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Annual
Report &
Form 20-F
2006

Table of contents

  • Page 1
    Annual Report & Form 20-F 2006

  • Page 2

  • Page 3
    ...its shareholding in British Telecommunications plc in three public offerings. This is the annual report for the year ended 31 March 2006. It complies with UK regulations and is the annual report on Form 20-F for the US Securities and Exchange Commission to meet US regulations. This annual report has...

  • Page 4
    ... Dividends of 11.9 pence per share for the year, up 14% a a s s s s s s Year ended 31 March In £ million unless otherwise stated 2006 2005 Revenue Operating profit Profit before taxation Profit for the year Basic earnings per share Specific items (charge) credita Profit for the year...

  • Page 5
    ... global networked IT services market. In the 2006 financial year, we acquired Atlanet in Italy (as part of a major deal with Fiat), Cara Group in Ireland and Total Network Solutions in the UK. And in the UK, we now have almost eight million broadband lines over which we are able to offer customers...

  • Page 6
    ..., with more than 340,000 connections. In a convergent world, we aim to offer customers the best of fixed and the best of mobile. We launched BT Fusion, the world's first service enabling customers to switch seamlessly 4 BT Group plc Annual Report and Form 20-F 2006 Chief Executive's statement

  • Page 7
    ... from BT. Because the quality of service we offer customers is key to their satisfaction levels, much of our investment in training and development is directed towards developing a truly customercentric culture in BT. Chief Executive's statement BT Group plc Annual Report and Form 20-F 2006 5

  • Page 8
    ... 7 Introduction to the Business review 7 Our customers 8 Our strategy 8 Outlook 8 Pursue profitable growth in new wave markets 11 Maximise the return from our traditional business 12 Transform our networks, systems and services for the twenty-first century 12 Create long-term partnerships with our...

  • Page 9
    ... of CPS, WLR and regulatory price reductions in mobile termination rates. BT Group plc Annual Report and Form 20-F 2006 7 Revenue by customer segment year ended 31 March 2006 Wholesale (UK and global carrier) 26% 27% 12% Consumer Major corporate 35% Business Operating and financial review

  • Page 10
    ...in the 2006 financial year, driven principally by broadband. Residential broadband customers increased by 52% to more than two million. Wholesale customers In the UK wholesale market, we provide network services and solutions to over 700 communications companies, including fixed and mobile network...

  • Page 11
    ... outsourcing contract won by BT and is one of our largest and most significant global deals. In the 2006 financial year, we secured networked IT services orders in the UK and internationally worth £5.4 billion, including a number of major contracts: s in June 2005, we signed a contract worth...

  • Page 12
    ... internet service provider for SMEs in the UK. At the end of the 2006 financial year, we had 453,000 BT Business Broadband customers. We recognise that businesses need solutions that combine fast and reliable access with superior support and a range of business applications and services. Many...

  • Page 13
    ... the 2005 financial year. Our BT Local Business initiative helped to secure BT's position as a key player in the SME market. At the end of the 2006 financial year, BT Local Business was active in 83 locations around the country, managing £1.2 billion of annual billed revenue. Traditional services...

  • Page 14
    ... during the 2006 financial year of the BT team serving major corporate customers in BT Global Services (previously part of BT Retail) should enable more effective account management for our global customers. We also continued to reduce overheads such as accommodation, using buildings more ef...

  • Page 15
    ... of customer-focused lines of business. In the 2005 financial year, we acquired Infonet, one of the world's leading providers of international managed voice and data network services, for £520 million, including acquisition costs. Excluding Infonet's net cash balance, the net value of the deal was...

  • Page 16
    ... a number of market reviews by Ofcom, BT has been deemed to have SMP in certain fixed telecommunications markets, including the markets for fixed narrowband retail services, fixed narrowband wholesale exchange lines, call origination and conveyance, wholesale broadband access and wholesale local...

  • Page 17
    ... notify Ofcom and other operators if it intends to amend existing charges or offer new services. Number portability Number portability charges are covered by an RPI minus X formula with X set at 5%, until 31 July 2006 when the price control lapses. BT Group plc Annual Report and Form 20-F 2006 15

  • Page 18
    ...'s statement on setting and reviewing charge ceilings for WLR (wholesale line rental) on 24 January 2006. From 1 March 2006, our rates have been as follows: s residential analogue lines: new line installation - £88, transfer - £2 a line, and annual line rental - £100.68 s business analogue lines...

  • Page 19
    ... UK receive a cash payment equivalent to the value of the shares. This allocation of profits was linked to the achievement of corporate performance measures determined by the Board. In addition, employees can buy shares at a discount under our savings-related share option plan. BT Group plc Annual...

  • Page 20
    ... developing innovative products and services for a converged, networked world. We continue to focus our innovation work on key areas which support our business and technology strategies, filing patent applications for 141 new inventions in the 2006 financial year and maintaining a total worldwide...

  • Page 21
    ... members who have a reputation for excellence in this field. An executive committee, the Corporate Social Responsibility Steering Group, oversees the implementation of our CSR strategy and programme. This includes risk assessment, target and objective setting and public accountability. BT...

