group business risk director and external auditor are normally invited to attend meetings. The audit committee is responsible for: monitoring the adequacy and effectiveness of the systems of risk management and internal control; reviewing the workplans and findings of the business risk function; oversight of the compliance programme; reviewing the selection, reappointment, independence and findings of the external auditor; and reviewing the preliminary and interim announcements, annual and interim financial statements and related accounting policies and key judgement areas.

Activities of the audit committee The committee met five times in the year and reported its conclusions to the full board. The committee formally reviewed draft interim and annual reports and associated preliminary and interim announcements, focusing on key areas of judgement, critical accounting policies and any changes required to those. It reviewed the work of the filings assurance committee described below and external audit findings. The committee spent considerable time at each of its meetings reviewing the effectiveness and findings from the risk management and internal control processes described below including review of risk mitigation plans for critical risks. It reviewed the work of the audit and risk committee described below. To support it in this activity it had available to it the resources of the business risk group which supports the processes for identifying and assessing the management of significant business risks and conducts internal audits across the whole of the group’s business. The committee reviewed the findings from all reviews undertaken by the business risk group and the rolling workplans of that group. The committee also reviewed quarterly a report in respect of the compliance programme described below. The committee reviewed its own effectiveness through an annual self-assessment in December.

Monitoring of external auditor During the year, the audit committee reviewed the external audit strategy and the findings of the external auditor from its review of the interim announcement and its audit of the annual financial statements. The committee also met three times with the external auditor alone, with no executive or staff member present. On the basis of this and comparison with both business risk group findings and other information available to the directors, the audit committee is able to assess the ongoing effectiveness of the external audit. In reviewing the independence of the external auditor, the audit committee considered a number of factors. These include the standing, experience and tenure of the external audit director; the nature and level of services provided by the external auditor; and confirmation from the external auditor that it has complied with relevant UK and US independence standards. In addition, the audit committee reconsidered the group’s policy in relation to the use of the external auditor for non-audit services and confirmed the principles underlying the existing policy that:

• it may be desirable to use the external auditor for the provision of certain non-audit services;

• for other non-audit services it is acceptable to use the external auditor, subject to good purchasing procedures;

• with the exception of those services which are prohibited by law or regulation, there are no services which the external auditor may not provide where they are best placed or considered to be the service provider offering the best value.

However, reflecting recent regulatory developments the audit committee approved a new policy, effective 1 May 2003. Under this policy the provision of any service must now be approved by the audit committee, unless the proposed service is both expected to cost less than £250,000 and also falls within one of a number of service categories which the audit committee pre-approved. These pre-approved service categories relate to services where the audit committee considers that the use of the external auditor is consistent with the above principles. The monetary threshold and the pre-approved service categories will be reviewed annually by the audit committee. The pre-approved service categories may be summarised as follows:

• accounting advice, employee benefit plan audits, and audit or other attest services required by statute or requested by management and not otherwise prohibited;

• due diligence relating to acquisitions and disposals, and other support relating to disposals;

• internal control reviews;

• accounting and fraud investigations; and

• certain tax services, including tax compliance; tax services on behalf of employees; tax planning and related implementation advice in relation to acquisitions, disposals and other reorganisations.

65 Diageo Annual Report 2003

Nomination committee Chaired by Lord Blyth, this committee comprises all the non-executive directors. The committee is responsible for keeping under review the composition of the board and succession to it. It makes recommendations to the board concerning appointments to the board, whether of executive or non-executive directors, having regard to the balance and structure of the board and the required blend of skills and experience. The committee has responsibility to:

• ensure that all members of the committee (or of a sub-committee appointed by the committee) hold meetings with possible candidates for future board membership;

• ensure any possible conflict of interest issues in respect of external candidates are fully considered;

• arrange for all directors to have the opportunity to meet potential external appointees before their appointment is formally proposed at a board meeting;

• establish and disband any sub-committee, determine its membership, terms of reference and the extent of its delegated powers;

• employ the services of such advisers and take such soundings within and outside the company as it deems necessary to fulfill its responsibilities.

Remuneration committee This committee is chaired by Sir Robert Wilson and comprises all the independent non-executive directors. The committee is responsible for making recommendations to the board on remuneration policy and on the remuneration of executive directors and members of the executive committee.
     The Chairman and the Chief Executive may attend remuneration committee meetings, except when their own remuneration is discussed. No director is involved in determining his or her own remuneration. The full committee met five times during the year and there was one sub-committee meeting. Details of the policy and of the remuneration of the directors are given in the directors’ remuneration report.

Executive direction and control
The executive committee, appointed and chaired by the Chief Executive, consists of the individuals responsible for the key components of the business: North America and the European major markets, key and venture markets, global supply and the global functions. It met for around two days eight times during the year, including the joint annual strategy conference with the board, and spent most of its time discussing strategy, people and performance (including brands). Responsibility and authority (within the financial limits set by the board) are delegated by the Chief Executive to individual members of the executive committee who are accountable to him for the performance of their business units.
     Executive direction and control procedures include approval of annual three-year rolling strategic plans submitted by each business unit executive and quarterly business reviews. These reviews are generally attended by at least two members of the executive committee and held in market. The reviews focus on business performance management and specific issues around brands, people, key business decisions and risk management.
     The Chief Executive has created several executive working groups to which are delegated particular tasks, generally with specific time spans and success criteria. He has also created committees, intended to have an ongoing remit, including the following:

Audit and risk committee chaired by the Chief Executive and responsible for overseeing the approach to securing effective risk management and control in the business, reviewing and challenging the sources of assurance as to their adequacy and reporting periodically on the above to the audit committee or to the board.

Corporate citizenship committee chaired by the CEO and responsible for making decisions and recommendations to the executive committee or board. The main areas addressed by the committee include: policies and codes (eg, occupational health and safety, human rights); social programmes (including alcohol education); environmental matters; community affairs; reputation issues referred by the Diageo brand committee; and measuring and reporting on social, environmental and economic performance. The committee seeks to identify social, community and environmental areas where the group could be at risk or where there is scope for positive impact on the communities where we operate. Policies and processes have been developed and implemented to manage each of these. Progress against these is reported periodically to the board and publicly through a separate corporate citizenship report, which is subject to external verification. That report and the group’s social, ethical and environmental policies are published on the Diageo web site. A copy of the corporate citizenship report is available on request. The company has communicated its policies widely and in key areas has established management systems to manage, monitor and enhance impacts. Wherever possible, these management systems are incorporated into existing practices such as the quality management programme or the procurement and vendor selection procedures.

Finance committee chaired by the CFO and responsible for making decisions or recommendations to the board on funding strategy, capital structure and management of financial risks and the policies and control procedures required to implement the financial strategy, including financial issues relating to treasury and taxation. Treasury activity is managed centrally within tightly defined dealing authorities and procedures proposed by the finance committee and approved by the board.

66 Diageo Annual Report 2003
Corporate governance report

Filings assurance committee chaired by the CFO and including the Chief Executive, this committee is responsible for implementing and monitoring the processes which ensure that the company complies with all relevant UK, US or other regulatory filing provisions, including those imposed by the Sarbanes-Oxley Act or deriving from it.
     As at the end of the period covered by this report, the committee carried out an evaluation of the effectiveness of the design and operation of Diageo’s disclosure controls and procedures. These are defined as those controls and procedures designed to ensure that information required to be disclosed in reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarised and reported within specified time periods. As of the date of the evaluation, the Chief Executive and the CFO concluded that the design and operation of these disclosure controls and procedures were effective. The company has developed a programme to transfer a number of its transaction processes (principally in relation to recording of sales and purchases) from business units to shared service centres using common global processes supported by new systems. During the period the transaction processing for a number of business units, principally related to operations in Ireland, has been transferred to shared service centres and further business unit transfers are planned for coming years.

Risk management and internal control
The group’s aim is to manage risk and to control its business and financial activities cost-effectively and in a manner that enables it to: exploit profitable business opportunity in a disciplined way; avoid or reduce risks that can cause loss, reputational damage or business failure; support operational effectiveness and enhance resilience to external events. To achieve this, an ongoing process has been established for identifying, evaluating and managing risks faced by the group, in accordance with the guidance of the Turnbull committee on internal control. This process has been in place for the full financial year and up to the date the financial statements were approved.
     Business units, groups of business units and the Diageo executive committee each perform a risk assessment at least annually as an integral part of their strategic planning. Business unit risk assessments and the activities planned to manage those risks are reviewed by relevant executives, for example at quarterly business reviews. The summary of all business unit risk assessments and the executive risk assessment are reviewed by the audit and risk committee and by the audit committee of the board. Those committees gain assurance in relation to the effectiveness of risk management and control from: summary information in relation to the management of identified risks; detailed review of the effectiveness of management of selected key risks; the independent work of the business risk group which supports and challenges risk assessments, supports and challenges management to improve the effectiveness of management of identified key risks and conducts internal audits; and external audit work and findings. In addition, a control self assessment is completed annually by each business unit or function, against control objectives and criteria defined within the relevant business and financial processes.
     The risk assessment and management processes described above are also applied to major business decisions or initiatives, such as acquisitions or disposals. Additional risk management activity is focused directly towards operational risks within the business including health and safety, product quality and environmental risk management.
     The above risk management processes and systems of internal control are designed to manage, rather than eliminate, the risk of failure to achieve the group’s strategic objectives. It should be recognised that such systems can only provide reasonable, not absolute, assurance against material misstatement or loss. Summary information and findings are regularly reported to the audit committee.
     The directors acknowledge that they are responsible for the group’s systems of internal control and risk management and for reviewing their effectiveness. They confirm that they have reviewed their effectiveness, based on the procedures described above, during the period.

Compliance programme
Diageo is committed to conducting its business responsibly and in accordance with all laws and regulations to which its business activities are subject. The board has established a compliance programme to support achievement of this commitment. The code of business conduct sets out expectations of Diageo businesses and employees in relation to issues such as conflicts of interest, competition law, insider trading and corrupt payments as well as illegal acts in general. A marketing code establishes the principles that Diageo follows in relation to advertising and promotion of its products. The full texts of the code of conduct, marketing code and compliance programme are available on the company’s web site.
     Compliance programme guidelines specify the manner in which any potential violations of these expectations should be dealt with, including line manager reporting and an independent ‘speak up’ line. The latter has been promoted to employees, is operated independently and reports in to the secretary to the audit committee and the compliance programme director for report to the audit committee. There is an annual certification requirement for all senior employees to confirm compliance with the code of conduct or to identify areas of possible non-compliance to the compliance programme director. Training and monitoring activities are also undertaken. Both the audit and risk committee and the audit committee review the operation of the programme.

Relations with shareholders
The company values its dialogue with both institutional and private investors. Institutional shareholders, fund managers and analysts are kept informed through regular meetings and presentations. For the benefit of private investors, Diageo produces the short-form Annual Review, which contains the information believed to be of most interest to them. Approximately 85% of private investors have elected to receive only this document rather than the full annual report. Shareholders can also choose to receive e-mail notification when shareholder documents and new company information are published on Diageo’s web site. The web site also provides shareholders with the facility to check their shareholdings on-line and to send any questions they may have to the company.
     Shareholders are invited to write in to the Chairman (or any other director) and express their views on any issues of concern at any time and the AGM provides an opportunity for shareholders to put their questions in person. The chairmen of the audit, nomination and remuneration committees are available at AGMs to take any relevant questions.
     At general meetings, a schedule of the proxy votes cast is made available to all shareholders. The company proposes a separate resolution on each substantially separate issue and does not bundle resolutions together inappropriately. Resolutions on the receipt of the reports and accounts and the approval of the directors’ remuneration report are put to the shareholders.

67 Diageo Annual Report 2003

Charitable and political donations
During the year, UK group companies made donations of £6.5 million (2002 — £6.9 million) to charitable organisations including the Diageo Foundation and £2.7 million (2002 — £2.7 million) to the Thalidomide Trust. The Diageo Foundation made charitable donations of £1.5 million (2002 — £1.8 million) during the year. In the rest of the world, group companies made charitable donations of £12.5 million (2002 — £10.0 million).
     The group has not given any money for political purposes in the United Kingdom. The group made no donations to EU political organisations and incurred no EU political expenditure during the year. The group made contributions to non-EU political parties totalling £0.6 million during the year.

Supplier payment policies and performance
Given the international nature of the group’s operations, there is no group standard in respect of payments to suppliers. Operating companies are responsible for agreeing terms and conditions for their business transactions when orders for goods and services are placed, ensuring that suppliers are aware of the terms of payment and including the relevant terms in contracts where appropriate. These arrangements are adhered to when making payments, subject to the terms and conditions being met by the supplier.
     Creditor days have not been calculated, as the company had no trade creditors at 30 June 2003. The company’s invoices for goods and services are settled by subsidiaries acting as agents for the company.

Statement of directors’ responsibilities
The following statement, which should be read in conjunction with the independent auditor’s report set out before the financial statements, is made with a view to distinguishing for shareholders the respective responsibilities of the directors and of the auditor in relation to the financial statements.
     The directors are required by the Companies Act 1985 to prepare financial statements for each financial year which give a true and fair view of the state of affairs of the company and the group at the end of the financial year and of the profit or loss for the financial year. The directors, in preparing these financial statements, consider that the company has used appropriate accounting policies, consistently applied and supported by reasonable and prudent judgements and estimates, and that all applicable accounting standards have been followed.
     The directors have responsibility for ensuring that the company keeps accounting records which disclose with reasonable accuracy the financial position of the company and which enable them to ensure that the financial statements comply with the Companies Act 1985. The directors have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the group and to prevent and detect fraud and other irregularities.
     The directors, having made appropriate enquiries, consider that the company and the group have adequate resources to continue in operational existence for the foreseeable future, and that therefore it is appropriate to adopt the going concern basis in preparing the financial statements.

68 Diageo Annual Report 2003

Directors’ report

The directors have pleasure in submitting their annual report for the year ended 30 June 2003.

Annual General Meeting
The AGM will be held at The Queen Elizabeth II Conference Centre, Broad Sanctuary, Westminster, London SW1P 3EE at 2.30 pm on Wednesday, 22 October 2003.

Dividends
Diageo paid an interim dividend of 9.9 pence per share on 7 April 2003. The directors recommend a final dividend of 15.7 pence per share. Subject to approval by members, the final dividend will be paid on 27 October 2003 to shareholders on the register on 19 September 2003. A dividend reinvestment plan, which enables ordinary shareholders to invest their dividends in ordinary shares, is available in respect of the final dividend and the plan notice date is 6 October 2003.

Directors
The directors of the company who served during the year are listed under ‘Directors and senior management’ above. Lord Blyth, JK Oates and PS Walsh retire by rotation at the AGM in accordance with the articles and, being eligible, offer themselves for re-election. The executive director proposed for re-election will have an unexpired contract term of one year. The non-executive directors proposed for re-election do not have service contracts. Further details of directors’ contracts and their interests in the shares of the company at 30 June 2003 are given in the directors’ remuneration report above. Lord Blyth’s term as Chairman was extended by the board of directors on 3 September 2003, for a further two years, to 30 June 2007. JK Oates will seek re-election for a one year term at this year’s AGM and, subject to re-election, will retire at the 2004 AGM. Sir Robert Wilson, senior non-executive director and chairman of the remuneration committee, will retire by rotation at this year’s AGM and will not seek a further term on the board. On 3 September 2003, the board of directors appointed RF Chase as senior non-executive director and chairman of the remuneration committee, with effect from 23 October 2003.

Auditor
The auditor, KPMG Audit Plc, is willing to continue in office and a resolution for its re-appointment as auditor of the company will be submitted to the AGM.

Purchases of own shares
At the 2002 AGM, shareholders gave the company renewed authority to purchase a maximum of 321 million ordinary shares. During the year ended 30 June 2003, Diageo purchased, and subsequently cancelled, 116 million ordinary shares (nominal value £34 million),representing approximately 4% of the issued ordinary share capital at 18 August 2003, for a consideration including expenses of £852 million.

Other information
Other information that in previous years has been in the directors’ report may now be found in the following sections of the annual report.

Information	Location in annual report
Business activities and development	Chief Executive’s review and Business description
Corporate citizenship	Corporate governance report
Charitable and political donations	Corporate governance report
Employment policies	Business description — Premium drinks — Employees
Purchase of own shares	Operating and financial review — Balance sheet
Supplier payment policies and performance	Corporate governance report
Shareholdings in the company	Additional information for shareholders — Major shareholders

The directors’ report of Diageo plc for the year ended 30 June 2003 comprises this page and the sections of the annual report referred to under ‘Other information’ and ‘Directors’ above.

The directors’ report was approved by a duly appointed and authorised committee of the board of directors on 3 September 2003 and signed on its behalf by Susanne Bunn, the Company Secretary.

69 Diageo Annual Report 2003

Independent auditor’s report

To the Board of Directors and shareholders of Diageo plc.

     We have audited the accompanying consolidated balance sheets of Diageo plc and subsidiaries as at 30 June 2003 and 30 June 2002, and the related consolidated profit and loss accounts, consolidated statements of total recognised gains and losses and consolidated cash flow statements for each of the years in the three year period ended 30 June 2003 presented on pages 70 to 129. These consolidated financial statements are the responsibility of the company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
     We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
     In our opinion, the aforementioned consolidated financial statements present fairly, in all material respects, the financial position of Diageo plc and subsidiaries as of 30 June 2003 and 30 June 2002 and the results of their operations and their cash flows for each of the years in the three year period ended 30 June 2003 in conformity with generally accepted accounting principles in the United Kingdom.
     Generally accepted accounting principles in the United Kingdom vary in certain significant respects from generally accepted accounting principles in the United States of America. Application of generally accepted accounting principles in the United States of America would have affected the results of operations for the years ended 30 June 2003, 2002 and 2001 and shareholders’ equity as at 30 June 2003 and 2002, to the extent summarised in note 32 to the consolidated financial statements.

KPMG Audit Plc
Chartered Accountants,
London, England

3 September 2003, except as to note 29(iii), which is as of 26 November 2003.

70 Diageo Annual Report 2003

Consolidated profit and loss account

			Year ended 30 June 2003									Year ended 30 June 2002
			Before									Before
			exceptional			Exceptional						exceptional			Exceptional
			items			items			Total			items			items			Total
	Notes		£ million			£ million			£ million			£ million			£ million			£ million
Turnover
Continuing operations				8,961			–			8,961			8,704			–			8,704
Discontinued operations				479			–			479			2,578			–			2,578
		2		9,440			–			9,440			11,282			–			11,282
Operating costs		4,7		(7,411	)		(168	)		(7,579	)		(9,176	)		(453	)		(9,629	)
Operating profit
Continuing operations				1,976			(168	)		1,808			1,766			(432	)		1,334
Discontinued operations				53			–			53			340			(21	)		319
		2		2,029			(168	)		1,861			2,106			(453	)		1,653
Share of associates’ profits		6		478			(21	)		457			324			(41	)		283
				2,507			(189	)		2,318			2,430			(494	)		1,936
Disposal of fixed assets
Continuing operations							(42	)		(42	)					1			1
Discontinued operations							(1	)		(1	)					(23	)		(23	)
		7					(43	)		(43	)					(22	)		(22	)
Sale of businesses
Continuing operations							16			16						512			512
Discontinued operations							(1,286	)		(1,286	)					309			309
		7					(1,270	)		(1,270	)					821			821
Interest payable (net)		8		(351	)		–			(351	)		(399	)		–			(399	)
Profit/(loss) before taxation				2,156			(1,502	)		654			2,031			305			2,336
Taxation		9		(539	)		52			(487	)		(511	)		(121	)		(632	)
Profit/(loss) after taxation				1,617			(1,450	)		167			1,520			184			1,704
Minority interests
Equity				(56	)		–			(56	)		(49	)		–			(49	)
Non-equity				(35	)		–			(35	)		(38	)		–			(38	)
Profit/(loss) for the year				1,526			(1,450	)		76			1,433			184			1,617
Dividends		10		(786	)		–			(786	)		(767	)		–			(767	)
Transferred (from)/to reserves				740			(1,450	)		(710	)		666			184			850
Pence per share		11
Basic earnings				49.0	p		(46.6	)p		2.4	p		43.2	p		5.6	p		48.8	p
Diluted earnings				49.0	p		(46.6	)p		2.4	p		43.1	p		5.6	p		48.7	p
Dividends				25.6	p		–			25.6	p		23.8	p		–			23.8	p
Average shares										3,113	m								3,316	m

The accompanying notes are an integral part of these financial statements.

71 Diageo Annual Report 2003

Consolidated profit and loss account continued

			Year ended 30 June 2001
			Before
			exceptional			Exceptional
			items			items			Total
	Notes		£ million			£ million			£ million
Turnover
Continuing operations				7,580			–			7,580
Discontinued operations				5,241			–			5,241
		2		12,821			–			12,821
Operating costs		4,7		(10,720	)		(228	)		(10,948	)
Operating profit
Continuing operations				1,430			(153	)		1,277
Discontinued operations				671			(75	)		596
		2		2,101			(228	)		1,873
Share of associates’ profits		6		203			–			203
				2,304			(228	)		2,076
Disposal of fixed assets
Continuing operations							25			25
Discontinued operations							(6	)		(6	)
		7					19			19
Sale of businesses
Continuing operations							28			28
Discontinued operations							(51	)		(51	)
		7					(23	)		(23	)
Interest payable (net)		8		(350	)		–			(350	)
Profit/(loss) before taxation				1,954			(232	)		1,722
Taxation		9		(468	)		33			(435	)
Profit/(loss) after taxation				1,486			(199	)		1,287
Minority interests
Equity				(43	)		–			(43	)
Non-equity				(37	)		–			(37	)
Profit/(loss) for the year				1,406			(199	)		1,207
Dividends		10		(751	)		–			(751	)
Transferred to reserves				655			(199	)		456
Pence per share		11
Basic earnings				41.6	p		(5.9	)p		35.7	p
Diluted earnings				41.6	p		(5.9	)p		35.7	p
Dividends				22.3	p		–			22.3	p
Average shares										3,377	m

The accompanying notes are an integral part of these financial statements.

72 Diageo Annual Report 2003

Consolidated balance sheet

						30 June 2003						30 June 2002
	Notes		£ million			£ million			£ million			£ million
Fixed assets
Intangible assets		12		4,288						5,434
Tangible assets		13		1,974						2,545
Investment in associates		14		3,034						2,899
Other investments		14		447						284
							9,743						11,162
Current assets
Stocks		15		2,193						2,316
Debtors — due within one year		16		2,173						2,209
Debtors — due after one year		16		897						1,210
Cash at bank and liquid resources		17		1,191						1,596
				6,454						7,331
Creditors — due within one year
Borrowings		17		(3,563	)					(3,718	)
Other creditors		19		(3,283	)					(3,645	)
				(6,846	)					(7,363	)
Net current liabilities							(392	)					(32	)
Total assets less current liabilities							9,351						11,130
Creditors — due after one year
Borrowings		17		(2,981	)					(3,711	)
Other creditors		19		(18	)					(49	)
							(2,999	)					(3,760	)
Provisions for liabilities and charges		20					(869	)					(814	)
							5,483						6,556
Capital and reserves
Called up share capital		22					897						930
Share premium account				1,327						1,324
Revaluation reserve				120						129
Capital redemption reserve				3,046						3,012
Profit and loss account				(436	)					606
Reserves attributable to equity shareholders		23					4,057						5,071
Shareholders’ funds							4,954						6,001
Minority interests
Equity				186						184
Non-equity		25		343						371
							529						555
							5,483						6,556

The accompanying notes are an integral part of these financial statements.
     These financial statements were approved by a duly appointed and authorised committee of the board of directors on 3 September 2003 and were signed on its behalf by PS Walsh and NC Rose, directors.

73 Diageo Annual Report 2003

Consolidated cash flow statement

			Year ended			Year ended			Year ended
			30 June 2003			30 June 2002			30 June 2001
	Notes		£ million			£ million			£ million
Net cash inflow from operating activities		26		1,970			2,008			2,276
Dividends received from associates				60			87			101
Returns on investments and servicing of finance
Interest paid (net)				(327	)		(360	)		(446	)
Dividends paid to equity minority interests				(28	)		(40	)		(31	)
				(355	)		(400	)		(477	)
Taxation				(105	)		(311	)		(230	)
Capital expenditure and financial investment
Purchase of tangible fixed assets				(382	)		(585	)		(439	)
Purchase/sale of own shares and investments				(85	)		(72	)		(69	)
Sale of tangible fixed assets				41			65			58
				(426	)		(592	)		(450	)
Acquisitions and disposals
Purchase of subsidiaries		27		(137	)		(3,592	)		(136	)
Sale of Burger King		28		642			–			–
Sale of other subsidiaries and businesses		28		270			5,100			31
Sale of options in relation to associates		28		58			–			–
				833			1,508			(105	)
Equity dividends paid				(767	)		(758	)		(725	)
Management of liquid resources				256			92			(572	)
Financing
Issue of share capital				4			11			31
Own shares purchased for cancellation				(852	)		(1,658	)		(108	)
Redemption of guaranteed preferred securities				–			–			(39	)
(Decrease)/increase in loans				(496	)		(137	)		398
				(1,344	)		(1,784	)		282
Increase/(decrease) in cash in the year				122			(150	)		100
Movements in net borrowings		17
Increase/(decrease) in cash in the year				122			(150	)		100
Cash flow from change in loans				496			137			(398	)
Change in liquid resources				(256	)		(92	)		572
Change in net borrowings from cash flows				362			(105	)		274
Exchange adjustments				227			267			(229	)
Non-cash items				37			(179	)		21
Decrease/(increase) in net borrowings				626			(17	)		66
Net borrowings at beginning of the year				(5,496	)		(5,479	)		(5,545	)
Net borrowings at end of the year				(4,870	)		(5,496	)		(5,479	)

The accompanying notes are an integral part of these financial statements.

74 Diageo Annual Report 2003

Consolidated statement of total recognised gains and losses

	Year ended			Year ended			Year ended
	30 June 2003			30 June 2002			30 June 2001
	£ million			£ million			£ million
(Loss)/profit for the year — group		(170	)		1,486			1,037
— associates		246			131			170
		76			1,617			1,207
Exchange adjustments   — group		(96	)		(38	)		121
— associates		(68	)		(55	)		(24	)
Tax charge on exchange in reserves		(7	)		–			(17	)
Total recognised gains and losses		(95	)		1,524			1,287

Note of consolidated historical cost profits and losses

There is no material difference between the reported profit shown in the consolidated profit and loss account and the profit for the relevant years restated on an historical cost basis.

The accompanying notes are an integral part of these financial statements.

75 Diageo Annual Report 2003

Accounting policies

Bases of accounting and consolidation
The accounts are prepared under the historical cost convention, modified by the revaluation of certain land and buildings, and in accordance with applicable UK accounting standards.
     The group accounts include the accounts of the company and its subsidiary undertakings (subsidiaries) together with the group’s attributable share of the results of joint arrangements and associated undertakings (associates). Unless otherwise stated, the acquisition method of accounting has been adopted. Under this method, the results of subsidiaries sold or acquired are included in the profit and loss account up to, or from, the date control passes.

Acquisitions and disposals
On the acquisition of a business, or of an interest in an associate, fair values, reflecting conditions at the date of acquisition, are attributed to the net assets including significant owned brands acquired. Adjustments to fair values include those made to bring accounting policies into line with those of the group. Where merger relief is applicable under the UK Companies’ Acts, the difference between the fair value of the business acquired and the nominal value of shares issued as purchase consideration is treated as a merger reserve.
     The profit and loss on the disposal of a previously acquired business includes the attributable amount of purchased goodwill relating to that business, including any goodwill written off direct to reserves prior to 1 July 1998.

Brands, goodwill and other intangible assets
When the cost of an acquisition exceeds the fair values attributable to the group’s share of the net assets acquired, the difference is treated as purchased goodwill. Goodwill arising on acquisitions subsequent to 1 July 1998 is capitalised but prior to that date it was eliminated against reserves, and this goodwill has not been restated.
     Acquired brands and other intangible assets which are controlled through custody or legal rights and could be sold separately from the rest of the business are capitalised, where fair value can be reliably measured.
     Where capitalised goodwill and intangible assets are regarded as having limited useful economic lives, their cost is amortised on a straightline basis over those lives — up to 20 years. Where goodwill and intangible assets are regarded as having indefinite useful economic lives, they are not amortised. Assets with indefinite lives are reviewed for impairment annually and other assets are reviewed for impairment wherever events or circumstances indicate that the carrying amount may not be recoverable. Impairment reviews, comparing the discounted estimated future operating cash flows with the net carrying value of brands or goodwill, are carried out to ensure that goodwill and intangible assets are not carried at above their recoverable amounts. Amortisation and any impairment write downs are charged to the profit and loss account.

Tangible fixed assets
Land and buildings are stated at cost or, for certain assets acquired prior to 1993, at professional valuation, less depreciation. Freehold land is not depreciated. Leaseholds are depreciated over the unexpired period of the lease. Other tangible fixed assets are depreciated on a straightline basis to estimated residual values over their expected useful lives within the following ranges: industrial and other buildings — 10 to 50 years; plant and machinery — 5 to 25 years; fixtures and fittings — 5 to 10 years; casks and containers — 15 to 20 years; and computer software — up to 5 years.
     Reviews are carried out if there is some indication that impairment may have occurred, to ensure that fixed assets are not carried at above their recoverable amounts.

Leases
Where the group has substantially all the risks and rewards of ownership of an asset subject to a lease, the lease is treated as a finance lease. Other leases are treated as operating leases, with payments and receipts taken to the profit and loss account on a straightline basis over the life of the lease.

Associates and joint arrangements
An associate is an undertaking in which the group has a long term equity interest and over which it exercises significant influence. The group’s interest in the net assets of associates is included in investments in the group balance sheet. Joint arrangements, where each party has its own separate interest in particular risks and rewards, are accounted for by including the attributable share of the assets and liabilities, measured according to the terms of the arrangement.

Investment in own shares
Investment in own shares is undertaken for the purpose of fulfilling obligations in respect of various employee share plans around the group. The difference between the purchase price of the shares and the exercise price of the option or grant is amortised over the relevant period, which is generally three years from the date of an award.

Stocks
Stocks are stated at the lower of cost and net realisable value. Cost includes raw materials, direct labour and expenses, and an appropriate proportion of production and other overheads. Cost is calculated on an actual usage basis for maturing stocks and on a first in, first out basis for other stocks.

76 Diageo Annual Report 2003
Accounting Policies

Foreign currencies
The profit and loss accounts and cash flows of overseas subsidiaries and associates are translated into sterling at weighted average rates of exchange, other than substantial transactions which are translated at the rate on the date of the transaction. The adjustment to closing rates is taken to reserves.
     Balance sheets are translated at closing rates. Exchange differences arising on the re-translation at closing rates of the opening balance sheets of overseas subsidiaries and associates are taken to reserves, as are exchange differences arising on related foreign currency borrowings and financial instruments. Tax charges and credits arising on such items are also taken to reserves. Other exchange differences are taken to the profit and loss account.
     The results, assets and liabilities of operations in hyper-inflationary economies are determined using an appropriate relatively stable currency as the functional currency. The exchange differences arising from this initial process are taken to the profit and loss account.
     Transactions in foreign currencies are recorded at the rate of exchange at the date of the transaction or, if hedged forward, at the rate of exchange under the related foreign currency contract.

Turnover
Turnover represents the net invoice value of goods and services, including excise duties and royalties receivable but excluding value added tax. Goods include premium drinks within continuing operations, and packaged food products and retail sales in the group’s quick service restaurants within discontinued operations. Services include royalties and other franchise fees primarily related to the group’s discontinued quick service restaurants business.
     Turnover for goods is recognised depending upon individual customer terms at the time of despatch (where the customers’ terms are FOB shipping point), delivery or some other specified point when the risk of loss transfers. Provision is made for returns where appropriate. Turnover for goods is stated net of price discounts, allowances for customer loyalty and certain promotional activities and similar items.
     Royalties are accrued as earned and other franchise fees are recognised when the related restaurant begins operations.

Advertising
Advertising production costs are charged to the profit and loss account when the advertisement is first shown to the public.

Research and development
Research and development, including developing new drinks products and package design expenditure is written off in the period in which it is incurred.

Pensions and other post employment benefits
The cost of providing pensions and other post employment benefits is charged against profits on a systematic basis, with pension surpluses and deficits arising allocated over the expected average remaining service lives of current employees. Differences between the amounts charged in the profit and loss account and payments made to pension or other plans are treated as assets or liabilities. Deferred tax is accounted for on these assets and liabilities. Unfunded post employment medical benefit liabilities are included in provisions in the balance sheet.

Exceptional items
Exceptional items are those that in management’s judgement need to be disclosed by virtue of their size or incidence. Such items are included within the profit and loss account caption to which they relate, and are separately disclosed either in the notes to the consolidated financial statements or on the face of the consolidated profit and loss account.

Deferred taxation
Full provision for deferred tax is made for timing differences between the recognition of gains and losses in the consolidated financial statements and their recognition in tax computations, using current tax rates. The group does not discount these balances. No deferred tax is provided in respect of any future remittance of earnings of foreign subsidiaries or associates where no commitment has been made to remit such earnings.

Financial instruments
The group uses derivative financial instruments to hedge its exposures to fluctuations in interest and foreign exchange rates. Instruments accounted for as hedges are structured so as to reduce the market risk associated with the underlying transaction being hedged and are designated as a hedge at the inception of the contract. If the underlying transaction to a hedge ceases to exist, the hedge is terminated and the profit or loss is recognised immediately. If the hedge transaction is terminated, the profit or loss is held in the balance sheet and amortised over the life of the original underlying transaction.
     Receipts and payments on interest rate instruments are recognised on an accruals basis over the life of the instrument. Foreign exchange contracts hedging net investments in overseas businesses are revalued at closing rates and exchange differences arising are taken to reserves. Gains and losses on contracts hedging forecast transactional cash flows, and on option instruments hedging the sterling value of foreign currency denominated income, are recognised in the hedged periods.
     Cash flows associated with derivative financial instruments are classified in the cash flow statement in a manner consistent with those of the transactions being hedged. Finance costs associated with debt issuances are charged to the profit and loss account over the life of the issue.

77 Diageo Annual Report 2003

Notes to the consolidated financial statements

Diageo was created by the merger of the former GrandMet and Guinness Group businesses on 17 December 1997. Under generally accepted accounting principles (GAAP) in the United Kingdom the combination has been accounted as a merger and the results and cash flows of GrandMet and the Guinness Group are combined as of the beginning of the earliest financial year presented. Under US GAAP the merger has been accounted for as an acquisition of the Guinness Group by GrandMet. At the time of the merger, Diageo changed its year end to 30 June.
     The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

1 New accounting standards in the United Kingdom
The financial statements comply, to the extent detailed below, with the following Financial Reporting Standard issued by the UK Accounting Standards Board.

FRS 17 — Retirement benefits This standard replaces the use of actuarial values for assets in a pension scheme in favour of a market-based approach. In order to cope with the volatility inherent in this measurement basis, the standard requires that the profit and loss account shows the relatively stable ongoing service cost, interest cost and expected return on assets. The difference between expected and actual returns and changes in actuarial assumptions are reflected in the statement of total recognised gains and losses. The group has continued to account for pensions and other post employment benefits in accordance with SSAP 24 but has complied with the transitional disclosure requirements of FRS 17 in these consolidated financial statements and will adopt this standard in its primary financial statements from 1 July 2003.

2 Segmental analysis
The classes of business, and the group’s reportable segments, are premium drinks, quick service restaurants and in prior years, packaged food. Each segment contains closely related products that are unique to that particular segment.

Premium drinks, an international manufacturer and distributor of spirits, wines and beer that produces and distributes a wide range of premium brands, including Smirnoff vodka, Johnnie Walker Scotch whiskies, Guinness stout, Baileys Original Irish Cream liqueur, JεB Scotch whisky, Captain Morgan rum and Tanqueray gin. Premium drinks also owns the distribution rights for the José Cuervo tequila brands in the United States and other countries.
     Premium drinks also owns a number of investments in unconsolidated associates, the principal investment being a 34% equity interest in Moët Hennessy, a French subsidiary of Moët Hennessy Louis Vuitton SA (LVMH). Moët Hennessy is based in France and is a leading producer and exporter of champagne and cognac.

Quick service restaurants, a leading fast food hamburger restaurant chain with, as at 30 June 2002, approximately 11,500 outlets worldwide of which over 8,100 were in the United States. At 30 June 2002, of the total number of outlets, 91% are franchised and 9% were company operated.
     On 13 December 2002, the group disposed of its quick service restaurants business (Burger King) to a newly formed company owned by Texas Pacific Group, Bain Capital and Goldman Sachs Capital Partners. In connection with the transaction Diageo has guaranteed up to $850 million (£515 million) of external borrowing of Burger King (see note 29).

Packaged food, produces and distributes leading food brands including Pillsbury refrigerated dough and other dough based goods, Old El Paso Mexican foods, Progresso soups, Green Giant vegetables and Häagen-Dazs ice cream, as well as operating a foodservice business.
     On 31 October 2001, the group disposed of its worldwide packaged food businesses to General Mills, Inc (General Mills). Diageo now owns approximately 21% of the issued share capital of General Mills, having exercised an option to sell 55 million of its shares in General Mills on 1 November 2001. General Mills produces and sells a variety of food products, principally in North America including Big G ready-to-eat cereals, Betty Crocker dessert, baking, dinner mix and snack products, Yoplait and Colombo yogurt as well as the businesses that formerly comprised the packaged food businesses. General Mills’ business is primarily in the United States. General Mills is incorporated in the United States and is listed on the New York Stock Exchange.

78 Diageo Annual Report 2003
Notes to the consolidated financial statements

2 Segmental analysis continued

(i) Segment information by class of business
							Discontinued operations
	Premium						Packaged		Quick service
	drinks			Other			food		restaurants			Total
	£ million			£ million			£ million		£ million			£ million
2003
Turnover		8,961			–			–		479			9,440
Operating profit before exceptional items		1,976			–			–		53			2,029
Exceptional items charged to operating profit		(168	)		–			–		–			(168	)
Operating profit		1,808			–			–		53			1,861
Corporate expenses		109			–			–		2			111
Depreciation		213			–			–		27			240
Tangible asset write down		13			–			–		–			13
Intangible asset amortisation		7			–			–		2			9
Amortisation of investment in own shares		27			–			–		–			27
Share of profits of associates		188			269			–		–			457
Sale of businesses		16			–			171		(1,457	)		(1,270	)
Profit/(loss) before interest and tax		2,011			228			171		(1,405	)		1,005
Capital expenditure		315			–			–		67			382
Net assets (shareholders’ funds and minority interests)		9,376			(3,893	)		–		–			5,483
Total assets		11,340			4,857			–		–			16,197
2002
Turnover		8,704			–			1,455		1,123			11,282
Operating profit before exceptional items		1,766			–			184		156			2,106
Exceptional items charged to operating profit		(432	)		–			–		(21	)		(453	)
Operating profit		1,334			–			184		135			1,653
Corporate expenses		78			–			8		6			92
Depreciation		183			–			39		62			284
Tangible asset write down		36			–			–		–			36
Intangible asset amortisation		6			–			6		4			16
Amortisation of investment in own shares		12			–			1		1			14
Share of profits of associates		158			112			13		–			283
Sale of businesses		512			–			322		(13	)		821
Profit before interest and tax		2,005			112			519		99			2,735
Capital expenditure		330			–			33		222			585
Net assets (shareholders’ funds and minority interests)		9,324			(4,211	)		–		1,443			6,556
Total assets		11,609			5,183			–		1,701			18,493

79 Diageo Annual Report 2003

2 Segmental analysis continued

(i) Segment information by class of business continued
							Discontinued operations
	Premium						Packaged			Quick service
	drinks			Other			food			restaurants			Total
	£ million			£ million			£ million			£ million			£ million
2001
Turnover		7,580			–			4,199			1,042			12,821
Operating profit before exceptional items		1,430			–			499			172			2,101
Exceptional items charged to operating profit		(153	)		–			(10	)		(65	)		(228	)
Operating profit		1,277			–			489			107			1,873
Corporate expenses		51			–			18			6			75
Depreciation		171			–			117			61			349
Tangible asset write down		32			–			–			22			54
Intangible asset amortisation		5			–			19			10			34
Exceptional write down of investment		–			–			–			23			23
Amortisation of investment in own shares		17			–			7			1			25
Share of profits of associates		177			–			26			–			203
Sale of businesses		28			–			(51	)		–			(23	)
Profit before interest and tax		1,507			–			464			101			2,072
Capital expenditure		176			–			113			150			439
Net assets (shareholders’ funds and minority interests)		6,213			(6,096	)		4,172			1,440			5,729
Total assets		7,957			3,094			4,851			1,742			17,644

(a) The ‘other’ segment for profit/(loss) before interest and tax represents the group’s share of profit before interest and tax from its investment in General Mills. The ‘other’ segment for net assets comprises the net investment in General Mills of £1,743 million (2002 — £1,837 million; 2001 — £nil); net external borrowings of £4,870 million (2002 — £5,496 million; 2001 — £5,479 million); tax and external dividend creditors of £1,532 million (2002 — £1,223 million; 2001 — £1,126 million); net pension prepayment of £518 million (2002 — £466 million; 2001 — £458 million); and other net assets of £248 million (2002 — £205 million; 2001 — £51 million). The ‘other’ segment for total assets comprises the net investment in General Mills of £1,743 million (2002 — £1,837 million; 2001 — £nil); cash at bank and liquid resources of £1,191 million (2002 — £1,596 million; 2001 — £1,842 million); pension prepayment of £536 million (2002 — £485 million; 2001 —£477 million); investment in own shares of £259 million (2002 — £219 million; 2001 — £169 million); interest rate and foreign currency swaps of £484 million (2002 — £365 million; 2001 — £315 million); and other assets of £644 million (2002 — £681 million; 2001 — £291 million).

(b) The group interest expense is managed centrally and is not attributable to individual activities. Inter segmental sales are immaterial and have been eliminated in computing the segmental disclosure.

(c) The weighted average exchange rates used in the translation of profit and loss accounts were US dollar — £1 = $1.59 (2002 — £1 = $1.44; 2001 — £1 = $1.45) and euro — £1 = €1.52 (2002 — £1 = €1.61; 2001 — £1 = €1.63). Exchange rates used to translate assets and liabilities at the balance sheet date were US dollar — £1 = $1.65 (2002 — £1 = $1.52) and euro — £1 = €1.44 (2002 — £1 = €1.54). The group uses option cylinders and foreign exchange transaction hedges to mitigate the effect of exchange rate movements.

80 Diageo Annual Report 2003
Notes to the consolidated financial statements

2 Segmental analysis continued

(ii) Geographical information
	Great			Rest of			North			Asia			Latin			Rest of
	Britain			Europe			America			Pacific			America			World			Total
	£ million			£ million			£ million			£ million			£ million			£ million			£ million
2003
Turnover		1,472			2,568			3,159			1,008			481			752			9,440
Goodwill amortisation		–			(1	)		(2	)		–			(1	)		–			(4	)
Operating profit before exceptional items		220			458			783			243			143			182			2,029
Exceptional items charged to operating profit		(62	)		(27	)		(70	)		–			(8	)		(1	)		(168	)
Operating profit		158			431			713			243			135			181			1,861
Profit/(loss) before interest and tax		156			448			(600	)		241			135			182			562
Long-lived assets		1,922			564			2,862			664			45			205			6,262
2002
Turnover		1,601			2,603			4,717			1,001			639			721			11,282
Goodwill amortisation		–			(1	)		(10	)		–			(1	)		–			(12	)
Operating profit before exceptional items		206			472			856			231			192			149			2,106
Exceptional items charged to operating profit		(55	)		39			(430	)		(2	)		(4	)		(1	)		(453	)
Operating profit		151			511			426			229			188			148			1,653
Profit before interest and tax		154			1,046			721			228			186			148			2,483
Long-lived assets		1,984			583			4,476			687			69			180			7,979
2001
Turnover		1,521			2,552			6,401			990			776			581			12,821
Goodwill amortisation		–			(1	)		(22	)		(1	)		(2	)		–			(26	)
Operating profit before exceptional items		171			442			979			205			186			118			2,101
Exceptional items charged to operating profit		(96	)		(62	)		(76	)		6			–			–			(228	)
Operating profit		75			380			903			211			186			118			1,873
Profit before interest and tax		61			404			880			234			215			123			1,917
Long-lived assets		1,946			452			5,967			241			82			160			8,848

(a) The geographical analysis of turnover and operating profit is based on the location of the third party customers.

(b) Long-lived assets comprise tangible fixed assets and intangible assets after depreciation and amortisation respectively. The net book value of brands are included in the geographical region in which the brand originated.

(c) Profit before interest and tax excludes the profit attributable to General Mills of £269 million (2002 — £112 million; 2001 — £nil) and the profit attributable to Moët Hennessy of £174 million (2002 — £140 million; 2001 — £155 million).

81 Diageo Annual Report 2003

3 Turnover — geographical area by origin
				Discontinued operations
	Premium			Packaged		Quick service
	drinks			food		restaurants		Total
	£ million			£ million		£ million		£ million
2003
North America		2,870			–		334		3,204
Europe		5,155			–		112		5,267
Asia Pacific		916			–		15		931
Latin America		304			–		18		322
Rest of World		656			–		–		656
		9,901			–		479		10,380
Less: Sales to group companies in other geographical areas		(940	)		–		–		(940	)
		8,961			–		479		9,440
2002
North America		2,680			1,236		775		4,691
Europe		5,113			102		269		5,484
Asia Pacific		801			53		35		889
Latin America		365			58		44		467
Rest of World		628			6		–		634
		9,587			1,455		1,123		12,165
Less: Sales to group companies in other geographical areas		(883	)		–		–		(883	)
		8,704			1,455		1,123		11,282
2001
North America		2,107			3,653		725		6,485
Europe		4,364			287		238		4,889
Asia Pacific		780			110		35		925
Latin America		516			130		40		686
Rest of World		533			19		4		556
		8,300			4,199		1,042		13,541
Less: Sales to group companies in other geographical areas		(720	)		–		–		(720	)
		7,580			4,199		1,042		12,821

Exports from the United Kingdom were £1,701 million (2002 — £1,614 million; 2001 — £1,435 million).

82 Diageo Annual Report 2003
Notes to the consolidated financial statements

4 Operating costs
					Discontinued operations
		Premium			Packaged			Quick service
		drinks			food			restaurants			Total
		£ million			£ million			£ million			£ million
2003
Change in stocks			(6	)		–			–			(6	)
Raw materials and consumables			2,159			–			93			2,252
Excise duties	— United States		459			–			–			459
	— Other		1,707			–			–			1,707
Advertising, marketing and promotion			1,185			–			18			1,203
Other external charges			517			–			157			674
Staff costs (note 5)			940			–			140			1,080
Depreciation and other amounts written off fixed assets			260			–			29			289
Other operating income			(68	)		–			(11	)		(79	)
			7,153			–			426			7,579
2002
Change in stocks			(71	)		(58	)		–			(129	)
Raw materials and consumables			2,286			476			216			2,978
Excise duties	— United States		438			–			–			438
	— Other		1,681			–			–			1,681
Advertising, marketing and promotion			1,127			318			40			1,485
Other external charges			849			294			350			1,493
Staff costs (note 5)			834			198			337			1,369
Depreciation and other amounts written off fixed assets			237			46			67			350
Other operating income			(11	)		(3	)		(22	)		(36	)
			7,370			1,271			988			9,629
2001
Change in stocks			(18	)		7			–			(11	)
Raw materials and consumables			1,883			1,152			189			3,224
Excise duties	— United States		353			–			–			353
	— Other		1,505			–			–			1,505
Advertising, marketing and promotion			980			886			36			1,902
Other external charges			580			1,022			326			1,928
Staff costs (note 5)			803			509			293			1,605
Depreciation and other amounts written off fixed assets			225			143			117			485
Other operating income			(8	)		(9	)		(26	)		(43	)
			6,303			3,710			935			10,948

(a) Other external charges include operating lease rentals for plant and machinery of £9 million (2002 — £20 million; 2001 — £27 million), other operating lease rentals (mainly properties) of £72 million (2002 — £104 million; 2001 — £107 million), income in respect of currency cylinders of £14 million (2002 — loss of £2 million; 2001 — loss of £90 million) (see note 18(i)); research and development expenditure of £15 million (2002 — £28 million; 2001 — £71 million), and maintenance and repairs of £43 million (2002 — £65 million; 2001 — £68 million).

(b) Other operating income includes £57 million for the termination of the Bass distribution rights and £11 million (2002 — £21 million; 2001 — £20 million) from operating leases in quick service restaurants.

(c) Exceptional operating costs for continuing operations amount to £168 million (2002 — £432 million; 2001 — £153 million) as follows: other external charges £138 million; staff costs £74 million; and amounts written off fixed assets £13 million (2002 — £306 million; £90 million; and £36 million, respectively; 2001 — £59 million; £67 million; and £27 million, respectively) less other operating income of £57 million. Exceptional operating costs for discontinued operations were £nil (2002 — £21 million; 2001 — £75 million).

83 Diageo Annual Report 2003

4 Operating costs continued

(d) Goodwill amortisation Operating costs for continuing operations in the year include goodwill amortisation of £2 million (2002 — £2 million; 2001 — £2 million). Operating costs for discontinued operations include goodwill amortisation of £2 million (2002 — £10 million; 2001 — £24 million).

(e) Fees paid to auditor The fees paid to the principal auditor of the group, KPMG Audit Plc, and its affiliates were as follows:
	United		Rest of
	Kingdom		World		2003		2002		2001
	£ million		£ million		£ million		£ million		£ million
Audit fees		2.3		2.0		4.3		3.9		2.8
Acquisitions and disposals		4.2		–		4.2		9.5		7.5
Other audit-related fees		0.2		0.7		0.9		0.9		1.5
Tax fees		2.4		4.9		7.3		6.2		4.4
All other fees		–		–		–		1.7		0.9
		9.1		7.6		16.7		22.2		17.1

Audit fees include the fee for statutory audit of the company of £23,000 (2002 — £23,000; 2001 — £23,000); and its subsidiaries of £3.0 million (2002 — £3.3 million; 2001 — £2.8 million); and other audit services required by statute or regulation of £1.3 million (2002 — £0.6 million; 2001 — £nil). A further £0.2 million (2002 — £0.1 million; 2001 — £0.1 million) was charged in relation to the audit by firms other than KPMG. Fees in relation to acquisitions and disposals include due diligence and other advisory work in relation to the disposals of Burger King, Pillsbury and other brands, and the acquisition of Seagram. Other audit-related fees include employee pension fund and benefit plan services. Tax fees consist principally of tax compliance services and tax advice, including advice in relation to acquisitions and disposals. Other fees in prior years consist principally of IT projects and support.

5 Employees
	2003						2002						2001
	Full time		Part time		Total		Full time		Part time		Total		Full time		Part time		Total
Average number of employees
Premium drinks		23,427		1,134		24,561		22,841		1,078		23,919		21,363		628		21,991
Discontinued operations		8,965		5,429		14,394		25,734		12,471		38,205		37,747		11,785		49,532
		32,392		6,563		38,955		48,575		13,549		62,124		59,110		12,413		71,523
Premium drinks includes ex-Seagram employees from 21 December 2001. Discontinued operations include employees for the quick service restaurants business prior to 13 December 2002 and packaged food prior to 31 October 2001, reflecting the periods in which the group owned the businesses.

	2003		2002			2001
	£ million	£ million			£ million
Aggregate remuneration
Wages and salaries	986		1,281			1,491
Employer’s social security	72		100			127
Employer’s pension	10		(24	)		(33	)
Other post employment	12		12			20
	1,080		1,369			1,605

Retirement benefits The group has continued to account for pensions and other post employment benefits in accordance with SSAP 24 and the disclosures in (i) below are those required by that standard. FRS 17 — Retirement benefits was issued in November 2000 and the group expects to comply fully in its primary statements with its requirements in the year ending 30 June 2004. Prior to this, transitional disclosures are required which, to the extent they are not given in (i), are set out in (ii).

(i) SSAP 24 disclosures The group operates a number of pension plans throughout the world, devised in accordance with local conditions and practices. The larger plans are generally of the defined benefit type and are funded by payments to separately administered funds or insurance companies. The principal plans are in the United Kingdom, Ireland, United States and Canada. All valuations were performed by independent actuaries using the projected unit method to determine pension costs.
     The principal assumptions for the calculation of the pension cost under SSAP 24 for the year ended 30 June 2003 were: real rate of return on assets 4% (2002 — 4%; 2001 — 4%); real annual increase in wages and salaries 2% to 2.5% (2002 — 2% to 2.5%; 2001 — 2% to 2.5%); real rate of future dividend growth for UK equities 1% — 1.25% (2002 — 1%; 2001 — 1%); and pension increases approximately in line with inflation. Surpluses or deficits on the pension plans arising from the actuarial valuations are spread over the expected average service lives of the members (12 to 17.5 years) of the relevant plan on a straight line basis using the single variation method.

84 Diageo Annual Report 2003
Notes to the consolidated financial statements

5 Employees continued

The actuarial value of the assets of those plans at 30 June 2002 was sufficient to cover approximately 123% of the benefits that had accrued to members after allowing for expected future increases in wages and salaries. Provision is made in the financial statements for the benefits accruing to members of unfunded pension plans in accordance with the advice of independent actuaries.
     The group also operates a number of plans, primarily in the United States, which provide employees with post employment benefits in respect of medical costs. The plans are generally unfunded and the liability in respect of these benefits is included in provisions. The liability is assessed by qualified independent actuaries under the projected unit method, assuming that principal assumptions under SSAP 24 were a liability discount rate of 7.5% (2002 — 7.5%; 2001 — 7.5%) and medical inflation of 10% reducing by 1% per year to 5% (2002 — 6% reducing by 1% per year to 5%; 2001 —7% reducing to 1% per year to 5%).
     The most recent full valuations of the significant defined benefit post employment plans were carried out as follows: United Kingdom on 31 March 2000; United States on 1 January 2003; and Ireland on 31 December 2000.

(ii) FRS 17 disclosures
	United Kingdom						Ireland						United States
	2003		2002		2001		2003		2002		2001		2003		2002		2001
	%		%		%		%		%		%		%		%		%
Major assumptions for significant defined benefit plans
Rate of general increase in salaries		4.0		4.3		4.3		4.2		5.0		5.0		3.5		5.0		5.5
Rate of increase to pensions in payment		3.1		3.2		3.2		2.2		3.0		3.0		–		–		–
Rate of increase to deferred pensions		2.6		2.6		2.6		2.2		3.0		3.0		–		–		–
Medical inflation		–		–		–		–		–		–		9.0		5.0		6.0
Discount rate for plan liabilities		5.2		5.9		6.3		5.1		6.0		6.0		5.9		7.1		7.5
Inflation		2.6		2.6		2.6		2.2		3.0		3.0		2.5		3.0		3.5
In 2003 for the United Kingdom and United States plans there is, in addition to the above percentages, age related promotional increases. The 2003 assumption for medical inflation reduces by 1% per year to 5%.
(a) On full compliance with FRS 17, on the basis of the above assumptions, the amounts that would have been charged to the consolidated profit and loss account and consolidated statement of total recognised gains and losses for the years ended 30 June 2003 and 30 June 2002 are set out below:

	United						United States
	Kingdom				Ireland		and other			Total
	£ million			£ million			£ million			£ million
2003
Operating profit
Current service cost		(50	)		(15	)		(21	)		(86	)
Past service cost		(1	)		(7	)		(1	)		(9	)
Total charge to operating profit		(51	)		(22	)		(22	)		(95	)
Finance income
Expected return on post employment plan assets		195			75			20			290
Interest on post employment plan liabilities		(173	)		(52	)		(22	)		(247	)
Net credit/(cost) to finance income		22			23			(2	)		43
Exceptional items
Gain on settlement/curtailment arising on disposal of businesses		6			–			32			38
(Charge)/credit before taxation		(23	)		1			8			(14	)
Consolidated statement of total recognised gains and losses
Actual return less expected return on post employment plan assets		(362	)		(202	)		(12	)		(576	)
Experience gains and losses arising on the plan liabilities		5			(14	)		(3	)		(12	)
Changes in assumptions underlying the present value of the plan liabilities		(305	)		(22	)		(41	)		(368	)
Actuarial loss recognisable in the reconciliation of the surplus		(662	)		(238	)		(56	)		(956	)
Changes in the recognisable surplus of the plans with a surplus restriction		–			–			14			14
Exchange adjustments		–			(5	)		10			5
Deficit in other plans first recognised under FRS 17 in the year		(30	)		(7	)		(67	)		(104	)
Total actuarial loss recognisable in the consolidated statement of total recognised gains and losses		(692	)		(250	)		(99	)		(1,041	)

85 Diageo Annual Report 2003

5 Employees continued
	United						United States
	Kingdom			Ireland			and other			Total
	£ million			£ million			£ million			£ million
2002
Operating profit
Current service cost		(45	)		(14	)		(33	)		(92	)
Past service cost		(3	)		–			(4	)		(7	)
Exceptional item — past service cost		–			(17	)		–			(17	)
Total charge to operating profit		(48	)		(31	)		(37	)		(116	)
Finance income
Expected return on post employment plan assets		237			87			52			376
Interest on post employment plan liabilities		(169	)		(45	)		(52	)		(266	)
Net credit to finance income		68			42			–			110
Exceptional items
Loss on settlement arising on disposal of Pillsbury		–			–			(16	)		(16	)
Credit/(charge) before taxation		20			11			(53	)		(22	)
Consolidated statement of total recognised gains and losses
Actual return less expected return on post employment plan assets		(682	)		(237	)		(199	)		(1,118	)
Experience gains and losses arising on the plan liabilities		5			(6	)		(3	)		(4	)
Changes in assumptions underlying the present value of the plan liabilities		(223	)		(35	)		(12	)		(270	)
Actuarial loss recognisable in the reconciliation of the surplus		(900	)		(278	)		(214	)		(1,392	)
Changes in the recognisable surplus of the plans with a surplus restriction		–			–			8			8
Exchange adjustments		–			15			2			17
Total actuarial loss recognisable in the consolidated statement of total recognised gains and losses		(900	)		(263	)		(204	)		(1,367	)
The percentages in the table below are expressed in relation to the plan assets/(liabilities) at the opening balance sheet date for the appropriate year.

							United
	United						States
	Kingdom			Ireland			and other
	%			%			%
2003
Additional disclosures
Difference between the expected and actual return on plan assets expressed as a percentage of the plan assets		(16	)		(23	)		(4	)
Experience losses on plan liabilities expressed as a percentage of the present value of the plan liabilities		–			(1	)		(1	)
Total actuarial loss recognised in the consolidated statement of total recognised gains and losses expressed as a percentage of the present value of the plan liabilities		(21	)		(25	)		(21	)
2002
Additional disclosures
Difference between the expected and actual return on plan assets expressed as a percentage of the plan assets		(27	)		(25	)		(21	)
Experience losses on plan liabilities expressed as a percentage of the present value of the plan liabilities		–			(1	)		(1	)
Total actuarial loss recognised in the consolidated statement of total recognised gains and losses expressed as a percentage of the present value of the plan liabilities		(30	)		(32	)		(18	)

During the year ended 30 June 2002, the group disposed of Pillsbury and its associated post employment plans. These plans were for employees based in the United States and the percentages in the above table exclude these plans.

86 Diageo Annual Report 2003
Notes to the consolidated financial statements

5 Employees continued

(b) The expected long term rate of returns and market values of the assets of the significant defined benefit post employment plans were as follows:

	United Kingdom					Ireland					United States and other					Total
	Expected					Expected					Expected					Expected
	long term					long term					long term					long term
	rates of		Market			rates of		Market			rates of		Market			rates of		Market
	return		value			return		value			return		value			return		value
	%		£ million			%		£ million			%		£ million			%		£ million
2003
Market value of assets
Equities		7.5		1,928			7.2		671			8.0		164			7.5		2,763
Bonds		5.2		1			4.2		80			5.3		123			4.9		204
Property		6.5		316			6.2		104			–		7			6.5		427
Other		3.5		22			4.2		9			3.7		11			3.7		42
				2,267					864					305					3,436
Present value of post employment plan liabilities				(3,370	)				(1,012	)				(473	)				(4,855	)
Deficit in the post employment plans				(1,103	)				(148	)				(168	)				(1,419	)
Surplus restriction				–					–					(1	)				(1	)
Post employment liabilities before deferred tax				(1,103	)				(148	)				(169	)				(1,420	)
Related deferred tax assets				–					15					49					64
Net post employment liabilities				(1,103	)				(133	)				(120	)				(1,356	)
2002
Market value of assets
Equities		8.0		2,142			8.3		789			8.7		177			8.1		3,108
Bonds		–		–			5.3		66			6.2		103			5.8		169
Property		7.0		355			7.3		99			–		–			7.1		454
Other		5.0		74			5.3		13			5.7		11			5.1		98
				2,571					967					291					3,829
Present value of post employment plan liabilities				(2,960	)				(868	)				(367	)				(4,195	)
(Deficit)/surplus in the post employment plans				(389	)				99					(76	)				(366	)
Surplus restriction				–					–					(16	)				(16	)
Post employment (liabilities)/assets before deferred tax				(389	)				99					(92	)				(382	)
Related deferred tax assets/(liabilities)				117					(10	)				32					139
Net post employment (liabilities)/assets				(272	)				89					(60	)				(243	)
2001
Market value of assets
Equities		7.7		2,793			8.1		934			8.5		1,013			7.9		4,740
Bonds		–		–			5.6		61			6.5		311			6.4		372
Property		6.7		333			7.1		81			–		–			6.8		414
Other		5.2		85			5.6		2			6.0		1			5.2		88
				3,211					1,078					1,325					5,614
Present value of post employment plan liabilities				(2,720	)				(727	)				(1,162	)				(4,609	)
Surplus in the post employment plans				491					351					163					1,005
Surplus restriction				–					–					(26	)				(26	)
Post employment assets before deferred tax				491					351					137					979
Related deferred tax liabilities				(147	)				(35	)				(53	)				(235	)
Net post employment assets				344					316					84					744

87 Diageo Annual Report 2003

5 Employees continued

(c) If the post employment (liabilities)/assets, identified in (b) above, had been recognised in the consolidated financial statements, the group’s net assets and profit and loss account reserve would be as follows:

	2003			2002			2001
	£ million			£ million			£ million
Group net assets
Net assets as per consolidated balance sheet (including SSAP 24 assets)		5,483			6,556			5,729
Less: net post employment assets under SSAP 24 (net of deferred tax)		(454	)		(420	)		(385	)
Add: net post employment (liabilities)/assets under FRS 17 (net of deferred tax)		(1,356	)		(243	)		744
Net assets including post employment assets under FRS 17		3,673			5,893			6,088
Group profit and loss account
Profit and loss account (deficit)/surplus as per consolidated balance sheet (including SSAP 24 assets)		(436	)		606			(269	)
Less: net post employment assets under SSAP 24 (net of deferred tax)		(454	)		(420	)		(385	)
Add: net post employment (liabilities)/assets under FRS 17 (net of deferred tax)		(1,356	)		(243	)		744
Profit and loss account (deficit)/surplus including post employment assets under FRS 17		(2,246	)		(57	)		90

(d) Movement in surplus/(deficit) during the two years ended 30 June 2003:
							United
	United						States
	Kingdom			Ireland			and other			Total
	£ million			£ million			£ million			£ million
Surplus in plans at 30 June 2001		491			351			163			1,005
Exchange adjustments		–			15			–			15
Current service cost		(45	)		(14	)		(33	)		(92	)
Past service cost		(3	)		(17	)		(4	)		(24	)
Curtailment/settlement cost		–			–			(16	)		(16	)
Cash contributions		–			–			28			28
Other finance income		68			42			–			110
Actuarial loss		(900	)		(278	)		(214	)		(1,392	)
(Deficit)/surplus in plans at 30 June 2002		(389	)		99			(76	)		(366	)
Deficit in other plans first recognised under FRS 17 in year		(30	)		(7	)		(67	)		(104	)
Exchange adjustments		–			(5	)		9			4
Current service cost		(50	)		(15	)		(21	)		(86	)
Past service cost		(1	)		(7	)		(1	)		(9	)
Curtailment/settlement cost		6			–			32			38
Cash contributions		1			2			14			17
Other finance income/(expense)		22			23			(2	)		43
Actuarial loss		(662	)		(238	)		(56	)		(956	)
Deficit in plans at 30 June 2003		(1,103	)		(148	)		(168	)		(1,419	)

The net deficit of £1,419 million at 30 June 2003 (2002 — £366 million) excludes the surplus restriction of £1 million (2002 — £16 million) referred to in note (b).
     The group has announced that it is anticipated that contributions of approximately £100 million will be made by the group to the significant defined benefit plans in the year ending 30 June 2004.

(e) The Diageo pension plans are recharged with the cost of administration and professional fees paid for by the company in respect of the pension plans. The total amount recharged for the year was £31 million (2002 — £23 million; 2001 — £21 million).

88 Diageo Annual Report 2003
Notes to the consolidated financial statements

6 Associates
	2003			2002			2001
	£ million			£ million			£ million
Share of turnover		1,988			1,745			1,025
Share of operating costs		(1,510	)		(1,421	)		(822	)
Share of operating profit before exceptional items		478			324			203
Share of exceptional items		(21	)		(41	)		–
Share of operating profit		457			283			203
Share of interest payable (net)		(72	)		(64	)		(3	)
Share of taxation		(138	)		(87	)		(29	)
Equity minority interests		(1	)		(1	)		(1	)
Dividends received by the group		(60	)		(87	)		(101	)
Share of profits retained by associates		186			44			69

Summarised financial information for the principal associates is presented below:

(a) General Mills, Inc General Mills prepares its financial statements in US dollars and under US GAAP to the end of May each year. Summary information for General Mills, as presented in its 2003 Form 10-K filed with the SEC for the 52 weeks ended 25 May 2003 translated at £1 = $1.59, is set out below.
	2003
	$ million		£ million
Turnover		10,506		6,608
Gross profit		4,397		2,765
Profit for the year		917		577

The group’s 21% share of operating profit before exceptional items and its share of the interest expense of General Mills was £287 million and £73 million (2002 — £143 million and £59 million; 2001 — £nil and £nil), respectively.

(b) Moët Hennessy Moët Hennessy prepares its financial statements in euros to 31 December each year. Summary information for Moët Hennessy for the three years ended 30 June 2003, in each year aggregating the results for the six month period ended 31 December with that of the following six months ended 30 June, translated at £1 = €1.52 (2002 — £1 = €1.61; 2001 — £1 = €1.63) is set out below:
	2003				2002				2001
	€ million		£ million		€ million		£ million		€ million		£ million
Turnover		2,131		1,402		2,285		1,419		2,311		1,418
Gross profit		1,445		951		1,441		895		1,427		875
Profit for the year		450		296		309		192		611		374

The group’s 34% share of operating profit before exceptional items of Moët Hennessy was £177 million (2002 — £150 million; 2001 — £155 million).

(c) Investment in other associates Summarised financial information, in aggregate, is presented below for all of the group’s investments in associates other than General Mills and Moët Hennessy:
	2003		2002		2001
	£ million		£ million		£ million
Turnover		335		644		1,201
Operating profit		50		74		134
Profit for the year		37		36		60

(d) Other information Group turnover includes sales to associates of £15 million (2002 — £20 million; 2001 — £37 million) and operating costs include purchases from associates of £18 million (2002 — £95 million; 2001 — £117 million).

89 Diageo Annual Report 2003

7 Exceptional items In the three years ended 30 June 2003 the following exceptional items were incurred:
	2003			2002			2001
	£ million			£ million			£ million
Operating items (note (i))		(168	)		(453	)		(228	)
Share of profits of associates (note (ii))		(21	)		(41	)		–
Disposal of fixed assets		(43	)		(22	)		19
Sale of businesses (note (iii))		(1,270	)		821			(23	)
		(1,502	)		305			(232	)
(i) Operating items
Continuing operations
Seagram integration (a)		(177	)		(164	)		–
Guinness UDV integration (b)		(48	)		(48	)		(74	)
Bass distribution rights (c)		57			–			–
José Cuervo settlement (d)		–			(220	)		–
Other integration and restructuring (e)		–			–			(79	)
		(168	)		(432	)		(153	)
Discontinued operations
Burger King (f)		–			(21	)		(65	)
Pillsbury — restructuring costs		–			–			(10	)
		–			(21	)		(75	)
		(168	)		(453	)		(228	)

(a) Costs of £177 million (2002 — £164 million) were incurred on the integration of the acquired Seagram spirits and wine businesses into premium drinks. It is anticipated that, as a result of the charge in the two years ended 30 June 2003, 2,200 jobs will be lost of which some 1,800 had been terminated by 30 June 2003. It is expected that further costs will be incurred in the year ending 30 June 2004 and the total integration will result in the loss of approximately 2,500 jobs.

An analysis of the movement in the Seagram integration liability is as follows:
	Charged to							Charged to
	profit and							profit and
	loss account							loss account
	in year							in year
	ended		Cash			Liability at		ended		Cash			Liability at
	30 June 2002		payments			30 June 2002		30 June 2003		payments			30 June 2003
	£ million		£ million			£ million		£ million		£ million			£ million
Employee related		72		(33	)		39		43		(56	)		26
Distributor rationalisation		14		(13	)		1		57		(37	)		21
Lease terminations		7		(2	)		5		6		(3	)		8
Legal and professional		10		(4	)		6		7		(7	)		6
Other		25		(18	)		7		38		(40	)		5
		128		(70	)		58		151		(143	)		66
Asset write downs		36							26
		164							177

During the year ended 30 June 2003, Diageo and Pernod Ricard finalised their arrangements for the sharing of restructuring charges in connection with the acquisition of the Seagram spirits and wine businesses. ‘Asset write downs’ charged to the profit and loss account in the year ended 30 June 2003 included £19 million in respect of costs incurred by the group and originally expected to be recovered from Pernod Ricard. These costs were principally employee related and include £13 million paid by Diageo in the year ended 30 June 2002 (and recorded as a debtor at 30 June 2002) and £6 million paid for by Diageo in the year ended 30 June 2003.

Asset write downs in the year ended 30 June 2002 were in respect of (i) two bottling facilities located in Canada (LaSalle and Toronto) of £19 million following a decision to close the plants as part of the integration of the Seagram spirits and wine businesses, (ii) the writedown of computer software and equipment following the adoption of common systems of £11 million, and (iii) sundry fixtures and fittings which became redundant following the integration of £6 million. The assets were written off on the basis of their anticipated value to the group, taking account of their expected future use, based on internal management estimates. LaSalle was a former Seagram plant and Toronto a Diageo plant. Both closures were announced in the year ended 30 June 2002. Toronto was closed in the year ended 30 June 2003 and LaSalle was significantly run down towards eventual closure.

(b) £48 million (2002 — £48 million; 2001 — £74 million) costs were incurred in the year in respect of the integration of the spirits, wine and beer businesses to create premium drinks. As a result of the charge in the three years ended 30 June 2003, it is anticipated that approximately 750 jobs will be lost of which approximately 600 had been terminated at 30 June 2003.

90 Diageo Annual Report 2003
Notes to the consolidated financial statements

7 Exceptional items continued

An analysis of the movement in the integration liability is as follows:
	Charged to							Charged to							Charged to
	profit and							profit and							profit and
	loss account							loss account							loss account
	in year							in year							in year
	ended		Cash			Liability at		ended		Cash			Liability at		ended		Cash			Liability at
	30 June 2001		payments			30 June 2001		30 June 2002		payments			30 June 2002		30 June 2003		payments			30 June 2003
	£ million		£ million			£ million		£ million		£ million			£ million		£ million		£ million			£ million
Employee related		32		(12	)		20		18		(22	)		16		28		(33	)		11
Legal and professional		9		(4	)		5		9		(8	)		6		11		(11	)		6
Other		26		(20	)		6		21		(24	)		3		7		(2	)		8
		67		(36	)		31		48		(54	)		25		46		(46	)		25
Asset write downs		7														2
		74														48

(c) Effective from 30 June 2003, the group relinquished its rights to distribute Bass Ale in the United States, resulting in an exceptional gain before taxes of £57 million.

(d) On 5 February 2002, Diageo and José Cuervo SA (José Cuervo) agreed to terminate their litigation in respect of a change of control issue which José Cuervo claimed arose as a result of the merger of GrandMet and Guinness, and new arrangements were formalised for the distribution rights for the José Cuervo brands in the United States which now extend to 2013. The settlement in favour of José Cuervo involved the return of the group’s 45% interest in José Cuervo and a net cash payment of £85 million. The exceptional charge in the year ended 30 June 2002 of £220 million (before tax) comprises the write off of the group’s investment in José Cuervo of £115 million, related goodwill previously written off to reserves of £20 million and the net cash payment to José Cuervo.

(e) In 2001, £79 million costs were incurred on the reorganisation of beer production facilities in Ireland and England and the restructuring of ownership and management within premium drinks. Included in the costs were £35 million of employee related costs and £26 million of tangible fixed asset write downs. The assets were written off on the basis of their expected future use, based on internal management estimates. The restructuring resulted in the loss of approximately 550 jobs of which 480 had been terminated at 30 June 2003.

(f) During the year ended 30 June 2002, in anticipation of the disposal of the Burger King business, their franchisee loan financing arrangements were restructured. This resulted in an exceptional charge for credit enhancement, performance and service fees of £21 million. In the year ended 30 June 2001, the exceptional items in respect of Burger King comprised provisions of £49 million made against certain fixed assets, costs associated with litigation of £21 million less £5 million of successor franchise fee income.

(ii) Share of profits of associates The group’s share of exceptional items in respect of associates comprised restructuring costs of £18 million (2002 — £31 million) incurred by General Mills following the acquisition of the Pillsbury business and £3 million (2002 — £10 million) in respect of Moët Hennessy.

(iii) Sale of businesses
	2003			2002			2001
	£ million			£ million			£ million
Continuing operations
Premium drinks		16			512			28
Discontinued operations
Burger King		(1,457	)		(13	)		–
Pillsbury		171			322			(51	)
		(1,286	)		309			(51	)
(Loss)/gain on sale of businesses		(1,270	)		821			(23	)

The gain on the disposal of Pillsbury in the year ended 30 June 2003 primarily represents additional consideration that the company received from General Mills in connection with the disposal of Pillsbury.
     The net loss from the sale of businesses was after charging goodwill previously written off, attributable to the businesses sold, of £682 million (2002 — £1,748 million; 2001 — £nil) of which £673 million arose on the disposal of Burger King (2002 — £1,671 million on the disposal of Pillsbury).

91 Diageo Annual Report 2003

8 Interest payable (net)
	2003			2002			2001
	£ million			£ million			£ million
On bank loans and overdrafts		21			16			32
On all other borrowings		501			499			418
Share of net interest payable by associates		72			64			3
		594			579			453
Less: Other interest receivable		(243	)		(180	)		(103	)
		351			399			350

9 Taxation (i) Analysis of taxation charge in the year
	2003									2002
	Before									Before
	exceptional			Exceptional						exceptional			Exceptional
	items			items			Total			items			items			Total
	£ million			£ million			£ million			£ million			£ million			£ million
Current tax
UK corporation tax payable at 30% (2002 — 30%)		21			(11	)		10			26			2			28
Less: Double taxation relief		–			–			–			(7	)		–			(7	)
		21			(11	)		10			19			2			21
Overseas corporate taxation		330			(32	)		298			408			(10	)		398
Share of taxes on profits of associates		145			(7	)		138			92			(5	)		87
Adjustments in respect of prior periods		17			4			21			(6	)		–			(6	)
Total current tax		513			(46	)		467			513			(13	)		500
Deferred tax (note 21)
United Kingdom		(27	)		(4	)		(31	)		(49	)		–			(49	)
Overseas		28			(8	)		20			(39	)		134			95
Adjustments in respect of prior periods		25			6			31			86			–			86
Total deferred tax		26			(6	)		20			(2	)		134			132
Taxation on profit on ordinary activities		539			(52	)		487			511			121			632

	2001
	Before
	exceptional			Exceptional
	items			items			Total
	£ million			£ million			£ million
Current tax
UK corporation tax payable at 30%		148			(26	)		122
Less: Double taxation relief		(107	)		–			(107	)
		41			(26	)		15
Overseas corporate taxation		356			(7	)		349
Share of taxes on profits of associates		29			–			29
Adjustments in respect of prior periods		(20	)		–			(20	)
Total current tax		406			(33	)		373
Deferred tax (note 21)
United Kingdom		28			–			28
Overseas		35			–			35
Adjustments in respect of prior periods		(1	)		–			(1	)
Total deferred tax		62			–			62
Taxation on profit on ordinary activities		468			(33	)		435

Included in adjustments in respect of prior periods for current tax is a UK credit of £42 million (2002 — charge of £26 million; 2001 — credit of £11 million) and an overseas charge for tax of £63 million (2002 — credit of £32 million; 2001 — credit of £9 million).

