Final Results - Year Ended 31 December 1999

British Aerospace PLC 3 March 2000 Preliminary Announcement 1999 BAE SYSTEMS Highlights Profit before interest increased 19.6%* Diluted earnings per share increased 6.3%* Dividend per share increased 23.1% Net debt at 31 December £(825)m Order book £36.6bn *excluding goodwill amortisation and exceptional items 1999 Preliminary results statement This has been an important year in the development of the Company, with the merger on 29 November 1999 of the former British Aerospace (BAe) and Marconi Electronic Systems (MES) businesses resulting in the creation of BAE SYSTEMS, now the world's second largest defence company. Profit before interest, excluding goodwill amortisation and exceptional items, increased to £763m (1998 £638m) on sales of £8,929m. Before taking into account the contribution from MES, this represents a 15.2% increase on 1998. MES contributed a £28m profit before interest, excluding goodwill amortisation and exceptional items, and £455m sales, which represented a single month's trading. Profit before tax, excluding goodwill amortisation and exceptional items, advanced 11.6% to £790m. The lower level of MES contribution for the short, December, trading month was the principal reason for holding back the corresponding increase in diluted earnings per share to 6.3%. Cash performance in the former BAe businesses was strong with net trading cash balances excluding the impact of the MES merger increasing to £373m before taking into account £686m relating to the cash raised following the issue of the Orange Exchangeable Bond. The total net cash flows associated with the merger with MES, including the cash generated for the one month of ownership, were (£1,884)m. These, together with the above cash flows of the former BAe businesses, resulted in net indebtedness of the Group at the year end of £825m. The significant majority of this indebtedness would have been offset by cash payments on defence contracts had they been received prior to the year end rather than, as was the case, in the early months of this year. BAE SYSTEMS ended the year with a strong order book of £36.6bn (1998 £28.1bn) with MES contributing £8.5bn to this. Performance in the Defence businesses was again good. Productivity further improved with a higher profit recognition as key programmes mature. Operating margin increased to 13.0% (10.0% in 1998) on lower sales. Defence sales benefited from higher activity in defence systems and key military aircraft programmes including Eurofighter Typhoon. These increases were offset by lower sales as the established Al Yamamah programme in the Kingdom of Saudi Arabia moves from hardware and construction phases towards a stable base of underlying customer support activity. The reduced sales for the year have also been affected by the renegotiated programme for Nimrod, where delays in the programme have occurred following a reassessment of the engineering resource and technical requirements. The 1999 results reflect the cost implications of this reassessment. A £10m loss before interest for Commercial aerospace reflects the higher launch aid repayments and the adverse effect of the delivery of aircraft against orders taken in a period of poor pricing. This was offset by profit improvements in the regional aircraft business together with continued good trading on Airbus wing sets. Launch aid repayments increased as a consequence of the dual incidence of a full year of repayments on both the A330/340 and the A320 programmes. Repayment on the A320 programme was completed at the end of 1999. An important step in addressing value creation through industrial consolidation was the merger with the MES businesses. The merger brings together two dynamic businesses with a depth of capability to rival any competitor and establishes BAE SYSTEMS as the future partner of choice. The merger was announced on 19 January 1999. At that time it was estimated that significant synergy benefits would result in annual cost savings totalling in excess of £275m within three full financial years of completion of the merger. Subsequent verification work has confirmed these savings and identified further opportunities. Integration of the two businesses has made an excellent start. A radical reorganisation has been undertaken drawing on, and integrating fully, the combined strengths of the two constituent management teams. The resulting lean organisation will have a major focus on programme management. Based on the confidence that the Directors have in the Company's outlook following the merger the dividend per share for the year has been increased to 8.0p (1998 6.5p), representing an increase of 23.1% which is covered 3.6 times on a diluted basis. This increase reflects the Company's intention to base its dividend policy on 3.25 times cover (before goodwill amortisation and exceptional items) on a full year basis. Commenting on these results Sir Richard Evans, Chairman said:- 'Following the merger BAE SYSTEMS is now a leader in the global aerospace and defence market. The business is financially strong with a large order book and the management team has an excellent track record of delivering value'. John