SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 6-K
Report of Foreign Private Issuer
Pursuant to Rule 13a-16 or 15d-16
of
the Securities Exchange Act of 1934
Report on Form 6-K dated June 2, 2004
BT Group plc
(Translation
of registrant’s
name into English)
BT Centre
81 Newgate Street
London EC1A 7AJ
England
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual reports under cover form 20-F or Form 40-F.
Form 20-F Form 40-F
Indicate by check mark whether the registrant by furnishing the information contained in the Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.
Yes No
This Report on Form 6-K is incorporated by reference into the registrant’s annual report on Form 20-F for the year ended March 31, 2004 (Commission file number 1-8819)
Enclosure: BT Group plc – Annual Report and Form 20-F 2004
This Report contains the Annual Report and Form 20-F 2004 of BT Group plc (the “Company”) for the fiscal year ended March 31, 2004. The Annual Report and Form 20-F 2004 comprises the Annual Report and accounts of the Company in accordance with United Kingdom requirements and the information required to be set out in the Company’s Annual Report on Form 20-F for the fiscal year ended March 31, 2004 (the “Form 20-F”) to the Securities and Exchange Commission. This information in the Annual Report and Form 20-F 2004 that is referenced in the “Cross-reference to Form 20-F” table on pages 155 to 157 shall be deemed to be filed with the Securities and Exchange Commission for all purposes, including incorporation by reference into the Company’s annual report on Form 20-F filed with the Securities and Exchange Commission on June 2, 2004.
BT is one of Europes leading providers of telecommunications services. Its principal activities include local, national and international telecommunications services, higher-value broadband and 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.
BT Group plc is a public limited
company registered in England and Wales, with listings on the London and New
York stock exchanges.
This
is the annual report for the year ended 31 March 2004. It complies with UK
regulations and is the annual report on Form 20-F for the Securities and Exchange
Commission to meet US
regulations.
This annual report has been sent to shareholders
who have elected to receive a copy. A separate annual review and summary financial
statement for the year ended 31 March 2004 has been issued to all shareholders.
In this annual report, references to BT Group, BT, the
group, the company, we or our are
to BT Group plc (which includes the continuing activities of British Telecommunications
plc) and its subsidiaries and lines of business, or any of them as the context
may require.
References to the financial year are
to the year ended 31 March of each year, eg the 2004 financial year refers
to the year ended 31 March 2004. Unless otherwise stated, all non-financial statistics
are at 31 March 2004.
Please see cautionary statement regarding forward-looking
statements on page 141.
BT was incorporated
in England and Wales on 30 March 2001 as Newgate Telecommunications Limited
with the registered number
4190816. The company changed its name to BT Group plc on 11 September 2001. Following
the demerger of mmO2 in
November 2001, the continuing activities of BT were transferred to BT Group.
BT Groups registered office address is 81
Newgate Street, London EC1A 7AJ.
2 | BT Annual Report and Form 20-F 2004 |
Financial headlines | |
Group turnover of £18.5 billion | |
New wave turnover of £3.4 billion, up 30% | |
Profit before taxation, goodwill amortisation and exceptional items of £2.0 billion, up 10% | |
Earnings per share before goodwill amortisation and exceptional items of 16.9 pence, up 19% | |
Net debt reduced from £9.6 billion to £8.4 billion | |
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 | 18,519 | 18,727 | 18,447 | |||
Exceptional operating costs | (33 | ) | (48 | ) | (3,990 | ) |
Total operating profit (loss) | 2,839 | 2,901 | (1,489 | ) | ||
Profit on sale of fixed asset investments | 38 | 1,700 | 169 | |||
Loss on sale of group undertakings | (2 | ) | (9 | ) | (148 | ) |
Profit on sale of property fixed assets | 14 | 11 | 1,089 | |||
Amounts written off investments | | (7 | ) | (535 | ) | |
Profit (loss) before taxation | 1,948 | 3,157 | (2,493 | ) | ||
Profit (loss) after taxation | 1,409 | 2,698 | (2,878 | ) | ||
Basic earnings (loss) per share | 16.4 | p | 31.2 | p | (34.8 | )p |
Dividends per share | 8.5 | p | 6.5 | p | 2.0 | p |
Profit before goodwill amortisation, exceptional items and taxation | 2,016 | 1,829 | 1,273 | |||
Basic earnings per share before goodwill amortisation and exceptional items | 16.9 | p | 14.2 | p | 8.8 | p |
Net cash inflow from operating activities | 5,389 | 6,023 | 5,023 | |||
Capital expenditure on property, plant and equipment | 2,673 | 2,445 | 3,100 | |||
The financial information above is discussed in the Financial review on pages 26 to 46, together with the reasons for focusing on the results from continuing activities before goodwill amortisation and exceptional
items.
The Consolidated financial
statements are on pages 74 to 134.
3 | BT Annual Report and Form 20-F 2004 |
Chairmans message
Your company has continued to make good progress this year delivering strong financial results while continuing to transform the business. New wave revenues grew by 30% to £3,387 million.
Earnings per share, before goodwill amortisation and exceptional items, grew by 19% to 16.9 pence almost doubling in two years. While continuing to invest for the future, we generated free cash flow of over £2 billion and reduced net debt to £8.4 billion a reduction of two thirds 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 continue to invest where we believe it will make the greatest
difference, while achieving rigorous standards of cost efficiency and smarter
working practices.
Returns to shareholders
Although long-term shareholder return remains the key measure of our success, our share price performance this year has not been strong. Earnings per share before goodwill amortisation and exceptional items have risen
well, but this has yet to be reflected in our share price.
However, total shareholder return also includes the dividend, and here the news for shareholders is positive.
We
are recommending a full year dividend of 8.5 pence per share. Reflecting BTs
commitment to a progressive dividend policy, the dividend pay out ratio for the
2004 financial year was around 50% of earnings before goodwill amortisation and
exceptional items. The full year dividend is 31% up on last year, and over four
times higher than two years ago. We are targeting a 60% pay out ratio in 2005/06.
The
strong cash flow generated by the group also enabled us to begin a share buy
back programme in the 2004 financial year. This is being funded from cash generated
over and above that
required to meet our debt target of £7 billion in 2006/07, after paying
dividends and taking into account any acquisitions or disposals.
Regulation
The recently announced strategic review of telecommunications by the UK regulator, Ofcom, is important and welcome to BT.
The review will cover, within the 21 key strategic questions to be addressed, the possibility of the structural separation of BT. Your company believes this is not in the interests of
shareholders, customers or employees, and will argue in favour of a strong and integrated BT.
Wider responsibilities
It
is important that companies such as BT live up to their responsibilities
in the wider communities in which we operate. Im proud to report that
in the 2004 financial year, we were the highest placed telecommunications
company in the Dow Jones Sustainability Index for the third year in a row.
Our goal is to help everyone benefit from improved communications and to spread the benefits of new technology as widely as possible. This is demonstrated, for example, by our wide
deployment of broadband technology throughout the UK, and by the BT Education Programme, which has enabled more than two million young people to participate in a drama-based campaign designed to help them improve their communications skills.
Strategic progress and outlook
The strong growth in new wave turnover, our ICT order book and broadband shows that our strategy is working. We remain committed to that strategy and are confident in our ability to deliver our key strategic
goals.
Weve come a long way since May 2001, when your Board announced a radical plan to reduce debts, manage costs and improve customer satisfaction. Weve
established a solid platform
for future growth and success.
None of this could have happened without the loyalty and support of our shareholders, customers, suppliers and employees. Given the continued support of all our stakeholders, we will build
on this success and accelerate the transformation of our business.
Sir Christopher Bland
Chairman
19 May 2004
4 | BT Annual Report and
Form 20-F 2004 |
Chief Executives statement
We live in an era of greater customer choice than we have ever seen before. This choice is good for customers and good for our industry.
Changes in technology
are leading to changes in peoples behaviour. People are, for example,
spending more time on the internet and sending information by e-mail, where
once
they would have used the phone or fax.
This
transformation is putting converged services at the heart of our offering, enabling
our customers to communicate wherever they happen to be.
As
we move from a narrowband to a broadband world, we are offering a new mix of
products and services in new markets ICT, broadband, mobility and managed
services.
“Technology
substitution” is
also having a significant impact in our traditional voice markets, where fixed-to-fixed
voice revenues were down in both the consumer
and business markets.
This
is both a challenge and an opportunity. We have to respond to those changes
in technology, the market and behaviour, at the same time as working to accelerate
them.
We
have to be absolutely focused on defending and reinventing our traditional
markets, through imaginative sales and marketing, through delivering the right
products
at the right prices. And we have to follow our customers where they want to
go, offering them new, flexible services that match their changing personal
and business needs.
Customer
satisfaction
Our passion for customers
is at the heart of everything we do.
A
year ago we launched our brand promise to make every customer experience “simple
and complete.” This
is essential to driving down customer dissatisfaction, which remains a critical
goal for us. In the 2004 financial year, we reduced
dissatisfaction by 22%.
As
customer dissatisfaction is driven down, so is the cost of failure. A great
customer experience and cost savings really can be two sides
of the same coin. Getting things right for customers the first time keeps them
loyal, contributes to cost effectiveness, and boosts our reputation.
New
wave business
ICT used to be an
aspiration; its now a reality. We had a superb year with ICT orders worth
more than £7 billion up 59% on just a year ago. The three deals
we signed with the NHS, for example expected to be worth more than £2.1
billion indicate our strength in this market.
I
believe that we have something very special to offer the ability to
act as “the
telco inside” our
customers organisations.
We offer our customers businesses and other large organisations, including
local and national government the chance to enhance their productivity,
through expert management of their information systems, desktop to desktop.
And
we have a full range of network-centric ICT solutions depending on what our
customers want from full service assurance across their ICT infrastructure,
through monitoring levels of service throughout their operations, to validation
of their networks, data centres and desktops.
Broadband
Its been a tremendous
year for broadband as well. People were sceptical when we said wed reach
two million DSL wholesale lines by the summer of 2004. What nobody expected
was that we would achieve two million in February 2004. As at 14 May 2004, we
had 2.45 million and climbing. The UK is now moving towards the top
of the broadband league.
And
our programme for upgrading our exchanges to broadband has been extremely effective
in bringing the benefits of this amazing technology to some of the remoter parts
of the UK. In April 2004, we announced a roll-out plan that will bring broadband
to 99.6% of the UKs homes and businesses.
The
announcement, in May 2004, that we will redesign and reduce the cost of our
local loop unbundling product, should encourage investment in broadband infrastructure
and promote innovation. Its a major move towards the telecommunications
market of the future.
In
the consumer broadband market weve teamed up with Yahoo! to offer compelling,
world-class content and launched a suite of new products that will enable customers
to get the most from broadband. A couple of years ago we were among the first
to offer a broadband connection for less than £30 a month. This year weve
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 the future.
Again,
our goal is to offer communications flexibility, enabling our customers to
communicate the information they choose, in the way that they choose, using
whatever communications
device they choose.
In
May 2004, we announced that we will be working with Vodafone UK to dismantle
the barriers between fixed and mobile services, by offering fully converged,
fixed/mobile services in the business and
5 | Chief Executives statement | BT Annual Report and
Form 20-F 2004 |
consumer mobile
markets. Our customers will benefit from being able to communicate and access
the same information and services however and wherever they want; whether they
are connected to a fixed network or on the move.
For
our larger business customers we also offer convergence, managing their fixed
and mobile communications seamlessly.
And the growth of Wi-Fi (wireless
broadband) suggests that it could well be one of those technologies which rapidly
becomes a part of our customers lives. Once theyve experienced
it, they find it hard to imagine life without it.
Traditional
business
Given the impact of new technology and increasing competition,
voice call volumes may no longer be the absolute guide to the health of the
company that they once were, but they remain a fundamental part of our business
and we are bringing an innovative approach to product development, sales and
marketing in the voice calls business. Robust defence doesnt mean retreat,
it means seizing new opportunities.
BT Together, for example, has been
a major success with around nine million customers. During the year, we announced
that we will be abolishing 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 getting close to our customers can deliver significant revenue benefits.
Cost
leadership
Cost leadership is vital to the accelerating transformation of
BT.
We can and must operate as efficiently
and effectively as possible, benchmarking our costs against those of other
European telecommunications companies. Most recently, these comparisons showed
that our
costs are better than average for large telecommunications
companies but that we still have some way to go to achieve best-in-class costs.
In the last three years, weve made major reductions in the costs of our
operations and weve identified a further £1 billion that can be
achieved.
Our Hands Off Access Network (HOAN)
project, for example, is helping to improve network efficiency by minimising
manual network intervention and reducing the need for exchange visits.
This is not about cutting corners
or compromising on service, but about finding innovative, cost-effective new
ways to meet customers needs.
And, over the next few years, well
be creating the 21st century network. We are transforming our networks, converging
them on to a modern, single, multi-purpose platform that will enable us to reduce
costs, meet customers changing needs and improve customer satisfaction.
The 21st century network will offer higher performance in return for lower
operating
costs.
Our
people
Of course, without the commitment and hard work of BT people, our
strategy would be nothing more than words on the page.
A year ago, we introduced our new
values trustworthy, helpful, inspiring, straightforward, heart. Since
then, our people have translated those values into action, driving down customer
dissatisfaction, defending the traditional business and winning business in
new markets.
Were very proud of what theyve
done and of what they are continuing to do.
Ben Verwaayen
Chief Executive
19 May 2004
6 | BT Annual Report and
Form 20-F 2004 |
Operating and financial
review
Business review
The Business
review is divided into the following sections: |
||
7 | Introduction | |
7 | Group structure | |
10 | Group strategy | |
10 | Keep
a relentless focus on improving customer satisfaction |
|
10 | Put broadband at the heart of BT | |
12 | Create mobility services and solutions | |
12 | Transform
our network for the twenty-first century |
|
13 | Achieve competitive advantage through cost | |
leadership | ||
13 | Lead the world in network-centric ICT | |
solutions | ||
15 | Reinvent our traditional business | |
16 | Motivate our people and live the BT values | |
17 | Research and development and IT support | |
17 | Regulation, competition and prices | |
23 | Relationship with HM Government | |
23 | 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. | ||
EBITDA = Earnings before interest, taxation, | ||
depreciation and amortisation. The definition, | ||
reconciliation and reasons for disclosing EBITDA | ||
are discussed in the Financial review. |
7 | Operating and financial review | BT Annual Report and Form 20-F 2004 |
Introduction
BT Group plc is the listed holding company for an integrated
group of businesses that provides voice and data services in the UK and overseas,
particularly in Europe, but also in the Americas and the Asia Pacific region.
British Telecommunications plc is a wholly-owned subsidiary of BT Group plc
and holds virtually all businesses and assets of the BT group.
Our aim is to increase shareholder
value through service excellence, an effective brand, our large-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 UKs largest
communications service provider, by market share, to the residential and business
markets, supplying over 20 million customers with a wide range of communications
products and services, including voice, data, internet and multimedia services,
and offering a comprehensive range of managed and packaged communications solutions.
Our core portfolio covers traditional
telephony products such as calls, analogue/digital lines and private circuits.
New wave revenue generation is focused on ICT, broadband, mobility and managed
services.
In the UK wholesale market, we provide
network services and solutions including broadband ADSL (asymmetric digital
subscriber line), interconnect, transit and private circuits to other
operators. We serve around 500 communications companies, fixed and mobile network
operators, and service providers. We aim to build complete communications packages
and work with our customers to help them succeed in their businesses.
Our aim in these markets is to continue
to increase profitable revenues from data and advanced broadband and internet
services, which will further reduce our dependence on revenues and profit generated
by traditional fixed-line voice services.
In the year ended 31 March 2004
(the 2004 financial year), 93% of our revenues were derived from operations
within the UK.
Outside the UK, we supply managed
services and solutions to multi-site organisations worldwide. Our core target
market is the top 10,000 global multi-site corporations and European multi-site
organisations. Building on our existing relationships with large multi-site
organisations in the UK and internationally, we provide global reach and a complete
range of ICT solutions and services.
Our extensive global communications
network and strong strategic partnerships enable us to serve customers in the
key commercial centres of Europe, North America and the Asia Pacific region.
In Europe, this network links more than 270 towns and cities across 19 countries
to our UK network, and beyond into the Americas and the Asia Pacific region.
Our global communications services
portfolio ranges from desktop and network equipment and software, transport
and connectivity, managed LAN (local area network), WAN
(wide area network) and IPVPN (internet protocol virtual private network) services,
applications hosting, storage and security services, through to business transformation
and change management.
Governance
BTs
policy is to achieve best practice in our standards of business integrity in
all our operations, in line with our published statement of business practice The
Way
We Work. This includes a commitment to maintaining the highest standards of corporate
governance throughout the group (see Corporate governance).
Corporate social responsibility
BT is committed to enhancing its positive
impact on society through leadership in CSR (corporate social responsibility).
In our
view, a well managed CSR programme supports the delivery of strategy and is in
the best
interests of customers, shareholders, employees and the community (see Our
commitment
to society).
From Oftel to Ofcom
The UK regulatory environment changed in 2003
when, on 25 July, the Communications Act came into force, bringing in a new regulator the Office of Communications (Ofcom) and
a new regulatory
framework.
See Regulation, competition and prices for
more information on Ofcoms duties and powers, and the
Communications Act.
Group structure
Background
Telephone services in almost all of the UK
were, until 1981, provided by the Post Office, which was a government department
until 1969, when it was established as a state public corporation. In 1981, the
postal and telecommunications services of the Post Office became the responsibility
of two separate corporations, with British Telecommunications under the trading name of British Telecom taking
over the telecommunications business.
As a result of the Telecommunications Act 1984, British Telecommunications plc was incorporated in England and Wales as a public limited company, wholly owned by the UK Government.
In November 1984, the UK Government offered 3,012 million ordinary shares (50.2% of the total issued ordinary shares) to the public. British Telecom shares made their debut on the London
Stock Exchange on 3 December 1984. From April 1991, British Telecommunications plc traded as BT.
In December 1991, the UK Government sold over half its remaining shares in BT, retaining a holding of about 22%. It sold this residual holding in July 1993.
In 1985, Cellnet, the mobile phone operator, was
launched as a joint venture between British Telecom and Securicor, which held
40% of the company. BT acquired
full control of Cellnet (now O2UK part
of
mmO2 plc)
by acquiring Securicors minority holding in November
1999.
8 | Operating and financial review | BT Annual Report and Form 20-F 2004 |
In January 2000, BT and AT&T established Concert as a 50/50 joint venture serving customers around the world and transferred their trans-border assets and operations to Concert.
2002 restructuring | |
During the 2002 financial year, we substantially completed a radical restructuring programme, the key elements of which were: | |
the UKs largest-ever rights issue raising £5.9 billion | |
the demerger of the majority of BTs mobile businesses | |
the disposal of significant non-core businesses and assets | |
the unwind of Concert, BTs joint venture with AT&T | |
the creation of customer-focused lines of business. | |
This restructuring resulted in a significant reduction of our debt levels. |
Demerger of mmO2
On 19 November 2001, we completed the demerger
of mmO2,
comprising what were BTs wholly-owned mobile assets in Europe.
Concert
On 1 April 2002, we completed the unwind of Concert. The assets taken back into our ownership have been rationalised and integrated with our existing operations with the aim of optimising performance of the business
and simplifying the product set for our customers.
Acquisitions and disposals prior to the 2004 financial year
Between the 1999 and 2002 financial years, we made a number of significant acquisitions, including a stake in J-Phone Communications and Japan Telecom and control of Viag Interkom in Germany.
During
the 2002 financial year, reflecting the change in the groups strategy,
we disposed of a number of businesses and assets, including Yell our international
directories
and e-commerce business and our stakes in Japan Telecom, J-Phone Communications
and Airtel the
Spanish wireless operator.
In
January 2003, we completed the sale of our 26% stake in Cegetel Groupe SA, the
leading alternative fixed-line operator in France, to Vivendi Universal for £2.6 billion in cash.
After accounting for goodwill written back from reserves, BT realised a profit of approximately £1.5 billion before an exceptional interest charge of £0.3
billion on closing out fixed interest rate swaps.
Also in the 2003 financial year, we disposed of a number of non-core investments, including our stakes in BSkyB, Mediaset, Blu and SmarTone.
Acquisitions and disposals in the 2004 financial year
In July 2003, BT received full repayment of
loan notes issued by Yell plc, the principal and accrued interest totalling £109
million. The notes, redeemable in 2013 and
accruing interest at LIBOR, became repayable, in full, on the IPO (initial public
offering) of Yell.
In
December 2003, BT issued bonds worth £99 million, maturing in December 2008, which are exchangeable into our 16.6% holding in LG Telecom (LGT) shares. LGT is a wireless
telecommunications service provider in the Republic of Korea. At a 17.5% premium to LGTs
current share price at the time of issue and a coupon of 0.75%, this was an efficient
way to monetise our shareholding in LGT.
In
December 2003, we sold our 7.8% stake in Inmarsat Ventures a provider of global mobile satellite communication services for a total cash consideration of £67
million.
In
January 2004, we acquired the UK operations of NSB Retail Systems, a supplier
of software products and services to the retail market for a consideration of £17 million. We also
became NSBs exclusive distributor in the UK and Ireland.
Also
in January 2004 we announced an offer for the entire issued, and to be issued,
share capital of Transcomm plc, at a price of 15.5 pence per share, valuing the
company at £16
million. Transcomm is one of the leading providers of data-only wireless services in the UK. In March 2004, the offer was declared wholly unconditional and in April 2004, more than 90% of Transcomms
shareholders had accepted the offer, enabling us compulsorily to purchase the
remaining shares in the company.
How BT operates
BT consists principally of three lines of business: BT Retail, BT 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 BTs managed services and solutions
provider, serving the needs of global, multi-site corporations and European multi-site
organisations. These three lines of business are focused on providing a simple
and complete experience for our customers.
9 | Operating and financial review | BT Annual Report and Form 20-F 2004 |
Consumer includes the external turnover of BT Retail from consumer customers.
Major corporate includes the external turnover of BT Retail from major corporate
customers, and the external turnover of BT Global Services, excluding the global
carrier business.
Business includes the external turnover of BT Retail from SME customers.
Wholesale includes the external
turnover of BT Wholesale
and BT Global Services global carrier business.
Further analysis of group turnover by customer segment and between new wave and traditional turnover is provided in the Financial review.
Consumer customers
As at 31 March 2004, BT had approximately
19 million UK consumer customers with more than 20 million residential customer
lines (exchange line connections). In the 2004 financial year, consumer revenues
declined by 2%
to £5,974 million.
Our strategy in the consumer market is to defend traditional revenues and market share vigorously through innovative service offerings backed by innovative marketing and excellent quality
of service, at the same time as driving for new wave revenues, particularly in the areas of ICT, broadband and mobility.
Underlying
12 month rolling average revenue per customer household (net of mobile termination
charges) was £268 in the 2004 financial year, compared with £271
in the 2003
financial year.
In
the consumer market, new wave revenues grew by 135% from £95 million in the 2003 financial year to £223
million in the 2004 financial year, driven principally by
broadband.
The number of UK consumer DSL (digital subscriber line) lines grew by 132%.
Business customers
As at 31 March 2004, we had over one million business customers worldwide, with more than nine million exchange lines.
In
the 2004 financial year, major corporate revenues increased by 2% to £5,909 million. The increase in new wave turnover of 21% to £2,452
million was driven by ICT, broadband and by mobility, not only in the UK but
also globally.
Our strategy in the major corporate market is to drive a continued migration from traditional voice-only services to managed ICT solutions. This enables us to build closer and more integrated relationships with our
customers, enabling them to manage their communications spend more effectively and gain competitive advantage in their markets.
In
the SME market (companies with between one and 500 employees), our strategy is
to provide business customers with tailored communications products and services
that enable them to manage their business more simply and efficiently. Although
we increased the number of BT Business Plan customers, the contraction of the
fixed-call market and regulation-driven price cuts in our telephony services
reduced our traditional turnover.
This reduction was only partially offset by robust and continued turnover growth
in new wave services. Overall, in the SME market during the 2004 financial year,
revenues reduced by 4% to £2,600 million.
Wholesale customers
In the 2004 financial year, turnover from
our wholesale activities totalled £4,002 million, a decline of 3%.
In
the UK, external turnover from BT Wholesale activities was £3,445 million in the 2004 financial year, compared with £3,525
million in the 2003 financial year.
New
wave revenues were £361 million, up 54% on the 2003 financial year. This
growth has been achieved through broadband and the provision of tailored managed
services to UK wholesale
customers.
In the coming year, our strategic emphasis for growth will continue to 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, revenues were £557 million in the 2004 financial year, down from £585
million in the 2003 financial year. Our global carrier business customers include
other fixed-line telecommunications operators, mobile operators and selected
internet service providers.
Report structure
For the purposes of this Business review, we are reporting
on each of our strategic priorities.
For
financial reporting purposes, we continue to report by line of business (see
Financial review).
Other businesses | |
As at 31 March 2004, we held stakes in a number of other businesses, including: | |
stakes in three satellite entities Eutelsat, Intelsat and New Skies | |
a 16.6% stake in LG Telecom, a mobile cellular telephone operator in the Republic of Korea | |
an 11.9% stake in StarHub, a fixed and mobile communications operator and pay-TV operator in Singapore. |
10 | Operating and financial review | 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 and cost efficiency while pursuing profitable growth by migrating our customers to new wave products and services such as ICT, broadband, mobility and managed services. Our strategic priorities are to: | |
keep a relentless focus on improving customer satisfaction | |
put broadband at the heart of BT | |
create mobility services and solutions | |
transform our network for the twenty-first century | |
achieve competitive advantage through cost leadership | |
lead the world in network-centric ICT solutions | |
reinvent our traditional business | |
motivate our people and live the BT values. |
Keep a relentless focus on improving customer satisfaction
Reducing customer dissatisfaction by 25% a year over three years, on a compound annual basis, to the 2005 financial year is a key target in our drive to deliver the highest levels of customer satisfaction. In the 2004
financial year, we achieved a 22% reduction in customer dissatisfaction, based on qualitative customer research conducted by external agencies. This follows a 37% reduction in the 2003 financial year.
The lines of business all reduced customer dissatisfaction levels during the year.
We are working to remove barriers to providing customers with excellent service and to involve all our customer-facing people in improving our service.
For example, our retail customer-facing and support teams participated in the my customer programme,
designed to
improve our customers experience and to promote teamworking.
Examples of my customer successes include the introduction of a new contact centre structure that enables our
people to handle more calls at the first point of contact and enabling engineering and contact centre teams directly to update customer records.
Put broadband at the heart of BT
In the 2004 financial year, we continued our drive
to enhance the awareness, availability and attractiveness of broadband. As at
31 March 2004, in the highly competitive retail market, BTs share of consumer
and
business broadband connections in the UK was 42%, representing 928,000 lines.
We aim to be a major player in wholesale broadband and data services in the UK.
Broadband for wholesale customers | |
In February 2004, ahead of our target, BTs installed base of broadband lines reached two million. We achieved the second million lines in just over eight months. As at 31 March 2004, we had 2.2 million broadband lines, which represents growth of 177% on the previous year, and our target is to reach five million by 2006. In March 2004, we were taking an average of 50,000 orders a week. In total, 2,465 exchanges had been upgraded by the end of the 2004 financial year, reaching more than 85% of the UKs homes and businesses. In May 2004, we announced further broadband progress. The number of broadband lines increased to 2.45 million, 2,652 exchanges had been upgraded and total UK coverage reached 90%. | |
The first step was upgrading to broadband more than 1,100 of our exchanges where there was a clear commercial case for doing so. In July 2002, we introduced a demand-driven registration scheme, which enabled people in areas where the exchange had not been upgraded to register an interest. This hugely successful scheme attracted more than 860,000 registrations, helping us match our investment to demand. Because the registration scheme gave us such a clear picture of demand, we were able to announce in April 2004 the speeding up of the delivery of broadband services to rural communities. The scheme is now closed and we intend to roll out broadband to a further 1,128 exchanges by no later than the summer of 2005. This will help bring broadband to exchanges serving 99.6% of UK homes and businesses. | |
We continue to explore commercially viable ways of bringing wireless broadband to rural communities. In December 2003, for example, we launched a trial of wireless broadband at sites throughout the UK. | |
The commercial launch of BT DataStream Symmetric and BT IPStream Symmetric to 150 exchanges during the year significantly strengthened our portfolio of business-class broadband services, which service providers can offer their customers. Based on SDSL (symmetric digital subscriber line) technology, it provides the same rate upstream and downstream and is suitable for the SME, remote office and teleworking access markets. | |
In November 2003, we introduced a new, faster broadband service for wholesale customers. BT IPStream Home 1000 is a self-install product for residential customers who want greater bandwidth than the standard 512Kbit/s available at present. | |
In May 2004, we announced that we are to redesign and cut the price for our LLU (local loop unbundling) product by between 15% and up to 70% in a phased series of price cuts. We believe that this move will benefit those companies that are willing to innovate and invest in broadband infrastructure. The new LLU product will be closer to simpler continental European models and we aim to bring it to the market within six months. Immediate price cuts should ensure that there is sustainable demand prior to launch and help potential customers plan ahead with confidence. (See Other market reviews). |
11 | Operating and financial review | BT Annual Report and Form 20-F 2004 |
We also announced that we will be adjusting the price of Datastream products to ensure there are adequate margins between Datastream and IPStream Home 500. The details will be announced by the end of May 2004. |
Broadband for consumers | |
During the year, we focused on improving sales processes, reduced the cost of our broadband help-desk operations and increased the number of orders placed online. We also launched several additions to our family of products and announced trials and launches of a new set of value-added products and services. | |
In September 2003, BT and Yahoo! relaunched the Openworld consumer internet service as BT Yahoo! Broadband, a broadband internet service combining high-quality access and a wide range of content and services, for the same price as the existing BT Openworld Broadband offering. The service combines high-quality access with compelling content and services such as intelligent personalisation (to help understand our customers needs and tailor content accordingly), LAUNCHcast (a personalised radio station), advanced security services including anti-spam, e-mail anti-virus and a free firewall news, sport and entertainment. | |
In October 2003, we launched a broadband access product for gamers Broadband from BT for Online Console Gaming. | |
December 2003 saw the launch of our BT Broadband Voice package, which enables cable broadband customers to make voice calls over the internet. This was the first move by a major UK player into the consumer VOIP (voice over IP) market. | |
In January 2004, we offered our fastest-ever consumer internet service, a 1Mbit/s broadband service through BT Yahoo! Broadband and BT Broadband. This is twice the speed of ordinary broadband and up to 20 times faster than traditional dial-up internet. The service is available to customers living within approximately 3.5 kilometres of a broadband-enabled exchange around 75% of existing broadband users. | |
In March 2004, we launched BT Broadband Basic, a simple to use, 0.5Mbit/s broadband entry level service, for under £20 a month. | |
From March 2004, our broadband advertising changed to focus on the range of our broadband portfolio a set of broadband products which give the consumer choice. | |
In March 2004, we announced a set of broadband products and services for consumers that will be at the heart of our broadband lifestyle strategy, as the priorities in the market switch from access to content, applications, flexibility and managed services. Flexible Bandwidth, which began trials in April 2004, enables users to increase bandwidth up to 2Mbit/s temporarily or permanently. BT Rich Media, launched in April 2004, is a platform that enables content providers to make content easily available to users. BT Communicator enables consumers to use a home PC for VOIP, instant messaging, text messaging and other related services. Trials will begin later this year. | |
Broadband for business customers | |
In January 2004, we rebranded our business broadband products and business broadband information portal, in order to simplify our offerings. BT Openworld Broadband products became BT Business Broadband products and our revamped business information portal became BT Broadband Office. BT Business Broadband remained the leading ISP for SMEs in the UK. As at March 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-added services. These companies include: Siebel e.pages, Worldpay, Interland, learndirect, 2Wire and Lexis Nexis. | |
As part of our drive to break down perceived barriers to broadband adoption and to accelerate take-up rates, we offered SME customers savings and activation deals worth up to £260 during the summer of 2003 on a range of broadband products (BT Business Broadband, 500 PLUS, 1,000 PLUS and 2,000 PLUS). | |
At the end of the 2004 financial year, we were connecting around 500 business customers to broadband every day. | |
In April 2004, we announced that we had joined forces with Microsoft to launch a one-stop shop IT and broadband solution. BT Connected & Complete, featuring Microsoft technology, gives small businesses access to regularly updated and individually tailored IT software and support previously available only to large companies. BT Connected & Complete will, for the first time, provide small businesses with secure broadband |
12 | Operating and financial review | BT Annual Report and Form 20-F 2004 |
access, applications service, support and maintenance, all from a single source and on one bill. |
Mobility for business customers | |
We are a service provider in the business mobile market and had over 103,000 business connections at 31 March 2004. | |
BT provides a range of managed mobile services to UK and global customers who either outsource their mobile communications entirely or rely on BT to provide specific managed services, such as supplier management or managed billing for mobility. | |
The introduction of BT Mobile Office a convergent, multi-access remote and flexible solution in September 2003 made it possible for business customers to access their corporate networks via a single, smart log-in application. | |
During the year, we established our position as a major UK provider of public wireless broadband (Wi-Fi) services. As at 31 March 2004, we had almost 2,400 Openzone live sites throughout the UK. In January 2004, we reached agreement with McDonalds to install Openzone access points in more than 500 McDonalds restaurants. We also started installing Openzone access points in our public telephone network. The target is to have 4,000 access points throughout the UK by the end of summer 2004. In January 2004, we sponsored Wireless Broadband Week, which offered seven days of free access to BT Openzone and saw traffic in the network increase by 133%. In February 2004, we announced a global deal with British Airways to install Openzone access points in 80 of its main customer lounges around the world. | |
The acquisition of Transcomm in 2004 enhanced BTs position in providing remote monitoring and management information services for business customers in the UK. Remote monitoring enables the control of electronic devices over long distances, helping businesses to manage their assets and risks. Devices which can be remotely monitored include: fire and burglar alarms, vending machines, refrigerators, EPOS (electronic point of sale) terminals, parking meters and distribution fleets. Through our BT Redcare operation, BT is already a leading player in fixed-line M2M (machine to machine) applications in the UK. This acquisition enhances our M2M service offering by adding wireless capabilities. | |
Mobility for wholesale customers | |
For wholesale customers, we will move towards our strategy in the UK wholesale mobile arena which is to defend our traditional mobility revenues and to grow the new mobility business. | |
We reached agreement to provide Vodafone UK with a managed access transmission network in the UK, connecting its base stations to its core switches. Vodafone will benefit from simplification of processes including a formalised payment structure as well as access to any new technologies implemented by BT within the five-year term of the contract. |
Transform
our network for the twenty-first century
Our UK network today
In the UK, we have 873 local and trunk
processor units, 121.7 million kilometres of copper wire and 7.3 million kilometres
of optical fibre. The network services we provide include Frame Relay, ATM (asynchronous
transfer mode) and IPVPN, and we have the most extensive IP backbone network
in the UK. We interconnect with over 100 other operators, as well as carrying
transit traffic between telecommunications operators.
Our global reach
In Europe, we own operations in Belgium,
France, Germany, Ireland, Netherlands, Spain, Scandinavia and Central and Eastern
Europe. We deliver service to our customers in Italy through our joint venture,
Albacom, and our applications hosting company, I.Net. In the Americas and the
Asia Pacific region, we deliver service to our customers through a combination
of direct sales and services operations and strategic partners.
Our network-based services (Frame Relay, ATM and IPVPN) extend to and across North and South America and the Asia Pacific region. This means that products are delivered seamlessly within
and from Europe to our own locations in the Americas and delivered locally through interconnect and supply agreements with regional carriers.
13 | Operating and financial review | BT Annual Report and
Form 20-F 2004 |
As at 31 March 2004, our flagship MPLS (multi-protocol label switching) product, which was launched in 2002, had 1,000 points of presence around the globe and could be accessed from more than 70 countries. MPLS-based IP virtual private networks are the next generation of data networks for corporate customers, supporting voice, data and video applications, offering enhanced flexibility and service performance. MPLS revenues grew by 102% during the 2004 financial year. | |
Global customer service is provided via service and network management centres around the world, 24 hours a day, seven days a week. |
Twenty-first century network As one of our strategic priorities, we are working to create an intelligent, flexible and customer-focused network for the 21st century (21CN). BTs 21CN is designed to support the next generation of services and revenues for BT and for our wholesale customers, while enhancing the customer experience and reducing costs through greater network intelligence and automation. 21CN aims to support the end-to-end transformation of BTs wholesale business and is designed to deliver tangible benefits to our customers businesses. The multi-service capabilities of 21CN were refined during a period of consultation with many of the leading communications operators in the industry, as well as technical and equipment vendors from around the world. The phased introduction of the new platform will support communication in a range of formats and across multiple devices. 21CN will also introduce new levels of network simplicity, intelligence and flexibility and will aim to support the delivery of new revenue-generating services faster than is currently possible. This is an innovative, long-term transformation programme which is already delivering benefits for our customers. Key developments in the 2004 financial year included: |
|
a programme of industry consultation to help refine the networks technical architecture requirements. | |
BTs supplier base for next-generation exchange equipment to support voice, video and data was expanded following comprehensive assessments and trials. | |
advanced next-generation network component and services trials will enable us to begin to move 21CN from the laboratory to the live network over the next 12 months. | |
we continued to eradicate duplication, increase efficiency and reduce network operating costs. For example, our Hands Off Access Network project is helping to improve efficiency by minimising manual network intervention and reducing exchange visits. | |
We expect to launch a range of new commercial broadband services over the next 12 months. These include: | |
variable bandwidth giving users the power to boost temporarily broadband speeds online, providing access to premium content such as DVD-quality streamed videos or online gaming. | |
digital content management capitalising on flexible bandwidth, we are launching a platform to support the management and distribution of new digital content. | |
voice over IP domestic customers will be able to manage all personal communications from a home PC, enabling phone or video calls over broadband connections. | |
During the 2004 financial year, we undertook
a detailed technical and economic analysis of the options for 21CN deployment.
The 2005 financial year will see the initial stages of implementation
and live technical trials will begin, prior to investment and deployment
decisions being taken. Capital expenditure is expected to rise, but remain within the groups £3 billion annual target, in the 2005 financial year as the group invests in its 21CN programme. |
|
Lead the world in network-centric ICT solutions
Our strategy in the ICT market is to establish BT as a global ICT player capable of competing with the
14 | Operating and financial review | BT Annual Report and
Form 20-F 2004 |
worlds best in selected growth markets outsourcing; IP infrastructure; broadband; mobility; managed desktop solutions; and CRM. These are the markets in which communication and networking skills are significant, migration is from our traditional markets, our brand has value and in which partnerships profitably supplement our capability.
ICT for business customers
As applications such as email and office productivity software are increasingly being networked, networks are increasingly seen as vital to productivity and competitive advantage.
ICT
revenues for the 2004 financial year were £2.6 billion, a rise of 19% on
the 2003 financial year, itself a rise of 8% on the previous year. We aim to
deliver ICT solutions to large business customers and other organisations (particularly
in the public and government sectors), which give them the communications tools
they need for profitability and/or business improvement.
Our
larger or more complex and global customer contracts are delivered through or
managed by our BT Global Solutions and BT Syntegra businesses. BT Global Solutions portfolio
covers a number of key ICT-related areas including IP infrastructure, CRM, applications
and hosting, and outsourcing. BT Syntegra
offers business transformation and change management services and is a key player
in the global trading systems market. BT Global Solutions and BT Syntegra won
business worth more than £7 billion during
the 2004 financial year.
The highest profile contracts in the year were three NHS contracts which are expected to be worth more than £2.1 billion and form an integral part of the National Programme for Information Technology in the NHS. These contracts represent some of the largest BT has ever won. | |
One, worth up to £620 million over ten years is to design, deliver and manage a national patient record database and transactional messaging service for the NHS Care Records Service. This will provide all 50 million NHS patients in England with an individual electronic care record and connect more than 30,000 GPs and 270 acute community and mental health NHS trusts in a single, secure national system. | |
A second contract, expected to be worth up to £996 million over ten years, is to design, deliver and operate integrated local patient record applications and systems for the whole of the London care community. |
|
The third, worth an estimated £533 million over seven years, is to procure, integrate and manage high-speed, broadband networking services for the New National Network for the NHS. | |
Capgemini UK chose BT under a ten-year sub-contract with a total sales order value of approximately £364 million as the telecommunication and WAN supplier for service delivery to the Inland Revenue. | |
Other significant wins included a six-year contract with ITV to create a new multimedia network and a five-year deal with Alliance & Leicester worth £10.5 million to upgrade its existing network infrastructure to IP. | |
In February 2004, we launched BT Applications Assured Infrastructure (AAI), designed to help organisations understand and master the complex interactions that occur within their communications infrastructure from desktop to data centre. With AAI, it becomes possible to guarantee that the performance of our customers ICT systems supports their business priorities and enhances their efficiency. This new proposition combines BTs extensive experience in the provision of corporate data networks and hosting with our professional services capability. | |
In the first quarter of 2004, BT became the first UK-based company to introduce Siebel CRM OnDemand to businesses in the UK, enabling SMEs and divisions of larger businesses to organise, manage and streamline their sales, marketing and customer service activity through a hosted environment. Customers can access the service either as an integrated part of BTs 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 mutual growth opportunities jointly in the global ICT marketplace. As a first step, we have signed managed service agreements with a combined value of US$1.5 billion over the next seven years. Under these agreements, HP will manage BTs mid-range and desktop ICT infrastructure in the UK, and BT will manage HPs voice and data network and product support call centres in Europe, the Middle East and Africa. |
ICT for consumers | |
Initiatives under the Home of Possibilities programme aim to bring the benefits of broadband into the home. BT Home Networking enables customers to connect a number of PCs to broadband simultaneously, without wires. And in December 2003, we introduced a broadband- |
15 | Operating and financial review | BT Annual Report and
Form 20-F 2004 |
enabled entertainment service, in partnership with Phillips, which enables customers to stream online radio stations and download music to any part of the house wirelessly. | |
BT Home Computing is a leading provider of computing technology in line with the Governments Home Computing Initiative legislation, which enables companies to provide employees with the use of computers at rates significantly below high street prices. |
ICT for wholesale customers To further our growth strategy, we aim to be the network ICT supplier and sales channel of choice, serving major corporate and government users, and to serve SME and consumer end-users, building on our existing intermediate and broadband portfolio. |
|
We signed wholesale ICT deals including a contract, estimated at £5.5 million, to provide Fibernet, the bespoke network service provider, with a fully managed voice network and a managed services contract with Intelliplus Group, a subsidiary of Eckoh Technologies. |
Reinvent our traditional business
We
face continued challenges in our traditional markets as a result of regulatory
intervention, competition and a shift in our customers buying patterns,
as we provide them with higher-specification, high-value,
new wave products.
Private circuit volumes fell, due to the switch into lower-priced partial private circuits (as a result of regulatory intervention).
Total fixed-to-fixed voice call minutes in the UK market declined by an estimated two percentage points in the 2004 financial year. This was driven by customers making use of alternatives
such as mobile calls, e-mail, instant messaging, corporate IPVPNs and VOIP.
However, call minutes are less important to BT as customer take-up of pricing packages continues and we actively migrate customers to new wave services such as broadband.
Traditional services for consumers | |
The BT Together pricing packages, which offer a range of competitive call prices and fixed-fee pricing options, are an important part of our traditional revenue defence strategy, and had around nine million customers as at 31 March 2004. During the year, we announced we would abolish the standard rate on 1 July 2004 to give more value for money. Existing standard rate customers will move to join those already on BT Together Option 1, which will become the benchmark for our fixed-line call prices. | |
We transformed more than 1,300 payphones in UK high streets, shopping centres, airports and stations into internet kiosks, offering internet access, e-mail, text messaging and video. These kiosks give fast access to a range of services, from news and sport to shopping, games, local maps and information about shops and restaurants. We also continued to offer space in our payphone kiosks for mobile antennas, Wi-Fi hotspots and CCTV (closed-circuit television). | |
During the 2004 financial year, we launched new calling card products to serve the needs of businesses and international travellers, including a virtual card for data-only users. | |
The immediate impact of the opening up to competition of the directory enquiries market in the UK in August 2003 was significantly to reduce the overall size of the market. Volumes of calls have continued to decline since deregulation. According to the latest figures from Ofcom, calls to all 118 service providers from the BT network in the April 2004 sample were 23% down on September 2003. However, since deregulation, calls to BT Directories 118 services have performed far better than the total market. Calls to 118 500 are 30% up on the level experienced immediately following the 192 switch-off. | |
We successfully re-entered the classified directories market with The BT Phone Book. 62,300 advertisers have signed up and 116 directories have been published, achieving market penetration of 5% in the first year. Our online directory enquiries service, www.bt.com/directoryenquiries, is the leading online player in the market, with almost 1.5 million searches (business name, residential and classified) a week. The classified service is currently generating more than one million searches a month. | |
Traditional services for business customers | |
During the 2004 financial year, we introduced an enhanced version of BT Business Plan offering a ten pence price cap on calls to the US and a 20 pence cap on calls to Europe and certain countries in the Asia Pacific region. We also reduced the annual spend commitment to £250. As at 31 March 2004, BT Business Plan had over 175,000 customers, compared with 20,000 as at 31 March 2003. | |
Our innovative BT Local Business initiative helped us gain traction in the SME market by building closer relationships with smaller business customers, who are often more comfortable dealing with other small companies rather than large 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 a five-year deal with BAA to supply traditional and new multimedia payphones. |
Traditional services for wholesale customers
Our strategy in the UK traditional wholesale market has been to stem the decline in traditional revenues while seeking areas for revenue growth. Our traditional UK wholesale business has been under pressure from
several directions over the year. As 77% of our
16 | Operating and financial review | BT Annual Report and Form 20-F 2004 |
traditional revenue is regulated, the impact of
regulatory changes served to reduce UK wholesale revenues. The impact of the
mobile termination rate price cuts reduced our external UK wholesale revenue
by £126 million (4%) in the year. The reductions from the regulatory network
charge control pricing formulae resulted in weighted average price reductions
of around 7% across the basket of relevant products.
New regulatory-driven
products, such as carrier pre-selection and wholesale access lines, necessitated
investment to create and introduce systems and processes all of which
are at a cost. However, we achieved a 1% increase in our UK external revenues
(excluding the impact of mobile termination rate cuts). We have further developed
our product portfolio, launching products such as wholesale calls and ISDN 30
Service Provider. We have continued with our cost reduction programmes across
the business and reduced our UK operating cost base by 4% over the financial
year.
In May 2004, we announced
we will be introducing a new wholesale calls product for carrier pre-selection
(CPS) operators that will allow them to use BT directly for certain calls at
a price such that their overall costs can be considerably reduced. This will
be developed in consultation with Ofcom and the industry, with interim arrangements
to be put in place from July 2004.
Motivate our people and live the BT values
Our people
As at 31 March 2004, we had a diverse workforce of 99,900 people, 91,600 of whom were employed in the UK. To support our international operations, we employ 8,300 people in 37 countries outside the UK.
Workforce flexibility
The changing nature of the markets in which we operate, our focus on cost leadership and our investment in new services have impacted the shape of our permanent workforce. During the 2004 financial year, 2,287 people
joined BT, natural attrition was running at 2.5% and, in the UK, 4,514 people left BT under our voluntary paid leaver package.
The composition of our workforce is regularly reviewed and, at the end of the 2004 financial year, managers and professionals represented 31% of our workforce.
We supplemented our long-term customer contact centre workforce in the UK with an additional workforce of 4.6% outside the UK. This workforce is under our direction and control.
We also instigated a review of our procurement contracts for the employment of temporary and agency workers. At 31 March 2004, we were working with ten agencies, with costs for contingency
workers (agency and contractors) reducing year on year by 17%.
Shares and pensions
Since privatisation, we have been committed to providing our employees with a stake in the company.
Under the BT Employee
Share Investment Plan (ESIP), employees can purchase shares in the 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 to the value of the shares.)
This allocation was linked to corporate performance measures determined by the
Board. 98% of eligible employees participate in one or more of these plans.
Most of our employees are members of the BT Pension Scheme or the BT Retirement Plan, both of which are controlled by independent trustees. The BT Pension Scheme was closed to new members
on 31 March 2001. The majority of new employees are eligible to join the BT Retirement Plan.
Listening to our people
Our annual employee attitude survey, most recently conducted in early 2004, gives employees the chance to express their opinions about the company, their managers and the work they do. It encourages managers and their
teams to work together to implement action plans to address specific issues. 80% of people participated in the survey and the results showed, for example, that 95% of employees are committed to our customers and 90% feel that their actions align
with our brand and people values.
Employees are
informed about our business through a wide range of communications channels,
including our online news service, monthly newspaper, regular e-mail bulletins
and senior management web chats and web cast briefings. This ensures that key
messages are available for everyone, with additional information sourced on an as needs basis.
In the UK two main trade unions are recognised by the company. In continental Europe, we have strong relationships with the works councils, with which we work closely, both on an
operational basis and as strategic stakeholders.
Health and safety
We have zero tolerance of workplace accidents and have set rigorous targets to effect significant improvements across the company. During the 2004 financial year, we beat our three-year targets set in 2000/01. Over the
three years, we have reduced workplace injuries by 40% and the number of cases of occupational ill-health referred to our occupational health service by 36%.
Diversity in our workforce
A work environment that actively supports all
our employees is central to BTs culture. We champion equality of opportunity regardless of gender, race, sexual orientation, disability or age
throughout the company. Internal networks include the Womens Network (gender
equality) and Kaleidoscope (sexual orientation).
During the 2004
financial year, we were awarded the platinum standard by Opportunity Now for
our work
on gender equality, the gold standard by Race for Opportunity for our work
on race equality, and the Business in the Community Diversity Award recognising
our forward-thinking and diverse approach
17 | Operating and financial review | BT Annual Report and Form 20-F 2004 |
to equal opportunities. We also work closely with the Employers Forum on Disability.
Learning and flexibility
In addition to culture change programmes, such as
my customer, during the year we spent over £61 million (excluding
staff and other direct costs) on the training and development of our employees.
We have also increased the emphasis on broadband, e-learning and self-teach opportunities. This is particularly important as we extend our practices of flexible working. At 31 March 2004,
we had around 500 job sharers, 5,570 people working part time and more than 7,900 people working from home.
Research and development and IT support
BT Exact is BTs 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 worlds largest communications research
and development facilities. The work undertaken by BT Exact is part of an investment of £334 million in research and development made by BT in the 2004 financial year. This compares with £380 million and £362
million invested in
the 2003 and 2002 financial years, respectively.
At BT Exacts core are our world-renowned laboratories at Adastral Park near Ipswich, which have been responsible for some of the worlds
most far-reaching advances in telecommunications technology, including the advancement
of single-mode optical fibre and of the technology and worldwide standards behind
passenger phones on aircraft and videoconferencing.
Brightstar BTs business incubator with the goal of commercialising our patent portfolio was created in January 2000. In March 2003, BT Exact
teamed up with Coller Capital and New Venture Partners (NVP) to create a new, independent corporate venturing partnership NVP
Brightstar.
BT remains a limited
partner and NVP Brightstar remains closely associated with BT Exact through exclusive
rights to continue to spin-out companies from its R&D, professional and
computing services base. This venturing unit complements our existing patent
licensing programme, for which we have an exclusive long-term arrangement with
Silicon Valley-based IPValue Management Inc.
Regulation, competition and prices
The commercial environment in the UK and in the countries in which BT operates is increasingly competitive and dynamic. However, we remain subject to extensive regulation, particularly in the UK, which can materially
affect the way in which we carry out our business. We also use inputs, such as networks and services from other regulated operators, largely outside the UK, and the availability and price of these inputs may change from time to time, which in turn
affects our business.
Regulation in the UK
It is our policy to be fully compliant with
the regulatory framework in which we operate. During the 2004 financial year,
we reviewed our compliance activities because we want to ensure that we continue
to meet the
obligations imposed by the UKs Communications Act (previously the Telecommunications
Act) and the Competition Act while competing fairly and vigorously within the
rules. We have published an annual compliance report which can be found in our
social and environment report at www.bt.com/betterworld.
Ofcom The UK regulatory environment changed materially in 2003. On 25 July 2003, the Communications Act 2003 (the Communications Act) came into force, bringing in a new regulator, the Office of Communications (Ofcom), and a new regulatory framework for electronic communications networks and services. Ofcom did not, however, assume its regulatory functions until 29 December 2003 and, in the transitional period, the existing regulators continued to carry out Ofcoms functions relating to networks and services, and spectrum. Ofcom was set up, as a result of the increasing convergence between telecommunications, broadcasting and radio, to provide a single, seamless approach to regulation across the whole converging marketplace. It amalgamates the roles of five former regulatory agencies: the Director General of Telecommunications (Oftel), the Independent Television Commission, the Broadcasting Standards Commission, the Radio Authority and the Radiocommunications Agency. Ofcom is headed by a board consisting of a chairman and executive and non-executive members. Currently, the chairman is Lord Currie and the chief executive is Stephen Carter. The main regulatory changes for providers of electronic communications networks and services are: |
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the regulators ability to impose conditions without agreement | |
the possibility of fines being imposed for breach of regulatory obligations | |
the availability of appeals against regulatory decisions, based on their merits | |
the creation of a new regulatory regime which, among other things, implements the requirements of the new EU Directives for general authorisations, instead of individual licences, and bases economic regulation on dominance, or significant market power (SMP). |
Ofcoms
duties and powers Ofcom has a wide range of general and specific duties laid down in the Communications Act. Below is a summary of those duties and functions of particular relevance to BTs activities: |
|
the principal duty to further the interests of citizens in relation to communications matters and, secondly, to further the interests of consumers, where appropriate, by promoting competition. In doing so, Ofcom must secure, |
18 | Operating and financial review | BT Annual Report and Form 20-F 2004 |
among other things, the availability in the UK of a wide range of electronic communications services. | |
the duty to have regard to the principles under which its regulatory activities should be transparent, accountable, proportionate, consistent and appropriately targeted. | |
the duty to review regulatory burdens on a regular basis and ensure that they do not involve the imposition or maintenance of unnecessary burdens. | |
the functions of setting conditions of entitlement (see Regulatory conditions), and enforcing those conditions (see Enforcement). Ofcoms decisions are subject to appeal on the merits (see Appeals). | |
In carrying out its duties, Ofcom must consider promoting competition and the use of effective self-regulation; encouraging investment and innovation; and encouraging the availability and use of high-speed data services (including broadband). |
Regulatory conditions
Under the new framework, based on 2003 EU Directives, providers are no longer required to obtain licences before offering telecommunications services. Individual licences, such as that granted to BT in 1984, no longer
exist. Instead, there is a general authorisation for anybody who wishes to provide electronic communications networks and services.
Regulation
is applied through separate sets of conditions made by Ofcom, of which some apply
to all relevant communications providers and others are imposed individually
on particular providers which, following a review of the relevant markets, are
found to have SMP, or which are designated as universal service providers. Other general obligations are set out in the Communications Act. The general and
specific obligations that form BTs regulatory environment are described
below.
Conditions applying to all providers of electronic communications networks or services
General conditions
The foundation of the new regulatory framework
is the set of general obligations referred to in the Communications Act as general conditions. These apply to all providers of electronic
communications networks or services, including systemless service
providers and internet service providers. These general conditions are mainly
concerned with consumer protection, but also address matters such as general
access and interconnection obligations, standards, emergency planning and numbering.
In addition, a separate condition has been set regulating the provision of premium
rate services.
Electronic Communications Code conditions
The Electronic Communications Code deals with powers to carry out streetworks and similar activities for the purposes of providing networks and its application is subject to conditions made by the Secretary of State
for Trade and Industry.
Other
general obligations Other obligations corresponding to licence conditions under the old framework now apply directly through provisions of the Communications Act. These are: |
|
payment of administrative charges (broadly the equivalent of licence fees under the old framework) | |
provision of information to Ofcom when required to do so. |
Conditions applying to BT only
USO (universal service obligation) conditions
BT has been designated as the supplier of universal service for the UK excluding the Hull area, where Kingston Communications is the designated provider. The services covered by the USO are defined in an Order issued
by the Secretary of State for Trade and Industry. Our basic obligation is to provide a single narrowband connection to the fixed telephone 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. All aspects of the USO will be reviewed,
including schemes for consumers with special social needs, disconnections, payphone provision, minimum data speeds, scope of USO and funding.
Significant market power (SMP) conditions and market reviews
The EU Directives on which the regulatory framework
is based require member state national regulatory authorities (in the case of
the UK, Ofcom) to define and analyse markets (market review)
and to determine whether any communications provider has SMP, which is aligned
with the competition law concept of dominance. Economic regulation can only be
imposed following a market review and finding of SMP.
In markets where Ofcom finds that a provider has SMP, it must impose appropriate additional obligations in the form of SMP conditions as specified in the Communications Act. These may
include obligations to meet reasonable requests to supply certain services to other communications providers, not to unduly discriminate, and to notify price changes. In some cases, additional obligations relating to, for example, price control and
regulatory accounting have also been, or will be, imposed.
Under provisions
in the Communications Act, conditions of BTs former licence are kept in
force as necessary pending the making of new significant market power conditions
following reviews of the relevant markets. Where market reviews have not yet
been completed in relation to services for which BT was formerly regulated, BT
is accordingly still regulated under conditions of the former licence.
In the UK, the majority of market reviews have been completed, although some are still in hand, and the local loop unbundling review has only recently commenced (see Other market reviews). The current
19 | Operating and financial review | BT Annual
Report and Form 20-F 2004 |
status of the UK market review programme and its implications for and effects on BT are summarised below.
Narrowband market reviews
Five reviews of narrowband markets
were concluded in November 2003. In four of these reviews, BT was found to have
SMP in some or all of the markets concerned, and conditions were imposed accordingly,
including price
controls (see Pricing
regulation), non-discrimination, publication of charges, terms and conditions,
and the publication
of a Reference Offer in
relation to access services. While many of these obligations are similar in scope of application and severity to those which applied under the old regulatory regime, a number of changes have been introduced. Some of these are favourable to BT. For
example, BT is no longer 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 reviews also produced some outcomes less favourable to BT: for example, Oftels
proposal to require us to provide digital wholesale line rental products was
confirmed.
Leased lines market review
In December 2003, Oftel published its
second draft Leased Lines Market Review (LLMR). Among other things, this continued
the obligation to provide cost-oriented partial private circuits (PPCs) as a
wholesale alternative to retail private circuits, or leased lines. The draft
LLMR also required a further effective price reduction of RPI-7%, to take effect
from August 2003. We are working with Ofcom to agree a forward-looking price
control for PPCs.
The
LLMR included a new requirement to provide a wholesale variant of BTs
retail ethernet-interface leased line services. We were already in negotiation
with wholesale customers for provision of a wholesale product and these
commercial negotiations will be guided by our regulatory obligations.
Wholesale broadband access market review
The consultation period on this market
review closed on 6 February
2004, and the publication of Ofcoms final decisions is awaited. In the
consultation document, Ofcom proposed that BT has SMP in markets for wholesale
broadband origination and conveyance, and set out plans to impose a full range
of SMP obligations.
BT is required to pass margin squeeze tests in advance of any price change on some of the wholesale products in our broadband portfolio. Margin squeeze tests are designed to address a
particular risk where a company with market power upstream is vertically integrated and sells an upstream input both to its own downstream operation and also to its downstream competitors. The test is to determine whether the company would be
profitable in the downstream market if it had to pay the same price for the upstream input
as its downstream competitors. This Direction has been continued pending completion
of the market review, and margin squeeze tests are likely to appear as regulatory
remedies in the event that BT is found to have
SMP in broadband access.
On
3 April 2003, Oftel began an investigation into BTs proposed price
change of the IPStream products, on the grounds that there might be a margin
squeeze on the Datastream products (regarded by Ofcom as the upstream product).
We agreed voluntarily to reduce the corresponding Datastream prices and,
in May 2004, announced our intention to further adjust the prices to ensure
there are adequate margins between Datastream and
IPStream Home 500 (see Traditional services for wholesale customers).
Other market reviews
Ofcom is conducting a market review
of local loop unbundling (LLU) and, in May 2004, published the first consultation.
A second will take place during the summer, with completion anticipated for December
2004.
On the mobile front, Oftel concluded a market review of mobile access and origination in November 2003, and a final statement is awaited from Ofcom on the review of mobile voice
termination.
Ofcom published a consultation document on financial reporting in April 2004. This makes proposals for SMP obligations relating to accounting separation and cost accounting systems across
all markets where SMP designations have been made.
SMP apparatus conditions
The Government has made provision in
the Communications Act for Ofcom to review markets for terminal apparatus (eg
telephones) and impose conditions on accounting methods, systems and separation,
and to impose price controls in relation to hard-wired phones on any provider
designated with SMP. Ofcom is considering whether to conduct a review of hard-wired
telephones.
Enforcement
The Communications Act sets out the
enforcement process to be followed in relation to breaches of conditions. Where
a breach is not remedied following notification by Ofcom, Ofcom may take legally
enforceable enforcement action and/or impose a penalty of up to 10% of relevant
turnover. In addition, a person who suffers loss or damage as a result of the
breach may, with Ofcoms consent, sue for damages, and, in the case of serious
and repeated
contraventions, Ofcom may restrict or suspend the providers entitlement
to provide electronic communications networks or services.
The Communications Act contains similar enforcement procedures (though with much smaller penalties) for matters such as non-compliance with a request for information or non-payment of an
administrative charge.
20 | Operating and financial review | BT
Annual Report and Form 20-F 2004 |
Appeals One of the main features of the new regulatory framework is that full appeals on the merits are now available against regulatory decisions. Consequently, appeals can be made against matters such as: |
|
SMP, SMP apparatus (see above) and USO designations | |
the setting, modification and revocation of conditions | |
enforcement actions, including the imposition of a penalty. | |
Any
person affected by a decision may appeal to the Competition Appeal
Tribunal. However, the Tribunal must refer on to the Competition Commission
for determination any matters in any appeal which relates to price
controls.
In
an appeal by BT, the Competition Appeal Tribunal has ruled that it
was wrong for Oftel to force us to supply mobile companies with the
private circuits that connect their cell sites to their main networks
more cheaply, on the basis that such circuits were interconnection,
than we had done historically. |
Competition
The competitive environment
The UK telecommunications market is
fully open and highly competitive.
Although
it is some years since the
Telecommunications Act abolished
the monopoly of the former statutory corporation, British Telecommunications,
obligations placed on BT, including pricing regulation, network access, non-discrimination
obligations and the requirement to provide universal service, are generally more
onerous than for other providers of electronic communications networks and services.
Competition and the UK economy
The growth of mobile over the last
decade has been a major factor
in shaping the UKs telecommunications landscape. Mobile now accounts for
approximately 30% of the total UK voice minutes. BTs market share of the
total UK voice market including mobile is estimated to be
approximately 40%.
BTs
share of the residential fixed-voice market, as measured by the volume
of fixed-to-fixed voice minutes, declined to an estimated 70% in the 2004
financial year, compared with an estimated 73% in the 2003 and 2002 financial
years. CPS has been one of the contributors to the loss of share in the
fixed-voice market. We estimate that BT had 42% of the market for business
fixed-voice calls in the 2004 financial year, compared
with an estimated 45% and 49% in the 2003 and 2002 financial years, respectively.
The estimated market shares are based on our actual minutes, market data provided by Ofcom and an extrapolation of the historical market trends.
We also estimate that BT has supplied approximately 80% of exchange lines in the UK during the three years under review.
The
growth in cable operators networks in the UK has historically had an adverse effect on BTs
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 arrangements will allow
BTs fixed-line customers to move PSTN lines to other operators which are
expected to be the
source of more competition in future.
Since
2000, we have been required to provide other operators with the use of
the lines connecting BTs local exchanges to our customers and to
other operators to install equipment in our exchanges (local loop unbundling)
(see Other market
reviews).
Competition Act
In addition to telecommunications industry
regulation, BT is subject to general competition law.
By virtue of provisions in the Competition Act 1998, UK competition law is in line with European Community law in prohibiting anti-competitive agreements, concerted practices and the abuse
of a dominant market position. In the case of electronic communications, Ofcom has concurrent investigatory and enforcement powers with the Office of Fair Trading. Breach of the relevant prohibitions could lead to fines of up to 10% of relevant
turnover in the UK for each year of infringement (up to a maximum of three years) and/or result in claims for damages in the civil courts. A company may also be ordered to cease an infringing activity. There is an independent mechanism for appeals
to the Competition Appeal Tribunal against decisions under the Competition Act.
The
Competition Appeal Tribunal is hearing Freeserves appeal against Ofcoms decision in which BT was found not to have infringed the prohibition on abuse of a dominant position
in relation to BT Openworlds consumer broadband products.
Enterprise Act
The Enterprise Act 2002 aims to give
more independence to the competition authorities, to reform insolvency and bankruptcy
laws and to tackle trading practices that harm consumers.
The key provisions of the Enterprise Act, including the new cartel offence and the section on director disqualification, entered into force on 20 June 2003. It is now a criminal offence,
punishable by imprisonment or a fine, or both, to engage in cartel activity. In addition, where companies infringe UK or EC competition law, company directors can be disqualified from acting as such for a maximum period of 15 years.
Pricing regulation
Fixed network
We are subject to price controls on
our fixed network services in the UK at two levels: retail and network. Fixed
network competitors are generally not subject to direct price controls, although
there are some controls
on mobile network operators.
