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Annual Report & Form 20-F 2008
Keeping BT ahead
of the game
BT Group plc Annual Report & Form 20-F 2008

Table of contents

  • Page 1
    Annual Report & Form 20-F 2008 Keeping BT ahead of the game

  • Page 2
    ...1993, the UK Government sold all of its shareholding in British Telecommunications plc in three public offerings. This is the Annual Report for the year ended 31 March 2008. It complies with UK regulations and is the Annual Report on Form 20-F for the US Securities and Exchange Commission to meet US...

  • Page 3
    ... paid out as part of share buy back programme C overage and support in 172 countries from our flagship MPLS network service; 25% growth in MPLS revenue £8 billion BT Global Services order intake 1 2.7 million broadband lines in the UK (DSL + LLU) 234 million Openzone minutes used in 2008...

  • Page 4
    ... back programme i maintain our solid investment grade credit rating invest in the growth of the business How we performed Revenue up 2% BT Operate and BT Design fully operational. Successful integration of networks, IT processes and technical product design £1.5 billion returned in 2008...

  • Page 5
    ...networked 2008 revenue by customer segment (%) Major corporate 26 37 Non-UK regional revenue growth in 2008 next generation TV to voice over innovative calls packages for homes and businesses to value-added services such as online trading communities and comprehensive IT support. Business...

  • Page 6
    ... by line of business (%) BT Group BT Global Services BT Retail BT Wholesale Openreach 18 4 BT Global Services BT Retail BT Wholesale 38 Openreach BT Design BT Operate 40 How we are structured We are meeting the needs of our different customer groups - major corporates, government and financial...

  • Page 7
    ... environment should enable us to make the necessary investments in the next generation of the UK's communications infrastructure with confidence. In the European Union we are also looking for a level playing field that allows BT access to other markets. 6 BT Group plc Annual Report & Form 20-F

  • Page 8
    ...driven global communications services company. We also expect our free cash flow to be at a similar level to 2008 and to increase dividends per share in 2009. I believe that we have the right team in place and the right culture throughout the organisation - an absolute commitment to the customer and...

  • Page 9
    ... share. That's grown more than two and a half times. In 2002, recognising that parts of our traditional business were in decline, we adopted the strategy of growing new wave revenue - from broadband, mobility and global networked IT services. In 2008, new wave activities accounted for 39% of total...

  • Page 10
    ...Ben Verwaayen Chief Executive of major managed network services contracts worth a projected total of £1.8 billion over their lifetimes. These range from a major outsourcing contract with the Post Office to providing enhanced connectivity for mobile operators T-Mobile, Orange and Virgin Media. New...

  • Page 11
    ...New entertainment services Support and security Traditional services for consumers Broadband for business customers New services for business customers Wi-Fi in the community Managed network services contracts New wholesale products Traditional wholesale portfolio Openreach and the UK access network...

  • Page 12
    ... value to our customers' lives and businesses. Revenue from traditional services was £12,661 million BT Group plc Annual Report & Form 20-F 11 Report of the Directors " networked IT services globally; " local, national and international communications services; " broadband and internet products...

  • Page 13
    ... contracts (see Networked IT services on page 15) as part of this long-term partnership strategy. At 31 March 2008, around 80% of our global services business unit's major contracts were for five or more years, and 70% of consumer revenue was under contract. 12 BT Group plc Annual Report & Form...

  • Page 14
    ... functional units: BT Design and BT Operate. BT Global Services is a global business operator; BT Retail, BT Wholesale and Openreach operate mainly within the UK, where BT is the largest communications services provider to the residential and business markets. BT Global Services Revenue in 2008...

  • Page 15
    ... centres, using a " other communications providers in the UK (including our wholesale customers and those who receive access network services provided by Openreach). For financial reporting purposes, we continue to report by lines of business (see Financial review). 14 BT Group plc Annual Report...

  • Page 16
    ... to productivity and competitive advantage. In 2008, we secured networked IT services orders in the UK and around the world with a total value of £5 billion. 1 2 (fiscal year) www.economist.com/countries/china (fiscal year) www.economist.com/countries/india BT Group plc Annual Report & Form 20...

  • Page 17
    ... secured a number of other major networked IT service contracts across all sectors, including financial services, energy and government. At contract value, these included: Date May 2007 Customer AGIS (the German IT subsidiary of insurance company Allianz) Nature of contract Five-year contract, part...

  • Page 18
    ...% over last year. More than half of them opted for one of our premium packages. In addition to these major deals, we signed a large number of smaller networked IT services contracts in 2008 with a wide range of customers from different sectors, including Credit BT Group plc Annual Report & Form 20...

  • Page 19
    ... we made calls to our customer service and helpdesks free. At 1 April 2008, 99% of the numbers to our customer service and helpdesks with an 0845 or 0870 prefix were switched to free 0800 numbers. The other numbers will be changed over the coming months. 18 BT Group plc Annual Report & Form 20-F

  • Page 20
    ... with potential customers and partners. At 31 March 2008, there were over 65,000 members of the BT Tradespace community, and we were adding around 2,000 each week; and applications designed to help small businesses with administration and cost control. A free online service, it addresses the core...

  • Page 21
    ...signed a number of major managed network services contracts worth a projected total of £1.8 billion over their lifetimes. These ranged from a comprehensive outsourcing deal with the Post Office, to providing enhanced connectivity for other communications providers' networks: Date May 2007 Customer...

  • Page 22
    ...providers to offer telephony services with their own brand and pricing structure over BT's network. At 31 March 2008, Openreach was providing over 22 million WLR lines to BT lines of business and just under 4.7 million to BT Group plc Annual Report & Form 20-F 21 Openreach and the UK access network...