  • Page 22
    ...helps developing world farmers access essential advice and information over a digital network. Community investment We commit a minimum of 1% of our UK pre-tax profits to activities which support society. We provided a total of £21.3 million designed to benefit society in the 2006 financial year...

  • Page 23
    .... The results of future scheme valuations will be impacted by the future performance of investment markets, interest and inï¬,ation rates and the general trend towards longer life expectancy, as well as regulatory changes, all of which are outside our control. BT Group plc Annual Report and Form 20...

  • Page 24
    ... of group income statement - IFRS Year ended 31 March 2006 £m 2005 £m Revenue Other operating income Operating costs Operating profit Before specific itemsa a Specific items Net finance expense Finance expense Finance income Share of post tax profits (losses) of joint ventures and associates...

  • Page 25
    ... leaver costs c Includes exceptional costs (release) d Includes exceptional costs e Includes exceptional tax credit f Based on actual dividends paid and/or year end exchange rate on proposed dividends a Includes b Operating and financial review BT Group plc Annual Report and Form 20-F 2006 23

  • Page 26
    ...005 1,310 Summary of group cash ï¬,ow statement - UK GAAP Year ended 31 March 2005 £m 2004 £m 2003 £m 2002 £m Net cash ï¬,ow from operating activities Dividends from associates and joint ventures Returns on investments and servicing of finance Taxation paid Capital expenditure and financial...

  • Page 27
    ...Year ended 31 March 2006 £m 2005 £m 2004 £m 2003 £m 2002 £m Group operating profit (loss) Income before taxes Net income (loss): Continuing activities Discontinued activities Basic earnings (loss) per ordinary share Diluted earnings (loss) per ordinary share Basic earnings (loss) per ordinary...

  • Page 28
    ...: 27 Introduction to the Financial review 28 Adoption of International Financial Reporting Standards 28 Summarised group income statement 29 Group results 31 Line of business results 31 BT Retail 32 BT Wholesale 33 BT Global Services 33 Other operating income 34 Operating costs 34 Specific items 34...

  • Page 29
    ... our business operations and markets in an environment where the pace of change is accelerating. We are driving the change by providing our customers with new technology and services with greater capabilities and lower cost. The focus on delivering the strategy continued and the group's performance...

  • Page 30
    ...GAAP. SUMMARISED GROUP INCOME STATEMENT Year ended 31 March 2006 £m 2005 £m Revenue Other operating incomea Operating costsa Operating profit: Before specific items Specific items Net finance expense: Finance expense Finance income Share of post tax profit (losses) of associates and joint...

  • Page 31
    ... wins in the 2006 financial year, combined with the £7.7 billion of contracts won in the 2005 financial year, are building the foundation for future revenue growth as we increase the level of networked IT services provided to major corporate customers. Revenue from business (smaller and medium...

  • Page 32
    ...ects the cost of investing in new wave activities and supporting new networked IT services contracts. BT's share of associates' and joint ventures' post tax profit before specific items was £16 million in the 2006 financial year, compared with losses of £14 million in the 2005 financial year...

  • Page 33
    ... for each line of business in the following commentary. BT Retail Revenue Gross margin Sales, general and administration costs EBITDA Operating profit Capital expenditure 2006 £m 2005 £m 8,452 2,354 1,563 791 644 153 8,698 2,354 1,600 754 607 170 BT Retail BT Wholesale BT Global Services Total...

  • Page 34
    ... companies, fixed and mobile network operators, internet and other service providers interconnecting with BT's UK fixed network. The customer base also includes BT's lines of business, BT Retail and BT Global Services. The majority of BT Wholesale's revenue is internal (2006 - 54%, 2005...

  • Page 35
    ...'s Strategic Review of Telecommunications, Openreach, a new line of business responsible for managing the UK access network on behalf of the telecommunications industry was launched on 21 January 2006. For the 2006 financial year Openreach's results are included within BT Wholesale's results. For...

  • Page 36
    ... of supporting new networked IT services contracts, but also increased levels of activity in the network. Other operating costs include the maintenance and support of our networks, accommodation, sales and marketing costs, research and development and general overheads. In the 2006 financial year...

  • Page 37
    ...EXPENSE 2006 £m 2005 £m costs, lower net finance charges and increased profits from joint ventures and associates. TAXATION Interest on borrowings Loss arising on derivatives not in a designated hedge relationship Interest on pension scheme liabilities Total finance expense Income from listed...

  • Page 38
    ...cash ï¬,ow statement 2006 £m 2005 £m Cash ï¬,ow from operations Income taxes paid Net cash inï¬,ow from operating activities Net purchase of property, plant, equipment and software Net acquisition of subsidiaries, associates and joint ventures Net sale of current and non current asset investments...

  • Page 39
    ... credit risk. Currently the group makes use of standard International Swaps and Derivative Association (ISDA) documentation. In addition, where management have a legal right of set off and the ability and intention to settle net, the relevant asset and liabilities are netted within the balance sheet...

  • Page 40
    ... we launched a new defined contribution pension scheme for people joining BT after that date which is to provide benefits based on the employees' and the employing company's contributions. This change is in line with the practice increasingly adopted by major UK groups and is designed to be more...