92 Diageo Annual Report 2003
Notes to the consolidated financial statements

9 Taxation continued (ii) Factors affecting tax charge for the year
	2003									2002
	Before									Before
	exceptional			Exceptional						exceptional			Exceptional
	items			items			Total			items			items			Total
	£ million			£ million			£ million			£ million			£ million			£ million
Profit on ordinary activities before taxation		2,156			(1,502	)		654			2,031			305			2,336
Notional charge at UK corporation tax rate of 30%		647			(451	)		196			609			92			701
Differences in effective overseas tax rates		(18	)		(14	)		(32	)		2			21			23
Differences in effective tax rates on profits of associates		6			–			6			14			(7	)		7
Depreciation in excess of capital allowances		27			–			27			6			–			6
Intangible amortisation		(130	)		–			(130	)		(178	)		–			(178	)
Timing differences		(28	)		9			(19	)		77			(134	)		(57	)
Permanent differences — items not chargeable		(54	)		–			(54	)		(57	)		–			(57	)
— items not deductible		46			406			452			46			15			61
Adjustments in respect of prior periods		17			4			21			(6	)		–			(6	)
Current ordinary tax charge for the year		513			(46	)		467			513			(13	)		500
Differences in effective overseas tax rates		–			(3	)		(3	)		(8	)		–			(8	)
Depreciation in excess of capital allowances		(27	)		–			(27	)		(4	)		–			(4	)
Intangible amortisation		–			–			–			1			–			1
Timing differences		28			(9	)		19			(77	)		134			57
Adjustments in respect of prior periods		25			6			31			86			–			86
Tax charge for the year		539			(52	)		487			511			121			632

	2001
	Before
	exceptional			Exceptional
	items			items			Total
	£ million			£ million			£ million
Profit on ordinary activities before taxation		1,954			(232	)		1,722
Notional charge at UK corporation tax rate of 30%		586			(69	)		517
Differences in effective overseas tax rates		9			32			41
Differences in effective tax rates on profits of associates		(42	)		–			(42	)
Depreciation in excess of capital allowances		30			–			30
Intangible amortisation		(114	)		–			(114	)
Timing differences		(113	)		(42	)		(155	)
Permanent differences — items not chargeable		(28	)		(9	)		(37	)
— items not deductible		98			55			153
Adjustments in respect of prior periods		(20	)		–			(20	)
Current ordinary tax charge for the year		406			(33	)		373
Differences in effective overseas tax rates		(51	)		(42	)		(93	)
Depreciation in excess of capital allowances		1			–			1
Timing differences		113			42			155
Adjustments in respect of prior periods		(1	)		–			(1	)
Tax charge for the year		468			(33	)		435

93 Diageo Annual Report 2003

9 Taxation continued

(iii) Factors that may affect future tax charges Deferred tax assets where realisation does not meet the more likely than not criterion, have not been recognised.
     No provision has been made for deferred tax on gains recognised on revaluing property or intangible assets or on the sale of properties or intangibles where potentially taxable gains have been rolled over into replacement assets. The total amount unprovided is £21 million (2002 — £12 million; 2001 — £10 million). Such tax would become payable only if the property or intangible was sold without it being possible to claim further rollover relief and this is not expected to occur in the foreseeable future.
     No deferred tax is recognised on the unremitted earnings of overseas subsidiaries and associates, as earnings are reinvested by the group and no tax is expected to be payable on them in the foreseeable future. It is not considered practical to calculate the amounts involved.

10 Dividends
	2003		2002		2001
	£ million		£ million		£ million
Interim
9.9 pence per share (2002 — 9.3 pence; 2001 — 8.9 pence)		304		309		298
Proposed final
15.7 pence per share (2002 — 14.5 pence; 2001 — 13.4 pence)		482		458		453
		786		767		751

11 Earnings per share
	2003				2002				2001
	Earnings		Shares		Earnings		Shares		Earnings		Shares
	£ million		million		£ million		million		£ million		million
Basic (profit/weighted average number of shares)		76		3,113		1,617		3,316		1,207		3,377
Adjustments — potential employee share issues		–		1		–		2		–		3
Diluted		76		3,114		1,617		3,318		1,207		3,380

Basic and diluted earnings per share are shown on the face of the profit and loss account calculated by reference to earnings before the £1,450 million charge (2002 — £184 million credit; 2001 — £199 million charge) in respect of exceptional items and the related tax, since the directors consider that this gives a useful additional indication of underlying performance.

12 Fixed assets — intangible assets
							Other
	Brands			Goodwill			intangibles			Total
	£ million			£ million			£ million			£ million
Cost
At 30 June 2002		5,307			107			50			5,464
Exchange adjustments		(275	)		(2	)		(1	)		(278	)
Additions		17			6			12			35
Disposals		(839	)		(71	)		(1	)		(911	)
At 30 June 2003		4,210			40			60			4,310
Amortisation
At 30 June 2002		–			18			12			30
Exchange adjustments		–			(1	)		(1	)		(2	)
Provided during the year		–			4			5			9
Disposals		–			(14	)		(1	)		(15	)
At 30 June 2003		–			7			15			22
Net book value
At 30 June 2003		4,210			33			45			4,288
At 30 June 2002		5,307			89			38			5,434

Brands are stated at fair value on acquisition, denominated in the currencies of their principal markets. An annual review is carried out by the directors to consider whether any brand has suffered an impairment in value. The principal acquired brands included above are Johnnie Walker, Smirnoff, Crown Royal, Captain Morgan and Windsor Premier.

     The addition to brands represents adjustments to the amounts attributable to the brands purchased on the acquisition of the Seagram spirits and wine businesses. Disposals of brands are primarily in respect of the sale of Burger King.

94 Diageo Annual Report 2003
Notes to the consolidated financial statements

13 Fixed assets — tangible assets
										Assets in
	Land and			Plant and			Fixtures and			course of
	buildings			machinery			fittings			construction			Total
	£ million			£ million			£ million			£ million			£ million
Cost or valuation
At 30 June 2002		1,652			1,988			157			178			3,975
Exchange adjustments		(38	)		(9	)		(2	)		(4	)		(53	)
Additions		54			177			57			109			397
Disposals		(764	)		(479	)		(90	)		(35	)		(1,368	)
Transfers		–			10			76			(86	)		–
At 30 June 2003		904			1,687			198			162			2,951
Depreciation
At 30 June 2002		402			923			105			–			1,430
Exchange adjustments		(14	)		3			(1	)		–			(12	)
Provided during the year		34			173			33			–			240
Exceptional write downs		–			10			3			–			13
Disposals		(292	)		(368	)		(34	)		–			(694	)
At 30 June 2003		130			741			106			–			977
Net book value
At 30 June 2003		774			946			92			162			1,974
At 30 June 2002		1,250			1,065			52			178			2,545

(a) The net book value of land and buildings comprises: freeholds of £749 million (2002 — £1,089 million); long leaseholds of £25 million (2002 — £44 million); and short leaseholds of £nil (2002 — £117 million). Depreciation was not charged on £207 million (2002 — £441 million) of land.

(b) Included in the total net book value of tangible assets is £1 million (2002 — £17 million) in respect of assets under finance leases; depreciation for the year on these assets was £nil (2002 — £3 million). Cost included £nil (2002 — £187 million) in respect of assets held for the purpose of leasing out under operating leases; accumulated depreciation on these assets was £nil (2002 — £54 million) and depreciation for the year was £1 million (2002 — £3 million).

(c) The total at cost or valuation for land and buildings comprises: £512 million (2002 — £519 million) at 1992 professional valuation; £96 million (2002 — £95 million) at 1988 professional valuation; and £296 million (2002 — £1,038 million) at cost. The professional valuations were made on an open market existing use basis except for specialised properties which were valued on a depreciated replacement cost basis.

(d) The historical cost of land and buildings, i.e. the original cost to the group of all land and buildings, was £784 million (2002 — £1,523 million) and the related accumulated depreciation was £130 million (2002 — £402 million).

95 Diageo Annual Report 2003

14 Fixed assets — investments
	Investment			Investment		Investment			Total			Investment									Total loans
	in General			in Moët		in other			investment			in own			Other						and other
	Mills			Hennessy		associates			in associates			shares			investments			Loans			investments			Total
	£ million			£ million		£ million			£ million			£ million			£ million			£ million			£ million			£ million
Cost
At 30 June 2002		1,837			993		79			2,909			248			47			42			337			3,246
Exchange adjustments		(133	)		70		(5	)		(68	)		–			(1	)		(4	)		(5	)		(73	)
Additions		–			–		63			63			97			3			141			241			304
Share of retained profits		73			107		6			186			–			–			6			6			192
Disposals and other		(34	)		–		(21	)		(55	)		(44	)		(25	)		(5	)		(74	)		(129	)
At 30 June 2003		1,743			1,170		122			3,035			301			24			180			505			3,540
Provisions/amortisation
At 30 June 2002		–			1		9			10			29			24			–			53			63
Amortisation of own shares		–			–		–			–			27			–			–			27			27
Increase in provision		–			–		–			–			–			1			6			7			7
Disposals		–			–		(9	)		(9	)		(14	)		(15	)		–			(29	)		(38	)
At 30 June 2003		–			1		–			1			42			10			6			58			59
Net book value
At 30 June 2003		1,743			1,169		122			3,034			259			14			174			447			3,481
At 30 June 2002		1,837			992		70			2,899			219			23			42			284			3,183

Investment in associates comprises the cost of shares, less goodwill written off on acquisitions prior to 1 July 1998, of £2,619 million (2002 — £2,666 million) plus the group’s share of post acquisition reserves of £415 million (2002 — £233 million).

(a) General Mills, Inc Included in associates is the group’s 79 million shares in General Mills. General Mills prepares its financial statements in US dollars and under US GAAP to the end of May each year. A summary of General Mills’ consolidated balance sheet, as presented in its Form 10-K filed with the SEC translated at £1 = $1.65 (2002 — £1 = $1.52), is set out below:
	25 May 2003						26 May 2002
	$ million			£ million			$ million			£ million
Fixed assets
Intangible assets		10,272			6,225			8,563			5,634
Other fixed assets		4,776			2,895			4,540			2,987
Current assets
Cash		703			426			975			641
Other current assets		2,476			1,501			2,462			1,620
Creditors — due within one year
Borrowings		(1,341	)		(813	)		(3,848	)		(2,532	)
Other creditors		(2,103	)		(1,275	)		(1,899	)		(1,249	)
Creditors — due after one year
Borrowings		(7,516	)		(4,555	)		(5,591	)		(3,678	)
Other creditors		(2,792	)		(1,692	)		(1,473	)		(969	)
Net assets before minority interests		4,475			2,712			3,729			2,454
Minority interests		(300	)		(182	)		(153	)		(101	)
Net assets after minority interests		4,175			2,530			3,576			2,353

At 30 June 2003, General Mills’ share price was $47.41 (£28.73) valuing the group’s interest at $3,745 million (£2,270 million).

     The 21% net investment in General Mills has been accounted for by aggregating the acquired share of the fair value of General Mills prior to the acquisition with the retained interest in Pillsbury pre-transaction net assets. Goodwill associated with the retained interest in Pillsbury, written off to reserves up to 1 July 1998, will be recycled through the profit and loss account on a subsequent sale of shares in General Mills.
     On 23 October 2002, Diageo sold call options to General Mills at a strike price of $51.56. These options expire in October 2005 and give General Mills the option to purchase 29 million of its own shares held by Diageo, subject to certain limitations. The premium of £58 million ($89 million) received in respect of the options has been deferred and is included in accruals and deferred income in other creditors.

96 Diageo Annual Report 2003
Notes to the consolidated financial statements

14 Fixed assets — investments continued

(b) Moët Hennessy Moët Hennessy prepares its financial statements in euros to 31 December each year. A summary of Moët Hennessy’s consolidated balance sheet as at 30 June 2003 and 30 June 2002, translated at £1 = €1.44 (2002 — £1 = €1.54), is set out below:
	2003						2002
	€ million			£ million			€ million			£ million
Fixed assets		1,350			937			1,287			836
Current assets		4,105			2,851			3,799			2,467
Creditors — due within one year		(1,361	)		(945	)		(1,398	)		(908	)
Creditors — due after one year		(367	)		(255	)		(392	)		(255	)
Net assets before minority interests		3,727			2,588			3,296			2,140
Minority interests		(28	)		(19	)		(32	)		(21	)
Net assets after minority interests		3,699			2,569			3,264			2,119

The 34% net investment in Moët Hennessy has been accounted for by aggregating the group’s share of the net assets of Moët Hennessy with fair value adjustments principally in respect of Moët Hennessy’s brands on acquisition.

(c) Investment in other associates The table below analyses and aggregates the group’s share of the net assets of associates other than General Mills and Moët Hennessy:

	2003			2002
	£ million			£ million
Fixed assets		85			37
Current assets		73			58
Creditors — due within one year		(31	)		(21	)
Creditors — due after one year		(5	)		(4	)
Net assets		122			70

(d) Investment in own shares At 30 June 2003 investment in own shares comprises 42.8 million ordinary shares held in respect of long term incentive plans for executive directors and senior executives and 2.2 million ordinary shares held in respect of grants under UK, Irish and US savings-related share option schemes. The market value of these shares at 30 June 2003 was £291 million (2002 — 38.7 million ordinary shares; market value £330 million). Dividends are waived for all shares owned by the company.

(e) Loans Included within loans at 30 June 2003 is £129 million ($212 million) receivable in respect of the disposal of Burger King. The loan earns interest of 9% which, except in certain circumstances, is rolled up until maturity of the loan in 2013.

15 Stocks
	2003		2002
	£ million		£ million
Raw materials and consumables		200		214
Work in progress		14		34
Maturing stocks		1,409		1,474
Finished goods and goods for resale		570		594
		2,193		2,316

Stocks are disclosed net of provisions for obsolescence, an analysis of which is as follows:
	2003			2002			2001
	£ million			£ million			£ million
Balance at beginning of the year		51			56			58
Exchange adjustments		(1	)		(1	)		–
Profit and loss account movements		4			17			6
Acquisitions		13			1			2
Disposals		–			(10	)		–
Written off		(17	)		(12	)		(10	)
		50			51			56

97 Diageo Annual Report 2003

16 Debtors
	2003				2002
	Due within		Due after		Due within		Due after
	one year		one year		one year		one year
	£ million		£ million		£ million		£ million
Trade debtors		1,295		10		1,349		–
Amounts owed by associates		2		–		3		–
Amounts receivable under finance leases		–		–		7		87
Other debtors		638		111		530		384
Pension prepayments		–		690		–		678
Other prepayments and accrued income		128		15		168		17
Deferred taxation (note 21)		110		69		152		42
ACT recoverable		–		2		–		2
		2,173		897		2,209		1,210

Debtors are disclosed net of provisions for bad and doubtful debts, an analysis of which is as follows:
	2003			2002			2001
	£ million			£ million			£ million
Balance at beginning of the year		120			100			78
Exchange adjustments		(6	)		(4	)		1
Profit and loss account movements		80			15			19
Acquisitions		–			20			4
Disposals		(30	)		(11	)		(2	)
Written off		(1	)		–			–
		163			120			100

17 Net borrowings
	At 30 June						Non-cash			Exchange			At 30 June
	2002			Cash flow			items			adjustments			2003
	£ million			£ million			£ million			£ million			£ million
Analysis of net borrowings
Cash and overdrafts
Cash at bank and liquid resources		1,596			(336	)		–			(69	)		1,191
Less: Bank deposits reclassified to liquid resources		(1,038	)		256			–			52			(730	)
Overdrafts		(295	)		202			–			10			(83	)
		263			122			–			(7	)		378
Borrowings excluding overdrafts
Borrowings due within one year		(3,423	)		1,816			(2,151	)		278			(3,480	)
Borrowings due after one year		(3,711	)		(1,567	)		2,124			173			(2,981	)
Interest rate and foreign currency swaps		365			221			64			(166	)		484
Net obligations under finance leases		(28	)		26			–			1			(1	)
		(6,797	)		496			37			286			(5,978	)
Liquid resources
Bank deposits reclassified from cash at bank and liquid resources		1,038			(256	)		–			(52	)		730
Net borrowings		(5,496	)		362			37			227			(4,870	)

98 Diageo Annual Report 2003
Notes to the consolidated financial statements

17 Net borrowings continued
	At 30 June						Non-cash			Exchange			At 30 June
	2001			Cash flow			items			adjustments			2002
	£ million			£ million			£ million			£ million			£ million
Cash and overdrafts
Cash at bank and liquid resources		1,842			(198	)		–			(48	)		1,596
Less: Bank deposits reclassified to liquid resources		(1,178	)		92			–			48			(1,038	)
Overdrafts		(262	)		(44	)		–			11			(295	)
		402			(150	)		–			11			263
Borrowings excluding overdrafts
Borrowings due within one year		(3,340	)		762			(1,010	)		165			(3,423	)
Borrowings due after one year		(3,993	)		(695	)		761			216			(3,711	)
Interest rate and foreign currency swaps		315			70			59			(79	)		365
Net obligations under finance leases		(41	)		–			11			2			(28	)
		(7,059	)		137			(179	)		304			(6,797	)
Liquid resources
Bank deposits reclassified from cash at bank and liquid resources		1,178			(92	)		–			(48	)		1,038
Net borrowings		(5,479	)		(105	)		(179	)		267			(5,496	)

£13 million (2002 — £16 million; 2001 — £19 million) of net borrowings due after one year and £204 million (2002 — £260 million; 2001 — £91 million) of net borrowings due within one year were secured on assets of the group.

     The interest rate swaps included in net borrowings comprise interest accruals on the swaps relating to the zero coupon bonds 2004. The foreign currency swaps comprise the net amount from the translation of the group’s foreign currency swap principal amounts. The interest rate and foreign currency swaps are included in other debtors. Bank deposits represent amounts placed with financial institutions which require notice of withdrawal of more than 24 hours in order to avoid an interest penalty.

		Year end
		interest rates		2003			2002
	Currency	%		£ million			£ million
Borrowings excluding overdrafts
Commercial paper	US dollar		0.95-2.09		863			1,600
Bonds 2002	Euro		6.25		–			148
Guaranteed bonds 2003	US dollar		6.0		–			329
Guaranteed bonds 2004	US dollar		6.625		605			657
Zero coupon bonds 2004	US dollar		8.13		712			714
Guaranteed notes 2004	US dollar		7.125		121			131
Guaranteed bonds 2005	US dollar		6.125		302			328
Guaranteed bonds 2005	Sterling		9.0		200			200
Guaranteed bonds 2007	US dollar		3.5		603			–
Guaranteed bonds 2008	US dollar		3.375		600			–
Guaranteed notes 2005/2035	US dollar		7.45		242			263
Guaranteed debentures 2011	US dollar		9.0		181			196
Guaranteed debentures 2022	US dollar		8.0		180			196
Medium term notes	Various	Various			384			1,067
Medium term notes 2003	Euro		2.53		209			–
Guaranteed bond	Sterling		7.69		500			500
Preferred securities	US dollar		5.66-5.86		455			493
Interest rate and foreign currency swaps	Various	Various			(484	)		(365	)
Bank loans and others	Various	Various			305			340
Total					5,978			6,797

99 Diageo Annual Report 2003

17 Net borrowings continued

The interest rates shown in the table are those contracted on the underlying borrowings before taking into account any interest rate protection (see note 18). The effective interest rate for the year, based on average net borrowings was 5.3% excluding associate interest (2002 — 7.4%). The above loans are stated net of unamortised finance costs of £48 million (2002 — £113 million) of which £30 million (2002 — £92 million) relates to the zero coupon bonds 2004.
     The weighted average interest rate for short term borrowings, before interest rate protection, at 30 June 2003 was 3.3% (2002 — 3.6%; 2001 — 5.2%).

18 Financial instruments and risk management

Financial instruments comprise net borrowings (see note 17) together with other instruments deemed to be financial instruments including certain fixed asset investments, long term debtors, other long term creditors and provisions for liabilities and charges. Disclosures dealt with in this note exclude short term debtors and creditors where permitted by the accounting standard on derivatives and other financial instruments (FRS 13).

(i) Currency risk management The group publishes its financial statements in sterling and conducts business in many foreign currencies. As a result, it is subject to foreign currency exchange risk due to exchange rate movements which will affect the group’s transaction costs, and the translation of the results and underlying net assets of its foreign subsidiaries.
     The group hedges a substantial portion of its exposure to fluctuations on the translation into sterling of its foreign currency net assets by holding net borrowings in foreign currencies and by using foreign currency swaps and cross currency interest rate swaps. During the year ended 30 June 2003, the group’s policy was to hedge currency exposure on its net assets before net borrowings at approximately the following percentages — 90% for US dollars (increased from 75% as a result of June 2002 policy review), 90% for the euro and 50% for other significant currencies where a liquid foreign exchange market exists. Exchange differences arising on the retranslation of foreign currency net borrowings and foreign exchange swaps are recognised in the statement of total recognised gains and losses to match exchange differences on foreign currency equity investments, in accordance with SSAP 20 — Foreign currency translation. At 30 June 2003, the group’s US dollar and euro net assets before net borrowings were approximately 91% and 84% hedged by net borrowings, respectively.
     During the year ended 30 June 2003 the group had US dollar and euro profit translation hedges in place against a proportion of its forecast profit before exceptionals and tax arising in the premium drinks business. The hedges comprised currency option cylinders (which consisted of separate put and call options) and forward foreign exchange contracts. This limited in part the translation exposure of the group’s profit before exceptional items and tax to movements in the exchange rates. For the profits covered by currency option cylinders, the group was only exposed to exchange rate movements within a specified range. The impact of exchange rate movements outside that range was taken by the counterparty to the transaction. Gains and losses on option cylinders were recognised in the underlying hedged periods.
     For currencies in which there is an active market, the group manages between 80% and 100% of transactional foreign exchange rate risk, up to 18 months forward, using forward foreign currency exchange contracts. The gain or loss on the hedge is recognised at the same time as the underlying transaction.

At 30 June 2003, as a result of the transaction and translation exposure cover outlined above, the group had the following outstanding gross foreign exchange contracts:

	Foreign currency amount						Percentage of total
	Purchase		Sell		Total		US dollar		Euro		Maturity
	£ million		£ million		£ million		%		%		Year
Transaction		466		1,347		1,813		46		26		2003-2004
Translation:
— Foreign currency contracts		3,439		4,593		8,032		71		21		2003-2004
— Cross currency interest rate swaps		208		160		368		57		43		2003

At 30 June 2002, as a result of the transaction and translation exposure cover outlined above, the group had the following outstanding gross foreign exchange contracts:

	Foreign currency amount						Percentage of total
	Purchase		Sell		Total		US dollar		Euro		Maturity
	£ million		£ million		£ million		%		%		Year
Transaction		409		2,307		2,716		54		30		2002-2003
Translation:
— Foreign currency contracts		2,315		3,306		5,621		67		22		2002
— Cross currency interest rate swaps		727		354		1,081		45		51		2002-2003

At 30 June 2003, there were no material monetary assets or liabilities in currencies other than the functional currencies of group companies, having taken into account the effect of forward contract and other derivative financial instruments that have been utilised to match foreign currency exposure.

100 Diageo Annual Report 2003
Notes to the consolidated financial statements

18 Financial instruments and risk management continued

(ii) Interest risk management The group has an exposure to interest rate risk and within this category of market risk, is most vulnerable to changes in US dollar, sterling and euro interest rates. To manage interest rate risk, the group manages its proportion of fixed to variable rate borrowings within limits approved by the board, primarily through issuing long term fixed rate bonds, medium term notes and floating rate commercial paper, and by utilising interest rate swaps, cross currency interest rate swaps and swaptions. The profile of fixed rate to floating rate net borrowings is maintained such that projected net borrowings are targeted to be fully floating after five years, and are approximately 50% fixed and 50% floating on an amortising basis within five years. The floating element of US dollar net borrowings within five years is partly protected using interest rate collars. Following the June 2002 policy review, the level of interest rate collars will reduce. Remaining interest rate collars as at 30 June 2003 will take up to approximately three years to expire. In addition, where appropriate, the group may use forward rate agreements to manage short term interest rate exposures. Receipts and payments on interest rate instruments including swaps, swaptions, forward rate agreements and collars taken out to hedge interest rate risk are accounted for on an accruals basis over the life of the instrument or the underlying hedged periods as appropriate. Such management serves to increase the accuracy of the business planning process and to help manage the interest cover ratio. Diageo has a target range for cash interest cover (defined as operating profit before exceptional items, interest, tax, depreciation and amortisation and share of profits of associates, and after dividends received from associates over net interest cash flow including minority interest dividends) of five to eight times and under the current economic environment Diageo’s intention is to move towards the higher end of this range.

At 30 June 2003, after taking account of interest rate swaps, cross currency interest rate swaps and forward rate agreements, the currency and interest rate profile of the financial liabilities and assets of the group was as follows:

													Impact of								Weighted
													foreign						Weighted		average
	Floating			Fixed			Interest						currency						average		time to
	rate			rate			free			Sub-total			swaps			Total			fixed rate		maturity
	£ million			£ million			£ million			£ million			£ million			£ million			%		Years
Financial liabilities:
US dollar		(3,061	)		(2,295	)		(314	)		(5,670	)		473			(5,197	)		5.5		3.1
Euro		(13	)		(600	)		(10	)		(623	)		(832	)		(1,455	)		4.7		1.9
Sterling		(719	)		–			(12	)		(731	)		1,269			538			–		–
Other		(92	)		(17	)		–			(109	)		(195	)		(304	)		8.8		3.3
		(3,885	)		(2,912	)		(336	)		(7,133	)		715			(6,418	)		5.3		2.9
Guaranteed preferred securities		–			(343	)		–			(343	)		–			(343	)		9.4		1.4
Financial assets:
US dollar		505			129			258			892			–			892			9.0		10.0
Euro		182			–			21			203			–			203			–		–
Sterling		170			45			15			230			–			230			3.0		1.0
Other		217			–			4			221			–			221			–		–
		1,074			174			298			1,546			–			1,546			7.4		7.7
Net financial (liabilities)/assets		(2,811	)		(3,081	)		(38	)		(5,930	)		715			(5,215	)		5.7		2.4

101 Diageo Annual Report 2003

18 Financial instruments and risk management continued At 30 June 2002, after taking account of interest rate swaps, cross currency interest rate swaps and forward rate agreements, the currency and interest rate profile of the financial liabilities and assets of the group was as follows:
													Impact of								Weighted
													foreign						Weighted		average
	Floating			Fixed			Interest						currency						average		time to
	Rate			rate			free			Sub-total			swaps			Total			fixed rate		maturity
	£ million			£ million			£ million			£ million			£ million			£ million			%		Years
Financial liabilities:
US dollar		(2,304	)		(3,053	)		(331	)		(5,688	)		(11	)		(5,699	)		5.5		2.7
Euro		(349	)		(588	)		(3	)		(940	)		(329	)		(1,269	)		4.8		3.3
Sterling		(739	)		(300	)		(3	)		(1,042	)		1,022			(20	)		5.9		0.5
Other		(80	)		(48	)		–			(128	)		(212	)		(340	)		5.1		0.9
		(3,472	)		(3,989	)		(337	)		(7,798	)		470			(7,328	)		5.4		2.6
Guaranteed preferred securities		–			(371	)		–			(371	)		–			(371	)		9.4		2.4
Financial assets:
US dollar		735			87			268			1,090			–			1,090			4.5		6.0
Euro		115			–			6			121			–			121			–		–
Sterling		222			331			12			565			–			565			7.0		0.6
Other		225			–			11			236			–			236			–		–
		1,297			418			297			2,012			–			2,012			6.5		1.7
Net financial (liabilities)/assets		(2,175	)		(3,942	)		(40	)		(6,157	)		470			(5,687	)		5.7		2.7

Floating rate financial liabilities bear interest based on short term interbank rates (predominantly six monthly LIBOR) and commercial paper rates.
     Interest bearing financial liabilities comprise bonds, medium term notes, commercial paper issued, money market loans, repurchase and forward rate agreements, net obligations under finance leases, bank overdrafts and certain provisions. Financial liabilities on which no interest is paid consist of: provisions for liabilities and charges payable after one year in respect of employee incentive plans and provisions for business disposals of £58 million (2002 — £57 million); other creditors of £180 million (2002 — £250 million); and derivative financial instruments of £98 million (2002 — £30 million). Interest bearing financial assets comprise cash, short term liquid investments with financial institutions and certain fixed asset investments, loans and debtors. Financial assets on which no interest is paid include certain fixed asset investments, loans and long term debtors.
     The foreign currency swaps, in the table above, adjust the currency basis of borrowings as part of the group’s policy to hedge its exposure to fluctuations on translation into sterling of its foreign currency net assets (see (i) above).The foreign currency swaps are short term in nature and therefore have a floating interest basis. They are shown after taking account of fixing interest rate swaps which transfer £600 million (2002 — £439 million) of euro floating rate interest liabilities arising from foreign currency swaps into euro fixed rate financial liabilities.

At 30 June 2003, the group had the following portfolio of interest rate derivative instruments:

Weighted

average

Weighted

Receive

Pay

fixed

average

Fixed

fixed

interest

remaining

Forward

notional

notional

rate

maturity

starting

Maturity

£ million

£ million

%

Years

Year

Year

Currency instrument

US dollar:

Interest rate swaps

3,484

–

5.5

3.7

–

2003-2022

Interest rate swaps

–

2,097

5.8

1.5

–

2003-2006

Euro:

Interest rate swaps

18

–

4.7

1.0

–

2004

Interest rate swaps

–

486

4.8

1.7

–

2003-2006

Forward starting swaps

–

132

4.4

2.4

2004-2006

2007

Sterling:

Interest rate swaps

700

–

6.5

0.9

–

2003-2005

102 Diageo Annual Report 2003
Notes to the consolidated financial statements

18 Financial instruments and risk management continued

At 30 June 2002 the group had the following portfolio of interest rate derivative instruments:

Weighted

average

Weighted

Receive

Pay

fixed

average

fixed

fixed

interest

remaining

Forward

notional

notional

rate

maturity

starting

Maturity

£ million

£ million

%

Years

Year

Year

Currency instrument

US dollar:

Interest rate swaps

3,041

–

6.5

4.4

–

2003-2007

Interest rate swaps

–

3,220

5.7

2.5

–

2003-2022

Forward starting

99

–

5.6

1.0

2003

2004

Forward starting

–

230

5.3

3.0

2003

2006

Euro:

Interest rate swaps

165

–

6.1

0.6

–

2002-2004

Interest rate swaps

–

604

4.8

2.2

–

2002-2006

Sterling:

Interest rate swaps

700

–

6.5

1.9

–

2003-2005

In addition to the above swaps, at 30 June 2003, a cross currency interest rate swap also existed with a principal of £160 million, which effectively converts a euro medium term note (maturing 2003) to US dollars.
     As at 30 June 2002, £325 million of euro interest rate swaps, with a weighted average remaining maturity of 0.5 years, adjusted the payment dates and basis of their interest calculations on existing euro floating rate debt. At 30 June 2002, cross currency interest rate swaps also existed which effectively convert a Japanese yen medium term note (maturing 2002) to US dollars (£26 million) and euro medium term notes (maturing 2002 and 2003). In addition, cross currency interest rate swaps convert £300 million of sterling investments to US dollars floating rate investments (maturing 2002).
     In addition to the interest rate and cross currency swaps reflected in the tables above for 30 June 2003, the group has £1,010 million notional principal of US dollar interest rate collars which mature between 1 July 2003 and 1 January 2006 and have floors of 3.09% — 6.32% and caps of 3.64% — 8.75%.

(iii) Maturity of financial liabilities
	2003								2002
	Bank loans				Finance				Bank loans				Finance
	and		Other		leases and				and		Other		leases and
	overdrafts		borrowings		other		Total		overdrafts		borrowings		other		Total
	£ million		£ million		£ million		£ million		£ million		£ million		£ million		£ million
Analysis by year of repayment:
After five years		76		719		117		912		1		623		164		788
From four to five years		26		1,215		18		1,259		–		3		11		14
From three to four years		23		3		16		42		–		329		10		339
From two to three years		27		302		17		346		16		595		10		621
From one to two years		26		564		91		681		10		1,800		36		1,846
Due after one year		178		2,803		259		3,240		27		3,350		231		3,608
Due within one year		186		2,893		99		3,178		586		3,101		33		3,720
		364		5,696		358		6,418		613		6,451		264		7,328

Other borrowings are net of interest rate and foreign currency swaps and forward rate agreements.
     The maturity category between one and two years includes an amount of £242 million ($400 million) regarding 7.45% 2005/2035 guaranteed notes. The notes are redeemable at the option of the holder on April 15 2005. If the holders do not redeem at this time the notes then become due in 2035. It is not currently anticipated that the note holders will redeem the notes in 2005.

The group had available undrawn committed bank facilities as follows:
	2003		2002
	£ million		£ million
Expiring within one year		1,182		1,250
Expiring in more than two years		788		855
		1,970		2,105

Commitment fees are paid on the undrawn portion of these facilities. Borrowings under these facilities will be at prevailing LIBOR rates plus an agreed margin, which is dependent on the period of drawdown. These facilities can be used for general corporate purposes and together with cash and cash equivalents support the group’s commercial paper programmes.

103 Diageo Annual Report 2003

18 Financial instruments and risk management continued

There are no financial covenants on the above short and long term borrowings. Certain of these borrowings contain cross default provisions and negative pledges (and related sale and lease back provisions).
     The committed bank facilities are subject to a single financial covenant being minimum interest cover ratio of two times (defined as the ratio of operating profit before exceptional items aggregated with share of profits and associates to net interest). They are also subject to pari passu ranking and negative pledge covenants.
     In addition, as part of the Burger King disposal, Diageo has guaranteed up to $850 million (£515 million) of borrowings of Burger King. The primary covenants under the guarantee are pari passu ranking negative pledge.
     Any non-compliance with covenants underlying Diageo’s financing arrangements could, if not waived, constitute an event of default with respect to any such arrangements, and any non compliance with covenants may, in particular circumstances, lead to an acceleration of maturity on certain notes and the inability to access committed facilities. Diageo was in full compliance with its financial covenants throughout each of the periods presented.

(iv) Fair values The estimated fair values of borrowings, guaranteed preferred securities, associated derivative financial instruments and other financial liabilities and assets at 30 June 2003 are set out below. The fair values of quoted borrowings and guaranteed preferred securities are based on year end mid-market quoted prices. The fair values of other borrowings, derivatives, financial instruments and other financial liabilities and assets are estimated using appropriate market rates prevailing at the year end by discounting the future cash flows to the net present values. These are based on rates obtained from third parties.

	2003						2002
	Net carrying			Estimated			Net carrying			Estimated
	amount			fair value			amount			fair value
	£ million			£ million			£ million			£ million
Primary financial instruments:
Borrowings due within one year including overdrafts		(3,563	)		(3,680	)		(3,718	)		(3,531	)
Borrowings due after one year		(2,981	)		(3,294	)		(3,711	)		(4,016	)
Cash at bank and liquid resources		1,191			1,191			1,596			1,596
Guaranteed preferred securities		(343	)		(370	)		(371	)		(421	)
Derivatives — interest rate contracts:
Interest rate swaps
— positive values		387			718			390			651
— negative values		(14	)		(211	)		(40	)		(165	)
Collars		(18	)		(78	)		(7	)		(81	)
Other interest rate contracts		5			–			8			–
Derivatives — foreign exchange contracts:
Transaction
— positive values		–			55			–			52
— negative values		–			(31	)		–			(31	)
Balance sheet translation
— positive values		138			136			97			98
— negative values		(16	)		(17	)		(66	)		(66	)
Foreign exchange options (profit translation)
— positive values		–			–			–			18
— negative values		–			–			–			(7	)
Other:
General Mills’options (see below)		(63	)		(70	)		–			–
Other financial liabilities		(256	)		(256	)		(207	)		(207	)
Other financial assets		325			325			342			372

On 23 October 2002, Diageo sold call options to General Mills giving General Mills the option to purchase 29 million of General Mills’ shares held by Diageo subject to certain limitations. The call options have a strike price of $51.56 and expire in October 2005. The estimated fair value of the call options at 30 June 2003 was $116 million (£70 million). The premium of £58 million ($89 million) received in respect of the options has been deferred and is included in accruals and deferred income in other creditors. The estimated fair value of the call options was derived using a Black Scholes model using market volatility, share price and interest rates as at 30 June 2003.
     In connection with the disposal of the packaged food business, Diageo received contingent consideration of £173 million on 1 May 2003. The estimated fair value of the contingent value right at 30 June 2002 was £166 million. The estimated fair value of the contingent value right was derived by valuing its component options using a Black Scholes model using market volatility, share price and interest rates as at 30 June 2002.
     The difference between net carrying amount and estimated fair value reflects unrealised gains or losses inherent in the instruments based on valuations at 30 June 2003. The volatile nature of the markets means that values at any subsequent date could be significantly different from the values reported above.

104 Diageo Annual Report 2003
Notes to the consolidated financial statements

18 Financial instruments and risk management continued

(v) Hedges Gains and losses on instruments used for hedging are not recognised until the exposure that is being hedged is itself recognised. The table below shows the extent to which the group has unrecognised gains and losses on financial instruments, and deferred gains and losses in respect of financial instruments and terminated financial instruments used as hedges, at the beginning and end of the year.
	Unrecognised								Deferred
	Gains		Losses			Total			Gains		Losses			Total
	£ million		£ million			£ million			£ million		£ million			£ million
Gains and losses:
On hedges at 30 June 2002		341		(245	)		96			7		(17	)		(10	)
Arising in previous years recognised during 2003		185		(199	)		(14	)		2		(3	)		(1	)
On hedges at 30 June 2003		386		(298	)		88			8		(13	)		(5	)
Of which gains/(losses) expected to be recognised in:
— year ending 30 June 2004		217		(182	)		35			3		(3	)		--
— year ending 30 June 2005 or later		169		(116	)		53			5		(10	)		(5	)

(vi) Credit risk A large number of major international financial institutions are counterparties to the interest rate swaps, foreign exchange contracts and deposits transacted by the group. Counterparties for such transactions entered into during the year have a long term credit rating of A or better. The group monitors its credit exposure to its counterparties, together with their credit ratings, and, by policy, limits the amount of agreements or contracts it enters into with any one party. The notional amounts of financial instruments used in interest rate and foreign exchange management do not represent the credit risk arising through the use of these instruments. The immediate credit risk of these instruments is generally estimated by the fair value of contracts with a positive value.
     Cash at bank and liquid resources principally comprise money market deposits, commercial paper and investments. The investments are with counterparties having strong credit ratings. At 30 June 2003, approximately 15% and 49% of the group’s cash at bank and liquid resources of £1,191 million were invested with United Kingdom and United States based counterparties, respectively.
     At 30 June 2003, approximately 34% and 20% of the group’s trade debtors of £1,305 million were due from United Kingdom and United States based counterparties, respectively.

19 Other creditors
	2003				2002
	Due within		Due after		Due within		Due after
	one year		one year		one year		one year
	£ million		£ million		£ million		£ million
Trade creditors		531		–		719		–
Corporate taxation		859		–		663		–
Other taxation including social security		238		–		267		–
Net obligations under finance leases		1		–		6		22
Other creditors		707		14		803		3
Ordinary dividends payable		482		–		458		–
Accruals and deferred income		465		4		729		24
		3,283		18		3,645		49
Gross obligation under finance leases due:
Between one and two years				–				6
Between two and three years				–				6
Between three and four years				–				6
Between four and five years				–				5
Thereafter				–				47
				–				70
Less: Future finance charges				–				(48	)
				–				22

Finance leases at 30 June 2002 were principally in respect of Burger King.

105 Diageo Annual Report 2003

20 Provisions for liabilities and charges
				Restructuring
	Post			and						Deferred
	employment			integration			Disposal			taxation		Other			Total
	£ million			£ million			£ million			£ million		£ million			£ million
At 30 June 2002		127			21			62			298		306			814
Exchange adjustments		(2	)		–			(5	)		21		(16	)		(2	)
Profit and loss account charge		13			2			21			13		87			136
Acquisitions and disposals		(17	)		(7	)		(1	)		4		(16	)		(37	)
Utilised and other movements		(8	)		(4	)		(3	)		36		(63	)		(42	)
At 30 June 2003		113			12			74			372		298			869

(a) Post employment provisions were £113 million (2002 — £127 million), comprising £59 million post employment benefits in respect of US medical costs and £54 million in respect of unfunded pension liabilities (2002 — £67 million and £60 million, respectively). These provisions are mainly actuarially assessed and are long term.

(b) Restructuring and integration provisions were £12 million, comprising £5 million for restructuring the beer production facilities and £7 million in respect of other restructuring costs. The majority of these provisions will be utilised in the next financial year.

(c) Disposal provisions were £74 million arising from commitments in respect of businesses sold. These provisions will predominantly be utilised within the next few years.

(d) Deferred taxation was £372 million (see note 21).

(e) Other provisions were £298 million (2002 — £306 million), including £43 million in respect of vacant properties, £119 million for a discounted value of an onerous contract on the acquisition of the Seagram spirits and wine businesses, £6 million for actuarially assessed non-insured claims and £55 million for employee incentive plans (2002 — £53 million, £124 million, £26 million and £35 million, respectively). The onerous contract provision will be utilised over the 10 year duration of the contract. The vacant property provision is based on the estimated discounted rental shortfall over the terms of the leases; the non-insured claims are long term and the timing of their utilisation is not known; and the incentive plan provision will be utilised within the next few years.

21 Deferred taxation
		2003			2002
		£ million			£ million
Accelerated depreciation			81			144
Pension prepayments and provisions			142			150
Post employment benefits other than pensions			(19	)		(19	)
Restructuring and integration costs			(26	)		(39	)
Tax losses			(34	)		(46	)
Other timing differences			49			(86	)
Net provision			193			104
Comprising:
Deferred tax asset (note 16)			(179	)		(194	)
Deferred tax provision (note 20)			372			298
			193			104
An analysis of the movement in the provision is as follows:
Provision at beginning of the year			104			92
Exchange adjustments			33			12
Tax charge on exchange in reserves			7			–
Deferred tax charge in profit and loss account for the year (note 9)			20			132
Acquisition of subsidiaries			(3	)		(58	)
Disposal of subsidiaries			32			(74	)
Provision at end of the year			193			104
The net deferred tax provision can be analysed as follows:
Current	— United Kingdom		(74	)		(105	)
	— United States and other overseas		127			(168	)
Non-current	— United Kingdom		177			199
	— United States and other overseas		(37	)		178
			193			104

106 Diageo Annual Report 2003
Notes to the consolidated financial statements

21 Deferred taxation continued

Deferred tax is not generally provided in respect of liabilities which might arise on the distribution of unappropriated profits of overseas subsidiaries and associates, except where distributions of such profits are planned.
     Deferred tax assets have been recognised to the extent that it is considered more likely than not that there will be suitable taxable profits from which the future reversal of the underlying timing differences can be deducted.
     Included in deferred tax assets are £34 million (2002 — £46 million) in respect of operating losses which are carried forward and are available to reduce future tax liabilities of certain subsidiaries in a number of foreign jurisdictions. Under US GAAP, the operating losses comprise a deferred tax asset of £292 million (2002 — £228 million) less a valuation allowance of £258 million (2002 — £182 million). £3 million of these operating losses, net of valuation allowance, have expiration dates through to 2012 and £31 million can be carried forward indefinitely.

22 Called up share capital

The authorised share capital of the company at 30 June 2003 was 5,329 million ordinary shares of 28 101/108 pence each (2002 and 2001 — 5,329 million) with an aggregate nominal value of £1,542 million (2002 and 2001 — £1,542 million). The allotted and fully paid share capital was 3,100 million ordinary shares of 28 101/108 pence each with an aggregate nominal value of £897 million (2002 — 3,215 million shares, aggregate nominal value £930 million; 2001 — 3,411 million shares, aggregate nominal value £987 million).
     During the year,1 million ordinary shares (nominal value £1 million) were allotted under the share option schemes for a total consideration of £4 million (2002 — 2 million ordinary shares, nominal value £1 million, consideration £11 million; 2001 — 7 million ordinary shares, nominal value £2 million, consideration £31 million).
     The company purchased, and subsequently cancelled, 116 million ordinary shares (nominal value £34 million) during the year for a consideration including expenses of £852 million (2002 — 198 million ordinary shares, nominal value £58 million, consideration £1,658 million; 2001 — 18 million ordinary shares, nominal value £5 million, consideration £108 million).
     Potential issues of ordinary shares are detailed in note 31(iii).

23 Reserves attributable to equity shareholders
	Share					Capital		Profit
	premium		Revaluation			redemption		and loss
	account		reserve			reserve		account			Total
	£ million		£ million			£ million		£ million			£ million
At 30 June 2000		1,285		138			2,949		(698	)		3,674
Retained earnings		–		–			–		456			456
Exchange adjustments		–		–			–		97			97
Tax charge on exchange in reserves		–		–			–		(17	)		(17	)
Premiums on share issues, less expenses		29		–			–		–			29
Repurchase of own shares		–		–			5		(108	)		(103	)
Transfers		–		(1	)		–		1			–
At 30 June 2001		1,314		137			2,954		(269	)		4,136
Retained earnings		–		–			–		850			850
Exchange adjustments		–		(4	)		–		(89	)		(93	)
Premiums on share issues, less expenses		10		–			–		–			10
Repurchase of own shares		–		–			58		(1,658	)		(1,600	)
Goodwill on disposals of businesses		–		–			–		1,768			1,768
Transfers		–		(4	)		–		4			–
At 30 June 2002		1,324		129			3,012		606			5,071
Retained earnings		–		–			–		(710	)		(710	)
Exchange adjustments		–		(9	)		–		(155	)		(164	)
Tax charge on exchange reserves		–		–			–		(7	)		(7	)
Premiums on share issues, less expenses		3		–			–		–			3
Repurchase of own shares		–		–			34		(852	)		(818	)
Goodwill on disposals of businesses		–		–			–		682			682
At 30 June 2003		1,327		120			3,046		(436	)		4,057

107 Diageo Annual Report 2003

23 Reserves attributable to equity shareholders continued

(a) Aggregate goodwill written off against the profit and loss account, net of disposals, is £1,643 million (2002 — £2,381 million; 2001 — £4,288  million) including £505 million (2002 — £541 million; 2001 — £109 million) in respect of associates of which £400 million relates to the 21% equity interest in General Mills (see note 14). The exchange adjustments are net of gains of £227 million in respect of foreign currency net borrowings (2002 — gains of £267 million; 2001 — losses of £229 million).

(b) At 30 June 2003 £982 million (2002 — £818 million; 2001 — £725 million) has been charged against the profit and loss account in respect of cumulative exchange adjustments.

24 Movements in consolidated shareholders’ funds
	2003			2002			2001
	£ million			£ million			£ million
Profit for the year		76			1,617			1,207
Dividends		(786	)		(767	)		(751	)
		(710	)		850			456
Exchange adjustments		(164	)		(93	)		97
Tax charge on exchange in reserves		(7	)		–			(17	)
New share capital issued		4			11			31
Repurchase of own shares		(852	)		(1,658	)		(108	)
Goodwill on disposals of businesses		682			1,768			–
Net movement in shareholders’ funds		(1,047	)		878			459
Shareholders’ funds at beginning of the year		6,001			5,123			4,664
Shareholders’ funds at end of the year		4,954			6,001			5,123

25 Minority interests — non-equity

Non-equity minority interests comprise £343 million 9.42% cumulative guaranteed preferred securities issued by subsidiaries (2002 — £371 million). The holders of these securities have no rights against group companies other than the issuing entity and, to the extent prescribed by the guarantee, the company. To the extent that payments due under the guarantee are not made because the company has insufficient distributable profits, the company has covenanted that it will not make any distribution on any share capital which ranks junior to these securities.

26 Net cash inflow from operating activities
	2003			2002			2001
	£ million			£ million			£ million
Operating profit		1,861			1,653			1,873
Exceptional operating costs		168			453			228
Restructuring and integration payments		(185	)		(148	)		(144	)
Depreciation and amortisation charge		276			314			403
Decrease/(increase) in stocks		6			(145	)		(30	)
Decrease/(increase) in debtors		36			(160	)		(46	)
(Decrease)/increase in creditors and provisions		(269	)		180			22
Other items		77			(139	)		(30	)
Net cash inflow from operating activities		1,970			2,008			2,276

Discontinued operations contributed £76 million (2002 — £346 million; 2001 — £852 million) to net cash inflow from operating activities. Other items include a £57 million receipt for the termination of the Bass distribution contract in the United States (2002 — net cash payment to José Cuervo SA of £80 million) which were, included in operating exceptional items in the consolidated profit and loss account. Restructuring and integration payments include costs in respect of the spirits, wine, beer and Seagram integrations charged to exceptional items in the consolidated profit and loss account.

108 Diageo Annual Report 2003
Notes to the consolidated financial statements

27 Purchase of subsidiaries
	Assets acquired and net cash outflow
	2003		2002			2001
	£ million		£ million			£ million
Brands		17		2,765			50
Goodwill arising on acquisition		6		21			41
Tangible fixed assets		16		248			73
Investments		1		7			(43	)
Net borrowings		–		(6	)		10
Working capital		18		681			15
Net assets acquired		58		3,716			146
Minority interests		3		–			(33	)
Purchase consideration paid		61		3,716			113
Net borrowings acquired		–		6			(10	)
Adjustment for deferred consideration		76		(130	)		33
Net cash outflow		137		3,592			136

On 21 December 2001, Diageo and Pernod Ricard SA (Pernod Ricard) completed the acquisition of the Seagram spirits and wine businesses from Vivendi for $8.15 billion (£5.62 billion) in cash, subject to certain debt, working capital and other adjustments. Diageo’s share of the purchase price after adjustments was £3.7 billion.
     In the table above net assets acquired and net cash outflow for the year ended 30 June 2003 included adjustments to the original fair values ascribed to the acquired Seagram assets and liabilities at 30 June 2002.

28 Sale of subsidiaries and businesses

(i) Disposal of Burger King The group’s quick service restaurants business (Burger King) was sold on 13 December 2002 for $1.5 billion (£0.9 billion). This sale generated a loss before taxes of £1,457 million, after writing back goodwill previously written off to reserves of £673 million. Following the disposal, Diageo retains $212 million (£129 million) of subordinated debt, with a 10 year maturity, from the entity owning Burger King. In addition, Diageo has guaranteed up to $850 million (£515 million) of borrowings of Burger King (see note 29).
     In the five and a half months ended 13 December 2002 Burger King contributed £479 million to turnover compared with £1,123 million in the year ended 30 June 2002. Operating profit for the five and a half months ended 13 December 2002 was £53 million compared with £156 million in the year ended 30 June 2002.

A summary of the net assets disposed of, and the subordinated debt acquired, translated at an exchange rate of £1 = $1.59 is as follows:
	$ million			£ million
Brands		1,200			755
Other intangibles		87			55
Tangible fixed assets		1,008			634
Other fixed assets		54			34
Subordinated debt		(212	)		(133	)
Working capital		172			108
Cash		24			15
Provisions for liabilities and charges		(42	)		(27	)
Loss on sale		(2,316	)		(1,457	)
Goodwill written back		1,070			673
Sale consideration received less transaction costs		1,045			657
Cash		(24	)		(15	)
Net cash inflow		1,021			642

109 Diageo Annual Report 2003

28 Sale of subsidiaries and businesses continued

(ii) Disposal of other businesses
	2003			2002			2001
	£ million			£ million			£ million
Brands		84			2,427			–
Other intangibles		2			–			–
Other fixed assets		8			1,451			28
Investment in associates		(55	)		–			–
Investment in General Mills		–			(1,922	)		–
Businesses held for resale in respect of Seagram spirits and wine businesses		65			203			–
Working capital and provisions		19			220			39
Cash		4			–			5
Minority interests		(9	)		(6	)		(13	)
Goodwill written back		2			1,748			–
Gain/(loss) on sale		187			821			(23	)
Sale consideration received less transaction costs		307			4,942			36
Net borrowings		–			164			–
Cash		(4	)		–			(5	)
Deferred consideration		(33	)		(6	)		–
Net cash inflow		270			5,100			31

The sale consideration received in the year ended 30 June 2003 includes the proceeds from the contingent value rights representing the additional consideration received in respect of the disposal of Pillsbury. The sale consideration received in the year ended 30 June 2002 includes the net proceeds in respect of the sales of Pillsbury, the Malibu brand, Glen Ellen wines, the Croft and Delaforce port and sherry brands and Guinness World Records Limited.

(iii) General Mills’options On 23 October 2002, Diageo sold call options to General Mills at a strike price of $51.56 which expire in October 2005. These give General Mills the option to purchase 29 million of its own shares held by Diageo, subject to certain limitations. The premium of £58 million ($89 million) received has been included in sale of options in relation to associates in the consolidated cash flow statements, and has been deferred and included in accruals and deferred income in other creditors.

29 Contingent liabilities

(i) Guarantees Diageo has guaranteed up to $850 million (£515 million) of external borrowings of Burger King. These loans have a term of five years from December 2002 although Diageo and Burger King have structured their arrangements to encourage refinancing by Burger King on a non-guaranteed basis prior to the end of five years. Also at 30 June 2003, in connection with the disposal of Pillsbury, Diageo has guaranteed the debt of a third party to the amount of $200 million (£121 million) until 13 November 2009.

Including the guarantees above, but net of the amount provided in the financial statements, the group has given performance guarantees and indemnities to third parties of £659 million.

(ii) Colombian excise duties In August 2000, Diageo learned that the Governors of the Departments of the Republic of Colombia and the City of Bogotá (the Departments) were considering initiating legal proceedings against major spirits companies in relation to unpaid excise duties and taxes on products that are smuggled into Colombia by third parties. Such proceedings are likely to be similar to the following actions which were brought by foreign countries against a number of major tobacco companies: (1) the action brought by the Attorney General of Canada against RJ Reynolds (the Canada action) in December 1999; (2) the action brought by the European Union, its member states and the Departments of Colombia against Philip Morris and British American Tobacco (the EU action) on 19 May 2000; (3) the action brought by Ecuador, Belize and Honduras against Philip Morris, RJ Reynolds and British American Tobacco and various other tobacco companies (the Ecuador action) on 20 December 2001; and (4) the action brought by the European Union and its member states against RJ Reynolds (the Second EU action) on 30 October 2002.
     In the Canada action, the complaint was dismissed on 30 June 2000. On 12 October 2001, the Second Circuit Court of Appeals affirmed the District Court’s order of dismissal. The Attorney General of Canada filed a petition for writ of certiorari to the U.S. Supreme Court on 7 March 2002. The US Supreme Court subsequently denied Canada’s petition for certiorari.

110 Diageo Annual Report 2003
Notes to the consolidated financial statements

29 Contingent liabilities continued

The EU Action was dismissed by the trial court on 19 February 2002. On 25 March 2002, the EU and the Departments of Colombia appealed the court’s dismissal. The Second Circuit has heard oral argument on the appeal, but has not yet rendered a decision. The trial court dismissed the Ecuador action on 26 February 2002. On 26 March 2002, Belize, Honduras and Ecuador appealed this decision to the Eleventh Circuit Court of Appeals. On 14 August 2003 the Eleventh Circuit Court of Appeals affirmed the trial court’s order of dismissal.
     Finally, the Second EU action, which alleges that the RJ Reynolds entities violated the Federal RICO statute by distributing products through distributors and others with alleged links to smuggling and money laundering, has been stayed pending a decision by the Second Circuit in the EU action.
     The directors intend that any proceedings of this kind that might be brought against Diageo will be strenuously defended. In December 2000, Diageo filed suits against the Departments challenging the legality of any claim outside the Colombian administration and judicial system and also challenging the legality of the discriminatory nature of the Colombian taxing system; several of these suits are pending.

(iii) Hakki v. Adolph Coors Company et al. Diageo learned on 20 November 2003 that a purported class action lawsuit, Hakki v. Adolph Coors Company et al., was commenced against a number of alcohol beverage companies on 14 November 2003, including Diageo, in the Superior Court of Washington, D.C. Diageo has not been served with a lawsuit. The complaint asserts claims under the District of Columbia Consumer Protection Procedures Act (DCCPPA) and the common law of the District of Columbia that the defendants specifically targeted the US advertising and marketing of certain of their products to individuals below the 21 year-old legal purchase age. The complaint alleges that ‘at least 15-20% of all alcoholic beverages sold in the United States are consumed by underage drinkers’. The complaint further alleges that profits earned by the defendants from the alleged illegal sales to underaged drinkers ‘greatly exceed $1 billion per year’.
     The lawsuit seeks certification as a class action on behalf of (a) parents and guardians whose funds were used by their children under 21 from 1982 to the present without their knowledge to purchase alcohol beverages marketed by the defendants, on whose behalf monetary recovery is sought and (b) the parents and guardians of all children under 21, on whose behalf the complaint requests that the Court enter an injunction prohibiting the defendants from marketing alcohol beverages to underage persons.
     The prayer for relief in the complaint seeks, among other matters, (i) that defendants each disgorge to the purported class all amounts by which they have been allegedly unjustly enriched, plus costs and interest; (ii) rescission of the alleged transactions whereby defendants allegedly obtained revenues from the illegal sale of alcoholic beverages to underage consumers and ordered to pay such monies to the purported class; and (iii) to assess all defendants jointly and severally for all alleged actual damages sustained by the purported plaintiff class plus treble damages or $1,500 per violation, whichever is greater, punitive damages, attorneys fees, costs of suit, and interest.
      Diageo intends to strenuously defend this purported action.

(iv) Other The group has extensive international operations and is a defendant in a number of legal proceedings incidental to these operations. There are a number of legal claims or potential claims against the group, the outcome of which cannot at present be foreseen.
     Save as disclosed above, neither Diageo nor any member of the Diageo group is or has been engaged in, nor (so far as Diageo is aware) is there pending or threatened by or against it, any legal or arbitration proceedings which may have a significant effect on the financial position of the Diageo group. Provision is made in these financial statements for all liabilities that are probable and reliably measurable.

There has been no material change since 30 June 2003 in the group’s performance guarantees and indemnities.

30 Commitments

Capital expenditure Commitments not provided for in these financial statements are estimated at £62 million (2002 — £43 million).
		2003						2002
		Land and						Land and
		buildings		Other		Total		buildings		Other		Total
Annual operating lease commitments:		£ million		£ million		£ million		£ million		£ million		£ million
Annual minimum payments under operating leases expiring:
After five years			28		–		28		79		2		81
From one to five years			18		3		21		45		3		48
Within one year			5		3		8		8		1		9
Payments	— due within one year		51		6		57		132		6		138
	— one to two years						47						119
	— two to three years						37						111
	— three to four years						34						97
	— four to five years						32						88
Thereafter	— due after five years						209						564
							416						1,117

31 Employee share option schemes

Option holdings in the tables within this note are stated as ordinary share equivalents in pence. Options prices are translated at the following exchange rates: grants at actual exchange rates; exercises and cancellations at average exchange rates and closing balances at year end exchange rates.

(i) Executive schemes

(a) Diageo executive share option plan (DSOP) This scheme was introduced in December 1999 and grants options to executives at the market price on the date of grant. Options issued under this scheme may normally be exercised between three and 10 years after the date granted. There are no performance conditions to be satisfied although some senior executives have a shareholding requirement. The US executives are granted options over the company’s ADSs (one ADS is equivalent to four ordinary shares).

(b) Diageo senior executive share option plan (SESOP) This scheme was introduced with effect from 1 January 2000 and grants options to senior executives at market price at date of grant. Options granted under the scheme may not normally be exercised unless a performance condition is satisfied. The performance condition applicable is linked to the increase in UK GAAP basic earnings per share before goodwill amortisation and exceptional items and is initially applied over a three year period. If the performance condition is satisfied, after this period, options can be exercised up to 10 years after the date of grant. The US executives are granted options over the company’s ADSs.

(c) Diageo associated companies share option plan (DACSOP) This scheme was introduced in March 2001 and grants options to executives in a number of associated companies. The terms of the scheme are the same as for the DSOP plan.

(d) UK executive share option schemes (ESOS) The group operates executive share option schemes and a supplemental scheme for senior executives. ESOS incorporates the former GrandMet scheme, the former Guinness PLC executive share option schemes and the Guinness PLC 1994 employee incentive trust.
     Options were granted at the market price on the date of the grant and there are no performance criteria. Options issued under these schemes may normally be exercised between three and 10 years after the date granted. The last options granted under ESOS were in 1997.

111 Diageo Annual Report 2003

31 Employee share option schemes continued

(i) Executive schemes continued

(e) US share option plan (USSOP) This is a long term incentive plan under which options to purchase the company’s ADSs were granted to senior US executives. Under the plan, senior executives were granted an option to purchase ADSs at the higher of the nominal value of the ADSs and the market price of the ADSs at the time the option was granted. There are no performance criteria to be met before the options can be exercised. Options granted prior to 1 January 1994 may normally only be exercised between three and seven years after their grant. The last options granted under USSOP were in 1997.

(f) Senior executive phantom share option scheme (SEPSOS) This is a share price related bonus scheme. It allows a small number of senior executives to benefit over the period between the sixth and tenth year from grant, from movements in the price of Diageo ordinary shares. In normal circumstances, no payments can be made under SEPSOS before the fifth anniversary of the date of grant. Once exercised, payments (which can also be taken in the form of Diageo ordinary shares) are then spread with interest added over the period from exercise to the tenth anniversary of the date of grant. The scheme also contains significant forfeiture provisions. The last grant under this scheme was in 1996 and all payments will have been made within 10 years from the date of grant.

(ii) Savings plans

(a) UK savings-related share option scheme (SRSOS) The UK savings-related share option scheme is an Inland Revenue approved scheme available to all UK employees. The scheme provides a long term savings opportunity for employees. The options may normally be exercised after three or five years, according to the length of the option period chosen by the employee, at a price not less than 80% of the market value of the shares at the time of the option grant.

(b) US employee stock purchase plan (USESPP) This scheme provides a long term savings and investment opportunity for US employees. The options may normally be exercised 12 months after the grant of the option at a price equivalent to 85% of the market value of the ADSs at the time of the grant.

(c) International savings-related share option plan (International) The group also operates an international savings-related share option plan. The scheme provides a long term savings opportunity for employees outside the United Kingdom. The options may be exercised between one and five years after grant. The scheme has discount criteria ranging from nil to 20% devised in accordance with local conditions and practices.

(iii) Outstanding options Options over ordinary shares and over ADSs (US schemes only) outstanding at 30 June 2003 were as follows:
	Options outstanding								Options exercisable
					Weighted
					average		Weighted				Weighted
	Range of				remaining		average				average
	exercise				contractual		exercise				exercise
Executive schemes	prices		Number at		life		price		Number at		price
	pence		30 June 2003		months		pence		30 June 2003		pence
Fixed schemes:
DSOP, ESOS, USSOP and DACSOP		300–399		238,175		15		387		238,175		387
		400–499		3,323,561		34		454		3,323,561		454
		500–599		9,080,285		86		547		4,396,122		516
		600–699		7,826,502		95		641		–		–
		700–799		8,455,176		111		741		–		–
		800–899		246,779		104		863		–		–
				29,170,478						7,957,858
Variable schemes:
SEPSOS and SESOP		300–399		16,558		18		382		16,558		382
		400–499		42,884		23		464		42,884		464
		500–599		4,511,173		84		542		1,328,620		516
		600–699		2,743,759		98		662		–		–
		700–799		2,637,765		112		740		–		–
				9,952,139						1,388,062

112 Diageo Annual Report 2003
Notes to the consolidated financial statements

31 Employee share option schemes continued

(iii) Outstanding options continued

Options outstanding

Options exercisable

Weighted

average

Weighted

Weighted

Range of

remaining

average

average

exercise

contractual

exercise

exercise

prices

Number at

life

price

Number at

price

pence

30 June 2003

months

pence

30 June 2003

pence

Savings plans:

SRSOS, USESPP and International

200–299

15,276

24

218

–

–

300–399

80,807

5

353

50,639

354

400–499

2,347,484

17

466

22,398

462

500–599

4,616,521

26

525

92,803

540

600–699

2,976,039

37

621

–

–

700–799

49,369

27

763

–

–

10,085,496

165,840

(a) Under the executive share option schemes, directors and executives hold options to subscribe for up to 3 million (2002 — 3 million; 2001 — 6 million) ordinary shares at prices ranging between 391 pence and 863 pence per share, exercisable by 2013.

(b) Under the savings-related share option schemes for employees, employees hold options to subscribe for up to 1 million (2002 — 1 million; 2001 — 1 million) ordinary shares at prices ranging between 213 pence and 778 pence per share, exercisable by 2006.

(iv) Transactions on schemes

(a) Executive schemes: Transactions on ESOS, USSOP, DSOP, DACSOP, SEPSOS and SESOP for options and phantom shares over ordinary shares and ADSs for the three years ended 30 June 2003 were as follows:
	ESOS, USSOP, DSOP, DACSOP					SEPSOS, SESOP*
				Weighted					Weighted
				average		Number of			average
				exercise		phantom			exercise
	Number of			price		shares and			price
	options			pence		options			pence
Balance outstanding at 30 June 2000		32,492,123			484		6,649,339			507
Granted		8,957,049			640		3,887,245			591
Exercised		(11,259,658	)		471		(1,425,811	)		476
Cancelled		(1,870,249	)		551		(692,846	)		570
Balance outstanding at 30 June 2001		28,319,265			563		8,417,927			577
Granted		10,247,012			686		2,695,115			692
Exercised		(8,528,525	)		538		(2,253,049	)		571
Cancelled		(1,079,055	)		588		–			–
Balance outstanding at 30 June 2002		28,958,697			592		8,859,993			594
Granted		8,669,356			750		2,783,959			756
Exercised		(6,451,062	)		559		(1,522,799	)		526
Cancelled		(2,006,513	)		652		(169,014	)		722
Balance outstanding at 30 June 2003		29,170,478			619		9,952,139			627
Number of options exercisable at:
30 June 2003		7,957,858					1,388,062
30 June 2002		4,219,507					59,442
30 June 2001		7,090,478					232,443

*SEPSOS are movements in phantom shares and SESOP are movements in options over shares.

113 Diageo Annual Report 2003

31 Employee share option schemes continued

(b) Savings plans: Transactions on SRSOS, USESPP and International schemes for options over ordinary shares and ADSs for the three years ended 30 June 2003 were as follows:
				Weighted
				average
				exercise
	Number of			price
	options			pence
Balance outstanding at 30 June 2000		15,232,118			439
Granted		3,273,333			504
Exercised		(4,153,354	)		435
Cancelled		(2,199,300	)		447
Balance outstanding at 30 June 2001		12,152,797			456
Granted		3,351,163			540
Exercised		(3,800,177	)		417
Cancelled		(857,440	)		479
Balance outstanding at 30 June 2002		10,846,343			497
Granted		3,291,920			607
Exercised		(3,275,691	)		486
Cancelled		(777,076	)		505
Balance outstanding at 30 June 2003		10,085,496			539
Number of options exercisable at:
30 June 2003		165,840
30 June 2002		171,120
30 June 2001		53,547

(v) Share awards to executives Prior to 17 December 1997, awards over shares were granted to senior executives under the Guinness Group 1991 employee incentive trust (EIT), with eventual transfer dependent on the performance of the company’s annualised total shareholder return against a comparator group of companies at the end of a minimum of three years after the date of grant. This plan was replaced by the Total Shareholder Return plan (TSR plan).
     The TSR plan benefited senior executives who were granted a conditional right to receive shares or ADSs or a cash sum if US participants. The right vests after the end of a three year period following the date of grant (the performance cycle), provided a performance test is achieved. The performance test is a comparison of the annualised total shareholder return with the total shareholder returns of a defined peer group of 18 companies over a three year period. The remuneration committee will not recommend the release of awards if there has not been an underlying improvement in the financial performance of the group.
     The Diageo Share Incentive Plan (DSIP) first awards were in the year ended 30 June 2000 to a small number of senior executives. The scheme involves awards of shares or ADSs over a three to five year period with performance criteria varying by employee. Awards under EIT, TSR and DSIP were at nil award price.

Transactions on the EIT, TSR and DSIP for awards of ordinary shares and ADSs for the three years ended 30 June 2003 were as follows:
	Number of
	awards of
	ordinary
	shares*
Balance outstanding at 30 June 2000		19,596,218
Granted under DSIP and TSR		1,454,042
Awarded		(5,566,990	)
Cancelled		(5,754,227	)
Balance outstanding at 30 June 2001		9,729,043
Granted under DSIP and TSR		1,087,650
Awarded		(3,457,064	)
Cancelled		(3,458,924	)
Balance outstanding at 30 June 2002		3,900,705
Granted under DSIP and TSR		1,086,854
Awarded		(1,355,209	)
Cancelled		(187,238	)
Balance outstanding at 30 June 2003		3,445,112

No awards were exercisable at 30 June 2001, 2002 or 2003.

*Award holdings over ADSs are stated as ordinary share equivalents.

114 Diageo Annual Report 2003
Notes to the consolidated financial statements

31 Employee share option schemes continued

(vi) Employee share trusts The group funds trusts to acquire shares in the company to hedge its obligations under the EIT, TSR, DSOP, SESOP, DSIP, former GrandMet and Guinness SRSOS, USESPP and its Irish executive schemes savings plans. Under UK GAAP, the shares held are accounted for as investments. Call options are used to manage the group’s obligations in respect of the supplemental executive share option scheme, USSOP, SEPSOS and Diageo SRSOS, USESPP and Irish executive schemes savings plans. The trusts purchase options from a third party equivalent to the outstanding options granted to executives. The premium for these third party options is deferred and included in debtors. The company has an obligation to fund the payment of deferred premium as it falls due. Dividends receivable by the employee share trusts on the shares are waived. The group has taken advantage of the exemption in UITF 17 from charging the discount on Inland Revenue approved SAYE schemes to the profit and loss account.

32 Reconciliation to US generally accepted accounting principles

Diageo plc is a public limited company incorporated under the laws of England and Wales and the group’s financial statements are prepared in accordance with generally accepted accounting principles (GAAP) applicable in the United Kingdom. UK GAAP differs in certain significant respects from US GAAP. The differences in respect of net income and shareholders’ equity are set out below:

Effect on net income of differences between UK and US GAAP:
				2003			2002			2001
	Notes			£ million			£ million			£ million
Net income in accordance with UK GAAP					76			1,617			1,207
Adjustments to conform with US GAAP:
Brands		(a	)		–			–			(230	)
Goodwill and other intangibles		(a	)		(7	)		(2	)		(212	)
Inventories		(b	)		(46	)		(58	)		(74	)
Restructuring and integration costs		(c	)		16			82			–
Pensions and other post employment benefits		(d	)		37			19			28
Derivative instruments in respect of General Mills shares		(e	)		(4	)		166			–
Other derivative instruments		(f	)		(189	)		(100	)		(17	)
Burger King impairment charges and transaction costs		(g	)		707			(135	)		–
Disposals of businesses		(g	)		(171	)		1,022			–
Employee share trust arrangements		(i	)		25			(6	)		(24	)
Other items					5			23			(46	)
Deferred taxation
— on above adjustments		(k	)		50			(49	)		32
— other		(k	)		(12	)		(25	)		94
Net income in accordance with US GAAP					487			2,554			758
Earnings per ordinary share in accordance with US GAAP		(l	)
Basic earnings per ordinary share					15.6	p		77.0	p		22.4	p
Diluted earnings per ordinary share					15.6	p		77.0	p		22.4	p
Basic earnings per ADS					62.4	p		308.0	p		89.6	p
Diluted earnings per ADS					62.4	p		308.0	p		89.6	p

115 Diageo Annual Report 2003

32 Reconciliation to US generally accepted accounting principles continued

Cumulative effect on shareholders' equity of differences between UK and US GAAP:
				30 June			30 June
				2003			2002
	Notes			£ million			£ million
Shareholders’ equity in accordance with UK GAAP					4,954			6,001
Adjustments to conform with US GAAP:
Brands		(a	)		3,038			2,780
Goodwill		(a	)		3,627			4,082
Other intangibles		(a	)		40			114
Inventories		(b	)		178			224
Pensions and other post employment benefits		(d	)		(1,250	)		(524	)
Derivative instruments in respect of General Mills shares		(e	)		(7	)		166
Other derivative instruments		(f	)		(104	)		(127	)
Investment in General Mills		(g	)		192			213
Disposals of businesses		(g	)		(83	)		(90	)
Revaluation of land and buildings		(h	)		(35	)		(36	)
Employee share trust arrangements		(i	)		(259	)		(219	)
Ordinary dividends		(j	)		482			458
Other differences in accounting principles					2			(38	)
Deferred taxation
— on above adjustments		(k	)		(36	)		52
— other		(k	)		(1,513	)		(1,740	)
Shareholders’ equity in accordance with US GAAP					9,226			11,316

A description of accounting differences between UK and US GAAP that are material to the group are set out below.

(a) Brands, goodwill and other intangibles Significant owned brands acquired by the group are recorded on the balance sheet. Under UK GAAP, the group has written off other intangible assets acquired up to 30 June 1998 direct to reserves in the period acquired. All intangible assets acquired from 1 July 1998 have been capitalised in the balance sheet. Where capitalised goodwill and intangible assets are regarded as having limited useful economic lives, their cost is amortised on a straight line basis over those lives — up to 20 years. Where intangible assets are regarded as having indefinite useful economic lives, they are not amortised but are subject to annual impairment reviews. Under US GAAP, up to 30 June 2001, intangible assets have been capitalised in the balance sheet and amortised through the statement of income over their useful economic lives, not exceeding 40 years. On 1 July 2001, the group adopted the provisions of SFAS No. 142 — Goodwill and Other Intangible Assets. The standard requires that intangible assets arising on acquisitions with definite useful lives, are amortised to their estimable residual values over their estimated useful lives. Intangible assets with indefinite useful lives are tested for impairment annually in lieu of being amortised. Goodwill arising on a combination of businesses is tested for impairment annually in lieu of amortisation.

(b) Accounting for the merger of the former GrandMet Group and the former Guinness Group For UK GAAP, the merger of the GrandMet Group and the Guinness Group was accounted for under merger accounting principles (pooling of interests) where the results, cash flows and balance sheets of both entities, having made adjustments to achieve uniformity of accounting policies, were aggregated with no adjustment to fair value. Under US GAAP, the merger was accounted for as an acquisition of the Guinness Group by GrandMet with an effective acquisition date of 31 December 1997. Consequently the Guinness Group assets and liabilities were recorded at fair values on 31 December 1997. Under US GAAP, the excess of the consideration over the fair value of the net assets has been allocated firstly to identifiable intangible assets based on their fair values with the remainder allocated to goodwill. Fair value adjustments to the recorded amounts of inventories, net of deferred tax, are expensed in the period in which the inventory is utilised.

(c) Restructuring and integration costs On the acquisition of a business, certain costs of reorganising the acquired business are required to be taken to the profit and loss account under UK GAAP, but are treated as fair value adjustments to goodwill under US GAAP.

