1st Quarter Results

BRITISH TELECOMMUNICATIONS plc 29 July 1999 FIRST QUARTER RESULTS TO JUNE 30, 1999 BT's results for the first quarter to June 30, 1999 are summarised in the table below. Sir Iain Vallance, Chairman of BT, said: 'Total turnover increased by 17.6 per cent in the quarter with good growth in mobile communications, our solutions businesses and our international ventures. There is a short-term cost of developing new businesses and acquiring new mobile customers which is reflected in the results. Earnings per share before exceptional items grew by 11.3 per cent.' ========================================================= RESULTS FOR FIRST QUARTER TO JUNE 30, 1999 1999 1998 Increase £m £m % Turnover, including share of associates and joint ventures 4,987 4,239 17.6 EBITDA 1,590 1,510 5.3 Total operating profit 835 820 1.8 Profit before taxation 772 723 6.8 Profit after taxation 537 499 7.6 Earnings per share 8.3p 7.6p 8.9 Earnings per share before exceptional items 8.4p 7.6p 11.3 ========================================================= Results ------- Earnings per share for the quarter to June 30, 1999 were 8.3 pence compared with 7.6 pence in the corresponding period of 1998. Profit before tax was £772 million against £723 million in the prior period, benefiting from lower interest costs. The strong advance in turnover was offset by increased costs particularly in mobile communications and payments to UK operators. Consequently total operating profit rose in the quarter by 1.8 per cent to £835 million. Turnover -------- Total turnover, including BT's proportionate share of its ventures' turnover, increased by 17.6 per cent to £4,987 million in the three months to June 30, 1999. A third of this increase was contributed by our ventures; group turnover grew by 12.0 per cent in the quarter compared with the corresponding period in the prior year. Mobile communications and receipts from other UK operators showed the strongest growth. Mobile communications' turnover rose by £199 million (64 per cent) to £508 million. Of this increase, £82 million resulted from Martin Dawes Telecommunications of which BT Cellnet acquired control in March 1999. BT Cellnet's customer base grew by 501,000 in the quarter to over 5 million, representing a 59 per cent increase over the twelve months to June 30, 1999. Around 75 per cent of BT Cellnet's customer base is on post-pay terms. Receipts from other UK operators increased by £84 million in the quarter. Turnover from inland calls over our fixed network grew by 3.2 per cent to £1,290 million in the quarter. Higher numbers of calls being made to mobile phones and customers' growing use of the Internet have strengthened call volume growth to 10 per cent on a moving average basis for the twelve months to June 30, 1999. Prices for fixed calls to mobile phones were reduced by 25 per cent, on average, at the end of April 1999 and this has had an adverse effect on call turnover growth. International call turnover increased by 8.3 per cent, predominantly due to continuing transit traffic growth. Call volume growth also strengthened to 12 per cent for the twelve months to June 30, 1999. Turnover from exchange lines rose by 5.4 per cent to £855 million in the quarter. Business line connections increased by 6.1 per cent over the twelve months to June 30, 1999 due to the continuing high level of demand for ISDN lines. Residential lines were virtually unchanged with customers installing second lines and those returning to BT offsetting the loss to competition. Both Syncordia Solutions and Syntegra grew strongly in the quarter with their combined external turnover up 27 per cent. The £261 million growth in BT's share of its ventures' turnover to £457 million is accounted for by a combination of newly acquired ventures, principally LG Telecom and Binariang and the growth in BT's continuing ventures, mainly Cegetel, Viag Interkom and Airtel. This quarter we have introduced an indicative analysis of our total turnover by service type. This analysis, which we will be developing in future quarters, shows our main fixed voice business, which grew by 4 per cent in the quarter, and our rapidly growing businesses. These are mobility which grew by 80 per cent, data up 17 per cent, Solutions