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Acquisition of Lockheed Martin Control Systems and Lockheed Martin Aerospace Electronics Systems (AES)
The group acquired two former Lockheed Martin businesses during 2000, the Control Systems business on 25 September for a cash purchase consideration of $510m (£346m) and the AES business on 27 November for a cash purchase consideration of $1.67bn (£1.18bn). In addition to the purchase price other costs associated with these two acquisitions totalled $105m (£73m).

Given the size of the businesses acquired, and the recent date of the acquisitions, provisional fair values have been assigned to the net assets acquired, and these will be reviewed during 2001 and amended as necessary in the light of subsequent knowledge or events to the extent that these reflect conditions as at the date of the respective acquisitions.

The key features of the adjustments made are set out below.

Accounting policies
The accounting policies previously adopted by Controls Systems and AES have been brought into line with those of the company. The most significant adjustment relates to the valuation of stock and long term contract balances, where under the Lockheed Martin policy certain elements of indirect overhead were absorbed into the work-in-progress valuations. Under the company policy such amounts are charged as incurred. As a consequence of this adjustment certain work-in-progress valuations, net of progress payments result in a net credit balance. This balance is recorded within creditors as a customer stage payment. Other significant adjustments are in relation to software costs where capitalised costs within the opening net assets have been removed in line with the company policy of charging when incurred, and the elimination of restructuring costs which had previously been capitalised.

Fair value adjustments
The key adjustments made relate to stock, creditors and provisions to reflect amounts in respect of contract risks, onerous contracts and other commitments existing as at the date of acquisition but not reflected in the acquired net assets.

Reorganisation provisions
No provisions relating to reorganisation and restructuring costs, for programmes and commitments established by the businesses prior to their acquisition, were included in the book values acquired for the Control Systems and the AES businesses.

Profit after taxation and minority interests
The profit after taxation and minority interests for Control Systems for the period 1 January 2000 to 24 September 2000 totalled £15m (£17m for the financial year beginning 1 January 1999).

The profit after taxation and minority interests for AES for the period 1 January 2000 to 26 November 2000 totalled £39m (£46m for the financial year beginning 1 January 1999).

Other acquisitions
On 14 January 2000 the group acquired 100% of the Watkins Johnson Telecommunications Group in the US for a total consideration of £38m ($59m) cash. Goodwill arising on consolidation amounted to £25m and is being amortised over its expected useful life of 20 years. Watkins Johnson is producer of electronic communications hardware to the US defence market.

On 3 March 2000 Saab AB, in which the group has a 35% equity interest, acquired 100% of the equity share capital of Celsius AB, a Swedish aerospace and defence company, for a cash consideration of SEK5bn (£385m). BAE SYSTEMS did not contribute cash to Saab AB in relation to this acquisition. The group's share of goodwill arising on the acquisition of Celsius by Saab AB amounted to £18m and is being amortised over its expected useful life of 20 years.

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Acquisition of MES
The group acquired the Marconi Electronic Systems (MES) businesses from The General Electric Company, p.l.c. on 29 November 1999. As noted in the 1999 accounts, provisional fair values were assigned to the net assets acquired. These have been reviewed during 2000 with amendments made to finalise the fair value adjustments as noted in the table above.

2000 fair value amendments
The main amendments made concern creditors and provisions where amounts were included as provisional fair values in respect of contract risks, onerous contracts and other commitments. These have been updated to more accurately reflect the conditions as at the date of acquisition based on information and knowledge which has subsequently come to light during the review in 2000, and adjustments have also been made to reflect the associated taxation effects. Similar contract related adjustments have been made to the acquired net assets of the joint ventures. In addition amendments have been made to reflect the decision made during 2000 not to hold Precision Aerostructures as a business for resale, and to update the valuation of certain tangible fixed assets disposed in the period.

Non-trading subsidiary undertakings
Included within subsidiary undertakings is the company’s interest in non-trading subsidiary undertakings whose assets comprise loans to the company totalling £187m (1999 £187m) which have been offset against the cost of the company’s investment.

Disposals
On 20 March 2000 the group disposed of Actuation Systems Inc. for a net cash consideration of £55m ($87m).

On 29 December 2000 the group disposed of its Avionics Power and Controls business for a net cash consideration of £60m.

Both businesses were acquired by the group as part of the acquisition of the MES businesses on 29 November 1999.

Qualifying Employee Share Ownership Trust (QUEST)
The group has a Qualifying Employee Share Ownership Trust (QUEST) for the purposes inter alia of the SAYE Share Option Scheme (1993). During the year contributions of £13m have been made to QUEST. The contributions reduced reserves of the company and the group, as outlined in note 24. The QUEST used the funds to subscribe for 8,000,000 new ordinary shares in the company issued in two tranches at the market price prevailing on the dates of issue, these being £3.95 per ordinary share on 11 May 2000 and £3.58 per ordinary share on 21 December 2000. At 31 December 2000, included within own shares is £8m (1999 £7m) representing the holding of 4,178,935 shares held at the option price. The market value of shares held at 31 December 2000 was £16m.

In the period from 1 January 2000 to 28 February 2001, 188,249 shares had been transferred to option holders exercising options under the SAYE Share Option Scheme (1993).

BAE SYSTEMS ESOP Trust Limited
Included within own shares is £12m (1999 £5m) representing a holding of 4,698,124 (1999 2,837,240) ordinary shares of 2.5p each in the company, listed on The London Stock Exchange and held by the company’s wholly owned subsidiary, BAE SYSTEMS ESOP Trust Limited acting as Trustee to the BAE SYSTEMS ESOP Trust (the ESOP Trust).

The market value of the shares held at 31 December 2000 was £18m (1999 £12m).

At 31 December 2000 a total of 3,782,668 ordinary shares held in the ESOP Trust were the subject of conditional awards under the company’s Performance Share Plan, of which 1,390,900 had been granted to executive directors. In addition, 883,867 ordinary shares were held in trust for employees under the rules of the company’s Restricted Share Plan, 344,697 of which were held for executive directors.

Dividends on the shares held in the ESOP Trust have not been waived. Finance costs and other administrative charges are dealt with in the profit and loss account on an accruals basis.

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The above list includes the company’s principal subsidiaries and investments. It does not represent a full list of subsidiaries and investments. All holdings represent 100% of ordinary share capital, except where otherwise indicated.

* Denotes companies subject to specific OFT undertakings. Copies of these companies’ accounts may be obtained from the group’s Company secretary.