Retail price controls
We are subject to two sets of UK retail
price controls, one on certain public-switched telephony call charges
21 | Operating and financial review | BT
Annual Report and Form 20-F 2004 |
Price control formula (RPI-X)
Years commencing 1 August | ||||||||||||
1998 | 1999 | 2000 | 2001 | 2002 | 2003 | |||||||
% RPI movement for the relevant perioda | 3.75 | 1.35 | 3.32 | 1.93 | 1.03 | 2.89 | ||||||
X in price control formulab | 4.50 | 4.50 | 4.50 | 4.50 | 1.03 | 2.89 | ||||||
% required reduction in base pricescd | (0.73 | ) | (3.15 | ) | (1.09 | ) | (2.45 | ) | 0 | 0 | ||
% reduction in base prices overall | (0.73 | ) | (3.24 | ) | (1.20 | ) | (2.50 | ) | (0.22 | ) | (0.16 | )e |
a | Annual increase in RPI to previous June |
b | From 1 August 1997, the RPI formula covers the main switched telephone services provided to the lowest 80% of BTs residential customers by bill size |
c | After permitted carry forward of any unused allowance or shortfall from previous years |
d | From 1 August 2002, the RPI formula covers the change in average prices (including residential discount packages) |
e | Price changes implemented up to March 2004 for all residential customers |
and exchange line rentals, and one
on certain private circuits. Each price control is based on a formula calculated
by reference to the UK Retail Prices Index (RPI) and a factor, X.
For
services covered by the controls, the weighted average of base prices cannot
increase in each year beginning 1 August by more than the annual change in RPI
minus X. The current retail price control for public-switched telephony, applying
from August 2002 to July 2006, is RPI minus RPI (ie the value of X is RPI and
prices cannot increase). It is measured on services used by the lowest 80% of
our residential customers classified by bill size. From August 2002, the services
covered by the control were extended to include BTs share of the revenue
for calls to all four mobile networks, replacing the previous 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 in RPI. Under the price controls for
private circuits that applied from August 1997 to July 2001, prices for domestic analogue and low-speed digital private circuits could not increase by more than the change in the RPI in any year. For all retail analogue private circuits and 8 Mbit/s
digital private circuits, we have voluntarily given an assurance to adhere to a RPI+0% price cap from 30 June 2003 (ie applied retrospectively) until 30 June 2006.
As
part of the review of price controls in 2002, BT was required to provide
a cost-based wholesale line rental product to other service providers at
a regulated price and in a way that
does not discriminate between BTs retail business and service providers.
This product (Wholesale Access) has been available from BT since 1 September
2002. Further consultation by Ofcom has resulted in an enhanced wholesale access
product
being available from 29 March 2004.
Network charge control
We operate under interconnection agreements
with most other operators. The current network charge control period began on
1 October 2001 and will last for four years from that date. It requires us to
set reasonable charges based on long-run incremental costs for our standard interconnection
services. Depending on the degree of competition for these services, charges
are cap-controlled each year by RPI
minus X (where X ranges from
7.5% to 13%) for services Ofcom considers unlikely to become competitive in the
near future; and safeguard cap controlled (ie no increases above RPI during any
relevant year of the overall control period) for services likely to become competitive.
Those services considered fully competitive are not subject to direct charge
controls. Later in 2004, Ofcom will begin a review of the network charge control
to determine what control should
apply from 1 October 2005.
The main network price caps are listed below: | |||
Basket |
X
Factor in RPI X formula |
Duration |
|
Call termination | 10 | 30 Sept 2005 | |
Call origination | 10 | 30 Sept 2005 | |
Tandem layer | 13 | 30 Sept 2005 | |
Safeguard cap | 0 | 30 Sept 2005 | |
Interconnect specific | 8.25 | 30 Sept 2005 | |
Local exchange FRIACO | 7.5 | 30 Sept 2005 | |
Number portability | 5 | 31 July 2006 | |
The number portability charge control runs from 1 August 2002 until 31 July 2006.
The charges are controlled by a RPI minus X formula, with X set at 5%. Under
the new regime, General Condition 18 requires all providers to offer number portability,
among other things, on reasonable terms and for charges to be cost-orientated.
Ofcom is currently consulting on proposals for Condition 69A, presently maintaining
the number portability charge control, to be replaced by a non-binding undertaking
from BT that we will continue to comply with its terms, including the RPI-5 charge
control as though the provision was still operative until 31 August 2006.
BT must publish a notification to Ofcom and other operators if we intend to amend existing charges or to offer new services. Notice periods range from 28 to 90 days for regulated services,
depending on the degree to which they are judged to be competitive.
FRIACO
FRIACO (flat-rate internet access call
origination) is a service that provides flat-rate charges for internet dialled
access. On 21 July 2003, Oftel issued a Direction on the intelligent network
component of the FRIACO price that required BT to delete this component from
the charge retrospectively to 1 June 2002. BT incurred rebate payments in the
2004 financial year of around £16
million.
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 been set
by Ofcom and are subject to a price control of RPI minus 2%, effective from
1 September 2002 for four years. The control applies to the aggregate of all
charges (rental, transfer and installation) as well as to line transfers separately.
We are also under an obligation to notify Ofcom and service providers if we
intend to amend existing charges. Notice periods range from 28 to 90 days, depending
on the specific service.
On 28
November 2003 Oftel published its statement on the fixed narrowband wholesale
exchange
line market. This statement contained new obligations on BT to provide business
ISDN2 wholesale line rentals with cost-oriented prices. We must also provide
residential ISDN2 and ISDN30 wholesale line rentals at retail minus prices.
Furthermore, the wholesale ISDN2 business and ISDN30 products have to be provided
in accordance with a functional specification defined by Ofcom. Ofcom is conducting
an investigation into the prices of business ISDN2 wholesale line rental.
Non-UK regulation
BT must comply with the regulatory regimes in
the countries in which we operate or wish to operate. The obligations placed
on BT and our suppliers continue to be relevant to our business models and have
cost implications for our end-user services. These rules are generally applied
by national regulatory authorities operating under a government mandate. The
impact of the decisions of these bodies can have a material impact on our business
models from time to time.
European Union
The degree to which the European directives have
been implemented varies by country. While 2004 should see a general move towards
the new regime, in some countries the directives may not be fully implemented
until 2005. In most, but not all, member states the primary legislation that
will enable the introduction of the new regulatory regime is going through,
or has been through, the legislative process. The processes of identification
of operators with SMP and the subsequent setting of regulatory obligations on
those operators are mostly in progress. The implementation process in Germany
is notably behind that in other major member states.
BT will not have
universal service obligations outside the UK, although in certain member states
we may be required to contribute towards an industry fund to pay for the cost
of meeting universal service obligations in those countries. Any findings that
BT has SMP in any non-UK market are not expected to have a material impact.
We are lobbying the European Commission and other EU bodies with responsibility
for electronic communications for consistent and timely implementation of the
new directives and associated regulation.
The availability of cost-oriented access products from regulated incumbents remains an important element of our strategy around the world and we continue to press these incumbents, their national regulatory authorities
and at EU level for such access. Their availability varies by country.
Rest of the world
The vast majority of the markets in
which we operate around the world are regulated, and in the majority of these
we have to obtain licences or other authorisations and to comply with the
conditions
of these. The degree to which these markets are liberalised varies widely:
while many are fully open to competition, others place restrictions on market
entrants,
such as the extent to which foreign ownership is permitted, or restrictions
on the services which may be provided. The extent to which the national incumbent
operator is effectively regulated also varies considerably. BTs ability
to compete fully in some countries is therefore constrained.
Other significant changes and issues | |
Mobile call termination | |
In early 2003, the Competition Commission ruled that mobile termination rates were against the public interest and recommended one-off cuts of 15% in real terms before 25 July 2003 and RPI minus X cuts for the following two years (X = 15% for Vodafone and O2 and X = 14% for T-Mobile and Orange). | |
(There
are two types of mobile termination charge. |
|
When a BT fixed-line customer makes a call to a mobile phone, we incur a termination charge payable to the mobile operator. This charge is incorporated in the cost of the call. | |
When a customer of any mobile operator makes a call to another mobile network, this can pass through BTs fixed network. In this case, BT passes the termination charge on behalf of the calling mobile network to the receiving mobile network.) | |
Oftel
introduced changes to the mobile operators licences to implement
the one-off 15% cut by 25 July 2003 and Ofcom is currently undertaking
a market review of mobile termination rates to evaluate what, if any,
controls should exist going forward. Ofcoms latest proposals seek
to implement the Competition Commissions original findings.
|
|
The
financial effect has been to reduce group revenues by over £200
million during the 2004 financial year. However, payments to mobile operators
have reduced by exactly the same amount, leaving a neutral effect on profits. |
Strategic Review of Telecommunications
During 2004, Ofcom will be carrying out
a strategic review of the UK telecommunications sector and published its
first consultation
in April 2004. The review will be comprehensive, wide ranging and will assess
the options for enhancing value and choice in the UK telecommunications sector
while having regard to investment and innovation. Ofcoms proposals
will be set out in a report to be published before the end of 2004.
23 | Operating and financial review | BT Annual Report and
Form 20-F 2004 |
The review focuses on five fundamental issues, relating respectively to: the key attributes of a well-functioning telecoms market for citizen-consumers; the achievement of sustainable competition; the possibility of a significant reduction in regulation; 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 on or in the public highway is required to make
financial provision to cover damage suffered by highway or other relevant authorities,
resulting from works carried out by the communications provider, for the removal
of its network, if necessary, in the event of the liquidation or bankruptcy
of the company.
The conditions
require the company to provide Ofcom annually with a certificate that, in the
company boards opinion, the company has fulfilled its obligations to ensure
the availability of the required funds.
Relationship with HM Government
The UK Government, collectively, is our largest
customer, but the provision of services to any one department or agency of the
UK Government does not comprise a material proportion of our revenues. Except
as described below, the commercial relationship between BT as a supplier and
the UK Government as customer has been on a normal customer and supplier basis.
We can, however, be required by law to do certain
things and provide certain services for the UK Government. General conditions
made under the Communications Act 2003 require all providers of public telephone
networks and/or publicly available telephone services, including BT, on the
request of and in consultation with the authorities, to make, and if necessary
implement, plans for the provision or restoration of services in connection
with disasters. Furthermore, the Civil Contingencies Bill, currently before
Parliament, contains provision enabling obligations to be imposed on providers
of public electronic communications networks, including BT, in connection with
civil contingency planning. In addition, the Secretary of State has statutory
powers to require us to take certain actions in the interests of national security
and international relations.
Legal proceedings
The company does not believe that there are any
pending legal proceedings which would have a material adverse effect on the
financial position or operations of the group.
Proceedings have
been initiated in Italy against 21 defendants, including a former BT employee,
in connection with the Italian UMTS auction. Blu, in which BT held a minority
interest, participated in that auction process. The evidential hearings are
continuing in Rome. If the proceedings are successful, BT could be held liable,
with others, for any damages. The company has concluded that it would not be
appropriate to make a provision in respect of any such potential claim.
24 | Operating and financial review | BT Annual Report and
Form 20-F 2004 |
Five-year financial summary
Profit
and loss account |
||||||||||
2000 | 2001 | 2002 | 2003 | 2004 | ||||||
Years ended 31 March
| £m | £m | £m | £m | £m | |||||
|
|
|
|
|
||||||
Total turnover: | ||||||||||
Continuing activities | 18,228 | 21,068 | 21,815 | 20,182 | 18,914 | |||||
Discontinued activities | 3,675 | 8,598 | 2,827 | | | |||||
21,903 | 29,666 | 24,642 | 20,182 | 18,914 | ||||||
Groups share of associates and joint ventures turnover | (3,364 | ) | (9,937 | ) | (4,764 | ) | (1,455 | ) | (395 | ) |
Trading between group and principal joint venture | 176 | 698 | 681 | | | |||||
|
|
|
|
|
||||||
Group turnover: | ||||||||||
Continuing activities | 16,125 | 17,141 | 18,447 | 18,727 | 18,519 | |||||
Discontinued activities | 2,590 | 3,286 | 2,112 | | | |||||
18,715 | 20,427 | 20,559 | 18,727 | 18,519 | ||||||
Other operating income | 216 | 359 | 362 | 215 | 177 | |||||
Operating costsab | (15,359 | ) | (20,759 | ) | (21,400 | ) | (16,370 | ) | (15,823 | ) |
|
|
|
|
|
||||||
Group operating profit (loss): | ||||||||||
Before goodwill amortisation and exceptional items | 3,772 | 3,257 | 2,580 | 2,790 | 2,892 | |||||
Goodwill amortisation and exceptional items | (200 | ) | (3,230 | ) | (3,059 | ) | (218 | ) | (19 | ) |
3,572 | 27 | (479 | ) | 2,572 | 2,873 | |||||
Groups share of operating profit (loss) of associates and | ||||||||||
joint venturesc | (400 | ) | (397 | ) | (1,381 | ) | 329 | (34 | ) | |
|
|
|
|
|
||||||
Total operating profit (loss): | ||||||||||
Continuing activities | 3,143 | 2,456 | (1,489 | ) | 2,901 | 2,839 | ||||
Discontinued activities | 29 | (2,826 | ) | (371 | ) | | | |||
3,172 | (370 | ) | (1,860 | ) | 2,901 | 2,839 | ||||
Profit on sale of fixed asset investments and group undertakings | 126 | 619 | 4,389 | 1,691 | 36 | |||||
Profit on sale of property fixed assets | 26 | 34 | 1,089 | 11 | 14 | |||||
Amounts written off investments | | | (535 | ) | (7 | ) | | |||
Net interest payabled | (382 | ) | (1,314 | ) | (1,622 | ) | (1,439 | ) | (941 | ) |
|
|
|
|
|
||||||
Profit (loss) on ordinary activities before taxation: | ||||||||||
Before goodwill amortisation and exceptional items | 3,100 | 2,072 | 1,113 | 1,829 | 2,016 | |||||
Goodwill amortisation and exceptional items | (158 | ) | (3,103 | ) | 348 | 1,328 | (68 | ) | ||
2,942 | (1,031 | ) | 1,461 | 3,157 | 1,948 | |||||
Tax on profit (loss) on ordinary activitiese | (957 | ) | (712 | ) | (443 | ) | (459 | ) | (539 | ) |
|
|
|
|
|
||||||
Profit (loss) on ordinary activities after taxation | 1,985 | (1,743 | ) | 1,018 | 2,698 | 1,409 | ||||
Minority interests | 10 | (127 | ) | (23 | ) | (12 | ) | 8 | ||
|
|
|
|
|
||||||
Profit (loss) for the financial year | 1,995 | (1,870 | ) | 995 | 2,686 | 1,417 | ||||
|
|
|
|
|
||||||
Average number of shares used in basic earnings per share (millions) | 7,235 | 7,276 | 8,307 | 8,616 | 8,621 | |||||
Basic earnings (loss) per share | 27.6 | p | (25.7 | )p | 12.0 | p | 31.2 | p | 16.4 | p |
Diluted earnings (loss) per share | 26.9 | p | (25.7 | )p | 11.9 | p | 31.0 | p | 16.3 | p |
Basic earnings (loss) per share from continuing activities | 29.2 | p | 20.7 | p | (34.8 | )p | 31.2 | p | 16.4 | p |
Diluted earnings (loss) per share from continuing activities | 28.5 | p | 20.4 | p | (34.8 | )p | 31.0 | p | 16.3 | p |
Dividends per share | 19.6 | p | 7.8 | p | 2.0 | p | 6.5 | p | 8.5 | p |
Dividends per share, centsf | 35.7 | c | 14.0 | c | 3.1 | c | 10.3 | c | 15.6 | c |
|
|
|
|
|
||||||
Basic earnings per share before goodwill amortisation and | ||||||||||
exceptional items | 29.8 | p | 17.5 | p | 6.1 | p | 14.2 | p | 16.9 | p |
Diluted earnings per share before goodwill amortisation and | ||||||||||
exceptional items | 29.1 | p | 17.3 | p | 6.0 | p | 14.1 | p | 16.8 | p |
Basic earnings per share before goodwill amortisation and | ||||||||||
exceptional items on continuing activities | 29.5 | p | 19.3 | p | 8.8 | p | 14.2 | p | 16.9 | p |
|
|
|
|
|
a | Operating costs include net exceptional costs | 111 | 2,857 | 2,707 | 198 | 7 | |||||
b | Includes redundancy and early leaver costs | 59 | 118 | 252 | 276 | 202 | |||||
c | Groups share of operating profit (loss) of associates and joint ventures includes exceptional costs (release) | | 332 | 1,294 | (150 | ) | 26 | ||||
d | Net interest payable includes exceptional costs (credits) | | (25 | ) | 162 | 293 | 55 | ||||
e | Includes exceptional tax charge (credit) | 5 | 22 | (143 | ) | (139 | ) | (29 | ) | ||
f | Based on actual dividends paid and/or year end exchange rate on | ||||||||||
proposed dividends |
25 | Operating and financial review | BT Annual Report and Form 20-F 2004 |
Cash flow statement
2000 | 2001 | 2002 | 2003 | 2004 | ||||||
Years ended 31 March |
£m | £m | £m | £m | £m | |||||
Net cash flow from operating activities | 5,849 | 5,887 | 5,257 | 6,023 | 5,389 | |||||
Dividends from associates and joint ventures | 5 | 10 | 2 | 6 | 3 | |||||
Returns on investments and servicing of finance | (163 | ) | (727 | ) | (1,695 | ) | (1,506 | ) | (527 | ) |
Taxation paid | (1,311 | ) | (669 | ) | (562 | ) | (434 | ) | (317 | ) |
Capital expenditure and financial investment | (3,752 | ) | (8,442 | ) | (1,354 | ) | (2,381 | ) | (2,477 | ) |
Acquisitions and disposals | (6,405 | ) | (13,754 | ) | 5,785 | 2,842 | (60 | ) | ||
Equity dividends paid | (1,364 | ) | (1,432 | ) | | (367 | ) | (645 | ) | |
Cash (outflow) inflow before management of liquid resources | ||||||||||
and financing | (7,141 | ) | (19,127 | ) | 7,433 | 4,183 | 1,366 | |||
Management of liquid resources | 1,236 | (480 | ) | (1,864 | ) | (1,729 | ) | 1,123 | ||
Financing | 5,959 | 19,735 | (5,479 | ) | (2,473 | ) | (2,445 | ) | ||
Increase (decrease) in cash in the year | 54 | 128 | 90 | (19 | ) | 44 | ||||
(Increase) decrease in net debt in the year | (6,582 | ) | (18,942 | ) | 13,930 | 4,225 | 1,222 | |||
Balance sheet | ||||||||||
2000 | 2001 | 2002 | 2003 | 2004 | ||||||
At 31 March |
£m | £m | £m | £m | £m | |||||
Intangible fixed assets | 5,777 | 18,380 | 252 | 218 | 204 | |||||
Tangible fixed assets | 18,163 | 21,625 | 16,078 | 15,888 | 15,487 | |||||
Fixed asset investments | 5,878 | 5,204 | 1,221 | 555 | 377 | |||||
Net current assets (liabilities) | (7,115 | ) | (11,143 | ) | 732 | 1,876 | 2,002 | |||
Total assets less current liabilities | 22,703 | 34,066 | 18,283 | 18,537 | 18,070 | |||||
Loans and other borrowings falling due after one year | (5,354 | ) | (18,775 | ) | (16,245 | ) | (13,456 | ) | (12,426 | ) |
Provisions for liabilities and charges | (3,011 | ) | (2,738 | ) | (2,324 | ) | (2,376 | ) | (2,504 | ) |
Minority interests | (498 | ) | (499 | ) | (72 | ) | (63 | ) | (46 | ) |
Total assets less liabilities | 13,840 | 12,054 | (358 | ) | 2,642 | 3,094 | ||||
Called up share capital | 7,485 | 7,573 | 434 | 434 | 432 | |||||
Share premium account | | | 2 | 2 | 2 | |||||
Capital redemption reserve | | | | | 2 | |||||
Other reserves | (3,345 | ) | (2,848 | ) | 1,025 | 998 | 998 | |||
Profit and loss account | 9,700 | 7,329 | (1,819 | ) | 1,208 | 1,660 | ||||
Total equity shareholders funds (deficiency) | 13,840 | 12,054 | (358 | ) | 2,642 | 3,094 | ||||
Total assets | 37,588 | 54,799 | 27,673 | 28,217 | 26,618 | |||||
US GAAP | ||||||||||
2000 | 2001 | 2002 | 2003 | 2004 | ||||||
Years ended 31 March |
£m | £m | £m | £m | £m | |||||
Group operating profit (loss) | 2,990 | (633 | ) | (337 | ) | 2,693 | 2,420 | |||
Income (loss) before taxes | 2,096 | (1,959 | ) | 1,025 | 3,653 | 1,188 | ||||
Net income (loss): | ||||||||||
Continuing activities | 1,559 | 809 | (1,680 | ) | 4,134 | 883 | ||||
Discontinued activities | (166 | ) | (3,166 | ) | 948 | | | |||
1,393 | (2,357 | ) | (732 | ) | 4,134 | 883 | ||||
Average number of ADSs used in basic earnings per ADS (millions) | 724 | 728 | 831 | 862 | 862 | |||||
Basic earnings (loss) per ordinary share | 19.3 | p | (32.4 | )p | (8.8 | )p | 48.0 | p | 10.2 | p |
Diluted earnings (loss) per ordinary share | 18.8 | p | (32.4 | )p | (8.8 | )p | 47.7 | p | 10.2 | p |
Basic earnings (loss) per ordinary share from continuing activities | 21.5 | p | 11.1 | p | (20.2 | )p | 48.0 | p | 10.2 | p |
Diluted earnings (loss) per ordinary share from continuing activities | 21.1 | p | 11.0 | p | (20.2 | )p | 47.7 | p | 10.2 | p |
Basic (loss) earnings per ordinary share from discontinued activities | (2.2 | )p | (43.5 | )p | 11.4 | p | | | ||
Diluted (loss) earnings per ordinary share from discontinued activities | (2.3 | )p | (43.5 | )p | 11.3 | p | | | ||
Basic earnings (loss) per ADS | £1.93 | £(3.24 | ) | £(0.88 | ) | £4.80 | £1.02 | |||
Diluted earnings (loss) per ADS | £1.88 | £(3.24 | ) | £(0.88 | ) | £4.77 | £1.02 | |||
Total assets as at 31 March | 38,481 | 55,361 | 30,428 | 31,131 | 28,674 | |||||
Ordinary shareholders equity (deficiency) as at 31 March | 13,634 | 10,231 | (4,247 | ) | (2,258 | ) | (1,455 | ) | ||
26 | Operating and financial review | BT Annual Report and Form 20-F 2004 |
Introduction
The 2004 financial year was marked by the continuing
transformation of our business operations and markets, where the pace of change
is accelerating. We are driving the change by providing our customers with new
technology and services with greater capabilities and lower cost. The focus on
delivering the strategy continued and the groups performance benefited
from the growth in new wave activities such as Information and Communications
Technology (ICT) solutions, broadband, mobility and managed services and continued
cost efficiency programmes.
The 2003 financial
year was characterised by a focus on implementing and delivering the strategy
announced in April 2002 and further corporate transactions in the continued restructuring
of the group and reduction of net debt. The corporate transactions included the
unwind of the Concert joint venture on 1 April 2002 and the disposal of our interest
in Cegetel for £2.6 billion.
The
2002 financial year was dominated by a series of corporate transactions designed
to
focus and transform the group and reduce its net debt position. Those corporate
transactions
included raising £5.9 billion through the rights issue in June 2001, selling
our Japanese telecom and Spanish mobile investments for £4.8
billion, selling the Yell directories business for approximately £2
billion, the demerger
of mmO2and the sale and leaseback of properties for £2.4
billion.
As a result of the major restructuring of the group and the significant level of corporate transactions completed during the period under review, we believe it is difficult for investors
to meaningfully compare the financial performance of the group between the financial years under review. In this Financial review the commentary is therefore focused principally on the trading results of the continuing activities of BT Group before
goodwill amortisation and exceptional items. In comparing the continuing activities of the group, the results of our discontinued activities, namely our Japanese telecom and Spanish mobile investments, Yell and mmO2 are excluded. Goodwill amortisation is excluded because the annual charge has varied significantly during the period under review as a result of the corporate transactions noted above and the exceptional impairment charges. The exceptional items, by virtue
of their size or nature, are excluded because they predominantly relate to corporate transactions rather than the trading activities of the group. This is also consistent with the way that financial performance is measured by management and we
believe allows a meaningful comparison to be made of the trading results of the group during the period under review.
The goodwill amortisation and exceptional items are therefore analysed and discussed separately from the line of business results in this Financial review because they are considered to be
a reflection of the corporate activity rather than the trading activity of the lines of business.
The following table shows the summarised profit and loss account which includes a reconciliation of the key performance measures before and after goodwill amortisation and exceptional
items and is discussed further in this Financial review. The operating results by line of business are discussed in addition to the overall group results as we believe the activities and markets they serve are distinct and this analysis provides a
greater degree of insight to investors.
27 | Operating and financial review | BT Annual Report and Form 20-F 2004 |
Summarised profit and loss account
2004 | 2003 | 2002 | ||||||
Continuing | Continuing | |||||||
activities | activities | Continuing | ||||||
and total | and total | activities | Total | * | ||||
£m | £m | £m | £m | |||||
Total turnover | 18,914 | 20,182 | 21,815 | 24,642 | ||||
Groups share of associates and joint ventures turnover | (395 | ) | (1,455 | ) | (4,049 | ) | (4,764 | ) |
Trading between group and principal joint venture | | | 681 | 681 | ||||
Group turnover | 18,519 | 18,727 | 18,447 | 20,559 | ||||
Other operating income | 177 | 215 | 361 | 362 | ||||
Operating costs | (15,823 | ) | (16,370 | ) | (18,854 | ) | (21,400 | ) |
Group operating profit (loss): | ||||||||
Before goodwill amortisation and exceptional items | 2,892 | 2,790 | 2,771 | 2,580 | ||||
Goodwill amortisation | (12 | ) | (20 | ) | (121 | ) | (352 | ) |
Exceptional items | (7 | ) | (198 | ) | (2,696 | ) | (2,707 | ) |
2,873 | 2,572 | (46 | ) | (479 | ) | |||
Groups share of operating profit (loss) of associates and joint ventures | (34 | ) | 329 | (1,443 | ) | (1,381 | ) | |
Total operating profit (loss): | ||||||||
Before goodwill amortisation and exceptional items | 2,884 | 2,971 | 2,663 | 2,546 | ||||
Goodwill amortisation | (12 | ) | (22 | ) | (162 | ) | (405 | ) |
Exceptional items | (33 | ) | (48 | ) | (3,990 | ) | (4,001 | ) |
2,839 | 2,901 | (1,489 | ) | (1,860 | ) | |||
Profit on sale of group undertakings and fixed asset investments | 36 | 1,691 | 21 | 4,389 | ||||
Profit on sale of property fixed assets | 14 | 11 | 1,089 | 1,089 | ||||
Amounts written off investments | | (7 | ) | (535 | ) | (535 | ) | |
Net interest payable | (941 | ) | (1,439 | ) | (1,579 | ) | (1,622 | ) |
Profit (loss) on ordinary activities before taxation: | ||||||||
Before goodwill amortisation and exceptional items | 2,016 | 1,829 | 1,273 | 1,113 | ||||
Goodwill amortisation | (12 | ) | (22 | ) | (162 | ) | (405 | ) |
Exceptional items | (56 | ) | 1,350 | (3,604 | ) | 753 | ||
1,948 | 3,157 | (2,493 | ) | 1,461 | ||||
Tax | (539 | ) | (459 | ) | (385 | ) | (443 | ) |
Profit (loss) after taxation | 1,409 | 2,698 | (2,878 | ) | 1,018 | |||
Minority interests | 8 | (12 | ) | (10 | ) | (23 | ) | |
Profit (loss) for the financial year | 1,417 | 2,686 | (2,888 | ) | 995 | |||
Basic earnings (loss) per share: | ||||||||
Before goodwill amortisation and exceptional items | 16.9 | p | 14.2 | p | 8.8 | p | 6.1 | p |
Goodwill amortisation | (0.1 | )p | (0.3 | )p | (2.0 | )p | (5.0 | )p |
Exceptional items | (0.4 | )p | 17.3 | p | (41.6 | )p | 10.9 | p |
16.4 | p | 31.2 | p | (34.8 | )p | 12.0 | p | |
* Including discontinued activities |
28 | Operating and financial review | BT Annual Report and
Form 20-F 2004 |
Group results
All references in this section
to the 2002 financial year results or performance against the 2002 financial
year are in relation to the results from continuing activities.
Whilst driving a significant transformation in the business, the group continued to make further progress with earnings per share before goodwill amortisation and exceptional items at 16.9
pence which were 19% ahead of the 2003 financial year and 92% ahead of the 2002 financial year.
The
acceleration of our transformation is demonstrated by the 30% growth of
new wave turnover to £3,387 million compared to an increase of 20%
in the 2003 financial year. New wave turnover represented 18% of group
turnover in the 2004 financial year compared to 14% and 12% in the 2003
and 2002 financial years, respectively. New wave turnover is mainly generated
from ICT solutions, broadband, mobility and managed
services.
In the 2004 financial year, performance was driven by particularly
strong growth in the ICT solutions business and broadband. However, this growth
was more than offset by a 6% decline in turnover from the groups
traditional businesses. The decline reflects regulatory intervention, price reductions and competitive and technological changes that are being used to drive customers from traditional services to better value and more flexible new wave services,
such as broadband and IPVPNs. Mobile operators were required to reduce their fees for terminating calls and these regulatory reductions were passed on to BT customers resulting in lower revenues but are profit neutral as payments to mobile
operators were reduced by the same amount. Group turnover was maintained after excluding the £219
million impact of these regulatory reductions to mobile termination rates.
In the 2003 financial year performance in new wave services was also driven by strong growth in ICT solutions and broadband. This growth was partly offset by the 1% decline in traditional
revenues.
The table below analyses the group turnover by customer segment. Consumer includes the external turnover of BT Retail from consumer customers. Business includes the external turnover of BT
Retail from smaller and medium sized enterprise (SME)
customers. Major Corporate includes
the external turnover of BT Retail Major Corporate customers, and the external
turnover of BT Global Services, excluding global carrier. Wholesale includes
the external turnover of BT Wholesale
and BT Global Services global carrier business.
Group turnover by customer segment
2004 £m |
2003 £m |
2002 £m |
||||
|
|
|||||
Consumer | 5,974 | 6,067 | 5,916 | |||
Business | 2,600 | 2,716 | 2,748 | |||
Major Corporate | 5,909 | 5,794 | 4,962 | |||
Wholesale | 4,002 | 4,110 | 4,433 | |||
Other | 34 | 40 | 388 | |||
|
|
|||||
18,519 | 18,727 | 18,447 | ||||
|
Consumer turnover in 2004 was
2% lower (1% excluding the impact of regulatory reductions in mobile termination
rates) at £5,974 million when compared to the 2003 financial year. In
the consumer fixed voice market, Carrier Pre Selection (CPS) had some impact
with BTs estimated residential market share, as measured by the volume
of fixed to fixed voice minutes, declining by 3 percentage points to 70% compared
to the 2003 financial year. The estimated market share, as measured by the volume
of fixed to fixed voice minutes, is based on our actual minutes, market data
provided by Ofcom and an extrapolation of the historical market trends.
The
proportion of contracted revenues has been increasing, now approaching 60% of
total revenues, with the success of the BT Together packages and broadband.
The underlying 12 months rolling average revenue per customer household (net
of mobile termination charges) of £268 in the 2004 financial year was
1% lower than the 2003 financial year. Consumer turnover in the 2003 financial
year was 3% higher at £6,067 million when compared to the 2002 financial
year. The number of BT Together packages increased by 304,000 packages during
the 2003 financial year.
The
aggregate Business and Major Corporate turnover in the 2004 financial year was
maintained when compared to the 2003 financial year after an increase of 10%
from the 2002 financial year. BTs estimated business market share of fixed
to fixed voice minutes declined to an estimated 42% in the 2004 financial year
compared to an estimated 45% and 49% in the 2003 and 2002 financial years, respectively.
Turnover
from smaller and medium sized enterprise customers in the 2004 financial year
reduced by 4% to £2,600 million compared to the 2003 financial year, reflecting
the continued penetration of CPS and the impact of customers switching from
traditional telephony services to new wave services such as broadband. However,
BT Business Plan, launched in January 2003, had successfully attracted more
than 267,000 business locations (175,000 customers) by 31 March 2004, helping
to mitigate the rate of market share decline. Revenues from smaller and medium
sized businesses in the 2003 financial year decreased by 1% compared to the
2002 financial year.
29 | Operating 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
reflects the continued migration of traditional voice only services to managed
ICT contracts from which turnover grew by 19% to £2,564 million in
the 2004 financial year confirming BTs status as a major ICT provider
in this market. Contract wins from ICT solutions amounted to more than £7
billion in the 2004 financial year. The highest profile of these were three
NHS contracts expected to be worth more than £2.1 billion and forming
an integral part of the National Programme for Information Technology in
the NHS. In the 2003 financial year Major Corporate revenues increased by
17% to £5,794 million with part of this increase reflecting the re-integration
of Concert. Contract wins from ICT solutions in the 2003 financial year amounted
to more than £4.4 billion compared to more than £3.3 billion
in the 2002 financial year.
Wholesale
(UK and Global Carrier) turnover in the 2004 financial year fell by 3% (maintained
excluding the impact of regulatory reductions to mobile termination rates) to
£4,002 million when compared to the 2003 financial year. New wave turnover
in the UK Wholesale business increased by 54% driven by broadband and managed
services after growing by 110% in the 2003 financial year. The Global Carrier
business turnover declined by 5% in the 2004 financial year. In the 2003 financial
year, Wholesale (UK and Global Carrier) turnover decreased by 7% when compared
to the 2002 financial year partly reflecting the re-integration of Concert.
Group
operating costs before goodwill amortisation and exceptional items reduced by
2% to £15,804 million in the 2004 financial year when compared to the
prior year. The group continued to focus on operational efficiency and effectiveness
initiatives which were offset by investment in new wave activities and the adverse
impact of currency movements of £80 million. Group operating costs before
goodwill amortisation and exceptional items in the 2003 financial year of £16,152
million increased by 1% compared to the 2002 financial year. Net staff costs
in the 2004 financial year, excluding leaver costs of £202 million, increased
by £138 million to £3,533 million due to the impact of increased
pay and national insurance rates and the higher SSAP 24 pension charge, offset
by improved efficiency. In the 2003 financial year, net staff costs excluding
leaver costs of £276 million declined by 2%. Payments to other telecommunications
operators were £3,963 million, an increase of 1% on the 2003 financial
year as both UK and overseas payments increased. In the 2003 financial year
payments to other telecommunication operators reduced by 8% to £3,940
million. The payments in the 2002 financial year include those made to the Concert
global venture for the delivery of BTs outgoing international calls, which
accounts for most of the reduction in the 2003 financial year. Other operating
costs before goodwill amortisation and exceptional items reduced by 6% in the
2004 financial year largely due to efficiency cost savings offset by the
adverse impact of currency
movements. Other operating costs in the 2003 financial year include the costs
associated with the re-integrated activities of the former Concert global venture.
Group
operating profit before goodwill amortisation and exceptional items at £2,892
million for the 2004 financial year was 4% higher than the prior year. This
reflects cost efficiencies achieved during the year, the improved performance
of BT Global Services and a £74 million decrease in leaver costs offset
by the decline in turnover. In the 2003 financial year, group operating profit
before goodwill amortisation and exceptional items at £2,790 million was
£19 million higher than the prior year. The cost efficiencies achieved
during the year were offset by a £90 million increase in leaver costs,
the negative group operating profit effects of unwinding the Concert global
venture and the Telereal property sale and leaseback transaction. In total,
these effects reduced group operating profits by over £400 million, although
this was compensated for at the profit before tax level by a corresponding improvement
in our share of the operating profits of associates and joint ventures and net
interest payable.
BTs
share of associates and joint ventures operating losses before goodwill
amortisation and exceptional items was £8 million in the 2004 financial
year, compared to a £181 million profit in the 2003 financial year and
a £108 million loss in the 2002 financial year. The 2003 financial year
includes the results of our interest in Cegetel which was sold in January 2003.
The improvement in the 2003 financial year mainly reflected the benefit of the
unwind of the Concert global venture.
Net
interest payable before exceptional items was £886 million for the 2004
financial year, an improvement of £260 million against the 2003 financial
year following an improvement of £271 million in the 2003 financial year.
This reflects the reduction in net debt in both years.
The
above factors resulted in the group achieving a profit before taxation, goodwill
amortisation and exceptional items of £2,016 million in the 2004 financial
year, an increase of 10% compared to the 2003 financial year, reflecting the
underlying operating performance of the group and lower net interest costs.
In the 2003 financial year the profit before taxation, goodwill amortisation
and exceptional items of £1,829 million was £556 million higher
than the 2002 financial year. The improvement in the 2003 financial year was
principally due to the exit from loss making businesses, improved operating
profits and lower interest charges.
The
taxation charge for the 2004 financial year was £568 million on the profit
before goodwill amortisation and exceptional items, an effective rate of 28.2%
compared to 32.7% and 41.5% in the 2003 and 2002 financial years, respectively.
The high effective rate in the 2002 financial year was mainly due to the impact
of loss making subsidiaries outside the UK for which tax relief was not available.
Basic
earnings per share before goodwill amortisation and exceptional items were 16.9
pence
30 | Operating and financial review | BT Annual Report and Form 20-F 2004 |
Line of business summary
Group turnover | Group operating profit (loss) | Goodwill amortisation | Exceptional charges (credits) | |||||||||||||||||||||
2004 £m |
2003 £m |
2002 £m |
2004 £m |
2003 £m |
2002 £m |
2004 £m |
2003 £m |
2002 £m |
2004 £m |
2003 £m |
2002 £m |
|||||||||||||
BT Retail | 13,534 | 13,882 | 13,284 | 1,433 | 1,527 | 894 | 1 | 1 | 1 | | | 111 | ||||||||||||
BT Wholesale | 10,859 | 11,247 | 12,325 | 1,682 | 1,758 | 2,070 | | | | (1 | ) | | 79 | |||||||||||
BT Global Services | 5,782 | 5,417 | 4,678 | (116 | ) | (394 | ) | (2,625 | ) | 11 | 19 | 120 | | | 2,211 | |||||||||
Other | 35 | 41 | 95 | (126 | ) | (319 | ) | (385 | ) | | | | 8 | 198 | 295 | |||||||||
Intra-group | (11,691 | ) | (11,860 | ) | (11,935 | ) | | | | | | | | | | |||||||||
Total continuing | ||||||||||||||||||||||||
activities | 18,519 | 18,727 | 18,447 | 2,873 | 2,572 | (46 | ) | 12 | 20 | 121 | 7 | 198 | 2,696 | |||||||||||
Discontinued | ||||||||||||||||||||||||
activities | | | 2,112 | | | (433 | ) | | | 231 | | | 11 | |||||||||||
Group totals | 18,519 | 18,727 | 20,559 | 2,873 | 2,572 | (479 | ) | 12 | 20 | 352 | 7 | 198 | 2,707 | |||||||||||
for the 2004 financial year, an increase of 19% from 14.2 pence in the 2003 financial year, and were 8.8 pence in the 2002 financial year. The 2002 financial year reflected the higher operating costs and net interest payable which have continued to improve during the 2004 and 2003 financial years.
Line of business results
In the following commentary, we discuss the operating results of the group for the 2004, 2003 and 2002 financial years in terms of the lines of business.
There is extensive trading between the lines of business and their profitability is dependent on the transfer price levels. The intra-group trading arrangements and operating assets are
subject to review and have changed in certain circumstances. Where that is the case the comparative figures have been restated to reflect 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, reflecting sales of calls
and access lines and network charges for other products. This trading relationship
also reflects the pass through of termination charges on other telecom
operator networks and the sale of wholesale broadband ISP
products. BT Retail also trades with BT Wholesale, selling calls and lines products,
private circuits, apparatus and conferencing for onward sale to other telecom
operators. BT Global Services turnover with BT Retail mainly reflects the sales
of Global Services products in the UK. BT Global Services trades with BT Wholesale mainly for use of the IP/ATM network, International Direct Dial traffic settlements and certain dial IP revenue share arrangements. BT Wholesales turnover with
BT Global Services reflects the use of the network infrastructure for BT Global Services products.
Internal cost recorded by: | ||||||||||
Internal
turnover recorded by: |
BT Retail £m |
BT Wholesale £m |
BT
Global Services £m |
Other £m |
Total £m |
|||||
BT Retail | | 769 | 130 | 5 | 904 | |||||
BT Wholesale | 6,902 | | 510 | 2 | 7,414 | |||||
BT Global Services | 2,702 | 646 | | 24 | 3,372 | |||||
Other | | | 1 | | 1 | |||||
Total | 9,604 | 1,415 | 641 | 31 | 11,691 | |||||
The line of business results are presented and discussed before goodwill amortisation and exceptional items, for the reasons set out above, to provide a meaningful comparison of the trading results between the
financial years under review. Goodwill amortisation and exceptional items are discussed separately in a group context in this Financial review.
In addition to measuring financial performance of the lines of business based on the operating profit before goodwill amortisation and exceptional items, management also measure the
operating financial performance of the lines of business based upon the EBITDA before exceptional items. EBITDA is defined as the group operating profit (loss) before depreciation and amortisation. This may not be directly comparable to the EBITDA
of other companies as they may define it differently. EBITDA excludes depreciation and amortisation, both being non cash items, from group operating profit and is a common measure, particularly in the telecommunications sector, used by investors and
analysts in evaluating the operating financial performance of companies.
EBITDA
before exceptional items is considered to be a good measure of the operating
performance because it reflects the underlying operating cash costs, by
eliminating depreciation and amortisation, and excludes non-recurring exceptional
items that are predominantly related to corporate transactions. EBITDA
is not a direct measure of the groups liquidity, which is shown by the groups cash flow statement and needs to be
considered in the context of the groups financial commitments. A reconciliation
of EBITDA before exceptional items to group operating profits (losses) by line
of business and for the group is provided in the table across the page above.
Trends in EBITDA before exceptional items are discussed for each line of business
in the following commentary.
31 | Operating and financial review | BT Annual Report and Form 20-F 2004 |
Group operating profit (loss) | ||||||||||||||||||||||||
before goodwill amortisation | Amortisation of | EBITDA before | ||||||||||||||||||||||
and exceptional items | Depreciation | intangible assets | exceptional items | |||||||||||||||||||||
2004 | 2003 | 2002 | 2004 | 2003 | 2002 | 2004 | 2003 | 2002 | 2004 | 2003 | 2002 | |||||||||||||
£m | £m | £m | £m | £m | £m | £m | £m | £m | £m | £m | £m | |||||||||||||
1,434 | 1,528 | 1,006 | 162 | 201 | 209 | | | | 1,596 | 1,729 | 1,215 | BT Retail | ||||||||||||
1,681 | 1,758 | 2,149 | 1,919 | 1,923 | 1,914 | | | | 3,600 | 3,681 | 4,063 | BT Wholesale | ||||||||||||
(105 | ) | (375 | ) | (294 | ) | 610 | 609 | 503 | 3 | 4 | 3 | 508 | 238 | 212 | BT Global Services | |||||||||
(118 | ) | (121 | ) | (90 | ) | 230 | 278 | 348 | | | | 112 | 157 | 258 | Other | |||||||||
| | | | | | | | | | | | Intra-group | ||||||||||||
Total continuing | ||||||||||||||||||||||||
2,892 | 2,790 | 2,771 | 2,921 | 3,011 | 2,974 | 3 | 4 | 3 | 5,816 | 5,805 | 5,748 | activities | ||||||||||||
Discontinued | ||||||||||||||||||||||||
| | (191 | ) | | | 414 | | | 11 | | | 234 | activities | |||||||||||
2,892 | 2,790 | 2,580 | 2,921 | 3,011 | 3,388 | 3 | 4 | 14 | 5,816 | 5,805 | 5,982 | Group totals | ||||||||||||
BT Retails results have demonstrated the strategic focus of defending traditional turnover and gross margins, cost reductions through a series of cost transformation programmes and focusing on turnover growth
through new wave initiatives in the ICT, broadband and mobility markets. In the 2004 and 2003 financial years, the results include those of the re-integrated Concert business relating to UK multinational customer accounts, including the associated
sales force and account management functions.
BT
Retails turnover decreased by 3% in the 2004 financial year to £13,534
million after rising by 5% in the 2003 financial year. The growth in new wave
turnover of 29% in the 2004 financial year was more than offset by the decline
in traditional turnover driven by the increased impact of regulation and competition.
After adjusting for the regulatory impact of the reduction in mobile termination
rates, turnover declined
by 2% compared to the 2003 financial year. The increase in the 2003 financial
year included turnover from the UK multinational customers re-integrated into
BT Retail from the Concert global venture. Turnover for the three years is summarised
as
follows:
BT Retail turnover | 2004 | 2003 | 2002 | |||
£m | £m | £m | ||||
Voice services | 9,012 | 9,665 | 9,590 | |||
Intermediate products | 2,356 | 2,534 | 2,285 | |||
Traditional | 11,368 | 12,199 | 11,875 | |||
ICT | 1,734 | 1,502 | 1,378 | |||
Broadband | 307 | 131 | 31 | |||
Mobility | 84 | 42 | | |||
Other | 41 | 8 | | |||
New wave | 2,166 | 1,683 | 1,409 | |||
Total | 13,534 | 13,882 | 13,284 | |||
Voice services comprise 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 for fixed to fixed voice call minutes in the 2004 financial year
was estimated to have declined by 2%, partly reflecting the migration to new
wave products and services
such as IPVPNs and
substitution by e-mail, instant messaging and mobile services. In the 2003 financial year, the estimated overall market for fixed to fixed voice call minutes declined by 3%.
BT
Retails total originating measured call volumes declined by 10% in the 2004 financial year (2003 5%) with geographic (local, national and international) calls declining by
8% (2003 4%), reflecting the decline in the market and some loss of market share due to CPS. Fixed to mobile call volumes were flat in the 2004 financial year after a 6% increase in the 2003 financial year. BT Retails internet and data
related call volumes declined by 16% reflecting the move to wholesale flat rate internet access products in the 2004 financial year. Total BT Group internet and data related call volumes increased by 1% (2003 30%), with the decline in the
year on year rate of growth driven by the migration to broadband which is not measured in minutes and a slow down in the growth of flat rate internet access minutes. As a result, BT Groups total originating measured call volumes declined by 2%
in the 2004 financial year (2003 13% increase).
The
directory services market was deregulated following an announcement in September
2001 which resulted in the introduction of the new 118 XXX number range in December
2002 and the
termination of the 192 and 153 services in August 2003. BTs market share
of the deregulated directory enquiries market through the 118 500 service has
increased during the year as the benefits and awareness of the quality of service
and pricing, supported by a marketing campaign became apparent. However, revenues
reduced significantly year on year due to a contraction in the market.
Turnover
from intermediate products in the 2004 financial year of £2,356 million
decreased by 7% in the 2004 financial year after increasing by 11% in the 2003
financial year. In the 2004 financial year, the change was mainly driven by a
decline in retail private circuits and ISDN as customers migrate to cheaper partial
private circuits and new wave products such as broadband and IPVPN. In the 2003
financial year growth was
achieved, which included the benefit of the re-integration of Concert, despite
the migration of customers from retail private circuits to partial private circuits.
As a result of changes required by Ofcom, partial private circuits used by UK
fixed
network
32 | Operating and financial review | BT Annual Report and Form 20-F 2004 |
operators are no longer provided by
BT Retail, but are provided as a BT Wholesale product. Private circuit revenues
declined by £228 million in the 2004 financial year and by £109
million in the 2003 financial year.
The total number of BT Retail lines, which includes
voice, digital and broadband, were flat at 29.6 million at 31 March 2004 following
an increase of 1% in the 2003 financial year, reflecting the continued growth
in broadband offset by the declining PSTN lines. The movement in the 2003 financial
year mainly reflected the growth of high speed ISDN lines and broadband.
New wave turnover grew by 29% to £2,166
million in the 2004 financial year compared to growth of 19% in the 2003 financial
year. ICT turnover increased by 15% in the 2004 financial year to £1,734
million after an increase of 9% in the 2003 financial year reflecting the growth
in new IP based services and solutions contracts, offset by the decline in business
telephony equipment. Broadband turnover grew by 134% to £307 million in
the 2004 financial year after an increase of 322% in the 2003 financial year.
This reflects the increased take up of broadband, with 928,000 BT Retail customers
at 31 March 2004 and 429,000 customers at 31 March 2003, reflecting increases
of 116% and 298% on the respective prior years. In November 2003, BT entered
the consumer mobile market with the launch of BT Mobile Home Plan through on-line,
voice and retail store outlets. BT now has a consumer and corporate mobile customer
base of 144,000. Total turnover from mobile services increased by 100% in the
2004 financial year to £84 million.
The gross margin percentage decreased by 1 percentage
point in the 2004 financial year after an increase of 1 percentage point in
the 2003 financial year. The decline in the 2004 financial year reflects lower
prices and changes in the revenue mix, partly offset by lower charges from BT
Wholesale, in line with market and regulatory prices. The improvements in the
2003 financial year were driven by the success of BT Together packages, improved
product mix and lower wholesale prices which more than offset the impact of
the decline in call volumes.
Gross margin is turnover less costs directly
attributable to the provision of the products and services reflected in turnover
in the period. Selling, general and administration costs are those costs that
are ancillary to the business processes of providing products and services and
are the general business operating costs. BT Retail analyses its costs in this
manner for management purposes in common with other retail organisations and
it has set target savings for selling, general and administration costs.
Cost transformation programmes in the 2004 financial
year generated selling, general and administration cost savings of £228
million before leaver costs in the traditional business compared to the 2003
financial year (£154 million net of new wave investment). The savings
in the year were driven by a reduction in people related expenses such as travel,
accommodation and communications, lower service costs resulting from improvements
in service quality, billing initiatives and cost reduction programmes focusing
on customer contact centres, improving the billing platform, and optimising
processes across BT Retail.
Excluding leaver costs and investment in new
wave activities, BT Retail has achieved its target of £800 million savings
almost a year early in the traditional business, achieving savings of £228
million, £275 million and £290 million in the 2004, 2003 and 2002
financial years, respectively.
The number of employees in BT Retail at 31 March
2004 and 31 March 2003 was 41,500 and 50,400, respectively.
BT Retails EBITDA before exceptional items
and goodwill amortisation declined by 8% to £1,596 million in the 2004
financial year after showing strong growth in the 2003 financial year of 42%
to £1,729 million. In the 2004 financial year, cost savings were more
than offset by the decline in turnover and the impact on margins of the product
mix. In the 2003 financial year, the cost savings and improved gross margins
contributed towards BT Retails strong EBITDA growth before exceptional
items.
BT Wholesale | 2004 | 2003 | 2002 | |||
£m | £m | £m | ||||
Group turnover | 10,859 | 11,247 | 12,325 | |||
Group operating profit* | 1,681 | 1,758 | 2,149 | |||
EBITDA* | 3,600 | 3,681 | 4,063 | |||
Capital expenditure | 1,809 | 1,652 | 1,974 | |||
* | Before goodwill amortisation and exceptional items |
BT Wholesale is the line
of business within BT that provides network services and solutions within
the UK. Its customers
include communications companies, fixed and mobile network operators and service
providers. The customer base includes BTs lines of business, BT Retail
and BT Global Services. The majority of BT Wholesales turnover is internal
(2004 68%, 2003 69%, 2002 68%) and mainly represents trading
with BT Retail. External turnover is derived from providing wholesale products
and solutions to other operators interconnecting with BTs UK
fixed network, including mmO2 since the
demerger. Internal turnover and costs
with mmO2 for the
2002 financial year have been reclassified as external in this section to enable
a meaningful year on year comparison.
In the
2004 financial year, turnover totalled £10,859 million, a decline of 3%
following a decrease of 9% to £11,247 million in the 2003 financial year.
The reduction in the 2004 and 2003 financial years is primarily due to lower
sales volumes and prices to BT Retail. The results for the 2002 financial year
included turnover of £770 million relating to the former Concert global
venture, which was re-integrated from 1 April 2002. Excluding this Concert
turnover
in the 2002 financial year, the underlying turnover declined by 3% in the 2003
financial year.
External
turnover declined by 2% in the 2004 financial year to £3,445 million
which is fully accounted for by regulatory price reductions on mobile termination
rates which have reduced external turnover
33 | Operating and financial review | BT Annual Report and Form 20-F 2004 |
by £126 million, although this
has no impact on profitability. In the 2003 financial year external turnover
declined by 11% to £3,525 million, although excluding sales to Concert
in the 2002 financial year, the underlying external turnover increased by 3%.
The
decline in external turnover from traditional products in the 2004 and 2003
financial years is due to the mobile termination rate impact and price reductions,
Network Charge Control (NCC) and other Oftel price determinations, coupled with
unfavourable market conditions. Turnover from retail private circuits at £207million
reduced by 36% in the 2004 financial year and in the 2003 financial year at
£325 million reduced by 9%. The decline is due to the migration of customers
from retail private circuits to lower priced partial private circuits, introduced
in August 2001. Turnover from partial private circuits showed an increase of
43% to £152 million in the 2004 financial year and an increase of 89%
to £106 million in the 2003 financial year. FRIACO generated turnover
of £78 million in the 2004 financial year (2003 £84 million,
2002 £68 million) and the trend follows the move to flat rate packages
by internet service providers in 2003 and their subsequent substitution by broadband
in 2004. Conveyance and low margin transit revenues of £2,054 million
decreased compared to the 2003 financial year and at £2,075 million increased
marginally compared to the 2002 financial year.
New
wave turnover, including broadband and managed services, at £361 million,
showed strong growth of 54% following growth of 110% in the 2003 financial year.
This growth in the 2004 financial year completely offsets the reduction in external
traditional turnover after excluding the impact of mobile termination rate cuts.
Wholesale broadband lines had an installed base of 2.2 million at 31 March 2004
representing growth of 177% on the number of lines as at 31 March 2003 which
had grown 380% on the previous year. At 14 May 2004 the installed base was 2.45
million, with net additions growing at more than 35,000 connections per week
since January 2004.
In
the 2004 financial year, internal turnover decreased by 4% to £7,414 million
after a decrease of 8% to £7,722 million in the 2003 financial year. Lower
call and retail private circuit volumes, reductions on mobile termination rates
and price reductions reflected most of the decline in the 2004 financial year.
The unwind of the Concert global venture resulted in a reduction of internal
revenues in the 2003 financial year. Excluding the Concert related revenues
in the 2002 financial year, the reduction in internal turnover in the 2003 financial
year was 5%. This reduction was primarily due to a reduction in prices on sales
to BT Retail, partly offset by the increased sales to BT Global Services.
Despite
network volume increases in the 2004 financial year, operating costs, excluding
depreciation and exceptional items, decreased by 4% to £7,351 million
(10% to £7,691 million in 2003). The movement in the 2003 financial year
was mainly due to £905 million of Concert related costs in the 2002 financial
year offset by an increase in leaver costs of £108 million.
Interconnect payments to other network
operators remained broadly flat in the 2004 financial year at £3,165
million. In the 2003 financial year, these payments decreased by 18% to £3,143
million and the unwind of the Concert global venture accounted for the majority
of this reduction as interconnect payments to Concert were no longer made.
These costs are mainly recharged to BT Retail with no margin or reflect external
transit revenues with a minimal margin.
Net
staff costs in the 2004 financial year, at £805 million, decreased by
1% after increasing by 19% to £816 million in the 2003 financial year.
The increase in the 2003 financial year reflects an increase in leaver costs
compared to the prior year of £108 million.
Payments
to other BT lines of business declined by 8% in the 2004 financial year to £2,933
million after declining by 12% to £3,175 million in the 2003 financial
year. The reduction in the 2004 financial year reflects the decline in private
circuits purchased from BT Retail. The reduction in the 2003 financial year
was principally due to the unwind of the Concert global venture which reduced
the cost of sales of BT Retail products, and a reduction in service costs.
EBITDA
before exceptional items at £3,600 million in the 2004 financial year
was 2% lower than in the 2003 financial year following a reduction of 9% to
£3,681 million in the 2003 financial year. EBITDA margins before exceptional
items were maintained at 33% across all three financial years.
Depreciation
costs were broadly flat at £1,919 million in the 2004 financial year and
£1,923 million in the 2003 financial year.
Operating
profit before goodwill amortisation and exceptional items at £1,681 million
decreased by 4% in the 2004 financial year. This was after a reduction of 18%
to £1,758 million in the 2003 financial year. The operating profit margin,
before exceptional items, remained broadly flat in the 2004 and 2003 financial
years.
Capital
expenditure on plant and equipment at £1,809 million in the 2004 financial
year was 10% higher than the 2003 financial year reflecting the focused expenditure
on transformational projects. In the 2003 financial year capital expenditure
declined by 16% to £1,652 million which reflected cost control, tight
governance and the alignment of capital spend with the development of the future
network strategy.
Managed
cash costs are used to measure the controllable operating and capital 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. In the 2004 financial year, managed
cash costs at £5,995 million decreased by 3%, despite a 10% increase in
capital expenditure. In the 2003 financial year, after adjusting for the unwind
of Concert, managed cash costs at £6,200 million decreased by 1% despite
the extra leaver payments of £108 million in the 2003 financial year.
After allowing
34 | Operating and financial review | BT Annual Report and
Form 20-F 2004 |
for price changes and volume effects, the efficiency cost savings were £280 million in the 2004 financial year and £237 million in the 2003 financial year. This brings the two year efficiency cost savings total to £517 million, which is above our two year target of £500 million.
BT Global Services | 2004 | 2003 | 2002 | |||
£m | £m | £m | ||||
Group turnover | 5,782 | 5,417 | 4,678 | |||
Group operating loss* | (105 | ) | (375 | ) | (294 | ) |
EBITDA* | 508 | 238 | 212 | |||
Capital expenditure | 479 | 445 | 615 | |||
* | Before goodwill amortisation and exceptional items |
BT Global Services is at the forefront of two areas of the groups
growth, being ICT solutions and servicing the needs of global multi-site corporations
and European multi-site organisations. The product portfolio covers a number
of key ICT related areas including IP infrastructure, Customer Relationship Management
(CRM), outsourcing and system integration. These are provided to customers through
BT Syntegra and BT Global Solutions. The 2004 financial year
results demonstrate the success of the re-integration of Concert and delivery
of customer orientated ICT based services and solutions. In the 2003 financial
year, the financial performance of Global Products and Global Carrier reflects
the
re-integration of the returning businesses as a result of the unwind of Concert.
In
the 2004 financial year BT Global Services turnover was £5,782 million, representing an increase of 7% compared to the prior year following an increase of 16% to
£5,417 million in the 2003 financial year reflecting the returning Concert businesses. BT Global Solutions turnover grew by 14% in the 2004 financial year to £2,802 million. In the 2003 financial year, BT Global Solutions
turnover grew by 10% to £2,455 million. BT Syntegra performed strongly with turnover of £721 million in the 2004 financial year, an increase of 16%, and turnover of £623 million in the 2003 financial year, an increase of 3%. In the
2004 financial year, contract wins from ICT solutions amounted to more than £7 billion. The highest profile of these were three NHS contracts expected to be worth over £2.1 billion and forming an integral part of the National Programme
for Information Technology in the NHS. In the 2003 financial year, contract wins from ICT solutions amounted to more than £4.4 billion. BT Global Products turnover grew by 9% in the 2004 financial year to £1,831 million reflecting
the growth of Multi Protocol Label Switching. In the 2003 financial year, BT Global Products turnover increased by 33% to £1,674 million and was mainly due to the re-integration of Concert and the growth in IPVPN products. The Global
Carrier division turnover decreased by 1% in the 2004 financial year to £962 million (2003 £974 million, 2002 £292
million). The increase in 2003 was principally due to the re-integration of the
international carrier
business of the former Concert global venture.
Continued cost reductions,
in network costs as well as selling, general and administration costs, helped
generate improvements in EBITDA before exceptional items in the 2004 financial
year of 113% to £508 million, following an improvement of 12% in the 2003
financial year. The re-integration of the former Concert business had an adverse
impact on the growth in EBITDA before exceptional items in the 2003 financial
year. The 2004, 2003 and 2002 financial years include leaver costs of £33
million, £65 million and £55 million, respectively. Headcount increased
by 23% to 21,200 in the 2004 financial year which includes transfers of operations
from other lines of business and an increase in BT Global Solutions headcount
due to increased outsourcing contracts. Headcount increased by 3% to 17,200 in
the 2003 financial year. All major European operations achieved their target
of becoming EBITDA positive during the 2003 financial year.
The
group operating loss before goodwill amortisation and exceptional items
decreased by £270 million in the 2004 financial year to a loss of £105 million after increasing by
£81 million to a loss of £375 million in the 2003 financial year.
The loss in the 2003 financial year includes the adverse impact of the former
Concert business.
Capital
expenditure for the 2004 financial year was £479 million, an increase of 8%, and £445
million in the 2003 financial year, a reduction of 28%.
Other operating income
Other operating income for the group
decreased by £38 million to £177 million in the 2004 financial year
and by £146 million to £215 million in the 2003 financial year. As
part of the arrangements for the establishment of Concert, BT had been seconding
staff and providing administrative and other services from its launch in early
January 2000. The income from these services before the re-integration of Concert
was £135
million in the 2002 financial year.
Operating costs
Total operating costs from continuing
activities were reduced by 3% in the 2004 financial
year to £15,823 million after reducing by 13% in the 2003 financial year.
As a percentage of group turnover from continuing activities, operating costs
from continuing activities, excluding goodwill amortisation and exceptional items,
reduced from 87% in the 2002 financial year, to 86% in the 2003 financial year
and 85% in the 2004 financial year. Operating costs in the 2003 financial year
include the costs associated with the re-integrated activities of the former
Concert global venture. Because these activities have been fully integrated into
the lines of business it is not possible to separately identify those specific
costs associated with the activities of the former Concert global venture. In
all three financial years, net exceptional costs from continuing activities were
incurred. These amounted to £7 million, £198 million
and £2,696 million in the 2004, 2003 and 2002 financial years, respectively.
These exceptional costs are considered separately in the discussion which follows.
35 | Operating and financial review | BT Annual Report
and Form 20-F 2004 |
Operating costs | 2004 | 2003 | 2002 | |||
£m | £m | £m | ||||
Continuing activities: | ||||||
Staff costs | 4,412 | 4,254 | 4,260 | |||
Own work capitalised | (677 | ) | (583 | ) | (623 | ) |
Depreciation | 2,921 | 3,011 | 2,974 | |||
Goodwill and other | ||||||
intangibles amortisation | 15 | 24 | 124 | |||
Payments to | ||||||
telecommunications | ||||||
operators | 3,963 | 3,940 | 4,289 | |||
Other operating costs | 5,182 | 5,526 | 5,134 | |||
Total operating costs from | ||||||
continuing activities before | ||||||
exceptional costs | 15,816 | 16,172 | 16,158 | |||
Net exceptional costs | 7 | 198 | 2,696 | |||
Total operating costs from | ||||||
continuing activities | 15,823 | 16,370 | 18,854 | |||
Total operating costs from | ||||||
discontinued activities | | | 2,546 | |||
Total operating costs | 15,823 | 16,370 | 21,400 | |||
Staff costs from continuing activities increased by 4% to £4,412 million in the 2004 financial year after being broadly flat in the 2003 financial year. In the 2004 financial year, the number of staff employed in
the continuing activities decreased by 4,800 to 99,900 at 31 March 2004 after decreasing by 3,900 in the 2003 financial year. Increased pay rates and national insurance and a £141
million increase in the pension charge offset the impact of the lower headcount
and leaver costs in the 2004 financial year. The increased leaver costs and salary
increases offset the impact of lower headcount in the 2003 financial year.
The
allocation for the employee profit share scheme, included within staff
costs, was £20 million in the 2004 financial year. The allocation for the 2003 and 2002 financial years was
£36 million and £25 million, respectively.
Early
leaver costs from continuing activities before exceptional items of £202 million were incurred in the 2004 financial year, compared with £276 million in the 2003
financial year and £186 million in the 2002 financial year. This reflects BTs continued focus on reducing headcount and improving operational efficiencies. Leaver costs include the cost of enhanced pension benefits provided to leavers
which amounted to £1 million, £60 million and £21 million in the 2004, 2003 and 2002 financial years, respectively. In the 2002 financial year this did not reflect the full cash cost because there was a pension fund accounting
surplus, which for accounting purposes includes any provision for pensions on the groups balance sheet, and in accordance with BTs accounting policies, the accounting surplus was utilised before making a charge to the profit and loss
account. The cost of enhanced pension benefits charged against the accounting surplus in the 2002 financial year amounted to £140
million.
The
depreciation charge from continuing activities decreased by 3% in the 2004
financial year to £2,921 million after increasing by 1% in the 2003 financial
year. The decrease in the 2004 financial year reflects more efficient capital
expenditure over recent years. The increase in the 2003 financial year
is despite the reduction in property depreciation as a result of the property
sale and leaseback in December 2001. The increase in the 2003 financial
year also reflects a reduction in the estimated asset lives, due to
BTs continuing investment in its networks and broadband.
