**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**FORM 20-F**

 

| o                                                                                | **REGISTRATION STATEMENT PURSUANT  TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                   |
|----------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                             |
| **OR**                                                                           |
|                                                                             |
| ý                                                                           | **ANNUAL REPORT PURSUANT TO SECTION  13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                               |
|                                                                             |                                                                                                                                                                                                    |
|                                                                             | **For the fiscal Year Ended****December  31, 2002**                                                                                                                                                     |
|                                                                             |
| **OR**                                                                           |
|                                                                             |
| o                                                                                | **TRANSACTION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                          |
|                                                                             |                                                                                                                                                                                                    |
|                                                                             | **For  the transition period from                 to               ** |
|                                                                             |
| **Commission  File Number: 33-312188**                                           |
|                                                                             |
| **PREMIER FOODS PLC**                                                            |
| **(formerly  Premier International Foods plc)**                                  |
| (Exact Name of  Registrant as Specified in Its Charter)                          |
|                                                                             |
| **England and Wales**                                                            |
| (Jurisdiction of  Incorporation or Organization)                                 |
|                                                                             |
| **28 The Green, Kings Norton,  Birmingham, B38 8SD, United Kingdom**             |
| (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** |
|---------------------------------------------------------------------------------------------|--------|-----------------------------------------------|
| None                                                                                        |   | None                                          |
|                                                                                        |   |                                          |
| 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: |
|                                                                                        |
| **$200,000,000 12% Senior Notes due  2009**                                                 |
|                                                                                        |
| **£75,000,000 121⁄4% Senior Notes due  2009**                                       |

 

Indicate the number ofoutstanding shares of each of the issuer’s classes of capital or common stockas of the close of the period covered by the Annual Report:

None

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.          ý   Yes    o    No

 

Indicate by check markwhich financial statement item the registrant has elected to follow.

o   Item17        ý   Item 18

 

 

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**FORM 20-F**

**TABLE OF CONTENTS**

 

**PART I**

 
| Item 1. | Identity of Directors, Senior Management and  Advisors     |
|---------|------------------------------------------------------------|
|    |
| Item 2. | Offer Statistics and Expected Timetable                    |
|    |
| Item 3. | Key Information                                            |
|    |
|    | Certain  Terminology                                       |
|    | Market  Share Information                                  |
|    | Cautionary  Statement Regarding Forward-Looking Statements |
|    | A.                                                         | Selected  Financial Data |
|    | B.                                                         | Capitalization and  Indebtedness |
|    | C.                                                         | Reasons for  the Offer and Use of Proceeds |
|    | D.                                                         | Risk Factors |
|    |
| Item 4. | Information on the Company                                 |
|    |
|    | A.                                                         | History and  Development of the Company |
|    | B.                                                         | Business  Overview |
|    | C.                                                         | Organizational  Structure |
|    | D.                                                         | Property, Plants and Equipment |
|    |
| Item 5. | Operating and Financial Review and Prospects               |
|    |
|    | A.                                                         | Operating  Results |
|    | B.                                                         | Liquidity and Capital  Resources |
|    | C.                                                         | Research  and Development |
|    | D.                                                         | Trend  Information |
|    |
| Item 6. | Directors, Senior Management and Employees                 |
|    |
|    | A.                                                         | Directors and Senior  Management |
|    | B.                                                         | Compensation |
|    | C.                                                         | Board Practices |
|    | D.                                                         | Employees |
|    | E.                                                         | Share Ownership |
|    |
| Item 7. | Major Shareholders and Related Party  Transactions         |
|    |
|    | A.                                                         | Major  Shareholders |
|    | B.                                                         | Related Party Transactions |
|    |
| Item 8. | Financial Information                                      |
|    |
|    | A.                                                         | Consolidated  Statements and Other Financial Information |
|    | B.                                                         | Significant  Changes |
|    |
| Item 9. | The Offer and Listing                                      |
|    |
|    | A.                                                         | Offer and Listing Details |
|    | B.                                                         | Plan of  Distribution |
|    | C.                                                         | Markets |
|    | D.                                                         | Selling  Shareholders |
|    | E.                                                         | Dilution |
|    | F.                                                         | Expenses  of the Issue |

 

2

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| Item 10.     | Additional Information                                                       |
|--------------|------------------------------------------------------------------------------|
|         |
|         | A.                                                                           | Share Capital |
|         | B.                                                                           | Memorandum and  Articles of Association |
|         | C.                                                                           | Material  Contracts |
|         | D.                                                                           | Exchange  Controls |
|         | E.                                                                           | Taxation |
|         | F.                                                                           | Dividends and Paying Agent |
|         | G.                                                                           | Statement  by Experts |
|         | H.                                                                           | Documents  on Display |
|         | I.                                                                           | Subsidiary  Information |
|         |
| Item 11.     | Quantitative and Qualitative Disclosures About  Market Risk                  |
|         |
| Item 12.     | Description of Securities Other than Equity  Securities                      |
|         |
|         |
| **PART II**  |
|         |
| Item 13.     | Defaults, Dividend Arrearages and Delinquencies                              |
|         |
| Item 14.     | Material Modification to the Rights of Security  Holders and Use of Proceeds |
|         |
| Item 15.     | Controls and Procedures                                                      |
|         |
| Item 16.     | [Reserved]                                                                   |
|         |
| **PART III** |
|         |
| Item 17.     | Financial Statements                                                         |
|         |
| Item 18.     | Financial Statements                                                         |
|         |
| Item 19.     | Exhibits                                                                     |

 

3

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**PARTI**

# ** **

**Item 1****.    IDENTITY OF DIRECTORS, SENIOR MANAGEMENT ANDADVISORS.**

                Not applicable.

 

**Item 2.****    OFFER STATISTICS AND EXPECTED TIMETABLE**

                Not applicable.

# ** **

**Item 3.****    KEYINFORMATION**

 

**CERTAIN TERMINOLOGY******

 

Unless otherwise indicated, references to “Premier”,“the Group”, “we”, “us”, “our” and “ours” in this Annual Report are to PremierFoods plc (formerly Premier International Foods plc) and its consolidatedsubsidiaries.  “Annual Report” refers tothis Annual Report filed pursuant to Section 13 or 15(d) of the SecuritiesExchange Act 1934 on Form 20-F.  The“Company” refers to Premier Foods plc (formerly Premier International Foodsplc) excluding its consolidated subsidiaries. “Premier Holdings” refers to Premier Foods (Holdings) Limited, our immediateparent company (formerly known as Premier Holdings Limited, itself formerlyknown as Hillsdown Holdings Limited). “Premier Financing” refers to Premier Financing Limited, our whollyowned subsidiary.  “Premier Investments”refers to Premier Foods Investments Limited, our ultimate U.K. parent company.“Hicks Muse” refers to Hicks, Muse, Tate & Furst Limited and itsaffiliates.  The “Notes” refers to our$200,000,000 12% Senior Notes due 2009 and £75,000,000 121⁄4% Senior Notes due2009.  The “Indenture” refers to theIndenture, dated as of August 10, 1999, between Premier and Bankers TrustCompany, as Trustee.  The “Senior CreditFacility” refers to the bank credit facility we have under the SeniorFacilities Agreement with J.P. Morgan plc and Barclays Capital as arrangers,JPMorgan Chase Bank and Barclays Bank plc as underwriters, with J.P. Morgan Europe Limited as agent andsecurity agent.  “SEC” refers tothe U.S. Securities and Exchange Commission. Unless otherwise indicated herein, references to 2002, 2001 and 2000refer to the fiscal years ended December 31, 2002, 2001 and 2000, respectively.“U.K.” refers to the United Kingdom of Great Britain and Northern Ireland.  “U.K. GAAP” refers to generally accepted accountingprinciples in the U.K.    “U.S. GAAP”refers to generally accepted accounting principles in the U.S.  The “U.S.” and “United States” refer to theUnited States of America.  “E.U.” refersto the European Union.

 

**MARKET SHARE INFORMATION**

 

The market, industry and productsegment data contained herein have been derived from industry and other sourcesavailable to us and adjusted based on our management’s industry and otherexperience.  Unless otherwise indicated,market share and segment data are based on volume of sales made in the U.K. (orFrance) and in certain product markets in the U.K. and Ireland.  Market share data are derived frominformation gathered by A.C. Nielsen for the year 2002, as adjusted by ourmanagement for factors not considered in the raw source data.  While our management believes that itsestimates derived from such sources, including those with respect to marketposition, are reasonable, we cannot assure you as to their accuracy.

 

4

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**CAUTIONARY STATEMENT****REGARDINGFORWARD-LOOKING STATEMENTS**

 

This Annual Report includes statements that are, ormay deemed to be, “forward-looking statements” (as defined in the U.S. PrivateSecurities Litigation Reform Act of 1995). These forward-looking statements can be identified by the use offorward-looking terminology, including the terms “believes,” “estimates,”“anticipates,” “expects,” “intends,” “may,” “will” or “should” or, in eachcase, their negative, or other variations or comparable terminology.  These forward-looking statements include allmatters that are not historical facts. They appear in a number of places throughout this Annual Report andinclude statements regarding Premier’s intentions, beliefs or currentexpectations concerning, among other things, our results of operations,financial condition, liquidity, prospects, growth, strategies and theindustries in which we operate.

 

Wemake these forward-looking statements based on our current expectations,assumptions, estimates and projections about us and our industry that address,among other things:

 

•                       ourability to leverage our leading market positions, flexible manufacturingcapabilities and strong relationships with retailers in the U.K. to introduceboth new products and product line extensions;

•                       ourability to increase our sales in continental Europe by leveraging our existingdistribution and manufacturing capabilities in France and Holland;

•                       the competitive environment in the food market ingeneral and in our specific market areas and our ability to expand our businessand develop additional revenue sources;

•                       oursubstantial leverage and our ability to meet our debt obligations; and

•                       ourability to integrate our acquisitions successfully.

 

By their nature,forward-looking statements involve risks and uncertainties because they relateto events and depend on circumstances that may or may not occur in thefuture.  We caution you thatforward-looking statements are not guarantees of future performance and thatPremier’s actual results of operations, financial condition and liquidity, andthe development of the industries in which we operate may differ materiallyfrom those made in or suggested by the forward-looking statements contained inthis Annual Report.  In addition, evenif Premier’s results of operations, financial condition and liquidity, and thedevelopment of the industries in which we operate are consistent with theforward-looking statements contained in this Annual Report, those results ordevelopments may not be indicative of results or developments in subsequentperiods.

 

We urge you to read Item 3.D. “Risk Factors,” Item 4.“Information on the Company,” Item 5. “Operating and Financial Review andProspects,” Item 8. “Financial Information” and Item 18. “Financial Statements”for a more complete discussion of the factors that could affect our futureperformance and the industries in which we operate.  In light of these risks, uncertainties and assumptions, theforward-looking events described in this Annual Report may not occur.

 

We undertake no obligation to publicly update orpublicly revise any forward-looking statement, whether as a result of newinformation, future events or otherwise. All subsequent written and oral forward-looking statements attributableto us or persons acting on Premier’s behalf are expressly qualified in theirentirety by the cautionary statements referred to above and contained elsewherein this Annual Report.

 

**A.            Selected Financial Data**

 

We have prepared the following selected historicalcombined and consolidated financial data as of and for each of the five yearsin the period ended December 31, 2002. The selected historical consolidated financial data as of December 31,2001 and December 31, 2002 and for each of the years ended December 31, 2000,December 31, 2001 and December 31, 2002 are derived from our historicalconsolidated financial statements included elsewhere in this AnnualReport.  The selected historicalcombined and consolidated financial data as of December 31, 1998, December 31,1999 and December 31, 2000 and for each of the years ended December 31, 1998and December 31, 1999 are derived from our historical combined and consolidatedfinancial statements not included in this Annual Report.

 

5

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The audited selected historical combined andconsolidated financial statements of Premier have been prepared in accordancewith U.K. GAAP, which differs in certain material respects from U.S. GAAP.  The principal differences between U.K. GAAPand U.S. GAAP are summarized in Note 24 to our audited historical financialstatements included elsewhere in this Annual Report.

 

You should read the following information inconjunction with the discussion of our operating results and liquidity andcapital resources included in Item 5.A. “Operating Results” and Item 5.B.“Liquidity and Capital Resources” and our audited historical combined andconsolidated financial statements and the related notes thereto includedelsewhere in this Annual Report.

 

**Selected Historical Financial Data**

** **
|                                                              |   | **1998****(9)**                               |    | **1999****(9)** |   | **2000****(9)** |   | **2001****(9)** |    | **2002** |   | **2002****(1)** |   |
|-------------------------------------------------------------------|--------|-----------------------------------------------|---------|-----------------|--------|-----------------|--------|-----------------|---------|----------|--------|-----------------|--------|
|                                                              |   | **£ millions  except for EBITDA margin** |    |
| Profit  and Loss Data:                                            |   |                                          |    |            |   |            |   |            |    |     |   |            |   |
| Amounts  in accordance with U.K. GAAP:                            |   |                                          |    |            |   |            |   |            |    |     |   |            |   |
| Turnover                                                          |   |                                          |    |            |   |            |   |            |    |     |   |            |   |
| Continuing                                                        |   | £                                        | 800.9   |            | £ | 854.3           |   | £          | 818.5   |     | £ | 845.2           |   | £ | 826.7 |   | $ | 1,330.6 |   |
| Acquisitions  (2)                                                 |   | —                                        |    | —          |   | —          |   | —          |    | 55.6     |   | 89.5            |   |
| Discontinued                                                      |   | 289.3                                         |    | 234.8           |   | 215.1           |   | 4.1             |    | 0.2      |   | 0.3             |   |
| Subtotal                                                          |   | £                                        | 1,090.2 |            | £ | 1,089.1         |   | £          | 1,033.6 |     | £ | 849.3           |   | £ | 882.5 |   | $ | 1,420.4 |   |
| Operating  profit (before operating  exceptional  items) (3) |   |                                          |    |            |   |            |   |            |    |     |   |            |   |
| Continuing                                                        |   | £                                        | 46.4    |            | £ | 54.7            |   | £          | 60.1    |     | £ | 64.3            |   | £ | 70.7 |   | $ | 113.8 |   |
| Acquisitions  (2)                                                 |   | —                                        |    | —          |   | —          |   | —          |    | 6.9      |   | 11.1            |   |
| Discontinued                                                      |   | 11.9                                          |    | 9.4             |   | 9.1             |   | (0.8            | )       | (0.1     | )      | (0.2            | )      |
| Subtotal                                                          |   | £                                        | 58.3    |            | £ | 64.1            |   | £          | 69.2    |     | £ | 63.5            |   | £ | 77.5 |   | $ | 124.7 |   |
|                                                              |   |                                          |    |            |   |            |   |            |    |     |   |            |   |
| Profit  / (loss)                                                  |   | £                                        | 29.1    |            | £ | (32.6           | )      | £          | (8.6    | )        | £ | (28.5           | )      | £ | 16.3 |   | $ | 26.2 |   |
|                                                              |   |                                          |    |            |   |            |   |            |    |     |   |            |   |
| Amounts  in accordance with U.S. GAAP:                            |   |                                          |    |            |   |            |   |            |    |     |   |            |   |
| Net  sales                                                        |   | £                                        | 1,090.2 |            | £ | 1,089.1         |   | £          | 1,033.6 |     | £ | 849.3           |   | £ | 882.5 |   | $ | 1,420.4 |   |
| Income  / (loss) from operations (4)                              |   | 24.5                                          |    | (13.1           | )      | 58.1            |   | 90.4            |    | 60.8     |   | 97.9            |   |
| Net  income / (loss)                                              |   | £                                        | 2.0     |            | £ | (45.5           | )      | £          | (13.4   | )        | £ | 37.8            |   | £ | 14.1 |   | $ | 22.7 |   |
|                                                              |   |                                          |    |            |   |            |   |            |    |     |   |            |   |
| Other  Financial Data:                                            |   |                                          |    |            |   |            |   |            |    |     |   |            |   |
| Amounts  derived under U.K. GAAP:                                 |   |                                          |    |            |   |            |   |            |    |     |   |            |   |
| EBITDA  (5)                                                       |   | £                                        | 81.5    |            | £ | 87.7            |   | £          | 91.5    |     | £ | 82.1            |   | £ | 103.1 |   | $ | 165.9 |   |
| EBITDA  margin (6)                                                |   | 7.5                                           | %       | 8.1             | %      | 8.9             | %      | 9.7             | %       | 11.7     | %      | 11.7            | %      |
| Depreciation  and amortization (7)                                |   | £                                        | 23.2    |            | £ | 23.6            |   | £          | 22.3    |     | £ | 18.6            |   | £ | 26.0 |   | $ | 41.8 |   |
| Capital  expenditure (8)                                          |   | 44.1                                          |    | 23.0            |   | 26.5            |   | 20.1            |    | 17.3     |   | 27.8            |   |
|                                                              |   |                                          |    |            |   |            |   |            |    |     |   |            |   |
| Amounts  derived under U.S. GAAP:                                 |   |                                          |    |            |   |            |   |            |    |     |   |            |   |
| EBITDA  (5)                                                       |   | £                                        | 75.9    |            | £ | 29.7            |   | £          | 87.5    |     | £ | 112.9           |   | £ | 81.3 |   | $ | 130.9 |   |
| EBITDA  margin (6)                                                |   | 7.0                                           | %       | 2.7             | %      | 8.5             | %      | 13.3            | %       | 9.2      | %      | 9.2             | %      |
| Depreciation  and amortization (7)                                |   | £                                        | 51.4    |            | £ | 42.8            |   | £          | 29.4    |     | £ | 22.5            |   | £ | 20.5 |   | $ | 33.0 |   |
| Capital  expenditure (8)                                          |   | 44.1                                          |    | 23.0            |   | 26.5            |   | 20.1            |    | 17.3     |   | 27.8            |   |
|                                                              |   |                                          |    |            |   |            |   |            |    |     |   |            |   |
| Balance  Sheet Data (at end of period):                           |   |                                          |    |            |   |            |   |            |    |     |   |            |   |
| Amounts  in accordance with U.K. GAAP:                            |   |                                          |    |            |   |            |   |            |    |     |   |            |   |
| Total  assets                                                     |   | £                                        | 679.1   |            | £ | 557.2           |   | £          | 516.3   |     | £ | 419.3           |   | £ | 546.5 |   | $ | 879.6 |   |
| Net  combined assets                                              |   | 140.0                                         |    | N/a             |   | N/a             |   | N/a             |    | N/a      |   | N/a             |   |
| Shareholder’s  deficit                                       |   | N/a                                           |    | (198.6          | )      | (214.4          | )      | (167.3          | )       | (149.8   | )      | (241.1          | )      |
|                                                              |   |                                          |    |            |   |            |   |            |    |     |   |            |   |
| Amounts  in accordance with U.S. GAAP:                            |   |                                          |    |            |   |            |   |            |    |     |   |            |   |
| Total  assets                                                     |   | £                                        | 734.6   |            | £ | 603.3           |   | £          | 579.0   |     | £ | 484.6           |   | £ | 614.0 |   | $ | 988.2 |   |
| Net  combined assets                                              |   | 173.7                                         |    | N/a             |   | N/a             |   | N/a             |    | N/a      |   | N/a             |   |
| Shareholder’s  deficit                                       |   | N/a                                           |    | (172.9          | )      | (187.3          | )      | (126.8          | )       | (111.5   | )      | (179.5          | )      |

 

See accompanyingnotes on the following pages.

 

6

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(1)                                 Amounts have been translated for convenience atthe noon buying rate on December 31, 2002 of $1.6095 to £1.00.

 

(2)                                 Acquisitions comprise the acquisition of theambient foods manufacturing business in the U.K. of Nestlé SA.

 

(3)                                 Aggregate U.K. GAAP exceptional items includeboth operating and non-operating exceptional items.  See Note 3 to our audited historical consolidated financialstatements for further information on operating and non-operating exceptionalitems for each of 2000, 2001 and 2002.

 

(4)                                 Income / (loss) from operations in accordancewith U.S. GAAP is defined herein as the sum of earnings from all operations, ineach case before related net interest expense and taxation expense.

 

                                                The following table reconciles operating profitin accordance with U.K. GAAP to income from operations in accordance with U.S.GAAP:

 
|                                                                                      |   | **Year Ended December 31,** |   |
|-------------------------------------------------------------------------------------------|--------|-----------------------------|--------|
|                                                                                      |   | **2000**                    |   | **2001** |   | **2002** |   |
|                                                                                      |   | **£ millions**         |   |
| Operating  profit (before operating exceptional items) in  accordance with U.K. GAAP |   | £                      | 69.2   |   | £ | 63.5 |   | £ | 77.5 |   |
| Operating  exceptional items as defined under U.K. GAAP                                   |   | (1.6                        | )      | (12.2 | ) | (16.8 | ) |
| Non-operating  exceptional items under U.K. GAAP                                          |   | (5.8                        | )      | (26.2 | ) | (2.0 | ) |
| U.S.  GAAP adjustments:                                                                   |   |                        |   |   |   |   |   |
| Pension  costs                                                                            |   | 3.4                         |   | 5.2 |   | 0.1 |   |
| Amortization  of goodwill                                                                 |   | (7.1                        | )      | (5.9 | ) | 3.1 |   |
| Derivative  financial instruments                                                         |   | —                      |   | 0.9 |   | (0.5 | ) |
| Adjustments  to U.K. GAAP loss on sale of  discontinued  operations                  |   | —                      |   | 65.1 |   | — |   |
| Amortization  of intangible assets                                                        |   | —                      |   | — |   | (0.6 | ) |
|                                                                                      |   |                        |   |   |   |   |   |
| Income  from operations in accordance with U.S. GAAP                                      |   | £                      | 58.1   |   | £ | 90.4 |   | £ | 60.8 |   |

 

 

(5)                                 We are required under the terms of the Indentureto provide, to the trustee and the holders of the Notes, all quarterlyfinancial statements that would be required by Form 10-Q in U.K. GAAP with areconciliation to U.S. GAAP of EBITDA, total assets, total debt andshareholders’ equity.  We have,therefore, included U.S. EBITDA in our selected financial information.  In addition, our banking covenants under theSenior Credit Facility require ratios of total net interest and total net debtto EBITDA.  We have, therefore, includedU.K. EBITDA in our selected financial information.  Furthermore, we believe that the investor community commonly usesEBITDA, calculated in the manner defined below, as a measure of the operatingperformance of businesses.

 

As presented herein, EBITDA represents, for U.K. GAAP presentationpurposes, operating profit before both operating and non-operating exceptionalitems and depreciation and amortization of intangible assets and pensionprepayments and any other non-cash income and non-cash charges.  This definition is in accordance with thedefinition of EBITDA in our Senior Credit Facility.

 

EBITDA, as calculated for U.S. GAAP presentation purposes, represents thesum of earnings from all operations, in each case before related net interestexpense, taxation expense, depreciation and amortization of goodwill andintangible assets.

 

EBITDA is not a measurement of operating performance calculated inaccordance with U.S. GAAP or U.K. GAAP, and should not be considered as asubstitute for operating income, profit after taxes or cash flows fromoperating activities, as determined by U.S. GAAP or U.K. GAAP, or as a measureof profitability or liquidity.  EBITDAdoes not necessarily indicate whether cash flow will be sufficient or availablefor cash requirements.  EBITDA may notbe indicative of our historical operating results and is not meant to be aprediction of our future results. Because all companies do not calculate EBITDA identically, thepresentation of EBITDA contained herein may not be comparable to similarly entitledmeasures of other companies.

 

7

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The following tablereconciles operating profit presented under U.K. GAAP to EBITDA presented underU.K. GAAP to EBITDA:

 
|                                                                                  |   | **Year Ended December 31,** |   |
|---------------------------------------------------------------------------------------|--------|-----------------------------|--------|
|                                                                                  |   | **2000**                    |   | **2001** |   | **2002** |   |
|                                                                                  |   | **£ millions**         |   |
| Operating  profit before operating exceptional items   presented under U.K. GAAP |   | £                      | 69.2   |   | £ | 63.5 |   | £ | 77.5 |   |
|                                                                                  |   |                        |   |   |   |   |   |
| Depreciation  of fixed assets charged to operating profit                             |   | 22.0                        |   | 16.1 |   | 18.8 |   |
| Amortization  of goodwill                                                             |   | 0.3                         |   | 0.4 |   | 3.1 |   |
| Amortization  of intangible assets                                                    |   | —                      |   | 0.1 |   | 1.1 |   |
| Amortization  of pension prepayment                                                   |   | —                      |   | 2.0 |   | 2.6 |   |
|                                                                                  |   |                        |   |   |   |   |   |
| EBITDA  presented under U.K. GAAP                                                     |   | £                      | 91.5   |   | £ | 82.1 |   | £ | 103.1 |   |

 

The following tablereconciles income from operations presented under U.S. GAAP to EBITDA presentedunder U.S. GAAP:

 
|                                                      |   | **Year Ended December 31,** |   |
|-----------------------------------------------------------|--------|-----------------------------|--------|
|                                                      |   | **2000**                    |   | **2001** |   | **2002** |   |
|                                                      |   | **£ millions**         |   |
| Income  from operations presented under U.S. GAAP         |   | £                      | 58.1   |   | £ | 90.4 |   | £ | 60.8 |   |
|                                                      |   |                        |   |   |   |   |   |
| Depreciation  of fixed assets charged to operating profit |   | 22.0                        |   | 16.1 |   | 18.8 |   |
| Amortization  of goodwill                                 |   | 7.4                         |   | 6.3 |   | — |   |
| Amortization  of intangible assets                        |   | —                      |   | 0.1 |   | 1.7 |   |
|                                                      |   |                        |   |   |   |   |   |
| EBITDA  presented under U.S. GAAP                         |   | £                      | 87.5   |   | £ | 112.9 |   | £ | 81.3 |   |

 

The following tablereconciles EBITDA presented under U.K. GAAP to EBITDA presented under U.S. GAAP:

 
|                              |   | **Year Ended December 31,** |   |
|-----------------------------------|--------|-----------------------------|--------|
|                              |   | **2000**                    |   | **2001** |   | **2002** |   |
|                              |   | **£ millions**         |   |
| EBITDA  presented under U.K. GAAP |   | £                      | 91.5   |   | £ | 82.1 |   | £ | 103.1 |   |
| U.S.  GAAP adjustments:           |   |                        |   |   |   |   |   |
| Derivative  financial instruments |   | —                      |   | 0.9 |   | (0.5 | ) |
| Operating  exceptional items      |   | (1.6                        | )      | (12.2 | ) | (16.8 | ) |
| Non-operating  exceptional items  |   | (5.8                        | )      | (26.2 | ) | (2.0 | ) |
| Sale  of discontinued businesses  |   | —                      |   | 65.1 |   | — |   |
| Pension  costs                    |   | 3.4                         |   | 3.2 |   | (2.5 | ) |
|                              |   |                        |   |   |   |   |   |
| EBITDA  presented under U.S. GAAP |   | £                      | 87.5   |   | £ | 112.9 |   | £ | 81.3 |   |

 

8

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(6)                                 Aspresented herein, EBITDA margin represents, for U.K. GAAP presentationpurposes, EBITDA divided by turnover from both continuing and discontinuedoperations.  EBITDA margin as calculatedfor U.S. GAAP presentation purposes represents EBITDA divided by turnover.  EBITDA margin is not a measure of operatingperformance calculated in accordance with U.S. GAAP or U.K. GAAP, and shouldnot be considered as a substitute for operating income, profit after taxes orcash flows from operating activities, as determined by U.S. GAAP or U.K. GAAP,or as a measure of profitability or liquidity. EBITDA margin does not necessarily indicate whether cash flow will besufficient or available for cash requirements. EBITDA margin may not be indicative of the historical operating resultsof Premier and is not meant to be a prediction of potential futureresults.  Because all companies do notcalculate EBITDA margin identically, the presentation of EBITDA margincontained herein may not be comparable to similarly entitled measures of othercompanies.

 

(7)                                 Under U.K.GAAP, depreciation and amortizationconsists of (i) depreciation of tangible fixed assets; (ii) amortization ofintangible assets and goodwill; and (iii) amortization of pension prepayment.Under U.S.GAAP, Depreciation and amortization consists of (i) depreciation oftangible fixed assets; and (ii) amortization of intangible assets and goodwill.

 

(8)                                 Capital expenditure comprises the cashexpenditure for the purchase of tangible fixed assets, together with capitallease funds applied to capital expenditure. Capital expenditure in 1998 includes £14.0 million for the purchase ofthe freehold estate of one of our major sites from a related company of PremierHoldings.

 

(9)                                  Thehistorical financial data for 2000 and 2001 has been restated for the impact ofFRS 19 “Deferred tax”. The historical financial data for 1998 and 1999 has notbeen restated for the impact of FRS 19 “Deferred tax”.  The historical financial data for 1998 hasnot been restated as a result of the change in accounting policy in 2001 toclassify certain sales deductions as a reduction in “sales” rather than “costof sales” and certain promotional expenditure as “selling and distributioncosts” rather than a reduction in “sales”.

 

(10)                            We have not presented any selected financial information on a per sharebasis as Premier is 100% owned by Premier Holdings and therefore data on a pershare basis is not relevant.

 

**Exchange Rates**

** **

In this Annual Report,unless otherwise specified or the context otherwise requires, all references to“pound(s) sterling” or “£” are to the lawful currency of the U.K., allreferences to “U.S. dollar(s)” or “$” are to the lawful currency of theU.S.  We make no representation that anyamount translated in this Annual Report could have been or could be convertedat any of the rates indicated below.

 

Solely for yourconvenience, we have translated certain financial information in this AnnualReport from pounds sterling to dollars at the rate of £1.00=$1.6095, the noonbuying rate in the City of New York for cable transfers as certified forcustoms purposes by the Federal Reserve Bank of New York on December 31, 2002(the “noon buying rate”).

 

The following table setsforth, for the periods indicated, certain information concerning the noonbuying rate of the Federal Reserve Bank of New York for pounds sterlingexpressed in dollars per £1.00.

 
| **Year ended December 31,** |   | **Period  end(1)** |   | **Average  Rate (2)** |   | **High** |   | **Low** |   |
|-----------------------------|--------|--------------------|--------|-----------------------|--------|----------|--------|---------|--------|
|                        |   |               |   |                  |   |     |   |    |   |
| 1998                        |   | 1.6994             |   | 1.6534                |   | 1.7065   |   | 1.6120  |   |
| 1999                        |   | 1.6150             |   | 1.6171                |   | 1.6765   |   | 1.5515  |   |
| 2000                        |   | 1.4938             |   | 1.5163                |   | 1.6569   |   | 1.3945  |   |
| 2001                        |   | 1.4543             |   | 1.4396                |   | 1.5045   |   | 1.3730  |   |
| 2002                        |   | 1.6095             |   | 1.5873                |   | 1.6095   |   | 1.4074  |   |

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(1)                                  Representsthe noon buying rate on the last business day of the period.

 

(2)                                  Theaverage of the exchange rates on the last business day of each full monthduring the relevant period.

 

9

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The following table setsforth, for the periods indicated, the high and low noon buying rates fordollars to pounds sterling.

 
| **Month and Year** |   | **High** |   | **Low** |   |
|--------------------|--------|----------|--------|---------|--------|
| December 2002      |   | 1.6095   |   | 1.5553  |   |
| January 2003       |   | 1.6482   |   | 1.5975  |   |
| February 2003      |   | 1.6480   |   | 1.5727  |   |
| March 2003         |   | 1.6129   |   | 1.5624  |   |
| April 2003         |   | 1.6000   |   | 1.5500  |   |
| May 2003           |   | 1.6484   |   | 1.5930  |   |

 

The noon buying rate on June 27, 2003 was£1.00=$1.6492.

 

For a discussion of the impact of exchange ratefluctuations on our operating results, see Item 11. “Quantitative andQualitative Disclosures about Market Risk”.

 

**B.            Capitalization and Indebtedness**

** **

Not applicable.

 

**C.****                                    Reasons for the Offer and Use ofProceeds**

** **

Not applicable.

 

**D.            Risk Factors**

** **

The risks anduncertainties described below are not the only ones facing us.  Additional risks and uncertainties notpresently known to us or that we currently deem immaterial also may impair ourbusiness operations.  If any of thefollowing risks or such other risks actually occur, our business could beharmed.

 

**Substantial Leverage — Our substantialdebt could adversely affect our financial health and prevent us from fulfillingour obligations under the Notes.**

** **

Wehave a large amount of debt when compared to the consolidated equity of ourstockholders.  As of December 31, 2002,our total net debt before deducting capitalized debt issuance costs was approximately£460.7 million and stockholders’ deficit was approximately £149.8 million.  Our substantial leverage has importantconsequences to you, including the risk that we may not be able to generatesufficient cash flow from our operations to service our debt, including theNotes, or to invest in our business.

 

Weanticipate that we will continue to have substantial leverage for theforeseeable future.  This leverage posesthe risks that:

 

•                  a significant portion of our cash flow from ouroperations must be dedicated to servicing our debt;

 

•                  our ability to obtain additional financing forworking capital, capital expenditures or business opportunities may beimpaired;

 

•                  we may be substantially more leveraged thancertain of our competitors, which may place us at a competitive disadvantage;and

 

•                  our flexibility to plan for or react to changingmarket conditions could be limited and we could be more vulnerable to adownturn in general economic conditions or in our industry or business.

 

**Restrictions on Operations — Our debtagreements contain significant restrictions limiting our flexibility inoperating our business.**

** **

Variouscovenants contained in our debt instruments limit or may limit our ability to:

 

•                  borrow money;

 

•                  use assets as security in other transactions;

 

•                  make certain asset dispositions;

 

•                  make investments;

 

10

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•                  enter into transactions with affiliates otherthan on arm’s-length terms; and

 

•                  pay dividends or make other distributions.

 

Thesecovenants could materially and adversely affect our ability to finance ourfuture operations or capital needs or to engage in other business activitiesthat may be in our best interest.

 

**Ability to Service Debt — To serviceour debt, we will require a significant amount of cash. Our ability to generatecash depends on many factors beyond our control.**

** **

Ourability to make scheduled payments on our debt obligations or to refinance ourdebt obligations depends upon our future financial and operating performance,which will be affected by prevailing economic conditions and financial,business and other factors, many of which are beyond our control.  We believe that, based on current levels ofoperations and anticipated future growth, our expected cash flow fromoperations together with available borrowings under the Senior Credit Facilitywill be adequate to meet our anticipated working capital, capital expenditureand scheduled principal and interest payments. We cannot assure you, however, that we will continue to generate cashflow at or above current levels or that estimated growth will be achieved.  If future cash flow is not sufficient tomake scheduled payments on our debt, we will need to refinance all or a portionof our debt, including the Notes, before maturity, obtain additional financing,delay planned acquisitions and capital expenditures or sell assets.  We cannot assure you that we will be able torefinance any of our debt, including debt outstanding under the Senior CreditFacility and the Notes, on commercially reasonable terms or at all.

 

Inconnection with this risk factor, you should also read Item 5.B. “Liquidity andCapital Resources” and our audited historical combined and consolidatedfinancial data and the accompanying notes included elsewhere in this AnnualReport.

 

**Significant Competition — We offerproducts in highly competitive markets. Our failure to compete effectivelycould adversely affect our results of operations.**

** **

Competitionwithin the grocery business is intense. The market share is concentrated among a small number ofwell-established companies that operate on both a national and internationalbasis with single- or multiple-branded product lines.  We face competition throughout our product lines from these andother companies, in both the branded and private-label products segments.  Our competitors have varying abilities towithstand changes in market conditions. Some of our competitors are multinational conglomerates with greaterfinancial resources and flexibility than we have.  Our ability to compete effectively will require continuousefforts in sales and marketing of our existing products, development of newproducts and cost rationalization. Furthermore, we cannot predict the pricing or promotional actions of ourcompetitors or their effect on our ability to market and sell ourproducts.  We cannot assure you that oursales volume or market shares would not be adversely affected by negativeconsumer reaction to our higher prices as a result of any price reduction or promotionalsales undertaken by our competitors or that we will not be forced to reduce ourprices to meet our competition or that we will otherwise be able to competeeffectively.  For further information oncompetition and our competitors in the sectors in which we compete, see Item4.B. “Business Overview—Company Products.”

 

**Dependence on Raw Materials — Ourinability to pass price increases of raw materials on to our customers or tosource raw material of acceptable quality could adversely affect our results ofoperations.**

** **

Wepurchase the raw materials used in our products from numerous suppliers.  The prices of many of these raw materialsare affected by, among other things, agricultural polices of the U.K. and, to acertain extent, the policies of the European Union.  In addition, severe weather conditions, such as floods, droughtsor frosts, may affect the supply and price of one or more of our rawmaterials.  If the supply of any of ourraw materials is adversely affected by adverse weather conditions, we cannotassure you that we will be able to obtain sufficient supplies from othersources.

 

Theindustry is facing increasing consumer sentiment in Europe against the use ofgenetically modified ingredients.  Whilewe have made efforts to avoid the use of genetically modified ingredients andhave been largely unaffected by this issue, some of our products still containgenetically modified ingredients and remain sensitive to consumerperception.  Replacement of thesegenetically modified ingredients with non-genetically modified alternatives maynot be possible or may only be possible at significantly higher prices.

 

Movementin the price levels of our raw materials can have a corresponding impact onfinished product costs and, therefore, on our gross margins.  Our ability to pass through increases in thecost of raw materials to our customers depends upon competitive conditions andpricing methods employed in the various markets in which we operate.

 

11

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**Seasonality and Quarterly Fluctuations— Our results of operations are subject to seasonal fluctuations.**

** **

Historically, our saleshave been higher during the first and fourth quarters than during the secondand third quarters.  Within our cannedfoods, pickles and sauces business, consumer demand for canned foods tends tobe higher in the colder months of the year, with increased sales during theautumn and winter and lower sales during the spring and summer and we generallyhave a significant increase in sales of our pickles and sauces during thepre-Christmas period.  Our hot chocolatedrinks business is affected by seasonal changes in temperature, with salesusually declining during the warm summer months.  In addition, our working capital requirements are affected by theseasonal nature of our sales and production as a portion of our seasonal cannedproducts is packed during the months from July to September. Because of the seasonal fluctuations, the resultsof our operating performance for any particular quarter will not necessarily beindicative of our results for the full year or future years.  For further information on the effects ofseasonality on our business, see Item 5.A. “Operating Results—Seasonality.”

 

**Consolidation of Retail Food Industryin the U.K. — Our ability to compete in the retail food industry could besignificantly affected if the consolidation of grocery retailers continues.**

** **

In recent years, therehas been increased consolidation among the major grocery retailers in the U.K.as well as in continental Europe.  In1998, two of the major retail food chains in the U.K., Somerfield and KwikSave,merged.  In addition, Wal-Mart enteredthe U.K. market through its 1999 acquisition of ASDA, one of the U.K.’s largestgrocery retailers.  In continentalEurope, two major grocery retailers, Carrefour and Promodes, merged in 1999 tocreate the largest retailer in France. In January 2003, Morrisons made an offer for Safeway.  Interest has also been expressed by a numberof other major multiple retailers and financial investors.

 

As of the 12 weeks toMarch 30, 2003, the five largest grocery retailers had a combined market shareof 75% of the grocery market in the U.K. (source: Taylor Nelson Sofres).  This in turn gives them significant leverageover their suppliers in dictating pricing and quality of product.  This leverage may lower our margins.  Further consolidation among the majorgrocery retailers may increase price competition among suppliers to the majorretail food chains, and may ultimately lead to greater consolidation among suchsuppliers.  The major grocery retailersand manufacturers frequently engage in pricing campaigns such as “Everyday LowPrice” and “Buy One/Get One Free” in order to promote their products and gainmarket share.  These campaigns havegenerally lowered our margins by increasing our short-term promotion costs, butthis effect is partially offset by the additional sales made as a result ofthese campaigns.    While we believethat our relationships with our retail customers are strong, the continuationof the trend of consolidation could have a material adverse impact on ourresults of operations.

 

**Consumer Preferences and Legislation — Trends in consumerpreferences and legislation may adversely affect our sales and cost base.**

** **

There are a number oftrends which impact on our industry and us in particular.  These include, among others an increase inconsumers’ preferences for branded rather than own label products, for freshand chilled and convenience products, for “organic” products and the potentialimplications of genetically modified ingredients.  An increase in the legislation regarding the food industry withparticular regard to food safety and consumer information will also impact ourbusiness.

 

We are responding to all these actively to takeadvantage of opportunities and limit any negative impacts.

 

**Government and European Regulation — Weare subject to extensive regulation.**

** **

Asa manufacturer of products intended for human consumption, we are subject toextensive governmental regulation.  Weare subject to regulations in the U.K. with respect to product composition,packaging, labeling, advertising and safety of our products, the health, safetyand working conditions of our employees and our competitive and marketplaceconduct.  In addition, as a companywithin the jurisdiction of the European Commission (the “E.C.”), we are subjectto various directives and other regulatory promulgations of the E.C. covering,among other things, the manufacturing, composition, ingredients, labeling,packaging and safety of food.  From timeto time additional legislative initiatives may be introduced which may affectour operations and the conduct of our businesses, and we cannot assure you thatin the future the cost of complying with such initiatives or the effects ofsuch initiatives will not have a material adverse effect on our operatingresults or financial condition.

 

12

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**Brands and Intellectual Property Rights— Certain of our intellectual property rights could be challenged or lapse.**

** **

Approximately49% of our sales of grocery products in 2002 were from brand-nameproducts.  Our principal trademarks areregistered in the U.K., and we have trademark registrations for various productsin more than 100 foreign countries. Some of our brands are produced and sold under licenses from thirdparties, including our *Cadbury's*brand of cocoa-based beverages, our *HP*brand of canned goods, our *Loyd Grossman*brand of sauces and dressings and our *Rowntree's*brand of jelly.  While we intend toenforce our trademark and licensing rights against infringement by thirdparties, we cannot assure you that our actions to establish and protect ourtrademark and license rights are adequate to prevent imitation of our productsby others or to prevent others from seeking to block sales of our productswhich violate their trademarks and proprietary rights.  If a competitor were to infringe ontrademarks or licenses held by us, enforcing our rights would likely be costlyand would divert funds and resources that could otherwise be used to operateour business.  We cannot assure you thatwe would be successful in enforcing our intellectual property rights.

 

Weare licensed by Cadbury Schweppes plc to use the *Cadbury*and *Cadbury’s*brandnames in connection with our manufacture and marketing of cocoa-basedbeverages.  Our *Cadbury’s*cocoa-basedbeverages contributed approximately 6% to the sales of our continuingbusinesses in 2002.  Our license to usethe *Cadbury*and *Cadbury’s*brand names for these beverages expires in2006.  This license under which wemanufacture and market hot chocolate drinks is automatically renewable in 2006unless Cadbury Schweppes plc gives notice that it will not renew this licenseon or before one year prior to the expiration of the initial term of thelicense.  In a letter dated April 30,2003, Cadbury Schweppes plc expressed their intention not to renew the licensebeyond 2006 on current terms.  They havenot yet served formal notice on us regarding non-renewal of the license, andnegotiations regarding the future trading relationship are ongoing.

 

Inconnection with our manufacture and marketing of *HP*canned baked beans and pasta, we have been granted a license byHP Foods Limited to use the *HP*brandname.  The license is for a term of 10years and is scheduled to expire in March 2006.  Our *HP*branded products contributed approximately 3% to oursales in 2002.

 

Wehave been granted an exclusive worldwide license to use the *Loyd Grossman* name on sauces, dressings,accompaniments and toppings, marinades, oils and salad dressings for a term of10 years until December 2011. There are provisions to extend the license toadditional products. Our *Loyd Grossman***brandedproducts contributed approximately 2% to our sales in 2002.

 

Theacquisition of Nestlé included a license from Nestlé SA for the use of the *Rowntree’s*brand name in respect of the production and sale of jelly.  The license is scheduled to expire in June2012.  The license agreement contains noprovision for renewal, and any renewal is subject to the parties’ futureintentions. Our *Rowntrees***brandedproducts contributed approximately 1% to our sales in 2002.

 

Althoughwe expect that all our material licenses will be renewed on acceptable terms,we cannot assure you that we will be able to renew these licenses or that thelicensors will offer to do so on terms acceptable to us.  The failure to renew one or more of ourmaterial licenses could have a material adverse effect on our ability to marketcertain products and on our results of operations.

 

**Influence of Principal Shareholder —The operation of our business is influenced by Hicks Muse, and the interests ofHicks Muse may conflict with the noteholders’ interests.**

** **

HicksMuse controls approximately 93.6% of the total shares issued by HMTF PremierLimited.  The remaining 6.4% of HMTFPremier Limited is controlled by a group of third-party co-investors. HMTF Premier Limited, a limited companyincorporated in the Cayman Islands, is the beneficial owner of 100% of theordinary shares of Premier Investments, which indirectly owns 100% of theshares of Premier. Accordingly, Hicks Muse has a great deal of influenceover our management policies and the power to control all matters submitted toa vote of our shareholders.  In the event that circumstances arise in whichthe interests of Hicks Muse conflict with your interests as the holders of theNotes, you could be disadvantaged by the actions that Hicks Muse may seek topursue.

 

**Environmental Matters — Our past andpresent operations may prove harmful to the environment, and any related costscould have a substantial impact on us.**

** **

Ourpast and present business operations and ownership and operation of realproperty are subject to a broad range of environmental laws and regulations ineach of the jurisdictions in which we operate. These laws and regulations impose increasingly more stringentenvironmental protection standards on us and affect, among other things, airemissions, wastewater discharges, the use and handling of hazardous materials,noise levels,

 

13

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wastedisposal practices and environmental clean-up. As a result, we may be exposedto substantial environmental costs and liabilities, including liabilitiesassociated with divested assets and past activities.

 

Atour Wisbech canning plant we are combating our compliance with air qualityregulations that become mandatory in 2003 by burning low-sulfur coal in thecoal-fired boilers. We are currently in discussions with the authorities withrespect to the emission levels now being achieved, but may need to introduce afiltration system at a cost estimated at approximately £0.5 million.

 

Weare not aware of any existing environmental liabilities, claims, investigationsor proceedings which could reasonably be expected to have a material adverseeffect on our financial position. However, we cannot predict future environmental liabilities nor can weassure you that the amounts we have provided and budgeted for will beadequate.  In addition, futuredevelopments such as changes in laws or environmental conditions may increaseenvironmental costs and liabilities and could have a material effect on ourresults of operations and our financial position in any given year.

 

**Currency Fluctuations — We havemultinational operations that expose us to currency exchange risks.**

** **

Although 84% of ourbusiness is conducted in the U.K., we have operations in France and theNetherlands.  We source raw materialsfrom countries around the world and export our products to variouscountries.  Therefore, our financialposition and results of operations are subject to both currency transactionrisk and currency translation risk.

 

Our operatingsubsidiaries incur currency transaction risk whenever they enter into either apurchase or sales transaction using a currency other than that in which theyregularly operate and incur their expenses. We enter into forward currency contracts to hedge against our exposureto foreign currency exchange rate fluctuations in the purchase of raw materialsand in our export business.  As ofDecember 31, 2002, we had £42.2 million nominal value of forward currencycontracts, cross-currency swaps and interest rate swaps, with an aggregateunrealized net loss, measured under U.K. GAAP, of £1.9 million on thoseinstruments at that date.

 

With respect to currencytranslation risk, the financial condition and results of operations of ournon-U.K. businesses are measured and recorded in the relevant domestic currencyof the jurisdiction in which the business is located and then translated intopounds sterling for inclusion in our consolidated financial statements.    The exchange rate has remainedcomparatively stable during 2000, 2001 and 2002.  However, since September 2002, sterling has depreciated againstthe euro from €1.59 to €1.445 in June 2003 (Closing rate June 23 as reported inthe Financial Times).  If thisdepreciation is sustained it will have a positive impact on our sales andoperating profits as reported in pounds sterling in subsequent periods.

 

Approximately16% of the revenues of our continuing businesses in 2002 were denominated incurrencies other than pounds sterling. In addition, a portion of our expenses was denominated in currenciesother than pounds sterling.  Ourfinancial condition and results of operations, reported in pounds sterling, maytherefore be affected by fluctuations in the value of the local currencies inwhich we transact business. Furthermore, many of our raw materials are obtained from sources outsidethe U.K. and therefore such costs are incurred in currencies other than thepound sterling.  While we engage inforeign exchange hedging transactions, we cannot assure you that exchange ratefluctuations will not have a material adverse effect on our own financialposition.

