SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 6-K
Report of Foreign Private Issuer
Pursuant to Rule 13a-16 or 15d-16 of
the Securities Exchange Act of 1934
7 December, 2004
BT Group plc
(Translation of registrant's name into English)
BT Centre
81 Newgate Street
London
EC1A 7AJ
England
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual
reports under cover Form 20-F or Form 40-F.
Form 20-F..X... Form 40-F.....
Indicate by check mark whether the registrant by furnishing the
information contained in this Form is also thereby furnishing the
information to the Commission pursuant to Rule 12g3-2(b) under the
Securities Exchange Act of 1934.
Yes ..... No ..X..
If "Yes" is marked, indicate below the file number assigned to the
registrant in connection with Rule 12g3-2(b): 82- ________
Enclosures: 1. SEC Letter announcement made on 7 December 2004
Mr. Larry Spirgel
Assistant Director
Division of Corporate Finance
US Securities and Exchange Commission
450 Fifth Street N.W.
Washington, D.C. 20549
USA
7 December 2004
Dear Mr. Spirgel,
We would like to acknowledge the receipt of the Securities and Exchange
Commission's (the "SEC" or "Staff") comments dated 18 November 2004 on our Form
20-F for the fiscal year ended 31 March 2004. We will be addressing the comments
in future filings as suggested in the Staff's comment letter. Our next filing of
our Form 20-F with the SEC will be the filing for the fiscal year ended 31 March
2005, which is expected to be filed with the Staff in early June 2005. In this
letter we are providing supplemental information for those comments (comments
no. 1, 2, and 3) that require further explanation.
The headings and page numbers below correspond to the headings set forth in the
comment letter of 18 November 2004. The Staff's comments are highlighted in bold
below followed by BT Group plc's (the "company", the "group" and/or "BT")
responses.
United States Generally Accepted Accounting Principles page 124
Comment 1- (k) deferred taxation, page 127.
We note your disclosure under note (k) that previously recognized deferred tax
liabilities were released in the 2003 financial year as a result of changes in
circumstances. Supplementally tell us the nature of the circumstances and their
related impact on your presentation of net income under US GAAP. Cite your basis
in the accounting literature.
Response 1.
As noted in footnote 7 to our financial statements, "Profit on sale of
fixed assets investments and group undertakings", in the year ended 31
March 2002 we sold our effective interest in Japan Telecom Co. Limited
and its interest in J-Phone Communications Co. Limited and our interest
in Airtel Movil SA which gave rise to realised profits on the disposals
of GBP2,538 million and GBP844 million, respectively.
Both investments were held through Dutch holding companies and the
resulting profits from these disposals were covered by a Dutch tax
exemption, meaning that the capital gains on these disposals were exempt
from taxes in Holland but were still exposed to taxes in the United
Kingdom should the Dutch holding company distribute the gains generated
on the sale of the investments either through a distribution or a
capital transaction to BT Group. At 31 March 2002, there was no
intention to repatriate the gains from the Dutch holding company and
thus under UK GAAP no deferred tax liability was recorded. For US GAAP
purposes, a deferred tax liability of approximately GBP979 million was
recorded in relation to the temporary difference between the book basis
of the investment in the Dutch holding company (which was at historical
cost) and the tax basis of the investment (which included the capital
gains generated upon disposal) as it was determined that the proceeds
(including the gain) would eventually either be transferred back to BT
Group or reinvested in other qualifying assets. In either scenario US
GAAP would require a deferred tax liability to be booked in relation to
the capital gain.
In July 2002, after the date on which the 2002 Annual Report and Form
20-F was approved and filed, the Finance Act in the United Kingdom was
enacted. This introduced new legislation with effect from 1 April 2002
which brought in a "substantial shareholding exemption", under which
certain qualifying gains would not be taxable in the United Kingdom.
Based on the new legislation, the repatriation of gains on the disposals
were expected to be permanently sheltered from UK tax.
