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Annual Report and
Form 20-F 2004
Delivering today
Investing for tomorrow

Table of contents

  • Page 1
    Delivering today Investing for tomorrow Annual Report and Form 20-F 2004

  • Page 2
    ... internet products and services, and IT solutions. In the UK, BT serves over 20 million business and residential customers with more than 29 million exchange lines, as well as providing network services to other operators. Contents Financial headlines Chairman's message Chief Executive's statement...

  • Page 3
    ... Dividends of 8.5 pence per share for the year, up 31% & & & Years ended 31 March Continuing activities In £ million unless otherwise stated 2004 2003 2002 Group turnover Exceptional operating costs Total operating profit (loss) Profit on sale of fixed asset investments Loss on sale of group...

  • Page 4
    ... on the level of three years ago. Our business Your company continues to make progress by innovating in our traditional markets and by growing revenues in all the new wave markets - ICT (information and communications technology), broadband, mobility and managed services - in which we operate. We...

  • Page 5
    ... year we've broken the £20 barrier, with an entry-level broadband product for just £19.99 a month. Mobility We also stepped back into the consumer mobility market with BT Mobile Home Plan and we established the high street presence that will enable us to offer converged products and services in...

  • Page 6
    ... the standard rate for our existing customers from 1 July 2004, and launched an enhanced range of option packages. In the business calls market BT Business Plan has had similar success - customer numbers were up from 20,000 to 175,000 in the year. And BT Local Business is demonstrating that...

  • Page 7
    ... the BT values Research and development and IT support Regulation, competition and prices Relationship with HM Government Legal proceedings Please see cautionary statement regarding forward-looking statements on page 141. All customer numbers are given as at 31 March 2004, unless stated otherwise...

  • Page 8
    ...scale networks and our existing customer base, and also through innovation in products, services and solutions. These increasingly build on our strengths in ICT (information and communications technology), broadband, IP (internet protocol) and solutions. BT is the UK's largest communications service...

  • Page 9
    ... Wholesale and BT Global Services. BT Retail and BT Wholesale operate almost entirely within the UK, addressing the consumer, major corporate, business and wholesale markets, and offer a broad spectrum of communications products and services. BT Global Services is BT's managed services and solutions...

  • Page 10
    ... move from the capital-intensive products of our traditional portfolio to broadband, ICT and mobility. We aim to provide the right solution, be it application, service or product, for our wholesale customers in order that we can continue to build our new wave revenues. In our global carrier business...

  • Page 11
    ... BT Annual Report and Form 20-F 2004 Group strategy Our strategy is to build long-term partnerships with our customers. With their support, we aim to maximise the potential of our traditional business - through a combination of enhanced quality of service, creative marketing, innovative pricing...

  • Page 12
    ... 2004, we had over 240,000 business customers. Around 40% of these customers use value-added services such as the Internet Security Pack and the Internet Business Pack. & During the financial year, BT Business Broadband joined forces with a number of companies to enhance its networking and value...

  • Page 13
    ... BT Annual Report and Form 20-F 2004 access, applications service, support and maintenance, all from a single source and on one bill. Create mobility services and solutions Mobility for consumers In the consumer mobility market our strategy is to build a foundation for the delivery of added-value...

  • Page 14
    ... next generation of data networks for corporate customers, supporting voice, data and video applications, offering enhanced ï¬,exibility and service performance. MPLS revenues grew by 102% during the 2004 financial year. Global customer service is provided via service and network management centres...

  • Page 15
    ...Customers can access the service either as an integrated part of BT's existing Siebel-based Contract Central CRM portfolio, which provides a full multimedia contact centre solution, or as a stand-alone CRM application. In May 2004, BT and HP announced plans to develop a strategic alliance to address...

  • Page 16
    ...corporations. At the end of the 2004 financial year, BT Local Business was active in 73 locations around the country and managing £1.1 billion of annual billed turnover. & BT remains the largest supplier of public and managed payphones, strengthening our market position during the year by securing...

  • Page 17
    ... company from their pre-tax salaries. In addition, they can buy shares at a discount under our savings-related share option plans. In the 2004 financial year, £20 million was allocated to provide free shares to employees under the ESIP. (Employees outside the UK receive a cash payment equivalent...

  • Page 18
    ... part time and more than 7,900 people working from home. Research and development and IT support BT Exact is BT's research, technology and IT operations business. It offers expertise and experience in ICT, backed by a team of over 6,000 technologists and one of the world's largest communications...

  • Page 19
    ... network, but additional USO conditions relate to issues such as schemes for consumers with special social needs and the provision of call box services. Ofcom is to carry out a fundamental review of the USO with a consultation expected in summer 2004 and a statement towards the end of the year...

  • Page 20
    ...subject to SMP conditions in retail international calls made by business customers or in wholesale international services on country routes accounting for 95% of call volumes. In addition, BT was found not to have SMP in markets for wholesale unmetered narrowband internet termination. However, these...

  • Page 21
    ...' networks in the UK has historically had an adverse effect on BT's share of the residential market as a result of increasing competition from these cable operators. However, in the 2004 financial year, BT grew its residential customer base by 190,000. Current and future wholesale line rental...

