KCOM Group PLC Annual report and accounts 2010/11. creating excellence together

Transcription

1 KCOM Group PLC Annual report and accounts 2010/11 creating excellence together

2 About us Ambitious, but achievable. Our mission is to help customers harness the power of communications to enhance their organisation s or personal experience. We achieve this by applying our collective experience and expertise, working closely with our partners and creating appropriate technology solutions. Together, everyone in the KCOM Group is committed to delivering inspiring customer experiences and passionately pursuing better ways to connect people. Read more in our Business review, page 10 A year of solid progress The Group is beginning to deliver on its return to growth strategy. Contract wins in the year underline our growing reputation and recognition in our chosen market.

3 Highlights of our year Delivering against our objectives. The KCOM Group has achieved a number of significant milestones over the past financial year, continuing on our solid progress last year and driven by the outcome of the strategic review undertaken in Operational highlights Delivering growth strategy: Positioning the business to deliver KCOM Group s financial stability, through significantly reduced debt, access to funding and certainty on pension liabilities, allows it both to invest in supporting growth across the Group and to maintain its dividend commitment. Key contract wins All four brands performed well in their chosen markets. Kcom in particular demonstrated its growing reputation and capability by winning business with leading organisations including Eversheds, Domino s, Morrisons and the NHS Business Services Authority. Building a presence in Public Sector Networks (PSNs) Kcom won the Staffordshire PSN contract and has been selected as preferred bidder for the Dorset PSN, positioning Kcom as a market leader in this area. Key financials Revenue ( m) 395.4m down from 412.8m in EBITDA* ( m) 76.0m up from 69.8m in * Before exceptionals C4.2% D8.8% Our financial performance in full: Business review, page

4 The KCOM Group employs over 1,800 people across eight main office locations. Our principal offices Brighton Exeter Hemel Hempstead Hull Ipswich London Sindlesham Wakefield Net debt ( m) 82.0m down from 116.8m in 2010 C 34.8m Profit before tax ( m) 32.9m up from 19.2m in 2010 D71.3% Operating profit* ( m) 48.6m up from 36.7m in D32.4% 48.6 Full year dividend (pence) 3.60 pence up from 1.75 pence in D105.7% * Before exceptionals

5 01 Visit us online We have created an online version of our Annual Report which you can find at To help us minimise our paper usage and impact on the environment, we offer shareholders the option of receiving reporting materials electronically. You can sign up for electronic communications at: Contents 02 Our business 04 Our vision 06 Our performance 08 Chairman s statement 10 Business review 14 KC & Eclipse 16 Kcom & Smart Risk management 21 Corporate social responsibility 26 Other disclosures 28 Board of directors Overview Business review Other disclosures Corporate governance 30 Corporate governance Remuneration report 35 Remuneration report 45 Independent auditors report 46 Consolidated income statement Consolidated statement of comprehensive income 47 Balance sheets 48 Consolidated statement of changes in shareholders equity 49 Parent company statement of changes in shareholders equity 50 Cash flow statements 51 Notes to the financial statements 79 Five year summary of consolidated figures 80 Shareholder information IBC Glossary Financial statements Shareholder information

6 02 Our business Four distinct brands, one partner of choice, one market leading experience. By focusing our brands on the markets we serve, we aim to deliver high quality customer experiences, a key ingredient in the creation of long term sustainable relationships. Our aim is to be the partner of choice for many of the UK s leading organisations. Our vision is to deliver a world class customer experience through each of our brands. Market focus: Consumers and businesses in the Hull and East Yorkshire region Small businesses and consumers across the UK Market focus: UK based businesses and public sector organisations