  • Page 23
    ... in those exchanges. There are two types of unbundled line: products, Ethernet resilience is now a viable and cost-effective option for enhancing service security. Deploying fibre to the premises In June 2007, Openreach completed an initial consultation with communications providers about the...

  • Page 24
    ... BT actively reviews its portfolio of assets and acquisition opportunities in its target markets. We will consider acquiring companies if they bring us skills, technology, geographic reach or time to market advantage for new products and services. March 2008 BT Group plc Annual Report & Form...

  • Page 25
    ...other non-Fiat business customers throughout Italy, for approximately E80 million, further reinforcing our position in the Italian market. In 2007, our acquisitions included dabs.com, PlusNet (an internet service provider) and International Network Services 24 BT Group plc Annual Report & Form 20-F

  • Page 26
    ... under BT Group plc Annual Report & Form 20-F 25 " the payment of administrative charges; and " the provision of information to Ofcom when required. Conditions applying to BT Universal service conditions BT is the designated supplier of universal service for the UK, excluding the Hull area where...

  • Page 27
    ... low and high bandwidth services and equipment. Ofcom will carry out a review of the PPC charge control before the existing control expires on 30 September 2008. In its consultation on the business connectivity market review, Ofcom has proposed to remove our SMP designation in relation to higher...

  • Page 28
    ... service performance. The consultation is expected to begin in early summer 2008 and any newly proposed regulatory measures should take effect during 2009. The implementation of the Undertakings and continuing changes to the market for Openreach products have resulted in changes to Openreach's cost...

  • Page 29
    ..., shareholders, the company and themselves. Building a global team Our people strategy continued to support the transformation of BT in our drive to become 'number one for customer service'. As we increasingly operate globally, so our workforce outside the UK continues to grow. At 31 March 2008, BT...

  • Page 30
    ... responses). The survey generates around 5,000 feedback reports for managers and their teams across the business, helping to promote effective team working. Employees are kept informed about our business through a wide range of communications channels, including our online news service, bi-monthly...

  • Page 31
    ... new programmes and services over 21CN and improving 'right first time' performance. We continued the radical transformation of the BT systems estate, with the aim of achieving year-on-year cost reductions at the same time as improving speed to market and enhancing the customer experience...

  • Page 32
    ... force - chaired by Ben Verwaayen and including 18 chairmen and CEOs from some of the UK's largest companies - resulted in the publication of a report, Climate change - everyone's business, in November 2007. The report concluded that all businesses have a BT Group plc Annual Report & Form 20-F 31

  • Page 33
    ... is a new area of focus for BT. During 2008, we established a set of sustainability criteria for assessing potential new products and services. In 2009, these criteria will be used as a part of our standard development process. During the year we also developed an 'opportunities map' to help us...

  • Page 34
    ...including any new services that we may offer in the future), nor extend the services which we have to provide to other communications providers. These controls may adversely affect our market share, the severity of competition and our future profitability. BT Group plc Annual Report & Form 20-F 33

  • Page 35
    ... measures including local loop unbundling, carrier pre-selection (making it easier for BT customers to route some or all of their calls over other communications providers' networks) and wholesale access products. Reduction in our share of the fixed-network market may lead to a fall in our revenue...

  • Page 36
    ... a business continuity strategy in place, designed to deal with such catastrophic events including, for example, major terrorist action, industrial action, extreme computer virus attack, hurricane or ï¬,ooding. A failure to deliver that strategy may lead to a BT Group plc Annual Report & Form 20...

  • Page 37
    ... information Other operating income Operating costs Operating profit 49 Taxation 49 49 50 Total tax contribution Tax strategy Tax accounting 50 Financial risk and capital management 50 52 52 52 53 Financial risk management Capital management Share buy back Capital resources Off-balance sheet...

  • Page 38
    ... of the key financial performance measures before and after specific items and is discussed further in this Financial review. Summarised group income statement ... Year ended 31 March 2008 £m 2007 £m 2006 £m Revenue Other operating incomea Operating costsa Operating profit Before speci...

  • Page 39
    ...fitable growth in new wave markets. Revenue from networked IT services, broadband and mobility all grew strongly. Revenue from networked IT services increased by 10% to £4,841 million (2007: £4,386 million, 2006: £4,065 million) 38 BT Group plc Annual Report & Form 20-F Major corporate Business...

  • Page 40
    ... (2%). New wave revenue represented 64% of all major corporate revenue in 2008, compared with 62% in 2007. Our BT Global Services line of business, which serves major corporate customers, achieved total contract wins of £8.0 billion in 2008 (2007: £9.3 billion, 2006: £8.9 billion). In the UK, we...

  • Page 41
    ... 3,400 employees), property exit costs and costs relating to the a b Line of business results Revenue Operating profit (loss) b Specific items 2008 £m 2007 b 2006 2008 £m 2007 b 2006 2008 £m 2007 b 2006b £m ... £m £m £m £m £m BT Global Services BT Retail BT Wholesale...

  • Page 42
    ...of business for 2008. The majority of the internal trading relates to Openreach and arises on rentals, and any associated connection or migration charges, of the UK access lines and other network products to the customer-facing lines of business, both directly, and also indirectly through BT Operate...

  • Page 43
    .... Our strategy of getting closer and becoming more important to our customers by offering high value propositions and services that can directly improve their business performance has delivered good growth in revenue. Revenue from networked IT services contracts grew by 9% to £4,385 million in 2008...

  • Page 44
    ... 3% in 2007. The accelerated rate of growth was driven by BT Business which continues to develop simple and complete solutions for the SME market. Our portfolio includes IP infrastructure - WAN/ LAN, IP telephony, data centre services, security, applications and outsourcing. The 2008 results include...