  • Page 22
    ... separate control on BT for calls to Vodafone and O2. The price control formula and our performance against the formula are set out in the table above. Under the new controls, we have also given an assurance that increases in line rental for business customers will be no more than the annual change...

  • Page 23
    22 Operating and financial review BT Annual Report and Form 20-F 2004 Wholesale access charge control The charges for wholesale access services are also subject to price control. The charges for the line rental (residential and business products), line transfer and new line installations have ...

  • Page 24
    ...; incentivising efficient and timely investment in next-generation networks; and the relevance of the issue of structural or operational separation of BT. Funds for liabilities Under conditions relating to the Electronic Communications Code, an electronic communications provider which has apparatus...

  • Page 25
    ... leaver costs c d Net interest payable includes exceptional costs (credits) e Includes exceptional tax charge (credit) f Group's share of operating profit (loss) of associates and joint ventures includes exceptional costs (release) Based on actual dividends paid and/or year end exchange rate on...

  • Page 26
    ... financial review BT Annual Report and Form 20-F 2004 Cash ï¬,ow statement Years ended 31 March 2000 £m 2001 £m 2002 £m 2003 £m 2004 £m Net cash ï¬,ow from operating activities Dividends from associates and joint ventures Returns on investments and servicing of finance Taxation paid Capital...

  • Page 27
    ...results Line of business results BT Retail BT Wholesale BT Global Services Other operating income Operating costs Group operating profit (loss) Associates and joint ventures Total operating profit (loss) Profit on sale of group undertakings and fixed asset investments Profit on sale of property...

  • Page 28
    ... Operating and financial review BT Annual Report and Form 20-F 2004 Summarised profit and loss account 2004 Continuing activities and total £m 2003 Continuing activities and total £m 2002 Continuing activities £m Total* £m Total turnover Group's share of associates' and joint ventures...

  • Page 29
    ... generated from ICT solutions, broadband, mobility and managed services. Group turnover (£ million) years ended 31 March 18,447 18,519 18,727 customers. Major Corporate includes the external turnover of BT Retail Major Corporate customers, and the external turnover of BT Global Services, excluding...

  • Page 30
    ... and financial review BT Annual Report and Form 20-F 2004 Major Corporate turnover increased by 2% to £5,909 million in the 2004 financial year with the growing new wave turnover offsetting the decline in traditional UK services. This reï¬,ects the continued migration of traditional voice only...

  • Page 31
    ... those changes. The table below analyses the trading relationships between each of the lines of business for the 2004 financial year. The majority of the internal trading is performed by BT Wholesale with BT Retail, reï¬,ecting sales of calls and access lines and network charges for other products...

  • Page 32
    ... calls made by customers on the BT fixed line network in the UK, analogue lines, equipment sales and rentals and other business voice products. Overall turnover from voice services was 7% lower in the 2004 financial year after an increase of 1% in the 2003 financial year. The overall market...

  • Page 33
    ... network services and solutions within the UK. Its customers include communications companies, fixed and mobile network operators and service providers. The customer base includes BT's lines of business, BT Retail and BT Global Services. The majority of BT Wholesale's turnover is internal (2004...

  • Page 34
    ... cash costs of the BT Wholesale business. Accordingly it is based on operating costs excluding payments to other network operators and depreciation, plus capital expenditure. Targets have been set for achieving managed cash cost savings and accordingly performance against those targets is reported...

  • Page 35
    ...turnover Group operating loss* (105) (375) (294) £55 million, respectively. Headcount increased by 23% 508 238 212 to 21,200 in the 2004 financial year which includes EBITDA* Capital expenditure 479 445 615 transfers of operations from other lines of business and an increase in BT Global Solutions...

  • Page 36
    ... allocation for the employee profit share scheme, included within staff costs, was £20 million in maintenance and support of the networks, accommodation and marketing costs, the cost of sales the 2004 financial year. The allocation for the 2003 of customer premises equipment and non pay related...

  • Page 37
    ... programme, reducing the number of call centres from 104 to 30 over two years & bad debt charges of £79 million, in BT Wholesale, as a result of severe liquidity problems in the TMT sector during the latter part of the year & costs of £98 million associated with the demerger of mmO2 Share...

  • Page 38
    .... The reduction in total operating profit in the 2004 financial year reï¬,ects the reduction in group turnover and associates' and joint ventures' profits offset by cost efficiency savings, the strong performance of BT Global Services and lower leaver costs. The improved performance in the 2003...

  • Page 39
    ...BT completed the sale and May 2001, the UK Office of Fair Trading announced leaseback of the majority of its UK properties to that the price controls over the UK Yellow Pages Telereal, a 50/50 joint venture partnership formed by advertising rates were to be tightened significantly. Land Securities...

  • Page 40
    ... transaction being completed with Telereal, BT also completed the sale of one of its major properties in London at a profit of £43 million. Interest charge In the 2004 financial year, the total net interest charge, including BT's share of its ventures' charges, at £941 million was £498 million...

  • Page 41
    ... from associates and joint ventures Net cash outï¬,ow for returns on investments and servicing of finance Taxation paid Net cash outï¬,ow for capital expenditure and financial investment Net cash (outï¬,ow) inï¬,ow for acquisitions and disposals Equity dividends paid Cash inï¬,ow before management...

