Statement of directors' responsibility | Report of the auditors |Accounting policies |Group profit & loss account | Group statement of total recognised gains and losses | Group cash flow statement | Balance sheets  | Notes to the financial statements | US generally accepted accounting principles |  Subsidary undertakings, joint ventures & associates

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Statement of directors' responsibility
FOR PREPARING THE FINANCIAL STATEMENTS


The directors are required by law to prepare financial statements for each financial year which give a true and fair view of the state of affairs of the company and the group as at the end of the financial year and of the profit or loss and cash flows of the group for that period.

The directors consider that, in preparing the financial statements for the year ended 31 March 1999 on pages 59 to 103, the company has used appropriate accounting policies, consistently applied and supported by reasonable and prudent judgements and estimates. The directors also consider that all applicable accounting standards have been followed and confirm that the financial statements have been prepared on the going concern basis.

The directors are responsible for ensuring that the company keeps accounting records which disclose with reasonable accuracy at any time the financial position of the company and which enable them to ensure that the financial statements comply with the Companies Act 1985.

The directors are also responsible for taking such steps that are reasonably open to them to safeguard the assets of the group and to prevent and detect fraud and other irregularities.

The auditors' responsibilities are stated in their report to the shareholders.

 


Report of the auditors
TO THE SHAREHOLDERS OF BRITISH TELECOMMUNICATIONS plc

We have audited the financial statements on page 59 to 103. We have also examined the amounts disclosed relating to the directors' remuneration, share options, long term incentives and pension entitlements on pages 47 to 55.

Respective responsibilities of directors and auditors

The directors are responsible for preparing the annual report including, as described on page 57, the financial statements. Our responsibilities, as independent auditors, are established by statute, the Auditing Practices Board, the Listing Rules of the London Stock Exchange and our profession's ethical guidance.

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 Companies Act 1985. We also report to you if, in our opinion, the report of the directors is not consistent with the financial statements, if the company has not kept proper accounting records, if we have not received all the information and explanations we require for our audit, or if information specified by law or the Listing Rules regarding directors' remuneration and transactions is not disclosed.

We read the other information contained in the annual report and consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the financial statements.

We review whether the statement on page 44 reflects the company's compliance with those provisions of the Combined Code specified for our review by the London Stock Exchange, and we report if it does not. We are not required to form an opinion on the effectiveness of the group's corporate governance procedures or its internal controls.

Basis of audit opinion

We conducted our audit in accordance with United Kingdom Auditing Standards issued by the Auditing Practices Board, which are substantially the same as auditing standards generally accepted in the United States. 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 company'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 at 31 March 1999 and of the profit and cash flows of the group for the year then ended and have been properly prepared in accordance with the Companies Act 1985.

- present fairly, in all material respects, the consolidated financial position of the group as at 31 March 1999 and 31 March 1998 and the results of its operations and its cash flows for the years ended 31 March 1999, 31 March 1998 and 31 March 1997 in conformity with accounting principles generally accepted in the United Kingdom. The principles differ in certain respects from accounting principles generally accepted in the United States. The effect of the differences in the determination of net income, shareholders' equity and cash flows is shown on pages 97 to 99.

PricewaterhouseCoopers

Chartered Accountants and Registered Auditors

London

25 MAY 1999

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Group profit and loss account
FOR THE YEAR ENDED 31 MARCH 1999

    Before Exceptional After    
    exceptional items exceptional    
    items   items    
    1999 1999 1999 1998 1997
  Notes £m £m £m £m £m
----------------------------------------------------------------------- -----------------------------------------------------------------------------------------
Total turnover - ongoing activities 2 18,223 - 18,223 16,039 15,021
Discontinued activities 2 - - - 1,372 2,358
----------------------------------------------------------------------- -----------------------------------------------------------------------------------------
Total turnover, including discontinued activities 2 18,223 - 18,223 17,411 17,379
Group's share of joint ventures' turnover 2 (561) - (561) (147) (80)
Group's share of associates' turnover 2 (709) - (709) (1,624) (2,364)
----------------------------------------------------------------------- -----------------------------------------------------------------------------------------
Group turnover - ongoing activities 2 16,953 - 16,953 15,640 14,935
Other operating income (a) 3 168 - 168 372 106
Operating costs 4 (13,236) (69) (13,305) (12,355) (11,796)
----------------------------------------------------------------------- -----------------------------------------------------------------------------------------
Group operating profit - ongoing activities   3,885 (69) 3,816 3,657 3,245
Group's share of operating loss of joint ventures 5 (342) - (342) (199) (36)
Group's share of operating profit (loss) of associates 5 - - - 3 220
----------------------------------------------------------------------- -----------------------------------------------------------------------------------------
Total operating profit:            
  Ongoing activities   3,543 (69) 3,474 3,436 3,209
  Discontinued activities   - - - 25 220
 
    3,543 (69) 3,474 3,461 3,429
Profit on sale of fixed asset investments 6 - 1,107 1,107 - -
Profit on sale of group undertakings 6 - - - 63 8
Interest receivable 7 165 - 165 162 209
Interest payable 8 (451) - (451) (472) (383)
Premium on repurchase of bonds 9 - - - - (60)
----------------------------------------------------------------------- -----------------------------------------------------------------------------------------
Profit on ordinary activities before taxation   3,257 1,038 4,295 3,214 3,203
Tax on profit on ordinary activities:
  Corporation and similar taxes 10 (1,002) (291) (1,293) (977) (1,102)
  Windfall tax 10 - - - (510) -
 