  • Page 45
    Report of the Directors Financial review Number of installed external WLR and LLU lines at 31 March (000s) 5,000 4,000 3,000 2,000 1,000 0 LLU WLR 2006 2007 2008 ... communications providers switching to LLU provided by Openreach (£81 million reduction). Revenue from our traditional products ...

  • Page 46
    ...working capital balances Creation of Openreach and delivery of the Undertakings Costs associated with settlement of open tax years Other operating income Net loss on sale of group undertakings Profit on sale of non current asset investments 10 Finance income Interest on settlement of open tax years...

  • Page 47
    ... Directors Financial review 3.6 times interest covera in 2008 a Before specific items and net finance income associated with the group's defined benefit pension scheme ... In 2008, specific operating costs included £402 million (2007 and 2006: £nil) in respect of restructuring costs relating...

  • Page 48
    ... offset by a tax credit of £41 million on certain specific items and a further specific tax credit of £938 million arising on the settlement of substantially all open UK tax matters relating to ten tax years up to and including the 2004/05 year. The net BT Group plc Annual Report & Form 20-F 47

  • Page 49
    ...agreed with 48 BT Group plc Annual Report & Form 20-F Ofcom. In 2008, we have continued to make targeted acquisitions to expand our global reach and enhance our capabilities in specific areas. Our net cash expenditure on acquiring new businesses was £364 million in 2008 (2007: £237 million, 2006...

  • Page 50
    ... BT and our customers. We seek to Free cash ï¬,ow achieve this through engagement with our stakeholders including HMRC and other tax authorities, partners and 2008 2007 2006 customers. The BT Board regularly reviews the group's tax £m £m £m ...strategy. Net cash inï¬,ow from operating The Board...

  • Page 51
    .... In each of the three years 2006, 2007 and 2008 the cash tax paid is lower than the income statement charges. This is partly due to the phasing of UK corporation tax instalments, the level of provisioning for risks, taxation of specific items, the impact of deferred tax and the impact of overseas...

  • Page 52
    ...-term requirements are regularly reviewed and managed by the centralised treasury operation within the parameters set by the Board. Our liquidity and funding management process includes projecting cash ï¬,ows and considering the level of liquid assets in relation thereto, monitoring balance sheet...

  • Page 53
    ... in 2008. These funding related actions ensure we are in a strong position and able to fund the Board approved projected business requirements beyond 2009. Price risk management We have limited exposure to equity securities price risk on investments that we hold. Further information on financial...

  • Page 54
    ... shares of £1,529 million and tax charges on items taken to equity of £877 million. BT's non current assets totalled £22,829 million at 31 March 2008, of which £15,307 million were property, plant and equipment, principally forming the UK fixed network. At 31 March 2007, non current assets...

  • Page 55
    ... a surplus. The market value of the equity investments had increased and the investment income and contributions received by the scheme exceeded the benefits paid in the three years ended 31 December 2005. However, longer life expectancy assumptions and a lower discount rate used to calculate the...

  • Page 56
    ... determined at a corporate level independently of ongoing trading operations such as dividends, share buy backs, acquisitions and disposals and repayment of debt. Our use of the term free cash ï¬,ow does not mean that this is a measure of the funds that are available for distribution to shareholders...

  • Page 57
    .... There are material limitations in the use of alternative performance measures and our use of the term net debt does not necessarily mean that the cash included in the net debt calculation is available to settle the liabilities included in this measure. 56 BT Group plc Annual Report & Form 20-F

  • Page 58
    ... directors Non-executive directors Operating Committee 79 Business policies 79 79 79 79 79 79 80 80 81 81 81 Responsible business Political donations Pension funds Payment of suppliers Financial statements Takeover Directive disclosure Financial instruments Internal control and risk management...

  • Page 59
    ... Business Dialogue, member of the CBI International Advisory Board, the Chartered Management Institute and BERR's US/UK Regulatory Taskforce. A Chartered Accountant, he was knighted in 2007 for his services to the accountancy profession. Aged 60. Franc ¸ois Barrault Chief Executive, BT Global...

  • Page 60
    ... vice-president and chief strategy officer, president mobile phones and president telecommunications. Matti is foundation board chairman of the International Institute for Management Development (IMD), a non-executive director of UPM-Kymmene Corporation, a member of the Board of Helsinki University...

  • Page 61
    ... 1 June 2007 2007 2008 2008 2008 Operating Audit c Remuneration d Nominating e Responsible and Sustainable Business f Pension Scheme Performance Review Group g Equality of Access Board b Ian Livingston becomes Chief Executive, BT Group on 1 June 2008. Ben Verwaayen steps down as Chief Executive on...

  • Page 62
    ... 2008. Main Board committees The Operating Committee, the key management committee, meets weekly and is chaired by the Chief Executive. The other members are the Group Finance Director and the Chief Executives of BT Retail, BT Wholesale and BT Global Services. The Secretary attends all meetings...

  • Page 63
    ... business risks, including risks relating to IT security, fraud and related matters, are properly identified and managed, the effectiveness of internal control, financial reporting, accounting policies and procedures, and BT's statements on internal controls before they were agreed by the Board...

  • Page 64
    ... to Ian Livingston as CEO BT Retail, as announced on 8 April 2008. Ian Livingston becomes Chief Executive and Gavin Patterson joins the Board on 1 June 2008. Ben Verwaayen steps down as a director on 30 June 2008. BT Group plc Annual Report & Form 20-F 63 Report of the Directors Governance

  • Page 65
    ... services to the company. The Committee also regularly consults the Chief Executive, the Group Finance Director, the Group HR Director, the Director Reward and Employee Relations, and the Secretary. " Remuneration review (audited) Directors' emoluments Former directors Loans Pensions Share options...