Weston, Chief Executive, added:- 'The transformation to BAE SYSTEMS melds two strong businesses into a single performance and customer focused organisation. It represents a major step in the strategy for systems led growth and creates a business with the technology and capability to compete in the global market'. Summarised profit and loss account For the year ended 31 December 1999 1998 £m £m Sales 8,929 8,611 =================================================== =========== ============ Operating profit* 769 666 Share of operating loss of joint ventures* (6) (28) Net interest* 27 70 --------------------------------------------------- ----------- ------------ Profit before tax, goodwill amortisation and 790 708 exceptional items Profit before tax 459 973 Tax (131) (280) Minority interests (4) (1) --------------------------------------------------- ----------- ------------ Profit for the year 324 692 =================================================== =========== ============ Basic earnings per share* 30.8p 29.4p Diluted earnings per share* 28.8p 27.1p Dividend per share 8.0p 6.5p * excluding goodwill amortisation and/or exceptional items as appropriate Segmental analysis For the year ended 31 December Sales Profit/(loss) -------------------- -------------------- 1999 1998 1999 1998 £m £m £m £m Defence 5,837 6,353 760 638 Commercial aerospace 2,970 2,523 (10) 12 MES businesses 455 - 28 - Other businesses and head office 35 47 (15) (12) ---------------------------------- --------- --------- --------- --------- 9,297 8,923 763 638 Less: intra-group (368) (312) - - Net interest excluding exceptional 27 70 items ---------------------------------- --------- --------- --------- --------- 790 708 Goodwill amortisation, including (63) (23) joint ventures Exceptional items (note 2) (268) 288 ---------------------------------- --------- --------- --------- --------- 8,929 8,611 459 973 ================================== ========= ========= ========= ========= Review of operations Defence Defence profit before interest and tax excluding goodwill amortisation and exceptional items advanced 19.1% on 1998 to £760m (1998 £638m) on sales of £5,837m (1998 £6,353m). Order intake in the year of £5bn resulted in a defence order book at the end of the year of £15.3bn (1998 £16.1bn). Development of Eurofighter Typhoon is progressing well to meet the requirements of the four European nations' partnership, with major assemblies for the first production aircraft of the initial batch of 148 aircraft nearing completion by the end of 1999. The first delivery of production aircraft is scheduled for the end of 2001. Nimrod MRA 4, a programme to replace maritime patrol aircraft for the UK Royal Air Force, involves the integration of a new, complex suite of sensors and systems into existing Nimrod airframes, with a total contract value of £2.2bn. This is a challenging programme, and the original plan for engineering resources underestimated the requirement for the extensive new structure and airframe systems. This has led to an early reassessment of the in-service date and consequent contract renegotiation with the customer, the UK MoD. The Hawk advanced jet trainer and light combat aircraft customer base continues to expand. Current production activity centres on aircraft for Australia and the NATO flying training programme in Canada. A recent notable success was the selection by South Africa of Hawk as part of a larger defence package including Gripen aircraft in partnership with Saab. Contracts leading to 24 Hawk and 28 Gripen aircraft are expected to become effective during the current year. In addition to the established aircraft activities the Company also participates in two programmes which are near the start of the maturity cycle in the Future Offensive Air System (FOAS) and the US-led Joint Strike Fighter (JSF). FOAS comprises a series of UK studies to define concepts for a system to replace Tornado strike aircraft from 2018. JSF is at the concept demonstration phase with proposals to replace a range of current fighter aircraft. The likely requirement identifies some 3,000 aircraft replacements. BAE SYSTEMS has been selected as prime contractor for the Type 45 Destroyer programme, a £2.5bn programme to replace the Royal Navy's Type 42 vessels. Rapid progress to move Type 45 to contract by the third quarter 2000 is now anticipated, leading to service entry for the first of up to 12 ship systems in 2007. The Type 45 main weapons system, Principal Anti Air Missile System (PAAMS) has been selected with contracts awarded to Matra BAe Dynamics last year. PAAMS will integrate with the highly advanced new Sampson multi-mode electronic scanning radar developed by BAE SYSTEMS. The Saab joint venture is in the process of acquiring another Swedish aerospace business, Celsius. This acquisition will significantly enhance Saab's strategic presence and has the endorsement of BAE SYSTEMS. Completion of the acquisition is planned for March 2000. As a result of the ongoing drive for operational improvements, coupled with reducing workload on the Harrier programme, in June the Company announced a Defence sector rationalisation. The programme encompasses the closure of the Dunsfold