 

Thefinal stage of the European Economic and Monetary Union (“Stage III”) began onJanuary 1, 1999 in 11 E.U. Member States. The 11 participating countries adopted fixed conversion rates betweentheir existing currencies and the euro, the currency that has been adopted astheir common legal currency, and then on January 1, 2002 converted their legacycurrencies into the euro at the fixed conversion rates.  Euro notes and coins were introduced onJanuary 1, 2002, and the legacy currencies ceased to be legal tender byFebruary 28, 2002.  The U.K. is notcurrently a Stage III participant, although the U.K. Government has stated thatthe U.K. might join the single currency at a later date.  If the U.K. adopts the euro, the euro willreplace the pound sterling as the U.K.’s legal currency andsterling-denominated Notes will be effectively redenominated into euro.

 

Franceand Holland participated in Stage III, and have converted their legacycurrencies into the euro.  The value ofour revenues and assets denominated in euro will therefore decline relative torevenues and assets that are denominated in other currencies, such as the poundsterling or the dollar, if the value of the euro declines.

 

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**Item 4****.    INFORMATIONON THE COMPANY**

 

**A.            History and Development of the Company**

** **

Premier Foods plc was incorporated on May 12, 1999 inEngland and Wales as a public company with limited liability under the name ofQueensbury Finance plc.  On July 15,1999, its name was changed to Premier International Foods plc and changed againto Premier Foods plc on September 23, 2002. Both Premier and its wholly owned subsidiary, Premier Financing, wereformed as financing vehicles in connection with Hicks Muse’s acquisition ofPremier Holdings in August 1999. Premier Holdings was a holding company with operating subsidiariesengaged in the grocery, furniture and poultry businesses.  As part of this acquisition, PremierHoldings undertook a reorganization in which it transferred its furniture andpoultry businesses to other entities controlled by Hicks Muse, and PremierHoldings was recapitalized as a grocery business on a stand-alone basis.  On October 29, 1999, Premier Holdingsundertook a further reorganization in which the parent company of PremierHoldings, HMTF Premier Limited, made a gift to it of 100% of the ordinary sharecapital of Premier and in turn Premier Holdings transferred all of itssubsidiaries (with the exception of JJ Yates & Co Limited and CitadelInsurance Limited) to Premier for which it received in consideration £60.0million of newly issued ordinary shares in Premier.  Premier in turn transferred those subsidiaries to PremierFinancing for which it received in consideration £60.0 million  of newly issued ordinary shares in PremierFinancing.

 

For information regarding acquisitions anddispositions of our material assets and our principal capital expenditures anddivestitures, see Item 5.A. “Operating Results” and Item 5.B. “Liquidity andCapital Resources.”

 

Our registered office is located at 28 The Green,Kings Norton, Birmingham, United. Kingdom, B38 8SD and our telephone number is+44 121 458 2403. Our principal executive office is located at Premier House,Centrium Business Park, Griffiths Way, St Albans, Hertfordshire, AL1 2RE,United Kingdom and our telephone number is +44 1727 815 859. We have appointedCT Corporation System, 111 Eighth Avenue, New York, New York 10011, as ouragent to receive service of process.

 

**B.            Business Overview**

 

**Overview**

** **

Weare a leading U.K. manufacturer and marketer of a diversified portfolio ofshelf-stable grocery products and one of the largest suppliers of groceryproducts in the U.K. We manufacture and market grocery products for theretail grocery and food service markets in three principal product types: (i)canned foods, pickles and sauces; (ii) beverages; and (iii) spreads (togetherour “grocery products business”).  Wealso operate a potato packing and marketing business supplying the retail grocery,food service and food manufacturing markets. Until January 2001, when we disposed of our biscuits operations, we alsomanufactured and marketed biscuits and cookies.

 

Our products are soldunder both private label and our own popular brand names, which include *HP* canned foods (under license), *Typhoo* tea, *Cadbury’s* chocolate drink mixes (under license), *Branston* and *Haywards* pickles, *Sarsons*vinegar, *Loyd Grossman* cookingsauces (under license), *Waistline*dressings,*Marvel* powdered creamer, *Chivers* and *Hartley’s* preserves, *SunPat*peanut butter, *Rowntree’s* (underlicense) and *Chivers* jelly, *Gale’s*honey and lemon curd, *Smash* instant potato and *Materne* compote and jam.

 

Ourbalanced portfolio of market-leading branded and private-label productsprovides us with stable revenue and cash flow and, together with ourcomprehensive manufacturing and distribution capabilities, gives us a strongplatform for introducing new products and product line extensions.  In addition, as one of the largest suppliersof grocery products in the U.K., we are able to develop strong relationshipswith our principal customers, the major grocery retailers, and to realizeeconomies of scale in sourcing of raw materials, manufacturing, distributionand marketing.

 

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**Recent developments**

** **

InMay 2002, we acquired the ambient foods manufacturing business in the U.K. ofNestlé SA (“Nestlé”) for a net consideration of £132.2 million.  The acquired business spans a broad range ofproduct categories, including pickles, vinegars, sauces, sweet spreads,preserves and ambient desserts.   Thepurchase price was funded by additional borrowings under the Senior CreditFacility (see Item 5.B. “Liquidity and Capital Resources”).  The rights to acquire the ambient foodsmanufacturing business in the Republic of Ireland of Nestlé SA, which wereincluded in the original acquisition agreement, were sold onto a managementbuy-in team in July 2002.  Theadministrative functions of Nestlé were integrated into our existing businessby December, 2002.  A review of themanufacturing platform was completed in the first quarter of 2003.  We have completed the consultation processand agreement has been reached with the representatives that we will close ourHadfield factory. It is intended that the operations will be integrated intoour existing spreads factory in Histon and the pickles factory in Bury St.Edmunds.  The integration should becompleted by December 2003.  We made noprovision at December 31, 2002 for the costs of integrating the manufacturingplatform.

 

**Industry**

** **

TheU.K. market for grocery products has demonstrated consistent growth over thepast five years.  According to the U.K.Office for National Statistics (“Business Monitor SDM28”), consumer spending onfood, drink and tobacco has grown from approximately £76.1 billion in 1998 toan estimated £91.6 billion in 2002, a compound annual growth rate ofapproximately 3.8%.  There has been moregrowth in the higher-margin value-added segment of the market.  Consumer trends favoring convenience,snacking, variety, health and nutrition have underpinned faster-growingcategories such as chilled and fresh produce, prepared and semi-prepared foods,biscuits, cakes, cereals and snacks.

 

TheU.K. grocery products market can also be characterized as being highlycompetitive.  Intense competition amonglarge national grocery retail chains has (i) led to a wave of consolidationamong retailers, (ii) increased the purchasing power of these retailers and(iii) prompted a rationalization of their supplier base.  With the majority of all retail food salesgenerated in supermarkets and hypermarkets, grocery manufacturers have soughtto maintain profit growth by working in partnership with these nationalretailers in both new product development and the broadening of private labelcategories.  It has, therefore, been thelargest U.K. grocery manufacturers that have succeeded in adapting toretailers’ demands for the nation-wide supply of a broad range of branded andprivate label products.

 

**Company Products**

** **

Sales from continuingoperations were £882.3 million for 2002, an increase of £37.1 million, or 4.4%,as compared to sales for 2001 of £845.2 million.  The increase in sales was principally due to the acquisition ofthe U.K. ambient food business of Nestlé, which contributed £55.6 million ofsales in 2002 and increased spreads sales of £7.0 million, principally as aresult of Nelsons contributing to sales for the full year.  The increase in sales was offset by a reductionof £7.7 million in the value of sales of potatoes and a reduction of £16.8million in sales in our existing canning, pickles and sauces business (*i.e.* excluding Nestlé).

 

***Canned Foods, Pickles and Sauces***

*** ***

Thetotal canned goods market is worth around £1.7 billion and contains 14 sectorsincluding baked beans, tinned soup, canned hot meats and canned fruit.According to a recent survey, at least 99.6% of U.K. households have boughtinto this market at least once during the year. We are the largest domesticmanufacturer of canned foods in the U.K. market.  We compete in substantially all product segments of the market,including the baked bean, pasta, soup, vegetable, fruit pie filling, meat andcasserole segments.  We are the marketleader in the vegetable and baked bean segments and in second position in thepasta segment, with market shares of 61%, 49% and 36%, respectively.  A big share of sales in the canned marketare own label products and we compete in both the branded and own labelmarkets; sales of our private label and branded canned foods accounted forapproximately 72% and 28%, respectively, of our canned foods revenues in 2002.We are a leading manufacturer of branded and private label pickles and saucesin the U.K.  Our sales of branded and privatelabel pickles and sauces products accounted for approximately 53% and 47%,respectively of our 2002 sales in this product category.  Our key brand names in the canned food,pickles and sauces group are *Branston*,***HP*,*Smash*,*Hartley*,***Haywards*,*Waistline and Loyd Grossman.*

* *

Sales of canned foods, pickles and sauces were £375.8 million for 2002,an increase of £13.4 million, or 3.7%, over sales of £362.4 million for2001.  The acquisition of Nestlécontributed sales of £30.2 million from date of acquisition to year end.  Excluding Nestlé, sales in our existingbusiness decreased by £16.8 million as a result of the business exiting anumber of low-margin contracts.

 

16

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| **Category**                      |   | **Company Revenues  (pounds sterling  in millions)** |      | **U.K. Market Share** |   | **Key Competitors**            |                      |
|-----------------------------------|--------|------------------------------------------------------|-----------|-----------------------|--------|--------------------------------|---------------------------|
|                              |   | **Year Ended  December 31, 2002**                    |      |                  |   |                           |                      |
| Canned foods, pickles and sauces: |   |                                                 |      |                  |   |                           |                      |
| Vegetables(1)                     |   | £                                               | 90.3      |                  | 61     | %                              | Campbells, La D’Oria |   |
| Baked beans and variants          |   | 102.9                                                |      | 50                    | %      | Heinz                          |                      |
| Pasta                             |   | 26.4                                                 |      | 36                    | %      | Heinz                          |                      |
| Soups (2)                         |   | 21.2                                                 |      | 11                    | %      | Heinz;  Campbell’s        |                      |
| Meats (3)                         |   | 9.3                                                  |      | 15                    | %      | Campbell’s;  Master Foods |                      |
| Fruit and fruit pie fillings      |   | 28.9                                                 |      | 10                    | %      | Del  Monte, Kerry Foods        |                      |
| Instant mashed potatoes           |   | 9.4                                                  |      | 49                    | %      | Various                        |                      |
| Pickles                           |   | 34.8                                                 |      | 42                    | %      | Hazelwood,  Baxters            |                      |
| Sauces(4)                         |   | 27.2                                                 |      | n/a                   |   | Master  Foods, Unilever        |                      |
| Vinegar                           |   | 13.0                                                 |      | 36                    | %      | Mitsubishi                     |                      |
| Other                             |   | 12.5                                                 |      |                  |   |                           |                      |
|                              |   |                                                 |      |                  |   |                           |                      |
| **Total**                         |   | **£**                                           | **375.8** | ** **            |   | ** **                     |                      | ** ** |

 

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| (1) |   | Excludes tomatoes.                                                                                                          |
|-----|--------|-----------------------------------------------------------------------------------------------------------------------------|
| (2) |   | Excludes retail pouches.                                                                                                    |
| (3) |   | Includes  only canned meats that require heating such as stews, curries and chilli.                                         |
| (4) |   | The  sauces market covers a range of different sub-markets which prevents  calculation of a U.K. sauces market share figure |

 

 

Withinthe canned foods, pickles and sauces category, our key product segments are (i)baked beans and variants, (ii) vegetables, (iii) pasta, (iv) soups, (v)pickles, (vi) sauces and (vii) vinegar.

 

*Baked Beansand variants. *We are the largest U.K. manufacturer and marketerin the £235 million U.K. canned baked bean market.  Approximately 17% of our sales in this category are attributableto *HP*, the number two U.K. brandof baked beans (behind Heinz).**Theremaining 83% of our 2002 sales in this product segment were from private labelsales, including value formats. Although the canned baked bean market is arelatively mature and stable market, it is the third largest sector in thecanned foods market, in which we have successfully grown the *HP* brand through product extensions; weoccupy the leading position in baked bean meal offerings through *HP* sub-brands “All-Day Breakfast” and “TheFull Monty” and private label products. We seek to grow by further developingproduct extensions and variants that can be sold both under our brand names andunder private labels.

 

*Vegetables. *We are the largest manufacturer of canned vegetables in the £211 millionU.K. canned vegetable (excluding tomatoes) market.  The majority of our 2002 sales in canned vegetables are fromsales to the private label market, but we also have a strong branded presencein many seasonal products such as peas and carrots.

 

*Pasta. *We are the second largest U.K. manufacturer in the £113 million U.K.canned pasta market.  *HP*pasta accounts for approximately onefifth of our sales in this category, with the balance comprising private-labelsales.  As with baked beans, the cannedpasta market is mature, and we seek to expand our offering through theintroduction of product extensions of our established products, for examplethrough character licensing, where 2002 sales included *Scooby Doo*and *Bob the Builder* pasta meals.

 

*Soups.   *Canned soup is the second largest sectorwithin the canned goods market, with a U.K. value of around £324 million. We compete with *Campbells*in the private label cannedsoups and are the second largest manufacturer of canned soups overall. We manufactureand market our products almost exclusively for the private label market.

 

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*Sweetpickles. *We manufacture *BranstonPickle*(recently acquired from Nestlé), the strong leader in thesweet pickle category, with a brand share of around 80%. The recipe remainsunchanged since its launch in 1922 and includes some 23 ingredients. The brandenjoys household penetration of 35% and consumer awareness of over 95%. Webelieve there is the opportunity to turn *Branston*into a significantly larger brand by extending it into adjacent categories ofthe pickle segment. The brand has enjoyed several successful productextensions, including “Sandwich Pickle” (1987), “Spicy Pickle” (1991), “TomatoPickle” (1996) and “Branston Smooth” (2001); more recently we have enjoyed asuccessful licensing initiative with *Walker’s*crisps’ “Great British Flavours” range. We are the largest U.K.manufacturer in the own label market, with products in this sector includingsweet pickles, relishes and chutneys.

 

*Sour pickles.*We are a leading manufacturer of sour pickles in the U.K. market, with asegment share of around 28%. We market a variety of pickled onions, gherkinsand beetroot under the number one *Haywards*brand,as well as under private-label; the latter accounts for approximately 59% ofcategory sales. We are planning to significantly increase the branded mixwithin the sour pickles category by leveraging the recently acquired *Branston* brand as well as by extending the*Haywards* brand.

** **

*Cooking sauces*. The cooking sauces market is valued at morethat £510 million and is a key category within the grocery sector. Over 90% ofour sales in this category are attributable to branded sales, mainly throughthe *LoydGrossman*brand, which shows strong year-on-year sales growth at thepremium end of the market. Cooking sauces are largely split between Italianpasta and more ethnic Indian, Chinese and New World cook-in sauces; *Loyd Grossman*sauces offer consumers arange of flavors within these categories, including tomato and basil, tomatoand chilli, sweet red pepper, puttanesca, bacon, tikka masala and green thai.

 

*Malt andspeciality vinegar.*We are the second largest brewer of malt andspeciality vinegars in the U.K. market. The *Sarson’s*brand (which weacquired from Nestlé) is synonymouswith malt vinegar in the U.K., originating in 1794 and featuring in the top 10sauces and condiments brands by value. It enjoys significant out-of-homepresence in the foodservice channel. We also manufacture *Dufrais* (also acquired from Nestlé), thenumber one U.K. speciality vinegar brand, which has a 10% share by volume ofthe highly fragmented U.K. market. We produce varieties that include whitewine, red wine, raspberry, cider, garlic, sherry and tarragon vinegars.

 

*Salad dressings.*Following the acquisition from Nestlé we now manufacture *Waistline*, the third largest brand in theU.K. low fat salad dressing market. The *Waistline*Dressings range consists of five variants: “Salad Cream”,“Vinaigrette”, “Creamy Italian”, “Creamy Thousand Island” and “Creamy Caesar”.We are extending the *Waistline*brand into low calorie pouch soups.  Wealso manufacture a range of dressings under the *Loyd Grossman* brand and expect strong growth for the brandgoing forward.

 

*Other.    *We manufacture and market the U.K. leading instant mashed potato brand, *Smash,*which has a brand share in the U.K. of around 75%. We expect to further extendthe brand in 2003 through product extensions and listing gains.  In addition, we produce canned meats andcasseroles and fruit pie fillings.

* *

***Beverages***

*** ***

Sales of beverages were £172.8 million for 2002, a decrease of £1.0million, or 0.6%, compared to sales of £173.8 million for 2001.  Our chocolate beverages business continuedto perform well with sales for the full year 3.4% ahead of last year.  A decrease in our tea sales during 2002 wasdue to the exit from marginal and under-performing contracts with increasedcompetition in the own label tea market due to excess capacity, offset bygrowth in sales of our *Typhoo*brand through the major multiple retailers. 

*** ***
| **Category**                    |   | **Company Revenues  (pounds sterling  in millions)** |      | **Market Share** |   | **Key Competitors**   |                   |
|---------------------------------|--------|------------------------------------------------------|-----------|------------------|--------|-----------------------|------------------------|
|                            |   | **Year Ended  December 31, 2002**                    |      |             |   |                  |                   |
| Beverages:                      |   |                                                 |      |             |   |                  |                   |
| Tea                             |   | £                                               | 97.4      |             | 23     | %                     | Tetley;  Unilever; ABF |   |
| Hot chocolate and malted drinks |   | 51.8                                                 |      | 41               | %      | GlaxoSmithKline;  ABF |                   |
| Powdered milk creamer           |   | 19.9                                                 |      | 82               | %      | Dairy  Crest          |                   |
| Other                           |   | 3.7                                                  |      |             |   |                  |                   |
|                            |   |                                                 |      |             |   |                  |                   |
| **Total**                       |   | **£**                                           | **172.8** | ** **       |   | ** **            |                   | ** ** |

 

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Weare a leading supplier of tea and the largest supplier of chocolate beveragesand milk creamers to the U.K. market.

 

*Teas.* We are the thirdlargest supplier of tea in the £574 million U.K. tea market. Branded sales, principally the *Typhoo*brand(the number three U.K. tea brand), represent over half of our total tea salesin 2002.  In addition to traditionaltea, we also market *Lift,*the largest instant lemon tea brandin the U.K. and *London Fruit and Herb*infusions, which is the second largestbrand of fruit and herbal infusions in the U.K.  In addition to marketing tea for the retail grocery market, wealso pack and market tea for sale to the catering and vending trades. In 2002,we were the largest supplier of own label tea to the U.K. market, with thewidest category coverage in the marketplace and the only player with a mixedbranded and own label product offering. In the past 12 months we have led asuccessful turnaround of our tea business, by exiting under-performing ownlabel contracts, dramatically changing our promotional strategy andre-positioning the core *Typhoo*brandaway from direct competition with the leading brands.

 

*Hot chocolateand malted drinks.*We arethe leading supplier in the £107 million U.K. hot chocolate and malted drinksmarket. Approximately 97% of sales of our hot chocolate and malted drink salesin 2002 were from branded products, principally under the *Cadbury’s* brand name whichenjoys a 60% market share of the traditional drinking chocolate category; thiscategory includes*Cadbury’s*cocoa, *Cadbury’s*drinking chocolate, *Bournvita,Chocolate Break*and*Highlights*.  Growth in the U.K. hot chocolate and malted drinks market isprimarily due to the strong growth in instant products (which are mixed withwater rather than milk), where our *CadburyChocolate Break*and *Highlights*brands are the market leaders in their respective standard and diet instant hotchocolate market sectors.

 

*Powdered milkcreamers. *We are the leading supplier in the £16 millionpowdered milk creamer market in the U.K. Approximately 57% of our powdered milkcreamer sales in 2002 were from branded products, which are principally soldunder the *Marvel,Country Dale*and *CoffeeCompliment*brand names.

 

*Otherbeverages. *We supply other hot and cold beverages,principally coffee and soup, to be able to offer a complete range of beverageproducts to those customers who require it.

 

***Spreads***

*** ***

Sales of spreadswere £183.8 million for 2002, an increase of £32.4 million, or 21.4%, ascompared to sales of £151.4 million for 2001. Theacquisition of Nestlé contributed sales of £25.4 million from the date ofacquisition to December 2002.  Theremaining increase in sales is principally due to an additional £8.5 millionfrom Nelsons contributing to sales for a full 12 months in 2002; the businesswas acquired in October 2001.

 

Weare the largest manufacturer of preserves and spreads in the U.K., with leadingmarket positions across a variety of product segments. We have also establisheda position as a leading producer of jam and ambient fruit compote inFrance.  In the U.K., we market acomprehensive range of branded products under the *Hartley’s*,*Chivers*,*Rose’s*,*Gales*,*and Sun Pat*brands, and in France wemarket our products predominantly under the *Materne, Confipote*and *Boin*brands.  Our branded products accounted forapproximately 51% and 56% of our 2002 sales in the U.K. and France,respectively, in this product category.

 
| **Category**  |   | **Company Revenues  (pounds sterling  in  millions)** |      | **U.K./French  Market Share(1)** |   | **Key Competitors** |        |
|---------------|--------|------------------------------------------------------------|-----------|---------------------------------------|--------|---------------------|-------------|
|          |   | **Year Ended  December 31, 2002**                          |      |                                  |   |                |        |
| **U.K.**      |   |                                                       |      |                                  |   |                |        |
| Preserves     |   |                                                       |      |                                  |   |                |        |
| Jam           |   | £                                                     | 28.1      |                                  | 44     | %                   | RHM; Duerrs |   |
| Marmalade     |   | 15.3                                                       |      | 32                                    | %      | RHM; Duerrs         |        |
| Honey         |   | 10.0                                                       |      | 45                                    | %      | Rowse               |        |
| Peanut butter |   | 7.6                                                        |      | 65                                    | %      | Duerrs              |        |
| Jelly         |   | 16.6                                                       |      | 96                                    | %      |                |        |
| Other         |   | 14.0                                                       |      |                                  |   |                |        |
| **France**    |   |                                                       |      |                                  |   |                |        |
| Compote       |   | 26.1                                                       |      | 26                                    | %      | Andros              |        |
| Preserves     |   | 21.8                                                       |      | 7                                     | %      | Andros              |        |
| Other         |   | 44.3                                                       |      |                                  |   |                |        |
|          |   |                                                       |      |                                  |   |                |        |
| **Total**     |   | **£**                                                 | **183.8** | ** **                            |   | ** **          |        | ** ** |

 

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| (1) |   | Because  of the various packaging formats in this category, market share for this category  is based on value rather than volume. |
|-----|--------|-----------------------------------------------------------------------------------------------------------------------------------|

 

*Preserves.*We are the leading provider of jam and marmaladein the £144 million U.K. preserves market. We market our jams under the *Hartley’s*brand, which is the U.K.’s leading branded standard jam. In 2002, were-positioned the *Hartley’s*brandto create separate positioning and price points in the standard jam and premiumjam segments. The new *Hartley’s Best*producthas higher fruit content, more premium packaging and a higher price point,competing with *Bonne Maman* in the premium jam segment. In addition, thetraditional *Hartley’s*standardjam has been re-branded and re-packaged as *Hartley’sFamily*. We marketmarmalade under the *Chivers*(the number two U.K. brand)*, Rose’s*and *MaMade*brand names.  We are the largest supplier of private labelpreserves to the U.K. market; private label sales represented approximately 49%of our preserves sales in 2002.

 

Weare one of the leading manufacturers of preserved fruit products in the Frenchgrocery market. We are the leading producer of ambient fruit compote, with atotal category share of 38%, driven by the number one *Materne* brand. Approximately 90% of ourcompote sales are attributable to the *Materne*brand. We are also the second largest manufacturer of jam in the Frenchmarket, with a 7% share of the jam category. We produce jam under the *Boin, Materne*and *Confipote* brands and also manufactureprivate label jam for French retail customers. Approximately 30% of our total annual jam sales are private labelproduct.

 

*Compotes. *The compote market in France is a growing segment, with sales of almost£200 million in 2002, comprising fresh (chilled) and ambient (shelf-stable)products.  The sector is dominated bybranded products.  In France, we sellcompote under our *Materne*brand, which has a market share of approximately onequarter of the combined fresh and ambient compote market.

 

*Honey*and *lemon curd. *We are a leadingmanufacturer of honey in the U.K., with a total category share of over45%.  Due to the recent Nestlé acquisitionwe now manufacture the *Gale’s*brand, which is the number one honey brand in the everyday category inthe U.K. market, with a product heritage pre-dating World War I.  We are also a significant supplier ofprivate label honey to the U.K. market and the largest manufacturer of lemoncurd in the U.K.  The *Gale’s*brand is also the number one brand in theU.K. in this segment.

 

*Jelly.*We manufacture *Rowntree’s* jelly, the number one jelly brand in the U.K.,with a category share of over 96%. We manufacture the *Rowntree’s*brand under license from Nestlé; the brand is synonymous with jelly,having been associated with the product since 1934. Successful new productdevelopment initiatives over the years have contributed to the growth of thebrand. Having broadened the range of packaging formats, the product is nowwidely available in tablet, ready-to-eat (RTE) and dehydrated varieties, whichinclude sugar free formats. *Rowntree’s*RTEjelly is ideally placed to capitalize on the growing trends within thesingle-size, lunchbox and snack markets. We expect to further extend the brandinto the lunchbox and snacking sectors as well as building on recent growth inthe sugar-free variety.

 

*Peanut butter.*Following the acquisition from Nestlé, we are theleading manufacturer of peanut butter in the U.K. due to the strength of thenumber one *Sun-Pat*brand, whichenjoys a category share of around 33%. *Sun-Pat*is the original peanut butter in the U.K., having been on the marketfor over 35 years. The *Sun-Pat “*Creamy”variety was successfully re-launched as a line extension in 2001, extending thebrand’s share and penetration with the consumer. We are also a leadingmanufacturer of private label peanut butter, with a total category share ofapproximately 65%.

 

We also market mincemeat in theU.K. and Ireland.

 

***Potatoes***

*** ***

Sales of potatoes were £149.9 million for 2002, a decrease of £7.7million, or 4.9%, as compared to sales of £157.6 million for 2001.  An average decrease of 15.0% in the priceper tonne sold during 2002 arose from a very good 2002 harvest, which reducedmarket prices of potatoes in the second half of 2002.  The tonnage of potatoes sold in 2002 was 986,000 tonnes, anincrease of 105,000 tonnes, or 11.9%, on 2001.  The profitability of this business is not directly linked to themarket price of potatoes and hence sales value, but is largely dependent oncrop yields and quality.

 

20

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Weare the leading marketer, grader and distributor of fresh potatoes in the U.K.Our fresh potato divisions, MBM, procures its supply of potatoes directly fromgrowers principally in the U.K.  Ourpotato business had sales of approximately £149.9 million and handledapproximately 986,000 tons of fresh potatoes for the Year Ended December 31,2002.  Our potato business is dividedinto three revenue-generating areas: (i) the provision of value-added packagesof potatoes to grocery retailers, food service and wholesale customers (51%);(ii) the supply of potatoes to chip, snack food and other potato productmanufacturers (35%) and (iii) seed potatoes to potato growers (14%).  The potato marketing, grading anddistribution market is highly fragmented; the only other competitor of asimilar size is Greenvale AP. We also supply potato packages to the majormultiple retailers as well as the largest players in the food service andprocessing industries. MBM has achieved preferred supplier status with itsmajor retail customers and continues to focus on quality and productconsistency in order to achieve marginal growth in sales volumes.

 

**Sales, Marketing and Distribution**

** **

Wehave a sales team of approximately 130 employees.  The sales force generally consists of national accounts teams,which are assigned to handle each of our major retail and food servicecustomers.  Sales personnel assigned tomajor grocery retail accounts typically work with the national retail chains toestablish a marketing and promotion plan for our private label and brand name products,while sales personnel are assigned to food service accounts work to develop andprovide products meeting the particular specifications and needs of our foodservice customers.  Our sales team isgenerally supported by a sales support staff responsible for marketing,category management and new product development.

 

Tostimulate demand for our branded products, each product group establishesmarketing programs that include television and print advertisements for certainkey brands and in-store and on-package promotions.  In 2002, we spent approximately £48 million on television andprint advertising and trade promotions. These promotions are aimed at increasing consumer awareness, buildingcustomer loyalty and increasing the usage and purchasing frequency of ourproducts.  In addition, in somesegments, we assist our major grocery retailers to design and implementmarketing promotions for their private label business, which will in turnincrease their demand for our private label products.  We also conduct trade promotions aimed at increasing our salesamong grocery retailers, wholesalers, cash and carry retailers and food serviceproviders.

 

We distribute our products predominantly through third-party carriersfrom our approximately 21 points of distribution, including our production andwarehouse facilities.

 

The following table analyses our sales by geographicalorigin and geographical market for each of 2000, 2001 and 2002.  The table has been derived from and shouldbe read in conjunction with our audited consolidated historical financialstatements and the related notes included elsewhere in this Annual Report.

 

 
|                    |   | **Turnover by geographical  origin** |   | **Turnover by geographical  market** |   |
|-------------------------|--------|--------------------------------------|--------|--------------------------------------|--------|
|                    |   | **2000**                             |   | **2001**                             |   | **2002** |   | **2000** |   | **2001** |   | **2002** |   |
|                    |   | **£ millions**                  |   | **£ millions**                  |   |
| U.K.                    |   | 694.9                                |   | 723.4                                |   | 763.8 |   | 681.9 |   | 712.3 |   | 741.5 |   |
| Mainland Europe         |   | 123.6                                |   | 121.8                                |   | 118.5 |   | 129.3 |   | 124.4 |   | 129.3 |   |
| Other countries         |   | —                               |   | —                               |   | — |   | 7.3 |   | 8.5 |   | 11.5 |   |
| Continuing operations   |   | 818.5                                |   | 845.2                                |   | 882.3 |   | 818.5 |   | 845.2 |   | 882.3 |   |
| Discontinued operations |   | 215.1                                |   | 4.1                                  |   | 0.2 |   | 215.1 |   | 4.1 |   | 0.2 |   |
|                    |   |                                 |   |                                 |   |   |   |   |   |   |   |   |   |
| Total                   |   | 1,033.6                              |   | 849.3                                |   | 882.5 |   | 1,033.6 |   | 849.3 |   | 882.5 |   |

 

The review of accounting policies in 2001 required byFRS 18 “Accounting Policies” identified that certain sales deductions would bemore appropriately classified as a reduction in “sales” rather than “cost ofsales” and certain promotional expenditure would be more appropriatelyclassified as “selling and distribution expenses” rather than a reduction in“sales”.  This change of policy wasadopted in 2001 and the 2000 comparatives have been restated accordingly (seeNotes 1 and 2 to the Consolidated Financial Statements under Item 18 “FinancialStatements”).

 

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**Raw Materials**

** **

Theprimary raw materials used in our operations differ in each product group andinclude packaging materials, sugar, tea, glucose, fats, honey, peanuts, dairyproducts, seasonal and non-seasonal fruit and vegetables, dried pulses, tomatopaste and meat.  With the exception ofcocoa and certain cocoa-related products, which we are contractually obliged toacquire exclusively from Cadbury Limited, our raw materials are generallysourced from a number of different suppliers in the U.K., Europe, the U.S.,Asia and Africa.  We believe there are anumber of alternative suppliers for all our primary raw and packagingmaterials.  Our overall group buyingpower is used where appropriate to secure competitive prices for rawmaterials.  We do not generally enterinto supply contracts for terms of more than one year.

 

Asubstantial portion of our raw material purchases is made in currencies otherthan pounds sterling and accordingly we are subject to foreign exchange risk insourcing our raw materials.  In additionto this risk, the price of fruits, vegetables, tea, cocoa, honey, peanuts andpulses may be affected by crop quantity and quality and demand from other foodprocessors.  Sugar supplies are affectedby the E.U. common agricultural policy, which sets sugar production levels forMember States and a minimum intervention price, which is set in euros.  Packaging costs are affected by the price ofsteel, glass, paper and board and the level of competition within the industry.

 

Eachproduct group offers a wide product range and operates flexible workingpractices aimed at minimizing the impact which the seasonal availability of rawmaterials, such as fruits and vegetables, has on production.  Seasonality may mean that there are somecapacity limitations placed on some non-seasonal products at certain times ofthe year and the level of finished goods stockholding and associated workingcapital requirements may also be affected by the seasonality of supply ofcertain product categories.

 

**Customers**

** **

Ourcustomer base is comprised primarily of grocery retailers, includingsupermarkets, convenience stores, discounters, co-operatives and cash and carryretailers.  In addition, we also sell towholesalers and food service providers, and our potato packing and marketingbusiness supplies food processors and potato growers.  For our continuing businesses, our six largest customersaccounted for 50% of our revenues in 2002, with two customers accounting forover 10% of our revenues during that period.

 

**Competition**

** **

Thegrocery supply business is highly competitive. We compete in a substantial number of product markets and marketsegments, and the size, nature and position of our competitors within thesemarkets and segments vary substantially. Our competitors in some of the markets and market segments in which wecompete may have substantially greater resources and stronger market positionsthan we have.  Our strategy forcompeting with our competitors varies from market to market, but generally weseek to compete on the basis of breadth of product offerings, service, qualityand price.  For additional informationregarding our primary competitors within our key product groups, see theinformation under the subheadings “— Canned Foods, Pickles and Sauces”, “—Beverages”, “— Preserves” and “— Potatoes”.

 

**Trademarks and Licenses**

** **

Weown a substantial number of registered and unregistered trademarks in countriesthroughout the world for use in connection with the sale and marketing of ourvarious food products.  These trademarksare important in the aggregate because brand name recognition is a key factorin the success of many of our product lines. The current registrations of these trademarks are effective for varyingperiods of time and may be renewed periodically, provided we comply with allapplicable laws.  We are not aware of anymaterial challenge to our ownership of our major trademarks.

 

Weare licensed by Cadbury Schweppes plc to use the *Cadbury*and *Cadbury’s*brandnames in connection with our manufacture and marketing of cocoa-based beverageson current terms.  Our *Cadbury’s*cocoa-basedbeverages contributed approximately 6% to the sales of our continuingbusinesses in 2002.  Our license to usethe *Cadbury*and *Cadbury’s*brand names for these beverages expires in2006.  This license under which wemanufacture and market hot chocolate drinks is automatically renewable in 2006unless Cadbury Schweppes plc gives notice that it will not renew this licenseon or before one year prior to the expiration of the initial term of thelicense.  In a letter dated April 30,2003, Cadbury Schweppes plc expressed their intention not to renew the licensebeyond 2006 on current terms.  They havenot yet served formal notice on us regarding non-renewal of the license, andnegotiations regarding the future trading relationship are ongoing.

 

22

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Inconnection with our manufacture and marketing of *HP*canned baked beans andpasta, we have been granted a license by HP Foods Limited to use the *HP*brand name.  The license is for a termof 10 years and is scheduled to expire in March 2006.  The license agreement contains no provision for renewal, and anyrenewal is subject to the parties’ future intentions.

 

Theacquisition of Nestlé included a license from Nestlé SA for the use of the *Rowntree’s*brand name in respect of the production and sale of jelly.  The license is scheduled to expire in June2012.  The license agreement contains noprovision for renewal, and any renewal is subject to the parties’ futureintentions.

 

Wehave been granted an exclusive, worldwide license to use the *Loyd Grossman* name on sauces, dressings,accompaniments and toppings, marinades, oils and salad dressings for a term of10 years until December 2011. There are provisions to extend the license toadditional products.

 

Inaddition to the licenses described above, we also have third-party licenses forthe use of the *Rose’s, Cadbury’s*and *Heinz WeightWatchers*brand names oncertain of our jam and marmalade and sweet spread products.  We also from time to time enter into royaltyagreements with various licensors in connection with our television and filmtie-in products.

 

Althoughwe expect our material licenses to be renewed on acceptable terms, we cannotassure you that we will be able to renew all these licenses or that the licensorswill offer to do so on terms acceptable to us. The failure to renew one or more of our material licenses could have amaterial adverse effect on our ability to market certain products and on ourresults of operations.

 

**Government Regulation**

** **

Asa manufacturer of products intended for human consumption, we are subject toextensive governmental regulation.  Weare subject to regulation in the U.K. with respect to the composition,packaging, labeling, advertisement and safety of our products, the health, safetyand working conditions of our employees and our competitive and marketplaceconduct.  In addition, as a companywithin the jurisdiction of the E.U., we are subject to various directives andother regulatory promulgations of the E.U. covering, among other things,product manufacturing, composition, ingredients, labeling, packaging andsafety.  The cost of compliance with thePackaging Directive introduced in 1998, is estimated at approximately £1.0million.

 

Ouroperations and properties are also subject to a wide variety of E.U., U.K. andlocal laws and regulations governing the use, storage, handling, generation,treatment, emission, release, discharge and disposal of hazardous materials,substances and wastes and the remediation of contamination to the environment.At our Wisbech canning plant we are ensuring our compliance with air qualityregulations, which become mandatory in 2003 by burning low-sulfur coal in thecoal-fired boilers. We are currently in discussions with the authorities withrespect to the emission levels now being achieved, but may need to introduce afiltration system at a cost of approximately £0.5 million.  In addition, we are expanding the capacityof our effluent plant at our Bury manufacturing facility to ensure that it hassufficient capacity following the transfer of production from our Hadfieldmanufacturing facility.

 

Exceptfor these programs, we do not believe, based upon our experience to date, thatthe future cost of compliance with existing environmental laws and regulations,and liability for known environmental claims will have a material adverseeffect on our business or financial position. However, future events, such as changes to existing laws and regulations(or in their interpretation) and more vigorous enforcement by regulatoryagencies may give rise to additional expenditures or liabilities that could bematerial to our business.

 

Inaddition to existing regulatory legislation, several legislative initiativesare under consideration which may have an effect on our operations, includingthe Integrated Pollution Prevention and Control initiative, which, if enacted,would set further standards for air emissions in furtherance of clear air.

 

Fromtime to time, additional legislation may be introduced that may affect ouroperations and the conduct of our business, and we cannot provide assurancethat the cost of complying with the legislation or that the effects of thelegislation will not have a material adverse effect on our profitability orfinancial condition in the future.

 

**Seasonality**

** **

Historically, our saleshave been higher during the first and fourth quarters than during the secondand third quarters.  Within our cannedfoods, pickles and sauces business, consumer demand for canned foods tends tobe higher in the colder months of the year, with increased sales during theautumn and winter and lower sales during the spring and summer and we generallyhave a significant increase in sales of our pickles and sauces during thepre-Christmas period.  Our hot chocolateand malted drinks business is affected by seasonal changes in temperature, withsales usually declining during the warm summer months.  In addition, our working capital 

 

23

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requirements are affectedby the seasonal nature of our sales and production as a portion of our seasonalcanned products is packed during the months from July to September. Weanticipate that the acquisition of theNestlé ambient business in the U.K. has not altered the seasonal profile of oursales as the businesses acquired had a similar profile to our existing productportfolio.

 

As a result of theseasonality of our sales, the results of our operations for any given fiscalquarter will not necessarily be indicative of our results for the fullyear.  The sales of our principalproduct groups (excluding potatoes) in the four fiscal quarters of 2002 areshown in the table below:

 
|                                  |   | **Fiscal Year Ended December 31, 2002** |   |
|---------------------------------------|--------|-----------------------------------------|--------|
|                                  |   | **First  Quarter**                      |   | **Second  Quarter** |   | **Third  Quarter** |   | **Fourth  Quarter** |   | **Total** |   |
|                                  |   | **£ millions**                     |   |
| **Sales**                             |   |                                    |   |   |   |   |   |   |   |   |   |
| Canned  foods, pickles and sauces (1) |   | 85.5                                    |   | 86.1 |   | 82.1 |   | 91.9 |   | 345.6 |   |
| Beverages                             |   | 44.0                                    |   | 41.2 |   | 40.6 |   | 47.0 |   | 172.8 |   |
| Spreads  (2)                          |   | 40.1                                    |   | 39.2 |   | 39.7 |   | 39.4 |   | 158.4 |   |
|                                  |   |                                    |   |   |   |   |   |   |   |   |   |
|                                  |   | 169.6                                   |   | 166.5 |   | 162.4 |   | 178.3 |   | 676.8 |   |
|                                  |   |                                    |   |   |   |   |   |   |   |   |   |
| Acquisitions                          |   |                                    |   |   |   |   |   |   |   | 55.6 |   |
| Potatoes (3)                          |   |                                    |   |   |   |   |   |   |   | 149.9 |   |
|                                  |   |                                    |   |   |   |   |   |   |   |   |   |
| Turnover  from continuing operations  |   |                                    |   |   |   |   |   |   |   | 882.3 |   |

 

----

(1)           Excluding sales from Nestlé of £30.2million.

(2)           Excluding sales from Nestlé of £25.4million.

(3)                               Potatoesare excluded from the seasonality table, as the value of our potato sales isprincipally dependent on the price at which potatoes are traded in thecommodity markets, which is principally dependent on the quality and size ofthe U.K. potato harvest, which can vary significantly from year to year.

 

24

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**C.            Organizational Structure**

** **

In connection with the acquisition of Nestlé, the following revisionswere made to our organizational structure:

 

•                  the third-party co-investors exchanged theirshares in Premier Holdings for shares in HMTF Premier Limited;

 

•                  the third-party co-investors and Hicks Musecontributed their shares in HMTF Premier Limited for a limited partnershipinterest in Premier Investment Holdings L.P., a newly formed limitedpartnership registered in the Cayman Islands; and

 

•                  a new company,Premier Investments, was formed and HMTF Premier Limited transferred its entireshareholding in Premier Holdings to it.

 

The following chart shows ourorganizational structure:

 

 

25

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Our material subsidiaries at December 31, 2002were as follows:

 
| **Subsidiary  Undertakings**             |   | **Country  of  incorporation or  registration and  principal operations** |   | **Business**                                      |   | **Percentage  owned** |
|------------------------------------------|--------|---------------------------------------------------------------------------|--------|---------------------------------------------------|--------|-----------------------|
|                                     |   |                                                                      |   |                                              |   |                  |
| **Financing**                            |   |                                                                      |   |                                              |   |                  |
|                                     |   |                                                                      |   |                                              |   |                  |
| Premier Financing Limited                |   | England and Wales                                                         |   | Financing                                         |   | 100                   |
|                                     |   |                                                                      |   |                                              |   |                  |
| **Grocery products**                     |   |                                                                      |   |                                              |   |                  |
|                                     |   |                                                                      |   |                                              |   |                  |
| Chivers Hartley Limited                  |   | England and Wales                                                         |   | Preserve and pickle manufacturing                 |   | 100                   |
|                                     |   |                                                                      |   |                                              |   |                  |
| H.L. Foods Limited                       |   | England and Wales                                                         |   | Food canning and processing                       |   | 100                   |
|                                     |   |                                                                      |   |                                              |   |                  |
| Jonker Fris BV                           |   | Netherlands                                                               |   | Food canning and processing                       |   | 100                   |
|                                     |   |                                                                      |   |                                              |   |                  |
| Materne  Boin SA                         |   | France                                                                    |   | Preserve and fruit  compote  manufacturing   |   | 100                   |
| Premier Ambient Products (U.K.) Limited  |   | England and Wales                                                         |   | Preserve, pickle and  vinegar  manufacturing |   | 100                   |
|                                     |   |                                                                      |   |                                              |   |                  |
| Premier International Foods U.K. Limited |   | England and Wales                                                         |   | Hot and cold beverages manufacturing              |   | 100                   |
|                                     |   |                                                                      |   |                                              |   |                  |
| **Potatoes**                             |   |                                                                      |   |                                              |   |                  |
|                                     |   |                                                                      |   |                                              |   |                  |
| MBM Produce Limited                      |   | England and Wales                                                         |   | Potato processing and grading                     |   | 100                   |

 

26

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**D.            Property, Plants and Equipment**

** **

Weoperate the production and processing plants described in the following table,all of which are owned and located in the U.K., except where noted.  We believe that our manufacturing plantshave sufficient capacity to accommodate our planned growth.

 
| **Location**                    |   | **Building area** |   | **Products manufactured**                                                 |
|---------------------------------|--------|-------------------|--------|---------------------------------------------------------------------------|
|                            |   |              |   |                                                                      |
| Long  Sutton                    |   | 40,000 m2         |   | Canned  and bottled foods (vegetables, baked beans, pasta and meat)       |
| Wisbech                         |   | 28,622 m2         |   | Canned  and bottled foods (vegetables, baked beans pasta, soup and fruit) |
| Heusden,  Holland (Jonker Fris) |   | 34,609 m2         |   | Canned  and bottled foods (vegetables and fruit)                          |
| Moreton                         |   | 29,000 m2         |   | Standard  mainstream tea                                                  |
| Knighton                        |   | 10,856 m2         |   | Chocolate  drinks and beverage whiteners                                  |
| Edinburgh(1)                    |   | 4,052 m2          |   | Fruit,  herb and specialty teas                                           |
| Histon                          |   | 27,890 m2         |   | Jams,  marmalades, honey and jelly                                        |
| Bury  St. Edmonds               |   | 12,600 m2         |   | Pickles  and sauces                                                       |
| Boué, France               |   | 21,000 m2         |   | Jams and ambient fruit compote                                            |
| Biars sur Cere, France          |   | 21,400 m2         |   | Jams                                                                      |
| Villeneuve sur Lot, France      |   | 5,500 m2          |   | Jams  and preserved fruit                                                 |
| Middleton(3)                    |   | 12,500 m2         |   | Vinegar                                                                   |
| Hadfield(3)                     |   | 30,296 m2         |   | Pickles  and sweet spreads                                                |
|                            |   |              |   |                                                                      |
| **Plants closed in 2002**       |   |              |   |                                                                      |
|                            |   |              |   |                                                                      |
| North  Walsham                  |   |              |   | Canned  foods (baked beans and meat)                                      |
| Aintree(2)                      |   |              |   | Jams,  marmalades, honey, jelly and mincemeat                             |

 

----

(1)                                 Leased.

(2)                                 The Aintree plant was closed in April 2002 andthe production transferred to our Histon plant. The North Walsham plant wasclosed in October 2002 and the production transferred to our Long Sutton andWisbech plants.

(3)                                 The Middleton and Hadfield sites were acquired onMay 27, 2002, as part of the Nestlé acquisition. Following a consultationprocess, agreement has been reached to close our Hadfield factory.

 

Inaddition to the production and processing facilities listed above, we own sevenadditional facilities in the U.K. that are utilized by our potato packing andmarketing business for potato packing, processing, grading, washing andstorage.

 

Inaddition to warehousing located at our manufacturing sites, we utilize 16strategically located warehouse and storage facilities in the U.K.  Five are used by our canned foods, picklesand sauces and preserves businesses and three used by our beverages business,with one further facility in Northern Ireland that services our full range ofproducts.  We operate three of thesefacilities with the operation of the other six facilities being contracted outto third parties.  We lease the threewarehouse and storage facilities that we operate in the U.K.  In addition, our Materne business utilizes athird party to store and distribute its products in France.  The remaining seven warehouse and storagefacilities are used by our potato packing and marketing business.

 

Allour property, plant and equipment have been pledged as security to the lendersof the Senior Credit Facility under the terms of the Senior Credit Facility.

 

Our past and presentbusiness operations and ownership of real property are subject to a broad rangeof environmental laws and regulations in each of the jurisdictions in which weoperate, such as the Environmental Protection Act 1990 and the Water ResourcesAct 1991.  See Item 4.B. “BusinessOverview — GovernmentRegulation”.

 

27

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**Item 5****.    OPERATINGAND FINANCIAL REVIEW AND PROSPECTS**

** **

**A.            Operating Results**

** **

*The following is a discussion of ourfinancial condition and consolidated results of operations for 2000, 2001 and2002, and of the significant factors affecting them.  You should read the following discussion in conjunction with the“Selected Historical Combined and Consolidated Financial Data” and our auditedconsolidated historical financial statements and the related notes theretoincluded elsewhere in this Annual Report. You should note that our financial statements have been prepared inaccordance with U.K. GAAP, which differs in certain material respects from U.S.GAAP.  The significant differencesbetween U.K. GAAP and U.S. GAAP are described in Note 24 to our consolidatedfinancial statements included elsewhere in this Annual Report.*

* *

**Overview**

** **

We manufacture andmarket grocery products for the retail grocery and food service markets inthree principal product types: (i) canned foods, pickles and sauces; (ii)beverages; and (iii) spreads, (together our “grocery products business”).  We also operate a potato packing andmarketing business supplying the retail grocery, food service and foodmanufacturing markets.  Until January2001, when we disposed of our biscuits operations, we also manufactured andmarketed biscuits and cookies.  Ourproducts are sold under both private label and our popular brand names, whichinclude *HP*canned foods, *Typhoo* tea, *Cadbury’s* chocolate drink mixes, *Branston* and *Haywards* pickles, *Sarsons*vinegar, *Loyd Grossman* cookingsauces, *Marvel*powdered creamer, *Chivers* and *Hartley’s* preserves, *Sun-Pat* peanut butter, *Rowntree’s* and *Chivers* jelly, *Smash* instant potato and *Materne*compote and jam. Until February 2001, when we disposed of our wines and spiritsoperations, we also had a private label wines and spirits bottling business.