(d) Pensions and other post employment benefits There are differences in the methods of valuation required under UK and US GAAP for valuing assets and liabilities of defined benefit pension plans. US GAAP is generally more prescriptive in respect of actuarial assumptions and the allocation of costs to accounting periods. In addition, under US GAAP, a minimum pension liability is recognised, as a component of other comprehensive income, in certain circumstances when there is a deficit of plan assets relative to the accumulated benefit obligations.

(e) Derivative instruments in respect of General Mills shares Under UK GAAP, the contingent value right received in connection with the disposal of Pillsbury was treated as a contingent asset and was therefore not recognised until its receipt became virtually certain. As a consequence it was accounted for in the consolidated profit and loss account in the year ended 30 June 2003. Also, under UK GAAP, the premium received from the sale of options to General Mills over 29 million ordinary shares of Diageo’s holding in that company has been deferred in the balance sheet pending exercise or lapse of the options. Under US GAAP, the contingent value right and the option premium represent derivatives and were accordingly held at their estimated fair values at the balance sheet dates with changes in fair value included in the statement of income.

116 Diageo Annual Report 2003
Notes to the consolidated financial statements

32 Reconciliation to US generally accepted accounting principles continued

(f) Other derivative instruments The group uses derivative financial instruments for risk management purposes. Under UK GAAP, changes in the fair value of interest rate derivatives, derivatives hedging forecast transactions and currency option cylinders are not recognised until realised. Changes in the fair value of derivatives hedging the translation of net assets of overseas operations are taken to the statement of total recognised gains and losses. Under US GAAP, all derivatives are carried at fair value at the balance sheet date. Certain of the group’s derivatives qualify for and are designated as hedges under US GAAP, which defers the effect on net income from gains and losses arising from changes in their fair values. Gains and losses arising from changes in the fair value of derivatives which do not qualify for US GAAP hedge accounting treatment are charged or credited in determining net income under US GAAP.

(g) Disposals of businesses Applying the accounting differences between UK and US GAAP can result in changes to the carrying values of assets and liabilities under UK and US GAAP. As a consequence of these different carrying values, including related tax balances, different gains or losses may arise on the subsequent disposal of the assets. In addition, the timing of the recognition of a loss on a disposal may be different under UK and US GAAP.
     On 31 October 2001, the group disposed of Pillsbury and acquired an equity investment in General Mills, Inc. The gain on this disposal under US GAAP is higher than that recorded under UK GAAP, because of such differences in carrying value, particularly in respect of intangible assets and deferred tax. The investment in General Mills under US GAAP is also greater than under UK GAAP. In connection with the disposal of Pillsbury in the year ended 30 June 2002, Diageo has guaranteed the debt of a third party up to the amount of $200 million (£121 million). Under UK GAAP, Diageo has provided for the amounts which it could have paid to settle the potential liability or transfer it to a third party as a cost of the transaction. Under US GAAP, rather than providing for the fair value as under UK GAAP, Diageo has deferred that element of the gain on disposal of Pillsbury equivalent to the amount guaranteed. The excess of the gain deferred for US GAAP over the amount provided under UK GAAP, has been charged in determining US GAAP net income for the year ended 30 June 2002 with a corresponding effect on shareholders’ equity in accordance with US GAAP.
     Under UK GAAP, the sale of Burger King has been accounted for as a disposal and the results prior to the disposal date are presented within discontinued operations. Under US GAAP, the transaction is not accounted for as a disposal due to the size of the investment made by the buyer and Diageo’s continuing involvement through the guarantee provided by Diageo in respect of the acquisition finance. Under US GAAP, the results of Burger King prior to 13 December 2002 (the completion date) have been presented within continuing operations in the income statement, and on the completion of the transaction, a charge for impairment was recognised rather than a loss on disposal. For the year ended 30 June 2003 an impairment charge of £750 million (2002 — £135 million) against the group’s quick service restaurants business has been included in US GAAP net income. Following the completion date, Diageo does not recognise profits of Burger King in its income statement but, generally, reflects losses of Burger King as an impairment charge against the assets retained on the balance sheet. In the US GAAP balance sheet, Diageo includes the total assets and total liabilities of Burger King (including consideration deferred under US GAAP) within ‘other long term assets’ and ‘other long term liabilities’ which at 30 June 2003 were each £1.3 billion. Under US GAAP, the transaction will be accounted for as a disposal when the uncertainties related to the guarantee provided in respect of the acquisition finance have been substantially resolved and/or the buyer’s cumulative investment meets or exceeds minimum levels.

(h) Revaluation of land and buildings UK GAAP allows the periodic revaluation of land and buildings. Professional valuations of certain of the group’s properties were carried out in 1988 which, under US GAAP, have not been reflected in the consolidated financial statements.

(i) Employee share trust arrangements Employee share trusts have been established in order to hedge obligations in respect of options issued under certain employee share option schemes. Under UK GAAP, the company’s ordinary shares held by the employee share trusts are included at cost in fixed asset investments and are written down, over the period until the option vests, to the amount of the option price payable by employees upon exercise. Under US GAAP, such shares are treated as treasury shares and are deducted from shareholders’ equity at cost. Under US GAAP, compensation cost for fixed awards (ie awards under which both the exercise price and the number of shares is fixed) is determined at the date of grant, based on the difference between the fair value of the shares subject to the award and the exercise price. Compensation cost so determined is allocated to expense over the vesting period. Compensation cost for variable awards (including awards subject to future performance conditions) is measured as the difference between the market price at the period end and the exercise price and is based on the number of awards expected to vest.

(j) Ordinary dividends Under UK GAAP, the proposed dividends on ordinary shares, as recommended by the directors, are deducted from shareholders’ equity and shown as a liability in the balance sheet at the end of the period to which they relate. Under US GAAP, such dividends are only deducted from shareholders’ equity at the date of declaration of the dividend.

(k) Deferred taxation UK GAAP requires that no provision for deferred tax should be made on the acquisition of a business where an asset acquired has no tax basis. US GAAP requires a deferred tax liability to be set up on all assets separately identified, apart from goodwill. Other minor differences are related to rolled over gains on the disposal of fixed assets.

(l) Earnings per ordinary share Under UK GAAP and US GAAP, the calculation of earnings per ordinary share is generally consistent and is based on the weighted average number of ordinary shares outstanding during the period. Earnings per American Depositary Share are calculated on the basis of one American Depositary Share representing four ordinary shares.

(m) Discontinued operations UK and US GAAP have different criteria for determining whether a business is a discontinued operation. Under UK GAAP, the turnover and operating profit of a discontinued operation is disclosed separately in the profit and loss account but as part of turnover and operating profit. Under US GAAP, sales and net income arising from discontinued operations are disclosed separately from net income from continuing operations. Pillsbury and Burger King have been treated as discontinued operations under UK GAAP but included within continuing operations under US GAAP.

117 Diageo Annual Report 2003

32 Reconciliation to US generally accepted accounting principles continued

(n) Turnover UK GAAP turnover (sales in US terminology) for the year ended 30 June 2003 was £287 million (2002 — £522 million; 2001 — £953 million) higher than turnover under US GAAP, as (i) following the adoption of EITF 01—09, £74 million (2002 — £306 million of which £217 million was in respect of Pillsbury; 2001 — £714 million of which £619 million was in respect of Pillsbury) of marketing expenditure has been reclassified from selling, general and administrative expenses to a reduction in sales under US GAAP, and (ii) the accounting treatment of joint arrangements (between the group and LVMH) is different. Under UK GAAP, the group includes in turnover its attributable share of turnover of joint arrangements, measured according to the terms of the arrangement and sales to joint arrangements by Diageo companies are eliminated on consolidation. Under US GAAP, joint arrangements are accounted for under the equity method of accounting and the group’s share of sales of the joint arrangements is not included as part of group sales. Sales to joint arrangements by Diageo companies are accounted for as part of turnover.

US GAAP statements of income
Statements of income under US GAAP for the three years ended 30 June 2003 are set out below:
	2003			2002			2001
	£ million			£ million			£ million
Sales		9,153			10,760			11,868
Cost of sales		(5,062	)		(6,261	)		(7,194	)
Gross profit		4,091			4,499			4,674
Selling, general and administrative expenses		(2,235	)		(2,433	)		(2,778	)
Amortisation of brands and goodwill		–			–			(435	)
Integration and restructuring costs		(202	)		(130	)		(169	)
Bass distribution rights		57			–			–
José Cuervo settlement		–			(194	)		–
Derivative instruments in respect of General Mills shares		(4	)		166			–
Burger King impairment charges and transaction costs		(750	)		(135	)		–
(Losses)/gains on disposal of fixed assets*		(40	)		(22	)		19
Gains/(losses) on disposals of businesses*		16			1,843			(8	)
Other operating income		22			36			43
Operating income*		955			3,630			1,346
Earnings from unconsolidated affiliates (net of income taxes)		254			152			111
Interest expense		(609	)		(950	)		(461	)
Interest income		286			418			128
Income before income taxes		886			3,250			1,124
Income taxes		(307	)		(609	)		(286	)
Minority interest charges		(92	)		(87	)		(80	)
Net income		487			2,554			758

Sales and cost of sales include £779 million (2002 — £692 million; 2001 — £536 million) of excise duties charged as a tax on sales, and cost of sales also includes £1,387 million (2002 — £1,427 million; 2001 — £1,322 million) of excise duties charged as production taxes.

*In prior years, gains and losses on disposals of fixed assets and businesses have been presented as non-operating items. The comparative figures included above have been reclassified to conform with the current year presentation of these items as components of operating income.

Research and development expenditure was written off to selling, general and administrative expenses in the period in which it was incurred.

118 Diageo Annual Report 2003
Notes to the consolidated financial statements

32 Reconciliation to US generally accepted accounting principles continued

Movements on US GAAP shareholders' equity
	2003			2002
	£ million			£ million
Shareholders’ equity in accordance with US GAAP at beginning of the year		11,316			11,880
Net income		487			2,554
Minimum pension liabilities		(770	)		(569	)
Deferred tax on minimum pension liabilities		(137	)		171
Dividends		(762	)		(762	)
New share capital issued		4			11
Repurchase of own shares for cancellation		(852	)		(1,658	)
Net change in employee share trust arrangements		(67	)		(45	)
Exchange adjustments		7			(266	)
Shareholders’ equity in accordance with US GAAP at end of the year		9,226			11,316

Under US GAAP, cumulative exchange adjustments charged against retained surplus are separately identified. This does not result in any difference in total shareholders’ equity between UK and US GAAP.

US GAAP balance sheet
A summary consolidated balance sheet under US GAAP at 30 June 2003 is set out below.
	2003		2002
	£ million		£ million
Total current assets		5,677		6,528
Property plant and equipment		1,935		2,505
Brands		7,280		8,118
Goodwill		3,273		3,823
Other intangible assets		85		152
Other long term assets		5,821		5,027
Total assets		24,071		26,153
Short term borrowings		3,574		3,701
Other current liabilities		3,134		3,582
Long term borrowings		3,149		3,870
Other long term liabilities		4,459		3,129
Minority interests		529		555
Shareholders’ equity		9,226		11,316
Total liabilities and shareholders’ equity		24,071		26,153

US GAAP cash flows The group’s financial statements include a consolidated statement of cash flows in accordance with the UK Financial Reporting Standard No. 1 (FRS 1 Revised).
     The objective and principles of FRS 1 (Revised) are similar to those set out in the US accounting standard SFAS No. 95, Statement of Cash Flows. The principal difference between the standards is in respect of classification. Under FRS 1 (Revised), the group presents its cash flows separately for operating activities, returns on investments and servicing of finance, taxation, capital expenditure and financial investment, acquisitions and disposals, equity dividends paid, management of liquid resources and financing. SFAS No. 95 requires only three categories of cash flow activity being operating, investing and financing.
     Cash flows arising from taxation and returns on investments and servicing of finance under FRS 1 (Revised) would be included as operating activities. Under SFAS No. 95, capital expenditure and financial investment would be included as an investing activity, and equity dividends paid would be classified as a financing activity.
     In addition, ‘cash’ for the purposes of the cash flow statement under FRS 1 (Revised), includes bank overdrafts but excludes liquid resources (current asset investments held as readily available disposable stores of value). Under US GAAP, bank overdrafts are classified as borrowings and the movements thereon are included in financing activities. Liquid resources, with a maturity of three months or less at the date acquired, are considered to be cash equivalents and the movements thereon are included in the overall cash movement under US GAAP.

119 Diageo Annual Report 2003

32 Reconciliation to US generally accepted accounting principles continued

A summarised consolidated cash flow statement under US GAAP is as follows:
	2003			2002			2001
	£ million			£ million			£ million
Cash inflow from operating activities		1,570			1,380			1,679
Cash inflow/(outflow) from investing activities		747			1,021			(1,032	)
Cash outflow from financing activities		(2,375	)		(2,571	)		(417	)
(Decrease)/increase in cash and cash equivalents		(58	)		(170	)		230
Exchange adjustments		(31	)		(48	)		28
Cash and cash equivalents at beginning of the year under US GAAP		788			1,006			748
Cash and cash equivalents at end of the year under US GAAP		699			788			1,006
Short term investments with original maturities of more than three months		492			808			836
Cash at bank and liquid resources at end of the year under UK GAAP		1,191			1,596			1,842

Statement of comprehensive (deficit)/income under US GAAP
Under UK GAAP the group presents a consolidated statement of total recognised gains and losses which is similar to a statement of comprehensive income required by US GAAP. Comprehensive income, under US GAAP, for the three years ended 30 June 2003 is as follows:
	2003			2002			2001
	£ million			£ million			£ million
Net income		487			2,554			758
Exchange adjustments		7			(266	)		140
Minimum pension liabilities		(770	)		(569	)		–
		(276	)		1,719			898
Tax charge in respect of exchange adjustments		–			–			(17	)
Tax (charge)/credit in respect of minimum pension liabilities		(137	)		171			–
Comprehensive (deficit)/income		(413	)		1,890			881

The tax (charge)/credit in respect of minimum pension liabilities includes a valuation allowance of £367 million (2002 — £nil) reflecting the uncertainty of the recoverability of the deferred tax asset.

120 Diageo Annual Report 2003
Notes to the consolidated financial statements

32 Reconciliation to US generally accepted accounting principles continued

US GAAP intangible assets
An analysis of movements in intangible assets for the two years ended 30 June 2003 is as follows:
							Other
	Brands			Goodwill			intangibles			Total
	£ million			£ million			£ million			£ million
Cost
At 30 June 2001		8,916			7,658			287			16,861
Exchange adjustments		(243	)		(195	)		(10	)		(448	)
Additions		2,765			572			7			3,344
Disposals		(2,427	)		(3,411	)		–			(5,838	)
At 30 June 2002		9,011			4,624			284			13,919
Exchange adjustments		(288	)		(72	)		(5	)		(365	)
Additions		17			6			12			35
Burger King transaction*		(755	)		(910	)		(123	)		(1,788	)
Disposals		(84	)		(2	)		–			(86	)
At 30 June 2003		7,901			3,646			168			11,715
Amortisation
At 30 June 2001		1,535			1,416			119			3,070
Exchange adjustments		(48	)		(39	)		(5	)		(92	)
Provided during the year		–			–			18			18
Impairment charge		–			135			–			135
Disposals		(594	)		(711	)		–			(1,305	)
At 30 June 2002		893			801			132			1,826
Exchange adjustments		(36	)		(10	)		(2	)		(48	)
Provided during the year		–			–			16			16
Burger King transaction*		(236	)		(418	)		(63	)		(717	)
At 30 June 2003		621			373			83			1,077
Net book value
At 30 June 2003		7,280			3,273			85			10,638
At 30 June 2002		8,118			3,823			152			12,093
At 30 June 2001		7,381			6,242			168			13,791

An analysis of movements in the net book value of goodwill for the two years ended 30 June 2003, by segment, is as follows:
	Premium			Packaged			Quick service
	drinks			food			restaurants			Total
	£ million			£ million			£ million			£ million
Goodwill — net book value
At 30 June 2001		2,848			2,722			672			6,242
Exchange adjustments		(27	)		(81	)		(48	)		(156	)
Additions		552			–			20			572
Impairment charge		–			–			(135	)		(135	)
Disposals		(58	)		(2,641	)		(1	)		(2,700	)
At 30 June 2002		3,315			–			508			3,823
Exchange adjustments		(44	)		–			(18	)		(62	)
Additions		4			–			2			6
Burger King transaction*		–			–			(492	)		(492	)
Disposals		(2	)		–			–			(2	)
At 30 June 2003		3,273			–			–			3,273

* In the year ended 30 June 2003 under UK GAAP, the sale of Burger King has been accounted for as a disposal. Under US GAAP, the transaction was not accounted for as a disposal due to the size of the investment made by the buyer and Diageo’s continuing involvement through the guarantee provided by Diageo in respect of the acquisition finance. On completion of the transaction, a charge for impairment was recognised and Diageo included the total assets and liabilities of Burger King within ‘Other long term assets’ and ‘Other long term liabilities’ which at 30 June 2003 were each £1.3 billion.

121 Diageo Annual Report 2003

32 Reconciliation to US generally accepted accounting principles continued

The differences in the shareholders’ equity reconciliation between UK and US GAAP for brands, goodwill and other intangibles are attributable to historical cost differences of £3,691 million, £3,606 million and £108 million, respectively (2002 — £3,704 million, £4,517 million and £234 million, respectively), less differences on accumulated amortisation of £621 million, £366 million and £68 million, respectively (2002 — £893 million, £783 million and £120 million, respectively). In addition, differences in relation to share of associates’ brands and goodwill are attributable to historical cost differences of £nil and £427 million, respectively (2002 — £nil and £384 million, respectively), less differences on accumulated amortisation of £32 million and £40 million, respectively (2002 — £31 million and £36 million, respectively).
     Additions to brands and goodwill of £23 million in the year ended 30 June 2003 are not subject to amortisation, but are reviewed annually for impairment. Additions to other intangibles of £12 million in the year ended 30 June 2003 are in respect of distribution rights which are amortised over a weighted average period of 10 years (2002 — 7 years). The estimated amortisation expense for the other intangibles currently in the balance sheet for the succeeding five years is as follows:

For the year ending 30 June 2004    £10 million
For the year ending 30 June 2005    £9 million
For the year ending 30 June 2006    £9 million
For the year ending 30 June 2007    £9 million
For the year ending 30 June 2008    £7 million

The impairment charge in the year ended 30 June 2002 is in respect of goodwill in the quick service restaurants business. The £135 million charge, based on discounted cash flows, arose as a consequence of reduced cash flows following a downturn in activity of the business and also reflected the cash flows which were expected to arise from the anticipated disposal of Burger King. The impairment charge has been included in ‘Burger King impairment charges and transaction costs’ in the US GAAP statement of income.

Exclusion of intangible asset amortisation
If amortisation expense (including any related tax effect) in respect of intangible assets that are no longer amortised under SFAS No. 142 were excluded for all years presented, net income, basic and diluted earnings per ordinary share and per ADS would have been as follows:
	2003			2002			2001
	£ million			£ million			£ million
Net income
As reported under US GAAP		487			2,554			758
Brand amortisation		–			–			230
Goodwill amortisation		–			–			226
Adjusted net income		487			2,554			1,214
Basic earnings per ordinary share
As reported under US GAAP		15.6	p		77.0	p		22.4	p
Brand amortisation		–			–			6.8	p
Goodwill amortisation		–			–			6.7	p
Adjusted basic earnings per ordinary share		15.6	p		77.0	p		35.9	p
Diluted earnings per ordinary share
As reported under US GAAP		15.6	p		77.0	p		22.4	p
Brand amortisation		–			–			6.8	p
Goodwill amortisation		–			–			6.7	p
Adjusted diluted earnings per ordinary share		15.6	p		77.0	p		35.9	p
Basic earnings per ADS
As reported under US GAAP		62.4	p		308.0	p		89.6	p
Brand amortisation		–			–			27.2	p
Goodwill amortisation		–			–			26.8	p
Adjusted basic earnings per ADS		62.4	p		308.0	p		143.6	p
Diluted earnings per ADS
As reported under US GAAP		62.4	p		308.0	p		89.6	p
Brand amortisation		–			–			27.2	p
Goodwill amortisation		–			–			26.8	p
Adjusted diluted earnings per ADS		62.4	p		308.0	p		143.6	p

The adjustment to net income for the year ended 30 June 2001 included £10 million of brand amortisation and £11 million of goodwill amortisation in respect of associates.

122 Diageo Annual Report 2003
Notes to the consolidated financial statements

32 Reconciliation to US generally accepted accounting principles continued

New accounting standards and pronouncements in the United States In November 2002, the Financial Accounting Standards Board (FASB) issued FIN No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. The interpretation provides guidance on the guarantor’s accounting and disclosure requirements for guarantees, including indirect guarantees of indebtedness of others. The accounting guidelines are applicable to guarantees issued or amended after 31 December 2002 and require that a liability, at inception, be recorded for the fair value of such guarantees in the balance sheet. Subsequent to 31 December 2002 Diageo has not entered into or modified any guarantees.
     In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation — Transition and Disclosure — an amendment of FASB Statement No. 123. This statement amends SFAS No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation and requires certain additional disclosures in respect of stock-based compensation. The group has adopted the disclosure requirements of this standard.
     In January 2003, the FASB issued FIN No. 46, Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51. FIN No. 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN No. 46 is effective immediately for all new variable interest entities created or acquired after 31 January 2003. For variable interest entities created or acquired prior to 1 February 2003 the provisions of FIN No. 46 must be applied for the first interim or annual period beginning after 15 June 2003. Diageo does not expect the adoption of FIN No. 46 to have a material effect on the group.
     In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. This statement amends and clarifies reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities, and is effective for contracts entered into or modified after 30 June 2003.
     In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity. The statement requires issuers to classify as liabilities (or assets in some circumstances) three classes of freestanding financial instruments that embody obligations for the issuer. Generally, SFAS No. 150 is effective for financial instruments entered into or modified after 31 May 2003 and is otherwise effective at the beginning of the first interim period beginning after 15 June 2003. The group did not enter into any financial instruments within the scope of the statement during June 2003. The group has not yet completed its evaluation of the impact of SFAS No. 150 on its existing financial instruments entered into on or before 31 May 2003.

Share option schemes Under US GAAP, the group has complied with APB No. 25 — Accounting for Stock Issued to Employees.
     The group has also complied with the disclosure requirements of SFAS No. 123, Accounting for Stock-Based Compensation as amended by SFAS No. 148. If the group had elected to recognise compensation expense based upon the fair value at grant date for awards made in the three years ended 30 June 2003 under these plans consistent with the alternative methodology set out in SFAS No. 123, net income and basic and diluted earnings per ordinary share would be the pro forma amounts indicated below.

	2003			2002			2001
	£ million			£ million			£ million
Net income
As reported under US GAAP		487			2,554			758
Stock based compensation, net of related tax effects, included in the determination
of net income as reported		(1	)		14			36
Stock based employee compensation expense, under fair value based method for all awards,
net of related tax effects		(24	)		(25	)		(46	)
Pro forma net income		462			2,543			748
Basic earnings per ordinary share
As reported under US GAAP		15.6	p		77.0	p		22.4	p
Pro forma basic earnings per ordinary share		14.8	p		76.7	p		22.1	p
Diluted earnings per ordinary share
As reported under US GAAP		15.6	p		77.0	p		22.4	p
Pro forma diluted earnings per ordinary share		14.8	p		76.7	p		22.1	p

These pro forma amounts may not be representative as they are subjective in nature and involve uncertainties and matters of judgement, and therefore cannot be determined precisely. Changes in assumptions could affect the estimates.

123 Diageo Annual Report 2003

32 Reconciliation to US generally accepted accounting principles continued

The fair value of options which, in determining the pro forma impact, is assumed to be amortised in the statement of income over the option vesting period, is estimated on the date of grant using the Black Scholes option pricing model and the following weighted average assumptions:

	2003				2002				2001
Weighted average exercise price of options whose exercise price equals the market price on the grant date (DSOP, DACSOP and SESOP)		752p				687p				625p
Weighted average assumptions
Risk free interest rate		4.7%				4.6%				5.3%
Expected life of the options	60 months			60 months				60 months
Expected volatility		30%				30%				30%
Dividend yield		4.0%				3.0%				3.7%
Weighted average fair value of options granted in year		292p				248p				233p
Weighted average exercise price of options whose exercise price is
less than the market price on the grant date (SRSOS, USESPP and International)		607p				540p				504p
Weighted average assumptions
Risk free interest rate		4.2%				4.4%				5.1%
Expected life of the options	38 months			39 months				38 months
Expected volatility		30%				30%				30%
Dividend yield		4.0%				3.0%				3.7%
Weighted average fair value of options granted in year		206p				223p				169p
Number of options granted in the year	14.7 million		*		16.3 million		*		16.1 million		*
Fair value of all options granted in the year	£40 million			£40 million				£35 million

* An option over one ADS has been treated as the equivalent of four options over ordinary shares. The TSR and DSIP plans are not subject to the disclosure requirements of SFAS No. 123.

Pension plans The group operates a number of pension plans throughout the world, devised in accordance with local conditions and practices. The plans generally are of the defined benefit type. The significant plans are in the United Kingdom, the United States, Ireland and Canada. The principal plans are funded by payments to separately administered funds or insurance companies.

The totals of the group’s periodic pension credits/(charges) for defined benefit plans and the funded status of the significant plans, calculated in accordance with SFAS No. 87, were as follows:

	2003			2002			2001
	£ million			£ million			£ million
Service cost		(80	)		(71	)		(80	)
Interest cost		(243	)		(249	)		(251	)
Expected return on assets		369			389			401
Amortisation of:
Unrecognised prior service cost		(17	)		(17	)		(17	)
Unrecognised transitional obligation		–			–			1
Unrecognised net gain		–			5			23
Termination, curtailment and settlements		10			(14	)		(2	)
Disposal of Pillsbury		–			(125	)		–
Net periodic pension income/(charge)		39			(82	)		75

124 Diageo Annual Report 2003
Notes to the consolidated financial statements

32 Reconciliation to US generally accepted accounting principles continued

The funded status of the group’s significant defined benefit plans and the amounts that would be recognised in the balance sheet under US GAAP were as follows:
	2003			2002
	£ million			£ million
Projected benefit obligations at beginning of the year		4,127			4,424
Exchange adjustments		46			28
Canadian plan not previously disclosed		54			–
Service cost		80			71
Interest cost		243			249
Special termination settlements		8			15
Actuarial loss		408			162
Employee contributions		11			9
Benefits and expenses paid		(203	)		(210	)
Disposal of Pillsbury		–			(621	)
Other disposals		(59	)		–
Projected benefit obligations at end of the year		4,715			4,127
Plan assets at fair value at beginning of the year		3,841			5,525
Exchange adjustments		38			32
Canadian plan not previously disclosed		51			–
Actual return on plan assets		(313	)		(716	)
Contributions by the group		6			5
Employee contributions		11			9
Benefits and expenses paid		(203	)		(210	)
Disposal of Pillsbury		–			(804	)
Other disposals		(39	)		–
Plan assets at fair value at end of the year		3,392			3,841
Excess of benefit obligations over plan assets		(1,323	)		(286	)
Unrecognised prior service cost		116			132
Unrecognised net loss		1,952			844
		745			690

125 Diageo Annual Report 2003

32 Reconciliation to US generally accepted accounting principles continued

The amounts that have been recognised in the US GAAP summary balance sheet are as follows:
	2003			2002
	£ million			£ million
Pension prepayment		305			322
Accrued benefit liabilities		(1,018	)		(336	)
Intangible asset		119			135
Accumulated other comprehensive income		1,339			569
		745			690

There are a number of pension plans in the United Kingdom, Ireland, the United States and Canada where the plan assets are less than the accumulated benefit obligations at 30 June 2003. With respect to these plans, the aggregated projected benefit obligations, accumulated benefit obligations and fair value of plan assets are £3,713 million, £3,522 million and £2,496 million, respectively.

     The following weighted average assumptions were used to determine the group’s obligations for the significant plans:

					US plans					Non-US plans
	2003		2002		2001		2003		2002		2001
	%		%		%		%		%		%
Discount rate		5.9		7.5		7.5		5.2		5.9		6.2
Expected return on plan assets		6.7		9.5		10		7.1		7.8		7.6
Salary increases		3.5		6.25		6.25		4.0		4.5		4.5

Contributions are made by the group, on actuarial advice, to provide assets sufficient to cover the benefit entitlements of plan participants. Generally, benefits are based on a formula recognising length of service and earnings close to retirement.

Postretirement benefits other than pensions The group also operates a number of plans, primarily in the United States, which provide employees with postretirement insurance. The plans are generally unfunded. The liability in respect of these benefits is assessed by qualified independent actuaries under the projected unit method and is included in other long term liabilities.

      The postretirement medical and life insurance costs for the plans in the United States, calculated in accordance with SFAS No. 106,were as follows:

	2003			2002			2001
	£ million			£ million			£ million
Service cost		(1	)		(2	)		(3	)
Interest cost		(6	)		(9	)		(15	)
Expected return on assets		2			1			1
Amortisation of unrecognised net gain		–			1			2
Disposal of Pillsbury		–			174			–
Other terminations, curtailments and settlements		4			–			–
Postretirement (charge)/income		(1	)		165			(15	)

126 Diageo Annual Report 2003
Notes to the consolidated financial statements

32 Reconciliation to US generally accepted accounting principles continued
	2003			2002
	£ million			£ million
Accumulated postretirement benefit obligations at beginning of the year		76			227
Exchange adjustments		(6	)		(10	)
Service cost		1			2
Interest cost		6			9
Canadian plan not previously disclosed		5			–
Plan amendments		–			5
Actuarial loss/(gain)		19			(3	)
Benefits and expenses paid		(5	)		(9	)
Disposal of Pillsbury		–			(145	)
Other disposals		(18	)		–
Accumulated postretirement benefit obligations at end of the year		78			76
Plan assets at fair value at beginning of the year		15			15
Exchange adjustments		(1	)		(1	)
Actual return on plan assets		(1	)		1
Contributions by the group		4			9
Benefits and expenses paid		(5	)		(9	)
Settlements		(10	)		–
Plan assets at fair value at end of the year		2			15
Excess of benefit obligations over plan assets		(76	)		(61	)
Unrecognised prior service cost		4			4
Unrecognised net gain/(loss)		12			(6	)
Accrued postretirement benefits at end of the year		(60	)		(63	)

The weighted average discount rate used for determining the obligations of postretirement medical plans is 5.9% (2002 — 7.5%; 2001 — 7.5%). Medical inflation for beneficiaries is 9% reducing by 1% per year to 5%.

The impact on the service and interest cost of the postretirement cost and the accumulated postretirement benefit obligations of a 1% increase and a 1% decrease in future medical care inflation is as follows:
	2003			2002			2001
	£ million			£ million			£ million
Impact of 1% increase in medical care inflation rates:
Aggregate of service cost and interest cost		1			1			2
Accumulated postretirement benefit obligations at end of the year		8			8			15
Impact of 1% decrease in medical care inflation rates:
Aggregate of service cost and interest cost		(1	)		(1	)		(1	)
Accumulated postretirement benefit obligations at end of the year		(7	)		(7	)		(14	)

127 Diageo Annual Report 2003

Company balance sheet

						30 June 2003						30 June 2002
	Notes		£ million			£ million			£ million			£ million
Fixed assets
Tangible assets		35		11						9
Investments		35		28,385						28,380
							28,396						28,389
Current assets
Amounts owed by subsidiaries				8,234						6,742
Other debtors — due within one year				54						59
Other debtors — due after one year				20						21
Cash at bank				13						–
							8,321						6,822
Creditors — due within one year
Borrowings		37		(21	)					(258	)
Other creditors		36		(555	)					(548	)
							(576	)					(806	)
Net current assets							7,745						6,016
Total assets less current liabilities							36,141						34,405
Creditors — due after one year
Borrowings		37		–						(23	)
Amounts owed to subsidiaries		38		(19,456	)					(16,506	)
							(19,456	)					(16,529	)
Provisions for liabilities and charges							(6	)					(8	)
							16,679						17,868
Capital and reserves
Capital and reserves
Called up share capital		22					897						930
Share premium account				1,327						1,324
Merger reserve				9,161						9,161
Capital redemption reserve				3,046						3,012
Profit and loss account				2,248						3,441
Reserves attributable to equity shareholders		39					15,782						16,938
Shareholders’ funds							16,679						17,868

These financial statements were approved by a duly appointed and authorised committee of the board of directors on 3 September 2003 and were signed on its behalf by PS Walsh and NC Rose, directors.

128 Diageo Annual Report 2003

Notes to the company balance sheet

33 Company profit and loss account
The company’s results are included in the consolidated profit and loss account, so a separate profit and loss account is not presented.

34 Directors’ emoluments
	2003		2002
	£000		£000
Executive directors — remuneration including bonuses		3,036		4,316
Fees to non-executive directors		851		637
		3,887		4,953

The total emoluments, share option gains and payments under other long term incentive plans received by the highest paid director were £3,612,000 (2002 — £3,664,000). The aggregate amount of gains made by the directors from the exercise of share options and from the vesting of awards during the year was £1,725,000 (2002 — £2,581,000) and payments under other long term incentive plans totalled £173,000 (2002 — £291,000). Further information on directors’ emoluments, share and other interests, transactions and pension entitlements is included in the directors’ remuneration report in this annual report.

35 Fixed assets
	Tangible assets										Investments
				Shares in					Other
				subsidiaries		Own shares			investments		Total
	£ million			£ million		£ million			£ million		£ million
Cost
At 30 June 2002		32			28,160		247			10		28,417
Additions		8			–		97			–		97
Disposals		(10	)		–		(44	)		–		(44	)
At 30 June 2003		30			28,160		300			10		28,470
Depreciation/amortisation
At 30 June 2002		23			–		29			8		37
Provided during the year		5			35		–			–		35
Amortisation of own shares		–			–		27			–		27
Disposals		(9	)		–		(14	)		–		(14	)
At 30 June 2003		19			35		42			8		85
Net book value
At 30 June 2003		11			28,125		258			2		28,385
At 30 June 2002		9			28,160		218			2		28,380

Investment in own shares at 30 June 2003 comprised 44.9 million ordinary shares (2002 — 38.5 million ordinary shares). The shares are held by employee trusts for the sole purpose of satisfying obligations under employee share schemes operated by the group.

     Details of the principal group companies are given after these financial statements.

36 Other creditors — due within one year
	2003		2002
	£ million		£ million
Ordinary dividends payable		482		458
Other creditors and accruals		73		90
		555		548

129 Diageo Annual Report 2003

37 Borrowings
	2003		2002
	£ million		£ million
Analysis by year of repayment
From one to two years		–		23
Due after one year		–		23
Due within one year		21		258
		21		281

		Year end
		interest rates		2003		2002
	Currency	%		£ million		£ million
Overdrafts					–		110
Bonds 2002	Euro		6.25		–		148
Bonds 2003	US dollar	Various			21		23
					21		281

The interest rates shown in the table above are those contracted on the underlying borrowings before taking into account any interest rate protection.

38 Amounts owed to subsidiaries

The amounts owed to subsidiaries include £343 million of 9.42% unsecured cumulative capital interests (2002 — £371 million). These securities are subordinated to all other liabilities of the company. The securities are redeemable only at the option of the company in or after 2004 or in the event of certain fiscal or legal changes in the United States or the United Kingdom. Interest and redemption payments may only be made to the extent that the company has adequate distributable profits or, in the case of a redemption, out of the proceeds of an issue of shares. To the extent that dividend or redemption payments have not been made when due, the company has covenanted that it will not make any distribution on any share capital which ranks junior to these securities.

39 Reserves attributable to equity shareholders
	Share				Capital
	premium		Merger		redemption		Profit and
	account		reserve		reserve		loss account			Total
	£ million		£ million		£ million		£ million			£ million
At 30 June 2002		1,324		9,161		3,012		3,441			16,938
Profit for the year		–		–		–		445			445
Dividends		–		–		–		(786	)		(786	)
Premiums on share issues, less expenses		3		–		–		–			3
Repurchase of own shares		–		–		34		(852	)		(818	)
At 30 June 2003		1,327		9,161		3,046		2,248			15,782

The profit and loss account reserve is available for the payment of dividends.

40 Contingent liabilities

The company has guaranteed certain borrowings of subsidiaries which at 30 June 2003 amounted to £5,752 million (2002 — £6,168 million). The company has also provided irrevocable guarantees relating to certain of its Irish and Dutch subsidiaries. In addition, the company has certain obligations with regard to the group’s non-equity minority interests (see note 25). In connection with the disposal of Pillsbury, the company has guaranteed the debt of a third party to the amount of $200 million (£121 million). In connection with the sale of Burger King, the company together with certain of its wholly owned subsidiaries, has agreed to guarantee up to $850 million (£515 million) of external borrowings of Burger King (see note 29).

130 Diageo Annual Report 2003

Principal group companies

The companies listed below include those which principally affect the profits and assets of the group. The operating companies listed below may carry on the business described in the countries listed in conjunction with their subsidiaries and other group companies. A full list of subsidiaries, all of which are consolidated, will be included in the company’s next annual return having made use of the exemption in Section 231 of the Companies Act 1985.

	Country of		Country of	Percentage of
	incorporation		operation	equity owned		Business description
Premium drinks
Diageo Ireland	Ireland		Worldwide	100	%	Production, marketing and
(formerly Guinness UDV Ireland)						distribution of premium drinks.
Diageo Great Britain Limited	England		Worldwide	100	%	Production, marketing and
(formerly Guinness United Distillers						distribution of premium drinks.
& Vintners Limited)
Diageo Scotland Limited		Scotland	Worldwide	100	%	Production, marketing and
(formerly Guinness United Distillers						distribution of premium drinks.
& Vintners Scotland Limited)
Guinness United Distillers & Vintners BV		Netherlands	Worldwide	100	%	Production, marketing and
						distribution of premium drinks.
Guinness United Distillers & Vintners		Netherlands	Worldwide	100	%	Production, marketing and
Amsterdam BV						distribution of premium drinks.
Diageo North America, Inc		United States	Worldwide	100	%	Production, importing and
(formerly Guinness UDV North America, Inc)						marketing of premium drinks.
Joseph E Seagram & Sons, Inc		United States	Worldwide	100	%	Production, marketing and
(merged into Diageo North America, Inc						distribution of premium drinks.
on 16 December 2002)
Quick service restaurants
Burger King Corporation		United States	Worldwide	100	%	Quick service restaurants.
(disposed of on 13 December 2002)
Corporate
Diageo Capital plc (a)		Scotland	United Kingdom	100	%	Financing company for the group.
Diageo Finance plc (a)		England	United Kingdom	100	%	Financing company for the group.
Diageo Investment Corporation		United States	United States	100	%	Financing company for US group.
Associates
Moët Hennessy, SNC (b)		France	Worldwide	34	%	Production and distribution
						of premium drinks.
General Mills, Inc (c)		United States	Worldwide	21	%	Manufacture and marketing
						of consumer food products.

(a) Directly owned by Diageo plc.

(b) French partnership.

(c) The group owns 79 million shares of common stock (par value $0.10 each) in General Mills, Inc.

All percentages, unless otherwise stated, relate to holdings of ordinary share capital and are equivalent to the percentages of voting rights held by the group.

131 Diageo Annual Report 2003

Unaudited computation of ratio of earnings to fixed charges and preferred share dividends

Under UK GAAP (unaudited)
	Year ended 30 June
	2003			2002			2001			2000			1999
	£ million			£ million			£ million			£ million			£ million
Earnings
Income before taxes on income, and minority interests		654			2,336			1,722			1,451			1,467
Loss/(income) from discontinued operations before taxes on income and minority interests		1,235			(606	)		(536	)		(581	)		(527	)
Less: Share of associates income other than 50% associates		(379	)		(200	)		(169	)		(161	)		(152	)
Add: Dividend income receivable from associates other than 50% associates		57			76			84			44			41
Add: Fixed charges		574			563			498			515			475
Less: Preferred share dividends payable		(35	)		(38	)		(37	)		(37	)		(36	)
		2,106			2,131			1,562			1,231			1,268
Fixed charges
Interest payable		522			515			450			466			431
Add: Preferred share dividends payable		35			38			37			37			36
Add: Share of 50% associates interest payable		–			–			1			–			1
Add: One third of rental expense for continuing operations		17			10			10			12			7
		574			563			498			515			475

	ratio		ratio		ratio		ratio		ratio
Ratio		3.7		3.8		3.1		2.4		2.7

Under US GAAP (unaudited)
	Year ended 30 June
	2003			2002			2001			2000			1999
	£ million			£ million			£ million			£ million			£ million
Earnings
Net income from continuing operations		487			2,554			758			798			392
Add: Minority interest charges		92			87			80			74			85
Add: Taxes on income from continuing operations		449			706			309			317			286
Less: Share of unconsolidated affiliates income other than 50% unconsolidated affiliates		(384	)		(239	)		(106	)		(142	)		(229	)
Add: Dividend income receivable from unconsolidated affiliates other than 50% unconsolidated affiliates		57			76			84			44			41
Add: Fixed charges		672			1,029			545			552			499
Less: Preferred share dividends payable		(35	)		(38	)		(37	)		(37	)		(36	)
		1,338			4,175			1,633			1,606			1,038
Fixed charges
Interest payable		609			950			461			469			433
Add: Preferred share dividends payable		35			38			37			37			36
Add: Share of 50% unconsolidated affiliates interest payable		1			1			2			2			1
Add: One third of rental expense for continuing operations		27			40			45			44			29
		672			1,029			545			552			499

	ratio		ratio		ratio		ratio		ratio
Ratio		2.0		4.1		3.0		2.9		2.1

132 Diageo Annual Report 2003

Additional information for shareholders

Legal proceedings

(i) Colombian excise duties In August 2000, Diageo learned that the Governors of the Departments of the Republic of Colombia and the City of Bogotá (the Departments) were considering initiating legal proceedings against major spirits companies in relation to unpaid excise duties and taxes on products that are smuggled into Colombia by third parties. Such proceedings are likely to be similar to the following actions which were brought by foreign countries against a number of major tobacco companies: (1) the action brought by the Attorney General of Canada against RJ Reynolds (the Canada action) in December 1999; (2) the action brought by the European Union, its member states and the Departments of Colombia against Philip Morris and British American Tobacco (the EU action) on 19 May 2000; (3) the action brought by Ecuador, Belize and Honduras against Philip Morris, RJ Reynolds and British American Tobacco and various other tobacco companies (the Ecuador action) on 20 December 2001; and (4) the action brought by the European Union and its member states against RJ Reynolds (the Second EU action) on 30 October 2002.
     In the Canada action, the complaint was dismissed on 30 June 2000. On 12 October 2001, the Second Circuit Court of Appeals affirmed the District Court’s order of dismissal. The Attorney General of Canada filed a petition for writ of certiorari to the US Supreme Court on 7 March  2002. The US Supreme Court subsequently denied Canada’s petition for certiorari.
     The EU action was dismissed by the trial court on 19 February 2002. On 25 March 2002, the EU and the Departments of Colombia appealed the court’s dismissal. The Second Circuit has heard oral argument on the appeal, but has not yet rendered a decision. The trial court dismissed the Ecuador action on 26 February 2002. On 26 March 2002, Belize, Honduras and Ecuador appealed this decision to the Eleventh Circuit Court of Appeals. On 14 August 2003 the Eleventh Circuit Court of Appeals affirmed the trial court’s order of dismissal.
     Finally, the Second EU action, which alleges that the RJ Reynolds entities violated the Federal RICO statute by distributing products through distributors and others with alleged links to smuggling and money laundering, has been stayed pending a decision by the Second Circuit in the EU action.
     The directors intend that any proceedings of this kind that might be brought against Diageo will be strenuously defended. In December 2000, Diageo filed suits against the Departments challenging the legality of any claim outside the Colombian administration and judicial system and also challenging the legality of the discriminatory nature of the Colombian taxing system; several of these suits are pending.

(ii) Hakki v. Adolph Coors Company et al. Diageo learned on 20 November 2003 that a purported class action lawsuit, Hakki v. Adolph Coors Company et al., was commenced against a number of alcohol beverage companies on 14 November 2003, including Diageo, in the Superior Court of Washington, D.C. Diageo has not been served with a lawsuit. The complaint asserts claims under the District of Columbia Consumer Protection Procedures Act (DCCPPA) and the common law of the District of Columbia that the defendants specifically targeted the US advertising and marketing of certain of their products to individuals below the 21 year-old legal purchase age. The complaint alleges that ‘at least 15-20% of all alcoholic beverages sold in the United States are consumed by underage drinkers’. The complaint further alleges that profits earned by the defendants from the alleged illegal sales to underaged drinkers ‘greatly exceed $1 billion per year’.
     The lawsuit seeks certification as a class action on behalf of (a) parents and guardians whose funds were used by their children under 21 from 1982 to the present without their knowledge to purchase alcohol beverages marketed by the defendants, on whose behalf monetary recovery is sought and (b) the parents and guardians of all children under 21, on whose behalf the complaint requests that the Court enter an injunction prohibiting the defendants from marketing alcohol beverages to underage persons.
     The prayer for relief in the complaint seeks, among other matters, (i) that defendants each disgorge to the purported class all amounts by which they have been allegedly unjustly enriched, plus costs and interest; (ii) rescission of the alleged transactions whereby defendants allegedly obtained revenues from the illegal sale of alcoholic beverages to underage consumers and ordered to pay such monies to the purported class; and (iii) to assess all defendants jointly and severally for all alleged actual damages sustained by the purported plaintiff class plus treble damages or $1,500 per violation, whichever is greater, punitive damages, attorneys fees, costs of suit, and interest.
     Diageo intends to strenuously defend this purported action.

(iii) Other The group has extensive international operations and is a defendant in a number of legal proceedings incidental to these operations. There are a number of legal claims or potential claims against the group, the outcome of which cannot at present be foreseen.
     Save as disclosed above, neither Diageo nor any member of the Diageo group is or has been engaged in, nor (so far as Diageo is aware) is there pending or threatened by or against it, any legal or arbitration proceedings which may have a significant effect on the financial position of the Diageo group. Provision is made in these financial statements for all liabilities that are probable and reliably measurable.

Material contracts

Agreement for the sale of Burger King Corporation On 13 December 2002, Gramet Holdings Corp. (Seller), Diageo and Delaware Champion Acquisition Corporation (Buyer) entered into an Amended and Restated Stock Purchase Agreement (the Agreement). Pursuant to the Agreement all of the capital stock of Burger King Corporation was sold to Buyer on 13 December 2002 (the Closing). The purchase price pursuant to the Agreement was $1.51 billion. As a result of closing adjustments specified in the Agreement (which were based on estimates as of the date of the sale), Diageo received approximately $1.2 billion in cash and a subordinated debt instrument issued by the holding company owning all of the capital stock of Burger King in an original principal amount of $212.5 million (the Debt Instrument). The Debt Instrument contains a 9% per annum payment in kind interest rate and matures on 13 June 2013. In connection with the transactions contemplated by the Agreement, Diageo (and certain of its wholly owned subsidiaries) agreed to guarantee (the Guarantee) a $750 million term loan and a $100 million revolving line of credit on behalf of Burger King and its subsidiaries (the Senior Loans). The Senior Loans have a term of five years from December 2002 although Diageo and Burger King agreed to structure their arrangements to encourage a refinancing by Burger King on a non-guaranteed basis prior to the end of five years providing the terms of any such refinancing are acceptable to Diageo. If a refinancing does not occur prior to 13 December 2005, Diageo will receive thereafter an annual guarantee fee of 5% of the outstanding principal amounts of the Senior Loans. Diageo will make an incentive payment of $10 million if the loans are refinanced during the first eighteen months following the Closing or a payment of $5 million if they are refinanced during the next eighteen months. In the event of such a refinancing, Diageo has agreed to compensate Burger King for any fees and additional interest incurred during the outstanding term of the Senior Loans. There can be no assurance that a non-guaranteed refinancing will occur prior to the end of the fifth year or prior to a payment being made by Diageo (or a wholly owned subsidiary of Diageo) under the Guarantee.

133 Diageo Annual Report 2003

Agreement for the combination of Pillsbury and General Mills On 31 October 2001 (Completion), Diageo completed the disposal to General Mills, Inc. of The Pillsbury Company and the capital stock or other equity interests of entities that comprised Diageo’s worldwide packaged food business.
     Under the terms of the transaction, Diageo received 134 million newly issued General Mills shares, constituting approximately 32% of General Mills’ share capital, and $3,830 million (£2,716 million) of cash and assumed debt. Diageo also had a contingent value right to receive up to $670 million (£475 million) on 30 April 2003 depending on the average General Mills share price over the 20 trading day period prior to such date and the number of shares of General Mills’ common stock that Diageo continued to hold on such date. Following completion Diageo exercised an option it had to sell 55 million of its General Mills shares back to General Mills at a price of $42.14 per share. As a result of such exercise, the maximum amount Diageo would have a right to receive pursuant to the contingent value right would be $395 million (£280 million). On 1 May 2003, Diageo received $273 million (£173 million) from General Mills pursuant to the contingent value right. This amount reflects a payment of the difference between the average General Mills stock price over the 20 trading day period prior to 30 April 2003 of $45.55 per share and $49.00, multiplied by Diageo’s then holding of 79 million General Mills shares.
     At Completion of the disposal, Diageo, General Mills and the Gramet Holdings Corporation, the sole stockholder of Pillsbury and an indirect wholly-owned subsidiary of Diageo, entered into the stockholders agreement. The stockholders agreement provides, amongst other things, for:

• a standstill provision, pursuant to which Diageo will be precluded from seeking to gain control of, or buying additional shares in, General Mills until the earlier of 20 years following Completion, or three years following the date on which Diageo owns less than 5% of General Mills’ outstanding shares;

• a requirement that Diageo dispose of at least 75% of the General Mills shares acquired at Completion within 10 years;

• voting restrictions for the General Mills shares acquired by Diageo. Diageo is required to vote all of its General Mills’ shares in favour of the director nominees recommended by the General Mills board of directors. On all other matters, the agreement generally requires pass-through voting by Diageo, so its shares will be voted in the same proportion as the other General Mills shares are voted for a period of 10 years or until Diageo owns less than 5% of General Mills’ outstanding shares, whichever is earlier;

• representation on the General Mills board for Diageo. So long as Diageo owns at least 50% of the 134 million shares it received in this combination, Diageo may designate two individuals to the General Mills board of directors. Those designees are Paul Walsh, Chief Executive Officer of Diageo, and Jack Keenan, former Deputy Chief Executive of Guinness United Distillers & Vintners. For as long as Diageo owns more than 5% of General Mills’ outstanding shares but less than 50% of the 134 million shares it received in the combination, the Group Chief Executive of Diageo will be designated to the General Mills board of directors;

• participation by Diageo in General Mills’ share repurchase programmes unless the repurchases are made by a tender offer or made in connection with the General Mills’ employee benefit plans; and

• registration rights for Diageo for its General Mills shares. At any time within one year of Completion or at any date over 20 months after Completion, Diageo may require General Mills to file a registration statement under the United States Securities Act of 1933 in respect of all or a portion of the General Mills shares received at Completion. Diageo may make up to 12 demands, but each registration must cover shares valued in excess of $300 million and only one demand may be made during any nine-month period.

Agreement for the acquisition of the Seagram spirits and wine businesses On 19 December 2000, Diageo and Pernod Ricard entered into a stock and asset purchase agreement with Vivendi Universal S.A., whereby Pernod Ricard and Diageo agreed to acquire stock and assets of the worldwide spirits, wines, wine and malt coolers, other malt beverages, fortified wines, non-alcoholic mixers and other alcoholic and non-alcoholic beverages business of The Seagram Company Ltd (the stock and asset purchase agreement). The acquisition was completed on 21 December 2001.
     The acquisition consideration, under the stock and asset purchase agreement, was $8.15 billion (£5.62 billion) in cash, subject to a number of adjustments. Diageo’s share of the purchase price, after adjustment, was £3.7 billion. The terms of the bidding and acquisition arrangements between Pernod Ricard and Diageo for the Seagram acquisition were governed by the Framework Implementation Agreement, a formal agreement entered into on 4 December 2000 which was subsequently amended and restated (the FIA). The FIA set out (amongst other things) principles governing the split of the Seagram spirits and wine businesses, the integration process for the business and the interim management of the non-core businesses. The FIA was terminated by the execution of a further agreement on 21 December 2002 which was subsequently amended and supplemented (the SOFIA) although this termination is without prejudice to any prior breaches of the FIA. Under the SOFIA, all material assets that were jointly acquired by Pernod Ricard and Diageo from Vivendi Universal S.A. are allocated between Diageo and Pernod Ricard. A number of the provisions of the FIA have been carried forward into the SOFIA in modified form. These include provisions relating to the parties’ responsibility for liabilities incurred by or in connection with the various businesses acquired under the stock and asset purchase agreement including for the sharing of certain liabilities between the parties. Where liability is to be shared between Diageo and Pernod Ricard, this is generally on the basis of the same 60.9/39.1 ratio adopted for the FIA (subject to, amongst other things, de minimis limitations that limit the ability of one party to recover from the other in certain cases and to detailed conduct of claim provisions). The SOFIA also provides for the settlement of various historic and ongoing claims between the parties under the FIA and for the settlement of various costs and expenses (including future costs and expenses). In addition, the SOFIA provides the basis for the management of the remaining jointly-owned businesses including for their future restructuring and/or liquidation.

134 Diageo Annual Report 2003
Additional information for shareholders

Related party transactions

On 23 October 2002 and 28 October 2002, Diageo and General Mills entered into two call option agreements in which Diageo granted to General Mills call options over 29,092,320 of General Mills’ ordinary shares held by Diageo. Under the call option agreements, from a date no earlier than 1 May 2003 through 28 September 2005, General Mills may exercise the call options subject to certain limitations. If General Mills exercises any call options during the period from 29 September 2005 to 28 October 2005, General Mills will be obligated to exercise the call options in respect of all covered ordinary shares not previously purchased. The premium for the call options was an aggregate of $89,313,422. General Mills has agreed to pay $51.56 per share upon exercise of the call options. The call options expire on 28 October 2005.
     Transactions with directors are disclosed in the directors’ remuneration report (see ‘Directors’ remuneration report – Additional information’).

Share capital

As at 14 November 2003, Diageo had an authorised share capital of 5,329 million ordinary shares of 28 101/108 pence each with an aggregate nominal value of £1,542 million and an allotted and fully paid share capital of 3,085 million ordinary shares of 28 101/108 pence each with an aggregate nominal value of £893 million.

Major shareholders At 14 November 2003, no substantial interest (3% or more) in the company’s ordinary share capital (voting securities) had been notified to the company. Diageo, so far as is known by the company, is not directly or indirectly owned or controlled by another corporation or by any government.
     Diageo knows of no arrangements, the operation of which may at a subsequent date result in a change of control of the company.
     As of the close of business at 14 November 2003, 220,979,140 ordinary shares, including those held through ADSs, were held by approximately 2,422 holders (including American Depositary Receipt (ADR) holders) with registered addresses in the United States, representing approximately 7% of the outstanding ordinary shares. At such date, 54,968,267 ADSs were held by 1,609 registered ADR holders. Since certain of such ordinary shares and ADSs are held by nominees or former GrandMet PLC or Guinness PLC ADR holders who have not re-registered their ADSs, the number of holders may not be representative of the number of beneficial owners in the United States or the ordinary shares held by them.

Trading market for shares The Diageo plc ordinary shares are listed on the London Stock Exchange (the Exchange) and on the Dublin and Paris Stock Exchanges. Diageo plc American Depositary Shares (ADSs), representing four Diageo plc ordinary shares each, are listed on The New York Stock Exchange (NYSE).
     The principal trading market for the ordinary shares is the Exchange. Shares are traded on the Exchange’s electronic order book. Orders placed on the order book are displayed on-screen through a central electronic system and trades are automatically executed, in price and then time priority, when orders match with corresponding buy or sell orders.
     Only member firms of the Exchange can enter or delete orders on behalf of clients or on their own account. All orders are anonymous. Although use of the order book is not mandatory, all trades, whether or not executed through the order book and regardless of size, are published immediately after execution. Trades greater than eight times normal market size, may be conducted under a worked principal regime, in which a member firm acting as principal commits to carry out, at some point in the future, a transaction in a size exceeding eight times normal market size. Member firms must agree a basis price with their client and must offer the potential for improvement in price and/or size. Worked principal agreements must be notified to the Exchange when entered into, although notifications are not published until the end of the business day or until 80% of the trade has been unwound.
     Diageo ordinary shares have a normal market size of 200,000. The normal market size classification for each equity security is subject to quarterly review in the light of trading volume in the previous quarter and to adjustment, as appropriate. The ordinary shares are a constituent element of the FTSE 100.
     Fluctuations in the exchange rate between the pound sterling and the US dollar will affect the US dollar equivalent of the pound sterling price of the ordinary shares on the Exchange and, as a result, will affect the market price of the ADSs on the NYSE. In addition, such fluctuations will affect the US dollar amounts received by holders of ADSs on conversion of cash dividends paid in pounds sterling on the underlying ordinary shares.

135 Diageo Annual Report 2003

The following table shows, for the periods indicated, the reported high and low middle market quotations (which represent an average of bid and asked prices) for the ordinary shares on the Exchange, taken from its Daily Official List, and the highest and lowest sales prices for ADSs as reported on the NYSE composite tape.

		Year ended 30 June
		2003		2002		2001		2000		1999
		pence		pence		pence		pence		pence
Per ordinary share	High		851		941		792		697		779
	Low		582		644		560		384		481

		$		$		$		$		$
Per ADS	High		52.36		55.01		45.38		44.25		51.75
	Low		38.00		38.50		32.56		24.75		33.00

		2003
		October		September		August		July		June		May		April
		pence		pence		pence		pence		pence		pence		pence
Per ordinary share	High		703.5		679.5		685.0		663.0		699.5		685.0		707.0
	Low		646.0		649.5		633.5		625.0		647.0		646.0		655.5

		$		$		$		$		$		$		$
Per ADS	High		48.18		44.40		43.95		44.80		46.94		44.60		44.51
	Low		43.66		42.27		41.20		40.59		43.50		42.17		41.25

At close of business on 14 November 2003, the market prices for ordinary shares and ADSs were 727 pence and $49.40, respectively.

The 9.42% cumulative guaranteed preferred securities, series A (the preferred securities) (liquidation preference $25 per security) issued by Grand Metropolitan Delaware, LP are traded on the NYSE. The following table shows, for the periods indicated, the highest and lowest sales prices of the preferred securities as reported on the NYSE composite tape.
		Year ended 30 June
		2003		2002		2001		2000		1999
		$		$		$		$		$
Per preferred security	High		28.20		28.22		27.62		28.00		51.75
	Low		26.95		26.66		25.27		24.31		33.00

		2003
		October		September		August		July		June		May		April
		$		$		$		$		$		$		$
Per preferred security	High		27.15		27.09		27.08		27.58		27.55		27.38		27.78
	Low		26.50		26.95		26.86		26.80		27.20		27.13		27.12

At close of business on 14 November 2003, the market price for the preferred securities was $26.53.

     As of 14 November 2003, 100% of the 22.4 million preferred securities were outstanding and were held by approximately 41,000 holders.

136 Diageo Annual Report 2003
Additional information for shareholders Annual Report 2003

Memorandum and articles of association

The following description summarises certain provisions of Diageo’s Memorandum and articles of association and applicable English law. This summary is qualified in its entirety by reference to the Companies Act 1985 of Great Britain (the Companies Act), as amended, and Diageo’s Memorandum and articles of association. Information on where investors can obtain copies of the Memorandum and articles of association is provided under — ‘Documents on display’ below.
     All of Diageo’s ordinary shares are fully paid. Accordingly, no further contribution of capital may be required by Diageo from the holders of such shares.

Objects and purposes Diageo is incorporated under the name Diageo plc, and is registered in England and Wales under registered number 23307. Diageo’s objects and purposes are set forth in the fourth clause of its Memorandum of Association and cover a wide range of activities, including to carry on the business of a holding company, to carry on the business of producing, distributing and marketing branded drinks and branded food products, operating fast food restaurant chains and brewing, distilling and manufacturing wines, spirits and mineral or other types of water as well as to carry on all other businesses necessary to attain Diageo’s objectives. The Memorandum of Association grants Diageo a broad range of powers to effect these objectives.

Directors Diageo’s articles of association provide for a board of directors, consisting (unless otherwise determined by an ordinary resolution of shareholders) of not fewer than three directors and not more than twenty-five directors, who shall manage the business and affairs of Diageo. Directors may be elected by the members in a general meeting or appointed by the board of directors. In addition, at each annual general meeting one-third of the directors, representing those directors who have been in office the longest since their last election, as well as any directors appointed by the board of directors since the last annual general meeting are required to resign and are then reconsidered for election, assuming they wish to stand for re-election.
     Under Diageo’s articles of association, a director cannot vote in respect of any proposal in which the director, or any person connected with the director, has a material interest. However, this restriction on voting does not apply to resolutions (a) giving the director any guarantee, security or indemnity in respect of obligations or liabilities incurred for the benefit of Diageo, (b) giving any guarantee, security or indemnity to a third party in respect of obligations of Diageo for which the director has assumed responsibility under an indemnity or guarantee, (c) relating to an offer of securities of Diageo in which the director participates or may participate as a holder of shares or other securities or in the underwriting, (d) relating to any contract in which the director is interested by virtue of the director’s interest in securities of Diageo or by reason of any other interest in or through Diageo, (e) concerning any other company in which the director (together with any connected person) is a shareholder or an officer or is otherwise interested, provided that the director (together with any connected person) is not interested in more than 1% of any class of the company’s equity share capital or the voting rights available to its shareholders, (f) relating to the arrangement of any employee benefit (including any retirement benefit plan) in which the director will share equally with other employees, and (g) relating to any insurance that Diageo purchases or maintains for its directors or any group of people, including directors.
     Under the articles of association, compensation awarded to executive directors may be decided by the board or any authorised committee of the board. The remuneration committee is responsible for making recommendations to the board concerning matters relating to remuneration policy. It is comprised of all the non-executive directors except for Lord Blyth.
     The directors are empowered to exercise all the powers of Diageo to borrow money, subject to the limitation that the aggregate amount of all liabilities and obligations of the group outstanding at any time shall not exceed an amount equal to twice the aggregate of the group’s paid up share capital and reserves calculated in the manner prescribed in the articles of association, unless sanctioned by an ordinary resolution of Diageo’s shareholders.
     No person may be appointed a director of Diageo if, at the time of their appointment, they have reached the age of 70. A director must retire at the first annual general meeting after their seventieth birthday. Directors are not required to hold any shares of Diageo as a qualification to act as a director.

Dividend rights Holders of Diageo’s ordinary shares may, by ordinary resolution, declare dividends but may not declare dividends in excess of the amount recommended by the directors. The directors may also pay interim dividends. No dividend may be paid other than out of profits available for distribution. Dividends may be paid to an approved depositary in currencies other than pounds sterling and such dividends will be calculated using an appropriate market exchange rate in London as determined by the directors in accordance with Diageo’s articles of association.
     If a dividend has not been claimed, the directors may invest the dividend or use it in some other way for the benefit of Diageo until the dividend is claimed. If the dividend remains unclaimed for 12 years after the date such dividend became due for payment, it will be forfeited and will revert to Diageo.
     Diageo’s articles of association permit payment or satisfaction of a dividend wholly or partly by distribution of specific assets, including fully paid shares or debentures of any other company. Such action must be directed by the general meeting which declared the dividend and upon the recommendation of the directors.

137 Diageo Annual Report 2003

Voting rights Voting at any general meeting of shareholders is by a show of hands unless a poll, which is a written vote, is duly demanded. On a show of hands, every shareholder who is present in person at a general meeting, including the duly authorised representative of a corporate holder of Diageo’s shares which is not itself a shareholder entitled to vote, has one vote regardless of the number of shares held. On a poll, every shareholder who is present in person or by proxy has one vote for every share held by that shareholder. A poll may be demanded by any of the following:

• the Chairman of the meeting;

• at least three shareholders entitled to vote and present in person, by proxy or by duly authorised representative at the meeting;

• any shareholder or shareholders representing in the aggregate not less than one-tenth of the total voting rights of all shareholders entitled to vote at the meeting and present in person, by proxy or by duly authorised representative; or

• any shareholder or shareholders holding shares conferring a right to vote at the meeting on which there have been paid-up sums in the aggregate equal to not less than one-tenth of the total sum paid up on all the shares conferring that right and present in person, by proxy or by duly authorised representative.

Matters are transacted at general meetings of Diageo by the proposing and passing of three kinds of resolutions:

• an ordinary resolution, which includes resolutions for the election, re-election and removal of directors, the approval of financial statements, the declaration of final dividends, the appointment or re-appointment of auditors, the increase of authorised share capital or the grant of authority to allot shares;

• a special resolution, which includes resolutions amending Diageo’s Memorandum and articles of association or relating to certain matters concerning Diageo’s winding up; and

• an extraordinary resolution, which includes resolutions modifying the rights of any class of Diageo’s shares at a meeting of the holders of such class.

An ordinary resolution requires the affirmative vote of a simple majority of the votes cast at a meeting at which there is a quorum. Special and extraordinary resolutions require the affirmative vote of not less than three-quarters of the votes cast at a meeting at which there is a quorum. The necessary quorum for a meeting of Diageo is a minimum of 10 persons entitled to attend and vote on the business to be transacted, each being a shareholder or a proxy for a shareholder or a duly authorised representative of a corporation which is a shareholder.
     In the case of an equality of votes, whether on a show of hands or on a poll, the Chairman of the meeting is entitled to cast the deciding vote in addition to any other vote he may have.

Liquidation rights In the event of the liquidation of Diageo, after payment of all liabilities and deductions in accordance with English law, the balance of assets available for distribution will be distributed among the holders of ordinary shares according to the amounts paid-up on the shares held by them. A liquidator may, with the sanction of a special resolution of the shareholders and any other sanction required by the Insolvency Act 1986, divide among the shareholders the whole or any part of Diageo’s assets. Alternatively, a liquidator may, upon the adoption of a special resolution of the shareholders, place the assets in whole or in part in trustees upon such trusts for the benefit of shareholders, but no shareholder is compelled to accept any assets upon which there is a liability.

Pre-emptive rights and new issues of shares While holders of ordinary shares have no pre-emptive rights under the articles of association, the ability of the directors to cause Diageo to issue shares, securities convertible into shares or rights to shares, otherwise than pursuant to an employee share scheme, is restricted. Under the Companies Act, the directors of a company are, with certain exceptions, unable to allot any equity securities without express authorisation, which may be contained in a company’s articles of association or given by its shareholders in general meeting, but which in either event cannot last for more than five years. Under the Companies Act, Diageo may also not allot shares for cash without first making an offer to existing shareholders to allot shares on the same or more favourable terms in proportion to their respective shareholdings, unless this requirement is waived by a special resolution of the shareholders.

Disclosure of interests in Diageo’s shares There are no provisions in the articles of association whereby persons acquiring, holding or disposing of a certain percentage of Diageo’s shares are required to make disclosure of their ownership percentage, although there are such requirements under the Companies Act. The basic disclosure requirement under sections 198 to 211 of the Companies Act imposes upon a person interested in the shares of Diageo a statutory obligation to notify Diageo in writing of details set out in the Companies Act where:

(a) he acquires or ceases to have an interest in shares comprising any class of Diageo’s issued and voting share capital; and

(b) as a result, either he obtains, or ceases to have:

(i) a ‘material interest’ in 3% or more of the nominal value of any class of Diageo’s issued voting share capital; or

(ii) an aggregate interest (whether material or not) in 10%, or more of the nominal value of any class of Diageo’s issued voting share capital or the percentage of his interest in Diageo’s issued voting share capital remains above the relevant level and changes by a whole percentage point or more.

A ‘material’ interest means, broadly, any beneficial interest, including those of a spouse or a child or a step-child, those of a company which is accustomed to act in accordance with the relevant person’s instructions or in which one third or more of the votes are controlled by such person and certain other interests set out in the Companies Act, other than those of an investment manager or an operator of a unit trust/recognised scheme/collective investment scheme/open-ended investment company.

138 Diageo Annual Report 2003
Additional information for shareholders Annual Report 2003

The Companies Act sets out particular rules of disclosure where two or more parties have entered into an agreement to acquire interests in shares of a public company, and the agreement imposes obligations/restrictions on any such party with respect to the use, retention or disposal of their interests in the shares and an acquisition of shares by a party pursuant to the agreement has taken place.
Under the Companies Act, Diageo may, by notice in writing, require a person that Diageo knows or has reasonable cause to believe is or was during the three years preceding the date of notice interested in Diageo’s shares to indicate whether or not that is correct and, if that person does or did hold an interest in Diageo’s shares, to provide certain information as set out in the Companies Act.
     The Companies Act further deals with the disclosure by persons of interests in shares or debentures of the companies of which they are directors and certain associated companies.
     There are additional disclosure obligations under the Rules Governing Substantial Acquisitions of Shares where a person acquires 15% or more of the voting rights of a listed company or when an acquisition increases his holding of shares or rights over shares so as to increase his voting rights beyond that level by a whole percentage point. Notification in this case should be to the London Stock Exchange and to Diageo no later than noon on the business day following the date of the acquisition.
     The City Code on Takeovers and Mergers also contains strict disclosure requirements with regard to dealings in the securities of an offeror or offeree company on all parties to a takeover and also to their respective associates during the course of an offer period.

General meetings and notices At least 21 days written notice of an Annual General Meeting is required. An Annual General Meeting may be held on short notice provided that all the shareholders entitled to attend and vote at the meeting agree. Any general meeting which is not an Annual General Meeting is called an ‘Extraordinary General Meeting’. At least 14 days written notice of any Extraordinary General Meeting is required, unless a special resolution or a resolution on which special notice has been given to Diageo is proposed, in which case 21 days written notice is required. Any Extraordinary General Meeting may be held on short notice if a majority in number of shareholders, who together hold at least 95% in nominal value of Diageo’s shares giving a right to attend and vote at such meeting, agree.
     Under Diageo’s articles of association, the Annual General Meeting of shareholders must be held within 15 months of the preceding Annual General Meeting and at a time and place determined by the directors.

Variation of rights If, at any time, Diageo’s share capital is divided into different classes of shares, the rights attached to any class may be varied, subject to the provisions of the Companies Act, either with the consent in writing of the holders of three-quarters in nominal value of the shares of that class or upon the adoption of an extraordinary resolution passed at a separate meeting of the holders of the shares of that class.
     At every such separate meeting, all of the provisions of the articles of association relating to proceedings at a general meeting apply, except that (a) the quorum is to be the number of persons (which must be at least two) who hold or represent by proxy not less than one-third in nominal value of the issued shares of the class or, if such quorum is not present on an adjourned meeting, one person who holds shares of the class regardless of the number of shares he holds, (b) any person present in person or by proxy may demand a poll, and (c) each shareholder will have one vote per share held in that particular class in the event a poll is taken.
     Class rights are deemed not to have been varied by the creation or issue of new shares ranking equally with or subsequent to that class of shares in all respects or by the reduction of the capital paid up on such shares or by the purchase or redemption by Diageo of its own shares in accordance with the Companies Act and the articles of association.

Repurchase of shares Subject to authorisation by shareholder resolution, Diageo may purchase its own shares in accordance with the Companies Act. Any shares which have been bought back must be cancelled immediately upon completion of the purchase, thereby reducing the amount of Diageo’s issued share capital. Diageo currently has shareholder authority to buy back up to 320,799,370 ordinary shares during the period up to the Annual General Meeting. The minimum price which must be paid for such shares is 28 101/108 pence and the maximum price is an amount equal to 105% of the average of the middle market quotations for an ordinary share for the five preceding business days.

Exchange controls

There are currently no UK foreign exchange control restrictions on the payment of dividends to US persons on Diageo’s ordinary shares or preferred securities or on the conduct of Diageo’s operations.
     There are no restrictions under the company’s Memorandum and articles of association or under English law that limit the right of non-resident or foreign owners to hold or vote the company’s ordinary shares or preferred securities.

Documents on display

The latest annual report, the annual review and any related documents of the company may be inspected at the Securities and Exchange Commission’s public reference rooms located at 450 Fifth Street, NW Washington, DC 20549. Information on the operation of the public reference room can be obtained by calling the Securities and Exchange Commission at 1 800 SEC 0330.

139 Diageo Annual Report 2003

Taxation

This section provides a descriptive summary of United States federal income tax and United Kingdom tax consequences that are likely to be material to the holders of the ordinary shares, ADSs or preferred securities, who hold their ordinary shares, ADSs or preferred securities as capital assets for tax purposes. It does not purport to be a complete technical analysis or a listing of all potential tax effects relevant to the ownership of the ordinary shares, ADSs and preferred securities. This section does not apply to any holder who is subject to special rules, including:

• a dealer in securities or foreign currency;

• a trader in securities that elects to use a mark-to-market method of accounting for securities holdings;

• a tax-exempt organisation;

• a life insurance company;

• a person liable for alternative minimum tax;

• a person that actually or constructively owns 10% or more of the voting stock of Diageo;

• a person that holds ordinary shares, ADSs or preferred securities as part of a straddle or a hedging or conversion transaction; or

• a person whose functional currency is not the US dollar.

For United Kingdom tax purposes, special rules may apply, in addition to those set out above, to holders that are banks, regulated investment companies or other financial institutions. This section is based on the Internal Revenue Code of 1986, as amended, its legislative history, existing and proposed regulations, published rulings and court decisions, and the laws of the United Kingdom all as currently in effect, as well as on the Conventions Between the Government of the United States of America and the Government of the United Kingdom of Great Britain and Northern Ireland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Tax on Income and Capital Gain entered into force 25 April 1980 (the Old Treaty) and entered into force on 31 March 2003 (the New Treaty). These laws are subject to change, possibly on a retroactive basis.
     The New Treaty will be effective in respect of taxes withheld at source for amounts paid or credited on or after 1 May 2003. Other provisions of the New Treaty, however, will take effect on 1 January 2004. The rules of the Old Treaty will remain applicable until these effective dates. A US holder who is eligible for the benefits of the Old Treaty and the New Treaty, however, may, in certain circumstances, elect to have the Old Treaty apply in its entirety for a period of 12 months after the applicable effective dates of the New Treaty. Holders of ordinary shares, ADSs or preferred securities are advised to consult their own tax advisers with respect to the overall tax implications of the New Treaty, including specifically the implications of making the above mentioned election.
     In addition, this section is based in part upon the representations of the Depositary and the assumption that each obligation in the Deposit Agreement and any related agreement will be performed in accordance with its terms. In general, and taking into account this assumption, for United States federal income tax purposes and for purposes of the Old Treaty and New Treaty, holders of ADRs evidencing ADSs will be treated as the owner of the shares represented by those ADSs. Exchanges of shares for ADSs, and ADSs for shares, generally will not be subject to United States federal income tax or to United Kingdom tax.

A US holder is a beneficial owner of ordinary shares, ADSs or preferred securities that is for United States federal income tax purposes:

• a citizen or resident of the United States;

• a United States domestic corporation;

• an estate whose income is subject to United States federal income tax regardless of its source; or

• a trust if a United States court can exercise primary supervision over the trust’s administration and one or more United States persons are authorised to control all substantial decisions of the trust.

This section is not intended to provide specific advice and no action should be taken or omitted to be taken in reliance upon it. This discussion addresses only United States federal income tax and United Kingdom income tax, corporation tax, capital gains tax, inheritance tax and stamp duty tax.