  • Page 41
    ... for BT on 1 April 2007. BT does not anticipate that the adoption of this new statement at the required effective date will have a significant effect on its results of operations, financial position or cash ï¬,ows. Operating and financial review BT Group plc Annual Report and Form 20-F 2006 39

  • Page 42
    ... of BT Global Services in October 2001. Since joining BT in 1986, he has held a number of positions, including Chief Executive of BT Openworld and Group Director of Strategy and Development. Andy was a member of the former Executive Committee from February 1995. He is a board member of e-skills UK...

  • Page 43
    ...Remuneration d Nominating e Community f Pension g Equality Support Scheme Performance Review Group of Access Board All the non-executive directors are considered independent of the management of the company. Board of directors and Operating Committee BT Group plc Annual Report and Form 20-F 2006...

  • Page 44
    ...non-executive directors throughout the 2006 financial year. The Board's principal focus is the overall strategic direction, development and control of the group. In support of this the Board approves the group's values, business practice policies, strategic plans, annual budget, capital expenditure...

  • Page 45
    ... dealing code. Principal Board committees The Operating Committee, the company's key management committee, meets weekly and is chaired by the Chief Executive, Ben Verwaayen. The other members are the Group Finance Director and the Chief Executives of BT Retail, BT Wholesale and BT Global Services...

  • Page 46
    ... £2.17 per share. The shares were purchased in an on-market programme of buying back the company's shares, initiated in November 2003, as part of the company's shareholder distribution strategy. 290 million shares have been 44 BT Group plc Annual Report and Form 20-F 2006 Report of the directors

  • Page 47
    ... its employee share plans. RELATIONS WITH SHAREHOLDERS STATEMENT OF BUSINESS PRACTICE Senior executives, led by the Chief Executive and the Group Finance Director and including, as appropriate, the other executive directors, hold meetings with the company's principal institutional shareholders to...

  • Page 48
    ... of business, financial and IT experience on the Committee. The Chief Executive and Group Finance Director, after evaluating the effectiveness of BT's disclosure controls and procedures as of the end of the period covered by this Annual Report and Form 20-F, have concluded that, as of such date, BT...

  • Page 49
    ...at the Barbican Centre, London, on 12 July 2006, together with explanatory notes, appear in the separate Annual Review & Notice of Meeting 2006 sent to all shareholders. By order of the Board Larry Stone Secretary 17 May 2006 Report of the directors BT Group plc Annual Report and Form 20-F 2006 47

  • Page 50
    ... of its meetings it reviewed with the group chief internal auditor and appropriate executives the implementation and effectiveness of key operational and functional change and remedial programmes including major contracts and IT programmes. The Committee also set aside time at every meeting to seek...

  • Page 51
    ...directors considered BT's Board processes and effectiveness to be good. Key areas highlighted were: the need for continued focus on Board diversity; continued efforts to maintain visibility of major capital projects (including post project reviews); and the amount of time available at Board meetings...

  • Page 52
    ... r REMUNERATION REVIEW (AUDITED) Directors' emoluments Former directors Loans Pensions Share options Share awards under long-term incentive schemes Vesting of outstanding share awards and options Deferred Bonus Plan Share awards under the Employee Share Investment Plan (ESIP) Operating Committee...

  • Page 53
    ... 2005/06 are given in the table on page 57. As a retention measure and given competitive market conditions, the Committee decided last year to introduce an additional special bonus arrangement for Andy Green, Chief Executive BT Global Services, linked to performance targets for that line of business...

  • Page 54
    ... in the table on page 60. Other share plans The executive directors and the Chairman may participate in BT's HM Revenue & Customs (HMRC) approved all-employee share plans, the Employee Sharesave Scheme and Employee 52 BT Group plc Annual Report and Form 20-F 2006 Report on directors' remuneration

  • Page 55
    ... 2006. As a result, BT offered those members affected the option to opt out of future accruals of pensionable service and in its place to receive a cash allowance annually. This was broadly cash neutral for the company. BT closed the BT Pension Scheme to new members from 1 April 2001. From this date...

  • Page 56
    ... Board. This policy is not mandatory. No element of non-executive remuneration is performancerelated. Non-executive directors do not participate in BT's bonus or employee share plans and are not members of any of the company pension schemes. 54 BT Group plc Annual Report and Form 20-F 2006 Report...

  • Page 57
    ... or understandings between any director or executive officer and any other person pursuant to which any director or executive officer was selected to serve. There are no family relationships between the directors. Report on directors' remuneration BT Group plc Annual Report and Form 20-F 2006 55

  • Page 58
    ... Corporate Trustees Limited for participants in the Employee Share Investment Plan. d Matti Alahuhta and Phil Hodkinson joined the Board on 1 February 2006. e On 2 May 2006, Baroness Jay inherited 261 shares. The directors, as a group, beneficially own less than 1% of the company's ordinary shares...

  • Page 59
    ... Reynolds sacrificed £225,000 of his total bonus of £360,000 and the company paid an equivalent amount into the BT Pension Scheme to provide him with additional benefits on a defined contribution basis. b Expenses Report on directors' remuneration BT Group plc Annual Report and Form 20-F 2006 57

  • Page 60
    ...pension provision. The company paid £31,680 into his personal pension plan, the maximum permitted by HMRC, plus a cash payment of £178,320 representing the balance of the pension allowance for the financial year 2005/06. BT also provides him with a lump sum death in service benefit of four times...