  • Page 42
    ...-term investments with total borrowings of £3,627 million being repaid. In addition, the group issued new loans of £1,326 million. The new loans included a US$172 million 0.75% exchangeable bond due in 2008, exchangeable into ordinary shares of LG Telecom, BT's Korean based associate and a sale...

  • Page 43
    ... financial review BT Annual Report and Form 20-F 2004 Treasury policy The group has a centralised treasury operation whose primary role is to manage liquidity, funding, investment and the group's financial risk, including risk from volatility in currency and interest rates and counterparty credit...

  • Page 44
    ... former mobile phone business, was completed in November 2001. The demerger, scheme of arrangement and associated reduction in capital were approved by shareholders in October 2001 and the High Court in November 2001. The demerger of mmO2 created two new listed companies and dealings in BT Group and...

  • Page 45
    ... 2001 and 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...

  • Page 46
    ... of our current employees, the return that the pension fund assets will generate in the time before they are used to fund the pension payments and the discount rate at which the future pension payments are discounted. We use estimates for all these factors in determining the pension costs and...

  • Page 47
    46 Operating and financial review BT Annual Report and Form 20-F 2004 investments and tangible fixed assets in our balance sheet. The amount of the charges are in most cases based on the discounted present value of the future cash ï¬,ows that we expected to be derived from these assets. We use ...

  • Page 48
    47 Operating and financial review BT Annual Report and Form 20-F 2004 Our commitment to society Corporate social responsibility (CSR) Our challenge is to manage social, ethical and environmental issues in ways that grow shareholder value and help make sustainable development happen. The Dow ...

  • Page 49
    ... to increasing the accessibility of our internet pages. In the 2004 financial year, our Age and Disability Action website (www.btplc.com/ age_disability) was awarded the RNIB See it Right logo. Community We commit a minimum of 0.5% of our UK pre-tax profits to direct activities in support of...

  • Page 50
    ... was appointed as Chief Executive 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 Green was a member of the former Executive Committee from February 1995...

  • Page 51
    ... and a director of ProShare. Aged 46. Key to membership of principal Board committees: a Operating b Audit c Remuneration d Nominating e Community Support f Pension Scheme Performance Review Group All the non-executive directors are considered independent of the management of the company.

  • Page 52
    ... directors' remuneration on pages 58 to 71 and the discussion on Corporate governance on pages 52 to 57. Substantial shareholdings At 19 May 2004, the company had received notifications from Legal & General Investment Management Limited, Barclays PLC and Brandes Investment Partners LLC, under Part...

  • Page 53
    ... directors. The directors' biographies are set out on pages 49 and 50. 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...

  • Page 54
    ... setting out the terms of his or her appointment, including membership of Board committees, the fees to be paid, the time commitment expected from the director and covering such matters as the confidentiality of information and the company's share dealing code. The appointment letter was reviewed...

  • Page 55
    ... the Board for each year's annual report. It also reviews the company's internal audit function and its relationship with the external auditors, including internal audit's plans and performance. It reviews the arrangements for dealing, in confidence, with complaints from employees about accounting...

  • Page 56
    ... Group Finance Director, the Chief Executives of BT Retail, BT Wholesale and BT Global Services and the Chief Broadband Officer. The Secretary attends all meetings. The Committee has collective responsibility for running the group's business end-to-end. To do that, it develops the group's strategy...

  • Page 57
    ... Committee has carried out these actions for the 2004 financial year. Material joint ventures and associates, which BT does not control, outside the UK have not been dealt with as part of the group for the purposes of this internal control assessment. The Board has approved the formal statement...

  • Page 58
    ...of BT. The level of political donations split as between the major UK political parties is shown in the Report of the directors. Pension funds BT's two main pension funds - the BT Pension Scheme and the BT Retirement Plan - are not controlled by the Board but by separate trustees who are company and...

  • Page 59
    ... directors Loans Pensions Share options Share awards under long-term incentive schemes Deferred Bonus Plan Share awards under all-employee share ownership plans Operating Committee The Remuneration Committee is made up wholly of independent non-executive directors. Throughout the year, the company...

  • Page 60
    ... The annual bonus plan is designed to reward the achievement of results against set objectives. For the 2004 financial year, on-target and maximum (requiring truly exceptional performance) bonus levels for executive directors and OC members, as a percentage of salary, were 50% and 100% (increased...

  • Page 61
    ... the Employee Share Ownership Scheme), on the same basis as other employees. There are further details of these plans in note 34 to the accounts. (ii) Annual package - 2005 financial year The Remuneration Committee has decided that there should be no increase in base pay for executive directors in...

  • Page 62
    ...on directors' remuneration BT Annual Report and Form 20-F 2004 combination of share options and share awards creates, in the Committee's view, a better balance of remuneration in the light of BT's business strategy, including the development of new wave business and the achievement of operating ef...

  • Page 63
    ... on directors' remuneration BT Annual Report and Form 20-F 2004 awarded under an employee share ownership plan or deferred bonus plan that have not vested, together with a year's salary and the value of any benefits. The Committee has reviewed contracts taking into account the joint statement of...

