Rolls-Royce plc Annual Report 1999

Reliability Integrity Innovation 1 Corporate profile Group financial highlights for the year ended December 31, 1999 2 Chairman’s statement 4 Picture spreads 1999 1998 8 Chief Executive’s review Group turnover £4,744m £4,496m 20 Finance Director’s review Profit before taxation £360m £325m 26 Board of directors Order book £11.5bn £10.4bn 27 Report of the directors Return on capital employed 17.0% 15.8% 32 Remuneration report Equity shareholders’ funds £1,988m £1,705m 40 Financial statements 69 Principal subsidiary undertakings Earnings per ordinary share: 71 Principal joint ventures Underlying 19.52p 16.91p 72 Joint arrangements that are not entities Basic 18.86p 17.25p 73 Directors’ responsibilities for the Dividend per ordinary share 7.25p 6.55p financial statements 73 Report of the auditors 74 Group five year review 76 Shareholders’ information

Rolls-Royce plc Registered office: 65 Buckingham Gate London SW1E 6AT Telephone: 020 7222 9020 Company number: 1003142 Rolls-Royce is a global company providing power on land, sea and air. To deliver shareholder value and to meet customers’ requirements, thereby becoming their preferred supplier, the Group is continuously improving performance and is investing to secure leadership in our key markets of civil aerospace, defence, marine and energy.

1 Rolls-Royce plc 1999 1999 was a successful year for Rolls-Royce in challenging conditions. We again achieved our financial target of double-digit earnings growth and continued to invest in improved efficiency and new products and services to ensure long-term growth.

We have transformed our business over the last decade. During this period Rolls-Royce has invested more than £5 billion in research and development and £1.5 billion in capital expenditure to establish a leading position in civil aerospace, Sir Ralph Robins Chairman defence, marine and energy. These are growing markets in which we are gaining market share. In 1999, the company invested a further £1 billion in significantly through acquisition and partnerships leading to acquisitions to strengthen its position in these markets. a trebling of sales over the last four years. In aerospace, the agreement to take full control of Each of these acquisitions has added routes to market and BMW Rolls-Royce, now Rolls-Royce Deutschland, enhances new products and services. We have also increased investment our leading position in the corporate and regional airline in research and development to create new products. sector. BMW increased its shareholding in Rolls-Royce to over The Trent 500 aero engine, under development for the ten per cent. Airbus Industrie A340-500/600 aircraft, ran for the first time With the acquisition of Vickers, we have become a world in June achieving its certification thrust. leader in marine propulsion and we expect to achieve strong The EJ200 engine for Eurofighter Typhoon will enter growth in this market. production this year and we are making good progress with In the energy sector, the acquisition of the rotating compressor our participation in the US Joint Strike Fighter programme. business of Cooper Cameron creates new opportunities for us, The WR-21 engine completed endurance testing in enhancing our position in the oil and gas industry. December. It is the only advanced-cycle marine gas turbine The acquisition of National Airmotive further strengthened under development in the world today. our repair and overhaul business, which has developed New products for energy markets include the Allen 5016

2 Rolls-Royce plc 1999 diesel and the industrial Trent, which has now accumulated opportunities for gas turbines in the commercial sector and 20,000 service hours. from the company’s ability to offer fully integrated power At the end of 1999 the company had a record order book of systems to customers in commercial and naval markets. £11.5 billion, with a further £1.7 billion of business announced We continue to invest in our energy business. Growing but not yet signed. demand for distributed power provides the opportunity for Our improvement initiative, Better Performance Faster, growth. The industrial Trent is uniquely positioned in this progressed from a net investment to a net saving during the market. Whilst its development has taken longer than year. During 2000 we will be implementing new Enterprise originally anticipated, market interest remains strong. Resource Planning systems to improve efficiency. Increasingly our customers are seeking a full spectrum of I extend my thanks to all our employees for their contribution services and support and we have developed innovative to the company’s progress and congratulate Julia King, who solutions to serve the customer through the long life-cycle of received a CBE in the Queen’s Birthday Honours List. our products. I would particularly like to thank Sir Gordon Higginson and 2000 will be as challenging as 1999, against a background of Mike Townsend, both of whom retired from the Board in 1999. the continuing cost of restructuring, the possibility of adverse Paul Heiden, an existing Board member, has been appointed exchange rates and reduced large engine deliveries. 2000 also Finance Director. I also welcome Carl Symon to the Board. He presents significant opportunities arising from the company’s became a non-executive director in June. broad product portfolio, new risk and revenue sharing partners, the continuing drive to reduce costs and the growth Prospects potential created by the newly acquired businesses. We continue The long-term prospects for all of our businesses are strong to target double-digit earnings growth. as we continue to improve our position in growing markets. In civil aerospace, we have won 30 per cent of engine orders Your Board has recommended a final dividend of 4.55p per over the past three years and, in 1999, delivered a record share, making a total for the year of 7.25p, an increase of 1,080 civil engines. As more engines enter service, we create 11 per cent over 1998. embedded value for the future, as we increase the opportunities for our service activities. We expect defence aerospace markets to grow over the next decade and are well positioned on all the major new programmes. Our marine systems business is a world leader. Future growth will arise from recovery in the oil and gas market, new Sir Ralph Robins Chairman, March 1, 2000

3 Rolls-Royce plc 1999 Rolls-Royce is now the world's leading single source for the supply of integrated ship systems. New products and services offered include propellers, thrusters, water jets, pods, ship design, deck machinery and stabilisers. The Trent is the market-leading engine on the new generation of widebody twin-engined aircraft. During 1999, nine new Trent 700 customers took delivery of A330 aircraft. Rolls-Royce has delivered 300 AE2100 engines to Lockheed Martin to power the new C-130J airlifter. The first RAF C-130J aircraft entered service during 1999. In the Slovak Republic, highly efficient RB211 gas generators with dry low emissions technology, provide power for vital pipelines bringing gas from Siberia into western Europe. 1999 was a significant and successful year for Rolls-Royce. The company made continued progress with its consistent, long-term strategy of building shareholder value by increasing its share of clearly defined growth markets, both through organic growth and acquisitions.

The development of leading positions in civil aerospace, defence, marine and energy markets, enables the company to John E V Rose Chief Executive apply generic skills and capabilities across a broad market base. We have complemented our core gas turbine technology with a range of associated products and services, improving our market prospects in each sector. We have continued to benefit from our customer-facing organisation, which we implemented in 1998. The strong focus on meeting customers’ needs in each of our markets has highlighted new business opportunities. In 2000 we will be presenting the full segmental analysis of our financial results to reflect the major market sectors which the company serves. The acquisition of Vickers during the year has more than doubled the company’s marine business. Rolls-Royce will benefit from being the first company to anticipate the changing needs of the marine market. We have become a world leader in marine propulsion systems, with the ability to offer fully integrated power systems across naval and commercial markets. We also strengthened our leading position in the corporate

8 Rolls-Royce plc 1999 Underlying earnings per share pence Order book – £13.2 billion firm and announced £bn 1995 7.94 Civil aerospace 8.9 1996 12.70 Defence 2.5 1997 15.16 Marine 1.4 1998 16.91 Energy 0.4 1999 19.52

and regional airlines sector with the assumption of full control of BMW Rolls-Royce, which had previously operated as a joint venture. We attracted new risk and revenue sharing partners to our programmes. These partners typically bring additional financial and engineering resource and share the costs and potential rewards of developing new products for growing markets. Their participation demonstrates their confidence in the future embedded value we have created from products which will have market lives measured in decades. In 1999, some 40 per cent of sales came from services and aftermarket activities. We have developed successful businesses offering financial and aftermarket services in 9.1 Trent 700 9.2 Industrial RB211 – Spain response to the rapid growth of our customer base, the 9.3 Trent 800-powered Boeing 777 growing number of products in service and the increasing 9.4 Ulstein-designed offshore vessel 9.5 BR710-powered Bombardier requirement from customers for through-life support. Global Express We continue to drive for improved productivity and efficiency. The Better Performance Faster programme moved from net investment to net saving in 1999, as the benefits of investment were realised. In addition, the company substantially increased its investment in restructuring. During 2000 we will further accelerate restructuring to create improvements in efficiency. Our people are crucial to the long-term success of Rolls-Royce. We increased investment in training and development last year and launched a major internal communications initiative, involving workshops for 5,000 managers, to ensure that we develop the desired leadership qualities for a growing international business.

9 Rolls-Royce plc 1999 Civil aero-engine deliveries Defence aero-engine deliveries 1995 405 1995 120 1996 424 1996 214 1997 625 1997 161 1998 911 1998 164 1999 1,080 1999 181 (Chart excludes helicopter engines) (Chart excludes helicopter engines)

Review of operations deliveries are scheduled to start in 2001 and will grow to more Civil aerospace – 1999 sales £2,654 million; profit £232 million than 120 engine deliveries in 2002. Rolls-Royce has developed the broadest range of aero engines The International Aero Engines’ V2500, in which in the world, available for more than 30 current airframes, a Rolls-Royce is a major shareholder, had an excellent year and five-fold increase compared to the position at the start of the now has more than 75 customers worldwide with sales to date 1990s. Engine deliveries have increased from less than 400 in exceeding $18 billion. 1990 to a record 1,080 in 1999, establishing Rolls-Royce as the The company made strong progress in the rapidly growing second largest civil aero engine manufacturer in the world. market for corporate and regional airlines. In October, the The strength of the company’s product portfolio will enable BR715 entered service on the Boeing 717. This engine is the sole deliveries to grow further in 2000, to about 1,120 engines, powerplant for the Boeing 717, which has secured firm and although the expected reduction in large engine deliveries will option orders for more than 250 aircraft. result in a fall in the equivalent thrust delivered. Deliveries of The AE3007 is playing a key role as the sole powerplant for 1,250 engines are expected in 2001, with the equivalent thrust the Embraer RJ135, RJ140 and RJ145 family of aircraft. The total delivered exceeding the 1999 level. firm and option order book for these twin-engined aircraft is The Trent has continued to be the engine of choice for both now almost 1,000. During 1999 the five hundredth AE3007 was the Boeing 777 and the Airbus Industrie A330. It has now delivered and by the end of the year the engine had completed secured the market-leading position on these airframes, with nearly two million flight hours. a 42 per cent share overall. On the Boeing 777, Rolls-Royce won additional business Defence – 1999 sales £1,138 million; profit £181 million from existing customers and recently gained El Al as a new Rolls-Royce has a strong position in all the key defence market Trent 800 customer. The Trent 800 has demonstrated outstanding sectors – combat, VSTOL, light attack, trainer, transport, performance and in February this year passed one million helicopters, maritime reconnaissance and aerial surveillance. hours in service. In all these markets, customers are increasingly seeking a full Nine new Trent 700 customers from Europe, the Middle spectrum of aviation support and services. Rolls-Royce is well East, North America and Asia took delivery of A330 aircraft placed to respond to these new requirements with innovative during 1999. products for customer support. The company foresees strong The Trent 500, under development for the A340-500/600 demand for military aero engines over the next ten years and aircraft, ran for the first time, achieving its 60,000lb certification through its presence on the principal new programmes, is well thrust. Orders and options in excess of $5 billion have been positioned to take advantage of this growth. received from ten customers for this engine. Production Production of the EJ200 has commenced for Eurofighter

10 Rolls-Royce plc 1999 Typhoon. The four-nation EUROJET consortium, in which Rolls-Royce is the major participant, has received firm orders for an initial 363 EJ200 engines out of a total European requirement for 1,500 engines. The first engines will be delivered to the customers this year and output is expected to grow to 40 engines in 2001. The United States Joint Strike Fighter programme is one of the world’s largest defence procurement programmes. Rolls-Royce participates in all of the proposed configurations of this aircraft. The Rolls-Royce developed LiftFan™ performed well during testing and, in 1999, successfully demonstrated its full range of performance characteristics. 11.1 GKN Westland WAH-64 Apache This fan-only system is a unique development and includes 11.2 Eurofighter Typhoon 11.3 Trent 800-powered Boeing 777 some of the largest bladed disks (blisks) ever made. Strong 11.4 Trent 800 progress was also made on the alternative F-120 engine, where 11.5 AE3007-powered Embraer RJ145 Rolls-Royce is teamed with General Electric. A $440 million contract was awarded for the design and testing of this engine. The Hawk advanced trainer, powered by the Rolls-Royce Turbomeca Adour, continues to attract new orders. During 1999 NATO Flight Training Canada placed a £100 million contract with the company for the supply and through-life support of the Adour engine. The company also secured a contract worth £150 million for the through-life support of Adour engines for Australia’s Hawk aircraft. The contract covers the 33 aircraft ordered by Australia, the first of which will be delivered in 2000. The AE1107C is now in production for the V-22 Osprey tilt-rotor. The customer’s service needs will be met by an innovative fleet hour agreement, the first of its kind between Rolls-Royce and a US defence organisation.

11 Rolls-Royce plc 1999 Further in-service support agreements included a five-year partnership, valued at £30 million, covering RTM322 helicopter engines for all three UK armed forces and the introduction of JETScan technology for the RB199 fleet. JETScan is an engine oil system diagnosis tool for improving flight safety and minimising maintenance. In December, Rolls-Royce secured one of the first contracts to be announced under the UK’s Smart Procurement Initiative when the Ministry of Defence placed an order worth up to £350 million to upgrade Pegasus engines for Royal Air Force Harrier GR7 aircraft. This new style of contract provides major cost, performance and reliability improvements to the customer.

Marine systems – 1999 sales £385 million; profit £37 million

Rolls-Royce has become a world leader in marine propulsion systems. The acquisition of Vickers has added a strong commercial marine business to the company’s existing naval business. The ability of Rolls-Royce to offer fully integrated power systems across naval and commercial markets will open up significant opportunities. This expanded capability matches the needs of the changing marine market as customers increasingly demand integrated propulsion system design and supply. The company’s extended range of marine capabilities includes project management, design and integration, ship 12.1 F405-powered T-45 Goshawk 12.2 AE1107C-powered V-22 Osprey control and instrumentation, procurement and equipment 12.3 Ro-ro passenger ferry supply, installation and commissioning, integrated logistics 12.4 Marine propellers and platform support. Rolls-Royce supports its extensive capabilities with a comprehensive product range. Power is available from gas

12 Rolls-Royce plc 1999 turbines, diesel engines and electric motors. Marine equipment includes market-leading names such as Kamewa and Ulstein. New markets addressed by the company in the commercial sector include cruise and passenger, offshore exploration, production and service vessels, fishing, tugs, and cargo shipping. In the naval market sector, Rolls-Royce is undertaking propulsion system development for all planned Royal Navy 13.1 Kamewa water jet 13.2 Cruise ship platforms, including Type 45 frigate, Future Attack Submarine, 13.3 Ulstein-designed fishing vessel Future Carrier and Future Surface Combatant. In 1999, the 13.4 Type 23 frigate 13.5 Vanguard class submarine company was selected to provide power systems for the Royal Navy’s ASTUTE class of submarine with a contract to design, build and supply three sets of turbo generators which will provide the submarines with electrical power for sensors, services and weapons systems. All three ASTUTE submarines will be powered by Rolls-Royce nuclear steam raising plant. The company made good progress with the WR-21 engine, which is the only advanced-cycle marine gas turbine under development in the world. The engine has now completed development testing. During the year the company launched a new marine gas turbine, the 601K in the 6-8MW class primarily designed to power corvette and fast patrol craft. In August Rolls-Royce achieved a significant breakthrough in the commercial market when the marine Trent was selected for a $1 billion contract to power the future FastShip cargo vessel. Each of five vessels will be powered by five marine Trents driving Kamewa water jets. The gas turbines and water jets will each be rated at 50MW, the most powerful in the world. The company is a world-leading supplier of electric podded propulsion systems and achieved an order book of more than 30 Mermaid units in 1999. Two Mermaid propulsion systems

13 Rolls-Royce plc 1999 have recently been successfully mounted on the first of four Millennium series cruise ships for Celebrity Cruises. The company’s marine systems business has developed a strong services capability, building upon the generic skills developed in other sectors. Total care packages such as Power by the Hour™ are offered. One of the first applications will be FastShip for which a 20-year support package has been proposed.