    (1,002) (291) (1,293) (1,487) (1,102)
----------------------------------------------------------------------- -----------------------------------------------------------------------------------------
Profit on ordinary activities after taxation   2,255 747 3,002 1,727 2,101
Minority interests 11 (19) - (19) (25) (24)
----------------------------------------------------------------------- -----------------------------------------------------------------------------------------
Profit for the financial year   2,236 747 2,983 1,702 2,077
----------------------------------------------------------------------- -----------------------------------------------------------------------------------------
Dividends:            
  Ordinary 12     (1,322) (1,216) (1,266)
  Special 12     - - (2,244)
        (1,322) (1,216) (3,510)
----------------------------------------------------------------------- -----------------------------------------------------------------------------------------
Retained profit (transfer from reserves) for the financial year 26     1,661 486 (1,433)
----------------------------------------------------------------------- -----------------------------------------------------------------------------------------
Basic earnings per share 13     46.3p 26.6p 32.8p
Basic earnings per share before
exceptional items 13     34.7p 31.7p 32.8p
Diluted earnings per share 13     45.3p 26.2p 32.2p
Diluted earnings per share before exceptional items
13     34.0p 31.2p 32.2p
----------------------------------------------------------------------- -----------------------------------------------------------------------------------------
(a) Including MCI break up fee net of expenses       - 238 -
----------------------------------------------------------------------- -----------------------------------------------------------------------------------------
 

Group statement of total recognised gains and losses
FOR THE YEAR ENDED 31 MARCH 1999

  1999 1998 1997
  £m £m £m
------------------------------------------------------------------------------------------------------------ -----------------------------------------
Profit (loss) for the financial year:      
  Group 3,362 1,951 1,987
  Joint ventures (362) (202) (38)
  Associates (17) (47) 128
------------------------------------------------------------------------------------------------------------ -----------------------------------------
Total profit for the financial year 2,983 1,702 2,077
Currency movements arising on consolidation of foreign subsidiaries,
joint ventures and associates 45 (74) (76)
------------------------------------------------------------------------------------------------------------ -----------------------------------------
Total recognised gains and losses for the financial year 3,028 1,628 2,001
------------------------------------------------------------------------------------------------------------ -----------------------------------------

Group cash flow statement
FOR THE YEAR ENDED 31 MARCH 1999

  1999 1998 1997
Notes £m £m £m
------------------------------------------------------------------------------------------------------------   -----------------------------------
Net cash inflow from operating activities 14 6,035 6,071 6,185
Dividends from joint ventures and associates   2 5 7
Returns on investments and servicing of finance
Interest received   111 168 196
Interest paid, including finance costs   (439) (328) (342)
Premium paid on repurchase of bonds   - - (60)
Dividends paid to minorities   - - (14)
Net cash outflow for returns on investments and servicing of finance   (328) (160) (220)
Taxation
UK corporation tax paid   (359) (1,625) (1,032)
Windfall tax paid   (255) (255) -
Overseas tax paid   (16) (6) (13)
Tax paid   (630) (1,886) (1,045)
Capital expenditure and financial investment
Purchase of tangible fixed assets   (3,220) (3,020) (2,823)
Sale of tangible fixed assets   143 127 124
Purchase of fixed asset investments   (103) (265) (172)
Disposal of fixed asset investments   4,226 50 51
Net cash inflow (outflow) for capital expenditure and financial investment   1,046 (3,108) (2,820)
Acquisitions and disposals
Purchase of subsidiary undertakings, net of £5m overdraft
(1998 - £6m, 1997 - £2m cash acquired)   (672) (121) (126)
Investments in joint ventures   (1,038) (323) (131)
Investments in associates   (288) (1,057) (17)
Sale of subsidiary undertakings   14 - 11
Sale of investments in joint ventures and associates   17 - 11
Net cash outflow for acquisitions and disposals   (1,967) (1,501) (252)
Equity dividends paid   (1,186) (3,473) (1,217)
------------------------------------------------------------------------------------------------------------   -----------------------------------
Cash inflow (outflow) before management of liquid resources and financing   2,972 (4,052) 638
Management of liquid resources 15 (2,447) 2,247 (504)
Financing
Issue of ordinary share capital   161 144 160
Minority shares issued   13 48 51
New loans   10 1,637 35
Loan repayments   (457) (338) (670)
Net increase (decrease) in short-term borrowings   (185) 303 200
Net cash inflow (outflow) from financing   (458) 1,794 (224)
------------------------------------------------------------------------------------------------------------   -----------------------------------
Increase (decrease) in cash in the year   67 (11) (90)
------------------------------------------------------------------------------------------------------------   -----------------------------------
Decrease (increase) in net debt in the year 16 3,146 (3,860) 849
------------------------------------------------------------------------------------------------------------   -----------------------------------

Balance sheets
AT 31 MARCH 1999

    Group Company
    ----------------------------- -----------------------------
    1999 1998 1999 1998
  Notes £m £m £m £m
  ----------- ----------------------------- -----------------------------
Fixed assets
Intangible assets 17 742 - - -
Tangible assets 18 17,854 17,252 15,022 14,899
Investments in joint ventures: 19  
Share of gross assets and goodwill   1,857 524    
Share of gross liabilities   (775) (274)    
    ----------- -----------    
    1,082 250    
Investments in associates 19 418 143    
Other investments 19 332 1,315    
 