7 03 Our KC brand provides a range of telecommunications and broadband services to businesses and consumers throughout Hull and East Yorkshire. It is the only telecoms provider in the UK to offer inclusive local calls in all its telephone packages and was one of the founding UK providers of broadband internet. KC has delivered a number of industry firsts for its customers. These include Britain s best value telephone calls packages, the UK s first weekday off peak broadband service and free local directory enquiries. In 2010/11 KC successfully launched bundled services for consumers and businesses. In consumer services, this has resulted in increasing average revenue per customer. I love Karoo for its fast speeds, even at peak times; the innovative ideas which help the community to enjoy activities in Hull, but best of all the value for money, which has helped me and my partner keep in touch with loved ones from Bradford to France. Well done Karoo. Lee Hull Future plans: investment in new services and capabilities; universal broadband coverage across our East Yorkshire network area by Summer 2011; and geographical expansion into the wider East Yorkshire region. for more, visit: Emphasis on growth Our Eclipse brand is award winning, driven by its desire to meet customer needs in a way that surpasses the rest of the market. A natural innovator with service at the heart of its product portfolio, it is recognised across the industry by organisations and consumer groups alike, so much so that it is one of only six Which? recommended broadband providers. Eclipse has made strong progress over the past twelve months, including the launch of super fast 40Mb broadband, a bonded DSL solution, to give customers even better upload and download speeds, and leading edge cloud services. Our website is absolutely central to the success of our business. As soon as we moved from our basic web hosting to Eclipse s Managed Server Hosting we experienced much better speed of access and reliability and our server could cope with the high demand and image heavy design of our site. Phil Jackson Theatre Manager Minack Theatre, Cornwall Future plans: continued growth and focus on the SME marketplace delivering first rate products and exceptional service; investment propositions to the reseller market through updated products and a full service portal; and development of additional leading edge, technological internet and hosting solutions, including cloud. for more, visit: Overview Business review Other disclosures Corporate governance Our Kcom brand delivers a range of critical communication services to customers throughout the UK and has plans to increase its presence in its chosen target markets. Its focus is on winning long term annuity contracts that exploit its expertise and experience in delivering managed communication solutions and on providing a world class customer experience. Through our strategic relationship with BT, it has access to an extensive portfolio of products and the largest, most advanced network in the UK. Future plans: developing and investing in our people and tools to enable Kcom to deliver a world class customer experience, making it easy to do business with; continuing to exploit our strong strategic relationship with BT to give Kcom a significant competitive advantage; raising the profile of the Kcom brand and its capabilities across its target markets, offering a credible alternative to other communication solutions providers; and With a thorough understanding of our needs, the Kcom team proactively provides advice around how we can enhance our use of communication applications. Mario Devargas IT Director Bolton Council I look forward to a further period of excellent service from their team. Philip Hawker Manager of Communication Networks and Infrastructure British Airways increasing market share in its target markets by using our collective capability to drive innovation for our customers. for more, visit: Smart421 delivers high end consultancy, integration and management of business-critical systems for customers including Telefónica O2 UK, Virgin Atlantic Airways and Aviva. It provides onshore IT services for complex business critical and bespoke projects. Smart421 has achieved strong revenue growth during 2010/11. Smart421 s agile business approach is solving business problems for companies more reliably and cost-effectively than many of the big names in IT consultancy. Future plans: ongoing relationship building with target customers; awareness building programmes and dedicated marketing initiatives for new customer acquisition; expansion of our leading independent architecture consulting team; and maintaining strategic partnerships with IBM, Our relationship with Smart421 has been in place for more than ten years They are all very skilled and professional Our Common Payment Interface was designed and developed by Smart421 specifically for O2. It processes millions of payments (top up) transactions per day and is a business-critical service. John Stretton Prepay Design and Development Manager Telefónica O2 UK Ltd Microsoft and Oracle and building on our new partnership with Amazon Web Services. Working with those partners, Smart421 will concentrate on opening new revenue streams in cloud architecture, cloud integration and infrastructure as a service (IaaS) related services, while continuing to win business based on Smart421 s core consulting and delivery capabilities. for more, visit: Remuneration report Financial statements Shareholder information

8 04 Our vision A pioneer in connecting people and delivering inspiring customer experiences. We have set out an inspirational but achievable vision of our journey towards excellence. Our focus is on operational excellence through shared knowledge and expertise, streamlined systems and effective partnerships. Ultimately this should translate into an inspiring experience for our customers, a reputation for excellence and superior returns for our shareholders. Dedicated to our values Everything we do at KCOM Group is driven by our values. They inform not only what we do, but the manner in which we do things. The values of our people are to be inspiring, flexible, innovative, open and to embrace the power of teamwork. These values capture the spirit, philosophy and day to day behaviours that we follow, both internally and externally. People The talent and leadership demonstrated by our colleagues across the Group has helped us to transform our business and to position ourselves to progress our inspirational vision of creating excellence together. This year we have started refining our people strategy which will support the business in the pursuit of its vision, strategic aims and objectives. That strategy is to create a workplace that recognises and rewards the potential of our people to deliver excellent business performance across our brands and provide a customer experience of which we can be proud. Achieving our vision relies on recruiting and retaining the very best people, empowering people to be the best they can be and building pride in KCOM Group. To drive our talent, leadership and organisational development we are: embedding our value driven culture; developing outstanding leaders capable of creating excellence together; and supporting our people at every stage of their career.

9 05 Customers Partners Focusing on operational excellence Processes and systems Overview Business review Other disclosures Across our brands we understand and anticipate the needs of our customers and align our products, services and solutions to meet those needs, delivering unique brand experiences. Our unrelenting drive passionately to pursue better ways to connect people and deliver inspiring customer experience will enable us to differentiate ourselves across our markets. In 2010/11 we have built and extended our customer relationships with a range of new contracts including Virgin Atlantic Airways, Eversheds, Domino s and Staffordshire Public Sector Network. Plans to develop our brands focus include: developing further our differentiated customer experience; and continuing to add compelling products and partnerships. Partners are key to the Group s success. We harness the skills and capabilities of our partners to support our brands focus. We have strategic relationships in place with a range of organisations, including BT, Phoenix IT Group, Microsoft, IBM, Cisco and Avaya. Through effective controls, we can exploit the value our partners bring in developing value propositions, processes and key relationships for our customers, ultimately enhancing our customers experience. Customer service excellence is underpinned by an organisation s processes and systems. In 2011/12 we plan to invest in processes and systems to enable us to deliver best in class customer outcomes through our brands and greatly enhance our operational effectiveness. Our plan is to: simplify tools, systems and processes to support our drive to deliver customer service excellence. Corporate governance Remuneration report Financial statements Shareholder information

10 06 Our performance Progress on key measures. We have built the foundations of a strong and profitable business, with four brands focused on our key customer segments. During the last year we have begun to execute growth plans across each of our brands. This is reflected in the financial metrics achieved. Our financial results show an improved performance for the Group: stronger margins; greater profitability; substantially lower levels of debt; and enhanced shareholder returns. We look forward to building on this solid foundation. Our financial performance in full: Business review, page 10 Financial KPIs 2010/11 Revenue 395.4m 2010: 412.8m Reduction reflects impact of strategy to focus on higher margin activity and exit low margin commodity based operations. KC & Eclipse revenue 122.9m 2010: 123.5m Growth in KC has been offset by revenue reduction in Eclipse and Hull Colour Pages.

