BRITISH TELECOMMUNICATIONS plc BRITISH TELECOMMUNICATIONS British Telecommunications plc Annual Report and Form 20-F 2003 2003 AND FORM 20-F REPORT ANNUAL As a wholly-owned subsidiary of BT Group plc, British Telecommunications plc meets the conditions set forth in General British Telecommunications plc Registered office: 81 Newgate Street, London EC1A 7AJ Registered in England No. 1800000 Instruction (I)(1)(a) and (b) of Form 10-K as applied to reports on Produced by BT Group Typeset by Greenaways Printed in England by Vitesse Printing Co Ltd Form 20-F and is therefore filing this Form 20-F with the reduced Printed on paper which meets international environmental standards disclosure format www.bt.com Business review 2 Financial review 6 Report of the directors 20 Statement of directors’ responsibility 22 Report of the independent auditors 23 Accounting policies 24 Consolidated financial statements 27 United States Generally Accepted Accounting Principles 70 Subsidiary undertakings, joint ventures and associates 78 Additional information for shareholders 79 Glossary of terms and US equivalents 85 Cross reference to Form 20-F 86 This is the annual report for the year ended 31 March 2003. It complies with UK regulations and is the annual report on Form 20-F for the Securities and Exchange Commission to meet US regulations. References to the “financial year” are to the year ended 31 March of each year, e.g. the “2003 financial year” refers to the year ended 31 March 2003. Unless otherwise stated, all non-financial statistics are at 31 March 2003. Please see cautionary statement regarding forward-looking statements on page 79. In this annual report, references to “BT”, “BT plc”, the “company”, the “group”, “us” or “we” are to British Telecommunications plc and its subsidiaries, or any of them, as the context may require. British Telecommunications plc Annual Report and Form 20-F 2003 1 Business review The review is divided into the following Introduction sections: British Telecommunications plc is a wholly owned 2 Introduction subsidiary of BT Group plc and is BT Group plc’s principal 2 Group strategy trading subsidiary. 3 Restructuring BT Group plc is the listed holding company for an 4 Debt reduction programme integrated group of businesses that provide voice and data 4 Pension fund services in the UK and elsewhere in Europe. British 4 Lines of business Telecommunications plc holds virtually all businesses and 4BTRetail assets of the BT group. Our collective aim is to create 5BTWholesale shareholder value through service excellence, an effective 5BTGlobal Services brand, our large-scale networks and our existing customer 5 Other businesses base, and also through developing and marketing new, 5 Research and development and IT support higher-value broadband and internet products and services. 5 Legal proceedings BT consists principally of three lines of business: BT Retail, BT Wholesale and BT Global Services (formerly Please see cautionary statement regarding BT Ignite). forward-looking statements on page 79. In the year ended 31 March 2003 (the 2003 financial All customer numbers are given as at 31 March year), 94% of our revenues were derived from operations 2003, unless stated otherwise. within the UK, where we are the largest full service EBITDA = Earnings before interest, taxation, telecommunications operator, serving over 20 million depreciation and amortisation. The definition, reconciliation and reasons for disclosing EBITDA customers. BT Retail and BT Wholesale operate almost are discussed in the Financial review. entirely within the UK, addressing the consumer, major business, business and wholesale markets, and offer a broad spectrum of communications products and services. Our aim is to increase profitable revenues from data and advanced broadband and internet services and to reduce further our dependence on revenues and profit generated by fixed-line voice services. For a summary of turnover for our lines of business for the years ended 31 March 2002 and 2003, see the table on page 4. Group strategy In 2002 BT set out its three-year strategy to create value for shareholders by being the best provider of communications services and solutions for everybody in the UK, and for multi-site organisations with European operations, achieving global reach through partnership. We have seven strategic priorities: & to deliver the highest levels of customer satisfaction performance and reduce the number of dissatisfied customers each year & to achieve organic profitable revenue growth, while carefully controlling capital expenditure & to put broadband at the heart of BT, expand the market for broadband services and create a media-enabled network & to provide solutions and other value-added services for multi-site organisations with European operations & to place all UK networks under a single management structure and to limit investment in legacy voice and data platforms, while migrating operations to new platforms & to move into broadband and mobility services for consumers; and also into advanced services, such as communications solutions and