Total investments 19 1,832 1,708 12,371 7,808
---------------------------------------------------------------------------- ----------- ----------------------------- -----------------------------
Total fixed assets   20,428 18,960 27,393 22,707
Current assets
Stocks   159 145 134 124
Debtors 20 3,995 3,387 5,976 4,918
Investments 21 3,278 731 1,897 15
Cash at bank and in hand   102 62 7 1
---------------------------------------------------------------------------- ----------- ----------------------------- -----------------------------
Total current assets   7,534 4,325 8,014 5,058
---------------------------------------------------------------------------- ----------- ----------------------------- -----------------------------
Creditors: amounts falling due within one year
Loans and other borrowings 22 947 881 7,250 3,282
Other creditors 23 7,082 6,081 7,008 6,043
---------------------------------------------------------------------------- ----------- ----------------------------- -----------------------------
Total creditors: amounts falling due within one year   8,029 6,962 14,258 9,325
---------------------------------------------------------------------------- ----------- ----------------------------- -----------------------------
Net current liabilities   (495) (2,637) (6,244) (4,267)
---------------------------------------------------------------------------- ----------- ----------------------------- -----------------------------
Total assets less current liabilities   19,933 16,323 21,149 18,440
---------------------------------------------------------------------------- ----------- ----------------------------- -----------------------------
Creditors: amounts falling due after more than one year
Loans and other borrowings 22 3,386 3,889 4,289 4,126
Provisions for liabilities and charges 24 1,391 1,426 1,116 1,269
Minority interests   216 223 - -
Capital and reserves
Called up share capital 25 1,617 1,603 1,617 1,603
Share premium account 26 1,206 892 1,206 892
Other reserves 26 774 776 747 749
Profit and loss account 26 11,343 7,514 12,174 9,801
 
 
Total equity shareholders' funds 26 14,940 10,785 15,744 13,045
---------------------------------------------------------------------------- ----------- ----------------------------- -----------------------------
    19,933 16,323 21,149 18,440
---------------------------------------------------------------------------- ----------- ----------------------------- -----------------------------
Debtors include amounts receivable after more than one year: group £nil (1998 - £97m) and company £nil (1998 - £213m).
The financial statements on pages 59 to 103 were approved by the board of directors on 25 May 1999 and were signed on its behalf by
Sir Iain Vallance Chairman
Sir Peter Bonfield CBE Chief Executive
R P Brace Group Finance Director

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Accounting policies


I Basis of preparation of the financial statements
The financial statements are prepared under the historical cost convention and in accordance with applicable accounting standards and the provisions of the Companies Act 1985. The group financial statements consolidate those of the company and all of its subsidiary undertakings. Where the financial statements of subsidiary undertakings, associates and joint ventures do not conform with the group's accounting policies, appropriate adjustments are made on consolidation in order to present the group financial statements on a consistent basis. The principal subsidiary undertakings' financial years are all coterminous with those of the company.

The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenditure during the reporting period. Actual results could differ from those estimates. Estimates are used principally when accounting for income, provision for doubtful debts, payments to telecommunication operators, depreciation, employee pension schemes and taxes. Certain comparative figures have been restated to conform with revised presentation and reclassification of figures in the year ended 31 March 1999, required by Financial Reporting Standards Nos 9 to 14.

II Turnover
Group turnover, which excludes value added tax and other sales taxes, comprises the value of services provided and equipment sales by group undertakings, excluding those between them.

Total turnover is group turnover together with the group's share of its associates' and joint ventures' turnover.

III Research and development
Expenditure on research and development is written off as incurred.

IV Interest
Interest payable, including that related to financing the construction of tangible fixed assets, is written off as incurred. Discounts or premiums and expenses on the issue of debt securities are amortised over the term of the related security and included within interest payable. Premiums payable on early redemptions of debt securities, in lieu of future interest costs, are written off when paid.

V Foreign currencies
On consolidation, assets and liabilities of foreign undertakings are translated into sterling at year-end exchange rates. The results of foreign undertakings are translated into sterling at average rates of exchange for the year.

Exchange differences arising from the retranslation at year-end exchange rates of the net investment in foreign undertakings, less exchange differences on borrowings which finance or provide a hedge against those undertakings, are taken to reserves and are reported in the statement of total recognised gains and losses.

All other exchange gains or losses are dealt with through the profit and loss account.

VI Goodwill
Goodwill, arising from the purchase of subsidiary undertakings and interests in associates and joint ventures, represents the excess of the fair value of the purchase consideration over the fair value of the net assets acquired.

For acquisitions completed on or after 1 April 1998, the goodwill arising is capitalised as an intangible asset or, if arising in respect of an associate or joint venture, recorded as part of the related investment. In most cases, the goodwill is amortised on a straight line basis from the time of acquisition over its useful economic life. Where special circumstances exist such that amortising goodwill over a finite period would not give a true and fair view, that goodwill is not amortised. The economic life is normally presumed to be a maximum of 20 years.

For acquisitions on or before 31 March 1998, the goodwill is written off on acquisition against group reserves.

If an undertaking is subsequently divested, the appropriate unamortised goodwill is dealt with through the profit and loss account in the period of disposal as part of the gain or loss on divestment.

VII Tangible fixed assets
Tangible fixed assets are stated at historical cost less depreciation.

(a) Cost
Cost in the case of network services comprises expenditure up to and including the last distribution point and includes contractors' charges and payments on account, materials, direct labour and related overheads.

(b) Depreciation
Depreciation is provided on tangible fixed assets on a straight line basis from the time they are available for use, so as to write off their costs over their estimated useful lives taking into account any expected residual values. No depreciation is provided on freehold land.


The lives assigned to other significant tangible fixed assets are:

 
Freehold buildings- 40 years
Leasehold land and buildings- Unexpired portion lease or 40 years, whichever is the shorter
Transmission equipment:  
duct - 25 years
cable - 3 to 25 years
radio and repeater equipment - 2 to 25 years
Exchange equipment - 2 to 13 years
Computers and office equipment - 2 to 6 years
Payphones, other network equipment, motor vehicles and cableships - 2 to 20 years
----------------------------------------------------------------------------------------- -----------------------------------------------------------------------------

VIII Fixed asset investments
Investments in subsidiary undertakings, associates and joint ventures are stated in the balance sheet of the company at cost less amounts written off. Amounts denominated in foreign currency are translated into sterling at year-end exchange rates.