site together with a voluntary redundancy programme across a number of other sites across the sector. Pre-tax costs of the programme are estimated at £250m over a two year period, with £198m charged in 1999. Commercial aerospace The Commercial aerospace activities produced sales of £2,970m (1998 £2,523m) primarily through increased Airbus activity, which saw current deliveries rise to 294 aircraft in 1999 (1998 229). The Commercial aerospace order book at the year end stood at £13.1bn compared to £12.0bn at the end of 1998, a result of continued strong Airbus order intake. Airlines placed net orders for 430 new Airbus airliners during 1999. Net of cancellations, the order book for Airbus airliners stood at 1,445 aircraft valued at $100.1bn at the year end (1998 $92.7bn). The Commercial aerospace sector results for the year included our share of the result attributable to Airbus Industrie (AI) being a loss after interest of £42m (1998 loss: £25m). The regional jet business delivered 23 RJ aircraft during 1999, with orders outstanding at year end for 11 aircraft. Launch aid repayments charged to the profit and loss account during 1999 amounted to £176m (1998 £141m) of which £74m were on single aisle programmes. Airbus continues to expand its family of airliners. Development of smaller and larger extensions to the range are currently underway. The 105 seat A318 will enter service in 2003 and, above 375 seats, the A340-500 and 600 airliners will enter service from 2002. Development of an A3XX family of airliners seating 480 - 650 passengers continues. Discussions are underway to establish possible sources of launch finance including the UK Government. Launch of this programme will be determined by a number of criteria including the extent of market interest from airlines. Work is still ongoing in planning for the conversion of the Airbus partnership into a new Airbus Integrated Company (AIC) which has been facilitated by the announcement in the second half of 1999 of the merger of DASA and Aerospatiale to form the European Aeronautic Defence and Space Company (EADS). MES Included in these results is £28m profit before interest excluding goodwill amortisation and exceptional items and £455m sales representing a single month's contribution from MES. At 31 December 1999 the MES order book stood at £9.3bn, including intra group orders of £0.8bn. The addition of MES' depth of capability in avionics and defence electronics alongside BAe's established capability in airframe and system integration significantly enhances the Company's capability in airborne systems. The merger also establishes BAE SYSTEMS with a comparable breadth and depth of capability in naval systems from combat management to surface ship, and submarine, design and build. The Company is expanding the scope of the guided weapons joint venture Matra BAe Dynamics with the addition of activities from the Alenia Marconi Systems (AMS) joint venture. At the same time the addition of former BAe activities will enhance the Anglo-Italian AMS joint venture in the field of radars and command systems. The merger has established BAE SYSTEMS as a major participant in the US industry with some 18,500 people in North America. In 1999 combined sales of BAe and MES were greater in the US than the UK market. The North American activities have a strong position in airborne systems and BAE SYSTEMS is a major supplier of support services to the US Navy. Future reporting The sectors against which the Company has in the past reported its results are not appropriate to BAE SYSTEMS going forward. The Company will in future give greater visibility of the constituents of its business performance by reporting seven sectors: North America Avionics Operations Commercial aerospace Major programmes Customer support International partnerships These revised sectors reflect the new Company organisation, which separates the management of large programmes from management of the operational facilities. It places a focus on customer support as a separate business stream and gives greater emphasis to the way joint ventures are managed. Importantly also it enables commercial separation of both the Avionics and North American businesses from other activities, facilitating compliance with regulatory undertakings in the UK and US. Consolidated profit and loss account For the year ended 31 Notes Ongoing Acquisitions Total Total December 1999 1999 1999 1998 £m £m £m £m Sales 8,474 455 8,929 8,611 Less: adjustment for share of joint venture sales (1,761) (125) (1,886) (1,569) ----------------------------- ----- ------- ------------ ------- -------- Turnover 6,713 330 7,043 7,042 Operating costs Excluding goodwill amortisation and exceptional items (5,950) (324) (6,274) (6,376) Goodwill amortisation (17) (26) (43) (12) Exceptional items 2 (210) - (210) (51) ------- ------------ ------- -------- (6,177) (350) (6,527) (6,439) ----------------------------- ----- ------- ------------ ------- -------- Operating profit/(loss) 536 (20) 516 603 Share of operating (loss)/profit of joint ventures Share of operating (loss)/profit before goodwill amortisation (28) 22 (6) (28) Goodwill amortisation (18) (2) (20) (11) (46) 20 (26) (39) ----------------------------- ----- ------- ------------ ------- -------- Non-operating exceptional 2 items Loss on sale and closure of operations - - - (22) Profit on disposal of fixed asset investments - - - 401 ------- ------------ ------- -------- - - - 379 ----------------------------- ----- ------- ------------ ------- -------- Profit before interest Excluding goodwill Amortisation and exceptional items 735 28 763 638 Goodwill amortisation and exceptional items (245) (28) (273) 305 ------- ------------ ------- -------- 490 - 490 943 ----------------------------- ----- ------- ------------ ------- -------- Interest Net interest arising on activities excluding exceptional items 15 (12) 3 45 Share of net interest of joint ventures 23 1 24 25 Exceptional interest charges 2 (58) - (58) (40) ------- ------------ ------- -------- (20) (11) (31) 30 ----------------------------- ----- ------- ------------ ------- -------- Profit/(loss) before tax on ordinary activities Excluding goodwill amortisation and exceptional items 773 17 790 708 Goodwill amortisation and exceptional items (303) (28) (331) 265 470 (11) 459 973 Tax Tax on profit excluding exceptional items (188) (172) Tax on exceptional items 57 (108) ------- -------- (131) (280) ----------------------------- ----- ------- ------------ ------- -------- Profit after tax on ordinary activities 328 693 Equity minority interests (4) (1) ----------------------------- ----- ------- ------------ ------- -------- Profit for the financial year 324 692 Dividends 4 Equity: ordinary shares (202) (114) Non-equity: preference shares (21) (21) ------- -------- (223) (135) ----------------------------- ----- ------- ------------ ------- -------- Retained profit 101 557 ----------------------------- ----- ------- ------------ ------- -------- Basic earnings per share Including goodwill amortisation and exceptional items 16.2p 38.4p ============================= ===== ======= ============ ======= ======== Excluding goodwill amortisation and exceptional items 30.8p 29.4p ============================= ===== ======= ============ ======= ======== Diluted earnings per share Including goodwill amortisation and exceptional items 15.6p 35.1p ============================= ===== ======= ============ ======= ======== Excluding goodwill amortisation and exceptional items 28.8p 27.1p ============================= ===== ======= ============ ======= ======== All results arise from continuing operations Consolidated balance sheet as at 31 December Group -------------------------- 1999 1998 Note £m £m Fixed assets Intangible assets 1 6,365 322 Tangible assets 2,167 1,604 Investments 1 Share of gross assets of joint ventures 5,208 3,384 Share of gross liabilities of joint ventures (4,573) (2,927) ------------ ------------ Share of joint ventures 635 457 Others 25 139 ------------ ------------ 660 596 ----------------------------- ------------------- ------------ ------------ 9,192 2,522 ----------------------------- ------------------- ------------ ------------ Current assets Stocks 1,559 1,442 Debtors due within one year 3,647 3,201 Debtors due after one year 512 511 Investments 1,713 1,066 Cash at bank and in hand 811 308 ----------------------------- ------------------- ------------ ------------ 8,242 6,528 Current liabilities Loans and overdrafts (2,025) (264) Creditors (4,871) (4,069) ----------------------------- ------------------- ------------ ------------ (6,896) (4,333) Net current assets 1,346 2,195 ----------------------------- ------------------- ------------ ------------ Total assets less current liabilities 10,538 4,717 ----------------------------- ------------------- ------------ ------------ Liabilities falling due after one year Loans (1,155) (898) Creditors (542) (701) Provisions for liabilities and charges (1,396) (1,092) ----------------------------- ------------------- ------------ ------------ 7,445 2,026 ----------------------------- ------------------- ------------ ------------ Capital and reserves Called up share capital 140 111 Shares to be issued 255 - Share premium account 212 110 Statutory reserve 202 202 Other reserves 5,212 324 Profit and loss account 1,339 1,273 ----------------------------- ------------------- ------------ ------------ Shareholders' funds Equity: ordinary shares 7,091 1,750 Non-equity: preference shares 269 270 ------------ ------------ 7,360 2,020 Equity minority interests 85 6 ----------------------------- ------------------- ------------ ------------ 7,445 2,026 Consolidated cash flow For the year ended 31 December 1999 1998 £m £m Net cash inflow/(outflow) from operating activities Operating profit 516 603 Depreciation, amortisation and impairment 254 150 Profit on disposal of fixed assets (4) (19) Movement in provisions for liabilities and charges excluding deferred tax (116) (93) Decrease/(increase) in working capital: Stocks 100 62 Debtors 122 (1,647) Creditors (409) 469 Customer stage payments (44) (31) -------------------------------------------------- ------------ ------------ 419 (506) ================================================== ============ ============ Cash flow statement Net cash inflow/(outflow) from operating activities 419 (506) Dividends from