Energy – 1999 sales £482 million; loss £39 million

Rolls-Royce is developing its energy businesses, concentrating on applications in the oil and gas sector and power generation equipment up to 75MW. These markets are addressed through a broad range of diesels and gas turbines and a comprehensive 14.1 Industrial RB211 – Slovakia 14.2 Allen 3000 diesel engines project development capability. 14.3 Industrial Trent – Teesside The company’s oil and gas business had a strong year. The 14.4 Allen 5000 diesel engine 14.5 Industrial Trent – Bristol acquisition of Cooper Cameron’s rotating compressor business enhances the company’s position as a leader in the oil and gas industry for pumping and compression and offshore power generation. Customers in these markets increasingly require innovative package solutions. The acquisition will enable Rolls-Royce to provide customers with improved products and integrated aftermarket services. In power generation the company increased its investment in new products. The latest addition to the portfolio of advanced medium speed diesels, the Allen 5016, was launched in September and is already attracting interest from potential customers worldwide. The company’s continuing investment in the industrial Trent resulted in increased in-service availability of the engines, which achieved 20,000 running hours in 1999. By the

14 Rolls-Royce plc 1999 end of the year, five Trent power stations were in operation. Rolls-Royce Power Ventures continued to develop its portfolio Good progress has been made with reducing emissions and we of power development projects. Successes in 1999 included the expect to introduce a fully compliant combustor in 2000. entry into service of a diesel power station in the Caribbean Continuing investment in this area will benefit the company’s and a new contract to supply diesel generating sets to gold complete range of industrial gas turbine products. mining operations in Tanzania. This company has attracted Rolls-Royce has 2,500 industrial gas turbines in active new partners into development projects and will be seeking service and expects this to grow as a consequence of the further opportunities to sell-down shares in projects, increased demand for distributed power and our investment unlocking value and releasing capital. in a broader range of products. The service element of this activity will assume a greater importance as customers Aftermarket services – 1999 sales and profit figures are included increasingly outsource the maintenance and operation of in the relevant market sectors equipment. Rolls-Royce overhauls more than 1,500 aero engines and 4,500 modules each year. The company repairs 47 different Services engine types for 400 customers through an international Financial and aftermarket service activities account for 40 per network of repair and overhaul operations based at cent of the company’s sales. Rolls-Royce continued to grow 16 locations on four continents. these businesses in 1999, offering a broader range of customer The company’s repair and overhaul business continued to services and generating increased revenue. grow in 1999, as a result of its comprehensive international network and the growing base of installed engines. Financial services – 1999 sales £37 million; profit £24 million Rolls-Royce won more than 100 repair and overhaul contracts Rolls-Royce & Partners Finance is the world’s largest specialist during the year. aero-engine leasing company. It successfully completed its first In September, the acquisition of National Airmotive, one full year as a joint venture with GATX Capital. At the end of of the United States’ leading aero and industrial engine repair the year the joint venture owned 144 aero engines, all of which and overhaul businesses, strengthened the company’s position are on lease to customers around the world. in the aftermarket. National Airmotive is an authorised Pembroke Group also completed a successful first full year maintenance centre for a variety of engines, including the of trading as a Rolls-Royce joint venture company. It specialises Rolls-Royce T56 and Model 250 engines, both of which have in aircraft leasing and management and, at the end of 1999, large fleets in service. owned 48 aircraft and managed a further 45 on behalf of The recently announced joint venture with SR Technics, a customers. sister company of Swissair will expand the global network for

15 Rolls-Royce plc 1999 Trent support, complementing existing facilities in the United States, Hong Kong, Singapore and the United Kingdom. Rolls-Royce formed a joint venture company, Data Systems & Solutions (DS&S), with Science Applications International Corporation. DS&S provides systems integration, integrated asset management and maintenance solutions to customers in aerospace, defence, marine and energy markets. DS&S won $82 million worth of new business in 1999 with customers as diverse as Condor, the German charter airline, and the Ignalina nuclear power station in Lithuania. DS&S now monitors 453 engines for 17 customers. Key development areas are the efficient capture of data, the enhancement of analytical tools 16.1 Trent 500 assembly and the delivery of information to customers via the internet. 16.2 Engine testbed 16.3 Repair and overhaul in USA 16.4 Customer training 16.5 Engine overhaul

16 Rolls-Royce plc 1999 Group turnover – per employee £000 Operating profit – per employee £000 1995 75 1995 3.9 1996 92 1996 5.4 1997 102 1997 6.2 1998 107 1998 7.8 1999 116 1999 9.2

People and community

We continue to invest in leadership programmes and workshops at different levels across the company. The Business Leadership Programme, which was launched in 1996, provided important training for another 30 senior executives last year. The Rolls-Royce Manager and Business Manager Courses have provided training for 250 new and middle managers over the year. This course also ran in the US for the first time, in collaboration with the Kelley Business School University of Indiana, for a group of managers from both North American and European locations. New skills and behavioural change courses continue to be designed and delivered for all employees in support of our business improvement processes. The Rolls-Royce Management Development Curriculum, established in conjunction with the Open University, has provided opportunities for certificate, diploma and masters degree qualifications. At the end of 1999, 274 company 17.1 Graduates with Trent 800 employees from around the world were participating in 17.2 Training for younger employees 17.3 Technical training the scheme. 17.4 Management development The accelerated development of younger employees continues through programmes like the International Business Awareness Course. Two programmes will be staged in India during this year providing development for over 100 young managers, including representatives from customer organisations. The investment in recruitment and development of graduates and modern apprentices across the business covered more than 300 people together with a further 274 undergraduate students, spending three to 12 months

17 Rolls-Royce plc 1999 training with the company. This represents a considerable investment in the development of those we consider to be the potential leaders and managers of the future. Company Training and Development continued its support for customer organisations in 35 countries around the world, in management, education and training. Notable among these were the provision of high-flyer programmes for the General 18.1 Customer support 18.2 Training in China Administration of Civil Aviation of China and the senior 18.3 Lord Mayor of London’s Show executive programmes for the State Economics and Trade 18.4 Employee charity support Commission of China and the State Development Planning Commission of China. Overall there was an increase in the number of people trained at all levels, representing an investment of over £24 million last year. Construction of a new company training centre is under way, representing an investment of £10 million. The centre, in Derby, will open in November 2000. The company supports a wide range of initiatives intended to improve the well being of the communities in which our employees live and work. Through our community investment committee, we help the socially and economically deprived. Our largest donation to date has been a contribution of £250,000 over five years to the Derbyshire Community Foundation to create a permanent fund to benefit local organisations and help the disadvantaged. As part of the company’s response to the Millennium, the committee is working closely with the National Museum for Science and Industry to develop a major new project in memory of Sir Frank Whittle, the central objective of which will be to attract more young people into engineering. We are also committed to improving the quality of

18 Rolls-Royce plc 1999 education at all levels. In 1999 the company contributed nearly £400,000 to this area. We are fully engaged in the government’s Education Action Zones, which are intended to bring schools and business communities closer together. We also support Business in the Community objectives and The Prince’s Trust. Through our ‘payroll giving’ scheme, employees can voluntarily give to charities of their choice. Nearly 3,500 employees are now donating to 176 charities through the scheme. We strongly encourage our employees to play a full part in the communities in which they work. Many of our employees are school governors and Rolls-Royce trainees assist community initiatives as an important part of their personal development. We will be marking the Millennium through support for ‘Creating Sparks’, the national festival of Science and the Arts in London, which incorporates the British Association’s Festival of Science. Some of our modern apprentices will be participating in the National Skills Festival to be held in 2000. This will be a showcase of practical and vocational skills by young people drawn from across the UK. Rolls-Royce also sponsors the arts through the Goldberg Chamber Orchestra, the East of England Orchestra and the new Tate Gallery.

19 Rolls-Royce plc 1999 Rolls-Royce delivered another year of strong financial performance allied with continued investment, including major acquisitions, to position the business for future growth. Paul Heiden Finance Director

Order book, turnover and profit were once again at record levels with underlying earnings per share meeting the double-digit growth target. Return on capital employed continued to exceed the cost of capital and net funds at the year-end remained unchanged, prior to the impact of acquisitions.

Results for the year

Group turnover for continuing operations was £4,744 million, an increase of £418 million, or 10 per cent, over 1998. Aerospace turnover increased by 9 per cent and industrial (including businesses to be disposed), by 14 per cent. Acquisitions contributed £161 million and have been largely included in industrial. Turnover growth was led by civil engines which increased by some 17 per cent. Civil spares income increased by 9 per cent. Defence sales remained fairly static, as did marine and energy.

20 Rolls-Royce plc 1999 Pre-tax return on average capital employed % Gross research and development £m 1995 9.4 1995 492 1996 11.9 1996 527 1997 14.2 1997 595 1998 15.8 1998 668 1999 17.0 1999 626

The Group continues to be a major exporter with 77 per cent Gross research and development expenditure reduced by (1998 80 per cent) of turnover originating in the UK and £42 million to £626 million. The Group continues to expense 80 per cent (1998 77 per cent) delivered to overseas customers. self-funded research and development expenditure which Gross margins on continuing operations improved to increased by £42 million to £215 million (1998 £173 million). 20 per cent (1998 19 per cent) due to a number of factors Training costs amounted to £24 million, equivalent to five including benefits from the Better Performance Faster days per employee. programme. The interest charge increased substantially from Capital expenditure amounted to £412 million £17 million in 1998 to £53 million in 1999, primarily as a (1998 £368 million). This represents another year of substantial consequence of the growth in inventory to support customers, investment to meet continued growth in demand, especially in the first half of the year, and the debt introduced predominantly for civil aerospace products, productivity for the funding of acquisitions. improvement objectives and increased capability in The Group made a profit before tax of £360 million manufacturing, supply and information technology. (1998 £325 million) which included a loss of £1 million for Included in the total was £162 million (1998 £128 million) acquisitions. The tax charge of £74 million represents an invested in financial services companies for power project effective tax rate of 21 per cent (1998 20 per cent). development, aircraft and gas turbine engine leasing. A final dividend of 4.55p is proposed, making 7.25p for Additionally £27 million was invested in joint ventures. the year (1998 6.55p). The dividend cover is 2.5 times During the year the Group acquired three undertakings (1998 2.6 times). and took full ownership of BMW Rolls-Royce. Details of the The number of Group employees increased by 9,300 during purchases were as follows: the year. Acquisitions and disposals accounted for a net Consideration increase of 10,900 and the underlying reduction of 1,600 was Undertaking Completion date £m Cooper Energy Services September 30, 1999 132 spread across the Group. Average numbers employed reduced National Airmotive Corporation November 1, 1999 47 Vickers November 17, 1999 595 by 1,100, being less impacted by acquisitions late in the year. BMW Rolls-Royce December 31, 1999 289 Group sales per employee were £116,000 (1998 £107,000). 1,063

Investments Restructuring costs of £55 million (1998 £15 million) were The Group invests for the future in a number of ways, incurred during the year. The main focus of the restructuring including research and development, training, capital programme was to remove surplus capacity, increase expenditure, investments in joint ventures and projects productivity, reduce non value-added activity and improve and, notably in 1999, acquisitions and restructuring. general capability. Aerospace businesses incurred £38 million,

21 Rolls-Royce plc 1999 Capital investment (restated for FRS9*) £m 1995 *152 1996 143 1997 229 1998 368 1999 412

with the balance being incurred by industrial businesses, year. The main risks continue to be movements in foreign largely Materials Handling. The expenditure included currency exchange rates, interest rates and commodity prices. redundancies for 2,000 employees. The Board regularly reviews the Group’s exposures and risk management and a specialist committee also considers these in Cash detail. All such exposures are managed by the Group Treasury, The Group cash flow statement is shown on pages 42 and 43 of which reports to the Finance Director and which operates the financial statements. Year-end net funds, before the impact within written policies approved by the Board and within the of acquisitions, amounted to £301 million (1998 £302 million). internal control framework described in the report of directors. The average overdraft for 1999 at £573 million was £393 million higher than 1998, giving rise to the increased interest charge. Foreign exchange risk Net cash flow from operating activities was £359 million The Group is exposed to movements in exchange rates for (1998 £285 million). Other sources of funds were £618 million both foreign currency transactions and the translation of net from increased borrowings and £4 million from the issue of assets and profit and loss accounts of foreign subsidiaries. shares. Major outflows were acquisitions (£666 million), net The Group does not hedge the translation effect of capital expenditure (£199 million) and an increase in net exchange rate movements on the profit and loss account or working capital (£97 million). balance sheet, as it regards its interests in overseas subsidiary The net working capital increase was significantly higher at companies as long-term investments. the half-year, as inventory build-up to support major customer The acquisitions undertaken during 1999 did not programmes impacted cash flows. This was largely corrected in significantly change the pattern of transactional foreign the second half, with inventory returning to more normal levels. exchange exposure faced by the Group. The most significant Provisions for liabilities and charges increased by transactional currency exposure remains the US dollar £180 million, substantially as a result of acquisitions. followed by the Euro. US dollar income, net of expenditure, represents 42 per cent of UK turnover. The Group has a less Treasury management significant exposure to other foreign currencies. The Group uses various financial instruments in order to The Group seeks to hedge its transactional exposure using manage the exposure that arises in its business operations as a a variety of financial instruments with the objective of result of movements in financial markets. The Group does not minimising the impact of fluctuations in exchange rates on trade in financial instruments for profit generation. All future transactions and cash flows. treasury activities are focused on risk management. There have The permitted range of the amount of cover taken is been no significant changes in the Group’s policies in the last determined by the written policies set by the Board. The

22 Rolls-Royce plc 1999 forward cover is managed within the parameters of these Group now has a net debt position, as a result of acquisitions policies in order to achieve the Group’s objectives, having undertaken during 1999. The acquisitions have been financed regard to the Group’s view of long-term exchange rates. by a £1 billion syndicated loan facility on a floating rate basis. US dollar cover extends for periods of up to six years, The Group’s exposure to interest rates via this borrowing is whilst Euro cover extends for periods of up to three years. now being limited by the use of interest rate swaps that lead to The majority of cover is in the form of standard foreign fixed rates being payable. The intention is to have a significant exchange contracts, although some cover, primarily of longer proportion of fixed interest rate obligations. This will be duration, includes instruments on which the exchange rates obtained via a combination of fixed-rate borrowings and achieved may be dependent on future interest rates. The Group interest rate swaps. also writes currency options against a portion of the unhedged dollar income. The premium received from the sale of the Commodity risk options is used to enhance the Group’s achieved rate. The Group has an ongoing exposure to the price of jet fuel Total US dollar cover approximates to two and a half years’ arising from business operations. The Group’s objective is net US dollar income (1998 two years). to minimise the impact of price fluctuations. The exposure The result has been to maintain a relatively stable foreign is hedged in accordance with the parameters contained in a exchange rate. In converting transactions denominated in written policy set by the Board. Hedging is conducted using US dollars, 1999 results have suffered by about £2 million in commodity swaps that extend for periods up to three years. comparison with 1998. This was a better result than expected early in 1999 and arose through a combination of a temporary Credit risk management fall in the exchange rate and management of the existing The Group’s policy is to monitor and manage its exposure forward cover. to counterparties. Credit limits are set to cover all financial In the absence of hedging, the Group is exposed to a gain or instruments for each counterparty. The Group’s policy is to loss each year of about £10 million for each one cent movement be exposed only to those counterparties that have a long-term in the US dollar/sterling relationship. credit rating of A3/A– or better.

Interest rate risk Taxation

The Group has historically managed its exposure to interest The UK tax charge continues to be reduced by the benefit rates by using interest rate swaps to change fixed-rate of timing differences, where full deferred tax has not been borrowings into floating-rate borrowings in order to match provided, and by the write-back of the Group’s Advance rates achieved on short-term deposits and cash at bank. The Corporation Tax (ACT) written off in previous years.

23 Rolls-Royce plc 1999 At the end of 1999, the Group had surplus ACT of £60 million Segmental analysis (1998 £102 million), in addition to that included in the balance In previous years, turnover, profit before interest and net assets sheet. ACT on dividends paid was abolished from April 1999, for the Group have been analysed in the customary segments but, through the introduction of the shadow ACT legislation, of aerospace and industrial and, for the current period, the Company has continued to utilise previously unrecovered businesses to be disposed. 1999 was the first full year of the ACT on broadly the same basis as in previous years. On the new management structure, focused on customers by sector. assumption that the Government continues with its stated The table below provides an alternative analysis by these intention that companies will be able to utilise unrecovered business sectors for 1999. Future reports will provide analysis ACT in this way, the Group expects to benefit from the only on this basis. recovery of ACT against its corporation tax liabilities over the Profit before Turnover interest next few years, resulting in a reduced effective UK tax rate. £m £m Overseas tax amounted to £10 million, primarily related Civil aerospace 2,654 232 Defence 1,138 181 to the results of North American businesses, including Marine systems 385 37 Energy 482 (39) Rolls-Royce Allison. Financial services* 37 24 Businesses to be disposed 48 (22) 4,744 413 Acquisitions *Gross turnover of financial services companies and joint ventures is £82 million. For the acquisitions made in the year, details of the adjustments to revalue assets and to align accounting policies Businesses to be disposed are detailed in note 30 on pages 66 to 68. This has resulted in Businesses under this heading are not expected to be part of total goodwill of £870 million, which has been capitalised and the Group at the next year-end. Included in this category for is being amortised. 1999 are the Materials Handling businesses which are expected Consideration to BMW for its 50.5 per cent holding of to be sold or closed in 2000. BMW Rolls-Royce included the issue of 33.3 million ordinary shares in Rolls-Royce and the waiver of the £180 million loan Financial Reporting Standards (FRS) owed to Rolls-Royce. The following FRSs have been fully implemented in the 1999 The impact of BMW Rolls-Royce is a profit of £14 million in financial statements for the first time: 1999 (1998 £3 million charge). This is a combination of a neutral FRS12 Provisions and contingencies trading position (after subvention payments) and foreign FRS13 Derivatives and other financial exchange movements. instruments: Disclosures FRS15, which deals with the cost, revaluation and depreciation

24 Rolls-Royce plc 1999 of tangible fixed assets, will be addressed for the 2000 financial their life cycles. Discounted cash flow analysis of the remaining statements. life of projects is performed on a regular basis to compute the value which underlies the Group’s market capitalisation. Year 2000 During the year, Rolls-Royce shares fell by 14 per cent from Rolls-Royce implemented a comprehensive strategy to address 249p to 214p per share compared to an 11 per cent fall for the Year 2000 computer issues. This required total additional aerospace and defence sector and an 18 per cent increase for external expenditure of approximately £25 million (£2 million the FTSE 100, which closed at a record level. less than previously forecast) which has been written off as The Company’s shares ranged in price from 189.5p, in incurred. To date no significant errors or failures have October, to 300p in April. occurred. Businesses acquired during the year had The number of shares in issue at the end of the year was substantially completed their Year 2000 projects prior to 1,545,024,330, an increase of 40,036,183 of which 33.3 million acquisition by Rolls-Royce. Whilst we continue to believe that were issued to BMW in part consideration for its 50.5 per cent the Group was well prepared in respect of Year 2000 issues, share in BMW Rolls-Royce and 6,736,183 related to share there is no absolute guarantee that problems will not arise in options and scrip dividends. the future, either with internal systems or at third parties with The average number of shares in issue was 1,506 million whom we deal. (1998 1,496 million). Underlying earnings per share were 19.52p, an increase of 15 per cent over 1998. The proposed final Shareholder value dividend per share will result in a total payment of 7.25p per The Group looks to create shareholder value in all activities share, an increase of 11 per cent over 1998. undertaken. A feature of the company’s business is very long product life cycles. Typically, a gas turbine engine family will sell for over 20 years, followed by long-term aftermarket support. This provides long-term predictability of sales and hence requires extended business plans. Potential new products, acquisitions and investments are subjected to rigorous examination of risks and future cash flows. The net present value of the opportunity is calculated using a 10 per cent cost of capital to establish its value to the Group. All major investments require Board approval. The Group has a portfolio of projects at different stages of