Ordinary shares or ADSs United Kingdom taxation There is no United Kingdom withholding tax on dividends. A shareholder resident for United Kingdom tax purposes in the United Kingdom that receives a dividend from the company will generally be entitled to a tax credit equal to one-ninth of the dividend. The Old Treaty, if applicable by virtue of an election under the New Treaty, allows an eligible US holder to claim a similar tax credit from the United Kingdom Inland Revenue. However, it also provides for a notional United Kingdom withholding tax which, in the case of an eligible US holder that owned, directly or indirectly, less than 10% of the voting stock of the company, is set at 15% of the aggregate of the dividend and the credit. At current rates, the notional withholding tax would eliminate the tax credit payment but no withholding in excess of the tax credit payment would be imposed upon the US holder. Thus, for example, an eligible US holder that received a dividend of £9 would also be entitled to receive from the United Kingdom Inland Revenue a tax credit of £1 (one-ninth of the dividend received), but the entire payment of £1 would be eliminated by the notional United Kingdom withholding tax, which would result in a net distribution, before United States tax, of £9 to the US holder.
     Under the New Treaty, an eligible US holder will not be entitled to a tax credit nor be subject to a withholding tax by the United Kingdom.

140 Diageo Annual Report 2003
Additional information for shareholders

United States taxation Under the United States federal income tax laws, and subject to the passive foreign investment company, or PFIC, rules discussed below, the gross amount of any dividend paid to a US holder by Diageo out of its current or accumulated earnings and profits (as determined for United States federal income tax purposes) is subject to United States federal income taxation. Dividends paid to a non-corporate US holder after 31 December 2002 and before 1 January 2009 that constitute qualified dividend income will be taxable to the holder at a maximum tax rate of 15% provided that the ordinary shares or ADSs are held for more than 60 days during the 120 day period beginning 60 days before the ex-dividend date and the holder meets other holding period requirements. Dividends paid by Diageo with respect to its ordinary shares or ADSs will be qualified dividend income. The dividend is taxable to the US holder when the holder, in the case of ordinary shares, or the Depositary, in the case of ADSs, receives the dividend, actually or constructively. US holders that are eligible for the benefits of the Old Treaty and have properly filed Internal Revenue Form 8833 may include any United Kingdom tax deemed withheld from the dividend payment in this gross amount even though they do not in fact receive it. Subject to certain limitations, the United Kingdom tax deemed withheld in accordance with the Old Treaty and paid over to the United Kingdom will be creditable against the US holder’s United States federal income tax liability. In addition, special rules apply in determining the foreign tax credit limitation with respect to dividends that are subject to the maximum 15% tax rate. Under the New Treaty, a US holder will not be entitled to a United Kingdom tax refund, but also will not be subject to United Kingdom withholding tax. In that case, the US holder therefore will include in income for United States federal income tax purposes only the amount of the dividend actually received, and the receipt of a dividend will not entitle the US holder to a foreign tax credit.
   The dividend must be included in income when the US holder, in the case of shares, or the Depositary, in the case of ADSs, receives the dividend, actually or constructively. The dividend will not be eligible for the dividends-received deduction generally allowed to United States corporations in respect of dividends received from other United States corporations. Dividends will be income from sources outside the United States, but generally will be ‘passive income’ or ‘financial services income’ which is treated separately from other types of income for purposes of computing the foreign tax credit allowable. The amount of the dividend distribution that must be included in income of a US holder will be the US dollar value of the pence payments made, determined at the spot United Kingdom sterling/US dollar foreign exchange rate on the date the dividend distribution is included in income, regardless of whether the payment is in fact converted into US dollars. Generally, any gain or loss resulting from currency exchange fluctuations during the period from the date the dividend payment is included in income to the date the payment is converted into US dollars will be treated as ordinary income or loss and will not be eligible for the special tax rate applicable to qualified dividend income. The gain or loss generally will be income or loss from sources within the United States for foreign tax credit limitation purposes. Distributions in excess of current and accumulated earnings and profits, as determined for United States federal income tax purposes, will be treated as a non-taxable return of capital to the extent of the holder’s basis in the ordinary shares or ADSs and thereafter as capital gain.

Preferred securities United Kingdom taxation Payments to a US holder of preferred securities whose holding is not effectively connected with a permanent establishment or a fixed base in the United Kingdom made (i) by Grand Metropolitan Delaware, LP pursuant to the preferred securities or (ii) by the company pursuant to its guarantee thereof will not be subject to United Kingdom withholding tax provided that, as regards the portion of any payment by the company which represents income in respect of the preferred securities:

(a) that portion is exempt from taxation in the United Kingdom under Article 22 (other income) of the Old Treaty or New Treaty, as applicable;

(b) the US holder is entitled to and has claimed the benefit of the Old Treaty or New Treaty, as applicable, in respect of such payment; and

(c) the company has received from the Inland Revenue, prior to the payment being made, a direction pursuant to the Old Treaty or New Treaty, as applicable, allowing payment to be made without deduction of United Kingdom tax.

If (b) or (c) above is not satisfied so that tax is withheld by the company, a person entitled to exemption under the Old Treaty or New Treaty, as applicable, may claim repayment of such tax from the Inland Revenue.

United States taxation A US holder of preferred securities will be required to include in gross income its distributive share of the net income of Grand Metropolitan Delaware, LP, which generally will not exceed the distributions received on the preferred securities. This income will not be eligible for the dividends received deduction, and will be foreign source ‘passive’ or, in the case of certain holders, ‘financial services’ income for foreign tax credit purposes.

Taxation of capital gain United Kingdom taxation A citizen or resident of the United States who is neither resident nor ordinarily resident in the United Kingdom will not be liable for United Kingdom tax on gains realised or accrued on the sale or other disposal of ordinary shares, ADSs or preferred securities unless the ordinary shares or ADSs or preferred securities are held in connection with a trade or business carried on by the holder in the United Kingdom through a branch or agency, or, in relation to accounting periods commencing on or after 1 January 2003, a United Kingdom permanent establishment. A US holder will be liable for United States federal income tax on such gains to the same extent as on any other gains from sale or dispositions of shares or stock.
     A US holder who is liable for both United Kingdom and United States tax on a gain on the disposal of ADSs, or ordinary shares or preferred securities will generally be entitled, subject to certain limitations, to a credit against the holder’s United States federal income tax liability for the amount of any United Kingdom tax paid in respect of such gain.

US taxation Subject to the PFIC rules discussed below, a US holder who sells or otherwise disposes of ordinary shares, ADSs, or preferred securities, will recognise capital gain or loss for United States federal income tax purposes equal to the difference between the US dollar value of the amount that is realised and the tax basis, determined in US dollars, in the ordinary shares, ADSs or preferred securities. Capital gain of a non-corporate US holder that is recognised on or after 6 May 2003 and before 1 January 2009 is taxed at a maximum rate of 15% where the property is held more than one year. The gain or loss will generally be income or loss from sources within the United States for foreign tax credit limitation purposes.

141 Diageo Annual Report 2003

PFIC rules Diageo believes that ordinary shares, ADSs and preferred securities should not be treated as stock of a PFIC for United States federal income tax purposes, but this conclusion is a factual determination that is made annually and thus may be subject to change. If treated as a PFIC, unless a US holder elects to be taxed annually on a mark-to-market basis with respect to the ordinary shares, ADSs or preferred securities, gain realised on the sale or other disposition of ordinary shares, ADSs or preferred securities would in general not be treated as capital gain. Instead, US holders would be treated as if the holder had realised such gain and certain ‘excess distributions’ pro-rated over the holder’s holding period for the ordinary shares, ADSs or preferred securities and would be taxed at the highest tax rate in effect for each such year to which the gain was allocated, together with an interest charge in respect of the tax attributable to each such year. In addition, dividends received from Diageo will not be eligible for the special tax rates applicable to qualified dividend income if Diageo is a PFIC either in the taxable year of the distribution or the preceding taxable year, but instead will be taxable at rates applicable to ordinary income.

United Kingdom inheritance tax An ordinary share, ADS or preferred security held by an individual shareholder who is domiciled in the United States for the purposes of the Convention Between the United States and the United Kingdom relating to estate and gift taxes (the Convention) will not be subject to United Kingdom inheritance tax on the individual’s death (whether held on the date of death or gifted during the individual’s lifetime) except in the exceptional case where the ADS or ordinary share is part of the business property of a United Kingdom permanent establishment of the individual or pertains to a United Kingdom fixed base of an individual who performs independent personal services. The Convention generally provides for tax paid in the United Kingdom to be credited against tax payable in the United States and for tax paid in the United States to be credited against any tax payable in the United Kingdom, based on priority rules set forth in the Convention, in a case where an ordinary share, ADS or preferred security is subject both to United Kingdom inheritance tax and to United States federal gift or estate tax.

United Kingdom stamp duty and stamp duty reserve tax Stamp duty reserve tax (SDRT) arises upon the deposit of an underlying ordinary share with the Depositary. The Depositary will pay the SDRT but will recover an amount in respect of such tax from the initial holders of ADSs.
     No United Kingdom stamp duty will be payable on the acquisition or transfer of ADSs or preferred securities, provided that the instrument of transfer is not executed in the United Kingdom and remains at all times outside the United Kingdom. Furthermore, an agreement to transfer ADSs in the form of ADRs or preferred securities will not give rise to a liability to SDRT.
     Purchases of ordinary shares will be subject to United Kingdom stamp duty at the rate of 50 pence per £100 (or part), or SDRT at the rate of 0.5% of the price payable for the ordinary shares at the time of the transfer. However, where ordinary shares being acquired are transferred direct to the Depositary’s nominee, the only charge will generally be the higher SDRT charge of 1.5% of the price payable for the ordinary shares so acquired.

142 Diageo Annual Report 2003

Signatures

Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the Registrant certifies that it meets all of the requirements for filing on Form 20-F and has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorised.

Diageo plc
(Registrant)
/s/ NC ROSE

NC Rose
Chief Financial Officer
26 November 2003

143 Diageo Annual Report 2003

Exhibits

1.1	Memorandum and Articles of Association of Diageo plc (incorporated by reference to Diageo plc’s Form 6-K filed on 15 November 2002)
2.1	Indenture, among Diageo Capital plc, Diageo plc and Citibank N.A., dated as of 3 August 1998 (incorporated by reference to Exhibit 4.1 to Diageo plc’s Registration Statement on Form F-3 (File No. 333-8874))
2.2	Indenture, among Diageo Investment Corporation, Diageo plc and Citibank N.A., dated as of 1 June 1999 (incorporated by reference to Exhibit 2.2 to Diageo plc’s Annual Report on Form 20-F for the year ended 30 June 2001 (File No. 1-10691))
4.1	Amended and Restated Stock Purchase Agreement among Gramet Holdings Corp., Diageo plc and Delaware Champion Acquisition Corporation, dated as of 13 December 2002 (incorporated by reference to Diageo plc’s Form 6-K filed on 10 January 2003)
4.2	First Amendment to Agreement and Plan of Merger, dated 12 April 2001 by and among General Mills, Inc., General Mills North American Businesses, Inc., Diageo plc and The Pillsbury Company (incorporated by reference to Exhibit 4.1 to Diageo plc’s Annual Report on Form 20-F for the year ended 30 June 2001 (Commission File No. 1-10691))
4.3	Second Amendment to Agreement and Plan of Merger, dated as of 31 October 2001 by and among General Mills, Inc., General Mills North American Businesses, Inc., Diageo plc and The Pillsbury Company (incorporated by reference to Exhibit 4.2 to Diageo plc’s Annual Report on Form 20-F for the year ended 30 June 2001 (Commission File No. 1-10691))
4.4	Stockholders Agreement, dated 31 October 2001 by and among General Mills, Inc., Gramet Holdings Corporation and Diageo plc (incorporated by reference to Exhibit 4.3 to Diageo plc’s Annual Report on Form 20-F for the year ended 30 June 2001 (Commission File No. 1-10691))
4.5	Stock and Asset Purchase Agreement among Vivendi Universal S.A., Pernod Ricard S.A. and Diageo plc, dated as of 19 December 2000 (incorporated by reference to Exhibit 10.3 to Registration Statement on Form F-4 (No. 333-55000) filed by Vivendi Universal) (incorporated by reference to Exhibit 4.4 to Diageo plc’s Annual Report on Form 20-F for the year ended 30 June 2001 (Commission File No. 1-10691))
4.6	SOFIA: an agreement relating to the termination of the Framework and Implementation Agreement between Diageo plc and Pernod Ricard S.A., dated 21 December 2002
4.7	Service Agreement, among Diageo plc and Paul Walsh, dated 7 October 1999 (incorporated by reference to Exhibit 4.6 to Diageo plc’s Annual Report on Form 20-F for the year ended 30 June 2001 (Commission File No. 1-10691))
4.8	Service Agreement, among Diageo plc and Nicholas Rose, dated 1 October 2000 (incorporated by reference to Exhibit 4.7 to Diageo plc’s Annual Report on Form 20-F for the year ended 30 June 2001 (Commission File No. 1-10691))
4.9	Letter Agreement, among Diageo plc and Lord Blyth of Rowington, dated 7 October 1999 (incorporated by reference to Exhibit 4.8 to Diageo plc’s Annual Report on Form 20-F for the year ended 30 June 2001 (Commission File No. 1-10691))
4.10	Letter of Agreement, among Diageo plc and Lord Blyth of Rowington, dated 7 March 2002
4.11	Letter of Agreement, among Diageo plc and Lord Blyth of Rowington, dated 10 September 2003
4.12	Form of Service Agreement for Diageo plc’s executives in the United Kingdom
4.13	Form of Service Agreement for Diageo plc’s executives in the United States
4.14	The Diageo plc Senior Executive Share Option Plan (incorporated by reference to Exhibit 99.1 to Diageo plc’s Registration Statement on Form S-8 (File No. 333-11462))
4.15	The Diageo plc Executive Share Option Plan Rules (incorporated by reference to Exhibit 99.1 to Diageo plc’s Registration Statement on Form S-8 (File No. 333-11460))
4.16	The Diageo plc Associated Companies Share Option Plan (incorporated by reference to Exhibit 2.2 to Diageo plc’s Annual Report on Form 20-F for the year ended 30 June 2001 (File No. 1-10691))
4.17	Diageo plc Long Term Incentive Plan Rules (incorporated by reference to Exhibit 2.2 to Diageo plc’s Annual Report on Form 20-F for the year ended 30 June 2001 (File No. 1-10691))
4.18	The Diageo plc Share Incentive Plan (incorporated by reference to Exhibit 2.2 to Diageo plc’s Annual Report on Form 20-F for the year ended 30 June 2001 (File No. 1-10691))
8.1	Principal group companies (incorporated by reference to page 130 in the Annual Report)
12.1	Certification of Paul S. Walsh filed pursuant to 17 CFR 240.13a-14(a)
12.2	Certification of Nicholas C. Rose filed pursuant to 17 CFR 240.13a-14(a)
13.1	Certification of Paul S. Walsh furnished pursuant to 17 CFR 240.13a-14(b) and 18 U.S.C./1350(a) and (b)
13.2	Certification of Nicholas C. Rose furnished pursuant to 17 CFR 240.13a-14(b) and 18 U.S.C./1350 (a) and (b)
14.1	Consent of independent auditor

144 Diageo Annual Report 2003

Cross reference to Form 20-F

The information in this document that is referenced in the following table and the cautionary statement concerning forward-looking statements on page 18 is included in Diageo’s 2003 Form 20-F and is filed with the Securities and Exchange Commission (SEC).

Item	Required item in 20-F		Page
Part I
1.	Identity of directors, senior management and advisers
	Not applicable
2.	Offer statistics and expected timetable
	Not applicable
3.	Key information
		Five year information	2-6
		Risk factors	15-17
4.	Information on the company
		Business description	7-15
		Principal group companies	130
5.	Operating and financial review and prospects
		Operating and financial review	19-43
		Trend information	43
		Liquidity and capital resources	44-46
		Contractual obligations	46
		Off-balance sheet arrangements	47
		Critical UK GAAP accounting policies	49
		New accounting standards	49-50
		Discussion of US GAAP differences	50-51
6.	Directors, senior management and employees
		Directors and senior management	52-54
		Directors’ remuneration report	55-62
		Corporate governance report—      Board of directors	63
		Audit committee	64
		Remuneration committee	65
		Directors’ report—Directors	68
		Note 5 Employees	83
7.	Major shareholders and related party transactions
		Directors’ remuneration report—      Note 12 Additional information	61-62
		Related party transactions	134
		Major shareholders	134
8.	Financial information
		Five year information—Note 6 Dividends	5
		Directors’ report—Dividends	68
		Independent auditor’s report	69
		Consolidated financial statements	70-74
		Accounting policies	75-76
		Notes to the consolidated financial      statements	77-126
		Principal group companies	130
		Legal proceedings	132

Item	Required item in 20-F		Page
9.	The offer and listing
		Trading market for shares	134-135
10.	Additional information
		Material contracts	132-133
		Share capital	134
		Memorandum and articles of      association	136-138
		Exchange controls	138
		Documents on display	138
		Taxation	139-141
11.	Quantitative and qualitative disclosures about market risk
		Risk management	47-48
		Sensitivity analysis	48
12.	Description of securities other than equity securities
	Not applicable
Part II
13.	Defaults, dividend arrearages and delinquencies
	Not applicable
14.	Material modifications to the rights of security holders and use of proceeds
	Not applicable
15.	Controls and procedures
		Filing assurance committee	66
16.	[Reserved]
17.	Financial statements
	Not applicable
Part III
18.	Financial statements
		Independent auditor’s report	69
		Consolidated financial statements	70-74
		Accounting policies	75-76
		Notes to the consolidated financial      statements	77-126
		Principal group companies	130
		Unaudited computation of ratio of earnings to fixed charges and preferred share dividends	131
		Glossary of terms and US equivalents	145
19.	Exhibits		143
It is possible to read and copy documents that have been filed by Diageo plc with the U.S. Securities and Exchange Commission (SEC) at the SEC’s public reference room, located at 450 5th Street, N.W., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room and their copy charges. Filings with the SEC are also available to the public from commercial document retrieval services and on the web site maintained by the SEC at www.sec.gov.

145 Diageo Annual Report 2003

Glossary of terms and US equivalents

In this document the following words and expressions shall, unless the context otherwise requires, have the following meanings:

Term used in UK annual report	US equivalent or definition
Accounts	Financial statements
Acquisition accounting	Purchase accounting
Associates	Affiliated companies
American Depositary Receipt (ADR)	Receipt evidencing ownership of an ADS
American Depositary Share (ADS)	Registered negotiable security, listed on the New York Stock Exchange, representing four Diageo plc ordinary shares of 28 101/108 pence each
Called up share capital	Common stock
Capital allowances	Tax depreciation
Capital redemption reserve	Other additional capital
Company	Diageo plc
Creditors	Accounts payable and accrued liabilities
Debtors	Receivables
Employee share schemes	Employee stock benefit plans
Employment or staff costs	Payroll costs
Equivalent units	Equivalent units are calculated as follows: beer in hectolitres divide by 0.9, wine in nine litre cases divide by five, ready to drink in nine litre cases divide by 10. An equivalent unit represents approximately 272 servings. A serving comprises 33ml of spirits; 165ml of wine; or 330ml of ready to drink or beer.
Euro, €	Euro currency
Exceptional items	Items that, in management’s judgement, need to be disclosed separately by virtue of their size or incidence. Exceptional items under UK GAAP do not represent extraordinary items under US GAAP
Finance lease	Capital lease
Financial year	Fiscal year
Fixed asset investments	Non-current investments
Free cash flow	Net cash flow arising from operating activities, dividends received from associates, returns on investments and servicing of finance, taxation, and capital expenditure and financial investment
Freehold	Ownership with absolute rights in perpetuity
GAAP	Generally accepted accounting principles
GrandMet	Grand Metropolitan Public Limited Company and its consolidated subsidiaries
GrandMet PLC	Grand Metropolitan Public Limited Company
Group and Diageo	Diageo plc and its consolidated subsidiaries
Guinness Group	Former Guinness PLC and its consolidated subsidiaries
Impact	An international drinks magazine that is independent from industry participants
Interests in associates and joint ventures	Investment in joint ventures
Loans to associates and joint ventures	Indebtedness to joint ventures
Merger	Merger of Grand Metropolitan Public Limited Company and Guinness PLC, effective 17 December 1997
Merger accounting	Pooling of interests
Net asset value	Book value
Net sales (after deducting excise duties)	Turnover less excise duties
Noon buying rate	Buying rate at noon in New York City for cable transfers in pounds sterling as certified for customs purposes by the Federal Reserve Bank of New York
Operating profit	Net operating income
Operating margin	Operating profit before exceptional items divided by turnover
Organic movement	At level exchange and after adjusting for acquisitions and disposals for continuing operations
Own shares	Treasury stock
Pillsbury	The Pillsbury Company
Pound sterling, sterling, £, pence, p	UK currency
Profit	Earnings
Profit and loss account	Income statement/statement of operations
Profit for financial year	Net income
Profit on sale of fixed assets	Gain on disposal of non-current assets
Provisions	Accruals for losses/contingencies
Recognised gains and losses	Comprehensive income
Redundancy charges	Early release scheme expenses
Reserves	Accumulated earnings
RPI	UK retail price index
Scrip dividend	Stock dividend
Share premium account	Additional paid-in capital or paid-in surplus
Shareholders’ funds	Shareholders’ equity
Shares	Common stock
Shares and ordinary shares	Diageo plc’s ordinary shares
Shares in issue	Shares issued and outstanding
Stocks	Inventories
Tangible fixed assets	Property, plant and equipment
Trade debtors	Accounts receivable (net)
Turnover	Revenue/sales
US dollars, US$, $, ¢	US currency

EX-4.6

                                                                     EXHIBIT 4.6

                                                                  CONFORMED COPY

                              DATED 14 APRIL, 2003




                                   DIAGEO PLC





                                       AND





                               PERNOD RICARD S.A.









                       -----------------------------------

                               AMENDING AGREEMENT
                                    TO SOFIA
                       AN AGREEMENT DATED 21 DECEMBER 2002
                         RELATING TO THE TERMINATION OF
                   THE FRAMEWORK AND IMPLEMENTATION AGREEMENT

                       -----------------------------------












                                SLAUGHTER AND MAY
                                 ONE BUNHILL ROW
                                 LONDON EC1Y 8YY
                                   (JADM/HLD)
                                   CE023500040










THIS AGREEMENT is made on  14 April, 2003

BETWEEN:

1.        DIAGEO PLC, a company incorporated in England and Wales under
          registered number 23307 whose registered office is at 8 Henrietta
          Place, London W1G 0NB, United Kingdom and when acting in its capacity
          as Primary Purchaser under this Agreement, acting as trustee for
          certain of its Affiliates ("DIAGEO"); and

2.        PERNOD RICARD S.A., a company incorporated in France under registered
          number RCS Paris B582041943 whose registered office is at 12 place des
          Etats-Unis, 75783, Paris, France ("PERNOD RICARD") and which is acting
          on behalf of itself and its subsidiaries (but only for so long as they
          remain subsidiaries).

WHEREAS:

(A)       On 21 December 2002, Diageo and Pernod Ricard entered into an
          agreement ("SOFIA") relating to, amongst other things, the termination
          of the Framework and Implementation Agreement (as defined in SOFIA).

(B)       The parties now wish to amend certain terms of SOFIA.

IT IS AGREED as follows:

1.        AMENDMENTS TO SOFIA

          SOFIA IS HEREBY AMENDED AND RESTATED IN THE FORM OF THE SCHEDULE TO
          THIS AGREEMENT AND HAS EFFECT, AS SO AMENDED AND RESTATED, FROM 21
          DECEMBER 2002.

2.        ARBITRATION; COUNTERPARTS; CHOICE OF GOVERNING LAW

          THE PROVISIONS OF CLAUSES 29, 34 AND 35 OF SOFIA SHALL APPLY TO THIS
          AGREEMENT AS IF SET OUT IN THIS AGREEMENT IN FULL.

IN WITNESS OF WHICH THIS AGREEMENT HAS BEEN EXECUTED ON THE DATE WHICH FIRST
APPEARS ON PAGE 1 OF THIS AGREEMENT.

SIGNED BY                  )
FOR AND ON BEHALF OF       )        /s/ Shaun Parker
DIAGEO PLC                 )

SIGNED BY                  )
FOR AND ON BEHALF OF       )        /s/ Pierre Pringuet
PERNOD RICARD S.A.         )






                                    SCHEDULE


                                       3






                           EFFECTIVE 21 DECEMBER 2002



                                   DIAGEO PLC

                               PERNOD RICARD S.A.














                     ---------------------------------------

                               SOFIA: AN AGREEMENT
                       RELATING TO THE TERMINATION OF THE
                     FRAMEWORK AND IMPLEMENTATION AGREEMENT
                (AS AMENDED AND RESTATED BY AN AMENDING AGREEMENT
                              DATED 14 APRIL 2003)

                     ---------------------------------------



















                                   Macfarlanes
                                10 Norwich Street
                                 London EC4A 1BD






                                    CONTENTS


CLAUSE                                                                      PAGE
- ------                                                                      ----
                                                                      
 1    Definitions and interpretation                                           2
 2    Warranties and Undertakings                                             10
 3    Seagram Companies and Assets                                            11
 4    "Wrong Pocket" Assets, Shared Assets and Joint Assets                   12
 5    Diageo and Pernod Ricard Liabilities                                    15
 6    Shared and Joint Liabilities                                            22
 7    Claims against Vivendi                                                  28
 8    Guarantee of FIA Identified Transactions                                30
 9    Guarantees and other assurances                                         30
10    Assets and liabilities leaving the groups                               31
11    Payments                                                                32
12    Misdirected cash receipts                                               33
13    Miscellaneous obligations of the parties                                34
14    Insurance                                                               35
15    Market Plan and Risk Properties                                         35
16    Jointly-owned Entities                                                  36
17    Access to information and accounts                                      37
18    Sale of Pernod Ricard On-sale Assets; Seagram Venture Assets,
      Additional Assets and Martell                                           39
19    Termination of the Framework and Implementation Agreement               41
20    Further Assurances and Mitigation                                       42
21    Confidentiality                                                         42
22    Announcements                                                           44
23    Assignment                                                              44
24    Variation                                                               44
25    Notices                                                                 45
26    Dispute Resolution                                                      46
27    Supervisory Committee                                                   46
28    Deadlock Resolution                                                     47
29    Arbitration                                                             48
30    Contracts                                                               49
31    Remedies and waivers                                                    50
32    No partnership                                                          51
33    Costs and expenses                                                      51
34    Counterparts                                                            51
35    Choice of governing law                                                 51

SCHEDULES

 1    Identified Assets
 2    Brands and Related Assets
 3    Companies and Assets
 4    Identified Liabilities
 5    Taxation provisions
 6    Jointly-owned Entities
 7    On-sale and Venture Transactions
 8    FIA Indemnified Sale and Purchase Agreements
 9    Settlement of Framework and Implementation Agreement Obligations
10    Outstanding Matters
11    Treasury Management
12    SOFIA Implementation Principles





EFFECTIVE 21 DECEMBER 2002

PARTIES

1         DIAGEO PLC, a company incorporated in England and Wales under
          registered number 23307 whose registered office is at 8 Henrietta
          Place, London W1G 0NB, United Kingdom and when acting in its capacity
          as Primary Purchaser under this Agreement, acting as trustee for
          certain of its Affiliates ("Diageo"); and

2         PERNOD RICARD S.A., a company incorporated in France under registered
          number RCS Paris B582041943 whose registered office is at 12 place des
          Etats-Unis 75783, Paris, France ("Pernod Ricard") and which is acting
          on behalf of itself and its subsidiaries (but only for so long as they
          remain subsidiaries).

RECITALS

A         On 4 December 2000, Diageo and Pernod Ricard entered into a framework
          and implementation agreement (which agreement has subsequently been
          amended) (the "Framework and Implementation Agreement") relating to
          the acquisition from Vivendi Universal S.A. of certain companies and
          assets and the assumption of certain liabilities comprising the
          Seagram spirits and wine and beverage businesses (the "Spirits and
          Wine Division").

B         On 19 December 2000, Diageo and Pernod Ricard entered into the Vivendi
          Sale Agreement (as defined below).

C         Pursuant to the Vivendi Sale Agreement, Diageo and Pernod Ricard,
          certain Jointly-owned Entities and certain of Diageo's Affiliates and
          Pernod Ricard's Affiliates (as such terms are defined below) acquired
          certain of the companies and assets and assumed certain of the
          liabilities comprising the Spirits and Wine Division.

D         Diageo and Pernod Ricard desire to agree a basis for the termination
          of the Framework and Implementation Agreement and an allocation of the
          assets and liabilities comprising the Spirits and Wine Division as
          well as the terms on which their relationship as regards the Spirits
          and Wine Division is to continue.

E         The amounts to be paid to Vivendi in respect of the purchase price
          pursuant to the Vivendi Sale Agreement were provisionally allocated to
          Diageo and Pernod Ricard purchasing entities initially without regard
          to the existence and/or amount of external working capital balances,
          cash, indebtedness, wrong pocket assets and liabilities (including
          inventory) or Shared Assets and Shared Liabilities (as such terms were
          defined in the Framework and Implementation Agreement). Provisions
          were included in the Framework and Implementation Agreement to share
          the benefit and burden of these items, which represented amounts to be
          taken into account in determining the final purchase price for the
          assets that the purchasers decided to retain. Diageo and Pernod Ricard
          intend these principles to continue to operate as the basis on which
          these payments are to be made as purchase price adjustments to the
          extent that such matters have not previously been settled.

F         In accordance with the principles referred to in Recital E, and
          consistent with the corresponding provisions of the Framework and
          Implementation Agreement, the parties desire that certain payments be
          made between them in respect of certain assets and liabilities where
          the economic intention is that Diageo and Pernod Ricard (and their
          respective Affiliates) shall share such assets and liabilities in the
          Diageo






          Proportion and the Pernod Ricard Proportion. However, under this
          Agreement, assets and liabilities may be shared in either the Diageo
          Proportion and the Pernod Ricard Proportion or in the Sharing
          Proportions. Therefore, in order to achieve the economic intention,
          where assets and liabilities are shared in the Sharing Proportions,
          additional purchase price adjustments shall be made pursuant to the
          FIA Identified Sale and Purchase Agreements (as amended).

IT IS AGREED as follows:

DEFINITIONS AND INTERPRETATION

2.1       DEFINITIONS

          In this Agreement:

          ACQUIRED ASSETS: means the businesses and assets (including shares in
          bodies corporate) acquired, directly or indirectly, from Vivendi and
          its Affiliates pursuant to the Vivendi Sale Agreement;

          ACQUISITION DATE: means 21 December 2001;

          AFFILIATE: means:

          (i)       in relation to any person other than a Jointly-owned Entity,
                    any other person which directly, or indirectly through one
                    or more intermediaries, controls, or is controlled by, or is
                    under common control with, that first person but excluding
                    any Jointly-owned Entity; and

          (ii)      in relation to a Jointly-owned Entity, any person which
                    directly, or indirectly through one or more intermediaries,
                    is controlled by that Jointly-owned Entity;

          and as used in this definition, control (including, with corresponding
          meanings, controlled by and under common control with) shall mean
          possession, directly or indirectly, of power to direct or cause the
          direction of management or policies (whether through ownership of
          securities or partnership or other ownership interests, by contract or
          otherwise);

          AFTER-ACQUIRED ASSETS: means the Acquired Assets listed or described
          in paragraph 6 of each of Part A and B of Schedule 1 and paragraph 2
          of each of Part A and B of Schedule 2;

          AGREED FORM: means, in relation to any document, that document in a
          form agreed by the parties;

          ASSURANCE: means any guarantee, indemnity or similar commitment;

          BRANDS: means those brands of beverage and beverage alcohol which are
          comprised in the Acquired Assets;

          BUSINESS DAY: means a day (other than a Saturday or Sunday) on which
          banks are open for business (other than solely for trading and
          settlement in euro) in London and Paris;


                                       2



          CLAIMS NOTICE: has the meaning given to it in Clause 6.1;

          CLOSING: means the closing of transactions contemplated in the Vivendi
          Sale Agreement, which took place on 21 December 2001;

          COMPLETION DATE: has the meaning given in Clause 3.5;

          CONDUCTING PARTY: means, in the case of certain Third Party
          Proceedings, the party which has conduct of such proceedings or, as
          the case may be, the relevant part thereof in accordance with Clauses
          5.2.6.1, 6.2.1 or 6.6.1 (as the case may be);

          DEADLOCK NOTICE: has the meaning set out in Clause 28.1;

          DIAGEO ASSETS: means those assets described in Clause 3 as being owned
          by Diageo and/or its Affiliates;

          DIAGEO LIABILITIES: means, save as expressly provided otherwise in
          this Agreement and subject to Clauses 5.1.2 to 5.1.5, each liability,
          whenever incurred, which solely or principally relates to Diageo
          Assets, together with those other liabilities as are expressed in this
          Agreement to be Diageo Liabilities PROVIDED THAT Diageo Liabilities do
          not include:-

          (i)       Historic Tax Liabilities;

          (ii)      Shared Tax Costs; and

          (iii)     any liability to the extent that it has been settled between
                    the parties or their respective Affiliates in accordance
                    with the Framework and Implementation Agreement, Schedule 9
                    or otherwise (whether before, on or after the date of this
                    Agreement);

          DIAGEO PROPORTION: means 60.9 per cent.;

          FIA ADDITIONAL SALE AND PURCHASE AGREEMENTS: means that additional
          sale and purchase agreements entered into in accordance with clause
          9.6(A) of the Framework and Implementation Agreement;

          FIA IDENTIFIED SALE AND PURCHASE AGREEMENTS: means the identified sale
          and purchase agreements referred to in clause 9.5 of the Framework and
          Implementation Agreement, brief details of which are set out in
          Schedule 8;

          FIA IMPLEMENTATION PRINCIPLES: means the implementation principles set
          out in clause 4 of the Framework and Implementation Agreement;

          FRAMEWORK AND IMPLEMENTATION AGREEMENT: means the framework and
          implementation agreement between Diageo plc and Pernod Ricard S.A.
          entered into on 4 December 2000 (as amended);

          GLOBAL SALE AND PURCHASE AGREEMENT: means the global sale and purchase
          agreement entered into among Diageo, Pernod Ricard and others and
          dated 21 December 2001;

          GUARANTEEING PARTY: means, in respect of any Assurance, the person who
          has given that Assurance;


                                       3


          HISTORIC LIABILITIES: means any liability which:

          (i)       (a) was a liability (whether contingent or otherwise) at
                        Closing; or

                    (b) is a liability arising out of any event or circumstance
                        occurring or existing on or before Closing,

                        (in either case) of any body corporate acquired,
                        directly or indirectly, by Diageo, Pernod Ricard or any
                        Jointly-owned Entity or any of their respective
                        Affiliates pursuant to the Vivendi Sale Agreement; or

          (ii)      is a liability incurred or assumed, directly or indirectly,
                    by Diageo, Pernod Ricard or any Jointly-owned Entity or any
                    of their respective Affiliates pursuant to the Vivendi Sale
                    Agreement,

          but excluding any liability to the extent that it has been settled
          between the parties or their respective Affiliates in accordance with
          the Framework and Implementation Agreement, Schedule 9 or otherwise
          (whether before, on or after the date of this Agreement), or which is
          an Historic Tax Liability;

          HISTORIC TAX LIABILITY: means any liability to Tax relating to the
          Acquired Assets arising from (i) any income, profits or gains earned
          accrued or received on or before Closing or (ii) any event or
          transaction that occurred on or before Closing to the extent that such
          liability to Tax is not fully recovered from or indemnified by Vivendi
          under the Vivendi Sale Agreement, but excluding any liability to the
          extent that it has been settled between the parties or their
          respective Affiliates in accordance with the Framework and
          Implementation Agreement, Schedule 9 or otherwise (whether before, on
          or after the date of this Agreement);

          INDEPENDENT EXPERT: has the meaning set out in Clause 28.3;

          INTELLECTUAL PROPERTY: means patents, trade marks, brand names,
          corporate names, trade names, domain names, logos, trade dress and
          service marks, together with the goodwill of the business appurtenant
          thereto, copyrights, designs, inventions, database rights, trade
          secrets and know-how, formulae and processes, in each case, whether
          registered or unregistered and any registrations and applications for
          registrations thereof, and any other rights of a similar nature;

          INTELLECTUAL PROPERTY ASSETS: means all Intellectual Property included
          in the Acquired Assets;

          INTEREST DETERMINATION DATE: means, in relation to each default, the
          day upon which default interest commences under Clause 11.5 and the
          same day of each month thereafter;

          INVESTMENT CANADA UNDERTAKINGS: means:

          (i)       the Investment Canada Undertaking, as that term is defined
                    in the Vivendi Sale Agreement; and

          (ii)      the undertakings given in accordance with the letter dated
                    24 October 2001 from Diageo and addressed to the minister
                    responsible for the Investment Canada Acts; and


                                       4



          (iii)     the undertakings given in accordance with the letter dated
                    13 December 2001 from Diageo and Pernod Ricard and addressed
                    to the minister responsible for the Investment Canada Acts;

          JES: means Joseph E. Seagram & Sons, Inc. (now amalgamated with and
          continued as Diageo North America, Inc.);

          JOINT ASSETS: means any amounts refunded to or recovered by Diageo or
          Pernod Ricard or any of their respective Affiliates in respect of a
          liability which is a Joint Liability, PROVIDED THAT Joint Assets do
          not include any amounts which have been settled between the parties or
          their respective Affiliates in accordance with the Framework and
          Implementation Agreement, Schedule 9 or otherwise (whether before, on
          or after the date of this Agreement) or any amounts refunded to or
          recovered by any Jointly-owned Entity;

          JOINT LIABILITIES: means each liability of Diageo, Pernod Ricard or
          any of their respective Affiliates, or any Jointly-owned Entity which
          has been agreed by the parties, directly or indirectly, to be shared
          by Diageo and Pernod Ricard in the Diageo Proportion and the Pernod
          Ricard Proportion respectively or which is expressed in this Agreement
          to be a Joint Liability,

          PROVIDED THAT Joint Liabilities do not include:-

          (i)       Shared Liabilities; or

          (ii)      any liability to the extent that it has been settled between
                    the parties or their respective Affiliates either in
                    accordance with Schedule 9 or otherwise (whether before, on
                    or after the date of this Agreement);

          JOINTLY-OWNED ENTITY: means those persons listed in Schedule 6
          together with any other person which is, or was at the relevant time,
          owned (directly or indirectly) by both Diageo and Pernod Ricard;

          LEGAL EXPERT: has the meaning given in Clause 7.1.2;

          MANAGING PARTY: means, in relation to a Jointly-owned Entity, the
          party whose name is set out against the name of such entity in
          Schedule 6;

          MARGARITAVILLE LIABILITIES: has the meaning given in Clause 6.7.2;

          MARKET PLAN: means the market plan in Agreed Form, as amended from
          time to time pursuant to Clause 15.1.1;

          MARKET PLAN IMPLEMENTATION COSTS: means all costs associated with the
          implementation of the Market Plan which:

          (i)       are dissolution, liquidation or winding-up costs; or

          (ii)      are costs or liabilities associated with any Assurances
                    given to liquidators or similar officials and/or creditors
                    of any Jointly-owned Entities; or

          (iii)     have been agreed by the parties to be shared by Diageo and
                    Pernod Ricard in the Diageo Proportion and the Pernod Ricard
                    Proportion,


                                       5



          PROVIDED THAT Market Plan Implementation Costs shall not include any
          liabilities to Tax;

          MARTELL ASSETS: means the Pernod Ricard Assets set out below:

          (i)       the following Brands: CORDON ARGENT, CORDON BLEU, CORDON
                    RUBIS, CORDON SUPREME, DE VALCOURT, JULES ROBIN, L'OR,
                    MARTELL, MARTELL & CO., MARTELL CORDON BLEU, MEDAILLON,
                    NOBLIGE and ROBIN;

          (ii)      all vineyards, production facilities and warehouses
                    primarily associated with Martell; and

          (iii)     any other asset which relates wholly to any of the assets
                    set out in (i) or (ii) above;

          NON-CONDUCTING PARTY: means, in relation to any Third Party
          Proceedings, the party to this Agreement who does not have conduct of
          the proceedings or the relevant part thereof;

          PAYMENT DATE: has the meaning given in Clause 11.2.1;

          PERNOD RICARD ASSETS: means those assets described in Clause 3 as
          being owned by Pernod Ricard and/or its Affiliates;

          PERNOD RICARD LIABILITIES: means, save as expressly provided otherwise
          in this Agreement and subject to Clauses 5.1.2 to 5.1.5, each
          liability, whenever incurred, which solely or principally relates to
          Pernod Ricard Assets together with those other liabilities as are
          expressed in this Agreement to be Pernod Ricard Liabilities PROVIDED
          THAT Pernod Ricard Liabilities do not include:-

          (i)       Historic Tax Liabilities;

          (ii)      Shared Tax Costs; and

          (iii)     any liability to the extent that it has been settled between
                    the parties or their respective Affiliates in accordance
                    with the Framework and Implementation Agreement, Schedule 9
                    or otherwise (whether before, on or after the date of this
                    Agreement);

          PERNOD RICARD ON-SALE ASSETS: means the Brands, other Acquired Assets
          and companies sold or contracted to be sold pursuant to the
          transactions described in Part B of Schedule 7;

          PERNOD RICARD PROPORTION: means 39.1 per cent.;

          PRIMARY PURCHASERS: means Diageo, acting as trustee for certain of its
          Affiliates, and Pernod Ricard;

          REVENUE AUTHORITY: means any domestic, foreign, federal, national,
          state, provincial, county or municipal or other local government
          authority (or any sub-division or agency of the same) having
          responsibility for administering and collecting taxes;

          SEAGRAM: means The Seagram Company Ltd, a Canadian corporation;


                                       6



          SEAGRAM VENTURE ASSETS: means the Brands, other Acquired Assets and
          companies sold or contracted to be sold pursuant to the transactions
          described in Part A of Schedule 7, dissolved, liquidated or wound up
          or to be dissolved, liquidated or wound up pursuant to the Market Plan
          or to be sold pursuant to Schedule 10.

          SETTLEMENT PERIOD: means the period from the date of this Agreement to
          31 December 2002 and thereafter each subsequent period of three
          calendar months;

          SHARED ASSETS: means any amounts refunded to or recovered by Diageo,
          Pernod Ricard or any of their respective Affiliates or any
          Jointly-owned Entity in respect of a liability which is a Shared
          Liability, PROVIDED THAT Shared Assets do not include:-

          (i)       any amount to the extent that it has been settled between
                    the parties or their respective Affiliates in accordance
                    with the Framework and Implementation Agreement, Schedule 9
                    or otherwise (whether before, on or after the date of this
                    Agreement); or

          (ii)      any asset in or received by a Jointly-owned Entity or which
                    relates to Seagram Venture Assets (as defined in the
                    Framework and Implementation Agreement and not as defined in
                    this Clause 1.1) or Pernod Ricard On-sale Assets (as defined
                    in the Framework and Implementation Agreement and not as
                    defined in this Clause 1.1), in each case representing
                    operating revenue received in the ordinary course of
                    business or the proceeds of disposal of any asset;

          SHARED LIABILITIES: means:

          (i)       each liability that is borne pursuant to the Vivendi Sale
                    Agreement by both Diageo and Pernod Ricard (excluding the
                    purchase price under that agreement and any adjustments
                    thereto); and

          (ii)      each liability which is an Historic Liability (but which is
                    not a Diageo Liability or a Pernod Ricard Liability), an
                    Historic Tax Liability, a Shared Tax Cost, a Market Plan
                    Implementation Cost, any liability which is expressed in
                    this Agreement to be a Shared Liability (including, without
                    limitation, pursuant to Clause 6.7.1 or Clause 9.2.3) or
                    which would have been a "Shared Liability" under the
                    Framework and Implementation Agreement (if such agreement
                    had remained in existence but had been amended to reflect
                    any inconsistent provision of this Agreement); and

          (iii)     each liability of Diageo, Pernod Ricard or any of their
                    respective Affiliates, or of any Jointly-owned Entity, which
                    the parties have agreed prior to the date of this Agreement
                    to treat as a "Shared Liability" for the purposes of the
                    Framework and Implementation Agreement; and

          (iv)      each liability of Diageo, Pernod Ricard or any of their
                    respective Affiliates, or of any Jointly-owned Entity, which
                    relates to any of those matters set out in Schedule 4,

          PROVIDED THAT Shared Liabilities do not include:-

          (i)       any liability incurred by a Jointly-owned Entity or with
                    respect to Seagram Venture Assets (as defined in the
                    Framework and Implementation Agreement


                                       7


                    and not as defined in this Clause 1.1) or Pernod Ricard
                    On-sale Assets (as defined in the Framework and
                    Implementation Agreement and not as defined in this Clause
                    1.1) that in either case is an operational or disposal cost.
                    For example, Shared Tax Costs arising on the disposal of
                    Seagram Venture Assets or Pernod Ricard On-sale Assets are
                    disposal costs and are not, therefore, Shared Liabilities;
                    or

          (ii)      any liability to the extent that it has been settled between
                    the parties or their respective Affiliates in accordance
                    with the Framework and Implementation Agreement, Schedule 9
                    or otherwise (whether before, on or after the date of this
                    Agreement), and

          PROVIDED FURTHER THAT a liability shall be counted only once as a
          Shared Liability if it falls into more than one part of the definition
          of Shared Liabilities;

          SHARED TAX COST: subject to the provisions of paragraphs 4, 6 and 10
          of Schedule 5, means the sum of:-

          (i)       all Taxes payable by Diageo and/or Pernod Ricard and/or any
                    Affiliate of either of them and/or any Jointly-owned Entity
                    in respect of, and directly as a consequence of, the
                    transactions referred to in clause 9 of the Framework and
                    Implementation Agreement;

          (ii)      all Taxes payable by Diageo and/or Pernod Ricard and/or any
                    Affiliate of either of them and/or any Jointly-owned Entity
                    in respect of, and directly as a consequence of, each step
                    included in the Tax Plan;

          (iii)     sales taxes (but not customs and excise duties) payable in
                    respect of, and directly as a consequence of, the matters
                    taken into account in (i) and (ii);

          (iv)      all stamp duties, transfer taxes, registration duties and
                    other like taxes arising as a direct consequence of the
                    acquisition of the Acquired Assets acquired directly or
                    indirectly from Vivendi pursuant to the Vivendi Sale
                    Agreement;

          (v)       any out-of-pocket costs and expenses reasonably incurred in
                    resolving any tax dispute in relation to Taxes falling
                    within paragraphs (i) to (iv) or paragraph (vi) of this
                    definition; and

          (vi)      all Taxes payable directly as a consequence of all other
                    transactions required to put into effect the FIA
                    Implementation Principles and achieve the acquisition and
                    separation of the Acquired Assets and the disposition of the
                    Pernod Ricard On-sale Assets (as defined in the Framework
                    and Implementation Agreement and not in this Clause 1.1) and
                    Seagram Venture Assets (as defined in the Framework and
                    Implementation Agreement and not in this Clause 1.1);

          SHARING PROPORTION: means, as regards Diageo, 68.6% and as regards
          Pernod Ricard, 31.4%;

          SOFIA IMPLEMENTATION PRINCIPLES: means the implementation principles
          set out in Schedule 12;

          SPIRITS AND WINE DIVISION: has the meaning given in recital A;

          SPLIT CLAIM NOTICE: has the meaning given to it in Clause 5.2.5;


                                       8


          SUPERVISORY COMMITTEE: has the meaning given in Clause 27;

          TAX OR TAXES: means all forms of taxes, imposts, duties, levies,
          charges or withholdings (whether local or national) including, without
          limitation, customs and excise duties, together with any interest or
          penalties relating to any of them;

          TAX ASSET: means a tax loss or other deduction or tax credit that can,
          in either case, be applied against or used to reduce a tax liability;

          TAX PLAN: means the tax plan in Agreed Form, being part of the Market
          Plan, as amended from time to time pursuant to Schedule 5;

          THIRD PARTY CLAIM: has the meaning given in Clause 6.5;

          THIRD PARTY PROCEEDINGS: means any claim, demand, action or other
          proceedings which are threatened, made or instituted by any person
          other than Diageo or Pernod Ricard or any of their respective
          Affiliates or any Jointly-owned Entity;

          US$ LIBOR: means the LIBOR rate for deposits in U.S. Dollars for a
          period of one month as shown on BBA's fixing Telerate Page 3770 (or if
          such source does not exist or is not available at the relevant time
          the equivalent rate set out in the Financial Times (London edition) on
          the Interest Determination Date) as at close of business in London, on
          the day that is two Business Days preceding the Interest Determination
          Date;

          VIVENDI: means Vivendi Universal S.A.;

          VIVENDI SALE AGREEMENT: means the agreement dated as of 19th December,
          2000 between Vivendi, Pernod Ricard and Diageo relating to the sale of
          the businesses and assets of the Spirits and Wine Division, as amended
          from time to time; and

          WORKING HOURS: means 9.30 a.m. to 5.30 p.m. on a Business Day.

2.2       In this Agreement, unless otherwise specified:

2.2.1     references to Clauses and Schedules are to Clauses of, and Schedules
          to, this Agreement;

2.2.2     use of any gender includes the other gender;

2.2.3     references to a "person" or "entity" shall be construed so as to
          include any individual, firm, company or other body corporate,
          government, state or agency of a state, local or municipal authority
          or government body or any joint venture, association or partnership
          (whether or not having separate legal personality);

2.2.4     a reference to any statute or statutory provision shall be construed
          as a reference to the same as it may have been, or may from time to
          time be, amended, modified or re-enacted;

2.2.5     any reference to a "day" (including within the phrase "Business Day")
          shall mean a period of 24 hours running from midnight to midnight;

2.2.6     references to times are to London times;


                                       9


2.2.7     references to "indemnifying" any person against any circumstance
          include indemnifying and keeping him harmless from all actions, claims
          and proceedings from time to time made against him and all loss,
          damage, payments, costs or expenses suffered made or incurred by him
          as a consequence of that circumstance, and the terms "indemnify" and
          "indemnified" shall be construed accordingly;

2.2.8     a reference to any other document referred to in this Agreement is a
          reference to that other document as amended, varied, novated or
          supplemented (other than in breach of the provisions of this
          Agreement) at any time;

2.2.9     headings and titles are for convenience only and do not affect the
          interpretation of this Agreement;

2.2.10    the terms "subsidiary" and "holding company" shall have the meanings
          given in the Companies Act 1985;

2.2.11    a reference to any English legal term for any action, remedy, method
          of judicial proceeding, legal document, legal status, court, official
          or any legal concept or thing shall in respect of any jurisdiction
          other than England be treated as a reference to any analogous term in
          that jurisdiction;

2.2.12    the rule known as the ejusdem generis rule shall not apply and
          accordingly general words introduced by the word "other" shall not be
          given a restrictive meaning by reason of the fact that they are
          preceded by words indicating a particular class of acts, matters or
          things; and

2.2.13    general words shall not be given a restrictive meaning by reason of
          the fact that they are followed by particular examples intended to be
          embraced by the general words.

2.3       The Schedules form part of this Agreement and shall have the same
          force and effect as if expressly set out in the body of this
          Agreement, and any reference to this Agreement shall include the
          Schedules.


WARRANTIES AND UNDERTAKINGS

2.4       Each of the parties to this Agreement warrants to the other party as
          follows:

2.4.1     it has the requisite power and authority to enter into and perform its
          obligations under this Agreement;

2.4.2     this Agreement constitutes binding obligations on it in accordance
          with its terms;

2.4.3     the execution and delivery of, and the performance by it of its
          obligations under, this Agreement will not:

          2.4.3.1   result in a breach of any provision of its memorandum or
                    articles of association or like constitutional documents; or

          2.4.3.2   result in a breach of, or constitute a default under, any
                    instrument to which it or any of its Affiliates is a party
                    or by which it or any of its Affiliates is bound; or


                                       10


          2.4.3.3   result in a breach of any order, judgment or decree of any
                    court or governmental agency to which it or any of its
                    Affiliates is a party or by which it or any of its
                    Affiliates is bound; or

          2.4.3.4   require the consent of its shareholders or of any other
                    person.


SEAGRAM COMPANIES AND ASSETS

2.5       Subject to the provisions of Clause 3.2, the parties acknowledge that,
          as between themselves, ownership of the Acquired Assets, other than
          those Acquired Assets either sold pursuant to the transactions
          described in Schedule 7 or sold in the ordinary course of trading, is
          divided between them (or their respective Affiliates) as set out in
          Schedules 1, 2 and 3 such that the Acquired Assets described or listed
          in Part A of any of Schedules 1, 2 or 3 are owned by Diageo and/or its
          Affiliates and the Acquired Assets described or listed in Part B of
          any of Schedules 1, 2 or 3 are owned by Pernod Ricard and/or its
          Affiliates.

2.6       To the extent that:

2.6.1     any of the assets which are Diageo Assets under Schedule 1 are also
          listed or described as Pernod Ricard Assets under Schedule 2, such
          assets shall be treated as being owned by Diageo (and/or its
          Affiliates) and shall be Diageo Assets for the purposes of this
          Agreement; and

2.6.2     any of the assets which are Pernod Ricard Assets under Schedule 1 are
          listed or described as Diageo Assets under Schedule 2, such assets
          shall be treated as being owned by Pernod Ricard (and/or its
          Affiliates) and shall be Pernod Ricard Assets for the purposes of this
          Agreement.

2.7       The parties acknowledge that ownership of the shares and membership
          interests in the bodies corporate listed in Schedule 3 is divided
          between them (or their respective Affiliates) on the same basis as set
          out in Schedule 3 such that the shares and other membership interests
          in the bodies corporate listed in Part A of Schedule 3 are owned by
          Diageo and/or its Affiliates and the shares and other membership
          interests in the bodies corporate listed in Part B of Schedule 3 are
          owned by Pernod Ricard and/or its Affiliates. Notwithstanding this and
          for the avoidance of doubt, such bodies corporate shall not constitute
          Diageo Assets or Pernod Ricard Assets for the purposes of this
          Agreement.

2.8       The assets (other than After-acquired Assets) which are described as
          Diageo Assets or Pernod Ricard Assets under Schedule 1 and/or Schedule
          2 shall be treated for the purposes of this Agreement as having been
          Diageo Assets or Pernod Ricard Assets (as the case may be) since
          Closing.

2.9       Each After-acquired Asset which is described as a Diageo Asset or a
          Pernod Ricard Asset under Schedule 1 or 2 shall be treated for the
          purposes of this Agreement as having been a Diageo Asset or Pernod
          Ricard Asset (as the case may be) with effect from the date (the
          "Completion Date") set against it in Schedule 1 or 2.

2.10      The assets which are described as Diageo Assets or Pernod Ricard
          Assets under Schedule 3 shall be treated for the purposes of this
          Agreement as having been Diageo Assets or Pernod Ricard Assets with
          effect from the date of this Agreement.


                                       11


"WRONG POCKET" ASSETS, SHARED ASSETS AND JOINT ASSETS

2.11      TRANSFER OF WRONG POCKET ASSETS

2.11.1    If, within 12 months from the date of this Agreement or, in the case
          of Intellectual Property Assets, at any time after the date of this
          Agreement, it is found that any right, title or interest in any Diageo
          Asset is held by Pernod Ricard or one of its Affiliates or a
          Jointly-owned Entity, then, save where such person ("the transferor")
          has acquired title to such asset after the date of this Agreement and
          as a direct or indirect consequence of a sale for value by Diageo or
          one of its Affiliates:

          2.11.1.1  Pernod Ricard (or, where the transferor is a Jointly-owned
                    Entity, both Pernod Ricard and Diageo) shall transfer or
                    procure that the transferor shall as soon as practicable
                    transfer such right, title or interest in the relevant asset
                    to Diageo or its nominee for no consideration unless for
                    legal or other reasons it is reasonably necessary or
                    desirable to effect such transfer at fair market value or
                    other lower value, in which event Clause 4.2 shall apply;

          2.11.1.2  Pernod Ricard (or, where the transferor is a Jointly-owned
                    Entity, both Pernod Ricard and Diageo) shall procure that
                    the transferor shall do all such further acts and things as
                    may be reasonably necessary to effect validly the transfer
                    and vest the asset or the relevant interest in Diageo (or
                    its nominee);

          2.11.1.3  Pernod Ricard (or, where the transferor is a Jointly-owned
                    Entity, both Pernod Ricard and Diageo) shall procure that
                    the transferor shall hold the asset, or relevant interest in
                    the asset, on trust for Diageo (or its nominee) (to the
                    extent permitted by any relevant law) until such time as the
                    transfer is validly effected to vest the asset or relevant
                    interest in the asset in Diageo (or its nominee); and

          2.11.1.4  Diageo (or, where the transferor is a Jointly-owned Entity,
                    both Pernod Ricard and Diageo) shall, or shall procure that
                    its nominee shall, make any payment required pursuant to
                    Clause 4.1.1.1, in cash, to the transferor (or its nominee)
                    promptly upon completion of the transfer of the relevant
                    asset or interest in the asset, and shall do, or shall
                    procure that its nominee shall do, all such further acts and
                    things as may be reasonably necessary to effect validly the
                    transfer and vest the asset or the relevant interest in the
                    asset in Diageo (or its nominee); and

          2.11.1.5  in the case of any transfer of Intellectual Property Assets
                    under this Clause 4.1.1, Diageo or one of its Affiliates
                    shall be responsible for preparing and recording with the
                    relevant government entity or entities any documentation
                    relating to such transfer at its sole expense.

2.11.2    If, following the expiry of the 12 month period referred to in Clause
          4.1.1, it is found that any right, title or interest in any Diageo
          Assets (other than an Intellectual Property Asset) is held by Pernod
          Ricard or one of its Affiliates or a Jointly-owned Entity, the
          provisions of Clause 4.1.1 shall not apply and neither Pernod Ricard,
          nor any of its Affiliates nor any Jointly-owned Entity shall have any
          obligation to transfer any such right, title or interest to Diageo or
          its nominee under such clause. For the

                                       12



          avoidance of doubt, the provisions of Clause 4.1.1 shall continue to
          apply in relation to Intellectual Property Assets after the expiry of
          such 12 month period.

2.11.3    If, within 12 months from the date of this Agreement or, in the case
          of Intellectual Property Assets, any time after the date of this
          Agreement, it is found that any right, title or interest in any Pernod
          Ricard Asset is held by Diageo or one of its Affiliates or a
          Jointly-owned Entity, then, save where such person ("the transferor")
          has acquired title to such asset after the date of this Agreement and
          as a direct or indirect consequence of a sale for value, otherwise
          than in connection with this Agreement, by Pernod Ricard or one of its
          Affiliates:

          2.11.3.1  Diageo (or, where the transferor is a Jointly-owned Entity,
                    both Pernod Ricard and Diageo) shall transfer or procure
                    that the transferor shall as soon as practicable transfer
                    such right, title or interest in the relevant asset to
                    Pernod Ricard or its nominee for no consideration unless for
                    legal or other reasons it is reasonably necessary or
                    desirable to effect such transfer at fair market value or
                    other lower value, in which event Clause 4.2 shall apply;

          2.11.3.2  Diageo (or, where the transferor is a Jointly-owned Entity,
                    both Diageo and Pernod Ricard) shall procure that the
                    transferor shall do all such further acts and things as may
                    be reasonably necessary to effect validly the transfer and
                    vest the asset or the relevant interest in Pernod Ricard (or
                    its nominee);

          2.11.3.3  Diageo (or, where the transferor is a Jointly-owned Entity,
                    both Diageo and Pernod Ricard) shall procure that the
                    transferor shall hold the asset, or relevant interest in the
                    asset, on trust for Pernod Ricard (or its nominee) (to the
                    extent permitted by any relevant law) until such time as the
                    transfer is validly effected to vest the asset or relevant
                    interest in the asset in Pernod Ricard (or its nominee); and

          2.11.3.4  Pernod Ricard (or, where the transferor is a Jointly-owned
                    Entity, both Diageo and Pernod Ricard) shall, or shall
                    procure that its nominee shall, make any payment required
                    pursuant to Clause 4.1.3.1, in cash, to the transferor (or
                    its nominee) promptly upon completion of the transfer of the
                    relevant asset or interest in the asset, and shall do, or
                    shall procure that its nominee shall do, all such further
                    acts and things as may be reasonably necessary to effect
                    validly the transfer and vest the asset or the relevant
                    interest in the asset in Pernod Ricard (or its nominee); and

          2.11.3.5  in the case of any transfer of Intellectual Property Assets
                    under this Clause 4.1.3, Pernod Ricard or one of its
                    Affiliates shall be responsible for preparing and recording
                    with the relevant government entity or entities any
                    documentation relating to such transfer at its sole expense.

2.11.4    If, following the expiry of the 12 month period referred to in Clause
          4.1.3, it is found that any right, title or interest in any Pernod
          Ricard Asset (other than an Intellectual Property Asset) is held by
          Diageo or one of its Affiliates or a Jointly-owned Entity, the
          provisions of Clause 4.1.3 shall not apply and neither Diageo, any of
          its Affiliates or any Jointly-owned Entity shall have any obligation
          to transfer any such right, title or interest to Pernod Ricard or its
          nominee under such clause. For the avoidance of

                                       13


          doubt, the provisions of Clause 4.1.3 shall apply in relation to
          Intellectual Property Assets after the expiry of such 12 month period.

2.12      COMPENSATORY PAYMENT FOR WRONG POCKET ASSETS

2.12.1    Where Diageo or any of its Affiliates receives any payment pursuant to
          Clause 4.1.3, Diageo shall (on behalf of itself and/or its
          Affiliates), pay to Pernod Ricard an amount equal to the amount of
          such payment.

2.12.2    Where Pernod Ricard or any of its Affiliates receives any payment
          pursuant to Clause 4.1.1, Pernod Ricard shall (on behalf of itself
          and/or its Affiliates), pay to Diageo an amount equal to the amount of
          such payment.

2.12.3    Where a Jointly-owned Entity receives any payment:

          2.12.3.1  from Diageo or any of its Affiliates pursuant to Clause
                    4.1.1; or

          2.12.3.2  from Pernod Ricard or any of its Affiliates pursuant to
                    Clause 4.1.3,

          (in the case of Clause 4.2.3.1) Pernod Ricard shall pay to Diageo (on
          behalf of itself and/or its Affiliates) an amount equal to the Pernod
          Ricard Proportion of the amount so received or (in the case of Clause
          4.2.3.2) Diageo (on behalf of itself and/or its Affiliates) shall pay
          to Pernod Ricard an amount equal to the Diageo Proportion of the
          amount so received.

2.12.4    Payments to be made pursuant to this Clause 4.2 shall be made in
          accordance with Clause 11.

2.13      SHARED ASSETS

2.13.1    Where, on or after Closing, either Primary Purchaser or any of its
          Affiliates or any Jointly-owned Entity receives an amount of cash in
          respect of any Shared Asset:

          2.13.1.1  (in the case of any such cash received by a Primary
                    Purchaser or any of its Affiliates) that Primary Purchaser
                    shall pay to the other Primary Purchaser an amount equal to
                    that other Primary Purchaser's Sharing Proportion of such
                    amount; and

          4.3.1.2   (in the case of any such cash received by a Jointly-owned
                    Entity) Diageo shall pay to Pernod Ricard an amount equal to
                    Pernod Ricard's Sharing Proportion of the Diageo Proportion
                    of such amount and Pernod Ricard shall pay to Diageo an
                    amount equal to Diageo's Sharing Proportion of the Pernod
                    Ricard Proportion of such amount.

2.13.2    For the purposes of Clause 4.3.1.2 above, each of Diageo and Pernod
          Ricard shall act as Primary Purchasers.

2.13.3    For the purposes of Clause 4.3.1 above, amounts received in respect of
          a Shared Asset by the purchaser or receiving entity under an FIA
          Identified Sale and Purchase Agreement to which JES is a party shall
          be treated as if received by JES.

2.13.4    Payments to be made pursuant to this Clause 4.3 shall be made in
          accordance with Clause 11.


                                       14


2.14      JOINT ASSETS

2.14.1    Where, on or after Closing, Diageo or any of its Affiliates receives
          an amount of cash in respect of any Joint Asset it shall pay to Pernod
          Ricard an amount equal to the Pernod Ricard Proportion of the amount
          so received.

2.14.2    Where, on or after Closing, Pernod Ricard or any of its Affiliates
          receives an amount of cash in respect of any Joint Asset it shall pay
          to Diageo an amount equal to the Diageo Proportion of the amount so
          received.

2.14.3    Payments to be made pursuant to this Clause 4.4 shall be made in
          accordance with Clause 11.


DIAGEO AND PERNOD RICARD LIABILITIES

2.15      DIAGEO AND PERNOD RICARD LIABILITIES

2.15.1    Diageo Liabilities shall be borne wholly by Diageo and Pernod Ricard
          Liabilities shall be borne wholly by Pernod Ricard.

2.15.2    LIABILITIES RELATING TO SCHEDULE 3 ASSETS

          In accordance with Clause 3.6, the Acquired Assets described in Parts
          A and B of Schedule 3 (the "Schedule 3 Assets") will be treated as
          Diageo Assets and Pernod Ricard Assets, respectively, with effect from
          the date of this Agreement. Liabilities relating to the Schedule 3
          Assets and which relate to an event or circumstance first occurring or
          existing on or prior to the date of this Agreement shall not be Diageo
          Liabilities or Pernod Ricard Liabilities. Such liabilities shall be
          Joint Liabilities or Shared Liabilities (as the case may be), save to
          the extent that such liabilities have been settled between the parties
          or their respective Affiliates in accordance with the Framework and
          Implementation Agreement, Schedule 9 or otherwise (whether before, on
          or after the date of this Agreement). Clause 5.1.5 shall also apply to
          liabilities relating to the Schedule 3 Assets which might otherwise be
          Diageo Liabilities or Pernod Ricard Liabilities.

2.15.3    LIABILITIES OF SCHEDULE 3 COMPANIES

          Subject to Clause 5.1.2, all liabilities of the bodies corporate
          listed in Schedule 3 which do not relate solely or principally to the
          assets described in Schedules 1, 2 or 3 (the "Corporate Liabilities")
          but which relate to an event or circumstance first occurring or
          existing on or prior to Closing shall not be Diageo Liabilities or
          Pernod Ricard Liabilities but shall be Joint Liabilities or Shared
          Liabilities (as the case may be), save to the extent that such
          liabilities have been settled between the parties or their respective
          Affiliates in accordance with the Framework and Implementation
          Agreement, Schedule 9 or otherwise (whether before, on or after the
          date of this Agreement).

          Those Corporate Liabilities (other than Historic Tax Liabilities and
          Shared Tax Costs) which relate to an event or circumstance occurring
          or existing after Closing shall (subject to Clause 5.1.5) be Diageo
          Liabilities (in the case of Corporate Liabilities of the bodies
          corporate listed in Part A of Schedule 3) and Pernod Ricard
          Liabilities (in the case of Corporate Liabilities of the bodies
          corporate listed in Part B of Schedule 3), save in each case to the
          extent that such liabilities have been settled by the parties or their
          respective Affiliates in accordance with the Framework and


                                       15


          Implementation Agreement, Schedule 9 or otherwise (whether before, on
          or after the date of this Agreement).

2.15.4    AFTER-ACQUIRED ASSETS

          Liabilities relating solely or principally to an After-acquired Asset
          shall not be treated as Diageo Liabilities or Pernod Ricard
          Liabilities (as the case may be) to the extent that they arise out of
          any event or circumstance first occurring or existing on or prior to
          the Completion Date relating to such After-acquired Asset. Clause
          5.1.5 shall also apply to liabilities relating to Acquired Assets
          which might otherwise be Diageo Liabilities or Pernod Ricard
          Liabilities.

2.15.5    In circumstances where a Corporate Liability or a liability relating
          to an Acquired Asset (in each case, other than a liability to Tax)
          arises out of events or circumstances first occurring or existing on
          or prior to the Relevant Date (as defined below), but such liability
          continues to arise or increases as a consequence of the continuation
          or repetition of such events or circumstances after such Relevant
          Date, then such liability as relates to the period after the Relevant
          Date shall be treated in the same way as if it had occurred or existed
          on or prior to the Relevant Date for the purposes of determining
          whether such liability is a Shared Liability, Joint Liability, Diageo
          Liability or Pernod Ricard Liability, subject always to Clause 20.4.
          In this Clause 5.1.5, "Relevant Date" means:

          2.15.5.1  (in the case of the Schedule 3 Assets) the date of this
                    Agreement;

          2.15.5.2  (in the case of an After-acquired Asset) the Completion Date
                    of such asset; and

          2.15.5.3  (in the case of the Acquired Assets described in Schedules 1
                    and 2, other than the After-acquired Assets) Closing; and

          2.15.5.4  (in the case of the Corporate Liabilities) Closing.

2.16      WRONG POCKET LIABILITIES

2.16.1    Upon Diageo becoming aware of any Third Party Proceedings against it
          or any of its Affiliates or any Jointly-owned Entity in respect of
          which Diageo is the Managing Party which relate solely to a Pernod
          Ricard Liability, or which solely give rise to a Pernod Ricard
          Liability, Diageo shall:-

          2.16.1.1  as soon as reasonably practicable (and in any event prior to
                    making any admission of liability, agreement, settlement,
                    payment or compromise with or to any third party in relation
                    to such Third Party Proceedings), notify Pernod Ricard in
                    writing, such notice (so far as reasonably practicable at
                    that time) to contain reasonable details regarding the Third
                    Party Proceedings;

          2.16.1.2  take (or, as appropriate, procure that its Affiliates or, to
                    the extent within its control, any relevant Jointly-owned
                    Entities take) such action and give such information and
                    assistance as Pernod Ricard may reasonably request in order
                    to avoid, dispute, resist, mitigate, settle, compromise or
                    defend the Third Party Proceedings PROVIDED THAT Pernod
                    Ricard shall indemnify Diageo (for itself and on behalf of
                    its Affiliates) and/or each relevant Jointly-owned Entity
                    (as the case may be) against any liability, cost, damage or

                                       16



                    expense which may be incurred thereby by Diageo and/or any
                    of its Affiliates and/or any such Jointly-owned Entity;

          2.16.1.3  at the request of Pernod Ricard, allow Pernod Ricard to take
                    the sole conduct of the Third Party Proceedings PROVIDED
                    THAT Pernod Richard shall indemnify Diageo (for itself and
                    on behalf of its Affiliates) and/or each relevant
                    Jointly-owned Entity against any liability, cost, damage or
                    expense which may be incurred thereby by Diageo and/or its
                    Affiliates or any relevant Jointly-owned Entity AND PROVIDED
                    FURTHER THAT Diageo and/or its Affiliates and/or any such
                    Jointly-owned Entity shall be entitled to retain the sole
                    conduct of any such Third Party Proceedings which, in
                    Diageo's reasonable view, could be materially detrimental to
                    the business of Diageo or any Affiliate or any such
                    Jointly-owned Entity, as the case may be;

          2.16.1.4  make (or, as appropriate, procure that its Affiliates or, to
                    the extent within its control, any Jointly-owned Entities
                    make) no admission of liability, agreement, settlement,
                    payment or compromise with or to any third party in relation
                    to any such Third Party Proceedings without the prior
                    consent of Pernod Ricard, which shall not be unreasonably
                    withheld or delayed, PROVIDED THAT Diageo and/or each of its
                    relevant Affiliates and/or each relevant Jointly-owned
                    Entity shall be entitled in Diageo's sole discretion (i) to
                    make such an admission, agreement, settlement or compromise
                    in circumstances where Pernod Ricard has not requested to
                    take conduct of the relevant Third Party Proceedings
                    pursuant to Clause 5.2.1.3 above within 20 Business Days
                    following notification of such Third Party Proceedings to
                    Pernod Ricard being made pursuant to Clause 5.2.1.1 above;
                    and/or (ii) to make such an agreement, settlement or
                    compromise (but not an admission of liability) at its own
                    cost and expense and on the basis that neither it nor the
                    person(s) with whom such agreement, settlement or compromise
                    is made will have any recourse to Pernod Ricard or any of
                    its Affiliates or any Jointly-owned Entity in respect of the
                    subject matter of the relevant Third Party Proceedings;
                    and/or (iii) to discharge any award against it or them of
                    damages, costs or any other amount which is the subject of a
                    final, binding and non-appealable decision from a court or
                    arbitration panel of competent jurisdiction.

2.16.2    If either Pernod Ricard takes, or Diageo (or one of its Affiliates) or
          any relevant Jointly-owned Entity in respect of which Diageo is the
          Managing Party retains, sole conduct of any Third Party Proceedings
          pursuant to Clause 5.2.1.3 above, it shall do so at its own cost and
          expense (but without prejudice to its rights to recover any amount
          settled or paid under Clause 5.3) and shall provide the other party
          with such information as such other party may reasonably require from
          time to time regarding the progress of and developments in relation to
          such Third Party Proceedings.

2.16.3    Upon Pernod Ricard becoming aware of any Third Party Proceedings
          against it or any of its Affiliates or any Jointly-owned Entity in
          respect of which Pernod Ricard is the Managing Party which relate
          solely to a Diageo Liability, or which solely give rise to a Diageo
          Liability, Pernod Ricard shall:-

          2.16.3.1  as soon as reasonably practicable (and in any event prior to
                    making any admission of liability, agreement, settlement,
                    payment or


                                       17


                    compromise with or to any third party in relation to any
                    such Third Party Proceedings), notify Diageo in writing,
                    such notice (so far as reasonably practicable at that time)
                    to contain reasonable details regarding the Third Party
                    Proceedings;

          2.16.3.2  take (or, as appropriate, procure that its Affiliates or, to
                    the extent within its control, any relevant Jointly-owned
                    Entity take) such action and give such information and
                    assistance as Diageo may reasonably request in order to
                    avoid, dispute, resist, mitigate, settle, compromise or
                    defend the Third Party Proceedings PROVIDED THAT Diageo
                    shall indemnify Pernod Ricard (for itself and on behalf of
                    its Affiliates) and/or each relevant Jointly-owned Entity
                    (as the case may be) against any liability, cost, damage or
                    expense which may be incurred thereby by Pernod Ricard
                    and/or any of its Affiliates and/or any such Jointly-owned
                    Entity;

          2.16.3.3  at the request of Diageo, allow Diageo to take the sole
                    conduct of the Third Party Proceedings PROVIDED THAT Diageo
                    shall indemnify Pernod Ricard (for itself and on behalf of
                    its Affiliates) and/or each relevant Jointly-owned Entity
                    against any liability, cost, damage or expense which may be
                    incurred thereby by Pernod Ricard and/or its Affiliates or
                    any relevant Jointly-owned Entity AND PROVIDED FURTHER THAT
                    Pernod Ricard and/or its Affiliates and/or any such
                    Jointly-owned Entity shall be entitled to retain the sole
                    conduct of any such Third Party Proceedings which, in Pernod
                    Ricard's reasonable view, could be materially detrimental to
                    the business of Pernod Ricard or any such Affiliate or any
                    such Jointly-owned Entity, as the case may be;

          2.16.3.4  make (or, as appropriate, procure that its Affiliates or, to
                    the extent within its control, any Jointly-owned Entities
                    make) no admission of liability, agreement, settlement or
                    compromise with or to any third party in relation to any
                    such Third Party Proceedings without the prior consent of
                    Diageo, which shall not be unreasonably withheld or delayed,
                    PROVIDED THAT Pernod Ricard and/or each of its relevant
                    Affiliates and/or each relevant Jointly-owned Entity shall
                    be entitled in Pernod Ricard's sole discretion (i) to make
                    such an admission, agreement, settlement or compromise in
                    circumstances where Diageo has not requested to take conduct
                    of the relevant Third Party Proceedings pursuant to Clause
                    5.2.3.3 above within 20 Business Days following notification
                    of such Third Party Proceedings to Diageo being made
                    pursuant to Clause 5.2.3.1 above; and/or (ii) to make such
                    an agreement, settlement or compromise (but not an admission
                    of liability) at its own cost and expense and on the basis
                    that neither it nor the person(s) with whom such admission,
                    agreement, settlement or compromise is made will have any
                    recourse to Diageo or any of its Affiliates or any
                    Jointly-owned Entity in respect of the subject matter of the
                    relevant Third Party Proceedings; and/or (iii) to discharge
                    any award against it or them of damages, costs or any other
                    amount which is the subject of a final, binding and
                    non-appealable decision from a court or arbitration panel of
                    competent jurisdiction.