Goodwill
amortisation in respect of subsidiaries and businesses acquired since 1
April 1998, when BT adopted Financial Reporting Standard No. 10, and amortisation
of other intangibles
totalled £15 million in the 2004 financial year compared with £24 million in the 2003 financial year and £124
million in the 2002 financial year. The low charge in the 2004 and 2003 financial
years reflect the impact of the
demerger of mmO2 and the impairment of goodwill
in
the 2002 financial year which significantly reduced the carrying value of goodwill. Goodwill on acquisitions before 1 April 1998 was written off directly to reserves.
Payments
to other telecommunications operators from continuing activities increased
by 1% in the 2004 financial year to £3,963 million after reducing by 8% in the 2003 financial
year. The increase in the payments for the 2004 financial year reflects the increase in both UK and overseas payments. The payments in the 2002 financial year include those made to the Concert global venture for the delivery of BTs
outgoing international calls, which accounts for most of the reduction in the
2003 financial year following the re-integration of Concert.
Other
operating costs before goodwill amortisation and exceptional items, which
reduced by 6% in the 2004 financial year to £5,182 million after increasing by 8% in the 2003
financial year, include the maintenance and support of the networks, accommodation and marketing costs, the cost of sales of customer premises equipment and non pay related leaver costs. The decrease in the 2004 financial year was largely due to
efficiency cost savings offset by the adverse impact of currency movements. The increase in the 2003 financial year includes the property rental costs of around £190
million following the sale and leaseback transaction in December 2001 and the
costs associated with the re-integrated activities of the former Concert global
venture.
36 | Operating and financial review | BT Annual Report
and Form 20-F 2004 |
The exceptional items within operating costs for the 2004, 2003 and 2002 financial years are shown in the table below.
Exceptional operating costs | 2004 | 2003 | 2002 | |||
£m | £m | £m | ||||
Rectification costs | 30 | | | |||
Property rationalisation costs | | 198 | | |||
Impairment of goodwill and | ||||||
tangible fixed assets | | | 2,202 | |||
Concert unwind costs | | | 172 | |||
BT Retail call centre | ||||||
rationalisation | | | 68 | |||
BT Wholesale bad debt | ||||||
(release) expense | (23 | ) | | 79 | ||
mmO2 demerger costs | | | 98 | |||
Other | | | 77 | |||
Total attributable to | ||||||
continuing activities | 7 | 198 | 2,696 | |||
Total attributable to | ||||||
discontinued activities | | | 11 | |||
Total exceptional | ||||||
operating costs | 7 | 198 | 2,707 | |||
In the 2004 financial year,
net exceptional operating costs are the estimated rectification costs
relating to a major incident offset by the £23 million release
of the surplus exceptional bad debt provisions made in the 2002 financial
year. In the 2003 financial year a property rationalisation charge of £198 million was recognised in relation to the rationalisation of the groups London office portfolio. The rationalisation involves the exit from a number of office properties. The most significant item in the 2002 financial year was the impairment of goodwill and tangible fixed assets in the European activities of BT Global Services. In the light of our announcement that BT Global Services was streamlining its activities to focus on multi-site corporate customers with European activities and the assimilation of BTs share of Concerts activities, an impairment review of the investment in its European activities was performed. As a result, a goodwill impairment charge of £1,939 million and a tangible fixed asset impairment charge of £263 million was recognised. The goodwill in the European activities was fully written down as a result of the charge. Other exceptional items in the 2002 financial year included: |
|
costs of £172 million associated with the unwind of the Concert global venture, discussed further on page 37 | |
charges of £68 million in relation to BT Retails call centre rationalisation 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 | |
other charges of £77 million including impairment of payphone assets. |
Group operating profit (loss)
In
the 2004 financial year, group operating profit from continuing activities before
goodwill amortisation and the exceptional items described above,
of £2,892 million was 4% higher than in the 2003 financial
year, which in turn was 1% higher than in the 2002 financial year.
Total
group operating profit for the 2004 financial year was £2,873 million compared to a profit of £2,572 million in the 2003 financial year and a loss of £479 million
in the 2002 financial year. The 2002 financial year loss reflects the losses generated by the discontinued activities and the exceptional charges of £2,707
million.
Associates and joint ventures
The results of associates and
joint ventures, split between continuing and discontinued activities, are shown
below:
2004 | 2003 | 2002 | ||||
£m | £m | £m | ||||
Share of turnover: | ||||||
Continuing activities | 395 | 1,455 | 4,049 | |||
Discontinued activities | | | 715 | |||
Total | 395 | 1,455 | 4,764 | |||
Share of operating (loss) | ||||||
profit before goodwill | ||||||
amortisation and | ||||||
exceptional items: | ||||||
Continuing activities | (8 | ) | 181 | (108 | ) | |
Discontinued activities | | | 74 | |||
Total | (8 | ) | 181 | (34 | ) | |
The groups share of associates and joint ventures turnover reduced by £1,060 million during the 2004 financial year mainly reflecting the disposal of the groups
interest in Cegetel in the
2003 financial year.
During
the 2003 financial year there was a significant rationalisation of the
groups investments in associates and joint ventures. On 1 April 2002 the unwind of the Concert global
venture was completed and on 22 January 2003 the sale of the groups stake in Cegetel was completed. As a result BTs share of its ventures turnover fell to £1,455 million in the 2003 financial year from £4,764 million in
the 2002 financial year. In the 2004 financial year, £386 million of the total arose from ventures located outside the UK, compared with £1,447 million in the 2003 financial year and £4,618
million in the 2002 financial
year.
The
principal contributors to turnover in the 2004 financial year were LG Telecom
in Korea (£196 million) and Albacom in Italy (£147 million). The principal contributors to
turnover in the 2003 financial year were Cegetel in France (£956 million) up to the date of disposal and LG Telecom (£198 million). The principal contributors to turnover from continuing activities in the 2002 financial year were Concert
(£2,158 million), Cegetel (£1,068 million) and LG Telecom (£240
million).
37 | Operating and financial review | BT Annual Report and Form 20-F 2004 |
The principal contributors to turnover
from discontinued activities in the 2002 financial year were Japan Telecom and
J-Phone (£559 million to June 2001) and Airtel (£76 million to June
2001).
The groups
share of its ventures operating losses from continuing activities before
goodwill amortisation and exceptional items totalled £8 million in the
2004 financial year. This compares to a profit of £181 million and a loss
of £108 million in the 2003 and 2002 financial years, respectively.
The
principal contributor to the groups share of operating profits from continuing
activities before goodwill amortisation and exceptional items in the 2003 financial
year was Cegetel (£198 million) and in the 2002 financial year the principal
contributor to the loss was Concert (£225 million) offset by profits from
Cegetel (£168 million).
Exceptional
items within the operating (losses) profits from joint ventures and associates
are as follows:
2004 | 2003 | 2002 | |||||
£m | £m | £m | |||||
Goodwill impairment | 26 | | 173 | ||||
Impairment of Concert | | | 806 | ||||
Concert unwind costs | | | 81 | ||||
Impairment of | |||||||
investments and | |||||||
(release) charge of | |||||||
related exit costs | | (150 | ) | 234 | |||
Total exceptional operating | |||||||
costs (credits) | 26 | (150 | ) | 1,294 | |||
In the 2004 financial year, BT charged its share
of an exceptional goodwill impairment made by Albacom, amounting to £26
million.
In
the 2003 financial year BT completed the exit from its investment in Blu on more
favourable terms than anticipated and accordingly exit cost provisions of £150
million were
released.
Concerts performance was a cause of concern in 2001 and in October 2001 BT and AT&T announced the unwind of Concert which was subsequently completed on 1 April 2002. On
completion, the businesses, customer accounts and networks returned to the two parent companies with BT and AT&T each taking ownership of substantially those parts of Concert originally contributed by them. As part of the settlement with
AT&T for the unwind of the Concert global venture, BT received net cash of US$72 million (£56
million). This net settlement includes the receipt of US$350 million reflecting
the allocation of the businesses and the payment of US$278 million to achieve
the equal division of specified working capital and other liability balances.
BT
and AT&T also terminated their Canadian joint venture agreement under which
BT was committed to participate in AT&Ts future obligation to acquire
all of the publicly
traded shares of AT&T Canada. AT&T has taken full ownership of BTs
interest in the Canadian joint venture and in AT&T
Canada, and has now assumed full responsibility for all future obligations of
the joint venture. BT has now
ceased to have any interest
in AT&T Canada, and has been released from its future expenditure commitment associated with AT&T
Canada.
In
the 2002 financial year BT wrote down the carrying value of its investments in
both Concert and AT&T Canada. The exceptional impairment charge of £1,153 million against these
investments comprises Concert goodwill impairment of £260 million, Concert tangible fixed asset write-downs of £546 million and the write off of BTs £347 million interest in AT&T
Canada (included within amounts written
off investments).
BT
also recognised exceptional restructuring charges of £81 million for its share of redundancy and other unwind costs in Concert and BTs own unwind costs of £172
million have been charged against group operating costs in the 2002 financial
year.
In the
2002 financial year exceptional impairment charges and related exit costs totalling £407
million, principally relating to goodwill and asset impairments in Blu and SmarTone,
were recognised in the light of the rapidly changing global telecoms market conditions.
Goodwill
amortisation in the 2004 financial year amounted to £nil, compared to £2 million in the 2003 financial year and £53
million in the 2002 financial year. The reduction in the 2003 financial year
reflects the disposals and the goodwill impairment charges referred to above.
Total operating profit (loss)
Total
operating profit from continuing activities before goodwill amortisation and
exceptional items for the 2004 financial year of £2,884 million was 3%
lower than in the 2003 financial year which in turn was 12% higher than the previous
financial year. The movement in the underlying total operating profit was due
to the factors explained above.
Total
operating profit for the 2004 financial year was £2,839 million, including BTs share of the operating results of its associates and joint ventures. This compared to
£2,901 million for the 2003 financial year and a loss of £1,860 million for the 2002 financial year. The reduction in total operating profit in the 2004 financial year reflects 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 financial year reflects the groups
exit from certain loss making activities and the lower level of goodwill amortisation
and exceptional items.
Profit on sale of group undertakings and fixed asset investments
During
the 2004 financial year, the consideration for disposals totalled £133 million and the profit before tax from disposals totalled £36 million. This was principally in relation to the disposal of the
groups 7.8% interest in Inmarsat which was sold for US$118 million (£67 million) realising a profit on disposal of £32
million.
38 | Operating and financial review | BT Annual Report and Form 20-F 2004 |
In the 2003 financial year a number
of non-core investments were sold. The consideration for the disposals totalled
£3,028 million and the profit before taxation from disposals totalled
£1,691 million. This was principally in relation to the disposal of our
26% interest in Cegetel, a French telecommunications operator, on 22 January
2003. The total proceeds were £2,603 million, received in cash, and the
profit was £1,509 million before the recognition of an exceptional interest
charge of £293 million on closing out fixed interest rate swaps following
receipt of the sale proceeds.
A
major feature of the 2002 financial year was the successful disposal of many
non-core businesses. The consideration for these disposals totalled £8.0
billion as shown in the table below.
Disposals | Profit (loss) | |||
Consideration | before tax | |||
Year ended 31 March 2002 | £m | £m | ||
Japan Telecom and J-Phone | ||||
Communications | 3,709 | 2,358 | ||
Yell | 1,960 | 1,128 | ||
Airtel | 1,084 | 844 | ||
Maxis Communications Berhard | 350 | (4 | ) | |
Rogers Wireless Communications | 267 | (23 | ) | |
BiB | 241 | 120 | ||
Clear Communications | 119 | (126 | ) | |
e-peopleserve | 70 | 61 | ||
Other | 173 | 31 | ||
Total | 7,973 | 4,389 | ||
BT completed the sale to Vodafone of its 20%
economic interest in Japan Telecom and its 20% interest in J-Phone Communications
on 1 June 2001 and subsequently its interest in J-Phone group companies. The
total proceeds
of sale were £3,709 million received in cash, and the profit was £2,358
million.
The
sale of Yell, BTs classified advertising directory businesses in the UK and the USA, was completed on 22 June 2001 for a consideration of £1,960 million, giving a profit of
£1,128 million. In May 2001, the UK Office of Fair Trading announced that the price controls over the UK Yellow Pages advertising rates were to be tightened significantly. The price we achieved for the sale of Yell, which was announced on 26
May 2001, reflected the impact of these controls on Yells prospects.
BT
completed the sale of its 18% interest in Airtel, a major Spanish wireless operator,
to Vodafone for £1,084 million on 29 June 2001. The profit of £844 million on the sale
compares with BTs investment in the company of £223 million, built
up during the 1990s.
In
November 2001, BT completed the sale of its 33% interest in Maxis Communications
of Malaysia for £350 million, which broadly equated with its carrying value. We completed the sale
of our interest in Rogers Wireless to AT&T for £267 million on 29 June 2001 and recognised a loss of £23
million.
BTs
interest in BiB was diluted in July 2000 when BSkyB gained control and in May
2001 we agreed to exchange
our residual interest in BiB for tranches of shares in BSkyB. We received the
first tranche
of 19 million BSkyB shares with an initial value of £128 million on 28 June 2001. We were required to hold 50%
of this tranche until May 2002 and recognised a profit on these shares when they were sold in May 2002. We also received the second tranche of BSkyB shares with a similar value in November 2002, and they were sold at that time. The profit of
£120 million recognised in the 2002 financial year relates to the BSkyB shares which we were permitted to sell on receipt. In the 2003 financial year a profit on disposal of BSkyB shares of £131
million was recognised.
In
December 2001, BT completed the sale of its wholly owned subsidiary company,
Clear Communications Limited, which operates a communications network in New
Zealand, for consideration of £119 million. A loss of £126 million has been recognised on this sale of which £45
million relates to goodwill taken directly to reserves before April 1998.
In
February 2002, we completed the sale of our 50% interest in e-peopleserve, a
major human resource outsourcing activity, to our joint-venture partner, Accenture,
for an initial
consideration of £50 million. BT is entitled to receive additional payments from an earn-out arrangement based on e-peopleserves revenues from customers other than BT and Accenture over the five years to 2007. These additional earn-out
payments will total between £27 million and approximately £167 million. A profit of £61 million on this transaction has been recognised in the 2002 financial year based on the initial consideration and the discounted value of the
additional minimum payments of £20 million.
In
addition, in the 2002 financial year we recognised an impairment charge of £347 million in relation to the fixed asset investment in AT&T Canada, as noted above, and
£157 million in relation to Impsat.
Profit on sale of property fixed assets
In
December 2001, as part of a wider property outsourcing arrangement, BT completed
the sale and leaseback of the majority of its UK properties to Telereal, a 50/50
joint venture partnership formed by Land Securities Trillium and The William
Pears Group. Around 6,700 properties offices, telephone exchanges, vehicle depots, warehouses, call centres and computer centres were transferred totalling some 5.5 million square metres. Under these
arrangements, Telereal is responsible for providing accommodation and estate management services to BT. The consideration received amounted to £2,380 million. BT has leased the properties back at a total annual rental commencing at around
£190 million for the 2003 financial year and subject to a 3% annual increase. This charge was offset by reduced depreciation and interest charges. In addition, BT has transferred the economic risk on a large portion of its leased properties to
Telereal in return for an annual rental commencing at approximately £90
million per annum. This was broadly equivalent to the existing
39 | Operating and financial review | BT Annual Report and Form 20-F 2004 |
level of rentals. In February 2002, BT outsourced its property management unit to Telereal.
The
profit on the sale of the properties amounted to £1,019 million and was determined after allowing £129 million for BTs actual and future obligations under the terms of the legal agreement with
Telereal and for the cost of advisors fees. The obligations include expenditure of £34
million to be incurred on completing nearly finished new properties and remedial
work to be undertaken on several properties.
Part
of the proceeds of sale were used in novating fixed interest rate obligations
to support Telereals financing. An exceptional cost of £162 million
was incurred in unwinding this position and was included in the interest charge
for the year.
In
summary, the property transaction benefited the results for the 2002 financial
year by £857 million as shown below:
Profit on sale and leaseback of properties | £m | |
Sales proceeds | 2,380 | |
Net book value of assets disposed | (1,232 | ) |
Estimated cost of BTs future obligations | (129 | ) |
Profit on properties sold | 1,019 | |
Interest rate swap novation costs | (162 | ) |
Net profit on sale and leaseback of properties | 857 | |
Following this transaction, we retained direct
ownership of approximately 220 properties including certain telephone exchanges, computer centres and high radio towers totalling
some 800,000 square metres. We also retained BT Centre, our headquarters building,
Adastral Park, our major research facility near Ipswich, Madley and Goonhilly
earth satellite stations and the BT Tower in central London.
In
advance of the property 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 BTs share of its ventures charges, at £941 million was £498 million lower than in the preceding year, which in turn was
£183 million lower than in the 2002 financial year. Of the total net charge, £924 million arises in the BT group for the 2004 financial year, compared with £1,420 million and £1,540
million in the 2003 and 2002 financial
years, respectively.
The reduction in the net interest charge in the 2004 financial year reflects the continued reduction in the level of net debt and lower net exceptional charges in the current year. The net
exceptional charge represents the premium on buying back €1.1
billion of 7.125% bonds due in 2011 and US$195 million of the groups US
dollar bonds, partially offset by a credit from the one off interest recognised
on full repayment of loan notes received as part of the original consideration
from the disposal of Yell.
The reduction
in the net interest charge in the 2003 financial year reflects the reduction
in the level of net debt
and is partly
offset by the £293 million exceptional cost of terminating fixed interest
rate swaps as a consequence of the receipt of the Cegetel sale proceeds.
The
substantially higher charge in the 2002 financial year is mainly due to the cost
of funding
the acquisition of mmO2s third-generation
mobile licences, principally in
the UK and Germany. In the 2002 financial year, the groups net interest charge included the £162
million exceptional cost of novating interest swaps as a consequence of the property
sale and leaseback transaction.
Interest cover in the 2004 financial year represented 3.3 times total operating profit before goodwill amortisation and exceptional items, and compares with interest cover of 2.6 in the
2003 financial year and 1.9 for continuing activities in the 2002 financial year. The improvement in cover in the 2004 financial year is due to the reduction in the interest charge mainly arising from the reduction in net debt. The improvement in
cover in the 2003 financial year is due to the reduction in the interest charge and improvement in the operating profit before goodwill amortisation and exceptional items. We expect the net interest charge to decrease and interest cover to continue
to improve in the 2005 financial year following the continued reduction in net debt during the 2004 financial year.
Profit (loss) before taxation
The
groups profit before taxation for the 2004 financial year was £1,948 million, compared with a profit of £3,157 million in the 2003 financial year and a profit of £1,461 million in the 2002
financial year. The profit in the 2003 financial year included the exceptional profits from the sale of investments and businesses totalling £1,691 million. The profit in the 2002 financial year included net exceptional gains of £753
million.
The
groups profit before taxation from continuing activities before goodwill amortisation and exceptional items for the 2004 financial year was £2,016 million, compared with
£1,829 million in the 2003 financial year and £1,273 million in the
2002 financial year. The improvement in the 2004 underlying profit was due to
cost efficiency savings, the strong performance of BT Global Services, lower
leaver costs and lower interest charges explained above. The improvement in the
2003 financial year was principally due to the exit from loss making businesses,
improved operating profits and lower interest charges explained above.
The
profit before taxation from discontinued activities in the 2002 financial year
amounted to £3,954 million. The 2002 financial year included gains on disposals from discontinued
activities of £4,368 million.
Taxation
The
tax charge for the 2004 financial year was £539 million and comprises £568 million on the profit before taxation, goodwill amortisation and exceptional items, offset by tax relief of £29
million
on certain exceptional charges. The tax charge on the profit
40 | Operating and financial review | BT Annual Report and Form 20-F 2004 |
before taxation, goodwill amortisation and exceptional items is at an effective rate of 28.2%.
The tax charge for the 2003 financial year was £459 million and comprises £598 million on the profit before taxation, goodwill amortisation and exceptional items, offset by tax relief of £139
million on certain exceptional charges. The tax charge on the profit before taxation,
goodwill amortisation and exceptional items is at an effective rate of 32.7%.
The tax charge for the 2002 financial
year was £443 million. The effective rate was 41.5% of the profit from
continuing activities before taxation, goodwill amortisation and exceptional
items. This was in excess of the standard UK tax rate of 30% due to the impact
of loss making subsidiaries outside the UK for which tax relief is not immediately
available and associate company taxation.
Earnings (loss) per share
The basic earnings per share of 16.4 pence per share for the 2004
financial year compares with 31.2 pence for the 2003 financial year and 12.0
pence for the 2002 financial year. The following table illustrates the impact
of the groups discontinued activities up to the date of demerger or sale
for the 2002 financial year, as well as significant exceptional items and goodwill
amortisation on the basic earnings per share for the past three financial
years:
2004 pence |
2003 pence |
2002 pence |
||||
Basic earnings per share before goodwill amortisation and exceptional items from continuing activities |
16.9 | 14.2 | 8.8 | |||
Exceptional items and goodwill amortisation from continuing activities |
(0.5 | ) | 17.0 | (43.6 | ) | |
Basic earnings (loss) per share from continuing activities |
16.4 | 31.2 | (34.8 | ) | ||
Basic earnings per share from discontinued activities |
| | 46.8 | |||
Total basic earnings per share | 16.4 | 31.2 | 12.0 | |||
Basic earnings per share before goodwill
amortisation and exceptional items, from BTs continuing activities of
16.9 pence for the 2004 financial year compare with an equivalent of 14.2 pence
and 8.8 pence for the
2003 and 2002 financial years, respectively.
Diluted earnings per share were not materially different in all three years.
Dividends
In line with the policy announced in November 2003, the board recommends
a final dividend of 5.3 pence per share to shareholders, amounting to £454 million. This will be paid, subject to shareholder approval, on
6 September 2004 to shareholders on the register on 6 August 2004. This takes the dividend for the full year to 8.5 pence per share, compared to 6.5 pence in the 2003 financial year, an increase of 31%. This years
dividend pay out ratio is 50% of earnings before goodwill amortisation and exceptional
items and we expect this to increase to around 60% for the 2006 financial year.
The interim and final dividend in
the 2003 financial year was 2.25 pence per share and 4.25 pence per share, respectively.
This gave a full dividend for the year of 6.5 pence per share,
amounting to £560 million.
The final and full dividend for the
2002 financial year was 2.0 pence per share, which absorbed £173 million. As part of BTs
debt reduction and restructuring plans, the Board decided in May 2001 that there
was to be no interim dividend for the 2002 financial year.
Financing
Net cash inflow from operating activities of £5,389 million in the 2004 financial year compares with £6,023 million in the 2003 financial year and £5,257 million in the 2002 financial year. Net cash inflow from continuing operating activities
amounted to £5,023 million in the 2002 financial year. Special and deficiency contributions to the main pension fund, described below, of £742 million in the 2004 financial year, £329
million in the 2003 financial year and
Summarised cash flow statement |
2004 £m |
2003 £m |
2002 £m |
|||
Net cash inflow from operating activities: | ||||||
Continuing activities | 5,389 | 6,023 | 5,023 | |||
Discontinued activities | | | 234 | |||
Total net cash inflow from operating activities | 5,389 | 6,023 | 5,257 | |||
Dividends from associates and joint ventures | 3 | 6 | 2 | |||
Net cash outflow for returns on investments and servicing of finance | (527 | ) | (1,506 | ) | (1,695 | ) |
Taxation paid | (317 | ) | (434 | ) | (562 | ) |
Net cash outflow for capital expenditure and financial investment | (2,477 | ) | (2,381 | ) | (1,354 | ) |
Net cash (outflow) inflow for acquisitions and disposals | (60 | ) | 2,842 | 5,785 | ||
Equity dividends paid | (645 | ) | (367 | ) | | |
Cash inflow before management of liquid resources and financing | 1,366 | 4,183 | 7,433 | |||
Management of liquid resources | 1,123 | (1,729 | ) | (1,864 | ) | |
Net cash outflow from financing | (2,445 | ) | (2,473 | ) | (5,479 | ) |
Increase (decrease) in cash in the year | 44 | (19 | ) | 90 | ||
Decrease in net debt in the year resulting from cash flows | 1,222 | 4,225 | 13,930 | |||
41 | Operating and financial review | BT Annual Report and Form 20-F 2004 |
£600 million in the 2002 financial year were paid, consequently reducing the net cash inflow by these amounts. The pension payments in the 2004 financial year include early payment of £380
million deficiency contributions to the BT Pension Scheme, which represents most
of the deficiency contributions for the 2005 and 2006 financial years.
The net cash outflow for returns on
investments and servicing of finance amounted to £527 million, £1,506 million and £1,695 million in the 2004, 2003 and 2002 financial
years, respectively. The reduction in the 2004 financial year outflow of £979 million reflects the receipt of £420 million of funds on restructuring some of the groups swap portfolio. There will be offsetting higher interest
payments in future years as a result of restructuring the swaps. The 2003 financial year included the payment of a £293 million premium on closing out £2.6
billion of fixed interest rate swaps, following receipt of the Cegetel sale
proceeds.
Tax paid in the 2004 financial year
totalled £317 million compared with £434 million in the 2003 financial year and £562
million paid in the 2002 financial year. The lower tax paid in the 2004 and 2003
financial years reflects the lower current tax charge and the level of payments
made on account.
The net cash outflow of £2,477 million for capital expenditure and financial investment in the 2004 financial year included £2,684 million of capital expenditure on property,
plant and equipment, offset by £208 million received on the sale of fixed assets. In the 2003 financial year the net cash outflow of £2,381 million for capital expenditure and financial investment included £2,580 million of capital
expenditure on plant and equipment, offset by £200 million received on the sale of fixed assets. In the 2002 financial year the net cash outflow of £1,354 million for capital expenditure and financial investment included £4,069
million of capital expenditure on plant and equipment, offset by £2,752 million received on the sale of fixed assets. These proceeds included £2,380
million from the property sale and leaseback transaction completed in December
2001,
described above.
The net cash outflow from acquisitions
less disposals in the 2004 financial year totalled £60 million. The principal cash outflow for acquisitions was due to the purchase of a
controlling interest in BT Expedite Limited (formerly NSB Retail plc) and Transcomm plc. In the 2003 financial year the net cash inflow from disposals less acquisitions totalled £2,842 million. Cash proceeds from disposals amounted to
£2,919 million and principally comprised £2,603 million from the sale of the investment in Cegetel. In the 2002 financial year the net cash inflow from disposals less acquisitions totalled £5,785 million. Cash proceeds from
disposals amounted to £6,916 million and principally comprised £3,075 million from the sale of the investment in Japan Telecom and J-Phone, £1,838 million from the sale of the Yell directories business and £1,084 million from
the sale of our investment in Airtel. The principal cash outflow for acquisitions was the completion of the purchase of a minority interest in Esat Digifone in April 2001 for £869
million.
Equity dividends paid in the 2004
financial year totalled £645 million whilst those paid in the 2003 financial year totalled £367
million. There were no equity dividends paid in the 2002 financial year as explained
above.
The resulting cash
inflow for the 2004 financial year, before management of liquid resources and
financing, of £1,366 million was mainly applied in repaying long-term borrowings
and
short-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, BTs Korean based associate and a sale and
leaseback of circuit switches which had no effect on net debt but increased gross
debt and cash by around £1 billion. The cash inflow for the 2003 financial
year of
£4,183 million was applied in repaying short-term borrowings and investing
in short-term investments, with total borrowings of £2,535 million being
repaid. The cash inflow for the 2002 financial year of £7,433 million was
also applied in repaying short-term borrowings and investing in short-term investments.
This was in part due to the success of the companys rights issue which
closed in June 2001. 1,976 million new shares were issued for a total consideration
of
£5,876 million, net of expenses. As part of the demerger arrangements, £440
million was received from mmO2, additionally mmO2 assumed £60 million
of the groups external net debt.
The cash inflow for the 2004 financial
year resulted in net debt reducing by a further £1,148 million to £8,425 million having reduced by £4,128 million to £9,573
million in the 2003 financial year. In the 2002 financial year the cash inflow resulted in net debt reducing to £13,701
million at 31 March 2002.
During the 2004 financial year, as
noted earlier, the group restructured some of its swaps portfolio to mitigate
credit risk to certain counterparties. As a result, the group terminated £7 billion of cross-currency interest rate swaps and replaced these with new swaps which had the same economic hedging effect. This resulted in the group paying £445 million in reducing gross debt and receiving £420
million of interest receipts. The interest receipts have been included within
deferred income on the balance sheet and will be amortised to the profit and
loss account over the term of the underlying hedged debt.
During the 2004 financial year the
group commenced a share buyback programme, repurchasing 81 million shares during
the year for consideration of £144 million. The buyback programme
will be funded from cash generated over and above that required to meet our net debt target of around £7
billion in the 2007 financial year, after paying dividends and taking into account
acquisitions or disposals.
42 | Operating and 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 groups financial risk,
including risk from volatility in currency and interest rates and counterparty
credit risk. The treasury operation is not a profit centre and the objective
is to manage risk at optimum cost.
The Board sets the treasury departments
policy and its activities are subject to a set of controls commensurate with
the magnitude of the borrowings and investments under its management. Counterparty
credit risk is closely monitored and managed within controls set by the Board.
Derivative instruments, including forward foreign exchange contracts, are entered
into for hedging purposes only.
We have set out further details on this topic and on our capital resources and foreign currency exposure in note 36 to the financial statements in compliance with FRS 13.
Capital resources
During the 2004 and 2003 financial years the group has reduced
its level of borrowings so that its net debt was £8.4 billion at 31 March 2004 compared with £9.6 billion at 31 March 2003 and £13.7
billion at 31 March 2002. The debt reduction in the 2003 financial year was
principally achieved by the disposal of our stake in Cegetel.
The directors have a reasonable expectation that the group has adequate resources to continue in operational existence for the foreseeable future and therefore they continue to adopt the
going concern basis in preparing the financial statements.
There has been no significant change in the financial or trading position of the group since 31 March 2004.
The following table sets out the groups
contractual obligations and commitments as they fall due for payment, as at 31
March 2004.
Payments due by period | ||||||||||
Less | More | |||||||||
than 1 | 1-3 | 3-5 | than 5 | |||||||
Total | year | years | years | years | ||||||
Contractual
obligations |
£m | £m | £m | £m | £m | |||||
Loans and other borrowings | 12,598 | 989 | 4,582 | 693 | 6,334 | |||||
Finance lease obligations | 1,099 | 282 | 556 | 261 | | |||||
Operating lease obligations | 10,914 | 367 | 723 | 736 | 9,088 | |||||
Capital commitments | 879 | 640 | 113 | 50 | 76 | |||||
Total | 25,490 | 2,278 | 5,974 | 1,740 | 15,498 | |||||
At 31 March 2004, the group had cash and short-term investments
of £5,272 million. At that date, £1,271 million of debt fell due for repayment in the 2005 financial year. The group had unused short-term
bank facilities, amounting to approximately £145 million at 31 March 2004.
These resources will allow the group to settle its obligations as they fall due.
At 31 March 2003, the group had cash
and short-term investments of £6,431 million. The group had unused short-term bank facilities, amounting to approximately £575
million at
31 March 2003.
Foreign currency and interest rate
exposure
Most of the groups current turnover is invoiced in pounds sterling, and most of its operations and costs arise within the UK. The groups foreign currency borrowings, which totalled £9.4 billion at 31
March 2004, are used to finance its operations. These borrowings have been predominantly swapped into sterling. Cross currency swaps and forward foreign exchange contracts have been entered into to reduce the foreign currency exposure on the
groups operations and the groups net assets. The group also enters into forward foreign exchange contracts to hedge investment, interest expense and purchase and sale commitments. The commitments hedged are principally US dollar and euro
denominated. As a result of these policies, the groups exposure to foreign
currency arises mainly on the residual currency exposure on its non-UK investments
in its subsidiaries and ventures and on any imbalances between the value of outgoing
and incoming international calls.
The groups exposure to changes
in currency movements decreased significantly following the demerger of the mmO2 business
and its European operations in November 2001. A 10% strengthening in sterling
against major currencies would cause the groups net assets at 31 March 2004 to fall by less than £120 million, with insignificant effect on the
groups profit. This compares with a fall of less than £100 million and £150
million in the years ended 31 March 2003 and 2002, respectively.
Foreign exchange contracts are entered into as a hedge of sales and purchases, accordingly a change in the fair value of the hedge is offset by a corresponding change in the value of the
underlying sale or purchase.
The majority of the groups long-term borrowings have been, and are, subject to fixed interest rates. The group has entered into interest rate swap agreements with commercial banks
and other institutions to vary the amounts and period for which interest rates are fixed. At 31 March 2004, the group had outstanding interest rate swap agreements with notional principal amounts totalling £5,210 million compared to
£5,170 million at 31 March 2003.
The long-term debt instruments which
BT issued in December 2000 and February 2001 both contained covenants that if
the BT group credit rating were downgraded below A3 in the case of
Moodys or below A minus in the case of Standard & Poors (S&P),
additional interest would accrue from the next interest coupon period at the
rate of 0.25 percentage points
43 | Operating and financial review | BT Annual Report and Form 20-F 2004 |
for each ratings category adjustment
by each ratings agency. In May 2001, Moodys downgraded BTs credit
rating to Baa1, which increased BTs annual interest charge by approximately
£32 million. BTs credit rating from S&P is A minus. Based upon
the total amount of debt of £9 billion outstanding on these instruments
at 31 March 2004, BTs annual interest charge would increase by approximately
£45 million if BTs credit rating were to be downgraded by one credit
rating category by both agencies below a long-term debt rating of Baa1/ A minus.
If BTs credit rating with Moodys was to be upgraded by one credit
rating category the annual interest charge would be reduced by approximately
£23 million.
Based
upon the composition of net debt at 31 March 2004, a one percentage point increase
in interest rates would increase the groups annual net interest expense
by less than £15 million. This compares with an increase of less than
£10 million and less than £20 million in the years ended 31 March
2003 and 2002, respectively.
Capital expenditure
Capital expenditure on plant, equipment
and property (excluding the movement on capital accruals) totalled £2,673
million in the 2004 financial year, compared with £2,445 million and £3,908
million in the 2003 and 2002 financial years, respectively. Of the total capital
expenditure in the 2002 financial year, £3,100 million was in relation
to the groups continuing activities. Work continues on enhancing the intelligence
of the network to enable customers to benefit from advanced services and improving
the networks capacity to carry high-speed data. Capital expenditure is
expected to rise, but remain within its £3 billion annual target, in
the 2005 financial year as the group invests in its 21st century network (21CN)
programme.
Capital
expenditure in relation to the groups discontinued activities amounted
to £808 million in the
2002 financial year. Prior to the demerger, mmO2
continued improving the quality and
capacity of its digital GSM network.
Of the
capital expenditure, £86 million was in Europe, outside the UK, in the
2004 financial year and £138 million was spent there in the 2003 financial
year.
Contracts
placed for ongoing capital expenditure totalled £879 million at 31 March
2004. We plan to develop the 21CN using stringent capital return criteria and
a rigorous approach to any investment in the narrowband network. 21CN aims
to
deliver long term, structural cost reduction, as we progressively migrate onto
a simpler, lower cost network architecture. BT expects that future capital
expenditure
will be funded from net cash inflows from operating activities, and, if required,
by external financing.
Acquisitions
The total amount invested in the 2004
financial year, including further funding of existing ventures, was £61
million. The total amount invested in the 2003 financial year, including further
funding of existing ventures,
was £77 million, significantly lower than the £1,131 million invested
in the 2002 financial year. In the 2002 financial year the significant acquisition
made in April 2001 was of the 49.5% interest in Esat Digifone that we did not
already own, from Telenor, for £869 million under an agreement made in
early 2000.
Demerger and capital
reduction
The demerger of mmO2,
the groups 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 mmO2
shares commenced on 19 November 2001.
BT shareholders on record on 16 November 2001, received one BT Group plc share
and one mmO2 plc
share for each existing British Telecommunications
plc share held. Based on the first days dealings on the London Stock
Exchange, BT Group represented approximately 78% of the equity value of the
former
BT group and mmO2
represented approximately 22%.
On the demerger,
net assets of £19,490 million attributable
to mmO2 were distributed to shareholders in
the form of a demerger distribution. mmO2
assumed approximately £500 million
of debt, with the bulk of the outstanding debt remaining with the continuing
BT Group. The reduction of capital had the effect of increasing distributable
reserves in BT Group plc by £9,537 million.
Balance sheet
Net assets at 31 March 2004
amounted to £3,094 million compared to £2,642 million at 31 March
2003, with the increase due to the retained profits of £685 million offset
by the £144 million buyback of shares and currency movements.
BT Group
plc, the parent company, has reserves of £9,585 million at 31 March 2004
and £9,537 million at 31 March 2003.
BTs
fixed assets totalled £16,068 million at 31 March 2004 of which £15,487
million were tangible assets, principally forming the UK fixed network. At 31
March 2003 fixed assets were £16,661 million and tangible assets were
£15,888 million.
Return on capital
employed
The return before goodwill amortisation
and exceptional items on the average capital employed (total assets, excluding
goodwill, less current liabilities, excluding corporate taxes and dividends
payable, and provisions other than those for deferred taxation) was 15.3% for
the 2004 financial year. In the 2003 financial year the group made a return
from continuing activities before goodwill amortisation and exceptional items
of 15.7%. In the 2002 financial year the group made a return from continuing
activities before goodwill amortisation and exceptional items of 15.7% on the
average capital employed in its business excluding
mmO2 and goodwill.
44 | Operating and financial review | BT Annual Report and Form 20-F 2004 |
Pensions
The most recently completed triennial
actuarial valuation of the BT Pension Scheme (BTPS), BTs main pension
fund, performed by the BTPS independent actuary for the trustees of the scheme,
was carried out as at 31 December 2002. This valuation showed the fund to be
in deficit to an amount of £2.1 billion. Assets of the fund of £22.8
billion at that date covered 92% of the funds liabilities. The previous
valuation was carried out as at 31 December 1999. The result of this valuation
was that the fund was in deficit by £1.0 billion. Assets of the fund of
£29.7 billion at that date covered 97% of the funds liabilities.
The deterioration in the funding position was principally the result of lower
equity returns over the three years and improved life expectancy of BTPS members
and was in spite of the additional deficiency funding payments totalling £600
million that were paid over the previous three years. The valuation under the
prescribed Minimum Funding Requirement approach showed the assets to cover 101%
of the liabilities at 31 December 2002.
The groups
ordinary contribution rate increased to 12.2% of employees pensionable
pay with effect from April 2003. The contribution rate was 11.6% for the 2003
and 2002 financial years. In addition, the company agreed to make annual deficiency
contributions to the BTPS of £232 million with effect from the 2004 financial
year. In the 2004 financial year total deficiency contributions of £612
million were made, including early payment of £380 million scheduled for
payment in subsequent years. This compares to the £200 million annual
deficiency payments made in the 2003 and 2002 financial years. The group is
also required to pay special contributions to cover costs arising from enhanced
pension benefits provided to leavers. The special contributions paid in the
2004, 2003 and 2002 financial years amounted to £130 million, £129
million and £400 million, respectively, in respect of early leavers. The
payment expected to be made in the 2005 financial year is £5 million in
relation to leavers in the calendar year ended 31 December 2003.
The group
continues to account for pension costs in accordance with UK Statement of Standard
Accounting Practice No. 24 (SSAP 24). The groups total annual pension
charges, including discontinued activities, for the 2004, 2003 and 2002 financial
years were £404 million, £322 million and £382 million, respectively.
This includes £376 million, £306 million and £373 million,
respectively, in relation to the BTPS. The increase in the pension charge in
the 2004 financial year reflects the £154 million amortisation charge
for the pension deficit partly offset by a reduction in the number of active
members and the interest credit related to the balance sheet prepayment.
The reduction
in the pension charge in the 2003 financial year reflects the lower membership
of the BTPS and the interest credit on the balance sheet prepayment.
The costs
of providing incremental pension benefits for leavers amounted to £1 million,
£60 million and £46 million
in the 2004, 2003 and 2002 financial years, respectively.
The pension
charge for the 2004 financial year is based upon the SSAP 24 valuation as at
31 March 2003. This valuation is based on the December 2002 funding valuation,
rolled forward to 31 March 2003, and uses a slightly higher investment return
assumption than was used for the trustees funding valuation, a lower inflation
rate and lower salary increase assumptions. The resulting SSAP 24 deficit amounts
to £1.4 billion. The regular pension cost is charged at 11.3% of pensionable
salaries compared to the 11.6% rate applied in the 2003 and 2002 financial years.
The full
FRS 17 disclosures are provided in the notes to the financial statements. At
31 March 2004 the FRS 17 deficit was £3.6 billion, net of tax, being a
reduction of 43% from £6.3 billion at 31 March 2003.
The number
of retired members and other current beneficiaries in the pension fund has been
increasing in recent years and, at 31 December 2003, was approximately 104%
higher than the number of active members. Consequently, BTs future pension
costs and contributions will depend on the investment returns of the pension
fund and could fluctuate in the medium term.
The BTPS
was closed to new entrants on 31 March 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 companys contributions.
This change is in line with the practice increasingly adopted by major UK groups
and is designed to be more flexible for employees and enable the group to determine
its pension costs more precisely than is the case for defined benefit schemes.
The financial impact of this change was not significant in the financial years
under review and is not expected to be significant in the next few years but
it should reduce pension costs in the longer term.
Geographical information
In the 2004 financial year, approximately
93% of the groups turnover was generated by operations in the UK, compared
with 94% in the 2003 and 89% in the 2002 financial years. Of its continuing
activities, approximately 92% of the groups turnover was generated by
operations in the UK in the 2002 financial year. BTs operating profits
have been derived from its UK operations with losses being incurred outside
the UK in each of the last three financial years.
Economic and Monetary
Union
The euro is established as the single
currency spanning the 12 EU member countries participating in Economic and
Monetary Union (EMU). Most of the groups business in Europe is conducted
in the UK, which is not one of the 12 participants.
Following
the June 2003 announcement by the UK Government detailed planning and preparation
for euro conversion has been put on hold until a Government decision to recommend
UK entry. After any such decision the issue will be put to a vote in
45 | Operating and financial review | BT Annual Report and Form 20-F 2004 |
Parliament and then to a referendum. BT has completed outline planning, participated in by representatives from across each of the BT lines of business and supporting group functions, for adoption of the euro. BT policy will ensure consistency of approach across the group and will be in line with Government plans for a phased transition.
Regulatory financial
information
BT is required under the continuation
notice issued by Oftel on 25 July 2003, which extends the applicability of
certain conditions previously included in its main licence, to publish disaggregated
financial information for various activities of the group, which have been
used
as the basis of charges paid by other telecommunication operators in the UK
for the use of BTs network. The activities presented separately in the
regulatory financial statements do not necessarily correspond with any businesses
separately managed, funded or operated within the group. The results set out
in regulatory financial statements for the 2003 and 2002 financial years showed
that the groups operating profit is derived predominantly from fixed-network
calls.
Regulation, competition
and prices
See pages 17 to 23 in the Business
review section.
Competition and
the UK economy
See page 20 in the Business
review section.
Environment
See pages 47 to 48 in the Our
commitment to society section.
Critical accounting
policies
The groups principal accounting
policies are set out on pages 75 to 77 of the Consolidated financial statements
and conform with UK Generally Accepted Accounting Principles (UK GAAP). In
accordance
with the requirements of Financial Reporting Standard No. 18, these policies
and applicable estimation techniques have been reviewed by the directors who
have confirmed them to be the most appropriate for the preparation of the 2004
financial statements.
We, in
common with virtually all other companies, need to use estimates in the preparation
of our financial statements. The most sensitive estimates affecting our financial
statements are in the areas of assessing the level of interconnect income with
and payments to other telecommunications operators, providing for doubtful
debts,
establishing fixed asset lives for depreciation purposes, assessing the stage
of completion and likely outcome under long term contracts, making appropriate
long-term assumptions in calculating pension liabilities and costs, making
appropriate
medium-term assumptions on asset impairment reviews and calculating current
tax liabilities on our profits.
We are
required to interconnect our networks with other telecommunications operators.
In certain instances we rely on other operators to measure the traffic flows
interconnecting with our networks. We use estimates
in these cases to determine the amount of income receivable from or payments
we need to make to these other operators. The prices at which these services
are charged are often regulated and are subject to retrospective adjustment.
We use estimates in assessing the likely effect of these adjustments. We provide
services to over 20 million individuals and businesses, mainly on credit terms.
We know that certain debts due to us will not be paid through the default of
a small number of our customers. We use estimates, based on our historical experience,
in determining the level of debts that we believe will not be collected. These
estimates include such factors as the current state of the UK economy and particular
industry issues.
The plant
and equipment used in our networks is long-lived with cables and switching
equipment operating for over ten years and underground ducts being used for
decades. The
annual depreciation charge is sensitive to the estimated service lives we allocate
to each type of asset. We regularly review these asset lives and change them
when necessary to reflect current thinking on their remaining lives in light
of technological change, prospective economic utilisation and physical condition
of the assets concerned.
As part
of the property rationalisation programme we have identified a number of properties
that are surplus to requirements. Although efforts are being made to sub-let
this space it is recognised by management that this may not be possible immediately
in the current economic environment. Estimates have been made of the cost of
vacant possession and any shortfall arising from the sub lease rental income
being lower than the lease costs being borne by BT.
We enter
into long term customer contracts which can extend over a number of financial
years. During the contractual period, turnover, cost and profits may be impacted
by estimates of the ultimate profitability of each contract. If, at any time,
these estimates indicate the contract will be unprofitable, the entire estimated
loss for the contract is recognised immediately. The company performs ongoing
profitability analyses of its contracts in order to determine whether the latest
estimates require updating. Key factors reviewed include future staff and third
party costs and potential productivity efficiencies.
We have
a commitment, mainly through the BT Pension Scheme, to pay pension benefits
to approximately 362,000 people over more than 60 years. The cost of these
benefits
and the present value of our pension liabilities depend on such factors as
the life expectancy of the members, the salary progression 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 liabilities incorporated in our financial statements.
In the
2002 financial year, we made charges for the impairment of the carrying value
of goodwill,
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 flows that we expected to be derived
from these assets. We use estimates in determining these future cash flows and
the discount rate.
The actual
tax we pay on our profits is determined according to complex tax laws and regulations.
Where the effect of these laws and regulations is unclear, we use estimates
in determining the liability for the tax to be paid on our past profits which
we recognise in our financial statements.
International accounting standards
The Council of the European Union (EU) announced
in June 2002 that all European listed companies will be required to adopt EU
endorsed International Financial Reporting Standards (IFRSs) and International
Accounting Standards (IASs) in the preparation of financial statements from
2005 onwards. This means the group will prepare its first financial statements
in accordance with endorsed IFRSs and IASs for the year ending 31 March 2006.
The international standard setter, the International Accounting Standards Board
(IASB), has undertaken an extensive exercise to develop new standards and improve
existing ones. The work on those standards that are applicable is now substantially
complete. In addition, the IASB may issue non-mandatory standards up to the
date of transition.
Our project to
manage the transition of financial reporting from UK GAAP to international accounting
is progressing well. The group has completed initial high level assessments
of the impact on our results and net assets and rolled out the initial phase
of detailed quantifications of comparative information.
The IFRSs which
will be mandatory in the 2006 financial year are now substantially complete
and, in addition, certain IFRSs may be issued before the 2006 financial year
which we may decide to adopt early. The effects of such early adoptions, if
any, cannot be quantified at present. However, we believe that the major areas
of impact on our net profit and shareholders funds will be due to the
standards regarding financial instruments, pensions, leases and share based
payments. Details of the required adjustments for the restated periods will
be provided at the appropriate time.
US GAAP
The groups net income (loss) and earnings
(loss) per share for the three financial years ended 31 March 2004 and shareholders equity
at 31 March 2004 and 2003 under US Generally Accepted Accounting Principles
(US GAAP) are shown further in the United States Generally Accepted Accounting
Principles Section (see Consolidated financial statements). Differences between
UK GAAP and US GAAP include results of the differing accounting treatment of
leasing transactions, pension costs, redundancy costs, intangible assets, goodwill,
deferred taxation, capitalisation of interest, financial instruments, contributing
assets to joint ventures, stock compensation, and dividends. Cash flow information
under the US GAAP presentation is also shown further in this document.
In January 2003,
the Financial Accounting Standards
Board (FASB) issued Financial Interpretation No. 46 (FIN 46), Consolidation
of Variable Interest Entities and in December 2003 issued a revised
interpretation, FIN 46R. The interpretation requires the primary beneficiary
to consolidate a variable interest entity if it has a variable interest that
will absorb a majority of the entitys losses if they occur, or receive
a majority of the entitys expected returns or both. BT had adopted FIN
46 in June 2003, and the further adoption of FIN 46R did not have a material
effect on the results or statement of financial position of the group.
In May 2003 the
FASB issued SFAS No. 150, Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and Equity. SFAS No. 150
establishes standards for how to classify and measure certain financial instruments
with characteristics of both liabilities and equity. It requires that an issuer
classify a financial instrument that is within its scope as a liability, or
an asset in some circumstances. On adoption, SFAS No. 150 did not have a material
effect on the results or statement of financial position of the group.
In November 2002
the Emerging Issues Task Force reached a consensus on EITF 00-21 Revenue
arrangements with multiple deliverables. BT adopted this consensus
for contracts entered into after 15 June 2003. Adoption of the consensus did
not have a material impact on the results of the group.
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 Jones Sustainability Indexes rank companies for their success in meeting this challenge. During the 2004 financial year, BT was ranked as the top telecommunications company in the
Dow Jones Sustainability Index for the third year running.
We
also hold the Queens Award for Enterprise in recognition of our contribution
to sustainable development.
This
section of the report, together with the broad statement on social, environmental
and ethical matters included in the section on Corporate governance,
provides information in response to the Association of British Insurers disclosure
guidelines on social responsibility.
More
detailed disclosures on BTs implementation of social, ethical and environmental
policies and procedures are available online in our independently-verified social
and environmental report, which has been prepared in accordance with the 2002
Global Reporting Initiative (GRI) sustainability reporting guidelines.
CSR governance
The
Board is kept informed of BTs main CSR risks and opportunities and any new developments which may impact on its duties and reviews annually our CSR strategy. In addition, social, ethical and environmental
matters have been incorporated into the directors induction programme.
A
Board committee the Community Support Committee oversees community,
charitable and arts expenditure and establishes the strategy for maximising our
contribution to society. The committee, chaired by Sir Christopher Bland, consists
of representatives from BT businesses, two non-executive directors and two external
independent members, who have a reputation for excellence in this field.
An
executive committee, the Corporate Social Responsibility Steering Group (CSRSG),
oversees the implementation of our CSR programme. This includes risk assessment,
target and objective
setting, ISO14001 certification the international standard for environmental management systems and
public accountability.
The CSRSG consists of CSR champions nominated by the lines of business and six support functions (human resources, corporate governance, health and safety, finance, communications and
procurement).
The
CSRSG is chaired by BTs overall CSR champion, Alison Ritchie, Chief Broadband
Officer and a member of the Operating Committee. It is supported by advice from
an independent panel
of CSR experts.
To
ensure that CSR is embedded into BTs commercial operations, we undertake CSR health checks of
our main commercial initiatives.
These health
checks identify specific social, economic and environmental impacts (both positive
and negative) and particular CSR risks and opportunities. A report is then compiled, including recommended actions.
We have important relationships with a wide range of stakeholders, including employees, customers and suppliers. We engage with these stakeholders in a number of ways, including consumer
liaison panels, an annual employee survey and a supplier relationship management programme.
We
also employ a number of CSR experts who investigate long-term societal trends,
identify potential issues that might affect the business and support BTs
commercial
activities.
We
have identified 11 non-financial KPIs (key performance indicators) in this context
to provide a quick overview of BTs social and environmental performance.
These KPIs have also been used to establish ten strategic social and environmental targets and are published in our social and environmental report.
Social,
environmental and ethical risks During the 2004 financial year, we developed a separate CSR risk register that sets out our important social, ethical and environmental risks. It identifies the following risks as the most significant in the context of CSR: |
|
supply chain working conditions | |
health and safety | |
climate change | |
diversity | |
geography of jobs (offshoring) | |
breach of the code of business ethics. | |
Each of these CSR risks has a risk owner and mitigation strategy in place (more detail can be found in our social and environmental report). |
CSR business opportunities
Following
a detailed statistical analysis of customer opinion data going back up to 80
months and based on tens of thousands of interviews, we have been able to show
that a 1% improvement in the publics
perception of our CSR activities results in a 0.1% increase in our retail customer
satisfaction figures.
This is a critical correlation and shows how important it is not only to protect our reputation through appropriate risk management activities, but also to enhance it through our community
activities.
Long-term sustainability trends are creating market opportunities for us, such as the use of teleconferencing and flexible working to reduce the need to travel and provide more flexible
lifestyles.
Increasingly,
BT has to address social and environmental matters when bidding for business.
In the 2004 financial year, bids to the value of almost £900 million required
us to
demonstrate expertise in managing these issues.
Environment
BT
is one of the largest consumers of industrial and commercial electricity in the
UK, and the growth of broadband is likely to increase our electricity use. However,
during the 2004 financial year, a £675,000
investment in our energy conservation programme
48 | Operating and financial review | BT Annual Report
and Form 20-F 2004 |
enabled us to reduce our electricity
consumption by 1.5%.
The
use of renewable energy and combined heat and power together with energy
and transport efficiency measures has enabled us to reduce our global-warming
CO2 emissions by 42% since 1996. We have set a target
to cap our 2010 CO2 emissions at 25% below those of 1996.
CO2 emissions | ||||||
Financial year | 2004 | 2003 | 2002 | |||
Total (UK only; million tonnes) | 0.92 | 0.96 | 1.03 | |||
% below 1996 | 42% | 40% | 36% | |||
Tonnes per £1m turnover | 50 | 51 | 56 | |||
During the 2004 financial year, we received an income of £4 million from our recycling activities, offset against the £10 million we spent managing our waste contracts, recycling our waste and sending waste to landfill.
Waste | ||||||
Financial year |
2004 | 2003 | 2002 | |||
Total waste (tonnes) | 107,303 | 117,688 | 114,999 | |||
Total waste recycled (tonnes) | 27,626 | 27,809 | 24,099 | |||
% Recycled | 26% | 24% | 21% | |||
Also during the 2004 financial year we reduced both our commercial fleet still one of the largest in the UK and our fuel consumption by 4%.
Transport | ||||||
Financial year |
2004 | 2003 | 2002 | |||
Number of vehicles (UK only) | 32,663 | 33,979 | 37,509 | |||
Fuel consumption (million litres) | 53.85 | 56.12 | 62.76 | |||
Digital inclusion
Digital inclusion is a key public policy issue and we are working with the UK Government and the voluntary sector to find effective ways to use communications technology to tackle social exclusion.
In
particular, we launched a digital inclusion campaign to support the Governments
aim to give all citizens online access within the next few years and demonstrate
how communications
can help improve society.
A
key element of the campaign is the Everybodyonline programme,
established in partnership with charity campaign group, Citizens Online. The
campaign is currently focused on eight deprived communities and aims to increase
skills and access to communications technology in underprivileged areas and to
deepen the understanding of the causes and effects of the digital divide and
how they may be addressed
nationally.
Disability services
Our
Age and Disability Action team promotes equal access to a wide range of products
and services. We work directly with older and disabled people and their representatives
to raise awareness of BTs inclusive
approach.
For
people with hearing or speech impairments, for example, our textphone offers
easy access to BT TextDirect the service that enables users to dial direct
to other text or voice users. Customers with visual or mobility impairments benefit
from products with large clear keypads and cordless or hands-free options. A
variety of new products and network services with mixed-ability appeal will be
launched during the 2005
financial year.
We continue to offer services to protect the telephone lines of people who need support. This includes free directory enquiries for those unable to use the printed directory and billing,
service and product information in a variety of formats, such as Braille and large print.
We are committed 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 society. This has ranged from £10 million in 1987, peaking at £16 million in 2001 and was £5.6 million
(including £1.2 million to charities) in the 2004 financial year. BT operations also provided a further £12.4
million in funding and support in kind over the past financial year.
The focus of our community programmes is on big issues where better communication can make a real difference to society.
For
example, more than 9,500 schools and over two million young people have taken
part in the BT Education Programme a drama-based campaign helping children
to improve their communication skills. This activity is supported by our volunteering
programme which, at 31 March 2004, had 3,000 registered volunteers working with
schools.
We are working with ChildLine on a major new campaign to raise funds to ensure that every one of the 4,000 children who call ChildLine every day has his/her call answered.
In
addition, BT people gave £2 million directly to charities during the 2004 financial year through Give as you Earn, to which BT added a direct contribution of £1
million.
49 | BT
Annual Report and Form 20-F 2004 |
Board of directors and Operating Committee
Board of directors
Sir Christopher Bland Chairmand,e,f
Sir Christopher Bland
was appointed to the Board as Chairman on 1 May 2001. He chairs the Nominating and Community
Support committees.
He
was chairman of the BBC Board of Governors from 1 April 1996 until 30 September
2001. From 1972 to 1979, Sir Christopher
was deputy chairman of the Independent Broadcasting Authority and chairman of
its Complaints Review Board. In 1982, he became a non-executive director of LWT
Holdings and was chairman from 1983 to 1994, when LWT was acquired by Granada
Group. From December 1994 to May 2000, he was chairman of NFC. From 1977 to
1985, he was chairman of Sir Joseph Causton & Sons.
Sir
Christopher, who was chairman
of the Hammersmith and Queen Charlottes Hospitals Special Health Authority from 1982 to 1994 and of Hammersmith Hospitals NHS Trust from 1994
to February 1997, was knighted for his work in the NHS in 1993. He was chairman of the Private Finance Panel from 1995 to 1996 and a member of the Prime Ministers Advisory Panel on the Citizens
Charter. He is senior adviser at Warburg Pincus and chairman of the Royal Shakespeare
Company. Aged 65.
Executive directors
Ben Verwaayen Chief Executivea
Ben Verwaayen was appointed
to the Board on 14 January 2002 and became Chief Executive on 1 February 2002.
He chairs the Operating Committee.
Ben Verwaayen was formerly vice chairman of the management board of Lucent Technologies in the USA from October 1999. He joined Lucent in September 1997 as executive vice president
international and became chief operating officer the following month. Prior to joining Lucent, Ben Verwaayen worked for KPN in the Netherlands for nine years as president and managing director of its telecoms subsidiary, PTT Telecom. From 1975 to
1988, he worked for ITT in Europe. A Dutch national, he is aged 52.
Ian Livingston Group Finance Directora,f
Ian Livingston was appointed
Group Finance Director in April 2002. He was formerly group finance director
of Dixons Group from 1997. He joined Dixons in 1991 after working for 3i Group
and Bank of America International. His experience at Dixons spanned a number
of operational and financial roles, both in the UK and overseas. He was also
a director of Freeserve from its inception. He is a Chartered Accountant. He
is a non-executive director of Hilton
Group. Aged 39.
Pierre Danon Chief Executive, BT Retaila
Pierre Danon was appointed to the
Board on 19 November 2001. He joined BT as Chief Executive of BT Retail in October 2000 and was a member of the former Executive Committee. From 1981 to 2000, he worked for Rank Xerox (which became Xerox in 1997), latterly as president of Xerox
Europe. He was a senior vice president of Xerox Corporation since 1997.
He is a non-executive director of Emap. A French national, he is aged 48.
Andy Green Chief Executive, BT Global Servicesa
Andy Green was appointed to
the Board on 19 November 2001. He 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. Aged 48.
Dr Paul Reynolds Chief
Executive, BT Wholesalea
Paul
Reynolds was appointed to the Board on 19 November 2001. In April 2000, he
was appointed to the former Executive Committee as Chief Executive of BT Wholesale.
He joined BT from the companys predecessor corporation, which he joined
in 1983, and has held a number of roles, including Director of the Office of
the Chairman, Director of Multimedia and, from 1999, Managing Director of Networks
and Information Services. He will become a non-executive director of E-Access
(a Japanese corporation), in June 2004. Aged
47.
Non-Executive directors
Clayton Brendishb,e
Clayton Brendish
was appointed to the Board on 1 September 2002. He is non-executive chairman
of Beacon Investment Fund and a non-executive director of Elexon and Herald
Investment Trust. He is also a trustee of Economist Newspapers and the Foundation
for Liver Research and a council member of City University of London. Prior
to his retirement in May 2001, Clayton Brendish was executive deputy chairman
of CMG having joined the board when it acquired Admiral. Clayton Brendish was
co-founder and executive chairman of Admiral, incorporated in 1979. He also
acted as an advisor to the Government on the efficiency of the Civil Service,
working as an advisor to the Chancellor of the Duchy of Lancaster and the Office
of Public Services on their respective Next Steps Agencies. Aged 57.
Sir Anthony Greener Deputy Chairmanb,c,d
Sir
Anthony Greener was appointed to the Board on 1 October 2000. He was appointed
Joint Deputy Chairman and chairman of the Audit Committee on 1 January 2001.
He is the senior independent director. He became Deputy Chairman and chairman
of the Remuneration
Committee on 18 July 2001.
Sir Anthony is chairman of University for Industry (learndirect) and the Qualifications and Curriculum Authority and a non-executive director of Robert Mondavi Corporation. He was formerly
chairman of Diageo. Prior to the merger of Guinness and Grand Metropolitan, he was chairman and chief executive of Guinness, having been chief executive of Guinness since 1992. Aged 63.
50 | Board of directors and Operating Committee | BT Annual Report and Form 20-F 2004 |
Louis R Hughesb,c
Louis Hughes joined
the Board on 1 January 2000. He is non-executive chairman of Maxager Technology
Inc. (USA). He was formerly president and chief operating officer of Lockheed
Martin Corporation and previously
executive vice president of General Motors.
Louis Hughes is a non-executive director of AB Electrolux (Sweden) and Sulzer AG and ABB Limited (both Switzerland). From 1993 to 2000, he was a member of the supervisory board of Deutsche
Bank. A US national, he is aged 55.
The Rt Hon Baroness Jay of Paddington PCc,e
Baroness (Margaret) Jay was appointed to the Board on 14 January 2002.
She was formerly Lord Privy Seal, Leader of the House of Lords and Minister for Women. Previously, she was Minister of State at the Department of Health.
Baroness
Jay is a non-executive director
of Independent News & Media and has held non-executive positions with Scottish
Power, Carlton Television and LBC. Currently chairman of the Overseas Development
Institute, she has been a member of the Central Research and Development Committee
for the NHS, was a founding director of the National AIDS trust, a governor of
South Bank University and a member of the Meteorological Office
Council. Aged 64.
John Nelsonb,d,f
John Nelson was
appointed to the Board on 14 January 2002. A Chartered Accountant, he retired
as chairman of Credit Suisse First Boston Europe (CSFB) on 31 January 2002. He
was a member of the executive board and chairman of the European executive committee
of CSFB.
Prior to joining CSFB in January 1999, John Nelson spent 13 years with Lazard Brothers. He was appointed vice chairman of Lazard Brothers in 1990. He was also a chairman of Lazard S.p.A.
in Italy and a managing director of Lazard Freres, New York.
He was a non-executive director of Woolwich until it was taken over by Barclays Bank in 2000. He is deputy chairman of Kingfisher and a non-executive director of Hammerson. Aged 56.
Carl G Symonb,c
Carl Symon was appointed to the Board
on 14 January 2002. He retired from IBM in May 2001 after a 32-year career, during
which he held senior executive positions in the USA, Canada, Latin America, Asia
and Europe,
including chairman and chief executive officer of IBM UK.
Carl Symon is chairman of a number of private companies and a non-executive director of Rolls-Royce and Rexam. A US national, he is aged 58.
Maarten van den Berghb,c,d,f
Maarten van den
Bergh was appointed to the Board on 1 September 2000. He chairs the Pension
Scheme Performance Review Group. He is chairman of Lloyds TSB Group and a
non-executive director of Royal Dutch Petroleum Company and British Airways.
Prior to his retirement in July 2000,
Maarten van den Bergh was president of the Royal Dutch Petroleum Company and
vice chairman of its committee of managing directors from July 1998, having
been appointed a managing director of the Royal Dutch Shell Group of companies
in July 1992. A Dutch national, he is aged 62.
Operating Committee
Ben Verwaayen Chief
Executive
Ian
Livingston Group Finance Director
Pierre Danon Chief
Executive, BT Retail
Andy Green Chief Executive, BT Global Services
Dr Paul Reynolds Chief
Executive, BT Wholesale
See page 49 for biographical details.
Alison Ritchiea,e
Alison Ritchie
joined BT
from the companys predecessor corporation, which she joined in 1981. She
was appointed a member of the former Executive Committee in December 2000.
Alison
Ritchie was appointed Chief Broadband Officer in November 2002 and she
directs BTs policy on broadband developments across the whole of BT ensuring a co-ordinated approach to
the delivery of high quality broadband services to residential and business customers. Alison Ritchie was formerly Chief Executive, BT Openworld. Before joining BT Openworld, she was BTs
Restructuring Project Director, co-ordinating the project teams working on the
financial, organisational and managerial restructuring of BT. She is a member
of the board of the British Quality Foundation and a non-executive director of
Roffey Park Institute. Aged 43.