25 Rolls-Royce plc 1999 Sir Ralph Robins BSc, FREng Paul Heiden BSc, ARCS, ACA Chairman Finance Director Appointed to the Board in 1982. He joined Rolls-Royce in 1955, became Appointed to the Board in 1997. He joined Rolls-Royce in 1992 and became Managing Director in 1984, Chief Executive in 1991, and was appointed Finance Director – Aerospace Group later that year and Director – Industrial Chairman in 1992. He is non-executive Chairman of Cable & Wireless plc Businesses in 1997. He was appointed Finance Director in October 1999. and a non-executive director of Marks and Spencer plc, Schroders plc and He is a non-executive director of Bunzl plc. Age 43. Standard Chartered plc. He is a Fellow of the Royal Academy of Engineering and Chairman of the Defence Industries Council. Age 67. Sir Robin Nicholson FREng, FRS Non-executive director John E V Rose MA Appointed to the Board in 1986. Until 1996 he was an executive director of Chief Executive Pilkington plc. He is a Fellow of the Royal Academy of Engineering, a Fellow Appointed to the Board in 1992. He joined Rolls-Royce in 1984 and was of the Royal Society and a non-executive director of BP Amoco p.l.c. He is a Managing Director – Aerospace Group from 1995 to 1996 when he was member of the UK Government’s Council for Science and Technology. Age 65. appointed Chief Executive. He is a non-executive director of Reckitt Benckiser plc and of Riggs National Corporation in the USA. He is President Philip C Ruffles BSc, RDI, FREng, FRS of AECMA, a Fellow of the Royal Aeronautical Society and a director of Director – Engineering and Technology The Prince’s Trust. Age 47. Appointed to the Board in 1997. He joined Rolls-Royce in 1961, became Director – Engineering, Aerospace Group in 1991 and Director – Lord Moore of Lower Marsh PC, BSc Engineering and Technology in 1997. He is a Fellow of the Royal Academy Non-executive Deputy Chairman of Engineering, a Fellow of the Royal Society and a Fellow of the Institution and Senior Independent non-executive director of Mechanical Engineers. He is a Council Member of the Royal Aeronautical Appointed to the Board in 1994 and appointed Deputy Chairman in 1996. Society and the Central Laboratory of the Research Councils and is Royal He is Chairman of Credit Suisse Asset Management Limited and a Designer for Industry. Age 60. non-executive director of Blue Circle Industries Plc, Monitor Inc., Marvin & Palmer Inc., G Tech Corp. and the Central European Growth Fund plc. Age 62. Carl G Symon BSc, MSc Non-executive director Peter J Byrom BSc, FCA Appointed to the Board in June 1999. He is Chairman of IBM UK Ltd and Non-executive director Chairman of the Supervisory Board of IBM Netherlands. He held a number Appointed to the Board in 1997. He was a director of N M Rothschild & Sons of senior executive positions with IBM in general management in Latin Limited from 1977 to 1996. He is Chairman of Domino Printing Sciences plc America, Canada, Asia and the USA. Age 53. and of Molins PLC, and a non-executive director of Peter Black Holdings plc and Wilson Bowden plc. He is a Fellow of the Royal Aeronautical Society. Age 55. Richard T Turner OBE, BA Group Marketing Director Colin H Green BSc, FREng Appointed to the Board in 1992. He joined Rolls-Royce in 1991 having Director – Operations previously been with the Company from 1965 to 1988. He is a Fellow of the Appointed to the Board in 1996. He joined Rolls-Royce in 1968, became Royal Aeronautical Society, a member of the Board of British Trade International Managing Director, Rolls-Royce Military Aero Engines in 1994, Executive and several other government advisory committees. He is a non-executive Vice President – Business Operations Allison Engine Company, Inc. in 1995, director of Corus Group plc and Senior plc. Age 57. Managing Director – Aerospace Group in 1996 and was appointed Director – Operations in March 1998. He is a Fellow of the Royal Academy Sir John Weston KCMG of Engineering, a Fellow of the Royal Aeronautical Society, a Fellow of the Non-executive director Institution of Mechanical Engineers, Council Member of the Society of Appointed to the Board in 1998. During his Diplomatic Service career he British Aerospace Companies and Chairman of the United Kingdom Council has lived and worked in Europe, the United States and Asia. In London he for Electronic Business. Age 51. was Deputy Secretary to the Cabinet and Political Director in the Foreign Office. He served as British Ambassador to NATO (1992-5), and subsequently James M Guyette BSc as British Ambassador to the United Nations in New York until July 1998. President and Chief Executive Officer of Rolls-Royce North America Inc. He is a non-executive director of British Telecommunications plc and also Appointed to the Board in 1998. He became President and Chief Executive President of the UK-wide Community Foundation Network. Age 62. Officer of Rolls-Royce North America Inc., in October 1997. Until 1994 he was Executive Vice President, Marketing and Planning of United Airlines. Charles Blundell MA He serves on the United States National Research Council Aeronautics and Company Secretary Space Engineering Board and he is a director of the Private Bank and Trust He joined Rolls-Royce in 1993 and was appointed Company Secretary in Company of Chicago, Illinois. Age 54. 1995. Age 48.

Membership of principal Board committees: Audit committee – P J Byrom (Chairman), Lord Moore of Lower Marsh and Sir Robin Nicholson. Remuneration committee – All non-executive directors (Sir Robin Nicholson, Chairman). Nominations committee – Sir Ralph Robins (Chairman), J E V Rose and all non-executive directors.

26 Rolls-Royce plc 1999 The directors present their report and the financial statements adapted to the particular needs of individual businesses. of the Group for the year ended December 31, 1999. The Group consults with employees and their elected representatives on a comprehensive range of topics relating to Principal activities its overall business objectives. Management and employee The Group’s principal activities are described in the Corporate representatives hold regular meetings at every location to profile on page 1. discuss opportunities and issues of common interest.

Results for the year Health, safety and environment

The Chairman’s statement, the Chief Executive’s review and The Group strongly believes that health, safety and the Finance Director’s review describe the year’s operations, environment (HS&E) form an integral and important part of research and development activities and future prospects. professional day-to-day business management. This The directors recommend a final dividend of 4.55p a share. commitment is reflected in the Group’s HS&E policy and is With the interim dividend of 2.70p a share, paid on January 10, demonstrated through the activities of the HS&E committee, 2000, this will make a total dividend of 7.25p a share for the year. which operates as a sub-committee of the Board in line with Subject to approval of the recommended final dividend by corporate governance principles. shareholders, the total cost of dividends for 1999 is £112 million. The Group’s core values of reliability, integrity and If approved, the Company will pay the final dividend on innovation guide its approach to HS&E matters, which are the July 3, 2000 to shareholders registered on April 25, 2000. specific responsibility of line-management, although all employees have an important role to play. All employees have Employment access to comprehensive HS&E training and are supported by The Group’s employment policies and practices support its HS&E professionals. overall business objectives by motivating and developing The Group maintained a low incidence of major and lost employees to be responsive to the needs of the business and time injuries over the year, which was well below the average its customers. for the manufacturing sector. There were no fatalities involving The number of Group employees at the end of the year employees or contractors. However, the Group did receive was 49,600 (1998 40,300). In 1999, 213 graduates, 117 modern enforcement notices regarding electrical cables and water apprentices and four other trainees were recruited. In addition treatment systems and was fined £5,000 for exceeding an there have been 274 undergraduate students in the Company effluent discharge consent. The lessons learnt from these for training periods of between three and 12 months during 1999. incidents have been applied across the Group. The Group operates an equal opportunities policy. The In 1997, Rolls-Royce set its businesses worldwide the Group’s policy is to provide, wherever possible, employment challenge of obtaining ISO 14001, the international opportunities and training for disabled people, to care for environmental management standard. The implementation employees who become disabled and to make the best possible programme has been highly successful. By the end of 1999, use of their skills and potential. 80 per cent of all businesses targeted in 1998 had achieved A particularly strong emphasis has been placed on effective certification. The Company is on target to secure ISO 14001 employee communications and there are various forms of certification for the remaining businesses by the end of 2000 employee communication programmes across the Group, each and for recent acquisitions, by the end of 2001.

27 Rolls-Royce plc 1999 Rolls-Royce is reducing energy consumption through greater and in accordance with the Combined Code, each director is fuel efficiency. Its commitment to reduce emissions and noise subject to re-election at intervals of not more than three years. is contributing to a cleaner and quieter world. Over the last Any director appointed during the year is also required to few decades, there have been substantial improvements in fuel retire and seek re-election by the shareholders at the next consumption for gas turbines used in aviation and power Annual General Meeting. The directors retiring at this year’s generation. Aircraft now use less than half the fuel per Annual General Meeting are Mr J M Guyette, Mr P Heiden, passenger kilometre than in the 1960s. Engine improvements Lord Moore of Lower Marsh and Mr R T Turner. As a newly have contributed over two-thirds of these savings. Similarly, appointed director, Mr C G Symon will also retire at the the fuel consumption of the Rolls-Royce industrial RB211 Annual General Meeting and, as a non-executive director, does engine has decreased by 20 per cent since it entered service, not have a service contract. They all offer themselves for whilst the industrial Trent is setting the standard for simple re-election. cycle operation in power generation. It is the Group’s aim to achieve a further 10 per cent reduction in fuel consumption for Corporate governance all its gas turbine products by 2010. The Group is committed to the highest standards of corporate The Group’s nuclear facilities operate under strict control governance. This statement describes how it applies the and are overseen by the Nuclear Installations Inspectorate. principles and complies with the provisions of the Combined Emergency exercises are regularly undertaken to ensure a Code. continuing high level of readiness to deal with any emergencies on site. Compliance During the year, the Group published its first report on the The Board confirms that in 1999, the Company complied with environment entitled ‘Powering a better world’, copies of which all the provisions of the Combined Code. are available on written request to the Company Secretary. The report provides a detailed account of the Group’s policy, The Board performance and initiatives in the field of health, safety and The Board comprises a chairman, a chief executive, five other the environment. It also gives details of a number of key executive directors and five non-executive directors. environmental targets for the Group’s manufacturing Biographies of the directors appear on page 26. processes and products. Lord Moore of Lower Marsh has held the position of non-executive Deputy Chairman since 1996 and is the Directors Company’s Senior Independent director. All the non-executive Directors who held office during 1999 are listed on page 26, directors are considered by the Board to be independent of with the exception of Sir Gordon Higginson who retired from management and free of any relationship which could the Board with effect from May 27, 1999 and Mr M Townsend materially interfere with the exercise of their independent who retired from the Board with effect from December 31, judgement. They are appointed by the Board for specified 1999. Mr C G Symon was appointed to the Board as a terms on the basis of recommendations put to the Board by the non-executive director with effect from June 1, 1999. nominations committee. Under the Company’s Articles of Association, one-third of The Board meets regularly throughout the year. It considers the directors are subject to re-election every year. In addition all issues relating to the strategy, direction and future

28 Rolls-Royce plc 1999 development of the Group. It has a schedule of matters Mr C H Green, Mr J M Guyette and Mr P C Ruffles. Further reserved to it for decision which is regularly updated. The information on the committee’s work on this important area is requirement for Board approval on these matters is understood set out in the Group’s environmental report. and communicated widely throughout the Group. The community investment committee is responsible for To enable the Board to function effectively and the directors administering the Company’s policy on charitable donations. to discharge their responsibilities, full and timely access is The committee is chaired by Sir John Weston and its other provided to all relevant information. members are Sir Gordon Higginson (retired May 27, 1999), There is an agreed procedure for directors to take Sir Robin Nicholson (appointed July 8, 1999) and Mr R T Turner. independent professional advice if necessary, at the Company’s The Company’s annual charitable donations budget is expense. This is in addition to the access every director has to administered by the committee and by regional site the Company Secretary and to the General Counsel. committees. During 1999 the Company made charitable donations amounting to £348,000. A list of the principal Board committees donations made in 1999 is available on written request to the The Board has delegated certain powers and duties to Company Secretary. Board committees, all of which operate within defined terms During the year, the committee reviewed the Company’s of reference. policy on charitable donations and implemented a number of The nominations committee makes recommendations to the changes to bring it more into line with the Company’s current Board on the appointment of executive and non-executive business objectives and community interests. The revised directors. The committee is chaired by Sir Ralph Robins and policy to which the committee is currently working when its other members are Mr P J Byrom, Sir Gordon Higginson considering charitable appeals is set out below: (retired May 27, 1999), Lord Moore of Lower Marsh, Sir Robin ‘As a forward-looking, innovative and global company, Nicholson, Mr J E V Rose, Mr C G Symon (appointed June 1, Rolls-Royce plc is committed to being a good corporate citizen 1999) and Sir John Weston. in its operations throughout the world. The Group’s policy on The remuneration committee’s membership and principal donations is to direct its support primarily to causes with terms of reference are set out in the Remuneration report on educational, engineering and scientific objectives, as well as to pages 32 to 39. social objectives connected with the Company’s business and The audit committee meets regularly with the external place in the wider community’. auditors, reviews the Group’s annual and interim financial The Group made no political contributions in 1999. statements and also ensures that appropriate accounting policies and compliance procedures are in place. The committee Communication with shareholders is chaired by Mr P J Byrom and its other members are The Group attaches considerable importance to the effectiveness Lord Moore of Lower Marsh and Sir Robin Nicholson. of its communication with shareholders. It publishes a concise The recently formed risk committee's membership and summary financial statement as well as its full report and principal terms of reference are set out in the section on accounts and there is a separate environmental report. internal controls on page 30. There is regular dialogue with individual institutional The health, safety and environment committee is chaired by shareholders as well as general presentations after the interim Mr J E V Rose and its other members are Mr P J Byrom, and preliminary results. All shareholders can gain access to

29 Rolls-Royce plc 1999 these presentations, as well as to the annual report and other accordance with the guidance on Internal Control and information about the Group, through the Group’s web site at Financial Reporting issued in 1994 by the Institute of Chartered http://www.rolls-royce.com. They may also attend the Accountants in England and Wales. Company’s Annual General Meeting at which the key business Rolls-Royce acquired Vickers on November 17, 1999. The developments during the financial year are highlighted and at internal financial controls of the majority of Vickers’ businesses which they have an opportunity to ask questions. have been reviewed since then in accordance with Vickers’ existing procedures. Internal controls The Group has a clearly defined organisation structure The directors are responsible for the Group’s system of within which operational management have detailed internal controls, financial and otherwise, recognising that responsibilities and levels of authorisation, supported by such a system can provide only reasonable and not absolute written job descriptions and operating manuals. The Group assurance against material misstatement or loss. also has a code of business conduct. In September 1999, the Turnbull Committee published Key financial issues, such as credit and foreign exchange further guidance on the Combined Code which extended the management, sales financing and risk management, are directors’ review of the effectiveness of internal financial regularly reported to the Board, with financial and controls to encompass all control aspects, including non-financial indicators reported on a monthly basis. The operational, compliance and risk management. Following Group has a comprehensive budgeting system, with an annual publication of this guidance, the Group initiated a review of its budget approved by the directors. Revised forecasts for the risk management practices and internal controls in order to year are prepared at least quarterly. Actual results are reported establish the procedures required to comply with the Turnbull monthly against budget and variances reviewed. In view of the Report in 2000. long-term nature of the business, the Group also prepares, In response to these new requirements, the Group has annually, a detailed five-year plan. established a risk committee. The committee is chaired by The finance and general managers of individual businesses Mr J E V Rose and its other members are Mr C H Green, are required to acknowledge in writing that their routine Mr J M Guyette, Mr P Heiden and Mr P C Ruffles. Its terms financial reporting is based on reliable data. They are also of reference include the review and implementation of the required to acknowledge, by interview and in writing, that they Group’s risk management strategy and policy, the reporting are aware of their responsibility to operate systems of internal of key risks and the containment of risk exposure within control which provide reasonable assurance of effective and delegated limits set by the Board. The committee will report efficient operations, reliable financial information and reporting to the Board at least twice a year on significant risks facing the and compliance with law and regulations, and that their results Group. In conjunction with the audit committee, it will also are properly stated in accordance with Group requirements. report on the adequacy of the Group’s internal controls. The Group has an internal audit department, which works The directors have identified the major financial, closely with the external auditors and operates to a work operational and compliance risks facing the business. programme agreed with the audit committee and based on Nevertheless, the directors have taken advantage of the risk assessment. The effectiveness of the system of controls is London Stock Exchange’s transitional rules and have examined by the use of detailed questionnaires and through continued to review and report on internal financial controls in specific investigations by internal audit, together with the

30 Rolls-Royce plc 1999 results of reviews by the external auditors and other external Share capital organisations. Where necessary, corrective action is taken. The following have a notifiable interest in the Company’s ordinary shares at March 1, 2000: Going concern % of issued After making enquiries, the directors have a reasonable share capital Schroder Investment Management Limited 12.9 expectation that the Group has adequate resources to continue BMW AG 10.0 in operational existence for the foreseeable future. For this reason they continue to adopt the going concern basis in Auditors preparing the financial statements. A resolution to reappoint the auditors, KPMG Audit Plc, and to authorise the directors to determine their remuneration, will be Fixed assets proposed at the Annual General Meeting. At the end of 1999, a revaluation of the Company’s land and buildings was carried out by professional valuers, which By order of the Board suggests a value marginally greater than the figure shown in the financial statements.

Charles E Blundell Company Secretary, March 1, 2000 Payment to suppliers

The Company is guided by the Supply Chain Relationships in Aerospace (SCRIA) initiative. It seeks the best possible terms from suppliers and when entering into binding purchasing contracts, gives consideration to quality, delivery, price and the terms of payment. In the event of disputes, efforts are made to resolve them quickly. The Company had the equivalent of 58 days purchases outstanding at December 31, 1999, based on the average daily amount invoiced by suppliers during the year.