Investments in associates and joint ventures are stated in the group balance sheet at the group's share of their net assets, together with any attributable unamortised goodwill on acquisitions arising on or after 1 April 1998.

The group's share of profits less losses of associates and joint ventures is included in the group profit and loss account.

Investments in other participating interests and other investments are stated at cost less amounts written off.

IX Stocks
Stocks mainly comprise items of equipment, held for sale or rental, consumable items and work in progress on long-term contracts.

Equipment held and consumable items are stated at the lower of cost and estimated net realisable value, after provisions for obsolescence.

Work in progress on long-term contracts is stated at cost, after deducting payments on account, less provisions for any foreseeable losses.

X Redundancy costs
Redundancy costs arising from periodic reviews of staff levels are charged against profit in the year in which employees agree to leave the group.

If the most recent actuarial valuation of the group's pension scheme shows a deficit, the estimated cost of providing incremental pension benefits in respect of employees leaving the group is charged against profit in the year in which the employees agree to leave the group, within redundancy charges.

XI Pension scheme
The group operates a defined benefit pension scheme, which is independent of the group's finances, for the substantial majority of its employees. Actuarial valuations of the scheme are carried out as determined by the trustees at intervals of not more than three years, the rates of contribution payable and the pension cost being determined on the advice of the actuaries, having regard to the results of these valuations. In any intervening years, the actuaries review the continuing appropriateness of the contribution rates.

The cost of providing pensions is charged against profits over employees' working lives with the group using the projected unit method. Variations from this regular cost are allocated over the average remaining service lives of current employees to the extent that these variations do not relate to the estimated cost of providing incremental pension benefits in the circumstances described in X above.

Interest is accounted for on the provision in the balance sheet which results from differences between amounts recognised as pension costs and amounts funded. The regular pension cost, variations from the regular pension cost, described above, and interest are all charged within staff costs.

XII Taxation
The charge for taxation is based on the profit for the year and takes into account deferred taxation. Provision is made for deferred taxation only to the extent that timing differences are expected to reverse in the foreseeable future, with the exception of timing differences arising on pension costs where full provision is made irrespective of whether they are expected to reverse in the foreseeable future.

XIII Financial instruments
(a) Debt instruments
Debt instruments are stated at the amount of net proceeds adjusted to amortise any discount evenly over the term of the debt.

(b) Derivative financial instruments
The group uses derivative financial instruments to reduce exposure to foreign exchange risks and interest rate movements. The group does not hold or issue derivative financial instruments for financial trading purposes.


Criteria to qualify for hedge accounting
The group considers its derivative financial instruments to be hedges when certain criteria are met. For foreign currency derivatives, the instrument must be related to actual foreign currency assets or liabilities or a probable commitment and whose characteristics have been identified. It must involve the same currency or similar currencies as the hedged item and must also reduce the risk of foreign currency exchange movements on the group's operations. For interest rate derivatives, the instrument must be related to assets or liabilities or a probable commitment and must also change the nature of the interest rate by converting a fixed rate to a variable rate or vice versa.

Accounting for derivative financial instruments
Principal amounts underlying currency swaps are revalued at exchange rates ruling at the date of the group balance sheet and are included in debtors or creditors.

Interest differentials, under interest rate swap agreements used to vary the amounts and periods for which interest rates on borrowings are fixed, are recognised by adjustment of interest payable.

The forward exchange contracts used to change the currency mix of net debt are revalued to balance sheet rates with net unrealised gains and losses being shown as part of debtors or creditors. The difference between spot and forward rate for these contracts is recognised as part of net interest payable over the term of the contract.

The forward exchange contracts hedging transaction exposures are revalued at the prevailing forward rate on the balance sheet date with net unrealised gains and losses being shown as debtors and creditors.

 

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United States Generally Accepted Accounting Principles
The group's consolidated financial statements are prepared in accordance with accounting principles generally accepted in the UK (UK GAAP), which differ in certain significant respects from those applicable in the US (US GAAP).

I Differences between United Kingdom and United States generally accepted accounting principles
The following are the main differences between UK and US GAAP which are relevant to the group's financial statements.

(a) Pension costs
Under UK GAAP, pension costs are accounted for in accordance with UK Statement of Standard Accounting Practice No. 24, costs being charged against profits over employees' working lives. Under US GAAP, pension costs are determined in accordance with the requirements of US Statements of Financial Accounting Standards (SFAS) Nos. 87 and 88. Differences between the UK and US GAAP figures arise from the requirement to use different actuarial methods and assumptions and a different method of amortising surpluses or deficits.

(b) Accounting for redundancies
Under UK GAAP, the cost of providing incremental pension benefits in respect of workforce reductions is taken into account when determining current and future pension costs, unless the most recent actuarial valuation under UK actuarial conventions shows a deficit. In this case, the cost of providing incremental pension benefits is included in redundancy charges in the year in which the employees agree to leave the group.

Under US GAAP, the associated cost of providing incremental pension benefits are charged against profits in the period in which the termination terms are agreed with the employees.

(c) Capitalisation of interest
Under UK GAAP, the group does not capitalise interest in its financial statements. To comply with US GAAP, the estimated amount of interest incurred whilst constructing major capital projects is included in fixed assets, and depreciated over the lives of the related assets. The amount of interest capitalised is determined by reference to the average interest rates on outstanding borrowings. At 31 March 1999 under US GAAP, gross capitalised interest of £499m (1998 - £525m) with regard to the company and its subsidiary companies was subject to depreciation generally over periods of 2 to 25 years.