Company Secretary
Larry Stone
Larry Stone, formerly Corporate Governance Director from 1 June 2000, was appointed Company Secretary on 27 March 2002. He previously held external relations and regulatory roles with BT in Tokyo and Brussels and with BT Cellnet (now O2 UK). He is a trustee of the BT Pension Scheme, a member of the executive committee of the British Quality Foundation 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. |
51 | Report of the directors | BT Annual Report and Form 20-F 2004 |
Report of the directors
The directors submit their report and the audited financial statements of the company, BT Group plc, and the group, which includes its subsidiary undertakings, for the 2004 financial year.
Introduction
BT Group plc is the listed holding company for the BT group of companies and was formed when the mmO2 business (comprising what had been British Telecommunications
plcs mobile activities in the UK, the Netherlands, Germany and the Republic
of Ireland) was demerged on 19 November 2001.
The
Operating and financial review on pages 6 to 46, the discussion on Corporate
governance on pages 52 to 57, the Report
on directors remuneration on pages 58 to 71 and Risk Factors on pages 138
and 139 form part of this report. The audited financial statements are presented
on pages 74 to 134.
Principal activity
The groups principal
activity is the supply of communications services and equipment. In the 2004
financial year, approximately 93% of group turnover arose from operations in
the UK.
Directors
The names and biographical details of the directors of the company are given on pages 49 and 50. All served throughout the financial year.
In
accordance with the articles of association, Sir Christopher Bland retires
by rotation at the forthcoming annual
general meeting and will be proposed for re-election. Andy Green, Ian Livingston
and John Nelson also retire by rotation and will be proposed for re-election.
Details of these directors contracts of appointment are included in the
Report
on 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 VI of the Companies
Act 1985, in respect of holdings of 289,727,496 shares, 347,436,030 shares
and 347,201,310 shares respectively, representing holdings of 3.37%, 4.04%
and 4.04% of the companys
issued ordinary share capital.
Interest of management in certain transactions
During and at the end
of
the 2004 financial year, none of the companys directors was materially
interested in any material transaction in relation to the groups business
and none is materially interested in any presently proposed material transactions.
Policy on the payment of suppliers
BTs policy is to use its purchasing
power fairly and to pay promptly and as agreed.
BT has a variety of payment terms with its suppliers. The terms for payments for purchases under major contracts
are settled when agreeing the other terms negotiated with the individual suppliers.
It is BTs policy to make payments for other purchases within 30 working
days of the invoice date, provided that the relevant invoice is presented to
the company in a timely fashion and is complete. BTs payment terms are
printed on the companys standard purchase order forms or, where appropriate,
specified in individual contracts agreed with the supplier. The ratio, expressed
in days, between the amounts invoiced to the company by its suppliers in the
2004 financial year and the amounts owed to its trade creditors at the end of
the year was 35 calendar
days.
Political donations
The companys continuing
policy is not to make political donations in the everyday sense of those words.
This is explained in the Corporate governance section on pages 52 to
57. However, during the 2004 financial year British Telecommunications plc
made the following payments to cover the cost of hosting briefing meetings
about the companys activities with MPs and MEPs:
Labour Party £8,882; Conservative Party £8,366; Liberal Democrat
Party £5,942; Scottish National Party £2,500.
Auditors
A resolution to reappoint
PricewaterhouseCoopers LLP as auditors of the company and authorise the directors
to settle their remuneration will be proposed at the AGM.
Authority to purchase shares
The authority given at last
years AGM of the company held on 16 July 2003 for the company to purchase
in the market 867 million of its shares, representing 10% of the issued share
capital, expires on 15 October 2004. Shareholders will be asked to give a similar
authority at the AGM.
During
the 2004 financial year, 81 million shares of 5 pence each were purchased
under this authority (1% of the
share capital) for a total consideration of £144 million, at an
average price of £1.77 per share. The shares were purchased in an on-market programme of buying back the companys shares, initiated in November 2003, as part of the companys shareholder distribution strategy. 36 million shares were
cancelled and 44 million shares have been retained as treasury shares. At 14 May 2004, 0.2 million treasury shares had been transferred to meet the companys
obligations under its employee share plans.
AGM resolutions
The resolutions to be proposed at the
AGM to be held on 14 July 2004, together with explanatory notes, appear in the
separate Notice of Annual General Meeting sent to all shareholders.
By order of the Board | |
Larry Stone Secretary |
19 May 2004 |
Registered office:
81 Newgate Street, London EC1A 7AJ Registered in England and Wales No. 4190816 |
52 | BT Annual Report and Form 20-F 2004 |
Corporate governance
BTs policy is to achieve best practice in our standards of
business integrity in all our operations. This includes a commitment to maintaining
the highest standards of corporate governance and ethics throughout
the group.
The
company took part in the consultations leading up to the publication in July
2003 of the UKs new Combined Code on Corporate Governance. BT is obliged this year to report on how
it has applied the previous version of the Combined Code. The directors consider that BT has, throughout the year, complied with the provisions of that version of the Code. This section also reports on BTs
position in respect of the provisions introduced by the new Combined Code. The
company will report fully on its compliance with the new Code next year.
The Board
Composition and role
The
Board, which operates as a single team, is currently made up of the part-time
Chairman, the Chief Executive, four other executive directors and seven non-executive
directors. All of the non-executive directors meet the criteria for independence
set out in the new Combined Code and are therefore considered by the Board to
be independent. It is BTs policy that the Board will comprise a majority of independent non-executive directors. The directors biographies
are set out on pages 49 and 50.
The
Boards principal focus is the overall strategic direction, development and control of the group. In support of this the Board approves the groups values, business practice
policies, strategic plans, annual budget, capital expenditure and investments budgets, larger capital expenditure proposals and the groups overall system of internal controls, governance and compliance authorities. It also has oversight and
control of the groups operating and financial performance. These responsibilities are set out in a formal statement of the Boards role which is available on the companys website. The Board has agreed the groups corporate
governance framework, as part of which it has empowered the companys key
management committee, the Operating
Committee, to make decisions on operational and other
matters. The roles and powers of these committees are set out later in this report
under Principal Board committees. Their powers and the authorities delegated
to individual members of the Operating Committee are available to everyone in
the group on the groups intranet site.
The Board meets every month, except in August. Additionally, it meets on an ad hoc basis to consider matters which are time critical. The Board met 11 times during the 2004 financial
year.
The roles of the Chairman and the Chief Executive are set out in written job descriptions. In addition to chairing the Board, the Chairman is responsible for consulting the non-executive
directors, particularly the Deputy Chairman, on corporate governance issues, matters considered by the Nominating Committee, which the Chairman chairs, and the individual performances of the non-executive directors. With the Chief Executive and the
Secretary, he ensures the Board is kept properly informed,
is consulted on all issues reserved to it and that its decisions are made in
a timely and considered way that enables the directors to fulfil their fiduciary
duties. The Chairman ensures that the views of the shareholders are known to
the Board and considered appropriately. He represents the company in specified
strategic and Government relationships, as agreed with the Chief Executive, and
generally acts as the bridge
between the Board and the Companys executive team, particularly on the
Groups broad strategic direction. The Chief Executive has final executive
responsibility
to the Board for the success of the group.
The
Secretary manages the provision of timely, accurate and considered information
to the Board for its meetings and, in consultation with the Chairman and
Chief Executive, at other appropriate times. He recommends to the Chairman
and the Chief Executive, for Board consideration where appropriate, the
companys corporate governance policies and practices and is responsible
for their communication and implementation.
BTs non-executive directors
The desired combination of experience,
skills and other attributes that the non-executive directors as a whole are to
bring to the Board is agreed and reviewed by the Nominating
Committee. This profile is used by the Committee to assess the suitability as
non-executive directors of candidates put forward by the directors and outside
consultants before the Committee meets short-listed candidates and goes on to
recommend to the Board a candidate for appointment.
The
non-executive directors provide a strong, independent element on the Board.
Between them, they bring experience and independent judgement, gained at
the most senior levels, of international business operations and strategy,
marketing, technology, communications and political and international affairs.
The Chairman and the non-executive directors hold regular dinners at which
they discuss matters without the executive
directors being present. At least annually, these provide an occasion for the
non-executive directors, led by the Deputy Chairman, Sir Anthony Greener,
to meet, without the Chairman present to review the Chairmans performance.
Sir
Anthony Greener, the Deputy Chairman, is the senior independent director.
He chairs the Audit and Remuneration committees.
In his capacity as the chairman of the Remuneration Committee, he
meets
with BTs major institutional shareholders. The Deputy Chairman also continues to be available to discuss matters with institutional shareholders where it would be inappropriate for those discussions to take place with either the Chairman or
the Chief Executive. He will also attend, at his discretion and in consultation with the Chairman and the Chief Executive, other meetings with shareholders during the year. The other non-executive directors may attend, at their request, meetings
with the companys major shareholders and others.
53 | Corporate governance |
BT Annual Report and
Form 20-F 2004 |
Non-executive directors are appointed initially for three years, subject to three months termination notice from either BT or the director. At the end of the first three years the appointment may be continued by mutual agreement. Each non-executive director is provided, upon appointment, with a letter 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 companys share dealing code. The appointment letter was reviewed by the Nominating Committee following the publication of the new Combined Code and new letters sent to all non-executive directors which align the companys letter, as appropriate, to the sample letter annexed to the new Code.
Election and re-election
All directors are required by the
companys articles of association to be elected by shareholders at the first
AGM after their appointment, if appointed by the Board. A director must subsequently
retire by rotation at an AGM at intervals of not more than three years. The director
may seek re-election.
Service agreements
The Chairman and executive directors
have service agreements, which are approved by the Remuneration Committee. Information
about the periods of these contracts is in the Report
on
directors remuneration.
Independent advice
The Board has a procedure for directors,
in furtherance of their duties, to take independent professional advice if necessary,
at the companys expense. In addition, all directors have access to the
advice and services of the Secretary, the appointment and removal of whom is
a matter for the whole Board. He advises the Board on appropriate procedures
for the management of its meetings and duties (and the meetings of the companys
principal committees), as well as the implementation of corporate governance
and compliance within the group.
Training and information
On appointment, the directors take
part in an induction programme when they receive information about BT, the role
of the Board and the matters reserved for its decision, the terms of reference
and membership of the principal Board and management committees, and the powers
delegated to those committees,
the companys corporate governance practices and procedures, including the
powers reserved to the groups most senior executives, and the latest financial
information about the group. This is supplemented by visits to key BT locations
and meetings with members
of the Operating Committee and
other key senior executives. Throughout their period in office the directors
are continually updated on BTs business, the competitive and regulatory
environments in which it operates, technology and corporate social responsibility
matters and other changes affecting BT and the
communications industry as a whole, by written briefings and meetings with senior
BT executives. Directors are also advised on appointment of their legal and other
duties and obligations as a director of a listed company, both in writing and
in face-to-face meetings with the Secretary. They are reminded of these duties
each year and they are also updated on changes to the legal and governance requirements
upon the company and themselves as directors. During the 2004 financial year,
for example, they have been advised on the changes to UK corporate governance
brought about by the new Combined Code, continued to receive briefings on the
US Sarbanes-Oxley Act of 2002, which affects BT because its securities are registered
with the US Securities and Exchange Commission (SEC), and various corporate proposals
from the European Commission. They also received an updated briefing on UK, US
and international financial
reporting developments.
Guidelines are in place concerning the content, presentation and delivery of papers for each Board meeting, so that the directors have enough information to be properly briefed
sufficiently far ahead of each Board meeting and at other appropriate times.
Board evaluation
During summer 2003 the Board carried
out, through a questionnaire and discussion with directors, an evaluation of
its performance and the quality of board processes. The results of that exercise
were considered by the Board in July 2003 and a number of actions agreed. A further
evaluation, including
on the performance of directors and the Boards committees, will be carried
out during 2004.
Directors and officers liability
insurance and indemnity
For some years the company has purchased
insurance to cover its directors and officers against their costs in defending
themselves in civil legal proceedings taken against them in that capacity and
in respect of damages resulting from the unsuccessful defence of any proceedings.
To the extent permitted by UK law, the company also indemnifies its directors
and officers. Neither the insurance nor the indemnity provide cover where the
director has acted
fraudulently or dishonestly.
Principal Board committees
To meet best corporate governance practice,
Audit, Remuneration and Nominating Committees have long been an established part
of BTs system of governance. Each committee has written terms of reference,
which are
available on the companys website. The minutes of Audit and Nominating
Committee meetings are sent, at their request, to directors who are not a member
of a committee. In the case of the Remuneration
Committee, minutes are circulated, on request, to other non-executive directors
as well as to members of the committee.
54 | Corporate governance |
BT Annual Report and
Form 20-F 2004 |
Audit Committee
The Audit
Committee is chaired by Sir Anthony Greener, the Deputy Chairman and senior
independent director.
The other members are Maarten van den Bergh, Clay Brendish, Lou Hughes, John
Nelson and Carl Symon. They are all independent non-executive directors. They
were members of the committee throughout the 2004 financial year. The Board considers
that the Committees members have
broad commercial experience and extensive business leadership, having held various
roles in accountancy, financial management and supervision, treasury and corporate
finance and that there is a broad and suitable mix of business, financial and
IT experience on the Committee. The Board has reviewed membership of the Committee
and is satisfied, for the purposes of the new Combined Code, that collectively
the Committee has recent and relevant financial experience.
The
Committee recommends the appointment and reappointment of the companys external auditors and considers their resignation or dismissal, recommending to the Board appropriate
action to appoint new auditors. It ensures that key partners are rotated at appropriate intervals. It discusses with the auditors the scope of their audits before they commence, reviews the results and considers the formal reports of the auditors
and reports the results of those reviews to the Board. It reviews the auditors performance,
including the scope of the audit, and recommends to the Board appropriate remuneration.
As
a result of regulatory or similar requirements, it may be necessary to
employ the companys external auditors for certain non-audit work. In order to safeguard the independence and
objectivity of the external auditors, the Board has determined policies as to what non-audit services can be provided by the companys
external auditors and the approval processes related to them. Under those policies
work of a consultancy nature will not be offered to the external auditors unless
there are clear efficiencies and value added benefits to the company. The overall
policies and the processes to implement them were reviewed and appropriately
modified in the light of the
provisions of the US Sarbanes-Oxley Act of 2002 relating to non-audit services
that external auditors may not perform. The Audit
Committee monitors
the extent of non-audit
work being performed by the companys auditors and approves such work before
it is undertaken. It also monitors the level of non-audit fees paid to the external
auditors.
The Audit
Committee reviews the companys published financial results, the Annual Report and Form 20-F and
other published information for statutory and regulatory compliance. It also reviews the disclosure made by the Chief Executive and Group Finance Director during the certification process for the annual report about the design or operation of
internal controls or material weaknesses in the controls, including any fraud involving management or other employees who have a significant role in the companys
financial controls. The Board, as required by UK law, takes responsibility
for all disclosures in the annual report.
The Audit
Committee monitors and reviews the standards of risk management and internal
control, the effectiveness
of internal control, financial reporting, accounting policies and procedures,
and the companys statements on internal controls before they are agreed by the Board for each years annual report. It also reviews the companys internal audit function and
its relationship with the external auditors, including internal audits plans and performance. It reviews the arrangements for dealing, in confidence, with complaints from employees about accounting or financial management impropriety, fraud,
poor business practices and other matters. At each of its meetings, the Committee sets aside time to seek the views of the companys
internal and external auditors in the absence of executives.
The
Group Finance Director, the Secretary, the groups chief internal auditor and the companys external auditors attend the Committees meetings. The Committee met four
times during the 2004 financial year. At its meetings the Committee has reviewed the companys full year and quarterly results and its Annual Report and Form 20-F and considered the adequacy of the financial systems that have produced those
results. It has reported its views to the Board so it has been able to approve the results announcements and the annual report for publication. It has also during the 2004 financial year considered the groups
risk register, as submitted to it
by the Management Council,
and reviewed the companys internal control, accounting systems, IT security and related matters. It also approved the arrangements for
employees to make confidential complaints about accounting and other issues and adopted, for the purposes of the Sarbanes-Oxley Act, a code of ethics for the Chief Executive, Group Finance Director and Director Group Financial Control and Treasury,
which is consistent with BTs overall statement of business ethics.
Remuneration Committee
The Remuneration
Committee comprises solely independent non-executive directors and is chaired
by Sir Anthony Greener. It met four times during the 2004 financial year. Further
details about the Committee are included in the Report on directors remuneration.
Nominating Committee
The Nominating
Committee consists of the Chairman, the Deputy Chairman, John Nelson and Maarten
van den Bergh. Its members have not changed during the 2004 financial year. It
ensures an appropriate balance of experience and abilities on the Board, using
this evaluation to review the size and composition of the Board and to recommend
any proposed changes to the Board. It keeps under
review the need for appointments to the Board, prepares a description of the
specific experience and skills needed for an appointment, considers candidates
who are put forward by the directors and external consultants, and recommends
to the Board the appointments of all directors after having met short-listed
candidates. It
55 | Corporate governance | BT Annual Report and Form 20-F 2004 |
also reviews the time required from the Deputy Chairman and other non-executive directors to carry out their duties and advises the Board on succession planning for the positions of the Chairman, Deputy Chairman, Chief Executive and all other Board appointments. The Committee met once during the 2004 financial year at which time it reviewed the current structure profile and balance of the Board, reviewed and recommended to the Board the continued appointments as non-executive directors of Sir Anthony Greener and Maarten van den Bergh (neither of whom took part in the review of his own position) and agreed changes to the non-executive directors letter of appointment to align it to recommended best practice.
Meetings attendance
The following table shows the attendance of directors at meetings of the Board and Audit,
Remuneration and Nominating committees during the 2004 financial year.
Audit | Remuneration | Nominating | ||||||
Board | Committee | Committee | Committee | |||||
(attendance is shown only for a committee | ||||||||
member) | ||||||||
Number of meetings/ | ||||||||
Director | 11 | 4 | 4 | 1 | ||||
Sir Christopher Bland | 11 | 1 | ||||||
Maarten van den Bergh | 9 | 4 | 3 | 1 | ||||
Clay Brendish | 11 | 3 | ||||||
Pierre Danon | 11 | |||||||
Andy Green | 11 | |||||||
Sir Anthony Greener | 10 | 4 | 4 | 1 | ||||
Lou Hughes | 11 | 4 | 4 | |||||
Margaret Jay | 11 | 3 | ||||||
Ian Livingston | 11 | |||||||
John Nelson | 11 | 4 | 1 | |||||
Paul Reynolds | 11 | |||||||
Carl Symon | 11 | 4 | 4 | |||||
Ben Verwaayen | 11 | |||||||
Operating Committee and Management Council
The Chief Executive, Ben Verwaayen,
chairs the Operating
Committee, which meets weekly. The other members are the 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 groups business end-to-end. To do that, it
develops the groups strategy and budget for Board approval, recommends
to the Board the groups capital expenditure and investments budgets, monitors
the financial, operational and customer quality of service performance of the
whole group, allocates resources across the group within plans agreed by the
Board, plans and delivers major cross-business programmes and reviews the senior
talent base and succession plans of the group. Within the groups
corporate governance
framework, approved by the Board, the Operating Committee is empowered
to approve up to limits after which Board approval is required, capital expenditure,
disposals
of
fixed assets, the making of investments by the group and divestments. It is authorised
to delegate these approvals, up to its own limits, to senior executives.
A sub-committee of the Operating
Committee, the Management
Council, meets monthly. It consists of the Operating Committee members plus a
number of other senior executives. It is an advisory forum supporting the Chief
Executive and the Operating Committee in policy formulation, in areas such as
cultural change, public policy, reputation and business practices policies, human
resources, pensions matters and employment policies.
Internal control and risk management | |
The Board is responsible for the groups systems of internal control and risk management and for reviewing the effectiveness of those systems. Such systems are designed to manage, rather than eliminate, the risk of failure to achieve business objectives; any system can provide only reasonable and not absolute assurance against material misstatement or loss. | |
The Board also takes account of significant social, environmental and ethical matters that relate to BTs businesses and reviews annually BTs corporate social responsibility. The companys workplace practices, specific environmental, social and ethical risks and opportunities and details of underlying governance processes are dealt with in the Our people and Our commitment to society sections of this report. | |
BT has processes for identifying, evaluating and managing the significant risks faced by the group. These processes have been in place for the whole of the 2004 financial year and have continued up to the date on which this document was approved. The processes are in accordance with the guidance for directors published in the UK in September 1999. | |
Risk assessment and evaluation takes place as an integral part of the groups annual strategic planning cycle. The group has a detailed risk management process, culminating in a Board review, which identifies the key risks facing the group and each business unit. This information is reviewed by senior management as part of the strategic review. The groups current key risks are summarised in Risk factors of this document. | |
The key features of the risk management process comprise the following procedures: | |
senior executives, led by the Secretary, review the groups key risks and have created a group risk register, describing the risks, owners and mitigation strategies. This is reviewed by the Management Council before being reviewed and approved by the Board. | |
the lines of business carry out risk assessments of their operations, have created registers relating to those risks, and ensure that the key risks are addressed. | |
senior management report regularly to the Group Finance Director on the operation of internal controls in their area of responsibility. | |
the Chief Executive receives annual reports from senior executives with responsibilities for major |
56 | Corporate governance | BT Annual Report and Form 20-F 2004 |
group operations with their opinion on the effectiveness of the operation of internal controls during the financial year. | |
the groups internal auditors carry out continuing assessments of the quality of risk management and control. Internal Audit reports to the management and the Audit Committee on the status of specific areas identified for improvement. They also promote effective risk management in the lines of business operations. | |
the Audit Committee, on behalf of the Board, considers the effectiveness of the operation of internal control procedures in the group during the financial year. This follows consideration of the matter by the Management Council. The Audit Committee reviews reports from the internal auditors and from the external auditors and reports its conclusions to the Board. The Audit 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 of matters which are reserved to it for consideration, approval or oversight. It has also approved the groups corporate governance framework, which sets out the high level principles by which the group is managed and the responsibilities and powers of the Operating Committee, Management Council and the groups senior executives. As part of this framework the development and implementation of certain powers relating to group-wide policies and practices are reserved to identified senior executives. |
Relations with shareholders
Senior executives,
led
by the Chief Executive and the Group Finance Director and including, as appropriate,
the other executive directors, hold meetings
with the companys principal institutional shareholders to
discuss the companys strategy, financial performance and specific major
investment activities. The Deputy Chairman also attends, at his discretion and
in consultation with the Chairman and the Chief Executive, meetings with shareholders
during
the year. As explained in the Report
on directors remuneration, we also maintain contact, when appropriate,
through the chairman of the Remuneration Committee and other senior executives
to discuss overall remuneration policies and plans. Contact with institutional
shareholders (and with financial analysts, brokers and the media) is controlled
by written guidelines to ensure the protection of share price sensitive information
that has not already been made generally available to the companys shareholders.
The directors are provided with reports and other written briefings from the
companys major shareholders and analysts, either in full or through summaries
from the companys brokers and are regularly informed by the Secretary about
the holdings of its principal shareholders. The Secretary also
surveys the companys retail shareholders about the quality of the companys
shareholder
communications and share registration
services.
We are continuing our policy that shareholders vote on the annual report at the AGM. Shareholders will also again be asked to vote on the Report
on
directors remuneration.
It
is part of our policy to involve shareholders fully in the affairs of the
company and to give them the opportunity at the AGM to ask questions about
the companys activities and
prospects. We also give the shareholders the opportunity to vote on every substantially different issue by proposing a separate resolution for each issue. The Boards
opinion is that the re-election and the fees of the auditors are interrelated
matters and should therefore be dealt with in one resolution.
The proxy votes for and against each resolution,
as well as abstentions, will be counted before the AGM and the results will be
made available at the meeting after the shareholders have voted on each resolution
on a show of hands and at the end of the meeting. It is our policy for all directors
to attend the AGM if at all possible. Whilst, because of ill health or other
pressing reasons, this may not always be possible, in normal
circumstances this means that the chairman of the Audit,
Nominating and Remuneration committees is at the AGM and is available
to answer relevant questions.
The
Annual Review and, if requested, the Annual Report and Form 20-F, together
with the Notice of the AGM, are sent to shareholders in the most cost-effective
fashion, given the large number of shareholders. We aim to give as much
notice as possible and at least 21 clear days, as required by the companys
articles of association. In practice, these documents are being sent to
shareholders more than 20 working days before the
AGM.
Established
procedures ensure the timely release of share price sensitive information
and the publication of the companys financial results and regulatory
financial statements.
Statement of business practice
To reinforce our commitment to achieve best practice in our standards of business integrity and ethics, BT has a written statement of business practice (The
Way We Work). The statement covers all our operations and reflects the expectations
in the
area of corporate governance and business practice standards. A copy of the statement
has been sent to every employee and is also available on
the companys intranet site.
These high-level principles are supported by a continuing and comprehensive communications programme and online training. A confidential helpline and e-mail facility are also available to
employees who have questions about the application of these principles. We also continue to require our agents and contractors to apply these principles when representing BT.
Political donations
It has always been BTs
policy that no company in the group
shall make cash contributions to any political
57 | Corporate governance | BT Annual Report and Form 20-F 2004 |
party. This policy continues and appropriate arrangements are in place to implement it throughout the group. However, the Companies Act 1985 requires companies to obtain shareholder authority before they can make
donations to EU political organisations (which includes UK political parties). The definition of political donations used in the Act is very much broader than the sense in which these words are ordinarily used. As a result, it covers activities
which form part of normal relationships between BT, individual politicians and the principal political parties. These activities are not designed to provide support to or to influence public support for any political party. They would not be thought
of as political donations in the everyday sense of these words. They are entirely non-political in nature and are designed so that BT can make MPs and others aware of key industry issues and matters affecting the company.
The
authority we are requesting from shareholders at the AGM is not designed
to change the companys stated policy of not making cash contributions. It will, however, ensure that BT
acts within the provisions of the current UK law when carrying out the above activities. They are carried out on an even-handed basis related broadly to the major UK political parties electoral
strength and the company believes that they make an important contribution to
the success 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
BTs 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 union nominees, under independent chairmen.
The trustees look after the assets of the funds, which are held separately from those of the company. The pension funds assets
can only be used in accordance with their respective rules and for no other purpose.
Financial
A statement by the directors
of their responsibilities for preparing the financial statements is included
in the Statement of directors responsibility. The
directors report on page 72 that the company is a going concern.
US Sarbanes-Oxley Act of 2002
BT has securities registered with the US Securities and Exchange Commission (SEC). As a result, BT is obliged to comply with those provisions of the Sarbanes-Oxley Act (the Act) applicable to foreign issuers. BT will
comply with the legal and regulatory requirements introduced pursuant to this legislation, in so far as they are applicable to the group.
Given
the narrow and prescriptive definition under the relevant SEC rules, it is the
opinion of the Board that the Audit Committee does not include a member who is
an audit committee financial expert. However, the Board considers that the Committees
members have broad commercial experience and extensive business leadership,
having held
various roles in accountancy, financial management and supervision, treasury and corporate finance and that there is a broad and suitable mix of business, financial and IT experience on the Committee. The Board and its committees will
keep under active review the financial expert matter during the 2005 financial year as part of their nomination and succession planning activities.
The
Chief Executive and Group Finance Director, after evaluating the effectiveness
of BTs disclosure controls and procedures as of the end of the period covered by this Annual Report
and Form 20-F, have concluded that, as of such date, BTs 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 certifications required by the
Act.
There
were no changes in BTs internal control over financial reporting that occurred during the year ended 31 March 2004 that have materially affected, or are reasonably likely to
materially affect, BTs internal control over financial reporting.
The
code of ethics for the Chief Executive, Group Finance Director and Director
Group Financial Control and Treasury, adopted for the purposes of the Act,
is posted on the companys
website at http://www.btplc.com/Thegroup/Companyprofile/ Ourcodesofethics/CodeofethicsCEO.htm
The New York Stock Exchange
In November 2003, the SEC approved the new corporate governance listing standards of the New York Stock Exchange (NYSE). The company, as a foreign issuer with American Depositary Shares listed on the NYSE, is obliged
to disclose any significant ways in which its corporate governance practices differ from these standards.
The
company has reviewed the NYSEs new listing standards and believes
that its corporate governance practices are consistent with them, with
one exception where the company does not meet the strict requirements set
out in the standards. The standards state that companies must have a nominating/
corporate governance committee composed entirely of independent directors
and with written terms of reference which, in addition to
identifying individuals qualified to become board members, develops and recommends
to the Board a set of corporate governance principles applicable to the
company. BT has a Nominating Committee. Information
about it is set out on pages 54 and 55. It does not develop corporate governance
principles for the Boards approval. The Board approves the groups
overall system of governance internal controls, governance and compliance
authorities. The Board and the Nominating Committee are made up of a majority
of independent, non-executive directors.
58 | BT Annual Report and Form 20-F 2004 |
Report on directors remuneration
The review is divided into the following sections: | ||
59 | Remuneration policy (Not audited) | |
(i) | Packages | |
(ii) | Annual package 2005 financial year | |
(iii) | Other Matters | |
Executive share ownership | ||
Pensions | ||
Other benefits | ||
Service agreements | ||
Termination payments | ||
Outside appointments | ||
Non-executive
directors letters of appointment |
||
Non-executive directors remuneration | ||
Directors
service agreements and contracts of appointment |
||
Directors interests | ||
Performance graph | ||
65 | Remuneration review (Audited) | |
Directors remuneration | ||
Former 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 has applied the principles
in Section 1 of the 1998 version of the Combined Code on Corporate Governance
(the Code) and complied with the Code. The Committee also adopted the
main principles set out in the Higgs Report, reviewing the role and effectiveness
of non-executive directors, and this report explains how the company has
complied with the principles and provisions of the new Combined Code on
Corporate Governance which will begin to apply for the company in the
2005 financial year. Shareholders will be invited to approve this report
at the companys 2004 AGM. |
||
Maarten van den Bergh | ||
Louis Hughes | ||
Margaret Jay | ||
Carl Symon | ||
The
Chairman and Chief Executive are invited to attend meetings. They are not
present when matters affecting their own remuneration arrangements are considered.
No director is involved in any decision relating to his or her remuneration. Non-executive directors who are not members of the Committee are entitled to receive papers and minutes of the Committee. The Committee has access to professional advisers, both from within the company and externally. Towers Perrin (HR consultants); Ben Verwaayen, Chief Executive; Ian Livingston, Group Finance Director; Alex Wilson, Group HR Director and Larry Stone, Company Secretary, provided advice that materially assisted the Committee in relation to the 2004 financial year. The Committee has agreed that Towers Perrin may advise both the Committee and BT, and should be invited to attend meetings when major remuneration policy issues are being discussed. Towers Perrin provides BT with a range of data and advisory services covering all aspects of executive pay, bonus arrangements, shares and benefits. |
59 | Report on directors remuneration | BT Annual Report and
Form 20-F 2004 |
Remuneration
policy
This
part of the Report on directors remuneration is not subject to audit.
BTs
executive remuneration policy is to reward employees competitively, taking into
account individual performance, company performance, market comparisons and
the competitive pressures in the information and communications technology industry.
Base salaries are positioned around the mid-market, with total direct compensation
(basic salary, annual bonus and the value of any long-term incentives) to be
at the upper quartile only for sustained and excellent performance. There are
no plans to change this policy.
A significant proportion of the total executive
remuneration package is linked to line of business and corporate performance.
Remuneration arrangements and performance targets are kept under regular review
to achieve this. The Committee has decided to review during the 2005 financial
year the companys current arrangements for executive remuneration, including
the structure of the remuneration packages, their constituent parts and their
mix.
Where
any significant changes are proposed to executive remuneration, these will be
discussed with BTs principal shareholders and the main representative
groups of the institutional shareholders.
(i) Packages
The remuneration package is made up of some or all of the following:
Basic salary
Salaries are reviewed annually. Salary increases are made only where the Committee believes that adjustments are appropriate to reflect contribution, increased responsibilities and/or market pressures.
Performance-related remuneration
Annual bonus and deferred bonus
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 from 75% at the beginning of the 2003 financial year to reward the achievement of increasingly stretching targets). The on-target and maximum bonus levels for the Chief Executive were 85% and 130%, respectively, under his service
agreement. Under his contract, the Chairman is not entitled to a bonus.
Targets
set at the beginning of the 2004 financial year for each objective, to which
specific weights were attached, were based on earnings per share and free cash
flow, each representing 40% of the potential bonus, and customer satisfaction
representing 20% of the potential bonus. For the three line of business CEOs, 75% of the potential bonus was linked to BTs
corporate performance and 25% to the performance of their respective line of
business. For all other relevant executives, bonuses are based solely on corporate
performance.
The Committee retains the flexibility to enhance or reduce bonus awards in exceptional circumstances.
Awards
in the form of BT shares, granted under the Deferred Bonus Plan (DBP), are
directly linked to the value of annual bonuses and hence to performance.
The shares are held in trust and transferred to the executive if still employed
by the company in three years time. There are no additional performance
measures for the vesting of DBP awards. The DBP rewards performance and acts
as a retention measure.
Awards for the senior management team are equivalent in value to 50% of gross annual bonus.
The awards under the DBP held by Ben
Verwaayen, Pierre Danon, Andy Green, Ian Livingston and Paul Reynolds at the end of the 2004 financial year are contained in the table on page 69. The amounts are in note e on page 65.
Long-term incentives
The BT Equity Incentive Portfolio (the Portfolio) is designed to ensure that equity participation is a significant part of overall remuneration. It comprises three elements: share options, incentive shares and
retention shares. Share options were the main element of equity participation in the 2004 financial year. Retention shares are used as a recruitment and retention tool.
Under
his service agreement, the Chairman is not entitled to participate in the annual
operation of the Portfolio.
Generally,
awards vest and options become exercisable only if a predetermined performance
target has been achieved. Normally, the performance measure for outstanding awards
and options is TSR (total shareholder return) compared with the FTSE 100 companies.
TSR links the reward given to directors with the performance of BT against the
shares of other major UK companies.
For 1999, 2000, 2001 and 2003 awards, the base
price at the beginning of the performance period has been calculated by averaging
the BT share price over the six months to 31 March in the year of award. For
the 2002 awards, the period was from 19 November 2001 (the date of the mmO2 demerger)
to 31 March 2002. The end price is the average of the share price over the six months to the end of the performance period. The end price is adjusted for all capital actions and dividend payments that occur during the performance
periods.
Share options
The price at which shares may be acquired under the Global Share Option Plan (GSOP) is the market price at the date of grant. Other than for new recruits, the size of option grant is based on corporate and individual
performance, and market relativity.
Options granted will be exercisable in three years, subject to the performance target being met. The Committee would not normally expect the initial value of annual grants of options,
based on the market price of a BT share, to exceed three times salary.
60 | Report on directors remuneration | BT Annual Report and Form 20-F 2004 |
For options granted
subject to a TSR measure, BTs TSR at the end of the three-year period
must be in the upper quartile for all of the options to be exercisable. At median,
30% of the options will be exercisable. Below that point, none of the options
may be exercised. If the performance measure is not met at the first measurement,
it may be re-tested against a fixed base in years four and five for options
granted in 2002. If TSR has not reached the median at the end of the fifth year,
previously unexercisable options will lapse. This was reduced to one re-testing
in year five for options granted in 2003.
The
one-off grant of options in 2002 to the seven senior executives most responsible
for delivering BTs strategic plan is subject to an earnings per share
test. The Committee believes that earnings per share was the most appropriate
measure for this grant as BT embarked on a radical business transformation that
will require exceptional performance in exceeding business goals. For these
options to become exercisable, there must be a 35% compound annual growth in
BTs earnings per share over three years (equivalent to 22 pence per share
at the end of the 2005 financial year). There will be no opportunity to re-test.
Earnings per share is calculated as basic earnings per share before goodwill
amortisation and exceptional items.
The
option granted to Sir Christopher Bland on 22 June 2001 as part of his recruitment
package is not subject to a performance measure as it matched a personal investment
in BT shares of £1 million.
The
details of the options held by Sir Christopher Bland, Ben Verwaayen, Pierre
Danon, Andy Green, Ian Livingston and Paul Reynolds at the end of the 2004 financial
year are contained in the table on page 67.
Incentive shares
There were no awards under the Incentive Share Plan (ISP) in the 2004 financial year. A number of awards made in previous years were, however, still outstanding at the beginning of the 2004 financial year, and are
contained in the table on page 68.
Participants
are entitled to shares at the end of a three-year performance period if the company
has met the relevant predetermined performance target and participants are still
employed
by the group. At the end of the three-year period, BTs TSR must be in the
upper quartile for all the shares to vest. At median, 25% of the shares under
award vest. Below that point, none of the shares vest.
None
of the awards of incentive shares granted in 2001 vested as BTs TSR was
at 83rd position on 31 March 2004, the end of the performance period.
Retention shares
Retention shares are granted under the Retention Share Plan (RSP) to individuals with critical skills, as a recruitment or retention tool. As a result, shares currently under award are not linked to a corporate
performance target. The length of the retention period before awards vest is flexible. The shares are transferred at the end of the specified period if the individual is still employed by BT.
Retention shares are used only in exceptional circumstances and, in the 2004 financial year, five awards were made for recruitment purposes and a further two were made for retention purposes, one of which was to Sir
Christopher Bland under his new contract securing his services for the company until 2007.
The awards under the RSP held by Sir Christopher Bland, Ben Verwaayen and Ian Livingston at the end of the 2004 financial year are contained in the table on page 68.
Executive Share Plan (ESP)
The
last awards under the ESP were granted in 1999. Participants are generally only
entitled to the shares at the end of a five-year performance period if the company
has met the relevant predetermined performance target and participants are still
employed by the group. At the end of the five-year period, if BTs TSR reaches
30th position, all the shares vest. If BT is at 70th position starting from the
top of the list, none of the shares vest. Between those points, the shares vest
on a straight line pro rata basis.
None
of the awards of shares granted under the ESP in 1999 vested as BTs TSR
was at 90th position on 31 March 2004, the end of the performance period.
Other share plans
The
executive directors and the Chairman may participate in BTs Inland Revenue
approved all-employee share plans, the Employee Sharesave Scheme and Employee
Share Investment Plan (which replaced 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 the 2005 financial year, which reflects the restraint
being exercised across the company. Salaries have now been held flat for three
years. There is no change either to on-target and maximum bonus levels (see page
59). The annual bonus plan will continue to focus on annual
objectives and to reward the achievement of results against those objectives.
Performance will again be against earnings per share, free cash flow and customer
satisfaction measures. Performance targets for the 2005 financial year are more
challenging than the outturn of the 2004 financial year, as BT continues its
transformation.
For the achievement of target, performance-related remuneration is approximately 63% of total remuneration (excluding pension) for the Chief Executive and 55% for the other executive
directors.
Total
remuneration comprises base salary, annual bonus and awards under the DBP, and
the expected value of share options and awards under BTs long-term incentive
plans.
The Committee has decided that a combination of performance-linked share options and incentive shares will be granted in the 2005 financial year. For the last two years, only share options
have been granted. The
61 | Report on directors remuneration | BT Annual Report
and Form 20-F 2004 |
combination of share options and share awards creates, in the Committees view, a better balance of remuneration in the light of BTs business strategy, including the development of new wave business and the
achievement of operating efficiencies. In the 2005 financial year, the maximum grant of options will reduce from three times base salary to 1.5 times base salary, and the maximum share award will be equivalent to two-thirds of salary. The overall
value of long-term incentive awards will not change as a result of these proposals, which were determined by the Committee with advice from Towers Perrin.
The performance measure will be relative TSR for both elements but the FTSE 100 is being replaced by the FTSE E300 Telecommunication Services index as the comparator group. Performance
against an appropriate industry sector is considered a more appropriate test of executive capability in driving absolute performance.
At
1 April 2004, the index contained the following companies, excluding BT:
Cable & Wireless | Swisscom |
Cosmote Mobile | TDC |
Telecommunications | Tele2 |
Deutsche Telekom | Telecom Italia |
France Telecom | Telecom Italia Mobile |
Hellenic | Telefonica |
Telecommunications | Telekom Austria |
mmO2 | Telenor |
Portugal Telecom | TeliaSonera |
KPN | Vodafone Group |
For awards made last year subject to TSR, there was provision for re-testing in year five against a fixed base. The Committee has decided that there will be no re-testing in respect of the share awards or options to be granted in the 2005 financial year. |
(iii) Other matters
Executive share ownership
A
shareholding programme encourages executive directors and OC members to build
up a shareholding in the company by retaining shares received as a result of
participating in a BT employee share plan (other than the shares sold to pay
a National Insurance or income tax liability). The programme, which is not mandatory,
is designed to encourage executive directors and members of the OC to build up
a shareholding with a value of 100% of their annual salary. Given
that a large part of an executives remuneration is already variable, the
proposal specifically excludes the need to make a personal investment should
awards not vest.
Pensions
Those executive directors and most
other senior executives who joined the company prior to 1 April 2001, have their
pension benefits based on service and salary (known as defined benefit arrangements).
Those with longer BT service are entitled to pensions at normal retirement age
of two-thirds of final salary, including any cash lump sum entitlement. Those
with shorter BT service are entitled to a pension of one-thirtieth of salary
for each year of service.
In both cases, a spouses pension of two-thirds of the executives pension is provided in the event of death after retirement. Should the executive die in service, a lump sum equal to four times annual salary is
payable together with a spouses pension of two-thirds of the executives anticipated pension at normal retirement age. BT closed its defined benefit arrangements to new employees with effect from 1 April 2001. From this date retirement
provision is made on a defined contribution basis. The company agrees to pay a fixed percentage of the executives salary each year towards the provision of retirement benefits, typically this is 20-30% of salary. Additionally, a lump sum equal
to four times annual salary is payable on death in service. Pension provision for all executives is based on salary alone bonuses,
other elements of pay and long-term incentives are excluded.
Other benefits
Other benefits for the Chairman and the senior management team include some or all of the following: company car, fuel and driver, personal telecommunications facilities and home security, medical and dental cover for
the director and immediate family, professional subscriptions and personal tax and financial counselling. The company has a permanent health insurance policy to provide cover for the Chairman and executive directors and members of the OC who may
become permanently incapacitated.
Service agreements
It
is the policy for the Chairman and executive directors to have service agreements
providing for one years notice. It may be necessary on recruitment to offer
longer initial periods to new directors from outside BT, or circumstances may
make it appropriate to offer a longer fixed term. All the service agreements
contain provisions dealing with the removal of a director through poor performance,
including in the event of early termination of the
contract by BT.
Termination payments
Sir
Christopher Blands contract expires at the conclusion of the AGM in 2007. On termination of his contract by BT before that date, he is entitled to payment of salary and the value of benefits for the period of
12 months from date of termination, or until the conclusion of the companys AGM in 2007, if that period is shorter. Ben Verwaayens contract entitles him on termination of his contract by BT to payment of £700,000.
The contracts of Pierre Danon, Andy Green, Ian Livingston and Paul Reynolds entitle
them on termination of their contract by BT to payment of salary and the value
of benefits until the earlier of 12 months from notice of termination or the
director obtaining
full-time employment.
If
the contract of a director (but not the Chairman) is terminated by BT within
one year of BT entering into a scheme of arrangement or becoming a subsidiary
of another company, he will be entitled to receive the higher of that current
years on-target bonus or the previous years bonus, the market value
of shares
62 | Report 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 years salary and the value of any benefits.
The Committee has reviewed contracts taking into account the joint statement of best practice on executive contracts and severance, published in December 2002 by the Association of British
Insurers and the National Association of Pension Funds, and other relevant guidelines, and believes contract terms are generally in line with best practice. The clause dealing with termination following BT entering into a scheme of arrangement or
becoming a subsidiary of another company will be reviewed for future appointments and in any contract renegotiations.
Outside appointments
The
Committee believes that there are significant benefits, to both the company and
the individual, from executive directors accepting non-executive directorships
of companies outside BT. The Committee will consider up to two external appointments
(of which only one may be to the Board of a major company), for which a director
may retain the fees. Pierre Danon receives fees of £35,000 per year as a non-executive director of Emap plc and Ian Livingston fees
of £35,000 per year as a non-executive director of Hilton Group plc. Pierre Danon has resigned from the Board of Hays plc where he received fees of £45,000
per year.
Non-executive directors letters of appointment
Non-executive
directors have letters of appointment. They are appointed for an initial period
of three years. During that period, either party can give the other at least
three months notice. At the end of the
period the appointment may be continued by mutual agreement. Further details
of appointment arrangements for non-executive directors are set out on page 53 in the section dealing with corporate governance issues.
The letters of appointment of non-executive directors are terminable on notice by the company without compensation.
Non-executive directors remuneration
Seven
of the directors on the Board are non-executive directors who, in accordance
with BTs articles of association, cannot individually vote on their own
remuneration. Non-executive remuneration is reviewed by the Chairman and the
Chief Executive and discussed and agreed by the Board. Non-executive directors
may attend the Board discussion but may not participate in it.
The
fees paid to non-executive directors were increased with effect from 1 January
2004 to reflect their increasing responsibilities and time commitments. Non-executive
directors fees were last changed five years ago, on 1 January 1999.
The
basic fee for non-executive directors is £40,000 per year. An additional
fee for membership of Board committees is £5,000
per year, other than for the Pensions Performance Review Group for which no fee
is paid. Sir Anthony Greener, Deputy Chairman and senior non-executive director,
who also chairs both the Remuneration Committee and the Audit Committee,
receives total fees of £115,000 per year.
To
align further the interests of the non-executive directors with those of shareholders,
the companys policy is to encourage these directors to purchase, on a voluntary basis,
£5,000 of BT shares each year. The directors are asked to hold these shares
until they retire from the Board. This policy is not mandatory.
No
element of non-executive remuneration is performance-related. Non-executive directors
do not participate in BTs bonus or employee share plans and are not members
of any of the
company pension schemes.
63 | Report on directors remuneration | BT Annual Report
and Form 20-F 2004 |
Directors service agreements and contracts
of appointment
The dates on which directors initial
service agreements/letters of appointment commenced and the current expiry dates
are as follows:
Chairman and executive directors | Commencement date | Expiry date of current service agreement or letter of appointment | |
Sir Christopher Bland | 1 May 2001 | Sir Christopher Bland entered into a new service agreement on | |
29 August 2003 which terminates at the conclusion of the 2007 | |||
AGM, terminable on 12 months notice by either the company or the | |||
director before that date. | |||
B Verwaayen | 14 January 2002 | The agreement was terminable during the first year by the company | |
giving two years notice and thereafter by notice of not less than one | |||
year; terminable by the director on six months notice ending after | |||
the first two years. | |||
} | |||
P Danon | The contract is terminable by the company on 12 months notice and | ||
A Green | 19 November 2001 | by the director on six months notice. | |
Dr P Reynolds | |||
I Livingston | 8 April 2002 | The initial period was for two years. The contract is terminable on | |
12 months notice by the company and six months notice by the | |||
director ending at any time after the initial period. | |||
Non-executive directors | Letters of appointment were for
an initial period of three years. Appointments were extended for
a further three years and are terminable
by the company or the director on three months notice. The appointments are renewable
by mutual agreement.
|
||
Sir Anthony Greener | 1 October 2000 | ||
M van den Bergh | 1 September 2000 | ||
L R Hughes | 1 January 2000 | ||
C Brendish Baroness Jay J Nelson C G Symon |
1 September 2002 14 January 2002 14 January 2002 14 January 2002 |
Letters
of appointment are for an initial period of three years and are terminable
by the company or the director on three months notice. The
appointments are renewable by mutual agreement.
|
|
There are no other service agreements or material contracts, existing or proposed, between the company and the directors. There are no arrangements or understandings between any director or executive officer and any other person pursuant to which any director or executive officer was selected to serve. There are no family relationships between the directors.
Directors interests
The
interests of directors and their families in the companys shares at 31
March 2004 and 1 April 2003, or date of appointment if later, are shown below:
No. of shares | ||||
Beneficial holdings | 2004 | 2003 | ||
Sir Christopher Blandc | 674,062 | b | 673,876 | |
B Verwaayenc | 387,876 | 387,876 | ||
P Danonc | 93,508 | b | 61,228 | b |
A Greenc | 92,351 | b | 85,729 | b |
I Livingstonc | 209,637 | b | 110,444 | |
Dr P Reynoldsc | 46,823 | ab | 43,223 | b |
Sir Anthony Greener | 34,607 | 11,167 | ||
M van den Bergh | 4,800 | 4,800 | ||
C Brendish | 23,920 | 10,920 | ||
L R Hughes | 6,800 | 6,800 | ||
Baroness Jay | 5,572 | 5,572 | ||
J Nelson | 50,000 | 50,000 | ||
C G Symon | 10,069 | 10,069 | ||
Total | 1,640,025 | 1,461,704 | ||
a | During the period from 1 April 2004 to 17 May 2004, Paul Reynolds 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 potential beneficiaries, had a non-beneficial interest in 30,463,435 shares (2003 31,719,402) held in trust by Ilford Trustees (Jersey) Limited for allocation to employees under the employee share schemes. They each also had a non-beneficial interest in 141,864 shares (2003 19,822) held in trust by Halifax Corporate Trustees Limited for participants in the Employee Share Investment Plan. |
64 | Report on directors remuneration | 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 BTs
mobile business in the 2002 financial year) relative to a broad equity market
index over the past five years. The FTSE 100 is considered to be the most appropriate
index against which to measure performance for these purposes, as BT has been
a constituent
of the FTSE 100 throughout the five-year period and the index is widely used.
TSR is the measure of the returns that a company has provided for its shareholders,
reflecting share price movements and assuming reinvestment of dividends.
65 | Report on directors remuneration | BT Annual Report and Form 20-F 2004 |
Remuneration Review
this part of the Report on directors remuneration is subject to
audit
Directors remuneration
Directors remuneration for the
2004 financial year was as follows:
Pension | Other | |||||||||||||||
Basic | allowance net | benefits | ||||||||||||||
salary and | of pension | Total salary | Annual | Expenses | excluding | Total | Total | |||||||||
fees | contributions | a | and fees | bonus | allowance | pension | d | 2004 | 2003 | |||||||
£000 | £000 | £000 | £000 | £000 | £000 | £000 | £000 | |||||||||
Sir Christopher Bland | 500 | | 500 | | | 32 | 532 | 512 | ||||||||
B Verwaayence | 700 | 110 | 810 | 859 | 250 | 49 | 1,968 | 2,174 | ||||||||
P Danonbe | 450 | | 450 | 259 | 19 | 22 | 750 | 829 | ||||||||
A Greene | 425 | | 425 | 336 | | 30 | 791 | 761 | ||||||||
I Livingstonbef | 450 | 115 | 565 | 325 | 19 | 4 | 913 | 1,116 | ||||||||
Dr P Reynoldsbe | 400 | | 400 | 295 | 19 | 23 | 737 | 732 | ||||||||
Sir Anthony Greener | 96 | | 96 | | | | 96 | 90 | ||||||||
M van den Bergh | 44 | | 44 | | | | 44 | 40 | ||||||||
C Brendishg | 39 | | 39 | | | | 39 | 20 | ||||||||
L R Hughes | 40 | | 40 | | | | 40 | 37 | ||||||||
Baroness Jay | 39 | | 39 | | | | 39 | 35 | ||||||||
J Nelson | 39 | | 39 | | | | 39 | 35 | ||||||||
C G Symon | 40 | | 40 | | | | 40 | 37 | ||||||||
3,262 | 225 | 3,487 | 2,074 | 307 | 160 | 6,028 | 6,418 | |||||||||
a | Balance or part of the pension allowance for the 2004 financial year see Pensions on pages 65 to 66. |
b | Pierre Danon, Ian Livingston and Paul Reynolds each received a monthly cash allowance in lieu of a company car totalling £18,500 per annum. |
c | Ben Verwaayen is entitled to a housing allowance of £250,000 per annum until 13 January 2005. In the 2004 financial year, £250,000 was paid in respect of that year (2003 £250,000). These amounts are included in the table above under Expenses allowance. |
d | Includes some or all of the following: company car, fuel and driver, personal telecommunications facilities and home security, medical and dental cover for the director and immediate family, professional subscriptions and personal tax and financial counselling. |
e | Deferred bonuses payable in
shares in three years time, were awarded to Ben Verwaayen £429,500
(2003 £849,000), Pierre Danon £129,500 (2003 £169,000),
Andy Green 168,000 (2003 £153,000), Ian Livingston £162,500
(2003 £169,000) and Paul Reynolds £147,500 (2003 £144,000). When added to the amounts paid or payable for the 2004 financial year, in the table above, the total remuneration of Ben Verwaayen was £2,397,500 (2003 £3,023,000); Pierre Danon £879,500 (2003 £998,000), Andy Green £959,000 (2003 £914,000); Ian Livingston £1,075,500 (2003 £1,285,000) and Paul Reynolds £884,500 (2003 £876,000). |
f | Ian Livingston joined the Board on 8 April 2002. |
g | Clayton Brendish joined the Board on 1 September 2002. |
h | Retirement benefits are accruing to three directors (2003 three) under defined contribution arrangements and to three directors (2003 three) under a defined benefit scheme. |
The salaries of the Chairman and executive
directors remained unchanged during the 2003 and 2004 financial years and,
following this years salary review, the Committee decided there should
be no increase from 1
June 2004 in basic salaries.
Sir
Christopher Bland was appointed as part-time Chairman on 1 May 2001. His annual
salary on appointment was £500,000.
Ben
Verwaayen joined the company on 14 January 2002 on an annual salary of £700,000.
He became Chief Executive on 1 February 2002.
Pierre
Danon, Andy Green and Paul Reynolds joined the Board on 19 November 2001 on salaries
of £450,000, £425,000 and £400,000, respectively.
Ian
Livingston joined the Board on 8 April 2002 on a salary of £450,000.
Annual bonus awards to executive directors ranged from 58% to 123% of salary in the 2004 financial year (2003: 72% to 121%). These payments are not pensionable.
Former directors
Yve
Newbold remains a member of the Community Support Committee for which she received
fees of £5,000 in the 2004 financial year. She also received fees of £4,000 as a member of BTs
Social Policy
Leadership Panel.
Dr Iain Anderson
received fees of £12,000 in the 2004 financial year as chairman 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 Danon
and Paul Reynolds each had interest-free loans from the company to assist with
relocation of £375,000 and £300,000,
respectively. At 31 March 2004, Pierre Danon owed £243,750 (2003 £281,250) and Paul Reynolds owed £260,000 (2003 £290,000). During the 2004 financial year, the maximum amount outstanding was £571,250.
There are no outstanding loans granted by any member of the BT group to any other
of the directors or guarantees provided by any member of the BT group for their
benefit.
Pensions
Sir
Christopher Bland is not a member of any of the company pension schemes, but
the company matches his contributions, up to 10% of the earnings cap, to a personal
pension plan. Company contributions of £9,900
were payable in respect of the 2004 financial year. The earnings cap is a restriction
on the amount
66 | Report on directors remuneration | BT Annual Report and Form 20-F 2004 |
of pay which can be used to calculate contributions and benefits due to a tax approved pension scheme.
Ben
Verwaayen is not a member of any of the company pension schemes, but the company
has agreed to pay an annual amount equal to 20% of his salary towards pension
provision. The company
paid £29,700 into his personal pension plan plus a cash payment of £110,300
representing the balance of the pension allowance for the 2004 financial year.
BT also provides him with a lump sum death in service benefit of four times his
salary.
Ian
Livingston is not a member of any of the company pension schemes, but the company
has agreed to pay an annual amount equal to 30% of his salary towards pension
provision. The company
paid £19,800 into his personal pension plan plus a cash payment of £115,200
representing the balance of the pension allowance for the 2004 financial year.
BT also provides him with a lump sum death in service benefit of four times his
salary.
Pierre Danons pension accrues at the rate of one-thirtieth of his final salary for each year of service. In addition, a two-thirds widows
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, unfunded arrangement.
Andy
Green is a member of the BT Pension Scheme. From 31 December 1997 the company
has been purchasing an additional 203 days of pensionable service each year
to bring his pensionable
service at age 60 up to 40 years. A two-thirds widows pension would be
payable on his death.
Paul
Reynolds is a member of the BT Pension Scheme. From 1 July 1996 the company has
been purchasing an additional 109 days of pensionable service each year to bring
his pensionable
service at age 60 up to 40 years. A two-thirds widows pension would be
payable on his death.
The table below shows the increase in the accrued benefits, including those referred to above, to which each director has become entitled during the year and the transfer value of the increase in accrued benefit:
Transfer value | ||||||||||||||
Change in | Additional | of increase | ||||||||||||
transfer | accrued | in accrued | ||||||||||||
value c-d | benefits | benefits less | ||||||||||||
Transfer value of | less directors | earned in | directors | |||||||||||
Accrued pension | accrued benefits | contributions | the year | contributions |
2004 | 2003 | 2004 | 2003 | 2004 | 2004 | 2004 | ||||||||
£000 | a | £000 | b | £000 | c | £000 | d | £000 | £000 | e | £000 | f | ||
P Danon | 52 | 37 | 519 | 286 | 218 | 14 | 125 | |||||||
A Green | 117 | 109 | 1,553 | 1,103 | 424 | 6 | 48 | |||||||
P Reynolds | 116 | 110 | 1,405 | 1,014 | 367 | 4 | 21 | |||||||
a-d | As required by the Companies Act 1985 Schedule 7A. |
a-b | These amounts represent the deferred pension to which the directors would have been entitled had they left the company on 31 March 2003 and 2004, respectively. |
c | Transfer value of the deferred pension in column (a) as at 31 March 2004 calculated on the basis of actuarial advice in accordance with Actuarial Guidance Note GN11 and excludes directors contributions. The transfer value represents a liability of the company rather than any remuneration due to the individual and cannot be meaningfully aggregated with annual remuneration, as it is not money the individual is entitled to receive. |
d | The equivalent transfer value but calculated as at 31 March 2003 on the assumption that the director left service at that date. |
e | The increase in pension built up during the year, net of inflation. |
f | The transfer value of the pension in column (e), less directors contributions. |
g | Directors contributions in the 2004 financial year were as follows: Pierre Danon, £14,850 (2003 £14,580); Andy Green, £25,500 (2003 £25,500); and Paul Reynolds, £24,000 (2003 £24,000). |
67 | Report on directors remuneration | BT Annual Report and Form 20-F 2004 |
Share options held at 31 March 2004
Number of shares under option | Usual date | |||||||||||||
Option exercise | from which | Usual expiry | ||||||||||||
1 April 2003 | Granted | Lapsed | 31 March 2004 | price per share | exercisable | date | ||||||||
Sir Christopher Bland | 314,244 | a | 314,244 | 318p | 01/05/04 | 01/05/11 | ||||||||
|
||||||||||||||
B Verwaayen | 1,121,121 | b | | | 1,121,121 | 250p | 11/02/05 | 11/02/12 | ||||||
935,830 | c | | | 935,830 | 187p | 29/07/05 | 29/07/12 | |||||||
561,500 | d | | | 561,500 | 187p | 29/07/05 | 29/07/12 | |||||||
1,052,632 | e | | 1,052,632 | 199.5p | 24/06/06 | 24/06/13 | ||||||||
|
||||||||||||||
2,618,451 | 1,052,632 | 3,671,083 | ||||||||||||
|
||||||||||||||
P Danon | 601,610 | c | | | 601,610 | 187p | 29/07/05 | 29/07/12 | ||||||
360,970 | d | | | 360,970 | 187p | 29/07/05 | 29/07/12 | |||||||
| 676,692 | e | | 676,692 | 199.5p | 24/06/06 | 24/06/13 | |||||||
|
||||||||||||||
962,580 | 676,692 | 1,639,272 | ||||||||||||
|
||||||||||||||
A Green | 2,905 | f | | | 2,905 | 255p | 14/08/05 | 13/02/06 | ||||||
568,190 | c | | | 568,190 | 187p | 29/07/05 | 29/07/12 | |||||||
340,910 | d | | | 340,910 | 187p | 29/07/05 | 29/07/12 | |||||||
639,098 | e | | 639,098 | 199.5p | 24/06/06 | 24/06/13 | ||||||||
|
||||||||||||||
912,005 | 639,098 | 1,551,103 | ||||||||||||
|
||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
I Livingston | 7,290 | f | | | 7,290 | 227p | 14/08/07 | 13/02/08 | ||||||
601,610 | c | | | 601,610 | 187p | 29/07/05 | 29/07/12 | |||||||
360,970 | d | | | 360,970 | 187p | 29/07/05 | 29/07/12 | |||||||
| 676,692 | e | | 676,692 | 199.5p | 24/06/06 | 24/06/13 | |||||||
|
||||||||||||||
969,870 | 676,692 | | 1,646,562 | |||||||||||
|
||||||||||||||
Dr P Reynolds | 4,555 | g | | | 4,555 | 218p | 14/02/07 | 13/08/07 | ||||||
534,760 | c | | | 534,760 | 187p | 29/07/05 | 29/07/12 | |||||||
320,860 | d | | | 320,860 | 187p | 29/07/05 | 29/07/12 | |||||||
| 601,504 | e | | 601,504 | 199.5p | 24/06/06 | 24/06/13 | |||||||
|
||||||||||||||
860,175 | 601,504 | | 1,461,679 | |||||||||||
|
||||||||||||||
Total | 6,637,325 | 3,646,618 | | 10,283,943 | ||||||||||
All of the above options were granted for nil consideration. No options were exercised during the year. | |
a | Options granted under the GSOP on 22 June 2001. The option is not subject to a performance measure. It was a term of Sir Christopher Blands initial service contract that (i) he purchased BT shares to the value of at least £1 million; and (ii) as soon as practicable after the purchase of the shares (invested shares), the company would grant a share option over shares to the value of at least £1 million. Sir Christopher Bland was the legal and beneficial owner of the invested shares on 1 May 2004, so the option became exercisable on that date. |
b | Options granted under the GSOP on 11 February 2002. The exercise of options is subject to a performance measure being met. The performance measure is relative TSR compared with the FTSE 100. BTs TSR must be in the upper quartile for all of the options to become exercisable. At median, 40% of the options will be exercisable. Below that point, none of the options may be exercised. |
c | Options granted under the GSOP on 29 July 2002. The exercise of options is subject to a performance measure being met. The performance measure is relative TSR compared with the FTSE 100. Details are set out on page 60. |
d | Options granted under the GSOP on 29 July 2002. The exercise of options is subject to a performance measure being met. The performance measure is earnings per share. Details are set out on page 60. |
e | Options granted under the GSOP on 24 June 2003. The exercise of options is subject to a performance measure being met. The performance measure is relative TSR compared with the FTSE 100. Details are set out on page 60. |
f | Options granted on 24 June 2002 under the Employee Sharesave Scheme, in which all employees of the company are eligible to participate. |
g | Options granted on 21 December 2001 under the Employee Sharesave Scheme, in which all employees of the company are eligible to participate. |
h | 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 162p 206.75p. |
|
There were no unrealised gains on the above share options at 31 March 2004 (2003 nil), based on the share price of the shares at that date. |
68 | Report on directors remuneration | BT Annual Report and Form 20-F 2004 |
Share awards under long-term
incentive schemes held at 31 March 2004
Details of the companys ordinary shares provisionally awarded to directors,
as participants under the ESP, ISP and RSP are as follows:
Total number of award shares | Monetary value of vested | |||||||||||||||||||
1 April 2003 | Dividends | 31 March | Expected | Market Price | h | Market Price | award | |||||||||||||
Awarded | Vested | Lapsed | re-invested | 2004 | vesting date | at grant | at vesting | £000 | ||||||||||||
Sir Christopher Bland | ||||||||||||||||||||
ISP 2001 | 318,308 | | | 331,488 | d | 13,180 | | | 267.912p | | | |||||||||
RSP 2003 | | 274,725 | a | | | 11,375 | 286,100 | | a | 182p | | | ||||||||
B Verwaayen | ||||||||||||||||||||
RSP 2001 | 799,754 | | | | 33,115 | 832,869 | 10/01/05 | 257.814p | | | ||||||||||
P Danon | ||||||||||||||||||||
RSP 2000 | 53,253 | | 54,474 | b | | 1,221 | | | 267.912p | 185p | 101 | |||||||||
ISP 2000 | 99,850 | | | 99,850 | c | | | | 267.912p | | | |||||||||
ISP 2001 | 179,047 | | | 186,460 | d | 7,413 | | | 267.912p | | | |||||||||
A Green | ||||||||||||||||||||
ESP 1998 | 38,095 | | | 38,095 | e | | | | 267.912p | | | |||||||||
ESP 1999 | 38,710 | | | 40,032 | f | 1,322 | | | 267.912p | | | |||||||||
ISP 2000 | 85,292 | | | 85,292 | c | | | | 267.912p | | | |||||||||
ISP 2001 | 179,047 | | | 186,460 | d | 7,413 | | | 267.912p | | | |||||||||
I Livingston | ||||||||||||||||||||
RSP 2002 | 505,081 | | 168,360 | g | | 13,943 | 350,664 | 05/04/05 | 273.5p | 185p | 311 | |||||||||
RSP 2002 | 113,012 | | | | 4,679 | 117,691 | 20/05/05 | 202.0p | ||||||||||||
Dr P Reynolds | ||||||||||||||||||||
ESP 1998 | 11,626 | | | 11,626 | e | | | | 267.912p | | | |||||||||
ESP 1999 | 11,605 | | | 11,999 | f | 394 | | | 267.912p | | | |||||||||
ISP 2000 | 48,111 | | | 48,111 | c | | | | 267.912p | | | |||||||||
ISP 2001 | 148,012 | | | 154,140 | d | 6,128 | | | 267.912p | | | |||||||||
Former directors | ||||||||||||||||||||
Sir Peter Bonfieldi | ||||||||||||||||||||
ESP 1998 | 112,579 | | | 112,579 | e | | | | 267.912p | | | |||||||||
ESP 1999 | 100,239 | | | 103,666 | f | 3,427 | | | 267.912p | | | |||||||||
ISP 2000 | 272,947 | | | 272,947 | c | | | | 267.912p | | | |||||||||
ISP 2001 | 522,025 | | | 543,641 | d | 21,616 | | | 267.912p | | | |||||||||
R Bracej | ||||||||||||||||||||
ESP 1998 | 57,149 | | | 57,149 | e | | | | 267.912p | | | |||||||||
B Cockburnj | ||||||||||||||||||||
ESP 1998 | 77,935 | | | 77,935 | e | | | | 267.912p | | | |||||||||
ESP 1999 | 68,432 | | | 70,771 | f | 2,339 | | | 267.912p | | | |||||||||
a | An award under the RSP was made to Sir
Christopher Bland on 1 September 2003 with an initial value of £500,000. The award will vest, subject to continued employment, at the conclusion of the 2007 AGM. |
b | The final tranche of the RSP award granted on 4 October 2000, vested on 6 October 2003. |
c | The ISP 2000 performance measurement period ended on 31 March 2003. At that time, BTs position was at 85th position. As a consequence, all awards lapsed. |
d | The ISP 2001 performance measurement period ended on 31 March 2004. At that time, BTs position was at 83rd position. As a consequence, all awards lapsed. |
e | The ESP 1998 performance measurement period ended on 31 March 2003. At that time, BTs position was at 83rd position. As a consequence, all awards have lapsed. |
f | The ESP 1999 performance measurement period ended on 31 March 2004. At that time, BTs position was at 90th position. As a consequence, all awards have lapsed. |
g | The first tranche of the RSP award granted on 30 May 2002 vested on 27 May 2003. The second and third tranches will vest on the second and third anniversaries of Ian Livingston joining BT. |
h | Adjusted for the demerger of BTs wireless business in November 2001. |
i | Under the terms of his agreement, the awards granted to Sir Peter Bonfield were preserved on his leaving the company until the normal vesting date. |
j | The awards granted to Bill Cockburn and Robert Brace were preserved at the discretion of the Remuneration Committee on their leaving until their normal vesting date. |
k | Details of the ISP, ESP and RSP and any relevant performance conditions are set out on page 60. |
69 | Report on directors remuneration | BT Annual Report and Form 20-F 2004 |
Vesting of outstanding
share awards and options
Details of options granted under the GSOP and awards
of shares under the ESP and ISP which would have vested based on BT Groups
TSR compared with the other companies in the FTSE 100 for the relevant performance
period up to 31 March 2004 are as follows:
31 March 2004 | 31 March 2003 | |||||||||
Expected | Percentage of | Percentage of | ||||||||
vesting date | TSR position | shares vesting | TSR position | shares vesting | ||||||
|
|
|
|
|
||||||
ESP 1999a | 31/03/04 | 90 | | 87 | | |||||
ISP 2001b | 31/03/04 | 83 | | 73 | | |||||
|
|
|
|
|
||||||
GSOP 2002 | 29/07/05 | 77 | | 61 | | |||||
GSOP 2003 | 24/06/06 | 93 | | | | |||||
|
|
|
|
|
a | The ESP 1999 performance measurement period ended on 31 March 2004. At that time, BTs position was at 90th position. As a consequence, all awards have lapsed. |
b | The ISP 2001 performance measurement period ended on 31 March 2004. At that time, BTs position was at 83rd position. As a consequence, all awards lapsed. |
Options granted to executive directors under the GSOP during the 2003 financial year as an additional incentive, whose exercise is subject to a 35% compound annual growth in earnings per share, before goodwill amortisation and exceptional items, being achieved over three years (equivalent to 22p per share at the end of the 2005 financial year), are not included in the above table, but are included in the table on page 67. Earnings per share, before goodwill amortisation and exceptional items, for the 2004 financial year are 16.9p per share (2003 14.2p). The compound annual growth in earnings per share over the 2003 and 2004 financial years was 38.6%.