31 Rolls-Royce plc 1999 Rolls-Royce operates in a highly competitive, international Compliance market. Its business is complex, technologically advanced and The Board confirms that the Company has complied has long time horizons. The improvement in performance to throughout the year with the provisions of the Combined which the Group is committed depends crucially on the Code relating to directors’ remuneration. individual contributions made by the executive team and by employees at all levels. It is for this reason that the Board The framework of remuneration strongly believes that an effective remuneration strategy will The Board has adopted, on the recommendation of the continue to play a crucial part in the future success of the Group committee, a remuneration policy reflecting the following by providing keen incentives and creating a close identity of broad principles: interest with shareholders. This report also describes how the i) The remuneration of executive directors and other senior principles identified by the Combined Code in relation to executives should directly reflect their responsibilities and executive directors’ remuneration are applied by the Company. contain incentives to deliver the Group’s performance objectives; The remuneration committee ii) A significant proportion of total remuneration should be In line with the requirements of the Combined Code, the based on Group and individual performance, both in the remuneration committee (the committee), which operates short and long term; and within agreed terms of reference, has responsibility for making iii) The system of remuneration should encourage a close identity recommendations to the Board on the Group’s general policy of interest between senior management and shareholders. towards executive remuneration. The committee also Within this framework of remuneration, the committee determines, on the Board’s behalf, the specific remuneration keeps under regular review the competitiveness of the Group’s packages of the executive directors and a number of senior remuneration structure. executives. The membership of the committee consists exclusively of The main components of remuneration independent non-executive directors. The members are The emoluments of executive directors and senior executives Sir Robin Nicholson (Chairman), Mr P J Byrom, Lord Moore of currently comprise the following elements: a base salary, an Lower Marsh, Mr C G Symon (who was appointed on June 1, annual performance award scheme, long-term incentive 1999) and Sir John Weston. Sir Gordon Higginson served as a arrangements, pension contributions and other benefits. The member of the committee until his retirement on May 27, 1999. policy takes into account pay levels elsewhere in the Group. The committee meets regularly and has access to professional advice from inside and outside the Company. Base salary The Chairman of the Company, Sir Ralph Robins, and the The committee believes that in order to attract and retain Chief Executive, Mr J E V Rose, generally attend meetings but executive directors of the right calibre and to provide them are not present during any discussion of their own with adequate incentives to deliver the Group’s objectives, emoluments. the Group should pursue a policy of offering median-level base salaries for its executive directors and senior executives, and through the performance-related schemes, the opportunity of upper quartile earnings for upper quartile performance.

32 Rolls-Royce plc 1999 Annual performance award scheme 2000 but with no executive receiving both an LTIP award and Executive directors and senior executives participate in an executive share options in the same year. The committee also annual performance award scheme. The scheme enables a confirmed that LTIP awards might be resumed at any point in maximum performance award of up to 60 per cent of salary to the future if market conditions indicated the need for more be paid to executive directors for exceptional performance competitive arrangements for long-term incentives. against pre-determined targets based upon return on capital employed, with a tapered and reducing scale of maximum Executive share option plan percentages for senior executives. The targets are set by the In line with the policy described above, a total of 69 North committee based upon the Group’s annual operating plans. American executives and new entrants to the Group received Such payments do not form part of pensionable earnings. executive share option plan awards in 1999. The first awards to One third of any awards made are paid in Rolls-Royce UK executives will be made in 2000. shares which are held in trust for two years, with release Up to 500 executives are eligible to receive options which normally being conditional on the individual remaining in the can be awarded on an annual basis. Options are granted at the Group’s employment until the end of the period. The required market value on the date of issue and normally have to be held shares are purchased on the open market. This arrangement for a minimum of three years before they are capable of exercise. provides a strong link between performance and remuneration They expire after ten years. In line with the committee’s view and promotes a culture of share ownership amongst the that an increasing proportion of remuneration should be Group’s senior management. performance related, the exercise of options is subject to a performance condition that the Group’s growth in earnings Long-term incentives per share (EPS) must exceed the UK retail price index by Following a review of remuneration policy in 1998, the three per cent per annum, over a three-year period. The committee concluded that the lack of an executive share option committee wishes to retain flexibility in the use of existing or plan was increasingly acting as a serious constraint on the new issue shares to fund the scheme, but has a general ability of the Company to offer competitive remuneration preference in favour of existing shares. packages, particularly in North America. A new executive share option plan was therefore introduced in 1999, having Long-term incentive plan been approved by shareholders at the 1999 Annual General The LTIP has operated with effect from January 1, 1997. In line Meeting. with the conclusions of the review of remuneration policy In the 1998 Remuneration report, the committee made clear referred to above, a third award under this plan was made to the relationship which it believed should exist between the 63 executives (including executive directors) in 1999. new executive share option plan and the Company’s existing The LTIP involves the grant of awards of shares in the long-term incentive plan (LTIP). A third set of LTIP awards Company, which can be realised in the form of shares and cash would be made in 1999 to coincide with the three-year cycle if demanding performance targets are met. The maximum under the plan. A limited number of executive share options value of the awards is 60 per cent of salary for executive would also be awarded but these would be restricted to North directors, with a tapered and reducing scale of maximum American executives and to new recruits to the Group. percentages for senior executives. The required shares for the Executive share options would be granted on a wider scale in LTIP are purchased on the open market.

33 Rolls-Royce plc 1999 The percentage of the award, and therefore the value which All employee incentives can be realised, depends upon the Company’s total The committee believes that sharesave schemes, described in shareholder return (TSR) over a three-year performance more detail on page 62, make a significant contribution to the measurement period, compared to that achieved over the same close involvement and interest of all employees in the Group’s period by a group of 19 comparator companies comprising performance. Accordingly, in September 1999 the sharesave other leading engineering and industrial companies. No award scheme was, for the first time, extended to include employees is realised unless the average growth in the Group’s EPS over overseas in a total of 24 countries. The response was very the three-year period is at least two per cent per annum greater positive with 42.5 per cent of employees worldwide taking up than the average increase in the UK retail price index over the the offer. same period. Under the rules of the LTIP, the percentage of shares Pensions comprised in the award which can be realised is determined by Mr J M Guyette participates in pension plans sponsored by the Company’s TSR ranking against the comparator group. Rolls-Royce North America Inc. 100 per cent of the award is secured for a first, second or third All other executive directors under their normal retirement ranking, with a uniform sliding scale of percentages then being age are members of the Group’s UK pension schemes. These applied to each ranking down to, and including, ninth place schemes are funded and approved final salary pension which earns 40 per cent of the share award. No award is made schemes providing, at retirement, a pension of up to two thirds if the Company’s TSR ranking is tenth or below. If an award is of final remuneration, subject to Inland Revenue limits. realised, the participant receives one half of its value at the The Company also operates the Rolls-Royce 1994 Senior release date in the form of shares and the other half in cash. Executive Retirement Scheme (SERS). The purpose of the SERS He or she is required to retain at least half of the shares for a is to fund pension provision above the pensionable earnings minimum of two years. cap which was imposed on approved pension schemes under The performance period for the 1997 LTIP grant ended on the 1989 Finance Act. Membership of the scheme is restricted December 31, 1999 and no award was realised. to executive directors and to a limited number of senior The committee reviewed the operation of the LTIP in 1999 executives. The scheme is administered by three trustees, and concluded that the level of merger and acquisition activity under the chairmanship of Lord Moore of Lower Marsh in the engineering sector had increased to the point where it (appointed October 21, 1999), none of whom has a beneficial had become impracticable to identify suitable replacement interest in the scheme. The members of the scheme include companies for the comparator group which were valid Mr P Heiden, Mr M Townsend and Mr R T Turner. They comparators to Rolls-Royce. The committee therefore decided joined the Group after the introduction of the earnings cap and that for the 1998 and 1999 LTIP grants any companies which their terms and conditions on joining the Group included a dropped out of the comparator group would not be replaced, commitment to provide pension and life cover based on total with the size of the comparator group being reduced salary, in line with other directors and senior executives. The accordingly. In line with the rules of the plan, the method of committee believes that for these executive directors, a funded calculation of the vesting of the award would then be adjusted arrangement is in the best interests of shareholders and avoids in a way which ensured that the new performance requirement the build up of unfunded liabilities for the future. would be no less onerous for the participants. During the year, special bonus payments were made to

34 Rolls-Royce plc 1999 Mr P Heiden, Mr M Townsend and Mr R T Turner to cover Notes 1 The pension entitlement shown is that which would be paid annually on retirement, based the income tax liability incurred by them on the contribution on service to the end of the year. 2 The transfer value stated represents liabilities of the Rolls-Royce and Rolls-Royce North payments made by the Company into the SERS. These America Inc. sponsored pension schemes and not sums paid to the individuals. The transfer value has been calculated on the basis of actuarial advice in accordance with Actuarial payments amounted to £11,500 (1998 £52,000) in the case of Guidance Note GN11, less the director’s contributions. Actuarial Guidance Note GN11 covers individual transfer calculations and the above figures have been calculated using Mr P Heiden, £141,000 (1998 £57,000) in the case of assumptions certified by the Actuaries as being consistent with GN11. 3 Benefits are translated at US$1.62 = £1.00. Mr M Townsend and £37,000 (1998 £29,000) in the case of 4 Members of the schemes have the option to pay Additional Voluntary Contributions. Neither the contributions nor the resulting benefits are included in the above table. Mr R T Turner. 5 The lump sum entitlement shown is that which would be paid on retirement based on service to the end of the year. The Company does not make any pension contributions in 6 The transfer value has been calculated as the contributions paid over the calendar year. 7 Mr J M Guyette is a member of two defined pension plans in the USA, one qualified and one respect of Sir Ralph Robins, who reached normal retirement non-qualified. The aggregate value of the two plans is shown in the first table. Mr J M Guyette is also a member of an unfunded non-qualified plan in the USA, from which he accrues a age in June 1994. retirement lump sum benefit. The values for this plan are shown in the second table. In addition, Mr Guyette is a member of a 401(K) Savings Plan in the USA to which his employer, Details of the pension benefits, which accrued over the Rolls-Royce North America Inc., contributes. During 1999 the employer’s contributions amounted to £4,444. year in the Group’s approved UK pension schemes and pension plans sponsored by Rolls-Royce North America Inc.,

1,4 are given below . Terms and conditions Service contracts

Transfer value2 Sir Ralph Robins has a one-year rolling contract, which Additional of additional pension earned pension earned Total accrued in excess of in excess of pension provides for 12 months’ notice in event of termination by the inflation during inflation during entitlement at year ended year ended the year ended Company. He works for the Company at the equivalent rate Dec 31, 1999 Dec 31, 1999 Dec 31, 1999 £000 per annum £000 £000 per annum of three days a week. Mr J E V Rose 40 817 171 Mr J M Guyette has a contract with Rolls-Royce North Mr C H Green 35 855 186 Mr J M Guyette 3,7 52311America Inc., drawn up under the laws of the State of Virginia. Mr P Heiden 3 42 23 It is for an indefinite term and provides that on termination Mr P C Ruffles 39 713 180 Mr M Townsend 10 190 28 without cause on, or after, the third anniversary, he is entitled Mr R T Turner 2 21 12 to one year’s severance pay without mitigation. If terminated by the Company without cause prior to the third anniversary, Details of the retirement benefits, which accrued over the the severance pay period would extend to October 1, 2001, year in the SERS and the plan sponsored by Rolls-Royce without mitigation.

5 North America Inc., are given below . In the light of the Combined Code, the committee has reviewed its previous policy of offering UK executive directors Transfer value 6 Additional of additional two-year rolling contracts. It has concluded that new appointees retirement retirement lump sum lump sum Total accrued to the Board will be offered notice periods of one year. The earned in earned in retirement excess of excess of lump sum committee recognises that in the case of appointments to the inflation during inflation during entitlement at year ended year ended the year ended Board from outside the Company, it may be necessary to offer Dec 31, 1999 Dec 31, 1999 Dec 31, 1999 £000 £000 £000 a longer initial notice period, which would subsequently Mr J M Guyette 3,7 282 140 560 Mr P Heiden 53 38 290 reduce to twelve months after that initial period. Mr M Townsend 128 216 643 Mr J E V Rose, Mr C H Green, Mr P Heiden, Mr P C Ruffles Mr R T Turner 47 54 378 and Mr R T Turner all have two-year rolling contracts, which

35 Rolls-Royce plc 1999 provide for 24 months’ notice in the event of termination of employment by the Company. Mr M Townsend who retired on December 31, 1999, also had a two-year rolling contract with the same notice requirement. These contracts were entered into before the change in policy described above. The non-executive directors do not have service contracts.

Compensation and mitigation

The committee has a defined policy on compensation and mitigation to be applied in the event of a UK director’s contract being prematurely terminated. In these circumstances, steps are taken to ensure that poor performance is not rewarded. When calculating termination payments, the committee takes into account a range of factors such as age, years of service and the director’s obligation to mitigate his own loss. Mr M Townsend retired early from the Company on December 31, 1999 and received a termination payment of £530,000 and a payment of £20,298 in lieu of benefits. The committee considered his compensation in the light of its policy on mitigation and in line with that policy concluded that it would not be appropriate to apply mitigation.

Non-executive directors

The fees paid to non-executive directors are determined by the executive directors who are informed by independent market surveys. Each non-executive director receives an annual fee of £25,000. In addition, fees of £5,000 per annum are paid in respect of membership of the audit and remuneration committees and £7,500 per annum to the chairmen of these committees. (Membership of the committees is reported on pages 29 and 32). Lord Moore of Lower Marsh is Chairman of the Trustees of the Rolls-Royce Pension Fund and receives an annual fee of £10,000 for performing this role. Non-executive directors do not participate in any of the Company’s share schemes, performance pay arrangements or pension schemes.

36 Rolls-Royce plc 1999 Individual directors’ emoluments The individual directors’ emoluments are analysed as follows: 1999 1998 Rolls-Royce plc Aggregate Aggregate Annual emoluments emoluments Board and performance excluding excluding Basic committee Taxable award Other pensions pensions salaries fees benefits scheme 1 payments contributions 2 contributions £000 £000 £000 £000 £000 £000 £000 Sir Ralph Robins 3 305 — 29 96 — 430 548 Mr J E V Rose 447 — 15 142 — 604 524 Mr C H Green 293 — 25 90 — 408 378 Mr J M Guyette 4 315 — 43 95 — 453 386 Mr P Heiden 254 — 14 86 — 354 308 Mr P C Ruffles 240 — 15 75 — 330 297 Mr M Townsend 5 262 — 16 79 550 6 907 339 Mr R T Turner 227 — 12 71 — 310 295 Mr P J Byrom —37—— —3734 Sir Gordon Higginson 7 —12—— —1226 Lord Moore of Lower Marsh —45—— —4537 Mr H G Mourgue 8 ———— ——13 Sir Robin Nicholson —37—— —3733 Mr C G Symon 9 —18—— —18— Sir John Weston —30—— —30 7 2,343 179 169 734 550 3,975 3,225

1 One third of the award will be paid in Rolls-Royce shares (see page 33). 2 Details of the directors’ pensions are set out on pages 34 and 35. 3 40% of Sir Ralph Robins’ taxable benefits for 1999 were reimbursed by Cable & Wireless plc, in respect of his position as non-executive Chairman of that Company. 4 Mr J M Guyette was paid in US dollars translated at $1.62 = £1. 5 Mr M Townsend retired as director with effect from December 31, 1999. 6 This payment is a termination payment to Mr M Townsend who took early retirement from the Company on December 31, 1999 (see page 36). 7 Sir Gordon Higginson retired as a director with effect from May 27, 1999. 8 Mr H G Mourgue retired as a director with effect from March 31, 1998. 9 Mr C G Symon was appointed to the Board with effect from June 1, 1999.

Directors’ share interests The directors, including their immediate family, at December 31, 1999, had the following beneficial interests, including options and LTIP awards, in the ordinary share capital of the Company: Holdings December 31, January 1, 1999 1999 Sir Ralph Robins 43,103 42,038 Mr J E V Rose 21,100 7,281 Mr C H Green 88,432 86,246 Mr J M Guyette 5,194 5,066 Mr P Heiden 17,179 10,179 Mr P C Ruffles 14,821 10,107 Mr M Townsend 24,390 24,390 Mr R T Turner 12,349 12,349 Mr P J Byrom 21,094 11,067 Lord Moore of Lower Marsh 17,164 11,864 Sir Robin Nicholson 17,036 7,036 Mr C G Symon 2,500 — Sir John Weston 2,050 2,000

Mr M Townsend retired as a director with effect from December 31, 1999. Mr C G Symon was appointed to the Board with effect from June 1, 1999 at which time he had no interests in the shares of the Company. Sir Ralph Robins, Mr C H Green, Mr J M Guyette, Mr P J Byrom, Lord Moore of Lower Marsh, and Sir John Weston took 603; 1,236; 74; 13; 170 and 29 shares respectively instead of cash dividends in January 2000. Otherwise there has been no change in the directors’ interests between December 31, 1999 and March 1, 2000.

37 Rolls-Royce plc 1999 Directors’ share interests continued

Options Aggregate January 1, Granted December 31, Exercise gains 1998 Exercisable 1999 in 1999 1999 price £000 dates Sir Ralph Robins 126,407 126,407 172p 2000 125,890 125,890 139p 2000-2001 7,438 7,4381 205p 2003 499 4991 194p 2003 259,735 499 260,234 157p2 —

Mr J E V Rose 116,750 116,750 176p 2000-2005 7,438 7,4381 205p 2003 947 9471 194p 2007 124,188 947 125,135 178p2 —

Mr C H Green 67,250 67,250 176p 2000-2005 8,633 8,6331 106p 2000 4,756 4,7561 205p 2005 4,053 4,0531 194p 2007 80,639 4,053 84,692 171p2 2

Mr J M Guyette 114,581 114,581 269p 2002 2,721 2,7211 194p 2002 117,302 117,302 267p2 —

Mr P Heiden 66,750 66,750 176p 2000-2005 7,438 7,4381 205p 2003 499 4991 194p 2003 74,188 499 74,687 179p2 —

Mr P C Ruffles 58,652 58,652 139p 2000-2001 80,685 80,685 125p 2000-2002 66,750 66,750 176p 2000-2005 4,600 4,6001 150p 2001 2,894 2,8941 205p 2003 1,098 1,0981 194p 2003 213,581 1,098 214,679 146p2 4

Mr M Townsend 118,959 118,959 125p 2000-2002 116,750 116,750 176p 2000-2005 5,750 5,7501 150p 2001 342 3421 205p 2001 241,801 241,801 150p2 7

Mr R T Turner 105,750 105,750 176p 2000-2005 6,900 6,9001 150p 2001 1,697 1,6971 194p 2003 112,650 1,697 114,347 175p2 —

1 Sharesave schemes. 2 Weighted average exercise price of December 31, 1999 balance.

No director exercised any share options in 1999 and accordingly no gains were made.

All of the outstanding options awarded under the executive share option scheme were granted at the market value on the date of issue and no discount was applied. The market price of the Company’s ordinary shares ranged between 189.5p and 300p during 1999 and was 214p on December 31, 1999.

38 Rolls-Royce plc 1999 Directors’ share interests continued

Conditional awards granted under the LTIP to executive directors (and which were granted in 1998 and 1999) are set out below. The extent to which the maximum number of shares comprised in an award (as stated below) is realised will depend on the satisfaction of demanding performance conditions (see pages 33 and 34).