2.16.4    If either Diageo takes, or Pernod Ricard (or one of its Affiliates) or
          any relevant Jointly-owned Entity in respect of which Pernod Ricard is
          the Managing Party

                                       18



          retains, sole conduct of any Third Party Proceedings pursuant to
          Clause 5.2.3.3 above, it shall do so at its own cost and expense (but
          without prejudice to its rights to recover any amount settled or paid
          under Clause 5.3) and shall provide the other party with such
          information as such other party may reasonably require from time to
          time regarding the progress of and developments in relation to such
          Third Party Proceedings.

2.16.5    Upon either party (the "Notifying Party") becoming aware of any Third
          Party Proceedings against it or any of its Affiliates, or any
          Jointly-owned Entity in respect of which it is the Managing Party, in
          relation to, or which may give rise to, two or more of (i) a Diageo
          Liability, (ii) a Pernod Ricard Liability and/or (iii) a Shared
          Liability and/or Joint Liability, it shall as soon as reasonably
          practicable give notice (a "Split Claim Notice") to the other party
          (the "Notified Party") in accordance with Clause 5.2.7. For the
          avoidance of doubt, Clauses 5.2.1 and 5.2.3 shall not apply to any
          such Third Party Proceedings.

2.16.6    Subject to Clause 5.2.9, following service of a Split Claim Notice
          under Clause 5.2.5:-

          2.16.6.1  Diageo shall have conduct (at its own cost and expense) of
                    the relevant Third Party Proceedings insofar as they relate
                    to the Diageo Liability, Pernod Ricard shall have conduct
                    (at its own cost and expense) of such proceedings insofar as
                    they relate to the Pernod Ricard Liability (and Diageo shall
                    be the Conducting Party in relation to such proceedings
                    insofar as they relate to the Diageo Liability and Pernod
                    Ricard shall be the Conducting Party in relation to such
                    proceedings insofar as they relate to the Pernod Ricard
                    Liability) and the provisions of Clause 6 shall apply to the
                    relevant Third Party Proceedings insofar as they relate to a
                    Shared Liability and/or Joint Liability;

          2.16.6.2  the parties shall take such procedural steps as may be
                    necessary in the relevant jurisdiction to facilitate conduct
                    of the Third Party Proceedings by both of them in the manner
                    contemplated by Clause 5.2.8.1, and shall otherwise
                    co-operate with one another in good faith in relation to
                    such conduct;

          2.16.6.3  the Conducting Party shall keep the Non-Conducting Party
                    promptly informed of all material developments regarding the
                    Third Party Proceedings (or the relevant part thereof) and
                    provide the Non-Conducting Party with such information as it
                    may reasonably request from time to time regarding the Third
                    Party Proceedings (or the relevant part thereof), save where
                    to provide such information would result in the loss of
                    legal privilege in that information or might result in a
                    breach of any applicable anti-trust or competition law, in
                    which case (to the extent possible) disclosure shall be on
                    an external counsel basis or to an independent third party
                    who shall undertake not to disclose privileged or anti-trust
                    sensitive information received to the Non-Conducting Party;

          2.16.6.4  the Conducting Party shall, where reasonably practicable,
                    consult the Non-Conducting Party and have reasonable regard
                    to the interests of the Non-Conducting Party and its
                    Affiliates before taking any significant step in relation to
                    the Third Party Proceedings (or the relevant part thereof);


                                       19


          2.16.6.5  the Non-Conducting Party shall take (or, as appropriate,
                    procure that its Affiliates or any Jointly-owned Entity in
                    respect of which it is the Managing Party take) such action
                    and give such information and assistance as the Conducting
                    Party may reasonably request in order to avoid, dispute,
                    resist, mitigate, settle, compromise or defend the Third
                    Party Proceedings (to the extent such proceedings relate to
                    a liability of the Conducting Party) PROVIDED THAT the
                    Conducting Party shall indemnify the Non-Conducting Party
                    (for itself and on behalf of its Affiliates) and/or each
                    relevant Jointly-owned Entity (as the case may be) against
                    any liability, cost, damage or expense which may be incurred
                    thereby by the Non-Conducting Party and/or its Affiliates
                    and/or any such Jointly-owned Entity;

          2.16.6.6  the Non-Conducting Party shall not make (and shall procure
                    that none of its Affiliates or any Jointly-owned Entity in
                    respect of which it is the Managing Party shall make) any
                    admission of liability, agreement, settlement or compromise
                    with any third party in relation to any such Third Party
                    Proceedings (insofar as such proceedings relate to the
                    liability of the Conducting Party) except (i) with the prior
                    consent of the Conducting Party, which shall not be
                    unreasonably withheld or delayed; or (ii) in order to
                    discharge any award of damages, costs or other amount which
                    is the subject of a final, binding and non-appealable
                    decision from a Court or arbitration panel of competent
                    jurisdiction; and

          2.16.6.7  save as expressly provided in this Clause 5.2.6, any costs
                    or expenses incurred by the Non-Conducting Party or any of
                    its Affiliates in connection with the relevant Third Party
                    Proceedings (or relevant part thereof) shall be for the
                    account of such Non-Conducting Party.

2.16.7    Any Split Claim Notice given pursuant to Clause 5.2.5 shall be in
          writing, shall identify itself as a Split Claim Notice for the
          purposes of this Agreement and shall specify in reasonable detail:-

          2.16.7.1  the party on whose behalf the notification is being made;

          2.16.7.2  a description of the Third Party Proceedings to which the
                    notice relates; and

          2.16.7.3  (insofar as it is reasonably practicable to do so at the
                    time of the Split Claim Notice) the expected currency and
                    the amount of the Diageo Liability and Pernod Ricard
                    Liability to which it relates.

2.16.8    The giving of a notice under Clause 5.2.1 or 5.2.3, or a Split Claim
          Notice under Clause 5.2.5, shall be without prejudice to the
          entitlement of the party giving the notice to give one or more
          subsequent notices to the other party for the purposes of this
          Agreement or for the purposes of making any such amendments to a
          notice as it reasonably considers to be necessary or appropriate to
          reflect further information in relation to the relevant Third Party
          Proceedings. References under Clauses 5.2.1, 5.2.3 and 5.2.5 to a
          notice or (as the case may be) to a Split Claim Notice shall be deemed
          to include a reference to any such subsequent notice.

2.16.9    If, following service of a Split Claim Notice pursuant to Clause
          5.2.5, the parties agree that one or the other of them (but not both
          of them) should have sole conduct of

                                       20


          the relevant Third Party Proceedings, the parties shall agree the
          basis on which such Third Party Proceedings shall be conducted.

2.17      PAYMENT OF PERNOD RICARD AND DIAGEO LIABILITIES

2.17.1    Subject to Clause 5.3.3 below and subject to proviso (ii) of Clause
          5.2.3.4, where, on or after Closing, Pernod Ricard or any of its
          Affiliates or any Jointly-owned Entity discharges any Diageo
          Liability, or any part thereof then:

          2.17.1.1  (in the case of any such liability, or part thereof,
                    discharged by Pernod Ricard or any of its Affiliates) Diageo
                    shall pay to Pernod Ricard an amount equal the amount so
                    discharged; and

          2.17.1.2  (in the case of any such liability, or part thereof,
                    discharged by a Jointly-owned Entity) Diageo shall pay to
                    Pernod Ricard an amount equal to the Pernod Ricard
                    Proportion of the amount so discharged.

          For the purposes of this Clause 5.3.1 and Clause 5.3.3, where Pernod
          Ricard or any of its Affiliates or any Jointly-owned Entity incurs any
          liability, cost, damage or expense which is the subject of an
          indemnity from Diageo under Clause 5.2.3.2 or Clause 5.2.3.3, such
          liability, cost, damage or expense shall (save as provided in Clause
          5.2.2 or Clause 5.2.4) be treated as a Diageo Liability that has been
          discharged by Pernod Ricard, one of its Affiliates or a Jointly-owned
          Entity (as the case may be).

2.17.2    Subject to Clause 5.3.3 below and subject to proviso (ii) of Clause
          5.2.1.4, where, on or after Closing, Diageo or any of its Affiliates
          or any Jointly-owned Entity discharges any Pernod Ricard Liability, or
          any part thereof then:

          2.17.2.1  (in the case of any such liability, or part thereof,
                    discharged by Diageo or any of its Affiliates) Pernod Ricard
                    shall pay to Diageo an amount equal to the amount so
                    discharged; and

          2.17.2.2  (in the case of any such liability, or part thereof,
                    discharged by a Jointly-owned Entity) Pernod Ricard shall
                    pay to Diageo an amount equal to the Diageo Proportion of
                    the amount so discharged.

          For the purposes of this Clause 5.3.2 and Clause 5.3.3, where Diageo
          or any of its Affiliates or any Jointly-owned Entity incurs any
          liability, cost, damage or expense which is the subject of an
          indemnity from Pernod Ricard under Clause 5.2.1.2 or Clause 5.2.1.3,
          such liability, cost, damage or expense shall (save as provided in
          Clause 5.2.2 or Clause 5.2.4) be treated as a Pernod Ricard Liability
          that has been discharged by Diageo, one of its Affiliates or a
          Jointly-owned Entity (as the case may be).

2.17.3    Diageo shall not be required to make any payment to Pernod Ricard
          pursuant to Clause 5.3.1.1 and Pernod Ricard shall not be required to
          make any payment to Diageo pursuant to Clause 5.3.2.1 in connection
          with any liability (or series of connected liabilities relating to or
          arising out of the same circumstances) unless, in each case, (i) the
          amount of such payment would exceed US$10,000 (and, for the avoidance
          of doubt, if the amount of such payment would exceed US$10,000 the
          whole amount shall be payable and not just the excess) and (ii)
          (without limitation of the provisions of Clauses 5.1 and 5.2) notice
          in writing has been given to the other at least 7 Business Days prior
          to the party giving the notice making any admission of liability,
          agreement, settlement, payment or compromise with or to any third
          party in

                                       21


          relation to the relevant Third Party Proceedings. The limitation set
          out in this Clause 5.3.3 shall not apply in respect of:

          2.17.3.1  payments to be made pursuant to Clauses 5.3.1.2 or 5.3.2.2
                    following discharge of a liability by a Jointly-owned
                    Entity; or

          2.17.3.2  payments under the indemnities contained in Clauses 5.2.1.2,
                    5.2.1.3, 5.2.3.2 or 5.2.3.3.

2.17.4    Payments to be made pursuant to this Clause 5.3 shall be made in
          accordance with Clause 11.


SHARED AND JOINT LIABILITIES

2.17.5    Upon either party (the "Notifying Party") becoming aware of any Third
          Party Proceedings against it or any of its Affiliates in relation to,
          or which may give rise to, a Shared Liability or a Joint Liability to
          which Clause 6.3.4 applies, it shall as soon as reasonably practicable
          (and in any event at least 7 Business Days prior to making any
          admission of liability, agreement, settlement, payment or compromise
          with or to any third party in relation to such Third Party
          Proceedings) give notice (a "Claims Notice") to the other party (the
          "Notified Party") in accordance with Clause 6.4. No Claims Notice
          shall be given under this Clause 6.1 in respect of a Shared Liability
          or a Joint Liability of the kind described in Clause 6.6 (Identified
          Litigation) PROVIDED THAT this sub-clause shall apply for the purposes
          of Third Party Proceedings in relation to Shared Tax Costs subject to
          the provisions of paragraph 4 of Schedule 5.

2.17.6    When considering whether any Third Party Proceedings may give rise to
          a Shared Liability or Joint Liability to which Clause 6.3.4 applies,
          the Notifying Party's estimate of the out-of-pocket costs and expenses
          to be incurred in connection with the defence or conduct of the
          relevant Third Party Proceedings shall be treated as part of the value
          of the liability for the purposes of the financial thresholds referred
          to in such clauses.

2.18      CONDUCT OF CLAIMS

          Following service of a Claims Notice under Clause 6.1:-

2.18.1    the Notifying Party shall have the sole conduct of the Third Party
          Proceedings to which such notice relates unless (i) agreed otherwise
          by the parties; or (ii) the circumstances giving rise to the Third
          Party Proceedings (or any related circumstances giving rise to the
          same cause of action) have previously been the subject of a Claims
          Notice issued by the other party, in which case such other party shall
          have conduct of all Third Party Proceedings relating to such
          circumstances;

2.18.2    the Conducting Party shall keep the Non-Conducting Party promptly
          informed of all material developments regarding the Third Party
          Proceedings and provide the Non-Conducting Party with such information
          as it may reasonably request from time to time regarding the Third
          Party Proceedings, save where to provide such information would result
          in the loss of legal privilege in that information or might result in
          a breach of any applicable anti-trust or competition law, in which
          case (to the extent possible) disclosure shall be on an external
          counsel basis or to an independent third party who shall undertake not
          to disclose privileged or anti-trust sensitive information received to
          the Non-Conducting Party;

                                       22


2.18.3    the Conducting Party shall, where reasonably practicable, consult the
          Non-Conducting Party and have reasonable regard to the interests of
          the Non-Conducting Party and its Affiliates before taking any
          significant step in relation to the Third Party Proceedings;

2.18.4    the Non-Conducting Party shall take (or, as appropriate, procure that
          its Affiliates or, to the extent within its control, any relevant
          Jointly-owned Entities for which it is the Managing Party take) such
          action and give such information and assistance as the Conducting
          Party may reasonably request in order to avoid, dispute, resist,
          mitigate, settle, compromise or defend the Third Party Proceedings;

2.18.5    neither party shall make (and each party shall procure that none of
          its Affiliates and, to the extent within its control, no Jointly-owned
          Entity shall make) any admission of liability, agreement, settlement
          or compromise with any third party in relation to any such Third Party
          Proceedings except (i) with the prior consent of the other party,
          which shall not be unreasonably withheld or delayed; or (ii) in order
          to discharge any award of damages, costs or other amount which is the
          subject of a final, binding and non-appealable decision from a Court
          or arbitration panel of competent jurisdiction; and

2.18.6    the Conducting Party shall conduct the relevant Third Party
          Proceedings with reasonable diligence and competence.

          The provisions of this Clause 6.2 shall have effect for the purposes
          of Third Party Proceedings which relate to Shared Tax Cost subject to
          the provisions of paragraph 4 of Schedule 5.

2.19      PAYMENT OF SHARED AND JOINT LIABILITIES

2.19.1    Where, on or after Closing, either Primary Purchaser or any of its
          Affiliates or any Jointly-owned Entity discharges any Shared
          Liability, or any part thereof, then:

          2.19.1.1  (in the case of any such liability, or part thereof,
                    discharged by a Primary Purchaser or any of its Affiliates)
                    the other Primary Purchaser shall pay to that Primary
                    Purchaser an amount equal to that other Primary Purchaser's
                    Sharing Proportion of the amount so discharged; and

          2.19.1.2  (in the case of any such liability, or part thereof,
                    discharged by a Jointly-owned Entity), Pernod Ricard shall
                    pay to Diageo (as a Primary Purchaser) an amount equal to
                    Pernod Ricard's Sharing Proportion of the Diageo Proportion
                    of the amount so discharged or incurred and Diageo (as a
                    Primary Purchaser) shall pay to Pernod Ricard an amount
                    equal to Diageo's Sharing Proportion of the Pernod Ricard
                    Proportion of the amount so discharged,

          PROVIDED THAT (without limitation to the provisions of Clauses 6.1 and
          6.2 and save in relation to a Shared Liability which is an Historic
          Tax Liability, a Shared Tax Cost or which otherwise relates to Tax)
          neither Diageo nor Pernod Ricard shall be required to make any payment
          to the other pursuant to Clause 6.3.1.1 unless notice has been given
          pursuant to Clause 6.1 at least 7 Business Days prior to the party
          giving the notice making any admission of liability, agreement,
          settlement, payment or compromise with or to any third party in
          relation to the relevant Third Party Proceedings.


                                       23


2.19.2    For the purposes of Clause 6.3.1 above, any Shared Liability, or part
          thereof, discharged by the purchaser or receiving entity under a FIA
          Identified Sale and Purchase Agreement to which JES is a party shall
          be treated as if discharged by JES.

2.19.3    Where, on or after Closing:

          2.19.3.1  Diageo or any of its Affiliates discharges any Joint
                    Liability, or any part thereof, which is not shared in the
                    Diageo Proportion and the Pernod Ricard Proportion
                    respectively independent of the operation of this Agreement,
                    then Pernod Ricard shall pay to Diageo (or its Affiliate(s)
                    as appropriate) an amount equal to the Pernod Ricard
                    Proportion of the amount so discharged; and

          2.19.3.2  Pernod Ricard or any of its Affiliates discharges any Joint
                    Liability, or any part thereof, which is not shared in the
                    Diageo Proportion and the Pernod Ricard Proportion
                    respectively independent of the operation of this Agreement,
                    then Diageo shall pay to Pernod Ricard (or its Affiliate(s)
                    as appropriate) an amount equal to the Diageo Proportion of
                    the amount so discharged,

          PROVIDED THAT (without limitation to the provisions of Clauses 6.1 and
          6.2 and save in relation to a Joint Liability which is an Historic Tax
          Liability, a Shared Tax Cost or which otherwise relates to Tax)
          neither Diageo nor Pernod Ricard shall be required to make any payment
          to the other pursuant to Clause 6.3.3.1 unless notice has been given
          pursuant to Clause 6.1 at least 7 Business Days prior to the party
          giving the notice making any admission of liability, agreement,
          settlement, payment or compromise with or to any third party in
          relation to the relevant Third Party Proceedings.

2.19.4    The provisions of Clause 6.3.1 to 6.3.4 shall only apply in respect of
          any Shared Liability or Joint Liability, or any part thereof, which:-

          2.19.4.1  (in the case of any such liability in respect of which a
                    Claims Notice is served pursuant to Clause 6.1 on or prior
                    to the first anniversary of this Agreement) exceeds
                    US$200,000 or which forms part of a series of connected
                    Joint Liabilities or Shared Liabilities (as appropriate)
                    relating to or arising out of the same circumstances which
                    in the aggregate exceed US$200,000; or

          2.19.4.2  (in the case of any such liability in respect of which a
                    Claims Notice is served pursuant to Clause 6.1 after the
                    first anniversary of this Agreement) exceeds US$1,000,000 or
                    which forms part of a series of connected Joint Liabilities
                    or Shared Liabilities (as appropriate) relating to or
                    arising out of the same circumstances which in the aggregate
                    exceed US$1,000,000; or

          2.19.4.3  relates to those matters referred to in Schedule 4; or

          2.19.4.4  is a Market Plan Implementation Cost; or

          2.19.4.5  is a Margaritaville Liability; or

          2.19.4.6  is a liability which is a Joint Liability or a Shared
                    Liability pursuant to Clause 18.1.1; or


                                       24


          2.19.4.7  is a Historic Tax Liability, a Shared Tax Cost or otherwise
                    relates to Tax (including, without limitation, those matters
                    referred to in paragraph 4 of Schedule 5); or

          2.19.4.8  is discharged by a Jointly-owned Entity.

          For the avoidance of doubt, where Clause 6.3.4.1 or 6.3.4.2 applies
          the provisions of this Clause 6 shall apply in their entirety to the
          whole of any Shared Liability or Joint Liability which exceeds
          US$200,000 or US$1 million (as the case may be) or which forms part of
          a series of connected Joint Liabilities or Shared Liabilities (as
          appropriate) relating to or arising out of the same circumstances
          which in the aggregate exceed US$200,000 or US$1 million (as the case
          may be) and not just to the excess over such amount.

2.19.5    Where either party or any of its Affiliates reasonably incurs any
          out-of-pocket costs or expenses in connection with the defence or
          conduct of any Third Party Proceedings in relation to, or which may
          give rise to, a Shared Liability or a Joint Liability, such costs and
          expenses shall be treated as forming part of and shall be aggregated
          with the Shared Liability and/or Joint Liability to which they relate
          for the purposes of this Clause 6.3. For the avoidance of doubt, such
          costs and expenses shall not be subject to the notice provisions
          contained in Clause 6.1 or the conduct of claims provisions contained
          in Clause 6.2.

2.19.6    Payments to be made pursuant to this Clause 6.3 shall be made in
          accordance with Clause 11.

2.20      CLAIMS NOTICES

2.20.1    Any Claims Notice given pursuant to Clause 6.1 shall be in writing,
          shall identify itself as a Claims Notice for the purposes of this
          Agreement and shall specify in reasonable detail:-

          2.20.1.1  the party on whose behalf the notification is being made;

          2.20.1.2  a description of the Third Party Proceedings to which the
                    notice relates; and

          2.20.1.3  (insofar as it is reasonably practicable to do so at the
                    time of the Claims Notice) the expected currency and the
                    amount of the Shared Liability and/or Joint Liability to
                    which it relates.

2.20.2    The giving of a Claims Notice shall be without prejudice to the
          entitlement of the party giving the notice to give one or more
          subsequent notices (at any time, notwithstanding the provisions of
          Clause 6.3.5) to the other party for the purposes of making any such
          amendments to the Claims Notice as it reasonably considers to be
          necessary or appropriate to reflect further information in relation to
          the matters referred to in Clause 6.4.1. References to a Claims Notice
          shall be deemed to include a reference to any such subsequent notice.

2.21      RECOVERY FROM THIRD PARTIES

2.21.1    Subject to Clause 6.5.3, if a party (a "Claiming Party") or one of its
          Affiliates has or may have a claim against a third party (not being
          Vivendi, one of the Claiming

                                       25


          Party's Affiliates, the other party or any of its Affiliates or any
          Jointly-owned Entity) in respect of a Shared Liability and/or a Joint
          Liability (a "Third Party Claim"), then:

          2.21.1.1  the Claiming Party shall promptly notify the other party
                    (the "Non-Claiming Party") in writing of the Third Party
                    Claim;

          2.21.1.2  the Claiming Party shall take, or procure that its
                    Affiliates take, all reasonable steps to enforce the Third
                    Party Claim save to the extent that such steps could, in the
                    Claiming Party's reasonable opinion, be materially
                    detrimental to its business or that of any of its
                    Affiliates;

          2.21.1.3  any amount actually recovered by the Claiming Party (or any
                    of its Affiliates) from the relevant third party in respect
                    of the Third Party Claim (less the amount of any Tax
                    applicable in respect of such recovery and less an amount
                    equal to the costs and expenses reasonably incurred by the
                    Claiming Party (or any of its Affiliates) in enforcing the
                    Third Party Claim) shall be treated as a Shared Asset (to
                    the extent that the Third Party Claim is in respect of to a
                    Shared Liability) and as a Joint Asset (to the extent that
                    the Third Party Claim relates to a Joint Liability) for the
                    purposes of this Agreement;

2.21.2    Notwithstanding the provisions of Clause 6.5.1, neither party shall be
          required to enforce (or procure that any of its Affiliates enforces),
          any claim against a past or present employee or officer of such party
          (or any of its Affiliates) unless, and then only to the extent that,
          such claim relates to the dishonesty or fraud of such employee or
          officer.

2.21.3    Clause 6.5.1 shall not apply in circumstances where Clause 6.3.4 does
          not apply to the Shared Liability or Joint Liability to which the
          relevant Third Party Claim relates.

2.22      IDENTIFIED LITIGATION

          Schedule 4 and the Market Plan each set out brief details of certain
          pending claims, actions, demands or proceedings ("Proceedings") which
          have been brought or alleged by or against Diageo, Pernod Ricard, one
          or more of their respective Affiliates or one or more Jointly-owned
          Entities and which the parties have agreed to treat as Shared
          Liabilities and/or Joint Liabilities. The following provisions shall
          apply in respect of such Proceedings:

2.22.1    The party whose name is set out in the seventh column of Schedule 4 in
          relation to each of the Proceedings described therein shall have the
          sole conduct of such Proceedings and, in the case of Proceedings
          described in the Market Plan, the party who is the country manager of
          the jurisdiction in which such Proceedings are taking place shall have
          the sole conduct of such Proceedings (the "Conducting Party").

2.22.2    The provisions of Clauses 6.2.2 to 6.2.6, 6.3.1 to 6.3.3 and 6.5 shall
          apply, mutatis mutandis, in respect of the Proceedings described in
          Schedule 4 and the Market Plan and any Shared Liabilities and Joint
          Liabilities relating thereto with effect from the date of this
          Agreement.

2.23      MARGARITAVILLE

2.23.1    Notwithstanding the provisions of Clause 5.1, Margaritaville
          Liabilities:


                                       26


          2.23.1.1  which are not recovered by Diageo and/or Pernod Ricard under
                    the terms of the Vivendi Sale Agreement (and each party
                    shall use its reasonable endeavours to recover such
                    liabilities to the extent that they are recoverable under
                    the Vivendi Sale Agreement);

          2.23.1.2  in respect of which an obligation to make a payment arises
                    or a claim is made on or prior to 21 December 2003,

          shall be Shared Liabilities.

2.23.2    For the purposes of this Clause 6.7, "Margaritaville Liabilities"
          means liabilities which relate to the MARGARITAVILLE Brand and which
          are:

          2.23.2.1  Historic Liabilities (including, for the avoidance of doubt,
                    claims arising from any prior arrangement between JES and
                    Margaritaville Holdings Inc. or its Affiliates relating to
                    the MARGARITAVILLE Brand); or

          2.23.2.2  liabilities arising either as a result of Closing or as a
                    result of the change of licensee of the MARGARITAVILLE Brand
                    from JES to Austin, Nichols & Co., Incorporated,

          but excluding any liability which arises out of the negligence or
          default of Pernod Ricard or any Affiliate of Pernod Ricard.

2.23.3    Pernod Ricard shall, and shall procure that each of its Affiliates
          shall, take all such action as is reasonable to mitigate any
          Margaritaville Liability. Pernod Ricard shall procure, in so far as it
          is able, that Diageo and/or its legal advisers shall be provided with
          all such information as they may reasonably require in order to assess
          the quantum of any Margaritaville Liability, save where to provide
          such information would result in the loss of legal privilege in that
          information or might result in a breach of any applicable anti-trust
          or competition law principles, in which case (to the extent possible)
          disclosure shall be on an external counsel basis or to an independent
          third party who shall undertake not to disclose privileged or
          anti-trust sensitive information received to Diageo.

2.24      LIABILITIES PASSING TO A DIFFERENT ENTITY

          Where, by operation of law in any jurisdiction, a liability which is
          primarily the liability of one entity could if not discharged by that
          entity become a secondary liability of another entity:

2.24.1    the parties shall endeavour to ensure that the entity primarily liable
          discharges it; but if

2.24.2    an entity secondarily liable in fact discharges it (in whole or in
          part) the parties will ensure that the entity discharging the
          liability is fully reimbursed so that the liability remains for the
          purpose of this Agreement a liability of the original obligor and
          shall at all times be treated as such for such purposes.


                                       27


CLAIMS AGAINST VIVENDI

2.25      TREATMENT OF CLAIMS

2.25.1    The parties shall use their respective reasonable endeavours to
          convene a meeting of the Supervisory Committee in March 2003 to
          discuss the feasibility of making any claims under Section 10.1 of the
          Vivendi Sale Agreement for breach of representations and warranties,
          details of any potential claims thereunder and the process (if any) to
          be followed in order to finalise any such claims and bring them
          against Vivendi within the time limits prescribed under the Vivendi
          Sale Agreement.

2.25.2    Subject to Clause 7.1.5, and save with the agreement of the other
          party, no claim under Section 10.1 of the Vivendi Sale Agreement for
          breach of representations and warranties (a "Claim") shall be pursued
          by either party or any of their respective Affiliates or by any
          Jointly-owned Entity or any of its Affiliates against Seagram or
          Vivendi or any of their Affiliates under the Vivendi Sale Agreement
          unless the Claim shall have first been referred to the parties' legal
          counsel who agree, based on the facts available, that proceeding with
          the Claim would, on a balance of probabilities, be a reasonable course
          of action to take. In the absence of such agreement the parties shall
          refer the matter to a New York law firm (the "Legal Expert"),
          appointed by agreement between the parties or (if they do not agree)
          upon the application by either party to the managing partner of Cleary
          Gottlieb Steen & Hamilton and he shall have determined that, in his
          opinion, based on the facts available to the Legal Expert, proceeding
          with the Claim would, on a balance of probabilities, be a reasonable
          course of action to take. The decision of the Legal Expert shall be
          final. The Legal Expert shall be entitled, in his absolute discretion,
          to seek such professional (including legal) advice as he shall
          determine in order to arrive at his opinion. The fees and expenses of
          the Legal Expert shall be borne equally by the parties.

2.25.3    The parties shall use reasonable endeavours to ensure that all matters
          which they reasonably believe will or could give rise to a Claim
          (other than a Claim which relates solely to a breach of any of the
          representations and warranties contained in sections 4.7(a) and
          4.7(b), or any of the indemnification provisions contained in article
          VII, of the Vivendi Sale Agreement) of which they or any of their
          Affiliates are aware are referred to each of the parties' legal
          counsel in accordance with Clause 7.1.2 on or prior to such date as
          shall be agreed between the parties' representatives at the meeting
          referred to in Clause 7.1.1.

2.25.4    After 20 June 2003, each of Pernod Ricard and Diageo shall, within one
          month of it or one of its Affiliates becoming aware of any matter
          which they reasonably believe will or could give rise to a Claim
          relating to a breach of any of the representations and warranties
          contained in sections 4.7(a) and 4.7(b), or any of the indemnification
          provisions contained in article VII, of the Vivendi Sale Agreement,
          refer any such Claim to each of the parties' legal counsel in
          accordance with Clause 7.1.2.

2.25.5    The provisions of Clause 7.1.2 shall not apply if compliance with the
          terms of this paragraph would be reasonably likely to affect the
          ability of either party or any of their respective Affiliates or any
          Jointly-owned Entity to bring the Claim under the Vivendi Sale
          Agreement (including, for the avoidance of doubt, the ability of
          either party to serve a notice under the Vivendi Sale Agreement within
          the requisite time period) or to prejudice materially the likelihood
          of success of that Claim or the amount which might be recovered under
          that Claim.

2.25.6    For the purposes of Clause 7.1.7 below, "Claimed Damages" means any
          amount:


                                       28


          2.25.6.1  which is finally adjudicated by a court of competent
                    jurisdiction, or which is agreed (whether as part of any
                    settlement or otherwise) by Vivendi or any of its
                    Affiliates, to be payable by Vivendi or any of its
                    respective Affiliates in respect of a Claim; or

          2.25.6.2  which a court of competent jurisdiction finally adjudicates
                    would have been payable, or which Vivendi or any of its
                    Affiliates agrees (whether as part of any settlement or
                    otherwise) would have been payable, by Vivendi or any of its
                    Affiliates in respect of a Claim but for any minimum
                    aggregate claim threshold (but not any threshold in relation
                    to individual claims) expressly imposed by the terms of the
                    Vivendi Sale Agreement; or

          2.25.6.3  which the Legal Expert estimates would have been payable by
                    Vivendi or any of its Affiliates in respect of a Claim or in
                    respect of facts or circumstances which would have given
                    rise to the ability to make a Claim but for any overall cap
                    on the liability of Vivendi and/or its Affiliates expressly
                    imposed by the terms of the Vivendi Sale Agreement.

2.25.7    If:

          2.25.7.1  any Claimed Damages are actually recovered by either party
                    or any of their respective Affiliates or by any
                    Jointly-owned Entity from Vivendi and/or its Affiliates; and

          2.25.7.2  other Claimed Damages are not actually recovered by either
                    party or any of their respective Affiliates or by any
                    Jointly-owned Entity from Vivendi and/or its Affiliates as a
                    result of any threshold or cap described in Clauses 7.1.6.2
                    or 7.1.6.3 above,

          then the parties agree that the Claimed Damages falling within Clause
          7.1.7.1 above shall be divided between the claimants in the
          proportions which the total Claimed Damages of each claimant bears to
          the total amount of Claimed Damages.

2.26      COSTS AND PROCEEDS OF CLAIMS

2.26.1    The costs of bringing a claim under the Vivendi Sale Agreement shall
          be borne:

          2.26.1.1  in the case of a claim that results in the recovery of
                    Claimed Damages, by the person who is to receive the benefit
                    of any proceeds of such claim and, if more than one, by such
                    persons in proportion to the Claimed Damages recovered by
                    each of them respectively; and

          2.26.1.2  in the case of a claim that does not result in the recovery
                    of Claimed Damages, by the person bringing the claim and, if
                    more than one, by such persons in proportion to the amounts
                    claimed by each of them respectively.

2.26.2    The proceeds of any claim in respect of any liability to taxation or
          any other liability which cannot be attributed specifically to any
          asset shall accrue to the party which bears the liability under this
          Agreement (and if borne by both parties, the benefit of the proceeds
          shall accrue in the same proportions as the burden of the liability is
          split).


                                       29


2.27      DEFAULT UNDER VIVENDI SALE AGREEMENT

2.27.1    Diageo undertakes to indemnify Pernod Ricard and its Affiliates for
          any losses or claims suffered by Pernod Ricard or its Affiliates as a
          result of the default of Diageo or any of its Affiliates or breach of
          any of their respective obligations under the Vivendi Sale Agreement.

2.27.2    Pernod Ricard undertakes to indemnify Diageo and its Affiliates for
          any losses or claims suffered by Diageo or its Affiliates as a result
          of the default of Pernod Ricard or any of its Affiliates or breach of
          any of their respective obligations under the Vivendi Sale Agreement.


GUARANTEE OF FIA IDENTIFIED TRANSACTIONS

8.1       Diageo hereby guarantees to Pernod Ricard (for itself and on behalf of
          its Affiliates) the performance by Diageo's Affiliates of their
          respective obligations to Pernod Ricard and its Affiliates under the
          FIA Identified Sale and Purchase Agreements.

2.29      Pernod Ricard hereby guarantees to Diageo (for itself and as trustee
          on behalf of its Affiliates) the performance by Pernod Ricard's
          Affiliates of their respective obligations to Diageo and its
          Affiliates under the FIA Identified Sale and Purchase Agreements.

2.30      The guarantees contained in Clauses 8.1 and 8.2 are continuing
          guarantees and shall remain in force until all obligations of the
          relevant guarantor and its Affiliates under the FIA Identified Sale
          and Purchase Agreements have been fully performed and all sums payable
          under them have been fully paid.

2.31      The obligations of a party as guarantor under this Clause 8 shall not
          be affected by any act, omission, matter or thing which, but for this
          provision, might operate to release or otherwise exonerate such party
          from its obligations or affect such obligations including, without
          limitation and whether or not known to such party:-

2.31.1    any time, indulgence, waiver or consent at any time given to the other
          of them or any other person;

2.31.2    any compromise or release of, or abstention from perfecting or
          enforcing, any rights or remedies against the other of them or any
          other person;

2.31.3    any legal limitation, disability, incapacity or other circumstance
          relating to the other of them or any other person or any amendment to
          or variation of the terms of any of the FIA Identified Sale and
          Purchase Agreements; and

2.31.4    any irregularity, unenforceability or invalidity of any obligations of
          the other of them.

2.32      The guarantee contained in Clauses 8.1 and 8.2 may be enforced by
          either of Pernod Ricard or Diageo without any steps or proceedings
          having first been taken against the relevant Affiliate(s) in default.


GUARANTEES AND OTHER ASSURANCES

2.33      This Clause 9 shall apply where any person (the "Guaranteeing Party")
          has given any Assurance to any other person in respect of any
          obligation or liability in relation to:


                                       30


2.33.1    (where the Guaranteeing Party is an Affiliate of Diageo) any Pernod
          Ricard Asset, any Pernod Ricard On-sale Asset or any Seagram Venture
          Asset;

2.33.2    (where the Guaranteeing Party is an Affiliate of Pernod Ricard) any
          Diageo Asset, any Pernod Ricard On-sale Asset or any Seagram Venture
          Asset; or

2.33.3    (where the Guaranteeing Party is a Jointly-owned Entity) any Diageo
          Asset or Pernod Ricard Asset.

2.34      Where the Assurance relates:

2.34.1    to a Diageo Asset, the "Releasing Party" shall mean Diageo;

2.34.2    to a Pernod Ricard Asset, the "Releasing Party" shall mean Pernod
          Ricard; and

2.34.3    to either a Pernod Ricard On-sale Asset or any Seagram Venture Asset
          (or both) the "Releasing Party" shall mean both Diageo and Pernod
          Ricard, who shall, in that case, bear any liability arising under this
          Clause 9 as a Shared Liability.

2.35      The Releasing Party covenants that, at any time and from time to time,
          it will execute and deliver all such instruments of assumption and
          acknowledgements or take such other action as the Guaranteeing Party
          may reasonably request in order to effect the release and discharge in
          full of those Assurances in respect of which it is a Releasing Party,
          and the substitution of the Releasing Party or any of its Affiliates
          as the primary obligor in respect of, each such Assurance in each case
          on a non-recourse basis to the Guaranteeing Party or any of its
          Affiliates. Pending such release and discharge, the Releasing Party
          hereby agrees with the Guaranteeing Party (on behalf of itself and
          each of its Affiliates from time to time) that it will assume and pay
          and discharge when due, and indemnify on an after-tax basis the
          Guaranteeing Party and its Affiliates against, all such Assurances.

2.36      CONDUCT OF CLAIMS

          If any action, claim, demand or proceedings are brought or alleged
          against a Guaranteeing Party or any of its Affiliates in respect of
          which an indemnity is to be sought from the Releasing Party pursuant
          to this Clause 9, the Guaranteeing Party shall forthwith notify the
          Releasing Party thereof and the Releasing Party shall have the option
          to assume the defence thereof. If the Releasing Party fails to assume
          such defence, it will be liable to the Guaranteeing Party for any
          legal or other expenses subsequently and reasonably incurred by the
          Guaranteeing Party or any of its Affiliates in connection with such
          defence.


ASSETS AND LIABILITIES LEAVING THE GROUPS

2.37      Where:

2.37.1    a body corporate is or has since Closing been sold to a third party by
          Diageo, Pernod Ricard, a Jointly-owned Entity or any of their
          respective Affiliates; and

2.37.2    at the time of the sale that body corporate or a subsidiary of that
          body corporate owned any asset or was subject to any liability which,
          had it been sold to the purchaser or discharged by that body corporate
          or subsidiary, would have given rise to a payment under any of Clauses
          4, 5 or 6,


                                       31


          then the selling party shall, on that sale, be deemed to have received
          or made an appropriate payment in respect of that asset or liability
          to which the provisions of Clauses 4, 5 or 6 shall apply. Where the
          selling party subsequently is subject to a liability or has the
          benefit of an asset which, had it been identified at the time of sale,
          would have given rise to a payment under this Clause then the selling
          party shall be entitled to claim an appropriate payment or shall be
          obliged to make an appropriate payment (as the case may be) pursuant
          to Clauses 4, 5 or 6 (as appropriate). In this Clause 10, "appropriate
          payment" means such payment as is fair and equitable in all the
          circumstances having regard to (in the case of a sale carried out on
          or prior to the date of this Agreement) the FIA Implementation
          Principles and (in the case of a sale carried out after the date of
          this Agreement) the SOFIA Implementation Principles.


PAYMENTS

2.38      NOTIFICATION OF AMOUNTS PAYABLE

2.38.1    Within 10 Business Days following the end of each Settlement Period,
          each of Diageo and Pernod Ricard shall notify to the other the amounts
          (if any) which it believes (acting in good faith) that it is entitled
          to receive from the other party or which it believes (acting in good
          faith) that it is obliged to pay to the other party under the terms of
          this Agreement (including, without limitation, Clauses 4 to 6).

2.38.2    Where either party believes (acting in good faith) that it is entitled
          to receive an amount in excess of US$1 million from the other party in
          respect of any single matter or series of related matters arising out
          of the same circumstances, it may notify such amount to the other
          party at any time.

2.38.3    The failure by any party to notify an amount that it is entitled to
          receive or that the other party is obliged to pay shall not constitute
          a breach of this Agreement and shall not prejudice or constitute a
          waiver of any claim it may have in respect of such amount.

2.39      PAYMENT BY SINGLE NET PAYMENT

2.39.1    Following notification of an amount pursuant to Clause 11.1.1 or
          11.1.2, the parties shall co-operate in good faith and seek to agree
          as soon as reasonably practicable the amounts payable between them.
          Amounts so agreed shall be settled on a date (a "Payment Date")
          falling not later than five Business Days after the date on which any
          such agreement is reached, by a net payment in US dollars by Diageo to
          Pernod Ricard or Pernod Ricard to Diageo (as the case may be). To the
          extent that any such payment is not so made the amount not paid shall
          accrue default interest in accordance with Clause 11.5 until the
          actual date of payment to the person entitled to the relevant amount.

2.39.2    Where a party is required to account to the other for an amount in
          excess of US$1 million received by it, it shall pay (or procure that
          one or more of its Affiliates pays) such amount to the other party on
          a date (the "Payment Date") falling not later than five Business Days
          after the date of receipt.


                                       32


2.40      CONFIRMATION OF SINGLE NET PAYMENT

          Within five Business Days of each Payment Date, the party making the
          payment on that Payment Date shall deliver to the other party written
          confirmation that the payment referred to in Clause 11.2.1 has been
          made.

2.41      CURRENCY CONVERSION

          In respect of any amount payable under this Agreement which is
          expressed in a currency other than US dollars, that amount shall be
          converted to US dollars at the closing spot rate as shown on Telerate
          screen page 44538 as at the day being two Business Days before the
          date on which the obligation to make the payment arises.

2.42      DEFAULT INTEREST

          Interest shall accrue daily on the US dollar amount of all net amounts
          due and payable under this Agreement from the due date of payment
          until the actual date of payment at the rate of 100 basis points above
          US$ LIBOR (after as well as before judgment).

2.43      PURCHASE PRICE ADJUSTMENTS

          In order to effect the parties' intentions adjustments to be made
          pursuant to Clauses 4, 5 and 6 shall be treated as purchase price
          adjustments among the Primary Purchasers and will be taken into
          account in determining the final purchase prices in respect of the
          Acquired Assets.

2.44      ADJUSTMENTS TO PAYMENT AMOUNTS

          Where the parties agree or it is otherwise determined that an amount
          which formed the basis of any net payment pursuant to Clause 11.2.1
          was incorrectly stated, the parties shall procure that the net amount
          payable between them as at the next following Payment Date is adjusted
          to correct the earlier error by adding or subtracting (as appropriate)
          the amount by which the original amount was incorrectly stated.


MISDIRECTED CASH RECEIPTS

2.45      To the extent that a party or any of its Affiliates or a Jointly-owned
          Entity (the "recipient") receives on or after Closing any cash amount
          which relates to a receivable which, under the terms of this
          Agreement, is an asset (other than an After-acquired Asset) of another
          person (a "Misdirected Cash Receipt"), Diageo and/or Pernod Ricard
          shall, or shall procure that the recipient shall, account to that
          other person for such cash amount.

2.46      Subject to Clause 12.3, amounts payable under this Clause 12 shall be
          notified to the other party in accordance with Clause 11.1.1 not later
          than ten Business Days after the end of the Settlement Period in which
          the relevant amount is received by the recipient (or, if later, is
          identified as being a Misdirected Cash Receipt) and shall be settled
          as part of the net settlement pursuant to Clause 11.2.1.

2.47      Where the amount of a Misdirected Cash Receipt exceeds US$1 million,
          Clause 12.2 shall not apply and the full amount of such receipt shall
          be paid to the person entitled thereto promptly and in any event
          within 10 Business Days after the recipient

                                       33


          receives the relevant Misdirected Cash Receipt (or, if later,
          identifies that such receipt has been received) and Clause 11.5 shall
          apply in the event of non-payment.

2.48      Within ten Business Days after a party or any of its Affiliates or a
          Jointly-owned Entity receives any Misdirected Cash Receipt (or, if
          later, identifies that such a receipt has been received) the party who
          received, or whose Affiliate received, or who is, in accordance with
          the Tax Plan, responsible for the management of the Jointly-owned
          Entity which received the Misdirected Cash Receipt shall deliver to
          the other party notice of such Misdirected Cash Receipt together with
          copy bank confirmation setting out the exact amount received.


MISCELLANEOUS OBLIGATIONS OF THE PARTIES

2.49      INVESTMENT CANADA UNDERTAKING

          Diageo agrees to indemnify Pernod Ricard, its Affiliates and each
          Jointly-owned Entity against any and all liabilities incurred by
          Pernod Ricard, its Affiliates and each Jointly-owned Entity to the
          recipients in respect of the Investment Canada Undertakings to the
          extent that such liabilities do not arise directly or indirectly as a
          result of Pernod Ricard or any of its Affiliates or any Jointly-owned
          Entity terminating co-pack arrangements in relation to Dorval/the
          Dorval facility.

2.50      GODIVA

          It is agreed that:

2.50.1    Diageo shall be permitted to approach N.V. Godiva Belgium S.A. and/or
          its Affiliates with a view to it or one of its Affiliates entering
          into an agreement with Diageo or one of its Affiliates for the
          distribution of the Godiva brand in the United States and/or Canada.

2.50.2    Pernod Ricard shall not before 30 June 2003 directly or indirectly
          enter into any discussions, negotiations or agreement with N.V. Godiva
          Belgium S.A. and/or its Affiliates regarding the distribution of the
          Godiva brand by Pernod Ricard or any of its Affiliates within the
          United States and/or Canada.

2.50.3    Subject to Pernod Ricard complying with its obligations under Clause
          13.2.2, Diageo shall pay to Pernod Ricard an amount equal to the
          direct brand contribution of Godiva less the hosting rate, such
          amounts to be calculated on the basis adopted by the parties for the
          purpose of the Framework and Implementation Agreement for the period
          from 21 December 2001 to 30 June 2003.

2.50.4    Amounts payable by Diageo under Clause 13.2.3 shall be notified to
          Diageo by Pernod Ricard in accordance with Clause 11.1 and shall be
          settled as part of the net settlement pursuant to Clause 11.2.1.

2.51      PATENT; EXTENSION OF LICENCE

2.51.1    Diageo hereby confirms that it does not and will not object to the use
          by Pernod Ricard and its Affiliates at no charge of the patent
          registered in respect of a rotary turret with pedestals and method of
          controlling the rotation thereof, brief details of which are contained
          in paragraph 3.1 of Part A of Schedule 1.


                                       34


2.51.2    Diageo agrees that it will extend, or will procure that one of its
          Affiliates will extend, to Pernod Ricard and its Affiliates a right to
          use the UPC barcode 87000 for a period of nine months from the date of
          this Agreement at no cost to Pernod Ricard or any of its Affiliates.


INSURANCE

2.52      Each party shall procure that each of the Jointly-owned Entities in
          respect of which it is the Managing Party is at all times from and
          including the date of this Agreement insured against all normal
          insurable liabilities which may arise from the business of the
          relevant Jointly-owned Entity at not less than the same level of
          cover, and on the same basis, as existed in respect of the business of
          such entity at the date of this Agreement. In respect of each
          Jointly-owned Entity, the relevant Managing Party may, with the
          consent of the other party (such consent not to be unreasonably
          withheld or delayed), reduce the scope of such insurance and such
          level of cover in respect of future periods of cover to the extent
          reasonable and consistent with prudent industry practice in the event
          that the scale or scope of the business of such Jointly-owned Entity
          reduces after the date of this Agreement.

2.53      The costs of providing insurance cover in accordance with Clause 14.1
          and of paying or meeting any deductible or similar charge in
          connection with any claim made under such cover shall be for the
          account of the relevant Jointly-Owned Entity.


MARKET PLAN AND RISK PROPERTIES

2.54      MARKET PLAN

2.54.1    The parties shall use their respective reasonable endeavours to
          implement the Market Plan in accordance with its terms, subject to
          such amendments thereto as may be agreed from time to time by the
          Supervisory Committee or such persons as such committee may nominate
          from time to time.

2.54.2    In implementing the Market Plan, the parties shall have regard to the
          Implementation Principles and shall act with no less level of skill
          and care than that with which they have acted in relation to the
          Jointly-owned Entities prior to the date of this Agreement.

2.54.3    In the event that either party becomes aware that implementation of
          the Market Plan is likely to result in costs, expenses or liabilities
          materially different from those set out in the Market Plan, it shall
          as soon as reasonably practicable notify the other party in writing.
          Each party shall keep the other party promptly informed of any
          material developments in relation to the Jointly-owned Entities for
          which it is the Managing Party. Without limitation to the foregoing,
          the Managing Party of each Jointly-owned Entity shall notify the other
          party promptly upon becoming aware of any Third Party Proceedings
          involving any such Jointly-owned Entity which may give rise to a
          liability of US$1 million or more and shall keep the other party
          informed of any material developments in relation to such Third Party
          Proceedings.

2.54.4    In the event of any inconsistency between the Tax Plan and the Market
          Plan, the Supervisory Committee shall decide which of such plans
          should take precedence and the parties shall amend the provisions of
          one or both of such plans accordingly.


                                       35


15.2      RISK PROPERTIES

          An Affiliate of Diageo (the "Occupying Affiliate") is the lessee of
          the Risk Properties (as defined below). Pursuant to Schedule 9, the
          parties have acknowledged and agreed that (if and to the extent that
          the Risk Properties (or any part or parts thereof) are not being used
          by Diageo or an Affiliate) all liabilities, costs and expenses
          whatsoever arising under or in connection with the Occupying
          Affiliate's leases over the Risk Properties (including, without
          limitation, rent, service charges, property and other Taxes,
          dilapidation charges, maintenance and guarding costs and utility
          charges) which are attributable to the Risk Properties (or the
          relevant part or parts thereof) that are not being used (such
          liabilities, charges, costs and expenses being together the
          "Occupation Costs") shall be a Shared Liability or Joint Liability, as
          the case may be. Diageo shall procure that the Occupying Affiliate
          shall use its reasonable efforts to mitigate the Occupation Costs.
          Without limitation, the Occupying Affiliate may (but shall not be
          obliged to):

          (i)       sublet all or part of all or any of the Risk Properties to
                    one or more sub-lessees of the Property; and/or

          (ii)      assign or otherwise transfer all or part of the Occupying
                    Affiliate's interest in all or any of the Leases to any
                    other person; and/or

          (iii)     surrender or otherwise lawfully terminate all or any of the
                    Leases,

          in each case on such terms and subject to such conditions as the
          Occupying Affiliate may determine to accept. All liability, costs and
          expenses ("Mitigation Expenses") so incurred by the Occupying
          Affiliate shall also be a Shared Liability or a Joint Liability, as
          the case may be. Diageo shall (or shall procure that the Occupying
          Affiliate shall) consult with Pernod Ricard before taking any step by
          way of mitigation of the Occupation Costs which would involve material
          expenditure on the part of the Occupying Affiliate. In this clause,
          "Risk Properties" means the properties defined as such in the section
          of the Market Plan relating to the US.


JOINTLY-OWNED ENTITIES

2.55      AUDITORS

2.55.1    The Managing Party in respect of each Jointly-owned Entity shall
          procure that such Jointly-owned Entity shall have an auditor whether
          or not that entity is required by law to have an auditor, and such
          auditor shall be nominated by such Managing Party.

2.55.2    The Managing Party in respect of each Jointly-owned Entity shall use
          its reasonable endeavours to procure that the working papers of any
          auditor appointed in respect of that Jointly-owned Entity in
          accordance with Clause 16.1.1 shall be made available to Pernod Ricard
          (where the Managing Party is Diageo) or to Diageo (where the Managing
          Party is Pernod Ricard).

2.55.3    The costs of each auditor appointed under this Clause 16 shall be
          borne by the Jointly-owned Entity in respect of which such auditor is
          appointed.

2.56      BOOKS AND RECORDS

          Each Managing Party shall be responsible for (i) procuring that the
          statutory books and the accounting books and records of its
          Jointly-owned Entities are kept and

                                       36


          maintained, and (ii) procuring that all statutory returns, filings and
          registrations that are reasonably required to be made by such entities
          are made. In fulfilling such responsibilities, each Managing Party
          shall act in a timely manner and use reasonable skill and care. The
          out of pocket costs and expenses incurred in connection with such
          responsibilities shall be borne by the relevant Jointly-owned
          Entities.

2.57      FUNDING

          Without prejudice to the Market Plan and subject to the provisions of
          Schedule 11, where any Jointly-owned Entity has any ongoing funding
          requirement, Diageo or an Affiliate of Diageo and Pernod Ricard or an
          Affiliate of Pernod Ricard shall support such funding requirement by
          either (i) providing inter-company loans to the Jointly-owned Entity
          or (ii) supporting a third party loan facility or (iii) subscribing
          for equity or other membership interests, in each case in the Diageo
          Proportion and the Pernod Ricard Proportion respectively.

2.58      TREASURY

          The provisions of Schedule 11 shall apply.

2.59      INTELLECTUAL PROPERTY

          Where any Intellectual Property Asset owned by any Jointly-owned
          Entity has not been allocated under this Agreement to Diageo and/or
          its Affiliates or Pernod Ricard and/or its Affiliates as a Diageo
          Asset or a Pernod Ricard Asset (as the case may be), the Managing
          Party of such Jointly-owned Entity:

2.59.1    shall be entitled to arrange the assignment or transfer of such
          Intellectual Property Asset for nil or other consideration (but at its
          own cost and expense) to itself or one of its Affiliates whereupon
          such Intellectual Property Asset shall become a Diageo Asset (where
          Diageo is the Managing Partner of the relevant Jointly-owned Entity)
          or a Pernod Ricard Asset (where Pernod Ricard is the Managing Party of
          the relevant Jointly-owned Entity); and/or

2.59.2    shall take such other action (at the cost and expense of the
          Jointly-owned Entity) in relation to such Intellectual Property Asset
          as it may (acting reasonably) consider appropriate in connection with
          the implementation of the Market Plan.


ACCESS TO INFORMATION AND ACCOUNTS

2.60      ACCESS TO INFORMATION BY THE PARTIES AND THEIR AUDITORS

          Each party (the "Disclosing Party") shall, and shall procure that its
          Affiliates shall, and shall (so far as it is able to do so) procure
          that any Jointly-owned Entity shall, allow to the other party (the
          "Receiving Party") and its Affiliates and to the auditors and
          professional advisers of the Receiving Party access to all information
          held by, or under the control of, the Disclosing Party or any of its
          Affiliates or any Jointly-owned Entity (each such person being a
          "Disclosing Affiliate"):

2.60.1    in so far as it relates to the Diageo Assets (where the Receiving
          Party is Diageo) and/or the Pernod Ricard Assets (where the Receiving
          Party is Pernod Ricard) and/or the Seagram Venture Assets and/or the
          Pernod Ricard On-sale Assets (whether the Receiving Party is Diageo or
          Pernod Ricard);


                                       37


2.60.2    to the extent that such access is reasonably necessary for the purpose
          of investigating any claim under this Agreement or mitigating the
          amount of any such claim; or

2.60.3    to the extent that such access is reasonably necessary for the
          purposes of this Agreement, the Vivendi Sale Agreement or any of the
          agreements entered into in connection with the transactions described
          in Schedule 7 (including, without limitation, for the purposes of
          verifying any information provided by any Disclosing Affiliate to the
          Receiving Party or any of its Affiliates under or pursuant to the
          terms of this Agreement),

          in such manner and at such times as the Receiving Party or any of its
          Affiliates shall reasonably require on a timely basis, provided that
          nothing in this Clause 17 shall oblige any such person to allow to the
          Receiving Party or any of its Affiliates access to information which:

          2.60.3.1  does not relate to the relevant assets referred to in Clause
                    17.1.1 above; or

          2.60.3.2  is commercially sensitive or confidential information
                    relating, where the Receiving Party is Diageo, to the Pernod
                    Ricard Assets or the wider business of Pernod Ricard and its
                    Affiliates and, where the Receiving Party is Pernod Ricard,
                    to the Diageo Assets or the wider business of Diageo and its
                    Affiliates; or

          2.60.3.3  if it were disclosed would result in the loss of legal
                    privilege in that information or might result in a breach of
                    any applicable anti-trust or competition law principles, in
                    which case (to the extent possible) disclosure shall be on
                    an external counsel basis or to an independent third party
                    who shall undertake not to disclose privileged or anti-trust
                    sensitive information to such other party.

2.61      ACCESS TO INFORMATION BY AUDITORS ONLY

          In the case of information which would be required by Clause 17.1 to
          be made available to the Receiving Party or any of its Affiliates but
          for the provisions of Clause 17.1.3.2, the Disclosing Party shall, or
          shall procure that the relevant Disclosing Affiliate(s) shall, subject
          to Clause 17.1.3.3, make that information available to the auditors of
          the Receiving Party in such manner and at such times as the Receiving
          Party or any of its Affiliates shall reasonably require, provided that
          the Receiving Party shall first procure that its auditors shall agree
          with the Disclosing Party that it shall not disclose such information
          to the Receiving Party or any of its Affiliates.

2.62      SALE OF AFFILIATES

          Where any party to this Agreement disposes of any of its Affiliates to
          any third party, and that Affiliate holds or controls information of a
          type referred to in Clause 17.1 or disposes of any business or assets
          including any such information, it shall use its reasonable endeavours
          to procure that on such sale the purchaser of such Affiliate, business
          or asset agrees to be bound by the terms of this Clause 17 (to the
          extent applicable at the relevant time) as if it were a Disclosing
          Party.

2.63      FIREWALL PROCEDURES

                                       38


          Each party shall, and shall procure that its Affiliates shall, comply
          with the firewall procedures agreed between them for the purposes of
          the Framework and Implementation Agreement.

2.64      DOCUMENT RETENTION

2.64.1    Diageo shall use its reasonable endeavours to ensure that neither it
          nor any of its Affiliates destroys any data, original documents or
          information relating to the Pernod Ricard Assets, the Seagram Venture
          Assets or the Pernod Ricard On-sale Assets for a period of 7 years
          after the date of this Agreement. Following the expiry of such 7 year
          period, Diageo shall use its reasonable endeavours to notify Pernod
          Ricard before it or any of its Affiliates destroys any such data,
          documents or information and to give Pernod Ricard the opportunity (at
          its own cost and expense) to take copies thereof prior to such
          destruction.

2.64.2    Pernod Ricard shall use its reasonable endeavours to ensure that
          neither it nor any of its Affiliates destroys any data, original
          documents or information relating to the Diageo Assets, the Seagram
          Venture Assets or the Pernod Ricard On-sale Assets for a period of 7
          years after the date of this Agreement. Following the expiry of such 7
          year period, Pernod Ricard shall use its reasonable endeavours to
          notify Diageo before it or any of its Affiliates destroys any such
          data, documents or information and to give Diageo the opportunity (at
          its own cost and expense) to take copies thereof prior to such
          destruction.

2.65      PROVISION OF INFORMATION FOR REPORTING REQUIREMENTS

          Each party shall provide to the other party on a timely basis all such
          information within its control, or that of its Affiliates or the
          Jointly-owned Entities in respect of which it is the Managing Party,
          as is reasonably required by that other party for the purposes of the
          statutory reporting requirements of that party and/or its Affiliates.


PERNOD RICARD ON-SALE ASSETS; SEAGRAM VENTURE ASSETS, ADDITIONAL ASSETS AND
MARTELL

2.66      JOINT AND SEVERAL LIABILITY UNDER SALE AGREEMENTS

2.66.1    Where, (i) under or in connection with the transactions listed on Part
          A of Schedule 7 Diageo (or any of its Affiliates) and Pernod Ricard
          (or any of its Affiliates) undertake or have undertaken a liability
          jointly or jointly and severally or (in circumstances where it was the
          intention of the parties or their respective Affiliates to share such
          liability in the Diageo Proportion and the Pernod Ricard Proportion)
          severally (a "Joint Sale Liability"), or (ii) under or in connection
          with the transactions listed on Part B of Schedule 7 Pernod Ricard (or
          any of its Affiliates) undertakes or has undertaken a liability (an
          "On-sale Liability"), the parties agree that such liabilities shall be
          charged on to any relevant Joint-Owned Entity which has primary
          liability in respect thereof (to the extent such on-charge is
          permissible) and otherwise shall be Shared Liabilities or Joint
          Liabilities (as the case may be), and the provisions of Clause 6 shall
          apply to any such Shared Liability or Joint Liability.

2.67      SEAGRAM VENTURE ASSETS AND ADDITIONAL ASSETS IN SINGLE OWNERSHIP

2.67.1    Where Diageo or an Affiliate of Diageo has prior to the date of this
          Agreement owned an asset which was a Seagram Venture Asset or an
          Additional Asset (within

                                       39


          the meaning of the Framework and Implementation Agreement) and on or
          after the date of this Agreement that owner:

          2.67.1.1  receives any cash from any person (other than Diageo or an
                    Affiliate of Diageo) in respect of that asset representing
                    the proceeds of disposal prior to the date of this Agreement
                    of that asset (including, without limitation, in relation to
                    the sale of that asset to Pernod Ricard or an Affiliate of
                    Pernod Ricard or a third party but not including any cash
                    received in the ordinary course of trading); or

          2.67.1.2  pays any cash to any person (other than Diageo or an
                    Affiliate of Diageo) in respect of that asset representing
                    the costs of disposal (prior to the date of this Agreement)
                    of that asset (but not including any cash paid in the
                    ordinary course of trading),

          then, in the case of 18.2.1.1, Diageo shall pay to Pernod Ricard and,
          in the case of 18.2.1.2, Pernod Ricard shall pay to Diageo, an amount
          equal to the Pernod Ricard Proportion of the amount so received or
          paid.

2.67.2    Where Pernod Ricard or an Affiliate of Pernod Ricard has prior to the
          date of this Agreement owned an asset which was a Seagram Venture
          Asset or an Additional Asset (within the meaning of the Framework and
          Implementation Agreement) and on or after the date of this Agreement
          that owner:

          2.67.2.1  receives any cash from any person (other than Pernod Ricard
                    or an Affiliate of Pernod Ricard) in respect of that asset
                    representing the proceeds of disposal prior to the date of
                    this Agreement of that asset (including, without limitation,
                    in relation to the sale of that asset to Diageo or an
                    Affiliate of Diageo or a third party but not including any
                    cash received in the ordinary course of trading); or

          2.67.2.2  pays any cash to any person (other than Pernod Ricard or an
                    Affiliate of Pernod Ricard) in respect of that asset
                    representing the costs of disposal (prior to the date of
                    this Agreement) of that asset (but not including any cash
                    paid in the ordinary course of trading),

          then, in the case of 18.2.2.1, Pernod Ricard shall pay to Diageo and,
          in the case of 18.2.2.2, Diageo shall pay to Pernod Ricard, an amount
          equal to the Diageo Proportion of the amount so received or paid.

2.67.3    For the avoidance of doubt, the provisions of this Clause 18.2 shall
          not apply to cash received or paid pursuant to an FIA Identified Sale
          and Purchase Agreement, an FIA Additional Sale and Purchase Agreement
          or the Global Sale and Purchase Agreement.

2.67.4    Subject to Clause 18.2.5, amounts payable by Diageo under Clause
          18.2.1 or Pernod Ricard under Clause 18.2.2 shall be notified to the
          other party in accordance with Clause 11.1.1 not later than 10
          Business Days after the end of the Settlement Period in which the
          relevant amount is received and shall be settled as part of the net
          settlement pursuant to Clause 11.2.1.

2.67.5    Where an amount payable by Diageo under Clause 18.2.1 or by Pernod
          Ricard under Clause 18.2.2 in respect of cash received exceeds US$1
          million, Clause 18.2.4 shall not apply and the full amount payable by
          Diageo or Pernod Ricard (as the case may be) under such clauses shall
          be paid to the other party promptly and in any event

                                       40



          within 10 Business Days after the date of receipt, and Clause 11.5
          shall apply in the event of non-payment.

2.67.6    Amounts payable by Pernod Ricard under Clause 18.2.1 or by Diageo
          under Clause 18.2.2 in respect of costs of disposal shall be notified
          to the paying party in accordance with Clause 11.1.1 or 11.1.2 (as the
          case may be) and shall be settled as part of the net settlement
          pursuant to Clause 11.2.1.

2.67.7    This Clause 18.2 does not apply to any asset which was beneficially
          held at Closing by JES or an Affiliate of JES which is incorporated,
          formed or constituted in the United States of America, or which was
          contributed by JES or any such Affiliate to Treat Venture LLC pursuant
          to the contribution agreement dated 21 December 2001 between Gramet
          Holdings Corp., JES and Treat Venture LLC.

2.68      MARTELL ASSETS

          In the event that:

2.68.1    Pernod Ricard and/or any of its Affiliates disposes of or agrees to
          dispose of some or all of the Martell Assets prior to 21 June 2003;
          and

2.68.2    the aggregate value of the consideration received by Pernod Ricard
          and/or its Affiliates in respect of such disposal(s) exceeds
          US$250,000,000,

          then Pernod Ricard shall pay to Diageo an amount equal to the Diageo
          Proportion multiplied by the amount of such excess.


TERMINATION OF THE FRAMEWORK AND IMPLEMENTATION AGREEMENT

2.69      With effect from the execution of this Agreement, the Framework and
          Implementation Agreement shall be terminated and shall be of no
          further effect and the parties shall be released and discharged from
          their respective obligations under that agreement, but in each case
          without prejudice to:

2.69.1    any breach of the Framework and Implementation Agreement occurring
          prior to such termination PROVIDED THAT the party wishing to claim in
          respect of such a breach shall only be able to recover once under the
          Framework and Implementation Agreement and this Agreement in respect
          of the same loss; and

2.69.2    any accrued rights of the parties under the Framework and
          Implementation Agreement which are to be dealt with in accordance with
          Schedule 9; and

2.69.3    any settlement between the parties or their respective Affiliates in
          accordance with the Framework and Implementation Agreement, Schedule 9
          or otherwise (whether before, on or after the date of this Agreement).

2.70      For the avoidance of doubt, Clause 19.1 shall not operate to terminate
          any agreements or arrangements entered into pursuant to the Framework
          and Implementation Agreement. The termination of the Framework and
          Implementation Agreement shall not affect the interpretation or
          application of any provision of this Agreement which refers to such
          agreement (with the intent that references in this agreement to
          provisions of the Framework and Implementation Agreement shall, save
          in Clause 19.1 and where expressly provided otherwise, be construed as
          references to such

                                       41


          provisions as if they were in full force and effect) or limit the
          rights of the parties under this Agreement.

2.71      The payments set out in Schedule 9 shall be made in accordance with
          the provisions of that Schedule.


FURTHER ASSURANCES AND MITIGATION

2.72      Each of the parties undertakes to co-operate in good faith to ensure
          that it and its Affiliates do such acts and things as may be
          reasonably necessary to give effect to this Agreement.

2.73      Diageo and Pernod Ricard shall, or shall procure that their respective
          Affiliates, do all such acts and things and shall execute or procure
          the execution of all such other documents as the other may from time
          to time reasonably require in connection with (i) the completion of
          the transactions contemplated by the Vivendi Sale Agreement, clauses 8
          and 9 of the Framework and Implementation Agreement and this Agreement
          (including, without limitation, completion of the transfer to the
          person entitled thereto of legal title to shares or other membership
          interests in bodies corporate which are comprised in the Acquired
          Assets) and (ii) those matters described in Schedule 10.

2.74.1    As soon as reasonably practicable following the date of this
          Agreement, the parties shall co-operate with one another and, acting
          in good faith, seek to agree, execute and implement (or, so far as
          practicable with effect from the date of this Agreement, procure that
          there are agreed and implemented) such amendments to the FIA
          Identified Sale and Purchase Agreements, FIA Additional Sale and
          Purchase Agreements, Global Sale and Purchase Agreement and all other
          relevant agreements contemplated thereby or related thereto (together,
          the "Relevant Documents") as may be reasonably necessary in connection
          with and/or to reflect the termination of the Framework and
          Implementation Agreement and the entry by the parties into this
          Agreement. In so doing the parties shall have regard to the SOFIA
          Implementation Principles.

2.74.2    Pending agreement and implementation of the amendments referred to in
          Clause 20.3.1, each party shall (and shall procure that its Affiliates
          and, so far as within its power, any relevant Jointly-owned Entities
          shall), so far as practicable, give effect to the provisions of this
          Agreement and have regard to the SOFIA Implementation Principles when
          observing the terms of the Relevant Documents.

2.75      The parties agree that where, as a consequence of the operation of
          this Agreement, any costs, liabilities or expenses are to be borne
          jointly by the parties (whether as Shared Liabilities or Joint
          Liabilities) they shall each seek to minimise such costs, liabilities
          or expenses.


CONFIDENTIALITY

2.76      CONFIDENTIAL INFORMATION

          Each party shall treat as confidential all information obtained as a
          result of negotiating and entering into this Agreement and the
          Framework and Implementation Agreement and which relates to:

2.76.1    the provisions of this Agreement or the Framework and Implementation
          Agreement;


                                       42


2.76.2    the negotiations relating to this Agreement or the Framework and
          Implementation Agreement;

2.76.3    the other party or any of its Affiliates;

2.76.4    the Acquired Assets acquired, directly or indirectly, from Vivendi
          (save to the extent that any such asset is ultimately acquired or held
          by that party or any of its Affiliates); or

2.76.5    any Jointly-owned Entity.

2.77      USE OF CONFIDENTIAL INFORMATION

          Each party shall:-

2.77.1    not disclose any such confidential information to any person other
          than any of its directors or employees whose duties include the
          implementation of this Agreement and who needs to know such
          information in order to discharge his duties;

2.77.2    not use any such confidential information other than for the purposes
          of, or in connection with, the implementation of this Agreement; and

2.77.3    procure that any person to whom such confidential information is
          disclosed by it complies with the restrictions set out in this Clause
          21 as if such person were a party to this Agreement.

2.78      PERMITTED DISCLOSURE BY EITHER PARTY

          Notwithstanding the previous provisions of this Clause 21, any party
          may disclose any such confidential information:-

2.78.1    if and to the extent required by law or for the purpose of any
          judicial proceedings save that, to the extent practicable, such
          disclosure shall only be made after consultation with the other party;

2.78.2    if and to the extent required by any securities exchange or regulatory
          or governmental body to which that party is subject, wherever
          situated, including (amongst other bodies) the Financial Services
          Authority, the London Stock Exchange plc, the Commission des
          Operations de Bourse, The Panel on Takeovers and Mergers, the U.S.
          Securities and Exchange Commission, the Federal Trade Commission, the
          European Commission or the United States Department of Justice,
          whether or not the requirement for information has the force of law
          save that, to the extent practicable, such disclosure shall only be
          made after consultation with the other party;

2.78.3    (subject to Clause 21.2.3) to its professional advisers, auditors and
          bankers; or

2.78.4    (subject to Clause 21.2.3) to a bona fide prospective purchaser of
          part or all of the Acquired Assets owned by that party, to the extent
          such disclosure is reasonably necessary in connection with the
          proposed sale;

2.78.5    if and to the extent the information has come into the public domain
          through no fault of that party.


                                       43


2.79      INFORMATION RELATING TO DIAGEO ASSETS AND PERNOD RICARD ASSETS

          Clauses 21.1 and 21.2 shall not apply to:

2.79.1    the disclosure, or use by, Diageo or any of its Affiliates of
          information to the extent that such information relates to Diageo
          Assets; and

2.79.2    the disclosure, or use by, Pernod Ricard or any of its Affiliates of
          information to the extent that such information relates to Pernod
          Ricard Assets.

2.80      DURATION OF OBLIGATIONS

          The restrictions contained in this Clause 21 shall continue to apply
          to each party without limit in time.


ANNOUNCEMENTS

2.81      RESTRICTION ON ANNOUNCEMENTS

          No announcement concerning this Agreement, the Framework and
          Implementation Agreement or the transactions contemplated by this
          Agreement or the Framework and Implementation Agreement shall be made
          by either party without the prior written approval of the other, such
          approval not to be unreasonably withheld or delayed.

2.82      PERMITTED ANNOUNCEMENTS

          Notwithstanding the previous provisions of this Clause 22, either
          party may make an announcement concerning this Agreement, the
          Framework and Implementation Agreement or the transactions
          contemplated by this Agreement or the Framework and Implementation
          Agreement if:

2.82.1    required by law save that, to the extent practicable, such
          announcement shall only be made after consultation with the other
          party; or

2.82.2    required by any securities exchange or regulatory or governmental body
          to which that party is subject, wherever situated, including (amongst
          other bodies) the Financial Services Authority, the London Stock
          Exchange plc, the Commission des Operations de Bourse, The Panel on
          Takeovers and Mergers, the U.S. Securities and Exchange Commission,
          the Federal Trade Commission, the European Commission or the United
          States Department of Justice, whether or not the requirement has the
          force of law save that, to the extent practicable, such announcement
          shall only be made after consultation with the other party.

2.83      DURATION OF RESTRICTIONS

          The restrictions contained in this Clause 22 shall continue to apply
          to each party without limit in time.


ASSIGNMENT

          This Agreement shall be binding on and enure for the benefit of each
          party's successors in title. No party shall assign (or declare any
          trust in favour of a third party over) all or any part of the benefit
          of, or its rights or benefits under, this Agreement.


                                       44


VARIATION

          Save as otherwise provided in this Agreement, this Agreement may only
          be varied in writing signed by each of the parties.


NOTICES

2.84      NOTICES TO BE IN WRITING

          Subject to the provisions of Clause 27.3, a notice under this
          Agreement shall only be effective if it is in writing; faxes are
          permitted but e-mail is not permitted.

2.85      ADDRESSES

          Subject to the provisions of Clause 27.3, notices under this Agreement
          shall be sent to a party at its address or number and for the
          attention of the individual set out below:



          PARTY AND TITLE OF INDIVIDUAL     ADDRESS                   FACSIMILE NO.
          -----------------------------     -------                   -------------
                                                                
          Pernod Ricard                     See page 1                +33 1 41 00 42 22
          Attn: Directeur General

          copied to Legal Department        See page 1                +33 1 41 00 42 22

          copied to Robert Sutton           10 Norwich Street         +44 20 7831 9607
          Macfarlanes                       London EC4A 1BD

          Diageo                            See page 1                +44 20 7927 4600
          Attn: Company Secretary
          copied to General Counsel                                   +44 20 7927 4864

          and to Jonathan Marks,            One Bunhill Row, London   +44 20 7090 5000
          Slaughter and May                 EC8Y 8YY


          Provided that a party may change its notice details on giving notice
          to the other parties of the change in accordance with this Clause 25.
          That notice shall only be effective on the date falling five clear
          Business Days after the notification has been received or such later
          date as may be specified in the notice.

2.86      RECEIPT OF NOTICES

2.86.1    Any notice given under this Agreement shall, in the absence of earlier
          receipt, be deemed to have been duly given as follows:

          2.86.1.1  if delivered personally, on delivery;

          2.86.1.2  if sent by first class inland post, two clear Business Days
                    after the date of posting;

          2.86.1.3  if sent by airmail, six clear Business Days after the date
                    of posting;

          2.86.1.4  if sent by facsimile, when despatched.


                                       45


2.86.2    Any notice given under this Agreement outside Working Hours in the
          place to which it is addressed shall be deemed not to have been given
          until the start of the next period of Working Hours in such place.


DISPUTE RESOLUTION

          All disputes arising in connection with this Agreement (whether
          relating to an alleged breach of the terms of this Agreement or
          otherwise), but excluding matters falling to be determined in
          accordance with Clause 7.1, shall be resolved in accordance with the
          provisions of Clauses 27 to 29.


SUPERVISORY COMMITTEE

2.87      DELEGATION TO SUPERVISORY COMMITTEE

          Each of Diageo and Pernod Ricard shall delegate to a committee
          comprising Shaun Parker and Emmanuel Babeau, or such other
          representative(s) as Diageo or Pernod Ricard may from time to time
          notify to the other in accordance with Clause 25 (the "Supervisory
          Committee") all powers, discretions and authorities necessary for the
          purposes of this Clause 27 and Clause 28 and shall enter into such
          agreements or arrangements as may be approved by, and comply with and
          be bound by any resolution of, the Supervisory Committee.