joint ventures 30 5 Returns on investments and servicing of finance (62) 94 Taxation (81) (136) Capital expenditure and financial investment (132) 419 Acquisitions and disposals Acquisitions - MES (1,357) - Other (18) (612) Disposal of subsidiary undertakings and joint ventures 42 201 Equity dividends paid (100) (60) -------------------------------------------------- ------------ ------------ Net cash outflow before financing and management of liquid resources (1,259) (595) Management of liquid resources 234 785 Financing (1,686) (127) -------------------------------------------------- ------------ ------------ Net increase in cash available on demand 661 63 ================================================== ============ ============ Reconciliation of net cash flow to net movement in net funds Net increase in cash available on demand 661 63 Net decrease in liquid resources (234) (785) (Increase)/decrease in other loans included within net funds (957) 145 -------------------------------------------------- ------------ ------------ Change in net funds from cash flows (530) (577) Investments, loans and finance leases assumed on acquisition of MES (435) - Other non cash movements 27 1 -------------------------------------------------- ------------ ------------ Net (decrease) in net funds (938) (576) Net funds at 1 January 212 788 -------------------------------------------------- ------------ ------------ Net (debt)/funds at 31 December (726) 212 ================================================== ============ ============ Reconciliation to movement in net cash/debt as defined by the Group Net (decrease) in net funds (938) (576) (Increase)/decrease in cash on customers' account (83) 11 -------------------------------------------------- ------------ ------------ Net decrease for the year (1,021) (565) ================================================== ============ ============ Statement of total recognised gains and losses For the year ended 31 December 1999 1998 £m £m Profit for the financial year 324 692 Currency translation on foreign currency net investments, including joint ventures (9) (7) Revaluation of current asset investment 563 - Revaluation of land and buildings (10) - Deferred tax on revalued assets - (37) ------------ ------------ Other recognised gains and losses relating to the year (net) 544 (44) -------------------------------------------------- ------------ ------------ Total recognised gains and losses relating to the year 868 648 Prior year adjustment - (284) -------------------------------------------------- ------------ ------------ Total recognised gains and losses 868 364 ================================================== ============ ============ Reconciliation of movements in shareholders' funds For the year ended 31 December 1999 1998 £m £m Profit for the financial year 324 692 Dividends (223) (135) -------------------------------------------------- ------------ ------------ 101 557 Other recognised gains and losses relating to the year (net) 544 (44) New share capital subscribed 29 - Merger reserve arising on the issuance of shares relating to the MES acquisition 4,336 - Shares to be issued in relation to the MES acquisition 255 - Issuance of shares to QUEST 7 - Exercise of share options, warrants and dividend scrip issue 68 51 Write back of goodwill on disposal of the Arlington Securities business - 4 -------------------------------------------------- ------------ ------------ Net increase in shareholders' funds 5,340 568 Opening shareholders' funds 2,020 1,452 -------------------------------------------------- ------------ ------------ Closing shareholders' funds 7,360 2,020 ================================================== ============ ============ Notes to the preliminary results 1 Acquisitions On 29 November 1999 the Group acquired the Marconi Electronic Systems (MES) businesses of The General Electric Company, p.l.c. (now Marconi p.l.c) for a total consideration of £6,534 million. This principally represents the issue of 1.17 billion ordinary shares of 2.5p, Capital Amortising Loan Stock of £369 million together with assumed debt of £1.4 billion. After fair value adjustments (£244 million) together with accounting policy realignments (£43 million), goodwill arising on consolidation amounted to £6,554 million, and is being amortised over its expected useful life of 20 years. The goodwill arising on consolidation has been allocated £6,076 million to MES subsidiary undertakings and £478 million to MES joint ventures. 