  • Page 61
    ... giving an unrealised gain as at that date of £15,790. There were no further unrealised gains on the above share options at 31 March 2006 (2005 - £2,105), based on the market price of the shares on 31 March 2006. Report on directors' remuneration BT Group plc Annual Report and Form 20-F 2006 59

  • Page 62
    ... of the company's ordinary shares provisionally awarded to directors, as participants under the ISP and RSP are as follows: Total number of award shares 31 March Lapsed 2006 Monetary value of vested award £000 1 April 2005 a Awarded Dividends re-invested e Vested Expected vesting date Price on...

  • Page 63
    ... Board 04/08/09 27/06/10 14/08/07 05/08/08 04/08/09 27/06/10 Sir Anthony Greener Deputy Chairman and Chairman of Remuneration Committee 17 May 2006 granted on 27 June 2005. On that date, the market price of a BT share was 220p. Report on directors' remuneration BT Group plc Annual Report and...

  • Page 64
    ...financial information included on the group's website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. 62 BT Group plc Annual Report and Form 20-F 2006 Statement of directors' responsibility

  • Page 65
    ... 17 May 2006 UNITED STATES OPINION Report of Independent Registered Public Accounting Firm to the board of directors and shareholders of BT Group plc In our opinion, the accompanying group balance sheets and the related group statements of income, of cash ï¬,ows and of statements of recognised...

  • Page 66
    ... plans 101 Employees 101 Share-based payment 104 Audit services 105 Financial instruments and risk management 111 Explanation of transition to IFRS 114 United States generally accepted accounting principles 122 Glossary of terms and US equivalents 64 BT Group plc Annual Report and Form 20-F 2006...

  • Page 67
    ... into line with those used by the group. All intra-group transactions, balances, income and expenses are eliminated on consolidation. Revenue represents the fair value of the consideration received or receivable for services provided and equipment sales, net of discounts and sales taxes. Revenue...

  • Page 68
    ... operation or are designated as hedges of a net investment, or from 1 April 2005, as cash ï¬,ow hedges, such exchange differences are initially recognised in equity. On consolidation, assets and liabilities of foreign undertakings are translated into sterling at year end exchange rates. The results...

  • Page 69
    ... review the continuing appropriateness of the contribution rates. The group also operates defined contribution pension schemes and the income statement is charged with the contributions payable. (XIV) SHARE BASED PAYMENTS The group has a number of employee share schemes and share option plans...

  • Page 70
    ... investments at initial recognition and re-evaluates this designation at each reporting date. Up to 31 March 2005, financial assets in these categories were held at the lower of cost and net realisable value in accordance with UK GAAP. 68 BT Group plc Annual Report and Form 20-F 2006 Accounting...

  • Page 71
    ... those of host contracts and host contracts are not carried at fair value. Changes in the fair value of embedded derivatives are recognised in the income statement in the line which most appropriately reï¬,ects the nature of the item or transaction. BT Group plc Annual Report and Form 20-F 2006 69

  • Page 72
    ... and particular industry issues. Goodwill The recoverable amount of cash-generating units have been determined based on value in use calculations. These calculations require the use of estimates. Useful lives for property, plant and equipment The plant and equipment in BT's networks is long-lived...

  • Page 73
    ... the balance sheet date. Management is currently assessing the impact of this amendment on the group's financial statements. Amendment to IAS 39 'Cash Flow Hedge Accounting of Forecast Intragroup Transactions' (effective from 1 April 2006) This amendment allows the foreign currency risk of a highly...

  • Page 74
    ... IAS 29' (effective from 1 April 2006) IFRIC 7 deals with the accounting when an entity identifies the existence of hyperinï¬,ation in the economy of its functional currency and how deferred tax items in the opening balance sheet should be restated. The group has operations in hyperinï¬,ationary...

  • Page 75
    GROUP INCOME STATEMENT For the year ended 31 March 2006 Before specific items £m Specific a items £m For the year ended 31 March 2006 Notes Total £m Revenue Other operating income Operating costs Operating profit Finance expense Finance income Net finance expense Share of post tax profit...

  • Page 76
    GROUP STATEMENT OF RECOGNISED INCOME AND EXPENSE For the year ended 31 March 2006 2006 £m 2005 £m Profit for the year Actuarial gains relating to retirement benefit obligations Exchange differences: - on translation of foreign operations - fair value loss on net investment hedges - reclassifi...

  • Page 77
    ... FLOW STATEMENT For the year ended 31 March 2006 2006 £m 2005 £m Notes Cash ï¬,ow from operating activities Profit before taxation Depreciation and amortisation Profit on sale of non current asset investments Net finance expense Other non cash charges Share of (profits) losses of associates...

  • Page 78
    GROUP BALANCE SHEET As at 31 March 2006 2006 £m 2005 £m Notes Non current assets Intangible assets Property, plant and equipment Derivative financial instruments Investments Associates and joint ventures Deferred tax assets Current assets Inventories Trade and other receivables Derivative fi...