2.88      POWERS OF SUPERVISORY COMMITTEE

          The Supervisory Committee shall have all powers, discretions and
          authorities necessary to:-

2.88.1    monitor the operation and implementation of this Agreement;

2.88.2    manage and direct all dealings of the parties with Vivendi in respect
          of the Vivendi Sale Agreement (including, without limitation, any
          claims under any warranties or indemnities under that agreement); and

2.88.3    discuss and resolve any disputes arising in connection with this
          Agreement or the Framework and Implementation Agreement.

2.89      CONVENING SUPERVISORY COMMITTEE MEETINGS

2.89.1    Diageo may, at any time, call a meeting of the Supervisory Committee
          for any purpose in connection with this Agreement by giving notice to
          Emmanuel Babeau (or such other person as Pernod Ricard may notify
          Diageo from time to time in accordance with Clause 25).

2.89.2    Pernod Ricard may, at any time, call a meeting of the Supervisory
          Committee for any purpose in connection with this Agreement by giving
          notice to Shaun Parker (or such other person as Diageo may notify
          Pernod Ricard from time to time in accordance with Clause 25).

2.89.3    Notwithstanding the provisions of Clause 25, any notice given in
          accordance with Clause 27.3.1 or Clause 27.3.2 may be given in writing
          (whether by letter or fax) or by telephone (but not by way of
          voicemail message) and shall only be deemed to have been received when
          actually received by the individual to whom it is addressed.


                                       46


2.89.4    Wherever practicable, at least five Business Days' notice of each
          meeting of the Supervisory Committee shall be given in accordance with
          Clause 27.3.1 or 27.3.2. Breach of this Clause 27.3 shall not affect
          the validity of any meeting of the Supervisory Committee which has
          otherwise been validly convened.

2.89.5    The parties intend that the Supervisory Committee shall meet at least
          once every three months.

2.90      PARTICIPATION ARRANGEMENTS

          Any one or more representatives of the parties may participate in and
          vote at the Supervisory Committee. Meetings may be held by means of a
          telephone or any other communication equipment which allows all
          persons participating in the meeting to hear each other (and, for the
          avoidance of doubt, two or more representatives are not required to be
          physically present in the same place in order to constitute a
          meeting).

2.91      MEETING, RESPONSIBILITIES AND DUTIES OF SUPERVISORY COMMITTEE

          The parties shall procure (so far as each is able to do so) that the
          Supervisory Committee shall:

2.91.1    meet within 14 days of a request for such a meeting having been given
          (in accordance with Clause 27.3) by one party to the other; and

2.91.2    use its reasonable endeavours to settle any disputes and/or agree the
          course of action to be followed in relation to the subject matter of
          the meeting.

2.92      RESOLUTIONS OF THE SUPERVISORY COMMITTEE

2.92.1    Resolutions of the Supervisory Committee shall be decided by the
          unanimous resolution of all members of the Supervisory Committee
          present at the relevant meeting and voting.

2.92.2    A resolution passed by the Supervisory Committee shall be minuted in
          English.

2.92.3    A resolution passed by the Supervisory Committee in connection with
          resolving any dispute between the parties in connection with the
          Agreement shall be binding upon the parties.


DEADLOCK RESOLUTION

2.93      DEADLOCK SITUATION

          If a proposal is made by a representative at a meeting of the
          Supervisory Committee but is not passed by a resolution of the
          Supervisory Committee, either party may give written notice to the
          other that it regards a deadlock situation as having arisen ("Deadlock
          Notice"). Only one Deadlock Notice may be served in respect of any one
          proposal.

2.94      CIRCULATION OF MEMORANDA

          Within seven days of the date of service of a Deadlock Notice, Diageo
          and Pernod Ricard shall each prepare and send to the other a
          memorandum stating its

                                       47


          understanding of the disagreement, its position in relation to the
          disagreement, its reasons for taking that position and any proposals
          for resolving the disagreement.

2.95      TAX EXPERT

          Other than in respect of a matter to be determined in accordance with
          Clause 7.1, if a deadlock relating to any Tax matter that is the
          subject of a Deadlock Notice is not resolved after applying the above
          procedure within 21 days from the date of service of the Deadlock
          Notice then, if both parties so agree within seven further days, they
          shall require an independent third party (the "Independent Expert") to
          resolve such matter (acting as expert and not as arbitrator), having
          regard to the FIA Implementation Principles or the SOFIA
          Implementation Principles (as the case may be) and the other
          provisions of this Agreement. The parties shall each be entitled to
          make written and oral submissions to the Independent Expert (such oral
          submissions being of no longer than 30 minutes each) and he shall be
          required to reach a decision as to which submission should be adopted
          (but, for the avoidance of doubt, shall not be able to make a
          different or compromise decision without the consent of both parties),
          within 48 hours of the dispute being referred to him. The decision as
          to which submission should be adopted as determined by the Independent
          Expert shall be final and binding on the parties.

2.96      REFERRAL TO SENIOR EXECUTIVES

          Following the service of a Deadlock Notice, Diageo and Pernod Ricard
          shall each use their reasonable endeavours to resolve the
          disagreement. If within 14 days from the date of service of a Deadlock
          Notice the parties shall have failed to resolve the disagreement, Nick
          Rose (or such other executive director of Diageo as Diageo may
          nominate) and Laurent Lacassagne (or such other senior executive of
          Pernod Ricard as Pernod Ricard may nominate) shall be provided with
          copies of all such memoranda and shall as soon as reasonably
          practicable meet to discuss the disagreement and use all reasonable
          endeavours to resolve it.

2.97      ARBITRATION

          If a deadlock relating to any proposal the subject of a Deadlock
          Notice is not resolved after applying the procedure set out in Clauses
          28.1 to 28.3 within 28 days from the date of service of the Deadlock
          Notice then the matter shall be referred to arbitration in accordance
          with Clause 29.


ARBITRATION

2.98      ICC RULES

          All disputes arising in connection with this Agreement (whether
          relating to an alleged breach of the terms of this Agreement or
          otherwise) shall be finally settled under the Rules of Arbitration of
          the International Chamber of Commerce ("ICC") by three arbitrators
          appointed in accordance with those rules. Should the arbitrator
          appointed by Diageo and the arbitrator appointed by Pernod Ricard not
          agree on the choice of third arbitrator (who shall not be English or
          French), this arbitrator shall be designated by the President of the
          ICC.

2.99      PLACE OF ARBITRATION

          The place of arbitration shall be Geneva, Switzerland.


                                       48


2.100     LANGUAGE OF ARBITRATION

          The language of the arbitration shall be English.


CONTRACTS

2.101     ASSIGNMENT OF CONTRACTS

          The parties wish to ensure (so far as possible) that each receives the
          benefit of, and the ability to perform, any agreements or arrangements
          with third parties relating to its respective Acquired Assets
          regardless of the legal entity which has the benefit of the relevant
          agreement or arrangement. Accordingly, where:

2.101.1   an agreement or arrangement (a "CONTRACT") to which a member of the
          Acquired Group (as defined in the Framework and Implementation
          Agreement) is a party confers a benefit on that member (the "CONTRACT
          PARTY");

2.101.2   the Contract Party is an Affiliate of a party to this Agreement (that
          party being the "CONTRACT PARENT" and, where the Contract Party is a
          Jointly-owned Entity, the "CONTRACT PARENT" shall mean both Diageo and
          Pernod Ricard); and

2.101.3   the other party to this Agreement or any of its Affiliates or any
          Jointly-owned Entity (the relevant person(s) being the "BENEFICIARY")
          carries on a Business (as defined in the Framework and Implementation
          Agreement) and, in order to carry on that Business in the same manner
          as it was carried on immediately prior to Closing, requires all or
          some of the benefit of the Contract or to be subject to all or some of
          the burden of the Contract,

          then if:

2.101.4   no consent or agreement of any third party is required to enable the
          Beneficiary to perform the Contract (or, in respect of those Contracts
          which relate in part only to the relevant Business, the relevant part
          thereof) or to enable the Contract Party to transfer the benefit or
          burden of that Contract (or the relevant part thereof) to the
          Beneficiary, then the Contract Parent shall procure that the Contract
          Party shall assign, for no consideration, the benefit (subject to the
          burden) of the Contract (or the relevant part thereof) to the
          Beneficiary; and

2.101.5   in any other case, the following provisions shall apply:

          2.101.5.1 each party shall (each at its own expense) use its
                    reasonable endeavours to obtain the consent or agreement of
                    the third party to whatever assignment, transfer or novation
                    is necessary to enable the Beneficiary to perform such
                    Contract (or the relevant part thereof) or as the case may
                    be to transfer the benefit and burden of such Contract (or
                    the relevant part thereof) to the Beneficiary. Any payment
                    necessary to procure such consent or agreement shall be
                    borne by Diageo and Pernod Ricard in the Sharing Proportions
                    PROVIDED THAT the parties shall use their reasonable
                    endeavours to minimise the amount of such payment and shall
                    adopt alternative arrangements if those are economically
                    more advantageous (taking into account the disruption to the
                    business caused by adopting such arrangements); and


                                       49


          2.101.5.2 until the consent or agreement referred to in Clause
                    30.1.5.1 is obtained, the parties shall (so far as each is
                    able to do so) procure that the Beneficiary shall, unless
                    the relevant Contract prohibits it, perform all the
                    obligations of the Contract Party under such Contract in
                    relation to the Business as agent for or sub-contractor to
                    the Contract Party or, if the relevant Contract does
                    prohibit the Beneficiary from so acting as agent and
                    sub-contractor, the Contract Parent shall procure that the
                    Contract Party shall, at the cost of the Beneficiary, do all
                    such acts and things as the Beneficiary may reasonably
                    require to enable due performance of the Contract and to
                    provide for the Beneficiary the relevant benefits, subject
                    to the relevant burdens, of the Contract. For this purpose,
                    it shall not be reasonable to require the Contract Party to
                    make any payment unless the Beneficiary has first put the
                    Contract Party in cleared funds sufficient to make such
                    payment.

2.102     CONTRACT HELD ON TRUST

          Until such time as any consent or agreement referred to in Clause
          30.1.5 is obtained, the Contract Party shall be deemed to hold the
          benefit of the relevant Contract (or the relevant part thereof) on
          trust for the Beneficiary absolutely and will account to the
          Beneficiary for any sums or any other benefits received by the
          Contract Party in relation thereto without any deduction or
          withholding of any kind (save as may be required by the law of any
          jurisdiction to which the Contract Party is subject).

2.103     THIRD PARTY CONDITIONS

          If a third party to a Contract imposes any condition to the novation
          or assignment of a Contract or as a term of giving its consent to the
          Beneficiary for such novation or assignment, the parties shall
          co-operate in good faith with a view to finding a mutually acceptable
          means of satisfying the requirements of that third party without
          varying (otherwise in any minor terms) the terms of such Contract or
          this Agreement relating to the rights and obligations to be assumed by
          the Beneficiary.


REMEDIES AND WAIVERS

2.104     DELAY OR OMISSION

          Save as otherwise provided in this Agreement, no delay or omission by
          any party to this Agreement in exercising any right, power or remedy
          provided by law or under this Agreement shall:

2.104.1   affect that right, power or remedy; or

2.104.2   operate as a waiver of it.

2.105     SINGLE OR PARTIAL EXERCISE

          The single or partial exercise of any right, power or remedy provided
          by law or under this Agreement shall not preclude any other or further
          exercise of it or the exercise of any other right, power or remedy.


                                       50


2.106     CUMULATIVE RIGHTS

          The rights, powers and remedies provided in this Agreement are
          cumulative and not exclusive of any rights, powers and remedies
          provided by law.

2.107     DAMAGES NOT AN ADEQUATE REMEDY

          Notwithstanding any express remedies provided under this Agreement and
          without prejudice to any other right or remedy which any party may
          have, each party acknowledges and agrees that damages alone may not be
          an adequate remedy for any breach by it of the provisions of this
          Agreement, so that in the event of a breach or anticipated breach of
          such provisions, the remedies of injunction and/or an order for
          specific performance would in appropriate circumstances be available.

2.108     NO THIRD PARTY RIGHTS

          The parties to this Agreement do not intend that any term of this
          Agreement should be enforceable, by virtue of the Contracts (Rights of
          Third Parties) Act 1999, by any person other than Diageo plc and
          Pernod Ricard S.A..


NO PARTNERSHIP

          Nothing in this Agreement and no action taken by the parties under
          this Agreement shall constitute a partnership, association or other
          co-operative entity between either of the parties or constitute any
          party the agent of any other party for any purpose.


COSTS AND EXPENSES

          Each party shall pay its own costs and expenses in relation to the
          negotiation, preparation, execution and carrying into effect of this
          Agreement except as otherwise expressly provided herein.


COUNTERPARTS

          This Agreement may be executed in any number of counterparts, and by
          the parties on separate counterparts, but shall not be effective until
          each party has executed at least one counterpart. Each counterpart
          shall constitute an original of this Agreement, but all the
          counterparts shall together constitute but one and the same
          instrument.


CHOICE OF GOVERNING LAW

          This Agreement is governed by and shall be construed in accordance
          with the substantive laws of England.


IN WITNESS of which this Agreement has been executed on the date which first
appears on page 1 of this Agreement.


                                       51


                                   SCHEDULE 1
                                IDENTIFIED ASSETS

                                     PART A
                                  DIAGEO ASSETS


1         INTELLECTUAL PROPERTY ASSETS RELATING TO BRANDS

          All Intellectual Property Assets relating wholly to the Brands set out
          in paragraph 1 or 2 of Part A of Schedule 2.


2         INTELLECTUAL PROPERTY ASSETS NOT ALLOCATED UNDER ITEM 1 ABOVE RELATING
          TO PRODUCT CATEGORIES

          All Intellectual Property Assets that are not referred to in paragraph
          1 or paragraph 3 of Part A or Part B of this Schedule 1 and that have
          been used wholly in relation to one of the following product
          categories and that can be completely separated from other
          Intellectual Property Assets:

          2.1 rum;
          2.2 North American whiskey/whisky; and/or
          2.3 wines

3         MISCELLANEOUS INTELLECTUAL PROPERTY ASSETS

3.1       Miscellaneous Patents


  PATENT INFORMATION           COUNTRY      OWNER                      EXPIRATION DATE      RELATED BRAND(S)
  ------------------           -------      -----                      ---------------      ----------------
                                                                                
  Rotary Turret with           U.S.A.       Joseph E. Seagram &        8/29/2020            The   patent   does   not
  Pedestals and a Method of                 Sons, Ltd. Waterloo,                            apply  to any  brand.  in
  Controlling Rotation                      Canada                                          particular
  Thereof (Reg. No.
  6,398,006)

  Adjustable Railing Support   U.S.A.       Joseph E. Seagram &        11/01/2014          Fenner    is    exclusive
  Post for Conveyor Lines                   Sons, Ltd. Waterloo,                           licensee  of patent.  May
  and Method of Use Thereof                 Canada (now The Seagram                        relate to all brands.
  (Reg. No. 5,492,218)                      Company Limited).
                                            Assigned to Treat
                                            Venture Holdings.


                                       52






3.2       Miscellaneous Copyrights


                                                                                        DATE OF
                                              CLASS AND                             CREATION/ DATE   RELATED
          COPYRIGHT INFORMATION               JURISDICTION       REG. NO./ DATE     OF PUBLICATION   BRAND(S)
          ---------------------               ------------       --------------     --------------   --------
                                                                                          
  1.  LE CANADA HERITAGES ET ESPOIRS          Literary Work     301481/ April 23,   No date           No
  Registered to The Seagram Company, Canada                     1980                                  relationship
  Ltd., on April 23, 1980. The Seagram                                                                with a
  Company Limited and Joseph E. Seagram &                                                             particular
  Sons Ltd. then formed The Seagram                                                                   brand.
  Company Limited. The Certificate of
  Amalgamation was filed March 26, 2001.
  Assigned to Treat Venture Holdings Ltd.
  at Vivendi closing.

  2. ALCOHOL FACTS, ALCOHOL FICTIONS          Literary &        386905/             No date           No
  Registered to Joseph E. Seagram & Sons      Artistic Work     March 13, 1989                        relationship
  Limited on March 13, 1989. The Seagram      Canada                                                  with a
  Company Limited and Joseph E. Seagram &                                                             particular
  Sons Ltd. then formed The Seagram                                                                   brand.
  Company Limited. The Certificate of
  Amalgamation was filed March 26, 2001.
  Assigned to Treat Venture Holdings Ltd.
  at Vivendi closing.

  3. THE WORLD OF LIQUEURS                    Literary Work     311140/             No date           No
  Registered to Joseph E. Seagram & Sons      Canada            September 9, 1981                     relationship
  Limited on September 9, 1981. The                                                                   with a
  Seagram Company Limited and Joseph E.                                                               particular
  Seagram & Sons Ltd. then formed The                                                                 brand.
  Seagram Company Limited. The
  Certificate of Amalgamation was filed
  March 26, 2001. Assigned to Treat
  Venture Holdings Ltd. at Vivendi
  closing.

  4. THE CANADIAN JOURNEY RIVERS OF           Literary Work     300465/             No date           No
  MEMORY, RIVERS OF DREAMS                    Canada            February 29, 1980                     relationship
  Registered to The Seagram Company Ltd.                                                              with a
  on February 29, 1980. The Seagram                                                                   particular
  Company Limited and Joseph E. Seagram &                                                             brand.
  Sons Ltd. then formed The Seagram
  Company Limited. The Certificate of
  Amalgamation was filed March 26, 2001.
  Assigned to Treat Venture Holdings Ltd.
  at Vivendi closing.



                                       53




3.3       Miscellaneous Domain Names

          Bottlingdevelopment.com
          Changepart.com
          Orienters.com
          Bd.ca

3.4       Miscellaneous Trademarks



                 TRADEMARK                            COUNTRY                 APP. NO.            REG. NO.
                 ---------                            -------                 --------            --------
                                                                                    
ARISTOCRAT                                   Canada                     198665               26679

BENGAL                                       Africa                     60540                10484

BENGAL                                       Canada                     355038               190143

BENGAL                                       Malawi                     427/70               B427/70

BENGAL                                       Somali Democratic Republic 739                  1504

BENGAL Tiger Label                           Kenya                      ""                   18174

BENGAL Tiger Label                           Pakistan                   54764                54764

BENGAL TIGER LABEL                           Sierra Leone               ""                   8860

BENGAL TIGER LABEL                           Tanganyika                 14192                B14192

BENGAL TIGER LABEL                           Uganda                     12179                12179

CANADA HOUSE                                 Benelux                    564831               50051

CANADA HOUSE                                 Canada                     197741               135/34603

CANADA HOUSE                                 Italy                                           458096

CANADA HOUSE                                 Japan                                           676450

CANADA HOUSE LABEL DESIGN                    Canada                     518528               300528

CANADIAN GRAND RESERVE                       Canada                     282725               149179

CARA MIA                                     Canada                     432290               255954

CASA DEL VALLE                               Chile                      336449               556895

CASA DEL VALLE                               United Kingdom             2061524              2061524

COLONY CLUB                                  Canada                     140182               268/57540

CORVETTE                                     United Kingdom                                  616156

CROCO DILLO MIT GUARANA Label                Germany                    S45159/33WZ          1187099

CROCODILLO                                   United Kingdom             1118254              1118254

CROCODILLO - Device                          Canada                     459622               298674

CROCODILLO - Stylized Letters                Canada                     459624               290911

CROCODILLO - Word and Bottle Design          Canada                     459623               287166

CROCODILLO & PICTURE BOTTLE                  Africa                     71085                21018

CROCODILLO & PICTURE BOTTLE                  Benelux                    637265               366556

CROCODILLO & Picture Bottle                  Denmark                    2809/1980            589/1981

CROCODILLO & PICTURE BOTTLE                  France                     568376               1594037

CROCODILLO & PICTURE BOTTLE                  Germany                    S35057/33WZ          1012660

CROCODILLO & PICTURE BOTTLE                  Greece                     66812                66812

CROCODILLO & Picture Bottle                  Ireland, Republic of       98597                98597

CROCODILLO & PICTURE BOTTLE                  Italy                      34757C/80            406634

CROCODILLO & Picture Bottle                  Liberia                    ""                   1496/126

CROCODILLO & Picture Bottle                  South Africa               80/8480              80/8480

CROCODILLO & PICTURE BOTTLE                  Switzerland                3366                 P308602

CROCODILLO & PICTURE BOTTLE                  United Kingdom             1135920              1135920

CROCODILLO (IN VERTICAL SCRIPT)              United Kingdom             1139015              1139015

CROCODILLO Character                         Germany                    S43862/33WZ          1105330

CROCODILLO CHARACTER                         United Kingdom             1137278              1137278

CROCODILLO Device                            Austria                    AM 5160/89           130.811

CROCODILLO Device                            Austria                    AM 5161/89           130.812

CROCODILLO Device                            Germany                    S49248               1159829

DEL 800                                      Chile                                           R426600

DISFRUTE NUESTA CALIDAD CON RESPONSABILIDAD  El Salvador                906/94               239

DISFRUTE NUESTRA CALIDAD CON RESPONSABILIDAD Argentina                                       1506936

DISFRUTE NUESTRA CALIDAD CON RESPONSABILIDAD Argentina                                       1506937


                                       54




                 TRADEMARK                            COUNTRY                 APP. NO.            REG. NO.
                 ---------                            -------                 --------            --------
                                                                                    
DISFRUTE NUESTRA CALIDAD CON RESPONSABILIDAD Argentina                                       1506938

DISFRUTE NUESTRA CALIDAD CON RESPONSABILIDAD Argentina                                       1506939

DISFRUTE NUESTRA CALIDAD CON RESPONSABILIDAD Argentina                                       1506940

DISFRUTE NUESTRA CALIDAD CON RESPONSABILIDAD Argentina                                       1506975

DISFRUTE NUESTRA CALIDAD CON RESPONSABILIDAD Argentina                                       1506976

DISFRUTE NUESTRA CALIDAD CON RESPONSABILIDAD Argentina                                       1506977

DISTILCO                                     Canada                     484430               38561

DOUBLE EAGLE                                 Canada                     147822               213/46500

DOUBLE L                                     Canada                     283989               148330

ENJOY OUR QUALITY WITH RESPONSIBILITY        Bahama Islands             16264                16264

ENJOY OUR QUALITY WITH RESPONSIBILITY        Trinidad&Tobago            22376

ENJOY OUR QUALITY WITH RESPONSIBILITY -      Aruba                      94020813             16625
Word Block

ESCORIAL                                     Brazil                                          6071236

ESCORIAL                                     Fiji                       10331                21229

ESCORIAL                                     Netherlands Antilles       ""                   9674

ESCORIAL                                     Peru                       100830               ""

ESCORIAL                                     Venezuela                  5177/79              133284F

ESCORIAL - Word Block Letters                Colombia                   92342640             183249

ESCORT                                       Dominican Republic         ""                   24967

ESCORT                                       Malaysia                   71298                M/71298

ESCORT                                       Thailand                   91956                30241/KOR41886

ESCORT Plus Corporate Design                 Japan                                           1638089

FIRST EDITION                                Canada                     242712               112455

FIVE CROWN                                   Canada                     165375               15/4714

FOUR SQUARE                                  Canada                     127799               177/39246

FRASER'S                                     Canada                     183241               69/18023

FYNE MIST HIGHLAND WHISKY                    Canada                     247197               114693

GOLD ANCHOR                                  Canada                     261886               126/236

GOOF PROOF                                   Canada                     295613               153172

GRAND CHENE                                  Benelux                    508680

GREAT OAKS                                   Canada                     379817               213107

GREEN & GOLD                                 Brazil                                          6550380

GREEN & GOLD                                 Brazil                     820963771

GREEN & GOLD                                 Dominican Republic         ""                   21952

GREEN & GOLD                                 Peru                       119092               69604

GREEN & GOLD                                 Venezuela                  6253/90              158776F

HARWOOD                                      Antigua & Barbuda                               1581

HARWOOD                                      Argentina                  1941877              1565566

HARWOOD                                      Japan                      13021996             4108280

HARWOOD                                      Malta                      10777                10777

HARWOOD                                      Montserrat                                      594

HARWOOD                                      Seychelles                                      278

HARWOOD                                      Turkey                     59913/71             130166

HARWOOD                                      Venezuela                  5197/85              128485F

HARWOOD in Rectangular Frame                 Argentina                  1030008              1601166

HARWOOD in Rectangular Frame                 Argentina                                       1601165

HARWOOD Label                                Pakistan                                        57260

HARWOOD'S                                    Bahama Islands                                  1946

HARWOOD'S                                    Bolivia                                         20919C 52354A

HARWOOD'S                                    Brazil                     805644               6023223

HARWOOD'S                                    Hungary                                         119063



                                       55



                 TRADEMARK                            COUNTRY                 APP. NO.            REG. NO.
                 ---------                            -------                 --------            --------
                                                                                    
HARWOOD'S                                    Paraguay                                        126062

HARWOOD'S                                    Suriname                                        7166

HARWOOD'S                                    Tangier                    3698                 R7381

HARWOOD'S (SCRIPT)                           Switzerland                                     381038

HARWOOD'S Label                              Australia                                       A197730

HOW TO TALK ABOUT ALCOHOL                    Canada                     710186               TMA430177

IT'S ALL IN THE POUR                         United States of America   76/312878

IZAAK WALTON LABEL                           United Kingdom                                  471332

J.G. GOWIE & Design                          United Kingdom                                  176279

J.G. GOWIE CO. HL & Design                   United Kingdom                                  181194

J.G. GOWIE CO.HL & Design                    Jamaica                                         532

JACK BAKER'S SECRET                          Canada                     394867               220687

KING'S TREASURE                              Canada                     18557400             19675

KINKY PINKY                                  Canada                     592212               346097

LORD SELKIRK                                 Canada                     364908               198615

MACUMBA                                      Brazil                                          6030319

MACUMBA                                      Brazil                                          1231/0603039

MACUMBA                                      Costa Rica                 NONE                 85978

MACUMBA                                      Dominican Republic         31012                60903

MACUMBA - Word Block Letters                 Canada                     375547               211494

MAGNA CARTA                                  Hong Kong                                       1227/1964

MAGNA CARTA                                  United Kingdom                                  157938

MAGNA CARTA                                  United Kingdom                                  838186

MAGNA CARTA - Word Block Letters             Italy                                           458728

MAGNA CHARTA                                 United Kingdom                                  838187

MASTER'S FLAG                                Brazil                                          6688870

MASTER'S FLAG                                Dominican Republic                              21945

MICKEY'S                                     Chile                                           R431639

MINI-A-CHEERS                                Canada                     569332               336208

MIRASOL                                      Chile                                           R427543

MONOGRAM                                     Canada                     139516               201/44005

NORTH STAR                                   Canada                     242258               111611

OLD BEAGLE (label)                           Chile                                           R431288

OLD COLONEL                                  Canada                     123979               169/37714

OLD COLONEL LABEL                            Canada                     157105               257/55302

OLD GLORY                                    Canada                     148047               214/46651

PARTING IS SUCH SWEET SORROW                 United States of America   76/312879

PENABLANCA                                   Chile                                           R428317

PIONEER                                      Canada                     145659               212/46304

PIONEER                                      United Kingdom             1119914              1119914

PIONEER Label                                United Kingdom                                  448998

PLENTY KIWI - Word Block Letters             Italy                      34433C/85            714611

PLENTY KIWI label                            Germany                    W55670               DD645181

QI XING Device (with Chinese Characters)     China                                           202256

RED SATIN                                    Canada                     147305               211/46176

RENOIR                                       Benelux                    425162

RENOIR                                       Benelux                    433903

RENOIR                                       Benelux                    541163

RENOIR                                       International Registration                      607831

RESPONSIBILITY SLOGAN - (CR) DISFRUTE        Colombia                   005017               186074

RESPONSIBILITY SLOGAN - (CR) DISFRUTE        Peru                       236882               586

RESPONSIBILITY SLOGAN - APRECIE A NOSSA      Brazil                     816755973

RESPONSIBILITY SLOGAN - DISFRUTE NUESTRA     Bolivia                    1571

RESPONSIBILITY SLOGAN - DISFRUTE NUESTRA     Costa Rica                                      488

RESPONSIBILITY SLOGAN - DISFRUTE NUESTRA     Ecuador                    51641                21895



                                       56



                 TRADEMARK                            COUNTRY                 APP. NO.            REG. NO.
                 ---------                            -------                 --------            --------
                                                                                    
RESPONSIBILITY SLOGAN - DISFRUTE NUESTRA     Guatemala                  131594               1642

RESPONSIBILITY SLOGAN - DISFRUTE NUESTRA     Honduras                   1158/94              65117

RESPONSIBILITY SLOGAN - DISFRUTE NUESTRA     Mexico                     2499                 10788

RESPONSIBILITY SLOGAN - DISFRUTE NUESTRA     Nicaragua                  9400709              29379CC

RESPONSIBILITY SLOGAN - DISFRUTE NUESTRA     Paraguay                   01880                174818

RESPONSIBILITY SLOGAN - DISFRUTE NUESTRA     Puerto Rico                                     34069

RESPONSIBILITY SLOGAN - DISFRUTE NUESTRA     Panama                     070945               70945
CALIDAD

RESPONSIBILITY SLOGAN - SEAGRAM DISFRUTE*    Venezuela                  3494/94

ROYAL CROWN                                  International Registration                      246102

ROYAL MILE                                   United Kingdom             ""                   B820790

ROYAL MILE                                   United States of America   72/139315            741704

RUSKA                                        Canada                     406047               228162

SAN MICHEL                                   Brazil                                          760240736

SAN MICHEL                                   Mexico                     215051

SEAGRAM DISFRUTE NUESTRA . . .*              Chile                                           435.074

SEVEN STAR IN CHINESE CHARACTERS             China                      92015668             632413

THE SPORTSMAN'S CHOICE                       Canada                     163581               0/2381

THOSE WHO APPRECIATE QUALITY ENJOY IT        South Africa               9515575              9515575
RESPONSIBLY

THOSE WHO APPRECIATE QUALITY ENJOY IT        South Africa               9515575              9515575
RESPONSIBLY

TROPINA                                      Canada                     503029               312492

TROPINA (IN SPECIAL FORM)                    New Zealand                158698               158698

V M                                          Canada                     361447               194072

VALENCIA & DESIGN                            Canada                     450671               264842

VAN KAMP                                     Canada                     247649               114/789

VICUNA                                       Argentina                  2108160              1708562

VICUNA                                       Brazil                     820440604            820440604

VICUNA                                       Canada                     858980               TMA536364

VICUNA                                       Mexico                     334274               624279

VICUNA                                       United States of America   75/406901            ""

VIP                                          Canada                     246985               120404

VIZZIO                                       Chile                                           R496095

WHITE WHEAT                                  Canada                     156243               257/55210


* The parties may determine to abandon or cancel these registrations.


4.        PRODUCTION AND OTHER ASSETS

4.1       Amherstburg, Ontario

4.2       Gimli, Manitoba

4.3       Lasalle, Quebec

4.4       Relay, Maryland

4.5       Carson, California


                                       57


4.7       United States wine facilities (other than Lawrenceburg, Indiana;
          Rushville, Indiana; Lawrenceburg, Kentucky)

4.8       All other North American production facilities and warehouses (other
          than Lawrenceburg, Indiana; Rushville, Indiana or any facilities in
          Mexico) including all offices and laboratories in White Plains, New
          York

4.9       All production facilities and warehouses associated with wine Brands
          that are Diageo Assets in France

4.10      All production facilities and the Cordesa farm in Venezuela

4.11      All production facilities and warehouses in Korea

4.12      All production facilities and warehouses relating to Don Julio and
          certain other brands, which facilities and warehouses passed (directly
          or indirectly) to Diageo and/or its Affiliates pursuant to the
          purchase agreement between Pernod Ricard, Diageo, Pernod Ricard North
          America and Diageo Nederland BV dated 15 May 2002

4.13      Milan, Indiana



5.        ART AND ANTIQUES

          All art and antiques acquired by Diageo and Pernod Ricard pursuant to
          the Vivendi Sale Agreement wholly relating to Diageo Assets.



6.        AFTER-ACQUIRED ASSETS OF DIAGEO
                                                                                    
6.1       A receivable in the amount of US$1.5 million to be paid by the Bianchi          The date of
          family in connection with their exercise of a put/call                          this Agreement
          option over the shares of Valentin Bianchi S.A.I.F. The
          option premium of $500,000 has already been paid. The US$1.5 million
          represents a second tranche of proceeds.

6.2       Dorval, Ontario                                                                 The date of this
                                                                                          Agreement
6.3       The Saruro Warehouse, Venezuela                                                 The date of this
                                                                                          Agreement
6.4       Lease Agreement (No.1) dated October 22, 1996, a Lease Agreement                The date of this
          (No.2) dated 23/31 December 1996 and a Lease Agreement (No.3) dated             Agreement
          January 28/29, 1997 entered into by Seagram Holding-und
          Handelsgesellschaft mbH regarding the lease of railcars (refrigerated
          boxcars) (together, the "Tropicana Lease Agreements") and Accounts
          Receivables Purchase Agreement (No.1) dated October 22, 1996, an
          Accounts Receivables Purchase Agreement (No.2) dated 23/31 December,
          1996 and an Accounts Receivables Purchase Agreement (No.3) dated
          January 28/29, 1997 entered into by Seagram Holding-und
          Handelsgesellschaft mbH regarding the purchase of certain rights under
          the Tropicana Lease Agreements of even dates



                                       58




                                     PART B
                              PERNOD RICARD ASSETS


1.        INTELLECTUAL PROPERTY ASSETS RELATING TO BRANDS

                    All Intellectual Property Assets relating wholly to the
                    Brands set out in paragraph 1 or 2 of Part B of Schedule 2.


2.        INTELLECTUAL PROPERTY ASSETS RELATING TO PRODUCT CATEGORIES

                    All Intellectual Property Assets that are not referred to in
                    paragraph 1 or paragraph 3 of Part A or Part B of this
                    Schedule 1 and that have been used wholly in relation to one
                    of the following product categories and that can be
                    completely separated from other Intellectual Property
                    Assets;

                    2.1      Scotch whisky;
                    2.2      cognac;
                    2.3      brandy; and/or
                    2.4      gin

3.        MISCELLANEOUS INTELLECTUAL PROPERTY ASSETS

3.1                 Miscellaneous Copyrights



                                                                                       DATE OF
                                              CLASS AND                             CREATION/ DATE      RELATED
           COPYRIGHT INFORMATION             JURISDICTION      REG. NO./ DATE       OF PUBLICATION      BRAND(S)
           ---------------------             ------------      --------------       --------------      --------
                                                                                          
  1.  SEAGRAM'S THE SPIRIT OF               Book (Textual      AF: 38425/ (no       No date           No
  HOSPITALITY: A GUIDE TO SUCCESSFUL        Work?)             date)                                  relationship
  ENTERTAINING.                             United States                                             with a
  Joseph E. Seagram & Sons, Ltd. Assigned                                                             particular
  to Treat Venture Holdings Ltd. at                                                                   brand.
  Vivendi closing.


  2.  PLAISIRS DE L'HOSPITALITE PAR         Book (French       AF: 38424/ (no       October 30, 1973  No
  SEAGRAM: COMMENT REUSSIA SES RECONTRES    translation)       date)                                  relationship
  SOCIALES                                  United States                                             with a
  Joseph E. Seagram & Sons, Ltd. Assigned                                                             particular
  to Treat Venture Holdings Ltd. at                                                                   brand.
  Vivendi closing.



                                       59




                                                                                       DATE OF
                                              CLASS AND                             CREATION/ DATE      RELATED
           COPYRIGHT INFORMATION             JURISDICTION      REG. NO./ DATE       OF PUBLICATION      BRAND(S)
           ---------------------             ------------      --------------       --------------      --------
                                                                                         
  3. LES PLAISIRS DE L'HOSPITALITE PAR      Literary &        249882/               No date           No
  SEAGRAM                                   Artistic Work     March 21, 1974                          relationship
  Registered to Joseph E. Seagram & Sons    Canada                                                    with a
  Limited on March 21, 1974. The Seagram                                                              particular
  Company Limited and Joseph E. Seagram &                                                             brand.
  Sons Ltd. then formed The Seagram
  Company Limited. The Certificate of
  Amalgamation was filed March 26, 2001.
  Assigned to Treat Venture Holdings Ltd.
  at Vivendi closing.


  4. SEAGRAM'S THE SPIRIT OF HOSPITALITY    Literary &        249881/ March 21,     No date           No
  - A GUIDE TO SUCCESSFUL ENTERTAINING      Artistic Work     1974                                    relationship
  Registered to Joseph E. Seagram & Sons    Canada                                                    with a
  Limited on March 21, 1974. The Seagram                                                              particular
  Company Limited and Joseph E. Seagram &                                                             brand.
  Sons Ltd. then formed The Seagram
  Company Limited. The Certificate of
  Amalgamation was filed March 26, 2001.
  Assigned to Treat Venture Holdings Ltd.
  at Vivendi closing.



3.3       Miscellaneous Domain Names

          None.



                                       60




3.4       Miscellaneous Trademarks



                 TRADEMARK                            COUNTRY                 APP. NO.            REG. NO.
                 ---------                            -------                 --------            --------
                                                                                    
ALBALUNA DI CONTRADA VISNA words             Italy                      MI99C008221

AMARETTO RISERVA DELL'AMORINO label          Italy                                           411897

BALBO device                                 International: Benelux,                         R371480
                                             France, Switzerland

BASTIANI word                                International              MI99C010295

BASTIANI word                                Italy                                           R369643

BATTINO word                                 International                                   R371482

BIANCA D'UVA words                           Italy                      MI98C006759

BLITZ word                                   Italy                      MI2001C001696

BOOKER'S                                     South Africa               9513408              9513408

BREGANZE word                                Mexico                                          357075

BROOMY KNOWE Label                           United Kingdom                                  174882

CA DEI FILARI words                          International                                   639901

CA DEI FILARI words                          Italy                                           655002

CA DEI FILARI words                          Venezuela                                       17644-95

CAIPIRA SEAGRAM                              Brazil                     817428828            817428828

CANAIMA                                      Mexico                     334100               581320

CANAIMA                                      Peru                       110174               64655

CARTA ORO                                    Brazil                                          3392740

COLUMBIA CLUB                                Canada                     181705               64/16900

CRICKET word                                 Italy                      MI98C002308

CRICKETER                                    United Kingdom                                  838659

CRICKETERS                                   United Kingdom                                  1106464

CRICKETER'S                                  Kenya                      47943

CRICKETERS GIN BOTTLE                        United Kingdom                                  1033198

CRUDELIA logo                                Italy                      MI99C012653

CUBANA                                       Canada                     215084               162/41419

DINO DAL POS words                           Italy                      MI2000C003703

DUBAC label                                  Italy                      MI99C012200

ENCORE                                       China                      92032237             641349

ENCORE                                       Hong Kong                  10201/92             B8826/95

ENCORE                                       Taiwan                     81026450             578806

EXCELLENT word                               Italy                                           825845

EXE word                                     Italy                                           825846

FERRERO                                      Brazil                                          6803881

FERRERO TORINO VERMOUTH label                International                                   2R136504

FERRERO TORINO VERMOUTH label                Italy                                           686813

FERRERO VERMOUTH label                       U.K.                                            447404

FERRERO word                                 Italy                      MI99C012147

GLEN VAT                                     Brazil                                          4506855

GLEN VAT                                     Dominican Republic         ""                   21941

GOLDEN DIAMOND                               Taiwan                     8127521              578808

GOLDEN DIAMOND in Chinese Characters         Taiwan                     81045277             590023

GOLDEN LAKE                                  Brazil                                          6687113

GOLDEN LAKE                                  Brazil                                          1231/0668771

GOLDEN LAKE                                  Venezuela                  6257/90              158779F

GOLDEN SUPREME                               Taiwan                     8107014              565172

GRAN TORINO                                  Brazil                                          7033974

GRAN TORINO VERMOUTH SPECIALE                International                                   R346804
TIPICO AMARO label

GRAN TORINO words                            International                                   2R130921

GRAN-TORINO                                  United Kingdom             925081               B925081

I TRALCI label                               International                                   595770

I TRALCI label                               Italy                                           585478

ILALA                                        South Africa               962640               962640

JADE                                         Japan                                           4322150



                                       61



                 TRADEMARK                            COUNTRY                 APP. NO.            REG. NO.
                 ---------                            -------                 --------            --------
                                                                                    
JADE                                         Thailand                   156370               308029/KOR45986

JAMAICA CLUB                                 Bahama Islands                                  1655

JAMAICA CLUB                                 Nigeria                    TP11670              51002

JAMAICA CLUB                                 United Kingdom             698238               698238

KALINKA                                      Canada                     343874               191108

KIEV RUS                                     Argentina                  1864585              1500320

KIEV RUS                                     Austria                    AM5850/92            149428

KIEV RUS                                     Azerbaijan

KIEV RUS                                     Benelux                    789801               524231

KIEV RUS                                     Brazil                     817019383            817019383

KIEV RUS                                     China                      93009045             686423

KIEV RUS                                     Dominican Republic                              56165

KIEV RUS                                     France                     92444673             92444673

KIEV RUS                                     Germany                    S55620/33WZ          2043462

KIEV RUS                                     Hungary                    M9206370             140314

KIEV RUS                                     Italy                      RM92C004548          645049

KIEV RUS                                     Korea, South               9234022              279552

KIEV RUS                                     Poland                     Z118358              79524

KIEV RUS                                     Spain                      1742020              1742020

KIEV RUS                                     Switzerland                8685/19929           406177

KIEV RUS                                     Taiwan                     81060169             607988

KIEV RUS                                     Thailand                   241628               241628/KOR19090

KIEV RUS Label Design                        Ukraine                    94030940

KING ARTHUR                                  Japan                                           4292565

KING ARTHUR - Word Block Letters             Africa                     81868                32198

KING'S PLATE                                 Canada                     163600               0/2254

KWELA                                        South Africa               9715635              9715635

LANDY FRERES label                           Italy                                           492393

LANDY FRERES logo                            Italy                                           411892

LANDY FRERES words                           Italy                                           411893

LANDY FRERES words                           Mexico                                          502757

LEOPARDO label                               Italy                      MI99C010213

LIGUSTRO label                               Italy                                           457473

LIGUSTRO word                                Italy                      MI99C010294

LINCOLN CLUB                                 Canada                     127799               177/39245

MASTERPIECE                                  Japan                      13011996             4108279

MELISSE word                                 Italy                                           644387

MIDNIGHT THE SPIRIT OF THE NIGHT             Benelux                    447569

MIDNIGHT THE SPIRIT OF THE NIGHT             Benelux                    447570

MOUNT DISA                                   South Africa               956285               956285

MOUNT DISA                                   United Kingdom             2026468              2026468

MOZART LIQUEUR words                         Italy                                           425737

MR. PICKWICK                                 Canada                     233563               107794

N DEL 800 COGNAC NAPOLEON (label)            Chile                                           R519833

NOTTURNO word                                International                                   785442

NOTTURNO word                                Italy                                           717627

OLD COURIER                                  United Kingdom                                  563411

OSLO BREZZA DEL NORD label                   Italy                                           425750

OSLO word                                    Italy                                           492402

PETER MALCOLM                                Brazil                                          006087353

PETER MALCOLM                                Brazil                                          6087353

PETER MALCOLM                                Mexico                     214064

PETER MALCOLM                                Panama                                          15699

PETER MALCOLM                                Peru                       100941               63598

PETER MALCOLM LABEL                          Fiji                       10375                21262

PREMIER CLUB COLLECTION                      Armenia                    950078               2713

PREMIER CLUB COLLECTION                      Azerbaijan                 940769               N980846

PREMIER CLUB COLLECTION                      Benelux                    757631               493123

PREMIER CLUB COLLECTION                      Czech Republic             NONE                 172242

PREMIER CLUB COLLECTION                      Georgia                    3565/03              3918


                                       62



                 TRADEMARK                            COUNTRY                 APP. NO.            REG. NO.
                 ---------                            -------                 --------            --------
                                                                                    
PREMIER CLUB COLLECTION                      Indonesia                  HC010119022          287740

PREMIER CLUB COLLECTION                      Kazakhstan                 26                   5164

PREMIER CLUB COLLECTION                      Korea                                           27619

PREMIER CLUB COLLECTION                      Korea, South               9340444              319137

PREMIER CLUB COLLECTION                      Latvia                     M9223                M30265

PREMIER CLUB COLLECTION                      Lithuania                  ZP559                20029

PREMIER CLUB COLLECTION                      Macedonia                  Z198894              03524

PREMIER CLUB COLLECTION                      Malaysia                   MA/8550/90           90/08550

PREMIER CLUB COLLECTION                      Mexico                     103579               ""

PREMIER CLUB COLLECTION                      Moldova                    000821               1732

PREMIER CLUB COLLECTION                      Romania                    25281                18266

PREMIER CLUB COLLECTION                      Russian Federation         158993               116238

PREMIER CLUB COLLECTION                      Slovak Republic            62321                173752

PREMIER CLUB COLLECTION                      Slovenia                   Z9181688             9181688

PREMIER CLUB COLLECTION                      Thailand                   211182               443019/Kor129

PREMIER CLUB COLLECTION                      Uzbekistan                 MBGU94012053         5466

PREMIER CLUB COLLECTION                      Yugoslavia                 Z1688/91             38393

PREMIER CLUB COLLECTION - Word               Australia                  548088               548088
Block Letters

PREMIER CLUB COLLECTION - Word               Belarus                    1577                 4821
Block Letters

PREMIER CLUB COLLECTION - Word               Bulgaria                   20002                20610
Block Letters

PREMIER CLUB COLLECTION - Word               Canada                     672345               TMA424017
Block Letters

PREMIER CLUB COLLECTION - Word               China                      91006538             581962
Block Letters

PREMIER CLUB COLLECTION - Word               Croatia                    Z921186A             Z921186
Block Letters

PREMIER CLUB COLLECTION - Word               Estonia                    9200481              13506
Block Letters

PREMIER CLUB COLLECTION - Word               Hungary                    3072/91              134689
Block Letters

PREMIER CLUB COLLECTION - Word               India                      581127               ""
Block Letters

PREMIER CLUB COLLECTION - Word               Israel                     78476                78476
Block Letters

PREMIER CLUB COLLECTION - Word               Italy                      RM91C000019          611107
block Letters

PREMIER CLUB COLLECTION - Word               Japan                      144047/1990          2532270
Block Letters

PREMIER CLUB COLLECTION - Word               Ukraine                    92120578             6947
Block Letters

PREMIER CLUB COLLECTION + Korean             Korea, South                                    27619
Characters

PREMIER CLUB COLLECTION w/Seagram Crest      Hong Kong                  9408702              B11546/1998
Design

PREMIER CLUB COLLECTION w/SEAGRAM  S Seal    United Kingdom             1453481              1453481
Design

PREMIER CLUB COLLECTION with Seagram         Germany                    S53500/33WZ          2035805
Crest Design

PREMIER CLUB COLLECTION with Seagram         Singapore                  275/95               275/95
Crest Design

QUINTESSENZA word                            Italy                                           687600

R.V. ALLEN 1881                              Portugal                                        140873

RISERVA SAINT HONORE label                   Italy                                           412035

SAINT HONORE words                           Italy                                           412030

SAMBUCA  label  *Seagram  Italia stated that Italy                                           473432
this mark is in use

SEAGRAM ESPANA (Commercial Name)             Spain                      157133               157133

SEAGRAM SYMPHONIA & DESIGN                   Canada                     691629               430584

SEAGRAM'S KIEV RUS                           Argentina                  1868352              1505935


                                       63



                 TRADEMARK                            COUNTRY                 APP. NO.            REG. NO.
                 ---------                            -------                 --------            --------
                                                                                    
SEAGRAM'S KIEV RUS                           Austria                    AM5849/92            149427

SEAGRAM'S KIEV RUS                           Azerbaijan

SEAGRAM'S KIEV RUS                           Benelux                    789800               526011

SEAGRAM'S KIEV RUS                           Brazil                     817019375            817019375

SEAGRAM'S KIEV RUS                           China                      93009046             686422

SEAGRAM'S KIEV RUS                           Dominican Republic                              56418

SEAGRAM'S KIEV RUS                           France                     92445695             92445695

SEAGRAM'S KIEV RUS                           Germany                    S55621/33WZ          2043463

SEAGRAM'S KIEV RUS                           Hungary                    M9300009             140315

SEAGRAM'S KIEV RUS                           Italy                      RM92C004549          645050

SEAGRAM'S KIEV RUS                           Korea, South               9234024              279553

SEAGRAM'S KIEV RUS                           Mexico                     156577               433847

SEAGRAM'S KIEV RUS                           Poland                     Z118357              79523

SEAGRAM'S KIEV RUS                           Switzerland                8684/19927           409146

SEAGRAM'S KIEV RUS                           Thailand                   241629               241629/KOR23255

SEAGRAM'S KIEV RUS                           Ukraine

SILVER FIZZ                                  Canada                     145416               209/45779

SKI                                          Ireland, Republic of                            66208

SKI                                          United Kingdom                                  841391

STILLATA word                                Italy                      MI98C006758

TROPICAL JOY words                           Italy                      MI98C006761

VICKERS                                      Canada                     143567               208/45421

VICKERS'                                     Nigeria                    TP17523/93/4

VICKERS'                                     Puerto Rico                                     23822

VICKERS COAT OF ARMS & DESIGN                Canada                     141482               201/44071

VICKERS LABEL DESIGN                         Canada                     137252               200/43989

ZUPPA INGLESE words                          Italy                                           425765


4.       PRODUCTION AND OTHER ASSETS

4.1       Lawrenceburg, Indiana

4.2       Rushville, Indiana

4.3       All production facilities and warehouses in the United Kingdom (except
          dedicated CAPTAIN MORGAN assets)

4.4       All production facilities and warehouses in Brazil associated with the
          Brands which are Pernod Ricard Assets

4.5       All production facilities and warehouses in India

4.6       All production facilities and warehouses in Portugal relating to
          Brands which are Pernod Ricard Assets

4.7       All production facilities and warehouses associated with MARTELL

4.8       All production facilities and warehouses in Mexico, excluding those
          referred to in paragraph 4.12 of Part A of this Schedule


5.        ART AND ANTIQUES

          All art and antiques acquired by Diageo and Pernod Ricard pursuant to
          the Vivendi Sale Agreement save for any art or antiques wholly
          relating to Diageo Assets.

                                       64


                                                                                  
6.        AFTER-ACQUIRED ASSETS OF PERNOD RICARD

6.1       Atwood Trade Credits                                                          The date of this
                                                                                        Agreement
6.2       Receivable relating to the loan made by Seagram do Brasil Industria e         The date of this
          Comercio Ltda and Maria Candida (also known as the Crown Industria e          Agreement
          Comercio Ltda loan).




                                       65


                                   SCHEDULE 2
                            BRANDS AND RELATED ASSETS

Note: It is agreed that, except where otherwise indicated on this Schedule,
sub-brands shall pass as is indicated for the principal Brand of which they form
a part.


                                     PART A
                        DIAGEO BRANDS AND RELATED ASSETS


1.   ASSETS RELATING TO BRANDS

All Acquired Assets (other than shares (or equivalent) in bodies corporate)
relating wholly to the following brands:

1.1           BARTON & GUESTIER
1.2           TRADITION
1.3           BULLEIT BOURBON
1.4           CACIQUE
1.5           CAPTAIN MORGAN
1.6           CHATEAU AND ESTATE AGENCY WINES
1.7           CROWN ROYAL
1.8           CUESTA DEL MADERO
1.9           MUMM (Note: "Mumm" used under licence)
1.10          MUMM CUVEE NAPA (Note: "Mumm" used under licence)
1.11          CUVEE MUMM (Note: "Mumm" used under licence)
1.12          DOMAINE MUMM (Note: "Mumm" used under licence)
1.13          DON JULIO
1.14          CHENTE
1.15          AGAVANA
1.16          TEQUILIER
1.17          TEQUIFRUIT
1.18          MACARENA
1.19          LA LEYENDA
1.20          JULIO GONZALEZ E.
1.21          A LEGENDARY MAN - A LEGENDARY TEQUILA
1.22          UN HOMBRE LEGENDARIO
1.23          DAMASO MENDIOLA
1.24          DON JULIAN, JULIO 1992
1.25          DON JULIO, 1942
1.26          LA TABERNA DE DON JULIO
1.27          MONTEZUMA
1.28          RESERVA DE DON JULIO
1.29          DON JULIO ANEJO
1.30          DON JULIO BLANCO
1.31          DON JULIO REAL
1.32          DON JULIO REPOSADO
1.33          MYERS'S
1.34          GOLD LABEL
1.35          GOLD LABEL (TRELAWNY)
1.36          SAN TELMO
1.37          SEAGRAM'S 5 STAR (Note: "Seagram's" used under licence from
              Pernod Ricard)
1.38          SEAGRAM'S 7 CROWN (Note: "Seagram's" used under licence from
              Pernod Ricard)



                                       66






1.39          SEAGRAM'S 83 (Note: "Seagram's" used under licence from
              Pernod Ricard)
1.40          SEAGRAM'S VO (Note: "Seagram's" used under licence from
              Pernod Ricard)
1.41          STERLING VINEYARDS
1.42          THE MONTEREY VINEYARD
1.43          TRES MAGUEYES
1.44          TRES MAGUEYES GRAN RESERVA
1.45          TRES MAGUEYES BLANCO
1.46          TRES MAGUEYES REPOSADO
1.47          TRES MAGUEYES RESERVA DE LA CASA
1.48          WINDSOR PREMIER
1.49          CRILLON
1.50          FREDERIC BASTIAT
1.51          GRAND BLASON
1.52          MONITOR


AFTER-ACQUIRED ASSETS OF DIAGEO

     All Acquired Assets (other than shares (or equivalent) in bodies corporate)
     relating wholly to the following Brands:

1.53          CITRUS                                 The date of this Agreement
1.54          DINASTIA                               The date of this Agreement
1.55          DUFRES (except Chile)                  The date of this Agreement
1.56          GRAN BLASON                            The date of this Agreement
1.57          JULIUS KAYSER                          The date of this Agreement
1.58          SAMBA                                  The date of this Agreement
1.59          SECRET                                 The date of this Agreement



                                       67






                                     PART B
                     PERNOD RICARD BRANDS AND RELATED ASSETS


1.   BRANDS

All Acquired Assets (other than shares (or equivalent) in bodies corporate)
relating wholly to the following brands:

1.1           100 PIPERS or ONE HUNDRED PIPERS or HUNDRED PIPERS
1.2           THE BLACK WATCH
1.3           ALDEIA VELHA & NOVA
1.4           BENRIACH
1.5           BLACK JACK
1.6           BLENDERS PRIDE
1.7           BOODLES
1.8           CHIVAS
1.9           CHIVAS REGAL
1.10          DE VALCOURT
1.11          DUNBAR
1.12          GLEN GRANT
1.13          GLEN KEITH
1.14          GLENLIVET
1.15          HERITAGE COLLECTION
1.16          HIGHLAND CLAN
1.17          IMPERIAL BLUE
1.18          JULES ROBIN
1.19          L'OR
1.20          LOCHAN ORA
1.21          LONGMORN
1.22          MACIEIRA
1.23          MARGARITAVILLE
1.24          MARTELL
1.25          CORDON ARGENT
1.26          CORDON BLEU
1.27          CORDON RUBIS
1.28          CORDON SUPREME
1.29          MARTELL & CO.
1.30          MASTER BLEND
1.31          MEDAILLON
1.32          MONTILLA
1.33          MONTILLA CARTA
1.34          NATU NOBILIS
1.35          NOBLIGE
1.36          OAKEN GLOW
1.37          ORLOFF
1.38          PRINCE CHARLIE
1.39          REGENCY
1.40          ROBERT BROWN'S
1.41          ROBIN
1.42          RON CABANA
1.43          ROYAL SALUTE
1.44          ROYAL STAG
1.45          SEAGRAM; SEAGRAM'S



                                       68






1.46          SEAGRAM'S GIN
1.47          SEAGRAM'S GIN AND JUICE
1.48          SEAGRAM'S VODKA
1.49          SOMETHING SPECIAL
1.50          STARS AND STRIPES
1.51          STRATHISLA
1.52          TEQUILA BRANDS (OTHER THAN THOSE IDENTIFIED IN SCHEDULE 2,
              PART A, SECTIONS 1.13-1.32 AND 1.43-1.47),
              INCLUDING (BUT NOT LIMITED TO)
1.53          CHARROS TEQUILA
1.54          COYOTE
1.55          DON LEONCIO
1.56          LOS INFIELES
1.57          LOS RUIZ
1.58          MANSION HOUSE
1.59          MARIACHI
1.60          MEXIQUILA
1.61          OLMECA
1.62          TESORO DEL SOL
1.63          THE CENTURY OF MALTS
1.64          WILLIAM LONGMORE
1.65          BOSTON CLUB, CAMP, CHATELAIN, CRESCENT, EMBLEM, EVERMORE, NEWS
              and TEN DISTILLERIES
1.66          RICK'S
1.67          SEAGRAM'S COOLERS
1.68          SEAGERS


AFTER-ACQUIRED ASSETS OF PERNOD RICARD

     All Acquired Assets (other than shares (or equivalent) in bodies corporate)
     relating wholly to the following Brands:

1.69          PASSPORT                                20 September 2002
1.70          ALMADEN                                 The date of this Agreement
1.71          SUNNY DAYS                              The date of this Agreement
1.72          BAIA DEI LIMONI                         The date of this Agreement
1.73          BURNETT'S WHITE SATIN (in Japan)        The date of this Agreement
1.74          FORESTIER                               The date of this Agreement
1.75          MAISON FORESTIER                        The date of this Agreement
1.76          GOLD BOND                               The date of this Agreement
1.77          JACQUES CARDIN                          The date of this Agreement
1.78          LOUIS D'OR                              The date of this Agreement
1.79          QUEEN ANNE                              The date of this Agreement
1.80          ROYAL LABEL                             The date of this Agreement



                                       69






1.81          SAO FRANCISCO                           The date of this Agreement
1.82          WILSONS                                 The date of this Agreement
1.83          WHITE SWAN                              The date of this Agreement
1.84          ALEXANDER                               The date of this Agreement
1.85          NIKOLAI (except Costa Rica)             The date of this Agreement



                                       70






                                   SCHEDULE 3
                              COMPANIES AND ASSETS

                                     PART A
                           DIAGEO COMPANIES AND ASSETS


All of the Acquired Assets (other than shares or other membership interests in
bodies corporate and those Acquired Assets listed or described in Schedules 1 or
2) owned by the following entities:

1. Barton & Guestier S.A. (France)
C.A. Circulo de Conocedores (Venezuela)
C.A. Cordesa S.A. (Venezuela)
C.A. Distribuidora Chumaceiro CADICH 2000 (Cayman Islands)
C.A. Distribuidora Chumaceiro CADICH Directos (Cayman Islands)
C.A. Seagram de Venezuela (Venezuela)
Captain Morgan Rum Distillers Ltd. (Canada)
Captain Morgan (Bermuda) Ltd. (Bermuda)
Claredon Distillers Limited (Jamaica)
Diageo Ichon Supply Co., Limited (formerly Doosan Seagram Co., Ltd.)
  (South Korea)
Diageo Korea Ltd (formerly World Liquor Trading Company) (South Korea)
Distillers Products Sales Corporation (U.S.A.)
Don Julio Agavera S.A. (Mexico)
Jerome Distributors, Inc. (U.S.A.)
JES (U.S.A.)
Kamina Trading Ltd. (Venezuela)
Licorerias Unidas, S.A. (Venezuela)
Myers Rum Company Limited (Bahamas)
Myers Rum Company (Jamaica) Limited (Jamaica)
'N' Productes, S.A. (Andorra)
Seagram-Baric (U.S.A.)
Seagram (Cayman) Ltd. (Cayman Islands)
Seagram de Argentina S.A. (Argentina)
Seagram Export Foreign Sales Corporation Limited (Jamaica)
Seagram Export Sales Co., Inc. (U.S.A.)
Seagram Korea B.V. (Netherlands)
Seagram Nevada Corporation (U.S.A.)
Seagram United Kingdom Limited (U.K.)
Servicios Agavera, S.A. (Mexico)
Sterling Vineyards, Inc. (U.S.A.)
Tequila Don Julio S.A. de C.V. (Mexico)
Tequila Don Julio Servicios S.A. de C.V. (Mexico)
Tomo Compania Anonima (Venezuela)
Trelawny Estates Limited (Jamaica)
Valentin Bianchi S.A.I.F. (Argentina)
Vignobles Internationaux S.A. (France)


                                       72






                                     PART B
                       PERNOD RICARD COMPANIES AND ASSETS


All of the Acquired Assets (other than shares or other  membership  interests in
bodies corporate and those Acquired Assets listed or described in Schedules 1 or
2) owned by the following entities:

1. Alexander McLaren and Company Limited (U.K.)
2. Associated Liquor Distributors (EM) Sdn. Bhd. (Sabah) (Malaysia)
Associated Liquor Distributors (Hong Kong) Limited (Hong Kong)
Associated Liquor Distributors Sdn. Bhd. (Malaysia)
Associated Liquor Distributors (Thailand) Ltd. (Thailand)
ALD Sales Company Ltd (Thailand)
Augier Robin Briand & Co. (France)
Barton & Guestier Limited (U.K.)
Braes of Glenlivet Ltd. (U.K.)
Braeval Limited (U.K.)
Caldbeck Phipson & Company Limited (U.K.)
Caledonia Glenlivet Water Company Limited (U.K.)
Canadian Distillers Ltd. (Canada)
Caperdonich Distillery Company Limited (U.K.)
Captain Morgan Rum Distillers Limited (U.K.)
Cente S.A. (Spain)
Chivas 2000 Unlimited (U.K.)
Chivas Brothers Limited (U.K.)
Chivas Brothers (Aberdeen) Limited (U.K.)
Continental Shelf 99 (U.K.)
Craigduff Distillers Limited (U.K.)
Crownsouth Limited (U.K.)
D. Rintoul & Company Limited (U.K.)
deVille & Co. Limited (U.K.)
Envoy Wines Limited (U.K.)
Fragrances Limited (Hong Kong)
George & J.G. Smith Limited (U.K.)
GeomorEx Limited (formerly George Morton Limited) (U.K.)
George Roe and Company Limited (U.K.)
Glen Grant Distilleries Limited (U.K.)
Glen Grant Whisky Company Limited (U.K.)
Glen Keith Distillery Company Limited (U.K.)
The Glenlivet & Glen Grant Agencies Limited (U.K.)
The Glenlivet Distillers Limited (U.K.)
The Glenlivet Mineral Water Company Limited (U.K.)
Glenlivet Spring Water Limited (U.K.)
The Glenlivet Whisky Company Limited (U.K.)
The Highland Bonding Company Limited (U.K.)
Hill Thomson & Co. Limited (U.K.)
Hudson's Bay Company Edinburgh Limited (U.K.)
J&F Martell Diffusion Hong Kong Limited (Hong Kong)
J&F Martell, Inc. (U.S.A)
J. & J. Grant, Glen Grant Limited (U.K.)
James Keith Limited (U.K.)
J.B. Sheriff & Company Limited (U.K.)
JDC Services, S.A. de C.V.
JDC. S.A, de C.V. (Mexico)
JFP Partnership (Hong Kong)
J.M. Tulloch & Company Limited (U.K.)



                                       72






John Dunbar & Company Ltd. (U.K.)
Joseph E. Seagram & Sons (Scotland) Limited (U.K.)
The Keith Bonding Company Limited  (U.K.)
Kirin-Seagram Limited (Japan)
Lawson & Smith Limited (U.K.)
The Longmorn Distilleries Limited (U.K.)
Martell & Co. (France)
Martell & Cie (South Africa) (Pty) Ltd. (South Africa)
Martell Far East Trading Limited (Hong Kong)
Martell South East Asia Limited (Hong Kong)
Meekdean Limited (U.K.)
Moray Bonding Company Limited (U.K.)
Morgan Wine & Spirit Co. Limited (U.K.)
Murrayfield Vatting Company Limited (U.K.)
Myers Rum Limited (U.K.)
Oreco (France)
Oceanic Distilleries Ltd. (India)
Pacific Shelf 768 Limited (U.K.)
The Paisley Bonding Company Limited (U.K.)
Perennial Brands Limited (U.K.)
Prestige Vintners Limited (Hong Kong)
Revico (France)
Robert Brown Limited (U.K.)
Rowett, Legge & Co. Ltd. (U.K.)
SCI Paradis Prat (France)
Seafield Blending Company Limited (U.K.)
Seagram do Brasil Industria a Comercio Ltda. (Brazil)
Seagram (China) Ltd. (Canada)
Seagram France Distribution (France)
Seagram Holding Limited (Thailand)
Seagram India Limited (India)
Seagram Ireland Limited (U.K.)
Seagram Manufacturing Limited (India)
Seagram de Margarita
Seagram Martell Duty Free Limited (Hong Kong)
Seagram de Mexico S.A . de C.V. (Mexico)
Seagram Research Limited (U.K.)
Seagram Romania (Romania)
Seagram Services S.A. de C.V. (Mexico)
Seagram (Thailand) Limited (Thailand)
Seamart Limited (Hong Kong)
Shanghai Seagram Limited (China)
Shanghai Yi Jia International Trading Company Limited (China)
Sheriff & Company (Glasgow) Limited (U.K.)
Sherriff & Company (Jamaica) Ltd. (Jamaica)
Sheriff's Scotch Malt Company (U.K.)
Sica U.V.P.C. (France)
Sir Robert Burnett & Co. Limited (U.K.)
Societe des Domaines Viticoles Martell S.A. (France)
Stewart Cameron & Son Limited (U.K.)
Strathisla Distillery Company Limited (U.K.)
Tianjin Seagram International Trading Limited (China)
Tianjin Seagram Limited (China)
Turner & Nicol Limited (U.K.)
Voyglow Limited (U.K.)



                                       73






Wm Chas. Anderson & Co. Limited (U.K.)
William Longmore & Company Limited (U.K.)
WilwalkEx  Limited  (formerly William Walker &. Company Limited) (U.K.)
WoodcoEx Limited (formerly Wood and Company Limited) (U.K.)



                                       74


                                   SCHEDULE 4
                             IDENTIFIED LIABILITIES

OUTSTANDING SEAGRAM LITIGATION: SHARED LIABILITIES



                          RELEVANT
                        TRANSACTION    BRANDS                                   INSURANCE/                              CONDUCTING
TITLE OF LITIGATION      PARTY/IES    INVOLVED             STATUS               INDEMNITY         OUTSIDE COUNSEL     PARTY/COMMENTS
- -------------------     -----------   --------             ------               ----------        ---------------     --------------
                                                                                                   
UNITED STATES

[US lawyers]          Seagram                     Pending personal         Brooks defending     William M. Nelson    Diageo
dispute/              Beverage                    injury claim.            claim pursuant to    Senior V.P.,         (Country
Canadian company      Company                                              contractual          General Counsel      Manager
Aconcia  v  Brooks    (Defendant)                                          indemnity            Dr. Pepper/Seven     for U.S.)
Beverage and                                                               provision.           Up Bottling Group
Seagram Beverage                                                                                5950 Sherry Lane,
Company                                                                                         Suite 500
                                                                                                Dallas, TX 75225
                                                                                                Phone:
                                                                                                001-214-530-5000
                                                                                                Fax:
                                                                                                001-214-530-5036

U.S. Administrative   Joseph E.                   Pending Environmental                                              Diageo
Proceeding            Seagram &                   Protection Agency                                                  (Country
U.S. EPA CERCLA       Sons, Inc.                  investigation                                                      Manager
Investigation                                     regarding a former JES                                             for U.S.)
against Joseph E.                                 warehouse in Ohio.
Seagram & Sons,
Inc. and Seagram
Spirits-n-Wine Group

U.S dispute           Joseph E.                   Action commenced on                                                Diageo
Paul Criscuolo v.     Seagram &                   December 21, 2002, in                                              (Country
Vivendi Universal,    Sons, Inc.                  federal court (SDNY).                                              Manager
Pernod Ricard,                                    Criscuolo was an                                                   for U.S.)
Diageo and Joseph                                 employee of JES prior
E. Seagram & Sons,                                to the closing.  He
Inc.                                              resigned prior to the
                                                  closing.  He alleges
                                                  that he was
                                                  constructively
                                                  discharged (i.e., that
                                                  he was not offered a
                                                  comparable position,
                                                  although he was
                                                  offered and turned
                                                  down a position with
                                                  PR).

US dispute            Joseph E.                   Threatened employee                                                Diageo
JES employee          Seagram &                   claim for severance                                             (Country
severance claim       Sons, Inc.                  (no claim filed yet).                                                Manager
                                                                                                                     for U.S.)



                                      75



                          RELEVANT
                        TRANSACTION    BRANDS                                   INSURANCE/                              CONDUCTING
TITLE OF LITIGATION      PARTY/IES    INVOLVED             STATUS               INDEMNITY         OUTSIDE COUNSEL     PARTY/COMMENTS
- -------------------     -----------   --------             ------               ----------        ---------------     --------------
                                                                                                   
[US lawyers] dispute  UNCLEAR                     Pending personal         Seagram's insurer    Terence Austgen      Diageo
Boles v South Bend    (Defendant)                 injury claim, with       is defending         9245 Calumet         (Country
Discount Liquors,                                 settlement offer         claims.              Avenue, Suite 200    Manager
et al.                                            outstanding.                                  Munster, Indiana     for U.S.)
                                                                                                46321
                                                                                                Phone:
                                                                                                001-219-836-0200
                                                                                                Fax:
                                                                                                001-219-836-2544

Canadian company      Joseph E        Diageo      Sales Agent (Mosaiq)                          Mark Robilotti       Diageo
Claims of Canadian    Seagram Ltd.    keep        claims that JES Ltd.                          Simpson Thacher &    (Country
Sales Agents          (potential      brands,     illegally terminated                          Bartlett             Manager
                      defendant)      Pernod      its agreement with                            425 Lexington        for U.S.)
                                      keep        agent, and seeks to                           Avenue
                                      brands      have party acquiring                          New York, NY 10017
                                      and         Mumm trademarks assume                        Phone:
                                      Seagram     JES's obligations.                            001-212-455-7325
                                      Venture                                                   Fax:
                                      brands                                                    001-212-455-2502

US dispute/Canadian   The Seagram     Patents     Pending patent                                Ronald Santucci,     Diageo
and US companies      Company Ltd.    appear      infringement claims                           Esq.                 (Country
(DCA2)                and Joseph E.   to have     relating, among other                         Pitney Hardin Kipp   Manager
Lemelson Medical,     Seagram &       been        things, to certain                            & Szuch, LLP         for U.S.)
Education &           Sons, Inc.      used in     techniques used in the                        711 Third Avenue
Research              (Defendant)     multiple    filling and scaling of                        New York, NY
Foundation, L.P. v                    Seagram     containers.  Stay                             10017-4059
the Seller, et al                     facilities  granted pending                               Phone: 212-687-6000
                                      prior to    outcome of parallel                           Fax: 212-682-3485
                                      VU          litigation with
                                      Closing.    Symbol., a district
                                                  court action not
                                                  expected to end until
                                                  mid-2003.  Settlement
                                                  discussions on hold in
                                                  light of merger and
                                                  divestiture.

US dispute/US         JES             Mixed       Pending accounts                                                   Diageo
company                               brands      receivable claim (JES                                              (Country
JES v. Global                                     is plaintiff)                                                      Manager
In-flight Systems                                                                                                    for U.S.)

Threatened Claim/US   JES             Seagram     Threatened claim for                                               Diageo
company                               Mixers      termination of                                                     (Country
Jamaica Beverage                                  distributorship                                                    Manager
Company v. JES                                    (distribution                                                      for U.S.)
                                                  agreement not
                                                  transferred to
                                                  purchaser of Seagram
                                                  Mixers).


                                      76



                          RELEVANT
                        TRANSACTION    BRANDS                                   INSURANCE/                              CONDUCTING
TITLE OF LITIGATION      PARTY/IES    INVOLVED             STATUS               INDEMNITY         OUTSIDE COUNSEL     PARTY/COMMENTS
- -------------------     -----------   --------             ------               ----------        ---------------     --------------
                                                                                                   
US dispute/US         Joseph E.       Patent      Pending patent           JES's attempt to     Ronald Santucci,     Diageo
company (NDTX)        Seagram &       at issue    infringement claims      enter into a joint   Esq.                 (Country
North American        Sons, Inc.      affected    against all defendants   indemnity            Pitney Hardin Kipp   Manager
Container, Inc. v     (Defendant)     Passport,   relating to the use of   agreement with all   & Szuch, LLP         for U.S).
Plastipak                             Four        blow-molded plastic      suppliers has been   711 Third Ave.,
Packaging, Inc., et                   Roses,      bottles made from        rejected by at       New York, NY
al. (including                        Canadian    oriental thermoplastic   least one            10017-4059
Joseph E. Seagram &                   Hunter,     materials.  JES          supplier.  JES has   Phone: 212-687-6000
Sons, Inc.)                           Mount       cross-claimed against    filed cross-claims   Fax: 212-682-3485
                                      Royal       its bottle suppliers.    for
                                      Light,      Settlement proposal      indemnification      and
                                      and &       under consideration by   against certain
                                      7Crown.     JES.   NAC's claims      vendors.             Pat McGowan Esq.
                                                  against Seagram were                          Akin, Gump,
                                                  dismissed subject to                          Straus, Hauer &
                                                  an agreement between                          Feld LLP
                                                  the parties.  Seagram                         1700 Pacific Ave.,
                                                  appears to have                               Suite 4100
                                                  settled with two                              Dallas, TX
                                                  vendors, although                             75201-4675
                                                  neither party has been                        Phone: 214-969-2800
                                                  formally dismissed.                           Fax: 214-969-4343
                                                  All of the other
                                                  cross-claims are still
                                                  pending.