(d) Goodwill
Under UK GAAP, in respect of acquisitions completed prior to 1 April 1998, the group wrote off goodwill arising from the purchase of subsidiary undertakings, associates and joint ventures on acquisition against retained earnings. The goodwill is reflected in the net income of the period of disposal, as part of the calculation of the gain or loss on divestment. Under US GAAP, such goodwill is held as an intangible asset in the balance sheet and amortised over its useful life and only the unamortised portion is included in the gain or loss recognised at the time of divestment. Gross goodwill under US GAAP at 31 March 1999 of £1,957m (1998 - £925m) was subject to amortisation over periods of 3 to 20 years. Goodwill relating to MCI was unchanged for the period from 31 October 1997 when the investment ceased to have associated company status until disposal on 15 September 1998. The value of goodwill is reviewed annually and the net asset value is written down if a permanent diminution in value has occurred. Under UK GAAP, goodwill arising on acquisitions completed on or after 1 April 1998 is generally accounted for in line with US GAAP.

(e) Mobile cellular telephone licences, software and other intangible assets
Certain intangible fixed assets recognised under US GAAP purchase accounting requirements are subsumed within goodwill under UK GAAP. Under US GAAP these separately identified intangible assets are valued and amortised over their useful lives.

(f) Investments
Under UK GAAP, investments are held on the balance sheet at historical cost. Under US GAAP, trading securities and available-for-sale securities are carried at market value with appropriate valuation adjustments recorded in profit and loss and shareholder's equity, respectively. The net unrealised holding gain on available-for-sale securities for the year ended 31 March 1999 was £76m (1998 - £1,315m relating primarily to the investment in MCI, 1997 - £nil).

(g) Deferred taxation
Under UK GAAP, provision for deferred taxation is generally only made for timing differences which are expected to reverse. Under US GAAP, deferred taxation is provided on a full liability basis on all temporary differences, as defined in SFAS No. 109.

At 31 March 1999, the adjustment of £1,424m (1998 - £2,095m) reconciling ordinary shareholders' equity under UK GAAP to the approximate amount under US GAAP included the tax effect of other US GAAP adjustments. This comprised an adjustment increasing non-current assets by £59m (1998 - £76m decrease); an adjustment increasing current assets by £50m (1998 - £68m increase); £nil adjustment (1998 - £184m decrease) to current liabilities; an adjustment decreasing minority interests by £11m (1998 - £3m decrease) and an adjustment increasing long-term liabilities by £1,544m (1998 - £2,274m increase).

(h) Dividends

Under UK GAAP, dividends are recorded in the year in respect of which they are declared (in the case of interim or any special dividends) or proposed by the board of directors to the shareholders (in the case of final dividends). Under US GAAP, dividends are recorded in the period in which dividends are declared.

II Net income and shareholders' equity reconciliation statements

The following statements summarise the material estimated adjustments, gross of their tax effect, which reconcile net income and shareholders' equity from that reported under UK GAAP to that which would have been reported had US GAAP been applied.


Net income   1999 1998 1997
YEAR ENDED 31 MARCH   £m £m £m
------------------------------------------------------------------------------------------   -----------------------------
Net income applicable to shareholders under UK GAAP   2,983 1,702 2,077
Adjustments for:
  Pension costs   (104) (66) 83
  Redundancy charges   (284) (253) 156
  Capitalisation of interest, net of related depreciation (a)   (19) (38) (23)
  Goodwill amortisation (a)   85 (71) (73)
  Mobile licences, software and other intangible asset capitalisation and
  amortisation, net (a)   (226) 42 77
  Investments   (6) 5 -
  Deferred taxation (a)   220 163 (148)
  Other items (a)   (60) (37) -
------------------------------------------------------------------------------------------   -----------------------------
Net income as adjusted for US GAAP   2,589 1,447 2,149
------------------------------------------------------------------------------------------   -----------------------------
Basic earnings per American Depositary Share as adjusted for US GAAP (b)   £4.02 £2.27 £3.39
Diluted earnings per American Depositary Share as adjusted for US GAAP (b)   £3.93 £2.23 £3.36
------------------------------------------------------------------------------------------   -----------------------------
Shareholders' equity     1999 1998
AT 31 MARCH     £m £m
------------------------------------------------------------------------------------------   -----------------------------
Shareholders' equity under UK GAAP     14,940 10,785
Adjustments for:
  Pension costs     (1,730) (1,347)
  Redundancy costs     (46) (41)
  Capitalisation of interest, net of related depreciation     245 299
  Goodwill, net of accumulated amortisation     293 2,118
  Mobile licences, software and other intangible asset capitalisation and amortisation     628 930
  Investments     5 1,266
  Deferred taxation     (1,424) (2,095)
  Dividend declared after the financial year end     799 736
  Other items     (36) (36)
------------------------------------------------------------------------------------------   -----------------------------
Shareholders' equity as adjusted for US GAAP     13,674 12,615
------------------------------------------------------------------------------------------   -----------------------------
(a) The disposal of the group's interest in MCI shares during the year ended 31 March 1999 gave rise to adjustments; increasing net income by £163m relating to goodwill and £95m relating to deferred taxation and decreasing net income by £197m relating to software and other intangible assets, £60m relating to foreign exchange translation differences and £5m relating to the capitalisation of interest.
(b) Each American Depositary Share is equivalent to 10 ordinary shares of 25p each.
 

III Minority Interests
Under US GAAP, the minority interest charge would have been reduced by £12m (1998 - £5m, 1997 - £nil) after adjusting for goodwill amortisation and accounting for associates and joint ventures. Net assets attributable to minority interests would have been £88m higher (1998 - £81m higher) after adjusting for goodwill, investments and other items.