  • Page 79
    ... these lines, the leasing of private circuits and other private services. It also generates revenue from broadband, mobility, data, internet and multimedia services and from providing managed and packaged communications solutions to customers. BT Wholesale derives its revenue from providing network...

  • Page 80
    ...Year ended 31 March 2005 Results Operating profit before specific items Specific items Segment result Share of post tax loss of associates and joint ventures Net finance expense Profit before tax Taxation Profit for the year Capital additions a Intangible assets Property, plant and equipment...

  • Page 81
    ... of property, plant and equipment Income from repayment works Other operating income Other operating income before specific items Specific items (note 4) Other operating income 2 74 151 227 - 227 22 64 107 193 358 551 Notes to the consolidated financial statements BT Group plc Annual Report...

  • Page 82
    ... that financial performance is measured by management and we believe assists in providing a meaningful analysis of the trading results of the group. 2006 £m 2005 £m Other operating income Profit on sale of non current asset investmentsa Operating costs Property rationalisation costsb c Creation...

  • Page 83
    ... foreign exchange movements on hedged investments and a net charge of £85 million relating to fair value movements on derivatives recycled from the cash flow reserve. b Income 6. TAXATION 2006 £m 2005 £m Analysis of taxation expense for the year United Kingdom: Corporation tax at 30% (2005: 30...

  • Page 84
    ... Deferred tax credit relating to share based payments Total taxation on items taken directly to equity 7. DIVIDENDS 2006 pence per share 2005 pence per share - (45) 9 629 (5) 588 7 - - 72 - 79 2006 £m 2005 £m Final paid in respect of the prior year Interim paid in respect of the current year...

  • Page 85
    ...: 2006 £m 2005 £m Per share impact of specific items: Profit on sale of non current asset investments Profit on sale of joint venture Property rationalisation costs Provision for the creation of Openreach Impairment in associates and joint ventures Tax credit on specific items Basic (loss...

  • Page 86
    ... key indicator used by management in order to assess operational performance. 2006 £m 2005 £m Cash generated from operations before taxation Income taxes paid Net cash inï¬,ow from operating activities Included in cash ï¬,ows from investing activities Net purchase of property, plant and equipment...

  • Page 87
    ...occurred on 1 April 2005, the group's revenue and profit after tax would have been higher by £4 million and £nil, respectively (year ended 31 March 2005, £38 million and £1 million, respectively). Notes to the consolidated financial statements BT Group plc Annual Report and Form 20-F 2006 85

  • Page 88
    .... d Year ended 31 March 2005 Infonet On 25 February 2005 the group acquired 100% of the issued share capital of Infonet Services Corporation (Infonet) for total consideration of £520 million including acquisition costs of £10 million (£315 million, net of cash in the business). At 31 March 2005...

  • Page 89
    ... Intangible assets Receivables Cash and cash equivalents Payables Group's share of original book value and fair value of net assets Goodwill Total consideration - 3 5 (5) 3 6 - - - 6 6 3 5 (5) 9 10 19 Notes to the consolidated financial statements BT Group plc Annual Report and Form 20-F 2006...

  • Page 90
    ... the group's cash generating units are considered to be the business segments. Goodwill has been allocated to cash generating units as follows: 2006 £m 2005 £m BT Global Services BT Retail 488 55 543 360 44 404 The recoverable amount of each cash generating unit (CGU) is based on value in use...

  • Page 91
    ...and buildings Total additions to property, plant and equipment (Decrease) increase in engineering stores Total additions 1,429 80 727 281 123 68 2,708 (15) 2,693 1,488 143 648 312 34 64 2,689 7 2,696 Notes to the consolidated financial statements BT Group plc Annual Report and Form 20-F 2006 89

  • Page 92
    ... value through the income statement. Loans and receivables Loans and receivable financial assets mainly consist of term deposits and other fixed term debt securities denominated in sterling with a fixed coupon and options for early redemption. 90 BT Group plc Annual Report and Form 20-F 2006...

  • Page 93
    ...stated after deducting £315 million (2005: £338 million) for doubtful debts. The amount charged to the income statement for doubtful debts for the year ended 31 March 2006 was £170 million (2005: £150 million). Notes to the consolidated financial statements BT Group plc Annual Report and Form...

  • Page 94
    ... applying associated currency and interest rate swaps in hedge arrangements. The carrying values disclosed above for the current year reï¬,ect balances at amortised cost adjusted for deferred and current fair value adjustments to the relevant loans or borrowing's hedged risk in a fair value hedge...

  • Page 95
    ...creditors Deferred income 445 40 485 352 42 394 Non current payables relate to operating lease liabilities and deferred gains on a prior period sale and operating and finance leaseback transaction. Notes to the consolidated financial statements BT Group plc Annual Report and Form 20-F 2006 93

  • Page 96
    ... costs and £70 million for the creation of Openreach, see note 4. 22. DEFERRED TAXATION Excess capital allowances £m Retirement benefit obligations £m Share based payments £m Other £m Total £m At 1 April 2004 Charge (credit) to income statement Charge to equity At 31 March 2005 Deferred tax...