EUROPE

Portuguese dispute    Sandeman & Ca,  Sandeman -  The Sandeman buyer has   Under the Sandeman   Sandeman & Ca        Sandeman Buyer
Quinto do Casal e     S.A.            Quinto do   recently notified        SPA, Diageo and      Contact:             with
Confradeiro v.        (Defendant)     Confradeiro Diageo and Pernod that   Pernod Ricard        Sara Gomes           indemnification
Sandeman & ca. S.A.                   mark        Quinta do Casal e        agreed to                                 from Diageo and
                                                  Confradeiro is           indemnify the        Local counsel        Pernod Ricard.
                                                  pursuing a claim to      Sandeman buyer       handling the
                                                  the Quinta do            against the costs    matter:
                                                  Confradeiro trademark    and other expenses   Dr. Vitor Refega
                                                  (Reg. No. 192046).       of settling this     Fernandes
                                                                           matter.              J. Pereira da Cruz
                                                                                                Rua Vitor Cordon 14
                                                                                                1249-102, Lisbon,
                                                                                                Portugal
                                                                                                Phone: 35 121 347
                                                                                                5020


                                       77



                          RELEVANT
                        TRANSACTION    BRANDS                                   INSURANCE/                              CONDUCTING
TITLE OF LITIGATION      PARTY/IES    INVOLVED             STATUS               INDEMNITY         OUTSIDE COUNSEL     PARTY/COMMENTS
- -------------------     -----------   --------             ------               ----------        ---------------     --------------
                                                                                                   
Portugal ExSande      Vivendi         N/A         Vivendi request for                           Tomas Va Pinto,      Pernod Ricard
Tax Guarantees        indemnity                   indemnification in                            Morais Leitao        and Diageo
                      claim notice                connection with the
                      dated November              commencement of a tax
                      14, 2002,                   examination of ExSande
                      against Diageo              by the Portuguese tax
                      plc and Pernod              authority relating to
                      Ricard S.A.                 excise duties and VAT
                                                  of Sandeman

Austrian dispute/     Seagram Austria             Employment dispute by                         Schonherr Barfuss    Diageo
German company        (Defendant)                 a former manager.                             Torggler & Partner   (Country
Schaller  v                                       Employee is                                   (Dr. Thomas Wenger)  Manager
Seagram Austria                                   represented by                                Phone:               for Germany).
                                                  Grieser, Gerlach,                             011-43-1-534-37-0
                                                  Gahleitner.                                   Fax:
                                                                                                011-43-1-533-25-21


EU and French         The House of    Armada      House of                                      Brian March          Sandeman Buyer
dispute/UK company    Seagram UK                  Seagram/Portugal                              Wildbore & Gibbons   with
L'Armada De La        Limited                     Venture Limited                               Wildbore House       indemnification
Liberte  v  The       (Defendant)                 withdrew this                                 361 Liverpool Road   from Diageo and
House of Seagram                                  application (no.                              London N1 1NL, UK    Pernod Ricard.
Limited                                           001626191) on or                              Phone:
                                                  shortly after 28 May                          44-207-607-7312
                                                  2002.                                         Fax:
                                                                                                44-207-607-9062

EU and Portuguese     The House of    Armada      House of                                      Brian March          Sandeman Buyer
dispute/UK company    Seagram Limited             Seagram/Portugal                              Wildbore & Gibbons   with
C. Da Silva           (Defendant)                 Venture Limited                               Wildbore House       indemnification
(Vinhos), S.A.  v                                 withdrew this                                 361 Liverpool Road   from Diageo and
The House of                                      application (no.                              London N1 1NL, UK    Pernod Ricard.
Seagram Limited                                   001626191) on or                              Phone:
                                                  shortly after 28 May                          44-207-607-7312
                                                  2002.                                         Fax:
                                                                                                44-207-607-9062
                                                  Note: Relates to same
                                                  CTM application as
                                                  preceding matter.

Spain                 Seagram Spain   N/A         Pending litigations      N/A                                       Diageo
Preferred                                         relating to preferred                                              (Country
wholesalers claims                                wholesalers.                                                       Manager
1)   Becerra y                                                                                                       for Spain)
     Olmedo, S.A.
2)   Telelicor



                                       78



                          RELEVANT
                        TRANSACTION    BRANDS                                   INSURANCE/                              CONDUCTING
TITLE OF LITIGATION      PARTY/IES    INVOLVED             STATUS               INDEMNITY         OUTSIDE COUNSEL     PARTY/COMMENTS
- -------------------     -----------   --------             ------               ----------        ---------------     --------------
                                                                                                   
Spain                 Seagram Spain   N/A         Ex-Seagram distributor.       N/A                                       Diageo
Distributor claim                                 The distribution                                                   (Country
by Cotolosa                                       relationship terminated                                            Manager
                                                  in 1996. The former                                                for Spain)
                                                  distributor is claiming
                                                  an indemnity to offset
                                                  any damages caused by
                                                  the alleged unilateral
                                                  interruption of the
                                                  commercial relationship.

Belgian               Schreurs,       N/A         No details available.                         Allen & Overy        Diageo
dispute/Belgian       Leurs,                      Threatened                                                         (Country
company               Corstjens &                 litigation. Lawyers                                                Manager
                      Olivier.                    have temporarily                                                   for Belgium)
Employee litigation                               ceased work
                                                  on this case until
                                                  further information
                                                  becomes available.

Belgian               Seagram         N/A                                                                            Diageo
dispute/Belgian       Belgium NV                                                                                     (Country
company                                                                                                              Manager
                                                                                                                     for Belgium)
Purdy Boutique v.
Seagram Belgium NV

UK                    Seagram United              Claims from former                                                 Diageo
Seagram United        Kingdom Limited             customers in respect                                               (Manager of
Kingdom Limited                                   of invoices they claim                                             Seagram UK)
small claims                                      they have not received
                                                  stock for.

LATIN AMERICA

[US                   (Defendant)     All         Threatened RICO                               Diageo is            Managed jointly
Lawyers][Colombian]                   Brands      litigation related to                         represented by       by Pernod
dispute                                           allegations that                              Walfrido Martinez    Ricard and
Claims of Colombia                                Seagram smuggled goods                        of Hunton &          Diageo
Governors                                         into Colombia and EC                          Williams in Florida
                                                  to avoid payment of
                                                  taxes.

Argentinian           Seagram de      Four        Pending opposition by                         Santiago R.          Diageo
dispute/Argentinian   Argentina S.A.  Seasons     Seagram to                                    O'Connor, Esq.       (Country
company               (Claimant)                  application.                                  Marval, O'Farrell    Manager
Seagram de                                        Applicant not yet                             & Mairal             for Argentina)
Argentina S.A. v.                                 notified of opposition                        Phone:
Cabrales S.A.                                     by Seagram.                                   54-11-431-00100
                                                                                                Fax:
                                                                                                54-11-431-00200
                                                                                                E-mail:
                                                                                                soc@marval.com.ar


                                       79



                          RELEVANT
                        TRANSACTION    BRANDS                                   INSURANCE/                              CONDUCTING
TITLE OF LITIGATION      PARTY/IES    INVOLVED             STATUS               INDEMNITY         OUTSIDE COUNSEL     PARTY/COMMENTS
- -------------------     -----------   --------             ------               ----------        ---------------     --------------
                                                                                                   
Venezuelan            C.A. Seagram                Seagram de Venezuela                          Local counsel:       Diageo
disputes/             de Venezuela,               has offered to settle                         Moritz Eiris         (Country
Venezuelan company    C.A.                        2 of the claims.                              Phone:               Manager
1) Maritza Gamboa     Distribuidory                                                             011-58-212-201-7158  for Venezuela)
v  C.A. Seagram de    Chumaceiro.
Venezuela;
2) Gian Carlos
Melchionna E. Juan
Luis Elvira
Rodriguez  v  C.A.
Distribuidora
Chumaceiro;
3) Alejandro
Bouquet Guerra y
Aniello de Vita
Canabal, Eisig
Martinez Moira
Cristina, C.A.
Seagram de
Venezuela and
Moritz J Eiris
Bonilla;

Argentina employee    Seagram de                  Plaintiffs were                               Iturralde &          Diageo
actions:              Argentina                   employees of Kepner                           Asociados            (Country
(1) Tapia                                         S.A.  who used to                             Buenos Aires         Manager
(2) Micelli                                       perform replacement                           J.F. Kennedy 2842    for Argentina)
                                                  activities for Seagram                        PB C
                                                  de Argentina.                                 Tel.: 5411 4771 1037
                                                  Replacement activities                        Fax: 5411 4771 0830
                                                  are restocking shelves
                                                  of supermarkets.  The
                                                  lawsuit is against
                                                  both Kepner and
                                                  Seagram de Argentina.
                                                  The case is still in
                                                  the trial stage of
                                                  litigation. A new
                                                  hearing is scheduled
                                                  for December 5, 2002.
                                                  Labor relationship
                                                  between Tapia and
                                                  Kepner ended on
                                                  April 26, 2002, and
                                                  labor relationship
                                                  between Micieli
                                                  and Kepner ended on
                                                  April 29, 2002.


                                       80



                          RELEVANT
                        TRANSACTION    BRANDS                                   INSURANCE/                              CONDUCTING
TITLE OF LITIGATION      PARTY/IES    INVOLVED             STATUS               INDEMNITY         OUTSIDE COUNSEL     PARTY/COMMENTS
- -------------------     -----------   --------             ------               ----------        ---------------     --------------
                                                                                                   
Argentina action      Seagram de                  Plaintiff is a former                         Iturralde &          Diageo
Fuentes vs. Seagram   Argentina                   distributor.   The                            Asociados            (Country
de Argentina                                      distribution                                  Buenos Aires         Manager
                                                  arrangement ended in                          J.F. Kennedy 2842    for Argentina)
                                                  May 2002.  The term of                        PB C
                                                  the agreement was                             Tel.: 5411 4771 1037
                                                  intended to expire in                         Fax: 5411 4771 0830
                                                  February 2003 but was
                                                  terminated early by
                                                  the company due to
                                                  irregularities in the
                                                  activities performed
                                                  by Fuentes.   Claim is
                                                  for wrongful
                                                  termination.  Claim is
                                                  for commissions for
                                                  the sale of the
                                                  products, among other
                                                  items.   Case is in
                                                  pre-trial stage of
                                                  litigation.  Evidence
                                                  has not been produced
                                                  yet.

Argentina action      Seagram de                  Plaintiffs was an                             Iturralde &          Diageo
Gomez v. Seagram de   Argentina                   employee of Kepner                            Asociados            (Country
Argentina                                         S.A.  who used to                             Buenos Aires         Manager
                                                  perform replacement                           J.F. Kennedy 2842    for Argentina)
                                                  activities for Seagram                        PB C
                                                  de Argentina. The                             Tel.:
                                                  lawsuit is against                            5411 4771 1037 1037
                                                  both Kepner and                               Fax: 5411 4771 0830
                                                  Seagram de
                                                  Argentina. The case
                                                  is still in the trial
                                                  stage of litigation.
                                                  A new hearing is
                                                  scheduled for
                                                  December 5, 2002.

Argentina action      Seagram de                                                                Iturralde &          Diageo
Galindez v. Seagram   Argentina                                                                 Asociados            (Country
de Argentina                                                                                    Buenos Aires         Manager
                                                                                                J.F. Kennedy 2842    for Argentina)
                                                                                                PB C
                                                                                                Tel.: 5411 4771 1037
                                                                                                Fax: 5411 4771 0830

Argentina action      Seagram de                                                                Iturralde &          Diageo
Ingenio Aguilares     Argentina                                                                 Asociados            (Country
v. Seagram de                                                                                   Buenos Aires         Manager
Argentina                                                                                       J.F. Kennedy 2842    for Argentina
                                                                                                PB C
                                                                                                Tel.: 5411 4771 1037
                                                                                                Fax: 5411 4771 0830

Argentina action      Seagram de                                                                Iturralde &          Diageo
La Estrella v.        Argentina                                                                 Asociados            (Country
Seagram de Argentina                                                                            Buenos Aires         Manager
                                                                                                J.F. Kennedy 2842    for Argentina)
                                                                                                PB C
                                                                                                Tel.: 5411 4771 1037
                                                                                                Fax: 5411 4771 0830


                                       81



                          RELEVANT
                        TRANSACTION    BRANDS                                   INSURANCE/                              CONDUCTING
TITLE OF LITIGATION      PARTY/IES    INVOLVED             STATUS               INDEMNITY         OUTSIDE COUNSEL     PARTY/COMMENTS
- -------------------     -----------   --------             ------               ----------        ---------------     --------------
                                                                                                   
Argentina action,     Seagram de      VICUNA      Opposition                                    Santiago R.          Diageo
Argentina company     Argentina S.A.              proceeding.  Seagram                          O'Connor             (Country
Seagram de            (Opposer)                   de Argentina opposed                          Marval, O'Farrell    Manager
Argentina S.A. v.                                 Miguel Angel                                  & Mairal             for Argentina)
Miguel Angel                                      Ricchiardi's                                  Tel:
Ricchiardi                                        application for                               54 11 431 00100
                                                  ESTANCIA LA VICUNITA,                         Fax: 54 11 431
                                                  Ser. No. 2.376.335, in                        00200
                                                  Class 33, based on its                        Email:
                                                  registration for                              soc@marval.com.ar
                                                  VICUNA, Ar. Reg. No.
                                                  1708562.

Chilean action,       Seagram de      N/A         Case filed by Seagram                         Contact:             Diageo
Chilean company       Chile                       de Chile against                              Gonzalo Jimenez      (Country
Seagram de Chile,                                 debtor.  The debtor                           Cariola, Diez,       Manager
Comercial Limitada                                was summoned to                               Perez-Cotapos &      for Chile)
v. Luis Garcia                                    acknowledge the debt                          Cia, Ltda.
Carvajal                                          but he did not appear                         Avda. Andres Bello
                                                  before the court.  The                        2711, piso 19, Las
                                                  plaintiff can now                             Condes,
                                                  proceed with an                               Santiago, Chile
                                                  "execution claim".                            Tel: (56-2) 368-3573
                                                                                                Fax: (56-2) 360-4030
                                                                                                gjimenez@cariola.cl

Chilean action,       Seagram de                  2 actions against same                        Contact:             Diageo
Chilean company       Chile                       defendant for bad                             Gonzalo Jimenez      (Country
Seagram de Chile,                                 checks.  (1) Claim to                         Cariola, Diez,       Manager
Comercial Limitada                                be served upon the                            Perez-Cotapos &      for Chile)
v. Patricio Jara                                  defendant, a debtor;                          Cia, Ltda.
Palma                                             (2) claim to be served                        Avda. Andres Bello
                                                  upon the defendant.                           2711, piso 19, Las
                                                                                                Condes,
                                                                                                Santiago, Chile
                                                                                                Tel: (56-2) 368-3573
                                                                                                Fax: (56-2) 360-4030
                                                                                                gjimenez@cariola.cl

Chilean action,       Seagram de                  Claim against debtor.                         Contact:             Diageo
Chilean company       Chile                       Claim to be served                            Gonzalo Jimenez      (Country
Seagram de Chile,                                 upon the defendant.                           Cariola, Diez,       Manager
Comercial Limitada                                                                              Perez-Cotapos &      for Chile)
v.  Claudia                                                                                     Cia, Ltda.
Collances Vidal                                                                                 Avda. Andres Bello
                                                                                                2711, piso 19, Las
                                                                                                Condes,
                                                                                                Santiago, Chile
                                                                                                Tel: (56-2) 368-3573
                                                                                                Fax: (56-2) 360-4030
                                                                                                gjimenez@cariola.cl


                                       82



                          RELEVANT
                        TRANSACTION    BRANDS                                   INSURANCE/                              CONDUCTING
TITLE OF LITIGATION      PARTY/IES    INVOLVED             STATUS               INDEMNITY         OUTSIDE COUNSEL     PARTY/COMMENTS
- -------------------     -----------   --------             ------               ----------        ---------------     --------------
                                                                                                   
Chilean action,       Seagram de                  Claim against debtor.                         Contact:             Diageo
Chilean company       Chile                       Claim to be served                            Gonzalo Jimenez      (Country
Seagram de Chile,                                 upon the defendant.                           Cariola, Diez,       Manager
Comercial Limitada                                                                              Perez-Cotapos &      for Chile)
v. Blanca Edilia                                                                                Cia, Ltda.
Lara Montecino                                                                                  Avda. Andres Bello
                                                                                                2711, piso 19, Las
                                                                                                Condes,
                                                                                                Santiago, Chile
                                                                                                Tel:  (56-2)
                                                                                                368-3573
                                                                                                Fax: (56-2)
                                                                                                360-4030
                                                                                                gjimenez@cariola.cl

Chilean action,       Seagram de                  Claim against debtor.                         Contact:             Diageo
Chilean company       Chile                       The plaintiff can now                         Gonzalo Jimenez      (Country
Seagram de Chile,                                 proceed with an                               Cariola, Diez,       Manager
Comercial Limitada                                "execution claim".                            Perez-Cotapos &      for Chile)
v. Patricio Jara                                                                                Cia, Ltda.
Palma and                                                                                       Avda. Andres Bello
Productora                                                                                      2711, piso 19, Las
Megaeventors Ltda.                                                                              Condes,
                                                                                                Santiago, Chile
                                                                                                Tel:  (56-2)
                                                                                                368-3573
                                                                                                Fax: (56-2)
                                                                                                360-4030
                                                                                                gjimenez@cariola.cl

Chilean action,       Seagram de                  Claim against debtor.                         Contact:             Diageo
Chilean company       Chile                       The next step is to                           Gonzalo Jimenez      (Country
Seagram de Chile,                                 ask the court to                              Cariola, Diez,       Manager
Comercial Limitada                                provide police                                Perez-Cotapos &      for Chile)
v. Tupper y Moreno                                assistance to proceed                         Cia, Ltda.
Ltda.                                             with the seizure of                           Avda. Andres Bello
                                                  assets.                                       2711, piso 19, Las
                                                                                                Condes,
                                                                                                Santiago, Chile
                                                                                                Tel:  (56-2)
                                                                                                368-3573
                                                                                                Fax: (56-2)
                                                                                                360-4030
                                                                                                gjimenez@cariola.cl


                                       83



                          RELEVANT
                        TRANSACTION    BRANDS                                   INSURANCE/                              CONDUCTING
TITLE OF LITIGATION      PARTY/IES    INVOLVED             STATUS               INDEMNITY         OUTSIDE COUNSEL     PARTY/COMMENTS
- -------------------     -----------   --------             ------               ----------        ---------------     --------------
                                                                                                   
Chilean action,       Seagram de                  Claim against debtor.                         Contact:             Diageo
Chilean company       Chile                       The proceeding is                             Gonzalo Jimenez      (Country
Seagram de Chile,                                 currently suspended                           Cariola, Diez,       Manager
Comercial Limitada                                because the debtor is                         Perez-Cotapos &      for Chile)
v. Andres Vidal                                   negotiating new credit                        Cia, Ltda.
                                                  conditions.                                   Avda. Andres Bello
                                                                                                2711, piso 19, Las
                                                                                                Condes,
                                                                                                Santiago, Chile
                                                                                                Tel:  (56-2)
                                                                                                368-3573
                                                                                                Fax: (56-2)
                                                                                                360-4030
                                                                                                gjimenez@cariola.cl

Chilean action,       Seagram de      Mixed       Claim against debtor.                         Contact:             Diageo
Chilean company       Chile                       The execution claim is                        Gonzalo Jimenez      (Country
Seagram de Chile,                                 currently in progress.                        Cariola, Diez,       Manager
Comercial Limitada                                                                              Perez-Cotapos &      for Chile)
v. Cecilia Vasquez                                                                              Cia, Ltda.
San Martin                                                                                      Avda. Andres Bello
                                                                                                2711, piso 19, Las
                                                                                                Condes,
                                                                                                Santiago, Chile
                                                                                                Tel:  (56-2)
                                                                                                368-3573
                                                                                                Fax: (56-2)
                                                                                                360-4030
                                                                                                gjimenez@cariola.cl

Chilean action,       Seagram de      Mixed       Claim against debtor.                         Contact:             Diageo
Chilean company       Chile                       The execution claim is                        Gonzalo Jimenez      (Country
Seagram de Chile,                                 in progress.                                  Cariola, Diez,       Manager
Comercial Limitada                                                                              Perez-Cotapos &      for Chile)
v. Gastronomica El                                                                              Cia, Ltda.
Castillo S.A.                                                                                   Avda. Andres Bello
                                                                                                2711, piso 19, Las
                                                                                                Condes,
                                                                                                Santiago, Chile
                                                                                                Tel:  (56-2)
                                                                                                368-3573
                                                                                                Fax: (56-2)
                                                                                                360-4030
                                                                                                gjimenez@cariola.cl


                                       84



                          RELEVANT
                        TRANSACTION    BRANDS                                   INSURANCE/                              CONDUCTING
TITLE OF LITIGATION      PARTY/IES    INVOLVED             STATUS               INDEMNITY         OUTSIDE COUNSEL     PARTY/COMMENTS
- -------------------     -----------   --------             ------               ----------        ---------------     --------------
                                                                                                   
Chilean action,       Seagram de                  Claim against debtor.                         Contact:             Diageo
Chilean company       Chile                       The execution claim is                        Gonzalo Jimenez      (Country
Seagram de Chile,                                 in progress.  The next                        Cariola, Diez,       Manager
Comercial Limitada                                step is to petition                           Perez-Cotapos &      for Chile)
v. Cristian Barra                                 the court for police                          Cia, Ltda.
Zambra                                            assistance to proceed                         Avda. Andres Bello
                                                  with the seizure of                           2711, piso 19, Las
                                                  assets.                                       Condes,
                                                                                                Santiago, Chile
                                                                                                Tel:  (56-2)
                                                                                                368-3573
                                                                                                Fax: (56-2)
                                                                                                360-4030
                                                                                                gjimenez@cariola.cl

Chilean action,       Seagram de                  Criminal action                               Contact:             Diageo
Chilean company       Chile                       against debtor.   The                         Gonzalo Jimenez      (Country
Seagram de Chile,                                 investigation is still                        Cariola, Diez,       Manager
Comercial Limitada                                pending.                                      Perez-Cotapos &      for Chile)
v. Pedro Ernesto                                                                                Cia, Ltda.
Concha Sandoval                                                                                 Avda. Andres Bello
                                                                                                2711, piso 19, Las
                                                                                                Condes,
                                                                                                Santiago, Chile
                                                                                                Tel:  (56-2)
                                                                                                368-3573
                                                                                                Fax: (56-2)
                                                                                                360-4030
                                                                                                gjimenez@cariola.cl

Chilean action,       Seagram de                  Claim not yet filed.                          Contact:             Diageo
Chilean company       Chile                       Civil or criminal                             Gonzalo Jimenez      (Country
Seagram de Chile,                                 claim to be filed.                            Cariola, Diez,       Manager
Comercial Limitada                                                                              Perez-Cotapos &      for Chile)
v. Supermercado                                                                                 Cia, Ltda.
Kamadi Ltda.                                                                                    Avda. Andres Bello
                                                                                                2711, piso 19, Las
                                                                                                Condes,
                                                                                                Santiago, Chile
                                                                                                Tel:  (56-2)
                                                                                                368-3573
                                                                                                Fax: (56-2)
                                                                                                360-4030
                                                                                                gjimenez@cariola.cl


                                       85



                          RELEVANT
                        TRANSACTION    BRANDS                                   INSURANCE/                              CONDUCTING
TITLE OF LITIGATION      PARTY/IES    INVOLVED             STATUS               INDEMNITY         OUTSIDE COUNSEL     PARTY/COMMENTS
- -------------------     -----------   --------             ------               ----------        ---------------     --------------
                                                                                                   
Chilean action,       Seagram de                  Criminal claim filed                          Contact:             Diageo
Chilean company       Chile                       with the court.                               Gonzalo Jimenez      (Country
Seagram de Chile,                                                                               Cariola, Diez,       Manager
Comercial Limitada                                                                              Perez-Cotapos &      for Chile)
v. Ximena Campos                                                                                Cia, Ltda.
Morales                                                                                         Avda. Andres Bello
                                                                                                2711, piso 19, Las
                                                                                                Condes,
                                                                                                Santiago, Chile
                                                                                                Tel:  (56-2)
                                                                                                368-3573
                                                                                                Fax: (56-2)
                                                                                                360-4030
                                                                                                gjimenez@cariola.cl

AFRICA

A. Sedgwick v.        Seagram Africa  Management  Royalties were paid by                                             Diageo
Seagram Africa                        fee in      the Martell entity to                                              (Country
                                      respect     Seagram Africa, a                                                  Manager for
                                      of          jointly-held entity.                                               South Africa)
                                      royalties   Local management are
                                      on          looking to Diageo to
                                      Martell     share in any legal
                                      sales.      costs or settlement
                                                  that may arise.
                                                  Unclear if this is a
                                                  shared liability.

South Africa          Seagram Africa              3 outstanding employee                                             Diageo
employee claims                                   claims.                                                            (Country
                                                                                                                     Manager for
                                                                                                                     South Africa)

HONG KONG

Charlie Chen v.       Unclear         N/A         Threatened claim by                                                Pernod Ricard
various entities                                  Charlie Chen relating                                              (Country
                                                  to pre-Closing                                                     Manager for
                                                  transactions.  Claim                                               Hong Kong)
                                                  notice in connection
                                                  with Charlie Chen
                                                  correspondence
                                                  delivered to Vivendi.
                                                  Vivendi replied that
                                                  all of Charlie Chen's
                                                  claims have been settled
                                                  pursuant to a settlement
                                                  agreement signed between
                                                  a Vivendi affiliate and
                                                  Charlie Chen in December
                                                  2001.


                                       86



                          RELEVANT
                        TRANSACTION    BRANDS                                   INSURANCE/                              CONDUCTING
TITLE OF LITIGATION      PARTY/IES    INVOLVED             STATUS               INDEMNITY        OUTSIDE COUNSEL      PARTY/COMMENTS
- -------------------     -----------   --------             ------               ----------       ---------------      --------------
                                                                                                    
EUROPE

Italian               Seagram Italia              Pending claim by                             Avv. Diego             Pernod Ricard
dispute/Italian       S.p.a.                      former employee                              Rigatti                (Country
company               (Defendant)                 alleging wrongful                            Studio Legale          Manager for
Osvaldo Giusto  v                                 termination.                                 Tributario             France)
Seagram Italia                                                                                 Via Cornaggia, 10
S.p.a.                                                                                          20123  Milano

                                                                                               Tel. 0039-02-85141
                                                                                               Fax 0039-02-89020299

Italian               Seagram Italia              Pending claims by                            Update received        Pernod Ricard
dispute/Italian       S.p.A.                      customers and an agent.                      form Gianfranco        (Country
company               (Defendant)                 Customer claims are of                       Sicignano of           Manager for
Seagram Italia                                    very low value and                           Seagram Italia         France)
                                                  have been provided for
                                                  as operating costs                           Avv. Diego
                                                                                               Rigatti
                                                                                               Studio Legale
                                                                                               Tributario
                                                                                               Via Cornaggia, 10
                                                                                                20123  Milano

                                                                                               Tel. 0039-02-85141
                                                                                               Fax 0039-02-89020299

French dispute/       The Seagram     Perrier-    Demand letter sent by                                               Pernod Ricard
French company        Company         Jouet       Financier Moulins                                                   (Country
Delacor v La          Limited,                    seeking indemnity for                                               Manager for
Societe Champagne     Joseph E.                   claims asserted                                                     France)
Perrier-Jouet         Seagram & Sons              against Perrier Jouet
                      Inc., Seagram               by Delacor.  Seagram's
                      International               reply letter refused
                      BV (Defendants)             indemnity claim.
                                                  No further
                                                  developments in 2002


                                       87



                          RELEVANT
                        TRANSACTION    BRANDS                                   INSURANCE/                              CONDUCTING
TITLE OF LITIGATION      PARTY/IES    INVOLVED             STATUS               INDEMNITY       OUTSIDE COUNSEL       PARTY/COMMENTS
- -------------------     -----------   --------             ------               ----------      ---------------       --------------
                                                                                                    
Spanish               The House of    Corregidor  Pending opposition by                       Brian March             Pernod Ricard
dispute/Spanish       Seagram Ltd                 Seagram against                             Wildbore & Gibbons      (Country
company                                           Spanish TM application                      Wildbore House          Manager for
                                                  no. 2434378 and                             361 Liverpool Road      Portugal)
The House of                                      pending appeal seeking                      London N1 1NL, UK
Seagram Ltd v. Coop                               clarification of                            Phone: 44-207-607-7312
Valenciana de                                     grounds for rejecting                       Fax: 44-207-607-9062
Vitgicultores                                     Valenciana's                                And  German Burgos
(Spain)                                           application no.                             Elzaburu
("Valenciana")                                    2372232.                                    Madrid
                                                                                              Phone: 34 91 700 9400

Portuguese            Sandeman & Cia  N/A         Customs cases.                              Tomas Vas Pinto         Pernod Ricard
dispute/Portuguese    (Portuguese                                                             MLGT                    (Country
company               entity                                                                  Portugal                Manager for
                      retained by VU                                                                                  Portugal)
Sandeman tax          but Portuguese
disputes              counsel
1.   German           advises that
     Case -           liabilities
     Portimplex       are Diageo and
2.   Luxemburg        PR's)
     Case - ACC
     International
3.
     Netherlands
     Case -
     Loendersloot
4.   Collection
     "a posteriori"
5.   Celeiros
     Case

Greek dispute/Greek   Seagram Apka    N/A                                                                             Pernod Ricard
company                                                                                                               (Country
                                                                                                                      Manager for
Seagram Apka S.A.:                                                                                                    Greece)
3 employee claims

Greek dispute/Greek   Seagram Apka                Claim from client                           Local lawyers are       Pernod Ricard
company                                           seeking redress for                         dealing with            (Country
                                                  contract termination.                       this.                   Manager for
Nektar v. Seagram                                 Settlement may take up                                              Greece)
Apka S.A.                                         to 2004.


                                       88



                          RELEVANT
                        TRANSACTION    BRANDS                                 INSURANCE/                               CONDUCTING
TITLE OF LITIGATION      PARTY/IES    INVOLVED            STATUS              INDEMNITY       OUTSIDE COUNSEL        PARTY/COMMENTS
- -------------------     -----------   --------            ------              ----------      ---------------        --------------
                                                                                                   
Greek dispute/Greek   Seagram Apka               Old receivables claims                     Local lawyers are        Pernod Ricard
company                                          against third                              dealing with these.      (Country
                                                 parties.  Local                                                     Manager for
Seagram Apka S.A.                                counsel is analysing                                                Greece)
v. third parties.                                and pursuing only
                                                 significant claims.

Turkish company       Seagram                    Pending claim for                                                   Pernod Ricard
                      Anadolou                   aircon unit.                                                        (Country
Seagram Anadolou      (Plaintiff)                                                                                    Manager for
                                                                                                                     Turkey)

LATIN AMERICA

Costa Rican company   Seagram de      N/A                                                                            Pernod Ricard
                      Costa Rica                                                                                     (Country
Purdy Boutique v.                                                                                                    Manager for
Seagram de Costa                                                                                                     Costa Rica)
Rica

[US                   (Defendant)     All        Threatened RICO                            DIAGEO IS                Managed jointly
Lawyers][Colombian]                   Brands     litigation related to                      REPRESENTED BY           by Pernod
dispute                                          allegations that                           WALFRIDO MARTINEZ        Ricard and
Claims of Colombia                               Seagram smuggled goods                     OF HUNTON &              Diageo
Governors                                        into Colombia and EC                       WILLIAMS IN FLORIDA
                                                 to avoid payment of
                                                 taxes.

Claim by Costa        Seagram de      All        Potential                                  Edgar                    Pernod Ricard
Rican Tax             Costa Rica      Spirits    investigation by                           Zurcher/Edgar Odio       (Country
Authorities           (Defendant)                Puerto Rico Public                         Zurcher, Montoya &       Manager for
                                                 Minister regarding                         Zurcher                  Costa Rica).
                                                 possible tax fraud.                        Courier C, 1, Av 9
                                                 Lower court rejected                       & 11
                                                 Public Minister's                          No 959
                                                 subpoena to search                         San Jose, Costa
                                                 Seagram's, and                             Rica
                                                 appellate court upheld                     Phone: 011 506 222 6633
                                                 decision.  Seagram's                       Fax: 011 506 221 9127
                                                 has filed a petition
                                                 to dismiss any further                     And
                                                 criminal investigation
                                                 or other proceedings..                     Robert Smit
                                                                                            Simpson Thacher &
                                                                                            Bartlett
                                                                                            425 Lexington
                                                                                            Avenue New York NY
                                                                                            10017
                                                                                            Phone: 212 455 2563
                                                                                            Fax: 212 455 2502


                                       89



                          RELEVANT
                        TRANSACTION    BRANDS                                   INSURANCE/                              CONDUCTING
TITLE OF LITIGATION      PARTY/IES    INVOLVED             STATUS               INDEMNITY         OUTSIDE COUNSEL     PARTY/COMMENTS
- -------------------     -----------   --------             ------               ----------        ---------------     --------------
                                                                                                    
Brazilian action,     Seagram de      Camila      Matter is pending.                            Santiago R.           Pernod Ricard
Argentina company     Argentina S.A.                                                            O'Connor              (Country
Seagram de            (Opposer)                                                                 Marval, O'Farrel l    Manager for
Argentina v. Camila                                                                             & Mairal              Brazil)
Distribuidora e                                                                                 Tel: 54 11 431 00100
Importadora Ltda.                                                                               Fax: 54 11 431 00200
                                                                                                Email:
                                                                                                soc@marval.com.ar

ASIA

[Hong Kong lawyers]   Seagram Asia                Pending                                       SEAGRAM ASIA          Pernod Richard
dispute               Pacific                     landlord/tenant                               PACIFIC CONTACT:      (Country
Tang Hon Tsai v       (Defendant)                 dispute. No steps                             MARIA TSANG           Manager for
Seagram Asia Pacific                              taken by the claimant                                               Hong Kong)
                                                  since January 2002.                           OUTSIDE COUNSEL:
                                                                                                MICHAEL CHEUK,
                                                                                                WONG & KEE
                                                                                                ROOM 3203-A-5
                                                                                                TOWER TWO LIPPO
                                                                                                CENTRE
                                                                                                89 QUEENSWAY
                                                                                                HONG KONG

Hong Kong company     Unclear         N/A         Threatened claim by                                                 Pernod Ricard
Charlie Chen and                                  Charlie Chen for                                                    (Country
Seagram (CI) Taiwan                               termination and                                                     Manager for
Ltd.                                              back-salary.  Unclear                                               Hong Kong)
                                                  if claim is against VU, the
                                                  current owner of the shares of
                                                  this entity, or Diageo and
                                                  Pernod Ricard.


All other litigation expressly described in the Market Plan



                                   SCHEDULE 5
                               TAXATION PROVISIONS


1.        TAX WORKING GROUP

1.1       The Tax Working Group will be composed of such representatives (being
          employees of Diageo and Pernod Ricard and/or advisers appointed by
          each of them) as may be appropriate from time to time. The team leader
          on the Diageo side shall be Chris Stiles (or such other person as
          Diageo shall notify for the time being) and the team leader on the
          Pernod Ricard side shall be Helene de Tissot (or such other person as
          Pernod Ricard shall notify for the time being).

1.2       Each team leader shall be responsible for the composition of his or
          her own teams on the Tax Working Group from time to time.

1.3       Starting from the date of this Agreement, the meetings of the Tax
          Working Group shall take place quarterly, or more frequently if the
          appointed team leaders so decide. Unless otherwise agreed by the team
          leaders, the meetings will be held alternately in Paris and London at
          the respective offices of Pernod Ricard and Diageo.

1.4       Except as provided otherwise by this agreement, each party shall bear
          its own costs in relation to the Tax Working Group (including the
          costs of any advisers appointed by each of them for the purposes of
          the activities of the Tax Working Group).

1.5       The Tax Working Group will be the forum for discussing all issues
          arising out of the Tax Plan (including the amendment of the Tax Plan
          under paragraph 3 of this Schedule 5) and shall be the initial forum
          for discussing other tax matters arising out of this Agreement.
          Subject to paragraphs 4.1 and 4.2 below, the Tax Working Group shall
          also deal with any tax related disputes with Vivendi under the Vivendi
          Sale Agreement.


IMPLEMENTATION OF TAX PLAN

1.6       Subject to paragraph 2.2 below, the parties shall implement the Tax
          Plan in accordance with the FIA Implementation Principles.

1.7       At any time during implementation of the Tax Plan, the parties may
          agree to modify it and either change or exclude transactions in the
          Tax Plan that have not yet been carried out or completed or include
          further transactions in the Tax Plan. Subject to such agreement, the
          modified Tax Plan shall replace the Tax Plan previously agreed for the
          purposes of this Agreement. For the avoidance of doubt, references in
          this Schedule to the Tax Plan are to the Tax Plan as it may be amended
          from time to time pursuant to the provisions of this Schedule.


AMENDMENTS TO THE TAX PLAN

1.8       If any new information comes to light (whether as to the location or
          ownership of assets or liabilities or relating to relevant Tax law or
          practice) during the implementation of the Tax Plan, the parties may
          (to the extent possible taking into account transactions that have
          already occurred pursuant to 2.1 or 2.2 above) amend the Tax Plan and
          shall do so where it is clear that the information on which the Tax
          Plan was previously based is for any reason incorrect or that steps
          comprised in the Tax Plan cannot be implemented for any legal reason
          or otherwise.



                                       91






1.9       In the event of any disagreement between the parties as to any
          amendments required to be made under paragraph 3.1 above:

1.9.1     the amendments shall, as far as possible, be consistent with the FIA
          Implementation Principles; and

1.9.2     the amendments shall, in accordance with the FIA Implementation
          Principles, as far as possible, minimize the Shared Tax Cost,

          provided that neither party shall be required to agree with amendments
          to the Tax Plan which, notwithstanding that the amendments are in
          accordance with the principles in paragraphs 3.2.1 and 3.2.2 above,
          would have material adverse Tax consequences for that party or its
          Affiliates. For these purposes, an amendment shall be treated as
          having material adverse tax consequences if it can be expected to
          result in one or more tax costs exceeding in aggregate US$100,000 in
          any one jurisdiction.

1.10      In amending the Tax Plan, where there are alternative ways of carrying
          out transactions in giving effect to the FIA Implementation Principles
          (with the same effect on the amount of Shared Tax Cost) but the
          ability of either party to utilise Tax Assets under sub-paragraphs 6.1
          or 6.2 (Tax Assets) below varies according to which particular way is
          employed, the party standing to benefit may be required by the other
          to compensate it on a reasonable basis for agreeing to employ that
          method in the amended Tax Plan.


PAYMENTS ON ACCOUNT OF SHARED TAX COST

1.11      Clauses 6.1 to 6.5 of this Agreement shall apply to Third Party
          Proceedings and any other action taken by a Revenue Authority which is
          likely to result in an increased liability to Tax (which, for the
          purposes of the application of those clauses shall be treated as Third
          Party Proceedings) in relation to liabilities comprised in Shared Tax
          Cost, provided that:

1.11.1    clause 6.1 of this Agreement shall only apply for the purposes of this
          Schedule 5 if the liability in question either is not specified in the
          Tax Plan or exceeds, to a material extent, the amount specified in the
          Tax Plan in respect of that liability;

1.11.2    subject to paragraph 4.1.1 above, a party shall be treated as having
          complied with clauses 6.1 and 6.4 of this Agreement where it has
          provided the other party with reasonable information, whether orally,
          by email or in writing, in respect of such claim or action;

1.11.3    clause 6.2 of this Agreement shall only apply in respect of any such
          claim or action if and to the extent that the Notified Party notifies
          the Notifying Party that it requires the provisions of clause 6.2 to
          be complied with; and

1.11.4    unless the Non-Conducting Party notifies the Conducting Party that it
          objects to the manner of conduct of the Third Party Proceedings under
          clause 6.2 of this Agreement (Conduct of Claims), the Conducting Party
          shall be entitled to assume that it is duly complying with the
          provisions of clause 6.2 of this Agreement and the Non-Conducting
          Party shall be deemed to have waived its rights to claim against the
          Conducting Party for breach of clause 6.2.

1.12      Payments on account of liabilities comprised in Shared Tax Cost (or
          adjustments to the payments made in respect of such liabilities) shall
          be settled in accordance with Clauses 6.3.1 and 6.3.6 of this
          Agreement, provided that, for the purposes of this



                                       92






          paragraph 4.2 and clauses 6.3.1 and 6.3.6, a liability shall be
          treated as having been discharged where a party makes an interim
          payment on account of a liability to Tax comprised in the Shared Tax
          Cost (even where that liability to Tax has not been finally
          determined) or where a party makes a payment on account of Tax in
          order to dispute a liability to Tax comprised in the Shared Tax Cost.

1.13      The determination of the nature or amount or value of payments (and
          any adjustments thereto) in respect of Shared Tax Cost referred to in
          paragraph 4.2 above shall take into account the time value of money at
          commercial interest rates for the relevant currency and the amount of
          the Shared Tax Cost shall be adjusted to reflect the same.

1.14      For the purposes of paragraph 4.1.1 above, the parties agree that an
          amount shall be material if it exceeds $100,000.


POST IMPLEMENTATION ADJUSTMENTS

          Where payments have been made on account of the Shared Tax Cost under
          paragraph 4.2 above, and the final determination of the amount of
          liabilities to Tax comprised in the Shared Tax Cost is different from
          that assumed in the original calculation of such payments, payments
          shall be made to ensure that, after taking into account such payments
          and any payment made under paragraph 4.2, the aggregate position
          reflects the final determination of those liabilities to Tax.


TAX ASSETS

1.15      Subject to the provisions of the Vivendi Sale Agreement:

1.15.1    any Tax Assets within the Acquired Assets at Closing should first be
          used to reduce or eliminate any Historic Tax Liability and then used
          by the parties to minimize the Shared Tax Cost; and

1.15.2    any Tax Assets within any Jointly Owned Entities, whenever arising,
          shall be used by the parties to minimize the Shared Tax Cost,

          in either case, in accordance with the FIA Implementation Principles.

1.16      Any Tax Asset that arises as a result of transactions included in the
          Tax Plan shall first be taken into account in determining the amount
          of any liability comprised in the Shared Tax Cost, provided that, this
          paragraph 6.2 shall not apply to any Tax Asset that falls within
          paragraph 6.4.5 below (or any Tax Asset that falls within paragraph
          6.4.4 below on the basis that such Tax Assets do not arise from steps
          included in the Tax Plan).

1.17      Any Tax Assets referred to in paragraphs 6.1 and 6.2 and not used or
          otherwise taken into account in accordance with those paragraphs will
          be available to the party entitled to them in law once the Tax Plan
          has been fully implemented for its own use and benefit and subject to
          no obligations under this Agreement.

1.18      For the purposes of determining the amount of a liability to Tax to be
          comprised in the Shared Tax Cost:

1.18.1    such liability shall be reduced by Tax Assets referred to in
          paragraphs 6.1 and 6.2 above, to the extent, in either case, that such
          Tax Assets are available to reduce or eliminate that liability;



                                       93






1.18.2    no account shall be taken of Tax Assets available to either party
          (other than Tax Assets referred to in paragraph 6.4.1 above) unless
          either party agreed to make such Tax Assets available for that purpose
          in which case the terms on which such Tax Assets are made available
          shall be agreed between the parties;

1.18.3    no account shall be taken of any Tax Asset arising as a result of the
          payment of the costs comprising a Shared Liability or a Joint
          Liability, to the extent that such Tax Asset is taken into account in
          calculating the amount of any payment made in respect of that Shared
          Liability or Joint Liability pursuant to clause 6 of this Agreement or
          any payment made pursuant to clauses 15 to 20 of the Framework and
          Implementation Agreement;

1.18.4    no account shall be taken of any Tax Asset arising as a result of the
          payment of any amount pursuant to clauses 15 to 20 of the Framework
          and Implementation Agreement, or clauses 4 to 6 or 18.2 of this
          Agreement ; and

1.18.5    no account shall be taken of any Tax Asset arising on the acquisition
          by Diageo (or an Affiliate of Diageo) of any Diageo Asset or by Pernod
          Ricard (or an Affiliate of Pernod Ricard) of any Pernod Ricard Asset
          pursuant to the Vivendi Sale Agreement or any step in the Tax Plan.

1.19      Where one party ("the first party"), pursuant to the provisions of
          this Agreement, is obliged to account to the other party for net
          income or profits arising from ordinary trading activities in relation
          to assets allocated to the other party, the first party shall be
          entitled to deduct from such payments an amount equal to liabilities
          to Tax that would have been payable in respect of such income or
          profits but for the use of a Tax Asset that would otherwise have been
          available to the first party or its Affiliates.


TAX ON TRADING PROFITS AND OTHER INCOME POST-COMPLETION

1.20      Liabilities to Tax in relation to post-Closing income or profits
          arising from any trading activities shall be:

1.20.1    Diageo Liabilities where such activities relate to Diageo Assets;

1.20.2    Pernod Ricard Liabilities where such activities relate to Pernod
          Ricard Assets; and

1.20.3    borne by the entity that recognises the income where such activities
          relate to any other Acquired Assets.

1.21      Customs and Excise duty liabilities arising in respect of all
          post-Closing business activities shall be Diageo Liabilities where
          they relate to Diageo Assets and Pernod Ricard Liabilities where they
          relate to Pernod Ricard Assets, and shall be borne by the entity that
          recognises the income where they relate to any other Acquired Assets.


TAX COMPLIANCE

1.22      Subject to paragraph 8.3 below, Tax compliance shall be the
          responsibility of the party identified in the Tax Plan and the persons
          identified in the Tax Plan (or any other persons as may be notified by
          the responsible party from time to time) shall deal with tax
          compliance matters on behalf of that party.

1.23      Subject to paragraph 8.3 below, it is the obligation of the party
          identified in the Tax Plan as being responsible for tax compliance to
          complete any tax return and deal with all tax compliance matters such
          as correspondence and meetings with any relevant



                                       94






          Revenue Authority in accordance with the Tax Plan, subject only to any
          change in law or practice after the date of the Tax Plan.

1.24      The party identified in the Tax Plan as being responsible for tax
          compliance shall be deemed to have complied with its obligations under
          paragraphs 8.1 and 8.2 above to the extent that it has appointed a
          firm of tax advisers/ accountants of international standing to deal
          with tax compliance matters on its behalf. Such firm may be changed
          from time to time subject to agreement between the parties.

1.25      Unless otherwise agreed, the costs of tax compliance in respect of
          each Jointly-Owned Entity shall be borne by that Jointly-Owned Entity.


EXCHANGE OF INFORMATION

1.26      Both parties agree to exchange all information reasonably requested by
          the other party relating to tax matters:

1.26.1    to enable full implementation of the FIA Implementation Principles and
          the SOFIA Implementation Principles;

1.26.2    arising out of any tax return and/or any other tax compliance matters
          including any such information reasonably required by either party or
          any of their Affiliates for the purposes of their tax filings or
          disputes with any Revenue Authority; and

1.26.3    arising out of any claims or disputes under the Vivendi Sale
          Agreement,

          provided that neither party shall be obliged to exchange any such
          information where such exchange would, in the reasonable opinion of
          the relevant party, breach any law including anti-trust law.


INTERPRETATION

1.27      A liability to Tax shall not form part of the Shared Tax Cost to the
          extent that it arises, or is increased as a result of:

1.27.1    the Tax Plan not having been implemented in accordance with its terms
          (except where the parties have agreed to amend the Tax Plan during its
          implementation); or

1.27.2    some other transaction (outside the precise terms of the Tax Plan)
          carried out by or between Diageo or Pernod Ricard and their respective
          Affiliates.

1.28      The parties may agree such amendments to the definition of Shared Tax
          Cost as, in their joint opinion, may be required either to give effect
          to the FIA Implementation Principles or the SOFIA Implementation
          Principles or to give effect to any change in law or practice.

1.29      For the purposes of this Agreement, liabilities to Tax shall not form
          part of the Shared Tax Cost to the extent that:

1.29.1    subject to paragraph 10.4 below, they comprise Taxes required to be
          deducted or withheld by any Jointly-owned Entity ("the distributing
          company") from any dividend paid or distribution made (including any
          distribution made in the liquidation or winding up of any such
          company) to Diageo or any Affiliate of Diageo or to Pernod Ricard or
          any Affiliate of Pernod Ricard;



                                       95






1.29.2    they comprise Taxes paid by Diageo or any Affiliate of Diageo or by
          Pernod Ricard or any Affiliate of Pernod Ricard on receipt of any
          dividend or distribution referred to in paragraph 10.3.1 above;

1.29.3    they comprise Taxes arising from transactions that are denoted as not
          being included in the final Tax Plan or that comprise transactions
          taken by one of the parties to reorganize or establish its own group
          structure;

1.29.4    they comprise Taxes paid by Diageo or an Affiliate of Diageo or by
          Pernod Ricard or an Affiliate of Pernod Ricard in respect of the
          disposal of shares (whether by sale, liquidation, dissolution or
          otherwise) in a body corporate that is a Jointly-owned Entity where,
          prior to that disposal, the shares in that Jointly-owned Entity were
          beneficially owned by Diageo (or an Affiliate of Diageo) and Pernod
          Ricard (or an Affiliate of Pernod Ricard) in the Diageo Proportion and
          the Pernod Ricard Proportion respectively;

1.29.5    they comprise Taxes arising from the sale of the quotas in Seagram do
          Brasil Industria e Comercio Ltda. by JES and its subsidiaries to
          Lawrenceburg Distillers and Importers LLC pursuant to the JES Seagram
          Venture Assets and Pernod Ricard Assets Sale and Purchase Agreement
          dated 21 December 2001, as amended; or

1.29.6    they comprise Taxes arising on the receipt of any payment to be made
          pursuant to clauses 15 to 20 of the Framework and Implementation
          Agreement, or clauses 4 to 6 or 18.2 of this Agreement.

1.30      Taxes shall not be treated as falling within paragraph 10.3.1 above
          where such Taxes deducted or withheld were of the nature of Taxes
          imposed on the income, profits or gains of the distributing company at
          the time of distribution. For this purpose, Taxes imposed on the
          income, profits or gains of the distributing company include Taxes
          imposed by way of deduction or withholding from the distribution but
          which were either creditable against the distributing company's own
          Tax liabilities or discharged a portion of what would otherwise have
          been the distributing company's own liability to Tax (regardless, in
          either case, of any credit that might be given to shareholders in
          respect of that liability to Tax under any imputation or similar
          system).

1.31      Subject to paragraph 10.3 above and without prejudice to the
          obligations of the parties under paragraph 3(C) of Schedule 5 to the
          Framework and Implementation Agreement, liabilities to Tax shall be
          part of the Shared Tax Cost notwithstanding that the information upon
          which the Tax Plan has been based is for any reason incorrect.

1.32      For the avoidance of doubt, the parties intend that the amount of any
          payment to be made pursuant to clauses 15 to 20 of the Framework and
          Implementation Agreement or clauses 4 to 6 or 18.2 of this Agreement
          in respect of any liability shall be calculated for the purposes of
          this Agreement after taking into account any Tax Asset, arising as a
          result of the discharge of that liability, available in law to the
          person who discharges the relevant liability.

1.33      Any disputes between the parties in relation to the application of
          this Schedule 5 or in connection with the Tax Plan shall be resolved
          pursuant to clauses 26 to 29 of this Agreement (Dispute
          Resolution/Deadlock Resolution).


                                       96



                                   SCHEDULE 6
                             JOINTLY-OWNED ENTITIES


                                                                                           
1.         WHERE ACTING IN THEIR CAPACITY AS A PERSON HOLDING (DIRECTLY OR                        MANAGING
           INDIRECTLY) PERNOD RICARD ON-SALE ASSETS, THE                                          PARTY
           FOLLOWING COMPANIES IN THE FOLLOWING JURISDICTIONS:
- ---------- -------------------------------------------------------------------------------------- -------------------
1.1        NEW YORK, USA
- ---------- -------------------------------------------------------------------------------------- -------------------
           Austin, Nichols & Company, Incorporated; and                                           Pernod Ricard
- ---------- -------------------------------------------------------------------------------------- -------------------
1.2        ENGLAND
- ---------- -------------------------------------------------------------------------------------- -------------------
           PR Newco 5 Limited; and                                                                Pernod Ricard
- ---------- -------------------------------------------------------------------------------------- -------------------
1.3        FRANCE
- ---------- -------------------------------------------------------------------------------------- -------------------
           Santa Lina.                                                                            Pernod Ricard
- ---------- -------------------------------------------------------------------------------------- -------------------
2.         THE FOLLOWING COMPANIES IN THE FOLLOWING JURISDICTIONS:
- ---------- -------------------------------------------------------------------------------------- -------------------
2.1        AUSTRALIA
- ---------- -------------------------------------------------------------------------------------- -------------------
           Chatelle Pty Limited (see further Schedule 10 (Outstanding Matters)) (50%)             Pernod Ricard
- ---------- -------------------------------------------------------------------------------------- -------------------
2.2        AUSTRIA
- ---------- -------------------------------------------------------------------------------------- -------------------
           Seagram Spirituosen Ges.mbH (100%).                                                    Diageo
- ---------- -------------------------------------------------------------------------------------- -------------------
2.3        BELGIUM
- ---------- -------------------------------------------------------------------------------------- -------------------
           Seagrams Belgium N.V. (100%)                                                           Diageo
- ---------- -------------------------------------------------------------------------------------- -------------------
           Forwarding and Handling Co. N.V. (100%)                                                Diageo
- ---------- -------------------------------------------------------------------------------------- -------------------
2.4        CANADA
- ---------- -------------------------------------------------------------------------------------- -------------------
           Distillers Corporation Limited (100%)                                                  Diageo
- ---------- -------------------------------------------------------------------------------------- -------------------
           Joseph E Seagram & Sons Limited (100%)                                                 Diageo
- ---------- -------------------------------------------------------------------------------------- -------------------
           Treat Venture Holdings Limited (100%)                                                  Diageo
- ---------- -------------------------------------------------------------------------------------- -------------------
2.5        CHILE
- ---------- -------------------------------------------------------------------------------------- -------------------
           Seagram de Chile Commercial Ltda (100%)                                                Diageo
- ---------- -------------------------------------------------------------------------------------- -------------------
2.6        COLOMBIA
- ---------- -------------------------------------------------------------------------------------- -------------------
           Atlas Commercial Seagram de Colombia S.A. (100%)                                       Pernod Ricard
- ---------- -------------------------------------------------------------------------------------- -------------------
2.7        COSTA RICA
- ---------- -------------------------------------------------------------------------------------- -------------------
           Seagram de Costa Rica S.A. (100%)                                                      Pernod Ricard
- ---------- -------------------------------------------------------------------------------------- -------------------
           Alimentos Preparados S.A. (100%)                                                       Pernod Ricard
- ---------- -------------------------------------------------------------------------------------- -------------------
           Seagram Centroamericana S.A. (100%)                                                    Diageo
- ---------- -------------------------------------------------------------------------------------- -------------------
2.8        CZECH REPUBLIC
- ---------- -------------------------------------------------------------------------------------- -------------------
           Seagram Spol. s.r.o. (100%)                                                            Pernod Ricard
- ---------- -------------------------------------------------------------------------------------- -------------------
2.9        DOMINICAN REPUBLIC
- ---------- -------------------------------------------------------------------------------------- -------------------
           Gist Dominicana S.A. (100%)                                                            Pernod Ricard
- ---------- -------------------------------------------------------------------------------------- -------------------
           Industria de Licores Internationales S.A. (100%)                                       Pernod Ricard
- ---------- -------------------------------------------------------------------------------------- -------------------
           Seagram Dominicana S.A. (100%)                                                         Pernod Ricard
- ---------- -------------------------------------------------------------------------------------- -------------------
2.10       GERMANY
- ---------- -------------------------------------------------------------------------------------- -------------------
           Julius Kayser & Co GmbH (100%)                                                         Diageo
- ---------- -------------------------------------------------------------------------------------- -------------------
           Seagram Global Markets Group GmbH (100%)                                               Diageo
- ---------- -------------------------------------------------------------------------------------- -------------------
2.11       GREECE
- ---------- -------------------------------------------------------------------------------------- -------------------
           Lupak S.A. (100%)                                                                      Pernod Ricard
- ---------- -------------------------------------------------------------------------------------- -------------------
           Seagram Apka S.A. (100%)                                                               Pernod Ricard
- ---------- -------------------------------------------------------------------------------------- -------------------
           Seagram Apka Dodescanes S.A. (100%)                                                    Pernod Ricard
- ---------- -------------------------------------------------------------------------------------- -------------------
2.12       HONG KONG
- ---------- -------------------------------------------------------------------------------------- -------------------
           Seagram C.I. (Taiwan) Company Limited (see further Schedule 10                         Pernod Ricard
           (Outstanding Matters)) (90% Class A, 99.9% Class B
           shares owned by Vivendi subsidiary)
- ---------- -------------------------------------------------------------------------------------- -------------------







                                                                                           
2.13       HUNGARY
- ---------- -------------------------------------------------------------------------------------- -------------------
           Seagram Hungary Ltd (100%)                                                             Pernod Ricard
- ---------- -------------------------------------------------------------------------------------- -------------------
2.14       ITALY
- ---------- -------------------------------------------------------------------------------------- -------------------
           Seagram Italia S.p.A. (100%)                                                           Pernod Ricard
- ---------- -------------------------------------------------------------------------------------- -------------------
           Seagram Global Markets Group Srl. (100%)                                               Pernod Ricard
- ---------- -------------------------------------------------------------------------------------- -------------------
2.15       ISRAEL
- ---------- -------------------------------------------------------------------------------------- -------------------
           International Distillers of Israel Limited (100%)                                      Pernod Ricard
- ---------- -------------------------------------------------------------------------------------- -------------------
2.16       NETHERLANDS
- ---------- -------------------------------------------------------------------------------------- -------------------
           Globalex B.V. (100%)                                                                   Pernod Ricard
- ---------- -------------------------------------------------------------------------------------- -------------------
           Matcommerce B.V. (100%)                                                                Pernod Ricard
- ---------- -------------------------------------------------------------------------------------- -------------------
           Seagram Nederland B.V. (100%)                                                          Pernod Ricard
- ---------- -------------------------------------------------------------------------------------- -------------------
2.17       PHILIPPINES
- ---------- -------------------------------------------------------------------------------------- -------------------
           Seagram Philippines Inc (99.9%)                                                        Pernod Ricard
- ---------- -------------------------------------------------------------------------------------- -------------------
2.18       POLAND
- ---------- -------------------------------------------------------------------------------------- -------------------
           Seagram Polska Sp.zo.o (100%)                                                          Pernod Ricard
- ---------- -------------------------------------------------------------------------------------- -------------------
2.19       PORTUGAL
- ---------- -------------------------------------------------------------------------------------- -------------------
           Sandeman & Ca. LDA (75%)                                                               Pernod Ricard
- ---------- -------------------------------------------------------------------------------------- -------------------
           Sarano & Companhia (100%)                                                              Pernod Ricard
- ---------- -------------------------------------------------------------------------------------- -------------------
           Seagram Portugal - Producao E Comerciao de Bebidas Lda (100%)                          Pernod Ricard
- ---------- -------------------------------------------------------------------------------------- -------------------
2.20       RUSSIA
- ---------- -------------------------------------------------------------------------------------- -------------------
           Silver Age LLC (100%)                                                                  Diageo
- ---------- -------------------------------------------------------------------------------------- -------------------
           Universal Distribution LLC (100%)                                                      Diageo
- ---------- -------------------------------------------------------------------------------------- -------------------
           Master Distributors LLC (100%)                                                         Diageo
- ---------- -------------------------------------------------------------------------------------- -------------------
2.21       SINGAPORE
- ---------- -------------------------------------------------------------------------------------- -------------------
           Associated Liquor Distributors (S) Pte Ltd (100%)                                      Pernod Ricard
- ---------- -------------------------------------------------------------------------------------- -------------------
           Seagram Asia Pacific (100%)                                                            Pernod Ricard
- ---------- -------------------------------------------------------------------------------------- -------------------
2.22       SLOVAKIA
- ---------- -------------------------------------------------------------------------------------- -------------------
           Seagram Slovakia s.r.o (100%)                                                          Pernod Ricard
- ---------- -------------------------------------------------------------------------------------- -------------------
2.23       SOUTH AFRICA
- ---------- -------------------------------------------------------------------------------------- -------------------
           Seagram Africa (Pty) Ltd (100%)                                                        Diageo
- ---------- -------------------------------------------------------------------------------------- -------------------
2.24       SPAIN
- ---------- -------------------------------------------------------------------------------------- -------------------
           Sandeman-Coprimar S.A. (100%)                                                          Diageo
- ---------- -------------------------------------------------------------------------------------- -------------------
           Chibros S.A. (100%)                                                                    Diageo
- ---------- -------------------------------------------------------------------------------------- -------------------
           Comercial Seagram Espana S.A. (100%)                                                   Diageo
- ---------- -------------------------------------------------------------------------------------- -------------------
2.25       SWEDEN
- ---------- -------------------------------------------------------------------------------------- -------------------
           Seagram Nordic AB (100%)                                                               Diageo
- ---------- -------------------------------------------------------------------------------------- -------------------
2.26       SWITZERLAND
- ---------- -------------------------------------------------------------------------------------- -------------------
           Seagram (Switzerland) Ltd (99.9%)                                                      Diageo
- ---------- -------------------------------------------------------------------------------------- -------------------
2.27       TURKEY
- ---------- -------------------------------------------------------------------------------------- -------------------
           Seagram Anadolou (100%)                                                                Pernod Ricard
- ---------- -------------------------------------------------------------------------------------- -------------------
           Seagram Icki Dagitum (100%)                                                            Pernod Ricard
- ---------- -------------------------------------------------------------------------------------- -------------------
2.28       UKRAINE
- ---------- -------------------------------------------------------------------------------------- -------------------
           Seagram Ukraine Limited                                                                Pernod Ricard
- ---------- -------------------------------------------------------------------------------------- -------------------
2.29       UNITED KINGDOM
- ---------- -------------------------------------------------------------------------------------- -------------------
           Agnew (Tyneside) Limited (100%)                                                        Pernod Ricard
- ---------- -------------------------------------------------------------------------------------- -------------------
           Diageo Sub 1 (formerly Page & Sandeman Limited) (100%)                                 Pernod Ricard
- ---------- -------------------------------------------------------------------------------------- -------------------
           Diageo Sub 2 (formerly Robertson Bros & Co (Port & Sherry Shippers) Ltd) (100%)        Pernod Ricard
- ---------- -------------------------------------------------------------------------------------- -------------------
           Erfield Limited (100%)                                                                 Pernod Ricard
- ---------- -------------------------------------------------------------------------------------- -------------------
           Rigrun Limited (100%)                                                                  Pernod Ricard
- ---------- -------------------------------------------------------------------------------------- -------------------
           Sarano & Co Limited (100%)                                                             Pernod Ricard
- ---------- -------------------------------------------------------------------------------------- -------------------
           Seagram European Customer Services Limited (100%)                                      Pernod Ricard
- ---------- -------------------------------------------------------------------------------------- -------------------
           Seagram Retail Limited (100%)                                                          Pernod Ricard
- ---------- -------------------------------------------------------------------------------------- -------------------




                                       98


                                                                                           
           Treat Venture (UK) Limited (100%)                                                      Diageo
- ---------- -------------------------------------------------------------------------------------- -------------------
2.30       UNITED STATES OF AMERICA
- ---------- -------------------------------------------------------------------------------------- -------------------
           Antique Distributing Company, Inc (100%)                                               Diageo
- ---------- -------------------------------------------------------------------------------------- -------------------
           Seagram Sales Corporation (100%)                                                       Diageo
- ---------- -------------------------------------------------------------------------------------- -------------------
           Madison Distributors, Inc. (100%)                                                      Diageo
- ---------- -------------------------------------------------------------------------------------- -------------------
           Premium Beverages, Inc. (100%)                                                         Diageo
- ---------- -------------------------------------------------------------------------------------- -------------------
           Diane Distillers, Inc. (100%)                                                          Diageo
- ---------- -------------------------------------------------------------------------------------- -------------------
           Nancy Flavors Corporation (100%)                                                       Diageo
- ---------- -------------------------------------------------------------------------------------- -------------------
           Hawe Holding Corporation (100%)                                                        Diageo
- ---------- -------------------------------------------------------------------------------------- -------------------
           Harold Realty Corporation (100%)                                                       Diageo
- ---------- -------------------------------------------------------------------------------------- -------------------
           KenAGRA, Inc. (100%)                                                                   Diageo
- ---------- -------------------------------------------------------------------------------------- -------------------
           Treat Venture LLC                                                                      Diageo
- ---------- -------------------------------------------------------------------------------------- -------------------
2.31       URUGUAY
- ---------- -------------------------------------------------------------------------------------- -------------------
           Dafinel S.A. (100%)                                                                    Pernod Ricard
- ---------- -------------------------------------------------------------------------------------- -------------------
           Seagram Del Uruguay S.A. (100%)                                                        Pernod Ricard
- ---------- -------------------------------------------------------------------------------------- -------------------






                                       99



                                   SCHEDULE 7
                        ON-SALE AND VENTURE TRANSACTIONS




                                                                                                                           EXPECTED
                                                                                                                           CLOSING
         VENTURE BRANDS                        SELLER(S)                      PURCHASER(S)                  SIGNING DATE     DATE
         ------------------------------------- ------------------------------ ----------------------------- -------------- ---------
                                                                                                          
1.       Oddbins                               Diageo Venture Bermuda         Societe d'Investissement      10/08/01       04/01/02
                                               Limited and Pernod Ricard SA   d'Aquitaine SA (COPEGEF)
- -------- ------------------------------------- ------------------------------ ----------------------------- -------------- ---------
2.       Seagrams Mixers                       Treat Venture LLC              The Coca-Cola Company         07/05/02       14/06/02
- -------- ------------------------------------- ------------------------------ ----------------------------- -------------- ---------
3.       Four Roses                            Treat Venture LLC              Kirin Brewery Company         04/10/01       19/02/02
         Henry McKenna
- -------- ------------------------------------- ------------------------------ ----------------------------- -------------- ---------
4.       Dufres (Chile)                        Seagram de Chile S.A.          Vina Tarapaca                                Sold
         Red Seal (Chile)                                                                                                  Locally -
         Toconao (Chile)                                                                                                   March 02
- -------- ------------------------------------- ------------------------------ ----------------------------- -------------- ---------
5.       Chemineaud (Venezeula only)           Licorerias Unidas S.A.         Distilerias Unidas S.A.       29/08/02       29/08/02
         Manager
         Diplomatico
- -------- ------------------------------------- ------------------------------ ----------------------------- -------------- ---------
6.       Raposeira                             Selviac Amsterdam B.V.  and    Shaw Clifte Associates        09/07/02       21/08/02
                                               Pernod Ricard SA
- -------- ------------------------------------- ------------------------------ ----------------------------- -------------- ---------
7.       Mumm Sekt                             Diageo Venture Bermuda         Domkeller GmbH                17/09/01       16/01/02
         Matheus Muller                        Limited and Pernod Ricard SA   (Rotkaeppchen)
         Matheus Muller Sekt
         Jules Mumm Selection
- -------- ------------------------------------- ------------------------------ ----------------------------- -------------- ---------
8.       Silver Age (Russia)                   Silver Age LLC                 Agro Holding                  13/03/02       TBD
- -------- ------------------------------------- ------------------------------ ----------------------------- -------------- ---------







                                                                                                                           EXPECTED
                                                                                                                           CLOSING
         VENTURE BRANDS                        SELLER(S)                      PURCHASER(S)                  SIGNING DATE     DATE
         ------------------------------------- ------------------------------ ----------------------------- -------------- ---------
                                                                                                          
9.       Sandeman                              Diageo plc, Selviac            Sogrape Holdings SGPS SA      07/12/01       18/06/02
         Robertson's                           Amsterdam BV, Pernod Ricard
         Capa Negra                            SA, Iberian Vintners SL,
         Capa Real                             IW Investments SA
         Confradeiro
         Fine Rick Madeira
         Imperial
         Imperial Tawny Port
         Partners
         Quinta Do Confradeiro
         Rain Water Madeira
         Terracos
- -------- ------------------------------------- ------------------------------ ----------------------------- -------------- ---------
10.      Rene Briand                           Seagram Italia S.p.A.          Torino Distillati S.r.l       24/07/02       03/09/02
         Piave
         Gemma D'Uva
- -------- ------------------------------------- ------------------------------ ----------------------------- -------------- ---------
11.      Adams                                 Treat Venture Holdings         White Rock Distilleries Inc.  29/07/02       01/08/02
         Adams Antique                         Ltd/Treat Venture LLC
         Adams Private Stock
         Canadian Hunter
         Indigo
         Kolomyka
         Melchers Very Mild
         Mount Royal / Mount Royal Light
         Premium Deluxe
- -------- ------------------------------------- ------------------------------ ----------------------------- -------------- ---------
12.      OVD                                   Seagram UK and Treat (UK)      William Grant & Sons Ltd.                    14/10/02
         VAT 19                                Venture Ltd.
         Wood's
- -------- ------------------------------------- ------------------------------ ----------------------------- -------------- ---------
13.      Maschio                               Seagram Italia S.p.A.          Cantine Cooperative Riunite   01/10/02       01/10/02
         Gran Festa                                                           S.c.a.r.l.
         Incrocio Manzoni
         Refosco
- -------- ------------------------------------- ------------------------------ ----------------------------- -------------- ---------
14.      Chatelle Napoleon (Australia)                                                                                     TBD
- -------- ------------------------------------- ------------------------------ ----------------------------- -------------- ---------


                                      101




                                                                                                                           EXPECTED
                                                                                                                           CLOSING
         VENTURE BRANDS                        SELLER(S)                      PURCHASER(S)                  SIGNING DATE     DATE
         ------------------------------------- ------------------------------ ----------------------------- -------------- ---------
                                                                                                          
15.      Paul Masson Brandy                    Treat Venture Holdings         Barton                        TBD            TBD
                                               Limited
- -------- ------------------------------------- ------------------------------ ----------------------------- -------------- ---------
16.      30 Degrees High (China)                                              Chinese JV Partner                           TBD
         D'Accord (China)
         Fontaine (China)
         Summer Palace (China)
- -------- ------------------------------------- ------------------------------ ----------------------------- -------------- ---------
17.      Centenario (Costa Rica)               Treat Venture LLC              Waked                         20/12/02       TBD
         Ron Rico (Costa Rica)
- -------- ------------------------------------- ------------------------------ ----------------------------- -------------- ---------
18.      Burnetts White Satin (except Japan)   Seagram United Kingdom         Heaven Hill Distilleries      23/08/02       23/08/02
                                               Limited and PR NewCo 5         Inc.
                                               Limited
- -------- ------------------------------------- ------------------------------ ----------------------------- -------------- ---------
19.      Martinazzi (Italy)                    Seagram Italia                 German Buyer                  TBD            TBD
- -------- ------------------------------------- ------------------------------ ----------------------------- -------------- ---------
20.      Sabra                                 International Distillers of                                  TBD            TBD
                                               Israel
- -------- ------------------------------------- ------------------------------ ----------------------------- -------------- ---------




                                      102



                                   SCHEDULE 8
                   FIA IDENTIFIED SALE AND PURCHASE AGREEMENTS


1.   The JES Seagram Venture Assets and Pernod Ricard Assets Sale and Purchase
     Agreement entered into by JES, Treat Venture LLC and Lawrenceburg
     Distillers & Importers LLC and dated 21 December 2001.

The JES Pernod Ricard On-Sale Assets Sale and Purchase Agreement entered into by
Austin, Nichols & Co., Incorporated and JES and dated 21 December 2001.

The Contribution Agreement entered into by Gramet Holding Corp., JES and Treat
Venture LLC and dated 21 December 2001.

The Burnett's White Satin Asset Purchase Agreement entered into by Seagram
United Kingdom Limited and PR Newco 5 Limited and dated 21 December 2001.

The OVD Asset Purchase Agreement entered into by Seagram United Kingdom Limited
and Treat (UK) Venture Limited and dated 21 December 2001.

The Passport Asset Purchase Agreement entered into by Chivas Brothers Limited
and PR Newco 5 Limited and dated 21 December 2001.

The Nikolai transfer letter agreement entered into by PR Newco 5 Limited and JES
and dated 21 December 2001.




                                   SCHEDULE 9
        SETTLEMENT OF FRAMEWORK AND IMPLEMENTATION AGREEMENT OBLIGATIONS

                                     PART 1

1.   DEFINITIONS

                  In this Schedule, the following words and expressions have the
                  following meanings:

1.1               AUGUST 2002 AGREEMENT: the agreement dated 7 August 2002 made
                  between the parties amending the Framework and Implementation
                  Agreement;

1.2               JES/LDI AGREEMENT: the JES Seagram Venture Assets and Pernod
                  Ricard Assets Sale and Purchase Agreement made between JES,
                  Treat Venture LLC, and Lawrenceburg Distillers & Importers LLC
                  dated 21 December 2001;

1.3               MARCH 2002 AGREEMENT: the agreement dated 21 March 2002 made
                  between the parties amending the Framework and Implementation
                  Agreement;

1.4               ONGOING ITEMS: those matters which are described in paragraph
                  3.1 below;

1.5               OUTSTANDING ITEMS: those matters which are described in
                  paragraph 4.1 below;

1.6               RESTRUCTURING COSTS: the meaning given in the Framework and
                  Implementation Agreement;

1.7               SETTLEMENT ITEMS: those matters which are taken into account
                  in the items which are set out in the numbered rows 1 and 6 to
                  11 of Column 1 of the table in Part 2 of this Schedule;

1.8               SETTLED RESTRUCTURING COSTS: Restructuring Costs excluding any
                  Restructuring Costs comprised in the Outstanding Items;

1.9               SMWC: Shared Monetary Working Capital as defined in and for
                  the purposes of the Framework and Implementation Agreement;

1.10              SPECIAL ITEMS: those matters referred to in the appendix to
                  the March 2002 Agreement and which are described in the
                  numbered rows 2 to 5 of Column 1 of the table in Part 2 of
                  this Schedule.

SETTLEMENT ITEMS

1.11              Pernod Ricard hereby agrees to pay, on its own behalf and on
                  behalf of its Affiliates, the amounts set out in Column 3 of
                  the table in Part 2 of this Schedule in respect of the
                  Settlement Item set out opposite each amount and Diageo agrees
                  that it receives such amounts, on its own behalf and on behalf
                  of its Affiliates, in each case, in accordance with the
                  provisions of the relevant agreement set out in the footnote
                  to the table.

1.12              Diageo hereby agrees to pay, on its own behalf and on behalf
                  of its Affiliates, the amounts set out in Column 2 of the
                  table in Part 2 of this Schedule in respect of the Settlement
                  Item set out opposite each amount and Pernod Ricard agrees
                  that it receives, on its own behalf and on behalf of its
                  Affiliates, in each case, in accordance with the provisions of
                  the relevant agreement set out in the footnote to the table.



1.13              The payments referred to in paragraphs numbered 2.1 and 2.2
                  shall be in full and final settlement of all amounts payable
                  in respect of the Settlement Items and the parties agree that
                  such amounts shall not be subject to further verification
                  whether by audit or otherwise. No amounts taken into account
                  in the Special Items described in the numbered rows 2 to 4 of
                  Column 1 of the table in Part 2 of this Schedule shall be
                  treated as part of Shared Tax Cost.

1.14              The parties agree that the payment made pursuant to paragraph
                  2.1 in respect of the Settlement Item in numbered row 6 of
                  Column 1 of the table in Part 2 of this Schedule:

1.14.1            is in full and final settlement of any adjustment required to
                  be made pursuant to the Framework and Implementation Agreement
                  in respect of the Special Items;

1.14.2            shall be treated as part of the settlement made between the
                  parties in relation to SMWC pursuant to the Framework and
                  Implementation Agreement; and

1.14.3            shall be made on 10 January 2003.

1.15              Any payments to be made under paragraphs 2.1 and 2.2, other
                  than those referred to in paragraph 2.4, shall be made on 31
                  January 2003.

ONGOING ITEMS

1.16              For the purposes of this Schedule, Ongoing Items shall mean:

1.16.1            Occupation Costs and Mitigation Expenses (as defined in Clause
                  15.2 of this Agreement) relating to the Risk Properties
                  referred to in the US section of the Market Plan that are
                  comprised in Restructuring Costs incurred by Diageo (or
                  Affiliates of Diageo) as calculated in accordance with Clause
                  15.2 of this Agreement.

1.16.2            Restructuring Costs incurred at any time by Jointly-owned
                  Entities.

1.17              The parties agree that they will make, or procure that their
                  Affiliates make, appropriate payments in full and final
                  settlement of those Ongoing Items pursuant to the relevant
                  provisions of the Framework and Implementation Agreement and
                  the JES/LDI Agreement within 10 Business Days of receipt of
                  notification that payment has been made.

OUTSTANDING ITEMS

1.18              For the purposes of this Schedule, Outstanding Items shall
                  mean adjustment payments in relation to:

1.18.1            profits (or losses) arising from the sale of inventory
                  relating to Diageo Assets or Pernod Ricard Assets where the
                  selling entity is either the other party (or an Affiliate of
                  the other party) or a Jointly-owned Entity whether pursuant to
                  paragraph 1 of Schedule 6 to the Framework and Implementation
                  Agreement or otherwise;

1.18.2            the purchase price paid by Diageo (or any Affiliate of Diageo)
                  to acquire inventory relating to Diageo Assets or by Pernod
                  Ricard (or any Affiliate of Pernod Ricard) to acquire
                  inventory relating to Pernod Ricard Assets from the other
                  party (or an Affiliate of the other party) or a Jointly-owned
                  Entity pursuant to clause 16 of the Framework and
                  Implementation Agreement; and



                                       2

1.18.3            the amount of the aggregate net surplus acquired or net
                  deficit assumed in respect of the Company Plans (as defined in
                  the Framework and Implementation Agreement) and determined in
                  accordance with clause 38.2(B) of the Framework and
                  Implementation Agreement.