IV Accounting for share options

Under UK GAAP, the company does not recognise compensation expense for the fair value, at the date of grant, of share options granted under the employee share option schemes. Under US GAAP, the company adopted the disclosure-only option in SFAS No. 123 "Accounting for Stock-Based Compensation" in the year ended 31 March 1997. Accordingly, the company accounts for share options in accordance with APB Opinion No. 25 "Accounting for Stock Issued to Employees", under which no compensation expense is recognised. Had the group expensed compensation cost for options granted in accordance with SFAS No. 123, the group's pro forma net income, basic earnings per share and diluted earnings per share under US GAAP would have been £2,560m (1998 - £1,432m, 1997 - £2,126m), 39.7p (1998 - 22.4p, 1997 - 33.6p) and 38.8p (1998 - 22.1p, 1997 - 33.2p), respectively. The SFAS No. 123 method of accounting does not apply to share options granted before 1 January 1995, and accordingly, the resulting pro forma compensation costs may not be representative of that to be expected in future years. See note 31 for the SFAS No. 123 disclosures of the fair value of options granted under employee schemes at date of grant.

V Consolidated statements of cash flows
Under UK GAAP, the Consolidated Statements of Cash Flows are presented in accordance with UK Financial Reporting Standard No. 1 (FRS 1). The statements prepared under FRS 1 present substantially the same information as that required under SFAS No. 95.

Under SFAS No. 95 cash and cash equivalents include cash and short-term investments with original maturities of three months or less. Under FRS 1 cash comprises cash in hand and at bank and overnight deposits, net of bank overdrafts.

Under FRS 1, cash flows are presented for operating activities; returns on investments and servicing of finance; taxation; capital expenditure and financial investments; acquisitions and disposals; dividends paid to the company's shareholders; management of liquid resources and financing. SFAS No. 95 requires a classification of cash flows as resulting from operating, investing and financing activities.

Cash flows under FRS 1 in respect of interest received, interest paid (net of that capitalised under US GAAP) and taxation would be included within operating activities under SFAS No. 95. Cash flows from purchases, sales and maturities of trading securities, while not separately identified under UK GAAP, would be included within operating activities under US GAAP. Capitalised interest, while not recognised under UK GAAP, would be included in investing activities under US GAAP. Dividends paid would be included within financing activities under US GAAP.

The following statements summarise the statements of cash flows as if they had been presented in accordance with US GAAP, and include the adjustments which reconcile cash and cash equivalents under US GAAP to cash at bank and in hand reported under UK GAAP.

  1999 1998 1997
  £m £m £m
  --------------------------------------
Net cash provided by operating activities 3,876 3,847 5,066
Net cash used in investing activities (950) (4,198) (2,589)
Net cash used in financing activities (1,665) (1,647) (1,517)
------------------------------------------------------------------------------------------------------- --------------------------------------
Net increase (decrease) in cash and cash equivalents 1,261 (1,998) 960
Effect of exchange rate changes on cash 33 21 (14)
Cash and cash equivalents under US GAAP at beginning of year 366 2,343 1,397
------------------------------------------------------------------------------------------------------- --------------------------------------
Cash and cash equivalents under US GAAP at end of year 1,660 366 2,343
Short-term investments with original maturities of less than 3 months (1,558) (304) (2,317)
------------------------------------------------------------------------------------------------------- --------------------------------------
Cash at bank and in hand under UK GAAP at end of year 102 62 26
------------------------------------------------------------------------------------------------------- --------------------------------------
 

VI Current asset investments

Under US GAAP, investments in debt securities would be classified as either trading, available-for-sale or held-to-maturity. Trading investments would be stated at fair values and the unrealised gains and losses would be included in income. Securities classified as available-for-sale would be stated at fair values, with unrealised gains and losses, net of deferred taxes, reported in shareholders' equity. Debt securities classified as held-to-maturity would be stated at amortised cost. The following analyses do not include securities with original maturities of less than three months.

At 31 March 1999, the group held trading investments (as defined by US GAAP) at a carrying amount of £1,678m (1998 - £384m) with fair values totalling £1,678m (1998 - £389m). Held-to-maturity securities at 31 March 1998 and 1999 consisted of the following:

 
   
  Amortised Estimated
  cost fair value
  £m £m
---------------------------------------------------------------------------------------------------------------- ----------------------------
UK Government securities and other UK listed investments 25 25
Commercial paper, medium term notes and other investments 18 18
---------------------------------------------------------------------------------------------------------------- ----------------------------
Total at 31 March 1999 43 43
---------------------------------------------------------------------------------------------------------------- ----------------------------
UK Government securities and other UK listed investments 25 25
Commercial paper, medium term notes and other investments 18 18
---------------------------------------------------------------------------------------------------------------- ----------------------------
Total at 31 March 1998 43 43
---------------------------------------------------------------------------------------------------------------- ----------------------------
The contractual maturities of the held-to-maturity debt securities at 31 March 1999 were as follows:
  Cost Fair value  
  £m £m  
         
Maturing on or before 31 March 2000 30 30    
Maturing after 31 March 2000 13 13    
---------------------------------------------------------------------------------------------------------------- ----------------------------
Total at 31 March 1999 43 43  
---------------------------------------------------------------------------------------------------------------- ----------------------------
 