11 07 EBITDA before exceptionals 76.0m 2010: 69.8m Increase reflects a reduction in operating costs across the Group and our continued focus on higher value activities. Net cash from operations 68.0m 2010: 74.6m Reduction is a result of prior year performance benefiting from substantial one off working capital improvement from strategic action taken by the Group. Net debt 82.0m 2010: 116.8m Tracking our performance Reduction reflects a strong performance on the management of receivables and working capital, as well as a lower level of capital spend. Overview Business review Other disclosures KC & Eclipse EBITDA before exceptionals 57.9m 2010: 57.3m Increase of 1% as a result of an overall reduction in operating costs. Kcom & Smart421 revenue 276.9m 2010: 291.0m Revenue growth from key markets in second half compared to first half, offset by planned exit from lower margin activities. Kcom & Smart421 EBITDA before exceptionals 25.8m 2010: 22.7m Increase of 13.6% as a result of an overall reduction in operating costs. Non financial KPIs are disclosed within the Corporate Social Responsibility section on pages 23 to 25 Corporate governance Remuneration report Focused on growth Over the coming year, our focus will remain on profitable growth and the Group will enhance further its capabilities and capacity to support this growth and build on the strengths, technologies and relationships already in place. Financial statements Shareholder information

12 08 Chairman s statement Watch Bill s full year results webcast at by Bill Halbert Executive Chairman A year of progress I am pleased to report that we end this year once again in a stronger competitive and financial position, with a simplified business structure and a clear focus. 2010/11 marked the completion of our previously announced transformation programme, during which our aims were to strengthen and underpin business fundamentals, to continue to improve the quality of the Group s activities, to position the Group for future profitable growth and to continue to grow shareholder value. As previously signalled, emphasis has now turned to growth in each of our brands and we have a clear vision of where we want the Group to be. With our key transformational objectives achieved, concluding with the resolution of our previous pension issues and successful debt refinancing, we can focus our attention increasingly on investing in and delivering that growth. We believe that as we continue to develop, significant growth opportunities will become increasingly available for each of our brands, through 2011/12 and beyond. Indeed, I am pleased to report that our efforts have been rewarded by some important new contract wins, both in the public and private sector. Our recent agreements with BT Wholesale and Phoenix IT Group, together with other existing key relationships including Cisco, Microsoft and Avaya, continue to enhance our competitiveness, our coverage and the unique levels of service we are able to offer our customers. Equally important is our ability to create the right environment in which our people can perform at their best and achieve their full potential and we are undertaking a number of initiatives, as part of our people strategy to achieve this. The ambition of our growth plans is to establish leadership positions in the markets we serve by: maintaining clear strategic focus; strengthening our reputation for service excellence; exploiting best in class partnerships; driving operational efficiencies and effectiveness; developing further our skill base and intellectual capital; and building on our financial strength. Changes to our Board In December 2010, in order to maintain stability during an important phase of the Group s development, particularly through the early stages of our return to growth, the Board announced that the role of Executive Chairman would be extended for a further twelve months to the Group s Annual General Meeting (AGM) in At that point, the Board intends to separate the two roles. On a personal note, while recognising the market sensitivities, I am delighted to continue to be part of this dedicated and successful team. Also in December, Paul Renucci resigned from the KCOM Group s Board. Paul made a considerable contribution to the creation and transformation of the Kcom brand. Paul Simpson, Chief Financial Officer, has assumed responsibility for the Kcom brand and continues at present to retain his Group wide finance responsibilities. Role and effectiveness of the Board At KCOM Group we believe that we have a very effective Board. Though we combine the roles of the Chief Executive Officer and Chairman, we have ensured that we maintain a balance of independent Non executive Directors and Executive Directors and have developed a strong culture of open challenge and debate. This was identified as a key strength in our annual Board performance evaluation. During the year we have ensured that our Nomination Committee has met separately from the Board to pay particular attention to matters relating to the composition and balance of the Board, the procedure for appointing new Directors, succession and the time commitment required from each Director. Further information on the way the Board operates can be found on page 30.

13 09 Emphasis turns now to growth in each of our brands and we have a clear vision of where we and the Group want to be. Dividend commitment In November 2010, we announced our minimum dividend commitment for the period to 2012/13. This underlined our financial stability and was a statement of the confidence we have in the Group s financial performance. I am pleased to announce that the Board is proposing a further increase in full year dividend to 3.60 pence, subject to approval of shareholders at our AGM in July The Board remains committed also to a minimum 10% growth per annum in the dividend, for the next two years. Looking forward Our plans for the future are ambitious but achievable, maintaining focus on delivering growth across our target markets, as we head towards achieving our longer term ambitions. Following the successful restructuring undertaken over the last two years, we will enhance further the capabilities and capacity of the Group to support growth and build on the strengths, technologies and relationships already in place. PSN contracts are seen as a key opportunity for Kcom and the Group in the year ahead, with the potential to add to the growth already seen with leading private sector companies that require a trusted partner to manage their critical communications. I would like to thank everyone within the KCOM Group for their determination and commitment over the past year. We have achieved a great deal during the past twelve months and we can be confident about the opportunities that lie ahead. Bill Halbert Executive Chairman 8 June 2011 KCOM Group Q&A long term vision Chairman s Q&A Q: Why have you chosen to establish your long term vision now? A: After a period of very successful transformation and restructuring, the Group is in a strong position now for growth. We are looking ahead with a clear focus on our key markets and we are reviewing our systems and processes so that we can deliver a world class customer experience. Q: How will each of the Group brands contribute to that vision? A: Our vision is a pioneering, inspiring goal that the whole Group can aim for, over and above the traditional incremental year on year business plan. Some of our brands have a relatively small share of their market and we are now in a more robust, competitive position to grow this. Q: What is it that sets the Group apart from its competitors? A: Our vision is to pursue value added ways to connect people and deliver inspiring customer experiences. What we mean by an inspiring customer experience will vary within each of our brands, but the essence is the same and that is to make sure that all our customers have an experience that is better than anywhere else. Q: Where do you see growth coming from between now and 2015? A: All our brands have growth opportunities and we are looking at the market to anticipate where the best of those will be over the next few years. There is a range of existing opportunities, through building relationships with new customers, launching new products and services and selling more to existing customers. We have the right skills and resources to adapt and change our plans to exploit new opportunities. Overview Business review Other disclosures Corporate governance Remuneration report Financial statements Shareholder information