businesses up 29 per cent, and Internet and multi-media up by 55 per cent in the quarter compared with the first quarter of the 1999 financial year. Operating costs --------------- Operating costs grew by 14.2 per cent in the three months to June 30, 1999, primarily due to the costs incurred by the fast growing mobile and Internet related activities. More than half of this increase is due to payments to telecommunication operators growing by 50 per cent as a result of the rising number of fixed to mobile phone and Internet related calls terminating on their networks. The increase in staff costs is mainly due to BT bringing forward its main pay review date to April 1 and higher national insurance contributions. Depreciation costs have grown by 7.2 per cent reflecting the group's increased capital spend. The increase in other operating costs was associated with the cost of winning BT Cellnet's new customers in the quarter and supporting its high growth. Associates and joint ventures results ------------------------------------- The group's proportionate share of its ventures' net operating losses increased by 9.1 per cent to £84 million in the quarter, prior to goodwill amortisation. Of this total, £68 million was incurred by Viag Interkom which is making good progress in developing its new integrated mobile phone business in Germany. Interest and taxation --------------------- Net interest for the quarter of £63 million was reduced by £34 million compared with the corresponding period of the prior year. The reduction was mainly due to the interest earned on the proceeds of the MCI shares sold in September 1998. BT's effective tax rate for the current financial year has been estimated at 30.5 per cent of profit. BT will be making its first quarterly payment of corporation tax on its profits for the year under the new UK arrangements in October. Capital expenditure ------------------- Capital expenditure on plant, equipment and property totalled £694 million in the quarter against £629 million in the corresponding quarter of the previous year. We continue to invest heavily in modern networks to meet the expanding data wave. In early July, we agreed a multi-million pound order for ADSL equipment. This will enable ordinary telephone lines to be transformed into high-speed digital channels to the Internet and multi-media services at many times the speed achieved across normal telephone lines. The equipment will initially be supplied to 400 exchanges around the UK covering nearly 6 million exchange lines by March 2000. Acquisitions ------------ In April 1999, BT acquired a 20 per cent interest in ImpSat, a leading telecommunications company in Latin America, for £93 million. In May 1999, we acquired a 20 per cent interest in SmarTone, a leading mobile operator in Hong Kong for £241 million; SmarTone, a listed company, has a customer base of more than 500,000 connections. In June 1999, BT acquired the remaining 75 per cent of the shares in Clear Communications of New Zealand that it did not already own. Cash flow and net debt ---------------------- Cash flow from operating activities amounted to £1,291 million in the quarter. The cash outflow on acquisitions of £623 million included the interests described above as well as further funding of Viag Interkom and Telfort. BT received £88 million from employees in the quarter in connection with the exercise of share options mainly under the group's savings-related schemes. On May 18, 1999, BT issued a £600 million Eurobond repayable in 2028 at an interest rate of 5.75 per cent. Gearing at June 30, 1999 stood at 9 per cent with net debt of £1,391 million. Proposed global venture with AT&T --------------------------------- Good progress has been made on the formation of the 50:50 global venture with AT&T for our trans-border telecommunication activities. BT will be transferring cross-border international network assets, its international traffic, its business with selected multinational customers and its international products for business customers together with Concert into the global venture, the formation of which is subject to regulatory clearances. The European Union clearance was received in March 1999 and the US Department of Justice gave its anti-trust