2 Exceptional items Year to Year to 31 31 December December 1999 1998 £m £m Exceptional loss included within operating profit Defence sector rationalisation (198) - MES integration costs (12) - Financial Risk Insurance Programme costs - (51) -------- -------- (210) (51) -------- -------- Exceptional profit/(loss) not included within operating profit Partial sale of investment in Orange plc - 368 Sale of investment in Orion Network Services Inc - 33 -------- -------- - 401 -------- -------- Sale of the Arlington Securities business - (22) -------- -------- - 379 -------- -------- Exceptional (loss)/profit included within profit before interest (210) 328 -------- -------- Exceptional interest Finance charges relating to the MES acquisition (22) - Adjustment to net present value provisions (36) (40) -------- -------- (58) (40) -------- -------- Net exceptional (loss)/profit included Within profit before tax (268) 288 ======== ======== Defence sector rationalisation On 24 June 1999 the Group announced a rationalisation of defence sector activities including the closure of the Dunsfold site together with redundancy programmes across a number of business units. The total cost of this rationalisation is estimated at £250 million before a tax credit of £60 million, of which £198 million before a tax credit of £43 million has been charged at 31 December 1999. The balance is expected to be charged in 2000. A net cash outflow of £53 million arose in 1999 in respect of these costs. MES integration and finance costs The Group is now in the process of integrating the former BAe and MES businesses. Costs of £12 million before a tax credit of £2 million have been charged at 31 December 1999. Integration costs are expected to continue in the next three financial years. A net cash outflow of £5 million arose in 1999 in respect of these costs. Finance charges arising as a result of the acquisition relate to certain loan and overdraft facilities that were required to be renegotiated as a direct consequence. The cost and cash outflows in the year resulting from these renegotiations amounted to £22 million before a tax credit of £1 million. Adjustment to net present value provisions Adjustments have been included to maintain the net present value of certain Commercial aerospace sector recourse provisions which were established as exceptional items on a net present value basis in prior years. The taxation effect of these adjustments is £11 million (1998 £nil). These adjustments have no cash flow effect. 3 Commercial aircraft financing Commercial aircraft are frequently sold for cash with the manufacturer retaining some financial exposure. Aircraft financing commitments of the Group can be categorised as either direct or indirect. Direct commitments arise where the Group has sold the aircraft to a third party lessor and then leased it back under an operating lease (or occasionally a finance lease) prior to an onward lease to an operator. Indirect commitments (contingent liabilities) may arise where the Group has sold aircraft to third parties who either operate the aircraft themselves or lease the aircraft on to operators. In these cases the Group may give guarantees in respect of the residual values of the related aircraft or certain head lease and finance payments to be made by either the third parties or the operators. The Group's exposure to these commitments is offset by future lease rentals and the residual value of the related aircraft. During 1998, an external review was commissioned of the likely income to be generated from the portfolio of aircraft to which the Group has either direct or indirect financing exposures. This review identified a most likely level of income of some £2.4 billion. Following this analysis, in September 1998, the Group entered into arrangements which reduced its exposure from commercial aircraft financing by obtaining insurance cover from a syndicate of leading insurance companies over a significant proportion of the contracted and expected income stream from the aircraft portfolio, including those aircraft where the Group has provided residual value guarantees. At the start of the insurance arrangements £2.2 billion of income was underwritten, of which £1.9 billion remained underwritten as at 31 December 1999. The net exposure of the Group to aircraft financing as at 31 December was: 1999 1998 £m £m Direct operating lease commitments 722 854 Direct finance lease commitments 5 6 Indirect exposure through aircraft contingent liabilities 1,589 1,481 Exposure to residual value guarantees 542 504 Income guaranteed through insurance arrangements (1,885) (2,053) --------- ------- Net exposure 973 792 Expected income not covered by insurance arrangements (43) (43) Expected income on aircraft delivered post insurance arrangements (330) (99) Adjustment to net present value (158) (160) --------- ------- Recourse provision 442 490 ========= ======= Income guaranteed through insurance arrangements represents the future income stream from the aircraft assets guaranteed under the insurance arrangements after deducting the policy excess. The external review identified likely income of £250 million above the level guaranteed under the insurance arrangements. Expected income not covered by insurance arrangements represents the amount of this income assumed by management for the purpose of provisioning. Expected income on aircraft delivered post insurance arrangements represents the level of future income anticipated on aircraft delivered since the start of the insurance arrangements. Given the long term nature of the liabilities, the Directors believe it is appropriate to state the recourse provision at its net present value. The provision covers costs to be incurred over a forecast period of 13 years from the balance sheet date. The adjustment to net present value reduces the expected liabilities from their outturn amounts to