 

**Significant Factors Affecting OurOperating Results**

** **

***Acquisitions, Disposals and Restructuring***

*** ***

We have historically pursued a strategy of bothinternal and external growth.  As aresult, we have made a number of acquisitions, dispositions and restructurings,which have affected our results of operations during the past three years.  The following is a summary of our keyacquisitions, dispositions and internal restructurings that we have undertakensince January 1, 2000.

 

•                  InJanuary 2001, we sold our biscuits operations to Eubisco Limited, an affiliateof ours, for net proceeds of £90.9 million, but retained our French biscuitsdistribution business.  Eubisco Limitedwas formed by Hicks Muse in connection with its acquisition of Burton’s GoldMedal Biscuits from Associated British Foods in October 2000.  We used the proceeds from the sale to reducethe balance due under our Senior Credit Facility.

 

•                  InFebruary 2001, we sold FE Barber Limited, our wines and spirits subsidiary for£10.9 million.  We used the proceedsfrom the sale to reduce the balance due under our Senior Credit Facility.

 

•                  InApril 2001, we acquired the canned foods, pickles and sauces business ofStratford on Avon Foods Limited (“SonA”), for £12.9 million.  This business has been integrated into ourexisting canned foods, pickles and sauces operations.

 

•                  InSeptember 2001, we acquired the “*Lift*”instant lemon tea business (“*Lift*”)for £8.3 million.  This business hasbeen integrated into our existing beverages operations.

 

•                  InOctober 2001, we acquired the assets and trade of Nelsons of Aintree Limited(“Nelsons”), a company manufacturing sweet preserves for £7.5 million.  This business was integrated into ourexisting spreads operations.

 

28

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•                  InMay 2002, we acquired the ambient foods manufacturing business in the U.K. ofNestlé SA for a net consideration of £132.2million.  The acquired business spans abroad range of product categories, including pickles, vinegars, sauces, sweetspreads, preserves and ambient desserts.  The purchase price was funded by additional borrowings under the SeniorCredit Facility (see Item 5.B. “Liquidity and Capital Resources”).  The rights to acquire the ambient foodsmanufacturing business in the Republic of Ireland of Nestlé SA, which wasincluded in the original acquisition agreement, was sold onto a managementbuy-in team in July 2002.  The trading,sales and marketing, logistics and administrative functions of Nestlé wereintegrated into our existing business by December 2002. A review of themanufacturing platform was completed in the first quarter of 2003. We havecompleted the consultation process and agreement has been reached with therepresentatives that we will close our Hadfield factory. It is intended thatthe operations will be integrated into our existing spreads factory in Histonand the pickles operation in Bury St. Edmunds. The integration should be completed by December 2003.  We have made no provision at December 31,2002 for the costs of integrating the manufacturing platform.

 

***Currency Fluctuation***

*** ***

Although 84% of ourbusiness is conducted in the U.K., we have operations in France and theNetherlands.  We source raw materialsfrom countries around the world and export our products to variouscountries.  Therefore, our financialposition and results of operations are subject to both currency transactionrisk and currency translation risk.

 

Our operatingsubsidiaries incur currency transaction risk whenever they enter into either apurchase or sales transaction using a currency other than that in which theyregularly operate and incur their expenses. We enter into forward currency contracts to hedge against our exposureto foreign currency exchange rate fluctuations in the purchase of raw materialsand in our export business.  As ofDecember 31, 2002, we had £42.2 million nominal value of forward currencycontracts, cross-currency swaps and interest rate swaps, with an aggregateunrealized net loss of £1.9 million on those instruments at that date.

 

With respect to currencytranslation risk, the financial condition and results of operations of ournon-U.K. businesses are measured and recorded in the relevant domestic currencyof the jurisdiction in which the business is located and then translated intopounds sterling for inclusion in our consolidated financial statements.    The exchange rate has remainedcomparatively stable during 2000, 2001 and 2002.  However, since September 2002, sterling has depreciated againstthe euro from €1.59 to €1.445 in June 2003. If this depreciation is sustained it will have a positive impact on oursales and operating profits as reported in pounds sterling in subsequentperiods.

 

***Industry Factors***

** **

Our financial conditionand results of operation are also influenced by industry trends.  In recent years, there has been increasedconsolidation among the major grocery retailers in the U.K. as well as incontinental Europe.  In 1998, two of themajor retail food chains in the U.K., Somerfield and KwikSave, merged.  In addition, Wal-Mart entered the U.K.market through its 1999 acquisition of ASDA, one of the U.K.’s largest groceryretailers.  In continental Europe, twomajor grocery retailers, Carrefour and Promodes, merged in 1999 to create thelargest retailer in France.  In January2003, Morrisons made an offer for Safeway. Interest has also been expressed by a number of other major multipleretailers and financial investors.

 

This consolidation hasincreased price competition among suppliers to the major retail food chains,and may ultimately lead to greater consolidation among such suppliers.  As a result, grocery retailers andmanufacturers frequently engage in pricing campaigns such as “Everyday LowPrice” and “Buy One/Get One Free” in order to promote their products and gainmarket share.  These campaigns havegenerally lowered our margins by increasing our short-term promotion costs, butthis effect is partially offset by the additional sales made as a result ofthese campaigns.  While we believe thatour relationships with our retail customers are strong, the continuation of thetrend of consolidation could have a material adverse impact on our results ofoperations.

 

There are a number ofother trends which impact on our industry and us in particular.  These include, among others, an increase inconsumers’ preferences for branded rather than own label products, for freshand chilled and convenience products, for “organic” products and the potentialimplications of genetically modified ingredients.  An increase in the legislation regarding the food industry withparticular regard to food safety and consumer information will also impact ourbusiness.

 

We are responding to all these actively to takeadvantage of opportunities and limit any negative impacts.

 

29

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***Seasonality***

*** ***

Historically, our saleshave been higher during the first and fourth quarters than during the secondand third quarters.  Within our cannedfoods, pickles and sauces business, consumer demand for canned foods tends tobe higher in the colder months of the year, with increased sales during theautumn and winter and lower sales during the spring and summer and we generallyhave a significant increase in sales of our pickles and sauces during thepre-Christmas period.  Our hot chocolateand malted drinks business is affected by seasonal changes in temperature, withsales usually declining during the warm summer months.  In addition, our working capitalrequirements are affected by the seasonal nature of our sales and production asa portion of our seasonal canned products is packed during the months from Julyto September.

 

As a result of theseasonality of our sales, the results of our operations for any given fiscalquarter will not necessarily be indicative of our results for the fullyear.  The sales of our principalproduct groups (excluding potatoes) in the four fiscal quarters of 2002 areshown in the table below:

 
|                                  |   | **Fiscal Year Ended December 31, 2002** |   |
|---------------------------------------|--------|-----------------------------------------|--------|
|                                  |   | **First  Quarter**                      |   | **Second  Quarter** |   | **Third  Quarter** |   | **Fourth  Quarter** |   | **Total** |   |
|                                  |   | **£ millions**                     |   |
| **Sales**                             |   |                                    |   |   |   |   |   |   |   |   |   |
| Canned  foods, pickles and sauces (1) |   | 85.5                                    |   | 86.1 |   | 82.1 |   | 91.9 |   | 345.6 |   |
| Beverages                             |   | 44.0                                    |   | 41.2 |   | 40.6 |   | 47.0 |   | 172.8 |   |
| Spreads  (2)                          |   | 40.1                                    |   | 39.2 |   | 39.7 |   | 39.4 |   | 158.4 |   |
|                                  |   |                                    |   |   |   |   |   |   |   |   |   |
|                                  |   | 169.6                                   |   | 166.5 |   | 162.4 |   | 178.3 |   | 676.8 |   |
|                                  |   |                                    |   |   |   |   |   |   |   |   |   |
| Acquisitions                          |   |                                    |   |   |   |   |   |   |   | 55.6 |   |
| Potatoes (3)                          |   |                                    |   |   |   |   |   |   |   | 149.9 |   |
|                                  |   |                                    |   |   |   |   |   |   |   |   |   |
| Turnover  from continuing operations  |   |                                    |   |   |   |   |   |   |   | 882.3 |   |

 

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(1)                                 Excludingsales from Nestlé of £30.2 million.

(2)                                 Excludingsales from Nestlé of £25.4 million.

(3)                                 Potatoesare excluded from the seasonality table, as the value of our potato sales isprincipally dependent on the price at which potatoes are traded in thecommodity markets, which is principally dependent on the quality and size ofthe U.K. potato harvest, which can vary significantly from year to year.

 

30

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**Operating Results**

** **

The following table summarizes our operating results before operatingexceptional items for each of 2000, 2001 and 2002.  The table has been derived from and should be read in conjunctionwith our audited consolidated historical financial statements and the relatednotes included elsewhere in this Annual Report.  The results of operations for 2000, 2001 and 2002 presented belowhave been restated to reflect the disposal of our biscuits and wines andspirits operations in the first quarter of 2001 and the reclassification ofcertain products between product groups in 2002.

 
|                                                 |   | **Year Ended December 31,**                     |   |
|------------------------------------------------------|--------|-------------------------------------------------|--------|
|                                                 |   | **2000**                                        |   | **% of  total  sales** |   | **2001** |   | **%  of total  sales** |   | **2002** |   | **% of  total  sales** |   |
|                                                 |   | **£ millions  except for percentage data** |   |
| Sales                                                |   |                                            |   |   |   |   |   |   |   |   |   |   |   |
| *Continuing  operations*                             |   |                                            |   |   |   |   |   |   |   |   |   |   |   |
| Canned  foods, pickles and sauces                    |   | 337.6                                           |   | 32.7 |   | 362.4 |   | 42.7 |   | 375.8 |   | 42.6 |   |
| Beverages                                            |   | 191.8                                           |   | 18.6 |   | 173.8 |   | 20.5 |   | 172.8 |   | 19.5 |   |
| Spreads                                              |   | 156.6                                           |   | 15.1 |   | 151.4 |   | 17.8 |   | 183.8 |   | 20.8 |   |
| Potatoes                                             |   | 132.5                                           |   | 12.8 |   | 157.6 |   | 18.5 |   | 149.9 |   | 17.0 |   |
|                                                 |   |                                            |   |   |   |   |   |   |   |   |   |   |   |
| Total  continuing operations                         |   | 818.5                                           |   | 79.2 |   | 845.2 |   | 99.5 |   | 882.3 |   | 99.9 |   |
| *Discontinued  operations*                           |   |                                            |   |   |   |   |   |   |   |   |   |   |   |
| Biscuits  and cookies                                |   | 159.6                                           |   | 15.4 |   | — |   | — |   | — |   | — |   |
| Wines  and spirits                                   |   | 52.7                                            |   | 5.1 |   | 1.9 |   | 0.2 |   | — |   | — |   |
| Holco, Chivers Ireland and others                    |   | 2.8                                             |   | 0.3 |   | 2.2 |   | 0.3 |   | 0.2 |   | 0.1 |   |
|                                                 |   |                                            |   |   |   |   |   |   |   |   |   |   |   |
| Total  discontinued operations                       |   | 215.1                                           |   | 20.8 |   | 4.1 |   | 0.5 |   | 0.2 |   | 0.1 |   |
|                                                 |   |                                            |   |   |   |   |   |   |   |   |   |   |   |
| Total  sales.                                        |   | 1,033.6                                         |   | 100.0 |   | 849.3 |   | 100.0 |   | 882.5 |   | 100.0 |   |
| Cost  of sales                                       |   | (788.8                                          | )      | (76.3 | ) | (660.9 | ) | (77.8 | ) | (653.8 | ) | (74.1 | ) |
|                                                 |   |                                            |   |   |   |   |   |   |   |   |   |   |   |
| Gross  profit                                        |   | 244.8                                           |   | 23.7 |   | 188.4 |   | 22.2 |   | 228.7 |   | 25.9 |   |
| Selling  and distribution expenses                   |   | (142.9                                          | )      | (13.8 | ) | (98.1 | ) | (11.5 | ) | (110.0 | ) | (12.5 | ) |
| Administrative  costs                                |   | (32.7                                           | )      | (3.2 | ) | (26.8 | ) | (3.2 | ) | (41.2 | ) | (4.6 | ) |
| Operating  profit before operating exceptional items |   | 69.2                                            |   | 6.7 |   | 63.5 |   | 7.5 |   | 77.5 |   | 8.8 |   |

 

31

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The following table analyses our sales by geographicalorigin and geographical market for each of 2000, 2001 and 2002.  The table has been derived from and shouldbe read in conjunction with our audited consolidated historical financialstatements and the related notes included elsewhere in this Annual Report.

 

 
|                    |   | **Turnover by geographical  origin** |   | **Turnover by geographical  market** |   |
|-------------------------|--------|--------------------------------------|--------|--------------------------------------|--------|
|                    |   | **2000**                             |   | **2001**                             |   | **2002** |   | **2000** |   | **2001** |   | **2002** |   |
|                    |   | **£ millions**                  |   | **£ millions**                  |   |
| U.K.                    |   | 694.9                                |   | 723.4                                |   | 763.8 |   | 681.9 |   | 712.3 |   | 741.5 |   |
| Mainland Europe         |   | 123.6                                |   | 121.8                                |   | 118.5 |   | 129.3 |   | 124.4 |   | 129.3 |   |
| Other countries         |   | —                               |   | —                               |   | — |   | 7.3 |   | 8.5 |   | 11.5 |   |
| Continuing operations   |   | 818.5                                |   | 845.2                                |   | 882.3 |   | 818.5 |   | 845.2 |   | 882.3 |   |
| Discontinued operations |   | 215.1                                |   | 4.1                                  |   | 0.2 |   | 215.1 |   | 4.1 |   | 0.2 |   |
|                    |   |                                 |   |                                 |   |   |   |   |   |   |   |   |   |
| Total                   |   | 1,033.6                              |   | 849.3                                |   | 882.5 |   | 1,033.6 |   | 849.3 |   | 882.5 |   |

 

The review of accounting policies in 2001 required byFRS 18 “Accounting Policies” identified that certain sales deductions would bemore appropriately classified as a reduction in “sales” rather than “cost ofsales” and certain promotional expenditure would be more appropriatelyclassified as “selling and distribution expenses” rather than a reduction in“sales”.  This change of policy wasadopted in 2001 and the 2000 comparatives have been restated accordingly (seeNotes 1 and 2 to the Consolidated Financial Statements under Item 18 “FinancialStatements”).

 

“Sales” is the value of sales, excluding transactionswith or between wholly owned subsidiaries, after deductions of sales rebates,value added tax and other sales related taxes. Sales are recognized upon receipt of confirmation that the goods shippedhave been accepted by the customer, where the sales price is fixed andcollectability is reasonably assured. Sales are also referred to as “Turnover” in the audited consolidatedhistorical financial statements and accompanying notes included elsewhere inthis Annual Report.  We derive our salesprincipally from selling canned foods, beverages, spreads, pickles and saucesand potatoes.  Our principal geographicmarkets are the U.K., which accounted for approximately 83.3%, 84.3% and 84.0%and France, which accounted for 11.1%, 10.1% and 9.8% of the sales of ourcontinuing operations in 2000, 2001 and 2002, respectively.  Sales of our own branded productsrepresented approximately 41% of our 2002 sales for our total business and 49%of our grocery products business.  Theremaining sales principally comprised private label, unbranded food service andsales of commodity products.

 

“Cost of sales”consists of costs directly attributable to manufacturing, including rawmaterials, packaging, labor, energy, other utilities and overhead costs attributable to themanufacturing processes and factories. Principal raw materials we use include tea, sugar, vegetables, fruit andcocoa. Manufacturing overheads include plant supervision and management costs,technical and engineering support costs, costs for the storage of our rawmaterial and finished goods inventory, health and safety compliance costs,maintenance and insurance costs, quality control costs and depreciationexpenses relating to manufacturing equipment.

 

“Selling and distribution expenses” consist of sellingcosts, which include advertising, direct and indirect marketing, costs ofpromotions and labor and overhead costs attributable to the salesfunction.  Our promotional costsinclude, among other things, discounts we give to retailers in connection withproduct-specific promotions. Distribution costs include freight, warehousing, labor and overheadcosts attributable to the distribution function.

 

The division of ourproducts into “branded” and “private label” makes the comparison of grossprofit after marketing expenses the principal measurement tool to determine theprofitability of our product lines. This is because the higher sales value of branded products yields highergross margins but the branded products require significant marketingexpenditure.  Therefore, to be able tocompare similar branded and private label products it is necessary to deductthe marketing expenditure incurred in supporting the branded products.

 

“Administrativeexpenses” comprise labor and costs directly attributable to the finance, humanresources, procurement, information technology and general managementfunctions.

 

“Net interest expense”principally comprises interest paid on our Notes, our Senior Credit Facilityand overdrafts less interest receivable on cash deposits.  Also included in our interest expense is theamortization of the capitalized debt issuance costs and exchange gains orlosses on our U.S. dollar-denominated Notes.

 

32

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“Tax” principallycomprises income taxes to which we are subject in the various countries inwhich we have operations.  We attempt tominimize the tax payable in each jurisdiction by using appropriate taxstrategies.   Our current high level ofleverage (and hence interest payable) reduces our tax payable on our operatingprofit.   Our tax payable is likely toincrease as we repay our debt under the Senior Credit Facility and hence reduceour net interest payable.

 

**Year Ended December 31, 2002 Compared to Year Ended December31, 2001**

** **

**Continuing Operations**

** **

***Sales****. *Sales from continuing operations were £882.3 million for2002, an increase of £37.1 million, or 4.4%, as compared to sales for 2001 of£845.2 million.  The increase in saleswas principally due to the acquisition of the U.K. ambient food business ofNestlé, which contributed £55.6 million of sales in 2002 and increased spreadssales of £7.0 million, principally as a result of Nelsons contributing to salesfor the full year.  The increase insales was offset by a reduction of £7.7 million in the value of sales ofpotatoes and a reduction of £16.8 million in sales in our existing canning,pickles and sauces business (*i.e.*,excluding Nestlé).

 

***Canned Foods, Pickles and Sauces***.  Sales of canned foods, pickles and sauces were £375.8m for 2002, anincrease of £13.4 million, or 3.7%, over sales of £362.4 million for 2001.  The acquisition of Nestlé contributed salesof £30.2 million from date of acquisition to year end.  Excluding Nestlé, sales in our existingbusiness decreased by £16.8 million as a result of the business exiting anumber of low-margin contracts.

 

***Beverages***.  Salesof beverages were £172.8 million for 2002, a decrease of £1.0 million, or 0.6%,compared to sales of £173.8 million for 2001. Our chocolate beverages business continued to perform well with salesfor the full year 3.4% ahead of last year. A decrease in our tea sales during 2002 was due to the exit frommarginal and under-performing contracts with increased competition in the ownlabel tea market due to excess capacity, offset by growth in sales of our *Typhoo* brand through the major multipleretailers.  In a letter dated April 30, 2003, CadburySchweppes plc expressed their intention not to renew the license beyond2006.  They have not yet served formalnotice on us regarding non-renewal of the license, and negotiations regardingthe future trading relationship are ongoing.

 

***Spreads***.  Sales of spreads were £183.8 million for 2002, an increase of£32.4 million, or 21.4%, as compared to sales of £151.4 million for 2001.  The acquisition of Nestlé contributed sales of £25.4 million from thedate of acquisition to December 2002. The remaining increase in sales is principally due to an additional £8.5million from Nelsons contributing to sales for a full 12 months in 2002; thebusiness was acquired in October 2001.

 

***Potatoes***.  Salesof potatoes were £149.9 million for 2002, a decrease of £7.7 million, or 4.9%,as compared to sales of £157.6 million for 2001.  An average decrease of 15.0% in the price per tonne sold during2002 arose from a very good 2002 harvest, which reduced market prices ofpotatoes in the second half of 2002. The tonnage of potatoes sold in 2002 was 986,000 tonnes, an increase of105,000 tonnes, or 11.9%, on 2001. The profitability of this business is not directly linked to the marketprice of potatoes and hence sales value, but rather to the volume of potatoessold.

 

**Discontinued Operations**

** **

The £0.2 million of salesby discontinued operations in 2002 represents sales made by a non-corenon-grocery business, which was put into liquidation in March 2002.

 

33

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**Premier Consolidated**

** **

***Gross Profit****. *Gross profit before operating exceptional items for our continuingoperations including Nestlé was £228.7 million for 2002, an increase of £40.7million, or 21.6%, compared to gross profit on continuing operations beforeoperating exceptional items of £188.0 million for 2001.  Excluding Nestlé, gross profit beforeoperating exceptional items for continuing operations was £206.2 million, anincrease of £18.2 million, or 9.7%, over 2001. Gross margin including Nestlé increased to 25.9% in 2002 from 22.2% in2001.  Excluding Nestlé, gross marginsincreased to 24.9% in 2002 from 22.2% for 2001.  The principal causes of the increase in gross margin were anincrease in the branded mix of our beverages business combined with operatingefficiencies and the recovery of our French preserves business from theoperational problems encountered last year. In addition, the elimination of under-performing contracts across thebusiness and the decrease in sales by our potato business, both serve to reducesales while the gross profit in value terms remains relatively unchanged.

 

***Selling and Distribution Expenses****.*  Selling and distribution expenses beforeoperating exceptional items were £110.0 million for 2002, an increase of £11.9million, or 12.1%, compared to selling and distribution expenses beforeoperating exceptional items of £98.1 million for 2001.  The principal cause of the increase inselling and distribution expenses before operating exceptional items was fromthe acquisition of Nestlé, which increased selling and distribution expenses by£8.6 million from the date of acquisition to December 2002.  The additional £3.3 million increase relatesto increases in our advertising expenditure on our major brands.

 

***Administrative Costs.***  Administrative costs before operatingexceptional items were £41.2 million for 2002, an increase of £14.4 million, or53.7%, compared to administrative costs before operating exceptional items of£26.8 million for 2001.  The principalcauses of the increase related to Nestlé, which incurred administrative costsof £7.0 million from the date of acquisition to December 2002.  The remaining increases in expenditureprincipally resulted from an increase of £3.0 million in the bonus payable toour employees, a reclassification of £2.0 million of expenditure from sellingand distribution expenses to administrative costs following the merger of ourFrench preserves manufacturing and biscuits distribution operations, anincrease in the amortization of goodwill of £0.8 million reflecting a fullyear’s amortization of the goodwill arising on the businesses acquired during2001 and an increase of £0.6 million in the amortization of the pensionprepayment.

 

***Operating Profit Before Operating Exceptional Items****.*  Operating profit before operatingexceptional items was £77.5 million for 2002, an increase of £14.0 million, or22.0%, over operating profit before operating exceptional items of £63.5million for 2001.  The principal causesof the increase in operating profit before operating exceptional items was theacquisition of Nestlé in May 2002, which contributed £6.9 million.  Operating margin increased to 8.8% for 2002from 7.5% for 2001.  This improvement inoperating margins reflects the increase in gross profit partly offset by the additionalmarketing and administrative expenditure.

 

***Operating Exceptional Items****.*  Operating exceptional items in 2002 comprisethe following principal items:

 

•                                         £3.8million in relation to reductions in manning and changes to shift patterns atour Moreton tea factory;

 

•                                         £3.0million of costs relating to the relocation of our principal administrativeoffice to St. Albans and the closure of our Histon and Hampstead administrativefunctions;

 

•                                         £2.4million of costs relating to the closure of our Nelsons spreads factory inAintree and the relocation of production to our Histon spreads factory;

 

•                                         £2.1million of costs relating to the Nestlé acquisition and the subsequentintegration of its administrative functions with those of Premier.  The review of the manufacturing platform wasnot completed until the first quarter of 2003; therefore, no provision has beenmade for the costs of this integration at December 31, 2002;

 

•                                         £2.1million of costs relating to the closure of our North Walsham canned foodsfactory.  This factory was closed in thefourth quarter of 2002 and the production integrated into our canned foodsfactories at Wisbech and Long Sutton; and

 

•                                         £2.1million in relation to further restructuring of our French spreads and biscuitsdistribution operation following the integration of the businesses in 2001.

 

34

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Operatingexceptional items in 2001 comprise the following items:

 

•                                         a charge of £4.5 million in relationto the transfer of administration functions from our Moreton site to our Histonand Long Sutton sites.  This charge includesthe redundancy costs of approximately 165 administration staff;

 

•                                         acharge of £3.5 million in relation to the restructuring of productionfacilities, principally the integration of the SonA production facilities intoour existing facilities at Long Sutton, Wisbech and Bury, and the closure andsale of the SonA site.  This charge includes the redundancy costs ofapproximately 130 production and administration staff; and

 

•                                         acharge of £4.2 million in relation to the restructuring of distribution arrangements,principally relating to the integration of our French biscuits distributionoperations into our French preserves operations.

 

***Non-operating Exceptional Items****.*  Non-operating exceptional items in 2002comprise the following principal items:

 

•                                         a loss on the liquidation of anon-core non-grocery subsidiary of £0.4 million; and

 

•                                         a loss on disposal of surplusproperties and other fixed assets of £1.6 million.

 

Non-operating exceptional items in 2001 comprise thefollowing principal items:

 

•                                         a loss on disposal of £25.5 millionon the sale of our biscuits operations. This includes the write-off of £53.0 million of goodwill that hadpreviously been written off to reserves;

 

•                                         aloss on disposal of our wines and spirits operations of £4.1 million; and

 

•                                         aprofit on disposal of surplus properties of £3.4 million.

 

***Net Interest Payable****.*  Net interest payable was £36.4 million for2002, which comprised £6.3 million of amortization charges on our capitalizeddebt issuance costs, £13.2 million of exchange gains on the translation of theprincipal amount of the U.S. dollar-denominated Notes and a net £43.3 millionpayable on the Notes, our Senior Credit Facility and other borrowings andcash.  Net interest payable was £52.7million for 2001, which comprised £7.5 million of amortization charges on ourcapitalized debt issuance costs, £3.6 million of exchange losses on thetranslation of the principal amount of the U.S. dollar-denominated Notes and anet £41.6 million payable on the Notes, our Senior Credit Facility and otherborrowings and cash.  The increase ofnet interest payable in 2002 on the Notes, our Senior Credit Facility and otherborrowings and cash was principally due to the additional debt raised under ourSenior Credit Facility to fund the Nestlé acquisition offset by reduction indebt through cash generated from our operating activities and a decrease inmarket interest rates applicable to our Senior Credit Facility.

 

***Taxation Charge on Profit / (Loss) on Ordinary Activities****.*  The tax charge on profit on ordinaryactivities was £6.0 million for 2002 as compared to a tax charge of £0.9million for 2001.  The tax charge in2001 has been restated following the implementation of FRS 19 “Deferred tax”.

 

**Year Ended December 31, 2001 Compared to Year Ended December31, 2000**

** **

**Continuing Operations**

** **

***Sales****. *Sales from continuing operations were £845.2 million for2001, an increase of £26.7 million, or 3.3%, as compared to sales for 2000 of£818.5 million.  The increase in saleswas principally due to (i) an increase of £25.1 million in the value of salesof potatoes following an increase in the market price of potatoes due to a poorU.K. harvest in the second half of 2000; and (ii) the acquisitions of (a) SonAin April 2001, which contributed £19.9 million of sales in 2001; (b) Lift,which contributed £1.2 million of sales in 2001; and (c) Nelsons, whichcontributed £6.0 million of sales in 2001. The increase in sales was offset by a reduction in tea sales of £18.0million and a decrease in sales by our existing spreads businesses of £5.2million.

 

***Canned Foods, Pickles and Sauces***.  Sales of canned foods, pickles and sauces were £362.4 million for 2001,an increase of £24.8 million, or 7.3%, over sales of £337.6 million for2000.  The increase in sales was primarilydue to (i) a £5.2 million, or 20.5%, increase in sales by Jonker Fris (which weacquired in April 1999) as we continued to leverage the synergies availablefollowing the acquisition; and (ii) sales of £19.9 million from the tradeacquired from SonA.

 

35

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***Beverages***.  Sales ofbeverages were £173.8 million for 2001, a decrease of £18.0 million, or 9.4%,compared to sales of £191.8 million for 2000. The decrease in sales was due toa reduction in both sales value and volume of branded tea as a result therepositioning of our marketing strategy in the middle of 2000 away from “BuyOne Get One Free” and other deep discounting activities to net pricing bylowering the selling prices of products supported by traditional marketingprogram.  The effect of the change inmarketing strategy was to increase the gross profit after marketing expensesdespite the reduction in overall sales and gross profit.  The acquisition of Lift, which we acquiredin September 2001, contributed £1.2 million in sales.

 

***Spreads***.  Sales of spreads were £151.4 million for 2001, a decrease of £5.2million, or 3.3%, as compared to sales of £156.6 million for 2000.  The decrease in sales was principally due to(i) a competitive U.K. market which led to a £3.6 million decrease in sales byour existing U.K. operation; and (ii) a £7.1 million decrease in sales by ourFrench operation due to distribution problems that arose during the integrationof our French preserves and biscuits operations.  This decrease was offset by sales of £6.0 million from Nelsons, which we acquired in October 2001.

 

***Potatoes***.  Sales ofpotatoes were £157.6 million for 2001, an increase of £25.1 million, or 18.9%,as compared to sales of £132.5 million for 2000.  The increase arose from an average 44.0% increase in the priceper tonne sold during the first half of 2001 following the poor U.K. potatoharvest in the second half of 2000.  Thetonnage of potatoes sold in 2001 was 881,000 tonnes, an increase of 16,500tonnes, or 1.9%, on 2000.

 

**Discontinued Operations**

** **

Sales of wines andspirits were £1.9 million for January 2001. The wines and spirits business was sold in February 2001.  The remaining £2.2 million of sales bydiscontinued operations in 2001 represents sales made by a non-core non-grocerybusiness, which has been put into liquidation in March 2002.

 

**Premier Consolidated**

** **

***Gross Profit****. *Gross profit before operating exceptional items for ouroverall operations was £188.4 million for 2001, a decrease of £56.4 million, or23.0%, compared to gross profit before operating exceptional items of £244.8million for 2000.  The principal causeof the decrease in gross profit before operating exceptional items was the saleof our biscuit manufacturing business in January 2001 and wines and spiritsbusiness in February 2001. Gross margin decreased to 22.2% for 2001 from 23.7%for 2000.  For continuing operations,gross profit before operating exceptional items was £188.0 million for 2001, adecrease of  £10.1 million, or 5.1%,over gross profit before operating exceptional items of  £198.1 million for 2000.  Gross margin for continuing operationsdecreased from 24.2% for 2000 to 22.2% for 2001. The principal causes of thedecrease in gross margin was the repositioning of our tea marketing strategyand the increase in the market price of potatoes.

 

***Selling and Distribution Expenses****.*  Selling and distribution expenses beforeoperating exceptional items were £98.1 million for 2001, a decrease of £44.8million, or 31.4%, compared to selling and distribution expenses beforeoperating exceptional items of £142.9 million for 2000.  The principal cause of the decrease inselling and distribution expenses before operating exceptional items was the saleof our biscuit manufacturing business in January 2001 and wines and spiritsbusiness in February 2001. For continuing operations, selling and distributionexpenses before operating exceptional items were £97.6 million for 2001, adecrease of  £15.8 million, or 13.9%,over selling and distribution expenses before operating exceptional itemsof  £113.4 million for 2000. Theprincipal causes of the decrease in selling and distribution expenses beforeoperating exceptional items was the repositioning of our tea marketingstrategy, which reduced marketing costs on tea by £19.1 million offset by anincrease in marketing expenses for the other operations of £5.9 million.

 

***Administrative Costs.***  Administrative costs before operatingexceptional items were £26.8 million for 2001, a decrease of £5.9 million, or18.0%, compared to administrative costs before operating exceptional items of£32.7 million for 2000.  The principalcause of the decrease in administrative costs before operating exceptionalitems was the sale of our biscuit manufacturing business in January 2001 andwines and spirits business in February 2001. For continuing businesses, administrative expenses before operatingexceptional items were £26.1 million, an increase of  £1.5 million, or 6.1%, over administrative expenses beforeoperating exceptional items of  £24.6million for 2000.  The principal causesof the increase were the acquisitions of the SonA and Nelsons.

 

36

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***Operating Profit Before Operating Exceptional Items.  ***Operating profitbefore operating exceptional items was £63.5 million for 2001, a decrease of£5.7 million, or 8.2%, over operating profit before operating exceptional itemsof £69.2 million for 2000.  Theprincipal cause of the decrease in operating profit before operatingexceptional items was the sale of our biscuit manufacturing business in January2001 and wines and spirits business in February 2001.  Operating margin increased to 7.5% for 2001 from 6.7% for 2000.  For continuing businesses, operating profitbefore operating exceptional items was £64.3 million, an increase of  £4.2 million, or 7.0%, over operating profitbefore operating exceptional items of £60.1 million for 2000.  Thisimprovement in operating margins reflects the reductions in selling and distributionexpenses, partly offset by the decrease in gross profit, as discussed above.

 

***Operating Exceptional Items****.*  Operating exceptional items in 2001 comprisethe following principal items:

 

•                                         a charge of £4.5 million in relationto the transfer of administration functions from our Moreton site to our Histonand Long Sutton sites.  This chargeincludes the redundancy costs of approximately 165 administration staff;

 

•                                         acharge of £3.5 million in relation to the restructuring of productionfacilities, principally the integration of the SonA production facilities intoour existing facilities at Long Sutton, Wisbech and Bury, and the closure andsale of the SonA site.  This charge includes the redundancy costs ofapproximately 130 production and administration staff; and

 

•                                         acharge of £4.2 million in relation to the restructuring of distributionarrangements, principally relating to the integration of our French biscuitsdistribution operations into our French preserves operations.

 

Operating exceptionalitems in 2000 comprises:

 

•                                         a charge of £1.6 million relating tothe further restructuring of our canned foods, pickles and sauces productionfacilities.

 

***Non-operating Exceptional Items****.*  Non-operating exceptional items in 2001comprise the following principal items:

 

•                                         a loss on disposal of £25.5 millionon the sale of our biscuits operations. This includes the write off of £53.0 million of goodwill that hadpreviously been written off to reserves;

 

•                                         aloss on disposal of our wines and spirits operations of £4.1 million; and

 

•                                         aprofit on disposal of surplus properties of £3.4 million.

 

Non-operating exceptionalitems in 2000 comprise the following principal items:

 

•                                         acharge of £4.2 million, which was an adjustment to the loss on disposal ofsubsidiaries, which were disposed of in prior years; and

 

•                                         aloss on disposal of surplus properties of £1.6 million.

 

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***Net Interest Payable****.*  Net interest payable was £52.7 million for2001, which comprised £7.5 million of amortization charges on our capitalizeddebt issuance costs, £3.6 million of exchange losses on the translation of theprincipal amount of the U.S. dollar-denominated Notes and a net £41.6 millionpayable on the Notes, our Senior Credit Facility and other borrowings andcash.  Net interest payable was £67.9million for 2000, which comprised £5.8 million of amortization charges on ourcapitalized debt issuance costs, £10.0 million of exchange losses on the translationof the principal amount of the U.S. dollar-denominated Notes and a net £52.1million payable on the Notes, our Senior Credit Facility and other borrowingsand cash.  The decrease of net interestpayable in 2001 on the Notes, our Senior Credit Facility and other borrowingsand cash was principally due to the utilization of the proceeds from the salesof our biscuit manufacturing and wines and spirits businesses in reducing ourterm debt.

 

***Taxation Charge on Profit / (Loss) on Ordinary Activities****.*  Tax on loss on ordinary activities was  £0.9 million for 2001 as compared to a taxcharge of £2.5 million for 2000.  Thetax charge in 2001 and 2000 has been restated following the implementation ofFRS 19 “Deferred tax”.

 

**Significant Accounting Policies**

 

Our accounting policiesare described in Note 1 of the Notes to our Consolidated Financial Statementsincluded in this Annual Report.  Certainof our accounting policies require the application of judgment by management inselecting the appropriate assumptions for calculating financial estimates.  By their nature these judgments are subjectto an inherent degree of uncertainty. These judgments are based on our historical experience, the terms ofexisting contracts, our observance of trends in the industry, informationprovided by our customers and information available from other outside sourcesas appropriate.  Our significantaccounting policies include:

 

***Over-riderDiscounts and Customer Rebates. ***Ourover-rider discounts and customer rebates reserve is established on our bestestimate of the amounts necessary to meet claims made by our customers inrespect of these discounts and rebates. Provision is made at the time of sale and released, if unutilized, oncethe likelihood of such a claim being made has become remote.

 

***Pension Benefits.**** *The determination of ourobligation and expense for pension benefits is dependent on our selection ofcertain assumptions used by actuaries in calculating such amounts.  Those assumptions are described in Note 6and Note 24 of the Notes to our Consolidated Financial Statements included inthis Annual Report and include, among others, the discount rate, the expectedlong-term rate of return on plan assets and rates of increase incompensation.  In accordance with bothU.K. and U.S. GAAP, actual results that differ from our assumptions areaccumulated and amortized over future periods and, therefore, generally affectour recognized expense and recorded obligation in such future periods.  We are guided in selecting our assumptionsby our independent actuaries and, while we believe that our assumptions areappropriate, significant differences in our actual experience or significantchanges in our assumptions may materially affect our pension obligations andour future pensions expense.

 

***Valuation ofGoodwill, Intangible and Other Fixed Assets ***Under U.K. GAAP, Premier’s accounting policy is toamortize property, plant and equipment, goodwill and intangible assets overtheir estimated useful lives.  Estimateduseful lives are based on our management’s estimates of the period that theassets will generate revenue.  For thedifferences between U.K. GAAP and U.S. GAAP accounting policies in respect ofthe valuation of goodwill, intangible assets and other fixed assets, see Note24 to the consolidated financial statements included elsewhere in this AnnualReport.  We additionally considerwhether any of the property, plant and equipment, goodwill and intangibleassets may have become impaired whenever events or changes in circumstances indicatethat the carrying value of the asset may not be recoverable.  Factors considered important which couldtrigger an impairment review include the following:

 

**•          **under performancerelative to historical or projected future operating results;

 

•                                          changesin the manner of use of the assets or the strategy for the overall business;and

 

•                                          negativeindustry or economic trends.

 

When we determine thatthe carrying value of the asset concerned may have been impaired, we record animpairment charge.  The impairmentcharge is determined by estimating the recoverable value of the asset using anappropriate method for that asset.

 

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**B.            Liquidity and Capital Resources**

** **

Our primary sources of liquidity are cash flow fromoperations and borrowings under our Senior Credit Facility.  Approximately £77.3 million was available tous at December 31, 2002 for borrowing under the Working Capital Facility, ofwhich up to £54.9 million may be used for guarantees and letters of credit.

 

***Cash Flow***

** **

***Net Cash Flow From Operating Activities***

** **

Net cash flow generated from operating activities(cash flow before interest, capital expenditure, tax and dividends, but afterworking capital movements and cash flows relating to operating exceptionalitems) was an inflow of £98.8 million for 2002, an increase of £17.1 millionover net cash flow from operating activities of £81.7 million for 2001, and anincrease of £8.6 million over net cash flow from operating activities of £90.2million for 2000.  The table belowanalyzes the decrease in net cash flow generated from operating activities:

 
|                                                     |   | **2000**            |   | **2001** |   | **2002** |   |
|----------------------------------------------------------|--------|---------------------|--------|----------|--------|----------|--------|
|                                                     |   | **£ millions** |   |
|                                                     |   |                |   |     |   |     |   |
| Operating  profit for continuing operations              |   | 60.1                |   | 64.3     |   | 77.6     |   |
| Depreciation  and amortization for continuing operations |   | 16.1                |   | 18.6     |   | 25.6     |   |
| Operating  cash outflow for discontinued operations      |   | (2.7                | )      | (0.8     | )      | (0.1     | )      |
| Working  capital movements for continuing operations     |   | 31.9                |   | 13.1     |   | 8.9      |   |
| Exceptional  items                                       |   | (15.2               | )      | (13.5    | )      | (13.2    | )      |
|                                                     |   |                |   |     |   |     |   |
| Net  cash inflow from operating activities               |   | 90.2                |   | 81.7     |   | 98.8     |   |

 

 

Historically, ourcash flows from operating activities have been largely stable with variancesresulting from the timing of the receipt of payment from major customers andpayments to major suppliers, and from capital and other expenditures relatingto the execution of our restructuring programs.

 

***Capital Expenditure and Financial Investment***

*** ***

We made capitalexpenditures of £17.3 million in2002.  We made capital expenditures of£20.1 million and £26.5 million in 2001 and 2000, respectively.  We believe that our manufacturing facilitiesare generally in good condition, and as we have improved the efficiency of ourmanufacturing facilities with our capital expenditure program during the threeyears ended December 31, 2002, capital expenditures are now expected to run inline with depreciation.  We havebudgeted for £19.4 million of capital expenditure in 2003.  We expect to fund future capital expenditurefrom our operating activities and borrowings under the Senior CreditFacility.  The Senior Credit Facilityplaces a limit on permitted capital expenditure of £18.8 million for 2003 andfor each year thereafter.  We have theright to carry forward the excess by which the limit exceeds the actual capitalexpenditure, up to a maximum amount of one third of the previous year’spermitted capital expenditure for use within the first six months of thefollowing financial year.  We believethat the excess carried forward from 2002 for utilization in 2003 will besufficient to enable us to meet our budgeted capital expenditure plans for2003, without breaching the capital expenditure set within the Senior CreditFacility.  In the event that we do nothave sufficient excess, we will reduce our capital expenditure plans accordingly.

 

39

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***Return on Investments, Servicing of Finance and Changes inFinance***

* *

We have significant debt service and repaymentobligations under the Senior Credit Facility and the Notes.  The maturity profile of our Notes, securedcredit facilities, other debt and payments due under our finance and operatingleases is set out in the table below.

 
|               |   | **Notes**           |     | **Term A  Facility** |   | **Term B  Facility** |   | **Other  Debt** |   | **Finance  Leases** |   | **Total  Debt** |   |
|--------------------|--------|---------------------|----------|----------------------|--------|----------------------|--------|-----------------|--------|---------------------|--------|-----------------|--------|
|               |   | **£ millions** | * * |
| Maturing  in:      |   |                |     |                 |   |                 |   |            |   |                |   |            |   |
| Less  than 1 year  |   | —              |     | 27.0                 |   | —               |   | 3.2             |   | 0.1                 |   | 30.3            |   |
| 1 to  2 years      |   | —              |     | 36.0                 |   | —               |   | —          |   | —              |   | 36.0            |   |
| 2 to  3 years      |   | —              |     | 50.0                 |   | —               |   | —          |   | —              |   | 50.0            |   |
| 3 to  4 years      |   | —              |     | 52.0                 |   | —               |   | —          |   | —              |   | 52.0            |   |
| 4 to  5 years      |   | —              |     | 59.3                 |   | 34.0                 |   | —          |   | —              |   | 93.3            |   |
| More  than 5 years |   | 199.2               |     | —               |   | 34.0                 |   | 9.4             |   | —              |   | 242.6           |   |
|               |   |                |     |                 |   |                 |   |            |   |                |   |            |   |
|               |   | 199.2               |     | 224.3                |   | 68.0                 |   | 12.6            |   | 0.1                 |   | 504.2           |   |

 
|               |   | **Total Debt** |   | **Operating  Leases** |   | **Capital   Commitments** |   | **Total** |   |
|--------------------|--------|---------------------|--------|-----------------------|--------|---------------------------|--------|-----------|--------|
|               |   | **£ millions** |   |
| Maturing  in:      |   |                |   |                  |   |                      |   |      |   |
| Less  than 1 year  |   | 30.3                |   | 4.0                   |   | 1.4                       |   | 35.7      |   |
| 1 to  2 years      |   | 36.0                |   | 3.1                   |   | —                    |   | 39.1      |   |
| 2 to  3 years      |   | 50.0                |   | 2.1                   |   | —                    |   | 52.1      |   |
| 3 to  4 years      |   | 52.0                |   | 1.4                   |   | —                    |   | 53.4      |   |
| 4 to  5 years      |   | 93.3                |   | 1.3                   |   | —                    |   | 94.6      |   |
| More  than 5 years |   | 242.6               |   | 4.3                   |   | —                    |   | 246.9     |   |
|               |   |                |   |                  |   |                      |   |      |   |
|               |   | 504.2               |   | 16.2                  |   | 1.4                       |   | 521.8     |   |

 

We paid net interest onour Notes, the Senior Credit Facility, overdrafts and cash balances of £47.4million in 2002 compared to net interest paid on our Notes, the Senior CreditFacility, overdrafts and cash balances in 2001 of £44.5 million.  The increase in interest paid is principallydue to the additional debt raised under the supplemental agreement to theSenior Credit Facility to fund the Nestlé acquisition offset by a reduction innet debt from cash generated through our operations and a general decrease inprevailing market interest rates.

 

***Senior Credit Facility***

*** ***

On May 27, 2002, weexecuted a Supplemental Agreement to the Senior Credit Facility that permittedone of our subsidiaries to borrow an additional £135.0 million under the SeniorCredit Facility to fund our acquisition of the Nestlé.  The Supplemental Agreement amended certainterms in the Senior Credit Facility, including the amortization schedule of thefacilities.  Following the completion ofthe acquisition, the Term A Facility is required to be repaid in semi-annualinstalments with final maturity in December 2007.  The Term B Facility is required to be repaid in two instalmentswith 50% repayable in June 2008 and the balance repayable in December 2008. TheWorking Capital Facility will cease to be available on December 31, 2007.  In addition, the Working Capital Facilitywas reduced from £125.0 million to £100.0 million.

 

The Senior CreditFacility provides for £392.3 million of loan facilities comprised of (i) twoterm facilities (the “Term A” and “Term B” Facilities); and (ii) a WorkingCapital Facility.

 

The Term A Facility is for an amount of up to £224.3million and the Term B Facility is for an amount of up to £68.0 million.  The Working Capital Facility in the amountof up to £100.0 million is available in pounds sterling or the equivalent incertain foreign currencies in the form of revolving advances and a letter ofcredit facility, which is to be used for general corporate purposes.

 

Borrowings under the Senior Credit Facility atDecember 31, 2002 comprised £224.3 million under the Term A Facility and £68.0million under the Term B Facility.  Ofthe £100.0 million of Working Capital Facility, £nil was drawn at December 31,2002 and £22.7 million was utilized for general corporate purposes.  Borrowings under the Senior Credit Facilitybear interest at floating rates and require interest payments on varying dates.

 

40

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The Term A Facilityis required to be repaid in semi-annual instalments, which commenced on June30, 2002, with final maturity on December 31, 2007.  The Term B Facility is required to be repaid in two instalmentswith 50% repayable on June 30, 2008 and the balance repayable in December 31,2008. The Working Capital Facility will cease to be available on December 31,2007.

 

Under the SeniorCredit Facility, we are required to make prepayments in full immediately uponthe occurrence of certain events, including a change of control (as definedtherein) or any asset sale (as defined therein).  We are also required to make mandatory prepayments with the first£100.0 million and thereafter 50% of the aggregate net proceeds of anyflotation (as defined therein) which does not constitute a full prepaymentevent and the net proceeds from disposals which are not applied in acquiringreplacement assets or other assets required in the business over a six-monthreinvestment period.  In addition, apercentage of our excess cash flow must be applied in prepayment of the SeniorCredit Facility.  The percentage is initially75% but reduces in two equal steps to 25% dependent upon the applicable totalnet debt to consolidated EBITDA ratio for the financial year in question.

 

For furtherdiscussion of the Senior Secured Facility, see Item 10.C.  “Additional Information —****Material Contracts — Senior CreditFacility.”