  • Page 97
    ... IN EQUITY 2006 £m 2005 £m Total equity at beginning of year Transition to IAS 32 and IAS 39 Profit for the year Dividends Share based payments Issue of shares Net purchase of treasury shares Exchange differences on translation Actuarial gains Net fair value movements on cash ï¬,ow hedges Tax on...

  • Page 98
    ... exchange adjustments Share based payments Dividends Net purchase of treasury shares Actuarial gain Net fair value gains Gains on available for sale investments Fair value loss on net investment hedge Recognised in income and expense in the year Tax on items taken directly to equity At 31 March 2006...

  • Page 99
    ...part of the Report on directors' remuneration. 28. FINANCIAL COMMITMENTS AND CONTINGENT LIABILITIES Capital expenditure contracted for at the balance sheet date but not yet incurred was: 2006 £m 2005 £m Property, plant and equipment and software 754 735 Future minimum operating lease payments...

  • Page 100
    ...: - scheme assets are measured at market value at the balance sheet date; - scheme liabilities are measured using a projected unit credit method and discounted at the current rate of return on high quality corporate bonds of equivalent term to the liability; and - actuarial gains and losses are...

  • Page 101
    ...future returns. The long-term expected rate of return on investments does not affect the level of the obligation but does affect the expected return on pension scheme assets within the net finance income. The history of experience gains and losses are as follows: 2006 £m 2005 £m Present value of...

  • Page 102
    ... year end of the BTPS. The valuation basis for funding purposes is broadly as follows: - - scheme assets are valued at market value at the valuation date; and, scheme liabilities are measured using a projected unit credit method and discounted at the estimated rate of return reï¬,ecting the assets...

  • Page 103
    ...in the income statement for the year in respect of share based payment plans was £76 million (2005: £50 million). The total value of share options and awards granted in the year ended 31 March 2006 was £64 million (2005: £77 million). The company has an employee share investment plan and savings...

  • Page 104
    ...rates of 4%. Details of this plan are provided in the Report on directors' remuneration. BT Group Legacy Option Plan On the demerger of O2, BT's share option plans ceased to operate and were replaced by similar BT Group Employee Sharesave plans and the BT Group Global Share Option Plan. The BT Group...

  • Page 105
    ... Normal dates of exercise 2006 Option price per share 2006 millions 2005 Option price per share 2005 millions BT Group Employee Sharesave plans 2005 2006 2007 2008 2009 2010 Total BT Group Legacy Option Plan 2001-2011 Total BT Group Global Share Option Plan 2005-2012 2004-2014 2007-2015 Total Total...

  • Page 106
    ... at a total cost of £13.7 million (2005: £11.7 million). Allshare, the free shares element of the ESIP allows BT to provide free shares to UK employees which are held in trust for at least three years. Employees outside the UK receive cash awards equivalent to the value of the free shares. In 2006...

  • Page 107
    ...-term debt markets in major currencies. Typically, but not exclusively, the bond markets provide the most cost-effective means of long-term borrowing. The group uses derivative financial instruments primarily to manage its exposure to market risks from changes in interest and foreign exchange rates...

  • Page 108
    ... credit risk. Currently the group makes use of standard International Swaps and Derivative Association (ISDA) documentation. In addition, where management have a legal right of set off and the ability and intention to settle net, the relevant asset and liabilities are netted within the balance sheet...

  • Page 109
    ... value of future cash ï¬,ows using the appropriate discount rates in effect at the balance sheet dates, where market prices of similar issues did not exist. The fair value of the group's outstanding swaps and foreign exchange contracts where the estimated amounts, calculated using discounted cash...

  • Page 110
    ...-financial liabilities and includes current tax liabilities. c The carrying amount excludes £9 million of current and £24 million of non-current provisions which relate to non-financial liabilities. 108 BT Group plc Annual Report and Form 20-F 2006 Notes to the consolidated financial statements

  • Page 111
    ... one year by reference to LIBOR. Financial assets The following tables set out the exposure of financial assets to market pricing and interest cash ï¬,ow risk and currency risk. The maturity profile of financial assets reï¬,ects the contractual repricing dates. 2006 Current investments £m Effect...

  • Page 112
    ... - (1) (48) 2 (46) The amounts shown in the table above take into account the effect of any currency swaps, forward contracts and other derivatives entered into to manage those currency exposures. 110 BT Group plc Annual Report and Form 20-F 2006 Notes to the consolidated financial statements

  • Page 113
    .... The accounting policies set out on pages 65 to 72 have been applied in preparing the financial statements for the year ended 31 March 2006, the comparative information for the year ended 31 March 2005 and the preparation of an opening balance sheet at 1 April 2004, the group's date of transition...

  • Page 114
    .... The credit entry for the share based payments is recognised directly in reserves as the awards are equity settled. The net effect has been an increase in equity of £7 million at 31 March 2005. 112 BT Group plc Annual Report and Form 20-F 2006 Notes to the consolidated financial statements

  • Page 115
    ... 31 March 2005, but has had no impact on profit or equity. (d) Dividends Under UK GAAP, the dividend charge was recognised in the profit and loss account in the period to which it related. Under IAS 10, 'Events After The Balance Sheet Date', dividends are not recognised in the income statement but...