  • Page 64
    ... purchased 144 shares under the BT Group Employee Share Investment Plan. b Includes free shares awarded under the Employee Share Investment Plan and Employee Share Ownership Scheme - details are set out on page 70. c At 31 March 2004, Sir Christopher Bland and each of the executive directors, as...

  • Page 65
    ... BT Annual Report and Form 20-F 2004 Performance graph This graph illustrates, as required by the Directors' Remuneration Report Regulations 2002, the performance of BT Group plc measured by TSR (adjusted for the rights issue and the demerger of BT's mobile business in the 2002 financial year...

  • Page 66
    ... of the BT Scotland Board. He will retire in June 2004. Sir Peter Bonfield received, under pre-existing arrangements, a pension of £331,000 payable by the company in the 2004 financial year (2003 - £322,000). Loans Prior to the date of their appointment to the Board on 19 November 2001, Pierre...

  • Page 67
    ... of his final salary for each year of service. In addition, a two-thirds widow's pension would be payable on his death. He is a member of the BT Pension Scheme, but as he is subject to the earnings cap the company has agreed to increase his benefits to the target level by means of a non-approved...

  • Page 68
    ... the Employee Sharesave Scheme, in which all employees of the company are eligible to participate. Details of the GSOP and performance conditions are set out on pages 59 and 60. The market price of the shares at 31 March 2004 was 177p (2003 - 157p) and the range during the 2004 financial year was...

  • Page 69
    ...' remuneration BT Annual Report and Form 20-F 2004 Share awards under long-term incentive schemes held at 31 March 2004 Details of the company's ordinary shares provisionally awarded to directors, as participants under the ESP, ISP and RSP are as follows: Total number of award shares Dividends 31...

  • Page 70
    ... be transferred to participants at the end of the three-year deferred period if those participants are still employed by BT Group. Total number of award shares Dividends 31 March re-invested 2004 Expected vesting date Market Price at grant Monetary value of vested Market Price award at vesting...

  • Page 71
    ... the BT Group Employee Share Investment Plan on 14 August 2003. On that date the market price of a BT Group share was 194p. b Awards granted under the BT Employee Share Ownership Scheme on 17 August 2000 vested on 17 August 2003. On 18 August 2003, the first dealing day after that date, the market...

  • Page 72
    ...-term incentive awards Company pension contributions Total 296 198 268 34 796 275 201 327 32 835 Of the six members of the OC, five are members of the Board. No options were granted under the BT Group Employee Sharesave Scheme to OC members, other than directors, during the 2004 financial year...

  • Page 73
    72 BT Annual Report and Form 20-F 2004 Statement of directors' responsibility for preparing the financial statements The directors are required by law to prepare financial statements for each financial year which give a true and fair view of the state of affairs of the company and the group as ...

  • Page 74
    ... set out in the table of contents including Financial headlines, Chairman's message, Chief Executive's statement, Operating and United States Opinion To the board of directors and shareholders of BT Group plc In our opinion, the accompanying group profit and loss account, group balance sheet, group...

  • Page 75
    ... and charges Reconciliation of movement in shareholders' funds Related party transactions Financial commitments, contingent liabilities and subsequent events Pension costs Directors' emoluments People employed Employee share schemes Auditors Financial instruments and risk management Company balance...

  • Page 76
    ... contracts, depreciation, goodwill amortisation and impairment, employee pension schemes, provisions for liabilities and charges and taxes. ii Turnover Group turnover net of discounts, which excludes value added tax and other sales taxes, comprises the value of services provided and equipment sales...

  • Page 77
    ... sheet of the company at cost less amounts written off. Amounts denominated in foreign currency are translated into sterling at year end exchange rates. Investments in associates and joint ventures are stated in the group balance sheet at the group's share of their net assets, together with any...

  • Page 78
    ... BT Annual Report and Form 20-F 2004 The cost of providing pensions is charged against profits over employees' working lives with the group using the projected unit method. Variations from this regular cost are allocated on a straight-line basis over the average remaining service lives of current...

  • Page 79
    ...BT Annual Report and Form 20-F 2004 Group profit and loss account for the year ended 31 March 2004 Continuing activities Before goodwill Goodwill amortisation amortisation and exceptional and exceptional items items Notes £m £m Total £m Total turnover Group's share of joint ventures' turnover...

  • Page 80
    ...BT Annual Report and Form 20-F 2004 Group profit and loss account for the year ended 31 March 2003 Continuing activities Before goodwill Goodwill amortisation amortisation and exceptional and exceptional items items Notes £m £m Total £m Total turnover Group's share of joint ventures' turnover...

  • Page 81
    ...costs Group operating profit (loss) Group's share of operating profit (loss) of joint ventures Group's share of operating profit (loss) of associates Total operating profit (loss) Profit on sale of fixed asset investments Profit (loss) on sale of group undertakings Profit on sale of property...

  • Page 82
    81 BT Annual Report and Form 20-F 2004 Group statement of total recognised gains and losses for the year ended 31 March 2004 2004 £m 2003 £m 2002 £m Profit (loss) for the financial year: Group Joint ventures Associates Total profit for the financial year Currency movements arising on ...

  • Page 83
    ... Annual Report and Form 20-F 2004 Group cash flow statement for the year ended 31 March 2004 Notes 2004 £m 2003 £m 2002 £m Net cash inï¬,ow from operating activities Dividends from associates and joint ventures Returns on investments and servicing of finance Interest received Interest paid...