 

***The Notes***

*** ***

In August 1999, weissued $200.0 million aggregate principal amount 12% Senior Notes due 2009 (the“Dollar Notes”) and £75 million aggregate principal amount 12 1/4% senior Notesdue 2009 (the “Sterling Notes”, and together with the Dollar Notes, the“Notes”).  The Notes were subsequentlyexchanged for SEC-registered Notes in July 2000 on the same terms andconditions by the holders.  The Noteswill mature on September 1, 2009, unless redeemed at our option at an earlierdate.  Cash interest on the Dollar Notesaccrues at a rate of 12% per annum and are payable in cash semi-annually onMarch 1 and September 1 of each year. Cash interest on the Sterling Notes accrues at a rate of 12 1/4% perannum and are payable in cash semi-annually on March 1 and September 1 of eachyear.

 

The Notes may beredeemed at our option at any time on or after September 1, 2004, in whole orin part.  At any time on or prior toSeptember 1, 2004, the Notes may also be redeemed as a whole upon theoccurrence of a change of control (as defined in the Indenture).

 

The Indenturegoverning the Notes contains covenants limiting our ability to:

 

•                  incur additional debt;

 

•                  transfer and sell assets;

 

•                  enter into transactions with ouraffiliates; and

 

•                  pay dividends or make any otherdistributions on our capital stock.

 

These covenants aresubject to a number of important limitations and exceptions.

 

For a furtherdiscussion of our Notes, see Item 10.C. “Additional Information — Material Contracts — The Notes.”

 

*Intercompany Loans*

* *

Pursuant to anintercompany loan agreement dated August 10, 1999 entered into between Premierand Premier Financing (the “Intercompany Loan”), Premier lent an amount equalto the proceeds of the original offering to Premier Financing, the proceeds ofwhich were used by Premier Financing to purchase preference shares of PremierHoldings.  Interest is to be payable onthe dates and at the rate that interest is payable under the Notes.  The Intercompany Loan has the same maturityas the Notes.  Premier Financing’sability to pay interest on, and to repay principal amounts borrowed under, theIntercompany Loan is dependent upon funds generated from the operations of itsoperating subsidiaries and on those subsidiaries’ ability to pay dividends andmake other distributions to Premier Financing. The Intercompany Loan is subordinated to the Senior Credit Facilitypursuant to a subordination deed.

 

Premier alsoborrowed £9.3 million from an affiliated company.  This loan is unsecured, interest-free, subordinated to the SeniorCredit Facility and repayable in full on July 31, 2009.

 

41

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*General Considerations*

* *

Premier Foods plc is a holding company and does nothave operations of its own.  It relieson dividends and payments on the Intercompany Loan to make payments on theprincipal and interest of the Notes. Premier Financing is also a holding company and does not directlyconduct any business operations. Premier Financing relies on dividends and other payments from ouroperating subsidiaries to generate funds to fulfill its obligations under theIntercompany Loan.  The ability ofPremier Financing, the borrower of the Senior Credit Facility, to makedividends and other payments is restricted by the terms of the Senior CreditFacility and the subordination deed. Furthermore, the right of the noteholders to receive payments on theNotes is structurally subordinated to all liabilities of our subsidiaries.

 

While we believe that cash generated from ouroperations, together with available borrowings under the Senior CreditFacility, will be adequate to meet anticipated future requirements for workingcapital, capital expenditures and scheduled payments of principal and intereston our indebtedness for the foreseeable future, we cannot assure you that wewill generate sufficient cash flow from operations or that future workingcapital will be available in an amount sufficient to enable us to service ourdebt, including the Notes, or to make necessary capital expenditures.

 

**Material Differences Between U.K. GAAP and U.S. GAAP**

** **

U.K. GAAP differsin certain significant respects from U.S. GAAP.  The differences applicable to us principally relate to goodwillamortization, pensions, derivative financial instruments and deferredtaxation.  A summary of the significantdifferences as they affect us are set out in Note 24 of the Notes to ourConsolidated Financial Statements included in this Annual Report.

 

**Recent Accounting Pronouncements**

 

A summary of the recent accounting standards as theyaffect us are set out in Note 24 of the Notes to our Consolidated FinancialStatements included in this Annual Report.

 

**C.            Research and Development**

** **

The Company engages in continuing research anddevelopment to maintain the appeal of our current products and develop newinnovative products for the consumer. We spent £0.5 million, £0.4 million and £1.0 million in 2000, 2001 and2002, respectively, on Company-sponsored research and development activities.Research and development expenditure is expensed in the year in which it isincurred.

** **

**D.            Trend Information**

** **

See trend information in Item 4.B. “BusinessOverview—Industry” and Item 5.A. “Operating Results—Industry Factors”.

 

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**Item 6.****    DIRECTORS,SENIOR MANAGEMENT AND EMPLOYEES**

** **

**A.            Directors and Senior Management**

** **

Thefollowing sets forth names, dates of birth and positions of the persons whocurrently serve as our directors and executive officers.

 
| **Name**            |   | **Date of birth** |   | **Position Held**           |
|---------------------|--------|-------------------|--------|-----------------------------|
| C. Dean Metropoulos |   | May 5, 1946       |   | Non-Executive  Chairman     |
| Robert  Schofield   |   | February 4, 1952  |   | Director,  Chief Executive  |
| John  R. Muse       |   | February 24, 1951 |   | Director                    |
| Lyndon  Lea         |   | January 13, 1969  |   | Director                    |
| Paul  Thomas        |   | December 30, 1955 |   | Director,  Finance Director |
| Luca  Velussi       |   | November 7, 1969  |   | Director                    |
| Stephen  Alexander  |   | December 12, 1955 |   | Non-Executive  Director     |

 

 

**C. DeanMetropoulos**became Non-Executive Chairman of Premier inJanuary 2002, prior  to  which he  served  as Premier’s  Executive Chairmanfrom September  1999  to January  2002. Mr. Metropoulos iscurrently Chairman of the Board and Chief Executive Officer of Pinnacle FoodsCorporation, a food manufacturer.  Mr.Metropoulos served as Chairman of the Board and Chief Executive Officer ofInternational Home Foods, Inc. from November 1996 to June 2000, and the ChiefExecutive  Officer  of Metropoulos  &  Co., a  management servicescompany.  From 1983 through 1993, Mr.Metropoulos served as President and Chief Executive Officer of Stella Foods,Inc.  In 1994, Mr. Metropoulos becameChairman and Chief Executive Officer of the Morningstar Group.  Previously, Mr. Metropoulos served in avariety of U.S. and international executive positions with GTE Corporation,including Vice President and General Manager-Europe and Vice President andController of GTE International.

 

**RobertSchofield** joined Premierin June 2001 and became Chief Executive of Premier in January 2002.  Prior to joining Premier, he served as ManagingDirector for United Biscuits U.K., where he directed both the McVities and KPFoods businesses.  Previously, Mr.Schofield spent eight years with Nestlé International in the Far East.  He graduated with Honours from theUniversity of East Anglia in 1973 and completed             post-graduate studies at IMD in Switzerland in 1994.

 

**John R. Muse**was appointed a director of Premier in May 1999. Mr.Muse is President and co-founder of Hicks Muse Inc.  Mr. Muse leads the firm’s investment initiatives in Europe.  Prior to the formation of Hicks Muse, Mr.Muse headed the investment and merchant banking activities of PrudentialSecurities for the southwestern region of the U.S.  Mr. Muse serves as a Director of the Anderson School of Businessat the University of California (UCLA), Los Angeles, California and of Dean Foods as well as several Hicks Musecompanies including Burton’s Foods, EurotaxGlass’s, LIN Television, MediaCapital, Pinnacle Foods and Yell.

 

**Lyndon Lea**, is aPartner of Hicks Muse and has been with Hicks Muse since 1998.  Prior to joining Hicks Muse, Mr. Lea servedat Glenisla, the European affiliate of Kohlberg Kravis Roberts & Co.  He previously served in the investmentbanking division of Schroders in London and, prior to this, in the mergers andacquisitions department of Goldman Sachs in New York.  Mr. Lea serves as a Director of Burton’s Foods, Christie-Tyler,EurotaxGlass’s and Yell.  He receivedhis B.A. in Honours Business Administration from the University of WesternOntario, Canada.

 

**PaulThomas**was appointed Finance Director of Premier on June 13,2002. Prior to joining Premier, he served as Finance Director at Bass Brewersand Bass Leisure and held senior finance roles at Grand Metropolitan and ThornEMI.  He graduated with Honours from theUniversities of Birmingham and Cambridge. He qualified as an ACA with Robson Rhodes.

 

**LucaVelussi**was appointed a director of Premier on February 10,2003. Mr. Velussi serves as a Principal of Hicks Muse.  Prior to joining Hicks Muse, Mr. Velussi wasemployed in the principal investments group of Goldman Sachs in London.  Mr. Velussi serves as a Director of AsterCity Holding.  He received his B.S.E.from Princeton University and his Masters in Finance from the HEC School ofManagement in Paris.

 

**StephenAlexander** became anon-executive director of Premier in March 2001.  He served as an executive director of Premier from February 2000to March 2001.  Stephen Alexander hasextensive knowledge of the food industry in Europe.  He was previously Chief Executive of the retail division ofAllied Domecq plc and Chief Executive of J. Lyons & Company Ltd. (FoodDivision of Allied Domecq plc).  He wasappointed Chief Executive Officer of Le Meridien Hotels and Resorts in April2003.

 

**Keith Buchanan**, who previously servedas Finance Director, resigned fromPremier on March 28, 2002.

 

**John Nichols**, who previously served as Chief Executive, resigned from Premier onJanuary 21, 2002.

 

43

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**B.            Compensation**

** **

Theaggregate compensation paid to all of our directors and executive officers forservices in such capacities was £2.2 million (2001: £2.6 million, 2000: £2.4million) for the year, including £1.0 million (2001: £0.8 million, 2000: £nil)of compensation for loss of office. Retirement benefits accrue to two Directors under defined benefitschemes.  The highest paid Director waspaid £0.5 million (2001: £1.0 million, 2000: £1.0 million).   The accruedpension in respect of this director was £0.0 million (2001: £0.0 million, 2000:£0.0 million).  Robert Schofieldand Paul Thomas are compensated by Premier. John Muse, Lyndon Lea and Luca Velussi receive no compensation fromPremier or Premier Holdings.  During2002, Dean Metropoulos ceased to be compensated by Premier Holdings but is nowcompensated by an affiliate of Hicks Muse. Stephen Alexander is compensated by an affiliate of Hicks Muse.

 

The following directors have been granted options overOrdinary shares of £0.20 in Premier Foods (Holdings) Limited on October 4,2002, at an exercise price of £1.46 and expiring on October 3, 2012:

 
| Robert Schofield |   | 2,215,000 |   |
|------------------|--------|-----------|--------|
| Paul Thomas      |   | 900,000   |   |

 

**C.            Board Practices**

 

**Board Composition**

 

The Board of Directors ofPremier meets on a quarterly basis to review performance and futurestrategy.  In addition, Premier has an“operational board” comprising Robert Schofield, Paul Thomas and other membersof our management responsible for production, sales and marketing.  The operational board meets twice monthly.

 

**Term of Office**

** **

All of Premier’s directors hold office until the nextannual general meeting following their appointment if appointed by the boardand, in any event, until their resignation or removal from office pursuant tothe Articles.  Hicks Muse effectivelycontrol 93.6% of HMTF Premier Investments Holdings L.P. which has indirectownership of 100% of the share capital of Premier (see Item 4.C.“Organizational Structure”).  As aresult, Hicks Muse has the ability to elect all of Premier’s directors.

 

**Employment Agreements**

** **

Robert Schofield and Paul Thomas are employed byPremier Foods (Holdings) Limited, the parent company of Premier.  John Muse, Lyndon Lea and Luca Velussi areemployed by Hicks Muse.  C. DeanMetropoulos and Stephen Alexander are employed by affiliates of HicksMuse.  Robert Schofield’s and PaulThomas’ service contracts are for a fixed term of one year and continuethereafter unless terminated by either party. These service agreements are terminable by Premier Holdings for cause(as defined in each service agreement).

 

**Auditand Remuneration Committees**

 

Premier does nothave a separate audit committee.  TheBoard believe that the representatives of Hicks Muse and the non-executivedirectors are sufficiently independent from the day to day operations to fulfilthe function of an audit committee. Premier does not have a separate remuneration committee.  The board of directors determineremuneration under guidance from Hicks Muse.

** **

**D.            Employees**

** **

At December 31, 2002, we had atotal of approximately 4,337 full-time employees, 1,871 of whom were employedin our canned foods, pickles and sauces group, 736 of whom were employed in ourbeverages group, 892 of whom were employed in our preserves group and 838 ofwhom were employed in our potato business. Of our full-time employees, 374 wereemployed in management and other staff positions and 3,963 were employed inproduction, processing and distribution.

 

AtDecember 31, 2001, we had a total of approximately 4,217 full-time employees,1,646 of whom were employed in our canned foods, pickles and sauces group, 790of whom were employed in our beverages group, 988 of whom were employed in ourpreserves group and 793 of whom were employed in our potato business. Of ourfull-time employees, 343 were employed in management and other staff positionsand 3,874 were employed in production, processing and distribution.

 

AtDecember 31, 2000, we had a total of approximately 6,590 full-time employees,1,890 of whom were employed in our canned foods, pickles and sauces group, 735of whom were employed in our beverages group, 2,160 of whom were employed inour biscuits group, 835 of whom were employed in our preserves,

 

44

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pickles and sauces group, 190 of whom wereemployed in our wines and spirits group and 790 of whom were employed in ourpotato business. Of our full-time employees, 476 were employed in managementand other staff positions and 6,114 were employed in production, processing anddistribution.

 

Weemploy approximately 200 to 300 people annually on a temporary basis duringpeak seasons.

 

Asubstantial number of our employees are represented by unions, and we have over15 collective bargaining agreements in place throughout our various businessesin the U.K., all of which are perpetual. Overall, we consider our relationswith both our unionized and non-unionized employees to be good, and we have nothistorically experienced any significant work stoppages, slowdowns or othercollective employee actions that have resulted in material disruptions of ourbusinesses.

 

**E.             Share Ownership**

** **

As of June 30, 2003 Mr.Metropoulos beneficially own less than 1% of our outstanding equity securities.No other members of our board of directors beneficially owns any of ouroutstanding equity.

 

45

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**Item 7****.    MAJORSHAREHOLDERS AND RELATED PARTY TRANSACTIONS**

** **

**A.            Major Shareholders**

 

Asat January 1, 2002, HMTF PremierLimited, a limited company incorporated in the Cayman Islands, was the beneficialowner of 93.6% of the ordinary shares of Premier.  Hicks Muse controlled 100% of the shares of HMTF PremierLimited.  The remaining 6.4% of sharesof HMTF Premier Limited was owned by a group of third-party co-investors.

 

On May 27, 2002, the followingchanges occurred:

 

•                                          the third parties exchanged their shares inPremier Holdings for shares in HMTF Premier Limited;

 

•                                          the third parties andHicks Muse contributed their shares in HMTF Premier Limited for a limitedpartnership interest in Premier Investment Holdings L.P., a newly formedlimited partnership registered in the Cayman Islands; and

 

•                                          a new U.K. company,Premier Investments, was formed and HMTF Premier Limited transferred its entireshareholding in Premier Holdings to it.

 

Therefore, as of December 31,2002, HMTF Premier Investments Holdings L.P., a limited liability partnershipincorporated in the Cayman Islands, is the beneficial owner of 100% of theordinary shares of Premier.  Hicks Musecontrols a partnership interest of approximately 93.6% of HMTF PremierInvestments Holdings L.P.  The remaining6.4% partnership interest of HMTF Premier Investments Holdings L.P. is owned bya group of third-party co-investors.

 

**B.            Related Party Transactions**

** **

Set forth below is a description of transactions andagreements with our shareholders or affiliates we entered into or existedduring the Year Ended December 31, 2002. Some of these relationships continue to be in effect and may result inconflicts of interest between us and these shareholders or affiliates.

 

**CitadelInsurance Services**

** **

Citadel, a subsidiary ofPremier Holdings, provides Premier with insurance services. Premier paidCitadel insurance premiums for the years ended December 31, 2002, 2001 and 2000of  £0.7 million, £0.5 millionand £0.6 million respectively.

 

**IntercompanyLoan**

** **

Pursuant to an intercompany loan agreement dated August 10, 1999 enteredinto between Premier and Premier Financing (the “Intercompany Loan”), Premierlent an amount equal to the proceeds of the original offering to PremierFinancing, the proceeds of which were used by Premier Financing to purchasepreference shares of Premier Holdings. Interest is to be payable on the dates and at the rate that interest ispayable under the Notes.  TheIntercompany Loan has the same maturity as the Notes.  Premier Financing’s ability to pay interest on, and to repayprincipal amounts borrowed under, the Intercompany Loan is dependent upon fundsgenerated from the operations of its operating subsidiaries and on thosesubsidiaries’ ability to pay dividends and make other distributions to PremierFinancing.  The Intercompany Loan issubordinated to the Senior Credit Facility pursuant to a subordination deed.

 

AtMay 31, 2003, the amount due from Premier Financing to Premier under the IntercompanyLoan was £196.8 million.

 

**Monitoringand Oversight Agreement**

** **

In 1999, Premierentered into a 10-year agreement (the “Monitoring and Oversight Agreement”)with Hicks Muse pursuant to which Premier will pay Hicks Muse an annual fee of£1.2 million for providing oversightand monitoring services to Premier. The annual fee is adjustable at the end ofeach fiscal year to an amount equal to one tenth of one percent of Premier’sbudgeted consolidated net sales, but in no event may the fee be less than £1.2 million. In addition, Premier has agreedto indemnify Hicks Muse and its shareholders and their respective directors,officers, agents, employees and affiliates from and against all claims,actions, proceedings, demands, liabilities, damages, judgments, assessments,losses and costs, including fees and expenses, arising out of or in connectionwith the services rendered by Hicks Muse under the Monitoring and OversightAgreement. The Monitoring and Oversight Agreement makes available to Premierthe resources of Hicks Muse concerning a variety of financial and operationalmatters. The services that have been and will continue to be provided by HicksMuse could not otherwise be obtained by Premier without the addition of

 

46

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personnel or the engagement of outside professional advisors. Inmanagement’s opinion, the fees provided for under the Monitoring and OversightAgreement reasonably reflects the benefits received and to be received byPremier.

 

**FinancialAdvisory Agreement**

** **

In 1999, Premier and Hicks Muse entered into anagreement (“the Financial Advisory Agreement”) pursuant to which will beentitled to receive a fee equal to 1.5% of the transaction value for eachacquisition made by Premier.  The FinancialAdvisory Agreement makes available to Premier the resources of Hicks Museconcerning a variety of financial and operational matters.  The services that have been and willcontinue to be provided by Hicks Muse could not otherwise be obtained byPremier without the addition of personnel or the engagement of outsideprofessional advisors. In our management’s opinion, the fees provided for underthe Financial Advisory Agreement reasonably reflect the benefits received andto be received by Premier.  Premier paid£2.1 million in 2002 (2001: £0.4 million, 2000: £nil) to Hicks Muse underthe Financial Advisory Agreement.

 

**Golden Share**

** **

A “Golden Share” has been issuedby Premier Financing with voting rights, which entitles the holder of theGolden Share to block the passing of resolutions for the winding-up oradministration of Premier Financing or resolutions approving other matters thatwould constitute a breach of the Senior Credit Facility. These voting rightsattaching to the Golden Share will lapse upon a payment default in respect ofthe Notes continuing unremedied and unwaived for a period of 180 days. TheGolden Share is held by an affiliate of Hicks Muse, which will agree with thelenders under the Senior Credit Facility as to the exercise of the votingrights of the Golden Share.

 

**PremierFoods (Holdings) Limited Management Charge**

** **

In 2000, 2001 and 2002, Premier was recharged £0.9 million, £0.2 million and £2.8 million,respectively, by Premier Foods (Holdings) Limited in respect of the sharedadministrative functions.  The increasefrom 2001 to 2002 in the recharge to Premier by Premier Holdings is primarilythe result of a reduction in Premier Holdings’ income and the recharge ofrestructuring costs incurred by Premier Holdings.

 

**HMTF Poultry Limited**

 

Premier has borrowed £9.3 million (2001: £7.6 million) from HMTF PoultryLimited, an affiliated company.  Thisloan is interest-free, subordinated to the Senior Credit Facility and repayablein full on July 31, 2009.

 

**Legal or Arbitration Proceedings**

 

Premier is, from time to time, involved in variousroutine legal proceedings incidental to the ordinary course of business. Webelieve that the outcome of all pending legal proceedings, either individuallyor in the aggregate, will not have a material effect on our consolidatedfinancial condition or results of operations.

* *

**C.            Interests of Experts and Counsel**

** **

Not applicable.

 

**Item 8****.    FINANCIALINFORMATION**

** **

**A.            Consolidated Statements and OtherFinancial Information**

** **

The financial statementsrequired by this item are found in Item 18 “Financial Statements” of thisAnnual Report, beginning on page F-1.

 

**B.            SIGNIFICANTCHANGES**

** **

None.

 

47

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**Item 9****.    THEOFFER AND LISTING**

** **

**A.            TheOffer and Listing Details**

** **

Not applicable.

 

**B.            Plan ofDistribution**

** **

Not applicable.

 

**C.            Markets**

** **

The Notes are listed on theLuxembourg Stock Exchange.

 

**D.            SellingShareholders**

** **

Not applicable.

 

**E.             Dilution**

** **

Not applicable.

 

**F.             Expensesof the Issue**

 

Not applicable.

 

**Item 10****. ADDITIONAL INFORMATION**

** **

**A.            Share Capital**

** **

Not applicable.

 

**B.            Memorandum and Articles of Association**

** **

Premier was incorporatedin England and Wales on May 12, 1999 (registered number 3771991).

 

*Objects and Purposes*

* *

Section 4 of the Memorandum of Association sets forththe objectives for which Premier was established:

 

•                  toreceive monies on deposit or loan and to borrow or raise money in any currency;

 

•                  toadvance, deposit or lend money, securities and/or property and to discount,buy, sell and deal in securities or documents;

 

•                  toacquire, invest in and hold by way of investment, sell and deal in securitiesof all kinds;

 

•                  toorganize, incorporate, reorganize, finance, aid and assist, financially orotherwise, companies and to underwrite or guarantee the subscription ofsecurities of any kind;

 

•                  toenter into currency and/or interest rate and any other type of swap agreements;

 

•                  toact as promoters and entrepreneurs and to carry on business as financiers;

 

•                  toexercise and enforce all rights and powers conferred by or incidental to theownership of securities;

 

•                  toenter into any guarantee or contract of indemnity or suretyship, and to providesecurity;

 

•                  tocarry on any other trade or business which can be advantageously carried on inconnection with or ancillary to any of the businesses of Premier or itssubsidiaries;

 

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•                  tobuy, sell, manufacture, repair, alter, improve, manipulate, prepare for market,let on hire, and generally deal in all kinds of things required by personshaving dealings with Premier;

 

•                  toapply for, purchase and by other means acquire, protect, prolong and renew anyform of intellectual property and to use, manufacture under and grant licensesand privileges in respect of those things;

 

•                  topurchase, take on lease, exchange, hire and otherwise acquire any real orpersonal property and any right or privilege over or in respect of it;

 

•                  tosell, lease, exchange, let on hire and dispose of any real or personal propertyand the whole or part of the undertaking of Premier, for such consideration asthe directors think fit;

 

•                  toadopt any means of publicizing and making known the businesses, services andproducts of Premier;

 

•                  tosupport, subscribe to and contribute to any charitable or public object and anyinstitution, society and club which may be for the benefit of Premier orpersons previously or presently affiliated with Premier; and

 

•                  toestablish, grant and take up agencies, and to do all other things the directorsmay deem conducive to the carrying on of Premier’s business as principal oragent.

 

**Directors’ Interest**

** **

A director of Premier who is in any way interested ina contract or proposed contract with us must declare the nature of his interestat a meeting of the directors. A director may not vote on or be counted in thequorum in relation to a resolution of the board or of a committee of the boardconcerning a contract, arrangement, transaction or proposal in which he has amaterial interest other than by virtue of his interest in shares in Premier.However, in the absence of some other material interest, this prohibition doesnot apply to a resolution concerning any of the following matters:

 

(1)           the granting of a guarantee, securityor indemnity in respect of money lent or obligations incurred by him or anyother person at the request of or for the benefit of Premier;

 

(2)           the granting of a guarantee, securityor indemnity in respect of a debt or obligation of Premier for which he himselfhas assumed responsibility in whole or in part, either alone or jointly withothers, under a guarantee or indemnity or by the giving of security;

 

(3)           a contract, arrangement, transactionor proposal concerning an offer of shares, debentures or other securities ofPremier for subscription or purchase, in which offer he is or may be entitledto participate as a holder of securities or in the underwriting orsub-underwriting of which he is to participate;

 

(4)           a contract, arrangement, transactionor proposal to which Premier is or is to be a party concerning another company(including a subsidiary undertaking of Premier) in which he is interestedwhether as an officer, shareholder, creditor or otherwise (a “relevantcompany”), if he does not to his knowledge hold an interest in sharesrepresenting one percent or more of either any class of the equity sharecapital of or the voting rights in the relevant company;

 

(5)           a contract, arrangement, transactionor proposal for the benefit of the employees of Premier (including any pensionfund or retirement, death or disability scheme) which does not award him aprivilege or benefit not generally awarded to the employees to whom it relates;and

 

(6)           a contract, arrangement, transactionor proposal concerning the purchase or maintenance of any insurance policyunder which he may benefit.

 

The salary or other remuneration of executivedirectors may be a fixed sum of money, or wholly or in part governed bybusiness done or profits made, or as otherwise decided by the board.Non-executive directors are entitled to such remuneration as Premier may byordinary resolution determine. No director is required to vacate his officebecause he has reached the age of 70 or another age, and section 293 of theU.K. Companies Act 1985 does not apply to Premier. There is no requirement ofshare ownership for a director’s qualification.

 

The board may appoint a person who is willing to actas a director, either to fill a vacancy or as an addition to the board. Adirector appointed in this way may hold office only until the dissolution ofthe next annual general meeting after his appointment unless he is reappointedduring that meeting.

 

The board may exercise all the powers to borrow moneyand to mortgage or charge all or part of the undertaking, property and assetsand uncalled capital of Premier and to issue debentures and other securities.

 

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**Shareholders’ Meetings and Notices**

 

The board convenes general meetings of shareholdersannually. Extraordinary general meetings may be convened by the board as deemednecessary or upon receipt of a requisition from shareholders in accordance withthe U.K. Companies Acts.

 

An annual general meeting and an extraordinary generalmeeting called for the passing of a special resolution require 21 clear days’notice. All other extraordinary general meetings require not less than 14 cleardays’ notice.

 

**Dividend Rights; Other Rights to Share in CompanyProfits; Capital Calls**

 

Premier has one series of ordinary shares authorizedand outstanding. Premier may by ordinary resolution declare a dividend to bepaid to shareholders, but no dividend may exceed the amount recommended by theboard. The board may declare and pay such interim dividends as appear to it tobe justified by the profits of Premier available for distribution. A dividendunclaimed for a period of 12 years from the date it was declared or became duefor payment is forfeited and ceases to remain owing by Premier.

 

Subject to the terms of allotment or issue, the boardmay make calls on shareholders in respect of amounts unpaid on the shares or aclass of shares held by them respectively and not payable on a date fixed by orin accordance with the terms of allotment or issue. None of our capital stockis subject to any sinking fund provisions.

 

Apart from shareholders’ rights to share in Premier’sprofits by dividend (if any is declared), the articles of association providethat the board may, with the authority of an ordinary resolution of Premier:

 

(1)           resolve to capitalise an amountstanding to the credit of reserves;

 

(2)           appropriate the sum resolved to becapitalised to the shareholders in proportion to the nominal amount of ordinaryshares held by them respectively and apply that sum on their behalf;

 

(3)           make any arrangements it thinks fitto resolve a difficulty arising in the distribution of a capitalized reserve;

 

(4)           authorise a person to enter (onbehalf of all shareholders concerned) an agreement with Premier; and

 

(5)           generally do all acts and thingsrequired to give effect to the resolution.

 

**Redemption Provisions; Liquidation Right***s*

 

Shares may be issued on terms that they are to beredeemed or, at the option of Premier or the holder, are liable to be redeemed.Upon a voluntary winding-up of Premier the liquidator may, on obtaining anysanction required by law, divide among the shareholders in kind the whole orany part of the assets of Premier. The liquidator may not, however, distributeto a shareholder without his consent an asset to which there is attached aliability or potential liability for the owner.

 

**Voting Rights; Variation of Rights**

 

At a general meeting, aresolution put to the vote of the meeting is decided by a show of hands unlessa poll is properly demanded. Holders of record of ordinary shares may appoint aproxy to attend and vote on their behalf at any shareholders’ meeting. Everyshareholder present in person has on a show of hands one vote and everyshareholder present in person or by proxy has on a poll one vote for everyordinary share of which he is the holder.

 

Subject to the U.K. Companies Acts, the rightsattached to a class of shares may be varied whether or not Premier is beingwound up (i) in such manner (if any) as may be provided by those rights, or(ii) in the absence of provision, either with the consent in writing of theholders of at least three fourths of the nominal amount of the issued shares ofthat class or with the sanction of an extraordinary resolution passed at aseparate meeting of the holders of the issued shares of that class validly heldin accordance with the articles, but not otherwise.

 

**Limitations on Voting and Shareholding**

 

There are no limitations imposed by English law orPremier’s memorandum or articles of association on the right of non-residentsor foreign persons to hold or vote Premier’s ordinary shares, other thanlimitations that would generally apply to all of the shareholders.

 

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**Disclosure of Interests in Shares**

 

There are no bylaw provisions governing the ownershipthreshold above which shareholder ownership must be disclosed.

 

**C.            Material Contracts**

 

The following summaries of certain material contractsdo not purport to be complete and are subject to, and are qualified in itsentirety by reference to, all the provisions of the relevant document.  Capitalized terms used in the followingparagraphs and not otherwise defined shall have the meanings given to them inthe relevant document.

 

**SeniorCredit Facility**

 

In May 2002, Premier Financing entered into an amendedand restated Senior Credit Facilities Agreement with J.P. Morgan plc andBarclays Capital as arrangers, JPMorgan Chase Bank and Barclays Bank plc asunderwriters, with J.P. Morgan Europe Limited as agent and security agent (the“Senior Credit Facility”). Under the Senior Credit Facility, a syndicate offinancial institutions made £412.3 million of senior secured credit facilitiesavailable to Premier Financing.  Thesefacilities have been reduced in line with repayments made.  At December 31, 2002, the facilitiesavailable to Premier amounted to £392.3 million.

 

**Structure**

 

The Senior CreditFacility provides for £392.3 million of loan facilities comprising (i) Term Aand Term B Facilities and (ii) the Working Capital Facility (each as describedbelow) and the ancillary facilities which may be provided therein.

 

The Term A Facility isfor an amount of up to £224.3 million and the Term B Facility is for an amountof up to £68.0 million.  At December 31,2002, £224.3 million was outstanding on the Term A Facility and £68.0 millionwas outstanding on the Term B Facility.

 

The Working CapitalFacility in the amount of up to £100.0 million is available in pounds sterlingor the equivalent in certain foreign currencies in the form of revolvingadvances and a letter of credit facility, which is to be used for generalcorporate purposes.  At December 31,2002, no advance had been drawn down under the Working Capital Facility and£22.7 million was utilized for general corporate purposes.

 

**Interest Rates and Fees**

 

Interest on advancesunder the various facilities is payable at the rate per annum equal to LIBOR(or EURIBOR for euro) plus applicable mandatory liquid asset costs plus thefollowing applicable margins in relation to the facilities:

 

•                                          2.25% perannum reducing on the basis of a ratchet reducing in several steps to 1.25% perannum dependent upon certain net debt to consolidated EBITDA ratios for theTerm A Facility and the drawn down amount under the Working CapitalFacility.  At December 31, 2002, themargin applied to LIBOR on the Term A Facility was 2.0%; and

 

•                                          2.75% perannum for the Term B Facility.

 

Commitment feesare payable at the rate of 0.75% per annum of the undrawn portion of therelevant facilities.  The commitmentfees on the Working Capital Facility reduce in several steps to 0.25% per annumdependent upon certain net debt to consolidated EBITDA ratios. At December 31,2002, the margin applied to LIBOR in respect of commitment fees was0.625%.  Default interest is payable atthe applicable interest rate plus 1% per annum.

 

**Security and Guarantees**

 

Premier Financing’sobligations under the Senior Credit Facility are required to be guaranteed byeach of the material operating subsidiaries of Premier. Each chargingsubsidiary has granted security over substantially all of its assets, includingEnglish law fixed charges over material properties, bank accounts, insurance,debts and shares and a floating charge over all of its other undertakings andassets. Certain limited material subsidiaries incorporated outside of Englandand Wales have given similar security.

 

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**Covenants**

 

The Senior CreditFacility requires Premier Financing to observe certain undertakings, includingundertakings relating to delivery of financial statements, insurance,notification of any default or any occurrence which could be reasonablyexpected to have a material adverse effect, consents and authorizations beingmaintained, compliance with environmental laws, notification of material litigationand labor disputes, access to books and records, uses of proceeds, filing oftax returns, pension schemes, the provision of guarantees and security fromsubsidiaries, euro compliance, intellectual property rights and hedgetransactions.

 

The Senior CreditFacility requires Premier Financing to comply with certain negative covenants,including covenants relating to negative pledges, borrowed money, guarantees,disposals, operating leases, change of accounting reference date or accountingpolicy, identity of auditors, equity yield and intercompany loan payments,reduction of capital, loans and credit, intra-group contracts and arrangements,distributions, share capital, disposals, acquisitions and joint ventures,amendments to documents, changes in business, merger and amalgamation,shareholders’ meetings and constitutive documents, acquisitions and jointventures and new subsidiaries.  Certaincategories of permitted payment may be made as exceptions to the restrictionson dividends and intercompany loan payments including payment of interest onthe Notes.

 

In addition, the SeniorCredit Facility requires Premier Financing to comply with specified financialratios and tests, including EBITDA / total interest expense, total net debt /EBITDA, fixed charge coverage ratio and maximum capital expenditure.

 

There are caps onpermitted budgeted capital expenditure for each financial year with the rightto carry forward any surplus of budgeted capital expenditures up to a maximumsurplus amount of one third of the previous year’s budget for use within thefirst six months of the following financial year.

 

**Maturity and Amortisation**

 

*Term Loan Facilities:*TheTerm A Facility will be repaid in semi-annual installments commencing on June30, 2002, with the final maturity on December 31, 2007.  The Term B Facility will be repaid in twoinstalments with 50% repayable on June 30, 2008 and the balance repayable onDecember 31, 2008.

 

*Working Capital Facility:*The Working Capital Facility (and all other facilities made availablethereunder) will cease to be available on December 31, 2007.

 

The Senior Credit Facility is required to be prepaid in full immediatelyupon the occurrence of certain events including a change of control (as definedtherein) or any asset sale (as defined therein).* *The first £100.0 million and thereafter 50% of the aggregatenet proceeds of any flotation (as defined therein) which does not constitute afull prepayment event (as defined therein) is applied in or towards prepaymentof the Senior Credit Facility.  The netproceeds from certain relevant disposals which are not applied in acquiringreplacement assets or other assets required in the business over a six-monthreinvestment period must be applied in prepayment of the Senior CreditFacility.  A percentage of excess cashflow must be applied in prepayment of the Senior Credit Facility.  This percentage is initially 75% but reducesin two equal steps to 25% depending upon the applicable total net debt to consolidatedEBITDA ratio for the financial year in question. * *Any amounts received in respect of any claims madeagainst professional advisors are applied in or towards prepayment of thesenior credit facility after applications to discharge associated liabilitiesand claims and/or to acquire assets to which the relevant claim relates.  Subject to an indemnity for broken fundingcosts, Premier Financing may prepay amounts outstanding under the Senior CreditFacility, without penalty or premium, in whole or in part in minimum amounts of£1.0 million, upon three business days’ notice to the agent for the SeniorCredit Facility.  Prepayments of anamount equal to the next two scheduled repayment installments will be appliedas directed by Premier Financing and thereafter firstly against advances underthe refinancing facilities on a *pro rata* basis, and secondly in reductionof working capital advances and thirdly in reduction of outstandings under theancillary facilities.

 

The Senior Credit Facility contains certain events of default, includingevents relating to failure to pay, misrepresentation, cross-default, derivativetransaction default, breach of undertakings, illegality or unenforceability,insolvency, administration, appointment of receivers and managers, suspensionor winding-up of business, seizure, qualification of financial statements,environmental matters and changes of ownership.

 

**Subordination Deed**

 

Inconnection with the Intercompany Loan, Premier and Premier Internationalentered into a subordination deed which provides for restrictions on Premiertaking certain actions in relation to the Notes.  In particular, Premier may not receive payments to pay principalon the Notes or any prepayment, redemption, defeasance or purchase of principalon the Notes or certain indemnities until the Senior Credit Facility has beenpaid in full.

 

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The subordination deed:

 

•                                         prohibits Premier Financing from making paymentson the principal amount of the Intercompany Loan while the Senior CreditFacility is outstanding;

 

•                                         prohibits other payments under the IntercompanyLoan to be made if certain stop events have occurred and are continuing or themaking of the payment would immediately give rise to a stop event (such stopevents are a notice of acceleration, payment default or insolvency events underthe Senior Credit Facility);

 

•                                         gives the Senior Credit Facility priority forpayment over the other subordinated debts, including the notes, in the event ofany insolvency, bankruptcy, receivership, liquidation or reorganizationproceeding relating to Premier Financing;

 

•                                         prohibits Premier from receiving security inrespect of the Intercompany Loan, creating security over or assigning,transferring or disposing of its rights in the Intercompany Loan and acceleratingor enforcing its rights thereunder; and

 

•                                         subjects Premier to “turnover” obligations in theevent that payments are received in breach of the subordination deed.

 

Restrictionsare also placed on Premier amending the Intercompany Loan or the Notes, theIndenture and other documents relating to the Notes which affect the timing oramount of payments due.

 

**Investors’Undertaking**

 

Aspart of the arrangements for the Senior Credit Facility, Premier has agreedthat, until a payment default in respect of the Notes continuing unremedied andunwaived for a period of 180 days, it would not take any formal legal steps towind up Premier Financing or to obtain an administrative order in respect ofPremier Financing in respect of unperformed obligations owed to it.

 

**The Notes**

 

In August 1999, weissued $200.0 million aggregate principal amount 12% Senior Notes due 2009 (the“Dollar Notes”) and £75 million aggregate principal amount 12 1/4% Senior Notesdue 2009 (the “Sterling Notes”, and together with the Dollar Notes, the“Notes”).  The Notes were subsequentlyexchanged for SEC-registered Notes in July 2000 on the same terms andconditions by the holders.  The Noteswill mature on September 1, 2009, unless redeemed at our option at an earlierdate.  Cash interest on the Dollar Notesaccrues at a rate of 12% per annum and are payable in cash semi-annually onMarch 1 and September 1 of each year. Cash interest on the Sterling Notes accrues at a rate of 12 1/4% perannum and are payable in cash semi-annually on March 1 and September 1 of eachyear.

 

The Notes may beredeemed at our option at any time on or after September 1, 2004, in whole orin part.  At any time on or prior toSeptember 1, 2004, the Notes may also be redeemed as a whole upon theoccurrence of a change of control (as defined in the Indenture).

 

The Indenturegoverning the Notes contains covenants limiting our ability to:

 

•                                         incur additional debt;

 

•                                         transfer and sell assets;

 

•                                         enter into transactions with ouraffiliates; and

 

•                                         pay dividends or make any otherdistributions on our capital stock.

 

These covenants aresubject to a number of important limitations and exceptions.

 

The Indenture contain covenantswhich, among other things, restrict us and our “restricted subsidiaries” (asdefined in the Indenture) from incurring any indebtedness, other than“permitted indebtedness”, unless we maintain a ratio of the consolidated cashflow (as defined in the Indenture) to the fixed charges (as defined in theIndenture) of at least 2.0 to 1.0 on or prior to August 10, 2001 and at least2.25 to 1.0 thereafter.

 

As defined in the Indenture,“permitted indebtedness” means, among other things,

 

•                                         our indebtedness outstanding under the SeniorCredit Facility; *provided* that the aggregate principal amount at any time outstandingdoes not exceed £420.0 million; and

 

•                                         additional indebtedness not to exceed £50.0million in principal amount outstanding at any time (which amount may, but neednot, be incurred under the Senior Credit Facility).

 

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TheIndenture also contains covenants restricting us from making asset sales (asdefined in the Indenture) unless, among other things:

 

•                                         we receive consideration at the time of the assetsale at least equal to the fair market value of the assets sold or otherwisedisposed of and as determined in good faith by our management or, if such assetsale involves consideration in excess of £7.5 million by our board ofdirectors, as evidenced by a board resolution;

 

•                                         at least 75% of the consideration received by usfrom such asset sale is in the form of cash or cash equivalents and is receivedat the time of such disposition; and

 

•                                         upon the consummation of an asset sale, we applythe net cash proceeds (as defined in the Indenture) within 180 days of receiptthereof either to repay any indebtedness of a restricted subsidiary of ours,which would include indebtedness under the Senior Credit Facility; reinvest inproductive assets (as defined in the Indenture) within 360 days of the date of receiptof such net cash proceeds; or purchase the Notes tendered at a price equal to100% of the principal amount thereof plus accrued interest thereon.

 

TheIndenture also contains covenants concerning the following:

 

•                                         limitation on transactions with our affiliates;

 

•                                         limitation on paying dividends or making anyother distributions on our capital stock by us or any of our restrictedsubsidiaries; and

 

•                                         limitation on secured indebtedness to be incurredby us.

 

Eventsof default under the Notes include:

 

•                                         the failure to pay interest on the Notes when theinterest becomes due and payable for a period of 30 days;

 

•                                         the failure to pay principal of or premium on anyNotes at maturity, upon redemption or otherwise;

 

•                                         a default in the observance or performance of anyother covenant or agreement contained in the Notes or the Indenture, whichdefault continues for a period of 30 days after written notice has been givenfrom the trustee or holders of at least 25% in aggregate principal amount ofoutstanding Notes;

 

•                                         the failure to pay at the stated maturity (givingeffect to any extensions thereof) the principal amount of any of ourindebtedness or of any of our restricted subsidiaries aggregating £10.0 millionor more after a 10-day period during which such default has not been cured;

 

•                                         one or more judgments in an aggregate amount inexcess of £10.0 million being rendered against us or any of our significantrestricted subsidiaries (as defined in the Indenture); and

 

•                                         certain events of bankruptcy, insolvency or reorganizationaffecting us or any of our significant restricted subsidiaries.

 

**Forwardpurchase of $200.0 million to cover the principal element of the Notes.**

 

In January 2003, weentered into forward exchange contracts with Barclays Bank PLC to purchase $200.0million, value dated September 1, 2004. These contracts were entered into to fix the sterling value of therepayment of the dollar-denominated principal. The sterling value of these contracts is £129.2 million.

 

**RelatedParties**

 

For a description of other material contracts we entered into during thepast two years, see Item 7.B. “Major Shareholders and Related PartyTransactions—Related Party Transactions.”

 

**D.            Exchange Controls**

 

Not applicable.

 

**E.             Taxation**

 

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**United States**

 

***U.S. Federal Income Tax Considerations***

 

The following discussionis based upon the provisions of the U.S. Internal Revenue Code of 1986 asamended (the “Code”), the applicable U.S. Treasury regulations promulgated orproposed thereunder, judicial authority and current administrative rulings andpractice. Legislative, judicial or administrative changes or interpretationsmay be forthcoming that may be retroactive and that could alter or modify thecontinued validity of the statements and conclusions set forth below.

 

Except with respect to the discussions set forth belowunder “— Non-U.S.Holders” and “— InformationReporting and Backup Withholding,” this discussion is limited to the U.S.federal income tax considerations applicable to a beneficial owner of a Notethat is (i) a citizen or resident of the United States, (ii) a corporation (orother enitity treated as a corporation for U.S. federal income tax purposes)treated or organized in the United States or under the laws of the UnitedStates or any political subdivision thereof or therein, (iii) an estate, theincome of which is includible in gross income for U.S. federal income taxpurposes regardless of its source, or (iv) a trust, if a court within the U.S.is able to exercise primary supervision over the administration of the trustand one or more U.S. persons have authority to control all substantialdecisions of the trust (a “U.S. Holder”). Certain aspects of U.S. federalincome taxation relevant to a beneficial owner of a Note other than a U.S.Holder (a “Non-U.S. Holder”) are also discussed below. This discussion does notaddress all aspects of U.S. federal income taxation that might be relevant toparticular holders in light of their personal investment circumstances orstatus, nor does it discuss the consequences to holders subject to specialtreatment under the U.S. federal income tax laws, such as brokers or dealers insecurities or foreign currency, taxpayers that have elected mark-to-marketaccounting, financial institutions, “financial services entities,” insurancecompanies, tax-exempt organizations, taxpayers holding Notes as part of a“straddle,” “hedge” or “conversion transaction,” or that have a “functionalcurrency” other than the U.S. dollar, and certain expatriates or formerlong-term residents of the United States. The discussion does not address anyspecial rules that may apply if the holder receives principal in installmentpayments or if the Note is called before the maturity date. Additionally, thediscussion does not consider the tax treatment of persons who hold Notesthrough a partnership or other pass-through entity.  Moreover, the effect of any applicable state, local or foreigntax laws or the applicability of U.S. federal gift or estate taxation is notdiscussed. Holders are urged to consult their own tax advisors regarding theU.S. federal, state, local, foreign and other tax considerations of theacquisition, ownership and disposition of the Notes.

 

Except as otherwiseindicated below, this discussion is generally limited to the tax consequencesto beneficial owners of the Notes that are initial holders of the Notes thathold the Notes as capital assets (within the meaning of Section 1221 of theCode) and that purchased the Notes at the “issue price.” For this purpose, the“issue price” of a Note is the first price at which a substantial amount of theNotes were sold to the public for money (excluding sales to bond houses,brokers or similar persons or organizations acting in the capacity of underwriters,placement agents or wholesalers).

 

**Each investor is advised to consult such person’s own taxadvisor with respect to the specific tax consequences to such person ofpurchasing, holding or disposing of Notes.**

 

***Stated Interest on Notes***

 

Stated interest on a Notewill be taxable to a U.S. Holder as ordinary income either at the time itaccrues or is received in accordance with the U.S. Holder’s method ofaccounting for U.S. federal income tax purposes.  Stated interest paid on a Note will be includible in income by aU.S. Holder in an amount equal to the U.S. dollar value of the interest,regardless of whether a payment is in fact converted to U.S. dollars at thattime. If such U.S. Holder uses the cash method of accounting for tax purposes,the U.S. dollar value of such interest is determined using the spot rate at thetime payment is received. If a U.S. Holder uses the accrual method ofaccounting for tax purposes, the U.S. dollar value of such interest isdetermined using the average exchange rate during the relevant accrual period(or partial accrual period with respect to interest paid in a subsequenttaxable year) or, if elected, the spot rate (i) on the last day of the relevantaccrual period (or partial accrual period) or (ii) on the payment date, if suchdate is within five business days of the last day of the accrual period ortaxable year. Any differences in the exchange rate between the rate at whichinterest on a Note is included in income and the spot rate on the payment (ordisposition) date for interest will result in exchange gain or loss withrespect to the related amount of interest, and will generally be treated asordinary income or loss for U.S. federal income tax purposes. The U.S. dollarvalue of interest accrued or received, adjusted for any exchange gain or losswith respect to the amount accrued, generally will be a U.S. Holder’s tax basisin the pounds sterling received as interest on a Note.

 

***Additional Amounts***

 

Assuming that thecontingency that we will pay “Additional Amounts” (*i.e.*, the amount of interestprovided in the Notes to prevent any net reduction for withholding taxes,determined using the withholding tax rate applicable to the U.S. Holder) isremote or incidental (within the meaning of applicable U.S. Treasury regulations),a U.S. Holder will treat the gross amount of any Additional Amounts as ordinaryinterest income at 

 

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the time such amount is received or accrued in accordance with suchU.S. Holder’s method of accounting for tax purposes in the same manner asdiscussed above under “— StatedInterest on Notes”. Consequently, the amount a U.S. Holder will include ingross income with respect to a Note could exceed the amount includible bythe  U.S. Holder as stated interestshould Additional Amounts be due under the Notes.