Accordingly as at 31 March 2003, there was no longer a temporary
difference between the book and tax values of the Dutch holding company
and as such there was no longer a need to carry a deferred tax liability
in relation to the capital gains incurred in conjunction with the
disposal of the investments described above for US GAAP purposes.
Accordingly, under US GAAP, the GBP979 million deferred tax liability
was released through the profit and loss account during the year ended
31 March 2003 in accordance with the guidance set forth in paragraph 27
of SFAS No. 109, "Accounting for Income Taxes", which states that
"deferred tax liabilities and assets shall be adjusted for the effect of
a change in tax laws or rates. The effect shall be included in income
from continuing operations for the period that includes the enactment
date."
Comment 2 - (k) deferred taxation, page 127.
We further note your disclosure of deferred tax assets and liabilities
at March 31, 2004. Supplementally provide, and in future filings
include, more details of the differences between deferred taxation under
UK GAAP versus US GAAP. Also, revise to include the disclosures
required by SFAS 109 to comply with Item 18 of Form 20-F.
Response 2.
We have re-examined our disclosure of deferred tax assets and
liabilities at 31 March 2004 included in footnote 12, "Tax on profit
(loss) on ordinary activities", footnote 27, "Provisions for liabilities
and charges", and note (k), "Deferred taxation" to footnote i,
"Differences between United Kingdom and United States generally accepted
accounting principles" in United States Generally Accepted Accounting
Principles.
The following is a reconciliation from UK GAAP to US GAAP of both our
deferred tax asset and liability accounts as at 31 March 2004:
Deferred tax Deferred tax
As at 31 March 2004 assets liabilities
------------------ ------------------
(GBP'm) (GBP'm)
UK GAAP 113 (2,304)
Tax effect of US GAAP adjustments (description of each respective
difference is provided in the US GAAP footnote):
Pension 1,714 -
Property sale/leaseback 413 (337)
Capitalised interest - (59)
Other - (21)
Difference related to "rollover relief" in conjunction with
capital gains that were reinvested - (59)
US GAAP 2,240 (2,780)
As disclosed in footnote 12 to our financial statements, the group had
overseas corporate tax losses of approximately GBP1 billion and
unutilised capital losses estimated to be in excess of GBP10 billion
that have not been recognised as deferred tax assets under UK GAAP.
These losses generate a deferred tax asset under US GAAP, however, there
is a full valuation allowance reserved against this asset as we have
determined it is not more likely than not these assets will be realised
in the future.
In addition, we have reviewed the disclosure requirements of SFAS 109 as
noted in paragraphs no. 43 - 48 of the standard. In future filings we
will include additional details within our US GAAP footnote regarding
any valuation allowances booked against deferred tax assets and their
movement from period to period. We will also disclose the amounts and
expiration dates of tax credit carryforwards for tax purposes.
Subsidiary Undertakings, Joint Ventures and Associates page 134.
Comment 3.
Supplementally provide us with your evaluation of FIN 46 (R) for your
investment in Albacom SpA.
Response 3.
FIN 46(R) "Consolidation of Variable Interest Entities" requires
companies to determine whether they hold interests in a variable
interest entity ("VIE") and, if so, to consolidate any VIEs for which
they are the primary beneficiary.
The following is the evaluation of FIN 46 (R) for our investment in
Albacom SpA ("Albacom") as at 31 March 2004.
Key facts regarding the investment and capital structure of Albacom
1. As at 31 March 2004, BT held 26% of the equity capital of Albacom via a
100% owned intermediate holding company, Albacom Holdings Ltd ("AHL").
Albacom is a fixed network telecoms supplier in Italy and has a large
fibre optic network. Albacom deals mainly with business customers. The
total book value of the share capital of Albacom as at 31 March 2004 was
EUR50.7 million, consisting of 50.7 million ordinary shares with a
nominal value of EUR1 each.