  • Page 84
    83 BT Annual Report and Form 20-F 2004 Group balance sheet as at 31 March 2004 Notes 2004 £m 2003 £m Fixed assets Intangible assets Tangible assets Investments in joint ventures: Share of gross assets and goodwill Share of gross liabilities Total investments in joint ventures Investments in ...

  • Page 85
    ... other private services, the sale and rental of customer premises equipment to the group's UK customers and other lines of business and from its narrowband and broadband internet access products. & BT Wholesale derives its turnover from providing network services to other BT lines of business, and...

  • Page 86
    ...Notes to the financial statements BT Annual Report and Form 20-F 2004 2. Segmental analysis continued Turnover External £m Internal £m Group total £m Operating profit (loss) of associates and joint ventures £m Year ended 31 March 2003 Depreciation and amortisation £m Total operating pro...

  • Page 87
    ... joint ventures and associates. The group turnover from continuing activities as disclosed in the group profit and loss account includes intra-group trading with discontinued activities. 2004 £m 2003 £m Group fixed assets are located UK Europe, excluding the UK Americas Asia and Pacific Total...

  • Page 88
    ...financial statements BT Annual Report and Form 20-F 2004 2. Segmental analysis continued The analysis of turnover by geographical area is stated on the basis of origin. In an analysis of turnover by destination, incoming and transit international calls by country of origin and turnover with non-UK...

  • Page 89
    88 Notes to the financial statements BT Annual Report and Form 20-F 2004 3. Turnover Group's share of associates' and joint ventures' turnover comprised: 2004 £m 2003 £m 2002 £m Joint ventures: Continuing activities Discontinued activities Associates: Continuing activities Discontinued ...

  • Page 90
    89 Notes to the financial statements BT Annual Report and Form 20-F 2004 5. Operating costs Total Group Staff costs: Wages and salaries Social security costs Pension costs (note 31) a Employee share ownership Total staff costs Own work capitalised Depreciation (note 21) Amortisation and ...

  • Page 91
    ... the financial statements BT Annual Report and Form 20-F 2004 5. Operating costs Continuing activities continued 2004 £m 2003 £m 2002 £m Staff costs: Wages and salaries Social security costs Pension costs (note 31) a Employee share ownership Total staff costs Own work capitalised Depreciation...

  • Page 92
    ... to the financial statements BT Annual Report and Form 20-F 2004 6. Group's share of operating (loss) profit of associates and joint ventures The group's share of operating (loss) profit of associates and joint ventures comprised: 2004 £m 2003 £m 2002 £m Joint ventures: Continuing activities...

  • Page 93
    ... on the group's share of results of joint ventures Prior year adjustments Total current taxation Deferred taxation charge (credit) at 30% Origination and reversal of timing differences Prior year adjustments Total deferred taxation Total tax on profit (loss) on ordinary activities 2004 £m 2003...

  • Page 94
    ... asset investments and group undertakings Higher (lower) effective tax on gain on disposal of non qualifying assets Prior year adjustments Other Current tax - effective corporation tax rate Deferred taxes on excess depreciation over capital allowances Pension provisions and prepayments Other timing...

  • Page 95
    ... the financial statements BT Annual Report and Form 20-F 2004 15. Earnings (loss) per share The basic earnings (loss) per share are calculated by dividing the profit for the financial year attributable to shareholders by the weighted average number of shares in issue after deducting the company...

  • Page 96
    ...BT Wholesale bad debts release (costs) Goodwill impairment in associates and joint ventures Impairment of investment in associates and joint ventures and release (charge) for related exit costs Profit on sale of fixed asset investments Loss on sale of group undertakings Profit on sale of property...

  • Page 97
    ... all short-term investments and deposits not repayable on demand are reported under the heading of management of liquid resources. 18. Acquisitions and disposals Acquisition of subsidiary companies and businesses Year ended 31 March 2004 a Total £m Consideration: Cash Deferred Total Year ended 31...

  • Page 98
    ... companies and businesses and the consideration given comprised: Book value and fair value £m Fixed assets Current liabilities Group's share of original book value of net assets and fair value to group Goodwill Total cost d 1 (1) - 13 13 On 18 April 2001, the group took full control of O2...

  • Page 99
    ...year ended 31 March 2002 the group increased its interest in Blu SpA. Year ended 31 March 2002 f Blu £m Group share of original book value of net assets and fair value to the group Goodwill Total cost f 16 50 66 On 31 January 2002, one of the venture partners in Blu exercised a put option for BT...

  • Page 100
    ... 31 March 2004 £m Analysis of net debt Cash in hand and at bank Overnight deposits Bank overdrafts Other current asset investments Short-term investments and cash, less bank overdrafts Debt due within one year, excluding bank overdrafts Debt due after one year Total debt, excluding bank overdrafts...

  • Page 101
    100 Notes to the financial statements BT Annual Report and Form 20-F 2004 21. Tangible fixed assets Land and a buildings £m Plant and b equipment £m Assets in course of construction £m Total £m Cost 1 April 2003 Acquisitions of subsidiary undertakings c Additions Transfers Disposals and ...