  • Page 66
    ... market. Annual bonus The annual bonus is linked to corporate performance targets set at the beginning of the financial year. In 2007/08, 35% of the scorecard related to earnings per share (EPS), 35% related to free cash ï¬,ow and 30% related to customer service, all of which support BT's strategy...

  • Page 67
    ... executives in 2005/06. The annual bonus is linked to Openreach targets and long-term incentives are paid in cash instead of shares. 66 BT Group plc Annual Report & Form 20-F All of the above companies were members of the group as at 1 April 2006. Telecom Moviles was also a member at that date...

  • Page 68
    ... incapacitated. BT Group plc Annual Report & Form 20-F 67 Report of the Directors Awards of incentive shares vest after a performance period of three years, if the participant is still employed by BT and a performance measure has been met. Dividends paid on the shares during the three-year period...

  • Page 69
    ... retire from the 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. 68 BT Group plc Annual Report & Form 20-F

  • Page 70
    ... other person pursuant to which any director or executive officer was selected to serve. There are no family relationships between the directors. BT Group plc Annual Report & Form 20-F 69 Report of the Directors Governance } The contract is terminable by the company on 12 months' notice and by...

  • Page 71
    ... used. 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. 250 230 210 190 170 150 130 110 90 70 BT's total shareholder return (TSR) performance over the five financial years to 31 March 2008...

  • Page 72
    ...as a member of the Board Committee for Responsible and Sustainable Business for which she receives an annual fee of £6,500. n John Nelson retired as a director on 13 January 2008. o Sir Anthony Greener retired as a director on 30 September 2006. BT Group plc Annual Report & Form 20-F 71 Report of...

  • Page 73
    ... his salary towards pension provision. The company paid £33,840 into his personal pension plan, plus a cash payment of £203,660 representing the balance of the pension allowance for the financial year 2007/08. BT also provides him with a lump sum death in service benefit of four times his salary...

  • Page 74
    ...On that date, BT's TSR was at 53rd position against the FTSE 100. As a result, all of the options have lapsed. BT Group plc Annual Report & Form 20-F 73 Report of the Directors a-d As required by the Companies Act 1985 Schedule 7A. a-b The values for Hanif Lalani represent the deferred pension to...

  • Page 75
    ... European Telecom Sector. As a result, 75% of shares awarded lapsed on that date and 25% of the shares will be transferred to participants in May 2008. c The performance periods for the ISP 2006 and ISP 2007 end on 31 March 2009 and 31 March 2010 respectively. 74 BT Group plc Annual Report & Form...

  • Page 76
    ...was calculated using the average middle market price of a BT share for the three days prior to the grant. The awards will vest, subject to meeting a performance condition, on 31 March 2010. The performance measure is relative TSR compared with a group of companies from the European Telecom Sector as...

  • Page 77
    ... end of the three-year deferred period if those participants are still employed by BT Group. Total number of award shares 31 March 2008 Monetary value of vested award £000 ...B Verwaayen b 1 April 2007 a Awarded Dividends re-invested Vested Lapsed Vesting date Price at grant Market price...

  • Page 78
    ... the company on 31 December 2007. d Paul Reynolds resigned as a director on 14 September 2007. By order of the Board Maarten van den Bergh Deputy Chairman and Chairman of Remuneration Committee 14 May 2008 BT Group plc Annual Report & Form 20-F 77 Report of the Directors Governance H Lalani...

  • Page 79
    ... reserved to the group's most senior executives, and the latest financial information. There are also visits to key BT locations and meetings with members of the Operating Committee and other key senior executives. Each year, directors participate in BT's 78 BT Group plc Annual Report & Form 20-F

  • Page 80
    ... information, including details of charitable donations made by the group, is available in Business review - Our wider responsibilities on page 30. Pension funds Report of the Directors BT's two main pension funds - the BT Pension Scheme and the BT Retirement Plan - are not controlled by the Board...

  • Page 81
    ... the operation of internal control procedures in the group during the financial year. It reviews reports from the internal and external auditors and reports its conclusions to the Board. The Audit Committee has carried out these actions for the 2008 financial year. New subsidiaries acquired during...

  • Page 82
    ... by this Annual Report & Form 20-F, have concluded that, as of such date, BT's disclosure controls and procedures were effective to ensure that material information relating to BT was made known to them by others within the group. The Chief Executive and Group Finance Director have also provided the...

  • Page 83
    ... shares were retained as treasury shares. All the shares were purchased in an on-market programme of buying back BT shares, started in November 2003, as part of our shareholder distribution strategy. By order of the Board Andrew Parker Secretary 14 May 2008 82 BT Group plc Annual Report & Form...

  • Page 84
    ... financial statements Glossary of terms and US equivalents Report of the independent auditors - parent company Financial statements of BT Group plc Subsidiary undertakings and associate Quarterly analysis of revenue and profit Selected financial data Financial statistics Operational statistics

  • Page 85
    ... law and International Financial Reporting Standards (IFRS) as adopted by the European Union (EU) and issued by the IASB, and for preparing the parent company financial statements in accordance with applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting...

  • Page 86
    ... the Financial Services Authority, and we report if it does not. We are not required to consider whether the board's statements on internal control cover all risks and controls, or form an opinion on the effectiveness of the group's corporate governance procedures or its risk and control procedures...

  • Page 87
    Financial statements Report of the independent auditors 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 income statements, Group balance sheets, Group cash ï¬,ow ...

  • Page 88
    ... Retirement benefit plans Employees Share based payments Audit and non audit services Financial instruments and risk management 88 96 97 98 99 100 Accounting policies Group income statement Group statement of recognised income and expense Group cash ï¬,ow statement Group balance sheet Notes to...