LTIP awards Aggregate Aggregate Aggregate conditional conditional conditional awards awards awards 1999 1998 Total Sir Ralph Robins 69,880 102,127 172,007 Mr J E V Rose 101,205 89,361 190,566 Mr C H Green 67,470 66,382 133,852 Mr J M Guyette 1 — 74,124 74,124 Mr P Heiden 57,831 53,617 111,448 Mr P C Ruffles 55,422 51,063 106,485 Mr M Townsend 61,446 61,276 122,722 Mr R T Turner 53,012 53,617 106,629

1 In 1999 in line with the remuneration policy for North American executives (see page 33), Mr J M Guyette was awarded executive share options rather than an LTIP award.

In addition to the individual interests in shares awarded under the LTIP shown above, each of the executive directors is, for Companies Act purposes, regarded as interested in all the 3,381,092 shares held by the discretionary trust linked to the LTIP. These shares are held for the purpose of satisfying awards granted under the LTIP to a total of 79 participants (including executive directors).

39 Rolls-Royce plc 1999 Other continuing Total Total Acquisitions operations 1999 1998 Notes £m £m £m £m Turnover: Group and share of joint ventures 161 4,646 4,807 4,687 Sales to joint ventures — 799 799 701 Less share of joint ventures’ turnover — (862) (862) (892) Group turnover 2 161 4,583 4,744 4,496 Cost of sales (124) (3,663) (3,787) (3,701) Gross profit 37 920 957 795 Commercial, marketing and product support costs (7) (188) (195) (162) General and administrative costs (21) (150) (171) (156) Research and development (net)* (2) (213) (215) (173) Utilisation of provision for loss on sale/termination of businesses ———12 Group operating profit 7 369 376 316 Share of operating profit of joint ventures —313117 Loss on sale of businesses 31 — (14) (14) (40) Profit from the sale to BMW of the automotive trademark registrations of the Rolls-Royce name ———40 Profit on sale of fixed assets 7 —2020 9 Profit on ordinary activities before interest 2 7 406 413 342 Net interest payable – Group 4 (35) (12) – joint ventures (18) (5) Profit on ordinary activities before taxation 3 360 325 Taxation 5 (74) (65) Profit on ordinary activities after taxation 286 260 Equity minority interests in subsidiary undertakings (2) (2) Profit attributable to ordinary shareholders 284 258 Dividends 6 (112) (99) Transferred to reserves 25 172 159

*Research and development (gross) (626) (668)

Earnings per ordinary share: 7 Underlying 19.52p 16.91p Basic 18.86p 17.25p Diluted basic 18.62p 17.10p

As permitted by the Companies Act 1985, a separate profit and loss account for the Company has not been included in these financial statements. Of the Group profit attributable to ordinary shareholders, a profit of £326m (1998 £281m) has been dealt with in the profit and loss account of the Company.

No operations were discontinued in 1999. The results of discontinued operations in 1998 are set out in note 3.

40 Rolls-Royce plc 1999 Group Company

1999 1998 1999 1998 Notes £m £m £m £m Fixed assets Intangible assets – goodwill 9 873 8 — — Tangible assets 10 1,753 1,217 857 744 Investments – subsidiary undertakings 11 — — 1,679 736 – joint ventures 12 151 134 48 67 share of gross assets 958 855 share of gross liabilities (807) (721) – other 13 31 15 10 5 2,808 1,374 2,594 1,552 Current assets Stocks 14 1,274 1,041 626 734 Debtors – amounts falling due within one year 15 1,321 975 1,086 750 – amounts falling due after one year 16 371 372 224 322 Short-term deposits and investments 17 464 722 355 671 Cash at bank and in hand 521 297 339 149 3,951 3,407 2,630 2,626 Creditors – amounts falling due within one year Borrowings 18 (408) (177) (151) (60) Other creditors 19 (2,467) (1,961) (1,841) (1,867) Net current assets 1,076 1,269 638 699

Total assets less current liabilities 3,884 2,643 3,232 2,251

Creditors – amounts falling due after one year Borrowings 20 (1,271) (540) (894) (199) Other creditors 21 (109) (63) (259) (252)

Provisions for liabilities and charges 22 (503) (323) (65) (86) 2,001 1,717 2,014 1,714

Capital and reserves Called-up share capital 24 309 301 309 301 Share premium account 25 615 548 615 548 Revaluation reserve 25 112 114 104 106 Other reserves 25 140 132 167 167 Profit and loss account 25 812 610 819 592 Equity shareholders’ funds 1,988 1,705 2,014 1,714

Equity minority interests in subsidiary undertakings 13 12 — — 2,001 1,717 2,014 1,714

The financial statements on pages 40 to 72 were approved by the Board on March 1, 2000 and signed on its behalf by: Sir Ralph Robins Chairman, P Heiden Finance Director

41 Rolls-Royce plc 1999 1999 1998 £m £m Net cash inflow from operating activities A 359 285 Dividends received from joint ventures 6 11 Returns on investments and servicing of finance B (32) (10) Taxation paid (38) (34) Capital expenditure and financial investment C (199) (309) Acquisitions and disposals D (666) 87 Equity dividends paid (88) (65) Cash outflow before use of liquid resources and financing (658) (35) Management of liquid resources E 261 (336) Financing F 622 113 Increase/(decrease) in cash 225 (258)

Reconciliation of net cash flow to movement in net funds Increase/(decrease) in cash 225 (258) Cash (inflow)/outflow from (decrease)/increase in liquid resources (261) 336 Cash inflow from increase in borrowings (618) (99) Change in net funds resulting from cash flows (654) (21) Borrowings of businesses acquired (332) — Loans disposed of with subsidiary undertakings (including reclassification to joint ventures) — 112 Zero-coupon bonds 2005/2007 (9.0% interest accretion) (3) (2) Exchange adjustments (7) — Movement in net funds (996) 89 Net funds at January 1 302 213 Net funds at December 31 (694) 302

At Other At January 1, Acquired Exchange non-cash December 31, Analysis of net funds 1999 Cash flow businesses adjustments changes 1999 £m £m £m £m £m £m Cash at bank and in hand 297 222 — 2 — 521 Overdrafts (97) 3 — (6) — (100) Short-term deposits and investments 722 (261) — 3 — 464 Other borrowings due within one year (69) (88) (141) (3) — (301) Borrowings due after one year (441) (538) (191) (1) (3) (1,174) Finance leases (110) 8 — (2) — (104) 302 (654) (332) (7) (3) (694)

42 Rolls-Royce plc 1999 1999 1998 £m £m Reconciliation of operating profit to operating cash flows Operating profit 376 316 Depreciation of tangible fixed assets (note 3) 105 113 Amortisation of purchased goodwill (note 3) 5 — Loss/(profit) on disposals of tangible fixed assets 4 (1) Decrease in provisions for liabilities and charges (34) (89) Decrease/(increase) in stocks 39 (102) Increase in debtors (113) (82) (Decrease)/increase in creditors (23) 130 A Net cash inflow from operating activities 359 285

Returns on investments and servicing of finance Interest received 26 47 Interest paid (51) (50) Interest element of finance lease payments (7) (7) B Net cash outflow for returns on investments and servicing of finance (32) (10)

Capital expenditure and financial investment Purchases of tangible fixed assets (381) (387) Disposals of tangible fixed assets 187 41 Sale to BMW of the automotive trademark registrations of the Rolls-Royce name — 40 Acquisition of own shares by trust (5) (3) C Net cash outflow for capital expenditure and financial investment (199) (309)

Acquisitions and disposals Acquisitions of businesses (note 30) (653) — Disposals of businesses – including cash balances disposed of — 132 Deferred consideration in respect of prior year disposals 14 — Investments in joint ventures (16) (44) Loans to joint ventures (11) — Loan repayments from joint ventures — 5 Acquisition of non-equity minority interests in subsidiary undertakings — (6) D Net cash (outflow)/inflow for acquisitions and disposals (666) 87

Management of liquid resources Decrease/(increase) in short-term deposits 262 (333) Increase in government securities and corporate bonds (1) (3) E Net cash inflow/(outflow) from management of liquid resources 261 (336)

Financing Borrowings due within one year – repayment of notes — (150) – increase in bank loans 88 87 Borrowings due after one year – repayment of loans (196) (4) – new loans 734 177 Capital element of finance lease payments (8) (11) Net cash inflow from increase in borrowings 618 99 Issue of ordinary shares 4 14 F Net cash inflow from financing 622 113

43 Rolls-Royce plc 1999 1999 1998 £m £m Profit attributable to the shareholders of Rolls-Royce plc 284 258 Exchange adjustments on foreign currency net investments 17 (12) Total recognised gains for the year 301 246

Group historical cost profits and losses for the year ended December 31, 1999

1999 1998 £m £m Profit on ordinary activities before taxation 360 325 Realisation of property revaluation gains of previous years — 5 Difference between the historical cost depreciation charge and the actual depreciation charge for the year calculated on the revalued amount 2 2 Historical cost profit on ordinary activities before taxation 362 332

Historical cost transfer to reserves 174 167

Reconciliations of movements in shareholders’ funds for the year ended December 31, 1999

Group Company 1999 1998 1999 1998 £m £m £m £m At January 1 1,705 1,443 1,714 1,495 Total recognised gains for the year 301 246 326 281 Ordinary dividends (net of scrip dividend adjustments) (101) (76) (101) (76) New ordinary share capital issued (net of expenses) 75 14 75 14 Goodwill transferred to the profit and loss account in respect of disposals of businesses 8 78 — — At December 31 1,988 1,705 2,014 1,714

44 Rolls-Royce plc 1999 1 Accounting policies

Basis of accounting Research and development The financial statements have been prepared in accordance with applicable The charge to the profit and loss account consists of total research and accounting standards on the historical cost basis, modified to include the development expenditure incurred in the year, less known recoverable revaluation of land and buildings. costs on contracts, contributions to shared engineering programmes and matching government assistance. Basis of consolidation The Group financial statements include the financial statements of the Foreign currencies Company and all of its subsidiary undertakings made up to December 31, Assets and liabilities denominated in foreign currencies are translated into together with the Group’s share of the results up to December 31 of: sterling at the rate ruling at the year end or, where applicable, at the i) joint ventures estimated sterling equivalent, taking account of future foreign exchange A joint venture is an entity in which the Group holds a long-term interest and similar contracts. The trading results of overseas undertakings are and which is jointly controlled by the Group and one or more other translated at the average exchange rates for the year or, where applicable, venturers under a contractual arrangement. The results of joint ventures at the estimated sterling equivalent, taking account of future foreign are accounted for using the gross equity method of accounting. exchange and similar contracts. Exchange adjustments arising from the ii) joint arrangements that are not entities retranslation of the opening net investment, and from the translation of The Group has certain contractual arrangements with other participants the profits or losses at average rate, are taken to reserves. Other exchange to engage in joint activities that do not create an entity carrying on a differences, including those arising from currency conversions in the usual trade or business of its own. The Group includes its share of assets, course of trading, are taken into account in determining profit on ordinary liabilities and cash flows in such joint arrangements, measured in activities before taxation. accordance with the terms of each arrangement, which is usually pro-rata to the Group’s risk interest in the joint arrangement. Treasury instruments Any subsidiary undertakings, joint ventures and joint arrangements that are The accounting treatment of the key instruments used by the Group is as not entities sold or acquired during the year are included up to, or from, the follows: dates of change of control. i) Gains or losses arising on forward exchange contracts are taken to the Some small adjustments have been made to comparative figures to put profit and loss account in the same period as the underlying transaction. them on a consistent basis with the current year. ii) Net interest arising on interest rate agreements is taken to profit and loss account. Purchased goodwill iii) Premiums paid or received on currency options are taken to profit and Goodwill represents the excess of the fair value of the purchase loss account when the option expires or matures. consideration for shares in subsidiary undertakings and joint ventures over iv) Gains or losses arising on jet fuel swaps are taken to the profit and loss the fair value to the Group of the net assets acquired. account in the same period as the underlying transaction. i) To December 31, 1997: Goodwill was written off to reserves in the year If the underlying transaction to a hedge ceases to exist, the hedge is of acquisition. The profit or loss on the disposal of a business acquired terminated and the profits and losses on termination are recognised in the before December 31, 1997 takes into account the attributable value of profit and loss account immediately. If the hedge transaction is terminated, purchased goodwill relating to that business. the profits and losses on termination are held in the balance sheet and ii) From January 1, 1998: Goodwill has been recognised within fixed assets amortised over the life of the original underlying transactions. in the year in which it arises and amortised on a straight line basis over its useful economic life, up to a maximum of 20 years. Post-retirement benefits Contributions to Group pension schemes are charged to the profit and loss Turnover account so as to spread the cost of pensions at a substantially level Turnover, excluding value added tax and discounts, comprises sales to percentage of payroll costs over employees’ service lives. outside customers, and the Group’s percentage interest in sales of joint The cost of providing post-retirement benefits other than pensions ventures. Long-term contracts are included in turnover on the basis of is charged to the profit and loss account over the service lives of the the sales value of work performed during the year by reference to the relevant employees. total sales value and stage of completion of these contracts. Certification costs Risk and revenue sharing partnerships Costs paid to airframe manufacturers in respect of meeting regulatory From time to time the Group enters into arrangements with partners who, certification requirements for new civil engine/aircraft combinations are in return for a share in future programme turnover or profits, make cash or carried forward in prepayments to the extent that they can be recovered other payments in kind which are not expected to be refundable. out of future sales and are charged to the profit and loss account over the Depending on the terms of the arrangements, the sums received are five years following certification. credited to turnover or to research and development. Payments to partners are charged to cost of sales for the relevant programmes.

45 Rolls-Royce plc 1999 1 Accounting policies continued

Interest ii) As Lessor Interest payable is charged to the profit and loss account as incurred except Amounts receivable under finance leases are included under debtors where the borrowing finances tangible fixed assets in the course of and represent the total amount outstanding under lease agreements construction relating to power development projects. Such interest is less unearned income. Finance lease income, having been allocated to capitalised until the asset is complete and income producing and is then accounting periods to give a constant periodic rate of return on the net written off by way of depreciation of the relevant asset. cash investment, is included in turnover. Interest receivable is credited to the profit and loss account as earned. Rentals receivable under operating leases are included in turnover on an accruals basis. Taxation Provision for taxation is made at the current rate and for deferred taxation at Depreciation the projected rate on all timing differences where a liability is expected to i) Land and buildings crystallise in the foreseeable future. Depreciation is provided on the original cost of purchases since 1996 and on the valuation of properties adopted at December 31, 1996 and is Scrip dividends calculated on the straight line basis at rates sufficient to reduce them to The amounts of dividends taken as shares instead of in cash under the their estimated residual value. Estimated lives, as advised by the Group’s scrip dividend scheme have been added back to reserves. The nominal professional valuers, are: value of shares issued under the scheme has been funded out of the share a) Freehold buildings – five to 45 years premium account. (average 23 years). b) Leasehold land and buildings – lower of valuers’ estimates or period Stock, contract provisions and long-term contracts of lease. Stock and work in progress are valued at the lower of cost and net realisable No depreciation is provided in respect of freehold land. value. Full provision is made for any estimated losses to completion of ii) Plant and equipment contracts having regard to the overall substance of the arrangements Depreciation is provided on the original cost of plant and equipment including, if appropriate, related commitments and undertakings given by and is calculated on a straight line basis at rates sufficient to reduce customers. Provided that the outcome of long-term contracts can be them to their estimated residual value. Estimated lives are in the range assessed with reasonable certainty, such contracts are valued at cost plus five to 25 years (average 17 years). attributable profit earned to date. iii) Aircraft and engines Progress payments received, when greater than recorded turnover, are Depreciation is provided on the original cost of aircraft and engines and deducted from the value of work in progress except to the extent that is calculated on a straight line basis at rates sufficient to reduce them to payments on account exceed the value of work in progress on any contract their estimated residual value. Estimated lives are in the range ten to where the excess is included in creditors. The amount by which recorded 25 years (average 18 years). turnover of long-term contracts is in excess of payments on account is iv) In course of construction classified as ‘amounts recoverable on contracts’ and is separately disclosed No depreciation is provided on assets in the course of construction. within debtors.

Accounting for leases i) As Lessee Assets financed by leasing agreements which give rights approximating to ownership (finance leases) have been capitalised at amounts equal to the original cost of the assets to the lessors and depreciation provided on the basis of the Group depreciation policy. The capital elements of future obligations under finance leases are included as liabilities in the balance sheet and the current year’s interest element, having been allocated to accounting periods to give a constant periodic rate of charge on the outstanding balance, is charged to the profit and loss account. The annual payments under all other lease arrangements, known as operating leases, are charged to the profit and loss account on an accruals basis.

46 Rolls-Royce plc 1999 2 Segmental analysis

Group turnover Profit before interest Net assets1 1999 1998 1999 1998 1999 1998 £m £m £m £m £m £m Analysis by businesses: Aerospace 3,774 3,476 442 370 1,543 1,036 Industrial 922 767 (7) 35 1,149 390 Businesses to be disposed 48 83 (22) — 3 10 4,744 4,326 413 405 2,695 1,436 Industrial – discontinued operations — 170 — (63) — (21) 4,744 4,496 413 342 2,695 1,415 Geographical analysis by origin: United Kingdom 3,663 3,575 334 238 1,506 1,059 Other 1,081 921 79 104 1,189 356 4,744 4,496 413 342 2,695 1,415 Geographical analysis by destination: United Kingdom 956 1,022 Rest of Europe 658 415 USA 1,625 1,619 Canada 104 120 Asia 796 827 Africa 106 193 Australasia 228 116 Other 271 184 4,744 4,496 Exports from United Kingdom 2,737 2,582 Sales to overseas subsidiaries (213) (213) Sales by overseas subsidiaries 1,260 1,101 Sales by overseas joint arrangements 4 4 Total overseas 3,788 3,474

1 Net assets exclude net debt of £694m (1998 net funds of £302m).

In 2000 the Group will adopt a new segmental analysis. Turnover and profit before interest for 1999 are shown below:

Profit before Turnover interest £m £m Civil aerospace 2,654 232 Defence 1,138 181 Marine systems 385 37 Energy 482 (39) Financial services* 37 24 Businesses to be disposed 48 (22) 4,744 413

*Gross turnover of financial services companies and joint ventures is £82m.