Deferred Bonus Plan awards
at 31 March 2004
The following deferred
bonuses have been awarded to the directors under the DBP. These shares will
normally be transferred to participants at the end of the three-year deferred
period if those participants are still employed by BT Group.
1 April 2003 | Awarded | Vested | Dividends re-invested |
Total number of award shares 31 March 2004 |
Expected vesting date |
Market Price at grant |
Market Price at vesting |
Monetary value of vested award |
||||||||||
£000 | ||||||||||||||||||
|
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B Verwaayen | 76,996 | | | 3,187 | 80,183 | 01/08/05 | 202.0p | | | |||||||||
| 425,614 | c | | 17,624 | 443,238 | 01/08/06 | 199.5p | | | |||||||||
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P Danon | 22,292 | | | 762 | 23,054 | 01/08/04 | 267.912p | | | |||||||||
75,983 | | | 3,146 | 79,129 | 01/08/05 | 202.0p | | | ||||||||||
| 84,586 | c | | 3,502 | 88,088 | 01/08/06 | 199.5p | | | |||||||||
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A Green | 10,924 | | 10,924 | ad | | | | 267.912p | 197.215p | 22 | ||||||||
45,179 | | | 1,544 | 46,723 | 01/08/04 | 267.912p | | | ||||||||||
50,654 | | | 2,097 | 52,751 | 01/08/05 | 202.0p | | | ||||||||||
| 76,803 | c | | 3,180 | 79,983 | 01/08/06 | 199.5p | | | |||||||||
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I Livingston | | 84,586 | c | | 3,502 | 88,088 | 01/08/06 | 199.5p | | | ||||||||
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|||||||||
Dr P Reynolds | 4,419 | | 4,419 | ad | | | | 267.912p | 197.215p | 9 | ||||||||
32,813 | | | 1,121 | 33,934 | 01/08/04 | 267.912p | | | ||||||||||
45,590 | | | 1,886 | 47,476 | 01/08/05 | 202.0p | | | ||||||||||
| 72,285 | c | | 2,992 | 75,277 | 01/08/06 | 199.5p | | | |||||||||
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|||||||||
Former directorb | ||||||||||||||||||
Sir Peter Bonfield | 86,725 | | 86,725 | ad | | | | 267.912p | 197.215p | 171 | ||||||||
152,502 | | | 5,216 | 157,718 | 01/08/04 | 267.912p | | | ||||||||||
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|
a | Andy Green, Paul Reynolds and Sir Peter Bonfield received 70p per share on their awards vesting as compensation for the difference between the price of a BT share at the date of vesting and the demerger when the awards should have vested. The Remuneration Committee determined that the awards should continue until their normal vesting date and that participants should be compensated if there was a subsequent fall in the share price. |
b | Under the terms of his service agreement, the awards granted to Sir Peter Bonfield were preserved on his leaving until the normal vesting date. |
c | Awards granted on 24 June 2003. |
d | Awards granted on 2 August 2000, vested on 4 August 2003. |
e | Details of the DBP are set out on page 59. |
70 | Report on directors remuneration | BT Annual Report and Form 20-F 2004 |
Share awards under all-employee share ownership plans at 31 March 2004
Total
number of
award shares 31 March 2004 |
Expected vesting date |
|||||||||
1 April 2003 | Awarded | Vested | ||||||||
Sir Christopher Bland | ||||||||||
ESIP 2003 | | 186 | a | | 186 | 05/08/08 | ||||
|
||||||||||
P Danon | ||||||||||
ESIP 2002 | 130 | | | 130 | 14/08/07 | |||||
ESIP 2003 | | 186 | a | | 186 | 05/08/08 | ||||
|
||||||||||
130 | 186 | | 316 | |||||||
|
||||||||||
A Green | ||||||||||
ESOS 2000 | 85 | | 85 | b | | 17/08/03 | ||||
ESOS 2001 | 66 | | | 66 | 30/07/04 | |||||
ESIP 2002 | 130 | | | 130 | 14/08/07 | |||||
ESIP 2003 | | 186 | a | | 186 | 05/08/08 | ||||
|
||||||||||
281 | 186 | 85 | 382 | |||||||
|
||||||||||
P Reynolds | ||||||||||
ESOS 2000 | 85 | | 85 | b | | 17/08/03 | ||||
ESOS 2001 | 66 | | | 66 | 30/07/04 | |||||
ESIP 2002 | 130 | | | 130 | 14/08/07 | |||||
ESIP 2003 | | 186 | a | | 186 | 05/08/08 | ||||
281 | 186 | 85 | 382 | |||||||
a | Awards granted under 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 price of a BT Group share was 191p. The market price on the date of award was 812p. |
71 | Report on directors remuneration | BT Annual Report and Form 20-F 2004 |
Operating Committee
The aggregate remuneration of members
of the Operating Committee (OC), other than directors, for services in all capacities
during the 2004 financial year was as follows:
2004 | 2003 | |||
£000 | £000 | |||
Salaries and benefits | 296 | 275 | ||
Annual bonuses | 198 | 201 | ||
Provision for long-term incentive awards | 268 | 327 | ||
Company pension contributions | 34 | 32 | ||
Total | 796 | 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 (2003 Nil).
The members
of the OC beneficially own less than 1% of the companys outstanding ordinary
shares.
By order of the Board
Sir Anthony Greener
Deputy Chairman and Chairman of Remuneration
Committee
19 May 2004
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 at the end
of the financial year and of the profit or loss and cash flows of the group
for that period.
The directors
consider that, in preparing the financial statements for the year ended 31 March
2004, on pages 74 to 134 the company has used appropriate accounting policies,
consistently applied and supported by reasonable and prudent judgements and
estimates. The directors also consider that all applicable accounting standards
have been followed and confirm that the financial statements have been prepared
on the going concern basis.
The
directors are responsible for ensuring that the company keeps accounting records
which disclose with reasonable accuracy at any time the financial position of
the company and which enable them to ensure that the financial statements comply
with the Companies Act 1985.
The directors
are also responsible for taking such steps that are reasonably open to them
to safeguard the assets of the group and to prevent and detect fraud and other
irregularities.
The auditors responsibilities
are stated in their report to the shareholders.
73 | BT Annual Report
and Form 20-F 2004 |
Report of the independent auditors
United Kingdom Opinion
Independent auditors report
to the shareholders of BT Group plc
We have audited the financial statements which
comprise the group profit and loss account, group and company balance sheets,
group cash flow statement, group statement of total recognised gains and losses
and the related notes which have been prepared under the historical cost convention
and the accounting policies set out in the Accounting Policies section. We have
also audited the disclosures required by Part 3 of Schedule 7A to the Companies
Act 1985
contained in the directors remuneration report (the audited
part).
Respective responsibilities
of directors and auditors
The directors responsibilities for preparing
the annual report and the financial statements in accordance with applicable
United Kingdom law and accounting standards are set out in the statement
of directors responsibilities. The directors are also responsible for
preparing the directors remuneration report.
Our responsibility is to audit the financial
statements and the audited part of the directors remuneration report
in accordance with relevant legal and regulatory requirements and United Kingdom
Auditing Standards issued by the Auditing Practices Board. This report, including
the opinion, has been prepared for and only for the companys members
as a body in accordance with Section 235 of the Companies Act 1985 and for
no other purpose. We do not, in giving this opinion, accept or assume responsibility
for any other purpose or to any other person to whom this report is shown or
into whose hands it may come save where expressly agreed by our prior consent
in writing.
We report to you our opinion as to whether the
financial statements give a true and fair view and whether the financial statements
and the audited part of the directors remuneration report have been properly
prepared in accordance with the Companies Act 1985. We also report to you if,
in our opinion, the directors report is not consistent with the financial
statements, if the company has not kept proper accounting records, if we have
not received all the information and explanations we require for our audit,
or if information specified by law regarding directors remuneration and
transactions is not disclosed.
We read the other information contained in the
Annual Report and Form 20-F and consider the implications for our report if
we become aware of any apparent misstatements or material inconsistencies with
the financial statements. The other information comprises only those sections
set out in the table of contents including Financial headlines, Chairmans
message, Chief Executives statement, Operating and financial review,
Report of the directors, Corporate governance and Risk factors.
We review whether the corporate governance statement
reflects the companys compliance with the seven provisions of the Combined
Code issued in June 1998 specified for our review by the Listing Rules of the
Financial Services Authority, and we report if it does not. We are not required
to consider whether the boards statements on internal control cover all
risks and controls, or to form an opinion on the effectiveness of the companys
or groups corporate governance procedures or its risk and control procedures.
Basis of audit opinion
We conducted our audit in accordance with
auditing standards issued by the Auditing Practices Board. An audit includes
examination, on a test basis, of evidence relevant to the amounts and disclosures
in the financial statements and the audited part of the directors remuneration
report. It also includes an assessment of the significant estimates and judgements
made by the directors in the preparation of the financial statements, and
of whether the accounting policies are appropriate to the companys
circumstances, consistently applied and adequately disclosed.
We
planned and performed our audit so as to obtain all the information and
explanations which we considered necessary in order to provide us with sufficient
evidence
to give reasonable assurance that the financial statements and the audited
part of the directors remuneration report are free from material
misstatement, whether caused by fraud or other irregularity or error. In
forming our opinion
we also evaluated the overall adequacy of the presentation of information
in the financial statements.
Opinion
In our opinion: the financial statements give
a true and fair view of the state of affairs of the company and the group
at 31 March 2004 and of the profit and cash flows of the group for the year
then ended; the
financial statements have been properly prepared in accordance with the Companies
Act 1985; and
those parts of the directors remuneration report required by Part 3
of Schedule 7A to the Companies Act 1985 have been properly prepared in accordance
with the Companies Act 1985.
PricewaterhouseCoopers LLP
Chartered Accountants and Registered
Auditors
London
19 May 2004
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 cash flow statement, group
statement of total recognised gains and losses and the related notes present
fairly, in all material respects, the financial position of BT Group
plc and its subsidiaries at 31 March 2004 and 2003, and the results of their
operations and their cash flows for each of the three years in the period ended
31 March 2004, in conformity with accounting principles generally accepted
in the United Kingdom. These financial statements are the responsibility of
the groups management; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits of
these statements in accordance with auditing standards generally accepted in
the United States of America, which require that we plan and perform the audit
to obtain reasonable assurance about
whether
the
financial
statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
Accounting
principles generally accepted in the United Kingdom vary in certain important
respects from accounting principles generally accepted in the United States of
America. Information relating to the nature and effect of such differences is
presented in the United States Generally Accepted Accounting Principles section.
PricewaterhouseCoopers LLP
Chartered Accountants and Registered
Auditors
London
19 May 2004
74 | BT Annual Report and Form 20-F 2004 |
Consolidated financial statements
75 | BT Annual Report and Form 20-F 2004 |
Accounting policies
i Basis
of preparation of the financial statements
The financial statements
are prepared under the historical cost convention and in accordance with applicable
accounting standards and the provisions of the Companies Act 1985. The group
financial statements consolidate those of the company and all of its subsidiary
undertakings. Where the financial statements of subsidiary undertakings, associates
and joint ventures do not conform with the groups accounting policies,
appropriate adjustments are made on consolidation in order to present the group
financial statements on a consistent basis. The principal subsidiary undertakings
financial years are all coterminous with those of the company.
The
preparation of financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements
and the reported amounts of income and expenditure during the reporting period.
Actual results could differ from those estimates. Estimates are used principally
when accounting for interconnect income, provision for doubtful debts, payments
to telecommunication operators, long-term 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 by group undertakings, excluding
those between them.
Total
turnover is group turnover together with the groups share of its associates
and joint ventures turnover, excluding the groups share of transactions
between the group and its principal joint venture, Concert BV in the 2002 financial
year.
Turnover
from calls is recognised in the group profit and loss account at the time the
call is made over the groups networks. Turnover from rentals is recognised
evenly over the period to which the charges relate. Turnover from equipment
sales is recognised at the point of sale. Prepaid call card sales are deferred
until the customer uses the stored value in the card to pay for the relevant
calls. Turnover arising from the provision of other services, including maintenance
contracts, is recognised evenly over the periods in which the service is provided
to the customer. Turnover from
installation and connection activities is recognised in the period in which
its is earned. Turnover from long term contracts is recognised throughout the
duration of the contract, to the extent that the outcome of the contract can
be assessed with reasonable certainty and in accordance with the stage of completion
of contractual obligations. Turnover from classified directories, mainly comprising
advertising revenue, is recognised in the group profit and loss account upon
completion of delivery.
iii Research
and development
Expenditure on research and development
is written off as incurred.
iv Leases
Assets held under
finance leases are capitalised and depreciated over their useful lives. The
capital element of future obligations under finance leases are recognised as
liabilities. The interest element of rental obligations are charged over the
period of the finance lease and represent a constant proportion of the balance
of capital repayments outstanding.
Operating
lease rentals are charged against the profit and loss account on a straight-line
basis over the lease period except where the contractual payment terms are considered
to be a more systematic and appropriate basis.
v Interest
Interest payable, including that related
to financing the construction of tangible fixed assets, is written off as incurred.
Discounts or premiums and expenses on the issue of debt securities are amortised
over the term of the related security and included within interest payable.
Premiums payable on early redemptions of debt securities, in lieu of future
interest costs, are written off when paid.
vi Foreign
currencies
On consolidation, assets
and liabilities of foreign undertakings are translated into sterling at year
end exchange rates. The results of foreign undertakings are translated into
sterling at average rates of exchange for the year.
Exchange
differences arising from the retranslation at year end exchange rates of the
net investment in foreign undertakings, less exchange differences on borrowings
which finance or provide a hedge against those undertakings, are taken to reserves
and are reported in the statement of total recognised gains and losses.
All
other exchange gains or losses are dealt with through the profit and loss account.
vii Intangibles
(a) Goodwill
Goodwill, arising from the purchase
of subsidiary undertakings and interests in associates and joint ventures, represents
the excess of the fair value of the purchase consideration over the fair value
of the net assets acquired.
For
acquisitions completed on or after 1 April 1998, the goodwill arising is capitalised
as an intangible asset or, if arising in respect of an associate or joint venture,
recorded as part of the related investment. Goodwill is amortised on a straight
line basis from the time of acquisition over its useful economic life. The economic
life is normally presumed to be a maximum of 20 years.
For
acquisitions on or before 31 March 1998, the goodwill is written off on acquisition
against group reserves.
76 | Accounting policies | BT Annual Report
and Form 20-F 2004 |
If an undertaking is subsequently divested, the appropriate unamortised goodwill or goodwill written off to reserves is dealt with through the profit and loss account in the period of disposal as part of the gain or loss on divestment.
(b) Other intangibles
Licence fees paid to governments, which permit telecommunication activities to be operated for defined periods, are amortised from the latter of the start of the licence period or launch of service to the end of the
licence period on a straight-line basis.
viii Tangible
fixed assets
Tangible fixed assets are stated at historical cost less depreciation.
(a) Cost
Cost
in the case of network services includes contractors charges and payments
on account, materials, direct labour and directly attributable overheads.
(b) Depreciation
Depreciation is provided on tangible fixed assets on a straight line basis from the time they are available for use, so as to write off their costs over their estimated useful lives taking into account any expected
residual values. No depreciation is provided on freehold land.
The lives assigned to other significant tangible fixed assets are:
Freehold buildings | 40 years |
Leasehold land and buildings | Unexpired portion |
of lease or | |
40 years, | |
whichever is | |
the shorter | |
Transmission equipment: | |
duct | 25 years |
cable | 3 to 25 years |
radio and repeater equipment | 2 to 25 years |
Exchange equipment | 2 to 13 years |
Computers and office equipment | 2 to 6 years |
Payphones, other network equipment, | |
motor vehicles and cableships | 2 to 20 years |
Software | 2 to 5 years |
ix Fixed
asset investments
Investments in subsidiary undertakings, associates and joint ventures are stated in the balance 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
groups share of their net assets, together with any attributable unamortised
goodwill on
acquisitions arising on or after 1 April 1998.
The
groups share of profits less losses of associates and joint ventures is
included in the group profit and loss account.
Investments in other participating interests and other investments are stated at cost less amounts written off.
x Asset
impairment
Intangible and tangible fixed assets are tested for impairment when an event that might affect asset values has occurred. Goodwill is also reviewed for impairment at the end of the first financial year after
acquisition.
An impairment loss is recognised to the extent that the carrying amount cannot be recovered either by selling the asset or by the discounted future cash flows from operating the
assets.
xi Stocks
Stocks mainly comprise items of equipment, held for sale or rental, consumable items and work in progress on long-term contracts.
Equipment held and consumable items are stated at the lower of cost and estimated net realisable value, after provisions for obsolescence.
Work in progress on long-term contracts is stated at cost, after deducting payments on account, less provisions for any foreseeable losses.
xii Debtors
Debtors are stated in the balance sheet at estimated net realisable value. Net realisable value is the invoiced amount less provisions for bad and doubtful debtors. Provisions are made specifically against debtors
where there is evidence of a dispute or an inability to pay. An additional provision is made based on an analysis of balances by age, previous losses experienced and general economic conditions.
xiii Redundancy
costs
Redundancy or leaver costs arising from periodic reviews of staff levels are charged against profit in the year in which the group is demonstrably committed to the employees leaving the group.
If
the estimated cost of providing incremental pension benefits in respect of employees
leaving the group exceeds any total accounting surplus based on the latest actuarial
valuation of
the groups pension scheme and the amount of the provision for pension liabilities
on the balance sheet, then the excess estimated cost is charged against profit
in the year in which the employees agree to leave the group, within redundancy
or
leaver costs.
xiv Pension
schemes
The
group operates a funded defined benefit pension scheme, which is independent
of the groups finances, for the substantial majority of its employees. Actuarial valuations of the main scheme are carried out by
an independent actuary as determined by the trustees at intervals of not more than three years, to determine the rates of contribution payable. The pension cost is determined on the advice of the companys
actuary, having regard to the results of these valuations. In any intervening
years, the actuaries review the continuing appropriateness of the contribution
rates.
77 | Accounting policies | 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 employees to the extent that these variations do not relate to the estimated cost of providing incremental pension benefits in the circumstances described in xiii above.
Interest is accounted for on the provision or prepayment in the balance sheet which results from differences between amounts recognised as pension costs and amounts funded. The regular
pension cost, variations from the regular pension cost, described above, and interest are all charged within staff costs. The group also operates defined contribution pension schemes and the profit and loss account is charged with the contributions
payable.
xv Taxation
Full provision is made for deferred taxation on all timing differences which have arisen but have not reversed at the balance sheet date. Deferred tax assets are recognised to the extent that it is regarded as more
likely than not that there will be taxable profits from which the underlying timing differences can be deducted. No deferred tax is provided in respect of any future remittance of earnings of foreign subsidiaries or associates where no commitment
has been made to remit such earnings. The deferred tax balances are not discounted.
xvi Financial
instruments
(a) Debt instruments
Debt instruments are stated at the amount of net proceeds adjusted to amortise any discount evenly over the term of the debt, and further adjusted for the effect of currency swaps acting as hedges.
(b) Derivative financial instruments
The group uses derivative financial instruments to reduce exposure to foreign exchange risks and interest rate movements. The group does not hold or issue derivative financial instruments for financial trading
purposes.
Criteria to qualify for hedge accounting
The
group considers its derivative financial instruments to be hedges when certain
criteria are met. For foreign currency derivatives, the instrument must be related
to actual foreign currency assets or liabilities or a probable commitment and
whose characteristics have been identified. It must involve the same currency
or similar currencies as the hedged item and must also reduce the risk of foreign
currency exchange movements on the groups operations. For
interest rate derivatives, the instrument must be related to assets or liabilities
or a probable commitment, such as a future bond issue, and must also change the
interest rate or the nature of the interest rate by converting a fixed rate to
a
variable rate or vice versa.
Accounting for derivative financial
instruments
Principal amounts underlying
currency swaps are revalued at exchange rates ruling at the date of the group
balance sheet and, to the extent that they are not related to debt instruments,
are included in debtors or creditors.
Interest differentials, under interest rate swap agreements used to vary the amounts and periods for which interest rates on borrowings are fixed, are recognised by adjustment of interest
payable.
The forward exchange contracts used to change the currency mix of net debt are revalued to balance sheet rates with net unrealised gains and losses being shown as part of debtors,
creditors, or as part of net debt. The difference between spot and forward rate for these contracts is recognised as part of net interest payable over the term of the contract.
The forward exchange contracts hedging transaction exposures are revalued at the prevailing forward rate on the balance sheet date with net unrealised gains and losses being shown as
debtors and creditors.
Instruments that form hedges against future fixed-rate bond issues are marked to market. Gains or losses are deferred until the bond is issued when they are recognised evenly over the term
of the bond.
78 | 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 | Total | ||||||
Notes | £m | £m | £m | |||||
|
|
|||||||
Total turnover | 2 | 18,914 | | 18,914 | ||||
|
|
|||||||
Groups share of joint ventures turnover | 3 | (352 | ) | | (352 | ) | ||
Groups share of associates turnover | 3 | (43 | ) | | (43 | ) | ||
|
|
|||||||
Group turnover | 2 | 18,519 | | 18,519 | ||||
Other operating income | 4 | 177 | | 177 | ||||
Operating costs | 5 | (15,804 | ) | (19 | ) | (15,823 | ) | |
|
|
|||||||
Group operating profit (loss) | 2,892 | (19 | ) | 2,873 | ||||
Groups share of operating loss of joint ventures | 6 | (12 | ) | (26 | ) | (38 | ) | |
Groups share of operating profit of associates | 6 | 4 | | 4 | ||||
|
|
|||||||
Total operating profit (loss) | 2,884 | (45 | ) | 2,839 | ||||
Profit on sale of fixed asset investments | 7 | 4 | 34 | 38 | ||||
Loss on sale of group undertakings | 7 | | (2 | ) | (2 | ) | ||
Profit on sale of property fixed assets | 14 | | 14 | |||||
Interest receivable | 10 | 264 | 34 | 298 | ||||
Interest payable | 11 | (1,150 | ) | (89 | ) | (1,239 | ) | |
|
|
|||||||
Profit (loss) on ordinary activities before taxation | 2,016 | (68 | ) | 1,948 | ||||
Tax on profit (loss) on ordinary activities | 12 | (568 | ) | 29 | (539 | ) | ||
|
|
|||||||
Profit (loss) on ordinary activities after taxation | 1,448 | (39 | ) | 1,409 | ||||
Minority interests | 13 | 8 | | 8 | ||||
|
|
|||||||
Profit (loss) for the financial year | 1,456 | (39 | ) | 1,417 | ||||
Dividends | 14 | (732 | ) | |||||
|
|
|||||||
Retained profit for the financial year | 28 | 685 | ||||||
|
|
|||||||
Basic earnings per share | 15 | 16.9 | p | 16.4 | p | |||
Diluted earnings per share | 15 | 16.8 | p | 16.3 | p | |||
|
|
79 | 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 | Total | ||||||
Notes | £m | £m | £m | |||||
Total turnover | 2 | 20,182 | | 20,182 | ||||
Groups share of joint ventures turnover | 3 | (425 | ) | | (425 | ) | ||
Groups share of associates turnover | 3 | (1,030 | ) | | (1,030 | ) | ||
Group turnover | 2 | 18,727 | | 18,727 | ||||
Other operating income | 4 | 215 | | 215 | ||||
Operating costs | 5 | (16,152 | ) | (218 | ) | (16,370 | ) | |
Group operating profit (loss) | 2,790 | (218 | ) | 2,572 | ||||
Groups share of operating profit (loss) of joint ventures | 6 | (31 | ) | 150 | 119 | |||
Groups share of operating profit (loss) of associates | 6 | 212 | (2 | ) | 210 | |||
Total operating profit (loss) | 2,971 | (70 | ) | 2,901 | ||||
Profit on sale of fixed asset investments | 7 | | 1,700 | 1,700 | ||||
Loss on sale of group undertakings | 7 | | (9 | ) | (9 | ) | ||
Profit on sale of property fixed assets | 11 | | 11 | |||||
Interest receivable | 10 | 195 | | 195 | ||||
Amounts written off investments | 9 | (7 | ) | | (7 | ) | ||
Interest payable | 11 | (1,341 | ) | (293 | ) | (1,634 | ) | |
Profit on ordinary activities before taxation | 1,829 | 1,328 | 3,157 | |||||
Tax on profit on ordinary activities | 12 | (598 | ) | 139 | (459 | ) | ||
Profit on ordinary activities after taxation | 1,231 | 1,467 | 2,698 | |||||
Minority interests | 13 | (5 | ) | (7 | ) | (12 | ) | |
Profit for the financial year | 1,226 | 1,460 | 2,686 | |||||
Dividends | 14 | (560 | ) | |||||
Retained profit for the financial year | 28 | 2,126 | ||||||
Basic earnings per share | 15 | 14.2 | p | 31.2 | p | |||
Diluted earnings per share | 15 | 14.1 | p | 31.0 | p | |||
80 | BT Annual Report and Form 20-F 2004 |
Group profit and loss account
for the year
ended 31 March 2002
Continuing activities | ||||||||||||
Before goodwill | Goodwill | Discontinued | ||||||||||
amortisation | amortisation | Total | activities and | |||||||||
and exceptional | and exceptional | continuing | intra-group | |||||||||
items | items | activities | items | Total | ||||||||
Notes | £m | £m | £m | £m | £m | |||||||
Total turnover | 2 | 21,815 | | 21,815 | 2,827 | 24,642 | ||||||
Groups share of joint ventures turnover | 3 | (2,752 | ) | | (2,752 | ) | (76 | ) | (2,828 | ) | ||
Groups share of associates turnover | 3 | (1,297 | ) | | (1,297 | ) | (639 | ) | (1,936 | ) | ||
Trading between group and principal joint venture | 3 | 681 | | 681 | | 681 | ||||||
Group turnover | 2 | 18,447 | | 18,447 | 2,112 | 20,559 | ||||||
Other operating income | 4 | 361 | | 361 | 1 | 362 | ||||||
Operating costs | 5 | (16,037 | ) | (2,817 | ) | (18,854 | ) | (2,546 | ) | (21,400 | ) | |
Group operating profit (loss) | 2,771 | (2,817 | ) | (46 | ) | (433 | ) | (479 | ) | |||
Groups share of operating profit (loss) of joint ventures | 6 | (323 | ) | (1,160 | ) | (1,483 | ) | 19 | (1,464 | ) | ||
Groups share of operating profit (loss) of associates | 6 | 215 | (175 | ) | 40 | 43 | 83 | |||||
Total operating profit (loss) | 2,663 | (4,152 | ) | (1,489 | ) | (371 | ) | (1,860 | ) | |||
Profit on sale of fixed asset investments | 7 | | 169 | 169 | 3,208 | 3,377 | ||||||
Profit (loss) on sale of group undertakings | 7 | | (148 | ) | (148 | ) | 1,160 | 1,012 | ||||
Profit on sale of property fixed assets | 8 | 27 | 1,062 | 1,089 | | 1,089 | ||||||
Interest receivable | 10 | 360 | | 360 | | 360 | ||||||
Amounts written off investments | 9 | | (535 | ) | (535 | ) | | (535 | ) | |||
Interest payable | 11 | (1,777 | ) | (162 | ) | (1,939 | ) | (43 | ) | (1,982 | ) | |
Profit (loss) on ordinary activities before taxation | 1,273 | (3,766 | ) | (2,493 | ) | 3,954 | 1,461 | |||||
Tax on profit (loss) on ordinary activities | 12 | (528 | ) | 143 | (385 | ) | (58 | ) | (443 | ) | ||
Profit (loss) on ordinary activities after taxation | 745 | (3,623 | ) | (2,878 | ) | 3,896 | 1,018 | |||||
Minority interests | 13 | (10 | ) | | (10 | ) | (13 | ) | (23 | ) | ||
Profit (loss) for the financial year | 735 | (3,623 | ) | (2,888 | ) | 3,883 | 995 | |||||
Dividends (see note below) | 14 | (173 | ) | |||||||||
Retained profit for the financial year | 28 | 822 | ||||||||||
Basic earnings (loss) per share | 15 | 8.8 | p | (34.8 | )p | 12.0 | p | |||||
Diluted earnings (loss) per share | 15 | 8.8 | p | (34.8 | )p | 11.9 | p | |||||
In addition to the final dividend for the year of £173 million there was a demerger distribution of £19,490 million, representing the net assets of mmO2 (including purchased goodwill) as at the date of demerger. Of the demerger distribution, £9 million represents a cash dividend paid by British Telecommunications plc to mmO2 plc as part of the demerger process.
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 | 2003 | 2002 | ||||
£m | £m | £m | ||||
Profit (loss) for the financial year: | ||||||
Group | 1,468 | 2,483 | 2,580 | |||
Joint ventures | (54 | ) | 103 | (1,524 | ) | |
Associates | 3 | 100 | (61 | ) | ||
Total profit for the financial year | 1,417 | 2,686 | 995 | |||
Currency movements arising on consolidation of non-UK: | ||||||
Subsidiaries | (87 | ) | (2 | ) | (14 | ) |
Joint ventures | (1 | ) | 5 | (46 | ) | |
Associates | (1 | ) | 2 | 45 | ||
Unrealised gain on transfer of assets and group undertakings to a joint venture | | | 5 | |||
Total recognised gains and losses for the financial year | 1,328 | 2,691 | 985 | |||
82 | BT Annual Report and Form 20-F 2004 |
Group cash flow statement
for the year ended 31 March 2004
2004 | 2003 | 2002 | ||||||
Notes |
£m | £m | £m | |||||
Net cash inflow from operating activities | 16 |
5,389 | 6,023 | 5,257 | ||||
Dividends from associates and joint ventures | 3 | 6 | 2 | |||||
Returns on investments and servicing of finance | ||||||||
Interest received | 673 | 231 | 309 | |||||
Interest paid, including finance costs | (1,200 | ) | (1,737 | ) | (2,004 | ) | ||
Net cash outflow for returns on investments and servicing of finance | (527 | ) | (1,506 | ) | (1,695 | ) | ||
Taxation | ||||||||
UK corporation tax paid | (305 | ) | (425 | ) | (557 | ) | ||
Non-UK tax paid | (12 | ) | (9 | ) | (5 | ) | ||
Taxation paid | (317 | ) | (434 | ) | (562 | ) | ||
Capital expenditure and financial investment | ||||||||
Purchase of tangible fixed assets | (2,684 | ) | (2,580 | ) | (4,069 | ) | ||
Sale of tangible fixed assets | 76 | 94 | 2,645 | |||||
Purchase of fixed asset investments | (1 | ) | (1 | ) | (37 | ) | ||
Disposal of fixed asset investments | 132 | 106 | 107 | |||||
Net cash outflow for capital expenditure and financial investment | (2,477 | ) | (2,381 | ) | (1,354 | ) | ||
Free cash flow before acquisitions, disposals and dividends | 2,071 | 1,708 | 1,648 | |||||
Acquisitions and disposals | ||||||||
Purchase of subsidiary undertakings,
net of £1m cash acquired (2003 £13m, 2002 £nil) |
(32 | ) | 56 | (896 | ) | |||
Investments in joint ventures | (29 | ) | (133 | ) | (235 | ) | ||
Disposal of subsidiary undertakings,
net of £nil cash disposed (2003 £nil, 2002 £28m) |
| 3 | 1,959 | |||||
Sale of investments in joint ventures and associates | 1 | 2,916 | 4,957 | |||||
Net cash (outflow) inflow for acquisitions and disposals | (60 | ) | 2,842 | 5,785 | ||||
Equity dividends paid | (645 | ) | (367 | ) | | |||
Cash inflow before management of liquid resources and financing | 1,366 | 4,183 | 7,433 | |||||
Management of liquid resources | 17 |
1,123 | (1,729 | ) | (1,864 | ) | ||
Financing | ||||||||
Issue of ordinary share capital | | 42 | 6,057 | |||||
Repurchase of ordinary share capital | (144 | ) | | | ||||
Inflow on demerger of mmO2 | 19 |
| | 440 | ||||
New loans | 1,326 | 20 | 30 | |||||
Repayment of loans | (3,627 | ) | (2,471 | ) | (1,851 | ) | ||
Net decrease in short-term borrowings | | (64 | ) | (10,155 | ) | |||
Net cash outflow from financing | (2,445 | ) | (2,473 | ) | (5,479 | ) | ||
Increase (decrease) in cash in the year | 44 | (19 | ) | 90 | ||||
Decrease in net debt in the year resulting from cash flows | 19 |
1,222 | 4,225 | 13,930 | ||||
83 | BT Annual Report and Form 20-F 2004 |
Group balance sheet
as at 31 March 2004
2004 | 2003 | |||||
Notes | £m | £m | ||||
Fixed assets | ||||||
Intangible assets | 20 | 204 | 218 | |||
Tangible assets | 21 | 15,487 | 15,888 | |||
Investments in joint ventures: | 22 | |||||
Share of gross assets and goodwill | 496 | 741 | ||||
Share of gross liabilities | (399 | ) | (610 | ) | ||
Total investments in joint ventures | 97 | 131 | ||||
Investments in associates | 22 | 24 | 27 | |||
Other investments | 22 | 256 | 397 | |||
Total investments | 22 | 377 | 555 | |||
Total fixed assets | 16,068 | 16,661 | ||||
Current assets | ||||||
Stocks | 89 | 82 | ||||
Debtors: | ||||||
Falling due within one year | 4,017 | 4,413 | ||||
Falling due after more than one year | 1,172 | 630 | ||||
Total debtors | 23 | 5,189 | 5,043 | |||
Investments | 24 | 5,163 | 6,340 | |||
Cash at bank and in hand | 109 | 91 | ||||
Total current assets | 10,550 | 11,556 | ||||
Creditors: amounts falling due within one year | ||||||
Loans and other borrowings | 25 | 1,271 | 2,548 | |||
Other creditors | 26 | 7,277 | 7,132 | |||
Total creditors: amounts falling due within one year | 8,548 | 9,680 | ||||
Net current assets | 2,002 | 1,876 | ||||
Total assets less current liabilities | 18,070 | 18,537 | ||||
Creditors: amounts falling due after more than one year | ||||||
Loans and other borrowings | 25 | 12,426 | 13,456 | |||
Provisions for liabilities and charges | ||||||
Deferred taxation | 27 | 2,191 | 2,017 | |||
Other | 27 | 313 | 359 | |||
Total provisions for liabilities and charges | 2,504 | 2,376 | ||||
Minority interests | 46 | 63 | ||||
Capital and reserves | ||||||
Called up share capital | 28, 37 | 432 | 434 | |||
Share premium account | 28 | 2 | 2 | |||
Capital redemption reserve | 28 | 2 | | |||
Other reserves | 28 | 998 | 998 | |||
Profit and loss account | 28 | 1,660 | 1,208 | |||
Total equity shareholders funds | 28 | 3,094 | 2,642 | |||
18,070 | 18,537 | |||||
The financial statements on pages 74 to 134 were approved by the board of directors on 19 May 2004 and were signed on its behalf by
Sir Christopher Bland
Chairman
Ben Verwaayen
Chief Executive
Ian Livingston
Group Finance Director
84 | BT Annual Report and Form 20-F 2004 |
Notes to the financial statements
Operating | ||||||||||||
Turnover | profit (loss) of | |||||||||||
Depreciation | associates | Total | ||||||||||
Group | and | and joint | operating | |||||||||
External | Internal | total | amortisation | ventures | profit (loss) | |||||||
Year ended 31 March 2004 |
£m | £m | £m | £m | £m | £m | ||||||
BT Retail | 12,630 | 904 | 13,534 | 163 | 1 | 1,434 | ||||||
BT Wholesale | 3,445 | 7,414 | 10,859 | 1,919 | | 1,682 | ||||||
BT Global Services | 2,410 | 3,372 | 5,782 | 624 | (37 | ) | (153 | ) | ||||
Other | 34 | 1 | 35 | 230 | 2 | (124 | ) | |||||
Intra-group | | (11,691 | ) | (11,691 | ) | | | | ||||
Group totals | 18,519 | | 18,519 | 2,936 | (34 | ) | 2,839 | |||||
85 | Notes to the financial statements | BT Annual Report
and Form 20-F 2004 |
2. Segmental analysis continued
Operating | ||||||||||||
Turnover | profit (loss) of | |||||||||||
Depreciation | associates | Total | ||||||||||
Group | and | and joint | operating | |||||||||
External | Internal | total | amortisation | ventures | profit (loss) | |||||||
Year ended 31 March 2003 |
£m | £m | £m | £m | £m | £m | ||||||
BT Retail | 12,979 | 903 | 13,882 | 202 | (3 | ) | 1,524 | |||||
BT Wholesale | 3,525 | 7,722 | 11,247 | 1,923 | (1 | ) | 1,757 | |||||
BT Global Services | 2,183 | 3,234 | 5,417 | 632 | 180 | (214 | ) | |||||
Other | 40 | 1 | 41 | 278 | 153 | (166 | ) | |||||
Intra-group | | (11,860 | ) | (11,860 | ) | | | | ||||
Group totals | 18,727 | | 18,727 | 3,035 | 329 | 2,901 | ||||||
Operating | ||||||||||||
Turnover | profit (loss) of | |||||||||||
Depreciation | associates | Total | ||||||||||
Group | and | and joint | operating | |||||||||
External | Internal | total | amortisation | ventures | profit (loss) | |||||||
Year ended 31 March 2002 |
£m | £m | £m | £m | £m | £m | ||||||
BT Retail | 12,139 | 1,145 | 13,284 | 248 | (6 | ) | 888 | |||||
BT Wholesale | 3,735 | 8,590 | 12,325 | 1,914 | | 2,070 | ||||||
BT Global Services | 2,185 | 2,493 | 4,678 | 2,835 | 144 | (2,481 | ) | |||||
Concert | | | | | (1,123 | ) | (1,123 | ) | ||||
Other | 58 | 37 | 95 | 348 | (458 | ) | (843 | ) | ||||
Intra-group | | (11,935 | ) | (11,935 | ) | | | | ||||
Total continuing activities | 18,117 | 330 | 18,447 | 5,345 | (1,443 | ) | (1,489 | ) | ||||
mmO2 | 2,273 | 392 | 2,665 | 648 | 5 | (461 | ) | |||||
Other | 169 | 2 | 171 | 8 | 57 | 90 | ||||||
Intra-group | | (724 | ) | (724 | ) | | | | ||||
Total discontinued activities | 2,442 | (330 | ) | 2,112 | 656 | 62 | (371 | ) | ||||
Group totals | 20,559 | | 20,559 | 6,001 | (1,381 | ) | (1,860 | ) | ||||
Transactions between divisions are at prices
set in accordance with those agreed with Ofcom (and previously Oftel) where the
services provided are subject to regulation. Other transactions are at arms
length.
The following tables show the capital expenditure on plant, equipment and property, the net operating assets or liabilities and the net book value of associates and joint ventures by line
of business for the years ended 31 March 2004 and 2003. Net operating assets comprise tangible and intangible fixed assets, stocks, debtors, less creditors (excluding loans and other borrowings) and provisions for liabilities and charges (excluding
deferred tax).
Interest in | ||||||
Net operating | associates | |||||
Capital | assets | and joint | ||||
expenditure | (liabilities) | ventures | ||||
Year ended, or as at, 31 March
2004 |
£m | £m | £m | |||
BT Retail | 118 | (40 | ) | (9 | ) | |
BT Wholesale | 1,809 | 11,940 | | |||
BT Global Services | 479 | 1,291 | 89 | |||
Other | 267 | 188 | 41 | |||
Total | 2,673 | 13,379 | 121 | |||
Interest in | ||||||
Net operating | associates | |||||
Capital | assets | and joint | ||||
expenditure | (liabilities) | ventures | ||||
Year ended, or as at, 31 March
2003 |
£m | £m | £m | |||
BT Retail | 109 | (430 | ) | (8 | ) | |
BT Wholesale | 1,652 | 12,041 | | |||
BT Global Services | 445 | 1,912 | 141 | |||
Other | 239 | 217 | 25 | |||
Total | 2,445 | 13,740 | 158 | |||
86 | Notes to the financial statements | BT Annual Report
and Form 20-F 2004 |
2. Segmental
analysis continued
Information about geographic areas:
2004 | 2003 | 2002 | ||||
£m | £m | £m | ||||
Turnover with external customers | ||||||
Attributable to UK | 17,190 | 17,536 | 16,703 | |||
Attributable to non-UK countriesa | 1,329 | 1,191 | 1,414 | |||
Total continuing activitiesb | 18,519 | 18,727 | 18,117 | |||
Attributable to UK | | | 1,555 | |||
Attributable to non-UK countriesa | | | 887 | |||
Total discontinued activities | | | 2,442 | |||
Group turnover | 18,519 | 18,727 | 20,559 | |||
a | Turnover attributable to non-UK countries comprises the external turnover of group companies and branches operating outside the UK, income from non-UK operators for calls terminating in or in transit through the UK and turnover with non-UK joint ventures and associates. |
b | The group turnover from continuing activities as disclosed in the group profit and loss account includes intra-group trading with discontinued activities. |
2004 | 2003 | |||
£m | £m | |||
Group fixed assets are located | ||||
UK | 14,591 | 14,785 | ||
Europe, excluding the UK | 1,029 | 1,227 | ||
Americas | 305 | 510 | ||
Asia and Pacific | 143 | 139 | ||
Total | 16,068 | 16,661 | ||
Geographical segment analysis in accordance with the requirements of SSAP 25 is as follows:
2004 | 2003 | 2002 | ||||
£m | £m | £m | ||||
Total turnover on basis of origin | ||||||
UK | 17,198 | 17,544 | 16,428 | |||
Europe, excluding the UK | 1,272 | 2,151 | 2,449 | |||
Americas | 151 | 155 | 2,000 | |||
Asia and Pacific | 293 | 332 | 608 | |||
Total continuing activitiesa | 18,914 | 20,182 | 21,485 | |||
UK | | | 1,635 | |||
Europe, excluding the UK | | | 927 | |||
Americas | | | 36 | |||
Asia and Pacific | | | 559 | |||
Total discontinued activities | | | 3,157 | |||
Total | 18,914 | 20,182 | 24,642 | |||
a | The total turnover from continuing activities as disclosed in the group profit and loss account includes intra-group trading with discontinued activities. |
2004 | 2003 | 2002 | ||||
£m | £m | £m | ||||
Group turnover on basis of origin | ||||||
UK | 17,190 | 17,536 | 16,703 | |||
Europe, excluding the UK | 1,124 | 978 | 1,113 | |||
Americas | 151 | 153 | 147 | |||
Asia and Pacific | 54 | 60 | 154 | |||
Total continuing activitiesa | 18,519 | 18,727 | 18,117 | |||
UK | | | 1,555 | |||
Europe, excluding the UK | | | 851 | |||
Americas | | | 36 | |||
Total discontinued activities | | | 2,442 | |||
Total | 18,519 | 18,727 | 20,559 | |||
a | The group turnover from continuing activities as disclosed in the group profit and loss account includes intra-group trading with discontinued activities. |
87 | Notes to the 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 joint ventures and associates would be treated differently but would
not lead to a materially different geographical analysis. See Information
about geographic areas above.
2004 | 2003 | 2002 | ||||
£m | £m | £m | ||||
Group operating profit (loss) | ||||||
UK | 2,999 | 3,220 | 2,628 | |||
Europe, excluding the UK | (132 | ) | (627 | ) | (2,829 | ) |
Americas | 9 | (28 | ) | 153 | ||
Asia and Pacific | (3 | ) | 7 | 2 | ||
Total continuing activities | 2,873 | 2,572 | (46 | ) | ||
UK | | | 4 | |||
Europe, excluding the UK | | | (429 | ) | ||
Americas | | | (6 | ) | ||
Asia and Pacific | | | (2 | ) | ||
Total discontinued activities | | | (433 | ) | ||
Total | 2,873 | 2,572 | (479 | ) | ||
2004 | 2003 | 2002 | ||||
£m | £m | £m | ||||
Share of operating (losses) profits of associates and joint ventures, | ||||||
including goodwill amortisation | ||||||
UK | (1 | ) | (2 | ) | (17 | ) |
Europe, excluding the UK | (48 | ) | 305 | (240 | ) | |
Americas | | (1 | ) | (1,135 | ) | |
Asia and Pacific | 15 | 27 | (51 | ) | ||
Total continuing activities | (34 | ) | 329 | (1,443 | ) | |
UK | | | 5 | |||
Europe, excluding the UK | | | 20 | |||
Asia and Pacific | | | 37 | |||
Total discontinued activities | | | 62 | |||
Total | (34 | ) | 329 | (1,381 | ) | |
2004 | 2003 | |||||||||||
Interest in | Net | Interest in | ||||||||||
Net | associates | operating | associates | |||||||||
operating | and joint | assets | and joint | |||||||||
assets | ventures | Total | (liabilities) | ventures | Total | |||||||
£m | £m | £m | £m | £m | £m | |||||||
UK | 11,419 | 7 | 11,426 | 12,196 | (8 | ) | 12,188 | |||||
Europe, excluding the UK | 1,742 | 24 | 1,766 | 1,652 | 76 | 1,728 | ||||||
Americas | 199 | | 199 | (85 | ) | | (85 | ) | ||||
Asia and Pacific | 19 | 90 | 109 | (23 | ) | 90 | 67 | |||||
Total | 13,379 | 121 | 13,500 | 13,740 | 158 | 13,898 | ||||||
Net operating assets (liabilities) comprise tangible and intangible fixed assets, stocks, debtors less creditors (excluding loans and other borrowings), and provisions for liabilities and charges (excluding deferred tax).
88 | Notes to the financial statements | BT Annual Report and Form 20-F 2004 |
3. Turnover
Groups share of associates and joint ventures turnover
comprised:
2004 | 2003 | 2002 | ||||
£m | £m | £m | ||||
Joint ventures: | ||||||
Continuing activities | 352 | 425 | 2,752 | |||
Discontinued activities | | | 76 | |||
352 | 425 | 2,828 | ||||
Associates: | ||||||
Continuing activities | 43 | 1,030 | 1,297 | |||
Discontinued activities | | | 639 | |||
43 | 1,030 | 1,936 | ||||
Groups share of associates and joint ventures turnover | 395 | 1,455 | 4,764 | |||
Concert, the joint venture with AT&T, was formed on 5 January 2000 and was unwound on 1 April 2002 (see note 18). The groups share of trading with Concert in the 2002 financial year, primarily in respect of international calls made to and from the UK and for services provided to Concert in the UK for the multinational customers transferred to Concert, is eliminated in arriving at total turnover, including the proportionate share of the groups associates and joint ventures, and is added back in arriving at group turnover.
2004 | 2003 | 2002 | ||||
£m | £m | £m | ||||
Seconded staff, administration and other services provided to Concert | | | 135 | |||
Other | 177 | 215 | 226 | |||
Total continuing activities | 177 | 215 | 361 | |||
Discontinued activities | | | 1 | |||
Total other operating income | 177 | 215 | 362 | |||
89 | Notes to the financial statements | BT Annual Report and Form 20-F 2004 |
5. Operating costs
2004 | 2003 | 2002 | ||||
Total Group | £m | £m | £m | |||
Staff costs: | ||||||
Wages and salaries | 3,672 | 3,621 | 4,013 | |||
Social security costs | 316 | 275 | 304 | |||
Pension costs (note 31) | 404 | 322 | 382 | |||
Employee share ownershipa | 20 | 36 | 25 | |||
Total staff costs | 4,412 | 4,254 | 4,724 | |||
Own work capitalised | (677 | ) | (583 | ) | (659 | ) |
Depreciation (note 21) | 2,921 | 3,011 | 3,680 | |||
Amortisation and impairment of goodwill and other intangibles (note 20) | 15 | 24 | 2,321 | |||
Payments to telecommunications operators | 3,963 | 3,940 | 4,299 | |||
Other operating costs | 5,189 | 5,724 | 7,035 | |||
Total operating costs | 15,823 | 16,370 | 21,400 | |||
Operating costs included the following: | ||||||
Early leaver costsb | 202 | 276 | 252 | |||
Research and development | 334 | 380 | 362 | |||
Rental costs relating to operating leases, including plant and equipment hire of | ||||||
£25 million (2003 £34 million, 2002 £51 million) | 370 | 395 | 283 | |||
Foreign currency gains | (5 | ) | (12 | ) | (1 | ) |
Amortisation of goodwill and exceptional items comprising: | ||||||
Rectification costs | 30 | | | |||
Property rationalisation provision | | 198 | | |||
Goodwill impairment in subsidiary undertakings | | | 1,955 | |||
Asset impairments | | | 324 | |||
Costs relating to the Concert unwind | | | 172 | |||
Costs relating to the demerger of mmO2 | | | 109 | |||
BT Retail call centre rationalisation costs | | | 68 | |||
BT Wholesale bad debt (release) costs | (23 | ) | | 79 | ||
Total exceptional items | 7 | 198 | 2,707 | |||
Goodwill amortisation | 12 | 20 | 352 | |||
Total amortisation of goodwill and exceptional items | 19 | 218 | 3,059 | |||
a | Amount set aside for the year for allocation of ordinary shares in the company to eligible employees. |
b | Includes £61 million of leaver costs associated with the rationalisation of the BT Retail call centres in the year ended 31 March 2002. |
The directors believe that the nature of the groups business is such that the analysis of operating costs required by the Companies Act 1985 is not appropriate. As required by the Act, the directors have therefore adapted the prescribed format so that operating costs are disclosed in a manner appropriate to the groups principal activity.
90 | Notes to the financial statements | BT Annual Report and Form 20-F 2004 |
5. Operating costs continued
2004 | 2003 | 2002 | ||||
Continuing activities | £m | £m | £m | |||
Staff costs: | ||||||
Wages and salaries | 3,672 | 3,621 | 3,659 | |||
Social security costs | 316 | 275 | 270 | |||
Pension costs (note 31) | 404 | 322 | 367 | |||
Employee share ownershipa | 20 | 36 | 25 | |||
Total staff costs | 4,412 | 4,254 | 4,321 | |||
Own work capitalised | (677 | ) | (583 | ) | (623 | ) |
Depreciation (note 21) | 2,921 | 3,011 | 3,266 | |||
Amortisation and impairment of goodwill and other intangibles (note 20) | 15 | 24 | 2,079 | |||
Payments to telecommunications operators | 3,963 | 3,940 | 4,289 | |||
Other operating costs | 5,189 | 5,724 | 5,522 | |||
Total operating costs | 15,823 | 16,370 | 18,854 | |||
Operating costs included the following: | ||||||
Early leaver costsb | 202 | 276 | 247 | |||
Research and development | 334 | 380 | 362 | |||
Rental costs relating to operating leases, including plant and equipment hire of | ||||||
£25 million (2003 £34 million, 2002 £51 million) | 370 | 395 | 277 | |||
Foreign currency gains | (5 | ) | (12 | ) | (1 | ) |
Amortisation of goodwill and exceptional items comprising: | ||||||
Rectification costs | 30 | | | |||
Property rationalisation provision | | 198 | | |||
Goodwill impairment in subsidiary undertakings | | | 1,955 | |||
Asset impairments | | | 324 | |||
Costs relating to the Concert unwind | | | 172 | |||
Costs relating to the demerger of mmO2 | | | 98 | |||
BT Retail call centre rationalisation costs | | | 68 | |||
BT Wholesale bad debt (release) costs | (23 | ) | | 79 | ||
Total exceptional items | 7 | 198 | 2,696 | |||
Goodwill amortisation | 12 | 20 | 121 | |||
Total amortisation of goodwill and exceptional items | 19 | 218 | 2,817 | |||
a | Amount set aside for the year for allocation of ordinary shares in the company to eligible employees. |
b | Includes £61 million of leaver costs associated with the rationalisation of the BT Retail call centres in the year ended 31 March 2002. |
2004 | 2003 | 2002 | ||||
Discontinued activities | £m | £m | £m | |||
Staff costs: | ||||||
Wages and salaries | | | 354 | |||
Social security costs | | | 34 | |||
Pension costs | | | 15 | |||
Total staff costs | | | 403 | |||
Own work capitalised | | | (36 | ) | ||
Depreciation | | | 414 | |||
Amortisation and impairment of goodwill and other intangibles | | | 242 | |||
Payments to telecommunications operators | | | 10 | |||
Other operating costs | | | 1,513 | |||
Total operating costs | | | 2,546 | |||
Operating costs included the following: | ||||||
Early leaver costs | | | 5 | |||
Rental costs relating to operating leases | | | 6 | |||
Amortisation of goodwill and exceptional items comprising: | ||||||
Costs relating to the demerger of mmO2 | | | 11 | |||
Goodwill amortisation | | | 231 | |||
Total amortisation of goodwill and exceptional items | | | 242 | |||
91 | Notes to the financial statements |
BT Annual Report and
Form 20-F 2004 |
6. Groups
share of operating (loss) profit of associates and joint ventures
The groups share of operating
(loss) profit of associates and joint ventures comprised:
2004 | 2003 | 2002 | |||||
£m | £m | £m | |||||
Joint ventures: | |||||||
Continuing activities | (38 | ) | 119 | (1,483 | ) | ||
Discontinued activities | | | 19 | ||||
(38 | ) | 119 | (1,464 | ) | |||
Associates: | |||||||
Continuing activities | 4 | 210 | 40 | ||||
Discontinued activities | | | 43 | ||||
4 | 210 | 83 | |||||
Groups share of operating (loss) profit of associates and joint venturesa | (34 | ) | 329 | (1,381 | ) | ||
a | Includes: | ||||||
Exceptional costs relating to the impairment of goodwill | 26 | | 433 | ||||
Exceptional costs relating to the impairment of investments and (release) charge of related exit costs | | (150 | ) | 780 | |||
Exceptional costs relating to the Concert unwind | | | 81 | ||||
Amortisation of goodwill arising in joint ventures and associates | | 2 | 53 | ||||
7. Profit
on sale of fixed asset investments and group undertakings
In December 2003 the group sold its
7.8% interest in Inmarsat Ventures plc for total cash consideration of US$118
million (£67 million) realising a profit on disposal of £32 million.
Other
gains of £6 million and losses of £2 million were recognised during
the year ended 31 March 2004. The consideration received in relation to these
disposals was £6 million.
In the
year ended 31 March 2003, disposals of subsidiary undertakings resulted in
losses of £9 million, the consideration received in relation to these disposals
was £3 million.
In January
2003, the group sold its 26% interest in Cegetel Groupe SA to Vivendi Universal
SA for consideration of €4,000 million (£2,603 million) in cash. The profit
on disposal was £1,509 million, before the recognition of an exceptional
interest charge of £293 million on closing out fixed interest rate swaps
following receipt of the sale proceeds, and includes a write-back of £862
million of goodwill taken directly to reserves before April 1998.
In December
2002, the group sold its interest in Blu SpA for consideration of £29
million. The profit on disposal was £19 million.
In October
2002, the group sold its 2% interest in Mediaset for consideration of £87
million in cash. The profit on disposal was £14 million.
In May
2002 and November 2002, the group sold its remaining holding of shares in BSkyB,
received for the exchange of the residual interest in British Interactive Broadcasting,
for consideration of £192 million recognising a profit of £131 million.
Other
gains of £39 million and losses of £12 million were recognised during
the year ended 31 March 2003. These gains and losses included a write-back of
£7 million of goodwill taken directly to reserves before April 1998. The
consideration received in relation to these disposals was £114 million.
In June
2001, the group sold its interest in the Yell Group comprising mainly the Yellow
Pages unit of BT, Yellow Pages Sales Limited and Yellow Book USA Inc. and its
subsidiary undertakings. The consideration for this sale was £1,960 million
and a profit of £1,128 million was realised. This profit includes a write-back
of £9 million of goodwill taken directly to reserves before April 1998.
In December
2001, the group sold its wholly owned subsidiary Clear Communications Limited,
which operates in New Zealand, for consideration of £119 million. A loss
of £126 million was recognised on this sale, of which £45 million
relates to goodwill taken directly to reserves before April 1998.
Other
disposals of subsidiary companies in the year ended 31 March 2002 resulted
in gains on disposal of £10 million.
A profit
of £120 million was recognised for the exchange of the residual interest
in British Interactive Broadcasting for BSkyB shares in May 2001. The consideration
received was £241 million of BSkyB shares and the profit recognised relates
to those shares that were marketable.
In June
2001, the group sold its effective 20% interest in Japan Telecom Co. Limited
and its 20% interest in J-Phone Communications Co. Limited to Vodafone plc for £3,075 million in cash. Under the sale agreement, the group also sold
shares representing 4.9% of J-Phone Communications Co. Limited obtained by exercising
an option in June 2001 for £634 million in cash. The realised profit on
the sale of the 20% interest in Japan Telecom Co. Limited and J-Phone Communications
Co. Limited, and the sale of the 4.9% share of J-Phone Communications Co. Limited
obtained through the exercise of options was £2,358 million.
In June
2001, the group sold its 17.81% interest in Airtel Movil SA to Vodafone plc
for £1,084 million in cash. The profit on disposal was £844 million.
92 | Notes to the financial statements | BT
Annual Report and Form 20-F 2004 |
7. Profit
on sale of fixed asset investments and group undertakings
continued
Other gains of £135 million and
losses of £80 million were also recognised during the year ended 31 March
2002. These gains and losses included a write-back of £14 million of goodwill
taken directly to reserves before April 1998. The consideration received in
relation to these disposals was £860 million, including deferred and non-cash
amounts of £63 million.
8. Profit
on sale of property fixed assets
In December 2001 the group entered into
a sale and leaseback transaction with Telereal under which substantially all
of the groups interest in most of its UK freehold and long leasehold
properties and its obligations in respect of rack rented properties were transferred
to
Telereal for cash consideration of £2,380
million. Of the total profit from the sale of property in the year to 31 March
2002, £1,019 million relates to this transaction.
9. Amounts
written off investments
Amounts written off investments were £nil (2003 £7 million, 2002 £535 million). In
the year ended 31 March 2002 these were mainly attributable to investments in
AT&T Canada, £347 million and Impsat, £157 million.
a | Includes an exceptional credit of £34 million in the year ended 31 March 2004 being one off interest recognised on full repayment of loan notes received as part of the original consideration from the disposal of Yell. |
a | Includes an exceptional charge of £89 million in the year ended 31 March 2004 being the premium on repurchasing £813 million of the groups issued bonds. |
b | Includes an exceptional charge of £293 million in the year ended 31 March 2003 on the termination of interest rate swap agreements following the receipt of the Cegetel sale proceeds. |
c | Includes an exceptional charge of £162 million in the year ended 31 March 2002 on the novation of interest rate swap agreements as a consequence of the property sale and leaseback transaction with Telereal. |
93 | Notes to the financial statements | BT Annual Report
and Form 20-F 2004 |
12. Tax on
profit (loss) on ordinary activities continued
The tax credit relating to exceptional
items is £29 million (2003 £139 million, 2002 £143
million).
A
tax charge on recognised gains and losses not included in the profit and loss
account of £47 million (2003 £16 million, 2002 £11
million) related to exchange movements offset in reserves.
Current tax and total tax on
profit on ordinary activities, differs from the amount computed by applying
the corporation tax rate to profit on ordinary activities before taxation. The
differences were attributable to the following factors:
2004 | 2003 | 2002 | ||||
% | % | % | ||||
|
|
|
||||
UK corporation tax rate | 30.0 | 30.0 | 30.0 | |||
Non-deductible depreciation, amortisation and impairment | 0.9 | 0.4 | 92.6 | |||
Non-deductible non-UK losses | 1.6 | 3.3 | 17.8 | |||
Higher taxes on non-UK profits | 0.2 | 0.4 | 0.8 | |||
Excess depreciation over capital allowances | 3.2 | 3.4 | 9.7 | |||
Pension provisions and prepayments | (9.9 | ) | (3.2 | ) | (11.5 | ) |
Other timing differences | (2.8 | ) | 0.7 | (0.5 | ) | |
Lower effective tax on gain on disposal of fixed asset | ||||||
investments and group undertakings | (1.3 | ) | (16.5 | ) | (66.3 | ) |
Higher (lower) effective tax on gain on disposal of non qualifying assets | | 2.0 | (44.6 | ) | ||
Prior year adjustments | | (2.0 | ) | (0.5 | ) | |
Other | (3.2 | ) | (0.8 | ) | (1.7 | ) |
|
|
|
||||
Current tax effective corporation tax rate | 18.7 | 17.7 | 25.8 | |||
Deferred taxes on excess depreciation over capital allowances | (3.2 | ) | (3.4 | ) | (9.7 | ) |
Pension provisions and prepayments | 9.9 | 3.2 | 11.5 | |||
Other timing differences | 2.8 | (0.7 | ) | 0.5 | ||
Prior year adjustments | (0.5 | ) | (2.3 | ) | 2.2 | |
|
|
|
||||
Total tax effective corporation tax rate | 27.7 | 14.5 | 30.3 | |||
|
|
|
Factors that may affect future
tax charges
The group operates in countries
where the tax rate is different to the UK corporate tax rate, primarily the
USA, the Netherlands, the Republic of Ireland, Germany and Spain.
As at
31 March 2004, the group had overseas corporate tax losses estimated to be £1
billion which are not recognised as deferred tax assets. In addition, the group
has unutilised capital losses estimated to be in excess of £10 billion
which were not recognised as deferred tax assets.