  • Page 116
    ... operating profit. - The group has historically recognised revenue arising from calls to our premium rate numbers on a gross basis, with amounts paid to service providers recorded separately within operating costs. In light of the transition to IFRS and changing market practice we have reviewed...

  • Page 117
    ...for deferred tax assets was as follows: 2006 £m 2005 £m Movement in year £m Capital losses Operating losses not utilised Other Total 5,493 775 271 6,539 4,436 860 705 6,001 1,057 (85) (434) 538 Notes to the consolidated financial statements BT Group plc Annual Report and Form 20-F 2006 115

  • Page 118
    ... value, being either market value or the sum of discounted future cash ï¬,ows. The assets that were not impaired under US GAAP are continuing to be depreciated over their remaining useful lives. (h) Revenue Under IFRS, long-term contracts to design, build and operate software solutions are accounted...

  • Page 119
    ... 31 March Note 2006 £m 2005 £m Total parent shareholders' equity under IFRS Adjustment for: Sale and leaseback of properties Pension costs Capitalisation of interest Goodwill Financial instruments Impairment of property, plant and equipment Current liabilities Deferred taxation Tax effect of US...

  • Page 120
    ... group's pension obligations. The pension cost determined under SFAS No. 87 was calculated by reference to an expected long-term rate of return on scheme assets of 7.11% (2005 - 7.27%). The components of the net periodic pension cost for the main pension scheme comprised: 2006 £m 2005 £m Service...

  • Page 121
    ... 4 100 58 16 9 12 5 100 Fair value £bn Year ended 31 December 2004 Target % % Equities Fixed interest bonds Index linked securities Property 18.3 4.4 2.7 3.8 29.2 63 15 9 13 100 63 16 9 12 100 Notes to the consolidated financial statements BT Group plc Annual Report and Form 20-F 2006 119

  • Page 122
    ...therefore the group has also prepared the following income statement which meets the SEC reporting format set forth in Item 10 of Regulation S-X. The numbers disclosed in the following income statement are prepared under IFRS. 2006 £m 2005 £m Revenue Operating expenses: Payroll costs Depreciation...

  • Page 123
    ... 2007. BT does not anticipate that the adoption of this new statement at the required effective date will have a significant effect on its results of operations, financial position or cash ï¬,ows. Notes to the consolidated financial statements BT Group plc Annual Report and Form 20-F 2006 121

  • Page 124
    ... internal use Allowance for bad and doubtful accounts receivable Long-term liabilities other than debt and specific accounts payable Comprehensive income Shareholders' equity other than paid-up capital Additional paid-in capital or paid-in surplus (not distributable) 122 BT Group plc Annual Report...

  • Page 125
    ... of BT Group plc for the year ended 31 March 2006. This separate report is set out on page 63. Respective responsibilities of directors and auditors The directors' responsibilities for preparing the annual report, the Report on directors' remuneration and the parent company financial statements in...

  • Page 126
    ...' equity at cost. (VII) CASH Cash includes cash in hand, bank deposits repayable on demand and bank overdrafts. The company has adopted FRS 17, 'Retirement benefits', FRS 20, 'Share based payment', FRS 21 'Events after the balance sheet date', FRS 23, 'The effects of changes in foreign exchange...

  • Page 127
    BT GROUP PLC COMPANY BALANCE SHEET 2006 £m 2005 £m Fixed assets Investments in subsidiary undertaking Total fixed assets Current assets Debtorsa b Investments Cash at bank and in hand Total current assets Creditors: amounts falling due within one yearc Net current (liabilities) assets Total ...

  • Page 128
    ...share capital at 31 March 2006, 26 million ordinary shares (2005: 26 million) were reserved to meet options granted under employee share option schemes. f The share premium account, representing the premium on allotment of shares is not available for distribution. g The profit for the financial year...

  • Page 129
    ... ordinary or common shares, unless otherwise stated. in the country of operations. through an intermediate holding company. d In February 2006, Mahindra British Telecom Limited changed its name to Tech Mahindra Limited. Subsidiary undertakings and associate BT Group plc Annual Report and Form...

  • Page 130
    ....2p Year ended 31 March 2005 Quarters Revenue Other operating income Operating costs Operating profit Net finance expense Share of post tax (losses) profits of associates and joint....3p 2,080 18.1p 17.9p 128 BT Group plc Annual Report and Form 20-F 2006 Quarterly analysis of revenue and profit

  • Page 131
    ... financial assets and investments. number of times net finance expense before net pension finance income is covered by total operating profit. Interest cover including net pension finance income is 5.6 times (2005: 4.5 times). Financial statistics BT Group plc Annual Report and Form 20-F 2006...

  • Page 132
    ....1 6.6 0.6 2002 £m Expenditure on research and development Total expenditure 257 2005 £m 334 2004 £m 380 2003 £m 362 2002 £m Expenditure on property plant and equipment and software Plant and equipment Transmission equipment Exchange equipment Other network equipment Computers and office...

  • Page 133
    ...000) Year ended 31 March b % Consumer contracted revenues Networked IT services sales order value (worldwide) (£m) 12 month consumer revenue, less mobile polos, divided by average number of primary lines b Includes line rental, broadband, select services and packages a Rolling 2006 '000 2005 '000...