2. The other shareholders in Albacom (including their industry sectors and
their respective equity interests) are as follows:
Name of shareholder Industry Equity interest
BT Communications 26.0%
Ente Nazionale Idrocarburi SpA (ENI) Oil & gas 35.0%
Banca Nazionale del Lavoro SpA (BNL) Commerical banking 19.5%
Mediaset SpA Media 19.5%
In addition to the contributed share capital each of the
shareholders have also made shareholder loans to Albacom. The
respective balances of these loans for each shareholder at 31 March 2004
are as follows:
Name of shareholder Percentage of total
Amount shareholder loans
EUR'000
BT 33,165 30%
ENI 23,089 22%
BNL 24,873 24%
Mediaset SpA 24,873 24%
Total 106,000 100%
These loans are repayable in 12 months and rank sub-ordinate to the
bank loan referred to below. Interest is payable at 12 months Euribor
plus 0.85%. This rate was negotiated at arms length between the
shareholders,.
The BT, BNL, and Mediaset balances are marginally higher than their
respective equity interests because ENI did not fully participate in the
most recent tranche of shareholder funding.
3. In addition to the shareholder loans described above, Albacom has
entered into a EUR250m bank loan on normal commercial terms from BNL
(one of the shareholders) on which interest is payable. This loan has
been guaranteed by the other shareholders and is senior to the
shareholder loans. The extent of the guarantee is in proportion to each
investor's shareholding. However, BT has agreed with the other
shareholders, including BNL, that the maximum amount of its exposure
under this guarantee is capped at approximately EUR35 million.
4. The Albacom board of directors comprises 11 directors, and BT appoints 3
members to the board, which is in proportion to its equity shareholding.
BT does not participate in the day to day management of Albacom.
5. BT transacts with Albacom as a supplier of telecommunication services
on normal arms length commercial terms and the level of trading is not
material to either BT or Albacom (Year ended 31 March 2004: Total
Albacom revenue - EUR638m, Revenue from BT - EUR32 million). Albacom
also trades with its other shareholders (Year ended 31 March 2004:
Revenue from BNL - EUR48m, Revenue from ENI - EUR105m, Revenue from
MediaSet - EUR21m)
6. BT accounts for Albacom as a joint venture (equity investee) and
recognises its share (26%) of the periodic gains and losses of Albacom.
7. Under the terms of the shareholder agreements, each of the shareholders
has pre-emption rights (i.e. right of first refusal) should one
shareholder wish to divest their holding. However, based on our review
of these agreements, we do not believe that any of the parties is
related, or that there are any de facto principal or agency
relationships between the investing parties (as specified in paragraph
16 of FIN 46(R).
Application of US GAAP
Scope of FIN 46(R)
To determine whether Albacom is within the scope of FIN 46(R), paragraph
4(h) must first be analysed:
4h. An entity that is deemed to be a business under the definition
in Appendix C need not be evaluated by a reporting enterprise to
determine if the entity is a variable interest entity under the
requirements of this Interpretation unless one or more of the following
conditions exist (however, for entities that are excluded by this
provision of this Interpretation, other generally accepted accounting
principles should be applied):
(1) The reporting enterprise, its related parties, or both
participated significantly in the design or redesign of the
entity. However, this condition does not apply if the entity is
an operating joint venture under joint control of the reporting
enterprise and one or more independent parties or a franchisee.
(2) The entity is designed so that substantially all of its
activities either involve or are conducted on behalf of the
reporting enterprise and its related parties.
(3) The reporting enterprise and its related parties provide more
than half of the total of the equity, subordinated debt, and
other forms of subordinated financial support to the entity based
on an analysis of the fair values of the interests in the entity.
(4) The activities of the entity are primarily related to
securitizations or other forms of asset-backed financings or
single-lessee leasing arrangements.
Although, Albacom is a properly constituted trading entity with inputs,
processes, revenues, fixed assets and employees, the investment that BT
holds in the entity is held through an intermediate holding company
(AHL), which was set up by BT. As a result we believe the business
exemption of appendix C to FIN 46(R) does not apply with regard to
Albacom.