 

***Withholding Taxes***

 

Any foreign withholdingtaxes paid at the rate applicable to a U.S. Holder will be treated as foreigntaxes eligible for credit against such holder’s U.S. federal income tax liability,at the election of the U.S. Holder, subject to generally applicable limitationsand conditions (including that the U.S. Holder claim any applicable treatybenefits).  Alternatively, such taxesare eligible for deduction in computing such U.S. Holder’s taxable income.Stated interest and Additional Amounts will constitute foreign source incomefor foreign tax credit purposes. Such income will generally constitute “highwithholding tax interest” for U.S. foreign tax credit purposes, unless the rateapplicable to the U.S. Holder is below 5%, in which case such income generallywill constitute “passive income.”  Thecalculation of foreign tax credits involves the application of complex rulesthat depend on a U.S. Holder’s particular circumstances. Accordingly, investorsare urged to consult their tax advisors regarding their ability to claim acredit for any foreign withholding taxes paid with respect to the Notes.

 

***Sale, Exchange or Redemption***

 

Unless a non-recognitionprovision applies, the sale, exchange, redemption (including pursuant to anoffer by us) or other disposition of a Note will be a taxable event for U.S.federal income tax purposes. In that event, a U.S. Holder will recognize gainor loss equal to the difference between (i) the amount of cash plus the fairmarket value of any property received upon that sale, exchange, redemption orother taxable disposition (other than amounts attributable to accrued interest)and (ii) the U.S. Holder’s adjusted tax basis in the Note. A U.S. Holder’s taxbasis in a Note generally will equal the cost of the Note to the U.S. Holder,which is the  U.S. dollar value of thepound sterling purchase price translated at the spot rate for the date ofpurchase (or, in some cases, the settlement date). The conversion of dollarsinto pounds sterling and the immediate use of those pounds sterling to purchasea Note generally will not result in a taxable gain or loss for a U.S.Holder  A U.S. Holder will have a taxbasis in any pounds sterling received on the sale, exchange or retirement of aNote equal to the U.S. dollar value of the pounds sterling on the date ofreceipt.

 

Gain or loss recognizedby a U.S. Holder of a Note should be capital gain or loss and will be long-termcapital gain or loss if the Note has been held by the U.S. Holder for more thanone year at the time of sale, exchange, redemption or other disposition. Uponthe sale, exchange, retirement or repayment of a Note, a U.S. Holder willrecognize exchange gain or loss to the extent that the rate of exchange on thedate of retirement or disposition differs from the rate of exchange on the datethe Note was acquired, or deemed acquired. Exchange gain or loss is recognized,however, only to the extent of total gain or loss on the transaction. Forpurposes of determining the total gain or loss on the transaction, a U.S.Holder’s tax basis in the Note will generally equal the U.S. dollar cost of theNote. Exchange gain or loss recognized by a U.S. Holder will generally betreated as ordinary income or loss.

 

Any gain realized by aU.S. Holder on the sale, exchange or redemption of a Note generally will betreated as U.S. source income for U.S. foreign tax credit purposes. Any lossrealized upon such a sale, exchange, redemption or other disposition of a Notegenerally will be treated as a U.S. source loss except to the extent that suchloss is attributable to accrued but unpaid interest.

 

***Non-U.S. Holders***

 

Subject to the discussion below under “— InformationReporting and Backup Withholding,” a Non-U.S. Holder of a Note generally willnot be subject to U.S. federal income or withholding tax on payments, includingstated interest and Additional Amounts, in respect of a Note and gain realizedon the sale, exchange, redemption or other disposition of a Note unless (i) thatincome is effectively connected with the conduct by the Non-U.S. Holder of atrade or business in the United States (or in the case of a treaty resident,attributable to a permanent establishment (or a fixed base) in the UnitedStates) or (ii) in the case of a gain, the Non-U.S. Holder of a Note is anon-resident alien individual who holds a Note as a capital asset and ispresent in the United States for 183 days or more in the taxable year of thesale, exchange, redemption or other disposition and certain other conditionsare satisfied.

 

***Information Reporting and Backup Withholding***

 

Payments of interest andprincipal on a Note and the proceeds from the sale of a Note paid to a U.S.Holder (other than a corporation or other exempt recipient) will be reported tothe U.S. Internal Revenue Service. A U.S. Holder may be subject to U.S. backupwithholding (currently at the rate of 30%) with respect to amounts paid on aNote and the proceeds from the sale of a Note unless such U.S. Holder (i) is acorporation or 

 

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comes within certain other exempt categories and, when required,demonstrates this fact or (ii) provides a correct taxpayer identificationnumber, certifies as to no loss of exemption from backup withholding andotherwise complies with the applicable requirements of the backup withholdingrules.

 

Interest on a Note paidoutside the United States to a Non-U.S. Holder through a U.S. person or a U.S.related person (as defined below) is subject to information reporting andpossible backup withholding unless certain documentation and other requirementsare satisfied. The payment of principal on a Note and the proceeds from thedisposition of a Note by a Non-U.S. Holder to or through the U.S. office of anybroker,      U.S. or foreign, or thenon-U.S. office of a U.S. person or a U.S. related person, will be subject toinformation reporting and possible backup withholding unless (i) the ownercertifies its non-U.S. status under penalties of perjury or otherwiseestablishes an exemption and (ii) the broker does not have actual knowledgethat the holder is a U.S. Holder or that the conditions of any other exemptionare not, in fact, satisfied. A “U.S. related person” is a person with certainenumerated U.S. relationships.

 

Backup withholding is notan additional tax.  Any amount withheldunder the backup withholding rules will be creditable against the holder’s U.S.federal income tax liability, subject to satisfaction of certain proceduralrequirements. Holders of Notes should consult their tax advisors to determinewhether they qualify for exemption from U.S. withholding and the procedure forobtaining an exemption, if applicable.

 

**U.K.**

 

***U.K. Tax Consequences***

 

The following summarydescribes certain U.K. tax consequences of the ownership of the Notes but doesnot purport to be comprehensive.  Exceptwhere expressly stated, the summary relates only to the position of thosepersons who are (i) the absolute beneficial owners of their Notes and theinterest thereon; (ii) who are neither resident nor ordinarily resident in theU.K. for the purpose of U.K. taxation; and (iii) who do not carry on a trade,profession or vocation in the U.K. through a branch or agency in the U.K., andmay not apply to special situations, such as those of dealers insecurities.  Furthermore, the discussionbelow is generally based upon provisions of U.K tax law and U.K. Inland Revenuepractice as of the date hereof.  Theseprovisions may be repealed, revoked or modified (possibly with retrospectiveeffect) so as to result in U.K. tax consequences different from those discussedbelow.  **Persons considering the purchase,ownership or disposition of the Notes should consult their own tax advisorsconcerning U.K. tax consequences in the light of their particular situations aswell as any consequences arising under the law of any other relevant taxjurisdiction.  No representations withrespect to the tax consequences to any particular holder of the Notes are madehereby.**

 

***Interest on the Notes***

 

The Notes will constitute“quoted Eurobonds” within the meaning of section 349 of the U.K. Income andCorporation Taxes Act 1988 (“ICTA”) provided they are listed on a “recognisedstock exchange” within the meaning of section 841 of ICTA.  The Luxembourg Stock Exchange is currently arecognised stock exchange for these purposes. Accordingly, as long as the Notes are listed on the Luxembourg StockExchange and remain so listed, payments of interest on the Notes may be madewithout withholding on account of U.K. income tax.

 

Interest on the Notesconstitutes U.K. source income for U.K. tax purposes and, as such, may besubject to income tax by direct assessment even where paid without withholdingexcept in the hands of a holder who is exempt from U.K. income tax under theterms of an applicable double taxation treaty or otherwise.  However, interest on a U.K. source receivedwithout deduction or withholding on account of U.K. tax will not be chargeableto U.K. tax in the hands of a holder of notes who is not resident for taxpurposes in the U.K. unless that holder of notes carries on a trade, professionor vocation in the U.K. through a U.K. branch or agency in connection withwhich the interest is received or to which the Notes are attributable.  There are exemptions for interest receivedby certain categories of agents (such as brokers and investment managers).

 

Any paying agent or otherperson through whom interest is paid to, or by whom interest is received onbehalf of, an individual (whether resident in the U.K. or elsewhere) may berequired to provide information in relation to the payment and the individualconcerned to the U.K. Inland Revenue. The Inland Revenue may communicate this information to the taxauthorities of other jurisdictions.

 

***Proposed European Directive on the Taxation of SavingsIncome***

 

On December 13, 2001, the Council of the EuropeanUnion published a revised draft directive regarding the taxation of savingsincome.  It is proposed that, subject toa number of important conditions being met, Member States will be required toprovide to the tax authorities of another Member State details of payments ofinterest (or other similar income) paid by a person within its jurisdiction toor for the benefit of an 

 

57

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individual resident in that other Member State, except that Belgium,Luxembourg and Austria will instead operate a withholding system for atransitional period in relation to such payments.

 

The proposed directive is not yet final and may besubject to further amendment. Consequently, it is not possible to predict what effect, if any, theadoption of the proposed directive would have on the Notes or on the paymentsof principal or interest on the Notes.

 

**Persons considering the purchase, ownershipor disposition of the Notes who are in any doubt as to their tax position orwho may be subject to tax in other jurisdictions should consult their own taxadvisors.**

 

**F.             Dividends and Paying Agent**

 

Not applicable.

 

**G.            Statement by Experts**

 

Not applicable.

** **

**H.            Documents on Display**

 

We are subject to theinformational requirements of the Securities Exchange Act of 1934, as amended(the “Exchange Act”), applicable to foreign private issuers and fulfill theobligation with respect to such requirements by filing reports with theSEC.  You may read and copy any reports,statements and other information we file with the SEC at the SEC’s publicreference rooms in Washington D.C., New York, New York, and Chicago, Illinois.  Copies of such material may be obtained bymail from the Public Reference Branch of the SEC at such addresses.  Please call 1-800-SEC-0330 for furtherinformation on the public reference rooms.

 

As a foreign private issuer, we are exempt from therules under the Exchange Act prescribing the furnishing and content of proxystatements, and our officers, directors and principal shareholders are exemptfrom the reporting and “short-swing” profit recovery provisions contained inSection 16 of the Exchange Act.  Inaddition, we are not be required under the Exchange Act to file periodicreports and financial statements with the SEC as frequently or as promptly asU.S. companies whose securities are registered under the Exchange Act.  A copy of each report submitted inaccordance with applicable U.S. law is available for public review at ourprincipal executive offices.

 

**I.              Subsidiary Information**

 

Not applicable.

 

**Item 11****.                 QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

The following discussionof our financial risk-management activities includes “forward-lookingstatements” that involve risks and uncertainties.  Actual results could differ materially from those projected inthe forward-looking statements.

 

Market risk representsthe risk of changes in the value of financial instruments, whether derivativeor non-derivative, as a result of fluctuations in foreign currency exchangerates and interest rates.  The objectiveof our financial risk management strategy is to protect us against unfavorablechanges in the financial markets and thus help us secure profitability.  Funding and management of the financialrisks are the responsibility of our treasury committee, which is asub-committee appointed by our board of directors.

 

Under our financialpolicy, we use various financial instruments within specified limits to managethe primary market exposures associated with our underlying assets andliabilities, as well as with anticipated transactions.  We use these instruments to reduce risk byessentially creating offsetting market exposures.  These contracts are entered into with financial institutions inaccordance with our treasury policies and procedures, thereby reducing the riskof credit loss.  We use derivativefinancial instruments only for commercial purposes and financial purposes.  We do not use derivative financialinstruments for speculative purposes.

 

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The following discussioncontains sensitivity analyses which present the hypothetical loss in cash flowsor fair values of the financial instruments and derivative financialinstruments that were held by us as of December 31, 2002 that were subject tochanges in foreign currency exchange rates and interest rates.  The range of sensitivities chosen for theseanalyses reflects our view of changes that are reasonably possible over aone-year period.

 

In the normal course ofbusiness, we also face risks that are either non-financial ornon-quantifiable.  These risksprincipally include country, commodity, credit and legal risks, and are notrepresented in the following analyses.

 

**ForeignCurrency Exchange Risk**

 

Our policy with regard to foreign currency exchangerisk is to hedgesuch risk using foreign currency purchase contracts, swaps, options andcurrency borrowing / investments.  It isour policy to minimize risk to adverse movements in exchange rates by hedgingthe exposure at the point when it becomes a contractual obligation.  We hedge all trading transaction exposuresabove an aggregate level of £100,000. These transaction exposures are managed by each of our subsidiarycompanies unless considered material to the group.  These and other exposures arising from our trade in non-sterlingcurrencies can only be hedged by a subsidiary company in agreement with grouptreasury and such positions are carefully monitored.

 

As of December 31, 2002, the contractual value andmarket value of our foreign currency forward purchase contracts were £42.2million and £41.9 million, respectively.

 

Using ahypothetical adverse change of 10% in foreign currency exchange rates, thehypothetical loss in cash flows of derivative and non-derivative financialinstruments and foreign currency denominated balance sheet positions atDecember 31, 2002 is estimated to be £7.2 million (2001: £10.3 million).

 

**Interest Rate Risk**

 

Changes in our marketrisk exposure during 2002 primarily involved the increase of interest rate riskdue to the increase in our debt following the acquisition of Nestlé.  This exposure will decrease with the pay downof the Senior Credit Facility.  We donot know of, nor do we expect, any significant increases in market riskexposure to be incurred in future reporting periods.

 

We pay interest at thefollowing rates on our borrowings:

 
| **Borrowings**                                               |   | **Amount  outstanding  at December 31, 2002**                                           |   | **Interest  rate  payable  per annum** |   | **Interest  rate at  December 31,  2002** |   |
|--------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------|--------|----------------------------------------|--------|-------------------------------------------|--------|
|                                                         |   |                                                                                    |   |                                   |   |                                      |   |
| Term  A Facility                                             |   | £224.3 million                                                                     |   | LIBOR plus  margin                     |   | 6.034                                     | %      |
| Term  B Facility                                             |   | £68.0 million                                                                      |   | LIBOR plus  margin                     |   | 6.784                                     | %      |
| Drawn  Working Capital Facility                              |   | £nil              |   | LIBOR plus  margin                     |   | 6.034                                     | %      |
| Working  Capital Facility utilized  for other  purposes |   | £22.7 million                                                                      |   | Various                                |   | Various                                   |   |
| Unutilized  Working Capital Facility                         |   | £77.3 million                                                                      |   | 0.25%-0.75                             | %      | 0.625                                     | %      |
| U.S.$200  million Notes                                      |   | U.S.$200.0  million                                                                     |   | 12.0                                   | %      | 12.00                                     | %      |
| £75 million Notes                                       |   | £75.0 million                                                                      |   | 12.25                                  | %      | 12.25                                     | %      |

 

The marginapplicable to the Term A Facility and drawings under the Working CapitalFacility is 2.25% per annum reducing on the basis of a ratchet in several stepsto 1.25% per annum dependent upon certain net debt to consolidated EBITDAratios.  At December 31, 2002, themargin applied to LIBOR on this facility was 2.0%.  The margin applied to LIBOR at December 31, 2002 on the Term BFacility was 2.75%.

 

The utilization of theWorking Capital Facility for other purposes incurs fees dependent upon thepurpose, for which the facility is used. Commitment fees are payable at the rate of 0.75% per annum of theundrawn portion of the relevant facilities. The interest payable per annum on commitment fees on the Working CapitalFacility reduce in several steps from 0.75% to 0.25% per annum dependent uponcertain net debt to consolidated EBITDA ratios.  At December 31, 2002, the margin applied to LIBOR in respect ofcommitment fees was 0.625%.

 

Our borrowings areprincipally denominated in pounds sterling and U.S. dollars, with both fixedand floating rates of interest.  Weactively monitor our interest rate exposure on these borrowings, and use avariety of derivative financial instruments to hedge such exposure, includinginterest rate swaps, collars and caps. The 

 

59

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nature and volume ofderivative financial instruments held by us is partially determined based uponconditions set by our borrowing agreements with our lenders.  The borrowing agreements require us to hedgea minimum of 50% of the interest rate exposure on our senior long-termdebt.  In addition, we have entered intoa coupon swap to fix the cash flows on our dollar notes, which has the effectof converting the interest payments from fixed-rate dollars into fixed-ratepounds sterling.

 

An estimated hypotheticalnegative effect of a 100 basis point (or one percent per year) increase ininterest rates would result in an increase in interest costs per year of £1.5million based on our debt position as at December 31, 2002 (2001: £0.8million).

 

**Credit risk**

 

Potential concentrationsof credit risk to us consist principally of cash and cash equivalents and tradereceivables.  Cash and cash equivalentsare deposited with high credit, quality financial institutions.  Trade receivables are due principally frommajor European grocery retailers. Furthermore, it is our policy to insure all third-party trade debt.  We do not consider there to be anysignificant concentration of credit risk at        December 31, 2002.

 

**Inflation**

 

We do not believe that our businesses are affected by inflation to anygreater extent than other businesses in our industry.

 

**Item 12****.DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES**

 

Not applicable.

 

**PARTII**

 

**Item 13****. DEFAULTS,DIVIDEND ARREARAGES AND DELINQUENCIES**

 

Not applicable.

 

**Item14****.****    MATERIAL MODIFICATION TO THERIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS**

 

Not applicable.

 

**Item 15****. CONTROLSAND PROCEDURES**

 

We carried out an evaluationof the effectiveness of the design and operation of our disclosure controls andprocedures within 90 days of the filing date of this report, and under thesupervision and participation of our management (including the Chief ExecutiveOfficer and the Finance Director). Since there are inherent limitations to the effectiveness of any systemof disclosure controls and procedures, including the possibility of human errorand the circumvention or overriding of the controls and procedures, even effectivedisclosure controls and procedures can only provide reasonable assurance ofachieving their control objectives. Based upon and as of the date of ourevaluation, the Chief Executive Officer and Finance Director have concludedthat the disclosure controls and procedures are effective to ensure, in allmaterial respects, that information relating to us and its consolidatedsubsidiaries required to be disclosed under the US Securities Exchange Act of1934, as amended, is recorded, processed, summarized and reported as and whenrequired.

 

In addition, there were no significant changes in our internal controlsor in other factors which could significantly affect our disclosure controlsand procedures subsequent to the evaluation date, nor were there any significantdeficiencies or material weaknesses in such disclosure controls and proceduresrequiring corrective actions.

 

**Item 16****. [Reserved]**

 

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**PARTIII**

 

**Item 17****. FINANCIALSTATEMENTS**

 

We have responded to Item 18 in lieu of this item.

 

**Item 18****. FINANCIALSTATEMENTS**

 

The financial statementsrequired by this item are found at the end of this report beginning on pageF-1.

 

**Item 19.****EXHIBITS**

 

The exhibits filed with or incorporated by referenceinto this Annual Report are listed below.

 

**Exhibit Number**

 

1.1*                          Certificateof Incorporation of Premier (incorporated herein by reference to Exhibit 3.1 ofthe Registration Statement on Form F-4 Registration No. 33-312188).

 

1.2*                          Memorandumand Articles of Association of Premier (incorporated herein by reference toExhibit 3.2 of the Registration Statement on Form F-4 Registration No.33-312188).

 

2.1*                          Indenturedated August 10, 1999 between Premier and Bankers Trust Company as Trustee(incorporated herein by reference to Exhibit 4.1 of the Registration Statementon Form F-4).

 

2.2*                          Form ofGlobal Note (included in Exhibit 2.1).

 

2.3*                          Form ofDefinitive Registered Note (included in Exhibit 2.1).

 

4.1*                          FacilitiesAgreement dated August 10, 1999 between Premier Financing as Borrower,   Chase Manhattan plc, Deutsche Banc Alex.Brown Incorporated and Salomon Brothers International Limited as arrangers, TheChase Manhattan Bank, Bankers Trust Company and Citibank N.A. as Underwriters,Chase Manhattan International Limited as the Agent and the Security Agent andBankers Trust Company as Document Agent (incorporated herein by reference toExhibit 4.6 of the Registration Statement on Form F-4 Registration No.33-312188).

 

4.2*                          Intra-GroupLoan Agreement dated August 10, 1999 between Premier as Lender and PremierFinancing Limited as Borrower (incorporated herein by reference to Exhibit 4.7of the Registration Statement on Form F-4 Registration No. 33-312188).

 

4.3*                          SubordinationDeed dated August 10, 1999 between Premier Financing as Principal Debtor,Premier as Subordinated Lender and Chase Manhattan International Limited asSecurity Agent (incorporated herein by reference to Exhibit 4.8 of theRegistration Statement on Form F-4 Registration No. 33-312188).

 

4.4*                          Monitoringand Oversight Agreement dated August 10, 1999 between Premier and Hicks Muse(incorporated herein by reference to Exhibit 10.2 of the Registration Statementon Form F-4 Registration No. 33-312188).

 

4.5*                          FinancialAdvisory Agreement dated August 10, 1999 between Premier and Hicks Muse(incorporated herein by reference to Exhibit 10.3 of the Registration Statementon Form F-4 Registration No 33-312188).

 

4.6†                           Dealslips for the purchase of $200 million from Barclays Bank PLC, value datedSeptember 1, 2004.

 

4.7*                          SupplementalAgreement dated May 27, 2002 relating to a Facilities Agreement dated August10, 1999 between, inter alia, Premier Financing Limited, the subsidiaries ofPremier Financing Limited party thereto, JP Morgan plc and Barclays Capital(the investment banking division of Barclays Bank PLC), as Amendment Arrangers,and JP Morgan Europe Limited, as Agent and Security Agent.

 

4.8*                          Agreementdated May 3, 2002 between Nestlé U.K. Limited, Nestlé (Ireland) Limited, PastamLimited and Premier Financing Limited.

 

8.1                                 Listof material subsidiaries of Premier (included in Item 10.I. and note 21 to theconsolidated financial statements of Premier).

 

12.1†                    Certificationpursuant to 18 U.S.C Section 1350, as Adopted by Section 906 of theSarbanes-Oxley Act of 2002 of Robert Schofield, dated June 30, 2003.

 

61

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12.2†                    Certificationpursuant to 18 U.S.C Section 1350, as Adopted by Section 906 of theSarbanes-Oxley Act of 2002 of Paul Thomas, dated June 30, 2003.

 

----

*                                         Incorporatedby reference.

 

†                                          Filedherewith

 

62

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**SIGNATURES**

 

The registrant herebycertifies that it meets all of the requirements for filing on Form 20-F andthat it has duly caused and authorized the undersigned to sign this AnnualReport on its behalf.

 

 
|   | PREMIER FOODS PLC |
|--------|-------------------|
|   |              |   |
|   | By:               | /s/ ROBERT SCHOFIELD |   |
|   | Name:             | Robert Schofield |
|   | Title:            | Chief Executive |
|   |              |   |
|   |              |   |
| Date:  | June 30, 2003     |   |   |
|        |                   |  |  |  |

 

63

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**CERTIFICATION**

 

I, Robert Schofield,certify that:

 

1. I have reviewed thisAnnual Report on Form 20-F of Premier Foods plc;

 

2. Based on my knowledge,this Annual Report does not contain any untrue statement of a material fact oromit to state a material fact necessary to make the statements made, in lightof the circumstances under which such statements were made, not misleading withrespect to the period covered by this Annual Report;

 

3. Based on my knowledge,the financial statements, and other financial information included in thisAnnual Report, fairly present in all material respects the financial condition,results of operations and cash flows of the registrant as of, and for, theperiods presented in this Annual Report;

 

4. The registrant’s other certifying officers and I are responsible forestablishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-14 and 15d-14) for the registrant and have:

 

a.               designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this Annual Report is being prepared;

 

b.              evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of this Annual Report (the“Evaluation Date”); and

 

c.               presentedin this Annual Report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5. The registrant’s othercertifying officers and I have disclosed, based on our most recent evaluation,to the registrant’s auditors and the audit committee of registrant’s board ofdirectors (or persons performing the equivalent function):

 

a.               allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b.              anyfraud, whether or not material, that involves management or other employees whohave a significant role in the registrant’s internal controls; and

 

6. The registrant’s othercertifying officers and I have indicated in this Annual Report whether or notthere were significant changes in internal controls or in other factors thatcould significantly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 

 

 

 

Date:June 30, 2003

 
|   | /S/    | ROBERT SCHOFIELD |   |
|--------|--------|------------------|--------|
|   |   | Robert Schofield |
|   |   | Chief Executive  |

 

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**CERTIFICATION**

.

I, Paul Thomas, certifythat:

 

1. I have reviewed thisAnnual Report on Form 20-F of Premier Foods plc;

 

2. Based on my knowledge,this Annual Report does not contain any untrue statement of a material fact oromit to state a material fact necessary to make the statements made, in lightof the circumstances under which such statements were made, not misleading withrespect to the period covered by this Annual Report;

 

3. Based on my knowledge,the financial statements, and other financial information included in thisAnnual Report, fairly present in all material respects the financial condition,results of operations and cash flows of the registrant as of, and for, theperiods presented in this Annual Report;

 

4. The registrant’s othercertifying officers and I are responsible for establishing and maintainingdisclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and15d-14) for the registrant and have:

 

d.              designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this Annual Report is being prepared;

 

e.               evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of this Annual Report (the“Evaluation Date”); and

 

f.                 presentedin this Annual Report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5. The registrant’s othercertifying officers and I have disclosed, based on our most recent evaluation,to the registrant’s auditors and the audit committee of registrant’s board ofdirectors (or persons performing the equivalent function):

 

c.               allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

d.              anyfraud, whether or not material, that involves management or other employees whohave a significant role in the registrant’s internal controls; and

 

6. The registrant’s othercertifying officers and I have indicated in this Annual Report whether or notthere were significant changes in internal controls or in other factors thatcould significantly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 

 

Date:                  June 30, 2003

 
|   | /s/    | PAUL THOMAS      |   |
|--------|--------|------------------|--------|
|   |   | Paul Thomas      |   |
|   |   | Finance Director |   |

 

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**Premier Foods plc**

 

**INDEX TO CONSOLIDATEDFINANCIAL STATEMENTS**

** **
| Report of  Independent Accountants – 2000, 2001 and 2002                                                       |
|---------------------------------------------------------------------------------------------------------------------|
|                                                                                                                |
| Audited  Consolidated Financial Statements                                                                          |
|                                                                                                                |
| Consolidated  Profit and Loss Accounts for each of the three years inthe three-year period ended December  31, 2002 |
|                                                                                                                |
| Consolidated Balance Sheets  at December 31, 2001 and 2002                                                          |
|                                                                                                                |
| Consolidated  Statements of Total Recognised Gains and Losses                                                       |
|                                                                                                                |
| Note  of Consolidated Historical Cost Profits and Losses                                                            |
|                                                                                                                |
| Reconciliation  of Movements in Consolidated Shareholder’s Funds                                               |
|                                                                                                                |
| Consolidated Cash  Flow Statements                                                                                  |
|                                                                                                                |
| Notes to  the Consolidated Financial Statements                                                                     |

 

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**REPORT OFINDEPENDENT ACCOUNTANTS****TO THE BOARD OFDIRECTORS AND SHAREHOLDERS OF PREMIER FOODS PLC**

 

In our opinion, theaccompanying consolidated balance sheets and the related consolidated statementsof profit and loss, cash flows and shareholder’s funds, included on pages 2 to45, present fairly, in all material respects, the financial position of PremierFoods plc and its subsidiaries at December 31, 2001 and December 31, 2002, andthe results of their operations, their cash flows and shareholder’s funds forthe years ended December 31, 2000, December 31, 2001 and December 31, 2002 inconformity with accounting principles generally accepted in the U.K.  These consolidated financial statements arethe responsibility of the Company’s management; our responsibility is toexpress an opinion on these consolidated financial statements based on ouraudits.  We conducted our audits ofthese statements in accordance with auditing standards generally accepted inthe U.K. and auditing standards generally accepted in the U.S., which requirethat we plan and perform the audit to obtain reasonable assurance about whetherthe financial statements are free of material misstatement.  An audit includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financialstatements, assessing the accounting principles used and significant estimatesmade by management, and evaluating the overall financial statementpresentation.  We believe that ouraudits provide a reasonable basis for our opinion.

 

Accounting principlesgenerally accepted in the U.K. vary in certain significant respects fromaccounting principles generally accepted in the U.S.  The application of the latter would have affected thedetermination of consolidated net income or loss expressed in pounds sterlingfor the years ended December 31, 2000, December 31, 2001 and December 31, 2002and the determination of the consolidated shareholder’s deficit at December 31,2001 and December 31, 2002, to the extent summarised in Note 24 to theconsolidated financial statements.

 

 

PricewaterhouseCoopersLLP

 

Chartered Accountants andRegistered Auditors

 

London

 

United Kingdom

 

March 31, 2003

 

F-1

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**Premier Foodsplc**

**CONSOLIDATEDPROFIT AND LOSS ACCOUNTS**

 
|                                                            |                        | **Year Ended****December 31,** |   |
|-----------------------------------------------------------------|-----------------------------|--------------------------------|--------|
|                                                            |                        | **Note**                       |   | **2000  £m  restated** |   | **2001  £m  restated** |   | **2002  £m** | ** ** |
|                                                            |                        |                           |   |   |   |   | ** ** |   | ** ** |
| **Turnover:**                                                   | Continuing operations       |                           | 8      |   | 818.5 |   | 845.2 |   | 826.7 |   |
|                                                            | Acquisitions                |                           |   |   | — |   | — |   | 55.6 |   |
|                                                            | Discontinued operations     |                           |   |   | 215.1 |   | 4.1 |   | 0.2 |   |
|                                                            |                        | 2,4                            |   | 1,033.6 |   | 849.3 |   | 882.5 |   |
|                                                            |                        |                           |   |   |   |   |   |   |   |
| **Operating  profit:**                                          | Continuing operations       |                           |   |   | 60.1 |   | 64.3 |   | 70.7 |   |
|                                                            | Operating exceptional items |                           | 3      |   | (1.6 | ) | (12.2 | ) | (14.6 | ) |
|                                                            |                        |                           |   | 58.5 |   | 52.1 |   | 56.1 |   |
|                                                            |                        |                           |   |   |   |   |   |   |   |
|                                                            | Acquisitions                |                           |   |   | — |   | — |   | 6.9 |   |
|                                                            | Operating exceptional items |                           | 3      |   | — |   | — |   | (2.2 | ) |
|                                                            |                        |                           |   | — |   | — |   | 4.7 |   |
|                                                            |                        |                           |   |   |   |   |   |   |   |
|                                                            | Discontinued operations     |                           |   |   | 9.1 |   | (0.8 | ) | (0.1 | ) |
|                                                            | Operating exceptional items |                           | 3      |   | — |   | — |   | — |   |
|                                                            |                        |                           |   | 9.1 |   | (0.8 | ) | (0.1 | ) |
|                                                            |                        |                           |   |   |   |   |   |   |   |
|                                                            |                        | 2,4                            |   | 67.6 |   | 51.3 |   | 60.7 |   |
|                                                            |                        |                           |   |   |   |   |   |   |   |
| Non-operating exceptional items                                 |                        | 3                              |   | (5.8 | ) | (26.2 | ) | (2.0 | ) |
|                                                            |                        |                           |   |   |   |   |   |   |   |
| **Profit on ordinary activities before  interest and taxation** |                        |                           |   | 61.8 |   | 25.1 |   | 58.7 |   |
|                                                            |                        |                           |   |   |   |   |   |   |   |
| Interest payable and similar charges                            |                        |                           |   | (71.0 | ) | (57.2 | ) | (40.3 | ) |
| Interest receivable                                             |                        |                           |   | 3.1 |   | 4.5 |   | 3.9 |   |
| Net interest payable and similar charges                        |                        | 7                              |   | (67.9 | ) | (52.7 | ) | (36.4 | ) |
|                                                            |                        |                           |   |   |   |   |   |   |   |
| **Profit / (loss) on ordinary  activities before taxation**     |                        |                           |   | (6.1 | ) | (27.6 | ) | 22.3 |   |
|                                                            |                        |                           |   |   |   |   |   |   |   |
| Taxation charge on profit / loss on ordinary  activities        |                        | 8                              |   | (2.5 | ) | (0.9 | ) | (6.0 | ) |
|                                                            |                        |                           |   |   |   |   |   |   |   |
| **Profit / (loss) on ordinary activities after taxation**       |                        |                           |   | (8.6 | ) | (28.5 | ) | 16.3 |   |
|                                                            |                        |                           |   |   |   |   |   |   |   |
| Dividends                                                       |                        | —                         |   | — |   | — |   | — |   |
|                                                            |                        |                           |   |   |   |   |   |   |   |
| **Transferred to reserves**                                     |                        | 17                             |   | (8.6 | ) | (28.5 | ) | 16.3 |   |

 

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

 

 

F-2

----

 

**Premier Foods plc**

**CONSOLIDATED BALANCE SHEETS**

 
|                                                            |   | **December 31,** |   |
|-----------------------------------------------------------------|--------|------------------|--------|
|                                                            |   | **Note**         |   | **2001  £m  restated** |   | **2002  £m** |   |
|                                                            |   |             |   |   |   |   |   |
| Fixed assets:                                                   |   |             |   |   |   |   |   |
| Intangible assets                                               |   | 9                |   | 17.4 |   | 113.9 |   |
| Tangible assets                                                 |   | 10               |   | 120.0 |   | 135.1 |   |
| Investments                                                     |   | 11               |   | 0.2 |   | 0.2 |   |
|                                                            |   |             |   | 137.6 |   | 249.2 |   |
| Current assets:                                                 |   |             |   |   |   |   |   |
| Stocks                                                          |   | 12               |   | 105.6 |   | 111.3 |   |
| Debtors due:                                                    |   |             |   |   |   |   |   |
| Within one year                                                 |   | 13               |   | 137.1 |   | 133.5 |   |
| After more than one year                                        |   | 13               |   | 11.7 |   | 9.0 |   |
| Cash at bank and in hand                                        |   |             |   | 27.3 |   | 43.5 |   |
|                                                            |   |             |   | 281.7 |   | 297.3 |   |
|                                                            |   |             |   |   |   |   |   |
| Creditors – amounts falling due within one year:           |   |             |   |   |   |   |   |
| Bank loans, overdrafts and other creditors                      |   | 14               |   | (199.1 | ) | (217.6 | ) |
|                                                            |   |             |   |   |   |   |   |
| Net current assets                                              |   |             |   | 82.6 |   | 79.7 |   |
|                                                            |   |             |   |   |   |   |   |
| Total assets less current liabilities                           |   |             |   | 220.2 |   | 328.9 |   |
|                                                            |   |             |   |   |   |   |   |
| Creditors – amounts falling due after more than one  year: |   |             |   |   |   |   |   |
| Borrowings                                                      |   | 15               |   | (375.7 | ) | (464.7 | ) |
| Other creditors                                                 |   | 15               |   | (0.5 | ) | (0.2 | ) |
| Provisions for liabilities and charges                          |   | 16               |   | (11.3 | ) | (13.8 | ) |
|                                                            |   |             |   | (387.5 | ) | (478.7 | ) |
|                                                            |   |             |   |   |   |   |   |
|                                                            |   |             |   |   |   |   |   |
| Net liabilities                                                 |   |             |   | (167.3 | ) | (149.8 | ) |
|                                                            |   |             |   |   |   |   |   |
| Capital and reserves:                                           |   |             |   |   |   |   |   |
| Called up share capital                                         |   | 17               |   | 83.7 |   | 83.7 |   |
| Share premium account                                           |   | 17               |   | 623.2 |   | 623.2 |   |
| Revaluation reserve                                             |   | 17               |   | 4.0 |   | 4.0 |   |
| Profit and loss account                                         |   | 17               |   | (878.2 | ) | (860.7 | ) |
|                                                            |   |             |   |   |   |   |   |
| Total shareholder’s deficit                                |   |             |   | (167.3 | ) | (149.8 | ) |

 

Signed on behalf of theBoard of Directors, who approved the financial statements on March 31, 2003.

 

 

PaulThomas

**Director**

 

 

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

 

F-3

----

 

**Premier Foods plc**

 

**CONSOLIDATED STATEMENTS OF**

**TOTALRECOGNISED GAINS AND LOSSES**

 
|                                                                        |   | **Year Ended****December 31,** |   |
|-----------------------------------------------------------------------------|--------|--------------------------------|--------|
|                                                                        |   | **2000  £m  restated**    |   | **2001  £m  restated** |   | **2002  £m** |   |
|                                                                        |   |                           |   |   | ** ** |   | ** ** |
| Profit / (loss) for the financial year                                      |   | (8.6                           | )      | (28.5 | ) | 16.3 |   |
| Currency translation differences on foreign currency  net investments       |   | (1.2                           | )      | (1.1 | ) | 1.2 |   |
|                                                                        |   |                           |   |   |   |   |   |
| Total recognised gains and losses for the year                              |   | (9.8                           | )      | (29.6 | ) | 17.5 |   |
| Prior year adjustment on implementation of FRS 19  “Deferred tax” |   |                           |   |   |   | (7.1 | ) |
|                                                                        |   |                           |   |   |   |   |   |
| Total recognised gains and losses since last Annual  Report                 |   |                           |   |   |   | 10.4 |   |

 

 

**NOTE OFCONSOLIDATED HISTORICAL COST PROFITS AND LOSSES**

** **
|                                                                    |   | **Year Ended****December 31,** |   |
|-------------------------------------------------------------------------|--------|--------------------------------|--------|
|                                                                    |   | **2000  £m  restated**    |   | **2001  £m  restated** |   | **2002  £m** |   |
|                                                                    |   |                           |   |   | ** ** |   | ** ** |
| Profit / (loss) on ordinary activities before taxation                  |   | (6.1                           | )      | (27.6 | ) | 22.3 |   |
| Realisation of property revaluation gains of previous  year             |   | 0.2                            |   | 0.1 |   | — |   |
|                                                                    |   |                           |   |   |   |   |   |
| Historical cost profit / (loss) on ordinary activities  before taxation |   | (5.9                           | )      | (27.5 | ) | 22.3 |   |
|                                                                    |   |                           |   |   |   |   |   |
| Historical cost profit / (loss) retained after  taxation, and dividends |   | (8.4                           | )      | (28.4 | ) | 16.3 |   |

 

 

**RECONCILIATIONOF MOVEMENTS IN CONSOLIDATED SHAREHOLDER’S FUNDS**

** **
|                                                                                    |   | **Year Ended****December 31,** |   |
|-----------------------------------------------------------------------------------------|--------|--------------------------------|--------|
|                                                                                    |   | **2000  £m  restated**    |   | **2001  £m  restated** |   | **2002  £m** |   |
|                                                                                    |   |                           |   |   | ** ** |   | ** ** |
| Profit / (loss) for the financial year                                                  |   | (8.6                           | )      | (28.5 | ) | 16.3 |   |
| Goodwill transferred to the profit and loss account in  respect of  disposed businesses |   | —                         |   | 53.0 |   | — |   |
| Other recognised gains and losses                                                       |   | (1.2                           | )      | (1.1 | ) | 1.2 |   |
| Share capital issued                                                                    |   | —                         |   | 23.7 |   | — |   |
| Net increase / (reduction) in shareholder’s funds                                  |   | (9.8                           | )      | 47.1 |   | 17.5 |   |
|                                                                                    |   |                           |   |   |   |   |   |
| Opening shareholder’s deficit                                                      |   | (198.6                         | )      | (214.4 | ) | (167.3 | ) |
| Prior year adjustment on implementation of FRS 19  “Deferred tax”             |   | (6.0                           | )      | — |   | — |   |
|                                                                                    |   |                           |   |   |   |   |   |
| Closing shareholder’s deficit                                                      |   | (214.4                         | )      | (167.3 | ) | (149.8 | ) |

 

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

 

F-4

----

 

**Premier Foods plc**

 

**CONSOLIDATEDCASH FLOW STATEMENTS**

 
|                                                             |   | **Year Ended****December 31,** |       |
|------------------------------------------------------------------|--------|--------------------------------|------------|
|                                                             |   | **Note**                       |       | **2000  £m** |   | **2001  £m** |   | **2002  £m** |   |
|                                                             |   |                           | ** ** |   | ** ** |   | ** ** |   | ** ** |
| Net cash inflow from operating activities                        |   | (a                             | )          | 90.2 |   | 81.7 |   | 98.8 |   |
| Return on investments and servicing of finance                   |   | (b                             | )          | (55.6 | ) | (40.1 | ) | (43.6 | ) |
| Taxation                                                         |   |                           |       | (3.9 | ) | (1.5 | ) | (1.3 | ) |
| Capital expenditure and financial investment                     |   | (b                             | )          | (23.9 | ) | (12.8 | ) | (15.1 | ) |
| Acquisitions and disposals                                       |   | (b                             | )          | (0.6 | ) | 72.3 |   | (132.8 | ) |
| Cash (outflow) / inflow before financing                         |   |                           |       | 6.2 |   | 99.6 |   | (94.0 | ) |
|                                                             |   |                           |       |   |   |   |   |   |   |
| Financing:                                                       |   |                           |       |   |   |   |   |   |   |
| Issue of shares                                                  |   | (b                             | )          | — |   | 23.7 |   | — |   |
| Debt issuance costs                                              |   |                           |       | — |   | — |   | (8.6 | ) |
| Increase / (reduction) in debt                                   |   | (b                             | )          | (35.7 | ) | (119.8 | ) | 116.4 |   |
|                                                             |   |                           |       | (35.7 | ) | (96.1 | ) | 107.8 |   |
|                                                             |   |                           |       |   |   |   |   |   |   |
| Increase / (decrease) in cash in the year                        |   |                           |       | (29.5 | ) | 3.5 |   | 13.8 |   |
|                                                             |   |                           |       |   |   |   |   |   |   |
| Reconciliation of net cash flow to movement in net  debt         |   |                           |       |   |   |   |   |   |   |
| Increase / (decrease) in cash in the year                        |   |                           |       | (29.5 | ) | 3.5 |   | 13.8 |   |
| Cash (outflow) / inflow from increased debt and lease  financing |   |                           |       | 35.7 |   | 119.8 |   | (116.4 | ) |
| Change in net debt arising from cash flows                       |   |                           |       | 6.2 |   | 123.3 |   | (102.6 | ) |
| Exchange movement on debt in the year                            |   |                           |       | (10.0 | ) | (3.6 | ) | 13.2 |   |
| Movement in net debt in the year                                 |   |                           |       | (3.8 | ) | 119.7 |   | (89.4 | ) |
|                                                             |   |                           |       |   |   |   |   |   |   |
| Net debt before capitalised debt issuance costs at  January 1,   |   |                           |       | (461.3 | ) | (470.9 | ) | (358.7 | ) |
|                                                             |   |                           |       |   |   |   |   |   |   |
| Net debt pre capitalised debt issuance at December 31,           |   |                           |       | (465.1 | ) | (351.2 | ) | (448.1 | ) |
| Capitalisation of debt issuance costs                            |   |                           |       | — |   | — |   | 8.6 |   |
| Less amortisation of capitalised debt issuance costs             |   |                           |       | (5.8 | ) | (7.5 | ) | (6.3 | ) |
|                                                             |   |                           |       |   |   |   |   |   |   |
| Net debt at December 31,                                         |   |                           |       | (470.9 | ) | (358.7 | ) | (445.8 | ) |

 

**Analysis of movement in net debt**

** **
|                            |   | **At****December 31,  2001  £m** |       | **Cash flow  £m** |       | **Acquisitions  £m** |       | **Capitalised  debt issuance  costs  £m** |       | **Exchange  movement  on debt  £m** |       | **At****December 31,   2002  £m** |       |
|---------------------------------|--------|---------------------------------------|------------|------------------------|------------|---------------------------|------------|------------------------------------------------|------------|------------------------------------------|------------|----------------------------------------|------------|
|                            |   |                                  | ** ** |                   | ** ** |                      | ** ** |                                           | ** ** |                                     | ** ** |                                   | ** ** |
| Bank overdrafts                 |   | (0.8                                  | )          | (2.4                   | )          | —                    |       | —                                         |       | —                                   |       | (3.2                                   | )          |
| Less:  Cash  balances      |   | 27.3                                  |       | 22.8                   |       | (6.6                      | )          | —                                         |       | —                                   |       | 43.5                                   |       |
| Net cash                        |   | 26.5                                  |       | 20.4                   |       | (6.6                      | )          | —                                         |       | —                                   |       | 40.3                                   |       |
| Debt due after 1 year           |   | (384.2                                | )          | 12.1                   |       | (115.0                    | )          | —                                         |       | 13.2                                     |       | (473.9                                 | )          |
| Debt due within 1 year          |   | (13.4                                 | )          | 6.4                    |       | (20.0                     | )          | —                                         |       | —                                   |       | (27.0                                  | )          |
| Capitalised debt issuance costs |   | 12.6                                  |       | —                 |       | 8.6                       |       | (6.3                                           | )          | —                                   |       | 14.9                                   |       |
| Net borrowings                  |   | (358.5                                | )          | 38.9                   |       | (133.0                    | )          | (6.3                                           | )          | 13.2                                     |       | (445.7                                 | )          |
|                            |   |                                  |       |                   |       |                      |       |                                           |       |                                     |       |                                   |       |
| Finance leases                  |   | (0.2                                  | )          | 0.1                    |       | —                    |       | —                                         |       | —                                   |       | (0.1                                   | )          |
|                            |   |                                  |       |                   |       |                      |       |                                           |       |                                     |       |                                   |       |
| Net debt                        |   | (358.7                                | )          | 39.0                   |       | (133.0                    | )          | (6.3                                           | )          | 13.2                                     |       | (445.8                                 | )          |

 

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

 

F-5

----

 

**Premier Foods plc**

 

**NOTES TO THECONSOLIDATED CASH FLOW STATEMENTS**

** **
|                                                                |   | **Year Ended  December  31,** |   |
|---------------------------------------------------------------------|--------|------------------------------------|--------|
|                                                                |   | **2000  £m**                  |   | **2001  £m** |   | **2002  £m** |   |
|                                                                |   |                               |   |   | ** ** |   | ** ** |
| **(a) Reconciliation of operating profit to operating cash  flows** |   |                               |   |   |   |   |   |
|                                                                |   |                               |   |   |   |   |   |
| Operating profit before exceptional items                           |   | 69.2                               |   | 63.5 |   | 77.5 |   |
| Depreciation of tangible fixed assets                               |   | 22.0                               |   | 16.1 |   | 18.8 |   |
| Amortisation of intangible fixed assets                             |   | 0.3                                |   | 0.5 |   | 4.2 |   |
| Amortisation of pension prepayment                                  |   | —                             |   | 2.0 |   | 2.6 |   |
| Cash flow relating to restructuring                                 |   | (13.9                              | )      | (13.5 | ) | (13.2 | ) |
| Other exceptional cash flows                                        |   | (1.3                               | )      | — |   | — |   |
| Decrease in stocks                                                  |   | 11.3                               |   | 17.8 |   | 7.3 |   |
| (Increase) / decrease in debtors                                    |   | (0.3                               | )      | (9.6 | ) | 7.3 |   |
| Increase / (decrease) in creditors                                  |   | 3.4                                |   | 6.0 |   | (4.2 | ) |
| Exchange movement in working capital                                |   | (0.5                               | )      | (1.1 | ) | (1.5 | ) |
|                                                                |   |                               |   |   |   |   |   |
| Net cash inflow from operating activities                           |   | 90.2                               |   | 81.7 |   | 98.8 |   |

 
| **(b) Analysis of cash flows for headings netted in the cash  flow statement** |   |   |   |   |   |   |   |
|--------------------------------------------------------------------------------|--------|--------|--------|--------|--------|--------|--------|
|                                                                           |   |   |   |   |   |   |   |
| **Return on investments and servicing of finance**                             |   |   |   |   |   |   |   |
| Interest received                                                              |   | 3.0    |   | 4.5    |   | 3.9    |   |
| Interest paid                                                                  |   | (58.4  | )      | (44.5  | )      | (47.4  | )      |
| Interest element of finance lease rental payments                              |   | (0.2   | )      | (0.1   | )      | (0.1   | )      |
|                                                                           |   |   |   |   |   |   |   |
| Return on investments and servicing of finance                                 |   | (55.6  | )      | (40.1  | )      | (43.6  | )      |
|                                                                           |   |   |   |   |   |   |   |
| **Capital expenditure and financial investment**                               |   |   |   |   |   |   |   |
| Purchase of tangible fixed assets                                              |   | (26.5  | )      | (20.1  | )      | (17.3  | )      |
| Sale / (purchase) of investments                                               |   | 0.2    |   | (0.1   | )      | — |   |
| Sale of tangible fixed assets                                                  |   | 2.4    |   | 7.4    |   | 2.2    |   |
|                                                                           |   |   |   |   |   |   |   |
| Capital expenditure and financial investment                                   |   | (23.9  | )      | (12.8  | )      | (15.1  | )      |
|                                                                           |   |   |   |   |   |   |   |
| **Acquisitions and disposals**                                                 |   |   |   |   |   |   |   |
| Purchase of subsidiary undertakings                                            |   | (0.6   | )      | (28.7  | )      | (132.8 | )      |
| Cash acquired with subsidiary undertakings                                     |   | — |   | (0.8   | )      | — |   |
| Sale of subsidiary undertakings                                                |   | — |   | 101.8  |   | — |   |
|                                                                           |   |   |   |   |   |   |   |
| Acquisitions and disposals                                                     |   | (0.6   | )      | 72.3   |   | (132.8 | )      |
|                                                                           |   |   |   |   |   |   |   |
| **Financing**                                                                  |   |   |   |   |   |   |   |
| Increase / (decrease) in debt due within one year                              |   | 8.7    |   | (6.5   | )      | 13.6   |   |
| Increase / (decrease) in debt due after more than one  year                    |   | (42.9  | )      | (112.4 | )      | 102.9  |   |
| Issue of shares                                                                |   | — |   | 23.7   |   | — |   |
| Capital element of finance lease rental payments                               |   | (1.5   | )      | (0.9   | )      | (0.1   | )      |
|                                                                           |   |   |   |   |   |   |   |
| Financing                                                                      |   | (35.7  | )      | (96.1  | )      | 116.4  |   |

 

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

 

F-6

----

 

**Premier Foods plc**

 

**NOTES TO THECONSOLIDATED FINANCIAL STATEMENTS**

 

**1. Accounting Policies**

 

The following accountingpolicies have been applied consistently in dealing with the items which areconsidered to be material in relation to Premier’s financial statements.