their anticipated net present value. Saab AB The Group is involved in similar transactions through its shareholding in Saab AB including aircraft financing commitments and contingent liabilities arising from guarantees in connection with aircraft sales. Where Saab AB is exposed to financial risk from the above transactions, it makes provision against the expected net exposure on a net present value basis, after taking into account the expected future sub-lease income and residual values of the aircraft. The Group's exposure is limited to its 35% shareholding in Saab AB. Airbus The Group is involved in similar transactions through its participation in Airbus Industrie GIE (AI) including aircraft financing commitments and contingent liabilities arising from credit guarantees and financing receivables under customer financing programmes. Where AI is exposed to financial risk from the above transactions, it makes provision against the expected net exposure, after taking into account future sub-lease rentals and residual values of related aircraft where appropriate. Provision for the net exposure is included within the Group's share of the results of AI. The Group's obligations under the financing commitments of AI are joint and several with the other Partners. 4 Dividends The Directors propose a final dividend of 5.0p per ordinary share which, with the interim dividend, makes a total dividend of 8.0p per ordinary share for the year (1998 6.5p). The dividend will be paid on 1 June 2000 to shareholders registered on 17 March 2000. The ex-dividend date will be 13 March 2000. 5 Authority To Purchase the Company's Shares A resolution will be put to shareholders at this year's Annual General Meeting to give a general authority to make market purchases of the Company's shares up to a maximum of 10 per cent of the share capital of the Company. Further details of the resolution will be included in the Notice of Annual General Meeting that will be sent to shareholders at the end of March. 6 Cash on customers' account Net cash excludes cash received on customers' account of £99 million (1998 £16 million) which is included within creditors on the consolidated balance sheet. 7 Exchangeable Bond On 21 July 1999 the Company issued £686 million 3.75% Senior Unsecured Exchangeable Bonds due 2006 (the Bonds). In summary as at 31 December 1999 the Bonds were exchangeable with the Company's investment in the ordinary shares of Orange plc and Mannesmann AG (the Exchange Property). Since the year end the Exchange Property has become subject to the offer to acquire Mannesmann AG by Vodafone AirTouch plc. The Bondholders have the right, at any time on or after August 1999, to exchange their Bonds; although, at the option of the Company, the Bonds may be settled in cash based on the prevailing market value of the Exchange Property. Notwithstanding that the bondholders currently have exchange rights (the bonds accordingly are being disclosed as a current liability) the Company does not at present anticipate any material exchange much before maturity in 2006. Consistent with the Company's strategy of disposing of its non-core assets, the Company does not intend to settle any amounts due to a Bondholder in cash. The substance of the transaction has therefore been to affect the probable future disposal of the Exchange Property at the issue price of the Bonds. To reflect this the Exchange Property has been transferred from fixed asset investments to current asset investments, and is recorded at the effective realisable value being the issue price of the Bonds of £686 million. One effect of transferring the Exchange Property to current asset investments has been to include it within net debt at 31 December 1999 at that value. The Bonds are recorded at issue price (less unamortised issue costs) within current liabilities, being the Group's maximum economic exposure. 8 New Financial Reporting Standards Financial Reporting Standard 16 - Current Taxation has been adopted for the first time in this preliminary statement. Its adoption has had no material impact upon reported results, and comparative figures have not needed restatement in consequence. Financial Reporting Standard 15 - Tangible Fixed Assets has not been adopted in this preliminary statement, but will be adopted in 2000, once a full assessment of its impact on the enlarged Group has been completed. 9 Other information The financial information for the years ended 31 December 1999 and 31 December 1998 contained in these preliminary results, which were approved by the Board on 2 March 2000, does not constitute statutory accounts of the Company within the meaning of section 240 of the Companies Act 1985. Statutory accounts for the year ended 31 December 1998 have been delivered to the Registrar of Companies. Statutory accounts for the year ended 31 December 1999 will be delivered to the Registrar of Companies following the Company's Annual General Meeting. The auditors have reported on both these sets of accounts. Their reports were not qualified and did not contain statements under section 237(2) or (3) of the Companies Act 1985. Issued by British Aerospace plc

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