13. Minority interests | 2004 | 2003 | 2002 | |||
£m | £m | £m | ||||
|
|
|
||||
Minority interests in (losses) profits: | ||||||
Group | (8 | ) | 4 | 7 | ||
Associates | | 8 | 16 | |||
|
|
|
||||
Total minority interests | (8 | ) | 12 | 23 | ||
|
|
|
In addition to the final dividend for the year ended 31 March 2002 of £173 million there was a demerger distribution of £19,490 million, representing the net assets of mmO2 (including purchased goodwill) as at the date of demerger. Of the demerger distribution, £9 million represents a cash dividend paid by British Telecommunications plc to mmO2 plc as part of the demerger process.
94 | Notes to 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 companys shares
held by employee share ownership trusts and treasury shares.
In calculating the diluted earnings (loss) per share, share options outstanding and other potential ordinary shares have been taken into account.
The weighted average number of shares in
the years were:
2004 millions of shares |
2003 millions of shares |
2002 millions of shares |
||||
Basic | 8,621 | 8,616 | 8,307 | |||
Dilutive ordinary shares from share options outstanding and shares held in trust | 55 | 52 | 70 | |||
Total diluted | 8,676 | 8,668 | 8,377 | |||
Options over 259 million shares (2003 177 million, 2002 16 million) were excluded from the calculation of the total diluted number of shares as they were anti-dilutive.
95 | Notes to the financial statements | BT Annual Report and Form 20-F 2004 |
15. Earnings (loss) per share continued
The items in the calculation of earnings (loss) per share before goodwill amortisation
and exceptional items in the years were:
2004 pence per share |
2003 pence per share |
2002 pence per share |
2004 £m |
2003 £m |
2002 £m |
|||||||
|
|
|||||||||||
Attributable to exceptional items and goodwill amortisation from | ||||||||||||
continuing activities: | ||||||||||||
Rectification costs | (0.3 | ) | | | (30 | ) | | | ||||
Goodwill amortisation | (0.1 | ) | (0.3 | ) | (2.0 | ) | (12 | ) | (22 | ) | (162 | ) |
Property rationalisation costs | | (2.3 | ) | | | (198 | ) | | ||||
Goodwill impairment in subsidiary undertakings | | | (23.5 | ) | | | (1,955 | ) | ||||
Asset impairment in subsidiary undertakings | | | (3.9 | ) | | | (324 | ) | ||||
Costs relating to the Concert unwind | | | (3.0 | ) | | | (253 | ) | ||||
Costs relating to the demerger of mmO2 | | | (1.2 | ) | | | (98 | ) | ||||
BT Retail call centre rationalisation costs | | | (0.8 | ) | | | (68 | ) | ||||
BT Wholesale bad debts release (costs) | 0.2 | | (0.9 | ) | 23 | | (79 | ) | ||||
Goodwill impairment in associates and joint ventures | (0.3 | ) | | (5.2 | ) | (26 | ) | | (433 | ) | ||
Impairment of investment in associates and joint ventures and | ||||||||||||
release (charge) for related exit costs | | 1.8 | (9.4 | ) | | 150 | (780 | ) | ||||
Profit on sale of fixed asset investments | 0.4 | 19.8 | 2.0 | 32 | 1,700 | 169 | ||||||
Loss on sale of group undertakings | | (0.1 | ) | (1.8 | ) | | (9 | ) | (148 | ) | ||
Profit on sale of property fixed assets | | | 12.8 | | | 1,062 | ||||||
Amounts written off investments | | | (6.4 | ) | | | (535 | ) | ||||
Finance cost of novating interest rate swaps | | (3.4 | ) | (2.0 | ) | | (293 | ) | (162 | ) | ||
Interest receivable on Yell loan notes | 0.4 | | | 34 | | | ||||||
Premium on repurchasing bonds | (1.1 | ) | | | (89 | ) | | | ||||
Tax credit | 0.3 | 1.6 | 1.7 | 29 | 139 | 143 | ||||||
Minority interest | | (0.1 | ) | | | (7 | ) | | ||||
|
|
|||||||||||
Net (charge) credit attributable to exceptional items and goodwill | ||||||||||||
amortisation from continuing activities | (0.5 | ) | 17.0 | (43.6 | ) | (39 | ) | 1,460 | (3,623 | ) | ||
Attributable to discontinued activities: | ||||||||||||
Costs relating to the demerger of mmO2 | | | (0.1 | ) | | | (11 | ) | ||||
Profit on sale of group undertakings | | | 14.0 | | | 1,160 | ||||||
Profit on sale of fixed asset investments | | | 38.6 | | | 3,208 | ||||||
Goodwill amortisation | | | (3.0 | ) | | | (243 | ) | ||||
Results of discontinued activities before goodwill amortisation and | ||||||||||||
exceptional items after tax and minority interest | | | (2.7 | ) | | | (231 | ) | ||||
|
|
|||||||||||
Net credit attributable to discontinued activities | | | 46.8 | | | 3,883 | ||||||
Basic earnings per share/profit for the financial year | ||||||||||||
after goodwill amortisation and exceptional items | 16.4 | 31.2 | 12.0 | 1,417 | 2,686 | 995 | ||||||
Less: Basic earnings per share/profit for the financial year attributable to | ||||||||||||
discontinued activities | | | 46.8 | | | 3,883 | ||||||
|
|
|||||||||||
Basic earnings (loss) per share/profit (loss) for the financial year | ||||||||||||
before discontinued activities | 16.4 | 31.2 | (34.8 | ) | 1,417 | 2,686 | (2,888 | ) | ||||
Less: Basic (loss) earnings per share/(loss) profit for the financial year | ||||||||||||
attributable to exceptional items and goodwill amortisation from | ||||||||||||
continuing activities | (0.5 | ) | 17.0 | (43.6 | ) | (39 | ) | 1,460 | (3,623 | ) | ||
|
|
|||||||||||
Basic earnings per share/profit for the financial year from continuing | ||||||||||||
activities before goodwill amortisation and exceptional items | 16.9 | 14.2 | 8.8 | 1,456 | 1,226 | 735 | ||||||
Earnings per share before goodwill amortisation and exceptional items is provided to help readers evaluate the performance of the group.
96 | Notes to the financial statements | BT Annual Report and Form 20-F 2004 |
16. Reconciliation of operating profit (loss) to operating cash flows | 2004 |
2003 |
2002 | |||
£m | £m | £m | ||||
Group operating profit (loss) | 2,873 | 2,572 | (479 | ) | ||
Depreciation | 2,921 | 3,011 | 3,680 | |||
Amortisation and impairment | 15 | 24 | 2,321 | |||
(Increase) decrease in stocks | (6 | ) | 31 | 43 | ||
Decrease (increase) in debtors | 414 | 764 | (545 | ) | ||
(Decrease) increase in creditors | (171 | ) | (294 | ) | 803 | |
Increase in pension prepayment and decrease in pension liabilities | (655 | ) | (314 | ) | (537 | ) |
(Decrease) increase in provisions | (49 | ) | 171 | 52 | ||
Other | 47 | 58 | (81 | ) | ||
Net cash inflow from operating activities | 5,389 | 6,023 | 5,257 | |||
Analysed as: | ||||||
Continuing activities | 5,389 | 6,023 | 5,023 | |||
Discontinued activities | | | 234 | |||
Net cash inflow from operating activities | 5,389 | 6,023 | 5,257 | |||
Movements in 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
Total | a | |
Year ended 31 March 2004 | £m | |
Consideration: | ||
Cash | 33 | |
Deferred | 3 | |
Total | 36 | |
Concert | b |
Other | c |
Total | ||
Year ended 31 March 2003 | £m | £m | £m | |||
Consideration: | ||||||
Cash | | 13 | 13 | |||
Carrying value of Concert global venture | 338 | | 338 | |||
Total | 338 | 13 | 351 | |||
In addition, net cash of £56 million was received in settlement of the unwind of the Concert global venture.
Esat Digifone | d |
Other | e |
Total | ||
Year ended 31 March 2002 | £m | £m | £m | |||
Consideration: | ||||||
Cash | 869 | 27 | 896 | |||
Deferred | | 8 | 8 | |||
Total | 869 | 35 | 904 | |||
aOn 5 January 2004 the group acquired the UK trade and assets of BT Expedite Limited (formerly NSB Retail plc) for consideration of £17 million (£2 million deferred). The net liabilities acquired amounted to £1 million giving rise to goodwill of £18 million which is being amortised over a period of 5 years. On 15 March 2004 the group acquired controlling interest in Transcomm plc for consideration of £15 million. The groups share of the net assets acquired was £2 million giving rise to goodwill of £13 million which is being amortised over a period of 13 years. On 13 January 2004 the group took full control of Siosistemi SpA for consideration of £4 million including deferred consideration of £1 million. Net assets of £1 million were acquired giving rise to goodwill of £4 million which is being amortised over a period of 10 years.
97 | Notes to the financial statements | BT Annual Report and Form 20-F 2004 |
18. Acquisitions and disposals continued
bOn
completion of the unwind of Concert on 1 April 2002, the former Concert businesses,
customer accounts and networks were returned to the two parent companies with
BT and AT&T each taking ownership of substantially those parts of the Concert global venture originally
contributed by them. As part of the settlement with AT&T for the unwind of the Concert global venture BT received net cash of US$72 million (£56
million). This net settlement included the receipt of US$350 million reflecting
the allocation of the businesses and the payment of US$278 million to achieve
the equal division of specified working capital and other liability balances.
The results of the acquired businesses, both pre and post acquisition, cannot
be separately identified and,
therefore, cannot be reported.
Book value and | ||
fair value | ||
£m | ||
Fixed assets | 398 | |
Current assets | 301 | |
Current liabilities | (405 | ) |
Provisions for liabilities and charges | (2 | ) |
Long-term debt | (10 | ) |
Groups share of original book value and fair value of net assets | 282 | |
Net receivable from AT&T | 56 | |
Total net assets acquired | 338 | |
Goodwill | | |
Total cost | 338 | |
The consideration was satisfied through the unwind of the Concert global venture,
the carrying value of which was £338 million. Accordingly there is no further
profit or loss on the unwind and no goodwill on the
acquisition.
cDuring the
year ended 31 March 2003, the acquisition of other subsidiary companies and businesses
and the consideration given comprised:
Book value and | ||
fair value | ||
£m | ||
Fixed assets | 1 | |
Current liabilities | (1 | ) |
Groups share of original book value of net assets and fair value to group | | |
Goodwill | 13 | |
Total cost | 13 | |
dOn 18 April 2001, the group took full control of O2 Communications (Ireland) (formerly Esat Digifone). Under an agreement made in 2000 the group purchased from Telenor its 49.5% interest in Esat Digifone for £869 million. Goodwill arising on the acquisition was being amortised over 20 years until it was demerged with mmO2.
Book value and | ||
fair value | ||
£m | ||
Minority interest | (7 | ) |
Groups share of original book value of net liabilities | (7 | ) |
Goodwill | 876 | |
Total cost | 869 | |
eOther subsidiary companies
During the year ended 31 March 2002, the acquisition of interests in other subsidiary
companies and the
consideration given comprised:
Book value and | ||
fair value | ||
£m | ||
Fixed assets | 3 | |
Current assets | 5 | |
Current liabilities | (6 | ) |
Groups share of original book value of net assets and fair value to group | 2 | |
Goodwill | 33 | |
Total cost | 35 | |
98 | Notes to the financial statements | BT Annual Report and Form 20-F 2004 |
18. Acquisitions and disposals continued
Acquisition of associates and joint ventures
On 31 July 2003 the groups
effective interest in Albacom SpA
increased by 3% to 26%.
During the year ended 31 March 2002 the group increased its interest in Blu SpA.
Blu | f | |
Year ended 31 March 2002 | £m | |
Group share of original book value of net assets and fair value to the group | 16 | |
Goodwill | 50 | |
Total cost | 66 | |
fOn 31 January 2002, one of the venture partners in Blu exercised a put option for BT to purchase a 9% interest for £66 million. The cost of £66 million arising on this purchase was written off. In addition in the year ended 31 March 2002 the value of BTs investment was reviewed and provision was made for the associated impairment and exit costs. In December 2002 the group sold its interest in Blu (note 7).
Disposal of subsidiaries and the demerger of mmO2
In the year ended 31 March
2003, BT disposed of subsidiaries with
net assets of £12 million. Consideration amounted to £3 million resulting in a loss on disposal of £9
million.
The
table below analyses the disposal
of subsidiaries and the demerger
of mmO2 for the year ended 31 March 2002.
Year ended 31 March 2002 | mmO2
£m |
g |
Yell £m |
h
|
Other
£m |
Total
£m
|
||
Net assets demerged or disposed of: | ||||||||
Fixed assets | 20,459 | 467 | 211 | 21,137 | ||||
Stocks | 109 | 98 | | 207 | ||||
Debtors | 1,381 | 400 | 19 | 1,800 | ||||
Cash | 121 | 21 | 7 | 149 | ||||
Creditors: amounts falling due within one year | (1,790 | ) | (153 | ) | (46 | ) | (1,989 | ) |
Creditors: amounts falling due after more than one year | | (10 | ) | | (10 | ) | ||
Provisions | (229 | ) | | | (229 | ) | ||
Intercompany loans | (561 | ) | | | (561 | ) | ||
Goodwill previously written off to reserves | | 9 | 44 | 53 | ||||
Net assets disposed of | 19,490 | 832 | 235 | 20,557 | ||||
Profit (loss) on disposal | | 1,128 | (116 | ) | 1,012 | |||
Consideration | 19,490 | 1,960 | 119 | 21,569 | ||||
Cash | | 1,859 | 119 | 1,978 | ||||
Demerger distribution | 19,490 | | | 19,490 | ||||
Loan notes | | 60 | | 60 | ||||
Other | | 41 | | 41 | ||||
Total | 19,490 | 1,960 | 119 | 21,569 | ||||
In addition £9 million deferred consideration was received during the year
ended 31 March 2002 in settlement of the disposals on 18 July 1999 of BT New
Towns Cable and Westminster Cable Limited.
Amounts
included in the cash flow
statement for the year ended 31
March 2002 attributable to mmO2 and Yell
and the results of mmO2 and
Yell included in
the results for the year ended 31 March 2002 to the date of demerger
and disposal respectively
were:
mmO2
£m
|
Yell
£m
|
|||
Net cash flow from operating activities | 227 | 7 | ||
Capital expenditure | 865 | 2 | ||
Decrease in cash in the year | (262 | ) | (4 | ) |
Results of mmO2 and Yell included to date of demerger/disposal: | ||||
Group turnover | 2,665 | 171 | ||
Total operating (loss) profit | (461 | ) | 33 | |
(Loss) profit before taxation | (569 | ) | 27 | |
Taxation charge | (24 | ) | (9 | ) |
(Loss) profit for the financial year | (593 | ) | 18 | |
gOn 19 November 2001 BT completed the demerger of mmO2, the groups former mobile phone business in Europe. mmO2 consisted of O2 UK Limited (formerly BT Cellnet Limited), O2 Communications (Ireland) Limited (formerly Esat Digifone Limited), Telfort Mobiel BV, Viag Interkom GmbH & Co, Manx Telecom and Genie.
99 | Notes to the financial statements | BT Annual Report and Form 20-F 2004 |
18. Acquisitions and disposals continued
hOn 22 June 2001, BT completed the
sale of the Yell Group. The Yell Group consisted of the Yellow Pages division of British Telecommunications plc, Yellow Pages Sales Limited and Yellow Book USA Inc., and its group undertakings.
2004 | 2003 | 2002 | ||||
£m | £m | £m | ||||
Reconciliation of net cash flow to movement in net debt | ||||||
Increase (decrease) in cash in the year | 44 | (19 | ) | 90 | ||
Cash outflow from decrease in debt | 2,301 | 2,515 | 11,976 | |||
Cash (outflow) inflow from increase in liquid resources | (1,123 | ) | 1,729 | 1,864 | ||
Decrease in net debt resulting from cash flows | 1,222 | 4,225 | 13,930 | |||
Currency and translation movements | (4 | ) | (67 | ) | (32 | ) |
(Increase) decrease in debt on acquisition or disposal of subsidiary undertakings | (1 | ) | 13 | 75 | ||
Other non-cash movements | (69 | ) | (43 | ) | 268 | |
Decrease in net debt in the year | 1,148 | 4,128 | 14,241 | |||
Net debt at 1 April | (9,573 | ) | (13,701 | ) | (27,942 | ) |
Net debt at 31 March | (8,425 | ) | (9,573 | ) | (13,701 | ) |
On the demerger, mmO2 had net debt of approximately £500 million of which BT Group was owed approximately £440 million in addition to ordinary trading account balances. mmO2 repaid this loan to BT Group on 19 November 2001.
100 | Notes to the financial statements |
BT Annual Report
and Form 20-F 2004 |
21. Tangible fixed assets | Assets | |||||||
Land and | Plant and | in course of | ||||||
buildings | a | equipment | b | construction | Total | |||
£m | £m | £m | £m | |||||
Cost | ||||||||
1 April 2003 | 955 | 34,346 | 958 | 36,259 | ||||
Acquisitions of subsidiary undertakings | 7 | 38 | | 45 | ||||
Additionsc | 20 | 691 | 1,942 | 2,653 | ||||
Transfers | 75 | 1,969 | (2,044 | ) | | |||
Disposals and adjustments | (120 | ) | (1,388 | ) | (10 | ) | (1,518 | ) |
Currency movements | (8 | ) | (77 | ) | (26 | ) | (111 | ) |
Total cost at 31 March 2004 | 929 | 35,579 | 820 | 37,328 | ||||
Depreciation | ||||||||
1 April 2003 | 352 | 20,064 | | 20,416 | ||||
Acquisitions of subsidiary undertakings | 5 | 35 | | 40 | ||||
Charge for the year | 53 | 2,868 | | 2,921 | ||||
Disposals and adjustments | (67 | ) | (1,352 | ) | | (1,419 | ) | |
Currency movements | (3 | ) | (49 | ) | | (52 | ) | |
Total depreciation at 31 March 2004 | 340 | 21,566 | | 21,906 | ||||
Net book value at 31 March 2004 | 589 | 14,013 | 820 | 15,422 | ||||
Engineering stores | | | 65 | 65 | ||||
Total tangible fixed assets at 31 March 2004 | 589 | 14,013 | 885 | 15,487 | ||||
Net book value at 31 March 2003 | 603 | 14,282 | 958 | 15,843 | ||||
Engineering stores | | | 45 | 45 | ||||
Total tangible fixed assets at 31 March 2003 | 603 | 14,282 | 1,003 | 15,888 | ||||
2004 | 2003 | ||||
£m | £m | ||||
a | The net book value of land and buildings comprised: | ||||
Freehold | 363 | 374 | |||
Long leases (over 50 years unexpired) | 13 | 27 | |||
Short leases | 213 | 202 | |||
Total net book value of land and buildings | 589 | 603 | |||
b The net book value of assets held under finance leases included within plant and equipment was £620 million at 31 March 2004 (2003 £6 million). The depreciation charge for the year to 31 March 2004 on those assets was £174 million (2003 £1 million).
2004 | 2003 | |||||
£m | £m | |||||
c | Expenditure on tangible fixed assets comprised: | |||||
Plant and equipment | ||||||
Transmission equipment | 1,324 | 1,277 | ||||
Exchange equipment | 150 | 228 | ||||
Other network equipment | 585 | 466 | ||||
Computers and office equipment | 205 | 281 | ||||
Motor vehicles and other | 316 | 162 | ||||
Land and buildings | 73 | 40 | ||||
2,653 | 2,454 | |||||
Increase (decrease) in engineering stores | 20 | (9 | ) | |||
Total expenditure on tangible fixed assets | 2,673 | 2,445 | ||||
101 | Notes to the financial statements |
BT Annual Report
and Form 20-F 2004 |
22. Fixed asset investments | Interests in associates and joint ventures | b | ||||||||
Share of post | ||||||||||
acquisition | Other | |||||||||
Shares | Loans | losses | investments | c | Total | |||||
£m | £m | £m | £m | £m | ||||||
Cost | ||||||||||
1 April 2003 | 595 | 20 | (236 | ) | 585 | 964 | ||||
Additions | 23 | 9 | | 19 | 51 | |||||
Disposals | (8 | ) | | (26 | ) | (197 | ) | (231 | ) | |
Share of losses for the year | | | (54 | ) | | (54 | ) | |||
Currency movements | (2 | ) | (1 | ) | 1 | (2 | ) | (4 | ) | |
Other movements | | | 13 | | 13 | |||||
Total cost at 31 March 2004 | 608 | 28 | (302 | ) | 405 | 739 | ||||
Provisions and amounts written off | ||||||||||
1 April 2003 | 221 | | | 188 | 409 | |||||
Disposals | (11 | ) | | | (41 | ) | (52 | ) | ||
Increase in the year | 3 | | | 2 | 5 | |||||
Total provisions and amounts written off at | ||||||||||
31 March 2004 | 213 | | | 149 | 362 | |||||
Net book value at 31 March 2004 | 395 | 28 | (302 | ) | 256 | 377 | ||||
Net book value at 31 March 2003 | 374 | 20 | (236 | ) | 397 | 555 | ||||
a
Subsidiary
undertakings, associates and joint ventures
Details of the principal operating subsidiary undertakings, joint ventures and associates are set out on page 134.
b | Associates and joint ventures | 2004 | 2003 | |||
£m | £m | |||||
Associates: | ||||||
Goodwill | 1 | 1 | ||||
Loans | | 1 | ||||
Share of other net assets | 23 | 25 | ||||
Total associates | 24 | 27 | ||||
Joint ventures: | ||||||
Loans | 28 | 19 | ||||
Share of other net assets | 69 | 112 | ||||
Total joint ventures | 97 | 131 | ||||
Net book value at 31 March | 121 | 158 | ||||
102 | Notes to the financial statements |
BT Annual Report
and Form 20-F 2004 |
22. Fixed asset investments
continued
The
groups proportionate share of its associates and joint ventures assets
and liabilities, in aggregate, at 31 March was as follows:
2004 | 2003 | |||
£m | £m | |||
Fixed assets | 347 | 570 | ||
Current assets | 149 | 186 | ||
Current liabilities | (217 | ) | (344 | ) |
Net current liabilities | (68 | ) | (158 | ) |
Long-term liabilities | (187 | ) | (271 | ) |
Minority interests | | (4 | ) | |
Share of net assets | 92 | 137 | ||
The groups proportionate share of its associates and joint ventures losses less profits before taxation excluding minority interests totalled £51 million (profits less losses 2003 £310 million, losses less profits 2002 £1,463 million) and its share of their losses less profits attributable to shareholders excluding minority interests totalled £51 million for the year ended 31 March 2004 (profits less losses 2003 £229 million, losses less profits 2002 £1,548 million).
c
Other investments
Other investments include ordinary shares of
the
company, with a net book value of £53 million (2003 £61 million) and a market value of £54 million (2003 £50 million), held in trust
for the BT Incentive Share Plan, the BT Retention Share Plan, the BT Executive Share Plan and the BT Deferred Bonus Plan (note 34). In the 2003 financial year they also include ordinary shares of the company with a net book value of £37
million and a market value of £25 million, held in trust for employee sharesave schemes. In the group balance sheet at 31 March 2004, listed investments were held with a book value of £22 million (2003 £22 million) and a
market value of £20 million (2003 £15 million).
a | Trade debtors are stated after deducting £345 million (2003 £491 million) for doubtful debts. The amount charged to the group profit and loss account for doubtful debts for the year ended 31 March 2004 was £136 million net of an exceptional credit of £23 million (2003 £264 million, 2002 £369 million including an exceptional charge of £79 million). |
b | Falling due after more than one year. |
a | Included within other short-term deposits and investments is £144 million invested with a swap counterparty (2003 £149 million). The counterparty has security over this investment in the event of BT defaulting on the swap. |
103 | Notes to the financial statements | BT Annual Report and Form 20-F 2004 |
25. Loans and other borrowings | 2004 | 2003 | ||
£m | £m | |||
US dollar 8.875% notes 2030 (minimum 8.625%a) | 1,686 | 1,928 | ||
5.75% bonds 2028 | 596 | 596 | ||
3.5% indexed linked notes 2025 | 270 | 262 | ||
8.625% bonds 2020 | 297 | 297 | ||
7.75% notes 2016 (minimum 7.5%a) | 691 | 691 | ||
Euro 7.125% notes 2011 (minimum 6.875%a) | 734 | 1,368 | ||
US dollar 8.375% notes 2010 (minimum 8.125%a) | 1,795 | 2,049 | ||
US dollar 8.765% bonds 2009 | 123 | 138 | ||
Euro 11.875% senior notes 2009 | 3 | 3 | ||
US dollar convertible 2008 (0.75%) | 97 | | ||
US dollar 7% notes 2007 | 596 | 606 | ||
12.25% bonds 2006 | 229 | 229 | ||
7.375% notes 2006 (minimum 7.125%a) | 398 | 398 | ||
Euro 6.375% notes 2006 (minimum 6.125%a) | 1,861 | 1,858 | ||
US dollar 7.875% notes 2005 (minimum 7.624%a) | 1,902 | 1,942 | ||
US dollar 6.75% bonds 2004 | 597 | 604 | ||
Euro 5.875% notes 2004 (minimum 5.625%a) | | 1,087 | ||
US dollar floating rate notes 2003a | | 761 | ||
7.125% bonds 2003 | | 500 | ||
Total listed bonds, debentures and notes | 11,875 | 15,317 | ||
Lease finance | 1,099 | 13 | ||
Bank loans due 2004-2009 (average effective interest rate 9.8%) | 480 | 558 | ||
Floating rate note 2004-2009 (average effective interest rate 4.1%) | 101 | 112 | ||
Floating rate loan 2006 (average effective interest rate 4.6%) | 140 | | ||
Bank overdrafts and other short-term borrowings | 2 | 4 | ||
Total loans and other borrowings | 13,697 | 16,004 | ||
a | The interest rate payable on these notes will be subject to adjustment from time to time if either Moodys or Standard and Poors (S&P) reduces the rating ascribed to the groups senior unsecured debt below A3 in the case of Moodys or below A minus in the case of S&P. In this event, the interest rate payable on the notes and the spread applicable to the floating notes will be increased by 0.25% for each ratings category adjustment by each ratings agency. In addition, if Moodys or S&P subsequently increase the rating ascribed to the groups senior unsecured debt, then the interest rate then payable on notes and the spread applicable to the floating notes will be decreased by 0.25% for each rating category upgrade by each rating agency, but in no event will the interest rate be reduced below the minimum interest rate reflected in the table above. |
Apart from the lease finance all borrowings at 31 March 2004 are unsecured. Lease finance is repayable by instalments.
2004 | 2003 | |||
£m | £m | |||
Repayments fall due as follows: | ||||
Within one year, or on demand | 1,271 | 2,548 | ||
Between one and two years | 4,361 | 846 | ||
Between two and three years | 777 | 4,031 | ||
Between three and four years | 854 | 501 | ||
Between four and five years | 100 | 606 | ||
After five years | 6,334 | 7,472 | ||
Total due for repayment after more than one year | 12,426 | 13,456 | ||
Total loans and other borrowings | 13,697 | 16,004 | ||
104 | Notes to the financial statements | BT Annual Report and Form 20-F 2004 |
26. Other
creditors |
2004 | 2003 | ||
£m | £m | |||
Trade creditors | 2,307 | 2,772 | ||
Amounts owed to joint ventures (trading) | 1 | 3 | ||
Corporation taxes | 441 | 406 | ||
Other taxation and social security | 448 | 438 | ||
Other creditors | 1,365 | 1,389 | ||
Accrued expenses | 729 | 718 | ||
Deferred income | 1,532 | 1,040 | ||
Dividends payable | 454 | 366 | ||
Total other creditors | 7,277 | 7,132 | ||
27. Provisions
for liabilities
and charges
Provisions for liabilities and charges
excluding deferred taxation
Property | Pension | Other | ||||||
provisions | a | provisions | b | provisions | c | Total | ||
£m | £m | £m | £m | |||||
Balances at 1 April 2003 | 258 | 33 | 68 | 359 | ||||
Charged against profit for the year | | 5 | 16 | 21 | ||||
Unwind of discount | 5 | | | 5 | ||||
Utilised in the year | (70 | ) | (2 | ) | | (72 | ) | |
Total provisions at 31 March 2004 | 193 | 36 | 84 | 313 | ||||
a | Property provisions comprise amounts provided for obligations to complete nearly finished new properties and remedial work to be undertaken on properties and the onerous lease provision on rationalisation of the groups London office portfolio. The provisions will be utilised over the remaining lease periods. |
b | Provision for unfunded pension obligations which will be utilised over the remaining lives of the beneficiaries. |
c | Other provisions include amounts provided for legal or constructive obligations arising from insurance claims and litigation which will be utilised as the obligations are settled. |
Deferred taxation
Deferred tax is provided for in full
on certain timing differences, BT does not discount the provision.
£m | ||
Balance at 1 April 2003 | 2,017 | |
Charge against profit for the year | 174 | |
Total deferred tax provisions at 31 March 2004 | 2,191 | |
2004 | 2003 | |||
£m | £m | |||
Tax effect of timing differences due to: | ||||
Excess capital allowances | 1,960 | 2,035 | ||
Pension prepayment | 335 | 167 | ||
Other | (104 | ) | (185 | ) |
Total provision for deferred taxation | 2,191 | 2,017 | ||
105 | Notes to the financial statements | BT Annual Report and Form 20-F 2004 |
28. Reconciliation of movement in shareholders funds
Share | Capital | Profit | ||||||||||
Share | premium | redemption | Other | and loss | ||||||||
capital | account | reserve | reserves | account | Total | |||||||
£m | £m | £m | £m | £m | £m | |||||||
Balances at 1 April 2001 | 7,573 | | | (2,848 | ) | 7,329 | 12,054 | |||||
Rights issuea | 2,272 | | | 3,604 | | 5,876 | ||||||
Shares issued to special purpose trustb | 65 | | | 108 | | 173 | ||||||
Other allotments of ordinary
shares prior to demerger 52 million shares issued |
61 | | | 160 | | 221 | ||||||
Distribution relating to demerger of mmO2c | | | | | (19,490 | ) | (19,490 | ) | ||||
Capital reduction on 21 November 2001d | (9,537 | ) | | | | 9,537 | | |||||
Goodwill, previously written off to reserves, taken | ||||||||||||
back to the profit and loss accounte (note 7) | | | | | 68 | 68 | ||||||
Employee share option schemes 1 million shares issued (note 34) | | 2 | | | | 2 | ||||||
Movement relating to BTs employee share ownership trustf | | | | | (70 | ) | (70 | ) | ||||
Unrealised gain on start up of joint ventures | | | | 5 | | 5 | ||||||
Realisation of gain made on start up of joint ventures | | | | (2 | ) | | (2 | ) | ||||
Movement in other reserves due to demerger | | | | (2 | ) | | (2 | ) | ||||
Currency movements (including £36
million net movements in respect of foreign currency borrowings)g |
| | | | (15 | ) | (15 | ) | ||||
Profit for the financial year | | | | | 995 | 995 | ||||||
Dividends (2.0p per ordinary share) | | | | | (173 | ) | (173 | ) | ||||
Balances at 1 April 2002 | 434 | 2 | | 1,025 | (1,819 | ) | (358 | ) | ||||
Goodwill, previously written off to reserves, taken | ||||||||||||
back to the profit and loss accounte (note 7) | | | | | 869 | 869 | ||||||
Employee share option schemes 0.2 million shares issued (note 34) | | | | | | | ||||||
Transfer between reservesi | | | | (27 | ) | 27 | | |||||
Currency
movements (including £106
million net movements in respect of foreign currency borrowings)g |
| | | | 5 | 5 | ||||||
Profit for the year | | | | | 2,686 | 2,686 | ||||||
Dividends (6.5p per ordinary share) | | | | | (560 | ) | (560 | ) | ||||
Balances at 1 April 2003 | 434 | 2 | | 998 | 1,208 | 2,642 | ||||||
Purchase of own shares:h | ||||||||||||
shares cancelled | (2 | ) | | 2 | | (64 | ) | (64 | ) | |||
shares held as treasury shares | | | | | (80 | ) | (80 | ) | ||||
Currency
movements (including £133
million net movements in respect of foreign currency borrowings)g |
| | | | (89 | ) | (89 | ) | ||||
Profit for the year | | | | | 1,417 | 1,417 | ||||||
Dividends (8.5p per ordinary share) | | | | | (732 | ) | (732 | ) | ||||
Balances at 31 March 2004 | 432 | 2 | 2 | 998 | 1,660 | 3,094 | ||||||
a | The groups rights issue closed on 15 June 2001, when British Telecommunications plc was the parent company of the group. A total of 1,976 million ordinary shares of 25p each was issued at 300p per share in a 3 for 10 rights issue. Of the total of £5,876 million raised, net of £52 million expenses, £494 million was credited to share capital and £5,382 million to the share premium account of British Telecommunications plc. Following the introduction of BT Group plc as the parent company of the group, the increase in consolidated share capital has been restated to reflect the nominal value of BT Group plc shares and the balance has been credited to other reserves. |
b | In connection with outstanding share options at the date of demerger, 57 million British Telecommunications plc ordinary shares were issued on 14 November 2001 to a special purpose trust. Of the consideration of £173 million, £159 million was credited to the share premium account of British Telecommunications plc. Following the introduction of BT Group plc as the parent company of the group, the increase in consolidated share capital has been restated to reflect the nominal value of BT Group plc shares and the balance has been credited to other reserves. |
c | The demerger distribution of £19,490 million represents the net assets of mmO2, including purchased goodwill, as at the date of the demerger. See also the note on the face of the group profit and loss account for the year ended 31 March 2002. |
d | Following the approval of the Court, the nominal value of BT Group shares was reduced from 115p each to 5p each on 21 November 2001 by way of a reduction of capital under section 135 of the Companies Act 1985. The surplus of £9,537 million arising from this reduction has been credited to group profit and loss reserve. |
e | Aggregate goodwill at 31 March 2004 in respect of acquisitions completed prior to 1 April 1998 of £385 million (2003 £385 million, 2002 £1,254 million) has been written off against retained earnings in accordance with the groups accounting policy. The goodwill written off against retained earnings will be charged in the profit and loss account on the subsequent disposal of the business to which it related. |
f | During the year ended 31 March 2002 the company issued shares at a market value of £154 million in respect of the exercise of options awarded under its principal savings-related share option scheme. Employees paid £84 million to the group for the issue of these shares and the balance of £70 million comprised contributions to the qualifying employee share ownership trust from group undertakings. |
g | The cumulative foreign currency translation adjustment, which increased retained earnings at 31 March 2004, was £133 million (2003 £222 million, 2002 £217 million). |
h | During the year ended 31 March 2004 the company repurchased 80,571,000 of its own shares of 5p each, representing 1% of the called-up share capital, for an aggregate consideration of £144 million. Of the total shares repurchased 36,222,000 shares with an aggregate nominal value of £2 million were cancelled immediately and 44,349,000 shares with an aggregate nominal value of £2 million are held as treasury shares. |
i | Release of statutory reserves in subsidiary undertakings on cessation of associated activities. |
106 | Notes 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 and BT Group plc (BT Group) became the ultimate parent
company of British Telecommunications plc (BT). The legal structure of the transaction
was such that BT transferred the mmO2 business to mmO2 plc and BT
Group Investments Limited (BTGI) became the immediate parent company of BT on
16 November 2001. On 19 November 2001, mmO2 plc transferred the
shares in BTGI to BT Group, as consideration
for the issue to former BT shareholders of one ordinary share of 115 pence
in the company, credited as fully paid, for each ordinary share in BT held
on 16
November 2001.
On
21 November 2001, following the approval of the Court, the nominal value of
BT Group shares was reduced from 115 pence per ordinary share to 5 pence per
ordinary share by way of a reduction of capital under section 135 of the Companies
Act 1985. The surplus of £9,537 million arising from this capital reduction
has been credited to the group profit and loss reserve.
The
transfer of BTGI to the company has been accounted for as a group reconstruction
in accordance with the principles of merger accounting set out in Financial
Reporting Standard 6 (FRS 6) and Schedule 4A to the Companies Act 1985. The
consolidated financial statements are therefore presented as if the company
had been the parent company of the group throughout the year ended 31 March
2001 and up to the date of the demerger. The results of mmO2 have
been included in discontinued activities in all three years.
The
transfer of BT to BTGI on 16 November 2001 was a group reorganisation effected
for non-equity consideration. This transaction has been accounted for in these
financial statements using the principles of merger accounting as if BT had
been owned and controlled by BTGI throughout the year ended 31 March 2001 and
up to 16 November 2001. This is not in accordance with the Companies Act 1985
since the group reorganisation does not meet all the conditions for merger
accounting.
If acquisition accounting had been applied to account for the reorganisation
whereby BTGI became the parent company of BT, this would have resulted in all
the separable assets and liabilities of the BT Group as at 16 November 2001
being recorded at their fair values, substantial goodwill and goodwill amortisation
charges arising and only the post demerger results being reflected within the
BT Group consolidated financial statements. The directors consider that to
have
applied acquisition accounting in preparing these financial statements would
have failed to give a true and fair view of the groups state of affairs
and results. This is because, in substance, BT Group is the successor to BT
and its shareholders have had a continuing interest in the BT business both
before and after the demerger. The directors consider that it is not practicable
to quantify the effects of this departure from the requirements of the Companies
Act 1985.
In
the companys financial statements, its investment in BTGI is stated at
the nominal value of shares issued. In accordance with sections 131 and 133
of the Companies Act 1985, no premium was recorded on the ordinary shares issued
(see note 37). On consolidation, the difference between the nominal value of
the shares issued and the aggregate share capital, share premium and capital
redemption reserve of BT at the date of the demerger (the merger difference),
has been debited to the other reserves.
29. Related
party transactions
In the year ended 31 March 2004, the
groups turnover with its associates and joint ventures amounted to £1
million (2003 £3 million, 2002 £15 million) and the
group purchased £60 million (2003 £69 million, 2002
£99 million) in services and products from these undertakings. Interest
for the year of £nil (2003 £nil, 2002 £1 million)
was receivable on debt due from these undertakings. The amount of debt outstanding
with these undertakings, at 31 March 2004, was £28 million (2003
£20 million). The maximum debt outstanding during the year was £43
million (2003 £92 million). As at the latest practicable date,
14 May 2004, the amount of debt outstanding was £28 million.
There
were a number of transactions during the year between the company and its subsidiary
undertakings, which are eliminated on consolidation and therefore not disclosed.
107 | Notes to the financial statements | BT Annual Report and Form 20-F 2004 |
30. Financial commitments, contingent liabilities and subsequent events
2004 | 2003 | ||||
£m | £m | ||||
Contracts placed for capital expenditure not provided in the accounts | 879 | 616 | |||
Operating lease payments payable within one year of the balance sheet date were in respect of | |||||
leases expiring: | |||||
Within one year | 8 | 11 | |||
Between one and five years | 29 | 26 | |||
After five years | 330 | 317 | |||
Total payable within one year | 367 | 354 | |||
Future minimum operating lease payments for the group at 31 March 2004 were as follows: | 2004 | ||
£m | |||
Payable in the year ending 31 March: | |||
2005 | 367 | ||
2006 | 361 | ||
2007 | 362 | ||
2008 | 367 | ||
2009 | 369 | ||
Thereafter | 9,088 | ||
Total future minimum operating lease payments | 10,914 | ||
Operating lease commitments were mainly
in respect of leases of land and buildings.
At 31 March 2004, other than disclosed below there
were no contingent liabilities or guarantees other than those arising in the
ordinary course of the groups business and on these no material losses
are anticipated. The group has insurance cover to certain limits for major
risks
on property and major claims in connection with legal liabilities arising in
the course of its operations. Otherwise, the group generally carries its own
risks.
The
group has provided guarantees relating to certain leases entered into by O2
UK Limited prior to its demerger with mmO2 on 19 November 2001, mmO2
plc has given BT a counterindemnity for these guarantees. The
maximum likely exposure is US$76 million (£41 million) as at 31 March
2004, although this could increase by a further US$582 million, (£317
million) in the event of credit default in respect of amounts used to defease future lease obligations. The
guarantee lasts until O2 UK Ltd has discharged all its obligations,
which is expected to
be when the lease ends on 30 January 2017.
The group
has guaranteed part of the bank borrowings of its joint venture Albacom SpA
under the terms of the joint ventures refinancing in the 2004 financial
year. This expires on the earlier of the loan being repaid or 31 October 2011.
The guarantee is triggered if Albacom fails to meet the repayment schedule
under
the terms of the loan and is effectively capped at €34.5 million.
The
company does not believe there are any pending legal proceedings which would
have a material adverse effect on the financial position or results of operations
of the group.
Proceedings
have been initiated in Italy against 21 defendants, including a former BT employee,
in connection with the Italian UMTS auction. Blu, in which BT held a minority
interest, participated in that auction process. The evidential hearings are
continuing, in Rome. If the proceedings are successful, BT could be held liable,
with others, for any damages. The company has concluded that it is not appropriate
to make a provision in respect of any such potential claim.
108 | Notes to the financial statements | BT Annual Report and Form 20-F 2004 |
31. Pension
costs
Background
The group continues to account
for pension costs in accordance with UK Statement of Standard Accounting Practice
No. 24 Pension Costs (SSAP 24). In addition, disclosures
have been presented in accordance with Financial Reporting Standard No. 17 Retirement
Benefits (FRS 17).
The
group offers retirement plans to its employees. The groups main scheme,
the BT Pension Scheme (BTPS), is a defined benefit scheme where the benefits
are based on employees length of service and final pensionable pay. The
BTPS is funded through a legally separate trustee administered fund. This scheme
has been closed to new entrants since 31 March 2001 and replaced by a defined
contribution scheme. Under this defined contribution scheme the profit and loss
charge represents the contribution payable by the group based upon a fixed percentage
of employees pay.
The
total pension costs of the group (including discontinued activities) expensed
within staff costs in the year was £404 million (2003 £322
million, 2002 £382 million), of which £376 million (2003
£306 million, 2002 £373 million) related to the groups
main defined benefit pension scheme, the BTPS. The increase in the pension cost
reflects the amortisation charge for the pension deficit partly offset by a
reduction in the number of active members of the BTPS and the interest credit
relating to the balance sheet prepayment. This total pension cost includes the
cost of providing enhanced pension benefits to leavers, which amounted to £1
million (2003 £60 million, 2002 £46 million). In the
year ended 31 March 2002 this profit and loss charge of £46 million was
not the full cash cost of £186 million because there was a pension fund
accounting surplus, including the provision on the balance sheet of £140
million, that was fully utilised before making a charge to the profit and loss
account.
The
pension cost applicable to the groups main defined contribution schemes
in the year ended 31 March 2004 was £7 million, (2003 £4
million, 2002 £5 million), and £0.7 million (2003
£0.4 million, 2002 £0.3 million) of contributions to the
schemes were outstanding at 31 March 2004.
The
group occupies four properties owned by the scheme on which an annual rental
of £3 million is payable. 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 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 | |
A triennial valuation is carried out for the independent scheme trustees by a professionally qualified independent actuary, using the projected unit method. The purpose of the valuation is to design a funding plan to ensure that present and future contributions should be sufficient to meet future liabilities. The triennial valuation as at 31 December 2002 forms the basis of determining the groups pension fund contributions for the year ending 31 March 2004 and future periods until the next valuation is completed. The funding valuation is performed at 31 December because 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 method and discounted at the estimated rate of return reflecting the assets of the scheme. | |
The last three triennial valuations were determined using the following long-term assumptions: |
Real rates (per annum) | Nominal rates (per annum) | ||||||||||||
2002 | 1999 | 1996 | 2002 | 1999 | 1996 | ||||||||
valuation | valuation | valuation | valuation | valuation | valuation | ||||||||
% | % | % | % | % | % | ||||||||
Return on existing assets, relative to market values | 4.52 | 2.38 | 3.80 | 7.13 | 5.45 | 7.95 | |||||||
(after allowing for an annual increase in dividends of) | 1.00 | 1.00 | 0.75 | 3.53 | 4.03 | 4.78 | |||||||
Return on future investments | 4.00 | 4.00 | 4.25 | 6.60 | 7.12 | 8.42 | |||||||
Average increase in retail price index | | | | 2.50 | 3.00 | 4.00 | |||||||
Average future increases in wages and salaries | 1.50 | * | 1.75 | 1.75 | 4.04 | * | 4.80 | 5.82 | |||||
Average increase in pensions | | | | 2.50 | 3.00 | 3.75-4.00 | |||||||
* | There is a short term reduction in the real salary growth assumption to 1.25% for the first three years. |
The mortality assumption reflects improvements in life expectancy since the 1999 valuation and incorporates further future improvements.
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 following effects on the
funding deficit:
Impact on funding deficit | ||||
Increase |
Decrease |
|||
£bn |
£bn |
|||
0.25 percentage point change in: | ||||
Investment return | (0.9 | ) | 0.9 | |
Wage and salary increases | 0.2 | (0.2 | ) | |
An additional year of life expectancy would
result in a £0.7 billion increase in the deficit.
At
31 December 2002, the assets of the BTPS had a market value of £22.8 billion
(1999 £29.7 billion) and were sufficient to cover 91.6% (1999 96.8%)
of the benefits accrued by that date, after allowing for expected future increases
in wages and salaries but not taking into account the costs of providing incremental
pension benefits for employees leaving under release
schemes since that date. This represents a funding deficit of £2.1
billion compared to £1.0 billion at 31 December 1999. The funding
valuation uses conservative assumptions whereas, had the valuation been
based on the actuarys view of the median estimate basis,
the funding deficit would have been reduced to £0.4 billion. Although
the market value of equity investments had fallen, the investment income
and contributions received by the scheme exceeded the benefits paid by £0.3
billion in the year ended 31 December 2002. As a result of the triennial
funding valuation the group agreed to make employers contributions
at a rate of 12.2% of pensionable pay from April 2003 and annual deficiency
payments of £232 million. This
compared to the employers contribution rate of 11.6% and annual deficiency
payments of £200 million that were determined under the 1999 funding
valuation. In the year ended 31 March 2004, the group made regular contributions
of
£284 million (2003 £278 million, 2002 £303 million)
and additional special contributions for enhanced pension benefits to leavers
in the year ended 31 December 2002 of £130 million in the 2004 financial
year (2003 £129 million, 2002 £400 million) and deficiency
contributions of £612 million (2003 £200 million, 2002 £200
million) which includes the early payment of £380
million scheduled for payment in subsequent years.
Under the terms of the trust deed that governs the BTPS the group is required to have a funding plan that should address the deficit over a maximum period of 20 years whilst the agreed
funding plan addresses the deficit over a period of 15 years. The group will continue to make deficiency payments until the deficit is made good.
The
BTPS was closed to new entrants on 31 March 2001 and the age profile of active
members will consequently increase. Under the projected unit method, the current
service cost, as a
proportion of the active members pensionable salaries, is expected to increase
as the members of the scheme approach retirement. Despite the scheme being closed
to new entrants, the projected payment profile extends over more than 60
years.
SSAP 24 accounting
valuation The SSAP 24 valuation is broadly on the following basis |
|
scheme assets are valued at market value; and | |
scheme liabilities are measured using the projected unit method and discounted at the estimated rate of return reflecting the assets of the scheme. |
The pension costs for the 2003 and 2002 financial years were based on the SSAP 24 valuation at 31 March 2000. At 31 March 2000 there was a SSAP 24 deficit of £0.2 billion and the regular cost for the 2003 and 2002 financial years was 11.6% of pensionable salaries. The SSAP 24 valuation at 31 March 2000 was based on the same assumptions as the December 1999 funding valuation, with the exception that, over the long term, it has been assumed that the return on the existing assets of the scheme, relative to market values, would be a nominal 5.6% per annum which equates to a real return of 2.5% per annum. | |
The pension cost for the 2004 financial year was based upon the SSAP 24 valuation at 31 March 2003. At 31 March 2003 there was a SSAP 24 deficit of £1.4 billion, before taking account of the balance sheet prepayment and the regular cost is 11.3% of pensionable salaries. The SSAP 24 valuation at 31 March 2003 is based on the 31 December 2002 funding valuation rolled forward, and uses the same assumptions as set out above, with the following exceptions: | |
return on existing assets is assumed to be a nominal 7.1% per annum, which equates to a real return of 4.7%; | |
average increase in retail price index is assumed to be 2.25% per annum; and | |
the average future increases in wages and salaries is assumed to include a short term reduction in the real salary growth assumption to 0.75% for the first three years, before returning to 1.5%. |
110 | Notes to the financial statements | BT Annual Report and Form 20-F 2004 |
31. Pension
costs continued
The
cumulative difference since the adoption of SSAP 24 between the cash contributions
paid by the group to the pension scheme and the profit and loss charge is
reflected on the balance sheet. The cumulative cash contributions exceed
the profit and loss charge and the resulting difference is shown as a prepayment
on the balance sheet. At 31 March 2004 the prepayment was £1,172 million (2003 £630
million) with the increase being principally due to the additional special
and deficiency contributions in the year.
The pension charge to the profit and loss account will also include the amortisation of the combined pension fund position and pension prepayment over the average remaining service lives
of scheme members, which amounts to 13 years, and the cost of enhanced pension benefits provided to leavers.
FRS 17 Retirement
benefits The group continues to account for pensions in accordance with SSAP 24. Full implementation of FRS 17 has been deferred by the Accounting Standards Board and would apply to the group for the 2006 financial year. However, in the 2006 financial year the group will adopt International Financial Reporting Standards (IFRS). The requirements for disclosure under FRS 17 remain in force between its issue and adoption of IFRS, and the required information is set out below. FRS 17 specifies how key assumptions should be derived and applied. These assumptions are often different to the assumptions adopted by the pension scheme actuary and 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 of return on high quality corporate bonds of equivalent term to the liability; and | |
movement in the scheme surplus/deficit is split between operating charges and financing items in the profit and loss account and, in the statement of total recognised gains and losses, actuarial gains and losses. The financial assumptions used to calculate the BTPS liabilities under FRS 17 at 31 March 2004 are: |
Real rates (per annum) |
Nominal rates (per annum) |
||||||||||||
2004 | 2003 | 2002 | 2004 | 2003 | 2002 | ||||||||
% | % | % | % | % | % | ||||||||
Average future increases in wages and salaries | 1.00 | * | 1.50 | * | 1.50 | 3.63 | * | 3.78 | * | 4.04 | |||
Average increase in pensions in payment and deferred pensions | | | | 2.60 | 2.25 | 2.50 | |||||||
Rate used to discount scheme liabilities | 2.83 | 3.08 | 3.41 | 5.50 | 5.40 | 6.00 | |||||||
Inflation average increase in retail price index | | | | 2.60 | 2.25 | 2.50 | |||||||
* | There is a short term reduction in the real salary growth assumption to 0.75% for the first two years (2003 three years). |
The expected nominal rate of return and fair values of the assets of the BTPS at 31 March were:
31 March 2004 | 31 March 2003 | 31 March 2002 | ||||||||||||||||
Expected long- | Expected long- | Expected long- | ||||||||||||||||
term rate of | term rate of | term rate of | ||||||||||||||||
return | return | return | ||||||||||||||||
(per annum) | Asset fair value | (per annum) | Asset fair value | (per annum) | Asset fair value | |||||||||||||
% | £bn | % | % | £bn | % | % | £bn | % | ||||||||||
UK equities | 8.2 | 9.2 | 34 | 8.2 | 7.4 | 34 | 8.0 | 11.1 | 41 | |||||||||
Non-UK equities | 8.2 | 8.1 | 30 | 8.2 | 6.4 | 30 | 8.0 | 8.1 | 30 | |||||||||
Fixed-interest securities | 5.3 | 4.0 | 15 | 5.2 | 3.1 | 14 | 5.6 | 3.0 | 11 | |||||||||
Index-linked securities | 4.4 | 2.3 | 9 | 4.3 | 1.7 | 8 | 4.8 | 1.9 | 7 | |||||||||
Property | 6.8 | 3.3 | 12 | 7.0 | 3.3 | 15 | 7.0 | 2.8 | 10 | |||||||||
Cash and other | 4.0 | | | 4.0 | (0.4 | ) | (1 | ) | 4.5 | 0.2 | 1 | |||||||
Total | 7.3 | 26.9 | 100 | 7.4 | 21.5 | 100 | 7.4 | 27.1 | 100 | |||||||||
111 | Notes to the financial 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 under FRS 17.
The net pension deficit set out below under FRS 17 is as if this standard was fully applied. The fair value of the BTPS assets, the present value of the BTPS liabilities based on the
financial assumptions set out above, and the resulting deficit, together with those of unfunded pension liabilities at 31 March 2004 and 31 March 2003 are shown below. The fair value of the BTPS assets is not intended to be realised in the short
term and may be subject to significant change before it is realised. The present value of the liabilities is derived from long-term cash flow projections and is thus inherently uncertain.
31 March 2004 | 31 March 2003 | |||||||||||
Present value | Present value | |||||||||||
Assets | of liabilities | Deficit | Assets | of liabilities | Deficit | |||||||
£m | £m | £m | £m | £m | £m | |||||||
BTPS | 26,900 | 32,000 | 5,100 | 21,500 | 30,500 | 9,000 | ||||||
Other liabilities | | 36 | 36 | | 33 | 33 | ||||||
Total deficit | 5,136 | 9,033 | ||||||||||
Deferred tax asset at 30% | (1,541 | ) | (2,710 | ) | ||||||||
Net pension liability | 3,595 | 6,323 | ||||||||||
If the above amounts had been recognised in the financial statements, the groups net assets and profit and loss reserve at 31 March would be as follows:
2004 | 2003 | |||
£m | £m | |||
Net assets (deficiency) | ||||
Net assets as reported | 3,094 | 2,642 | ||
SSAP 24 pension prepayment (net of deferred tax) | (820 | ) | (441 | ) |
SSAP 24 pension provision (net of deferred tax) | 25 | 23 | ||
Net pension liability under FRS 17 | (3,595 | ) | (6,323 |
) |
Net deficiency including net pension liability | (1,296 | ) | (4,099 | ) |
2004 | 2003 | |||
£m | £m | |||
Profit and loss reserve | ||||
Profit and loss reserve, as reported | 1,660 | 1,208 | ||
SSAP 24 pension prepayment (net of deferred tax) | (820 | ) | (441 | ) |
SSAP 24 pension provision (net of deferred tax) | 25 | 23 | ||
Net pension liability under FRS 17 | (3,595 | ) | (6,323 | ) |
Profit and loss reserve including net pension liability | (2,730 | ) | (5,533 | ) |
On the basis of the above assumptions and in compliance with FRS 17 the amounts that would have been charged to the consolidated profit and loss account and the statement of total recognised gains and losses for the year ended 31 March 2004 would be as follows:
2004 | 2003 | |||
£m | £m | |||
Analysis of amounts that would be charged to operating profit on an FRS 17 basis | ||||
Current service cost | 438 | 444 | ||
Past service cost | 1 | 60 | ||
Total operating charge | 439 | 504 | ||
Amount that would be charged (credited) to net interest payable on an FRS 17 basis | ||||
Expected return on pension scheme assets | (1,560 | ) | (1,983 | ) |
Interest on pension scheme liabilities | 1,615 | 1,694 | ||
Net finance expense (return) | 55 | (289 | ) | |
Amount that would be charged to profit before taxation on an FRS 17 basis | 494 | 215 | ||
Analysis of the amount that would be recognised in the consolidated statement of total | ||||
recognised gains and losses on an FRS 17 basis | ||||
Actual return less expected return on pension scheme assets | 4,130 | (6,995 | ) | |
Experience (losses) gains arising on pension scheme liabilities | (290 | ) | 1,056 | |
Changes in assumptions underlying the present value of the pension scheme liabilities | (500 | ) | (1,660 | ) |
Actuarial gain (loss) recognised | 3,340 | (7,599 | ) | |
112 | Notes to the financial statements | BT Annual Report and Form 20-F 2004 |
31. Pension costs continued
The net pension cost of £494 million for the year ended 31 March 2004 (2003 £215 million) under FRS 17 is £90 million higher (2003 £107
million lower) than the profit and loss
charge recognised under SSAP 24.
The movements
in the net pension liability, on an FRS 17 basis, during the year were:
2004 | 2003 | |||
£m | £m | |||
Deficit at 1 April | 9,033 | 1,830 | ||
Current service cost | 438 | 444 | ||
Contributions | (1,051 | ) | (611 | ) |
Past service costs | 1 | 60 | ||
Other finance expense (income) | 55 | (289 | ) | |
Actuarial (gain) loss recognised | (3,340 | ) | 7,599 | |
Deficit at 31 March | 5,136 | 9,033 | ||
Net pension liability, post tax, at 31 March | 3,595 | 6,323 | ||
The history of experience gains (losses) which would have been recognised under FRS 17 were
2004 | 2003 | |||
Difference between expected and actual return on scheme assets: | ||||
Amount (£m) | 4,130 | (6,995 | ) | |
Percentage of scheme assets | 15.4% | 32.5% | ||
Experience gains and losses on scheme liabilities: | ||||
Amount (£m) | (290 | ) | 1,056 | |
Percentage of the present value of scheme liabilities | 0.9% | 3.5% | ||
Total amount recognised in statement of total recognised gains and losses: | ||||
Amount (£m) | 3,340 | (7,599 | ) | |
Percentage of the present value of scheme liabilities | 10.4% | 24.9% | ||
32. Directors emoluments
The emoluments of the directors for the year ended 31 March 2004 and the benefits received under the long-term incentive plans were, in summary, as follows:
2004 | 2003 | 2002 | ||||
£000 | £000 | £000 | ||||
Salaries | 3,150 | 3,212 | 2,223 | |||
Performance-related and special bonus | 2,074 | 2,309 | 1,691 | |||
Deferred bonus in shares | 1,037 | 1,484 | 492 | |||
Other benefits | 467 | 644 | 160 | |||
6,728 | 7,649 | 4,566 | ||||
Payments to non-executive directors | 337 | 294 | 414 | |||
Total emoluments | 7,065 | 7,943 | 4,980 | |||
Gain on the exercise of share optionsa | | | 75 | |||
Value of shares vested under the Executive Share Plan and Retention Share Plan | 412 | 411 | 483 | |||
a | The 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 71.
113 | Notes to the financial statements | BT Annual Report and Form 20-F 2004 |
33. People employed
2004 | 2003 | 2002 | ||||||||||
Year end | Average | Year end | Average | Year end | Average | |||||||
000 | 000 | 000 | 000 | 000 | 000 | |||||||
Number of employees in the group: | ||||||||||||
UK | 91.6 | 94.8 | 96.3 | 98.4 | 100.1 | 104.9 | ||||||
Non-UK | 8.3 | 8.3 | 8.4 | 9.0 | 8.5 | 9.7 | ||||||
Total continuing activities | 99.9 | 103.1 | 104.7 | 107.4 | 108.6 | 114.6 | ||||||
UK | | | | | | 5.8 | ||||||
Non-UK | | | | | | 4.4 | ||||||
Total discontinued activities | | | | | | 10.2 | ||||||
Total employees | 99.9 | 103.1 | 104.7 | 107.4 | 108.6 | 124.8 | ||||||
34. Employee
share schemes
The company has a share ownership scheme used for employee share allocations (profit sharing), an employee share investment plan, savings-related share option schemes for its employees and those of participating
subsidiaries, further share option schemes for selected group employees and an employee stock purchase plan for employees in the United States. It also has several share plans for executives.
Share option schemes
The major share option scheme, the BT Group Employee Sharesave Scheme, is savings related and the share options are normally exercisable on completion of a three or five year Save As You Earn contract. A similar
savings related scheme exists for group employees based outside the UK.
Following the scheme of arrangement and demerger in November 2001, all options under the savings related schemes became exercisable for a period of six months. On expiry of this period,
these options lapsed to the extent to which they had not been exercised. Shortly before the scheme of arrangement, 57 million shares were allotted to a special purpose trust to satisfy options which were likely to be exercised during that six month
period.
Participants
in the BT Share Option Scheme, the BT US Stock Option Plan, the BT Worldwide
Share
Option Scheme, and the BT Global Share Option Plan (the Executive Option Plans)
were given the opportunity to (i) conditionally on the scheme of arrangement
being sanctioned by the Court, release their options over British Telecommunications
plc shares in consideration for the grant of options in their employers
new holding
company (BT Group plc or mmO2 plc);
or (ii) if their options were already exercisable, exercise their options over
ordinary shares irrespective of whether
the scheme of arrangement was sanctioned by the Court; or (iii) if their options
were not already exercisable, conditionally on the scheme of arrangement being
sanctioned by the Court, exercise their options immediately following that time
but prior to the reduction of BT Groups share capital.
To the extent that they had not already been exercised, these options lapsed on 16 November 2001, the effective date of the scheme of arrangement.
The
BT Group Legacy Option Plan was operated on 17 December 2001 following the scheme
of arrangement
and demerger in November 2001. Replacement unapproved options over BT Group shares
were granted to all participants in the Executive Option Plans who had released
their options over British Telecommunications plc shares. The value of the replacement
options was determined by averaging the combined prices of BT Group plc and mmO2 plc
shares over the 20 dealing days following the demerger on 19 November 2001. This
resulted in a factor of 1.3198 being applied to the former option over British
Telecommunications plc shares in order to give the number of BT Group shares
under the 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, BTs share option plans ceased to operate
and were replaced by similar BT Group Employee Sharesave schemes and the BT Group
Global Share
Option Plan.
In the 2004 financial year, options over 55 million shares were granted under the BT Group Share Option Plan. The options will be exercisable subject to continued employment and meeting
corporate performance targets, on the third anniversary of the date of grant. A second award of options over 64 million shares was also granted. This second award will vest in three equal tranches, on each of the first three anniversaries of the
date of grant, subject to continued employment.
114 | Notes to the financial statements | BT Annual Report and Form 20-F 2004 |
34. Employee share schemes continued
Options outstanding under these share option schemes at 31 March 2004 and 2003, together with their exercise prices and dates, were as follows:
2004 | 2003 | |||||||
Option price | 2004 | Option price | 2003 | |||||
Normal dates of exercise | per share | millions | per share | millions | ||||
BT Group Employee Sharesave schemes | ||||||||
2005 | 218p255p | 26 | 218p255p | 51 | ||||
2006 | 154p173p | 30 | | | ||||
2007 | 218p227p | 54 | 218p227p | 113 | ||||
2008 | 154p | 123 | | | ||||
Total | 233 | 164 | ||||||
BT Group Legacy Option Plana | ||||||||
1994-2009 | | | 277p727p | 2 | ||||
2001-2011 | 318p602p | 16 | 318p602p | 17 | ||||
Total | 16 | 19 | ||||||
BT Group Global Share Option Plan | ||||||||
2004-2014 | 176p199.5p | 63 | | | ||||
2005-2012 | 163p263p | 61 | 163p263p | 66 | ||||
2006-2014 | 176p199.5p | 54 | | | ||||
Total | 178 | 66 | ||||||
Total outstanding options | 427 | 249 | ||||||
a | 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 model. The following weighted average assumptions
were used in that model: an expected life extending one month later than the
first exercise date; estimated annualised dividend yield of approximately 5%
(2003 5%, 2002 5%); risk free interest rates of approximately 4% (2003 5%,
2002 6%); and expected volatility of approximately 25% (2003 40%, 2002 34%).
The
weighted average fair value of the share options granted in the year ended 31
March 2004 was 42p (2003 55p, 2002 55p) for options exercisable three years after the date
of grant and 51p (2003 72p, 2002 55p) for options exercisable five years after the date of grant. The weighted average fair value of options granted under the BT Group Global Share Option Plan has been estimated as 41p. The weighted
average fair value of options granted under the Special Incentive Award has been estimated as 42p. The total value of share options granted by BT in the year ended 31 March 2004 was £22 million (2003 £41 million, 2002
£88 million).
In
accordance with UK accounting practices, no compensation expense is recognised
for the fair value of options granted where the exercise price equals the market
price at date of grant or options granted under approved Sharesave schemes. See
United States Generally Accepted Accounting Principles IV Accounting for
share options for the treatment under US GAAP.
115 | Notes to the financial statements | BT Annual Report and Form 20-F 2004 |
34. Employee
share schemes continued
Options granted, exercised and
lapsed under these share option schemes during the years ended 31 March 2002,
2003 and 2004 and options exercisable at 31 March 2002, 2003 and 2004 were as
follows:
Savings | a | Savings | b | Executive | Weighted | |||||||
related | related | option | Exercise | average | ||||||||
schemes | schemes | plans | Total | price | exercise | |||||||
millions | millions | millions | millions | range | price | |||||||
Outstanding, 31 March 2002 | 160 | 92 | 24 | 276 | 218p852p | 448p | ||||||
Granted | 45 | | 65 | 110 | 168p255p | 201p | ||||||
Exercised | | (8 | ) | | (8 | ) | 240p332p | 321p | ||||
Lapsed | (41 | ) | (84 | ) | (4 | ) | (129 | ) | 187p852p | 432p | ||
Outstanding, 31 March 2003 | 164 | | 85 | 249 | 163p727p | 231p | ||||||
Granted | 165 | | 119 | 284 | 154p199.5p | 175p | ||||||
Lapsed | (96 | ) | | (10 | ) | (106 | ) | 154p716p | 220p | |||
Outstanding, 31 March 2004 | 233 | | 194 | 427 | 154p727p | 196p | ||||||
Exercisable, 31 March 2002 | | 47 | 7 | 54 | 218p852p | 395p | ||||||
Exercisable, 31 March 2003 | | | 11 | 11 | 255p727p | 491p | ||||||
Exercisable, 31 March 2004 | | | 13 | 13 | 255p727p | 476p | ||||||
a | The BT Group Employee Sharesave schemes. |
b | The BT Employee Sharesave schemes. |
Incentive Share Plan and Retention
Share Plan
The BT Incentive Share
Plan (ISP) and the BT Retention Share Plan (RSP) were introduced for employees
of the group in 2000. Under the plans, company shares are acquired by an employee
share ownership trust and are conditionally awarded to participants. Under the
ISP participants are normally only entitled to these shares in full at the end
of a three-year period if the company has met the relevant pre-determined corporate
performance measure and if the participants are still employed by the group.