 

Premierhas adopted FRS 19 “Deferred tax” this year, which requires full provision tobe made for deferred tax arising from timing differences between therecognition of gains and losses in the financial statements and their inclusionin tax computations.  The adoption ofthis standard represents a change in accounting policy and the comparativefigures have been restated accordingly.

 

***Basis of Accounting***

 

Theconsolidated financial statements have been prepared in accordance withapplicable accounting standards in the U.K., under the historical costconvention.

 

**Consolidated financial statements for2000, 2001 and 2002**

 

The results of Premierfor the three years ended December 31, 2002 and the balance sheets at December31, 2001 and December 31, 2002 have been consolidated in accordance withapplicable accounting standards in the U.K., under the historical costconvention.

 

The preparation of theconsolidated financial statements in conformity with generally acceptedaccounting principles in the U.K. requires management to make estimates andassumptions that affect reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereported periods.  Actual results coulddiffer from those estimates.

 

The businesses acquiredduring the financial periods presented have been consolidated from the date onwhich control of the net assets and operations of the businesses wastransferred to Premier.  Similarly, theresults of Group companies and businesses divested during the financial periodspresented have been included in the Group’s accounts only until the date thatcontrol of the net assets and operations of the companies and businesses wastransferred from Premier.

 

Premier is allocatedoverhead costs relating to Premier Holdings’ shared administrative functionsbased on central management’s estimate of the time involved in supporting eachof the groups that Premier Holdings provides those administrative functionsto.  The allocated costs are included ingeneral administrative and other expenses in the consolidated profit and lossaccount.  Management believes that suchallocation methodology is reasonable. The expenses allocated to Premier for these services are not necessarilyindicative of the expenses that would have been incurred if Premier had been aseparate independent entity.  In 2000,2001 and 2002, Premier has been recharged £0.9m, £0.2m and £2.8m by PremierFoods (Holdings) Limited in respect of the shared administrativefunctions.  The increase from 2001 to2002 in the recharge to Premier by Premier Holdings is primarily the result ofa reduction in Premier Holdings’ income and the recharge of restructuring costsincurred by Premier Holdings.

 

Employees of Premiercompanies are members of a number of defined benefit pension schemes.  Each of Premier’s operating companiesdirectly funds the schemes based on the actual pension cost for its employeesin accordance with the funding levels as determined by the schemesactuaries.  There are no recharges orallocations of costs from Premier Holdings.

 

***Goodwill***

 

In accordance with FRS 10“Goodwill and Intangible Assets”, purchased goodwill, being the excess of thefair value of the purchase consideration over the fair value of the separablenet tangible assets of businesses acquired, is capitalised and amortised overthe shorter of its estimated useful life and 20 years on a straight-line basis.Prior to 1998, goodwill arising on the acquisition of subsidiary undertakingswas written off to reserves in the year of acquisition. On the subsequentdisposal or termination of a business acquired prior to 1998, the profit orloss on disposal or termination is calculated after charging the gross amountof any related goodwill previously taken to reserves.

 

F-7

----

 

***Turnover***

 

Turnover is the value ofsales, excluding transactions with or between wholly owned subsidiaries, afterdeduction of sales rebates, value added tax and other taxes directlyattributable to turnover.  Sales arerecognised upon receipt of confirmation that the goods shipped have beenaccepted by the customer, where the sales price is fixed and collectability isreasonably assured.  Shipping andhandling costs are included in selling and distribution costs.  The review of accounting policies requiredby FRS 18 “Accounting Policies” identified that certain sales deductions wouldbe more appropriately classified as a reduction in “sales” rather than “cost ofsales” and certain promotional expenditure would be more appropriatelyclassified as “selling and distribution costs” rather than a reduction in“sales”.  This change of policy wasadopted in 2001 and the 2000 comparatives were restated accordingly (see Note 2“Analysis of Continuing Operations”).

 

***Research and Development***

 

Research and developmentexpenditure is expensed in the year in which it is incurred (see Note 5 “Profit / Loss on Ordinary Activities before Taxation”).

 

***Depreciation and Amortisation***

 

Freehold land is notdepreciated. Long and short leasehold property is amortised over the terms ofthe leases from the date the property is brought into use.

 

Other fixed assets aredepreciated over their estimated useful lives on a straight-line basis at ratessufficient to reduce them to their estimated residual value. Such estimateduseful lives are:

 
| Freehold  land       |   | -  Not depreciated |
|----------------------|--------|--------------------|
| Freehold  buildings  |   | -  20 to 50 years  |
| Plant  and machinery |   | -  3 to 15 years   |
| Vehicles             |   | - 3 to 5 years.    |

 

When properties arerevalued, the depreciation thereafter provided is based on the revalueddepreciable amounts.

 

In accordance with FRS 11“Impairment of Fixed Assets and Goodwill”, where assets are impaired as aresult of market factors, write-downs are charged initially against any relatedrevaluation reserve until historic cost is reached and thereafter charged tooperating profit.

 

***Fixed Asset Investments***

 

Investments held as fixedassets are stated at cost less any provision for impairment in their value.

*** ***

***Leasing***

 

Finance leases relatingto significant items of plant, machinery and vehicles have been capitalised anddepreciated in accordance with Premier’s depreciation policy, subject to amaximum period of the term of the lease. The capital element of future leasepayments is included in other creditors. Payments under operating leases are charged wholly to the profit andloss account in the year in which they are incurred.

 

Where a leaseholdproperty which has substantially ceased to be used for the purpose of thebusiness is sublet, full provision is made for the future costs of the propertyless recoverable amounts.

*** ***

***Stocks***

 

Stocks are valued at thelower of cost and net realisable value. No interest is included but, whereappropriate, cost includes production and other attributable overhead expenses.Cost is calculated on a first-in-first-out basis by reference to the invoicedvalue of supplies and attributable costs of bringing stocks to their presentlocation and condition.

*** ***

***Foreign Currency Translation***

 

Assetsand liabilities denominated in foreign currencies are translated into Sterlingat rates of exchange ruling at the end of the financial year, and the resultsof overseas subsidiaries are translated at the average rate of exchange rulingduring the year. Differences on exchange arising from the retranslation of theopening net investment in subsidiary undertakings, and from the translation ofthe results of those companies at an average rate are taken to reserves. Whereforeign currency borrowings are used to finance or hedge equity investments,the gain or loss arising on translation of these matched borrowings is alsotaken to reserves.  All otherexchange differences are dealt with through the profit and loss account.

 

F-8

----

 

***Deferred Tax***

 

FRS19 “Deferred tax”, which has been adopted this year, requires full provision tobe made for deferred tax arising from timing differences between therecognition of gains and losses in the financial statements and their inclusionin tax computations.  Premier has chosennot to discount its deferred tax liability. The prior year figures have been restated in order to comply with thestandard.  The effects of FRS 19“Deferred tax” are:

 
|                                                      |   | **2000****£m** |       | **2001****£m** |       | **2002****£m** |       |
|-----------------------------------------------------------|--------|---------------------|------------|---------------------|------------|---------------------|------------|
|                                                      |   |                | ** ** |                | ** ** |                | ** ** |
| Increase / (reduction) in taxation charge for the  period |   | 0.8                 |       | 0.3                 |       | (0.6                | )          |
|                                                      |   |                |       |                |       |                |       |
| Reduction in net assets                                   |   | 6.0                 |       | 7.1                 |       | —              |       |

 

***Government Grants***

 

Government grants oncapital expenditure are credited to a deferral account and are released torevenue by equal annual amounts over the life of the asset to which theyrelate. Other grants are released to revenue over the life of the projects towhich they relate.

*** ***

***Pension Costs***

 

The pension costsrelating to Premier pension schemes are assessed in accordance with the adviceof independent qualified actuaries. The amounts so determined include theregular cost of providing the benefits as a percentage of current and expectedfuture earnings of the employees covered. Variations from the regular pensioncost are spread on a systematic basis over the estimated average remainingservice lives of current employees in the plans.

*** ***

***FRS 17 “Retirement benefits”***

 

FRS 17 “Retirementbenefits” introduces a completely different approach to accounting for definedbenefit pension schemes. At each year end the pension scheme assets aremeasured at market value, the pension scheme liabilities are measured at apresent value using a specified actuarial valuation method and discounted at acorporate bond rate, and the resulting surplus or deficit is shown on thecompany’s balance sheet. FRS 17 “Retirement benefits” redefines what should bereported as operating costs, including an annual “current service cost” (whichis no longer reduced or increased by spreading forward surpluses or deficits).The expected return on scheme assets less the notional interest cost on thescheme liabilities is included as other finance costs (or income) adjacent tointerest. Actuarial gains and losses from year to year are to be recognisedimmediately in the Statement of Total Recognised Gains and Losses. Pension costs continue to be recognised andmeasured in accordance with SSAP 24 “Accounting for pension costs”.  FRS 17 “Retirement benefits” requires thataccounts ending after June 22, 2001 give additional balance sheet disclosure inorder to provide adequate future data comparatives when FRS 17 “Retirementbenefits” is fully implemented.  Premierhas provided this information separately within the financial statements.  Full adoption of FRS 17 “Retirementbenefits” has been delayed in accordance with the standard until the financialstatements for the Year Ended December 31, 2005.

*** ***

***Post Retirement Benefits***

 

Premier provides certainadditional post retirement and unfunded pension benefits principally foremployees in continental Europe. The estimated cost of providing such benefitsis charged against profits on a systematic basis over the employees’ workinglives within Premier.

*** ***

***Exceptional Items***

 

Exceptional items arethose that need to be disclosed by virtue of their size or incidence. Suchitems are included within operating profits unless they represent profits orlosses on the sale or termination of an operation, costs of a fundamentalreorganisation or restructuring having a material affect on the nature andfocus of Premier’s business, or profits or losses on the disposal of fixedassets.

*** ***

***Cash and Liquid Resources***

 

Short-term cash deposits,which can be called on demand or without notice without any material penaltyare included within cash balances within the consolidated balance sheet and consolidatedcash flow statements.

 

F-9

----

 

***Debt Issuance Costs***

 

Costs relating to theissuance of debt are capitalised and amortised over the period of the debt, inline with the amortisation of the debt, in accordance with FRS 4 “CapitalInstruments”.

*** ***

***Financial Instruments***

 

Derivative financialinstruments utilised by Premier comprise interest rate swaps, cross currencyswaps, forward foreign exchange contracts and currency options.  All such instruments are used for hedgingpurposes to alter the risk profile of an underlying exposure faced byPremier.  Interest rate swap settlementsare recognised as adjustments to interest expense over the term of theunderlying instrument and exchange gains or losses are recognised on thematurity of the underlying transaction.

 

**2. Analysis of Continuing Operations**

** **
|                     |   | **2000**                           |   | **2001**                                   |       |
|--------------------------|--------|------------------------------------|--------|--------------------------------------------|------------|
|                     |   | **Continuing operations  £m** |   | **Operating  exceptional  items  £m** |       | **Discontinued   operations  £m** |   | **Total  £m** |   | **Continuing   operations  £m** |   | **Operating  exceptional   items  £m** |   | **Discontinued   operations  £m** |   | **Total  £m** |   |
|                     |   |                               |   |                                       | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |
| Turnover                 |   | 818.5                              |   | —                                     |       | 215.1 |   | 1,033.6 |   | 845.2 |   | — |   | 4.1 |   | 849.3 |   |
| Cost of sales            |   | (620.4                             | )      | —                                     |       | (168.4 | ) | (788.8 | ) | (657.2 | ) | (0.9 | ) | (3.7 | ) | (661.8 | ) |
|                     |   |                               |   |                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Gross profit             |   | 198.1                              |   | —                                     |       | 46.7 |   | 244.8 |   | 188.0 |   | (0.9 | ) | 0.4 |   | 187.5 |   |
|                     |   |                               |   |                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Selling and distribution |   | (113.4                             | )      | —                                     |       | (29.5 | ) | (142.9 | ) | (97.6 | ) | (2.5 | ) | (0.5 | ) | (100.6 | ) |
| Administrative           |   | (24.6                              | )      | (1.6                                       | )          | (8.1 | ) | (34.3 | ) | (26.1 | ) | (8.8 | ) | (0.7 | ) | (35.6 | ) |
| Net operating expenses   |   | (138.0                             | )      | (1.6                                       | )          | (37.6 | ) | (177.2 | ) | (123.7 | ) | (11.3 | ) | (1.2 | ) | (136.2 | ) |
|                     |   |                               |   |                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating profit         |   | 60.1                               |   | (1.6                                       | )          | 9.1 |   | 67.6 |   | 64.3 |   | (12.2 | ) | (0.8 | ) | 51.3 |   |

 

 
|                              |   | **2002**                                                                        |   |
|-----------------------------------|--------|---------------------------------------------------------------------------------|--------|
|                              |   | **Continuing   operations   before   operating   exceptional   items  £m** |   | **Operating exceptional   items in   continuing operations  £m** |   | **Acquisitions before   operating   exceptional   items  £m** |   | **Operating exceptional   items in   acquisitions  £m** |   | **Discontinued   operations  £m** |   | **Total  £m** |   |
|                              |   |                                                                            |   |   |   |   | ** ** |   | ** ** |   | ** ** |   | ** ** |
| Turnover                          |   | 826.7                                                                           |   | — |   | 55.6 |   | — |   | 0.2 |   | 882.5 |   |
| Cost of sales                     |   | (620.5                                                                          | )      | — |   | (33.1 | ) | — |   | (0.2 | ) | (653.8 | ) |
|                              |   |                                                                            |   |   |   |   |   |   |   |   |   |   |   |
| Gross profit                      |   | 206.2                                                                           |   | — |   | 22.5 |   | — |   | — |   | 228.7 |   |
|                              |   |                                                                            |   |   |   |   |   |   |   |   |   |   |   |
| Selling and distribution expenses |   | (101.4                                                                          | )      | — |   | (8.6 | ) | — |   | — |   | (110.0 | ) |
| Administrative costs              |   | (34.1                                                                           | )      | (14.6 | ) | (7.0 | ) | (2.2 | ) | (0.1 | ) | (58.0 | ) |
|                              |   |                                                                            |   |   |   |   |   |   |   |   |   |   |   |
| Net operating expenses            |   | (135.5                                                                          | )      | (14.6 | ) | (15.6 | ) | (2.2 | ) | (0.1 | ) | (168.0 | ) |
|                              |   |                                                                            |   |   |   |   |   |   |   |   |   |   |   |
| Operating profit                  |   | 70.7                                                                            |   | (14.6 | ) | 6.9 |   | (2.2 | ) | (0.1 | ) | 60.7 |   |

 

Thediscontinued operations principally relate to The Horizon Biscuit Company Ltd,which was sold in January 2001, and FE Barber Limited (trading as KingslandWines and Spirits), which was sold in February 2001.  The comparatives for 2000 have been restated accordingly.  The acquisition relates to the ambient foodmanufacturing business in the U.K. of Nestlé SA (“Nestlé”), which was acquiredin May 2002.

 

F-10

----

 

***Restatement of 2000 sales, cost of salesand selling and distribution costs***

 

As described in Note 1,certain sales deductions have been reclassified as a reduction in “sales”rather than “cost of sales” and certain promotional expenditure has beenreclassified as “selling and distribution costs” rather than a reduction in“sales”.  This change of policy wasadopted in 2001 and the 2000 comparatives have been restated accordingly, andthe effect is set out below:

 
|                                                                      |   | **2000£m** |       |
|---------------------------------------------------------------------------|--------|-----------------|------------|
|                                                                      |   |            |       |
| **Sales**                                                                 |   |            |       |
| Reported in Annual Financial Report for the Year Ended  December 31, 2000 |   | 1,036.4         |       |
| Reduction in sales reclassified as selling and  distribution costs        |   | 9.2             |       |
| Cost of sales reclassified as reduction in sales                          |   | (12.0           | )          |
|                                                                      |   |            |       |
| Reported in Annual Financial Report for the Year Ended  December 31, 2001 |   | 1,033.6         |       |
|                                                                      |   |            |       |
| **Cost of sales**                                                         |   |            |       |
| Reported in Annual Financial Report for the Year Ended  December 31, 2000 |   | 800.8           |       |
| Cost of sales reclassified as reduction in sales                          |   | (12.0           | )          |
|                                                                      |   |            | ** ** |
| Reported in Annual Financial Report for the Year Ended  December 31, 2001 |   | 788.8           |       |
|                                                                      |   |            |       |
| **Marketing costs**                                                       |   |            |       |
| Reported in Annual Financial Report for the Year Ended  December 31, 2000 |   | 133.7           |       |
| Reduction in sales reclassified as selling and  distribution costs        |   | 9.2             |       |
|                                                                      |   |            | ** ** |
| Reported in Annual Financial Report for the Year Ended  December 31, 2001 |   | 142.9           |       |

 

**3. Exceptional Items**

 

Theprincipal components of exceptional items are as follows:

 
|                                                   |   | **2000  £m** |   | **2001  £m** |       | **2002  £m** |       |
|--------------------------------------------------------|--------|-------------------|--------|-------------------|------------|-------------------|------------|
|                                                   |   |              |   |              | ** ** |              | ** ** |
| Operating exceptional items:                           |   |              |   |              |       |              |       |
| Continuing operations:                                 |   |              |   |              |       |              |       |
| Restructuring of production facilities                 |   | (1.6              | )      | (3.5              | )          | (8.8              | )          |
| Restructuring of distribution arrangements             |   | —            |   | (4.2              | )          | (1.3              | )          |
| Restructuring of administration facilities             |   | —            |   | (4.5              | )          | (4.5              | )          |
| Nestlé acquisition costs                          |   | —            |   | —            |       | (2.2              | )          |
|                                                   |   |              |   |              |       |              |       |
| Total operating exceptional items                      |   | (1.6              | )      | (12.2             | )          | (16.8             | )          |
|                                                   |   |              |   |              |       |              |       |
| Non-operating exceptional items:                       |   |              |   |              |       |              |       |
| Loss on sale or termination of discontinued operations |   | (4.2              | )      | (29.6             | )          | (0.4              | )          |
| Profit / (loss) on sale of fixed assets                |   | (1.6              | )      | 3.4               |       | (1.6              | )          |
|                                                   |   |              |   |              |       |              |       |
| Total non-operating exceptional items                  |   | (5.8              | )      | (26.2             | )          | (2.0              | )          |

 

Theloss on sale or termination of discontinued operations in 2002 relates to theliquidation of a non-core non-grocery business, which was put into liquidationin March 2002.  The loss on sale ortermination of discontinued operations in 2001 relates to the disposal of ourbiscuits and wines and spirits operations.

 

F-11

----

 

**4. Summary Segmental Analysis**

 
|                             |   | **Turnover by product group** |   |
|----------------------------------|--------|-------------------------------|--------|
|                             |   | **2000  £m**             |   | **2001**

**£m** |   | **2002  £m** | ** ** |
|                             |   |                          |   |   |   |   |   |
| Canned foods, pickles and sauces |   | 337.6                         |   | 362.4 |   | 375.8 |   |
| Beverages                        |   | 191.8                         |   | 173.8 |   | 172.8 |   |
| Spreads                          |   | 156.6                         |   | 151.4 |   | 183.8 |   |
| Potatoes                         |   | 132.5                         |   | 157.6 |   | 149.9 |   |
| Continuing operations            |   | 818.5                         |   | 845.2 |   | 882.3 |   |
| Discontinued operations          |   | 215.1                         |   | 4.1 |   | 0.2 |   |
|                             |   |                          |   |   |   |   |   |
| Total                            |   | 1,033.6                       |   | 849.3 |   | 882.5 |   |

 

Followingthe acquisition of the ambient food manufacturing business in the U.K. ofNestlé SA (“Nestlé”), the Preserves product group was renamed “Spreads” toreflect the increased product range within the product group.

 

Premierrestructured its operations during 2000 to form a unified grocery productsbusiness.  The product groups shown haveshared administrative functions and the operating assets are not separable.Therefore, further segmental analysis of operating profit and operating assetsis not possible.

 

Thepickles and sauces operations have been reclassified from the spreads reportingunit into the reporting unit with canned foods following a change in managementreporting lines in 2001.

 

In2002, certain products have been reclassified between the beverages, spreadsand canned foods, pickles and sauces product group and the comparatives for2000 and 2001 restated accordingly.

 

The2000 comparatives have also been restated to reflect a change in theclassification of certain sales deductions and which have now been reclassifiedfrom a deduction from sales to marketing costs or from cost of sales to sales(see Note 2 “Analysis of Continuing Operations”).

 
|                    |   | **Turnover by geographical  origin** |   | **Turnover by geographical  market** |   |
|-------------------------|--------|--------------------------------------|--------|--------------------------------------|--------|
|                    |   | **2000  £m**                    |   | **2001  £m**                    |   | **2002  £m** |   | **2000  £m** |   | **2001  £m** |   | **2002  £m** |   |
|                    |   |                                 |   |                                 |   |   |   |   |   |   |   |   | ** ** |
| U.K.                    |   | 694.9                                |   | 723.4                                |   | 763.8 |   | 681.9 |   | 712.3 |   | 741.5 |   |
| Mainland Europe         |   | 123.6                                |   | 121.8                                |   | 118.5 |   | 129.3 |   | 124.4 |   | 129.3 |   |
| Other countries         |   | —                               |   | —                               |   | — |   | 7.3 |   | 8.5 |   | 11.5 |   |
| Continuing operations   |   | 818.5                                |   | 845.2                                |   | 882.3 |   | 818.5 |   | 845.2 |   | 882.3 |   |
| Discontinued operations |   | 215.1                                |   | 4.1                                  |   | 0.2 |   | 215.1 |   | 4.1 |   | 0.2 |   |
|                    |   |                                 |   |                                 |   |   |   |   |   |   |   |   |   |
| Total                   |   | 1,033.6                              |   | 849.3                                |   | 882.5 |   | 1,033.6 |   | 849.3 |   | 882.5 |   |

 

F-12

----

 
|                                 |   | **Operating profit by  geographical origin** |       | **Operating assets by  geographical origin** |       |
|--------------------------------------|--------|----------------------------------------------|------------|----------------------------------------------|------------|
|                                 |   | **2000£m**                              |       | **2001**

**£m**                        |       | **2002£m** |   | **2001restated  £m** |   | **2002£m** |   |
|                                 |   |                                         | ** ** |                                         | ** ** |   | ** ** |   | ** ** |   | ** ** |
| U.K.                                 |   | 58.7                                         |       | 62.5                                         |       | 74.5 |   | 169.2 |   | 262.1 |   |
| Mainland Europe                      |   | 1.4                                          |       | 2.3                                          |       | 3.1 |   | 22.0 |   | 33.9 |   |
| Other countries                      |   | —                                       |       | (0.5                                         | )          | — |   | — |   | — |   |
| Continuing operations                |   | 60.1                                         |       | 64.3                                         |       | 77.6 |   | 191.2 |   | 296.0 |   |
| Operating exceptional items (Note 3) |   | (1.6                                         | )          | (12.2                                        | )          | (16.8 | ) | — |   | — |   |
| Discontinued operations              |   | 9.1                                          |       | (0.8                                         | )          | (0.1 | ) | 0.2 |   | — |   |
|                                 |   |                                         |       |                                         |       |   |   |   |   |   |   |
| Total                                |   | 67.6                                         |       | 51.3                                         |       | 60.7 |   | 191.4 |   | 296.0 |   |
|                                 |   |                                         |       |                                         |       |   |   |   |   |   |   |
| Net debt                             |   |                                         |       |                                         |       |   |   | (358.7 | ) | (445.8 | ) |
|                                 |   |                                         |       |                                         |       |   |   |   |   |   |   |
| Net deficit                          |   |                                         |       |                                         |       |   |   | (167.3 | ) | (149.8 | ) |

 

**5. Profit / Loss on Ordinary ActivitiesBefore Taxation**

** **
|                                                         |   | **2000  £m** |       | **2001  £m** |       | **2002  £m** |       |
|--------------------------------------------------------------|--------|-------------------|------------|-------------------|------------|-------------------|------------|
|                                                         |   |              | ** ** |              | ** ** |              | ** ** |
| The profit / loss before tax was arrived at after  charging: |   |              |       |              |       |              |       |
|                                                         |   |              |       |              |       |              |       |
| Depreciation of fixed assets                                 |   |              |       |              |       |              |       |
| Owned assets                                                 |   | 21.0              |       | 15.9              |       | 19.1              |       |
| Leased assets                                                |   | 1.0               |       | 0.2               |       | 0.1               |       |
| Amortisation of intangible assets                            |   | 0.3               |       | 0.5               |       | 4.2               |       |
| Auditors remuneration                                        |   |              |       |              |       |              |       |
| Audit services                                               |   | 0.3               |       | 0.3               |       | 0.3               |       |
| Non-audit services                                           |   | 0.4               |       | 0.4               |       | 0.5               |       |
| Operating lease payments                                     |   |              |       |              |       |              |       |
| Plant and machinery                                          |   | 5.9               |       | 4.3               |       | 2.9               |       |
| Land and buildings                                           |   | 2.5               |       | 1.7               |       | 1.6               |       |
| Research and development                                     |   | 0.5               |       | 0.4               |       | 1.0               |       |

 

**6. Employees**

 

Employeeremuneration and related costs (including directors’ emoluments) were asfollows:

 

 
|                  |   | **2000  £m** |   | **2001  £m** |   | **2002  £m** |   |
|-----------------------|--------|-------------------|--------|-------------------|--------|-------------------|--------|
|                  |   |              |   |              |   |              |   |
| Wages and salaries    |   | 133.5             |   | 90.0              |   | 94.9              |   |
| Social security costs |   | 12.0              |   | 9.0               |   | 9.2               |   |
| Other pension costs   |   | 3.7               |   | 2.7               |   | 3.1               |   |
|                  |   |              |   |              |   |              |   |
|                  |   | 149.2             |   | 101.7             |   | 107.2             |   |

 

 

Theaverage number of employees during the period was as follows: 

 
|                               |   | **2000** |   | **2001** |   | **2002** |   |
|------------------------------------|--------|----------|--------|----------|--------|----------|--------|
|                               |   |     |   |     |   |     |   |
| Management                         |   | 476      |   | 343      |   | 374      |   |
| Administration                     |   | 490      |   | 586      |   | 670      |   |
| Production, distribution and other |   | 5,624    |   | 3,288    |   | 3,293    |   |
|                               |   |     |   |     |   |     |   |
|                               |   | 6,590    |   | 4,217    |   | 4,337    |   |

 

F-13

----

 

***Pensions***

 

Premierparticipates in a number of Premier Holdings pension schemes (principally theHF scheme, the HF No 2 scheme and the Premier Brands pension plan), themajority of which are funded defined benefit schemes; there are in addition asmall number of company defined contribution schemes, personal pension schemesand life assurance only arrangements. The scheme funds are administered by trusteesand are independent of Premier’s finances. The schemes invest in a mixture of U.K. and European equities andcorporate and government bonds.

 

Thetotal pension cost for Premier in 2000, 2001 and 2002 has been assessed inaccordance with the advice of independent qualified actuaries, using theProjected Unit Method.  Actuarialassessments of the schemes were made during 2002, with the principal actuarialassumptions being that the rate of discount of liabilities is 3% more than wageinflation and 4% more than pension increases. Allowance was made for pensions in payment to increase as required bystatute and in accordance with the rules of the schemes, and also to reflectPremier Holdings’ and Premier’s policies. Assets were valued in 2002 using a discounted dividend approach.  In 2001 and 2000, assets were valued using amarket value approach.  The marketvaluation methodology was more appropriate than an actuarial value approach in2001 and 2000, as the discounted dividend approach generated valuations of thescheme assets that were excessive, in the view of Premier’s management.  The adjustment to the market valuation anddividend yields of the assets of the schemes in the period from 2000 to 2002enables the use of the discounted dividend approach to value the scheme assets.

 

AtOctober 17, 2002, the date of the latest actuarial assessments, the totalmarket value of the assets was £176.9m and the actuarial value of the assetswas sufficient to cover 110% of the benefits that had accrued to members afterfully allowing for future salary increases. The normal cost of Premier’s defined benefit pension schemes was £3.9m(2001: £3.9m, 2000: £7.7m) which, after amortisation of the remainingunrecognised surplus, resulted in a net defined benefit pensions expense of£2.6m (2001: £2.0m, 2000: £3.4m). Premier has not contributed to the schemes during 2002, due to thescheme surplus, thherefore the amortisation of the pension prepayment of £2.6mcomprises the net defined benefit pensions expense of £2.6m.  In 2001, Premier did not contribute to theschemes, due to the scheme surplus.  Thenet defined benefit pensions expense of £2.0m comprised an amortisation of thepension prepayment of £2.0m.  In 2000,cash contributions by Premier to the schemes equated to the net defined benefitpensions expense and therefore no amortisation of the pension prepayment wasrequired.  The cost of the definedcontribution schemes was £0.2m (2001: £0.7m, 2000: £0.3m).

 

Thepension prepayment at December 31, 2002 was £8.2m (2001: £10.8m), whichrepresents the accumulated difference between the pension cost and employercontributions.  The reduction in theprepayment of £2.6m comprises the amortisation in 2002 of £2.6m.

 

Premieralso operates plans in continental Europe, which provide employees with certainpost retirement and unfunded pension benefits. The liabilities in respect of these benefits amounted to £0.1m atDecember 31, 2002 (2001: £0.6m).

*** ***

***FRS 17 “Retirement benefit” disclosures***

 

FRS17 “Retirement benefits” came into effect during 2001.  The following items are recorded under thetransitional disclosure requirements of FRS 17, and should be read inconjunction with the pension disclosures in accordance with SSAP 24 “Accountingfor pension costs” recorded above. Full actuarial assessments of the schemeswere made at October 17, 2002, and have been updated by an independentqualified actuary as at December 31, 2002. The major assumptions used by the actuary were:

 
|                                    |   | **2001** |   | **2002** |   |
|-----------------------------------------|--------|----------|--------|----------|--------|
|                                    |   |     |   |     |   |
| Rate of increase in salaries            |   | 3.0      | %      | 2.5      | %      |
| Rate of increase in pensions in payment |   | 2.0      | %      | 1.5      | %      |
| Discount rate                           |   | 6.0      | %      | 5.5      | %      |
| Inflation assumption                    |   | 2.0      | %      | 1.5      | %      |

 

F-14

----

 

Theassets in the scheme and the expected rate of return at December 31, were:

 
|                                |   | **Expected  rate of  return2001** |   | **Market  value2001£m** |   | **Expected  rate of  return  2002** |   | **Market  value  2002  £m** |       |
|-------------------------------------|--------|-----------------------------------|--------|------------------------------|--------|-------------------------------------|--------|----------------------------------|------------|
|                                |   |                              |   |                         |   |                                |   |                             | ** ** |
| **Asset**                           |   |                              |   |                         |   |                                |   |                             | ** ** |
|                                |   |                              |   |                         |   |                                |   |                             |       |
| Equities                            |   | 7.4                               | %      | 145.5                        |   | 7.3                                 | %      | 123.3                            |       |
| Bonds                               |   | 6.5                               | %      | 62.4                         |   | 6.0                                 | %      | 51.6                             |       |
| Other                               |   | 4.0                               | %      | 4.7                          |   | 4.0                                 | %      | 0.7                              |       |
|                                |   |                              |   |                         |   |                                |   |                             |       |
| Total market value of scheme assets |   | 7.0                               | %      | 212.6                        |   | 7.0                                 | %      | 175.6                            |       |

 

Thefollowing amounts at December 31, were measured in accordance with therequirements of FRS 17 “Retirement benefits”.

 
|                                |   | **2001****£m** |   | **2002****£m** |       |
|-------------------------------------|--------|---------------------|--------|---------------------|------------|
|                                |   |                |   |                | ** ** |
| Total market value of scheme assets |   | 212.6               |   | 175.6               |       |
| Present value of scheme liabilities |   | (215.1              | )      | (185.9              | )          |
|                                |   |                |   |                |       |
| Deficit in the schemes              |   | (2.5                | )      | (10.3               | )          |
| Related deferred tax asset          |   | 0.8                 |   | 3.1                 |       |
|                                |   |                |   |                |       |
| Net pension liability               |   | (1.7                | )      | (7.2                | )          |

 

Ifthe above amounts had been recognised in the financial statements, Premier’snet liabilities and profit and loss reserve at December 31, would be asfollows:

 
|                                                                           |   | **2001£m  restated** |       | **2002  £m** |       |
|--------------------------------------------------------------------------------|--------|---------------------------|------------|-------------------|------------|
|                                                                           |   |                      | ** ** |              | ** ** |
| Net deficit including pension prepayment recognised  under SSAP 24             |   | (167.3                    | )          | (149.8            | )          |
| Pension prepayment recognised under SSAP 24                                    |   | (10.8                     | )          | (8.2              | )          |
| Net pension liability recognised under FRS 17                                  |   | (1.7                      | )          | (7.2              | )          |
|                                                                           |   |                      |       |              |       |
| Net liabilities including pension liability recognised  under FRS 17           |   | (179.8                    | )          | (165.2            | )          |
|                                                                           |   |                      |       |              |       |
| Profit and loss reserve including pension prepayment  recognised under SSAP 24 |   | (878.2                    | )          | (860.7            | )          |
| Pension prepayment recognised under SSAP 24                                    |   | (10.8                     | )          | (8.2              | )          |
| Pension reserve                                                                |   | (1.7                      | )          | (7.2              | )          |
|                                                                           |   |                      |       |              |       |
| Profit and loss reserve including pension liability  recognised under FRS 17   |   | (890.7                    | )          | (876.1            | )          |

 

F-15

----

 

The following amountswould have been recognised in the performance statements in the year toDecember 31, 2002 under the requirements of FRS 17:

 
|                                                                                                                                                                                  |   | **2002£m** |       |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------|------------|
|                                                                                                                                                                                  |   |            | ** ** |
| **Analysis of amount charged to operating profit**                                                                                                                                    |   |            |       |
| Current  service cost                                                                                                                                                                 |   | 3.9             |       |
| Past  service cost (gross)                                                                                                                                                            |   | —          |       |
| Less  unrecognised surplus                                                                                                                                                            |   | —          |       |
| Curtailments  / settlements (gross)                                                                                                                                                   |   | —          |       |
| Less  unrecognised surplus                                                                                                                                                            |   | —          |       |
| Total  operating charge                                                                                                                                                               |   | 3.9             |       |
|                                                                                                                                                                                  |   |            |       |
| **Analysis of amount credited to other finance income**                                                                                                                               |   |            |       |
| Expected  return on pension scheme assets                                                                                                                                             |   | 15.0            |       |
| Interest  on pension scheme liabilities                                                                                                                                               |   | (12.9           | )          |
| Net  return                                                                                                                                                                           |   | 2.1             |       |
|                                                                                                                                                                                  |   |            |       |
| **Analysis of amount recognised in Statement of Total  Recognised Gains and Losses**                                                                                                  |   |            |       |
| Actual  return less expected return on pension scheme assets                                                                                                                          |   | (31.2           | )          |
| Experience  gains and losses arising on the scheme liabilities                                                                                                                        |   | 2.4             |       |
| Changes  in assumptions underlying the present value of the scheme liabilities                                                                                                        |   | 22.8            |       |
| Actuarial  gain / (loss) recognised in the Statement of Total Recognised Gains and  Losses                                                                                            |   | (6.0            | )          |
|                                                                                                                                                                                  |   |            |       |
| **Movement in surplus / (deficit) during the year**                                                                                                                                   |   |            |       |
| Surplus  / (deficit) in the scheme at beginning of the year                                                                                                                           |   | (2.5            | )          |
| Movement  in year:                                                                                                                                                                    |   |            |       |
| Current  service cost                                                                                                                                                                 |   | (3.9            | )          |
| Employer  contributions                                                                                                                                                               |   | —          |       |
| Past  service costs                                                                                                                                                                   |   | —          |       |
| Other  finance income                                                                                                                                                                 |   | 2.1             |       |
| Actuarial  gain / (loss) recognised in the Statement of Total Recognised Gains and  Losses                                                                                            |   | (6.0            | )          |
| Surplus  / (deficit) in scheme at end of year                                                                                                                                         |   | (10.3           | )          |
|                                                                                                                                                                                  |   |            |       |
| **History of experience gains and losses**                                                                                                                                            |   |            |       |
|                                                                                                                                                                                  |   |            |       |
| Difference  between the expected and actual return on scheme assets:                                                                                                                  |   |            |       |
| Amount  (£m)                                                                                                                                                                     |   | 31.2            |       |
| Percentage  of scheme assets at period end                                                                                                                                            |   | 18              | %          |
|                                                                                                                                                                                  |   |            |       |
| Experience  gains and losses of scheme liabilities:                                                                                                                                   |   |            |       |
| Amount  (£m)                                                                                                                                                                     |   | 2.4             |       |
| Percentage  of the present value of the scheme liabilities at period end                                                                                                              |   | 1               | %          |
|                                                                                                                                                                                  |   |            |       |
| Total  amount recognised in Statement of Total Recognised Gains and Losses:                                                                                                           |   |            |       |
| Amount  (£m)                                                                                                                                                                     |   | (6.0            | )          |
| Percentage  of the present value of the scheme liabilities at period end                                                                                                              |   | 3               | %          |
|                                                                                                                                                                                  |   |            |       |
| Employer  contributions in the Year Ended December 31, 2002 were £nil. It has been  expected that contributions will be £2.0m in 2003 and £4.0m per annum  thereafter. |   |            |       |

 

F-16

----

*** ***

***Directors’ emoluments***

 

Aggregateemoluments paid to Directors by Premier in respect of services to Premier andits subsidiaries totalled £2.2m (2001: £2.6m, 2000: £2.4m) for the year,including £1.0m (2001: £0.8m, 2000: £nil) of compensation for loss of office.  Retirement benefits accrue to two Directorsunder defined benefit schemes.  Thehighest paid Director was paid £0.5m (2001: £1.0m, 2000: £1.0m).   The accrued pension in respect of thisdirector was £0.0m (2001: £0.0m, 2000 £0.0m).

 

**7. Net Interest Payable**

** **
|                                                   |   | **2000  £m** |   | **2001  £m** |   | **2002  £m** |       |
|--------------------------------------------------------|--------|-------------------|--------|-------------------|--------|-------------------|------------|
|                                                   |   |              |   |              |   |              | ** ** |
| Bank loans and overdrafts                              |   | 55.0              |   | 46.0              |   | 47.1              |       |
| Exchange loss / (gain) on U.S. dollar-denominated bond |   | 10.0              |   | 3.6               |   | (13.2             | )          |
| Amortisation of capitalised debt issuance costs        |   | 5.8               |   | 7.5               |   | 6.3               |       |
| Finance leases                                         |   | 0.2               |   | 0.1               |   | 0.1               |       |
| Total interest payable                                 |   | 71.0              |   | 57.2              |   | 40.3              |       |
|                                                   |   |              |   |              |   |              |       |
| External interest receivable                           |   | (3.1              | )      | (4.5              | )      | (3.9              | )          |
|                                                   |   |              |   |              |   |              |       |
| Net interest payable                                   |   | 67.9              |   | 52.7              |   | 36.4              |       |

 

**8. Taxation on Profit / Loss onOrdinary Activities**

** **
|                                                      |   | **2000  £mrestated** |   | **2001  £mrestated** |   | **2002  £m** |   |
|-----------------------------------------------------------|--------|---------------------------|--------|---------------------------|--------|-------------------|--------|
|                                                      |   |                      |   |                      |   |              |   |
| Premier and subsidiary undertakings:                      |   |                      |   |                      |   |              |   |
| U.K. corporation tax at 30.0% (2001: 30.0%, 2000:  30.0%) |   |                      |   |                      |   |              |   |
| Current year                                              |   | 0.7                       |   | 0.8                       |   | 6.7               |   |
| Prior year                                                |   | 0.8                       |   | (0.2                      | )      | —            |   |
| Overseas tax                                              |   | 0.2                       |   | —                    |   | —            |   |
| Total current tax                                         |   | 1.7                       |   | 0.6                       |   | 6.7               |   |
| Deferred tax                                              |   | 0.8                       |   | 0.3                       |   | (0.7              | )      |
|                                                      |   |                      |   |                      |   |              |   |
| Taxation charge on profit / loss on ordinary  activities  |   | 2.5                       |   | 0.9                       |   | 6.0               |   |

 

The principal itemsaffecting the tax charge are exceptional items not allowable for taxpurposes.  Tax relief on exceptionalitems in the year was £4.0m (2001: £2.5m, 2000: £0.5m).

 

In accordance with FRS 19“Deferred tax”, deferred tax has been restated for the years ended December 31,2000 and 2001.

 

F-17

----

 

A reconciliation from thecorporation tax calculated from the profit / (loss) before tax to the actualtax charge is set out below.

** **
|                                                                                                                     |   | **2000  £mrestated** |       | **2001  £mrestated** |       | **2002  £m** |       |
|--------------------------------------------------------------------------------------------------------------------------|--------|---------------------------|------------|---------------------------|------------|-------------------|------------|
|                                                                                                                     |   |                      | ** ** |                      | ** ** |              | ** ** |
| Profit / (loss) before taxation                                                                                          |   | (6.1                      | )          | (27.6                     | )          | 22.3              |       |
|                                                                                                                     |   |                      |       |                      |       |              |       |
| Tax credit / (charge) on profit / loss before tax at  U.K. corporation tax rate of 2000: 30.0%, 2001: 30.0%, 2002: 30.0% |   | 1.8                       |       | 8.3                       |       | (6.7              | )          |
|                                                                                                                     |   |                      |       |                      |       |              |       |
| Disallowable exceptional items                                                                                           |   | (1.7                      | )          | (9.0                      | )          | (1.6              | )          |
| Timing differences                                                                                                       |   | (0.2                      | )          | 0.9                       |       | (0.7              | )          |
| Utilisation of taxation losses                                                                                           |   | —                    |       | —                    |       | 4.1               |       |
| Other disallowable items                                                                                                 |   | (1.6                      | )          | (0.8                      | )          | (1.8              | )          |
|                                                                                                                     |   |                      |       |                      |       |              |       |
| Taxation credit / (charge) on profit / loss on  ordinary activities                                                      |   | (1.7                      | )          | (0.6                      | )          | (6.7              | )          |

 

**9. Intangible Assets**

 
|                                |   | **Goodwill  £m** |   | **Trademarks  £m** |   | **Total  £m** |       |
|-------------------------------------|--------|-----------------------|--------|-------------------------|--------|--------------------|------------|
|                                |   |                  |   |                    |   |               | ** ** |
| Cost at January 1, 2002             |   | 10.7                  |   | 7.5                     |   | 18.2               |       |
| Additions                           |   | 80.7                  |   | 20.0                    |   | 100.7              |       |
|                                |   |                  |   |                    |   |               |       |
| Cost at December 31, 2002           |   | 91.4                  |   | 27.5                    |   | 118.9              |       |
|                                |   |                  |   |                    |   |               |       |
| Amortisation at January 1, 2002     |   | 0.7                   |   | 0.1                     |   | 0.8                |       |
| Charge for the year                 |   | 3.1                   |   | 1.1                     |   | 4.2                |       |
|                                |   |                  |   |                    |   |               |       |
| Amortisation at December 31, 2002   |   | 3.8                   |   | 1.2                     |   | 5.0                |       |
|                                |   |                  |   |                    |   |               |       |
| Net book value at December 31, 2002 |   | 87.6                  |   | 26.3                    |   | 113.9              |       |
|                                |   |                  |   |                    |   |               |       |
| Net book value at December 31, 2001 |   | 10.0                  |   | 7.4                     |   | 17.4               |       |

 

Theaddition to goodwill during 2002 comprises £80.1 million in relation to theacquisition of the ambient foods manufacturing business in the U.K. of NestléSA (“Nestlé”) and £0.6 million in relation to the acquisition of apotato seed business (see Note 18).   Goodwill arising on acquisition isamortised over a period of 20 years. The addition to trademarks in 2002 relates to trademarks acquired on theacquisition of Nestlé.  Trademarks are amortised over a period of 20years.

 

F-18

----

 

**10. Tangible Fixed Assets**

** **
|                                                                             |   | **Freehold****land and  buildings  £m** |   | **Long****leasehold   properties  £m** |   | **Short****leasehold   properties  £m** |   | **Plant and**** machinery  £m** |   | **Total  £m** |       |
|----------------------------------------------------------------------------------|--------|----------------------------------------------|--------|--------------------------------------------------|--------|---------------------------------------------------|--------|-------------------------------------------|--------|--------------------|------------|
|                                                                             |   |                                         |   |                                             |   |                                              |   |                                      |   |               | ** ** |
| Cost or valuation at January 1, 2002                                             |   | 62.4                                         |   | 3.7                                              |   | 0.8                                               |   | 213.1                                     |   | 280.0              |       |
| Additions                                                                        |   | 2.8                                          |   | —                                           |   | —                                            |   | 14.5                                      |   | 17.3               |       |
| Acquisition of subsidiaries                                                      |   | 6.4                                          |   | —                                           |   | —                                            |   | 13.5                                      |   | 19.9               |       |
| Disposals                                                                        |   | (2.7                                         | )      | —                                           |   | —                                            |   | (19.0                                     | )      | (21.7              | )          |
| Exchange adjustments                                                             |   | 0.5                                          |   | —                                           |   | —                                            |   | 2.0                                       |   | 2.5                |       |
|                                                                             |   |                                         |   |                                             |   |                                              |   |                                      |   |               |       |
| Cost or valuation at December 31, 2002                                           |   | 69.4                                         |   | 3.7                                              |   | 0.8                                               |   | 224.1                                     |   | 298.0              |       |
|                                                                             |   |                                         |   |                                             |   |                                              |   |                                      |   |               |       |
| Depreciation at January 1, 2002                                                  |   | 14.5                                         |   | 0.6                                              |   | 0.4                                               |   | 144.5                                     |   | 160.0              |       |
| Charge for the year                                                              |   | 2.1                                          |   | —                                           |   | —                                            |   | 17.1                                      |   | 19.2               |       |
| Acquisition of subsidiaries                                                      |   | —                                       |   | —                                           |   | —                                            |   | —                                    |   | —             |       |
| Disposals                                                                        |   | (1.3                                         | )      | —                                           |   | —                                            |   | (16.6                                     | )      | (17.9              | )          |
| Exchange adjustments                                                             |   | 0.3                                          |   | —                                           |   | —                                            |   | 1.3                                       |   | 1.6                |       |
|                                                                             |   |                                         |   |                                             |   |                                              |   |                                      |   |               |       |
| Depreciation at December 31, 2002                                                |   | 15.6                                         |   | 0.6                                              |   | 0.4                                               |   | 146.3                                     |   | 162.9              |       |
|                                                                             |   |                                         |   |                                             |   |                                              |   |                                      |   |               |       |
| Net book value at December 31, 2002                                              |   | 53.8                                         |   | 3.1                                              |   | 0.4                                               |   | 77.8                                      |   | 135.1              |       |
|                                                                             |   |                                         |   |                                             |   |                                              |   |                                      |   |               |       |
| Net book value at December 31, 2001                                              |   | 47.9                                         |   | 3.1                                              |   | 0.4                                               |   | 68.6                                      |   | 120.0              |       |
|                                                                             |   |                                         |   |                                             |   |                                              |   |                                      |   |               |       |
| The cost or valuation of depreciable assets included  above at December 31, 2002 |   | 23.7                                         |   | 3.7                                              |   | 0.8                                               |   | 224.1                                     |   | 252.3              |       |
|                                                                             |   |                                         |   |                                             |   |                                              |   |                                      |   |               |       |
| Analysis of cost or valuation at December 31, 2002                               |   |                                         |   |                                             |   |                                              |   |                                      |   |               |       |
| Cost                                                                             |   | 65.4                                         |   | 3.7                                              |   | 0.8                                               |   | 224.1                                     |   | 294.0              |       |
| Valuation                                                                        |   | 4.0                                          |   | —                                           |   | —                                            |   | —                                    |   | 4.0                |       |
|                                                                             |   |                                         |   |                                             |   |                                              |   |                                      |   |               |       |
|                                                                             |   | 69.4                                         |   | 3.7                                              |   | 0.8                                               |   | 224.1                                     |   | 298.0              |       |

 

Included in longleasehold property at December 31, 2002 were capitalised finance leases with anet book value of £0.3m (2001: £0.3m, 2000: £0.3m).  Depreciation charged during the year on these assets was £nil(2001: £nil, 2000: £nil). Included in plant and machinery at December 31, 2002were capitalised leases with a net book value of £0.2m (2001: £0.2m, 2000:£2.5m). Depreciation charged during the year on these assets was £0.1m (2001£0.2m, 2000: £0.9m).