1.19              The parties agree:

1.19.1            to use reasonable endeavours to agree, in good faith, the
                  actual amounts of all the Outstanding Items and the mechanism
                  by which such amounts should be settled on or before 31 March
                  2003;

1.19.2            that they shall each provide to the other such information as
                  may be reasonably requested of them to allow the other party
                  to verify the amount of the Outstanding Items;

1.19.3            that they will make, or procure that their Affiliates make,
                  appropriate payments in full and final settlement of those
                  Outstanding Items in respect of which they have reached
                  agreement within 10 Business Days of such agreement pursuant
                  to the relevant provisions of the Framework and Implementation
                  Agreement and the JES/LDI Agreement;

1.19.4            that if they fail to reach agreement in respect of any of the
                  Outstanding Items they will endeavour to resolve such dispute
                  in accordance with the provisions of the Framework and
                  Implementation Agreement.

1.20              For the avoidance of doubt, any final settlement of the
                  Outstanding Items shall be made pursuant to the relevant
                  provisions of the Framework and Implementation Agreement, the
                  JES/LDI Agreement and related agreements and not pursuant to
                  the provisions of this Agreement.

1.21              The parties agree that the provisions of the Framework and
                  Implementation Agreement (including, without limitation, the
                  provisions of clause 16 (Wrong Pocket Assets and Liabilities),
                  clause 17 (Shared Assets and Shared Liabilities), clause 18
                  (SMWC and Employee Benefit Adjustment), Part D (Supervisory
                  Committee), clause 38.3 (Disputes), clause 53 (Arbitration),
                  and Schedule 6 (Financial Provisions) (including such
                  provisions as extended or modified by any other agreement
                  between the parties or their Affiliates) shall apply in order
                  to determine and establish the nature and extent of the
                  Outstanding Items and the parties to whom and by whom payment
                  should be made.

GALAXY AND VANDELA COSTS

1.22              The table in Part 3 of this Schedule shows the disposal costs
                  that have been incurred or will be incurred by the parties and
                  their Affiliates in relation to the disposal of Seagram
                  Venture Assets and Pernod Ricard On-Sale Assets (in each case
                  as defined in the Framework and Implementation Agreement).

1.23              The parties shall procure that such costs are recharged:

1.23.1            in a case where the disposal was made by a Jointly-owned
                  Entity, to that Jointly-owned Entity;

1.23.2            in a case where the disposal was made by Diageo (or an
                  Affiliate of Diageo) and Pernod Ricard (or an Affiliate of
                  Pernod Ricard), to the relevant disposing entities in the
                  Diageo Proportion and the Pernod Ricard Proportion.



                                       3

RESTRUCTURING COSTS

                  The payments made pursuant to this Schedule are in full and
                  final settlement of all adjustments pursuant to the Framework
                  and Implementation Agreement and the JES/LDI Agreement for
                  Restructuring Costs.

AUDIT

                  The amounts of any Ongoing Items, Outstanding Items and any
                  costs referred to in paragraph 5.1 may, at the request of
                  either party, be subject to an audit. The scope of such audit,
                  and the rights and obligations of the parties and their
                  respective advisers in relation to it, shall be governed by
                  audit procedures which the parties shall endeavour to agree,
                  in good faith, as soon as reasonably practicable after such
                  request.



                                       4


                                     PART 2
                                      TABLE

    PAYMENTS TO BE MADE BETWEEN DIAGEO, PERNOD RICARD AND THEIR AFFILIATES(1)



                                         1                                              2                          3
- --------------------------------------------------------------------------- -------------------------- ------------------------
                                                                                   DIAGEO PLC             PERNOD RICARD S.A.
                                   SETTLEMENT ITEM                             US$ (UNLESS STATED)        US$ (UNLESS STATED)
- --------------------------------------------------------------------------- -------------------------- ------------------------
                                                                                                
RESTRUCTURING COSTS
- --------------------------------------------------------------------------- -------------------------- ------------------------
1. Settled Restructuring Costs(2)                                                  (8,759,000)                 8,759,000
- --------------------------------------------------------------------------- -------------------------- ------------------------
SPECIAL ITEMS
- --------------------------------------------------------------------------- -------------------------- ------------------------
2. Brazil - indirect tax litigation and compliance provision                       (16,198,000)                16,198,000
- --------------------------------------------------------------------------- -------------------------- ------------------------
3. India - excise tax provision                                                    (8,891,000)                 8,891,000
- --------------------------------------------------------------------------- -------------------------- ------------------------
4. Argentina - provisions for stamp duty, social security,                         2,151,000 AR$             (2,151,000) AR$
impairment of assets etc.
- --------------------------------------------------------------------------- -------------------------- ------------------------
5. Korea - long term receivables                                                   (13,685,000)                13,685,000
- --------------------------------------------------------------------------- -------------------------- ------------------------
6. SPECIAL ITEMS (TOTAL)(3)                                                       US$(38,774,000)             US$38,774,000
                                                                                  + AR$2,151,000            + AR$(2,151,000)
- --------------------------------------------------------------------------- -------------------------- ------------------------
7. Trading balances(4)                                                              11,373,000                (11,373,000)
- --------------------------------------------------------------------------- -------------------------- ------------------------
8.  Brazilian and other venture brands - settlement in respect
of 60.9% of value of venture brands held by Seagram do Brasil(5)                    3,045,000                 (3,045,000)
- --------------------------------------------------------------------------- -------------------------- ------------------------
9. Additional assets/wrong pocket assets - adjustments in
relation to the reallocation of additional assets and wrong pocket assets            (849,000)                   849,000
- --------------------------------------------------------------------------- -------------------------- ------------------------
10. Don Julio - overhead allocation due from Tequila
Don Julio to Seagram de Mexico                                               (22,000,000 Mexican peso)   22,000,000 Mexican peso
- --------------------------------------------------------------------------- -------------------------- ------------------------
11. Wrong pocket inventory - venture brands(6)                                     (2,593,000)                 2,593,000
- --------------------------------------------------------------------------- -------------------------- ------------------------



- -------------
(1) Figures in brackets denote payments to be made; figures not in brackets
denote payments to be received.

(2) Adjustment payments made pursuant to clause 17.2 of the Framework and
Implementation Agreement and clauses 7.3 and 7.4 of the JES/LDI Agreement

(3) Adjustment payments made pursuant to clause 18 of and Schedule 6 to the
Framework and Implementation Agreement and clause 9 of the JES/LDI Agreement (in
each case, as amended by the memorandum of agreement dated 21 March 2002)

(4) Adjustment payments made pursuant to clause 18 of and Schedule 6 to the
Framework and Implementation Agreement and clause 9 of the JES/LDI Agreement (as
amended by the March 2002 Agreement ad the August 2002 Agreement)

(5) Payment in respect of contingent receivable due to Treat Venture LLC
pursuant to the Contribution Agreement made between Gramet Holding Corp, JES and
Treat Venture LLC

(6) Adjustment payment made pursuant to clause 16 of the Framework and
Implementation Agreement




                                     PART 3

                            GALAXY AND VANDELA COSTS



                                                DIAGEO (OR AFFILIATEES)     PERNOD RICARD (OR AFFILIATES)       TOTAL
                                                          US$                            US$                     US$
- --------------------------------------------- ---------------------------- ------------------------------- -----------------
                                                                                                 
Amount to be invoiced to brand owning
entities                                              20,271,000                      3,211,000
- --------------------------------------------- ---------------------------- ------------------------------- -----------------
Amount accrued/incurred by brand owning
entities                                               8,018,000
- --------------------------------------------- ---------------------------- ------------------------------- -----------------
                                                      28,289,000                      3,211,000              31,500,000
- --------------------------------------------- ---------------------------- ------------------------------- -----------------



                                       6

                                  SCHEDULE 10
                               OUTSTANDING MATTERS


1.   The obtaining of an order from a court of competent jurisdiction declaring
     the share certificate numbered 5B0001 representing 18 million Ordinary
     Shares of (Y)50 each in the capital of Kirin-Seagram Limited ("the Missing
     KSL Shares") to be void and permitting the issue by Kirin-Seagram Limited
     of a replacement share certificate representing the Missing KSL Shares, and
     the transfer to Lawrenceburg Distillers and Importers, LLC of the shares in
     Kirin-Seagram Limited held by JES.

The transfer of (a) share(s) in the capital of Seagram Export Foreign Sales
Corporation from a nominee shareholder and the issue of a new share certificate
to Treat Venture LLC in connection with the transfer of Seagram Export Foreign
Sales Corporation by Joseph E. Seagram & Sons, Inc. to Treat Venture LLC.

The obtaining of any shares and/or assets of Chatelle (Pty) Ltd. which were held
by Vivendi Universal S.A. prior to the Closing, in accordance with Section 2.3
of the Vivendi Sale Agreement. The sale of such shares in Chatelle (Pty) Ltd. to
a third party (the proceeds of such sale to be a Joint Asset).

2.   The completion of the transfer from an Affiliate of Vivendi Universal to
     Pernod Ricard and Diageo and/or Affiliates of them, of some of its the
     shares in Seagram C.I. (Taiwan) Company Limited, the liquidation of that
     company or alternatively arranging for Vivendi Universal or one of its
     Affiliates to retain ownership of Seagram C.I. Taiwan) Company Limited.

The execution of the inter-company debt assignment agreement in the Agreed Form
as soon as practicable following execution of this Agreement and the
implementation of such assignment in accordance with its terms.

The sale to a third party or third parties of the Sabra brand (and any sale
proceeds are to be a Joint Asset), or the agreement of an alternative allocation
of the Sabra brand between the parties.

3.   The sale of Seagram de Costa Rica S.A. and Alimentos Preparados S.A. to a
     third party buyer, or the agreement of an alternative allocation of the
     companies and their assets between the parties.





                                   SCHEDULE 11
                               TREASURY MANAGEMENT


GENERAL PRINCIPLES

1        Cash on Deposit

Where any Jointly-owned Entity has a cash surplus, the Managing Party shall
invest such surplus to obtain the best market rate reasonably available.

2        Offshore Government Cash Restrictions

Where it is not legally possible to move cash out of a jurisdiction, cash shall
be transferred to a local Affiliate of the party to whom such cash is due.

3        Responsibility for Closing Down Operations Post-Execution of this
         Agreement

In connection with the implementation of the Market Plans, the Managing Party
shall:

3.1 close down any bank facilities that are in the name of the Jointly-owned
Entity (including, without limitation, credit support facilities and
guarantees);

3.2 withdraw any comfort letters executed by the Managing Party for or on behalf
of the Jointly-owned Entity (and inform the Non-Managing Party to withdraw any
comfort letters executed by the Non-Managing Party for or on behalf of the
Jointly-owned Entity);

3.3      close down any bank accounts that are in the name of the Jointly-owned
         Entity; and

3.4      provide written confirmation to the Non-Managing Party of the
         completion of any of the actions described in Sections 3.1 to 3.3 of
         this Schedule 11.

4        Treasury Representative

Each of the respective Treasury departments of Diageo and Pernod Ricard shall
notify to the other party's Treasury department the name and telephone number of
their respective representative responsible for Treasury matters in connection
with this Agreement or the Framework and Implementation Agreement (the "Treasury
Representative"). Each party may change its respective Treasury Representative
at any time by written notice to the other party's Treasury Representative.


5        Intercompany Indebtedness - Write-offs/Write-ups

If there is a dispute between Diageo and Pernod Ricard, on the one hand, and a
liquidator or other person (other than an Affiliate of Diageo or Pernod Ricard,
except where such Affiliate is acting in its capacity of as a liquidator)
responsible for completion of local actions required for the implementation of a
Market Plan in respect of any loan balances of a Jointly-owned Entity, (i) any
write-off and/or write-up of such loan balances shall be agreed in writing by
Diageo and Pernod Ricard and (ii) any such write-off and/or write-up shall be a
Joint Liability.

EQUITY MANAGEMENT PRINCIPLES

Where Diageo, Pernod Ricard and/or their respective Affiliates are required to
recapitalize or otherwise inject equity into any Jointly-owned Entity:



                                       8

     o    Diageo and Pernod Ricard shall agree (i) the amount of such
          recapitalization or equity injection (the "Recapitalization Payment")
          and (ii) the date on which Diageo and Pernod Ricard or their
          respective Affiliates shall make such Recapitalization Payment (the
          "Recapitalization Date");

     o    Diageo or its Affiliates shall pay 60.9% of the total amount of any
          Recapitalization Payment required to be paid to a Jointly-owned Entity
          and Pernod Ricard or its Affiliates shall pay 39.1% of any
          Recapitalization Payment required to be paid to a Jointly-owned Entity
          without regard to the number of interests or shares of the
          Jointly-owned Entity held by Diageo or Pernod Ricard or their
          respective Affiliates;

     o    Diageo and Pernod Ricard or their respective Affiliates shall make any
          Recapitalization Payment on the applicable Recapitalization Date. If
          either Diageo or Pernod Ricard (a "Defaulting Party") fails to timely
          make such Recapitalization Payment, interest shall accrue in
          accordance with Section 11.5 of this Agreement;

     o    A Jointly-owned Entity shall not distribute or otherwise pay any cash
          to a Defaulting Party or any of its Affiliates unless and until any
          cash owed by the Jointly-owned Entity to the non-Defaulting Party has
          been distributed or paid to the non-Defaulting Party;

     o    Where both Diageo and Pernod Ricard have made a Recapitalization
          Payment, a Jointly-owned Entity shall thereafter distribute or
          otherwise pay any cash owed to either or both of Diageo and Pernod
          Ricard and/or their respective affiliates in the Diageo Proportion or
          the Pernod Ricard Proportion, respectively;

     o    One the same day that a Jointly-owned Entity receives a
          Recapitalization Payment, the Managing Party of such Jointly-owned
          Entity shall confirm, or shall cause the liquidator of such
          Jointly-owned Entity to confirm, in a written notice to Diageo and
          Pernod Ricard's respective Treasury Representatives that such
          Jointly-owned Entity has received the Recapitalization Payment; and

     o    In the first quarter of 2003, Diageo and Pernod Ricard shall agree a
          process by which Pernod Ricard or an Affiliate of Pernod Ricard shall
          pay to Diageo an amount equal to 39.1% of any Recapitalization Payment
          required to be made by Treat Venture LLC to any Jointly-owned Entity
          held directly or indirectly by Treat Venture LLC.


DEBT MANAGEMENT PRINCIPLES

Where any Jointly-owned Entity pays cash to Diageo or Pernod Ricard or their
respective Affiliates in satisfaction of any debt owed to Diageo or Pernod
Ricard or their respective Affilaties (a "Debt Repayment"):

     o    The applicable Jointly-owned Entity shall make such Debt Repayment as
          soon as reasonably possible;

     o    The applicable Jointly-owned Entity shall make such Debt Repayment in
          the currency of the jurisdiction of formation of such Jointly-owned
          Entity;

     o    On the same day that a Jointly-owned Entity makes a Debt Repayment,
          the Managing Party of such Jointly-owned Entity shall confirm, or
          shall cause the liquidator of such Jointly-owned Entity to confirm, in
          a written notice to Diageo and Pernod Ricard's respective


                                       9


          Treasury Representatives the amount of any Debt Repayment made to
          either of Diageo or Pernod Ricard or their respective Affiliates; and

     o    In the first quarter of 2003, Diageo and Pernod Ricard shall agree a
          process by which a Jointly-owned Entity that is directly or indirectly
          held by Treat Venture LLC shall make a Debt Repayment to Treat Venture
          LLC or to Diageo, Pernod Ricard or their respective Affiliates.





                                       10

                                   SCHEDULE 12
                         SOFIA IMPLEMENTATION PRINCIPLES

(a)               Save where expressly provided otherwise in, or determined
                  pursuant to, this Agreement, the economic benefit and burden
                  (both past and future) of the Diageo Assets shall be for the
                  account of Diageo and/or its Affiliates.

(b)               Save where expressly provided otherwise in, or determined
                  pursuant to, this Agreement, the economic benefit and burden
                  (both past and future) of the Pernod Ricard Assets shall be
                  for the account of Pernod Ricard and/or its Affiliates.

(c)               Save where expressly provided otherwise in, or determined
                  pursuant to, this Agreement, the economic benefit and burden
                  (both past and future) of the Pernod Ricard On-sale Assets and
                  the Seagram Venture Assets (including the cost of acquisition
                  of those assets from Vivendi and any net proceeds of sale of
                  any of those assets) shall be for the account of Diageo and
                  Pernod Ricard (and/or their respective) Affiliates in
                  proportion to the Diageo Proportion and the Pernod Ricard
                  Proportion respectively.

(d)               Subject to Schedule 5 of this Agreement, all transactions
                  effected to implement the terms of this Agreement shall be
                  effected in such a way as to minimise the Shared Tax Cost
                  suffered by the parties and their respective Affiliates and
                  the Shared Tax Cost shall be borne by Diageo and Pernod Ricard
                  in the Diageo Proportion and the Pernod Ricard Proportion
                  respectively.

(e)               Where, as a consequence of the other SOFIA Implementation
                  Principles the FIA Implementation Principles and other terms
                  of this Agreement or the Framework and Implementation
                  Agreement, the economic benefit and burden of any costs or
                  liabilities is to be borne jointly by the parties, the parties
                  shall seek to minimise such costs or liabilities.

(f)               Except as expressly set out in this Agreement, all
                  transactions effected to implement the terms of this Agreement
                  shall be effected in such a way as to maintain the principle
                  that the aggregate consideration ultimately paid by the
                  parties shall be borne by Diageo and Pernod Ricard in the
                  Diageo Proportion and the Pernod Ricard Proportion
                  respectively.

(g)               All transactions effected to implement the terms of this
                  Agreement shall be effected in such a way as to prevent each
                  party from having access to commercially sensitive or
                  confidential information relating, where that party is Diageo,
                  to the Pernod Ricard Assets or the Pernod Ricard On-sale
                  Assets and, where that party is Pernod Ricard, to the Diageo
                  Assets, except where (i) it is mutually agreed that
                  information may be shared or (ii) to the extent that specific
                  provision is made in this Agreement provided that, in respect
                  of every category of Acquired Asset, in either case, all
                  applicable anti-trust laws and principles shall be observed.

(h)               All transactions effected to implement the terms of this
                  Agreement in sharing either the economic benefit and burden
                  (both past and future) of the Pernod Ricard On-sale Assets and
                  Seagram Venture Assets in accordance with principle (c) above
                  of Shared Liabilities in accordance with Clause 6 or Historic
                  Tax Liabilities of whatsoever nature relating to any of the
                  Acquired Assets not recovered from Vivendi or its Affiliates
                  (as envisaged by Schedule 5) shall be effected in such a way
                  as to take fully into account both the tax effects of the
                  items being shared and the tax consequence of any transactions
                  effected to achieve such sharing (the intent here being that
                  any such sharing is done on a full after tax basis and by
                  Diageo in the Diageo Proportion and


                                       11


                  by Pernod Ricard in the Pernod Ricard Proportion) PROVIDED
                  THAT this principle shall not apply to Taxes on payments made
                  pursuant to Clauses 4 to 6, 10 or 18.2.




                                       12


         Signed by                          )
                                            )        /s/ Shaun Parker
         as attorney for and on behalf of   )
         DIAGEO PLC                         )




         Signed by                          )
                                            )        /s/ Pierre Pringuet
         for and on behalf of               )
         PERNOD RICARD S.A.                 )



                                       13

EX-4.10

                                                                    EXHIBIT 4.10

COMPANY SECRETARIAL DEPARTMENT                  [DIAGEO LOGO]

                                                DIAGEO PLC
                                                8 Henrietta Place
                                                London W1G 0NB

                                                Tel: +44 (0)20 7927 5200
                                                Fax: +44 (0)20 7927 4708



7 March 2002


Lord Blyth of Rowington
Windmill House
Finwood Road
Rowington
Warwickshire CV35 7DF                                                   Personal


Dear James

Following a review of remuneration received by the Chairmen of major UK-based
companies, the Board has decided to increase your total remuneration to Pound
Sterling 450,000 with effect from 1st January 2002.

As discussed, we have agreed that it is appropriate for this additional
remuneration to be in the form of Diageo shares, in order to demonstrate further
the alignment of your interests with those of the shareholders. However, we have
received legal advice that this would require a change in the Company's Articles
- - which would not practical until the next AGM in October 2002.

You have, accordingly, undertaken as follows:

1.   You will apply the after tax amount of the increase in remuneration (Pound
     Sterling 150,000), and of any future increase to the purchase of ordinary
     shares in Diageo, pursuant to a standing order with Stocktrade. You will
     instruct Stocktrade to advise the Company Secretary's office of each such
     purchase, as your agent, so that the appropriate notification can be made
     to the London Stock Exchange.

2.   You will retain such shares until such time as you retire from the Company
     or cease to be a director for any other reason.

3.   The next review of your fees will not be before 1st January 2003 and any
     such review will be dependent on any material change of the remuneration of
     Non Executive Chairmen.

4.   Finally, it is confirmed that the role of Chairman of Diageo is expected to
     need an average of three days per week of your time.





Please confirm that the above accurately reflects our discussion, and that you
agree to be legally bound by the above undertakings, by signing and returning
the enclosed copy of this letter to me.


Yours sincerely

/s/ Roger Myddelton


ROGER MYDDELTON
COMPANY SECRETARY


Signed: /s/ Blyth                               DATE: 7 MARCH 2002
                                                      ------------

EX-4.11

                                                                    EXHIBIT 4.11


                                                Diageo plc
                                                8 Henrietta Place
                                                LONDON W1G 0NB

                                                Tel  +44 207 927 5274
                                                Fax  +44 207 927 4637

Lord Blyth of Rowington
Windmill House
Finwood Road
Rowington
Warwickshire CV35 7DF



10 September 2003


Dear James


Further to the Board's decision on 3 September 2003, I confirm that your
appointment as Chairman of Diageo has been extended for a further period of two
years.

Your appointment will therefore be for a period of seven years starting on 1
July 2000 terminable, as before, by either side giving six months notice in
writing at any time or, if the Board wishes to terminate the arrangement, by
payment of six months' fee in lieu of notice.

All other terms of your appointment set out in the letters to you dated 7
October 1999 and 7 March 2002 remain unchanged.

Please confirm that you agree to this revised term by signing and returning the
enclosed copy of this letter to me.


Yours sincerely


/s/ Susanne Bunn

SUSANNE BUNN
Company Secretary





SIGNED /s/ Blyth                                DATE  15 September 2003
       -----------------------------                  -----------------

EX-4.12

                                                                    EXHIBIT 4.12





                                     [DATE]







                                 (1) DIAGEO PLC




                                     - AND -




                                   (2) [NAME]







                                SERVICE AGREEMENT






AN AGREEMENT made as of [DATE]


BETWEEN:-

(1)  DIAGEO PLC (23307) whose registered office is at 8 Henrietta Place, London
     W1M 9AG and

(2)  [NAME]


IT IS AGREED as follows:-


1.   INTERPRETATION

1.1  In this Agreement words and expressions listed in Schedule 1 shall have the
     meanings set out in that Schedule. The Schedules to this Agreement are an
     integral part of this Agreement and references to this Agreement shall
     include references thereto.


2.   APPOINTMENT

2.1  Diageo shall employ you as [ROLE] (or in such other reasonably comparable
     capacity of equivalent status as Diageo may reasonably require) on the
     terms set out in this Agreement.

2.2  Your principal place of work shall be at Diageo's London offices or such
     other location in the UK as Diageo may reasonably require from time to time
     and you shall undertake any travel necessary for the proper performance of
     your duties.

2.3  For the purposes of the Act your previous employment with relevant
     companies counts as part of your continuous employment by Diageo and your
     continuous employment accordingly began on [DATE].


3.   SALARY

3.1  You shall receive a basic annual salary of [SALARY] which shall be payable
     by equal monthly instalments in arrears on the 27th day of each calendar
     month or such salary as may be agreed with you and confirmed to you in
     writing by, or on behalf of, Diageo in its sole discretion from time to
     time. Salaries are normally reviewed annually on 1 October.

3.2  You shall not be entitled to any fees in respect of any directorship of any
     Group Company and to give effect to this clause you shall forthwith pay to
     Diageo or procure that Diageo is paid all such fees received.



                                       2






4.   INCENTIVE PLANS

4.1  In addition to your basic annual salary, you will be eligible to
     participate in the following incentive schemes as exist from time to time
     (or their substantially similar replacements), subject always to their
     respective rules:

     4.1.1 The Diageo Economic Profit Incentive Plan;

     4.1.2 The Diageo Senior Executive Share Option Plan;

     4.1.3 The Diageo Long Term Incentive Plan;

     4.1.4 The Diageo Profit Share scheme


5.   OTHER BENEFITS

5.1  During your employment:-

     5.1.1. You will participate in the Diageo Flexible Benefits Programme. This
            comprises a Flexible Allowance which will be reviewed annually. Your
            current flexible benefits allowance is [SUM]. With this allowance
            you may receive a combination of any of the following benefits:-

            o    holidays

            o    company car(s)

            o    private fuel

            o    financial counselling

            o    private medical insurance

            The Flexible Benefits Programme allows you to influence the mix and
            level of benefits you receive from Diageo, within specified limits.
            Whilst Diageo will, of course, take any preference you have into
            account, the ultimate decision as to the package you receive and as
            to the availability of any cash supplement is entirely at Diageo's
            discretion. Diageo will offer you a total package which you may
            choose to accept. The offer may be revised from time to time, but
            shall not be reviewed more frequently than once a year.



                                       3





     5.1.2  In accordance with Diageo's policy on medical examination, you will
            be entitled to a regular medical examination and test by a medical
            practitioner nominated by Diageo. The company can also require you
            at any time to submit to medical examinations from time to time
            with such frequency as is reasonable. In respect of such medical
            examination the result may, subject to the provisions of the Access
            to Medical Reports Act 1988 (as applicable), be disclosed to Diageo.

     5.1.3  Diageo shall provide cover under a personal accident insurance
            scheme at such level as the company shall in its absolute
            discretion decide.

     5.1.4  Diageo shall pay premiums to a long term disability scheme of an
            amount to provide cover at such level as the company shall in its
            absolute discretion decide.

     5.1.5  Diageo will provide you with a taxable product allowance not
            exceeding [SUM] per annum. If you are employed for part of a full
            calendar year you will receive a pro rated allowance.

     5.1.6  Diageo shall pay on your behalf, the annual subscription fees for
            one professional body relevant to your employment.

5.2  Any benefits available under clauses 5.1.1, 5.1.3 and 5.1.4 above are
     subject to the rules of the relevant scheme from time to time in force.


6.   PENSION AND RETIREMENT

6.1  You will be eligible for membership of the Senior Executive Pension Plan
     under the Diageo Pension Scheme. Your membership will be subject to the
     rules of the Pension Scheme as amended from time to time.

6.2  To the extent that your benefits under the Pension Scheme are restricted by
     the operation of the "earnings cap", the balance will be provided by
     Diageo.

6.3  The Pension Scheme is contracted out of the State Earnings Related Pension
     and a contracting out Certificate is in force.

6.4  Your employment shall terminate on your Normal Retirement Date unless
     otherwise agreed.


7.   DUTIES

     7.1.1  You shall perform the duties and exercise the powers consistent with
            your role and the status which from time to time may reasonably be
            assigned to or vested in you by Diageo and shall devote the whole of
            your time, ability and attention to your duties under this Agreement
            during normal office hours and such other



                                       4




            times as may reasonably be required for the proper performance of
            your duties and shall carry out such duties in a competent manner.

     7.1.2. You shall at all times use all reasonable endeavours to promote the
            interests of Diageo and all Group Companies and shall not knowingly
            or willingly do or permit to be done anything to the prejudice, loss
            or injury of Diageo or any Group Company.

     7.1.3. You shall not be entitled to any additional remuneration for work
            performed outside normal office hours.

7.2  Diageo shall be entitled at any time to require you, if reasonably
     necessary, to perform services consistent with your role and status not
     only for Diageo but also for any Group Company including, if so required,
     acting as a director of any Group Company.

7.3  You shall whenever reasonably requested keep Diageo promptly and fully
     informed, in writing if so requested, of your conduct of the business or
     affairs of Diageo and any Group Company and provide such explanations of
     your conduct as may reasonably be required.

7.4  Notwithstanding the provisions of clause 7.1 Diageo may at any time
     following the giving of notice by you to terminate this Agreement, and for
     such period as it may specify not exceeding the length of notice given,
     cease to provide work for you. In that event, during such period, the other
     provisions of this Agreement including those relating to your remuneration
     and benefits shall continue to have full force and effect and you will
     continue to be required to hold yourself available to assist with answering
     any questions or dealing with any other matters relating to your work, but
     you shall not be entitled to access to any premises of Diageo or any Group
     Company otherwise than directly connected with your duties as a director of
     a Group Company.

7.5  Subject to clause 8, during the Term you shall not without the prior
     written consent of Diageo engage in any activities, public office or other
     occupation outside your employment which may in the reasonable opinion of
     Diageo detract from the proper and timely performance of your duties under
     this Agreement.


8.   CONFLICTS OF INTEREST AND DEALINGS IN SECURITIES

8.1  During your employment you shall not whether alone or jointly with or on
     behalf of any other person, firm or company and whether as principal,
     partner, manager, employee, contractor, director, consultant, investor or
     otherwise (except as a representative or nominee of Diageo or any Group
     Company or otherwise with the prior consent in writing of Diageo) be
     engaged, concerned or interested in any other business which:-

     8.1.1  is wholly or partly in competition with any business carried on by
            Diageo or any Group Company; or

     8.1.2  as regards any goods or services is a supplier to or customer of
            Diageo or any Group Company.



                                       5






     This clause shall not prevent you from holding (directly or through
     nominees) by way of bona fide personal investment any units of any
     authorised unit trust and up to three per cent. of the issued shares,
     debentures or other securities of any class of any company whose shares are
     listed on a recognised investment exchange within the meaning of the
     Financial Services Act 1986 or dealt in the Alternative Investment Market.

8.2  You acknowledge that you shall not enter into any transaction which
     contravenes the insider dealing provisions contained in Part V of the
     Criminal Justice Act 1993.

8.3  You undertake at all times to comply both with the provisions and with the
     spirit of the Model Code from time to time of The London Stock Exchange and
     any share dealing rules adopted from time to time by Diageo. Under Rule 6
     of the Model Code, the person to whom notice should be given and from whom
     acknowledgement must be received before you may deal in securities shall be
     Diageo's Chairman from time to time or such other person as shall be
     notified to you. You also acknowledge that under the provisions of the
     Model Code you must seek to ensure compliance with the Model Code by
     persons connected with you (within the meaning of section 346 of the
     Companies Act 1985) including, without limitation, your spouse and
     dependent children, and by investment managers acting on your behalf or on
     behalf of connected persons. You undertake to seek to procure that dealings
     by or on behalf of such persons are in compliance with the Model Code.


9.   HOLIDAY PAY

9.1  For the calendar year in which your employment commences you shall be
     entitled to your annual holiday entitlement calculated on a pro rata basis.
     During any notice period under clause 12.1 you may be required to use up
     any accrued untaken holiday. Without prejudice to the above, on the
     termination of your employment you shall either be entitled to salary in
     lieu of any outstanding pro rata holiday entitlement or be required to
     repay to Diageo any salary received in respect of holiday taken in excess
     of your pro rata holiday entitlement, such salary to be calculated on the
     basis of 1/261 the basic annual salary payable to you under clause 3.1 for
     each day of outstanding or excess holiday entitlement as appropriate.


9.2  If this Agreement is terminated under clause 12.5, you will not be entitled
     to any payment in lieu of holiday not taken at the Termination Date.


10.  ILLNESS OR ACCIDENT

10.1 If you are absent from your duties as a result of sickness or injury:-

     10.1.1 for a period of six days or less you will on your return to work on
            request, complete and produce a self certificate; or



                                       6






     10.1.2 for a period of 7 days or more you will, on request, produce medical
            certificates

     to Diageo in respect of this absence.

10.2 Diageo will pay or procure payment of 100% of basic annual salary during
     the first twelve months of certificated absence and 75% thereafter until
     the Termination Date, subject to confirmation by an independent medical
     adviser that you are unfit to carry out your duties. Diageo will determine
     how this benefit level is provided.

10.3 Diageo shall pay you all sums payable by way of statutory sick pay in
     accordance with the legislation in force at the time of absence and any
     remuneration paid shall be deemed to be inclusive of statutory sick pay.


11.  EXPENSES

     You shall be entitled to be reimbursed all reasonable out-of-pocket
     expenses (including hotel, travelling and entertainment expenses) incurred
     by you in the proper performance of your duties, subject to the production
     of such receipts or other evidence as Diageo may reasonably require.


12.  TERMINATION

12.1 Your employment under the terms of this Agreement commenced on the
     Effective Date and shall continue (subject to the provisions of this
     Agreement) until terminated by either party giving to the other notice
     under the provisions of this clause 12.

12.2 You may terminate this agreement at any time by giving Diageo six months
     notice in writing. Following receipt of notice under this clause 12.2,
     Diageo may:

     12.2.1 require you to work out your period of notice, subject to clause
            7.4;

     or

     12.2.2 agree with you that your employment shall cease before the end of
            the period of notice.

12.3 Diageo may terminate this agreement at any time by giving you twelve
     months' previous notice in writing (or such shorter period as will take you
     to your Normal Retirement Date for pension purposes). Unless otherwise
     agreed, not later than fourteen days after the service of such notice
     Diageo shall pay you (subject in each case to tax and National Insurance)
     compensation equal to twelve months' pay at your basic annual salary plus
     the value for twelve months of Full Benefits as defined in clause 12.4
     provided that the total sum paid under this clause 12.3 shall not exceed an
     amount equal to the total of your basic annual salary and the value of Full
     Benefits for the period from the date notice of termination is given until
     your Normal Retirement Date.



                                       7






     Diageo may at its option pay all or part of the sum payable under this
     clause 12.3 into the Pension Scheme in order to augment your benefits under
     the Scheme, subject always to Inland Revenue Limits and the approval of the
     Trustees of the Pension Scheme. The extent of the augmentation purchased by
     the sum paid shall be determined by the actuaries to the Pension Scheme.

     From the date of payment under this clause this agreement shall come to an
     end, except for those provisions which are expressed to continue, you will
     cease to be obliged to work out your period of notice and, subject to the
     provisions of Schedule 2, you will be free to take up other employment.

12.4 In clause 12.3, "Full Benefits" shall mean benefits under the Economic
     Profit Incentive Plan, the Long Term Incentive Plan and the Senior
     Executive Stock Option Plan, annual accrual of pension benefit, life
     insurance, benefits under the Flexible Benefits Programme and all other
     benefits of employment whatsoever. For certainty and ease of calculation,
     the parties irrevocably agree that the amount payable under clause 12.3 in
     respect of the value of Full Benefits for twelve months shall be an amount
     equal to your basic annual salary at the date notice of termination is
     given.

12.5 Notwithstanding the provisions of clauses 12.1 to 12.3 Diageo shall be
     entitled, by notifying you in writing, to terminate this Agreement and your
     employment forthwith without any payment by way of compensation, damages or
     otherwise if you shall:-

     12.5.1 commit any act of gross misconduct;

     12.5.2 commit any material breach of any of the terms or conditions of this
            Agreement including any wilful neglect or unreasonable refusal to
            carry out any of your duties provided that, if such breach is
            capable of remedy, you shall have failed to remedy it within such
            reasonable period as is specified in a written notice from Diageo
            pointing out the breach and requiring it to be remedied;

     12.5.3 have a bankruptcy order made against you or shall compound with or
            enter into any voluntary arrangements with your creditors; or

     12.5.4 be disqualified from holding office in Diageo or any other company
            under the Insolvency Act 1986 or the Directors Disqualification Act
            1986 or be disqualified or disbarred from membership of, or after
            due process be found to have committed any serious disciplinary
            offence by, any professional or other public body of standing,
            which on reasonable grounds undermines the confidence of the Board
            in your continued employment with Diageo.

12.6 You shall resign from the board of any Group Company of which you are
     director:-

     12.6.1 if at any time during the Term you are prevented from performing
            your duties whether through long-term sickness (for a continuous
            period of twelve months) or because Diageo has exercised its



                                        8






            rights under clause 7.4 or otherwise howsoever and Diageo requires
            you to resign; and in any event

      12.6.2 on the Termination Date,

12.7  The proper exercise by Diageo of its right of termination under clause
      12.5 shall be without prejudice to any other rights or remedies which
      Diageo or any Group Company may have or be entitled to exercise against
      you.

12.8  If your employment under this Agreement shall be terminated for the
      purpose of reorganisation reconstruction or amalgamation for whatever
      reason and you shall be offered employment with any concern or
      undertaking resulting from this reconstruction or amalgamation on terms
      and conditions no less favourable than the terms of this Agreement then
      you shall have no claim against Diageo in respect of the termination of
      your employment hereunder.

12.9  You shall not at any time during any period when you are required to cease
      the performance of your duties under clause 7.4 or after the Termination
      Date make any public statement in relation to Diageo or any Group Company
      or any of their officers or employees. You shall not without Diageo's
      consent after the Termination Date represent yourself as being employed by
      or connected with Diageo or any Group Company.

12.10 All credit, charge and expense cards and all books, papers, drawings,
      designs, documents, records and computer software kept or made by or in
      your possession or control relating to the businesses of Diageo and any
      Group Company and all other property of Diageo or such Group Company
      including the car(s) are and remain the property of Diageo or such Group
      Company and you shall deliver all such items in your possession custody or
      control at the Termination Date immediately to Diageo with the exception
      that this clause does not apply to Board Minutes and agendas of any Group
      Company relating to a period during which you were a director of such
      Group Company which shall nevertheless remain confidential.


13.  CONFIDENTIALITY

13.1  You acknowledge that during your employment you will in the performance of
      your duties become aware of trade secrets and other confidential
      information relating to Diageo, the Group Companies, their businesses and
      its or their current or prospective customers, suppliers, agents,
      distributors or franchisees.

13.2  Without prejudice to your general duties at common law in relation to such
      trade secrets and other confidential information, you shall not during the
      Term or at any time after the Termination Date disclose or communicate to
      any person or persons or make use (other than in the proper performance of
      your duties under this Agreement or for the purposes of obtaining legal,
      accountancy or pension advice or unless ordered to do so by the Inland
      Revenue or any regulatory authority or a court of competent jurisdiction)
      and shall use all reasonable endeavours to prevent any disclosure,
      communication or use by any other person, of any such trade secrets or
      confidential information.



                                       9





13.3 The provisions of this clause shall cease to apply to information or
     knowledge which comes into the public domain otherwise than by reason of
     your default.


14.  PROTECTION OF BUSINESS INTERESTS

     You shall be bound by the provisions of Schedule 2.


15.  INTELLECTUAL PROPERTY RIGHTS

15.1 To the extent permitted by law, all rights in patents, copyright,
     registered design right, design right, trade marks, confidential
     information and know how which arise in relation to Diageo's business
     during the Term shall belong to Diageo absolutely.

15.2 You shall, at the request and expense of Diageo, execute such documents and
     do such things as may be required to vest such rights in Diageo or to
     provide evidence of such vesting as the case may be. Furthermore you
     irrevocably authorise Diageo as your attorney for the purposes of this
     clause to make use of your name and to sign and to execute any documents or
     do anything on your behalf.


16.  DISCIPLINARY AND GRIEVANCE PROCEDURE

16.1 Any disciplinary matters affecting you will be dealt with by the Chief
     Executive of Diageo. There are no specific disciplinary rules affecting
     you. Should you wish to appeal against any disciplinary decision you should
     submit your appeal in writing to the Chairman of the Remuneration Committee
     of the Board whose decision on such appeal shall be final.

16.2 If you wish to seek redress for any grievance relating to your employment
     you should submit your grievance in writing to the Chairman of the
     Remuneration Committee of the Board whose decision on such grievance shall
     be final.

16.3 In order to investigate a complaint against you, Diageo reserves the right
     to suspend you on your full current annual salary and benefits and to
     exclude you from any premises of Diageo and any Group Company for so long
     as it is reasonably necessary to carry out a proper investigation and to
     hold any appropriate disciplinary hearings.



                                       10





17.  NOTICES

     Any notice to be given under this Agreement shall be in writing. Notices
     may be served by either party by personal service or by recorded delivery
     or by first class post addressed to the other party (in the case of Diageo,
     to the Company Secretary) or by leaving such notice at (in the case of
     Diageo) its registered office for the time being and (in your case) your
     last known address. Any notice given shall be deemed to have been served at
     the time at which the notice was personally served or, if sent by recorded
     delivery, at the time of delivery as recorded or, if sent by first class
     post, on the second working day after posting or, in the case of being left
     as appropriate at the registered office or last known address, the date on
     which it was so left.


18.  DEDUCTIONS

     For the purposes of the Act and otherwise you consent to the deduction from
     your wages of any sums owing by you to Diageo at any time and you also
     agree to make any payment to Diageo of any sums owing by you to Diageo upon
     demand by Diageo at any time. This clause is without prejudice to the
     rights of Diageo to recover any sums or balance of sums owing by you to
     Diageo by legal proceedings.


19.  GENERAL

19.1 The information in this Agreement constitutes a written statement of your
     terms of employment in accordance with the provisions of the Act.

19.2 This Agreement (including its Schedules) constitute the entire and only
     legally binding agreement between the parties relating to your employment
     by Diageo or any Group Company and replaces any previous employment
     agreements or arrangements. No variation to this Agreement shall be
     effective unless made in writing signed by or on behalf of Diageo and
     expressed to be such a variation.

19.3 No failure or delay by Diageo or you in exercising any remedy, right, power
     or privilege under or in relation to this Agreement shall operate as a
     waiver of the same nor shall any single or partial exercise of any remedy,
     right, power or privilege preclude any further exercise of the same or
     exercise of any other remedy, right, power or privilege.

19.4 No waiver by Diageo of any of the requirements of this Agreement or of any
     of its rights under this Agreement shall have effect unless given in
     writing and signed by or on behalf of Diageo. No waiver of any particular
     breach of the provisions of this Agreement shall operate as a waiver of any
     repetition of that breach.

19.5 If any provision of this Agreement shall be, or become, void or
     unenforceable for any reason within any jurisdiction, this shall affect
     neither the validity of that provision within any other jurisdiction nor
     any of the remaining provisions of this Agreement.



                                       11






19.6 This Agreement and the rights and obligations of the parties hereto shall
     be governed by and construed in accordance with the laws of England and the
     English Courts and Tribunals shall have exclusive jurisdiction.


AS WITNESS the hands of the parties hereto or their duly authorised
representatives.


SIGNED by                                   )
a Director or Secretary duly                )
authorised for and on behalf of             )
Diageo plc                                  ) ..................................



Executed as a DEED and DELIVERED
by .........................                )
in the presence of:-                        ) ..................................


.............................................

Witness name  .........................................

Address  ..............................................

         ..............................................

Occupation ............................................



                                       12







                                   SCHEDULE 1


"the Act"                     Employment Rights Act 1996;


"Effective Date"              [DATE];


"Group Company"               any company which from time to time is:-

                              (a) a subsidiary of Diageo;

                              (b) a holding company of Diageo; or

                              (c) a subsidiary of any such holding company; or

                              (d) any company in which Diageo or any company as
                              described in (a) (b) or (c) above holds directly
                              or indirectly 30% or more of the ordinary share
                              capital or any company which holds 30% or more of
                              the ordinary share capital of Diageo or any
                              company as described in (a) (b) or (c) above;

                              "subsidiary" and "holding company" have the
                              meanings attributed to them by section 736 of the
                              Companies Act 1985.


"Normal Retirement Date"      The date of your 62nd birthday


"Pension Scheme"              Diageo Pension Fund


"Term"                        The period between the Effective Date and the day
                              on which your employment under this Agreement
                              ceases for any reason.


"Termination Date"            The date on which your employment under this
                              Agreement terminates for whatever reason.


Words and phrases which are not defined in this Agreement but which are defined
in the Act, the Companies Act 1985 or the Insolvency Act 1986 shall be construed
as having those meanings.



                                       13






                                   SCHEDULE 2


PROTECTION OF BUSINESS INTERESTS

In this Schedule the following words and expressions shall have the following
meanings:-


"Business"                            the business or businesses of Diageo or
                                      any Group Company in or with which you
                                      have been materially involved or
                                      concerned at any time during the period
                                      of twelve months prior to the Termination
                                      Date;


"Directly or indirectly"              acting either alone or jointly with or on
                                      behalf of any other person, firm or
                                      company, whether as principal, partner,
                                      manager, employee, contractor, director,
                                      consultant, investor or otherwise;


"Key Personnel"                       any person who is at the Termination Date
                                      or was at any time during the twelve
                                      months prior to the Termination Date
                                      employed or engaged in a Level 2 or
                                      higher grade and with whom you have had
                                      material dealings during the course of
                                      your employment under this Agreement;


"Prospective Customer, Client"        any person firm or company who has been
                                      engaged in negotiations, with which you
                                      have been materially and personally
                                      involved, with Diageo or any Group
                                      Company with a view to purchasing
                                      Relevant Goods and Services from Diageo
                                      or any Group Company in the twelve months
                                      prior to the Termination Date;


"Relevant Area"                       any country in which you have been
                                      engaged in the Business;


"Relevant Customer, Client"           any person firm or company who at any
                                      time during the twelve months prior to
                                      the Termination Date was a customer,
                                      client of Diageo or any Group Company,
                                      with whom or which you directly,
                                      regularly dealt in a material way or for
                                      whom or which you were responsible on
                                      behalf of Diageo or any Group Company at
                                      any time during the said period (or the
                                      Term if shorter);



                                       14






"Relevant Goods and Services"         any goods and services competitive with
                                      those supplied by Diageo or any Group
                                      Company at any time during the twelve
                                      months prior to the Termination Date in
                                      the manufacture or supply of which you
                                      were directly and materially involved or
                                      concerned at any time during the said
                                      period;


"Relevant Period"                     the period of twelve months from the
                                      Termination Date less any period during
                                      which you have not been provided with
                                      work pursuant to clause 7.4 of this
                                      Agreement;


"Relevant Supplier"                   any person firm or company who at any
                                      time during the twelve months prior to
                                      the Termination Date was a supplier of
                                      any goods or services (other than
                                      utilities and goods or services supplied
                                      for administrative purposes) to Diageo or
                                      any Group Company and with whom or which
                                      you had personal dealings during the
                                      course of your employment under this
                                      Agreement in a material way; and


1.   You shall not without the prior written consent of Diageo directly or
     indirectly at any time during the Relevant Period:-

     (a)  solicit away from Diageo or any Group Company; or

     (b)  endeavour to solicit away from Diageo or any Group Company, any Key
          Personnel.


2.   You shall not without the prior written consent of Diageo directly or
     indirectly at any time within the Relevant Period:-

     2.1  solicit the custom of any Relevant Customer, Client or Prospective
          Customer, Client in respect of any Relevant Goods or Services.

     2.2  (a) interfere; or

          (b)  endeavour to interfere,

     with the continuance of supplies to Diageo and/or any Group Company (or the
     terms relating to those supplies) by any Relevant Supplier, save that the
     procuring of services from such Relevant Supplier shall not, of itself,
     constitute interference.



                                       15






3.   You shall not without the prior written consent of Diageo (such consent not
     to be unreasonably withheld) directly or indirectly at any time within the
     Relevant Period engage or be concerned or interested in any business within
     the Relevant Area which in either case (a) competes or (b) will at any time
     during the Relevant Period compete with the Business to an extent which is
     reasonably considered by Diageo to be commercially significant. This clause
     shall not prevent you from holding (directly or through nominees) by way of
     bona fide personal investment any units of any authorised unit trust and up
     to three per cent. of the issued shares, debentures or securities of any
     class of any company whose shares are listed on a recognised investment
     exchange within the meaning of the Financial Services Act 1986 or dealt in
     the Alternative Investment Market.


4.   You acknowledge and agree that you shall be obliged to draw the provisions
     of this Schedule to the attention of any third party who may at any time
     before, or within the Relevant Period after, the termination of your
     employment hereunder offer to engage you in any capacity and for whom or
     with whom you intend to work.



                                       16

EX-4.13

                                                                   EXHIBIT 4.13


     EXECUTIVE EMPLOYMENT AGREEMENT

     This executive employment agreement ("Agreement") is made and entered into
     between Diageo North America, Inc. (the "Company") and NAME ("Executive"),
     and sets forth the terms and conditions of Executive's employment with the
     Company.


1.   COMPENSATION

     1.1. SALARY

     Executive's annual base salary shall be SALARY per annum, subject to
     periodic increases in accordance with the Company's Total Rewards
     Compensation Plan, but not subject to any decreases below the base salary
     during the term of this Agreement.

     1.2. INCENTIVE PLAN

     Executive shall continue to be eligible for an annual incentive
     ("Incentive") in accordance with terms and conditions of the Company's
     Economic Profit Incentive Plan (the "Incentive Plan"). Executive's declared
     bonus under the Incentive Plan is xx% of base salary.

     1.3. DIAGEO SENIOR EXECUTIVE SHARE OPTION PLAN

     Executive shall participate in the Senior Executive Share Option Plan in
     accordance with the provisions of that plan.

     1.4. TSR PLAN

     Executive shall participate in the TSR Plan in accordance with the
     provisions of that plan.


2.   BENEFITS

     Executive shall participate in the benefit plans of the Company described
     in Exhibit 1 hereto. Such benefits shall be subject to and governed by the
     terms of the applicable benefits plan.


3.   TERMINATION OF AGREEMENT AND EMPLOYMENT RELATIONSHIP

     This Agreement and Executive's employment relationship with the Company may
     be terminated under the following circumstances:

     3.1  DEATH

     In the event of the death of Executive, this Agreement and the employment
     relationship shall automatically terminate. In such event, the Company's
     sole obligation shall be to pay the legal representative of Executive's
     estate any unpaid portion of the Executive's annual Salary through the date
     of death at the rate in effect at the time of death, and all other amounts
     owed, if any, under any compensation plan of the Company to which Executive
     is entitled as of the date of the Executive's death. Said payments shall be
     made within fifteen (15) days of the death of Executive. In addition, the
     legal representative of Executive's estate shall be paid a prorated
     Incentive to the extent Executive is eligible at the time of death.






     3.2  DISABILITY

     If Executive is absent from or unable to perform the Executive's job duties
     for six (6) months during any twelve (12) month period because Executive is
     physically or mentally incapacitated so as to render Executive incapable of
     performing the Executive's usual and customary duties under this Agreement
     with reasonable accommodation, the Company may terminate this Agreement and
     the employment relationship. In such event, the Company's sole obligation
     shall be to pay Executive any unpaid portion of the Executive's annual
     Salary through the date of termination at the rate in effect at the time
     the disability commenced (and as set forth in the applicable Disability
     Plan), and all other unpaid amounts, if any, under any compensation plan of
     the Company to which Executive is entitled as of the date the disability
     commenced. Said payments shall be made at the time such payments would
     normally have been made. In addition, Executive shall be paid a prorated
     Incentive to the extent Executive is eligible at the time the disability
     commenced.

     3.3  TERMINATION FOR CAUSE BY THE COMPANY

     The Company may terminate this Agreement and the employment relationship
     without notice at any time for Cause. "Cause" shall include (i) gross
     insubordination, (ii) falsification of any work, personnel or company
     records, (iii) unauthorized taking of company funds, property or
     unauthorized charges against the Company's accounts, (iv) refusal to
     perform Executive's duties, (v) gross negligence in the performance of
     Executive's duties, (vi) serious misconduct of any kind, (vii) breach of
     the Diageo NA, Inc. Code of Conduct, (viii) conviction of the Executive of,
     or the entering of a plea of guilty or no contest by the Executive to, a
     felony involving moral turpitude or (ix) any other misconduct by Executive
     which impacts the Executive's ability to effectively perform Executive's
     duties.

     3.4  TERMINATION WITHOUT CAUSE BY EITHER PARTY

     The Company or the Executive may terminate this Agreement and Executive's
     employment without Cause at any time on thirty (30) day's advance written
     notice to the other party.

     3.5  TERMINATION FOR GOOD REASON BY EXECUTIVE

     Executive may terminate this Agreement and the employment relationship for
     Good Reason. "Good Reason" shall mean: (i) elimination of the Executive's
     position without being offered a comparable alternative position (a
     comparable position is an alternative executive level position within xx%
     of target cash compensation); and (ii) a reduction in Executive's Base
     Salary.

     3.6  NOTICE OF TERMINATION

     Any termination of this Agreement and the employment relationship by either
     party hereto shall be communicated by the other in writing in accordance
     with the provisions of Paragraph 14, below.

     3.7  DATE OF TERMINATION

     "Date of Termination" shall mean: (i) if Executive's employment is
     terminated because of death, the date of Executive's death; (ii) if
     Executive's employment is terminated for disability, the date Notice of
     Termination is given; (iii) if Executive's employment is terminated for
     Cause pursuant to Paragraph 3.3, above, the date Notice of Termination is
     given; and (iv) if Executive's employment is terminated pursuant to either
     Paragraph 3.4 or 3.5, above, the date specified in the Notice of
     Termination (which, in either case, shall not be less than thirty (30) days
     from the date such Notice of Termination is given).



                                       2






4.   COMPENSATION UPON TERMINATION

     (a)  If this Agreement and the employment relationship are terminated by
          death or disability of Executive, the Company shall make the payments
          specified in Paragraphs 3.1 and 3.2, above.

     (b)  If this Agreement and the employment relationship are terminated by
          the Company for Cause or by the Executive for other than Good Reason,
          the Company shall pay Executive the unpaid portion of his annual
          Salary through the Date of Termination at the rate in effect at the
          time Notice of Termination is given, and all other unpaid amounts
          under any compensation plan of the Company to which the Executive is
          entitled as of the time of termination and such payments shall be made
          at the time they normally would have been made to Executive. The
          Company shall have no further financial or other obligations to the
          Executive under this Agreement or otherwise.

     (c)  If this Agreement and the employment relationship are terminated by
          the Company without Cause or by Executive for Good Reason, then:

          (i)   the Company shall pay Executive the unpaid portion of his annual
                Salary through the Date of Termination at the rate in effect at
                the time Notice of Termination is given; and

          (ii)  in lieu of any further Salary and Incentive payments to and in
                exchange for a release approved by the Company , the Company
                shall pay a sum equal to twenty four (24) months of Salary
                (including the Notice of Termination period) at the rate in
                effect at the time Notice of Termination is given, such amount
                to be paid, at Executive's sole election, in equal monthly
                installments or a lump sum. Regardless of the option selected,
                Executive will be entitled to Incentive and Bonus Bank according
                to the plan provisions in effect at the time of the Notice of
                Termination; and

          (iii) if the Executive elects installment payments, Executive shall
                continue to participate in Diageo's medical, dental and vision
                plans for a period of twenty four (24) months from the Date of
                Termination or until such time as Executive becomes eligible for
                coverage under another plan, whichever occurs first. The
                Executive's participation will cease in all of the Company's
                other employee benefit plans.

     (d)  Executive shall not be required to mitigate the amount of any payment
          or benefit provided for in this Paragraph 4 by seeking other
          employment or otherwise Except as provided in Paragraph 4(c)(iii),
          above, the amount of any such payments or benefits shall not be
          reduced by any compensation earned by Executive as the result of his
          employment with a subsequent employer or by retirement benefits,
          unless such employment is in violation of Section 6 of this Agreement.


5.   DISCLOSURE AND ASSIGNMENT OF TRADE SECRETS AND CONFIDENTIAL INFORMATION

     Executive agrees that with respect to any and all Trade Secrets,
     Confidential Information and other works made or conceived by the Executive
     while employed by the Company (or within one year of the termination of the
     Executive's employment if based on or related to Trade Secrets or
     Confidential Information), whether solely or jointly with any other person
     or organization, during or after regular hours of employment:



                                       3






     5.1  The Executive will disclose promptly to the Company all such Trade
          Secrets, Confidential Information and other works.

     5.2  The Executive will execute and promptly deliver to the Company (at the
          Company's expense) such written instruments and do such other acts as
          may be required to patent, copyright or otherwise protect such Trade
          Secrets, Confidential Information and other works, and any
          documentation or other materials pertaining thereto, and to vest the
          entire right and title thereof in the Company. All such Trade Secrets,
          Confidential Information and other works, together with any
          documentation or other materials pertaining thereto, shall be
          considered work made for hire and prepared by the Executive within the
          scope of the Executive's employment by the Company.

     5.3  The Company shall have the perpetual and unlimited right, without
          cost, to use in its business and to sublicense and assign, in whole or
          in part, any of such Trade Secrets, Confidential Information or other
          works, and to make, use and sell any and all products, processes,
          research and services derived from any of such Trade Secrets,
          Confidential Information or other works. This includes, but is not
          limited to, using, making and selling products, processes and/or
          services derived from such Trade Secrets, Confidential Information or
          other works.


6.   CONFIDENTIALITY

     In consideration of employment by the Company, Executive agrees that during
     the term of Executive's employment with the Company, and at any time after
     that employment terminates, Executive will not, without the Company's prior
     written consent, disclose to any person or entity or use for any purpose
     any trade secret or confidential or proprietary information of the Company
     unless required to do so by the discharge of the Executive's duties to the
     Company. Upon termination of employment with the Company for any reason,
     Executive shall promptly return to the Company all documents containing any
     trade secret or confidential or proprietary information of the Company.


7.   NON-SOLICITATION AND NON-COMPETE

     Executive agrees that while employed with the Company, and for a period of
     twelve (12) months following the Date of Termination with the Company, he
     shall not, except on behalf of the Company:

     o    solicit the business services of any employee of the Company or its
          affiliates or induce in any manner any employee of the Company or its
          affiliates to terminate his employment or association with the
          Company.

     o    participate in any manner in the negotiation of distribution
          agreements for wine or spirits with any distributors or brokers about
          which the Executive has learned or developed confidential information
          regarding the Company's contracts, policies or negotiation strategies
          or plans

     o    perform executive, sales, marketing, supervisory or consulting
          services for Allied-Domecq, Bacardi, Brown-Forman, and/or
          Anhueser-Busch, or any entity resulting from a merger with or
          combination of the foregoing entities.



                                       4






     Executive recognizes and agree that the foregoing restrictions are
     reasonable and necessary to protect the Company's trade secrets and that
     they do not foreclose him from working in the adult beverages industry but
     only from working in those portions of the industry which will necessarily
     place the Company's trade secrets at the greatest risk of use or
     disclosure.

     To the extent that any of the provisions in paragraphs 5, 6, or 7 are held
     to be overly broad or otherwise unenforceable at the time enforcement is
     sought, Executive agrees that the provisions shall be reformed and enforced
     to the greatest extent permissible by law. Executive further agrees that if
     any provision is held to be enforceable the remaining provisions shall be
     enforced as written.


8.   CERTAIN RELIEF

     The Executive acknowledges that any breach of Paragraphs 5, 6 or 7 of this
     Agreement will cause the Company irreparable harm for which there is no
     adequate remedy at law, and as a result, the Company shall be entitled to
     the issuance of an injunction, restraining order or other equitable relief
     without bond by a Court of competent jurisdiction restraining the Executive
     from committing or continuing any such violation. Any right to obtain an
     injunction, restraining order or other equitable relief hereunder shall not
     be deemed a waiver of any right to assert any other remedy the Company may
     have at law or in equity. If Executive breaches any of the covenants set
     forth in Paragraph 5, 6 or 7 of this Agreement, Executive agrees to pay all
     costs (including reasonable attorney's fees) incurred by the Company in
     establishing that breach and in otherwise enforcing any of the covenants or
     provisions of this Agreement.


9.   RESIGNATION OF OFFICES

     Upon termination of this Agreement and the employment relationship for any
     reason, Executive shall immediately resign from all directorships and
     officerships held in the Company and any entity affiliated with the
     Company.


10.  RETURN OF COMPANY PROPERTY

     Upon termination of this Agreement and the employment relationship for any
     reason, Executive shall promptly return all Company property in his
     possession, including but not limited to, computer hardware/software,
     credit cards, and cellular phones.


11.  INDEMNIFICATION

     The Company shall indemnify Executive in their capacity as an officer or
     director of the Company and its subsidiaries or affiliated companies to the
     fullest extent permitted under the corporate laws of the State of
     Connecticut.


12.  ENTIRE AGREEMENT

     This Agreement contains all the understandings between the parties hereto
     pertaining to the matters referred to herein, and supersedes all
     undertakings and agreements, whether oral or in writing, previously entered
     into by them with respect thereto.


13.  AMENDMENT OR MODIFICATION WAIVER

     No provision of this Agreement may be amended, changed, modified or waived
     unless such amendment, change, modification or waiver is agreed to in
     writing, signed by Executive and by a duly authorized officer of the
     Company. No waiver by any party hereto of any breach by another party
     hereto of any condition or provision of this Agreement to be performed by
     such



                                       5






     other party shall be deemed a waiver of a similar or dissimilar condition
     or provision at the same time, any prior time or any subsequent time.


14.  NOTICES

     Any notice to be given hereunder shall be in writing and shall be addressed
     to the party concerned at the address indicated below or to such other
     address as such party may subsequently give notice of hereunder in writing:

                     Executive:             EXECUTIVE
                                            TITLE
                                            ADDRESS 1
                                            ADDRESS 2

                     Company:               Senior Vice President, HR
                                            Diageo NA, Inc.
                                            6 Landmark Square
                                            Stamford, CT  06901

     Any notice delivered personally or by courier under this Paragraph 14 shall
     be deemed given on the date delivered, and any notice sent by facsimile or
     registered or certified mail, postage prepaid, return receipt requested,
     shall be deemed given on the date the facsimile transmission is completed
     or the return receipt is signed.


15.  SEVERABILITY

     If any provision of this Agreement or the application of any such provision
     to any party or circumstances shall be determined by any court to be
     invalid and unenforceable to any extent, the remainder of this Agreement or
     the application of such provision to such person or circumstances other
     than those to which it is so determined to be invalid and unenforceable,
     shall not be affected thereby, and each provision hereof shall be validated
     and shall be enforced to the fullest extent permitted by law.


16.  SURVIVORSHIP

     The provisions set forth in Paragraphs 3, 4, 5, 6, 7, 8, and 9 hereof shall
     remain in full force and effect after the termination of this Agreement
     notwithstanding the termination of this Agreement.


17.  SUCCESSORS: NON-ASSIGNABILITY OF AGREEMENT

     Neither this Agreement nor any rights or obligations hereunder may be
     assigned by either party hereto without the express written consent of the
     other, except that this Agreement shall be binding upon and inure to the
     benefit of any successor to the Company, whether by merger, consolidation,
     sale or transfer of assets or otherwise, and any reference herein to the
     Company shall be deemed to include any such successor.


18.  GOVERNING LAW

     This Agreement, and the interpretation thereof, shall be governed by the
     laws of the State of Connecticut without regard to its conflict of law
     rules and shall be deemed to have been made in the State of Connecticut.



                                       6






19.  ARBITRATION

     The Company and Executive mutually consent to the resolution by arbitration
     of all claims or controversies, whether or not arising out of Executive's
     employment or its termination, that Executive may have against the Company,
     or against its directors, officers, employees or agents, or that the
     Company may have against Executive.

     Executive and the Company agree that any arbitration shall be in accordance
     with the then-current employment arbitration procedures of the American
     Arbitration Association before an arbitrator who is licensed to practice
     law in Connecticut. The arbitration shall take place in Stamford,
     Connecticut.


20.  HEADINGS

     All descriptive headings of sections and paragraphs in this Agreement are
     intended solely for convenience, and no provision of this Agreement is to
     be construed by reference to the heading of any section or paragraph.


21.  WITHHOLDINGS

     All payments to Executive under this Agreement shall be reduced by all
     applicable withholdings required by federal, state or local law.




By:___________________________________     Dated:_______________________
EXECUTIVE



Diageo



By:___________________________________     Dated:________________________
NAME
TITLE



                                       7







EXHIBIT 1


                      SUMMARY OF BENEFIT PLANS AND PROGRAMS


RETIREMENT PROGRAMS

o    DIAGEO, NA, INC. SAVINGS 401(K) PLAN: You will be eligible to participate
     on the first day of the month coincident with or following the day you have
     completed one year of service. For more plan details, review the Diageo
     North America, Inc. Savings Plan (401(k)) Summary Plan Description on the
     HR website -- MyLink.

o    DIAGEO, NA, INC. CASH BALANCE PLAN (PENSION): You will be eligible to
     participate on the first day of the month coincident with or following the
     day you have completed one year of service. This is a company-provided
     pension plan and enrollment is automatic. Upon enrollment the company
     contributes 10% of your base salary plus designated pensionable bonus(s)
     into the plan up to the statutory limit of $160,000 per annum.
     Contributions will be credited quarterly with a rate of interest equal to
     the 30-Year Treasury rate.

o    DIAGEO, NA, INC. BENEFIT SUPPLEMENT PLAN: You will be eligible to
     participate in this plan on the first day of the month coincident with or
     following the day you have completed one year of service. Contributions
     credit on any pensionable earnings over $200,000 are credited in an account
     under this non-qualified Plan. The contributions and interest credits are
     the same as the qualified Cash Balance Pension Plan. Since this plan is
     non-qualified, any amounts accrued are not subject to ERISA legislation
     and, as such, are not eligible for direct rollover when distributed.

o    DIAGEO, NA, INC. DEFERRED COMPENSATION PLAN: You will be eligible to
     participate in this plan if you complete and submit the enrollment
     materials within 30 days of your appointment. The plan provides an
     opportunity to defer current compensation on a pre-tax basis.


FINANCIAL PLANNING & SUPPORT PROGRAMS

o    FINANCIAL COUNSELLING: You are entitled to be reimbursed up to a maximum of
     [SUM] per annum for fees charged for services by the Company's financial
     services vendor.

o    ESTATE PLANNING: You are entitled to a one life-time reimbursement of
     estate planning fees, up to a maximum of [SUM].

o    TAX PREPARATION: You are entitled to be reimbursed up to a maximum of [SUM]
     per calendar year for fees charged for services by the Company's financial
     services vendor.


WELFARE BENEFIT PROGRAMS

o    MEDICAL, DENTAL, VISION: You are eligible to participate in the medical,
     dental and vision plans. In addition, you can also participate in the
     Express Pharmacy Service Mail-Order Drug Program.

o    LIFE INSURANCE AND AD&D: You are entitled to participate in Core Benefits
     and/or Buy-up Benefits.

o    DISABILITY INSURANCE:



                                       8






     --   Short Term Disability: Short Term Disability is provided for first six
          months of disability, the first three months at 100% of base pay and
          the next three months at 60% of base pay.

     --   Long Term: Long Term Disability is provided after six months of
          disability. Due to the coverage provisions of the Executive LTD
          programs, we recommend an election coverage of 60%.

     --   Executive Long Term: You will be covered under the Executive Long Term
          Disability Program. The premiums as an active employee will be paid by
          the Company. Details will be sent under separate cover from the
          Executive LTD Insurance Carrier.


OTHER PROGRAMS

o    PERQUISITE ALLOWANCE: You will receive an annual perquisite allowance of
     [SUM] (less applicable withholding taxes).

o    FLEXIBLE SPENDING ACCOUNTS (FSA): You are eligible to participate in the
     FSA Plan and can use Dependent Care Account if your spouse is working full
     time or you have a regularly scheduled day care arrangements with a
     licensed facility.

o    VACATION AND VACATION BUY: You will be entitled to five weeks vacation per
     calendar year. Your first year entitlements will be pro-rated from date of
     hire. You may elect to buy up to an additional week of vacation per
     calendar year.

o    BRAND AMBASSADOR PROGRAM: You will be entitled to receive an allowance of
     [SUM] per quarter, for the purchase of Company brands upon the completion
     of the Quarterly Brand Tutorial program.



                                       9

EX-12.1

                                                                    EXHIBIT 12.1


I, Paul S. Walsh, certify that:

1.   I have reviewed this annual report on Form 20-F of Diageo plc;

2.   Based on my knowledge, this report does not contain any untrue statement of
     a material fact or omit to state a material fact necessary to make the
     statements made, in light of the circumstances under which such statements
     were made, not misleading with respect to the period covered by this
     report;

3.   Based on my knowledge, the financial statements, and other financial
     information included in this report, fairly present in all material
     respects the financial condition, results of operations and cash flows of
     the company as of, and for, the periods presented in this report;

4.   The company's other certifying officer(s) and I are responsible for
     establishing and maintaining disclosure controls and procedures (as defined
     in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the company and have:

     (a)  Designed such disclosure controls and procedures, or caused such
          disclosure controls and procedures to be designed under our
          supervision, to ensure that material information relating to the
          company, including its consolidated subsidiaries, is made known to us
          by others within those entities, particularly during the period in
          which this report is being prepared;

     (b)  Evaluated the effectiveness of the company's disclosure controls and
          procedures and presented in this report our conclusions about the
          effectiveness of the disclosure controls and procedures, as of the end
          of the period covered by this report based on such evaluation; and

     (c)  Disclosed in this report any change in the company's internal control
          over financial reporting that occurred during the period covered by
          the annual report that has materially affected, or is reasonably
          likely to materially affect, the company's internal control over
          financial reporting; and

5.   The company's other certifying officer(s) and I have disclosed, based on
     our most recent evaluation of internal control over financial reporting, to
     the company's auditors and the audit committee of the company's board of
     directors (or persons performing the equivalent functions):

     (a)  All significant deficiencies and material weaknesses in the design or
          operation of internal control over financial reporting which are
          reasonably likely to adversely affect the company's ability to record,
          process, summarize and report financial information; and

     (b)  Any fraud, whether or not material, that involves management or other
          employees who have a significant role in the company's internal
          control over financial reporting.


Date: __ November 2003


                                      /s/ PS Walsh
                                      ----------------------------
                                      Title: Chief Executive
                                      (Principal Executive Officer)

EX-12.2

                                                                    EXHIBIT 12.2



I, Nicholas C. Rose, certify that:

     1.   I have reviewed this annual report on Form 20-F of Diageo plc;

     2.   Based on my knowledge, this report does not contain any untrue
          statement of a material fact or omit to state a material fact
          necessary to make the statements made, in light of the circumstances
          under which such statements were made, not misleading with respect to
          the period covered by this report;

     3.   Based on my knowledge, the financial statements, and other financial
          information included in this report, fairly present in all material
          respects the financial condition, results of operations and cash flows
          of the company as of, and for, the periods presented in this report;

     4.   The company's other certifying officer(s) and I are responsible for
          establishing and maintaining disclosure controls and procedures (as
          defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the company
          and have:

          (a)  Designed such disclosure controls and procedures, or caused such
               disclosure controls and procedures to be designed under our
               supervision, to ensure that material information relating to the
               company, including its consolidated subsidiaries, is made known
               to us by others within those entities, particularly during the
               period in which this report is being prepared;

          (b)  Evaluated the effectiveness of the company's disclosure controls
               and procedures and presented in this report our conclusions about
               the effectiveness of the disclosure controls and procedures, as
               of the end of the period covered by this report based on such
               evaluation; and

          (c)  Disclosed in this report any change in the company's internal
               control over financial reporting that occurred during the period
               covered by the annual report that has materially affected, or is
               reasonably likely to materially affect, the company's internal
               control over financial reporting; and

     5.   The company's other certifying officer(s) and I have disclosed, based
          on our most recent evaluation of internal control over financial
          reporting, to the company's auditors and the audit committee of the
          company's board of directors (or persons performing the equivalent
          functions):

          (a)  All significant deficiencies and material weaknesses in the
               design or operation of internal control over financial reporting
               which are reasonably likely to adversely affect the company's
               ability to record, process, summarize and report financial
               information; and

          (b)  Any fraud, whether or not material, that involves management or
               other employees who have a significant role in the company's
               internal control over financial reporting.


Date: __ November 2003


                                      /s/ NC Rose
                                      -------------------------
                                      Title: Finance Director
                                      (Principal Financial Officer)

EX-13.1

                                                                    EXHIBIT 13.1



                                  CERTIFICATION
            PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
       (SUBSECTIONS (a) AND (b) OF SECTION 1350, CHAPTER 63 OF TITLE 18,
                              UNITED STATES CODE)


     Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a)
and (b) of section 1350, chapter 63 of title 18, United States Code), the
undersigned officer of Diageo plc, a company incorporated under the laws of
England (the "Company"), hereby certifies, to such officer's knowledge, that:

     The Annual Report on Form 20-F for the year ended 30 June 2003 (the
"Report") of the Company fully complies with the requirements of section 13(a)
or 15(d) of the Securities Exchange Act of 1934 and information contained in the
Report fairly presents, in all material respects, the financial condition and
results of operations of the Company.


Dated: __ November 2003


                                      /s/ PS Walsh
                                      ----------------------------
                                      Name: Paul S. Walsh
                                      Title: Chief Executive
                                      (Principal Executive Officer)



     The foregoing certification is being furnished solely pursuant to section
906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350,
chapter 63 of title 18, United States Code) and is not being filed as part of
the Report or as a separate disclosure document.

EX-13.2

                                                                    EXHIBIT 13.2



                                  CERTIFICATION
            PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
       (SUBSECTIONS (a) AND (b) OF SECTION 1350, CHAPTER 63 OF TITLE 18,
                              UNITED STATES CODE)


     Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a)
and (b) of section 1350, chapter 63 of title 18, United States Code), the
undersigned officer of Diageo plc, a company incorporated under the laws of
England (the "Company"), hereby certifies, to such officer's knowledge, that:

     The Annual Report on Form 20-F for the year ended 30 June 2003 (the
"Report") of the Company fully complies with the requirements of section 13(a)
or 15(d) of the Securities Exchange Act of 1934 and information contained in the
Report fairly presents, in all material respects, the financial condition and
results of operations of the Company.


Dated: __ November 2003


                                      /s/ NC Rose
                                      ------------------------------
                                      Name: Nicholas C. Rose
                                      Title: Finance Director
                                      (Principal Financial Officer)



The foregoing certification is being furnished solely pursuant to section 906 of
the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter
63 of title 18, United States Code) and is not being filed as part of the Report
or as a separate disclosure document.

EX-14.1

                                                                    EXHIBIT 14.1


                         CONSENT OF INDEPENDENT AUDITOR

We consent to the incorporation by reference of our report dated 3 September
2003 (except for note 29 (iii) which is as of 26 November 2003) with respect to
the consolidated balance sheets of Diageo plc and subsidiaries as at 30 June
2003 and 30 June 2002, and the related consolidated profit and loss accounts,
consolidated statements of total recognised gains and losses, and consolidated
cash flow statements for each of the years in the three year period ended 30
June 2003, which report appears in the Form 20-F for the year ended 30 June 2003
in the following Registration Statements.


Registration Statement on Form F-3 (File Nos. 333-10410 and 333-14100); and
Registration Statement on Form S-8 (File No. 333-11460); and
Registration Statement on Form S-8 (File No. 333-11462); and
Registration Statement on Form S-8 (File No. 333-9770); and
Registration Statement on Form S-8 (File No. 333-8092); and
Registration Statement on Form S-8 (File No. 333-8094); and
Registration Statement on Form S-8 (File No. 333-8096); and
Registration Statement on Form S-8 (File No. 333-8098); and
Registration Statement on Form S-8 (File No. 333-8090); and
Registration Statement on Form S-8 (File No. 333-8100); and
Registration Statement on Form S-8 (File No. 333-8106); and
Registration Statement on Form S-8 (File No. 333-8102); and
Registration Statement on Form S-8 (File No. 333-8104)



KPMG Audit Plc
Chartered Accountants

London, England

26 November 2003