  • Page 89
    ... BT Group plc (''the company'') and entities controlled by the company (its subsidiaries) and incorporate its share of the results of jointly controlled entities (joint ventures) and associates using the equity method of accounting. The results of subsidiaries acquired or disposed of during the year...

  • Page 90
    ...the end of the licence period. Brands, customer lists and customer relationships Intangible assets acquired through business combinations are recorded at fair value at the date of acquisition. Assumptions are used in estimating the fair values of acquired intangible assets BT Group plc Annual Report...

  • Page 91
    ...' charges, materials, payments on account and directly attributable overheads. Depreciation Depreciation is provided on property, plant and equipment on a straight line basis from the time the asset is available for use, so as to write off the asset's cost over the estimated useful life taking...

  • Page 92
    ...designated by management. Financial assets held in this category are initially recognised and subsequently measured at fair value, with changes in value recognised in the BT Group plc Annual Report & Form 20-F 91 (xvii) Taxation Current tax, including UK corporation tax and foreign tax, is provided...

  • Page 93
    ...categories. Available-for-sale financial assets are carried at fair value, with unrealised gains and losses (except for changes in exchange rates for monetary items, interest, dividends and impairment losses which are recognised in the income statement) are recognised in equity until the financial...

  • Page 94
    ... Annual Report & Form 20-F 93 Financial statements Share capital Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares are shown in equity as a deduction from the proceeds received. Shares in the parent company, BT Group plc, held by employee...

  • Page 95
    ... 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 rate at which the future pension payments are discounted. We use estimates for all these factors in determining the pension costs and liabilities...

  • Page 96
    ... payments subsequently re-measured at fair value through the income statement. IFRS 3 (Revised) is applicable prospectively to business combinations effected on or after the effective date. The group is currently assessing the potential impact of this amendment upon the results and net assets...

  • Page 97
    ...nancial statements Group income statement ... Year ended 31 March 2008 Notes Before specific items £m Specific a items £m Total £m Revenue Other operating income Operating costs Operating profit Finance expense Finance income Net finance expense Share of post tax loss of associates and...

  • Page 98
    ... on cash ï¬,ow hedges: - fair value gains (losses) - reclassified and reported in net profit - reclassified and reported in non current assets Tax impact of above items Net gains recognised directly in equity Total recognised income and expense for the year Attributable to: Equity shareholders of...

  • Page 99
    ... of ordinary shares by subsidiary Net cash used in financing activities Effect of exchange rate changes on cash and cash equivalents Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at the start of the year Cash and cash equivalents at the end of the year 9 (1,236...

  • Page 100
    ... financial statements on pages 88 to 138 and 144 were approved by the Board of Directors on 14 May 2008 and were signed on its behalf by Sir Michael Rake Chairman Ben Verwaayen Chief Executive Hanif Lalani Group Finance Director BT Group plc Annual Report & Form 20-F 99 Financial statements

  • Page 101
    ... internal functional units, BT Operate and BT Design. The activities of each of the customer facing lines of business are as follows: BT Global Services serves major corporate and carrier organisations across the world providing high-performance managed networked IT services, application management...

  • Page 102
    ...,514 - 19,514 Operating results by line of business BT Global Services £m BT Retail £m BT Wholesale £m Openreach £m Other £m Total £m ... Year ended 31 March 2008 Operating profit before specific items Specific items Segment result Share of post tax loss of associates and joint ventures...

  • Page 103
    ...nancial statements 1. Segmental analysis continued ... Year ended 31 March 2006 (restated) BT Global Services £m BT Retail £m BT Wholesale £m Openreach £m Other £m Total £m Operating profit before specific items Specific items Segment result Share of post tax profit of associates...

  • Page 104
    ... 4,078 993 128 1,748 24,155 3,023 187 103 26 - 3,339 2,951 203 73 20 - 3,247 71 137 130 142 - 480 152 27 164 - - 343 Total assets and capital expenditure are allocated to geographical areas based on the location of the asset. BT Group plc Annual Report & Form 20-F 103 Financial statements

  • Page 105
    ... 227 - 227 3. Operating costs 2008 £m 2007 £m 2006 £m ... Costs by nature Staff costs: Wages and salaries Social security costs Pension costs Share based payments Total staff costs Own work capitalised Net staff costs Depreciation of property, plant and equipment: Owned assets Under finance...

  • Page 106
    ... - (41) 96 BT Group plc Annual Report & Form 20-F 105 Financial statements a The loss on disposal in the current and prior year relates primarily to the disposal of the group's satellite broadcast service assets (2008: £10 million, 2007: £7 million, 2006: £nil). b In 2007 the group disposed of...

  • Page 107
    ...Annual General Meeting and therefore the liability of approximately £805 million (2007: £825 million) has not been included in these financial statements. The proposed dividend will be payable to all shareholders on the Register of Members on 22 August 2008. 106 BT Group plc Annual Report & Form...

  • Page 108
    ... share based payments Total taxation on items taken directly to equitya a (1) 29 - 804 832 (17) 62 877 - 62 - 424 486 (12) (70) 404 - (45) 9 629 593 - (5) 588 2008 includes a £50 million expense arising from the re-measurement of deferred tax balances at 28%. BT Group plc Annual Report & Form...

  • Page 109
    ... sale of group undertakings Profit on sale of non current asset investments Restructuring costs Property rationalisation costs Creation of Openreach and delivery of the Undertakings Write off of circuit inventory and other working capital balances Costs associated with settlement of open tax years...

  • Page 110
    ...but it is a key indicator used by management in order to assess operational performance and balance sheet strength. 2008 £m 2007 £m ... Analysis of net debt Loans and other borrowings (current and non current) Less: Cash and cash equivalents Current asset investments Adjustments: To retranslate...