  • Page 134
    ...statements Listings Share and ADS prices Capital Gains Tax (CGT) Rights issue Demerger of O2 Analysis of shareholdings Dividends Dividend mandate Dividend investment plan Global Invest Direct Total shareholder return Results announcements Individual Savings Accounts (ISAs) ShareGift Unclaimed Assets...

  • Page 135
    ...; developments in the convergence of technologies; prolonged adverse weather conditions resulting in a material increase in overtime, staff or other costs; the timing of entry and profitability of BT and its lines of business in certain communications markets; significant changes in market shares...

  • Page 136
    ...but are not listed, on the London Stock Exchange. Trading on the New York Stock Exchange is under the symbol 'BT'. SHARE AND ADS PRICES a Pence per ordinary share High pence Low pence High $ US$ per ADS Low $ Years ended 31 March 2002 2003 2004 2005 2006 Year ended 31 March 2005 1 April - 30 June...

  • Page 137
    ... into US dollars using exchange rates prevailing on the date the ordinary dividends were paid. Per ordinary share Years ended 31 March Interim pence Final pence Total pence Interim £ Final £ Per ADS Total £ Interim US$ Final US$ Per ADS Total US$ 2002 2003 2004 2005 2006 a Qualifying - 2.25...

  • Page 138
    ... is used to buy further BT shares in the market. Shareholders could elect to receive additional shares in lieu of a cash dividend for the following dividends: Date paid Price per share pence 2001 interim 2002 final 2003 interim 2003 final 2004 interim 2004 final 2005 interim 2005 final 2006...

  • Page 139
    ... practicable date for this annual report, the Noon Buying Rate was US$1.89 to £1.00. SHARE BUY BACK The following table gives details of the purchase by BT of its own shares during the 2006 financial year. Total number of Average price paid per shares purchased as part of publicly announced share...

  • Page 140
    ...paid on any class of shares on the dates stated for the payments of those dividends. The directors can offer ordinary shareholders the right to choose to receive new ordinary shares, which are credited as fully paid, instead of some or all of their cash dividend. Before they can do this, the company...

  • Page 141
    ... person, asks for them. (h) General meetings of shareholders Every year the company must hold an annual general meeting. The Board can call an extraordinary general meeting at any time and, under general law, must call one on a shareholders' requisition. (i) Limitations on rights of non-resident or...

  • Page 142
    ... retroactive effect. US Holders should consult their own tax advisors as to the applicability of the Convention and the consequences under UK, US federal, state and local, and other laws, of the ownership and disposition of ordinary shares or ADSs. 140 BT Group plc Annual Report and Form 20-F 2006...

  • Page 143
    ... securities market in the United States, or (ii) the non-US corporation is eligible for the benefits of a comprehensive US income tax treaty (such as the Convention) which provides for the exchange of information. BT currently believes that dividends paid with respect to its ordinary shares...

  • Page 144
    ... social and environment report at www.bt.com/betterworld Document Annual Review and Notice of Meeting Annual Report and Form 20-F Social and Environment Report EAB Annual Report Quarterly results releases Current Cost Financial Statements Statement of Business Practice Publication date May May May...

  • Page 145
    ... JPMorgan Chase Bank, NA PO Box 3408 South Hackensack, NJ 07606-3408 United States Tel +1 800 634 8366 (toll free) or +1 201 680 6630 (from outside the USA) e-mail: [email protected] Website: www.adr.com Additional information for shareholders BT Group plc Annual Report and Form 20-F 2006 143

  • Page 146
    ...and financial review and prospects Operating results 5B Liquidity and capital resources 92 97 105 5C Research and development, patents and licences 5D Trend information 8 18 129 26 133 37 5E Off-balance sheet arrangements 144 BT Group plc Annual Report and Form 20-F 2006 Cross reference...

  • Page 147
    ...plans Share based payment Board of directors and Operating Committee Report of the directors The Board Directors Report on directors' remuneration Financial review Group results Consolidated financial statements Notes to the financial statements Employees Operational statistics Report on directors...

  • Page 148
    ... Audit committee financial expert 16B Code of ethics 16C Principal accountants fees and services 104 48 137 16E Purchases of equity securities by the issuer and affiliated purchasers 17 18 Financial statements Financial statements 63 64 114 128 146 BT Group plc Annual Report and Form 20-F 2006...

  • Page 149
    ... Audit Committee, Report of the 48 Audit services 104-105 Balance sheet 24, 25, 38, 76 Board of directors and Operating Committee 40-41 BT Global Services 7, 33, 77-78 BT Retail 7, 31-32, 77-78 BT Wholesale 7, 32-33, 77-78 Business review 6-21 Capital expenditure 24, 31- 33, 38, 97 Capital gains tax...

  • Page 150
    BT Group plc Registered office: 81 Newgate Street, London EC1A 7AJ Registered in England and Wales No. 4190816 Produced by BT Group Designed by Pauffley Ltd, London Typeset by St Ives Financial Printed in England by Pindar plc Printed on elemental chlorine-free paper sourced from sustainably managed...