If the company has exceeded the pre-determined corporate performance measure
the participants may be awarded up to double the shares conditionally awarded.
The corporate performance measure is BTs 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 the beginning
of the relevant performance period. Awards made under the ISP in 2000 and 2001
did not vest as the company did not meet the corporate performance measure.
Under the RSP the length of retention period before awards vest is flexible.
Awards may vest in annual tranches. The shares are transferred at the end of
a specified period, only if the individual is still employed by the group. During
the 2004 financial year 720,472 (2003 374,039) shares vested in 7 (2003
11) participants in the RSP.
Executive Share Plan and Deferred
Bonus Plan
The BT Executive Share
Plan (ESP) was introduced for employees of the group in 1994. Under the ESP,
company shares are acquired by an employee share ownership trust and are conditionally
awarded to participants. Participants are only entitled to these shares in full
at the end of a five-year period under the ESP if, at the end of the period,
the company has met the relevant pre-determined corporate performance measure.
Awards of shares were granted in each of the years from 1994 to 1999 under the
ESP.
The
corporate performance measure is BTs total shareholder return (TSR) measure
against those top 100 companies listed on the London Stock Exchange, as rated
by the FTSE 100 index, at the beginning of the relevant performance period.
The
sixth five-year performance cycle of the ESP ended on 31 March 2004 and on the
basis of the corporate performance measure, the companys Total Shareholder
Return (TSR) target relative to other companies in the FTSE 100, no shares
vested.
The fifth five-year performance cycle of the ESP ended on 31 March 2003 and
on the basis of the corporate performance measure, no shares vested. The fourth
five-year performance cycle of the ESP ended on 31 July 2002 and on the basis
of the corporate performance measure, 32.5% of the shares vested on 1 August
2002 in 65 participants and 1.0 million shares were transferred to those participants.
116 | Notes to 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 trust and transferred to participants at the end of three years if
he or she has continued to be employed by the group throughout that period.
On 1 August 2003, 653,899 shares (1 August 2002 657,592) were transferred
to 225 participants (1 August 2002 223) at the end of the three-year
deferred period.
At
31 March 2004, 30.5 million shares (2003 31.7 million shares) in the
company were held in trust for employee share schemes, of which no shares (2003
15.5 million shares) were held for the ISP, 3.0 million shares (2003
2.9 million shares) were held for the RSP, no shares (2003 2.3
million shares) were held for the ESP and 6.5 million shares (2003 4.2
million shares) were held for the DBP. Dividends or dividend equivalents earned
on the shares during the conditional periods are reinvested in company shares
for the potential benefit of the participants.
Additional
information relating to the plans is as follows:
ISP | RSP | ESP | DBP | Total | ||||||
Year ended 31 March 2004 | £m | £m | £m | £m | £m | |||||
Value of range of possible future transfers: nil to | | 5.3 | | 11.4 | 16.7 | |||||
Provision for
the costs of the plans charged to the profit and loss account in year |
| 7.8 | | 6.7 | 14.5 | |||||
Nominal value of shares held in trust | | 0.2 | | 0.3 | 0.5 | |||||
Market value of shares held in trust | | 5.3 | | 11.4 | 16.7 | |||||
ISP | RSP | ESP | DBP | Total | ||||||
Year ended 31 March 2003 | £m | £m | £m | £m | £m | |||||
Value of range of possible future transfers: nil to | 24.3 | 4.6 | 3.6 | 6.7 | 39.2 | |||||
Provision
for the costs of the plans charged (credited) to the profit and loss account in year |
| (0.2 | ) | (0.2 | ) | 5.8 | 5.4 | |||
Nominal value of shares held in trust | 0.8 | 0.1 | 0.1 | 0.2 | 1.2 | |||||
Market value of shares held in trust | 24.3 | 4.6 | 3.6 | 6.7 | 39.2 | |||||
Of the total BT Group plc
shares held, 21.0 million shares were held at 31 March 2004 in trust for
future awards under
employee share schemes. These shares had a nominal value of £1 million
and a market value of £37.2 million at 31 March 2004.
The
values of possible future transfers of shares under the plans were based on
the BT Group plc share price at 31 March 2004 of 177p (2003 157p). The
provisions for the costs of the ISP, RSP and ESP were based on best estimates
of the companys performance over the plans conditional periods,
relating to those portions of the plan conditional periods from commencement
up to the financial year end.
Employee Share Investment
Plan
From December 2001 the
BT Group Employee Share Investment Plan (ESIP) was in operation. The ESIP, which
has been approved by the Inland Revenue, gives UK employees an opportunity to
purchase shares (partnership shares) monthly out of pre-tax salary up to a maximum
value of £1,500 per year. During the 2004 financial year, 6.0 million
shares (2003 5.3 million shares) were purchased by the Trustee of the
ESIP on behalf of 13,974 (2003 12,092) employees at a total cost of £11.1
million (2003 £10.6 million). The free shares element of the ESIP
allows BT to provide free shares to UK employees which are held in trust for
at least three years. A phantom plan, which delivers cash awards equivalent
to the value of the free shares, operates for employees outside the UK. In 2004,
1% of pre-tax profits, amounting to £20 million, was set aside for the
ESIP and the phantom plan for employees outside the UK (2003 £36
million). The allocation of this sum was subject to two performance targets,
one of increasing earnings per share by 15% and the other of reducing customer
dissatisfaction by 25%, with only the first target being achieved. The ESIP
replaced the BT Employee Share Ownership Scheme which operated for employee
profit sharing until 2001.
Employee Stock Purchase Plan
The BT Group Employee Stock Purchase
Plan (ESPP) for employees in the US enables participants to purchase ADSs quarterly
at a price (the Base Option Price) which is 85% of the market price of an ADS
at the start of the offer (and in the case of employees who have joined the
ESPP after the start of the offer, 85% of the market price on the date of joining,
whichever is higher). Up to 15 May 2004, 69,164 new shares have been issued
and 226,218 shares have been transferred to participants out of treasury under
the ESPP. As the ADS price was less than the Base Option Price of US$31.72 from
July 2002 to April 2003, the ESPP was suspended in accordance with the rules
of the ESPP from April 2003 until the end of the first offer in December 2003.
A second offer was launched in December 2003, with a Base Option Price of US$25.61
and will run until December 2004.
117 | Notes to the financial statements | BT Annual Report and Form 20-F 2004 |
35. Auditors
The auditors remuneration
for the year ended 31 March 2004 for the group was £3,790,000 (2003
£2,943,000, 2002 £2,702,000).
The audit fees payable to the companys auditors, PricewaterhouseCoopers
LLP, for the company and UK subsidiary undertakings statutory accounts
were £2,482,000 (2003 £1,910,000, 2002 £1,656,000).
The audit fee of the company was £32,000 (2003 £31,000, 2002
£44,000). The following fees for audit and non-audit services were
paid or are payable to the companys auditors, PricewaterhouseCoopers LLP,
for the years ended 31 March 2004, 31 March 2003 and 31 March 2002:
2004 | 2003 | 2002 | ||||
£000 | £000 | £000 | ||||
Audit services | ||||||
Statutory audit | 3,767 | 2,916 | 2,649 | |||
Regulatory audit | 1,950 | 1,690 | 1,142 | |||
5,717 | 4,606 | 3,791 | ||||
Further assurance services | ||||||
Rights issue, restructuring and demerger projects | | | 14,161 | |||
Corporate finance advice | 462 | 265 | 982 | |||
Other | 82 | 829 | 1,960 | |||
544 | 1,094 | 17,103 | ||||
Tax services | 2,656 | 2,245 | 1,883 | |||
Other services | ||||||
Systems advice | | 3,765 | 2,565 | |||
Other | 110 | 766 | 1,537 | |||
110 | 4,531 | 4,102 | ||||
Total | 9,027 | 12,476 | 26,879 | |||
Total fees paid or payable
to PricewaterhouseCoopers LLP in the UK for non audit services in the year
ended 31 March 2004 were £4,545,000
(2003 £8,980,000, 2002 £22,683,000).
In
order to maintain the independence of the external auditors, the Board has determined
policies as to what non audit services can be provided by the companys
external auditors and the approval processes related to them. Under those policies
work of a consultancy nature will not be offered to the external auditors unless
there are clear efficiencies and value added benefits to the company.
Under
the terms of BTs main licence the group is required to publish audited
regulatory financial statements. The fees for regulatory work principally reflect
the audit fees associated with those regulatory financial statements. The fees
for tax services include tax compliance and tax advisory services. The fees
for systems advice in the year ended 31 March 2003 related to advisory services
provided in connection with the implementation of certain billing systems.
These
services, which were provided by PwC Consulting, the consulting business of
PricewaterhouseCoopers that was sold to IBM in October 2002, commenced in 2002
and were completed in 2003.
36. Financial
instruments and risk management
The group holds or issues
financial instruments mainly to finance its operations; for the temporary
investment
of short-term funds; and to manage the currency and interest rate risks arising
from its operations and from its sources of finance. In addition, various financial
instruments for example trade debtors and trade creditors arise
directly from the groups operations.
The
group finances its operations primarily by a mixture of issued share capital,
retained profits, deferred taxation, long-term loans and short-term loans,
principally
by issuing commercial paper and medium-term notes. 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 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 are prescribed
in group treasury policies with limits on the exposure to any one organisation.
Short-term investing in financial instruments is undertaken on behalf of the
group by substantial external fund managers who are limited to dealing in debt
instruments and certain defined derivative instruments and are given strict
guidelines on credit, diversification and maturity profiles.
118 | Notes to the financial statements | BT Annual Report and Form 20-F 2004 |
36. Financial instruments
and risk management continued
During
the year ended 31 March 2004, the groups net debt reduced from £9.6 billion to £8.4 billion due to working capital inflows. During the 2004 financial year, the group restructured some of its
swaps portfolio to mitigate credit risk to certain counter parties. As a result, the group terminated £7 billion of cross-currency interest rate swaps and replaced these with new swaps which had the same economic hedging effect. This resulted
in the group paying £445 million in reducing gross debt and receiving £420 million of interest. The interest receipt has been included in deferred income and will be amortised to the profit and loss account over the term of the
underlying debt. The groups fixed:floating interest rate profile is 76:24
at 31 March 2004.
During
the year ended 31 March 2003, the groups net debt reduced from £13.7 billion to £9.6 billion. £2.6 billion was realised from the disposal of the groups
interest in Cegetel Groupe SA in the year, and the group has closed out £2.6 billion of associated fixed interest rate swaps. The groups
fixed:floating interest rate profile therefore remained at 88:12 at 31 March
2003.
During
the year ended 31 March 2002, net debt was reduced from £27.9 billion to £13.7 billion mainly by the groups
rights issue, disposal of its Yell business, its Japanese and Spanish interests,
and the property sale and leaseback transaction. The proceeds of the rights issue
and sale of assets were applied mainly in reducing short-term borrowings. The
group repaid substantially all of its medium-term notes
and commercial paper in that year.
As a result of the demerger of the mmO2 business including its European operations,
the group swapped an
additional €7
billion into floating rate sterling debt. This, in conjunction with the novation
of £1 billion fixed rate swaps to Telereal for
the property transaction, enabled the group to maintain its fixed:floating ratio
at approximately 88:12 at 31 March 2002.
The
group uses financial instruments to hedge some of its currency exposures arising
from its non-UK assets, liabilities and forward purchase commitments. The group
also hedges some of its interest liabilities. The financial instruments used
comprise borrowings in foreign currencies, forward foreign currency exchange
contracts, gilt locks and interest and currency swaps.
There
has been no change in the nature of the groups risk profile between 31
March 2004 and the date of these financial statements.
The
notional amounts of derivatives summarised below do not necessarily represent
amounts exchanged by the parties and, thus, are not necessarily a measure of
the exposure of the group through its use of derivatives. The amounts exchanged
are calculated on the notional amounts and other terms of the derivatives which
relate to interest and exchange rates.
(a) Interest rate risk management
The
group has entered into interest rate swap agreements with banks and other institutions
to vary the amounts and periods for which interest rates on borrowings are fixed.
Under interest rate swaps, the group agrees with other parties to exchange, at
specified intervals, the differences between fixed rate and floating rate interest
amounts calculated by reference to an agreed notional principal amount. Under
gilt locks, forward sales of UK government long-dated
treasury stock were entered into for periods of up to one year. This hedge effectively
fixed in the interest on part of the groups then future borrowings, all
of which have now been taken on.
At
31 March 2004, the group had outstanding interest rate swap agreements having
a total notional principal amount of £5,210 million (2003 £5,170
million).
(b) Foreign exchange risk management
Cross
currency swaps and forward foreign exchange contracts have been entered into
to reduce the foreign currency exposure on the groups operations and the groups
net assets. The group also enters into forward foreign exchange contracts to
hedge investments, interest expense and purchase and sale commitments denominated
in foreign currencies (principally US dollars and the euro). The remaining terms
of the currency swaps are up to 30 years and the
terms of currency forward exchange contracts are typically less than one year.
The
purpose of the groups foreign currency hedging activities is to protect
the group from the risk that the eventual net inflows and net outflows will be
adversely affected by
changes in exchange rates.
At
31 March 2004, the group had outstanding foreign currency swap agreements and
forward exchange contracts having a total notional principal amount of £11,367 million (2003
£14,545 million).
The fair
values of forward foreign currency contracts at 31 March 2004 were £301
million (2003 £673 million) for purchases of currency and £1,223 million (2003 £1,041
million) for sales of currency. These fair values have been estimated by calculating
their present 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 purchase and sale commitments, and in addition had deferred realised net gains of £3 million (2003 £10
million). These are included in the profit and loss account as part of the hedged
purchase or sale transaction when it is recognised, or as gains or losses when
a hedged transaction is no longer expected to occur.
119 Notes to the financial statements | BT Annual Report and Form 20-F 2004 |
36. Financial
instruments and risk management continued
(c) Concentrations of credit risk and credit exposures
of financial instruments
The group
considers that it is not exposed to major concentrations of credit risk. The
group, however, is exposed to credit-related losses in the event of non-performance
by counterparties to financial instruments, but does not expect any counterparties
to fail to meet their obligations. The group limits the amount of credit exposure
to any one counterparty. The group does not normally see the need to seek collateral
or
other security.
The
long-term debt instruments issued in December 2000 and February 2001 both contained
covenants that if the group credit rating was downgraded below A3 in the case
of Moodys or below A minus in the case of S&P, additional interest
would accrue from the next interest coupon period at the rate of 0.25 percentage
points for each ratings category adjustment by each ratings agency. In May 2001,
Moodys downgraded BTs credit rating to Baa1, which increased BTs
interest charge by approximately £32 million per annum. BTs current
credit rating from S&P is A minus. Based upon the total debt of £9
billion
outstanding on these instruments at31
March 2004, BTs annual interest charge would increase by approximately £45
million if BTs credit ratings were to be downgraded by one credit rating
category by both agencies below a long-term debt rating of Baa1/A minus. If BTs
credit rating with Moodys was to be upgraded by one credit rating category
the annual interest charge would be reduced by approximately £23
million.
(d) Fair value of financial instruments
The
following table shows the carrying amounts and fair values of the groups
financial instruments at 31 March 2004 and 2003. The carrying amounts are
included in the group balance sheet under the indicated headings, with the
exception of derivative amounts, which are included in debtors or other creditors
or as part of net debt as appropriate. The fair values of the financial instruments
are the amount at which the instruments could be exchanged in a current transaction
between willing parties, other than in forced or liquidation sale.
Carrying amount | Fair value | |||||||||
2004 | 2003 | 2004 | 2003 | |||||||
£m | £m | £m | £m | |||||||
Non-derivatives: | ||||||||||
Assets | ||||||||||
Cash at bank and in hand | 109 | 91 | 109 | 91 | ||||||
Short-term investmentsa | 5,117 | 6,311 | 5,117 | 6,319 | ||||||
Fixed asset investmentsb | 231 | 317 | 229 | 311 | ||||||
Liabilities | ||||||||||
Short-term borrowings | 2 | 4 | 2 | 4 | ||||||
Long-term borrowings, excluding finance leasesc | 11,800 | 15,966 | 13,506 | 17,720 | ||||||
Derivatives relating to investments and borrowings (net)d: | ||||||||||
Assets | | 10 | | 229 | ||||||
Liabilities | 748 | | 1,182 | | ||||||
Derivative financial
instruments held or issued to hedge the current exposure on expected future transactions (net): |
||||||||||
Assets | | 2 | | 2 | ||||||
Liabilities | | | | | ||||||
a | The fair values of listed short-term investments were estimated based on quoted market prices for those investments. The carrying amount of the other short-term deposits and investments approximated to their fair values due to the short maturity of the instruments held. |
b | The fair values of listed fixed asset investments were estimated based on quoted market prices for those investments. |
c | The fair value of the groups bonds, debentures, notes and other long-term borrowings has been estimated on the basis of quoted market prices for the same or similar issues with the same maturities where they existed, and on calculations of the present value of future cash flows 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 groups outstanding foreign currency and interest rate swap agreements was estimated by calculating the present value, using appropriate discount rates in effect at the balance sheet dates, of affected future cash flows translated, where appropriate, into pounds sterling at the market rates in effect at the balance sheet dates. |
120 | Notes to the financial statements | BT Annual Report and Form 20-F 2004 |
36. Financial
instruments and risk management continued
The
following information is provided in accordance with the requirements of
FRS 13 Derivatives and other financial instruments: disclosures.
Except for disclosures under currency exposures below,
the financial information excludes all of the groups short-term debtors
and creditors.
Financial liabilities
After
taking into account the various interest rate swaps and forward foreign currency
contracts entered into by the group, the interest rate profile of the groups
financial liabilities at 31 March was:
2004 | 2003 | |||||||||||||||
Financial | Financial | |||||||||||||||
Fixed rate | Floating rate | liabilities on | Fixed rate | Floating rate | liabilities on | |||||||||||
financial | financial | which no | financial | financial | which no | |||||||||||
liabilities | liabilities | interest is paid | Total | liabilities | liabilities | interest is paid | Total | |||||||||
Currency: | £m | £m | £m | £m | £m | £m | £m | £m | ||||||||
Sterling | 7,747 | 5,950 | | 13,697 | 8,814 | 7,172 | | 15,986 | ||||||||
Euro | | | | | | | 18 | 18 | ||||||||
Total | 7,747 | 5,950 | | 13,697 | 8,814 | 7,172 | 18 | 16,004 | ||||||||
For the fixed rate financial liabilities, the average interest rates and the average periods for which the rates are fixed are:
2004 | 2003 | |||||||
Weighted | Weighted | |||||||
Weighted | average | Weighted | average | |||||
average | period for | average | period for | |||||
interest | which rate | interest | which rate | |||||
rate | is fixed | rate | is fixed | |||||
Currency: | % | Years | % | Years | ||||
Sterling | 8.7 | 13 | 8.5 | 13 | ||||
The floating rate financial liabilities bear interest at rates fixed in advance for periods ranging from one day to one year by reference to LIBOR. The financial liabilities on which no interest is paid are due to
mature within one year of the balance sheet date.
The maturity profile of financial liabilities is as given in note 25.
Financial assets
After
taking into account the various interest rate swaps and forward foreign currency
contracts entered into by the group, the interest rate profile of the groups
financial assets at 31 March was:
2004 | 2003 | |||||||||||||||
Fixed rate | Floating rate | Financial assets | Fixed rate | Floating rate | Financial assets | |||||||||||
financial | financial | on which no | financial | financial | on which no | |||||||||||
assets | assets | interest is paid | Total | assets | assets | interest is paid | Total | |||||||||
Currency: | £m | £m | £m | £m | £m | £m | £m | £m | ||||||||
Sterling | 1,310 | 3,962 | 167 | 5,439 | 457 | 5,974 | 255 | 6,686 | ||||||||
Euro | | | 23 | 23 | | | 19 | 19 | ||||||||
Other | | | 41 | 41 | | | 43 | 43 | ||||||||
Total | 1,310 | 3,962 | 231 | 5,503 | 457 | 5,974 | 317 | 6,748 | ||||||||
The sterling fixed rate financial assets yield interest at a weighted average of 4.5% (2003 4.3%) for a weighted average period of 22 months (2003 16 months).
The floating rate financial assets bear interest at rates fixed in advance for periods up to one year by reference to LIBOR.
121 | Notes to the financial statements | BT Annual Report and
Form 20-F 2004 |
36. Financial instruments
and risk management continued
Currency exposures
The table below shows the currency
exposures of the groups net monetary assets (liabilities), in terms of
those transactional exposures that give rise to net currency gains and losses
recognised in the profit and loss account. Such exposures comprise the monetary
assets and monetary liabilities of the group that are not denominated in the
operating (or functional) currency of the operating
unit involved, other than certain non-sterling borrowings treated as hedges
of net investments in non-UK operations. At 31 March, these exposures were
as
follows:
2004 | 2003 | |||||||||||||||||||
Sterling | US dollar | Euro | Other | Total | Sterling | US dollar | Euro | Other | Total | |||||||||||
£m | £m | £m | £m | £m | £m | £m | £m | £m | £m | |||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Functional currency of | ||||||||||||||||||||
group operation: | ||||||||||||||||||||
Sterling | | 43 | 7 | 1 | 51 | | | | 1 | 1 | ||||||||||
Euro | | 2 | | 2 | 4 | 3 | (6 | ) | | | (3 | ) | ||||||||
Other | | | | | | 1 | 3 | | | 4 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total | | 45 | 7 | 3 | 55 | 4 | (3 | ) | | 1 | 2 | |||||||||
|
|
|
|
|
|
|
|
|
|
The amounts shown in the table above take into
account the effect of any currency swaps, forward contracts and other derivatives
entered into to manage those currency exposures.
At 31 March
2004, the group also held various forward currency contracts that the group
had taken out to hedge expected future foreign currency purchases and sales.
Fair values of financial assets held for trading | 2004 | 2003 | ||
£m | £m | |||
|
|
|||
Net gain included in profit and loss account | 61 | 34 | ||
Fair value of financial assets held for trading at 31 March | 785 | 2,610 | ||
|
|
The net gain was derived from government bonds, commercial paper and similar debt instruments. The average fair value of financial assets held during the year ended 31 March 2004 did not differ materially from the year end position.
Hedges
Gains and losses on instruments used
for hedging are not recognised until the exposure that is being hedged is itself
recognised. Unrecognised and deferred gains and losses on instruments used for
hedging and those recognised in the years ended 31 March 2004 and 31 March 2003
are as follows:
2004 | 2003 | |||||||
Gains | Losses | Gains | Losses | |||||
£m | £m | £m | £m | |||||
|
|
|
|
|||||
Gains and losses: | ||||||||
recognised in the year but arising in previous yearsa | 104 | 106 | 16 | 27 | ||||
unrecognised at the balance sheet date | 306 | 740 | 1,088 | 878 | ||||
carried forward in the year end balance sheet, pending recognition in the | ||||||||
profit and loss accounta | 564 | 122 | 140 | 128 | ||||
expected to be recognised in the following year: | ||||||||
unrecognised at balance sheet date | 9 | | 16 | 1 | ||||
carried forward in the year end balance sheet, pending recognition in | ||||||||
the profit and loss accounta | 124 | 59 | 104 | 106 | ||||
|
|
|
|
a | Excluding gains and 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 £nil, consisting of a futures purchase contract with a fair value of £68 million and a futures sales contract with a fair value of £68 million. These contracts were closed out in April 2003.
Unused committed lines of credit
Unused committed lines of credit for
short-term financing available at 31 March 2004 totalled approximately £145
million (2003 £575 million), which was in support of a commercial
paper programme or other borrowings. These lines of credit are available for
up to one year.
122 | Notes to the financial statements | BT Annual Report and
Form 20-F 2004 |
37. Company balance sheet | 2004 | 2003 | ||
£m | £m | |||
|
|
|||
Fixed assets | ||||
Investment in subsidiary undertaking | 9,971 | 9,971 | ||
|
|
|||
Total fixed assets | 9,971 | 9,971 | ||
Current assets | ||||
Debtorsa | 456 | 368 | ||
Investmentsb | 2 | 2 | ||
Cash at bank and in hand | 62 | 2 | ||
|
|
|||
Total current assets | 520 | 372 | ||
Creditors: amounts falling due within one yearc | 470 | 370 | ||
|
|
|||
Net current assets | 50 | 2 | ||
|
|
|||
Total assets less current liabilities | 10,021 | 9,973 | ||
|
|
|||
Capital and reservesd | ||||
Called up share capital | 432 | 434 | ||
Share premium account | 2 | 2 | ||
Capital redemption reserve | 2 | | ||
Profit and loss account | 9,585 | 9,537 | ||
|
|
|||
Total equity shareholders funds | 10,021 | 9,973 | ||
|
|
a | Debtors consists of amounts owed by subsidiary undertakings of £456 million (2003 £368 million). |
b | The company invested in a listed investment, with a book value and market value of £1 million (2003 £1 million), and short term loans to subsidiary undertakings of £1 million (2003 £1 million). |
c | Creditors consists of dividends payable of £454 million (2003 £366 million), amounts owed to subsidiary undertakings of £9 million (2003 £nil) and other creditors of £7 million (2003 £4 million). |
d | Capital and reserves are shown on page 123. |
The financial statements of the company on pages 122 to 123 were approved by the board of directors on 19 May 2004 and were signed on its behalf by
Sir Christopher Bland Chairman
Ben Verwaayen Chief
Executive
Ian Livingston Group
Finance Director
123 | Notes to the financial statements | BT Annual Report and
Form 20-F 2004 |
37. | Company balance sheet continued |
Share | Capital | Profit | |||||||||
Share | premium | redemption | and loss | ||||||||
capital | e | account | f | reserve | account | Total | |||||
£m | £m | £m | £m | £m |
|
|
|||||||||
Balance at 1 April 2001 | | | | | | |||||
Issue of shares | 9,971 | | | | 9,971 | |||||
Capital reduction | (9,537 | ) | | | 9,537 | | ||||
Movement relating to BTs employee share | ||||||||||
ownership trust | | 2 | | | 2 | |||||
Profit for the financial yearg | | | | 173 | 173 | |||||
Dividends (2.0p per ordinary share) | | | | (173 | ) | (173 | ) | |||
|
|
|||||||||
Balances at 31 March 2002 | 434 | 2 | | 9,537 | 9,973 | |||||
|
|
|||||||||
Profit for the financial yearg | | | | 560 | 560 | |||||
Dividends (6.5p per ordinary share) | | | | (560 | ) | (560 | ) | |||
|
|
|||||||||
Balances at 31 March 2003 | 434 | 2 | | 9,537 | 9,973 | |||||
|
|
|||||||||
Movement relating to BTs employee share ownership trusti | | | | | | |||||
Purchase of own sharesh | ||||||||||
shares cancelled | (2 | ) | | 2 | (64 | ) | (64 | ) | ||
treasury shares | | | | (80 | ) | (80 | ) | |||
Profit for the financial yearg | | | | 924 | 924 | |||||
Dividends (8.5p per ordinary share) | | | | (732 | ) | (732 | ) | |||
|
|
|||||||||
Balances at 31 March 2004 | 432 | 2 | 2 | 9,585 | 10,021 | |||||
|
|
e | The authorised share capital of the company throughout the years ended 31 March 2004 and 31 March 2003 was £13,463 million representing 269,260,253,468 ordinary shares of 5p each. |
The allotted, called up and fully paid ordinary share capital of the company at 31 March 2004 was £432 million (2003 £434 million), representing 8,634,629,038 ordinary shares of 5p each (2003 8,670,849,554). | |
Of the authorised but unissued share capital at 31 March 2004, 26 million ordinary shares (2003 25 million) were reserved to meet options granted under employee share option schemes described in note 34. | |
f | The share premium account, representing the premium on allotment of shares is not available for distribution. |
g | The profit for the financial year, dealt with in the profit and loss account of the company and after taking into account dividends from subsidiary undertakings, was £924 million (2003 £560 million). As permitted by Section 230 of the Companies Act 1985, no profit and loss account of the company is presented. |
h | During the year ended 31 March 2004 the company repurchased 80,571,000 of its own shares of 5p each, representing 1% of the called-up share capital, for an aggregate consideration of £144 million. Of the total shares repurchased 36,222,000 shares with an aggregate nominal value of £2 million were cancelled immediately and 44,349,000 shares with an aggregate nominal value of £2 million are held as treasury shares. |
i | Ordinary shares allotted during the year were as follows: |
Nominal value | Consideration | |||||
Number | £m | £m | ||||
|
|
|
||||
Savings related schemes for the year ended 31 March 2004 | 1,484 | | | |||
|
|
|
124 |
BT Annual Report and Form 20-F 2004 |
United States Generally Accepted Accounting Principles
The United States Generally Accepted | |
Accounting Principles are divided into | |
the following sections: | |
125 | Differences between United Kingdom and |
United States generally accepted | |
accounting principles | |
128 | Net income and shareholders equity |
reconciliation statements | |
128 | Minority interests |
129 | Accounting for share options |
129 | Consolidated statements of cash flows |
129 | Current asset investments |
130 | Pension costs |
132 | Income statement in US GAAP format |
133 | US GAAP developments |
125 | United States Generally Accepted Accounting Principles |
BT Annual Report and Form 20-F 2004 |
The groups 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 US (US GAAP).
i Differences between United Kingdom and
United States generally accepted accounting
principles
The following are the main differences between UK and US GAAP which are relevant
to the groups financial statements.
(a) Sale and leaseback of properties
Under UK GAAP, the sale of BTs property portfolio is treated as a fixed
asset disposal and the subsequent leaseback is an operating lease. Under US GAAP,
the transaction is regarded as financing and the land and buildings are recorded
on the balance sheet at their net book value, an obligation equivalent to the
cash proceeds is recognised and the gain on disposal is deferred until the properties
are vacated by BT. Rental payments made by BT are reversed and
replaced by a finance lease interest charge and a depreciation charge.
(b) Pension costs
Under UK GAAP, pension costs are accounted for in accordance with UK Statement
of Standard Accounting Practice No. 24, with costs being charged against profits
over employees working lives. Under US GAAP, pension
costs are determined in accordance with the requirements of US Statements of
Financial Accounting Standards (SFAS) Nos. 87 and 88. Differences between the
UK and US GAAP figures arise from the requirement to use different actuarial
methods and
assumptions and a different method of amortising surpluses or deficits.
(c) Accounting for redundancies
Under UK GAAP, the cost of providing incremental pension benefits in respect of workforce reductions is taken into account when determining current and future pension costs, unless the most recent actuarial valuation,
combined with the provision for pension costs in the group balance sheet, under UK actuarial conventions, shows a deficit. In this case, the cost of providing incremental pension benefits is included in redundancy charges in the year in which the
employees agree to leave the group.
Under US GAAP, the associated costs of providing incremental pension benefits are charged against profits in the period in which the termination terms are agreed with the employees. The
fair value of termination benefits for employees who are to be retained beyond their minimum contractual retention period is recognised on a straight line basis over the future service period.
(d) Capitalisation of interest
Under UK GAAP, the group does not capitalise interest. To comply with US GAAP, the estimated amount of interest incurred whilst constructing major capital projects is included in fixed assets, and depreciated over the
lives of the related assets. This included capitalisation of interest incurred on funding the 3G licences up to the date of the mmO2 demerger. The amount of interest capitalised is determined by reference to the average interest rates on outstanding borrowings. At 31 March 2004 under US GAAP, gross capitalised interest of £358 million (2003 £461 million) with regard to the company and its subsidiary companies was subject to depreciation generally over periods of 3 to 25 years.
(e) Goodwill
Under UK GAAP, in respect of acquisitions completed prior to 1 April 1998, the group wrote off goodwill arising from the purchase of subsidiary undertakings, associates and joint ventures on acquisition against
retained earnings. The goodwill is reflected in the net income of the period of disposal, as part of the calculation of the gain or loss on divestment. All unamortised and pre-April 1998 goodwill will be brought back to the profit and loss account
on disposal. Following the implementation of UK Financial Reporting Standard No. 10 (FRS 10), goodwill arising on acquisitions completed after 1 April 1998 is capitalised and amortised on a straight line basis over its useful economic life.
Under
US GAAP up to 31 March 2002, goodwill arising on the acquisition of subsidiaries,
associates and joint ventures was capitalised as an intangible asset and amortised
over its useful life. With effect from 1 April 2002 BT has adopted SFAS No. 142,
and goodwill is no longer amortised but tested annually for impairment. In connection
with the adoption of SFAS No. 142 transitional and annual impairment reviews
were performed. There
was no transitional impairment charge recorded. As a result of the annual impairment
review, no goodwill impairment charge was recognised in the year ended 31 March
2004 (2003 £54 million). Goodwill of £12 million (2003
£20 million) amortised under UK GAAP is written back through the income
statement.
126 | United States Generally Accepted Accounting Principles |
BT Annual Report and Form 20-F 2004 |
Had the cessation of goodwill amortisation requirement of SFAS No. 142 been applied in prior periods, results of operations would have been as follows:
2003 | 2002 | |||
£m | £m | |||
Net income (loss) as adjusted for US GAAP | 4,134 | (732 | ) | |
Add back: goodwill amortisation | | 34 | ||
Adjusted net income (loss) | 4,134 | (698 | ) | |
Adjusted basic earnings per American Depositary Share | £4.80 | £(0.84 | ) | |
Adjusted diluted earnings per American Depositary Share | £4.80 | £(0.84 | ) | |
(f) Mobile cellular telephone licences, software and other intangible assets
Certain intangible fixed assets recognised under US GAAP purchase accounting requirements are subsumed within goodwill under UK GAAP. Under US GAAP these separately identified intangible assets are valued and amortised
over their useful lives of 20 years.
(g) Financial instruments
Under UK GAAP, investments are held on the balance sheet at historical cost,
and own shares held in trust for share schemes are recorded in fixed asset investments.
Gains and losses on instruments used for hedges are not recognised until the
exposure being hedged is recognised. Under US GAAP, trading securities and available-for-sale
securities are carried at market value with appropriate valuation adjustments
recorded in profit and loss and shareholders equity, respectively.
Certain
derivative financial instruments which qualify for hedge accounting under UK
GAAP do not qualify for hedge accounting under US GAAP. Under US GAAP,
financial instruments do not qualify for hedge accounting due to the extensive
documentation requirements. These financial instruments, under US GAAP, are carried
at market value with valuation adjustments recorded in the profit and loss account.
The reassessment and purchase
of derivatives in the year ended 31 March 2004 gave rise to an adjustment reducing
net income by £133 million net of tax (2003 increase £610 million). The net unrealised holding gain on equity investments held as
available-for-sale securities for the year ended 31 March 2004 was £5 million (2003 £22 million, 2002 £271 million). SFAS 133 became effective for BT on 1 April 2001 and the unamortised transitional adjustment of
£9 million net of tax remains in shareholders equity at 31 March
2004.
(h) Deferred gain
Under UK GAAP, assets contributed to a joint venture by the groups partners are measured at their net replacement cost. Any difference between the groups share of the joint ventures resulting net
assets and the net book value of assets contributed by the group to the joint venture, including certain accrued start up costs, is immediately reflected by adjusting the groups investment in the joint venture and recording a deferred
difference in shareholders equity. Under US GAAP, the assets contributed by all joint venture partners are carried at their historical net book value and any difference between the groups share of the joint ventures
resulting net assets and the net 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 at their discounted price when the options are exercised. Under US GAAP, a plan is
considered compensatory when the discount to market price is in excess of 15%. Compensation cost is recognised for the difference between the exercise price of the share options granted and the quoted market price of the shares at the date of grant
or measurement date and accrued over the vesting period of the options.
Under
UK GAAP, shares held by employee share ownership trusts are recorded as fixed
asset investments at cost less amounts written off. Under US GAAP, those
shares not fully vested are regarded as treasury stock and recorded at cost as
a deduction from shareholders equity.
(j) Investments in associates
Under UK GAAP, the economic interest in the associates operating profits
before minority interest is reported as part of the total operating profit. For
those associates in which a minority interest is recognised in their respective
statements of profit and loss, such minority interest is reported as minority
interest in the consolidated profit and loss account. Under US GAAP, the minority
interest in the associates is reclassified from minority interest and
reported within the share of results of associates.
127 | United States Generally Accepted Accounting Principles | BT Annual Report and Form 20-F 2004 |
(k) Deferred taxation
Under
UK GAAP, provision is made for deferred tax in so far as a liability or asset
arose as a result of transactions that had occurred by the balance sheet
date and give rise to an obligation to pay more tax in the future, or a right
to pay less tax in the future. Under US GAAP, deferred taxation is provided
for on a full liability basis. Future tax benefits are recognised as deferred
tax assets to the extent that their realisation is more likely than not.
As
a result of changes in circumstances, previously recognised deferred tax liabilities
were released in the 2003 financial year. At 31 March 2004 total deferred
tax liabilities were £2,780 million primarily in respect of accelerated capital
allowances and total deferred tax assets were £2,240 million, primarily
in respect of pension obligations.
(l) Dividends
Under UK GAAP, dividends are recorded in the year in respect of which they are declared (in the case of interim or any special dividends) or proposed by the board of directors to the shareholders (in the case of final
dividends). Under US GAAP, dividends are recorded in the period in which dividends are declared.
(m) Impairment
Under UK GAAP, if there is an indication of impairment the assets should be tested for impairment and, if necessary written down to the value in use, calculated based on discounted future pre-tax cash flows related to
the asset or the income generating unit to which the asset belongs.
US
GAAP requires that an entity assess whether impairment has occurred based on
the undiscounted future cash flows. An impairment loss exists if the sum of these
cash flows is less than the carrying amount of the asset. The impairment loss
recognised in the income statement is based on the assets fair value, being
either market value or the sum of discounted future cash flows.
(n) Discontinued operations
Under UK GAAP, the disposal of certain lines of business and joint ventures and associates are shown as discontinued activities. Under US GAAP, only the disposals of lines of business under SFAS No. 144 would be
reported as discontinued operations.
(o) Disposals of businesses
There are timing differences between UK GAAP and US GAAP for recognition of gains on the sale of certain businesses. Foreign exchange movements taken to reserves under UK GAAP are reported in the income statement under
US GAAP. Historical GAAP differences on disposed businesses are also shown under this line item.
(p) Property rationalisation provision
Under
UK GAAP in the 2003 financial year, a provision in connection with the rationalisation
of the groups London office property portfolio was recorded. Under US GAAP,
in accordance with SFAS No 146, these costs are not recognised until the group
fully exits and therefore ceases to use the affected properties.
(q) Software
Under
UK GAAP long-term contracts to design, build and operate software solutions are
accounted for under SSAP 9 Stocks and long-term contracts and FRS 5 Reporting the substance of
transactions, under which turnover is recognised as earned over the
contract period.
Under
US GAAP revenue of £77 million under these contracts is deferred in the 2004 financial year under SOP 97-2 Software revenue recognition,
which requires vendor specific objective evidence to support the fair value of
the separate elements to be delivered. There was no impact on net income.
128 | 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 equity from that reported under
UK GAAP to that which would have been
reported had US GAAP been applied.
Net income | 2004 | 2003 | 2002 | |||||
Years ended 31 March | £m | £m | £m | |||||
Net income applicable to shareholders under UK GAAP | 1,417 | 2,686 | 995 | |||||
Adjustment for: | ||||||||
Sale and leaseback of properties | (85 | ) | (114 | ) | (1,178 | ) | ||
Pension costs | (428 | ) | (177 | ) | (106 | ) | ||
Redundancy charges | 20 | | (140 | ) | ||||
Capitalisation of interest, net of related depreciation | (23 | ) | (17 | ) | 398 | |||
Goodwill | 12 | (35 | ) | 11 | ||||
Mobile licences, software and other intangible asset capitalisation and | ||||||||
amortisation, net | | (26 | ) | (32 | ) | |||
Financial instruments | (82 | ) | 731 | 23 | ||||
Deferred gain | | | 313 | |||||
Impairment | (24 | ) | (24 | ) | 147 | |||
Employee share plans | (8 | ) | (11 | ) | (8 | ) | ||
Property rationalisation provision | (142 | ) | 147 | | ||||
Disposals of businesses | | 130 | 254 | |||||
Deferred taxation | 4 | 976 | (1,320 | ) | ||||
661 | 4,266 | (643 | ) | |||||
Tax effect of US GAAP adjustments | 222 | (132 | ) | (89 | ) | |||
Net income (loss) as adjusted for US GAAP | 883 | 4,134 | (732 | ) | ||||
Basic earnings (loss) per American Depositary Share as adjusted for US GAAPa | £1.02 | £4.80 | £(0.88 | ) | ||||
Diluted earnings (loss) per American Depositary Share as adjusted for US GAAPa | £1.02 | £4.77 | £(0.88 | ) | ||||
a | Each American Depositary Share is equivalent to ten ordinary shares. |
In the 2004 and 2003 financial
years all the adjustments relate to continuing operations (2002 £2,009
million reduction in relation to discontinued operations). Net income from
continuing operations was £883 million (2003 £4,134
million, 2002 £1,680 million loss).
The
adjustments to net income relating to discontinued operations are £nil
(2003 £nil, 2002 £282 million).
Shareholders equity | 2004 | 2003 | |||
At 31 March | £m | £m | |||
Shareholders equity under UK GAAP | 3,094 | 2,642 | |||
Adjustment for: | |||||
Sale and leaseback of properties | (1,377 | ) | (1,292 | ) | |
Pension costs | (5,714 | ) | (6,371 | ) | |
Redundancy charges | 20 | | |||
Capitalisation of interest, net of related depreciation | 195 | 225 | |||
Goodwill | 124 | 113 | |||
Financial instruments | (8 | ) | 86 | ||
Impairment | 100 | 124 | |||
Property rationalisation provision | 5 | 147 | |||
Deferred taxation | (59 | ) | (63 | ) | |
Dividend declared after the financial year end | 454 | 366 | |||
(3,166 | ) | (4,023 | ) | ||
Tax effect of US GAAP adjustments | 1,711 | 1,765 | |||
Shareholders equity as adjusted for US GAAP | (1,455 | ) | (2,258 | ) | |
iii Minority interests
Under
US GAAP, the income to minority interests would have been unchanged (2003 £27 million reduction, 2002 £26 million reduction) after adjusting for goodwill amortisation and accounting for
associates and joint ventures. Net assets attributable to minority interests would have been unchanged (2003 unchanged)
after adjusting for financial instruments.
129 | 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. Under US GAAP, the company adopted the disclosure-only
provisions in SFAS No. 123 Accounting for Stock-Based Compensation. Accordingly, the company accounts for share options in accordance with APB Opinion No. 25 Accounting for Stock Issued to
Employees, under which no compensation expense is recognised. Had the group expensed recognised compensation cost for options granted in accordance with SFAS No. 123, the groups pro forma net income (loss), basic earnings (loss)
per share and diluted earnings (loss) per share under US GAAP would have been £862 million (2003 £4,127 million, 2002 £792 million loss), 10.0p (2003 47.9p, 2002 9.5p loss) and 9.9p (2003 47.6p,
2002 9.5p loss), respectively. See note 34 for the SFAS No. 123 disclosures
of the fair value of options granted under employee schemes at date of grant.
v Consolidated statements
of cash flows
Under UK GAAP, the Consolidated Statements of Cash Flows are presented in accordance with UK Financial Reporting Standard No. 1 (FRS 1). The statements prepared under FRS 1 present substantially the same information as
that required under SFAS No. 95.
Under SFAS No. 95, cash and cash equivalents include cash and short-term investments with maturities of three months or less at the date of purchase. Under FRS 1 cash comprises cash in
hand and at bank and overnight deposits, net of bank overdrafts.
Under FRS 1, cash flows are presented for operating activities; returns on investments and servicing of finance; taxation; capital expenditure and financial investments; acquisitions and
disposals; dividends paid to the companys shareholders; management of liquid
resources and financing. SFAS No. 95 requires a classification of cash flows
as resulting from operating, investing and financing activities.
Cash
flows under FRS 1 in respect of interest received, interest paid (net of that
capitalised under US GAAP) and taxation would be included within operating activities
under SFAS No. 95. Cash flows from purchases, sales and maturities of trading
securities, while not separately identified under UK GAAP, would be included
within operating activities under US GAAP. Capitalised interest, while not recognised
under UK GAAP, is included
in investing activities under US GAAP. Dividends paid are included within financing
activities under US GAAP.
The following statements summarise the statements of cash flows as if they had been presented in accordance with US GAAP, and include the adjustments which reconcile cash and cash
equivalents under US GAAP to cash at bank and in hand reported under UK GAAP.
2004 | 2003 | 2002 | ||||
£m | £m | £m | ||||
Net cash provided by operating activities | 4,632 | 3,395 | 1,455 | |||
Net cash (used) provided by investing activities | (3,460 | ) | 1,253 | 3,049 | ||
Net cash used in financing activities | (3,093 | ) | (2,852 | ) | (5,611 | ) |
Net (decrease) increase in cash and cash equivalents | (1,921 | ) | 1,796 | (1,107 | ) | |
Effect of exchange rate changes on cash | (5 | ) | 13 | (50 | ) | |
Cash and cash equivalents under US GAAP at beginning of year | 2,933 | 1,124 | 2,281 | |||
Cash and cash equivalents under US GAAP at end of year | 1,007 | 2,933 | 1,124 | |||
Short-term investments with original maturities of less than three months | (898 | ) | (2,842 | ) | (966 | ) |
Cash at bank and in hand under UK GAAP at end of year | 109 | 91 | 158 | |||
vi Current asset investments
Under
US GAAP, investments in debt securities would be classified as either trading,
available-for-sale or held-to-maturity. Trading investments would be stated at
fair values and the unrealised gains and losses would be included in income.
Securities classified as available-for-sale would be stated at fair values, with
unrealised gains and losses, net of deferred taxes, reported in shareholders equity.
Debt securities classified as held-to-maturity would be stated at amortised cost.
The following analyses do not include securities with original maturities of
less than three months.
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 securities at 31 March 2004 and 2003 consisted of
the following:
Amortised | Estimated | |||
cost | fair value | |||
£m | £m | |||
Commercial paper, medium-term notes and other investments at 31 March 2004 | 3,629 | 3,629 | ||
Commercial paper, medium-term notes and other investments at 31 March 2003 | 2,565 | 2,565 | ||
The contractual maturities of the held-to-maturity debt securities at 31 March 2004 were as follows:
Amortised | Estimated | |||
cost | fair value | |||
£m | £m | |||
Maturing on or before 31 March 2005 | 2,253 | 2,253 | ||
Maturing after 1 year through 5 years | 1,376 | 1,376 | ||
Total at 31 March 2004 | 3,629 | 3,629 | ||
Available for sale investments at 31 March 2004 and 2003 consisted of the following:
Amortised | Estimated | |||
cost | fair value | |||
£m | £m | |||
Commercial paper, medium-term notes and other investments at 31 March 2004 | 214 | 214 | ||
Commercial paper, medium-term notes and other investments at 31 March 2003 | | | ||
The contractual maturities of the available for sale investments at 31 March 2004 were as follows:
Amortised | Estimated | |||
cost | fair value | |||
£m | £m | |||
Maturing on or before 31 March 2005 | 214 | 214 | ||
Maturing after 1 year through 5 years | | | ||
Total at 31 March 2004 | 214 | 214 | ||
vii Pension
costs
The following position for the main pension scheme is computed in accordance with US GAAP pension accounting rules under SFAS No. 87 and SFAS No. 88, the effect of which is shown in the above reconciliation
statements.
The pension cost determined
under SFAS No. 87 was calculated by reference to an expected long-term rate of
return on scheme assets of 7.35% (2003 6.9%, 2002 6.5%). The
components of the pension cost for the main pension scheme comprised:
2004 | 2003 | 2002 | ||||
£m | £m | £m | ||||
Service cost | 388 | 453 | 564 | |||
Interest cost | 1,657 | 1,707 | 1,739 | |||
Expected return on scheme assets | (1,646 | ) | (1,813 | ) | (1,863 | ) |
Amortisation of prior service costs | 24 | 24 | 24 | |||
Amortisation of net obligation at date of limited application of SFAS No. 87 | 2 | 52 | 52 | |||
Recognised gains | 378 | (22 | ) | (67 | ) | |
Additional cost of termination benefits | 1 | 60 | 140 | |||
Pension cost for the year under US GAAP | 804 | 461 | 589 | |||
131 | United States Generally Accepted Accounting Principles | BT Annual Report and Form 20-F 2004 |
vii Pension
costs continued
The information required to be disclosed in accordance with SFAS No. 132 concerning the funded status of the main scheme at 31 March 2003 and 31 March 2004, based on the valuations at 1 January 2003 and 1 January 2004,
respectively, is given below.
2004 | 2003 | |||
Minimum liability, intangible asset and other comprehensive income | £m | £m | ||
Plan assets at fair value | 26,675 | 22,757 | ||
Accumulated benefit obligation | 31,137 | 28,551 | ||
Minimum liability | 4,462 | 5,794 | ||
Net amount recognised at end of year | (2,275 | ) | (2,497 | ) |
Minimum additional liability | 2,187 | 3,297 | ||
Intangible asset as at 31 March 2004: | ||||
Unrecognised net transition obligation | | (2 | ) | |
Unrecognised prior service cost | (79 | ) | (103 | ) |
Accumulated other comprehensive income | 2,108 | 3,192 | ||
Changes in benefit obligation | 2004 | 2003 | ||
£m | £m | |||
Benefit obligation at the beginning of the year | 30,277 | 29,097 | ||
Service cost | 388 | 453 | ||
Interest cost | 1,657 | 1,707 | ||
Employees contributions | 148 | 156 | ||
Additional cost of termination benefits | 1 | 60 | ||
Actuarial movement | 1,428 | 152 | ||
Other changes | 5 | 13 | ||
Benefits paid or payable | (1,456 | ) | (1,361 | ) |
Benefit obligation at the end of the year | 32,448 | 30,277 | ||
The benefit obligation and pension cost for the main pension scheme were determined using the following assumptions at 1 January 2002, 2003 and 2004:
2004 | 2003 | 2002 | ||||
per annum | per annum | per annum | ||||
% | % | % | ||||
Discount rate | 5.5 | 5.6 | 6.0 | |||
Rate of future pay increases | 3.6 | 3.8 | 4.0 | |||
Rate of future pension increases | 2.6 | 2.25 | 2.5 | |||
Contributions expected to be paid to the plan during the next fiscal year are estimated at £290 million.
Changes in scheme assets | 2004 | 2003 | ||
£m | £m | |||
Fair value of scheme assets at the beginning of the year | 22,757 | 26,597 | ||
Actual return on scheme assets | 4,195 | (3,255 | ) | |
Employers contributionsa | 1,026 | 607 | ||
Employees contributions | 148 | 156 | ||
Other changes | 5 | 13 | ||
Benefits paid or payable | (1,456 | ) | (1,361 | ) |
Fair value of scheme assets at the end of the year | 26,675 | 22,757 | ||
Funded status under US GAAP | 2004 | 2003 | ||
£m | £m | |||
Projected benefit obligation in excess of scheme assets | (5,773 | ) | (7,520 | ) |
Unrecognised net obligation at date of initial application of SFAS No. 87b | | 2 | ||
Unrecognised prior service costsc | 79 | 103 | ||
Other unrecognised net actuarial losses | 3,419 | 4,918 | ||
Net amount recognised under US GAAP | (2,275 | ) | (2,497 | ) |
a | The employers contributions for the year ended 31 March 2004 includes special contributions of £362 million paid in December 2003 and £380 million paid in March 2004 (2003 £329 million paid in December 2002). |
b | The unrecognised net obligation at the date of initial application is being amortised over 15 years from 1 April 1988. |
c | Unrecognised prior service costs on scheme benefit improvements are being amortised over periods of 15 or 16 years commencing in the years of the introduction of the improvements. |
132 | United States Generally Accepted Accounting Principles | BT Annual Report and Form 20-F 2004 |
vii Pension
costs continued
Asset allocation
The Trustees of the main pension scheme approve the target asset allocation as well as deviation limits. The objective 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 | Target | |||||
£bn | % | % | ||||
Equities | 17.1 | 65.0 | 64.75 | |||
Fixed interest bonds | 3.9 | 14.8 | 15.25 | |||
Index linked securities | 2.1 | 8.0 | 8.00 | |||
Property | 3.2 | 12.2 | 12.00 | |||
Cash | | | | |||
26.3 | 100.0 | 100.00 | ||||
Year ended 31 December 2002 | ||||||
Fair value | Target | |||||
£bn | % | % | ||||
Equities | 14.8 | 64.9 | 64.75 | |||
Fixed interest bonds | 3.4 | 15.0 | 15.25 | |||
Index linked securities | 1.8 | 7.7 | 8.00 | |||
Property | 3.1 | 13.9 | 12.00 | |||
Cash | (0.4 | ) | (1.5 | ) | | |
22.7 | 100.0 | 100.00 | ||||
The assumption for the expected return in scheme assets is a weighted average based on an assumed expected return for each asset class and the proportions held of each asset class at the beginning of the year. The expected returns on bonds are based on the gross redemption yields at the start of the year. Expected returns on equities and property are based on a combination of an estimate of the risk premium above, yields on government bonds and consensus economic forecasts of future returns. The expected return of 7.27% per annum used for the calculation of pension costs for the year ending 31 March 2005 is consistent with that adopted for FRS 17.
viii Income
statement in US GAAP format
The group profit and loss accounts on
pages 78 to 80 comply with UK GAAP and the directors believe they are in the
most appropriate format for shareholders to understand the results of our business.
We believe that it is important to show our results before deducting goodwill
amortisation and exceptional items because these items predominantly relate to
corporate transactions rather than the trading activities of the group. For SEC
reporting purposes this
presentation would be considered non GAAP and therefore
the group has also prepared the following income statement which meets the SEC
reporting format set forth in Item 10 of Regulation S-X. The financial numbers
disclosed
in the following income statement are prepared under UK GAAP.
2004 | 2003 | 2002 | ||||
£m | £m | £m | ||||
Revenue | 18,519 | 18,727 | 18,447 | |||
Operating expenses: | ||||||
Payroll costs | 3,735 | 3,671 | 3,698 | |||
Depreciation and amortisation | 2,936 | 3,035 | 5,345 | |||
Payments to telecommunication operators | 3,963 | 3,940 | 4,289 | |||
Other operating expenses | 5,189 | 5,724 | 5,522 | |||
Total operating expenses | 15,823 | 16,370 | 18,854 | |||
Net operating income (loss) | 2,696 | 2,357 | (407 | ) | ||
Other income, net | 227 | 1,910 | 936 | |||
Net interest expense | (941 | ) | (1,439 | ) | (1,579 | ) |
Income taxes | (539 | ) | (459 | ) | (385 | ) |
Minority interests | 8 | (12 | ) | (10 | ) | |
Equity in earnings (losses) of investees | (34 | ) | 329 | (1,443 | ) | |
Income (loss) from continuing operations | 1,417 | 2,686 | (2,888 | ) | ||
Discontinued operations | | | 3,883 | |||
Net income | 1,417 | 2,686 | 995 | |||
Earnings per share basic | 16.4 | p | 31.2 | p | 12.0 | p |
Earnings per share diluted | 16.3 | p | 31.0 | p | 11.9 | p |
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 2003 issued a
revised interpretation, FIN 46R. The interpretation requires the primary beneficiary to consolidate a variable interest entity if it has a variable interest that will absorb a majority of the entitys losses if they occur, or receive a majority
of the entitys expected returns or both. BT had adopted FIN 46 in June
2003, and the further adoption of FIN 46R did not have a material effect on the
results or statement of financial position of the group.
In
May 2003 the FASB issued SFAS No. 150 Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.
SFAS No. 150 establishes standards for how to classify and measure certain financial
instruments with characteristics of both liabilities and equity. It requires
that an issuer classify a financial instrument that is within its scope as a
liability, or an asset in some
circumstances. On adoption, SFAS No. 150 did not have a material effect on the
results or statement of financial position of the group.
In
November 2002 the Emerging Issues Task Force reached a consensus on EITF 00-21 Revenue arrangements with multiple deliverables.
BT adopted this consensus for contracts entered into after 15 June 2003. Adoption
of the consensus did not have a material impact on the results of the group.
134 | BT Annual Report and Form 20-F 2004 |
Subsidiary undertakings, joint ventures and associates.
BT Group plc is the parent company of the group. Brief details of its principal operating subsidiary undertakings, joint ventures and associates at 31 March 2004, all of which were unlisted unless otherwise stated, were as follows:
Activity | Group interest | Country | |
in allotted capitalb | of operationsc | ||
Subsidiary undertakings | |||
British Telecommunications plcd | Communication related services and products provider | 100% ordinary | UK |
BT Australasia Pty Limitedde | Communication related services and products provider | 100% ordinary | Australia |
100% preference | |||
BT Cableships Limitedd | Cableship owner | 100% ordinary | International |
BT Communications | Telecommunication services provider | 100% ordinary | UK |
Management Limitedd | |||
BT Hong Kong Limiteddf | Communication related services and products provider | 100% ordinary | Hong Kong |
100% preference | |||
BT Fleet Limitedd | Fleet management company | 100% ordinary | UK |
BT Global Services Limiteddg | International telecommunication network systems provider | 100% ordinary | UK |
BT Holdings Limitedd | Investment holding company | 100% ordinary | UK |
BT (Germany) GmbH & Co. oHGdh | Communication related services and products provider | 100% ordinary | Germany |
BT Nederland NVd | Communication related services and products provider | 100% ordinary | Netherlands |
BT Americas Inc.d | Communication related services and products provider | 100% common | USA |
BT Property Limitedd | Property holding company | 100% ordinary | UK |
BT Subsea Cables Limitedd | Cable maintenance and repair | 100% ordinary | UK |
BT ESPANA, Compania de Servicios | Communication related services and products provider | 100% ordinary | Spain |
Globales de Telecommunicaciones, | |||
S.A.di |
|||
BT Limiteddj | International telecommunication network systems provider | 100% ordinary | International |
BT US Investments LLCd | Investment holding company | 100% ordinary | USA |
Communications Networking Services | Communication related services and products provider | 100% ordinary | UK |
(UK)d | |||
Communications Global Network | Communication related services and products provider | 100% ordinary | Bermuda |
Services Limitedd | |||
Esat Telecommunications Limitedd | Telecommunication services provider | 100% ordinary | Ireland |
Farland BVcd | Provider of trans-border fibre network across BTs | 100% ordinary | International |
partners in Europe | |||
Syntegra Limitedd | Systems integration and application development | 100% ordinary | UK |
Syntegra Groep BVd | Systems integration and application development | 100% common | Netherlands |
Syntegra SAd | Systems integration and application development | 100% ordinary | France |
Syntegra (USA) Inc.cd | Systems integration and electronic business | 100% common | International |
outsourcing services | |||
a | The group comprises a large number of companies and it is not practical to include all of them in this list. The list, therefore, only includes those companies that have a more significant impact on the profit or assets of the group. |
b | The proportion of voting rights held corresponds to the aggregate interest percentage held by the holding company and subsidiary undertakings. |
c | All overseas undertakings are incorporated in their country of operations. Subsidiary undertakings operating internationally are all incorporated in England and Wales, except Farland BV and Syntegra (USA) Inc. which are incorporated in the Netherlands and USA, respectively. |
d | Held through intermediate holding company. |
e | In June 2003, BT Pty Limited changed its name to BT Australasia Pty Limited. |
f | In August 2003, BT (Hong Kong) Limited changed its name to BT Hong Kong Limited. |
g | In June 2003, BT Global Networks Limited changed its name to BT Global Services Limited. |
h | In September 2003, BT Ignite GmbH & Co. oHG changed its name to BT (Germany) GmbH & Co. oHG. |
i | In October 2003, BT Ignite Espana SAU changed its name to BT ESPANA, Compania de Servicios Globales de Telecommunicaciones, S.A. |
j | In April 2003, BT (Worldwide) Limited changed its name to BT Limited. |
Share capital | |||||
b = billions | Percentage | Country of | |||
m = millions | Activity | Issueda | owned | operationsb | |
Joint Ventures | |||||
Albacom SpA | Communication related services and products provider | €51m | 26.0 | %c | Italy |
LG Telecom | Mobile cellular telephone system provider and operator | Won 1,386b | 16.59 | %c | Republic of South Korea |
a | Issued share capital comprises ordinary or common shares, unless otherwise stated. All investments are held through intermediate holding companies. |
b | All overseas companies are incorporated in their country of operations. |
c | Held through intermediate holding company. |
135 | BT Annual Report and Form 20-F 2004 |
Quarterly analysis of turnover and profit
Year ended 31 March 2004 | Unaudited | |||||||||
Quarters | 1st | 2nd | 3rd | 4th | Total | |||||
£m | £m | £m | £m | £m | ||||||
Total turnover | 4,693 | 4,667 | 4,676 | 4,878 | 18,914 | |||||
Groups share of associates and joint ventures turnover | (107 | ) | (99 | ) | (98 | ) | (91 | ) | (395 | ) |
Group turnover | 4,586 | 4,568 | 4,578 | 4,787 | 18,519 | |||||
Other operating income | 52 | 44 | 37 | 44 | 177 | |||||
Group operating profit | 727 | 745 | 740 | 661 | 2,873 | |||||
Groups share of operating (loss) profit of associates and joint | ||||||||||
ventures | (3 | ) | (4 | ) | 5 | (32 | ) | (34 | ) | |
Total operating profit | 724 | 741 | 745 | 629 | 2,839 | |||||
Profit (loss) on sale of fixed asset investments and group undertakings | (1 | ) | | 33 | 4 | 36 | ||||
Profit on sale of property fixed assets | | 1 | 1 | 12 | 14 | |||||
Net interest payable | (225 | ) | (234 | ) | (260 | ) | (222 | ) | (941 | ) |
Profit on ordinary activities before taxation | 498 | 508 | 519 | 423 | 1,948 | |||||
Tax on profit on ordinary activities | (153 | ) | (132 | ) | (133 | ) | (121 | ) | (539 | ) |
Profit on ordinary activities after taxation | 345 | 376 | 386 | 302 | 1,409 | |||||
Minority interests | 6 | 1 | | 1 | 8 | |||||
Profit for the financial period | 351 | 377 | 386 | 303 | 1,417 | |||||
Basic earnings per share | 4.1 | p | 4.3 | p | 4.5 | p | 3.5 | p | 16.4 | p |
Diluted earnings per share | 4.0 | p | 4.3 | p | 4.4 | p | 3.5 | p | 16.3 | p |
Profit before goodwill amortisation, exceptional items and taxation | 502 | 529 | 526 | 459 | 2,016 | |||||
Basic earnings per share before goodwill amortisation and | ||||||||||
exceptional items | 4.1 | p | 4.4 | p | 4.4 | p | 3.9 | p | 16.9 | p |
Diluted earnings per share before goodwill amortisation and | ||||||||||
exceptional items | 4.1 | p | 4.4 | p | 4.4 | p | 3.9 | p | 16.8 | p |
Year ended 31 March 2003 | Unaudited | |||||||||
Quarters | 1st | 2nd | 3rd | 4th | Total | |||||
£m | £m | £m | £m | £m | ||||||
Total turnover | 4,998 | 5,094 | 5,124 | 4,966 | 20,182 | |||||
Groups share of associates and joint ventures turnover | (411 | ) | (433 | ) | (423 | ) | (188 | ) | (1,455 | ) |
Group turnover | 4,587 | 4,661 | 4,701 | 4,778 | 18,727 | |||||
Other operating income | 52 | 44 | 52 | 67 | 215 | |||||
Group operating profit | 562 | 726 | 555 | 729 | 2,572 | |||||
Groups share of operating profit of associates and joint ventures | 49 | 66 | 197 | 17 | 329 | |||||
Total operating profit | 611 | 792 | 752 | 746 | 2,901 | |||||
Profit (loss) on sale of fixed asset investments and group undertakings | 70 | (4 | ) | 99 | 1,526 | 1,691 | ||||
Profit on sale of property fixed assets | 3 | 3 | 1 | 4 | 11 | |||||
Amounts written off investments | | (7 | ) | | | (7 | ) | |||
Net interest payable | (300 | ) | (295 | ) | (285 | ) | (559 | ) | (1,439 | ) |
Profit on ordinary activities before taxation | 384 | 489 | 567 | 1,717 | 3,157 | |||||
Tax on profit on ordinary activities | (107 | ) | (165 | ) | (116 | ) | (71 | ) | (459 | ) |
Profit on ordinary activities after taxation | 277 | 324 | 451 | 1,646 | 2,698 | |||||
Minority interests | (2 | ) | (9 | ) | (6 | ) | 5 | (12 | ) | |
Profit for the financial period | 275 | 315 | 445 | 1,651 | 2,686 | |||||
Basic earnings per share | 3.2 | p | 3.7 | p | 5.2 | p | 19.1 | p | 31.2 | p |
Diluted earnings per share | 3.2 | p | 3.6 | p | 5.1 | p | 19.0 | p | 31.0 | p |
Profit before goodwill amortisation, exceptional items and taxation | 322 | 496 | 521 | 490 | 1,829 | |||||
Basic earnings per share before goodwill amortisation and | ||||||||||
exceptional items | 2.5 | p | 3.7 | p | 4.1 | p | 3.9 | p | 14.2 | p |
Diluted earnings per share before goodwill amortisation and | ||||||||||
exceptional items | 2.5 | p | 3.7 | p | 4.1 | p | 3.9 | p | 14.1 | p |
136 | BT Annual Report and Form 20-F 2004 |
Financial statistics
Years ended 31 March
2000 | 2001 | 2002 | 2003 | 2004 | |||||||
Financial ratios | |||||||||||
Basic earnings per share on continuing activities | |||||||||||
before goodwill amortisation and exceptional | |||||||||||
items pence | 29.5 | 19.3 | 8.8 | 14.2 | 16.9 | ||||||
Basic earnings (loss) per share on continuing | |||||||||||
activities pence | 29.2 | 20.7 | (34.8 | ) | 31.2 | 16.4 | |||||
Basic earnings (loss) per share pence | 27.6 | (25.7 | ) | 12.0 | 31.2 | 16.4 | |||||
Return on capital employed %a | 18.2 | 14.9 | 6.6 | de | 15.5 | de | 15.1 | ||||
Interest coverb | 8.8 | 2.6 | 0.6 | c | 2.0 | c | 3.0 | c | |||
a | The ratio is based on profit before tax, goodwill amortisation 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 computation of the average, except in the case of short-term investments and borrowings where average daily balances are used in their place. |
b | The number of times net interest payable is covered by total operating profit before goodwill amortisation. |
c | Interest cover based on continuing activities before goodwill amortisation and exceptional items was 3.3 times (2003 2.6 times). |
d | Return on capital employed is based upon the continuing activities. |
e | Return on capital employed on continuing activities before goodwill amortisation and exceptional items was 15.3% (2003 15.7%). |
2000 | 2001 | 2002 | 2003 | 2004 | ||||||
£m | £m | £m | £m | £m | ||||||
Expenditure on research and development | ||||||||||
Total expenditure | 345 | 364 | 362 | 380 | 334 | |||||
2000 | 2001 | 2002 | 2003 | 2004 | ||||||
£m | £m | £m | £m | £m | ||||||
Expenditure on tangible fixed assets | ||||||||||
Plant and equipment | ||||||||||
Transmission equipment | 1,239 | 1,655 | 1,373 | 1,277 | 1,324 | |||||
Exchange equipment | 412 | 478 | 428 | 228 | 150 | |||||
Other network equipment | 636 | 918 | 694 | 466 | 585 | |||||
Computers and office equipment | 419 | 407 | 273 | 281 | 205 | |||||
Motor vehicles and other | 254 | 231 | 189 | 162 | 316 | |||||
Land and buildings | 187 | 171 | 153 | 40 | 73 | |||||
3,147 | 3,860 | 3,110 | 2,454 | 2,653 | ||||||
Increase (decrease) in engineering stores | 13 | (3 | ) | (10 | ) | (9 | ) | 20 | ||
Total continuing activities | 3,160 | 3,857 | 3,100 | 2,445 | 2,673 | |||||
Total discontinued activities | 520 | 1,129 | 808 | | | |||||
Total expenditure on tangible fixed assets | 3,680 | 4,986 | 3,908 | 2,445 | 2,673 | |||||
(Increase) decrease in creditors | (112 | ) | (230 | ) | 161 | 135 | 11 | |||
Cash outflow on purchase of tangible fixed assets | 3,568 | 4,756 | 4,069 | 2,580 | 2,684 | |||||
Financial statistics have been restated where necessary to provide consistency with the presentation of the 2004 financial year figures.
