BT 1998 Annual Report Download

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Annual report and accounts 1998

Table of contents

  • Page 1
    Annual report and accounts 1998

  • Page 2
    ...32 per share in 1994. As I write, the MCI/WorldCom merger is awaiting regulator y clearance in the USA and Europe. Nor has the success of Concert Communications Services, our joint venture with MCI, been compromised. Indeed, Concert has continued to lead the world in providing global managed network...

  • Page 3
    ...in the life of the company and I can assure you that my personal commitment to BT and to the industry is undiminished. Financial highlights FOR THE YEAR ENDED 31 MARCH 1998 1998 1997 1996 !!!11110!!!11110!!!11110 Turnover MCI break-up fee net of expenses Operating profit Profit before taxation...

  • Page 4
    ... operator to enable customers to send and receive faxes and data using mobile phones. And, in the last year, it has launched an Internet-linked service, Cellnet Genie, that delivers information such as news, share prices, football scores or job opportunities to your mobile phone. In mainland Europe...

  • Page 5
    ...a market which has been open to competition since 1 January 1998. We have joint ventures operating in every major country and they have already won 11 licences for fixed or mobile services. Taken together, our European alliances are expected to have annual revenues of £2.5 billion this year, a rise...

  • Page 6
    ... a number of key partnerships around the world and significant investment in international services. The USA In the USA, the principal news in the year was the announcement by MCI Communications Corporation on 10 November 1997 that it was recommending a merger with WorldCom to form MCI WorldCom and...

  • Page 7
    ... a majority stake in SFR, the number two mobile operator in France, with more than 2.5 million customers and a market share of approximately 40 per cent of new subscribers. In Spain, our fixed line operator - BT Telecomunicaciones - has the second largest data network and has trebled its revenues...

  • Page 8
    ... around the world. Currently, only a third of small and medium-sized businesses use electronic mail, compared with two-thirds of large firms; and only a quarter use the Internet, compared with around half of large corporations. But the market for information technology and communications in this...

  • Page 9
    ... customers news, sport, entertainment, business information and home shopping and is the only UK-focused on-line service of its kind. For businesses, BT WebWorld is a quick, easy and cost-effective web hosting service for creating and operating Internet sites. BT WebWorld offers a full range of web...

  • Page 10
    ... copper network. This will enable us to provide new services at the most affordable price. BT is car rying out trials of ADSL (asymmetric digital subscriber loop) technology, which uses compression techniques to increase the capacity of a phone line 30-fold, giving high-speed Internet access, TV...

  • Page 11
    ... a Cellnet digital phone. Card Services BT's Card Services have developed and launched Concert Card, BT's first truly international calling card for the global marketplace. Launched initially in three European markets in association with our joint venture partners in Italy and Germany, Concert Card...

  • Page 12
    ... to world-class quality of service. We recruited over 500 high-calibre graduates and 500 modern apprentices in the year. BT is a key supporter of the UK Government's New Deal welfare-to-work initiative and plans to help 250 unemployed people get back to work during 1998. We encourage our people to...

  • Page 13
    ... last year, we have put in place a programme to enable charities and voluntary groups to make more effective use of communications technology. As part of this, we are collaborating with the charity OneWorld On Line to offer training and support for small charities to help them run their own Internet...

  • Page 14
    ... management system standard (ISO14001). Targets are set in line with ISO14001 and industry best practice. Our policy, first published in 1990 and regularly reviewed, covers all significant environmental impacts: procurement, fuel and energy, emissions to air, local impacts, and wastes. BT now trades...

  • Page 15
    ... the break-up of the proposed BT/MCI merger, the payment of a £2.2 billion special dividend and the UK Government's imposition of a windfall tax on BT and other privatised companies. The results for the 1997 financial year were adversely affected by significant redundancy costs of £367 million and...

  • Page 16
    ... two years. The group's turnover is analysed as follows: 1998 £m 1997 £m 1996 £m )))%00511111110111 Inland calls International calls Exchange line rentals Private circuits Mobile communications Customer premises equipment supply Yellow Pages and other directories Other sales and services Total...

  • Page 17
    .... BT is reducing prices substantially on most international routes. Turnover from the fixed network line rentals grew by 5.2% in the 1998 financial year to £2,957 million after increasing by 4.7% in the 1997 financial year. The increased turnover was the combined result of the growth in business...

  • Page 18
    ... the effect of reductions in mobile call prices. Cellnet had 3.1 million customer connections at 31 March 1998, 75% of which were on its digital GSM network. The strong growth in BT's sales of its advanced services, including FeatureNet, its Syncordia Solutions operation, incorporating managed data...