VII Pension costs
The following position for the main pension scheme is computed in accordance with US GAAP pension accounting rules under SFAS No. 87 and SFAS No. 88, the effect of which is shown in the above reconciliation statements.
The pension cost determined under SFAS No. 87 was calculated by reference to an expected long-term rate of return on scheme assets of 7.7% (1998 - 8.2%, 1997 - 9.2%). The components of the pension cost for the main pension scheme comprised:
  1999 1998 1997
  £m £m £m
------------------------------------------------------------------------------------------------ -----------------------------------
Service cost 387 327 268
Interest cost 1,653 1,554 1,645
Expected return on scheme assets (1,712) (1,595) (1,668)
Amortisation of prior service costs 24 24 24
Amortisation of net obligation at date of limited application of SFAS No. 87 52 52 52
Recognised gains (137) (129) (123)
Additional cost of termination benefits 279 224 258
------------------------------------------------------------------------------------------------ -----------------------------------
Pension cost for the year under US GAAP 546 457 456
------------------------------------------------------------------------------------------------ -----------------------------------
 


The information required to be disclosed in accordance with SFAS No. 132 concerning the funded status of the main scheme at 31 March 1998 and 31 March 1999, based on the valuations at 1 January 1998 and 1 January 1999, respectively, is given below.


 
    1999 1998
Changes in benefit obligation   £m £m
------------------------------------------------------------------------------------------------ ------------------------
Benefit obligation at the beginning of the year   23,513 20,733
Service cost   387 327
Interest cost   1,653 1,554
Employees' contributions   163 157
Additional cost of termination benefits   279 224
Actuarial movement (a)   2,361 1,618
Other changes   25 7
Benefits paid   (1,223) (1,107)
------------------------------------------------------------------------------------------------ ------------------------
Benefit obligation at the end of the year   27,158 23,513
------------------------------------------------------------------------------------------------ ------------------------
Changes in scheme assets
Fair value of scheme assets at the beginning of the year   22,666 19,879
Actual return on scheme assets   3,050 3,494
Employers' contributions (b)   439 236
Employees' contributions   163 157
Other changes   25 7
Benefits paid   (1,223) (1,107)
------------------------------------------------------------------------------------------------ ------------------------
Fair value of scheme assets at the end of the year   25,120 22,666
------------------------------------------------------------------------------------------------ ------------------------
Funded status under US GAAP
Projected benefit obligation in excess of scheme assets   (2,038) (847)
Unrecognised net obligation at date of initial application of SFAS No. 87 (c)   210 262
Unrecognised prior service costs (d)   199 223
Other unrecognised net actuarial gains   (1,039) (2,199)
------------------------------------------------------------------------------------------------ ------------------------
Accrued pension cost under US GAAP   (2,668) (2,561)
------------------------------------------------------------------------------------------------ ------------------------
(a) The actuarial movements in the years ended 31 March 1998 and 1999 are significant due to the decline in the discount rates used to calculate the benefit obligation as a result of the fall in long-term interest rates in 1997 and 1998.
(b) The employers' contributions for the year ended 31 March 1999 include a special contribution of £200m paid on 31 March 1999.
(c) The unrecognised net obligation at the date of initial application is being amortised over 15 years from 1 April 1988.
(d) Unrecognised prior service costs on scheme benefit improvements, are being amortised over periods of 15 or 16 years commencing in the years of the introduction of the improvements.
The benefit obligation for the main pension scheme was determined using the following assumptions at 1 January 1998 and 1 January 1999:
    1999 1998
    per annum per annum
    % %
------------------------------------------------------------------------------------------------ ------------------------
Discount rate   5.5 7.2
Rate of future pay increases   4.8 5.8
------------------------------------------------------------------------------------------------ ------------------------
The determination also took into account requirements in the scheme as to future pension increases.

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Subsidiary undertakings, joint ventures and associates