Determination of variable interest entity
As such, a FIN 46(R) paragraph 5 scoping analysis must be performed. The
italicised text that follows is taken from FIN 46(R)
5. An entity shall be subject to consolidation according to the
provisions of this Interpretation if, by design, the conditions in a, b
or c exist:
a. The total equity investment at risk is not sufficient to
permit the entity to finance its activities without additional
subordinated financial support provided by any parties.
All of Albacom's debt is provided by the four shareholders. There is no
subordinated financial support from non- shareholders. Although the bank
loan is under normal commercial terms from BNL, it is from a one of the
shareholders, with the remainder guaranteed by the other shareholders.
Albacom has made losses to date, but management expected the entity to
be profitable in the future. Losses thus far have been absorbed by the
shareholders in direct proportion to their equity holdings.
Upon examination of Albacom's capital structure and given the fact that
all of Albacom's debt is provided by, or guaranteed by, the four equity
investors we believe it is reasonable to assume that the equity invested
is insufficient to finance Albacom's activities. Since the equity is
not sufficient, Albacom should be treated as a VIE per the guidance in
FIN 46(R).
b. As a group the holders of the equity investment at risk lack
any one of the following three characteristics of a controlling
financial interest:
1. The direct or indirect ability through voting rights or similar
rights to make decisions about an entity's activities that have a
significant effect on the success of the entity. The investors do
not have that ability through voting rights or similar rights if no
owners hold voting rights or similar rights (such as those of a
common shareholder in a corporation or a general partner in a
partnership).
As a group, the shareholders have the ability to make decisions about
the activities of Albacom, along with their representation on the Board
of Directors, which is in proportion to their respective shareholdings.
2. The obligation to absorb the expected losses of the entity. The
investor or investors do not have that obligation if they are
directly or indirectly protected from the expected losses or are
guaranteed a return by the entity itself or by other parties involved
with the entity.
As a group, the shareholders have the obligation to absorb losses of the
entity and have done so in proportion to their respective shareholdings.
3. The right to receive the expected residual returns of the
entity. The investors do not have that right if their return is
capped by the entity's governing documents or arrangements with
other variable interest holders or with the entity.
As a group, the shareholders of the equity investment at risk do have
the right to receive the expected residual returns of the entity.
c. The equity investors as a group also are considered to lack
characteristic (b)(1) if (i) the voting rights of some investors are
not proportional to their obligations to absorb the expected losses
of the entity, their rights to receive the expected residual returns
of the entity, or both and (ii) substantially all of the entity's
activities (for example, providing financing or buying assets)
either involve or are conducted on behalf of an investor that has
disproportionately few voting rights. For purposes of applying this
requirement, enterprises shall consider each party's obligations to
absorb expected losses and rights to receive expected residual
returns related to all of that party's interests in the entity and
not only to its equity investment at risk.
The voting rights of all investors are proportional to their obligations
to absorb the expected losses of the entity and to receive the expected
residual returns of the entity
Determination of primary beneficiary
Having established that Albacom is a VIE, based on the analysis of
paragraph 5a, BT needs to determine whether it is required to
consolidate Albacom as the primary beneficiary in this VIE, in
accordance with paragraphs 14 and 15.
14. An enterprise shall consolidate a variable interest entity if
that enterprise has a variable interest (or combination of variable
interests) that will absorb a majority of the entity's expected losses,
receive a majority of the entity's expected residual returns, or both.
An enterprise shall consider the rights and obligations conveyed by its
variable interests and the relationship of its variable interests with
variable interests held by other parties to determine whether its
variable interests will absorb a majority of a variable interest
entity's expected losses, receive a majority of the entity's expected
residual returns, or both. If one enterprise will absorb a majority of a
variable interest entity's expected losses and another enterprise will
receive a majority of that entity's expected residual returns, the
enterprise absorbing a majority of the losses shall consolidate the
variable interest entity.