47 Rolls-Royce plc 1999 3 Profit on ordinary activities before taxation

1999 1998 £m £m After crediting Risk and revenue sharing partnerships – receipts 232 162 – payments (99) (63) Net impact of risk and revenue sharing partnerships 133 99 Operating lease rentals receivable 15 37

After charging Amortisation of goodwill 5 — Restructuring costs in respect of acquired businesses 6 — Depreciation of owned tangible fixed assets 1 98 107 Depreciation of tangible fixed assets held under finance leases 1 7 6 Operating lease rentals payable – hire of plant and equipment 27 19 – hire of other assets 7 10 Auditors’ fees were as follows during the year: Audit 1999 – Group £2.0m (1998 £1.8m) including Company £0.6m (1998 £0.7m) Other 1999 – United Kingdom £0.7m (1998 £0.9m) – Rest of World £0.7m (1998 £0.6m)

1 Including appropriate amounts charged to stocks.

The 1998 profit and loss account comparative figures were as follows: Continuing Discontinued operations operations 2 1998 £m £m £m Group turnover 4,326 170 4,496 Cost of sales (3,520) (181) (3,701) Gross profit/(loss) 806 (11) 795 Commercial, marketing and product support costs (161) (1) (162) General and administrative costs (150) (6) (156) Research and development (net) (169) (4) (173) Utilisation of provision for loss on sale/termination of businesses — 12 12 Group operating profit/(loss) 326 (10) 316 Share of operation profit of joint ventures 17 — 17 Profit/(loss) on sale of businesses 13 (53) (40) Profit from the sale to BMW of the automotive trademark registrations of the Rolls-Royce name 40 — 40 Profit on sale of fixed assets 9— 9 Profit/(loss) on ordinary activities before interest 405 (63) 342

2 Discontinued operations include the disposal in 1998 of the transmission and distribution businesses, in addition to transactions relating to the withdrawal in1996 from large steam power generation.

4 Net interest payable – Group

1999 1998 £m £m Interest payable on: Bank loans and overdrafts (31) (16) Other borrowings (26) (30) Finance leases (7) (7) Interest capitalised 1 1 (63) (52) Interest receivable 28 40 (35) (12)

48 Rolls-Royce plc 1999 5 Taxation

1999 1998 £m £m United Kingdom – corporation tax at 30.25% (1998 31.0%) 93 65 – advance corporation tax written back (37) (40) – deferred tax 5 6 61 31 Overseas – current tax 5 17 – deferred tax 5 15 Joint ventures 3 2 74 65

Analysis of taxation charge: Trading activities 72 61 Other profits (note 7) 2 4 74 65

6 Dividends – ordinary shares

1999 1998 £m £m Interim 2.70p (1998 2.45p) per share 41 37 Final proposed 4.55p (1998 4.10p) per share 71 62 112 99

7 Earnings per ordinary share

Basic earnings per ordinary share are calculated by dividing the profit attributable to ordinary shareholders of £284m (1998 £258m) by 1,506 million (1998 1,496 million) ordinary shares, being the average number of ordinary shares in issue during the year, excluding own shares held under trust (note 13) which have been treated as if they had been cancelled. Underlying earnings per ordinary share have been calculated as follows. 1999 1998 Pence £m Pence £m Profit attributable to ordinary shareholders 18.86 284 17.25 258 Exclude: Net loss on sale of businesses 0.93 14 2.67 40 Profit from the sale to BMW of the automotive trademark registrations of the Rolls-Royce name ——(2.67) (40) Profit on sale of fixed assets (excluding lease engines and aircraft sold by financial services companies) (1.13) (17) (0.61) (9) Amortisation of goodwill 0.33 5 —— Restructuring of acquired business 0.40 6 —— Related tax effect 0.13 2 0.27 4 Underlying earnings per ordinary share 19.52 294 16.91 253

Diluted basic earnings per ordinary share are calculated by dividing the profit attributable to ordinary shareholders of £284m (1998 £258m) by 1,525 million (1998 1,509 million) ordinary shares, being 1,506 million (1998 1,496 million) as above adjusted by the bonus element of existing share options of 19 million (1998 13 million).

49 Rolls-Royce plc 1999 8 Employee information

1999 1998 Number Number Average weekly number of Group employees during the year United Kingdom 30,000 31,400 Overseas 10,900 10,600 40,900 42,000 Aerospace businesses 30,400 29,300 Industrial businesses 10,500 12,700 40,900 42,000

£m £m Group employment costs Wages and salaries 1,140 1,081 Social security costs 95 90 Pensions and other post-retirement benefits (note 29) 71 73 1,306 1,244

9 Intangible fixed assets – goodwill

1999 £m Group Cost At January 1, 1999 8 Additions (note 30) 870 At December 31, 1999 878

Accumulated amortisation At January 1, 1999 — Provided during the year 5 At December 31, 1999 5 Net book value at December 31, 1999 873 Net book value at December 31, 1998 8

50 Rolls-Royce plc 1999 10 Tangible fixed assets

Land and Plant and Aircraft and In course of buildings equipment engines construction Total £m £m £m £m £m Group Cost or valuation: At January 1, 1999 308 1,053 211 257 1,829 Exchange adjustments 2104218 Additions at cost 12 169 133 98 412 On acquisition of businesses 142 223 7 19 391 On disposals of businesses —(3)——(3) Reclassifications 27 145 — (172) — Disposals/write-offs (2) (50) (146) (34) (232) At December 31, 1999 489 1,547 209 170 2,415 Accumulated depreciation: At January 1, 1999 29 528 55 — 612 Exchange adjustments —41—5 Provided during year 12 84 9 — 105 On disposals of businesses —(1)——(1) Disposals/write-offs — (45) (14) — (59) At December 31, 1999 41 570 51 — 662 Net book value at December 31, 1999 448 977 158 170 1,753 Net book value at December 31, 1998 279 525 156 257 1,217

Company Cost or valuation: At January 1, 1999 232 752 — 161 1,145 Additions at cost 10 76 — 97 183 Reclassifications 24 101 — (125) — Disposals/write-offs (1) (46) — — (47) At December 31, 1999 265 883 — 133 1,281 Accumulated depreciation: At January 1, 1999 16 385 — — 401 Provided during year 10 51 — — 61 Disposals/write-offs —(38)— —(38) At December 31, 1999 26 398 — — 424 Net book value at December 31, 1999 239 485 — 133 857 Net book value at December 31, 1998 216 367 — 161 744

51 Rolls-Royce plc 1999 10 Tangible fixed assets continued

Group Company 1999 1998 1999 1998 Tangible fixed assets include: £m £m £m £m Net book value of finance leased assets 109 130 32 35 Assets held for use in operating leases: Cost 194 196 — — Depreciation (44) (48) — — Net book value 150 148 — — Non-depreciable land 90 69 59 58 Land and buildings at cost or valuation comprise: Cost 222 41 62 29 Valuation at December 31, 1985 1 1 — — Valuation at December 31, 1996 1 266 266 203 203 489 308 265 232 Land and buildings at net book value comprise: Freehold 415 265 232 208 Long leasehold 19 15 8 9 Short leasehold 14 (1) (1) (1) 448 279 239 216 On an historical cost basis the net book value of land and buildings would have been as follows: Cost 471 291 246 214 Depreciation (135) (126) (111) (104) 336 165 135 110 Capitalised interest included in net book value of assets in course of construction 2 2 — — Capital expenditure commitments – contracted but not provided for 1772 250 33 52

1 Group properties were revalued at December 31, 1996 as follows: i) Specialised properties, including certain of the Group’s major manufacturing sites, were revalued on a depreciated replacement cost basis. ii) Non-specialised properties were revalued by reference to their existing use value. iii) Properties surplus to the Group’s requirements were revalued on an open market value basis. In the United Kingdom the revaluation was carried out by Gerald Eve, Chartered Surveyors, Fuller Peiser, Chartered Surveyors and Storey Sons & Parker, Chartered Surveyors, in accordance with the appraisal and valuation manual of the Royal Institution of Chartered Surveyors. Overseas properties were valued principally by independent local valuers. 2 The Group’s capital expenditure commitments include £91m for various aircraft purchases, which it intends to re-sell or lease to third parties.

52 Rolls-Royce plc 1999 11 Investments – subsidiary undertakings

Shares Loans Total £m £m £m Company Cost: At January 1, 1999 501 235 736 Additions 864 59 923 Transfer from joint ventures 20 — 20 At December 31, 1999 1,385 294 1,679

The principal subsidiary undertakings are listed on pages 69 and 70.

12 Investments – joint ventures

Share of post Shares acquisition at cost reserves Loans Total £m £m £m £m Group At January 1, 1999 110 13 11 1341 Exchange adjustments —(1)—(1) Additions 16 — 11 27 On acquisition of businesses —— 8 8 Transfer to subsidiary undertakings (20) (3) — (23) Share of retained profit —6—6 At December 31, 1999 106 15 30 1511 Company At January 1, 1999 63 — 4 67 Additions 1—— 1 Transfer to subsidiary undertakings (20) — — (20) At December 31, 1999 44 — 4 48

The principal joint ventures are listed on pages 71 and 72.

1 Investments in joint ventures are represented by: 1999 1998 £m £m Share of aggregate assets: Fixed 588 412 Current 370 443 Share of aggregate liabilities: Due within one year (387) (424) Due after one year (420) (297) 151 134

53 Rolls-Royce plc 1999 13 Investments – other

Unlisted Own shares investments held under at cost trust1 Total £m £m £m Group At January 1, 1999 10 5 15 Additions —55 On acquisition of businesses 11 — 11 At December 31, 1999 21 10 31 Company At January 1, 1999 —55 Additions less amortisation —55 At December 31, 1999 —1010

1 Ordinary shares in the Company are held in two trusts: i) as part of the long-term incentive plan (LTIP) and the Rolls-Royce 1999 executive share option plan for executive directors and other senior management (see Remuneration report on pages 32 to 39 for details of the plan). This independently managed trust purchased shares on the open market:

£m LTIP June 25, 1997 685,189 at £2.42 per share 1.7 April 24, 1998 651,103 at £2.82 per share 1.8 March 26, 1999 569,800 at £2.54 per share 1.4 Rolls-Royce 1999 executive share option plan June 30, 1999 1,475,000 at £2.73 per share 4.0

At December 31, 1999, these shares had a market value of £7.2m. In accordance with UITF* 17 ‘Employee share schemes’, the Company is required to amortise the cost of likely awards over each separate performance measurement period and to include this charge as part of the cost of ‘wages and salaries’. *The UITF (Urgent Issues Task Force) is a committee of the Accounting Standards Board. ii) in respect of a qualifying employee share trust (QUEST), which provides employees with shares under Inland Revenue approved Save As You Earn (SAYE) share schemes. At December 31,1999, a total of 1,512,267 of these shares had still not been allocated to option holders, their market value being £3.2m. These outstanding allocations should occur in 2000.

Both trusts have waived dividends and voting rights, and their costs of administration have been charged to the Company’s profit and loss account.

54 Rolls-Royce plc 1999 14 Stocks

Group Company 1999 1998 1999 1998 £m £m £m £m Raw materials 288 177 54 82 Work in progress 483 395 178 223 Long-term contracts work in progress 159 50 — — Finished goods 597 581 469 505 Payments on account 45 26 11 48 1,572 1,229 712 858 Progress payments received against: Long-term contracts work in progress (121) (27) — — Other stocks 1 (177) (161) (86) (124) 1,274 1,041 626 734

1 Includes payments received from joint ventures (12) (6) (12) (6)

15 Debtors – amounts falling due within one year

Group Company 1999 1998 1999 1998 £m £m £m £m Trade debtors 839 644 272 323 Amounts recoverable on contracts 78 66 3 15 Amounts owed by – subsidiary undertakings — — 606 211 – joint ventures 165 128 121 126 Corporate taxation 10 5 10 — Other debtors 93 45 1 14 Prepayments and accrued income 136 87 73 61 1,321 975 1,086 750

16 Debtors – amounts falling due after one year

Group Company 1999 1998 1999 1998 £m £m £m £m Trade debtors 45 47 40 42 Amounts owed by – subsidiary undertakings — — 25 51 – joint ventures 45 15 44 13 Corporate taxation 19 34 19 34 Other debtors 1 66 154 — 135 Prepayments and accrued income 91 43 91 42 Prepaid pension contributions 105 79 5 5 371 372 224 322

1 In 1998 other debtors included £135m in connection with the Company’s contribution to the financing of Rolls-Royce Deutschland GmbH (formerly BMW Rolls-Royce GmbH).

55 Rolls-Royce plc 1999 17 Short-term deposits and investments

Group Company 1999 1998 1999 1998 £m £m £m £m Short-term deposits 431 690 355 671 Investments – government securities and corporate bonds 33 32 — — 464 722 355 671

18 Borrowings – amounts falling due within one year

Group Company 1999 1998 1999 1998 £m £m £m £m Overdrafts 100 97 — 4 Bank loans 160 69 150 54 Other loans 141 — — — Obligations under finance leases 7 11 1 2 408 177 151 60

19 Other creditors – amounts falling due within one year

Group Company 1999 1998 1999 1998 £m £m £m £m Payments received on account 1 348 191 145 141 Trade creditors 658 546 339 377 Amounts owed to – subsidiary undertakings — — 432 411 – joint ventures 105 107 98 101 Corporate taxation 130 91 71 51 Other taxation and social security 66 39 34 26 Other creditors 547 512 387 419 Accruals and deferred income 501 376 223 242 Interim dividend since paid 41 37 41 37 Final proposed dividend 71 62 71 62 2,467 1,961 1,841 1,867

1 Includes payments received from joint ventures 64 60 64 60

56 Rolls-Royce plc 1999 20 Borrowings – amounts falling due after one year

Group Company 1999 1998 1999 1998 £m £m £m £m Unsecured Bank loans 734 — 696 — 1 1 7 8% Notes 2003 199 199 — — 1 2 4 2% Notes 2005 177 177 177 177 Other loans 2001-2009 (interest rates nil) 5 8 — — Secured Obligations under finance leases payable: 3 Between one and two years 8 17 1 1 Between two and five years 45 35 17 17 After five years 44 47 3 4 Zero-coupon bonds 2005/2007 (including 9.0% interest accretion) 4 33 29 — — Bank loans 2001 (interest rates 5.8% to 6.8%) 4 26 28 — — 1,271 540 894 199 Repayable Between one and two years – by instalments 26 21 1 1 – otherwise 408 — 398 — Between two and five years – by instalments 48 54 17 17 – otherwise 497 209 298 — After five years – by instalments 82 50 3 4 – otherwise 210 206 177 177 1,271 540 894 199

1 The Group has borrowed US $300m through a subsidiary, Rolls-Royce Capital Inc., in order to provide a loan for general Group purposes. This has been translated into sterling after taking account of future contracts. The loan is guaranteed by the Company. These notes are the subject of interest swap agreements under which counterparties have undertaken to pay amounts at fixed rates of interest in consideration for amounts payable by the Group at variable rates of interest. 2 The Company has borrowed c256m in order to provide a loan for general Group purposes. These notes are the subject of currency swap agreements under which counterparties have undertaken to pay amounts at fixed rates of interest and exchange in consideration for amounts payable by the Company at variable rates of interest and at fixed exchange rates. 3 Obligations under finance leases are secured by related leased assets. 4 Secured on aircraft financed by joint arrangements. Repayment of the zero-coupon bonds is also guaranteed by the Company.

21 Other creditors – amounts falling due after one year

Group Company 1999 1998 1999 1998 £m £m £m £m Payments received on account 1 40 32 40 32 Amount owed to subsidiary undertaking — — 198 198 Other creditors 18 6 — — Accruals and deferred income 51 25 21 22 109 63 259 252

1 Includes payments received from joint ventures — 5 — 5

57 Rolls-Royce plc 1999 22 Provisions for liabilities and charges

At On Unused Charged to At January 1, Exchange acquisitions On transfer amounts profit and December 31, 1999 adjustments of businesses of businesses reversed loss account Utilised 1999 £m £m £m £m £m £m £m £m Group Post-employment, pensions and other post-retirement benefits 88 3 10 — — 12 (5) 108 Deferred taxation 28—22——10—60 Discontinued operations 8—14——— (5)17 Warranty/guarantees 83 — 61 — — 23 (23) 144 Contract loss 55 1 20 — (4) 19 (45) 46 Customer financing 9— 3——18—30 Insurance 26— 4——— (3)27 Restructuring 1 — 45 — — 6 (17) 35 Other 25 — 21 — (2) 7 (15) 36 323 4 200 — (6) 95 (113) 503 Company Warranty/guarantees 55 — — (8) — 3 (9) 41 Contract loss 6—— (5)— 7 (2)6 Customer financing 9———— 4—13 Other 16 — — (3) — — (8) 5 At December 31, 1999 86 — — (16) — 14 (19) 65

Post-employment, pensions and other post-retirement provisions are long term in nature and the timing of their utilisation is uncertain. Provisions for discontinued operations, contract loss and restructuring are generally expected to be utilised within one year. Warranty provisions relate to products sold and generally cover a period of up to three years. Customer financing provisions cover guarantees provided for asset values and/or financing as described in note 27. Timing of utilisation is uncertain. Insurance provisions relate to the Group’s captive insurance business with timing of utilisation being uncertain. Other provisions comprise numerous liabilities with varying expected utilisation rates. Group Company 1999 1998 1999 1998 Deferred taxation £m £m £m £m Provided in accounts: Fixed asset timing differences 5 — — — Other timing differences 70 38 — — Advance corporation tax (15) (10) — — 60 28 — — Full potential liability/(asset): Fixed asset timing differences 127 101 99 84 Other timing differences 52 25 (14) (14) 179 126 85 70 Advance corporation tax (75) (112) (56) (97) 104 14 29 (27)

The above figures exclude taxation payable on capital gains which might arise from the sale of fixed assets at the values at which they are stated in the Group’s balance sheet.

58 Rolls-Royce plc 1999 23 Financial instruments

Details of the Group’s policies on the use of financial instruments are given in the Finance Director’s review on pages 20 to 25 and in the accounting policies on pages 45 and 46. The following disclosures provide additional information regarding the effect of these instruments on the financial assets and liabilities of the Group excluding short-term debtors and creditors, where permitted by FRS 13. Additionally, in some instances comparatives have not been provided in the first year of implementation.