14 10 Business review Our Directors report is presented in four sections the Business review, Other disclosures, our Corporate governance report and the Directors remuneration report. The Directors report represents the management report of the Group. by Paul Simpson Chief Financial Officer Group overview During the year, we completed the final stages of our transformation programme. We took action to reduce risk and increase certainty in respect of our pension schemes position. The Group has achieved also a financing arrangement to July 2015 that reflects the financial strength of the business. Group financial overview Overall Group revenue has reduced 4.2% to million (2010: million). In the second half of the year, we have seen revenue growth in our core markets, compared to the first half of the year. This has been offset by the continued effect of the disposal of certain break fix activities to Phoenix IT Group in January 2010 and of reduced volume on lower margin activities. Group EBITDA before exceptional items has increased to 76.0 million (2010: 69.8 million) benefiting from a reduction in operating costs across the Group and our continued focus on higher margin activities. Depreciation and amortisation has reduced by 5.7 million to 27.3 million (2010: 33.0 million) which reflects mainly the reduced amortisation of intangible assets arising on acquisition. Finance costs have remained flat at 7.4 million reflecting a reduction in the quantum of debt offset by the write off of prepaid loan arrangement fees associated with the Group s previous bank facility which was refinanced in November The combination of the improvement in EBITDA before exceptional items, lower depreciation and amortisation and lower exceptional costs has resulted in Group profit before tax increasing by 71.3% to 32.9 million (2010: 19.2 million). Net debt has reduced to 82.0 million (2010: million) as a result of strong performance throughout the year, and out performance in the final quarter of the year, on the management of receivables and working capital. The year end debt position has benefited also from a lower level of capital spend than anticipated of 13.9 million (2010: 17.6 million) due to the timing of a number of capital projects. PLC and associated costs (PLC) This segment includes Public Company central and share scheme expenses and the costs, excluding current and past service costs, associated with the Group s defined benefit pension schemes. The net pre exceptional costs incurred in the PLC segment have reduced to 7.7 million (2010: 10.2 million), as a result of lower costs associated with the Group s defined benefit schemes of 0.3 million (2010: 2.9 million). Such pension costs have reduced due to a recovery in asset values and a reduction in liabilities of the scheme over the last two financial years. Group operating profit Group operating profit is 40.3 million (2010: 26.5 million). The overall improvement in operating profit of 13.8 million is a result of: 6.2 million improvement in Group EBITDA before exceptional items; 1.9 million reduction in exceptional costs; and 5.7 million reduction in depreciation and amortisation.

15 11 During the year we completed the final stage of our transformation programme. Based on our results, we are pleased to recommend an increased final dividend, making the full year dividend more than double that of the previous year. Financial highlights Revenue reduction to million (2010: million) reflects effect of strategy to exit low margin commodity-based operations. Revenue in the second half of the year of million (H1: million) demonstrates growth in a number of our key target markets. EBITDA before exceptional items improved to 76.0 million (2010: 69.8 million) following further reductions in operating costs. Profit before tax increased 71.3% to 32.9 million (2010: 19.2 million). Balance sheet strengthened further, with strong cash generation reducing net debt by 34.8 million in the year to 82.0 million (31 March 2010: million) and pension deficit reduction to 6.9 million (31 March 2010: 50.4 million). Increase in proposed full year dividend to 3.60 pence (2010: 1.75 pence) above previously announced minimum commitment, reflects strong cash performance and confidence in on going earnings and cash generation. Previous commitment on dividend growth remains. Overview Business review Other disclosures Corporate governance Remuneration report Financial statements Shareholder information