Brief details of principal operating subsidiary undertakings, joint ventures and associates at 31 March 1999, all of which were unlisted unless otherwise stated, were as follows:
      Group interest
      in allotted
Subsidiary undertakings   Activity capital (b) Country of operations (c)
-------------------------------------------------------------------------------------- -----------------------------------------------------------------------
BT Australasia Pty Limited (a)   Communication related services 100% ordinary Australia
    and products provider 100% preference
-------------------------------------------------------------------------------------- -----------------------------------------------------------------------
BT Cableships Limited (a)   Cableship owner 100% ordinary International
-------------------------------------------------------------------------------------- -----------------------------------------------------------------------
BT Communications   Telecommunication 100% ordinary International
Management Limited (a)   services provider
-------------------------------------------------------------------------------------- -----------------------------------------------------------------------
BT Communications Services KK (a)   Communication related services 70% ordinary Japan
    and products provider
-------------------------------------------------------------------------------------- -----------------------------------------------------------------------
BT (Hong Kong) Limited (a)   Communication related services 100% ordinary Hong Kong
    and products provider 100% preference
-------------------------------------------------------------------------------------- -----------------------------------------------------------------------
BT Network Information   Communication related services 70% ordinary Japan
Services Company Limited (a)   and products provider effective interest
-------------------------------------------------------------------------------------- -----------------------------------------------------------------------
BT North America Inc (a)   Communication related services 100% common USA
    and products provider
-------------------------------------------------------------------------------------- -----------------------------------------------------------------------
BT Property Limited (a)   Property holding company 100% ordinary United Kingdom
-------------------------------------------------------------------------------------- -----------------------------------------------------------------------
BT Subsea Cables Limited   Cable maintenance and repair 100% ordinary United Kingdom
-------------------------------------------------------------------------------------- -----------------------------------------------------------------------
BT Telecomunicaciones SA (a)   Communication related services 100% ordinary Spain
    and products provider
-------------------------------------------------------------------------------------- -----------------------------------------------------------------------
BT (Worldwide) Limited (a)   International telecommunication 100% ordinary International
    network systems provider
-------------------------------------------------------------------------------------- -----------------------------------------------------------------------
Cellnet Group Limited   Holding company for the 60% ordinary United Kingdom
    BT Cellnet group (d)
-------------------------------------------------------------------------------------- -----------------------------------------------------------------------
Concert Communications   Telecommunication services and 100% ordinary International
Company (a)   network systems provider
-------------------------------------------------------------------------------------- -----------------------------------------------------------------------
Farland BV (a) (c)   Provider of trans-border fibre network 100% ordinary International
    across BT's partners in Europe    
-------------------------------------------------------------------------------------- -----------------------------------------------------------------------
Manx Telecom Limited (a)   Telecommunication services supplier 100% ordinary Isle of Man
-------------------------------------------------------------------------------------- -----------------------------------------------------------------------
Martin Dawes   Cellular telecommunication 48% ordinary United Kingdom
Telecommunications Limited (a) (e)   services provider effective interest
-------------------------------------------------------------------------------------- -----------------------------------------------------------------------
Syntegra SA (a)   Systems integration and 100% ordinary France
    application development
-------------------------------------------------------------------------------------- -----------------------------------------------------------------------
Syntegra Groep BV (a)   Systems integration and 100% common Netherlands
    application development
-------------------------------------------------------------------------------------- -----------------------------------------------------------------------
Telecom Securicor   Mobile cellular telephone 60% ordinary United Kingdom
Cellular Radio Limited (a)   system provider and operator
-------------------------------------------------------------------------------------- -----------------------------------------------------------------------
Yellow Pages Sales Limited (a)   Yellow Pages sales contractor 100% ordinary United Kingdom
-------------------------------------------------------------------------------------- -----------------------------------------------------------------------
(a) Held through intermediate holding company.
(b) The proportion of voting rights held corresponds to the aggregate interest percentage held by the holding company and subsidiary undertakings, unless otherwise stated.
(c) All overseas undertakings are incorporated in their country of operations. Subsidiary undertakings operating internationally are all incorporated in England and Wales, except Farland BV, which is incorporated in the Netherlands.
(d) In May 1999, Cellnet was renamed BTCellnet.
(e) Held by Telecom Securior Cellular Radio Limited.
 
      Share capital
      ------------------------------
        Percentage
owned
Joint ventures   Activity Issued (a) Country of operations (b)
------------------------------------------------------------   --------------------------- -------------------- -------------------- ------------------
Airtel Movil SA (c)   Mobile cellular telephone system provider and operator Ptas 78 billion 17.8% Spain
     
     
------------------------------------------------------------   --------------------------- -------------------- -------------------- ------------------
Albacom SpA   Communication related services and products provider ITL 343.4 billion 23% Italy
   
   
------------------------------------------------------------   --------------------------- -------------------- -------------------- ------------------
Bharti Cellular Limited   Mobile cellular telephone system provider and operator Rs1.05 billion 39.5% India
     
     
------------------------------------------------------------   --------------------------- -------------------- -------------------- ------------------
British Interactive   Digital tv interactive service provider £0.1m 32.5% United Kingdom
Broadcasting Limited    
------------------------------------------------------------   --------------------------- -------------------- -------------------- ------------------
Clear Communications Limited   Communication related services and products provider NZ$102m 25% New Zealand
         
   
------------------------------------------------------------   --------------------------- -------------------- -------------------- ------------------
LG Telecom Limited   Mobile cellular telephone system provider and operator Won 653.5 billion 23.5% Republic of Korea
     
     
------------------------------------------------------------   --------------------------- -------------------- -------------------- ------------------
Springboard Internet   Internet service provider £8.3m 33% United Kingdom
Services Limited  
------------------------------------------------------------   --------------------------- -------------------- -------------------- ------------------
Sunrise Communications AG   Communication related services and products provider SFr 19.7m 24.4% Switzerland
   
   
------------------------------------------------------------   --------------------------- -------------------- -------------------- ------------------
Telenordia AB   Communication related services and products provider SKr104m 33.3% Sweden
   
   
------------------------------------------------------------   --------------------------- -------------------- -------------------- ------------------
Telfort BV   Communication related services and products provider NLG 0.5m 50% Netherlands
   
   
------------------------------------------------------------   --------------------------- -------------------- -------------------- ------------------
VIAG INTERKOM   Communication related services and products provider Partnership 45% Germany
GmbH & Co  
   
------------------------------------------------------------   --------------------------- -------------------- -------------------- ------------------
(a) Issued share capital comprises ordinary or common shares, unless otherwise stated. All investments, except Sunrise Communications AG, are held through intermediate holding companies.
(b) All overseas undertakings are incorporated in their country of operations.
(c) Airtel Movil SA is being accounted for as a joint venture because of the relationship with other shareholders.
         
        Share capital
      ----------------------------------
       
Percentage
owned
Associates   Activity Issued (a) Country of operations (b)
------------------------------------------------------------   --------------------------- -------------------- -------------------- ------------------
Binariang Berhad (c)   Communication related services and products provider Myr 157.9m 33.3% Malaysia
     
     
------------------------------------------------------------   --------------------------- -------------------- -------------------- ------------------
Cegetel SA   Communication related services and products provider FFr9.55 billion 26% France
     
     
------------------------------------------------------------   --------------------------- -------------------- -------------------- ------------------
The Link Stores Limited   Telecommunications equipment retailer £80 40% United Kingdom
       
------------------------------------------------------------   --------------------------- -------------------- -------------------- ------------------
(a) Issued share capital comprises ordinary or common shares, unless otherwise stated. All investments are held through intermediate holding companies.
(b) All overseas undertakings are incorporated in their country of operations.
(c) Certain exchange control constraints operate in Malaysia.

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