Funding and interest rates

Sterling US Dollar Euro Other Total £m £m £m £m £m Financial assets Cash at bank and in hand 1 366 72 17 66 521 Short-term deposits 2 370 16 23 22 431 Government securities and corporate bonds 3 2119233 Unlisted fixed asset investments 4 — 10 — 11 21 Debtors – amounts falling due after one year 4 132 24 — — 156 889 123 49 101 1,162

Financial liabilities 5 Floating-rate borrowings 6 (505) (123) (143) (131) (902) Fixed-rate borrowings (673) (76) — (23) (772) Borrowings on which no interest is paid ——— (5)(5) Other creditors – amounts falling due after one year 4 — (2) — (16) (18) Provisions 4 (19) — — (7) (26) (1,197) (201) (143) (182) (1,723)

Notes 1 Cash at bank and in hand comprises deposits placed on money markets overnight and bank balances. 2 The short-term deposits are deposits placed on money markets for periods ranging from two nights up to one month. 3 The interest on the securities and bonds is at a fixed rate; the weighted average interest rate on the sterling securities is 6.8% and on the US Dollar securities is 6.0%. The weighted average time for these securities for which the rate is fixed is 1.5 years. 4 These amounts do not incur or accrue interest. 5 Financial liabilities are stated after taking into account the various interest rate and currency swaps entered into by the Group. 6 The floating-rate financial liabilities comprise bank borrowings bearing interest at rates fixed in advance for periods ranging from one to six months based on the applicable LIBOR rate.

The analysis of fixed-rate borrowings is as follows: Weighted Weighted average average period for interest rate which rate Total at which fixed is fixed £m % Months Currency Sterling 673 5.8 96 US Dollar 76 6.4 61 Other 23 5.0 79

The maturity profile of the Group’s financial liabilities is as follows: £m In one year or less, or on demand 434 In more than one year but not more than two years 778 In more than two years but not more than five years 255 In more than five years 256 1,723

59 Rolls-Royce plc 1999 23 Financial instruments continued

Borrowing facilities The Group has various borrowing facilities available to it. The undrawn committed facilities available at December 31, 1999 were as follows: 1999 1998 £m £m Expiring within one year 20 18 Expiring in one to two years 100 109 Expiring thereafter 395 345 515 472

Exchange risk management The table below shows the Group’s currency exposures at December 31, 1999 on currency transactions that give rise to the net currency gain and losses recognised in the profit and loss account. Such exposures comprise the net monetary assets and liabilities at December 31, 1999 of the Group that are not denominated in the functional currency of the operating company involved. The exposures are stated after taking into account the effects of currency swaps and forward foreign exchange contracts. Net foreign currency monetary assets/(liabilities) Sterling US Dollar Euro Other Functional currency of Group operation £m £m £m £m Sterling —(4)(7)5 US Dollar 1——— Euro ———— Other (1) 27 9 (2)

Fair values of financial assets and financial liabilities The estimated fair value of the Group’s financial instruments are summarised below: Where available, market values have been used to determine current values. Where market values are not available, fair values have been calculated by discounting expected future cashflows at prevailing interest and exchange rates Book value Fair value £m £m Unlisted fixed asset investments 21 21 Cash at bank and in hand 521 521 Short-term deposits and investments 464 462 Short-term debt (408) (409) Long-term debt (1,271) (1,283) Other creditors – amounts falling due after one year (18) (16) Debtors – amounts falling due after one year 156 132 Provisions (26) (25)

Derivatives used to hedge the interest, currency and commodity exposure of the business: Jet fuel swaps —3 Interest rate swaps (10) (8) Currency options (6) (3) Forward foreign currency contracts (4) 32

Cash at bank and in hand, short-term deposits and short-term borrowings The book value approximates to fair value either due to the short-term maturity of the instruments or because the interest rate of investments is reset after periods not greater than six months.

Derivatives The fair value of derivatives is the estimated amount which the Group would expect to pay or receive were it to terminate the derivatives at the balance sheet date. This is based on current market rates.

60 Rolls-Royce plc 1999 23 Financial instruments continued

Hedges of future transactions As described in the Finance Director’s review on pages 20 to 25 the Group’s policy is to hedge the following exposures: – interest rate risk – using interest swaps – currency exposures on future forecast sales – using forward foreign currency contracts, currency swaps and currency options – commodity price risk – using jet fuel swaps Gains and losses on instruments used for hedging are as outlined in the accounting policies on pages 45 and 46. Unrecognised gains and losses on instruments used for hedging, and the movements therein, are as follows: Total net Gains Losses gains/(losses) £m £m £m Unrecognised gains and losses on hedges at January 1, 1999 169 (24) 145 Gains and losses arising in previous year that were recognised in 1999 (62) 18 (44) Gains and losses arising in previous year that were not recognised in 1999 107 (6) 101 Gains and losses arising as a result of acquisitions 3(4)(1) Gains and losses arising in 1999 that were not recognised in 1999 (46) (10) (56) Unrecognised gains and losses on hedges at December 31, 1999 of which: 64 (20) 44 Gains and losses expected to be recognised in 2000 22 (2) 20 Gains and losses expected to be recognised thereafter 42 (18) 24

61 Rolls-Royce plc 1999 24 Share capital

Non-equity Equity Nominal special ordinary shares value share of £1 of 20p each £m Authorised At January 1 and December 31, 1999 1 2,000,000,000 400 Issued and fully paid At January 1, 1999 1 1,504,988,147 301 Exercise of share options — 2,308,121 — In lieu of paying dividends in cash — 4,428,062 1 As part consideration for acquisitions — 33,300,000 7 At December 31, 1999 1 1,545,024,330 309

Certain special rights, set out in the Company’s Articles of Association, attach to the special rights redeemable preference share (special share) issued to HM Government. Subject to the provisions of the Companies Act 1985, the special share may be redeemed by the Treasury Solicitor at par at any time. The special share confers no rights to dividends or to vote at general meetings but in the event of a winding-up it shall be repaid at its nominal value in priority to any other shares.

At December 31, 1999, the following ordinary shares were subject to options: Date of Exercise Exercisable grant Number price dates Executive share option scheme 1990 126,407 172p 2000 1991 286,123 139p 2000-2001 1992 421,323 125p 2000-2002 1995 2,010,250 176p 2000-2005 1996 126,000 238p 2000-2006 Executive share option plan 1999 1,542,669 269p 2002-2009 1999 254,896 216p 2002-2009 Sharesave schemes 1992 4,022,010 106p 2000 1995 15,467,262 150p 2001/2003 *1995 264,648 117p 2000 *1995 112,358 155p 2000 *1996 110,516 168p 2001 1997 17,912,763 205p 2001/2003/2005 *1997 178,917 154p 2000/2002 *1998 1,570,055 107p 2002/2004 1999 24,797,257 194p 2002/2003/2005/2007

Under the terms of the executive share option scheme, options granted to 124 directors and senior executives were outstanding at December 31, 1999. Under the terms of the sharesave schemes, the Board may grant options to purchase ordinary shares in the Company each year to those employees who enter into an Inland Revenue approved Save As You Earn (SAYE) contract for a period of either three, five or seven years. In 1999 employees in 24 countries were invited to participate through arrangements broadly comparable to the UK scheme. In the USA a ‘423’ plan which has a two-year savings period was offered. *Relates to options granted under the Vickers plc sharesave schemes which, following acquisition of Vickers plc, were exchanged in accordance with Inland Revenue Rules for options over Rolls-Royce plc ordinary shares.

62 Rolls-Royce plc 1999 25 Reserves

Non-distributable Share Revaluation Other Profit and premium reserve reserves loss account £m £m £m £m Group At January 1, 1999 548 114 132 610 Exchange adjustments ———17 Scrip dividend adjustment ———11 Ordinary shares issued relating to scrip dividend (1)——— Write-back of purchased goodwill relating to disposals —— 8— Arising on share issues (net of expenses) 68——— Transfers between reserves —(2)—2 Retained profit for the year ———172 At December 31, 1999 615 112 140 812 Company At January 1, 1999 548 106 167 592 Scrip dividend adjustment ———11 Ordinary shares relating to scrip dividend (1)——— Arising on share issues (net of expenses) 68——— Transfers between reserves —(2)—2 Retained profit for the year ———214 At December 31, 1999 615 104 167 819

The cumulative amount of goodwill, arising on the acquisition of undertakings still in the Group at December 31, 1999, written off against other reserves amounts to £428m (1998 £436m). The continuance of this basis, in respect of pre-1998 acquisitions, is permitted under the transitional arrangements of FRS 10. The undistributed profits of overseas subsidiary and joint ventures may be liable to overseas taxes and/or United Kingdom tax (after allowing for double tax relief) if remitted as dividends to the UK. No deferred tax has been provided on the basis that there is currently no intention to pay such dividends.

26 Operating lease annual commitments

Group Company 1999 1998 1999 1998 £m £m £m £m Leases of land and buildings which expire: Within one year 2 1 — — Between one and five years 5 3 — — After five years 4 3 2 2 Other leases which expire: Within one year 3 5 1 1 Between one and five years 12 8 5 8 After five years 27 14 1 7

63 Rolls-Royce plc 1999 27 Contingent liabilities

In connection with the sale of its products, on some occasions the Group and Company enter into individually and collectively significant long-term contingent obligations. These can involve, inter alia, guaranteeing financing for customers, guaranteeing a proportion of the values of both engine and airframe, entering into leasing transactions, commitments to purchase aircraft and in certain circumstances could involve the Group and Company assuming certain of its customers’ entitlements and related borrowing or cash flow obligations until the value of the security can be realised. At December 31, 1999, having regard to the estimated net realisable value of the relevant security, the net contingent liabilities in respect of financing arrangements on all delivered aircraft amounted to £118m (1998 £63m). Sensitivity calculations are complex, but, for example, if the value of the relevant security was reduced by 20%, a net contingent liability of approximately £272m (1998 £237m) would result. There are also net contingent liabilities in respect of undelivered aircraft but it is not considered practicable to estimate these as deliveries can be many years in the future and the related financing will only be put in place at the appropriate time. At the date these accounts are approved, the directors regard the possibility that there will be any significant loss arising from these contingencies, which cover a number of customers over a long period of time, as remote. In determining this, and the values above, the directors have taken account of advice, principally from Airclaims Limited, professional aircraft appraisers, who base their calculations on a current and future fair market value basis assuming an arms length transaction between a willing seller and a willing buyer. Contingent liabilities exist in respect of guarantees provided by the Group in the ordinary course of business for engine delivery, performance and reliability. The Company and some of its subsidiary undertakings have, in the normal course of business, entered into arrangements in respect of export finance, performance bonds, countertrade obligations and minor miscellaneous items. Various Group undertakings are parties to legal actions and claims which arise in the ordinary course of business, some of which are for substantial amounts. While the outcome of some of these matters cannot precisely be foreseen, the directors do not expect any of these arrangements, legal actions or claims, after allowing for provisions already made, to result in significant loss to the Group or Company. In addition to the guarantees referred to in note 20 at December 31, 1999, there were other Company guarantees in respect of financial obligations of subsidiary undertakings £4m (1998 £16m) and joint ventures £46m (1998 £49m).

28 Related party transactions

Joint ventures In the course of normal operations, the Group has contracted on an arms length basis with joint ventures. The aggregated transactions which are considered to be material and which have not been disclosed elsewhere in the financial statements are summarised below:

1999 1998 £m £m Other income 18 — Purchases of goods and services (315) (274)

64 Rolls-Royce plc 1999 29 Post-retirements benefits

Pensions The Group’s pension schemes are mainly of the defined benefit type and the assets of the schemes are held in separate trustee administered funds. The pension cost relating to the UK schemes is assessed in accordance with the advice of independent qualified actuaries using the projected unit method. The latest actuarial valuations of the principal schemes were as at March 31, 1997 (for The Rolls-Royce Pension Fund), March 31, 1998 (for the Vickers Group Pension Scheme) and April 5, 1998 (for the Rolls-Royce Group Pension Scheme). The principal assumptions used were that in the long term the average return on investments would be between 2.0% and 2.5% per annum higher than the average increase in pay and between 4.0% and 5.5% per annum higher than the average increase in pensions. The assets of The Rolls-Royce Pension Fund and of the Vickers Group Pension Scheme have been valued using the discounted income method assuming that UK equity dividends increase at rates between 3.0% and of 3.7% less than the return on investments. For the Rolls-Royce Group Pension Scheme, assets were taken at a smoothed market value. The difference in asset valuation assumptions between The Rolls-Royce Pension Fund and the Rolls-Royce Group Pension Scheme reflects a change in actuarial approach following taxation changes in the July 1997 Budget. The assumptions used for the March 1998 valuation of the Vickers Group Pension Scheme were determined by Vickers plc prior to it being acquired by Rolls-Royce. The pension cost relating to overseas schemes is calculated in accordance with local best practice and regulations. The total pension cost for the Group was £60m (1998 £62m) of which £7m (1998 £9m) relates to the overseas schemes. The aggregate of the market values of the UK schemes at the dates of the latest actuarial valuations was £3,851m. The actuarial value of the assets of the principal schemes represented respectively 94.4% (for The Rolls-Royce Pension Fund), 111.0% (for the Vickers Group Pension Scheme) and 125.0% (for the Rolls-Royce Group Pension Scheme) of the value of the projected accrued liabilities. The difference between the value of the assets and the value of the projected accrued liabilities (after allowing for expected future increases in earnings and discretionary pension increases) is being amortised over periods of between nine and 13 years, being the average remaining service lives of the pensionable employees. Prepayments of £105m (1998 £79m) are included in debtors and accruals of £24m (1998 £17m) are included in provisions for liabilities and charges, being the differences between the accumulated amounts paid into the pension funds and the accumulated pension costs.

Post-retirement benefits other than pensions In the USA, and to a lesser extent in some other countries, the Group’s employment practices include the provision of healthcare and life insurance benefits for retired employees. In the USA, 119 retired employees currently benefit from these provisions and it is estimated that 4,996 current employees will be eligible on retirement. The cost of post-retirement benefits other than pensions for the Group was £11m (1998 £11m). Provisions for the benefit obligations at December 31, 1999 amounted to £80m (1998 £67m) and are included in provisions for liabilities and charges. There were no plan assets at either December 31, 1999 or December 31, 1998. The future costs of benefits are assessed in accordance with the advice of independent qualified actuaries and are based on a weighted average discount rate of 7.75% and a weighted average assumed healthcare costs trend rate of 5%.

65 Rolls-Royce plc 1999 30 Acquisitions

The following major acquisitions were made by the Group during the year: On September 30, 1999 the rotating compressor equipment interests (Cooper Energy Services) of Cooper Cameron Corporation, Inc. On November 1, 1999 National Airmotive Corporation, Inc. This business has been renamed Rolls-Royce Engine Services – Oakland Inc. On November 17, 1999 Vickers plc. On December 31, 1999 the 50.5% shareholding in BMW Rolls-Royce GmbH held by BMW AG, which together with the 49.5% already held taking the Group interest to 100%. This business has been renamed Rolls-Royce Deutschland GmbH.

These acquisitions have been accounted for using acquisition accounting principles and the goodwill arising has been capitalised within fixed assets. Details of the book value and the fair value of the assets and liabilities at the date of acquisition, after making the necessary adjustments are summarised in the tables below. These adjustments are provisional and may be subject to amendment. In particular completion accounts for the Cooper Energy Services business and for National Airmotive have yet to be finalised.

Accounting Book policy Revaluation Fair value adjustments adjustments value Cooper Energy Services £m £m £m £m Tangible fixed assets 20 (3) 5 22 Investments ———— Stocks 33 (8) — 25 Debtors 39 — — 39 Cash and deposits ———— Borrowings ———— Other liabilities (20) — — (20) Provision for restructuring (2) — 2 — Other provisions for liabilities and charges (9) — (5) (14) Net assets acquired 61 (11) 2 52 Goodwill 80 Total consideration 132

The principal adjustments have been to eliminate capitalised research and development costs included in fixed assets and in stock, to align accounting policies and to revalue fixed assets and an onerous lease provision.

Accounting Book policy Revaluation Fair value adjustments adjustments value Rolls-Royce Engine Services – Oakland £m £m £m £m Tangible fixed assets 63615 Investments ———— Stocks 21 (5) — 16 Debtors 11 — — 11 Cash and deposits ———— Borrowings ———— Other liabilities (9) — — (9) Provision for restructuring ———— Other provisions for liabilities and charges —— (1)(1) Net assets acquired 29 (2) 5 32 Goodwill 15 Total consideration 47

The principal adjustments are to align accounting policies in respect to stock provisions and to revalue fixed assets.

66 Rolls-Royce plc 1999 30 Acquisitions continued

Accounting Book policy Revaluation Fair value adjustments adjustments value Vickers £m £m £m £m Intangible assets – goodwill 250 (250) — — Tangible fixed assets 175 (1) (5) 169 Investments 19 — — 19 Stocks 154 — (1) 153 Debtors 260 — 10 270 Cash and deposits 93 — — 93 Borrowings (191) — — (191) Other liabilities (373) — (1) (374) Provision for restructuring (32) — — (32) Other provisions for liabilities and charges (57) (12) (20) (89) Net assets acquired 298 (263) (17) 18 Goodwill 577 Total consideration 595

Adjustments to align accounting policies have principally been to eliminate purchased goodwill, and to create a deferred tax provision for the pension prepayment. The revaluation adjustments have primarily been to contract provisions and to the pension surplus included in prepayments.

Accounting Book policy Revaluation Fair value adjustments adjustments value Rolls-Royce Deutschland £m £m £m £m Intangible assets 5(5)—— Tangible fixed assets 75 76 34 185 Stocks 126 (46) — 80 Debtors 123 (11) — 112 Cash and deposits ———— Borrowings (141) — — (141) Other liabilities (81) — — (81) Provision for restructuring (13) — — (13) Other provisions for liabilities and charges (48) (3) — (51) Net assets acquired 46 11 34 91 Goodwill 198 Total consideration 289

The principal adjustments have been to eliminate capitalised research and development costs included in intangible assets and in stock, to align accounting policies and to revalue fixed assets.

67 Rolls-Royce plc 1999 30 Acquisitions continued

Fair value of consideration The fair value of the consideration given for the Group’s major acquisitions during the year and goodwill arising is summarised below:

Rolls-Royce Engine Cooper Energy Services – Rolls-Royce Services Oakland Vickers Deutschland Total £m £m £m £m £m Previous investment — — — 23 23 Cash 131 47 580 11 769 Shares issued — — — 71 71 Acquisition costs 1—15420 Loan waived — — — 180 180 Total consideration 132 47 595 289 1,063 Assets acquired 52 32 18 91 193 Goodwill arising 80 15 577 198 870

The net outflow of cash in respect of the above acquisitions comprises: Cash consideration (including acquisition costs) 789 Cash less overdrafts in businesses acquired (93) Included in accruals (43) Cash outflow/(inflow) per cash flow statement 653

Profit after tax and minority interest of Vickers for the period from January 1, 1999 to November 17, 1999 was £23m (year ended December 31, 1998 £123m). During the years ended December 31, 1999 and 1998, Rolls-Royce Deutschland made neither a profit nor a loss, as its results were offset by subvention payments. The post-acquisition cash flows of the acquired businesses did not have a material impact on the Group’s cash flow.