clearance in June. We expect that the global venture will receive final regulatory clearance later in 1999. Japan Telecom ------------- On April 25, 1999, BT together with AT&T, announced that they would acquire a 30 per cent interest in Japan Telecom, one of Japan's largest telecommunication groups. The consideration will be about £1.2 billion. BT will have an economic interest of 20 per cent with BT and AT&T jointly managing the investment. Our Japanese subsidiary (BTCS) will be integrated into Japan Telecom. European Union clearance was obtained earlier in July and the transaction is expected to close by Autumn 1999. BT Cellnet ---------- BT announced on July 27, 1999 that it had agreed to acquire Securicor's 40 per cent shareholding in BT Cellnet for £3.15 billion. The consideration will be in cash or loan notes at the option of Securicor's shareholders. The cash required will be provided from BT's own resources. The transaction is conditional upon, among other things, approval by Securicor's shareholders and regulatory approvals. The acquisition is likely to be completed in Autumn 1999. _________________________________________________________ The company's final dividend for the year ended March 31, 1999 of 12.3 pence per ordinary share, is payable on September 20, 1999 to those shareholders on the register on August 20, 1999. The last date for lodging mandates for the BT dividend investment plan is also August 20, 1999. The second quarter and half year's results are expected to be announced on November 11, 1999. ------------------------------------------------------------ GROUP PROFIT AND LOSS ACCOUNT for the three months ended June 30, 1999 ------------------------------------------------------------ First Quarter Year ended ended June 30 March 31 1999 1998 1999 (unaudited) (note 1) Notes £m £m £m ---------------------------------------------------------- TOTAL TURNOVER 2 4,987 4,239 18,223 Group's share of associates and joint ventures turnover 2 (457) (196) (1,270) ------ ------ ------ GROUP TURNOVER 4,530 4,043 16,953 Other operating income 33 37 168 Operating costs (a) 3 (3,633) (3,182) (13,305) ------ ------ ------ Group operating profit 930 898 3,816 Group's share of operating losses of associates and joint ventures 4 (95) (78) (342) ------ ------ ------ Total operating profit 835 820 3,474 Profit on sale of fixed asset investments (b) 5 - - 1,107 Interest receivable 46 22 165 Interest payable (109) (119) (451) ------ ------ ------ PROFIT BEFORE TAXATION 772 723 4,295 TAXATION (235) (224) (1,293) -------- -------- -------- PROFIT AFTER TAXATION 537 499 3,002 Minority interests (3) (13) (19) ------ ------ ------ PROFIT ATTRIBUTABLE TO SHAREHOLDERS 534 486 2,983 ====== ====== ====== EARNINGS PER SHARE 6 - BASIC 8.3p 7.6p 46.3p ====== ====== ====== - DILUTED 8.1p 7.4p 45.3p ====== ====== ====== EARNINGS PER SHARE BEFORE EXCEPTIONAL ITEMS 6 - BASIC 8.4p 7.6p 34.7p ====== ====== ====== - DILULTED 8.3p 7.4p 34.0p ====== ====== ====== ------------------------------------------------------------ (a) Including costs relating to disengaging from MCI (17) - (69) (b) Exceptional gain, mainly on sale of MCI shares - - 1,107 GROUP CASH FLOW STATEMENT for the three months ended June 30, 1999 ------------------------------------------------------------ First Quarter Year ended ended June 30 March 31 1999 1998 1999 (unaudited) (note 1) £m £m £m ---------------------------------------------------------- NET CASH INFLOW FROM OPERATING ACTIVITIES (note 7) 1,291 1,265 6,035 DIVIDENDS FROM ASSOCIATES AND JOINT VENTURES - - 2 NET CASH OUTFLOW FOR RETURNS ON INVESTMENTS AND SERVICING OF FINANCE (110) (167) (328) TAXATION PAID (249) (192) (630) Purchase of tangible -------- -------- -------- fixed assets (766) (782) (3,220) Net sale (purchase) of fixed asset investments (11) (6) 4,123 Sale of tangible fixed assets 24 32 143 -------- -------- -------- NET CASH INFLOW (OUTFLOW) FOR CAPITAL EXPENDITURE AND FINANCIAL INVESTMENT (753) (756) 1,046 NET CASH OUTFLOW FOR ACQUISITIONS AND DISPOSALS (623) (166) (1,967) EQUITY DIVIDENDS PAID - - (1,186) ------ ------ ------ CASH INFLOW (OUTFLOW) BEFORE USE OF LIQUID RESOURCES AND FINANCING (444) (16) 2,972 MANAGEMENT OF LIQUID RESOURCES (3) (128) (2,447) Issue of ordinary share -------- -------- -------- capital 88 124 161 Issue of shares to minorities 15 - 13 New loans 635 - 10 Repayment of loans (174) (4) (457) Net movement on short- term borrowings 66 39 (185) -------- -------- -------- NET CASH INFLOW (OUTFLOW) FROM FINANCING 630 159 (458) ------ ------ ------ INCREASE IN CASH 183 15 67 ====== ====== ====== DECREASE (INCREASE) IN NET DEBT (note 10) (341) 108 3,146 ====== ====== ====== GROUP BALANCE SHEET at June 30, 1999 ------------------------------------------------------------ June 30 March 31 1999 1998 1999 (unaudited) (note 1) £m £m £m ---------------------------------------------------------- FIXED ASSETS Intangible assets (note 9) 795 - 742 Tangible assets 17,971 17,245 17,854 Investments 2,277 1,806 1,832 ------ ------ ------ 21,043 19,051 20,428 CURRENT ASSETS -------- -------- -------- Stocks 218 151 159 Debtors 4,024 3,563 3,995 Investments 3,375 872 3,278 Cash at bank and in hand 226 23 102 ------ ------ ------ 7,843 4,609 7,534 ------ ------ ------ CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR Loans and other borrowings 912 1,050 947 Other creditors 6,594 5,588 7,082 ------ ------ ------ 7,506 6,638 8,029 ------ ------ ------ -------- -------- -------- NET CURRENT ASSETS (LIABILITIES) 337 (2,029) (495) ------ ------ ------ TOTAL ASSETS LESS CURRENT LIABILITIES 21,380 17,022 19,933 ====== ====== ====== CREDITORS: AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR Loans and other borrowings 4,080 3,754 3,386 PROVISIONS FOR LIABILITIES AND CHARGES (note 11) 1,479 1,630 1,391 MINORITY INTERESTS 232 235 216 CAPITAL AND RESERVES -------- -------- -------- Called up share capital 1,624 1,612 1,617 Reserves (note 12) 13,965 9,791 13,323 -------- -------- -------- TOTAL EQUITY SHAREHOLDERS' FUNDS 15,589 11,403 14,940 ------ ------ ------ 21,380 17,022 19,933 ====== ====== ====== ----------------------------------------------------------- NOTES ----------------------------------------------------------- 1 Basis of preparation -------------------- The unaudited interim results of the group, which are not statutory accounts, have been prepared on the basis of the accounting policies as set out in the report and accounts for the year ended March 31, 1999. Figures for the year ended March 31, 1999 are extracts from the group accounts for that year. The group accounts for the year ended March 31, 1999, on which the auditors made an unqualified report which did not contain a statement under Section 237(2) or (3) of the Companies Act 1985, have been delivered to the Registrar of Companies. 2 Turnover -------- First quarter Year ended ended June 30 March 31 1999 1998 1999 £m £m £m Inland calls 1,290 1,250 5,178 Exchange lines 855 811 3,337 Mobile communications 508 309 1,400 International calls 390 360 1,501 Private circuits 298 289 1,165 Receipts from UK operators 224 140 645 Customer premises equipment supply 209 220 870 Yellow Pages and other directories 121 124 491 Other UK sales and services 472 399 1,770 Non-UK operations 163 141 596 ------ ------ ------ Group turnover 4,530 4,043 16,953 Share of associates and joint ventures turnover 457 196 1,270 ------ ------ ------ Total turnover 4,987 4,239 18,223 ====== ====== ====== 3 Operating costs --------------- First quarter Year ended ended June 30 March 31 1999 1998 1999 £m £m £m Staff costs 1,005 949 3,871 Own work capitalised (102) (108) (428) Depreciation and amortisation (a) 657 612 2,568 Payments to tele- communication operators 697 466 2,106 Other operating costs (b) 1,359 1,263 5,119 ------ ------ ------ Total operating costs before exceptional costs 3,616 3,182 13,236 Exceptional costs (c) 17 - 69 ------ ------ ------ Total operating costs 3,633 3,182 13,305 ====== ====== ====== (a) Includes goodwill amortisation of £4m for the three months ended June 30, 1999. (b) Includes redundancy costs. Also included in the year ended March 31, 1999 are foreign currency gains of £87m relating to the reinvestment of the MCI share sale proceeds. (c) The exceptional costs relate to the group's disengagement from MCI. 4 Group's share of operating losses of associates and --------------------------------------------------- joint ventures -------------- The results include goodwill amortisation of £11m for the three months ended June 30, 1999 (1998 - £1m) and £17m for the year ended March 31, 1999. 