  • Page 111
    ...2008 of £720 million (2007: £741 million) in respect of internally developed computer software. Impairment tests of goodwill The group performs an annual goodwill impairment test, based on cash generating units (CGUs). BT Global Services is a CGU. BT Retail comprises four CGUs: Consumer; Business...

  • Page 112
    ... by the board covering a five year period. They reï¬,ect management's expectation of revenue growth, operating costs and margin for each CGU based on past experience. Cash ï¬,ows beyond the five year period have been extrapolated using an estimated terminal growth rate of 0%. This rate has been...

  • Page 113
    ... ratings of counterparties with which available-for-sale investments were held were AAA in both the 2008 and 2007. Loans and receivables Loans and receivable financial assets mainly consist of fixed term loans denominated in Sterling with a fixed coupon. 112 BT Group plc Annual Report & Form...

  • Page 114
    ... 2007 Share of post tax loss Dividends received Acquisitions Disposals Exchange differences and other At 31 March 2008 45 22 (5) 3 (1) (3) 61 (5) (1) 12 (1) 13 79 3 (7) (1) 4 - 7 6 (6) (1) - (1) 8 6 48 15 (6) 7 (1) 4 67 (11) (2) 12 (2) 21 85 BT Group plc Annual Report & Form 20-F 113 Financial...

  • Page 115
    ...) Trade receivables not past due and accrued income are analysed below by line of business. The nature of customers associated with each segment is provided in note 1... Trade receivables not past due BT Global Services BT Retail BT Wholesale Other 2008 £m 2007 £m 793 224 68 5 1,090 608 299 50...

  • Page 116
    ... table. b Hedged in a designated cash flow hedge. c Hedged in a designated cash flow and fair value hedge. d Commercial paper is denominated in Sterling £nil (2007: £25 million) and Euro £107 million (2007: £769 million). BT Group plc Annual Report & Form 20-F 115 Financial statements 147 42

  • Page 117
    ...ve years Less: future finance charges Total finance lease obligations 35 127 450 612 (292) 320 329 123 415 867 (300) 567 19 63 238 320 - 320 303 56 208 567 - 567 The group's obligations under finance leases are secured by the lessors' title to the leased assets. 116 BT Group plc Annual Report...

  • Page 118
    ... £m Total £m At 1 April 2007 Charged to the income statementc Unwind of discount Acquisitions Utilised in the year Exchange differences At 31 March 2008 240 24 3 - (57) - 210 130 63 - 3 (61) 1 136 370 87 3 3 (118) 1 346 BT Group plc Annual Report & Form 20-F 117 Financial statements

  • Page 119
    ... been recognised in the income statement as a specific item and a charge of £50 million which has been recognised in equity. The decrease in deferred tax is due to the reduction in the corporation tax rate from 30% to 28% with effect from 1 April 2008. 118 BT Group plc Annual Report & Form 20-F

  • Page 120
    ... movements in equity 2008 £m 2007 £m 2006 £m ... Total equity at 1 April 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 Actuarial gains Net fair value movements on cash ï¬,ow hedges Tax on...

  • Page 121
    ...to equity At 1 April 2007 Exchange differences Net purchase of treasury shares Cancellation of treasury shares Net fair value gain on cash ï¬,ow hedges Recognised in income and expense in the year Reclassified and reported in non current assets Tax on items taken directly to equity At 31 March 2008...

  • Page 122
    ... information concerning directors' remuneration, shareholdings, pension entitlements, share options and other long-term incentive plans is shown in the audited part of the Report on directors' remuneration, which forms part of the financial statements. During 2008, the group purchased services...

  • Page 123
    ...Less: fair value of net assets acquired Goodwill arising Consideration: Cash Deferred consideration Equity shares issued Total The outï¬,ow of cash and cash equivalents is as follows: Cash consideration Less: cash acquired BT Global Services ... Year ended 31 March 2007 Fair value of consideration...

  • Page 124
    ... continued Year ended 31 March 2008 BT Global Services Comsat International On 14 June 2007, the group acquired Comsat International Inc (Comsat International) through the purchase of 100% of the issued share capital of its parent company, CI Holding Corporation. The total purchase consideration...

  • Page 125
    ... £1 million. Year ended 31 March 2007 BT Global Services International Network Services On 25 February 2007, BT acquired 100% of the issued share capital of International Network Services Inc (INS) for a total consideration of £133 million. At 31 March 2007, the fair value of INS' net assets were...

  • Page 126
    .... The total pension cost for the year in respect of the group's main defined contribution scheme was £37 million (2007: £28 million, 2006: £19 million) and £3 million (2007: £3 million, 2006: £2 million) of contributions were outstanding at 31 March 2008. BT Group plc Annual Report & Form 20...

  • Page 127
    ... market value at the balance sheet date. The liabilities of the BTPS are measured by discounting the best estimate of future cash ï¬,ows to be paid out by the scheme using the projected unit method. Estimated future cash ï¬,ows are discounted at the current rate of return on high quality corporate...

  • Page 128
    ...by employer Deficiency contributions by employer Contributions by employees Benefits paid Exchange differences Closing fair value of plan assets 38,390 2,448 (2,572) 388 320 19 (1,559) 14 37,448 35,640 2,292 993 406 520 18 (1,477) (2) 38,390 BT Group plc Annual Report & Form 20-F 127 Financial...

  • Page 129
    ... The BTPS assets are invested in UK and overseas equities, UK and overseas properties, fixed interest and index linked securities, deposits and short-term investments. At 31 March 2008, the UK equities included 10 million (2007: 14 million) ordinary shares of the company with a market value of £22...