15. The enterprise that consolidates a variable interest entity is
called the primary beneficiary of that entity...
Based on the quantitative and qualitative analysis set out below, BT is
satisfied that it is not the primary beneficiary in Albacom.
BT BNL ENI Mediaset Other Total
------------ ------------ ----------- ------------ ----------- -- ------------
EUR'000 EUR'000 EUR'000 EUR'000 EUR'000 EUR'000
Share capital 13,173 9,880 17,733 9,880 - 50,666
Shareholder loans 33,165 24,873 23,089 24,873 - 106,000
Bank loan - Guaranteed amount 34,500 79,250 87,500 48,750 - 250,000
Revenue 31,774 48,339 104,987 21,063 431,361 637,524
% % % % % %
Share capital 26.0 19.5 35.0 19.5 - 100.0
Shareholder loans 30.0 22.0 24.0 24.0 - 100.0
Bank loan - Guaranteed amount 13.8 31.7 35.0 19.5 - 100.0
Revenue 5.0 7.6 16.4 3.3 67.7 100.0
The primary beneficiary is the reporting enterprise that is obligated to
absorb the majority of the VIE's expected losses. Losses to date have
been absorbed in direct proportion to the shareholders' equity holdings.
At such point that equity is extinguished, losses would be absorbed by
shareholder loans and then by bank debt. BT does not hold a majority of
any of these instruments and losses would be absorbed rateably by
parties in accordance with each shareholders respective holding
percentage. Accordingly, in no circumstance would BT expect to absorb a
majority of the expected losses of Albacom. BT also considered the
trading between Albacom and BT and determined that these arms length
transactions were not material in the determination of the primary
beneficiary.
(Note: For the purpose of evaluating the extent of each shareholder's
exposure to losses at Albacom, we used the book values of each
shareholder's interests in the table above because this is an objective
measure, and the relative significance of each shareholder's interest
would not change if fair values were used instead of book values.)
Conclusion
As set out above, Albacom appears to be a VIE because it meets the
criteria specified in paragraph 5a of FIN 46(R). However, given BT's
level of voting interest, the lack of a de facto relationship with other
investors and the quantitative and qualitative analysis performed, BT
does not believe that it is the primary beneficiary of the VIE and
accordingly, is not required to consolidate Albacom. Instead, Albacom
is treated as a joint venture accounted for under the equity method.
On 3 December 2004, BT announced that it will take 100% control of
Albacom, following acceptance of BT's offer to the other shareholders to
purchase their holdings. This transaction was negotiated on an arms
length basis and was not the result of any term in the Albacom
investment agreement. Following regulatory approval and consummation of
the proposed deal, BT expects to consolidate the results of Albacom in
its Financial Statements from the date of acquisition.
We believe that the information contained in this letter, together with the
proposed additional disclosures to be included in the Company's annual Form
20-F for the year ended 31 March 2005, responds to the Staff's comments in your
comment letter of 18 November 2004.
Please do not hesitate to call me at 011 44 20 7356 5080 or John Wroe at
011 44 20 7356 4963 if you have any questions regarding this submission.
Additionally, please do not hesitate to contact PricewaterhouseCoopers LLP, our
auditors, directly by contacting Charles Bowman (011 44 20 7804 4980) for UK
GAAP related matters and David Charles (011 44 20 7213 3823) for US GAAP and/or
SEC reporting related questions.
Thank you for your consideration of this submission.
Yours sincerely,
Ian Livingston
Group Finance Director
Copies to:
Securities and Exchange Commission
Kathryn Jacobson
Kyle Moffatt
BT Group plc
John Wroe
Glyn Parry
PricewaterhouseCoopers LLP
Charles Bowman (Engagement and audit partner)
David L. Charles (SECPS reviewer)
Michael Liesmann (National office)
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
BT Group PLC
(Registrant)
By: /s/ Patricia Day
--------------------
Patricia Day, Assistant Secretary. Head of Shareholder Services
Date 7 December, 2004