16 12 Business review continued We took action to reduce risk and increase certainty in respect of our pension schemes position. Group overview continued Group operating profit continued Exceptional costs amount to 8.3 million (2010: 10.2 million) and comprise: 4.2 million (2010: 5.0 million) of restructuring costs relating to employees; 3.0 million credit (2010: Nil) from the curtailment gain arising from the closure of the Group s two defined benefit schemes to future accrual and breaking the salary link; and 7.1 million (2010: Nil) relating to the forecast loss arising on the build stage of a contract to build and manage a broadband network on behalf of a third party provider. This contract has now been revised, in terms of reducing the scope of, and changes to, its network design and reflecting also certain operational challenges on the build element. The remaining build phase of this contract is envisaged to be completed by the end of this financial year after which Kcom will have a profitable ten year managed service contract. As part of the agreement to re scope the network, we have been able to reduce materially the level of work in progress on this contract. Depreciation and amortisation has reduced by 17.3% to 27.3 million (2010: 33.0 million). Of this, amortisation of intangible assets arising on acquisitions has fallen to 5.5 million (2010: 7.5 million). At the year end, the net book value of intangible assets arising on acquisitions amounts to 0.5 million (2010: 6.0 million), which will be fully charged to the Income Statement over the next two financial years to 31 March The balance of depreciation and amortisation has reduced by 3.7 million to 21.8 million (2010: 25.5 million) reflecting the reduction in capital spend over the last two financial years compared to historical levels. Finance costs Net finance costs have remained flat at 7.4 million despite the reduction in debt. This is mainly due to the write off of arrangement fees in respect of the previous banking facility which was refinanced in November 2010, along with increased borrowing costs associated with the new facility. The Group has entered previously into fixed rate swap arrangements for 80.0 million of debt at a weighted average rate of 5.5%. In order to provide certainty over future interest costs, the Group has entered into new forward start fixed rate swap arrangements for 60.0 million of debt which commence on maturity of the existing swaps in January The new hedges have a weighted average rate of 2.7% and mature in July Taxation The taxation charge of 10.3 million (2010: 1.5 million) reflects the ongoing unwind of the deferred tax asset as the Group moves towards a tax payment position. The high effective rate of 31.2% (2010: 7.7%) reflects mainly the write off of a proportion of the deferred tax balance as a result of the reduction in corporation tax rates from 28% to 26%. Dividend The Board is proposing an increased final dividend of 2.50 pence per share (2010: 1.25 pence per share) resulting in a total dividend for the year of 3.60 pence per share (2010: 1.75 pence per share). The Board maintains its commitment to a minimum 10% growth in dividend over the subsequent two years. Subject to shareholder approval at the KCOM Group PLC AGM on 22 July 2011, the final dividend will be payable on 29 July 2011 to shareholders registered at the close of business on 17 June 2011.

17 13 Overview Business review Other disclosures Pension schemes Net liabilities associated with the Group s retirement benefit obligations have reduced to 6.9 million (2010: 50.4 million). The year on year reduction arises as a result of an increase in scheme assets of 11.9 million and a reduction in retirement benefit liabilities of 31.6 million. The reduction in liabilities predominantly relates to the Kingston Communications Pension Scheme and reflects the Government s decision to link future inflationary increase for both deferred members and pensions in payment from the Retail Price Index to the Consumer Price Index. This has been recognised in the Statement of comprehensive income as part of the actuarial gain of 31.5 million (2010: 5.6 million). In addition, the decision to close both schemes to future accrual and break the salary link has also reduced liabilities resulting in a curtailment gain of 3.0 million (2010: 1.7 million). The curtailment gain has been fully recognised in the Income Statement, and due to its incidence and size, the current period gain has been treated as an exceptional item. The increase in scheme assets is a result of the increased level of deficit contributions into the scheme and recovery of asset values (approximately 60% of scheme assets are held in return seeking asset classes). Effective from 1 April 2010, the Group increased its ongoing deficit contributions into the schemes for the next three years to 6.9 million per annum (previously 3.5 million per annum). The Group made also a one off contribution of 3.3 million in the first half of the current financial year, into the Kingston Communications Pension Scheme, the Group s main defined benefit scheme. The Group is committed to continue to mitigate long term risk associated with the defined benefit schemes. As part of this the Group is working alongside the Trustees to review the current investment strategy to reduce risk and volatility. This is likely to result in a lower proportion of return seeking asset classes than currently held. Cash flow and net debt Net debt has reduced to 82.0 million (2010: million) reflecting the continued strength of the business and the over performance in the final quarter of the year in the management of receivables and working capital and the conversion of earnings into cash. Net cash inflow from operations reduced to 68.0 million (2010: 74.6 million), prior year performance having benefited from a substantial one off working capital improvement as a result of the strategic actions taken by the Group. Cash outflows associated with the purchase of tangible and intangible assets have reduced to 13.9 million (2010: 17.6 million). This reduction reflects the ongoing evaluation during the year of appropriate investment opportunities in support of growth with a resultant timing difference on capital spend into the next financial year with the Group anticipating expenditure on capital investment to be in the region of 25.0 million. Paul Simpson Chief Financial Officer 8 June 2011 The Board maintains its commitment to a minimum 10% growth in dividend over the subsequent two years. Corporate governance Remuneration report Financial statements Shareholder information