  • Page 130
    ... is performed at 31 December as this is the financial 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 to...

  • Page 131
    ... plan for employees in the United States. It also has several share plans for executives. All share based payment plans are equity settled and details of these plans and an analysis of the total charge by type of award is set out below. 2008 £m 2007 £m 2006 £m ... Employee Sharesave Plan...

  • Page 132
    ... meeting corporate performance targets. Options must be exercised within seven years of the vesting date. BT Group Legacy Option Plan (GLOP) On the demerger of 02, BT's share option plans ceased to operate and were replaced by similar BT Group Employee Sharesave plans and the BT Group Global Share...

  • Page 133
    ... (3.7) (0.4) 0.6 12.4 3.2 1.4 (1.8) (0.3) 0.1 2.6 73.4 27.1 (12.5) (10.7) 4.1 81.4 At 31 March 2008, 2.1 million shares (2007: 15.6 million) were held in trust and 79.3 million shares (2007: 57.8 million) were held in treasury for executive share plans. 132 BT Group plc Annual Report & Form 20-F

  • Page 134
    ... on internal controls and other advice on accounting matters. BT Group plc Annual Report & Form 20-F 133 Financial statements The following fees for audit and non audit services were paid or are payable to the company's auditors, PricewaterhouseCoopers LLP, for the three years ended 31 March 2008.

  • Page 135
    ... The group borrows in the major long-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...

  • Page 136
    ...2008 were £688 million (2007: £1,297 million) for purchases of currency and £1 million (2007: £2 million) for sales of currency. The forward currency contracts had a term remaining ranging from 1 to 259 days (2007: 2 to 321 days). BT Group plc Annual Report & Form 20-F 135 Financial statements

  • Page 137
    ... regularly reviewed and managed by the centralised treasury operation within the parameters of the policies set by the Board. The group's liquidity and funding management process includes projecting cash ï¬,ows and considering the level of liquid assets in relation thereto, monitoring balance sheet...

  • Page 138
    ... new contracts. The hedged interest cash ï¬,ows arise on a semi-annual basis and extend over a period of up to 23 years (2007: 24 years). BT Group plc Annual Report & Form 20-F 137 Financial statements The group has limited exposure to equity securities price risk on investments held by the group...

  • Page 139
    ... 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 ï¬,ow models, that the group would receive or pay in order...

  • Page 140
    Financial statements Glossary of terms and US equivalents Term used in UK Annual Report Accounts Associates Capital allowances Capital redemption reserve Finance lease Financial year Freehold Interests in associates and joint ventures Leaver costs Loans to associates and joint ventures Own work ...

  • Page 141
    Financial statements Report of the independent auditors - parent company Independent auditors' report to the members of BT Group plc We have audited the parent company financial statements of BT Group plc for the year ended 31 March 2008 which comprise the balance sheet and the accounting policies...

  • Page 142
    ...Group plc were the only employees of the company during the 2008 financial year. The costs relating to qualifying services provided to the company's principal subsidiary, British Telecommunications plc, are recharged to that company. BT Group plc Annual Report & Form 20-F 141 Financial statements

  • Page 143
    ...page 144. The financial statements of the company on pages 142 to 144 were approved by the board of the directors on 14 May 2008 and were signed on its behalf by Sir Michael Rake Chairman Ben Verwaayen Chief Executive Hanif Lalani Group Finance Director 142 BT Group plc Annual Report & Form 20-F

  • Page 144
    ... 250,000,000 treasury shares were cancelled at a cost of £570 million. At 31 March 2008 607,285,178 shares (2007: 370,877,631) with an aggregate nominal value of £30 million (2007: £19 million) are held as treasury shares at cost. BT Group plc Annual Report & Form 20-F 143 Financial statements

  • Page 145
    ...BT customers Systems integration and application development Investment holding company Communication related services and products provider Data communication services Technology equipment retailer Global managed network service provider Global managed network service provider Technology consulting...

  • Page 146
    Financial statements Quarterly analysis of revenue and profit Unaudited ... Year ended 31 March 2008 Revenue Other operating income Operating costs Quarters 1st £m 2nd £m 3rd £m 4th £m Total £m 5,033 66 (4,441) 658 (55) (3) - 600 8 608 7.4p 7.2p 650 5.9p 5.8p 5,095 73 (4,647) 521 (92...

  • Page 147
    ... the accounting policies section on page 88. The directors believe these measures provide a more meaningful analysis of the trading results of the group and are consistent with the way the financial performance is measured by management. b Based on actual dividends paid and/or year end exchange rate...

  • Page 148
    ...lease back transaction in 2001. The adjustment has the effect of increasing US GAAP deferred tax assets and retained earnings by £320 million. The adjustment did not have a material impact on US GAAP net income or earnings per share. BT Group plc Annual Report & Form 20-F 147 Financial statements

  • Page 149
    ... data Summary of group cash ï¬,ow statement - IFRS ... Year ended 31 March 2008 £m 2007 £m 2006 £m 2005 £m Net cash inï¬,ow from operating activities Net cash (outï¬,ow) inï¬,ow from investing activities Net cash used in financing activities Effect of exchange rate changes on cash and cash...

  • Page 150
    ... account Total equity shareholders' funds Total assets 623 15,916 115 (2,165) 14,489 (8,091) (2,497) (50) 3,851 432 3 2 998 2,416 3,851 26,950 204 15,487 324 2,027 18,042 (12,426) (2,504) (46) 3,066 432 2 2 998 1,632 3,066 26,565 BT Group plc Annual Report & Form 20-F 149 Financial statements

  • Page 151
    ... derivative financial assets and investments. b The 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 7.6 times (2007: 11.6 times, 2006: 5.6 times). 150 BT Group plc Annual Report & Form...