5 Profit on sale of fixed asset investments ----------------------------------------- In September 1998, the group completed the sale of its interest in MCI for £4,159m at a pre-tax profit of £1,133m. A provision of £26m against another fixed asset investment has been offset against this profit giving a net gain of £1,107m for the year ended March 31, 1999. 6 Earnings per share ------------------ The basic earnings per share are calculated by dividing the profit attributable to shareholders by the average number of shares in issue after deducting the company's shares held by employee share ownership trusts. In calculating the diluted earnings per share, share options outstanding and other potential ordinary shares have been taken into account. The average number of shares in the periods were: First quarter Year ended ended June 30 March 31 1999 1998 1999 million of shares million of shares Basic 6,467 6,409 6,442 Diluted 6,632 6,547 6,592 The items in the calculation of the earnings per share before exceptional items are: First quarter Year ended ended June 30 March 31 1999 1998 1999 £m £m £m Costs relating to the disengagement from MCI (17) - (69) Profit on sale of MCI shares - - 1,133 Provision against another fixed asset investment - - (26) ------ ------ ------ (17) - 1,038 Tax credit (charge) attributable 5 - (291) ------ ------ ------ Net credit (charge) (12) - 747 ====== ====== ====== 7 Reconciliation of operating profit to operating cash flow --------------------------------------------------------- First quarter Year ended ended June 30 March 31 1999 1998 1999 £m £m £m Group operating profit 930 898 3,816 Depreciation and amortisation 660 612 2,581 Changes in working capital (284) (252) (30) Provision movements and other (15) 7 (332) ------ ------ ------ Net cash flow from operating activities 1,291 1,265 6,035 ====== ====== ====== 8 Expenditure on tangible fixed assets ------------------------------------ First quarter Year ended ended June 30 March 31 1999 1998 1999 £m £m £m Plant and equipment: Transmission equipment 292 274 1,416 Exchange equipment 86 84 411 Other network equipment 108 101 558 Computers and office equipment 80 81 464 Motor vehicles and other 64 46 215 Land and buildings 64 43 205 ------ ------ ------ Total expenditure 694 629 3,269 ====== ====== ====== 9 Intangible assets ----------------- In September 1998, the group acquired MCI's 24.9% interest in Concert Communications Company for £607m. Goodwill of £568m arose on this transaction. This goodwill is not being amortised and Concert is to be transferred into the proposed global venture with AT&T in the foreseeable future at a value higher than its current book value including this goodwill. Amortisation for the period would not be material. 10 Net debt -------- (a) Analysis At June 30 At March 31 1999 1998 1999 £m £m £m Long-term loans and other borrowings falling due after more than one year 4,080 3,754 3,386 Short-term borrowings and long-term loans and other borrowings falling due within one year 912 1,050 947 ----- ----- ----- Total debt 4,992 4,804 4,333 Short-term investments (3,375) (872) (3,278) Cash at bank (226) (23) (102) ----- ----- ----- Net debt at end of period 1,391 3,909 953 ===== ===== ===== (b) Reconciliation of net cash flow to movement in net debt First quarter Year ended ended June 30 March 31 1999 1998 1999 £m £m £m Net debt at beginning of period 953 3,977 3,977 Increase (decrease) in net debt resulting from cash flows 341 (108) (3,146) Currency and other movements 97 40 122 ----- ----- ----- Net debt at end of period 1,391 3,909 953 ===== ===== ===== 11 Provisions for liabilities and charges -------------------------------------- At June 30 At March 31 1999 1998 1999 £m £m £m Pension provisions 948 1,225 953 Deferred taxation 439 296 350 Other provisions 92 109 88 ----- ----- ----- 1,479 1,630 1,391 ===== ===== ===== 12 Reserves -------- £m Balance at April 1, 1999 13,323 Profit for the first quarter to June 30, 1999 534 Currency movements(a) 27 Premium on allotment of ordinary shares 259 Movement relating to BT's employee share ownership trust (178) ------ Balance at June 30, 1999 13,965 ====== (a) Net of £7m movement on the retranslation of foreign borrowings. 