18 14 Business review continued KC & Eclipse Delivering inspiring customer experiences is what gives KC and Eclipse the competitive edge in their markets. KC serves consumers and businesses in the Hull and East Yorkshire region and Eclipse is firmly focused on the UK SME market. Key figures 122.9m Revenue 57.9m EBITDA before exceptionals At a glance KC Over the past year, the Group s KC brand has undergone a successful transformation. This has enabled it to adopt new ways of working that are in line with customer needs and that support the Group s long term vision. The brand is now reaping the benefits of last year s transformation projects. These include improvements to its broadband network and the enhancement of its KC Talk packages by adding additional free features. Plans are in place to grow the KC brand further through the delivery of new products to its existing market and through strategic expansion beyond its traditional geographical boundaries to offer services to consumers and business in new areas. As we work towards our long term vision, plans are in place to: enhance further our KC customer experience; and expand the KC brand by offering phone and broadband packages in new geographical areas. Eclipse The Eclipse brand aims to be the number one internet services provider for small businesses. An important part of Eclipse s strategy for growth over the next 12 months is to develop new products and services that meet the needs of its small business customers and help them to perform better. During the past year, Eclipse has benefited from the Group s relationship with BT to provide high speed broadband connectivity and related services. It has launched also advanced anti spam and anti virus hosted solutions for SME exchange servers, as well as its Sentinel broadband performance monitoring product. Eclipse is investing also in its proposition to the Reseller market to ensure that its offering is compelling at all levels. Plans are in place to: launch new products and services for the Eclipse brand and retain its position at the top of its marketplace; ensure that all activity is market led, so that Eclipse is delivering to the needs of the SME market place and exploiting all opportunities; continue building on the sales achievements in the higher end connectivity market (such as leased lines) so that we can exploit further the Group s relationship with BT; and develop Eclipse s customer service ethos in support of its ambitious growth aspirations. Operational review Overall revenue declined by 0.5% to million (2010: million), with growth in KC offset by revenue reduction in Eclipse and KC Colour Pages. EBITDA before exceptional items increased by 1.0% to 57.9 million (2010: 57.3 million) benefiting from an overall reduction in operating costs. Growth within KC reflects increasing demand for higher bandwidth from business customers. In consumer services, the upsell to higher value KC packages has resulted in increasing average revenues per customer. We have been pleased with the level of demand for bundled packages, which were launched in November. Progress has been made also on our expansion into selected neighbouring towns and villages, with new customers being connected to a KC service since the launch date of April This offsets a reduction in customer numbers and the continuing decline of traditional call revenues, consistent with the rest of the UK consumer market. The decline in Eclipse reflects the anticipated churn of lower end consumer contracts. The proportion of revenue from business customers has increased as a result of its focus on the SME market. This has been achieved through a mix of new customers taking broadband connectivity and by broadening the portfolio of services we provide to existing customers. Recent developments include expansion of our high speed broadband connectivity and DSL services portfolio. The decline in KC Colour Pages is driven by a reduction in advertising volumes, consistent with general market trends. Growth within KC reflects increasing demand for higher bandwidth from business customers.

19 15 Case studies Providing inspiring customer experiences My phone calls are answered quicker at Eclipse than with other providers and the technical analysts are second to none. I know, when I call Eclipse, I m going to get a friendly yet professional voice on the phone who will offer me constant updates and information if anything does go wrong It s a service which feels exclusive. I have a great rapport with several of the technical analysts and know that I am calling people who really understand how my business works and who are happy to go the extra mile. Colin Painter PinkConnect We ve never been frightened to make major investments in the back office if ultimately it helps our clients win their case and fast. It s OK looking good from the outside but if you can t back that up with great service the public will soon find you out. As a service business we need good technology and good people and so we continue to invest heavily in both. Working with a local firm like KC gives us reassurance that if any issues arise a real person is on hand to resolve them fast so that the service we give our customers is unaffected. Andrew Baldwin Rapid Solicitors Overview Business review Other disclosures PinkConnect PinkConnect, a telecoms, IT and broadband supplier, uses Eclipse broadband products for the majority of their customers and switch customers to Eclipse at a rate of between 10 and 20 a month. In return, we promise a safe switch for partners looking to move customers to our broadband. We are so confident of the Eclipse service promise that we offer a no quibble guarantee of a smooth switch worth three months broadband cost. Rapid Solicitors With headquarters in Hull, Rapid Solicitors is one of the UK s largest specialist personal injury legal firms. A key factor in its success is the speed with which it responds to and resolves clients cases, resulting in high levels of customer satisfaction and word of mouth recommendations. Rapid recently invested in a new communications system across its four East Yorkshire offices to increase efficiency and support its future growth ambitions. It selected KC to install a high speed, dedicated fibre internet link at its main office and a virtual private network to connect the office seamlessly and securely to its other sites. The solution gives Rapid s employees faster access to research tools. Corporate governance Remuneration report Financial statements Shareholder information

20 16 Business review continued Kcom & Smart421 The Group s Kcom and Smart421 brands aim to deliver a world-class customer experience in their chosen markets. Following the results of its ongoing customer experience research programme, the Group has made changes to its processes and is investing further in the systems and tools that underpin the customer experience. Key figures 276.9m Revenue 25.8m EBITDA before exceptionals Kcom continues to secure new and renewed contracts across both enterprise and the public sector. At a glance Kcom Over the past year, the Kcom brand has secured several key contract wins. Its recent award of a contract for the Staffordshire County Council Public Sector Network (PSN) is the first of its kind for Kcom, and amongst the first five regional PSNs to be established in the country. This highlights the Kcom brand s ability to deliver complex and industry leading solutions and it is now well placed to win similar contracts. Kcom will continue to focus on its other target markets; multi site enterprise, and channel partners and generate growth through additional Managed Services contracts, such as those with Morrisons and Domino s. Kcom has plans to develop its service and propositions to its target corporate and public sector customers. This will develop the combined capabilities of Kcom with that of its partners whilst investing in core systems and processes. This investment will be undertaken in parallel with a programme to improve the market awareness of the Kcom brand. Smart421 The Group s Smart421 brand delivers high end consultancy, integration and management of business critical systems for large enterprises. It provides onshore IT services for complex and bespoke projects. Smart421 will maintain its longstanding partnerships with IBM, Microsoft and Oracle, and will build on its partnership with Amazon Web Services. Using these relationships and its direct sales operations, Smart421 will concentrate on opening new revenue streams in cloud architecture, cloud integration and infrastructures as a services (IaaS) related solutions, in addition to winning further business around Smart421 s core consulting and delivery capabilities. Operational review Reported revenue has declined 4.8% to million (2010: million). This movement reflects the exit from low margin services, specifically maintenance contracts (including those sold to Phoenix IT Group) and product resale. EBITDA before exceptional items increased by 13.6% to 25.8 million (2010: 22.7 million) reflecting a reduction in operating costs. Whilst overall revenues have reduced year on year, the focus on growth and delivery against this is visible in a number of areas. within Kcom, revenue from our key target markets of managed and connect services grew in the second half of the financial year compared to the first half. Kcom continues to secure new and renewed contracts across both enterprise and the public sector. Within the enterprise area, new contracts have been signed with Domino s and Eversheds. Renewals and extensions to contracts include Phones4U, Admiral Group and Morrisons; within the public sector, Kcom has seen further success, as preferred bidder for a second PSN contract in Dorset, already having won the Staffordshire contract and delivered a self service contact centre solution for NHS Business Services Authority; and Smart421, has delivered strong revenue growth of 42.0% to 23.0 million (2010: 16.2 million). This has been achieved by working with a range of companies including Telefónica O2 UK Ltd, Virgin Atlantic Airways, Aviva UK, ConstructionSkills, Citigroup and Drax Group. The Group has committed an investment of 2.5 million to enhance its Network Operation Centre tools, which support our existing customers and the growth experienced in distributed, corporate and public sector networks.