  • Page 102
    ...the financial statements BT Annual Report and Form 20-F 2004 22. Fixed asset investments Shares £m b Interests in associates and joint ventures Loans £m Share of post acquisition losses £m Other c investments £m Total £m Cost 1 April 2003 Additions Disposals Share of losses for the year...

  • Page 103
    ... to the financial statements BT Annual Report and Form 20-F 2004 22. Fixed asset investments continued The group's proportionate share of its associates' and joint ventures' assets and liabilities, in aggregate, at 31 March was as follows: 2004 £m 2003 £m Fixed assets Current assets Current...

  • Page 104
    ... Total listed bonds, debentures and notes Lease finance Bank loans due 2004-2009 (average effective interest rate 9.8%) Floating rate note 2004-2009 (average effective interest rate 4.1%) Floating rate loan 2006 (average effective interest rate 4.6%) Bank overdrafts and other short-term borrowings...

  • Page 105
    ...to the financial statements BT Annual Report and Form 20-F 2004 26. Other creditors Trade creditors Amounts owed to joint ventures (trading) Corporation taxes Other taxation and social security Other creditors Accrued expenses Deferred income Dividends payable Total other creditors 2004 £m 2003...

  • Page 106
    ... statements BT Annual Report and Form 20-F 2004 28. Reconciliation of movement in shareholders' funds Share capital £m Share premium account £m Capital redemption reserve £m Other reserves £m Profit and loss account £m Total £m Balances at 1 April 2001 Rights issuea b Shares issued...

  • Page 107
    ... to the financial statements BT Annual Report and Form 20-F 2004 28. Reconciliation of movement in shareholders' funds continued Reorganisation and demerger On 19 November 2001, the legal separation of the mmO2 business from the rest of the former British Telecommunications plc group was completed...

  • Page 108
    ... the financial statements BT Annual Report and Form 20-F 2004 30. Financial commitments, contingent liabilities and subsequent events 2004 £m 2003 £m Contracts placed for capital expenditure not provided in the accounts Operating lease payments payable within one year of the balance sheet date...

  • Page 109
    ... linked securities, deposits and short-term investments. At 31 March 2004, the UK equities included 33 million (2003 - 37 million, 2002 - 55 million) ordinary shares of the company with a market value of £58 million (2003 - £58 million, 2002 - £154 million). BT Pension Scheme Funding valuation...

  • Page 110
    109 Notes to the financial statements BT Annual Report and Form 20-F 2004 31. Pension costs continued The assumed rate of investment return, salary increases and mortality all have a significant effect on the funding valuation. A 0.25 percentage point change in these assumptions would have the ...

  • Page 111
    ... trustees in determining the funding position of pension schemes. The accounting requirements under FRS 17 are broadly as follows: & scheme assets are valued at market value at the balance sheet date; & scheme liabilities are measured using a projected unit method and discounted at the current rate...

  • Page 112
    ... statements BT Annual Report and Form 20-F 2004 31. Pension costs continued The long-term expected rate of return on investments does not affect the level of the deficit but does affect the level of the expected return on assets within the net finance cost charged to the profit and loss account...

  • Page 113
    ...amount for the year ended 31 March 2002 is entirely attributable to former directors. More detailed information concerning directors' remuneration, shareholdings, pension entitlements, share options and other long-term incentive plans is shown in the report on directors' remuneration on pages 58 to...

  • Page 114
    ... new option. The option prices of the original options were also adjusted to take account of the different number of shares under option. On the demerger of mmO2, BT's share option plans ceased to operate and were replaced by similar BT Group Employee Sharesave schemes and the BT Group Global Share...

  • Page 115
    ... The option prices of shares under the BT Group Legacy Option Plan were adjusted at the time of the demerger as detailed on page 113. The weighted average fair value of share options granted during the year ended 31 March 2004 has been estimated on the date of grant using a binomial option pricing...

  • Page 116
    ... measure the participants may be awarded up to double the shares conditionally awarded. The corporate performance measure is BT's total shareholder return (TSR) measure against those top 100 companies listed on the London Stock Exchange, as rated by the Financial Times (the FTSE 100 index), at...

  • Page 117
    ... the financial statements BT Annual Report and Form 20-F 2004 34. Employee share schemes continued The BT Deferred Bonus Plan (DBP) was established in 1998 and awards are granted annually to employees of the group. Under this plan, shares in the company are acquired by an employee share ownership...

  • Page 118
    ...to manage its exposure to market risks from changes in interest and foreign exchange rates. The derivatives used for this purpose are principally interest rate swaps, gilt locks, currency swaps and forward currency contracts. The types of financial instrument used for investment of short-term funds...

  • Page 119
    ... values using the market discount rates, appropriate to the terms of the contracts, in effect at the balance sheet dates. At 31 March 2004, the group had deferred unrealised gains of £nil (2003 - £2 million) and losses of £5 million (2003 - £nil), based on dealer-quoted prices, from hedging...

  • Page 120
    ... on calculations of the present 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. d The fair value of the group's outstanding foreign currency and interest rate swap agreements was estimated by...

  • Page 121
    ... account the various interest rate swaps and forward foreign currency contracts entered into by the group, the interest rate profile of the group's financial assets at 31 March was: 2004 Fixed rate financial assets £m Floating rate Financial assets financial on which no assets interest is paid...