 

Premierhas implemented FRS 15, “Tangible and intangible fixed assets” in 2000.  Premier has taken advantage of thetransitional arrangements relating to previously revalued assets and has notrevalued those assets held at valuation. Premier’s freehold and long leasehold properties in the U.K. wererevalued on the basis of open market value for existing use by Bidwells atDecember 31, 1990. The historical cost of revalued assets at December 31, 2002was £0.1m (2001: £0.1m). The valuations were undertaken in accordance with themanual of the Royal Institute of Chartered Surveyors. The book values of theseproperties were adjusted to their valuations during the relevant financialperiod and the resultant net surplus credited to the revaluation reserve. 

 
|                                                                                   |   | **2001  £m** |   | **2002**

**£m** |       |
|----------------------------------------------------------------------------------------|--------|-------------------|--------|-----------------------|------------|
|                                                                                   |   |              |   |                  | ** ** |
| Capital expenditure commitments                                                        |   |              |   |                  |       |
| Expenditure contracted for but not provided in the  consolidated  financial statements |   | 0.3               |   | 1.4                   |       |

 

F-19

----

 

**11. Fixed Asset Investments**

 
|                                     |   | **£m** |   |
|------------------------------------------|--------|-------------|--------|
|                                     |   |        |   |
| **Unlisted  investments**                |   |        |   |
|                                     |   |        |   |
| At January 1, 2002                       |   | 0.2         |   |
| Additions                                |   | 0.1         |   |
| Disposals                                |   | (0.1        | )      |
| At December 31, 2002                     |   | 0.2         |   |
|                                     |   |        |   |
| Provisions at December 31, 2001 and 2002 |   | —      |   |
|                                     |   |        |   |
| Net book value at December 31, 2002      |   | 0.2         |   |
|                                     |   |        |   |
| Net book value at December 31, 2001      |   | 0.2         |   |

 

**12. Stocks**

** **
|                                |   | **2001  £m** |       | **2002  £m** |       |
|-------------------------------------|--------|-------------------|------------|-------------------|------------|
|                                |   |              | ** ** |              | ** ** |
| Raw materials                       |   | 34.5              |       | 36.9              |       |
| Work in progress                    |   | 5.9               |       | 4.9               |       |
| Finished goods and goods for resale |   | 65.2              |       | 69.5              |       |
|                                |   |              |       |              |       |
|                                |   | 105.6             |       | 111.3             |       |

 

**13. Debtors**

** **
|                                  |   | **2001  £m** |       | **2002  £m** |       |
|---------------------------------------|--------|-------------------|------------|-------------------|------------|
|                                  |   |              | ** ** |              | ** ** |
| Due within one year:                  |   |              |       |              |       |
| Trade debtors, net of provisions      |   | 114.6             |       | 108.8             |       |
| Other debtors including VAT           |   | 19.8              |       | 18.8              |       |
| Prepayments                           |   | 2.7               |       | 5.9               |       |
|                                  |   | 137.1             |       | 133.5             |       |
| Due after more than one year:         |   |              |       |              |       |
| Other debtors and pension prepayments |   | 11.7              |       | 9.0               |       |
|                                  |   |              |       |              |       |
| Total debtors                         |   | 148.8             |       | 142.5             |       |

 

F-20

----

 

**14. Creditors Due Within One Year**

 
|                                       |   | **2001  £m** |   | **2002  £m** |       |
|--------------------------------------------|--------|-------------------|--------|-------------------|------------|
|                                       |   |              |   |              | ** ** |
| Senior Credit Facility due within one year |   | 13.4              |   | 27.0              |       |
| Other bank loans and overdrafts            |   | 0.8               |   | 3.2               |       |
| Capitalised debt issuance costs            |   | (4.1              | )      | (5.7              | )          |
|                                       |   | 10.1              |   | 24.5              |       |
|                                       |   |              |   |              |       |
| Trade creditors                            |   | 139.0             |   | 138.4             |       |
| Corporation taxes                          |   | 6.8               |   | 12.4              |       |
| Other taxes and social security            |   | 5.9               |   | 5.9               |       |
| Finance lease obligations                  |   | 0.1               |   | 0.1               |       |
| Amounts due to parent company              |   | 3.4               |   | 0.9               |       |
| Other creditors                            |   | 10.5              |   | 12.8              |       |
| Interest accruals                          |   | 10.8              |   | 10.5              |       |
| Other accruals                             |   | 12.5              |   | 12.1              |       |
|                                       |   |              |   |              |       |
|                                       |   | 199.1             |   | 217.6             |       |

 

**15. Creditors Due After More Than OneYear**

** **
|                                                           |   | **2001  £m** |       | **2002  £m** |       |
|----------------------------------------------------------------|--------|-------------------|------------|-------------------|------------|
|                                                           |   |              | ** ** |              | ** ** |
| Borrowings:                                                    |   |              |       |              |       |
| Unsecured subordinated U.S.$200m 12.0% Senior Notes  due 2009  |   | 137.4             |       | 124.2             |       |
| Unsecured subordinated £75m 12.25% Senior Notes due  2009 |   | 75.0              |       | 75.0              |       |
| Capitalised debt issuance costs                                |   | (3.3              | )          | (1.1              | )          |
|                                                           |   | 209.1             |       | 198.1             |       |
|                                                           |   |              |       |              |       |
| Senior Credit Facility                                         |   | 163.9             |       | 265.3             |       |
| Capitalised debt issuance costs                                |   | (5.2              | )          | (8.1              | )          |
|                                                           |   | 158.7             |       | 257.2             |       |
|                                                           |   |              |       |              |       |
| Loan from related party                                        |   | 7.6               |       | 9.3               |       |
| Other unsecured loans                                          |   | 0.3               |       | 0.1               |       |
|                                                           |   | 7.9               |       | 9.4               |       |
|                                                           |   |              |       |              |       |
|                                                           |   | 375.7             |       | 464.7             |       |
| Other creditors:                                               |   |              |       |              |       |
| Finance lease obligations:                                     |   |              |       |              |       |
| Due between one and five years                                 |   | 0.1               |       | —            |       |
| Government grants in respect of capital expenditure            |   | 0.4               |       | 0.2               |       |
|                                                           |   |              |       |              |       |
|                                                           |   | 0.5               |       | 0.2               |       |

 

The loan from relatedparty is from HMTF Poultry, an affiliated company, does not bear interest andis repayable in full on July 31, 2009.

 

The maturity profiles ofborrowings and finance lease obligations are shown in Note 20.

 

F-21

----

 

**Descriptionof Senior Credit Facility and Subordination Arrangements**

** **

**SeniorCredit Facility**

 

In May 2002, PremierFinancing entered into an amended and restated Senior Credit FacilitiesAgreement with J.P. Morgan plc and Barclays Capital as arrangers, JPMorganChase Bank and Barclays Bank plc as underwriters, with J.P. Morgan EuropeLimited as agent and security agent (the “Senior Credit Facility”). Under theSenior Credit Facility, a syndicate of financial institutions made £412.3m ofsenior secured credit facilities available to Premier Financing.  These facilities have been reduced in linewith repayments made.  At December 31,2002, the facilities available to Premier amounted to £392.3m.

** **

**Structure**

 

The Senior CreditFacility provides for £392.3m of loan facilities comprising (i) Term A and TermB Facilities and (ii) the Working Capital Facility (each as described below)and the ancillary facilities which may be provided therein.

 

The Term A Facility isfor an amount of up to £224.3m and the Term B Facility is for an amount of upto £68.0m.  At December 31, 2002,£224.3m was outstanding on the Term A Facility and £68.0m was outstanding onthe Term B Facility.

 

The Working CapitalFacility in the amount of up to £100.0m is available in pounds sterling or theequivalent in certain foreign currencies in the form of revolving advances anda letter of credit facility, which is to be used for general corporatepurposes.  At December 31, 2002, noadvance had been drawn down under the Working Capital Facility and £22.7m wasutilised for general corporate purposes.

** **

**Interest Rates and Fees**

 

Interest on advancesunder the various facilities is payable at the rate per annum equal to LIBOR(or EURIBOR for euro) plus applicable mandatory liquid asset costs plus thefollowing applicable margins in relation to the facilities:

 

•                  2.25% per annum reducing on the basisof a ratchet reducing in several steps to 1.25% per annum dependent uponcertain net debt to consolidated EBITDA ratios for the Term A Facility and thedrawn down amount under the Working Capital Facility.  At December 31, 2002, the margin applied to LIBOR on the Term AFacility was 2.0%; and

 

•                  2.75% per annum for the Term BFacility.

 

Commitment fees arepayable at the rate of 0.75% per annum of the undrawn portion of the relevantfacilities.  The commitment fees on theWorking Capital Facility reduce in several steps to 0.25% per annum dependentupon certain net debt to consolidated EBITDA ratios. At December 31, 2002, themargin applied to LIBOR in respect of commitment fees was 0.625%.  Default interest is payable at theapplicable interest rate plus 1% per annum.

** **

**Security and Guarantees**

 

Premier Financing’sobligations under the Senior Credit Facility are required to be guaranteed byeach of the material operating subsidiaries of Premier. Each chargingsubsidiary has granted security over substantially all of its assets, includingEnglish law fixed charges over material properties, bank accounts, insurances,debts and shares and a floating charge over all of its other undertakings and assets.Certain limited material subsidiaries incorporated outside of England and Waleshave given similar security.

 

F-22

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**Covenants**

 

The Senior CreditFacility requires Premier Financing to observe certain undertakings, includingundertakings relating to delivery of financial statements, insurances,notification of any default or any occurrence which could be reasonablyexpected to have a material adverse effect, consents and authorisations beingmaintained, compliance with environmental laws, notification of materiallitigation and labour disputes, access to books and records, uses of proceeds,filing of tax returns, pension schemes, the provision of guarantees andsecurity from subsidiaries, euro compliance, intellectual property rights andhedge transactions.

 

The Senior CreditFacility requires Premier Financing to comply with certain negative covenants,including covenants relating to negative pledges, borrowed money, guarantees,disposals, operating leases, change of accounting reference date or accountingpolicy, identity of auditors, equity yield and intercompany loan payments,reduction of capital, loans and credit, intra-group contracts and arrangements,distributions, share capital, disposals, acquisitions and joint ventures,amendments to documents, change in business, merger and amalgamation,shareholder’s meetings and constitutive documents, acquisitions and jointventures and new subsidiaries.  Certaincategories of permitted payment may be made as exceptions to the restrictionson dividends and intercompany loan payments including payment of interest onthe Notes.

 

In addition, the SeniorCredit Facility requires Premier Financing to comply with specified financialratios and tests, including EBITDA / total interest expense, total net debt /EBITDA, fixed charge coverage ratio and maximum capital expenditure.

 

There are caps onpermitted budgeted capital expenditure for each financial year with the rightto carry forward any surplus of budgeted capital expenditures up to a maximumsurplus amount of one third of the previous year’s budget for use within thefirst six months of the following financial year.

** **

**Maturity and Amortisation**

* *

*Term Loan Facilities:*The Term A Facilitywill be repaid in semi-annual instalments commencing on June 30, 2002, with thefinal maturity on December 31, 2007. The Term B Facility will be repaid in two instalments with 50% repayableon June 30, 2008 and the balance repayable on December 31, 2008.

* *

*Working Capital Facility:* The WorkingCapital Facility (and all other facilities made available thereunder) willcease to be available on December 31, 2007.

** **

**Subordination Deed**

 

TheSubordination Deed provides for restrictions on Premier taking certain actionsin relation to the Notes.  Inparticular, Premier may not receive payments to pay principal on the Notes orany prepayment, redemption, defeasance or purchase of principal on the Notes orcertain indemnities until the Senior Credit Facility has been paid in full.

 

F-23

----

 

**16. Provisions for Liabilities andCharges**

** **
|                                              |   | **Deferred  tax  £mrestated** |   | **Unfunded pension****liabilities and post  retirement  benefits  £m** |   | **Restructuring  and****other provisions  £m** |   | **Total  £mrestated** |   |
|---------------------------------------------------|--------|------------------------------------|--------|-----------------------------------------------------------------------------|--------|-----------------------------------------------------|--------|----------------------------|--------|
|                                              |   |                               |   |                                                                        |   |                                                |   |                       |   |
| At January 1, 2002 as previously reported         |   | 0.6                                |   | 0.6                                                                         |   | 3.0                                                 |   | 4.2                        |   |
| Prior year adjustment on implementation of FRS 19 |   | 7.1                                |   | —                                                                      |   | —                                              |   | 7.1                        |   |
| At January 1, 2002 (restated)                     |   | 7.7                                |   | 0.6                                                                         |   | 3.0                                                 |   | 11.3                       |   |
| Utilised                                          |   | —                             |   | —                                                                      |   | (1.7                                                | )      | (4.9                       | )      |
| Charged / (released)                              |   | (0.7                               | )      | (0.5                                                                        | )      | 5.4                                                 |   | 7.4                        |   |
|                                              |   |                               |   |                                                                        |   |                                                |   |                       |   |
| At December 31, 2002                              |   | 7.0                                |   | 0.1                                                                         |   | 6.7                                                 |   | 13.8                       |   |

 

Restructuringprovisions represent the liability in respect of (i) the reorganization of ourcanned foods production facilities following the closure of our North Walshamcanned foods factory; (ii) changes to shift patterns at our Moreton teafactory; (iii) integration of the administration functions of Nestlé within theexisting operations.  The provisionincludes redundancy costs of approximately 45 administration staff; and (iv)provision in relation to the restructuring of Materne, Premier’s Frenchpreserve and compote manufacturing and selling operation following theintegration of Premier Brands France, Premier’s French biscuit distributioncompany

 

Theprovision for unfunded pension liabilities and post retirement benefitsrepresents the liability in respect of pension obligations in Premier’scontinental European operations where no funded plans are in operation.

 

Thepotential liability for tax on capital gains, which might arise if Premier’srevalued properties were to be sold at their book value, and no advantage takenof rollover relief, is estimated to be £1.2m (2001: £1.2m).

 

Deferredtax has not been provided in respect of liabilities, which might arise on thedistribution of unappropriated profits of overseas entities.

 

**17. Share Capital and Reserves**

** **
|                                                                             |   | **2001  £m** |       | **2002  £m** |       |
|----------------------------------------------------------------------------------|--------|-------------------|------------|-------------------|------------|
|                                                                             |   |              | ** ** |              | ** ** |
| Authorised                                                                       |   |              |       |              |       |
| 100,000,000 £1 ordinary shares (2001: 100,000,000 £1  ordinary shares) |   | 100.0             |       | 100.0             |       |
|                                                                             |   |              |       |              |       |
| Issued and fully paid                                                            |   |              |       |              |       |
| 83,701,200 £1 ordinary shares (2001: 83,701,200 £1  ordinary shares)   |   | 83.7              |       | 83.7              |       |

 

F-24

----

 
|                                              |   | **Share  capital  £m** |   | **Share premium  £m** |   | **Revaluation reserve  £m** |   | **Profit and loss  account  £m** |   | **Total  capital  and  reserves  £m** |       |
|---------------------------------------------------|--------|-----------------------------|--------|----------------------------|--------|----------------------------------|--------|---------------------------------------|--------|--------------------------------------------|------------|
|                                              |   |                        |   |                       |   |                             |   |                                  |   |                                       | ** ** |
| At January 1, 2002 as previously reported         |   | 83.7                        |   | 623.2                      |   | 4.0                              |   | (871.1                                | )      | (160.2                                     | )          |
| Prior year adjustment on implementation of FRS 19 |   | —                      |   | —                     |   | —                           |   | (7.1                                  | )      | (7.1                                       | )          |
| At January 1, 2002 (restated)                     |   | 83.7                        |   | 623.2                      |   | 4.0                              |   | (878.2                                | )      | (167.3                                     | )          |
| Movements in the year:                            |   |                        |   |                       |   |                             |   |                                  |   |                                       |       |
| Retained profit for the financial year            |   | —                      |   | —                     |   | —                           |   | 16.3                                  |   | 16.3                                       |       |
| Exchange movements                                |   | —                      |   | —                     |   | —                           |   | 1.2                                   |   | 1.2                                        |       |
|                                              |   |                        |   |                       |   |                             |   |                                  |   |                                       |       |
| At December 31, 2002                              |   | 83.7                        |   | 623.2                      |   | 4.0                              |   | (860.7                                | )      | (149.8                                     | )          |

 

**18. Acquisitions and Disposals**

 

Theprovisional value of the net assets acquired and consideration paid in respectof the acquisition of the ambient foods business in the U.K. of Nestlé SA(“Nestlé”) in May 2002, was as follows:

 
|                                |   | **Book  value  £m** |   | **Revaluations  £m** |   | **Consistency  of  accounting  policy  £m** |   | **Provisional  fair value  £m** |       |
|-------------------------------------|--------|--------------------------|--------|---------------------------|--------|--------------------------------------------------|--------|--------------------------------------|------------|
|                                |   |                     |   |                      |   |                                             |   |                                 | ** ** |
| Assets acquired:                    |   |                     |   |                      |   |                                             |   |                                 |       |
| Intangible assets                   |   | 20.0                     |   | —                    |   | —                                           |   | 20.0                                 |       |
| Fixed assets                        |   | 24.7                     |   | (4.8                      | )      | —                                           |   | 19.9                                 |       |
|                                |   |                     |   |                      |   |                                             |   |                                 |       |
| Current assets                      |   |                     |   |                      |   |                                             |   |                                 |       |
| Stocks                              |   | 12.4                     |   | (0.1                      | )      | (0.9                                             | )      | 11.4                                 |       |
| Trade debtors                       |   | —                   |   | —                    |   | —                                           |   | —                               |       |
| Other debtors                       |   | 1.0                      |   | —                    |   | —                                           |   | 1.0                                  |       |
|                                |   |                     |   |                      |   |                                             |   |                                 |       |
| Creditors due in less than one year |   |                     |   |                      |   |                                             |   |                                 |       |
| Trade creditors                     |   | —                   |   | —                    |   | —                                           |   | —                               |       |
| Other creditors                     |   | (0.2                     | )      | —                    |   | —                                           |   | (0.2                                 | )          |
|                                |   |                     |   |                      |   |                                             |   |                                 |       |
| Total capital employed              |   | 57.9                     |   | (4.9                      | )      | (0.9                                             | )      | 52.1                                 |       |
|                                |   |                     |   |                      |   |                                             |   |                                 |       |
| Consideration                       |   |                     |   |                      |   |                                             |   |                                 |       |
| Cash                                |   | 132.2                    |   | —                    |   | —                                           |   | 132.2                                |       |
| Debt net of cash acquired           |   | —                   |   | —                    |   | —                                           |   | —                               |       |
|                                |   |                     |   |                      |   |                                             |   |                                 |       |
| Total consideration                 |   | 132.2                    |   | —                    |   | —                                           |   | 132.2                                |       |
|                                |   |                     |   |                      |   |                                             |   |                                 |       |
| Goodwill arising                    |   | 74.3                     |   | 4.9                       |   | 0.9                                              |   | 80.1                                 |       |

 

TheNestlé ambient foods businesscontributed £55.6m to Premier’s turnover, £6.9m to Premier’s operating profitin 2002 and £9.1m to net cash flow from operating activities, £5.9m of interestexpense and £0.3m to capital expenditure.

 

Inaddition, in January 2002, Premier acquired a potato seed business for£0.6m.  The assets acquired comprised£0.2m of trade debtors and £0.2m of trade creditors.  The goodwill arising on the acquisition was £0.6m.

 

F-25

----

 

Thevalue of the net assets acquired of the canned foods, pickles and saucesbusinesses of Stratford on Avon Foods Limited (“SonA”) in April 2001, the“Lift” instant lemon tea business (“Lift”) in September 2001, the “Nelsons ofAintree” preserves manufacturing business (“Nelsons”) in October 2001 were asfollows:

 
|                                   |   | **2001  £m** |       |
|----------------------------------------|--------|-------------------|------------|
|                                   |   |              | ** ** |
| Assets acquired:                       |   |              |       |
| Intangible assets                      |   | 7.5               |       |
| Fixed assets                           |   | 9.2               |       |
|                                   |   |              |       |
| Current assets                         |   |              |       |
| Stocks                                 |   | 10.7              |       |
| Trade debtors                          |   | 5.6               |       |
| Other debtors                          |   | 0.3               |       |
|                                   |   |              |       |
| Creditors due in less than one year    |   |              |       |
| Trade creditors                        |   | (6.8              | )          |
| Other creditors                        |   | (0.6              | )          |
| Creditors due after more than one year |   | (0.2              | )          |
|                                   |   |              |       |
| Total capital employed                 |   | 25.7              |       |
|                                   |   |              |       |
| Consideration                          |   |              |       |
| Cash                                   |   | 28.7              |       |
| Debt net of cash acquired              |   | 0.8               |       |
|                                   |   |              |       |
| Total consideration                    |   | 29.5              |       |
|                                   |   |              |       |
| Goodwill arising                       |   | 3.8               |       |

 

Thenet assets disposed and consideration received in respect of Horizon BiscuitsLimited and FE Barber Limited (“Kingsland Wines and Spirits”) which weredisposed of in 2001, were as follows:

 
|                                        |   | **2001  £m** |   |
|---------------------------------------------|--------|-------------------|--------|
|                                        |   |              |   |
| Assets disposed:                            |   |              |   |
| Fixed assets                                |   | (47.8             | )      |
|                                        |   |              |   |
| Current assets                              |   |              |   |
| Stocks                                      |   | (23.5             | )      |
| Trade debtors                               |   | (41.6             | )      |
| Other debtors                               |   | (11.4             | )      |
| Tax                                         |   | (0.9              | )      |
|                                        |   |              |   |
| Creditors less than one year                |   |              |   |
| Creditors                                   |   | 28.1              |   |
| Other creditors                             |   | 18.7              |   |
|                                        |   |              |   |
| Total capital employed                      |   | (78.4             | )      |
|                                        |   |              |   |
| Cash consideration                          |   | 101.8             |   |
|                                        |   |              |   |
| Goodwill previously written off to reserves |   | (53.0             | )      |
|                                        |   |              |   |
| Loss on sale                                |   | (29.6             | )      |

 

Therewere no disposals in 2002.

 

F-26

----

 

**19. Commitments and Contingencies**

 

Commitmentsto make operating lease payments during the next financial year were asfollows:

 
|                  |   | **Land and buildings** |   | **Plant and****machinery** |   |
|-----------------------|--------|------------------------|--------|----------------------------|--------|
|                  |   | **2001  £m**      |   | **2002  £m**          |   | **2001  £m** |   | **2002  £m** | ** ** |
|                  |   |                   |   |                       |   |   |   |   | ** ** |
| On leases expiring:   |   |                   |   |                       |   |   |   |   |   |
| Within 1 year         |   | 0.6                    |   | 0.4                        |   | 2.0 |   | 0.4 |   |
| Between 2 and 5 years |   | 0.5                    |   | 0.3                        |   | 1.5 |   | 2.2 |   |
| After 5 years         |   | 0.7                    |   | 0.7                        |   | — |   | — |   |
|                  |   |                   |   |                       |   |   |   |   |   |
|                  |   | 1.8                    |   | 1.4                        |   | 3.5 |   | 2.6 |   |

 

Capital commitments aredisclosed in Note 10 “Tangible Fixed Assets”.

 

**Contingent liabilities**

 

Premieris subject to certain legal claims incidental to its operations.  In the opinion of the directors, aftertaking appropriate legal advice, these claims are not expected to have, eitherindividually or in aggregate, a material adverse effect upon Premier’s financialposition.

 

F-27

----

 

**20.Financial Instruments**

** **

**Risk management**

 

The interest rate andforeign exchange risks are managed by the Treasury Committee, which is asub-committee appointed by the Board of Directors.  Day to day management of treasury activities is performed by theGroup treasury department.  Theframework for management of these risks is set down in the Senior Credit FacilityAgreement and in the Treasury Policies and Procedures manual.

 

The main risks arisingfrom Premier’s financial transactions are interest rate risk, liquidity riskand foreign currency risk.  The policiestowards these risks are documented and are reviewed on a regular basis by theTreasury Committee.

 

Premier also enters into contractswith suppliers for its principal raw materials, some of which are consideredcommodities.  However, as thesecontracts are part of Premier’s normal purchasing activities and always resultin actual delivery, commodity risk arising from these contracts is notconsidered material.

 

**Interestrate risk**

 

Premier borrowsprincipally in pounds sterling and U.S. dollars at both fixed and floatingrates of interest.  Premier activelymonitors its interest rate exposure since the high level of gearing makes itsprofitability sensitive to movements in interest rates.  However, the minimum interest rate hedgingthat must be in place is governed by the hedging strategy letter, which formspart of the £392.3m Senior Credit Facility Agreement.  Premier makes use of a variety of derivative instrumentsincluding interest rate swaps, collars and caps to hedge its interest rateexposure.  The mixture of instrumentsused to hedge its exposure however is determined by the conditions of itscredit facility agreement and discussions with its lending group.  The Senior Credit Facility Agreementrequires Premier to hedge a minimum of 50% of its senior debt, which currentlyamounts to £292.3m.  Premier currentlyhas hedging in place for £146.0m until September 2004.  In addition, Premier has entered into acoupon swap to fix the cash flows on its U.S.$200m high yield debt issue, whichhas the effect of converting the interest payments into fixed rate sterling.

 

**Liquidityrisk**

 

Premier has negotiatedfacilities with its bankers that provide sufficient headroom to ensureliquidity and continuity of funding.  Ittherefore has sufficient unutilised banking facilities and reserve borrowingcapacity. Premier tends to have significant fluctuations in its short-termborrowing position due to seasonal factors; however, the revolving creditfacilities are set at a level sufficient to meet its projected peak borrowingrequirements.

 

**Foreignexchange risks**

 

Premier reports itsfinancial statements in pounds sterling and trades in several non-sterlingcurrencies. Its trading transactions are therefore subject to the effect ofmovements in these currencies.  Suchexposures arise from sales or purchases in currencies other than the unit’sfunctional currency.  Management of themajor exposures is centralised and managed by the Group treasury department,the small residual being managed by subsidiary companies within the guidelinesset down in the Treasury Policies and Procedures manual.  This requires subsidiaries to hedgecommitted foreign currency transaction exposure above certain levels.  It is Premier’s policy to hedge exposureusing forward foreign currency exchange contracts, currency borrowings /investments and currency options. Again, this is monitored by the Treasury Committee.  Although Premier generates some of itsprofits in non-sterling currencies and has assets in non-sterlingjurisdictions, the translation exposure resulting from these profits andoverseas net assets is not considered material and is currently not hedged.  This matter is reviewed regularly by membersof the Treasury Committee.

 

F-28

----

 

**Creditrisk**

 

Potential concentrationsof credit risk to Premier consist principally of cash and cash equivalents andtrade receivables.  Cash and cashequivalents are deposited with high-credit, quality financialinstitutions.  Trade receivables are dueprincipally from major European grocery retailers. Furthermore, it is Premier’spolicy to insure all third-party trade debt. Premier does not consider there to be any significant concentration ofcredit risk at December 31, 2002.

 
|                                                                                           |   | **Sterling** |       | **U.S.  dollar** |       | **Euro**    |       | **Other**   |       | **Total**   |       |
|------------------------------------------------------------------------------------------------|--------|--------------|------------|------------------|------------|-------------|------------|-------------|------------|-------------|------------|
| **Interest  rate and currency profile**                                                        |   | **£m**  |       | **£m**      |       | **£m** |       | **£m** |       | **£m** |       |
| **2002**                                                                                       |   |         |       |             |       |        |       |        |       |        |       |
| Financial assets                                                                               |   |         |       |             |       |        |       |        |       |        |       |
| Floating rate                                                                                  |   | 30.2         |       | 1.6              |       | 11.7        |       | —      |       | 43.5        |       |
|                                                                                           |   |         |       |             |       |        |       |        |       |        |       |
| Cash and deposits                                                                              |   | 30.2         |       | 1.6              |       | 11.7        |       | —      |       | 43.5        |       |
|                                                                                           |   |         | ** ** |             | ** ** |        | ** ** |        | ** ** |        | ** ** |
| **2001**                                                                                       |   |         |       |             |       |        |       |        |       |        |       |
| Financial assets                                                                               |   |         |       |             |       |        |       |        |       |        |       |
| Floating rate                                                                                  |   | 20.8         |       | 1.6              |       | 4.9         |       | —      |       | 27.3        |       |
|                                                                                           |   |         |       |             |       |        |       |        |       |        |       |
| Cash and deposits                                                                              |   | 20.8         |       | 1.6              |       | 4.9         |       | —      |       | 27.3        |       |
|                                                                                           |   |         |       |             |       |        |       |        |       |        |       |
| The financial assets all have maturities of less  than one year and are all at floating rates. |
|                                                                                           |   |         | ** ** |             | ** ** |        | ** ** |        | ** ** |        | ** ** |
|                                                                                           |   | **Sterling** |       | **U.S.  Dollar** |       | **Euro**    |       | **Other**   |       | **Total**   |       |
|                                                                                           |   | **£m**  |       | **£m**      |       | **£m** |       | **£m** |       | **£m** |       |
| **2002**                                                                                       |   |         |       |             |       |        |       |        |       |        |       |
| Financial  liabilities                                                                         |   |         |       |             |       |        |       |        |       |        |       |
| Floating rate                                                                                  |   | (207.3       | )          | —           |       | —      |       | —      |       | (207.3      | )          |
| Fixed rate                                                                                     |   | (272.7       | )          | —           |       | —      |       | —      |       | (272.7      | )          |
| Interest free                                                                                  |   | (9.3         | )          | —           |       | —      |       | —      |       | (9.3        | )          |
|                                                                                           |   |         |       |             |       |        |       |        |       |        |       |
| Borrowings                                                                                     |   | (489.3       | )          | —           |       | —      |       | —      |       | (489.3      | )          |
|                                                                                           |   |         |       |             |       |        |       |        |       |        |       |
| Fixed rate weighted average interest rate                                                      |   | 10.2         | %          |             |       |        |       |        |       |        |       |
| Fixed rate  weighted average years to maturity                                                 |   | 1.69         |       |             |       |        |       |        |       |        |       |
|                                                                                           |   |         |       |             |       |        |       |        |       |        |       |
| **2001**                                                                                       |   |         |       |             |       |        |       |        |       |        |       |
| Financial  liabilities                                                                         |   |         |       |             |       |        |       |        |       |        |       |
| Floating rate                                                                                  |   | (119.0       | )          | —           |       | (1.1        | )          | —      |       | (120.1      | )          |
| Fixed rate                                                                                     |   | (258.3       | )          | —           |       | —      |       | —      |       | (258.3      | )          |
| Interest free                                                                                  |   | (7.6         | )          | —           |       | —      |       | —      |       | (7.6        | )          |
|                                                                                           |   |         |       |             |       |        |       |        |       |        |       |
| Borrowings                                                                                     |   | (384.9       | )          | —           |       | (1.1        | )          | —      |       | (386.0      | )          |
|                                                                                           |   |         |       |             |       |        |       |        |       |        |       |
| Fixed rate weighted average interest rate                                                      |   | 10.9         | %          |             |       |        |       |        |       |        |       |
| Fixed rate  weighted average years to maturity                                                 |   | 2.31         |       |             |       |        |       |        |       |        |       |

 

The interest ratesapplicable to the Notes and Term and Working Capital Facilities are detailed inNote 15.  The analysis of averageinterest rates and years to maturity on fixed rate debt is after adjusting forinterest rate swaps.  Exposure tomovements in interest rates and years to maturity on fixed rate debt is afteradjusting for interest rate swaps. Exposure to movements in interest rates is further protected by interestrate caps and interest rate collars amounting to £72.5m bringing the totalamount of interest rate hedging to £342.4m. The hedging currently in place on the senior debt is operative untilSeptember 2004.

 

F-29

----

 

**Maturityof financial liabilities**

 
|                        |   | **2001**    |   | **2002**                                   |   |
|-----------------------------|--------|-------------|--------|--------------------------------------------|--------|
|                        |   | **Debt**    |   | **Capitalised    debt   issuance   costs** |   | **Finance leases** |   | **Total** |   | **Debt** |   | **Capitalised    debt   issuance   costs** |   | **Finance   leases** |   | **Total** |   |
|                        |   | **£m** |   | **£m**                                |   | **£m** |   | **£m** |   | **£m** |   | **£m** |   | **£m** |   | **£m** |   |
|                        |   |        |   |                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Within 1 year or  on demand |   | 14.2        |   | (4.1                                       | )      | 0.1 |   | 10.2 |   | 30.2 |   | (5.7 | ) | 0.1 |   | 24.6 |   |
| Between:                    |   |        |   |                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| 1 and 2 years               |   | 18.0        |   | (3.9                                       | )      | 0.1 |   | 14.2 |   | 36.0 |   | (3.9 | ) | — |   | 32.1 |   |
| 2 and 3 years               |   | 22.5        |   | (2.6                                       | )      | — |   | 19.9 |   | 50.0 |   | (2.2 | ) | — |   | 47.8 |   |
| 3 and 4 years               |   | 31.5        |   | (1.2                                       | )      | — |   | 30.3 |   | 52.0 |   | (1.7 | ) | — |   | 50.3 |   |
| 4 and 5 years               |   | 71.6        |   | (0.7                                       | )      | — |   | 70.9 |   | 59.3 |   | (1.1 | ) | — |   | 58.2 |   |
| Over 5 years                |   | 240.6       |   | (0.1                                       | )      | — |   | 240.5 |   | 276.6 |   | (0.3 | ) | — |   | 276.3 |   |
|                        |   |        |   |                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                        |   | 398.4       |   | (12.6                                      | )      | 0.2 |   | 386.0 |   | 504.1 |   | (14.9 | ) | 0.1 |   | 489.3 |   |

 

**Currencyanalysis of financial assets and liabilities**

The table below shows Premier’s currency exposures that give rise tonet currency gains and losses that are recognised in the consolidated profitand loss account for the Year Ended December 31, 2002.  Such exposures comprise monetary assets /(liabilities) that are not denominated in the functional currency of thesubsidiary involved.

 

The amounts shown beloware after taking into account the effect of forward exchange contracts andother derivative instruments entered into to manage these exposures.

 

**Netforeign currency assets / (liabilities)**

 
|             |   | **2001**                                    |   | **2002**                                    |   |
|------------------|--------|---------------------------------------------|--------|---------------------------------------------|--------|
|             |   | **Functional  currency of Group operation** |   | **Functional  currency of Group operation** |   |
|             |   | **Sterling**                                |   | **Euro**                                    |   | **Other** |   | **Total** |   | **Sterling** |   | **Euro** |   | **Other** |   | **Total** |   |
|             |   | **£m**                                 |   | **£m**                                 |   | **£m** |   | **£m** |   | **£m** |   | **£m** |   | **£m** |   | **£m** |   |
|             |   |                                        |   |                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Sterling         |   | —                                      |   | (0.1                                        | )      | — |   | (0.1 | ) | — |   | 0.1 |   | — |   | 0.1 |   |
| Euro             |   | 14.6                                        |   | —                                      |   | — |   | 14.6 |   | 23.5 |   | — |   | — |   | 23.5 |   |
| U.S.  dollar     |   | (117.8                                      | )      | —                                      |   | — |   | (117.8 | ) | (95.1 | ) | — |   | — |   | (95.1 | ) |
| Greek  drachma   |   | 0.1                                         |   | —                                      |   | — |   | 0.1 |   | — |   | — |   | — |   | — |   |
| Swiss  franc     |   | (0.2                                        | )      | —                                      |   | — |   | (0.2 | ) | (0.4 | ) | 0.1 |   | — |   | (0.3 | ) |
| Canadian  dollar |   | —                                      |   | —                                      |   | — |   | — |   | 0.2 |   | — |   | — |   | 0.2 |   |
| Other            |   | —                                      |   | —                                      |   | — |   | — |   | 0.1 |   | — |   | — |   | 0.1 |   |
|             |   |                                        |   |                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |
|             |   | (103.3                                      | )      | (0.1                                        | )      | — |   | (103.4 | ) | (71.7 | ) | 0.2 |   | — |   | (71.5 | ) |

 
|                                           |   | **2001**    |   | **2002**    |   |
|------------------------------------------------|--------|-------------|--------|-------------|--------|
| **Undrawn committed borrowing facilities**     |   | **£m** |   | **£m** |   |
|                                           |   |        |   |        |   |
| Expiring  in less than 1 year                  |   | —      |   | —      |   |
| Expiring  in more than 1 but less than 2 years |   | —      |   | —      |   |
| Expiring  in more than 2 years                 |   | 106.7       |   | 77.3        |   |
|                                           |   |        |   |        |   |
| As  at December 31,                            |   | 106.7       |   | 77.3        |   |

 

The above undrawnfacilities form part of Premier’s overall working capital lines, which bearinterest at floating rates and are committed until December 31, 2007.

 

F-30

----

 

**Fair value of financial assets and liabilities**

 

Set out below is acomparison of book and fair values of all Premier’s financial instruments bycategory:

 
|                                                                        |   | **2001**            |   | **2001**         |   | **2002**         |   | **2002**         |   |
|-----------------------------------------------------------------------------|--------|---------------------|--------|------------------|--------|------------------|--------|------------------|--------|
|                                                                        |   | **Book value** |   | **Fair   value** |   | **Book   value** |   | **Fair   value** |   |
|                                                                        |   | **£m**         |   | **£m**      |   | **£m**      |   | **£m**      |   |
|                                                                        |   |                |   |             |   |             |   |             |   |
| Financial  instruments held or issued to finance Premier’s operations: |   |                |   |             |   |             |   |             |   |
| Short-term  borrowings and current portion of long-term borrowings          |   | (14.2               | )      | (14.2            | )      | (30.2            | )      | (30.2            | )      |
| Long-term  borrowings                                                       |   | (384.2              | )      | (387.9           | )      | (473.9           | )      | (478.6           | )      |
| Other  financial liabilities                                                |   | (0.2                | )      | (0.2             | )      | (0.1             | )      | (0.1             | )      |
| Cash  deposits                                                              |   | 27.3                |   | 27.3             |   | 43.5             |   | 43.5             |   |

 

Fair values for theNotes, which have been included within long-term borrowings, have been based oncurrent market values.

 

Financial instrumentsheld or issued to manage Premier’s interest rate or currency profile are setout below:

 
|                        |   | **2001**               |   | **2001**         |   | **2002**            |   | **2002**         |   |
|-----------------------------|--------|------------------------|--------|------------------|--------|---------------------|--------|------------------|--------|
|                        |   | **Nominal value** |   | **Fair   value** |   | **Nominal   value** |   | **Fair   value** |   |
|                        |   | **£m**            |   | **£m**      |   | **£m**         |   | **£m**      |   |
|                        |   |                   |   |             |   |                |   |             |   |
| Interest  rate swaps        |   | —                 |   | (0.5             | )      | —              |   | (2.8             | )      |
| Cross  currency swaps       |   | —                 |   | 5.2              |   | —              |   | 0.6              |   |
| Foreign  exchange contracts |   | (32.7                  | )      | (31.9            | )      | (42.2               | )      | (41.9            | )      |

 

The fair values offoreign exchange contracts and interest rate swap agreements have beencalculated on a mark to market basis. All commodity contracts are settled byphysical delivery and are not held for trading purposes.  There are no significant gains or losses onhedges at December 31, 2002 expected to be shown in the income statement forDecember 31, 2003.

 

The analysis of financialinstruments in this note excludes short-term debtors and creditors as permittedunder FRS 13 “Derivatives and other financial instruments”.

 

F-31

----

 

**21. Principal Subsidiary Undertakings**

 

Thefollowing represent the principal undertakings of Premier at December 31, 2002.Percentages indicate ownership of the undertakings’ ordinary share capital byPremier, directly or indirectly. Details of the country of incorporation andprincipal operations and the main activity of each undertaking are also given.All undertakings shown are included in the consolidated financial statements.

 
| **Subsidiary  Undertakings**              |   | **Country of**incorporation or  registration and  principal operations |   | **Business**                              |   | **%** Owned |   |
|-------------------------------------------|--------|------------------------------------------------------------------------|--------|-------------------------------------------|--------|-------------|--------|
|                                      |   |                                                                   |   |                                      |   |        |   |
| **Financing**                             |   |                                                                   |   |                                      |   |        |   |
|                                      |   |                                                                   |   |                                      |   |        |   |
| Premier Financing  Limited                |   | England and Wales                                                      |   | Financing                                 |   | 100         |   |
|                                      |   |                                                                   |   |                                      |   |        |   |
| **Beverages, Canning, Preserves**         |   |                                                                   |   |                                      |   |        |   |
|                                      |   |                                                                   |   |                                      |   |        |   |
| Chivers Hartley  Limited                  |   | England and Wales                                                      |   | Preserve and pickle  manufacturing        |   | 100         |   |
|                                      |   |                                                                   |   |                                      |   |        |   |
| H.L. Foods Limited                        |   | England and Wales                                                      |   | Food canning and  processing              |   | 100         |   |
|                                      |   |                                                                   |   |                                      |   |        |   |
| Jonker Fris BV                            |   | Netherlands                                                            |   | Food canning and  processing              |   | 100         |   |
|                                      |   |                                                                   |   |                                      |   |        |   |
| Materne Boin SA                           |   | France                                                                 |   | Preserve and fruitcompote manufacturing   |   | 100         |   |
|                                      |   |                                                                   |   |                                      |   |        |   |
| Premier Ambient  Products (U.K.) Limited  |   | England and Wales                                                      |   | Preserve, pickle andvinegar manufacturing |   | 100         |   |
|                                      |   |                                                                   |   |                                      |   |        |   |
| Premier International  Foods U.K. Limited |   | England and Wales                                                      |   | Hot and cold beverages  manufacturing     |   | 100         |   |
|                                      |   |                                                                   |   |                                      |   |        |   |
| **Potatoes**                              |   |                                                                   |   |                                      |   |        |   |
|                                      |   |                                                                   |   |                                      |   |        |   |
| MBM Produce Limited                       |   | England and Wales                                                      |   | Potato processing and  grading            |   | 100         |   |

 

F-32

----

 

**22. Certain Relationships and RelatedParty Transactions**

 

Thefollowing related party relationships and transactions have been disclosedbecause of their material nature to the operations of Premier.  Other transactions with entities within thePremier Foods Investments Limited Group are not disclosed as permitted by FRS 8“Related party disclosures”.

** **

**Monitoring and Oversight Agreement**

 

In 1999, Premier enteredinto a 10-year agreement (the “Monitoring and Oversight Agreement”) with HicksMuse pursuant to which Premier will pay Hicks Muse an annual fee of £1.2m forproviding oversight and monitoring services to Premier. The annual fee isadjustable at the end of each fiscal year to an amount equal to one-tenth ofone percent of Premier’s budgeted consolidated net sales, but in no event maythe fee be less than £1.2m. In addition, Premier has agreed to indemnify HicksMuse and its shareholders and their respective directors, officers, agents,employees and affiliates from and against all claims, actions, proceedings,demands, liabilities, damages, judgements, assessments, losses and costs,including fees and expenses, arising out of or in connection with the servicesrendered by Hicks Muse under the Monitoring and Oversight Agreement. TheMonitoring and Oversight Agreement makes available to Premier the resources ofHicks Muse concerning a variety of financial and operational matters. Theservices that have been and will continue to be provided by Hicks Muse couldnot otherwise be obtained by Premier without the addition of personnel or theengagement of outside professional advisors. In management’s opinion, the feesprovided for under the Monitoring and Oversight Agreement reasonably reflectsthe benefits received and to be received by Premier.

 

F-33

----

 

**Financial Advisory Agreement**

 

In 1999, Premier andHicks Muse entered into an agreement (“the Financial Advisory Agreement”)pursuant to which will be entitled to receive a fee equal to 1.5% of thetransaction value for each acquisition made by Premier.  The Financial Advisory Agreement makesavailable to Premier the resources of Hicks Muse concerning a variety offinancial and operational matters.  Theservices that have been and will continue to be provided by Hicks Muse couldnot otherwise be obtained by Premier without the addition of personnel or theengagement of outside professional advisors. In management’s opinion, the feesprovided for under the Financial Advisory Agreement reasonably reflect thebenefits received and to be received by Premier.  Premier paid £2.1m in 2002 (2001: £0.4m, 2000: £nil) to HicksMuse under the Financial Advisory Agreement.

** **

**Golden Share**

 

AGolden Share has been issued by Premier Financing with voting rights, whichentitles the holder of the Golden Share to block the passing of resolutions forthe winding-up or administration of Premier Financing or resolutions approvingother matters that would constitute a breach of the Senior Credit Facility.These voting rights attaching to the Golden Share will lapse upon a paymentdefault in respect of the Notes continuing unremedied and unwaived for a periodof 180 days. The Golden Share is held by an affiliate of Hicks Muse, which willagree with the lenders under the Senior Credit Facility as to the exercise ofthe voting rights of the Golden Share.

** **

**Premier Foods (Holdings) Limitedmanagement charge**

 

In 2000, 2001 and 2002,Premier was recharged £0.9m, £0.2m and £2.8m, respectively, by Premier Foods(Holdings) Limited in respect of the shared administrative functions.  The increase from 2001 to 2002 in therecharge to Premier by Premier Holdings is primarily the result of a reductionin Premier Holdings’ income and the recharge of restructuring costs incurred byPremier Holdings.

** **

**HMTF Poultry Limited**

 

Premierhas borrowed £9.3m (2001: £7.6m) from HMTF Poultry Limited, an affiliatedcompany.  This loan is interest-free,subordinated to the Senior Credit Facility and repayable in full on July 31,2009.

** **

**FRS 8 “Related Party Disclosures”**

 

The Company is a whollyowned subsidiary undertaking of Premier Foods Investments Limited, whichprepares consolidated financial statements made available for publicdisclosure.  In accordance with theexemptions available to such undertakings under FRS 8 “Related PartyDisclosures”, no other disclosure of related party transactions with PremierFoods Investments Ltd group companies has been made in these financialstatements.

 

**23. Parent Undertakings**

 

The Company’s ultimateparent undertaking is HMTF Premier Limited, a company incorporated in theCayman Islands.  The Company’s immediateparent undertaking is Premier Foods (Holdings) Limited (formerly PremierHoldings Limited, formerly Hillsdown Holdings Limited), a company incorporatedin England and Wales and which owns 100% of Premier’s issued share capital.

 

Premier Food InvestmentsLimited is the largest group undertaking that prepares consolidated financialstatements, which include the Company. The consolidated financial statements of Premier Food InvestmentsLimited are available at the Company’s registered office, which is at 28 TheGreen, Kings Norton, Birmingham, B38 8SD.