21 17 Case studies Passionately pursuing better ways to connect people Kcom s experience in the public sector has been invaluable in creating a solution which works for us. It is reassuring that the PSN we are developing with Kcom is in direct alignment with Cabinet Office guidance, policies and standards. Sander Kristel CIO at Staffordshire County Council Virgin Atlantic is pleased to be working with Smart421 to establish an SOA platform fit to deliver long term growth. Smart421 has shown a strong capability in this area and we re looking forward to delivering some great services for the airline. Beverley Sewell Head of IT for Virgin Atlantic Overview Business review Other disclosures Staffordshire Public Sector Network Kcom was selected to deliver one of the country s first Public Sector Networks (PSN) across Staffordshire. The network is one of the largest networks in the UK connecting around 50,000 devices. The five year extendable contract combines wide and local-area networks, rationalisation of multiple telephony services onto a single IP platform, a new contact centre system, streamlining of mobile phone connectivity and the centralisation of security functions. It will provide also a platform for introducing new, flexible ways of working into the council and its partners. Virgin Atlantic Virgin Atlantic Airways Limited needed to transform its IT landscape, rationalise its current shared services and develop additional services to achieve its long term strategic goals. Virgin Atlantic selected Smart421 as its IT system transformation partner to provide IT consultancy, design, development and support for its service oriented architecture (SOA) platform, with the objective of delivering improvements that its customers will notice and appreciate. Virgin Atlantic chose Smart421 as a partner due to its expertise and experience recognising Smart421 s capability to drive this initiative and deliver successfully. The programme is the initial phase of a multi year engagement and will deliver SOA governance and architecture, together with an associated set of key services across a number of business areas. Corporate governance Remuneration report Financial statements Shareholder information

22 18 Risk management In 2010/11 we have strengthened further our processes and systems for managing and controlling risks and we are well placed to anticipate, understand and respond to the challenges we face. We take seriously our responsibility to identify and manage risk across the Group and recognise the direct effect this has on delivering long term value to shareholders. We have made significant investments to ensure that we have the right skills in place across the Group to manage our risks effectively. In 2010/11 we have strengthened further our processes and systems for managing and controlling risks and we are well placed to anticipate, understand and respond to the challenges we face. Our philosophy is to identify, evaluate and manage the risks facing the business, rather than to eliminate all risks, and we recognise that our internal control systems can provide only reasonable and not absolute assurance against material misstatement or loss. Our risk reporting process provides the means for us to identify, assess, measure, manage and monitor all risks to provide us with a single picture of the threats, uncertainties and opportunities we face. We are able then to make appropriate decisions to limit and control the impact that these risks may have on our goals and objectives. The Board has overall responsibility for determining the nature and extent of the significant risks it is willing to take to achieve its objectives and for ensuring that the Group maintains sound internal control and risk management systems, as well as for reviewing the effectiveness of those systems. The Board receives regular reports from management, Internal Audit and the external Auditors on the effectiveness of the systems of internal control and risk management and is satisfied that the systems are embedded within the day to day activities of the business and that the Group continues to be compliant with the provisions of the UK Corporate Governance Code relating to internal control. Risk management framework The Group s risk management framework is developed in accordance with Financial Reporting Council Guidance. Under this framework each area of the business maintains a risk register, on which