  • Page 19
    ... of the company's share of MCI's profits less BT's share of losses in its joint ventures in Germany and Sweden which were commencing establishing their businesses. BT's share of MCI's pre-tax profit for the 1997 financial year amounted to £175 million, under BT's accounting policies, and was...

  • Page 20
    ... the 1998 financial year is an effective 31.5% of pre-tax profit, excluding the MCI merger break-up fee which is effectively subject to a lower tax charge under UK capital gains tax legislation. This effective tax charge reflects the lower 31% rate of corporation tax set for the year, compared with...

  • Page 21
    ...to pay tax in quarterly instalments starting at the half year stage in each financial year. The changes are being phased in and are in place of the current main single corporation tax payment made nine months after the financial year end and advance corporation tax payments associated with dividends...

  • Page 22
    ...net debt at 31 March 1998, an increase of £3,801 million in the year. Net debt has increased substantially during the course of the 1998 financial year primarily as a result of the special dividend payment and the investment in Cegetel. The majority of the group's long-term borrowings has been, and...

  • Page 23
    ...cost basis, in its business in the year ended 31 March 1998, compared with returns of 18.9% and 18.3% in the two previous years. % return on capital employed 94 95 96 97 98 Pensions An actuarial valuation of BT's main pension fund as at 31 December 1996 was completed during the 1998 financial...

  • Page 24
    ... the sale of its investment, which will depend on the sterling:US dollar exchange rate. Also under the WorldCom agreement, BT has agreed to acquire MCI's 24.9% equity interest in the Concert Communications Services joint venture at a price to be negotiated. Year 2000 The BT Year 2000 Programme deals...

  • Page 25
    ... such information to be analysed in a similar manner to that used by management in managing the business. US GAAP The group's net income and earnings per share for the three financial years ended 31 March 1998 and shareholders' equity at 31 March 1998 and 1997 under US Generally Accepted Accounting...

  • Page 26
    .... Aged 55. Bill Cockburn CBE, TD Group Managing Director, BT UK (a) 4 Bill Cockburn joined the company on 1 October 1997 as Group Managing Director of BT's UK business and was appointed to the Board with effect from 1 April 1998. After a career in the Post Office, he became chief executive in 1992...

  • Page 27
    ...of principal Board committees: (a) Group Executive Committee (b) Audit Committee (c) Remuneration Committee (d) Nominating Committee (e) Pensions Committee (f) Community Affairs Committee * Indicates that the director is considered independent of the management of the company Neville Isdell Ireland...

  • Page 28
    ... 3.9% of the company's issued ordinary share capital. Policy on the payment of suppliers BT's policy is to use its purchasing power fairly and to pay promptly and as agreed. BT has a variety of payment terms with its suppliers. The terms for payments for purchases under major contracts are settled...

  • Page 29
    ... us to perform the additional work necessary to, and we do not, express any opinion on the effectiveness of either the group's system of internal financial control or its corporate governance procedures nor on the ability of the group and company to continue in operational existence. Opinion With...

  • Page 30
    ... Best Practice published by the Committee on the Financial Aspects of Corporate Governance (the "Cadbury Committee") and Section A of the best practice provisions of the Stock Exchange Listing Rules introduced following the publication of Directors' Remuneration - Report of a Study Group chaired by...

  • Page 31
    ...Audit Committee has reviewed the effectiveness of the systems of internal financial control in existence in the group for the year ended 31 March 1998 and for the period up to the date of approval of the financial statements. Relations with shareholders Senior executives, led by the Chief Executive...

  • Page 32
    ... A statement by the directors of their responsibilities for preparing the financial statements is included on page 41. A report to the company by the auditors, Coopers & Lybrand, on corporate governance matters is set out on page 29. Statement of BT Business Practice BT's policy is to achieve best...

  • Page 33
    ... Stock Exchange Listing Rules as they relate to executive directors. The Committee's role is to agree the service contracts, salaries, other benefits, including bonuses and participation in the company's share plans, and other terms and conditions of employment of the executive directors and members...

  • Page 34
    ... encourage personal investment in BT shares, to foster community of interest with shareholders, to encourage key executives to stay with BT and to link reward and long-term corporate performance more effectively. Under the plan, shares are awarded to participants conditionally on the company meeting...

  • Page 35
    ... date of retirement in year (a) 1998 £000 1997 £000 1998 £000 Total accrued pension at year end or at date of retirement, if earlier (b) 1997 £000 1998 £000 Transfer value of increase in accrued benefit (c) 1997 £000 BT Share Option Scheme The BT Share Option Scheme for senior executives was...