 

F-34

----

 

**24. Summary of Differences Between U.K.and U.S. Generally Accepted Accounting**

** **

**Principles**

 

The consolidatedfinancial statements have been prepared in accordance with accountingprinciples generally accepted in the U.K. (“U.K. GAAP”), which differ incertain material respects from generally accepted accounting principles in theU.S. (“U.S. GAAP”). Such differences involve methods for measuring the amountsshown in the consolidated financial statements, as well as additionaldisclosures required by U.S. GAAP.

 

Thefollowing is a summary of the material adjustments to the consolidated profiton ordinary activities after taxation and consolidated shareholder’s deficitthat would have been required in applying the significant differences betweenU.K. and U.S. GAAP.

** **

**Reconciliation of consolidated profitand loss accounts**

** **
|                                                                                                         |   |   |   | **Year Ended December 31,** |   |
|--------------------------------------------------------------------------------------------------------------|--------|--------|--------|-----------------------------|--------|
|                                                                                                         |   |   |   | **2000**                    |   | **2001** |   | **2002** |   |
|                                                                                                         |   |   |   | **£m**                 |   | **£m** |   | **£m** |   |
|                                                                                                         |   |   |   |                        |   |   |   |   |   |
| Consolidated profit / (loss) on ordinary activities  after taxation as previously reported under U.K. GAAP   |   |   |   | (7.8                        | )      | (28.2 | ) | 16.3 |   |
| Prior year adjustment on implementation of FRS 19  “Deferred tax”                                  |   |   |   | (0.8                        | )      | (0.3 | ) | — |   |
| Consolidated profit / (loss) on ordinary activities  after taxation  as reported under  U.K. GAAP (restated) |   |   |   | (8.6                        | )      | (28.5 | ) | 16.3 |   |
| U.S. GAAP adjustments:                                                                                       |   |   |   |                        |   |   |   |   |   |
| Amortisation of goodwill                                                                                     |   | (a     | )      | (7.1                        | )      | (5.9 | ) | 3.1 |   |
| Amortisation of intangible assets                                                                            |   | (a     | )      | —                      |   | — |   | (0.6 | ) |
| Pensions                                                                                                     |   | (b     | )      | 3.4                         |   | 5.2 |   | 0.1 |   |
| Deferred tax                                                                                                 |   | (c     | )      | (0.1                        | )      | (0.4 | ) | — |   |
| Derivative financial instruments                                                                             |   | (d     | )      | —                      |   | 5.5 |   | (7.4 | ) |
| Goodwill transferred to the profit and loss account in   respect of disposed businesses                 |   | (a     | )      | —                      |   | 49.0 |   | — |   |
| Pension prepayment asset in respect of disposed  businesses                                                  |   | (b     | )      | —                      |   | 10.0 |   | — |   |
| Deferred tax liability in respect of disposed  businesses                                                    |   | (c     | )      | —                      |   | 6.1 |   | — |   |
|                                                                                                         |   |   |   |                        |   |   |   |   |   |
| Net U.S. GAAP adjustments                                                                                    |   |   |   | (3.8                        | )      | 69.5 |   | (4.8 | ) |
| Tax effect of net U.S. GAAP adjustments                                                                      |   |   |   | (1.0                        | )      | (3.2 | ) | 2.6 |   |
|                                                                                                         |   |   |   |                        |   |   |   |   |   |
| Consolidated net income / (loss) in accordance with  U.S. GAAP                                               |   |   |   | (13.4                       | )      | 37.8 |   | 14.1 |   |

 

**Reconciliation of consolidated shareholder’s deficit**

 
|                                                                            |   |   |   | **2001**    |   | **2002**    |   |
|---------------------------------------------------------------------------------|--------|--------|--------|-------------|--------|-------------|--------|
|                                                                            |   |   |   | **£m** |   | **£m** |   |
|                                                                            |   |   |   |        |   |        |   |
| Consolidated shareholder’s deficit as previously  reported under U.K. GAAP |   |   |   | (160.2      | )      | (149.8      | )      |
| Prior year adjustment on implementation of FRS 19  “Deferred tax”     |   |   |   | (7.1        | )      | —      |   |
| Consolidated shareholder’s deficit as reported under  U.K. GAAP            |   |   |   | (167.3      | )      | (149.8      | )      |
| U.S. GAAP adjustments:                                                          |   |   |   |        |   |        |   |
| Goodwill not capitalised under U.K. GAAP                                        |   | (a     | )      | 213.3       |   | 213.3       |   |
| Accumulated amortisation of goodwill not capitalised  under U.K. GAAP           |   | (a     | )      | (189.7      | )      | (189.7      | )      |
| Amortisation of goodwill under U.K. GAAP not amortised  under U.S. GAAP         |   | (a     | )      | —      |   | 3.1         |   |
| Amortisation of intangible assets recognised as  goodwill under U.K. GAAP       |   | (a     | )      | —      |   | (0.6        | )      |
| Capitalisation of tax benefit on acquisition of  intangible assets              |   | (a     | )      | —      |   | 4.2         |   |
| Pensions                                                                        |   | (b     | )      | 28.4        |   | 28.5        |   |
| Deferred tax                                                                    |   | (c     | )      | (13.0       | )      | (14.6       | )      |
| Derivative financial instruments                                                |   | (d     | )      | 5.5         |   | (1.9        | )      |
| Revaluation of fixed assets                                                     |   | (e     | )      | (4.0        | )      | (4.0        | )      |
|                                                                            |   |   |   |        |   |        |   |
| Net U.S. GAAP adjustments                                                       |   |   |   | 40.5        |   | 38.3        |   |
|                                                                            |   |   |   |        |   |        |   |
| Consolidated shareholder’s deficit as reported under  U.S. GAAP            |   |   |   | (126.8      | )      | (111.5      | )      |

 

F-35

----

 

**Rollforward analysis of consolidated shareholder’s fundsdeficit**

** **
|                                                                                    |   |   |   | **2000**    |   | **2001**    |   | **2002**    |   |
|-----------------------------------------------------------------------------------------|--------|--------|--------|-------------|--------|-------------|--------|-------------|--------|
|                                                                                    |   |   |   | **£m** |   | **£m** |   | **£m** |   |
|                                                                                    |   |   |   |        |   |        |   |        |   |
| Balance in accordance with U.S. GAAP at January 1,                                      |   |   |   | (172.9      | )      | (187.3      | )      | (126.8      | )      |
| U.K. GAAP profit / (loss) for the financial year                                        |   |   |   | (7.8        | )      | (28.2       | )      | 16.3        |   |
| Other recognised gains and losses                                                       |   |   |   | (1.2        | )      | (1.1        | )      | 1.2         |   |
| Issue of share capital                                                                  |   |   |   | —      |   | 23.7        |   | —      |   |
| U.S. GAAP adjustments                                                                   |   |   |   |        |   |        |   |        |   |
| Amortisation of goodwill                                                                |   | (a     | )      | (7.1        | )      | (5.9        | )      | 3.1         |   |
| Amortisation of intangible assets recognised as  goodwill  under U.K. GAAP              |   | (a     | )      | —      |   | —      |   | (0.6        | )      |
| Capitalisation of tax benefit on acquisition of  intangible assets                      |   | (a     | )      | —      |   | —      |   | 4.2         |   |
| Goodwill transferred to the profit and loss account in  respect  of disposed businesses |   |   |   | —      |   | 49.0        |   | —      |   |
| Pensions                                                                                |   | (b     | )      | 3.4         |   | 5.2         |   | 0.1         |   |
| Pension prepayment asset in respect of disposed  businesses                             |   | (b     | )      | —      |   | 10.0        |   | —      |   |
| Deferred tax                                                                            |   | (c     | )      | (1.9        | )      | 2.2         |   | 2.6         |   |
| Deferred tax arising on acquisition of intangible  assets                               |   | (a     | )      | —      |   | —      |   | (4.2        | )      |
| Derivative financial instruments                                                        |   | (d     | )      | —      |   | 5.5         |   | (7.4        | )      |
| Revaluation of fixed assets                                                             |   | (e     | )      | 0.2         |   | 0.1         |   | —      |   |
|                                                                                    |   |   |   |        |   |        |   |        |   |
| Balance in accordance with U.S. GAAP at December 31,                                    |   |   |   | (187.3      | )      | (126.8      | )      | (111.5      | )      |

 

Asummary of the principal differences and additional disclosures applicable toPremier are set out below:

* *

----

*(a) Goodwill and intangible assets*

 

Both U.K. GAAP and U.S.GAAP require purchase consideration to be allocated to the net assets acquiredat their fair value on the date of acquisition, with the difference between theconsideration and the fair value of the identifiable net assets recorded asgoodwill.

 

Under U.K. GAAP, goodwillarising on acquisitions made on or before December 31, 1997 has been writtenoff directly to reserves in the year of acquisition.  If a subsidiary or a business has been subsequently sold orclosed, previously written-off goodwill that resulted from the initialacquisition has been taken into account in determining the gain or loss on saleor closure.  Goodwill that arises onacquisitions subsequent to December 31, 1997, following the introduction of FRS10 “Goodwill and Intangible Assets”, has been capitalised and amortised overits estimated useful life, which has been estimated at 20 years.

 

Under U.S. GAAP, goodwillarising on acquisitions made on or before December 31,1997 has been capitalisedas an intangible asset and amortised over its estimated useful life.  However, Premier adopted the transitionprovisions of FAS 141, “Business Combinations” (“FAS 141”), with effect fromJuly 1, 2001.  Premier also adopted theprovisions of FAS 142, “Goodwill and Other Intangible Assets” (“FAS 142”), onJanuary 1, 2002. As a result, goodwill is no longer subject to amortisationsubsequent to the date of adoption.  Asthe non-amortisation of goodwill provisions of FAS 142 were effectiveimmediately for all acquisitions after June 30, 2001, goodwill arising from theLift and Nelsons acquisitions was also not amortised during 2001.

 

In May 2002, Premieracquired the ambient foods manufacturing business in the U.K. of Nestlé SA(“Nestlé”) for net consideration of £132.2 million.  The acquired business spans a broad range of product categories,including pickles, vinegars, sauces, sweet spreads, preserves, ambient dessertsand dehydrated foods.  The business wasacquired principally because of the quality of the brands of the acquiredbusiness, their complementarity with Premier’s own product ranges and thesynergies available in combining the two businesses.  The definition of intangible assets under FAS 141 is wider thanthat under FRS 10.  Furthermore FAS 109requires the recognition of a deferred tax provision on the amortisation ofacquired intangible assets.  Thedeferred tax provision created on the acquisition of the Nestlé intangibleassets was £4.2m under U.S. GAAP whereas no deferred tax provision wasrecognised under U.K. GAAP.  Therefore,the total intangible assets recognized on the acquisition of Nestlé under FAS141 were £63.9m, compared with £20.0m recognised under FRS 10.  Goodwill calculated under FAS 141 was£40.4m, compared to £80.1m under U.K. GAAP. Goodwill has arisen on the acquisition because the value of the ownlabel and industrial elements of the business, the established manufacturingprocesses and the synergies arising from the combination of the businesses arenot capitalisable as intangible assets under FAS 141.  In addition, Premier acquired a potato seed business, for a netconsideration of £0.6m, which resulted in goodwill of £0.6m.

 

F-36

----

 

Horizon Biscuits Limitedwas disposed of in 2001 and goodwill of £53.0m, which had been written offdirectly to reserves was written back through the profit and loss account inaccordance with U.K. GAAP.  Under U.S.GAAP, this goodwill had been capitalised and amortised and the net book valueof goodwill remaining in respect of Horizon Biscuits Limited at the date ofdisposal was £4.0m.  The U.S. GAAP adjustment,therefore to the U.K. GAAP profit and loss on disposal in respect of goodwillwas the goodwill previously amortised under U.S. GAAP of £49.0m.  The U.S. GAAP adjustment reverses thefollowing: (i) write-off of goodwill arising on acquisitions made on or beforeDecember 31, 1997 directly to reserves under U.K. GAAP; and (ii) amortisationexpense recorded under U.K. GAAP and the movement in accumulated amortisationunder U.K. GAAP during the period subsequent to the adoption of FAS 141 and FAS142.

 

The following table showsthe results of operations as if FAS 142 were applied to prior periods:

 
|                                    |   | **2000**    |   | **2001**    |   |
|-----------------------------------------|--------|-------------|--------|-------------|--------|
|                                    |   | **£m** |   | **£m** |   |
|                                    |   |        |   |        |   |
| Net  income as reported under U.S. GAAP |   | (13.4       | )      | 37.8        |   |
| Add  back: Goodwill amortisation        |   | 7.4         |   | 6.3         |   |
|                                    |   |        |   |        |   |
| Adjusted  net income                    |   | (6.0        | )      | 44.1        |   |

 

Premier has alsoevaluated its existing goodwill relating to prior business combinations and hasdetermined that an adjustment or reclassification to intangible assets as ofJanuary 1, 2002 was not required in order to conform to the new criteria in FAS141. The Group has also reassessed the useful lives and carrying values ofother intangible assets, and will continue to amortise these assets over theirremaining useful lives.

 

The gross carrying amountof other intangible assets, which consists of brands, trademarks and licensesunder U.S. GAAP, is £71.4m as of December 31, 2002 (£7.5m as of December 31,2001), are being amortised over an estimated useful life of between 20 and 40years.  Accumulated amortisation as ofDecember 31, 2002 was  £1.8m (£0.1m atDecember 31, 2001). The amortisation expense for the Year Ended December 31,2002 is £1.7m (£0.1m and £nil in 2001 and 2000, respectively).  Amortisation expense on the other intangibleassets is expected to be £2.5m in each of 2003, 2004, 2005, 2006, and 2007.

 

As of January 1, 2002,Premier performed the transitional impairment test under FAS 142 and comparedthe carrying value for each reporting unit to its fair value, which wasdetermined based both on discounted cash flows and a value based on a multipleof earnings.  Upon completion of thetransitional impairment test, Premier determined that there was no impairmentas of January 1, 2002, as the carrying value of each reporting unit did notexceed its fair value determined under either of the valuation methods.  Premier also completed the annual impairmenttest required by FAS 142 during the fourth quarter of 2002, which was alsoperformed by comparing the carrying value of each reporting unit to its fairvalue based on discounted cash flows and a value based on a multiple ofearnings.  This annual impairment testdid not indicate any impairment in the carrying value of the goodwill.

 

A roll forward of U.S.GAAP goodwill during 2002 is shown below:

 
|                             |   | **Premier  Foods U.K.** |   | **Materne** |   | **MBM**     |   | **Total**   |   |
|----------------------------------|--------|-------------------------|--------|-------------|--------|-------------|--------|-------------|--------|
|                             |   | **£m**             |   | **£m** |   | **£m** |   | **£m** |   |
|                             |   |                    |   |        |   |        |   |        |   |
| Balance  as of January 1, 2002   |   | 27.6                    |   | 5.9         |   | 0.1         |   | 33.6        |   |
| Goodwill  acquired               |   | 40.4                    |   | —      |   | 0.6         |   | 41.0        |   |
|                             |   |                    |   |        |   |        |   |        |   |
| Balance  as of December 31, 2002 |   | 68.0                    |   | 5.9         |   | 0.7         |   | 74.6        |   |

 

*(b) Pensions*

 

UnderU.K. GAAP, the cost of providing pension benefits should be expensed over theaverage expected service lives of eligible employees in accordance with theprovisions of SSAP 24.

 

UnderU.S. GAAP, the annual pension cost comprises the estimated cost of benefitsaccruing in the period as determined in accordance with Statement of FinancialAccounting Standards (SFAS) No. 87, which requires readjustment of thesignificant actuarial assumptions annually to reflect current market andeconomic conditions.

 

F-37

----

 

UnderSFAS No. 87, part of the surplus which represents the excess plan assets overplan obligations has been recognised in the balance sheet, with the remainderof the unrecognised surplus and the unrecognised gains and losses spread overthe employees’ remaining service lifetimes. The pension benefit obligation is calculated by using a projected unitcredit method.  Actuarial gains or losseswithin a 10% “corridor” have not been recognised.

 

Thenet assets under U.K. GAAP of Horizon Biscuits Limited, which was disposed ofin 2001 included a pension prepayment asset of £10.0m.  No asset was included in the net assetsunder U.S. GAAP disposed of.  The U.S.GAAP adjustment, therefore to the U.K. GAAP profit and loss on disposal inrespect of pension assets was £10.0m.

 

Thecomponents of net periodic pension cost for all Premier sponsored definedbenefit pension plans were as follows:

 

**Components of pension cost**

 
|                               |   | **2000**    |   | **2001**    |   | **2002**    |   |
|------------------------------------|--------|-------------|--------|-------------|--------|-------------|--------|
|                               |   | **£m** |   | **£m** |   | **£m** |   |
|                               |   |        |   |        |   |        |   |
| Service cost                       |   | 7.7         |   | 3.9         |   | 3.9         |   |
| Recognised actuarial loss          |   | —      |   | —      |   | 2.0         |   |
| Interest cost                      |   | 15.2        |   | 12.8        |   | 11.3        |   |
| Expected return on plan assets     |   | (21.2       | )      | (18.2       | )      | (11.4       | )      |
| Sale of biscuit businesses         |   | —      |   | —      |   | (2.0        | )      |
| Amortisation of prior service cost |   | —      |   | —      |   | —      |   |
| Amortisation of transition asset   |   | (1.7        | )      | (1.7        | )      | (1.3        | )      |
|                               |   |        |   |        |   |        |   |
| Net periodic pension cost          |   | —      |   | (3.2        | )      | 2.5         |   |

 

The funded status underU.S. GAAP for Premier sponsored defined benefit pension plans is as follows:

 

**Funded status**

 
|                                     |   | **2001**    |   | **2002**    |   |
|------------------------------------------|--------|-------------|--------|-------------|--------|
|                                     |   | **£m** |   | **£m** |   |
|                                     |   |        |   |        |   |
| Projected benefit obligation             |   | (215.1      | )      | (185.9      | )      |
| Fair value of plan assets                |   | 212.6       |   | 175.6       |   |
|                                     |   |        |   |        |   |
| Funded status                            |   | (2.5        | )      | (10.3       | )      |
| Unrecognised net actuarial (gain) / loss |   | 45.0        |   | 47.0        |   |
| Unrecognised transition asset            |   | (3.3        | )      | —      |   |
| Unrecognised prior service cost          |   | —      |   | —      |   |
|                                     |   |        |   |        |   |
| Net asset recognised                     |   | 39.2        |   | 36.7        |   |

 

Amountsrecognised in respect of Premier’s pension obligations for Premier sponsoreddefined benefit pension plans in the consolidated balance sheets consist of thefollowing:

 
|                    |   | **2001**    |   | **2002**    |   |
|-------------------------|--------|-------------|--------|-------------|--------|
|                    |   | **£m** |   | **£m** |   |
|                    |   |        |   |        |   |
| Prepaid pension expense |   | 39.2        |   | 36.7        |   |
|                    |   |        |   |        |   |
| Net asset recognised    |   | 39.2        |   | 36.7        |   |

 

F-38

----

 

Changesin the benefit obligation and plan assets of Premier sponsored defined benefitpension plans during the year were as follows:

 
|                                            |   | **2001**    |   | **2002**    |   |
|-------------------------------------------------|--------|-------------|--------|-------------|--------|
|                                            |   | **£m** |   | **£m** |   |
|                                            |   |        |   |        |   |
| Benefit obligation at January 1,                |   | 246.1       |   | 215.1       |   |
| Service cost                                    |   | 3.9         |   | 3.9         |   |
| Interest cost                                   |   | 12.8        |   | 11.3        |   |
| Employee contributions                          |   | 1.8         |   | 1.8         |   |
| Benefit payments                                |   | (15.2       | )      | (15.9       | )      |
| Actuarial losses / (gains)                      |   | 7.4         |   | (28.4       | )      |
| Sale of biscuit businesses                      |   | (40.1       | )      | —      |   |
| Sale of Kingsland Wines and Spirits             |   | —      |   | (1.9        | )      |
| Payment following demerger of Terranova in 1999 |   | (1.6        | )      | —      |   |
|                                            |   |        |   |        |   |
| Benefit obligation at December 31,              |   | 215.1       |   | 185.9       |   |

 

Changes in plan assetsfor Premier sponsored defined benefit pension plans were as follows: 

 
|                                            |   | **2001**    |   | **2002**    |   |
|-------------------------------------------------|--------|-------------|--------|-------------|--------|
|                                            |   | **£m** |   | **£m** |   |
|                                            |   |        |   |        |   |
| Fair value of plan assets at January 1,         |   | 290.2       |   | 212.6       |   |
| Actual return on plan assets                    |   | (19.4       | )      | (25.2       | )      |
| Employer contributions                          |   | —      |   | —      |   |
| Employee contributions                          |   | 1.8         |   | 1.8         |   |
| Benefit payments                                |   | (15.2       | )      | (15.9       | )      |
| Payment of biscuit transfer                     |   | (42.8       | )      | 4.2         |   |
| Sale of Kingsland Wines and Spirits             |   | —      |   | (1.9        | )      |
| Payment following demerger of Terranova in 1999 |   | (2.0        | )      | —      |   |
|                                            |   |        |   |        |   |
| Fair value of plan assets at December 31,       |   | 212.6       |   | 175.6       |   |

 

Theweighted-average assumptions used at December 31, to determine pension cost forPremier’s defined benefit pension plans were as follows:

 
|                                             |   | **2000** |   | **2001** |   | **2002** |   |
|--------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
|                                             |   | **%**    |   | **%**    |   | **%**    |   |
|                                             |   |     |   |     |   |     |   |
| Discount rate                                    |   | 6.0      |   | 6.0      |   | 5.5      |   |
| Expected long-term return on plan assets         |   | 7.0      |   | 7.0      |   | 5.9      |   |
| Expected rate of increase in compensation levels |   | 3.0      |   | 3.0      |   | 2.5      |   |
| Expected rate of increase of pensions            |   | 2.0      |   | 2.0      |   | 1.5      |   |

 

F-39

----

 

*(c) Deferred tax*

 

UnderU.K. GAAP, Premier has adopted FRS19 “Deferred tax” this year, which requiresfull provision to be made for deferred tax arising from timing differencesbetween the recognition of gains and losses in the financial statements andtheir inclusion in tax computations. Premier has chosen not to discount its deferred tax liability.  The prior year figures for 2001 and 2000have been restated in order to comply with the standard.

 

UnderU.S. GAAP, deferred tax is provided for on a full liability basis. Under thefull liability method, deferred tax assets or liabilities are recognised fordifferences between the financial and tax basis of assets and liabilities andfor tax loss carry forwards at the statutory rate at each reporting date. Avaluation allowance is established when it is more likely than not that someportion or all of the deferred tax assets will not be realised.

 

Theloss on disposal of Horizon Biscuits Limited, which was disposed of in 2001,was calculated under U.K. GAAP on net assets including a deferred tax liabilitycalculated on the partial provision basis. Under U.S. GAAP, the net assets disposed of would include a deferred taxasset or liability calculated on the full provision basis.  The difference of £6.1m between the deferredtax liability as calculated under U.K. GAAP and U.S. GAAP is therefore recordedas a decrease to the loss on disposal of Horizon Biscuits Limited as recordedunder U.K. GAAP.

 

Classificationof Premier’s tax liabilities and assets under U.S. GAAP is as follows:

 
|                             |   | **2001**    |   | **2002**    |   |
|----------------------------------|--------|-------------|--------|-------------|--------|
|                             |   | **£m** |   | **£m** |   |
| Deferred tax liabilities:        |   |        |   |        |   |
| Accelerated tax depreciation     |   | 4.6         |   | 4.6         |   |
| Rollover relief                  |   | 2.8         |   | 2.8         |   |
| Derivative financial instruments |   | 1.7         |   | (0.6        | )      |
| Pensions                         |   | 11.7        |   | 11.0        |   |
| Intangible assets                |   | —      |   | 3.9         |   |
|                             |   |        |   |        |   |
| Total deferred tax liabilities   |   | 20.8        |   | 21.7        |   |
|                             |   |        |   |        |   |
| Deferred tax assets:             |   |        |   |        |   |
| Provisions                       |   | (0.1        | )      | (0.1        | )      |
|                             |   |        |   |        |   |
|                             |   | 20.7        |   | 21.6        |   |

 

Totaltax expense is as follows: 

 
|                                                                          |   | **Year Ended December 31** |   |
|-------------------------------------------------------------------------------|--------|----------------------------|--------|
|                                                                          |   | **2000**                   |   | **2001** |   | **2002** |   |
|                                                                          |   | **£m**                |   | **£m** |   | **£m** |   |
| U.K. GAAP:                                                                    |   |                       |   |   |   |   |   |
| Current tax expense                                                           |   | 1.7                        |   | 0.6 |   | 6.7 |   |
| Deferred tax expense / (credit) restated for FRS 19  “Deferred tax” |   | 0.8                        |   | 0.3 |   | (0.7 | ) |
|                                                                          |   |                       |   |   |   |   |   |
| Total tax expense                                                             |   | 2.5                        |   | 0.9 |   | 6.0 |   |
|                                                                          |   |                       |   |   |   |   |   |
| U.S. GAAP:                                                                    |   |                       |   |   |   |   |   |
| Current tax expense                                                           |   | 1.7                        |   | 0.6 |   | 6.7 |   |
| Deferred tax expense / (credit)                                               |   | 1.9                        |   | 3.9 |   | (3.3 | ) |
|                                                                          |   |                       |   |   |   |   |   |
| Total tax expense                                                             |   | 3.6                        |   | 4.5 |   | 3.4 |   |

 

*(d) Derivative financial instruments*

 

Premier’sderivative financial instruments include interest rate swaps, cross currencyswaps and foreign exchange contracts. Under U.K. GAAP, Premier has recorded its derivative financialinstruments off-balance sheet as at December 31, 2001 and December 31,2002.  Premier has recorded paymentsarising from interest rate derivatives in the profit and loss account alongwith the related interest payments on its net debts according to the accrualmethod.  Premier records currencyderivatives relating to net cash flows in the profit and loss account as suchcash flows are received or paid; any unrealised gains or losses are deferred atreporting period end.

 

F-40

----

 

Under U.S. GAAP, prior tothe adoption of Statement of Financial Accounting Standards No. 133,“Accounting for Derivative Instruments and Hedging Activities” (SFAS 133),Premier had designated its foreign currency derivatives as hedges of specificunderlying assets and liabilities.

 

OnJanuary 1, 2001, Premier adopted SFAS 133, as amended by SFAS 137 and SFAS 138and as interpreted by the Derivatives Implementation Group.  Premier has not designated any of itsderivatives as qualifying hedge instruments under SFAS 133.  Premier has not subsequently designated anyof its derivatives as qualifying hedge instruments under SFAS 133, such thatgains and losses related to the fair value adjustment of all derivativeinstruments are classified in the consolidated statement of income and cashflows in accordance with the earnings treatment of the hedged transaction. Asummary of movements in fair value is summarised below.

** **
|                                                     |   | **2001**    |   | **2002**    |   | **Movement** |   |
|----------------------------------------------------------|--------|-------------|--------|-------------|--------|--------------|--------|
|                                                     |   | **£m** |   | **£m** |   | **£m**  |   |
| Fair value adjustment profit / (loss)                    |   |        |   |        |   |         |   |
| Interest rate swaps                                      |   | (0.5        | )      | (2.8        | )      | (2.3         | )      |
| Cross currency swaps                                     |   | 5.2         |   | 0.6         |   | (4.6         | )      |
| Foreign exchange contracts                               |   | 0.8         |   | 0.3         |   | (0.5         | )      |
|                                                     |   |        |   |        |   |         |   |
| Fair value adjustment profit / (loss)                    |   | 5.5         |   | (1.9        | )      | (7.4         | )      |
| Less tax at 30%                                          |   | (1.7        | )      | 0.6         |   | 2.3          |   |
|                                                     |   |        |   |        |   |         |   |
| Fair value adjustment profit / (loss) net of tax at  30% |   | 3.8         |   | (1.3        | )      | (5.1         | )      |

 

Themovement on the fair value of the interest rate swaps and cross currency swapshas been recognised as interest income as these products are used to hedgefuture interest payments in pounds sterling and U.S. dollars.  The movement on the fair value of theforeign exchange contracts has been recognised as an adjustment to cost of salesas these contracts are solely used to eliminate currency risk from our rawmaterial purchases.

 

Premierhas also evaluated its existing contracts for “embedded” derivatives, and hasconsidered whether any embedded derivatives would have to be bifurcated, orseparated, from the host contracts in accordance with SFAS 133requirements.  No significant embeddedderivatives were noted as a result of this exercise.

 

**Fair value of financial instruments**

 

Thefollowing methods and assumptions were used in estimating the indicated fairvalues of financial instruments:

 

Cashand Cash Equivalents: The carrying amount approximates fair value because ofthe short maturity of these instruments.

 

Receivables(other than trade receivables): The fair values are estimated based on one ofthe following methods: (i) quoted market prices; (ii) current rates for similarissues; (iii) recent transactions for similar issues; or (iv) present value ofexpected future cash flows.

 

Short-termdebt: The fair value is estimated based on current rates offered for similardebt.

 

Premieruses derivative financial instruments for the purpose of reducing its exposureto adverse fluctuations in foreign currency exchange rates and interest rates.Premier is not a party to leveraged derivatives and does not hold or issuefinancial instruments for speculative or trading purposes.

 

*(e) Revaluation of fixed assets*

 

UnderU.K. GAAP, certain tangible fixed assets have been revalued so that theircarrying value is equivalent to their current market value at that date, asdetermined by an independent appraiser. Revaluation amounts are recorded toboth tangible fixed assets and reserves and are reduced by accumulateddepreciation as appropriate. Under U.S. GAAP, tangible fixed assets are carriedat cost. Accordingly, revaluation reserves net of accumulated depreciation havebeen reclassified to long-term assets and related depreciation amounts recordedin the profit and loss account.

 

F-41

----

 

*(f) Stock compensation*

 

During the Year EndedDecember 31, 2000, Premier Holdings approved a share option scheme, whichincluded in its terms the ability to grant share options to certain employeesof Premier.  The options follow a gradedvesting schedule, in that a third of the shares granted vest at each fiscalyear end following the grant date. Options can be exercised at any point after vesting, up to 10 yearsafter the grant date.  Premier Holdingshas the ability to repurchase the shares at their fair value after the optionsare exercised.

 

Shareoption activity on share options granted to Premier employees for the threeyears ended December 31, 2000, December 31, 2001 and December 31, 2002 was asfollows:

 
|                        |   | **Number of shares under option** |       |
|-----------------------------|--------|-----------------------------------|------------|
|                        |   | **2000**                          |       | **2001** |   | **2002** |   |
|                        |   |                              | ** ** |   | ** ** |   | ** ** |
| Outstanding at January 1,   |   | —                            |       | 5,421,284 |   | 2,628,382 |   |
| Granted                     |   | 6,030,140                         |       | — |   | 5,489,000 |   |
| Lapsed                      |   | (608,856                          | )          | (2,792,902 | ) | (1,561,782 | ) |
|                        |   |                              |       |   |   |   |   |
| Outstanding at December 31, |   | 5,421,284                         |       | 2,628,382 |   | 6,555,600 |   |
|                        |   |                              |       |   |   |   |   |
| Exercisable at December 31, |   | 1,401,191                         |       | 1,538,192 |   | 4,047,267 |   |

 

The weighted averageexercise price of all options granted, lapsed and outstanding in 2000, 2001 and2002 was £1.46.

 

The weighted-averagecontractual life of options outstanding at December 31, 2002, was 9.6 years.  Premier Holdings’ management estimates thatthe grant date fair value of Premier Holdings’ shares did not exceed £1.46.

 

Nocompensation cost has been recognised for this scheme under U.K. GAAP as theshare options have been granted by Premier Foods (Holdings) Limited. Nocompensation cost has been recognised for this scheme under U.S. GAAP as thegrant date fair value of the options was estimated to be less than or equal tothe exercise price.  No options outstandingat December 31, 2002, were subject to future performance criteria.

 

Thestock based compensation expense, net of tax, based on the fair value at thegrant dates calculated under the fair value method consistent with theprovisions of FAS 123, for all awards would have been £0.2m resulting in a proforma net income under U.S. GAAP of £13.9m for the Year Ended December 31,2002.  Because options vest over severalyears and additional option grants may be made in future years, the above proforma results may not be representative of the pro forma results for futureyears.

 

Forpurposes of the pro forma disclosure, Premier calculated the fair value of theoptions using the Black-Scholes model. The fair value of each option grant was estimated on the date of grantat £0.15 using the minimum value method with the following assumptions for thegrants: 0% dividend yield, expected life of three years and a weighted averagerisk free interest rate of 3.8%.

* *

*(g) Other disclosures required by U.S.GAAP*

** **

**Cash flow information**

 

UnderU.K. GAAP, Premier’s cash flow statements are presented in accordance with U.K.Financial Reporting Standard No. 1, as revised (“FRS 1”). These statementspresent substantially the same information as is required under Statement ofFinancial Accounting Standards No. 95, in accordance with U.S. GAAP.Differences between the two presentations are outlined below.

 

UnderU.K. GAAP, Premier’s “cash flow” comprises of increases or decreases in “cash”,which comprises cash balances less amounts repayable on demand and overdrafts.Cash flow is defined differently under U.S. GAAP. For purposes of presentingcash flow information in accordance with U.S. GAAP, cash flow representsincreases or decreases in “cash and cash equivalents”, which includeshort-term, highly liquid investments with original maturities of less than 90days, and exclude overdrafts.

 

UnderU.K. GAAP, cash flows are presented for operating activities; returns oninvestments and servicing of finance; taxation; capital expenditure andfinancial investment; acquisitions and disposals; equity dividends paid; andmanagement of liquid resources and financing. U.S. GAAP requires theclassification of cash flows resulting from operating, investing and financingactivities.

 

F-42

----

 

Cashflows under U.K. GAAP in respect of interest received, interest paid,investment income and taxation are included within operating activities underU.S. GAAP. Also, under U.S. GAAP, capital expenditures and financial investmentand cash flows from acquisitions and disposals are included within investingactivities. Equity dividends paid and management of liquid resources areincluded within financing activities.

 

Asummary of Premier’s operating, investing and financing activities, classifiedin accordance with U.S. GAAP, follows:

 
|                                                          |   | **2000**    |   | **2001**    |   | **2002**    |   |
|---------------------------------------------------------------|--------|-------------|--------|-------------|--------|-------------|--------|
|                                                          |   | **£m** |   | **£m** |   | **£m** |   |
| Net cash provided by operating activities                     |   | 30.7        |   | 40.1        |   | 53.9        |   |
| Net cash provided by / (used in) investing activities         |   | (24.5       | )      | 59.5        |   | (147.9      | )      |
| Net cash used in financing activities                         |   | (37.8       | )      | (98.5       | )      | 110.2       |   |
|                                                          |   |        |   |        |   |        |   |
| Net increase / (decrease) in cash and cash equivalents        |   | (31.6       | )      | 1.1         |   | 16.2        |   |
| Cash and cash equivalents under U.S. GAAP, beginning  of year |   | 57.8        |   | 26.2        |   | 27.3        |   |
|                                                          |   |        |   |        |   |        |   |
| Cash and cash equivalents under U.S. GAAP, end of year        |   | 26.2        |   | 27.3        |   | 43.5        |   |

 

**Restructuring costs**

 

Forthe Year Ended December 31, 2000, a restructuring charge of £2.3m relates tothe relocation of Premier’s French biscuits distribution operation, which hasbeen retained following the disposal of Horizon Biscuits.  The restructuring charge covers theredundancy of approximately 25 sales and administration staff, the terminationof sales agency contracts and distribution contracts.

 

Forthe Year Ended December 31, 2001, the restructuring charge of £12.2m relates tothe (i) integration of the administration functions of Premier Brands withthose of HL Foods and Chivers Hartley. The charge includes the redundancy costs of approximately 165administration staff; (ii) the relocation of the manufacturing facilities ofStratford on Avon Foods Limited to our existing sites at Long Sutton and BurySt Edmunds.  The charge includes theredundancy costs of approximately 130 production and administration staff; and(iii) further costs from the relocation of Premier’s French biscuitsdistribution operation, which has been retained following the disposal ofHorizon Biscuits.  The £1.8mrestructuring provision at December 31, 2001, represents the costs still to beincurred in relation to the integration of Premier Brands France, Premier’sFrench biscuit distribution company, into Materne, Premier’s French preservesand compote manufacturing and selling operation.  The costs comprise anticipated payments arising from thereorganisation of distribution and logistics arrangements.

 

Forthe Year Ended December 31, 2002, the restructuring charge of £16.8mprincipally relates to (i) the restructuring of our manufacturing processes atour Moreton tea factory.  The £3.8mapproximate cost, which included the redundancy costs for approximately 84production staff, were in relation to reductions in manning and changesto shift patterns at our Moreton tea factory; (ii) £3.0 million of costsrelating to the relocation of our principal administrative office to St Albansand the closure of our Histon and Hampstead administrative functions.  The charge includes the redundancy costs ofapproximately 15 administration staff; (iii) £2.4 million of costs relating tothe closure of our Nelsons spreads factory in Aintree and the relocation of productionto our Histon spreads factory.  Thecharge includes the redundancy costs of approximately 116 people; (iv) £2.1million of costs relating to the Nestlé acquisition and the subsequentintegration of its administrative functions with those of Premier.  The charge includes the redundancy costs ofapproximately 45 administration staff. The review of the Nestlé manufacturing platform was not completed untilthe first quarter of 2003, therefore, no provision has been made for the costsof this integration at December 31, 2002; (v) £2.1 million of costs relating tothe closure of our North Walsham canned foods factory.  The charge includes the redundancy costs ofapproximately 120 production and administration staff.  This factory was closed in the fourthquarter of 2002 and the production integrated into our canned foods factoriesat Wisbech and Long Sutton; and (vi) £2.1 million in relation to furtherrestructuring of our French spreads and biscuits distribution operationfollowing the integration of the businesses in 2001.

** **

**Customer Base**

 

In2002, Premier had sales to two customers who represented more than 10% ofPremier’s total sales (2001: one, 2000: one). The customers represented 13% and 11% respectively of Premier’s totalsales in 2002 (2001: 12%, 2000 11%).

 

F-43

----

 

**Lease commitments**

 

Thefollowing is a summary of future minimum lease payments:

 
|                                        |   | **Operating  Leases** |   | **Finance  Leases** |   |
|---------------------------------------------|--------|-----------------------|--------|---------------------|--------|
|                                        |   | **£m**           |   | **£m**         |   |
| Fiscal year ending December 31,             |   |                  |   |                |   |
| 2003                                        |   | 4.0                   |   | 0.1                 |   |
| 2004                                        |   | 3.1                   |   | —              |   |
| 2005                                        |   | 2.1                   |   | —              |   |
| 2006                                        |   | 1.4                   |   | —              |   |
| 2007                                        |   | 1.3                   |   | —              |   |
| Thereafter                                  |   | 4.3                   |   | —              |   |
|                                        |   |                  |   |                |   |
| Total future minimum lease payments         |   | 16.2                  |   | 0.1                 |   |
| Less amount representing interest           |   |                  |   | —              |   |
| Present value of net minimum lease payments |   |                  |   | 0.1                 |   |
| Less current maturities                     |   |                  |   | (0.1                | )      |
|                                        |   |                  |   |                |   |
| Long-term obligation                        |   |                  |   | —              |   |

 

Totalrent expense on operating leases was £4.5m (2001: £6.0m, 2000: £8.4m).

 

**Comprehensive income**

 

Comprehensiveincome is defined as the change in net assets of a business enterprise arisingfrom transactions and other events and circumstances from non-owner sources. Itincludes all changes in net assets during the reporting period except thoseresulting from investments by owners and distributions to owners.  The disclosures required for comprehensiveincome under U.S. GAAP are substantially similar to those presented in theStatement of Total Recognised Gains and Losses as prepared under U.K. GAAP.

 
|                                   |   | **2000**    |   | **2001**    |   | **2002**    |   |
|----------------------------------------|--------|-------------|--------|-------------|--------|-------------|--------|
| **Allowance for doubtful receivables** |   | **£m** |   | **£m** |   | **£m** |   |
|                                   |   |        |   |        |   |        |   |
| Balance at January 1,                  |   | 1.0         |   | 0.8         |   | 1.5         |   |
| Acquisitions / (disposals)             |   | —      |   | 0.2         |   | —      |   |
| Charged to costs and expenses          |   | 0.3         |   | 0.6         |   | (0.5        | )      |
| Deductions                             |   | (0.5        | )      | (0.1        | )      | (0.4        | )      |
|                                   |   |        |   |        |   |        |   |
| Balance at December 31,                |   | 0.8         |   | 1.5         |   | 0.6         |   |
|                                   |   |        |   |        |   |        |   |
|                                   |   |        |   |        |   |        |   |
|                                   |   | **2000**    |   | **2001**    |   | **2002**    |   |
| **Inventory  obsolescence provision**  |   | **£m** |   | **£m** |   | **£m** |   |
|                                   |   |        |   |        |   |        |   |
| Balance at January 1,                  |   | 4.6         |   | 5.5         |   | 10.0        |   |
| Charged to costs and expenses          |   | 2.6         |   | 6.3         |   | (0.5        | )      |
| Deductions                             |   | (1.7        | )      | (1.8        | )      | (2.5        | )      |
|                                   |   |        |   |        |   |        |   |
| Balance at December 31,                |   | 5.5         |   | 10.0        |   | 7.0         |   |

 

**Advertising expense**

 

Costsassociated with advertising are expensed in the year incurred.  Premier incurred £11.2m of advertisingexpenses during 2002 (2001: £3.9m, 2000: £6.9m).

 

**Excise taxes**

 

Premierwas charged and in turn collected £nil (2001: £3.6m, 2000: £102.1m) of excisetaxes during 2002.  The decrease inexcise taxes charged and in turn collected is due to the sale of FE BarberLimited in January 2001, which was the principal subsidiary of Premier whichcharged and collected excise taxes.

 

F-44

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| **Long-lived assets analysed by  geographical region** |   | **Long-lived assets** |   |
|--------------------------------------------------------|--------|-----------------------|--------|
|                                                   |   | **2000**              |   | **2001** |   | **2002** |   |
|                                                   |   | **£m**           |   | **£m** |   | **£m** |   |
| By geographic region:                                  |   |                  |   |   |   |   |   |
| U.K.                                                   |   | 142.2                 |   | 103.2 |   | 120.7 |   |
| Mainland Europe                                        |   | 12.6                  |   | 12.8 |   | 14.4 |   |
|                                                   |   |                  |   |   |   |   |   |
|                                                   |   | 154.8                 |   | 116.0 |   | 135.1 |   |

 

Thelong-lived assets detailed above are presented under U.S. GAAP accountingstandards and exclude the revaluation permitted under U.K. GAAP accountingstandards.

 

**Related party transaction**

 

Citadel,a subsidiary of Premier Holdings, provides Premier with insuranceservices.  Premier paid Citadelinsurance premium payments for the years ended December 31, 2002, 2001 and 2000of £0.7m, £0.5m and £0.6m, respectively.

** **

**Pro forma results of operations**

 

The following unauditedpro forma information presents the results of operations, including the effectsof acquisition financing, of Premier under U.K. GAAP, giving pro forma effectto the following acquisitions as if they had occurred as of January 1, 2000:(i) SonA; (ii) Lift; (iii) Nelsons; and (iv) Nestlé. 

 
|                |   | **(unaudited)****Year Ended December 31,** |   |
|---------------------|--------|--------------------------------------------|--------|
|                |   | **2000**                                   |   | **2001** |   | **2002** |   |
|                |   | **£m**                                |   | **£m** |   | **£m** |   |
|                |   |                                       |   |   |   |   |   |
| Net sales           |   | 1,191.3                                    |   | 967.6 |   | 917.7 |   |
|                |   |                                       |   |   |   |   |   |
| Operating profit    |   | 91.0                                       |   | 81.7 |   | 74.1 |   |
|                |   |                                       |   |   |   |   |   |
| Interest charge     |   | (79.2                                      | )      | (63.0 | ) | (40.3 | ) |
|                |   |                                       |   |   |   |   |   |
| Net income / (loss) |   | (3.1                                       | )      | (2.4 | ) | 11.2 |   |

 

The pro forma results arenot necessarily indicative of what actually would have occurred if the SonAacquisition, the Lift instant lemon tea acquisition, the Nelsons acquisitionand the Nestlé acquisition had been in effect for the periods presented, norshould they be considered indicative of future results.

** **

**Other classification differences**

*** ***

***Consolidated profit and loss accounts***

 

UnderU.K. GAAP, discontinued operations are recorded when material and separableoperations are sold either during the year or by the earlier of thefinalisation of the annual accounts or three months subsequent to yearend.  Discontinued operations aredisclosed separately within the financial statements and related notes theretoand prior year comparative figures are restated to reflect thediscontinuance.  Under U.S. GAAP,disposals of businesses that do not constitute separate business segments arenot accounted for as discontinued operations, and are recorded and disclosed asasset sales within continuing operations.

 

UnderU.K. GAAP, items classified as exceptional do not meet the definition of“extraordinary” under U.S. GAAP, and accordingly are classified as operatingexpenses or non-operating expenses as appropriate.

 

UnderU.K. GAAP, shipping and handling costs are included in selling and distributioncosts.  Under U.S. GAAP, shipping andhandling costs are included in cost of sales. Shipping and handling costs forthe years ended December 31 2002, 2001 and 2000 were £38.0m, £36.3m and £39.3m.

 

F-45

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***Consolidated balance sheets***

 

Under U.K. GAAP, Premierclassifies non-current receivables due later than one year as currentassets.  Non-current receivables areclassified as non-current assets under U.S. GAAP.

 

UnderU.K. GAAP, debt issuance costs are netted against the related debt balances andare amortised over the term of the underlying debt.  Under U.S. GAAP, debt issuance costs are capitalised as assets onthe balance sheet, separate from the related debt, and are amortised over theterm of the underlying debt.

** **

**Recently issued accounting standards**

*** ***

***United States***

 

**SFAS No. 146**

 

In June 2002, the FASBissued SFAS No. 146, “Accounting for Costs Associated with Exit or DisposalActivities” (“FAS 146”). This Statement addresses financial accounting andreporting for costs associated with exit or disposal activities and nullifiesEmerging Issues Task Force Issue No. 94-3, “Liability Recognition for CertainEmployee Termination Benefits and Other Costs to Exit an Activity (includingCertain Costs Incurred in a Restructuring)”. This Statement requires that aliability for a cost associated with an exit or disposal activity be recognizedwhen the liability is incurred and can be measured at fair value. Theprovisions of this Statement are effective prospectively for exit or disposalactivities initiated after December 31, 2002. Premier does not expect thisstatement to have a material impact on the financial statements.

 

**FIN 45**

 

In November 2002, theFASB issued Interpretation No. 45 (“FIN 45”), “Guarantor’s Accounting andDisclosure Requirements for Guarantees, Including Indirect Guarantees ofIndebtedness of Others”. The Interpretation expands on the accounting guidanceof FAS 5, “Accounting for Contingencies”, FAS 57, “Related Party Disclosures”,and FAS 107, “Disclosures about Fair Value of Financial Instruments”, andincorporates without change the provisions of FIN 34, “Disclosure of IndirectGuarantees of Indebtedness of Others”, an interpretation of FASB Statement No.5, which is being superseded. FIN 45 elaborates on the existing disclosurerequirements for most guarantees, including loan guarantees, such as standbyletters of credit. It also clarifies that at the time a company issues aguarantee, the company must recognize an initial liability for the fair value,or market value, of the obligations it assumes under that guarantee and mustdisclose that information in its interim and annual financial statements. FIN 45will be effective on a prospective basis to guarantees issued or modified afterDecember 31, 2002. The disclosure requirements in this Interpretation areeffective for financial statements of periods ending after December 15, 2002.  Premier is currently evaluating the impactof this statement on its results of operations and financial position.

 

**FIN 46**

** **

In January 2003, theFinancial Accounting Standards Board issued FASB Interpretation No. 46,“Consolidation of Variable Interest Entities” (“FIN 46”). Under that interpretation, certainentities known as “Variable Interest Entities” (VIE) must be consolidated bythe “primary beneficiary” of the entity. The primary beneficiary isgenerally defined as having the majority of the risks and rewards arising fromthe VIE. For VIE’s in which a significant (but not majority) variable interestis held, certain disclosures are required. The measurement principles of thisinterpretation will be effective for Premier’s December 31, 2003 financialstatements. Premier does not believe it has any variable interest entities anddo not expect this statement to have a material impact on the financialstatements.

 

F-46

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