  • Page 122
    ... losses on hedges accounted for by adjusting the carrying amount of a fixed asset. During the year ended 31 March 2003, the group entered into two derivatives contracts as an investment in a UK listed equity, with limited net overall exposure. At 31 March 2003, the two contracts had a net value of...

  • Page 123
    122 Notes to the financial statements BT Annual Report and Form 20-F 2004 37. Company balance sheet Fixed assets Investment in subsidiary undertaking Total fixed assets Current assets Debtorsa Investmentsb Cash at bank and in hand Total current assets Creditors: amounts falling due within one ...

  • Page 124
    ... statements BT Annual Report and Form 20-F 2004 37. Company balance sheet continued Share e capital £m Share premium f account £m Capital redemption reserve £m Profit and loss account £m Total £m Balance at 1 April 2001 Issue of shares Capital reduction Movement relating to BT's employee...

  • Page 125
    ... between United Kingdom and United States generally accepted accounting principles Net income and shareholders' equity reconciliation statements Minority interests Accounting for share options Consolidated statements of cash ï¬,ows Current asset investments Pension costs Income statement in...

  • Page 126
    125 United States Generally Accepted Accounting Principles BT Annual Report and Form 20-F 2004 The group's consolidated financial statements are prepared in accordance with accounting principles generally accepted in the UK (UK GAAP), which differ in certain respects from those applicable in the ...

  • Page 127
    ... book value of assets contributed by the group to the joint venture is amortised over the life of the items giving rise to the difference. (i) Employee share plans Certain share options have been granted under BT save-as-you-earn plans at a 20% discount. Under UK GAAP, the share issues are recorded...

  • Page 128
    ... loss recognised in the income statement is based on the asset's fair value, being either market value or the sum of discounted future cash ï¬,ows. (n) Discontinued operations Under UK GAAP, the disposal of certain lines of business and joint ventures and associates are shown as discontinued...

  • Page 129
    ... United States Generally Accepted Accounting Principles BT Annual Report and Form 20-F 2004 ii Net income and shareholders' equity reconciliation statements The following statements summarise the material estimated adjustments, gross of their tax effect, which reconcile net income and shareholders...

  • Page 130
    ... United States Generally Accepted Accounting Principles BT Annual Report and Form 20-F 2004 iv Accounting for share options Under UK GAAP, the company does not recognise compensation expense for the fair value, at the date of grant, of share options granted under the employee share option schemes...

  • Page 131
    130 United States Generally Accepted Accounting Principles BT Annual Report and Form 20-F 2004 vi Current asset investments continued At 31 March 2004, the group held trading investments (as defined by US GAAP) with fair values totalling £423 million (2003 - £935 million). Held-to-maturity ...

  • Page 132
    ... Actual return on scheme assets Employer's contributionsa Employees' contributions Other changes Benefits paid or payable Fair value of scheme assets at the end of the year 2004 £m 2003 £m 22,757 4,195 1,026 148 5 (1,456) 26,675 2004 £m 26,597 (3,255) 607 156 13 (1,361) 22,757 2003 £m Funded...

  • Page 133
    ... of the investment activities is to maximise investment return within an acceptable level of risk, taking into consideration the liabilities of the main pension scheme. Year ended 31 December 2003 Fair value £bn % Target % Equities Fixed interest bonds Index linked securities Property Cash 17...

  • Page 134
    133 United States Generally Accepted Accounting Principles BT Annual Report and Form 20-F 2004 ix US GAAP developments In January 2003, the Financial Accounting Standards Board (FASB) issued Financial Interpretation No. 46 (FIN 46), ''Consolidation of Variable Interest Entities'' and in December ...

  • Page 135
    ... In April 2003, BT (Worldwide) Limited changed its name to BT Limited. Share capital b = billions m = millions Activity a Issued Percentage owned Country of b operations Joint Ventures Albacom SpA LG Telecom Communication related services and products provider Mobile cellular telephone system...

  • Page 136
    135 BT Annual Report and Form 20-F 2004 Quarterly analysis of turnover and profit Year ended 31 March 2004 Quarters Total turnover Group's share of associates' and joint ventures' turnover Group turnover Other operating income Group operating profit Group's share of operating (loss) profit of ...

  • Page 137
    ... and interest on long-term borrowings, to average capital employed. Capital employed is represented by total assets, excluding goodwill, less current liabilities, excluding corporate taxes and dividends payable, and provisions other than those for deferred taxation. Year-end figures are used in the...

  • Page 138
    ... growth in absolute call minutes. 2000 2001 2002 2003 2004 UK exchange line connections Business ('000) % growth (decline) over previous year Residential ('000) % growth (decline) over previous year Service providers ('000) % growth (decline) over previous year Total exchange line connections ('000...

  • Page 139
    ...equipment in or adjacent to its exchanges (local loop unbundling), to make it easier for BT's customers to route some or all of their calls over competitors' networks (carrier pre-selection) and by the introduction of a wholesale access product (wholesale line rental). Reduction in BT's market share...

  • Page 140
    ... investment market performance, interest rates and the general trend towards longer life expectancy, all of which are outside the control of BT. In the event that investment returns decline or life expectancy increases, the cash funding cost to BT may increase and may have a significant effect...