31 Disposal of businesses

During the year the Group disposed of its interests in Peebles Electrical Machines and in certain African businesses. The losses arising are as follows:

£m African businesses (after writeback of £8m goodwill) (9) Peebles Electrical Machines and others (5) (14)

68 Rolls-Royce plc 1999 Incorporated in Great Britain

Aerospace businesses Rolls E.L. Turbofans Limited FJ44 engine support services/holding company Industrial businesses Allen Power Engineering Limited 1 Diesel engines Clarke Chapman Limited 1 Cranes and mechanical handling equipment Cochran Boilers Limited 1 Shell boilers Derby Specialist Fabrications Limited 1 High integrity pressure vessels and fabrications Rolls-Royce Industrial Power (India) Limited 2 Power station construction Rolls-Royce Marine Power Operations Limited Nuclear submarine propulsion systems Rolls-Royce Materials Handling Limited 2 Management company Rolls-Royce Nuclear Engineering Services Limited 1 Refurbishment and modification of nuclear power plant Rolls-Royce Power Engineering plc Power generation R-R Industrial Controls Limited 1 Control systems for power station and industrial application Vickers plc Holding company Vickers Engineering plc 3 Defence systems and marine gas turbine components Corporate NEI Overseas Holdings Limited 2 Holding company Rolls-Royce Aircraft Management Limited Aircraft leasing Rolls-Royce Capital Limited 4 Sales finance and other financial services Rolls-Royce International Limited International support and commercial information services Rolls-Royce Leasing Limited Engine leasing Rolls-Royce Overseas Holdings Limited Holding company Rolls-Royce Power Ventures Limited Provision of project development capabilities Sourcerer Limited 4 Supply of goods, services and utilities to the engineering sector

1 The interests are held by Rolls-Royce Power Engineering plc and these companies act as agents of that company. 2 The interests are held by Rolls-Royce Power Engineering plc. 3 The interest is held by Vickers plc. 4 These subsidiaries act as agents of Rolls-Royce plc.

The above companies operate principally in Great Britain and the effective Group interest is 100%.

69 Rolls-Royce plc 1999 Incorporated overseas

Aerospace businesses Brazil Motores Rolls-Royce Limitada Repair and overhaul France Rolls-Royce Technical Support SARL 1 Project support Germany Rolls-Royce Deutschland GmbH BR700 series engine development and manufacture USA Allison Engine Company, Inc. 2 Design, development and manufacture of gas turbine engines USA Rolls-Royce Engine Services – Oakland Inc. 3 Repair and overhaul USA Rolls-Royce Gear Systems Inc. 3 Design and manufacture of accessory gearbox systems Industrial businesses Australia Rolls-Royce Australia Limited 1 Electrical, mechanical and construction engineering Canada Rolls-Royce Canada Limited 4 Industrial gas turbines and aero engine sales, service and overhaul Canada Rolls-Royce Holdings Canada Inc. Holding company Canada Rolls-Royce Industries Canada Inc. 5 Holding company France Caillard SA 6 Cranes and bulk materials handling equipment India Rolls-Royce Energy Systems India Pty Limited 1 Project management and customer support New Zealand Rolls-Royce New Zealand Limited 7 Electrical switchgear and industrial engineering Norway Vickers Marine AS 8 Holding company South Africa NEI Africa Holdings Limited (60.44%) 6 Holding company South Africa Northern Engineering Industries Africa Limited (55.93%) 9 Energy conversion and distribution equipment (The effective interest in South African companies is 34.99%) Sweden Kamewa Holdings AB 8 Holding company USA Rolls-Royce Energy Systems Inc. 3 Turbine generator packages USA Syncrolift Inc. 3 Shiplift systems Corporate Guernsey Nightingale Insurance Limited 1 Insurance services Saudi Arabia Rolls-Royce International Turbines (Saudi Arabia) Limited (51%) Operation and maintenance of electrical generating plant USA Rolls-Royce (USA) Holdings Co. 10 Holding company USA Rolls-Royce North America Holdings Inc. 11 Holding company USA Rolls-Royce Capital Inc. 12 Financial services

1 The interests are held by Rolls-Royce Overseas Holdings Limited. 2 The interest is held by Rolls-Royce North America Ventures III Inc. 3 The interests are held by Rolls-Royce North America Ventures I Inc. 4 The interest is held by Rolls-Royce Industries Canada Inc. 5 The interest is held by Rolls-Royce Holdings Canada Inc. 6 The interests are held by NEI Overseas Holdings Limited. 7 The interest is held by Rolls-Royce Australia Limited. 8 The interest is held by Vickers International Limited. 9 The interest is held as follows: 52.93% by NEI Africa Holdings Limited, 3% by NEI Overseas Holdings Limited. 10 The interest is held by Rolls-Royce Ireland. 11 The interest is held by Rolls-Royce (USA) Holdings Co. 12 The interest is held by Rolls-Royce North America Ventures II Inc.

The above companies operate principally in the country of their incorporation and the effective Group interest is 100% unless otherwise stated.

A list of all subsidiary undertakings will be included in the Company annual return to Companies House.

70 Rolls-Royce plc 1999 Incorporated in Great Britain

% of class % of total held by equity held by Class Rolls-Royce plc Rolls-Royce plc Aerospace businesses Rolls-Royce Turbomeca Limited (England & France) A Shares — ü ý 50 Adour and RTM322 engines collaboration B Shares 100 þ RoSec Limited 1 A Ordinary — ü ý 50 Digital engine controls B Ordinary 100 þ Turbo-Union Limited (England, Germany & Italy) Ordinary 40 ü ý 40 RB199 engine collaboration A Shares 37.5 þ Industrial businesses Clarke Chapman Portia Port Services Limited 2 A Ordinary — ü ý 50 Port development and port management B Ordinary 100 þ Rolls Wood Group (Repair and Overhauls) Limited A Ordinary 100 ü ý 50 Repair and overhaul B Ordinary — þ Corporate Alpha Leasing Limited Ordinary 50 50 Engine leasing Rolls-Royce & Partners Finance Limited Ordinary 50 50 Engine leasing

Incorporated overseas

% of class % of total held by equity held by Class Rolls-Royce plc Rolls-Royce plc Aerospace businesses China Xian XR Aero Components Co Limited Ordinary 49 49 Manufacturing facility for aero-engine parts Germany EUROJET Turbo GmbH (England, Germany, Italy & Spain) Ordinary 33 33 EJ200 engine collaboration Germany MTU, Turbomeca, Rolls-Royce GmbH (England, France & Germany) Ordinary 33.3 33.3 MTR390 engine collaboration Hong Kong Hong Kong Aero Engine Services Limited 3 Ordinary 50 50 Repair and overhaul Israel TechJet Aerofoils Limited 3 A Ordinary 50 ü ý 50 Manufacture of compressor aerofoils B Ordinary 50 þ Saudi Arabia Middle East Propulsion Company 4 Foreign 16.7 ü ý 16.7 Repair and overhaul Ordinary — þ Singapore Singapore Aero Engine Services Limited 3 (effective interest 40%) Ordinary 30 30 Repair and overhaul Singapore International Engine Components Overhaul Pte Limited 3 Common 50 50 Repair and overhaul Spain Industria de Turbo Propulsores SA Ordinary 46.9 46.9 Manufacture and maintenance of aero engines Switzerland IAE International Aero Engines AG (England, Germany, Japan & USA) A Shares 100 ü ï V2500 series engine collaboration B Shares — ï ý 32.5 C Shares — ï ï D Shares — þ USA Texas Aero Engine Services, LLC 5 Ordinary 50 50 Repair and overhaul USA Williams-Rolls Inc. 6 (Europe & North America) Common 15 15 FJ44 engine collaboration

71 Rolls-Royce plc 1999 Incorporated overseas continued

% of class % of total held by equity held by Class Rolls-Royce plc Rolls-Royce plc Corporate Isle of Man Pembroke Group Limited 7 (Eire) Ordinary 50 50 Aircraft leasing USA Data Systems & Solutions, LLC 8 (England and USA) Common 50 50 Advanced controls and predictive data management

Unincorporated overseas

Aerospace businesses USA Light Helicopter Turbine Engine Company (LHTEC). Allison Engine Company, Inc. has a 50% interest in this unincorporated partnership which was formed to jointly develop and market the T800 engine.

1 The interest is held by Rolls-Royce Engine Controls Limited. 2 The interest is held by Rolls-Royce Power Engineering plc. 3 The interests are held by Rolls-Royce Overseas Holdings Limited. 4 The interest is held by Middle East Equity Partners Limited. 5 The interest is held by Rolls-Royce Engine Services Holdings Co. 6 The interest is held by Rolls E.L. Turbofans Limited. 7 The interest is held by Rolls-Royce Partners Finance (Netherlands) BV. 8 The interest is held by Rolls-Royce Control Systems Holdings Co.

The countries of principal operations, if other than the country of registration, are stated in brackets after the name of the company.

Joint arrangements that are not entities at December 31, 1999

% of class % of total held by equity held by Class Rolls-Royce plc Rolls-Royce plc Cayman Islands SAMA Leasing Company Limited 1 A Ordinary — ü ý 50 Aircraft leasing B Ordinary 100 þ Jersey RS Leasing Limited 2 A Ordinary 100 ü ý 50 Aircraft leasing B Ordinary — þ

1 The interest is held by Rolls-Royce Aircraft Management Limited. 2 The interest is held by Rolls-Royce Leasing Limited.

72 Rolls-Royce plc 1999 Company law requires the directors to prepare financial statements for each We have audited the financial statements on pages 40 to 72. We have also financial year which give a true and fair view of the state of affairs of the examined the amounts disclosed relating to emoluments, share options, Company and of the Group and of the profit or loss for that period. long-term incentive plan interests and directors’ pension entitlements which form part of the remuneration report on pages 32 to 39. In preparing those financial statements, the directors are required to: i) select suitable accounting policies and then apply them consistently; Respective responsibilities of directors and auditors ii) make judgements and estimates that are reasonable and prudent; The directors are responsible for preparing the Annual Report. As described iii) state whether applicable accounting standards have been followed, on this page, this includes responsibility for preparing the financial statements subject to any material departures disclosed and explained in the in accordance with applicable United Kingdom law and accounting standards. financial statements; Our responsibilities, as independent auditors, are established in the United iv) prepare the financial statements on the going concern basis unless it is Kingdom by statute, the Auditing Practices Board, the Listing Rules of the inappropriate to presume that the Company and the Group will London Stock Exchange, and by our profession’s ethical guidance. continue in business. We report to you our opinion as to whether the financial statements give a true and fair view and are properly prepared in accordance with the The directors are responsible for keeping proper accounting records which Companies Act. We also report to you if, in our opinion, the directors’ report disclose with reasonable accuracy at any time the financial position of the is not consistent with the financial statements, if the Company has not kept Company and to enable them to ensure that the financial statements proper accounting records, if we have not received all the information and comply with the Companies Act 1985. They have general responsibility for explanations we require for our audit, or if information specified by law or taking such steps as are reasonably open to them to safeguard the assets of the Listing Rules regarding directors’ remuneration and transactions with the Group and to prevent and detect fraud and other irregularities. the Group is not disclosed. We review whether the statement on page 28 reflects the Company’s compliance with the seven provisions of the Combined Code specified for our review by the Stock Exchange, and we report if it does not. We are not required to consider whether the Board’s statements on internal control cover all risks and controls, or form an opinion on the effectiveness of the Group’s corporate governance procedures or its risk and control procedures. We read the other information contained in the Annual Report, including the corporate governance statement, and consider whether it is consistent with the audited financial statements. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the financial statements.

Basis of audit opinion We conducted our audit in accordance with Auditing Standards issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements. It also includes an assessment of the significant estimates and judgements made by the directors in the preparation of the financial statements, and of whether the accounting policies are appropriate to the Group’s circumstances, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial statements.

Opinion In our opinion the financial statements give a true and fair view of the state of affairs of the Company and the Group as at December 31, 1999 and of the profit of the Group for the year then ended and have been properly prepared in accordance with the Companies Act 1985.

KPMG Audit Plc Chartered Accountants, Registered Auditor London March 1, 2000

73 Rolls-Royce plc 1999 Profit and loss account 1999 1998 1997 1996 1995 £m £m £m £m £m Group turnover 1 4,744 4,496 4,348 3,912 3,233 Trading profit 3 591 489 487 424 358 Operating exceptional items — — — (101) — Research and development (net)* (215) (173) (216) (199) (206) Group operating profit 2 376 316 271 124 152 Share of operating profit of joint ventures 31 17 17 12 13 Non-operating exceptional items 6 9 1 (147) 32 Net interest payable (53) (17) (13) (17) (22) Profit/(loss) on ordinary activities before taxation 360 325 276 (28) 175 Taxation (74) (65) (51) (16) (31) Profit/(loss) on ordinary activities after taxation 286 260 225 (44) 144 Equity minority interests in subsidiary undertakings (2) (2) (1) (3) (2) Profit/(loss) attributable to ordinary shareholders 284 258 224 (47) 142 Dividends (112) (99) (88) (78) (73) Transferred to/(from) reserves 172 159 136 (125) 69

*Research and development (gross) (626) (668) (595) (527) (492)

1 Group turnover Continuing operations 4,744 4,326 3,944 3,422 2,774 Discontinued operations — 170 404 490 459

2 Group operating profit/(loss) Continuing operations 376 326 266 229 170 Discontinued operations — (10) 5 (105) (18)

Earnings/(loss) per ordinary share Underlying 19.52p 16.91p 15.16p 12.70p 7.94p Basic 18.86p 17.25p 15.16p (3.19)p 10.25p Dividends per ordinary share 7.25p 6.55p 5.90p 5.30p 5.00p

3 Trading profit represents gross profit less commercial, marketing, product support, general and administration costs but is stated before operating exceptional items.

74 Rolls-Royce plc 1999 Balance sheet 1999 1998 1997 1996 1995 £m £m £m £m £m Fixed assets 2,808 1,374 1,276 1,171 1,166 Current assets 3,951 3,407 3,265 2,902 2,641 6,759 4,781 4,541 4,073 3,807 Liabilities and provisions (4,758) (3,064) (3,079) (2,748) (2,447) 2,001 1,717 1,462 1,325 1,360

Share capital 309 301 296 295 292 Reserves 1,679 1,404 1,147 1,008 1,053 Equity shareholders’ funds 1,988 1,705 1,443 1,303 1,345 Minority interests in subsidiary undertakings 13 12 19 22 15 2,001 1,717 1,462 1,325 1,360

Cash flow 1999 1998 1997 1996 1995 £m £m £m £m £m Cash inflow from operating activities 359 285 320 176 117 Interest, dividends and taxation (152) (98) (113) (102) (87) Capital expenditure and financial investment (199) (309) (203) (96) (19) Acquisitions and disposals (666) 87 42 (21) (180) (658) (35) 46 (43) (169) Cash flow from financing 622 113 13 64 229 (Decrease)/increase in cash and liquid resources (36) 78 59 21 60

75 Rolls-Royce plc 1999 Financial calendar Shareholder enquiries Ex dividend date for final dividend April 25, 2000 If you would prefer to receive new shares instead of cash dividends, please Calculation period for scrip dividend April 25-May 2, 2000 ask the Registrar for a scrip dividend mandate. If you have any queries on Qualifying (record) date for final dividend May 2, 2000 the following: Last date for new scrip dividend instructions May 23, 2000 i) Transfer of shares Annual General Meeting, The Queen Elizabeth II ii) Change of name or address Conference Centre, Broad Sanctuary, London SW1 11am May 25, 2000 iii) Lost share certificates Payment of final/scrip dividend July 3, 2000 iv) Lost or out of date dividend cheques Press advertisement of 2000 interim results* August 25, 2000 v) Death of a registered holder of shares Ex dividend date for interim dividend October 16, 2000 vi) Any other query relating to Rolls-Royce plc shares Calculation period for scrip dividend October 16-20, 2000 please write to, or telephone, the Registrar at the following address: Qualifying (record) date for interim dividend October 20, 2000 Computershare Services PLC Last date for new scrip dividend instructions November 10, 2000 PO Box 82 Financial year end December 31, 2000 The Pavilions Payment of interim/scrip dividend January 8, 2001 Bridgwater Road Press advertisement of 2000 preliminary results* March, 2001 Bristol BS99 7NH 2000 Annual Report published April, 2001 Helpline: 0870 702 0111

*Note: Preliminary and interim results are notified by press advertisements and will also be The Company operates a free-of-charge service for consolidating the available on the Company’s website http://www.rolls-royce.com. individual shareholdings of immediate members of a family. Please ask the Registrar for details if you are interested.

Low-cost share dealing Details of special low-cost dealing services in the Company’s shares may be Analysis of ordinary shareholders at December 31, 1999 obtained from Hoare Govett Limited (telephone 020 7601 0101) and from NatWest Stockbrokers Limited (telephone 020 7895 5489). Both are Number of % of total % of total members of the Securities and Futures Authority and NatWest Stockbrokers Number of shares holdings holdings shares is also a member of the London Stock Exchange. 1 – 150 125,157 36.94 1.06 You can obtain the current market price of the Company’s shares by 151 – 500 172,649 50.95 2.80 telephoning 0839 500 232 or alternatively by viewing teletext or similar 501 – 10,000 39,186 11.57 4.47 services. 10,001 – 100,000 1,157 0.34 2.34 100,001 – 1,000,000 505 0.15 11.72 Internet 1,000,001 and over 166 0.05 77.61 The Annual Report, Company announcements and other information are 338,820 100.00 100.00 available through the Internet on http://www.rolls-royce.com

76 Rolls-Royce plc 1999 ®

All images © Rolls-Royce plc

Designed by Addison Typeset by Charnwood Technic Art Limited and printed in England by Burrups Ltd Rolls-Royce plc 65 Buckingham Gate London SW1E 6AT www.rolls-royce.com