  • Page 36
    ... shortfall resulting from the pensions cap. In addition he has a funded unapproved retirement benefits scheme transferred from his previous employer to which the company is making contributions of £120,000 over the 12 months from 1 March 1998. Mr Cockburn's salary has been reduced, at his request...

  • Page 37
    ... shares on the date of exercise exceeded the option price. The figures for 1998 include the employee compensation for the special dividend (see note 3 to the financial statements). Under the terms for his leaving the company, Michael Hepher continued to receive his salary and contractual benefits...

  • Page 38
    ... The interests of directors and their families in the company's shares at 31 March 1998 and 1 April 1997 are shown below: Beneficial holdings Sir Iain Vallance Sir Peter Bonfield R P Brace Sir Colin Marshall J I W Anderson M Argent B E Breuel Sir Ewen Fergusson J K Oates 1998 1997 0000000000001110...

  • Page 39
    ...under the BT Share Option Scheme on 9 January 1998. (c) Dr Rudge retired as a director of the company on 31 October 1997. (d) Options exercised under the BT Share Option Scheme on 14 January 1998. (e) Options exercised under the BT Employee Sharesave Scheme, in which all employees of the company are...

  • Page 40
    ...the market price of the shares at that date. The market price of the shares at 31 March 1998 was 650p (1997 - 445.5p) and the range during the year ended 31 March 1998 was 379.5p to 685p. Details of the company's ordinary shares provisionally awarded to directors, as participants under the Long Term...

  • Page 41
    ... of the financial year and of the profit or loss, total recognised gains or losses and cash flows of the group for that period. The directors consider that, in preparing the financial statements for the year ended 31 March 1998 on pages 45 to 79, the company has used appropriate accounting policies...

  • Page 42
    ... financial position of the group as at 31 March 1998 and 31 March 1997 and the results of their operations, total recognised gains and their cash flows for the years ended 31 March 1998, 31 March 1997 and 31 March 1996 in conformity with accounting principles generally accepted in the United Kingdom...

  • Page 43
    Five year financial summary Y E A R S E N D E D 3 1 M AR C H 1994 £m 1995 £m 1996 £m 1997 £m 1998 £m ))))))))%!!!0000000511 Profit and loss account Turnover Other operating income (a) Operating profit (b) Group's share of profits (losses) of associated undertakings Profit (loss) on sale ...

  • Page 44
    ...1996 £m 1997 £m 1998 £m ))))))))%!!!0000000511 Balance sheet Tangible fixed assets Fixed asset investments Net current assets (liabilities) Total assets less current liabilities Loans and other bor rowings falling due after one year Provisions for liabilities and charges Minority interests 15...

  • Page 45
    ... equipment - Digital telephone exchange equipment - Computers and office equipment - Payphones, other network equipment, motor vehicles and cableships - 3 to 20 years II Turnover Turnover, which excludes value added tax and other sales taxes, comprises the value of services provided and equipment...

  • Page 46
    ... other investments are stated at cost less amounts written off. 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...

  • Page 47
    ... (continued) Accounting for derivative financial instruments Principal amounts underlying cur rency 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 var...

  • Page 48
    ... loss account F OR T H E Y E A R E N D E D 3 1 M A R C H 1 9 9 8 Notes 1998 £m 1997 £m 1996 £m 0111!!!01111110051111 Turnover Other operating income (a) Operating costs (b) Operating profit Group's share of profits (losses) of associated undertakings Profit on sale of group undertakings...

  • Page 49
    ...(122) 16 - (132) Equity dividends paid Cash inflow (outflow) before management of liquid resources and financing Management of liquid resources Financing Issue of ordinary share capital Minority shares issued New loans Loan repayments Net increase (decrease) in short-term borrowings Net cash inflow...

  • Page 50
    ... 21 1,426 1,391 1,269 1,341 Minority interests 223 208 - - Capital and reserves Called up share capital Share premium account Other reserves Profit and loss account Total equity shareholders' funds 55555555555555555111 22 23 23 23 23 55 1,603 892 776 7,514 10,785 1,589 675 777 8,075...

  • Page 51
    ... telephone calls in the United Kingdom, the provision of telephone exchange lines to homes and businesses, international telephone calls made to and from the United Kingdom, the provision of private circuits to businesses, the supply of mobile communication services and equipment to businesses...

  • Page 52
    ... Operating costs Staff costs: Wages and salaries Social security costs Pension costs (note 25) Employee share ownership scheme (a) Employee share option scheme compensation for special dividend (b) Total staff costs Own work capitalised Depreciation (note 14) Payments to telecommunication operators...