outsourcing for major business customers; and ICT (information and 2 British Telecommunications plc Annual Report and Form 20-F 2003 Business review communications technology) for SME (small and solely under the BT brand, and that parts of mmO2 were medium enterprises). able to use some of our trademarks and brands on a & all delivered by diverse, skilled and motivated people. transitional basis, both lapsed on 31 March 2003. Broadband Acquisitions and disposals Broadband is at the heart of our strategy and, during the Between the 1999 and 2002 financial years, BT made a year, we made progress in our drive to enhance the number of significant acquisitions, including taking stakes awareness, availability and attractiveness of broadband. in Japan Telecom and J-Phone Communications in Japan, As at 16 May 2003, we had 936,000 ADSL and control of Viag Interkom in Germany, and Esat (asymmetric digital subscriber line) connections and are on Telecom and Esat Digifone in the Republic of Ireland. track to meet our target of one million connections by During the 2002 financial year, reflecting the change in the summer 2003. The speed at which this is happening is group’s strategy, we disposed of a number of businesses generating economies of scale that will help us continue to and assets, including Yell – our international directories and reduce costs and progress beyond the one million figure. e-commerce business – and our stakes in Japan Telecom, A series of technological breakthroughs can, for the J-Phone Communications and Airtel, the Spanish wireless first time, bring ADSL within potential reach of 90% of UK operator. The consideration received enabled us to focus homes and small businesses within the next few years. on our core businesses and to reduce net debt. In November 2002, as further evidence of our In January 2003, we completed the sale of our 26% commitment to broadband, we announced the stake in Cegetel Groupe SA, the leading alternative fixed- appointment of BT’s first Chief Broadband Officer, whose line operator in France, to Vivendi Universal for £2.6 billion role is to direct and align the people and processes involved in cash. After accounting for goodwill written back from in the end-to-end delivery of broadband. reserves, BT realised a profit of approximately £1.5 billion before an exceptional interest charge of £0.3 billion on Restructuring closing out fixed interest rate swaps. During the 2002 financial year, we substantially completed In the 2003 financial year, we disposed of a number of a radical restructuring programme, the key elements of non-core investments, including stakes in BSkyB, Mediaset which were: Blu and SmarTone. & the UK’s largest-ever rights issue – 1.98 billion new No material acquisitions were made in the 2003 shares were issued to shareholders who took up their financial year. rights, raising £5.9 billion, net of expenses & the demerger of the majority of BT’s mobile Property businesses to create two separate listed companies – BT In December 2001, as part of our wider property Group plc and mmO2 plc outsourcing arrangement, we completed the sale and & the disposal of significant non-core businesses leaseback of the majority of our UK property portfolio to and assets Telereal, a 50/50 joint venture partnership between Land & the unwind of Concert, BT’s joint venture with AT&T Securities Trillium and the William Pears Group, for & the creation of customer-focused lines of business £2.4 billion in cash. Approximately 6,700 properties, & a major programme of debt reduction. offices, telephone exchanges, vehicle depots, warehouses, call centres and computer centres, equating to Demerger of mmO2 approximately 5.5 million square metres were transferred. On 19 November 2001, we completed the demerger of Under these arrangements, Telereal is responsible for mmO2, comprising what were BT’s wholly-owned mobile providing accommodation and estate management services assets in Europe: O2 UK (formerly known as BT Cellnet), to BT. O2 Communications (Ireland) (formerly known as Esat We retained direct ownership of approximately 220 Digifone), Telfort Mobiel, Viag Interkom, Manx Telecom properties – including certain telephone exchanges, and Genie. Shareholders received one share in mmO2 plc computer centres and high radio towers – totalling some and one share in BT Group plc for each share they 800,000 square metres. We also retained BT Centre, our previously held in British Telecommunications plc. Trading headquarters building, Adastral Park, our major research in BT Group plc and mmO2 plc shares began on facility near Ipswich, Madley and Goonhilly earth satellite 19 November 2001. stations and the BT Tower in Central London. BT and mmO2, through arm’s length negotiations, In the third quarter of the 2003 financial year, we entered into a number of agreements to define the provided £198 million against the costs of vacating and continuing relationship between the groups, including the disposing of surplus London offices, as we rationalise from agreement that, until November 2004, we will exclusively 14 buildings to five.