13 Analysis of turnover by service type ------------------------------------ First quarter Year ended ended June 30 March 31 1999 1998 Increase 1999 £m £m % £m Fixed voice 2,687 2,582 4 10,629 Mobility 867 481 80 2,439 Data 543 465 17 1,989 Solutions 244 189 29 905 Internet and multi-media 155 100 55 471 Customer premises equipment, Yellow Pages and other 491 422 16 1,790 ----- ----- ------ Total turnover 4,987 4,239 18 18,223 ===== ===== ====== This analysis involves the use of apportionments and allocations and should be taken as indicative. 14 Selected group activities and ventures -------------------------------------- First quarter ended June 30 Turnover (a) Operating profit (loss) before goodwill amortisation 1999 1998 1999 1998 £m £m £m £m TOTAL RESULTS: Group activities BT Cellnet 535 332 26 57 Yellow Pages 119 124 36 47 Syntegra 97 89 3 2 Associates and joint ventures (b) Cegetel 662 425 41 (18) Airtel Movil 299 182 44 18 LG Telecom 155 n/a 9 n/a Viag Interkom 96 24 (150) (98) Telfort (c) 48 16 (28) (35) GROUP'S SHARE OF ASSOCIATES AND JOINT VENTURES' RESULTS: Cegetel (26%) 172 111 11 (4) Airtel Movil (18%) 53 29 8 3 LG Telecom (24%) 36 n/a 2 n/a Viag Interkom (45%) 43 11 (68) (44) Telfort (50%) 24 8 (14) (17) (a) Turnover includes sales to other group companies or units. (b) Results are stated on BT's accounting policies. (c) Telfort's operating result for the first quarter ended June 30, 1998 includes pre-implementation costs of £20m in relation to the mobile operation. n/a = not a BT investment in the reporting period. 15 Earnings before interest, taxation, depreciation and ---------------------------------------------------- amortisation (EBITDA) --------------------- First quarter Year ended ended June 30 March 31 1999 1998 1999 £m £m £m Group operating profit 930 898 3,816 Depreciation and amortisation 660 612 2,581 ----- ----- ----- EBITDA 1,590 1,510 6,397 Exceptional items, excluding depreciation 14 - 56 ----- ----- ----- EBITDA before exceptional items 1,604 1,510 6,453 ===== ===== ===== 16 United States Generally Accepted Accounting Principles ------------------------------------------------------ The results set out above have been prepared in accordance with accounting principles generally accepted in the United Kingdom. The table below sets out the results calculated in accordance with United States Generally Accepted Accounting Principles. First quarter Year ended ended June 30 March 31 1999 1998 1999 £m £m £m Net income attributable to shareholders 448 314 2,589 Earnings per ADS (£) 0.69 0.49 4.02 Earnings per ADS before exceptional items (£) 0.71 0.49 2.88 Each American Depositary Share (ADS) represents 10 ordinary shares of 25p each. Shareholders' equity, calculated in accordance with United States Generally Accepted Accounting Principles, is £13,421m at June 30, 1999 (June 30, 1998 - £12,447m, March 31, 1999 - £13,674m). --------------------------------------------------------- ADDITIONAL INFORMATION Year 2000 --------- The London Stock Exchange requires companies to summarise their preparedness for the Year 2000 in their 1999 results statements. BT's current position is described in the following paragraphs. The Year 2000 problem arises from the inability of many computer-based systems to handle correctly the century date change and other significant dates such as February 29, 2000. BT has recognised this issue for some time and, in December 1995, established a programme to tackle the problem. Working to guidelines defined by the British Standards Institution, we set out to deploy conformant systems, including those, which support billing and finance, into our computer and telecommunications networks by December 31, 1998. BT has now substantially completed its technical work and subject to the risks identified below, we plan to offer customers normal levels of service during the transition into the year 2000 and beyond. The programme is now in its final phase where the focus is on the continuity of our business. This includes maintaining conformance and regular reviews of our contingency plans to manage the risks of the Year 2000 transition. BT is working closely with other UK operators, Oftel, the utilities and HM Government (including