  • Page 53
    ... instalment is payable on 1 December 1998. The charge is based on the group's profit for the financial years ended 31 March 1986 to 31 March 1989. Total tax on profit on ordinary activities, excluding the windfall tax, varied from the amount computed by applying the corporation tax rate to profit on...

  • Page 54
    ... 10. Earnings per share Earnings per share are calculated by dividing the profit for the financial year ended 31 March 1998, amounting to £1,706m (1997 - £2,077m, 1996 - £1,986m), by 6,394 million shares, the weighted average number of shares in issue during the financial year (1997 - 6,336...

  • Page 55
    ...Purchase of short-term investments and payments into short-term deposits over 3 months Sale of short-term investments and withdrawals from short-term deposits over 3 months Net movement of short-term investments and short-term deposits under 3 months not repayable on demand 1998 £m 1997 £m 1996...

  • Page 56
    ...Transfers Disposals and adjustments Total cost at 31 March 1998 Depreciation Balances at 1 April 1997 Charge for the year Disposals and adjustments Total depreciation at 31 March 1998 Net book value at 31 March 1998 Engineering stores Total tangible fixed assets at 31 March 1998 Net book value at 31...

  • Page 57
    ...!!!0111 Group 1998 £m 1997 £m (b) Expenditure on tangible fixed assets comprised: 0051111 0111!!!0111 Plant and equipment: Transmission equipment Exchange equipment Other network equipment Computers and office equipment Motor vehicles and other Land and buildings Decrease in engineering...

  • Page 58
    ...111000051 15. Fixed asset investments Group Cost Balances at 1 April 1997 Additions Transfer of investment in MCI Communications Corporation (b) Share of losses less retained profits for the year Repayments, disposals and other transfers Currency movements Balances at 31 March 1998 Provisions and...

  • Page 59
    ... in prior years in respect of this investment and this goodwill will be accounted for at the completion of the MCI/WorldCom merger in determining the profit on the sale of the shares which the group will recognise. In the period 1 April 1997 to 31 October 1997, the group's turnover with MCI amounted...

  • Page 60
    ... charged to the group profit and loss account for doubtful debts for the year ended 31 March 1998 was £218m (1997 - £188m, 1996 - £179m). (b) Advance corporation tax recoverable Advance corporation tax on proposed final dividend and, in 1997, on special dividend Amount offset against deferred tax...

  • Page 61
    ... discount £5m (1997 - £5m)) Total listed bonds, debentures and notes Lease finance Bank loans due 1999-2009 Other loans Bank overdrafts and other short-term bor rowings Commercial paper Loans from subsidiary undertakings 5 5 1 1 3 3 Average effective interest rates (a) % Group Company 1998...

  • Page 62
    ... values using the market discount rates, appropriate to the terms of the contracts, in effect at the balance sheet dates. At 31 March 1998, the group had deferred unrealised gains of £nil (1997 - £21m) and losses of £36m (1997 - £7m), based on dealer-quoted prices, from hedging purchase and sale...

  • Page 63
    ... be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Carrying amount 1998 £m 1997 £m 1998 £m Fair value 1997 £m 0051111!!!0051111 0051111!!!0051111 Non-derivatives: Assets Cash at bank and in hand Short-term investments (i) Liabilities...

  • Page 64
    ... 1997 £m 1998 £m Company 1997 £m 0051111!!!0051111 20. Other creditors Trade creditors Amounts owed to subsidiary undertakings Amounts owed to associated undertakings Corporation and windfall taxes Other taxation and social security Other creditors Accrued expenses Deferred income Dividends...

  • Page 65
    ...the year ended 31 March 1998 a number of shareholders elected to take all or part of their interim dividend in shares at a value of £18m. The nominal value of the shares issued has been funded out of the capital redemption reserve and the amount of the dividend has been added back to the profit and...

  • Page 66
    ... of movement in shareholders' funds Group Balances at 31 March 1995 Goodwill, arising on acquisition of subsidiary and associated undertakings (b) Goodwill, previously written off to reserves, taken back to the profit and loss account Employee share option schemes - 57 million shares issued (note 28...

  • Page 67
    ...related share option scheme. Employees paid £118m to the group for the issue of these shares and the balance of £85m comprised contributions to the qualifying employee share ownership trust from group undertakings. (e) The profit for the financial year, dealt with in the profit and loss account of...

  • Page 68
    ... TAT E M E N T S Group 1998 £m 1997 £m 1998 £m Company 1997 £m 0051111!!!0051111 24. Financial commitments and contingent liabilities Contracts placed for capital expenditure not provided for in the accounts Operating lease payments payable within one year of the balance sheet date were in...