  • Page 141
    ...and ADS prices Capital gains tax (CGT) Rights issue Demerger of mmO2 Analysis of shareholdings Dividends Dividend mandate Dividend investment plan Global Invest Direct Total shareholder return Results announcements Individual savings accounts (ISAs) ShareGift Unclaimed Assets Register Exchange rates...

  • Page 142
    ...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 for BT and its principal products and services; ï¬,uctuations...

  • Page 143
    ...'s ordinary shares on the London Stock Exchange and, as a result, are likely to affect the market price of the ADSs on the New York Stock Exchange. Capital gains tax (CGT) The rights issue in June 2001 and the demerger of mmO2 in November 2001 adjusted the value for capital gains tax purposes of BT...

  • Page 144
    ... of the year ended 31 March 2004 was paid on 9 February 2004 to shareholders on the register on 30 December 2003. The dividends paid or payable on BT shares and ADSs for the last five years are shown in the following table. The dividends on the ordinary shares exclude the associated tax credit. The...

  • Page 145
    ... approval at the annual general meeting. The US dollar amount of the final dividend of 53 pence per ADS to be paid to holders of ADSs will be based on the exchange rate in effect on 6 September 2004, the date of payment to holders of ordinary shares. As dividends paid by the company are in pounds...

  • Page 146
    145 Additional information for shareholders BT Annual Report and Form 20-F 2004 Total Shareholder Return Total shareholder return (TSR) is the measure of the returns that a company has provided for its shareholders, reï¬,ecting share price movements and assuming reinvestment of dividends. It is, ...

  • Page 147
    ...in effect on the last day of each month during the relevant period. On 14 May 2004, the most recent practicable date for this annual report, the Noon Buying Rate was US$1.7572 to £1.00. Memorandum and Articles of Association The following is a summary of the principal provisions of BT's memorandum...

  • Page 148
    ... 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's shareholders must have...

  • Page 149
    ... information for shareholders BT Annual Report and Form 20-F 2004 (g) Untraced shareholders BT may sell any shares after advertising its intention and waiting for three months if the shares have been in issue for at least 10 years, during that period at least three dividends have become payable on...

  • Page 150
    ... of owning and disposing of the ordinary shares or ADSs. In particular, this summary is based on (i) current UK tax law and UK Inland Revenue practice and US law and US Internal Revenue Service (''IRS'') practice, including the Internal Revenue Code of 1986, as amended, Treasury regulations...

  • Page 151
    ... to any UK withholding tax on IRS Form 8833 (TreatyBased Return Position Disclosure Under Section 6114 or 7701(b)). For purposes of calculating the foreign tax credit, dividends paid on the ordinary shares or ADSs will be treated as income from sources outside the United States and generally will...

  • Page 152
    ... 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 both Conventions) which provides for the exchange of information. BT currently believes that dividends paid with respect to its ordinary shares...

  • Page 153
    ...government laws, decrees or regulations in the United Kingdom that restrict the export or import of capital, including, but not limited to, UK foreign exchange control restrictions, or that affect the remittances of dividends or other payments to non-resident holders of the company's ordinary shares...

  • Page 154
    ... about their shareholding, they should contact the Registrar (the address can be found below). Lloyds TSB Registrars maintain BT Group's share register and the separate BT Group EasyShare and BT Employee Share Ownership Scheme registers. They also provide a Shareholder Helpline service on Freefone...

  • Page 155
    ... Financial statements Equity investees Tax depreciation Other additional capital Accounts payable and accrued liabilities Current liabilities Long-term liabilities Other non-current assets Employee stock benefit plans Capital lease Fiscal year Non-current investments Ownership with absolute rights...

  • Page 156
    ... in this Annual Report Section Page 1 2 3 3A Identity of directors, senior management and advisors Offer statistics and expected timetable Key information Selected financial data Not applicable Not applicable Five year financial summary Additional information for shareholders Exchange rates Not...

  • Page 157
    ...Financial Review Capital resources Board of directors and Operating Committee Report on directors' remuneration Notes to the financial statements Pension costs Directors' emoluments Board of directors and Operating Committee Report of the directors Directors Corporate governance Report on directors...

  • Page 158
    ..., dividend arrearages and delinquencies Material modifications to the rights of security holders and use of proceeds Controls and procedures 57 57 57 117 54 16A Audit committee financial expert 16B Code of ethics 16C Principal accountants fees and services 17 18 Financial statements Financial...

  • Page 159
    ...and development 17, 75, 89, 90, 136 Restructuring 8, 26, 37 Return on capital employed 43, 136 Rights issue 8, 26, 105, 142 Risk factors 138-139 Risk management 117-121 Sarbanes-Oxley Act 53, 57 Segmental analysis 84-87 Share and ADS prices 142 Share capital 25, 83, 105, 122-123 Share option schemes...

  • Page 160
    BT Group plc Annual Report and Form 20-F 2004 BT Group plc Registered office: 81 Newgate Street, London EC1A 7AJ Registered in England and Wales No. 4190816 Produced by BT Group Designed by Paufï¬,ey, London Typeset by Greenaways Printed in England by Pindar plc Printed on elemental chlorine-free ...