Action 2000, the Government appointed body dealing with Year 2000) to ensure that not only is BT ready but also that its risks and dependencies are fully understood. Progress on global services is complicated by the group's dependency on non-UK operators at the national and local level. BT is part of the International Telecommunications Union Taskforce and is involved in a number of activities which include information sharing, workshops in high-risk regions, and testing between operators. We believe much progress has been made around the world but concern exists for a minority of international operators where information is sparse. The total cost of the Year 2000 programme is expected to be around £300 million, which is being funded by displacement of other activities. We believe that costs will be held within this forecast as much of the spending had been completed by June 30, 1999. Depending on circumstances, there is likely to be increased demand for our network services and, hence, costs may vary. All Year 2000 related investigation, remedial work and testing costs have been written off as incurred as these relate to making existing computer software Year 2000 conformant. As the technical work is now substantially complete, the risk of an internal failure arising from a date related problem has been reduced. We believe the greatest risks are external to the group and they include: - The failure of suppliers or other third parties to meet their obligations to BT or the failure of parts of the services or systems of an international operator could result in liability or loss of revenue for BT; - Potential congestion on the network. BT expects demand for telecommunications services to exceed its normal peak at the beginning of 2000 due to additional celebrations and resulting emergencies; - Many small failures, inside or outside BT, could occur simultaneously and multiply; - Failure in the supply chain causing stock shortages and disruption in the transport network; - Extreme bad weather at the turn of the year could add a further burden. Contingency plans are in place to mitigate these risks, which have been built upon existing incident management and emergency plans. These plans have then been enhanced to include a transition operating plan to deal with the special needs of this particular new year. BT has invested in additional equipment to manage congestion and protect the 999 emergency service. Where there remains a risk, additional contingency plans are in place and a special remuneration package has been arranged for employees to ensure that key areas of the business are properly resourced over the New Year period. Contingency plans will be reviewed throughout the remainder of 1999 as the requirements of our customers become clearer. Rehearsals of our plans have already begun with several more scheduled throughout the summer and autumn. We are now considering plans to provide information on the performance of our products and services during the period December 1999 through January 2000. The activities of BT's Year 2000 programme focus on achieving a significant reduction of the Year 2000 risk. However, due to various unknowns, mainly relating to insufficient information regarding the readiness of non- UK carriers and other third parties, the effect of this issue on BT will not be known until January 2000. There can be no assurance or guarantee that the Year 2000 problem will not have a material adverse effect on our business, financial condition or results of BT's operations. A Year 2000 failure could result in BT being unable to continue to provide its services to its customers, loss of network capability, inaccurate billing, loss of revenue and reputation, legal and regulatory exposure and failure of management controls. BT believes, however, that its Year 2000 programme is reducing the level of uncertainty and, together with its continuity planning, will reduce the risks it faces. The above disclosure is the Year 2000 readiness disclosure within the meaning of the US Year 2000 Information and Readiness Disclosure Act of 1998 to the extent that the disclosure relates to Year 2000 processing by BT or products or services offered by BT.

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