  • Page 69
    ... 1999. The incremental pension costs of employees taking early retirement in the years ended 31 March 1997 and 1996, £258m and £266m, respectively were included in redundancy costs charged to the profit and loss account in those years. In the year ended 31 March 1998, the group made regular...

  • Page 70
    ... linked securities, deposits and short-term investments. At 31 March 1998, the UK equities included 42 million (1997 - 56 million) ordinary shares of the company with a market value of £270m (1997 - £250m). 26. Directors Directors' emoluments The emoluments of the directors for the year ended 31...

  • Page 71
    ... has a share ownership scheme used for employee share allocations (profit sharing), savings-related share option schemes for its employees and those of participating subsidiaries and further share option schemes for selected group employees. It also has a performance share plan and a long-term...

  • Page 72
    ... employed by the group. Awards of shares were granted in each of the years from 1994 to 1997 under the LTRP and from 1995 to 1997 under the PSP. The corporate performance measure assesses the company's overall performance against those top 100 companies listed on the London Stock Exchange, as rated...

  • Page 73
    ... or are payable to other members of Coopers & Lybrand International for the year ended 31 March 1998 in respect of audit and other services to the company's overseas subsidiary undertakings and in respect of other services to the group. 30. United States Generally Accepted Accounting Principles The...

  • Page 74
    ...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 1998 which related primarily to the investment in MCI was £1,315m (1997...

  • Page 75
    ..., 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...

  • Page 76
    ...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 1998, the group held trading investments...

  • Page 77
    ... 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 requirements for the year ended 31 March 1998 was calculated by reference to an expected long-term rate of return on scheme...

  • Page 78
    ...0010 Cellnet Group Limited (a) Cellnet Solutions Limited (a) Holding company for the Cellnet group Messaging service provider for cellular telephone systems United Kingdom United Kingdom 00005111!!0000011!!!0051!!!0010 00005111!!0000011!!!0051!!!0010 Concert Communications Company (a) Europe...

  • Page 79
    ...Telecom Securicor Cellular Radio Limited (a) Westminster Cable Company Limited Activity Group interest in allotted capital (b) Country of operations (c) 00005111!!0000011!!!0051!!!0010 Mobile cellular telephone system provider and operator Cable television service provider 60% ordinary United...

  • Page 80
    ...0111 Turnover Other operating income (a) Operating profit (b) Group's share of profits (losses) of associated undertakings Profit (loss) on sale of group undertakings Interest receivable Interest payable Profit on ordinary activities before taxation Tax on profit on ordinary activities: Corporation...

  • Page 81
    ... employed. Capital employed is represented by total assets less cur rent liabilities, excluding corporate taxes and dividends payable, and provisions other than those for deferred taxation. Year-end figures are used in the computation of the average, except in the case of short-term investments...

  • Page 82
    ... C H 1994 1995 1996 1997 1998 ))))))))%!!!000000051 % growth in fixed network call volumes over the previous year: Inland International (a) (a) Outgoing, incoming and transit. 6 6 7 5 6 9 7 7 7 9 000000005!!!0000000511 Exchange line connections A T 3 1 MA R CH Business ('000) % growth over...

  • Page 83
    ...information incorporates the effects of certain apportionments and allocations of expenditures and assets. BT is required to submit annual audited accounts in respect of the classified directory business to the Director of the Office of Fair Trading within nine months of the company's financial year...

  • Page 84
    ..., BT shares are traded on the Tokyo Stock Exchange under the code ''9484''. CREST: London Stock Exchange settlement system The company's ordinary shares are settled in CREST, the computerised system for settling sales and purchases of shares. CREST is a voluntary system which enables shareholders...

  • Page 85
    ...cost information for the Network Business by 30 November 1998. Copies of the Form 20-F, the Financial Statements for the Businesses and Activities, the Current Cost Financial Statements and details of quarterly results announcements, when available, may be obtained on request from the BT Shareholder...

  • Page 86
    ... BT Employee Share Ownership Scheme register. They also provide a BT Shareholder Helpline service. Shareholders should contact the Registrar (details above) if they have any enquiries about their shareholding. General enquiries British Telecommunications plc BT Centre 81 Newgate Street London...

  • Page 87
    ... value Other current assets Costs of group's employees engaged in the construction of plant and equipment for own use Profit Profit and loss account (statement) Profit and loss account (under 'capital and reserves' in balance sheet) Profit for financial year Profit on sale of fixed assets Provision...