137 | BT Annual Report and Form 20-F 2004 |
Operational statistics
Years ended 31 March
2000 | 2001 | 2002 | 2003 | 2004 | ||||||
Call growth (decline) | ||||||||||
% growth (decline) in UK fixed-network call volumes | ||||||||||
(minutes) over the previous year | 12 | 18 | 19 | 13 | (2 | ) | ||||
Growth is estimated by reference to growth in absolute call minutes.
2000 | 2001 | 2002 | 2003 | 2004 | ||||||
UK exchange line connections | ||||||||||
Business (000) | 8,450 | 8,918 | 9,072 | 9,198 | 9,071 | |||||
% growth (decline) over previous year | 5.9 | 5.5 | 1.7 | 1.4 | (1.4 | ) | ||||
Residential (000) | 20,035 | 19,981 | 20,093 | 20,357 | 20,550 | |||||
% growth (decline) over previous year | (0.1 | ) | (0.3 | ) | 0.6 | 1.3 | 0.9 | |||
Service providers (000) | 95 | 67 | 56 | 91 | 377 | |||||
% growth (decline) over previous year | | (29.5 | ) | (16.4 | ) | 62.5 | 314 | |||
Total exchange line connections (000) | 28,580 | 28,966 | 29,221 | 29,646 | 29,998 | |||||
% growth over previous year | 1.9 | 1.4 | 0.9 | 1.5 | 1.2 | |||||
2000 | 2001 | 2002 | 2003 | 2004 | ||||||
People employed | ||||||||||
Continuing activities (000) | 120.8 | 116.8 | 108.6 | 104.7 | 99.9 | |||||
Discontinued activities (000) | 16.0 | 20.2 | | | | |||||
Total employees (000) | 136.8 | 137.0 | 108.6 | 104.7 | 99.9 | |||||
138 | BT Annual Report and Form 20-F 2004 |
Risk factors
The business of BT is affected by a number of factors, not all of which are wholly within BTs control. Although many of the factors influencing BTs performance are macro economic and likely to affect the performance of businesses generally, some aspects of BTs business make it particularly sensitive to certain areas of business risk. This section highlights some of those specific areas. However, it does not purport to be an extensive analysis of the factors affecting the business and some risks may be unknown to us and other risks, currently believed to be immaterial, could turn out to be material. All of these could materially adversely affect our business, turnover, profits, assets, liquidity and capital resources. They should also be considered in connection with the forward looking statements in this document and the cautionary statement regarding forward-looking statements on page 141 of this document.
If BTs activities
are subject to significant price and other regulatory controls, its market share,
competitive position and future profitability may be affected
Most of BTs fixed network activities in the UK are subject to significant regulatory controls. The controls regulate, among other things, the prices BT may charge for many of its services and the extent to which
it has to provide services to its competitors. In recent years, the effect of these controls has been to cause BT to reduce its prices. BT cannot assure its shareholders that the regulatory authorities will not increase the severity of the price
controls, nor extend the services to which controls apply (including any new services that BT may offer in the future), nor extend the services which it has to provide its competitors. These controls may adversely affect BTs market share, the
severity of competition and its future profitability. During 2004 Ofcom is undertaking a strategic review of the UK telecommunications market in order to formulate the principles on which it can base its regulatory decisions in the future. This
review is scheduled to be completed before the end of 2004. It is not possible to predict the outcome or implications for BT of Ofcoms review. Further details on the regulatory framework in which BT operates can be found in
Business Review regulation, competition and prices on
pages 17 to 23 of this document.
BT faces strong competition in UK fixed network services
BT continues to have a significant market
share in some aspects of UK fixed network services. In particular, in the 2004
financial year we estimate we had a market share of 70% of consumer calls and
42% of business calls in the UK. Regulators have promoted competition in this
area by allowing BTs competitors to site equipment in or adjacent to its exchanges (local loop unbundling), to make it easier for BTs 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 BTs
market share in the fixed network may
lead to a fall in BTs turnover and an adverse effect on profitability.
Unlike its competitors, BT continues to be obliged by the current regulatory
regime to serve customers in the United Kingdom, whether or not such provision
of service is economic, and the competitive measures described above may have
the effect of accelerating the diversion of its more profitable existing customers
without it being able to reduce its costs commensurately. These
changes in the regulatory environment and ensuing increased competition on its
fixed network may cause adverse effects on its business, results of operations,
financial condition and prospects.
BTs business
is dependent on the ability to exploit technological advances quickly and successfully
BT operates in an industry with a recent
history of fast technological changes. It expects that new products and technologies
will emerge and that existing products and technologies will develop further.
BT needs to continually develop its services and products to exploit those next
generation technologies. However, BT cannot predict the actual effect of these
technological changes on its business or on its ability to provide competitive
services. For example
there is evidence of substitution by customers using mobile phones for day-to-day
voice calls in place of making such calls over the fixed network. Additionally,
some calls are now being routed over the internet in place of the traditional
switched
network. If these trends accelerate, BTs fixed network assets may be used
uneconomically and its investment in these assets may not be recovered through
profits on fixed-network calls and line rentals. Impairment write-downs may be
incurred and margins may decline if fixed costs cannot be reduced in line with
falling turnover.
BT is carrying out a transformation strategy, including the targeting of significant growth in new business areas
BT has a strategy to transform its business.
This may result in changes to its products, services, markets and culture. If
the groups transformation strategy is unsuccessful there is a risk that
the future turnover and profitability will decline. In particular BT has targeted
significant growth in new business areas, such as broadband, mobility and Information
and Communications Technology (ICT) solutions. In view of the likely level of
competition
and uncertainties regarding the level of economic activity, there can be no certainty
that BT will meet its growth targets in these areas, with a consequential impact
on future turnover and profitability.
BTs businesses
may be adversely affected if they fail to perform on major contracts
BT has entered into a number of complex
and high value services contracts with customers. Failure to manage and meet
BTs commitments under these contracts may lead to a reduction in BTs
future turnover,
profitability and cash generation.
139 | Risk factors | BT Annual Report and
Form 20-F 2004 |
BTs businesses
may be adversely affected if their networks or systems experience any significant
failures
or interruptions
BTs businesses are dependent
on their ability to transfer substantial volumes of data speedily and without
interruption. Any significant failure or interruption of such data transfer
due to factors outside their control could have a material adverse effect on
the businesses and their results from operations. BT has a business continuity
strategy designed to deal with such catastrophic events, including for example
major terrorist action, industrial action, extreme virus attack, hurricane or
flooding, that may impact the ability to maintain an effective service to customers.
A failure to deliver that strategy may result in a material loss and there can
be no assurance that material adverse events will not occur.
Declining investment returns
and longer life expectancy may result in the funding cost of the defined benefit
pension scheme becoming a significant burden on the financial resources of BT
The defined benefit pension scheme,
the BT Pension Scheme (BTPS), was closed to new members on 31 March 2001 and
has been replaced by a defined contribution scheme (BTRP). The latest full triennial
actuarial valuation of the BTPS was completed as at 31 December 2002. As a result,
BT agreed to make normal contributions of 12.2% of pensionable pay and annual
deficiency payments of £232 million. This will apply until the next triennial
actuarial valuation is completed as at 31 December 2005. In March 2004 a £380
million prepayment of deficiency contributions was made, representing most of
the deficiency contributions for the 2005 and 2006 financial years. The results
of future scheme valuations will be impacted by the future 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 on the financial resources of BT.
140 | BT Annual Report and
Form 20-F 2004 |
Additional information for shareholders
141 | Additional information for shareholders | BT Annual Report and
Form 20-F 2004 |
Cautionary statement regarding
forward-looking statements
Certain statements in this annual report
are forward-looking and are made in reliance on the safe harbour provisions
of the US Private Securities Litigation Reform Act of 1995. These statements
relate to analyses and other information which are based on forecasts of future
results and estimates of amounts not yet determinable. These statements include,
without limitation, those concerning: BTs strategy and its ability to
achieve it; BTs debt reduction plans; growth of, and opportunities available
in, the communications industry and BTs positioning to take advantage
of those opportunities; expectations regarding competition, market shares, prices
and growth; expectations regarding the convergence of technologies; growth and
opportunities in new wave business (ICT, broadband, mobility and managed services);
BTs 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; BTs possible or assumed
future results of operations and/or those of its associates and joint ventures;
BTs future dividend policy; capital expenditure and investment plans;
adequacy of capital; financing plans; demand for and access to broadband and
the promotion of broadband by third-party service providers; and those preceded
by, followed by, or that include the words believes,
expects, anticipates, intends
or similar expressions.
Although
BT believes that the expectations reflected in these forward-looking statements
are reasonable, it can give no assurance that these expectations will prove
to have been correct. Because these statements involve risks and uncertainties,
actual results may differ materially from those expressed or implied by these
forward-looking statements.
Factors
that could cause differences between actual results and those implied by the
forward-looking statements include, but are not limited to: material adverse
changes in economic conditions in the markets served by BT and its lines of
business; future regulatory actions and conditions in its operating areas,
including
competition from others in the UK and other international communications markets;
selection by BT and its lines of business of the appropriate trading and marketing
models for its products and services; technological innovations, including
the
cost of developing new products and the need to increase expenditures for improving
the quality of service; the anticipated benefits and advantages of new technologies
not being realised; developments in the convergence of technologies; prolonged
adverse weather conditions resulting in a material increase in overtime, staff
or other costs; the timing of entry and profitability of BT and its lines of
business in certain communications markets; significant changes in market shares
for BT and its principal products and services; fluctuations in foreign currency
exchange rates and interest rates; and general financial market conditions
affecting
BTs performance. Certain of these factors are discussed in more detail
elsewhere in this annual report including, without limitation, in Risk
factors. BT undertakes no obligation to update any forward-looking
statements whether as a result of new information, future events or otherwise.
142 | Additional information for shareholders | BT Annual Report and Form 20-F 2004 |
Listings
The
principal listing of BT Groups ordinary shares is on the London Stock Exchange. American Depositary Shares (ADSs), each representing 10 ordinary shares, have been issued by JPMorgan Chase Bank, as Depositary
for the American Depositary Receipts (ADRs) evidencing the ADSs, and are listed on the New York Stock Exchange. ADSs also trade, but are not listed, on the London Stock Exchange. Trading on the New York Stock Exchange is under the symbol
BTY.
a | The pre-19 November 2001 prices shown have been adjusted for the rights issue and demerger that occurred in the 2002 financial year. |
The prices are the highest and lowest closing middle market prices for BT ordinary shares, as derived from the Daily Official List of the London Stock Exchange and the highest and lowest sales prices of ADSs, as
reported on the New York Stock Exchange composite tape.
Fluctuations
in the exchange rate between the pound sterling and the US dollar affect the
dollar equivalent of the pound sterling price of the companys 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 shares.
Rights issue
An explanatory note on the effects of the rights issue on the CGT position relating to BT shareholdings is available from the Shareholder Helpline (see page 153).
143 | Additional information for shareholders | BT Annual Report and Form 20-F 2004 |
Demerger
of mmO2 capital
gains tax calculation
The confirmed official opening
prices for BT Group and mmO2 shares on 19 November 2001 following
the demerger were 285.75p and 82.75p, respectively.
This means that, of the total (combined) value of 368.50p, 77.544%
is attributable to BT Group and 22.456% to mmO2.
Accordingly, for CGT calculations, the base cost
of your BT Group shares and
mmO2
shares
is calculated by multiplying the acquisition cost of your
BT shareholding by 77.544% and 22.456%, respectively.
a | 31 million shares were held in trust by Ilford Trustees (Jersey) Limited for allocation to employees under the employee share plans. |
b | Under the BT Employee Share Ownership Scheme and the BT Group Employee Share Investment Plan, 7 million and 39 million shares respectively were held in trust on behalf of 105,657 and 89,129 participants respectively who were beneficially entitled to the shares. 137 million shares were held in the corporate nominee BT Group EasyShare on behalf of 124,279 beneficial owners. |
c | 208 million shares were represented by ADSs. Analysis by size of holding is not available for this holding. |
d | 14.3% of the shares were in 1,572,571 individual holdings, of which 135,432 were joint holdings, and 85.7% of the shares were in 31,694 institutional holdings. |
So far as the company is aware, the company is not directly or indirectly owned or controlled by another corporation or by the UK Government or any other foreign government or by any other natural or legal person
severally or jointly. There are no arrangements known to the company the operation of which may at a subsequent date result in a change in control of the company.
At 14 May 2004, there were 8,590,507,813 ordinary shares outstanding and 44,121,225 shares were held as treasury shares. At the same date, approximately 21.2 million ADSs (equivalent to
212 million ordinary shares, or approximately 2.5% of the total number of ordinary shares outstanding on that date) were outstanding and were held by 2,461 record holders of ADRs. At 31 March 2004, there were 3,577 shareholders with a US address on
the register of shareholders.
Dividends
Since
shortly after its incorporation in 1984, British Telecommunications plc paid
interim dividends annually in February and final dividends in September. However,
as part of BTs debt reduction and restructuring
plans, neither a final dividend for the year ended 31 March 2001 nor an interim
dividend for the year ended 31 March 2002 was paid to shareholders.
A final dividend in respect of the year ended 31
March 2003, was paid on 8 September 2003 to shareholders on the register on 8
August 2003, and an interim dividend in respect 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 amounts shown are
not those that were actually paid to holders of ADSs. For the tax treatment of
dividends paid on or after 6 April 1999 see Taxation of dividends below. The
dividends on the ADSs paid before 5 April 1999 include the associated UK tax credit available to certain beneficial owners who are resident in the United States or Canada for tax purposes, but before deduction of UK withholding taxes. Dividends have
been translated from pounds sterling into US dollars using exchange rates prevailing on the date the ordinary dividends were paid.
144 | Additional information for shareholders | BT Annual Report and Form 20-F 2004 |
Per ordinary share | Per ADS | Per ADS | |||||||||||||||||
Years ended |
Interim | Final | Total | Interim | Final | Total | Interim | Final | Total | ||||||||||
31 March |
pence | pence | pence | £ | £ | £ | US$ | US$ | US$ | ||||||||||
2000 | 8.70 | 13.20 | 21.90 | 0.870 | 1.320 | 2.190 | 1.529 | 2.039 | 3.568 | ||||||||||
2001 | 8.70 | | 8.70 | 0.870 | | 0.870 | 1.397 | | 1.397 | ||||||||||
2002 | | 2.00 | 2.00 | | 0.200 | 0.200 | | 0.311 | 0.311 | ||||||||||
2003 | 2.25 | 4.25 | 6.50 | 0.225 | 0.425 | 0.650 | 0.366 | 0.673 | 1.039 | ||||||||||
2004 | 3.20 | 5.30 | 8.50 | 0.320 | 0.530 | 0.850 | 0.590 | | a | | a | ||||||||
a | Qualifying holders of ADSs on record as of 6 August 2004 are entitled to receive the final dividend which will be paid on 14 September 2004, subject to 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 sterling, exchange rate fluctuations will affect the US dollar amounts received by holders of ADSs on conversion by the Depositary of such cash dividends.
Dividend mandate
Any shareholder wishing dividends
to be paid directly into a bank or building society account should contact the
Shareholder Helpline (see page 153). Dividends paid in this way will be paid
through the Bankers Automated Clearing System (BACS). Alternatively, a form
may be downloaded from the internet at www.bt.com/aboutbt.
Dividend investment plan
The dividend investment plan replaced
the share dividend plan for shareholders following the 1999 interim dividend.
Under the dividend investment plan, cash from participants dividends is
used to buy further BT
Group 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 | |||
2000 final | 18 September 2000 | 809.6 | ||
2001 interim | 12 February 2001 | 621.8 | ||
2002 final | 9 September 2002 | 191.19 | ||
2003 interim | 10 February 2003 | 178.23 | ||
2003 final | 8 September 2003 | 184.41 | ||
2004 interim | 9 February 2004 | 175.98 | ||
Global Invest Direct
Details of the direct purchase plan run by the ADR Depositary, JPMorgan Chase Bank, Global Invest Direct, including reinvestment of dividends, are available from JPMorgan Chase Bank on 1 800 749 1687 (toll free within
the USA) or +1 781 575 4328 (from outside the USA), or on written request to the ADR Depositary.
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, reflecting
share price movements and assuming reinvestment of dividends. It is, therefore,
a good indicator of a companys overall performance.
Over
the past five years (as shown in the TSR chart below), BT after performing very
strongly in the first year, has suffered falls in its share price like many
stocks in the telecoms, media and technology (TMT) sector. BTs TSR (as
adjusted for the rights issue and demerger) over the last five years was negative
72% compared to a FTSE 100 TSR fall of negative 20%. However, over the past
year both BT and the FTSE 100 have delivered a very positive performance (BT
positive 18% and the FTSE 100 positive 26%).
In
the period between the demerger on 19 November 2001 and 31 March 2004, BTs
share price outperformed the European Telecoms sector for most of the period.
However, BT shares have not matched the sector recovery in the most recent months
resulting in an underperformance versus the European Telecom sector by around
8% (as shown in the share price performance chart), over the 28 month period.
Individual savings accounts
(ISAs)
Information about investing in BT shares
through an ISA may be obtained from Halifax Share Dealing Limited, Trinity Road,
Halifax, W.Yorkshire HX1 2RG (telephone 0870 242 5588). ISAs are also offered
by other organisations.
ShareGift
The Orr Mackintosh Foundation operates
a charity share donation scheme for shareholders with small parcels of shares
whose value makes it uneconomic to sell them. Details of the scheme are available
from ShareGift at www.sharegift.org or telephone 020 7337 0501, or can
be obtained from the Shareholder Helpline.
Unclaimed Assets Register
BT is among a growing number of companies
who subscribe to the Unclaimed Assets Register, which provides a search facility
for financial assets, such as shareholdings and dividends which have become
separated from their owners. The Register donates a proportion of its public
search fees to charity via ShareGift. For further information on the Unclaimed
Assets Register, visit www.uar.co.uk or telephone 0870 241 1713.
146 | Additional information for shareholders | BT Annual
Report and Form 20-F 2004 |
Exchange rates
BT publishes its consolidated
financial statements expressed in pounds sterling. The following tables detail
certain information concerning the exchange rates between pounds sterling and
US dollars based on the noon buying rate in New York City for cable transfers
in pounds sterling as certified for customs purposes by the Federal Reserve
Bank of New York (the Noon Buying Rate).
Years ended 31 March | 2000 | 2001 | 2002 | 2003 | 2004 | |||||
|
|
|
|
|
|
|||||
Period end | 1.59 | 1.42 | 1.43 | 1.57 | 1.84 | |||||
Averagea | 1.61 | 1.47 | 1.43 | 1.55 | 1.71 | |||||
High | 1.68 | 1.60 | 1.48 | 1.65 | 1.90 | |||||
Low | 1.55 | 1.40 | 1.37 | 1.43 | 1.55 | |||||
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|||||
Month | |||||||||||||
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|||||||||||||
November | December | January | February | March | April | ||||||||
2003 | 2003 | 2004 | 2004 | 2004 | 2004 | ||||||||
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|
|
|
|
|
||||||||
High | 1.72 | 1.78 | 1.85 | 1.90 | 1.87 | 1.86 | |||||||
Low | 1.67 | 1.72 | 1.79 | 1.82 | 1.79 | 1.77 | |||||||
|
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||||||||
a | The average of the Noon Buying Rates 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 BTs memorandum
and articles of association (Memorandum and Articles),
a copy of which has been filed with the Registrar of Companies.
Memorandum
The Memorandum provides that its principal
objects are, among other things, to carry on any business of running, operating,
managing and supplying telecommunication systems and systems of any kind for
conveying, receiving, storing, processing or transmitting sounds, visual images,
signals, messages and communications of any kind.
Articles
In the following description of the rights
attaching to the shares in the company, a holder of shares
and a shareholder is, in either case, the person entered
on the companys register of members as the holder of the relevant shares.
Shareholders can choose whether their shares are to be evidenced by share certificates
(i.e. in certificated form) or held in electronic (i.e. uncertificated) form
in CREST (the electronic settlement system in the UK).
(a) Voting
rights
Subject to the restrictions described below, on a show of hands, every shareholder
present in person or by proxy at any general meeting has one vote and, on a poll,
every shareholder present in person or by proxy has one vote for each share which
they hold.
Voting at any meeting of shareholders is by a
show of hands unless a poll is demanded by the chairman of the meeting or by
at least five shareholders at the meeting who are entitled to vote (or their
proxies), or by one or more shareholders at the meeting who are entitled to
vote (or their proxies) and who have, between them, at least 10% of the total
votes of all shareholders who have the right to vote at the meeting.
No person is, unless the Board decide otherwise,
entitled to attend or vote at any general meeting or to exercise any other
right conferred by being a shareholder if he or any person appearing to be
interested in those shares has been sent a notice under section 212 of the
Companies Act 1985 (which confers upon public companies the power to require
information with respect to interests in their voting shares) and he or any
interested person has failed to supply to the company the information requested
within 14 days after delivery of that notice. These restrictions end seven
days after the earlier of the date the shareholder complies with the request
satisfactorily or the company receives notice that there has been an approved
transfer of the shares.
(b) | Variation of rights |
Whenever the share capital of the company is split into different classes of shares, the special rights attached to any of those classes can be varied or withdrawn either: | |
(i) | with the sanction of an extraordinary resolution passed at a separate meeting of the holders of the shares of that class; or |
(ii) | with the consent in writing of the holders of at least 75% in nominal value of the issued shares of that class. |
At any separate
meeting, the necessary quorum is two persons holding or representing by
proxy not less than one-third in nominal amount of the issued shares of
the class in question (but at any adjourned meeting, any person holding
shares of the class or his proxy is a quorum). |
147 | Additional information for shareholders | BT
Annual Report and Form 20-F 2004 |
The company can issue new shares and attach any rights and restrictions to them, as long as this is not restricted by special rights previously given to holders of any existing shares. Subject to this, the rights of new shares can take priority over the rights of existing shares, or existing shares can take priority over them, or the new shares and the existing shares can rank equally.
(c) | Changes in capital |
The company may by ordinary resolution: | |
(i) | consolidate and divide all or any of its share capital into shares of a larger amount; |
(ii) | divide all or part of its share capital into shares of a smaller amount; |
(iii) | cancel any shares which have not, at the date of the ordinary resolution, been taken or agreed to be taken by any person and reduce the amount of its share capital by the amount of the shares cancelled; and |
(iv) | increase its share capital. |
The company may also: | |
(i) | buy back its own shares; and |
(ii) | by special resolution reduce its share capital, any capital redemption reserve and any share premium account. |
(d) | Dividends |
The companys shareholders can declare dividends by passing an ordinary resolution provided that no dividend can exceed the amount recommended by the directors. Dividends must be paid out of profits available for distribution. If the directors consider that the profits of the company justify such payments, they can pay interim dividends on any class of shares of the amounts and on the dates and for the periods they decide. Fixed dividends will be 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 companys shareholders must have passed an ordinary resolution
authorising the directors to make this offer. |
|
Any
dividend which has not been claimed for 10 years after it was declared
or became due for payment will be forfeited and will belong to the company
unless the directors decide otherwise. |
|
(e) | Distribution of assets on winding up |
If the company is wound up (whether the liquidation is voluntary, under supervision of the court or by the court) the liquidator can, with the authority of an extraordinary resolution passed by the shareholders, divide among the shareholders all or any part of the assets of the company. This applies whether the assets consist of property of one kind or different kinds. For this purpose, the liquidator can place whatever value the liquidator considers fair on any property and decide how the division is carried out between shareholders or different groups of shareholders. The liquidator can also, with the same authority, transfer any assets to trustees upon any trusts for the benefit of shareholders which the liquidator decides. The liquidation of the company can then be finalised and the company dissolved. No past or present shareholder can be compelled to accept any shares or other property under the Articles which could give them a liability. | |
(f) | Transfer of shares |
Certificated shares of the company may be transferred in writing either by an instrument of transfer in the usual standard form or in another form approved by the Board. The transfer form must be signed or made effective by or on behalf of the person making the transfer. The person making the transfer will be treated as continuing to be the holder of the shares transferred until the name of the person to whom the shares are being transferred is entered in the register of members of the company. |
The Board may refuse to register any transfer of any share held in certificated form: | |
which is in favour of more than four joint holders; or | |
unless the transfer form to be registered is properly stamped to show payment of any applicable stamp duty and delivered to the companys registered office or any other place the Board decide. The transfer must have with it the share certificate for the shares to be transferred; any other evidence which the Board ask for to prove that the person wanting to make the transfer is entitled to do this; and if the transfer form is executed by another person on behalf of the person making the transfer, evidence of the authority of that person to do so. | |
Transfers of uncertificated
shares must be carried out using a relevant system (as defined in the Uncertificated Securities Regulations 1995 (the Regulations)).
The Board can refuse to register a transfer of an uncertificated share
in the circumstances stated in the Regulations. |
|
If the Board decide not to register a transfer of a share, they
must notify the person to whom that share was to be transferred no later
than two months after the company receives the transfer or instruction
from the operator of the relevant system. |
|
The
Board can decide to suspend the registration of transfers, for up to 30
days a year, by closing the register of shareholders. The register must
not be closed without the consent of the operator of a relevant system
(as defined in the Regulations) in the case of uncertificated shares. |
148 | Additional 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 them
and have not been claimed and BT has not heard from the shareholder or any person
entitled to the dividends by transmission. The net sale proceeds belong to BT,
but it must pay those proceeds to the former shareholder or the person entitled
to them by transmission if that shareholder, or that other person, asks for them.
(h) General
meetings of shareholders
Every year
the company must hold an annual general meeting. The Board can call an extraordinary
general meeting
at any time and, under general law, must call one on a shareholders requisition.
(i) Limitations
on rights of
non-resident or foreign shareholders
The
only limitation imposed by the Articles on the rights of non-resident or foreign
shareholders is that a shareholder whose registered address is outside the UK
and who wishes to receive notices of meetings 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 fees for
his services as the Board decide, not exceeding £50,000 a year and
increasing by the percentage increase of the UK Retail Prices Index (as defined
by Section 833(2) Income and Corporation Taxes Act 1988) for any 12-month
period
beginning1 April
1999 or an anniversary of that date. The company may by ordinary resolution decide
on a higher sum.This resolution can increase
the fee paid to all or any directors either permanently or for a particular period.
The directors may be paid their expenses properly incurred in connection with
the business of the
company.
The
Board can award extra fees to a director who holds an executive position; acts
as chairman or deputy chairman; serves on a Board committee at the request of
the Board; or performs any other services which the Board consider extend beyond
the ordinary duties of a director.
The
directors may grant pensions or other benefits to, among others, any director
or former director or persons connected with them. However, BT can only provide
these benefits to any director or former director who has not been an employee
or held any other office or executive position in the company or any of its subsidiary
undertakings, or to relations or dependants of, or people connected to, those
directors or former directors, if the shareholders approve this by passing an
ordinary resolution.
Directors votes
A
director need not be a shareholder, but a director who is not a shareholder
can still attend and speak at shareholders meetings.
Unless
the Articles say otherwise, a director cannot vote on a resolution about
a contract in which the director has a material interest (this will also
apply to interests of a person connected with the director). The director
can vote if the interest is only an interest in BT shares, debentures or
other securities. A director can, however, vote and be counted in a quorum
in respect of certain matters in which he is interested as set out in the
Articles.
Subject
to the relevant legislation, the shareholders can by passing an ordinary
resolution suspend or relax, among other things, the provisions relating
to the interest of a director in any contract or arrangement or relating
to a directors right to vote and be counted in a quorum on resolutions
in which he is interested to any extent or ratify any particular contract
carried out in breach of those provisions.
Directors interests | |
If the legislation allows and the director has disclosed the nature and extent of the interest to the Board, the director can: | |
(i) | have any kind of interest in a contract with or involving BT (or in which BT has an interest or with or involving another company in which BT has an interest); |
(ii) | have any kind of interest in a company in which BT has an interest (including holding a position in that company or being a shareholder of that company); |
(iii) | hold a position (other than auditor) in BT or another company in which BT has an interest on terms and conditions decided by the Board; and |
(iv) | alone (or through some firm with which the director is associated) do paid professional work (other than as auditor) for BT or another company in which BT has an interest on terms and conditions decided by the Board. |
149 | Additional information for shareholders | BT Annual Report and Form 20-F 2004 |
Retirement of directors
Provisions of the legislation which, read with the Articles, would prevent a person from being or becoming a director because that person has reached the age of 70 do not apply to the company.
At every annual general meeting any director who was elected or last re-elected a director at or before the annual general meeting held in the third year before the current year, shall
retire by rotation. Any director appointed by the directors automatically retires at the next following annual general meeting. A retiring director is eligible for re-election.
Directors borrowing powers
To the extent that the legislation and the Articles
allow, the Board can exercise all the powers of the company to borrow money,
to mortgage or charge its business, property and assets (present and future)
and to issue debentures and other securities, and give security either outright
or as collateral security for any debt, liability or obligation of the company
or another person. The Board must limit the borrowings of the company and exercise
all the
companys voting and other rights or powers of control exercisable by the company in relation to its subsidiary undertakings so as to ensure that the aggregate amount of all borrowings by the group outstanding, net of amounts borrowed
intra-group among other things, at any time does not exceed £35 billion.
Material contracts
The following contracts (not being contracts entered into in the ordinary course of business) have been entered into in the two years preceding the date of this document by BT or another member of the group and are, or
may be, material to the group or have been entered into by BT or another member of the group and contain a provision under which a member of the group has an obligation or entitlement which is, or may be, material to BT or such other member of the
group.
Cegetel
On 5 December 2002, Vivendi Universal
(Vivendi) served a notice exercising its pre-emption
rights under the Shareholders Agreement in respect of Cegetel Groupe SA
(Cegetel) to acquire BTs entire shareholding a
26% interest in Cegetel from Cegetel Holdings I BV Sarl (Cegetel
Holdings),
a BT group company for €4.0 billion (£2.6
billion) in cash. This pre-emption right became exercisable as a result of Cegetel
Holdings
having entered into a share purchase agreement for the sale of its shareholding
in Cegetel to Vodafone AG for €4.0
billion in cash, in October 2002.
Vivendi paid €2.7 billion of the consideration to Cegetel Holdings on 17 January 2003 and the transaction was
completed when Vivendi paid the balance of €1.3 billion on 22 January 2003.
Taxation (US Holders)
This is a summary only of the principal US federal income tax and UK tax consequences of the ownership and disposition of ordinary shares or ADSs by US Holders (as defined below) who hold their ordinary shares or ADSs
as capital assets. It does not address all aspects of US federal income taxation and does not address aspects that may be relevant to persons who are subject to special provisions of US federal income tax law, including US expatriates, insurance
companies, tax-exempt organisations, financial institutions, securities broker-dealers, traders in securities who elect a mark-to-market method of accounting, persons subject to alternative minimum tax, investors that directly, indirectly or by
attribution own 10% or more of the outstanding share capital or voting power of BT, persons holding their ordinary shares or ADSs as part of a straddle, hedging transaction or conversion transaction, persons who acquired their ordinary shares or
ADSs pursuant to the exercise of options or otherwise as compensation, or persons whose functional currency is not the US dollar, amongst others. Those holders may be subject to US federal income tax consequences different from those set forth
below.
For purposes of this summary, a US Holder is
a beneficial owner of ordinary shares or ADSs that, for US federal income tax
purposes, is: an individual citizen or resident of the United States, a corporation
(or other entity taxable as a corporation for US federal income tax purposes)
created or organised in or under the laws of the United States or any state thereof,
an estate the income of which is subject
to US federal income taxation regardless of its source, or a trust if a US court
can exercise primary supervision over the administration of the trust and one
or more US persons are authorised to control all substantial decisions of the
trust. If a partnership holds ordinary shares or ADSs, the tax treatment of a
partner generally will depend upon the status of the partner and the activities
of the partnership. A partner in a partnership that holds ordinary shares or
ADSs is urged to consult
its own tax advisor regarding the specific tax consequences 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, rulings, judicial decisions and administrative practice, all as currently in effect, (ii) the United KingdomUnited States Income Tax Convention that entered into force on 25
April 1980 as in effect on 1 January 2003 (the 1980 Convention), (iii) the United KingdomUnited States Convention relating to estate and gift taxes, and (iv) the new United KingdomUnited
States Tax Convention that
entered into force on
150 | Additional information for shareholders | BT Annual Report and Form 20-F 2004 |
31 March 2003 (the New 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.
US Holders should be aware that the New Convention generally will have effect in respect of dividends paid on or after 1 May 2003. However, a US Holder entitled to benefits under the 1980
Convention may elect to have the provisions of the 1980 Convention continue for an additional twelve months if the election to apply the 1980 Convention would result in greater benefits to the Holder. If a US Holder were to make an effective
election, the discussion below with respect to dividend payments made pursuant to the 1980 Convention would continue to apply to dividends paid by BT prior to 1 May 2004. The discussion below notes instances where the relevant provisions of the New
Convention will produce a materially different result for a US Holder. US Holders should note that certain articles in the New Convention limit or restrict the ability of a US Holder to claim benefits under the New Convention and that similar
provisions were not contained in the 1980 Convention.
US Holders should consult their own tax advisors as to the applicability of the Conventions and the consequences under UK, US federal, state and local, and other laws, of the ownership and
disposition of ordinary shares or ADSs.
Taxation of dividends
The UK currently does not apply a withholding tax on dividends under its internal tax laws.
For US federal income tax purposes, a distribution (including any additional dividend income arising from a foreign tax credit claim as described below) will be treated as ordinary
dividend income to the extent paid out of the current or accumulated earnings and profits, as determined for US tax purposes, based on the US dollar value of the distribution calculated by reference to the spot rate in effect on the date the
distribution is actually or constructively received by a US Holder of ordinary shares, or by the Depositary, in the case of ADSs. Distributions by BT in excess of its current and
accumulated earnings and profits will be treated first as a tax-free return of
capital to the extent of the US Holders adjusted tax basis in the ordinary
shares or ADSs, and thereafter taxable as capital gain. Dividends paid by BT
will not be eligible for the US dividends received deduction.
For
dividends paid on or before 5 April 1999, US Holders were generally entitled
to receive the cash dividend plus a Treaty payment from the Inland Revenue of
one quarter of the dividend, subject to a UK withholding tax of 15% of the aggregate
amount paid. As an example for illustration purposes only, a US Holder who was
entitled to a dividend of £80 was also entitled to a Treaty payment of £20, reduced by the withholding
tax of 15% on the gross amount of £100, i.e. £15, leaving a net cash payment of £85.
The full dividend plus the full Treaty payment including the UK tax withheld
was taxable income for US purposes, and the UK tax withheld generally was available
as a US credit or deduction.
For dividends
paid on or after 6 April 1999 and subject to the 1980 Convention as described
above, the Treaty payment reduces to one ninth of the dividend (i.e. one tenth
of the gross payment). As a result of the UK withholding tax (which cannot exceed
the amount of the hypothetical Treaty payment), US Holders will no longer receive
any Treaty payment. In the above example, the cash dividend would be £80, and the
hypothetical Treaty payment would be £8.89 (one ninth of £80). However, since the UK withholding tax (15% of £88.89), would exceed the amount of the hypothetical Treaty payment, no Treaty payment will be made and the US Holder will
receive only the cash dividend (here, £80). A US Holder will be taxable in the US on the full dividend and full hypothetical Treaty payment (£88.89), and will be treated as having paid a foreign tax equal to the hypothetical Treaty
payment (here, £8.89). The effect on each US Holder will depend on circumstances
that are particular to that Holder.
The
foreign tax deemed paid generally will be available as a US credit or deduction.
A US Holder could elect to receive a foreign tax credit or deduction with respect
to any UK withholding tax on IRS Form 8833 (Treaty-Based 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 constitute passive income or, for certain Holders, financial services income.
The rules relating to the determination of the foreign tax credit are very complex.
US Holders who do not elect to claim a credit with respect to any foreign taxes
paid in a given taxable year may instead claim a deduction for foreign taxes
paid. A deduction does not reduce US federal income tax on a dollar for dollar
basis like a tax credit.
The deduction, however, is not subject to the limitations applicable to foreign
credits.
There will be no hypothetical Treaty payment and no notional UK withholding tax applied to a dividend payment made under the New Convention. Therefore, it will not be possible for US
Holders to claim a foreign tax credit in respect of any dividend payment made by BT on or after 1 May 2003 (or 1 May 2004 in the case of a US Holder who effectively elects to extend the applicability of the 1980 Convention as described
above).
US Holders should consult their
own tax advisors to determine whether the US Holder is eligible for benefits
under the 1980 Convention and the New Convention, whether, and to what extent,
a foreign tax credit will be available with respect to dividends received from
BT, whether it may be advisable in light of the Holders particular circumstances
to elect to have the provisions of the 1980 Convention continue in force until
1 May 2004, and the treatment of any foreign currency gain or loss on any pounds
sterling received with respect to ordinary shares that are not converted into
US dollars on the date the pounds sterling are actually or constructively received.
151 | Additional information for shareholders | BT Annual Report and Form 20-F 2004 |
Recent US tax law changes applicable to individuals
Under 2003 US tax legislation, some
US Holders (including individuals) are eligible for reduced rates of US federal
income tax (currently a maximum of 15%) in respect of qualified dividend
income received in taxable years beginning after 31 December 2002
and beginning before 1 January 2009. For this purpose, qualified dividend income
generally includes dividends paid by non-US corporations if, among other things,
certain minimum holding periods are met and either (i) the shares (or ADSs) with
respect to which the dividend has been paid are readily tradeable on an established
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 and ADSs will constitute qualified dividend
income for US federal income tax purposes, provided the individual US Holders
of its ordinary shares and ADSs meet certain requirements. Some of the eligibility
requirements for non-US corporations are not entirely certain, however, and further
guidance from the IRS is anticipated. In addition, the IRS is expected to issue
certification procedures in 2004 whereby a non-US corporation will be required
to certify as to the eligibility of its dividends for the reduced US federal
income tax
rates.
Taxation of capital gains
Unless a US resident carries on a trade through a branch or agency in the UK, and the disposal of ordinary shares and/or ADSs is related to the activities of that trade, UK capital gains tax is not charged on US
residents who dispose of ordinary shares and/or ADSs.
For
US federal income tax purposes, a US Holder generally will recognise capital
gain or loss on the sale or other disposition of ordinary shares or ADSs in
an amount equal to the difference between the US dollar value of the amount
realised on the disposition and the US Holders adjusted tax basis (determined
in US dollars) in the ordinary shares or ADSs. Such gain or loss generally
will be US source gain or loss, and will be treated as long-term capital gain
or loss if the ordinary shares have been held for more than one year at the
time of disposition. The deductibility of capital losses is subject to significant
limitations. Capital gains recognised by an
individual US Holder generally are subject to US federal income tax at preferential
rates if specified holdings periods are met.
Passive foreign investment company status
A non-US corporation will be classified
as a Passive Foreign Investment Company (a PFIC) for any taxable year if at least 75% of its gross income consists of passive income or at least 50% of
the average value of its assets consist of assets that produce, or are held for the production of, passive income. BT currently believes that it did not qualify as a PFIC for the taxable year ending 31 March 2004 for US federal income tax purposes.
If BT were to become a PFIC for any taxable year, US Holders would suffer adverse tax consequences. These consequences may include having gains realised on the disposition of ordinary shares or ADSs treated as ordinary income rather than capital
gains and being subject to punitive interest charges on certain dividends and on the proceeds of the sale or other disposition of the ordinary shares or ADSs. Furthermore, dividends paid by BT would not be qualified dividend
income and would be subject to the higher rates applicable to other
items of ordinary income. US Holders should consult their own tax advisors regarding
the potential application of the PFIC rules to BT.
US information reporting and backup withholding
Dividends paid on and proceeds received from the sale or disposition of ordinary shares or ADSs may be subject to information reporting to the IRS and backup withholding at a current rate of 28%. Certain exempt
recipients (such as corporations) are not subject to these information reporting requirements. Backup withholding will not apply, however, to a Holder who provides a correct taxpayer identification number or certificate of foreign status and makes
any other required certification or who is otherwise exempt. US persons who are required to establish their exempt status generally must furnish IRS Form W-9 (Request for Taxpayer Identification Number and Certification). Non-US Holders generally
will not be subject to US information reporting or backup withholding. However, such Holders may be required to provide certification of non-US status in connection with payments received in the United States or through certain US-related financial
intermediaries.
Amounts
withheld as backup withholding may be credited against a Holders US federal
income tax liability. A Holder may obtain a refund of any excess amounts withheld
under the backup withholding rules by timely filing the appropriate claim for
refund with the IRS and furnishing any required information.
UK stamp duty
A transfer of an ordinary share will generally be subject to UK stamp duty or UK stamp duty reserve tax at 0.5% of the amount or value of any consideration provided. A transfer of an ordinary share into a clearance
service or American depository system gives rise to a 1.5% charge of either the amount of the consideration provided or the value of the share issued. No UK stamp duty will be payable on the transfer of an ADS (assuming it is not registered in the
UK), provided that the transfer documents are executed and always retained outside the UK.
152 | Additional information for shareholders | BT Annual Report and Form 20-F 2004 |
UK inheritance and gift taxes in connection with ordinary shares and/or ADSs
Where an individual holder, who is not
a UK national, of ordinary shares and/or ADSs falls within the scope of the
UK/US Estate and Gift Tax Convention, US-domiciled holders of ordinary shares
and/or ADSs will not generally be subject to UK inheritance tax on a gift of
ordinary shares and/or ADSs if the gift is subject to US federal gift tax.
Similarly, ordinary shares and/or ADSs passing on the death of a US-domiciled
shareholder, who is not a UK national,
will not generally be subject to UK inheritance tax if the estate is subject
to US estate tax. The rules and scope of domicile are complex and action should
not be taken without advice specific to the individuals circumstances.
Exchange controls and other limitations affecting security holders
There are currently no 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 companys ordinary shares, except as otherwise described
in Taxation (US Holders) above. There are no limitations under the laws of the United Kingdom restricting the right of non-residents to hold or to vote shares in the company.
Documents on display
All reports and other information that
BT files with the US Securities and Exchange Commission may be inspected at the
SECs public reference facilities at Room 1200, 450 Fifth Street, Washington, DC, USA. These
reports may be accessed via the SECs website at www.sec.gov.
Publications
BT produces a series of reports on the
companys financial, economic, social and environmental performance. Most
of these reports, which are available to shareholders on request, can be accessed
on the internet at www.bt.com/aboutbt.
More detailed disclosures on BTs implementation of social, ethical and
environmental policies and procedures are available online through our fully
and independently verified social and environment report at www.bt.com/betterworld.
Document |
Publication date |
Annual Review including summary financial statement | June |
Annual Report and Form 20-F | June |
Quarterly results releases | July, November, February and May |
Current Cost Financial Statements for the Businesses | |
and Activities and Statement of Standard Services (as required by Ofcom) | August |
Social and Environment Report | June |
Statement of Business Practice | October 2003 |
For printed copies, when available, contact the Shareholder Helpline on Freefone 0808 100 4141 or, alternatively, contact the Registrar in the UK, at the address on page 153.
153 | Additional information for shareholders | BT Annual Report and Form 20-F 2004 |
Electronic communication
Shareholders can now choose to receive
their shareholder documents electronically rather than by post. Shareholders
may elect to receive documents in this way by going to www.bt.com/signup and
following the online instructions, or by calling the Shareholder Helpline.
Shareholder communication
BT is committed to communicating openly with each of its stakeholder audiences in the manner most appropriate to their requirements.
All investors can visit our website at www.bt.com/aboutbt for more information about BT. There are direct links
from this page to sites providing information particularly tailored for shareholders, institutional investors and analysts, industry analysts and journalists.
An electronic copy of this document is
available at www.bt.com/aboutbt.
Private shareholders
If private shareholders have any enquiries about their shareholding, they should contact the Registrar (the address can be found below).
Lloyds
TSB Registrars maintain BT Groups share register and the separate BT Group
EasyShare and BT Employee Share Ownership Scheme registers. They also provide
a Shareholder Helpline
service on Freefone 0808 100 4141.
Institutional investors and analysts
Institutional investors and equity research analysts may contact Investor Relations on:
Tel 020 7356 4909
Fax 020 7356 5270
e-mail: investorrelations@bt.com
Industry analysts may contact: Tel 020 7356 5378 Fax 01332 577434 e-mail: industryenquiry@bt.com |
Shareholder Helpline | |
Tel Freefone 0808 100 4141 | |
Fax 01903 833371 | |
Textphone Freefone 0800 169 6907 | |
From outside the UK: | |
Tel +44 121 433 4404 | |
Fax +44 1903 833371 | |
Textphone +44 121 415 7004 | |
e-mail: bt@lloydstsb-registrars.co.uk | |
The Registrar | ADR Depositary |
Lloyds TSB Registrars (2450) | JPMorgan Chase Bank |
The Causeway | JPMorgan Service Centre |
Worthing, West Sussex | P.O. Box 43013 |
BN99 6DA | Providence, RI 02940-3013 |
United Kingdom | United States |
Website: | Tel 1 800 634 8366 (toll free) |
www.lloydstsb-registrars.co.uk | or +1 781 575 4328 (from outside the USA) |
e-mail: adr@jpmorgan.com | |
Website: www.adr.com | |
General enquiries | |
BT Group plc | |
BT Centre | |
81 Newgate Street | |
London EC1A 7AJ | |
United Kingdom | |
Tel (020) 7356 5000 | |
Fax (020) 7356 5520 | |
From overseas: | |
Tel +44 20 7356 5000 | |
Fax +44 20 7356 5520 |
154 | BT Annual Report and Form 20-F 2004 |
Glossary of terms and US equivalents
A full list of BT contacts, and an electronic feedback facility, is available at www.bt.com/talk. | |
Term used in UK annual report | US equivalent or definition |
Accounts | Financial statements |
Associates | Equity investees |
Capital allowances | Tax depreciation |
Capital redemption reserve | Other additional capital |
Creditors | Accounts payable and accrued liabilities |
Creditors: amounts falling due within one year | Current liabilities |
Creditors: amounts falling due after more than one year | Long-term liabilities |
Debtors: amounts falling due after more than one year | Other non-current assets |
Employee share schemes | Employee stock benefit plans |
Finance lease | Capital lease |
Financial year | Fiscal year |
Fixed asset investments | Non-current investments |
Freehold | Ownership with absolute rights in perpetuity |
Gearing | Leverage |
Inland calls | Local and long-distance calls |
Interests in associates and joint ventures | Securities of equity investees |
Investment in own shares | Treasury shares |
Loans to associates and joint ventures | Indebtedness of equity investees not current |
Net book value | Book value |
Operating profit | Net operating income |
Other debtors | Other current assets |
Own work capitalised | Costs of groups employees engaged
in the construction of plant and equipment for internal use |
Profit | Income |
Profit and loss account (statement) | Income statement |
Profit and loss account | |
(under capital and reserves in balance sheet) | Retained earnings |
Profit for the financial year | Net income |
Profit on sale of fixed assets | Gain on disposal of non-current assets |
Provision for doubtful debts | Allowance for bad and doubtful accounts receivable |
Provisions | Long-term liabilities other than debt and specific accounts payable |
Recognised gains and losses (statement) | Comprehensive income |
Reserves | Shareholders equity other than paid-up capital |
Share based payment | Stock compensation |
Share premium account | Additional paid-in capital or paid-in surplus (not distributable) |
Shareholders funds | Shareholders equity |
Stocks | Inventories |
Tangible fixed assets | Property, plant and equipment |
Trade debtors | Accounts receivable (net) |
Turnover | Revenues |
155 | BT Annual Report and Form 20-F 2004 |
Cross reference to Form 20-F
The information in this document that is referred to in the following table shall be deemed to be filed with the Securities and Exchange Commission for all purposes:
Required Item in Form 20-F | Where information can be found in this Annual Report | |||||
Item | Section | Page | ||||
1 | Identity of directors, senior management and advisors | Not applicable | ||||
2 | Offer statistics and expected timetable | Not applicable | ||||
3 | Key information | |||||
3A | Selected financial data | Five year financial summary | 24-25 | |||
Additional information for shareholders | ||||||
Exchange rates | 146 | |||||
3B | Capitalisation and indebtedness | Not applicable | ||||
3C | Reasons for the offer and use of proceeds | Not applicable | ||||
3D | Risk factors | Risk factors | 138-139 | |||
4 | Information on the company | |||||
4A | History and development of the company | Business review | ||||
Introduction | 7 | |||||
Background | 7-8 | |||||
2002 restructuring | 8 | |||||
Demerger of mmO2 | 8 | |||||
Concert | 8 | |||||
Acquisitions and disposals prior
to the 2004 financial year |
8 | |||||
Acquisitions
and disposals in the 2004 financial year |
8 | |||||
Financial review | ||||||
Capital expenditure | 43 | |||||
4B | Business overview | Business review | 6-23 | |||
Financial review | ||||||
Geographical information | 44 | |||||
Our commitment to society | 47-48 | |||||
Financial statistics | 136 | |||||
Operational statistics | 137 | |||||
Notes to the financial statements | ||||||
People employed | 113 | |||||
Additional information for shareholders | ||||||
Cautionary statement regarding
forward-looking statements |
141 | |||||
4C | Organisational structure | Business review | ||||
Introduction | 7 | |||||
Subsidiary undertakings, joint ventures and associates | 134 | |||||
4D | Property, plant and equipment | Financial review | ||||
Profit on sale of property fixed assets | 38-39 | |||||
5 | Operating and financial review and prospects | |||||
5A | Operating results | Financial review | 26-46 | |||
Additional information for shareholders | ||||||
Cautionary statement regarding
forward-looking statements |
141 | |||||
5B | Liquidity and capital resources | Financial review | 26-46 | |||
Additional information for shareholders | ||||||
Cautionary statement regarding
forward-looking statements |
141 | |||||
Notes to the financial statements | ||||||
Loans and other borrowings | 103 | |||||
Financial commitments, contingent liabilities and subsequent events | 107 | |||||
Financial instruments and risk management |
117-121 | |||||
5C | Research and development, patents and licences | Business review | ||||
Research and development and IT support |
17 | |||||
Financial statistics | 136 | |||||
5D | Trend information | Financial review | 26-46 | |||
Additional information for shareholders | ||||||
Cautionary statement regarding
forward-looking statements |
141 | |||||
5E | Off-balance sheet arrangements | Financial Review | ||||
Off-balance sheet arrangements |
42 |
156 | Cross reference to Form 20-F | BT Annual Report and Form 20-F 2004 |
Required Item in Form 20-F | Where information can be found in this Annual Report | |||||
Item | Section | Page | ||||
5F | Tabular disclosure of contractual obligations | Financial Review | ||||
Capital resources | 42 | |||||
6 | Directors, senior management and employees | |||||
6A | Directors and senior management | Board of directors and Operating Committee | 49-50 | |||
6B | Compensation | Report on directors remuneration | 58-71 | |||
Notes to the financial statements | ||||||
Pension costs | 108-112 | |||||
Directors emoluments | 112 | |||||
6C | Board practices | Board of directors and Operating Committee | 49-50 | |||
Report of the directors | ||||||
Directors | 51 | |||||
Corporate governance | 52-57 | |||||
Report on directors remuneration | 58-71 | |||||
Statement of directors responsibility | 72 | |||||
6D | Employees | Business review | ||||
Motivate our people and live the BT values |
16-17 | |||||
Notes to the financial statements | ||||||
People employed | 113 | |||||
Operational statistics | 137 | |||||
6E | Share ownership | Report on directors remuneration | 58-71 | |||
Notes to the financial statements | ||||||
Employee share schemes | 113-116 | |||||
7 | Major shareholders and related party transactions | |||||
7A | Major shareholders | Report of the directors | ||||
Substantial shareholdings | 51 | |||||
Additional information for shareholders | ||||||
Analysis of shareholdings | 143 | |||||
7B | Related party transactions | Report of the directors | ||||
Interest of management in certain transactions |
51 | |||||
Report on directors remuneration | 58-71 | |||||
Notes to the financial statements | ||||||
Related party transactions | 106 | |||||
7C | Interests of experts and counsel | Not applicable | ||||
8 | Financial information | |||||
8A | Consolidated statements and other financial information | See item 18 below. | ||||
Business review | ||||||
Legal proceedings | 23 | |||||
Additional information for shareholders | ||||||
Dividends | 143-144 | |||||
8B | Significant changes | Financial review | ||||
Capital resources | 42 | |||||
Notes to the financial statements | ||||||
Financial commitments, contingent
liabilities and subsequent events |
107 | |||||
9 | The offer and listing | |||||
9A | Offer and listing details | Additional information for shareholders | ||||
Share and ADS prices | 142 | |||||
9B | Plan of distribution | Not applicable | ||||
9C | Markets | Additional information for shareholders | ||||
Listings | 142 | |||||
9D | Selling shareholders | Not applicable | ||||
9E | Dilution | Not applicable | ||||
9F | Expenses of the issue | Not applicable | ||||
10 | Additional information | |||||
10A | Share capital | Not applicable | ||||
10B | Memorandum and articles of association | Business review | ||||
Background | 7-8 | |||||
Additional information for shareholders | ||||||
Memorandum and Articles of Association |
146-149 | |||||
10C | Material contracts | Additional information for shareholders | ||||
Material contracts | 149 | |||||
10D | Exchange controls | Additional information for shareholders | ||||
Exchange controls and other limitations
affecting security holders |
152 |
157 | BT Annual Report and Form 20-F 2004 |
Required Item in Form 20-F | Where information can be found in this Annual Report | |||||
Item | Section | Page | ||||
10E | Taxation | Additional information for shareholders | ||||
Taxation (US Holders) | 149-150 | |||||
10F | Dividends and paying agents | Not applicable | ||||
10G | Statement by experts | Not applicable | ||||
10H | Documents on display | Additional information for shareholders | ||||
Documents on display | 152 | |||||
10I | Subsidiary information | Not applicable | ||||
11 | Quantitative and qualitative | Financial review | ||||
disclosures about market risk | Treasury policy | 42 | ||||
Foreign currency and interest rate exposure | 42-43 | |||||
Notes to the financial statements | ||||||
Financial instruments and risk management | 117-121 | |||||
12 | Description of securities other than equity securities | Not applicable | ||||
13 | Defaults, dividend arrearages and delinquencies | Not applicable | ||||
14 | Material modifications to the rights of security holders | |||||
and use of proceeds | Not applicable | |||||
15 | Controls and procedures | Corporate governance | ||||
US Sarbanes-Oxley Act of 2002 | 57 | |||||
16A | Audit committee financial expert | Corporate governance | ||||
US Sarbanes-Oxley Act of 2002 | 57 | |||||
16B | Code of ethics | Corporate governance | ||||
US Sarbanes-Oxley Act of 2002 | 57 | |||||
16C | Principal accountants fees and services | Notes to the financial statements | ||||
Auditors | 117 | |||||
Corporate Governance | ||||||
Audit Committee | 54 | |||||
17 | Financial statements | Not applicable | ||||
18 | Financial statements | Report of the independent auditors | 73 | |||
Accounting policies | 75-77 | |||||
Consolidated financial statements | 74-123 | |||||
United States Generally Accepted Accounting Principles | 124-133 | |||||
Quarterly analysis of turnover and profit | 135 |
158 | BT Annual Report and Form 20-F 2004 |
Index
21st century network 13, 43 | Glossary of terms and US equivalents 154 | |
Accounting and presentation changes 84 | ICT 3, 4, 9, 13-15, 28, 29, 31, 34, 84 | |
Accounting policies 45-46, 75-77 | Intangible assets 31, 75-76, 83, 99 | |
Additional information for shareholders 140-153 | Interest 24, 27, 29, 39, 42-43, 75, 78-80, 82, 92, 118, 120 | |
Auditors remuneration 117 | Interest cover 39, 136 | |
Auditors report to shareholders 73 | Internal control and risk management 55-56 | |
Background 7-8 | Investments 8, 26, 36-38, 76, 83, 91-92, 101-102 | |
Balance sheet 25,
43, 83 Broadband 3, 4, 9, 10-12, 13, 19, 28, 31-33 |
Joint ventures and associates 29, 36-37, 76, 78-80, 85, 87, 88, 91, 98, 101-102, 106, 134 | |
BT Exact 17 | Legal proceedings 23, 107 | |
BT Global Services 30-31, 34, 84-85 | Licence 17-18, 45, 76 | |
BT Retail 30-32, 84-85 | Listings 142 |
|
BT Wholesale 30-31, 32-34, 84-85 | Loans and other borrowings 42, 103 | |
Business practice, statement of 56 | Management Council 54-56 | |
Business review 6-23 | Management of liquid resources 96 | |
Call volume growth 137 | Material contracts 149 |
|
Capital commitments 107 | Memorandum and Articles of Association 146-149 |
|
Capital expenditure 2, 13, 43, 82, 85, 100, 107, 136 | Minority interests 93, 78-80, 83, 102, 128 |
|
Capital gains tax 142 | mmO2 7-8, 36, 39, 43, 84, 98, 106, 143 | |
Cash flow statement 25, 40, 82, 96 | Mobility 4-5, 12 | |
Cautionary statement 141 | Net debt 2, 25, 41, 42, 99, 118 | |
Chairmans message 3 | New wave 2, 4, 9, 28 | |
Chief Executives statement 4-5 | Ofcom 7, 17-22, 138 | |
Community 16, 47, 48 | Oftel 7, 17, 19-22 | |
Company balance sheet 122-123 | Other operating income 34, 78-80, 88 | |
Competition and the UK economy 20 | Operating and Financial Review 6-48 | |
Concert global venture 8, 26, 36, 37, 85, 88, 89-90, 96-97 | Operating Committee 50, 55 | |
Contact details 153 | Operating costs 13, 34, 36, 89-90 | |
Contingent liabilities 107 | Operating profit (loss) 36-37, 87, 96 | |
Corporate governance 52-57 | Operational statistics 137 | |
Creditors 51, 83, 104, 122 | Our commitment to society 47-48 | |
Cross reference to Form 20-F 155-157 | Pensions 16, 44, 61, 76-77, 108-112 | |
Customer satisfaction 3, 4, 10, 47, 59 | Political donations 51, 57 | |
Debtors 76, 83, 102, 122 | Price control 20-22, 138 | |
Demerger 8, 36, 43, 80, 84, 89, 90, 93, 98, 99, 105, 106, 143 | Profit (loss) before/after tax 2, 25, 27, 29, 39, 78-80, 135 | |
Depreciation 31, 33, 35, 76, 89, 90, 96, 100 | Provisions for liabilities and charges 83, 104 | |
Disposals 8, 37-38, 91-92, 96-99 | Publications 152 | |
Directors | Purchase of own shares 3, 39, 105, 123 | |
Biographies 49-50 | Quarterly analysis of turnover and profit 135 | |
Emoluments 112 | Reconciliation of movement in shareholders funds 105-106 | |
Interests in shares 63 | Reconciliation of operating profit (loss) to operating cash flows 96 | |
Proposed for election or re-election at AGM 51 | Redundancy costs 76, 89-90 | |
Remuneration, report on 58-71 | Regulation 3, 17-23, 45 | |
Report 51 | Research and development 17, 75, 89, 90, 136 | |
Responsibility statement 72 | Restructuring 8, 26, 37 | |
Dividend investment plan 144 | Return on capital employed 43, 136 | |
Dividends 2, 3, 24, 40, 41, 78-80, 82, 93, 104, 122, 143-144 | Rights issue 8, 26, 105, 142 | |
Earnings (loss) per share 2, 3, 24, 27, 28, 40, 78-80, 94-95, 135, 136 | Risk factors 138-139 | |
Economic and Monetary Union 44-45 | Risk management 117-121 | |
Electronic communication 153 | Sarbanes-Oxley Act 53, 57 | |
Employee share schemes 113-116 | Segmental analysis 84-87 | |
Employees 16-17, 32, 113, 137 | Share and ADS prices 142 | |
Environment 45, 47-48, 152 | Share capital 25, 83, 105, 122-123 | |
Exchange controls 152 | Share option schemes 105, 113-116 | |
Exchange lines 1, 9, 29, 137 | Shareholder communication 153 | |
Financial calendar 152 | Shareholdings analysis 143 | |
Financial commitments 107 | Staff costs 33, 35, 89-90 | |
Financial headlines 2 | Statement of total recognised gains and losses 81 | |
Financial instruments 77, 117-121 | Stocks 76, 83 | |
Financial ratios 136 | Strategy 3, 10 | |
Financial review 26-46 | Subsidiary undertakings 7, 134 | |
Financial statistics 136 | Substantial shareholdings 51 | |
Financing 40-41 | Suppliers payment policy 51 | |
Five-year financial summary 24-25 | Tangible fixed assets 25, 43, 76, 83, 100, 136 | |
Foreign currencies 42-43, 75, 89-90, 118, 121 | Taxation 24, 25, 27, 29, 39-40, 77, 78-80, 92-93, 104 | |
Going concern 42, 72 | Taxation (US Holders) 149-150 | |
Goodwill 26-27, 30, 35, 37, 75-76, 89-90, 95, 96, 99, 101, 105 | Total shareholder return 64, 145 | |
Treasury policy 42 | ||
Turnover 2, 9, 24, 27, 28, 30, 75, 78-80, 84-87, 88, 135 | ||
US GAAP 46, 124-133 |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
BT Group plc | |||
By: /s/ Patricia Day | |||
Name: Patricia Day | |||
Date: June 2, 2004 |
Title: Assistant Secretary | ||