  • Page 152
    ... of property plant and equipment and software a The ratio is based on profit before tax, goodwill amortisation and interest on long-term borrowings, to average capital employed. b The number of times net interest payable is covered by total operating profit before goodwill amortisation. c Return on...

  • Page 153
    ... sales order value (£m) People employed Total employees (000) a Rolling 12 month consumer revenue, less mobile POLOs, divided by average number of primary lines. b Includes line rental, broadband, select services and packages. 111.9 106.2 104.4 102.1 99.9 152 BT Group plc Annual Report & Form...

  • Page 154
    Additional information Additional information Page 154 154 165 168 171 Information for shareholders Cross reference to Form 20-F Glossary of terms Index

  • Page 155
    ... broadband and mobility); BT's network development and plans for the 21st century network; plans for the launch of new products and services; network performance and quality; the impact of regulatory initiatives on operations, including the regulation of the UK fixed wholesale and retail businesses...

  • Page 156
    ... listed, on the London Stock Exchange. Trading on the New York Stock Exchange is under the symbol 'BT'. Share and ADS prices High pence Pence per ordinary share Low pence High US$ US$ per ADS Low US$ ... Financial years ended 31 March 2004 2005 2006 2007 2008 Financial year ended 31 March 2007...

  • Page 157
    ... into US dollars using exchange rates prevailing on the date the ordinary dividends were paid. Per ordinary share Per ADS Interim £ Final £ Total £ Interim US$ Final US$ Per ADS Total US$ Interim pence Final pence Total pence ... Financial years ended 31 March 2004 2005 2006 2007 2008 3.20 3.90...

  • Page 158
    ... Dividend investment plan, cash from participants' dividends 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 2004 2004 2005 2005 2006 2006 2007 2007 2008...

  • Page 159
    ... 2008. Total number of shares purchased as part of publicly announced plans or programmes Maximum number of shares that may yet be purchased under the plans or b programmes Average price paid Total number of per share (pence - net of dealing costs) shares purchased ... Calendar month April 2007...

  • Page 160
    ...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 161
    ... of shareholders or documents from BT must give the company an address within the UK to which they may be sent. (j) Directors Directors' remuneration Excluding remuneration referred to below, each director will be paid such fee for his services as the Board decide, not exceeding £50,000 a year and...

  • Page 162
    ...-United States Tax Convention that entered into force on 31 March 2003 and the protocol thereto (the Convention), all as in effect on the date of this annual report, all of which are subject to change or changes in interpretation, possibly with retroactive effect. BT Group plc Annual Report & Form...

  • Page 163
    ... or loss (taxable as ordinary income or loss) equal to the difference (if any) between the US dollar value of the amount received based on the exchange rates in effect on the date of sale or other disposition and the settlement date. However, in the case of 162 BT Group plc Annual Report & Form 20-F

  • Page 164
    ... shares or ADSs. Furthermore, dividends paid by BT would not be 'qualified dividend income' which may be eligible for reduced rates of taxation as described above. US Holders should consult their own tax advisors regarding the potential application of the PFIC rules to BT. US information reporting...

  • Page 165
    ... information Information for shareholders ... Document Publication date Annual Review & Notice of Meeting Annual Report & Form 20-F Changing World: Sustained Values, Innovation and implementation EAB Annual Report Quarterly results releases Current Cost Financial Statements Statement of Business...

  • Page 166
    ...applicable Not applicable Selected financial data Additional information for shareholders Exchange rates Not applicable Not applicable Business review Group risk factors Contents page Business review Introduction How BT is structured Acquisitions and disposals Prior to 2008 Financial review Capital...

  • Page 167
    ... senior management and employees Directors and senior management Compensation Financial review Off-balance sheet arrangements Financial review Capital resources Corporate governance Board of Directors and Operating Committee Report on directors' remuneration Consolidated financial statements Notes...

  • Page 168
    ...Controls and procedures Audit committee financial expert Code of ethics Principal accountants' fees and services 81 81 81 133 62 158 16E 17 18 Financial statements Financial statements 86 87 145 BT Group plc Annual Report & Form 20-F 167 Additional information Purchases of equity securities...

  • Page 169
    .... It will offer ten times the bandwidth of the core MPLS network, delivering high-speed data connectivity to corporate customers and mobile operators A ARPU: average revenue per user B backhaul network: the network linking a communication provider's network with the BT exchange broadband: comes from...

  • Page 170
    ... for new BT employees from 1 April 2001 BT Softphone: an easy to download service giving free global PC-to-PC chat at any time of day BT Together: a calling plan for consumer customers, offering three low-cost calling packages BT Tradespace: an online trading community that brings businesses and...

  • Page 171
    ... networks set up by BT providing wire-free, high-speed broadband coverage which can be used for easy access to information and services in city centre locations and offer a range of new services for consumers, businesses and local authority workers WLR: wholesale line rental - enables communications...

  • Page 172
    ... and risk management 134-138 Financial review 37-56 Financial risk and capital management 50-53 Financial statements of BT Group plc 141-143 Financial statistics 150-151 Financing 47-49 Foreign currencies 89 Free cash ï¬,ow 13, 49, 55 G Geographical information 39, 103 Global Invest Direct 157...

  • Page 173
    Notes

  • Page 174
    Notes

  • Page 175
    Notes

  • Page 176
    Notes

  • Page 177
    Notes

  • Page 178
    ... No. 4190816 Produced by BT Group Designed by Greentarget, London Typeset by Bowne Printed in England by Pindar Graphics Printed on Revive 50:50 Silk, which is produced using 50% recovered waste fibre and 50% virgin wood fibre. All pulps used are elemental chlorine free (ECF). www.bt.com PHME 55430...