23 19 The risk reporting process A risk register report is taken to the Board three times a year Risks are identified and added to the risk register and rated for probability and impact The Risk Committee reviews formally the registers to check for consistency or omissions Mitigating actions are agreed by senior management and noted on the register The risk registers are reviewed regularly and updated at senior management meetings Overview Business review Other disclosures it records any risks which may prevent that area of the business from meeting its objectives. Risks may be identified by anyone within the business; risks are then discussed and agreed by the management team for that business area and entered on to the risk register. Each risk is assessed on the probability of it occurring and the impact should it occur. Each risk is assigned a senior management owner who is responsible for monitoring and evaluating the risk and associated mitigation strategies. The risk register for each business area is reviewed and updated by senior management on an ongoing basis, with a Group risk register presented to the Board three times a year. This enables the Board to assess whether the overall risk profile of the Group is being maintained at an appropriate level. During the year we established a Group wide Risk Committee which also monitors and reviews the risk registers to ensure that consistent ratings are applied and no risks are omitted. The Committee is responsible also for reviewing progress in mitigating risks and discussing and agreeing actions relating to any new risks that have been identified. Membership of the Committee is at a senior management level and the Committee meets quarterly and prepares a report for the Board after each meeting. Internal Audit The Group s Internal Audit team consists of three qualified accountants, each with a Big Four background, who perform financial, operational and compliance reviews across the business and report three times a year to the Audit Committee. The audit plan is risk based and audit testing is designed to ensure that the controls in place are operating effectively. The Internal Audit team is led by the Company Secretary who reports to the Executive Chairman, with a direct reporting line also to the Chairman of the Audit Committee. We believe that internal and external auditing teams should work closely together to minimise risks and enhance shareholder value. Our Internal Audit team works closely with our external Auditors, who report also to the Audit Committee any material risks identified during their interim review and the full year audit. Those, together with any significant risks identified by the Internal Audit function, are highlighted to the Board. Financial risk management Each part of our business produces a budget on an annual basis which is reviewed by management and ultimately approved by the Board. This is then updated quarterly as the year progresses. Performance against budget and quarterly reforecast is monitored at monthly senior management meetings and is reported to and reviewed by the Board. Further information about the financial risk management policies in place, and in particular the way in which credit risk, liquidity risk, interest rate risk and foreign currency risk are managed, are in notes 19 and 29 to the accounts. Controls around consolidation The basis of consolidation for the financial statements is detailed in note 2 to the accounts. Strong controls are in place around the process for preparing consolidated accounts. The work of consolidation is performed by experienced, qualified accountants and a review of the consolidation forms part of the audit work performed by our external Auditors. Principal risks and uncertainties As with all businesses, we are affected by a number of risks and uncertainties, some of which are beyond our control. The table overleaf sets out the principal risks and uncertainties which could have a material adverse effect on the Group and have been identified through the risk management framework. This is not an exhaustive list and there may be risks and uncertainties of which currently we are unaware, or which are believed to be immaterial, which could have an adverse effect on the business. Corporate governance Remuneration report Financial statements Shareholder information

24 20 Risk management continued Managing key risks Risk Movement in risk Action taken Key risks mitigated from last year Pension deficits Last year we noted that we operate ten pension schemes including two defined benefit schemes. Volatility of equity returns combined with changing actuarial assumptions resulted in significant adverse movements in the scheme funding position requiring additional deficit repair payments. Compliance with health and safety legislation We noted last year that, like all businesses, we need to ensure we provide a safe working environment for all our employees, including engineers working on our networks. We have taken a number of steps to mitigate the risk associated with our defined benefit schemes, principally: closure of both defined benefit schemes to future accrual at September 2010 breaking the link to final salary; and increasing the ongoing level of cash contributions into the schemes. These steps, coupled with improvements in equity markets, have resulted in a material reduction in the deficit. Though activity continues on mitigating the risk associated with the pension schemes, we no longer consider that this is a key risk. During the year we have achieved certification to the BS OHSAS Health and Safety Standard which reflects the commitment of the Group to ensure that we have best practice health and safety procedures in place. Whilst the risk has not changed during the year, we believe that our mitigation has continued to strengthen and therefore this is no longer considered to be a key risk for 2011/12. Key risks this year Security and resilience of IT, networks and data We continue to operate networks across the UK and host data for many customers alongside operating billing platforms and other IT systems internally. This means that we are dependent on the secure operation and resilience of our information systems, networks and data. We have maintained appropriate monitoring and development forums in place including standards compliance where appropriate. The newly formed Risk Committee specifically considers information security and we have recently launched a new Data Governance Policy across the Group to reflect best practice and compliance with relevant standards. We have held the ISO Information Security Management standard since 2007, which demonstrates the robustness of our security processes. Reliance on key third party suppliers Our strategic agreements with BT and Phoenix means we are dependent on the performance of these third parties. We continue to use dedicated teams to maintain close relationships with our key suppliers. These relationships have worked extremely well during the year. We have appropriate contracts and service levels in place and monitor performance to ensure that our customers are receiving the best possible service at all times. Business continuity Business continuity in the event of a crisis or disaster is a risk we continue to monitor and mitigate against. It is essential to many of our customers that we can continue to provide services even when a significant incident occurs. Over the last two years we have been working to ensure that we have identified all of our critical processes across the Group and that we have robust business continuity plans in place for all such processes. We are currently reviewing all of our plans to ensure that these are compliant with the BS Business Continuity standard. Over the last two years we have reviewed also our planning to ensure that we are fully prepared for a pandemic situation as well as more traditional business continuity scenarios.

25 21 Corporate social responsibility Our CSR strategy has three main areas of focus: community, people and environment. We are committed to acting as a responsible member of the business community as an employer, investor and contributor to the communities in which our people live and work. Corporate social responsibility (CSR) is key to delivering our business strategy and is vital in maintaining the trust of our customers and all our stakeholders. Overview Business review Other disclosures Community The evidence of our work with customers and wider communities keenly demonstrates that corporate social responsibility in KCOM Group is embedded firmly in our business. Examples of this commitment can be found in every corner of the Group, from sponsorship activities and community volunteering initiatives to mentoring schemes and charitable support. Our quarterly community grants scheme awarded grants of 150, 250 and 500 to help schools and members of the community and their organisations get their community projects off the ground. In the past twelve months we have helped support hundreds of projects including purchasing training equipment for clubs and schools, helping to establish local enterprises and supporting a variety of national and local charities and initiatives. Supporting the valuable work undertaken in the charitable sector is another strand of our responsible business approach. Each year we select a Group Charity of the Year to support. The decision is made by our people by voting on a shortlist of UK registered national charities. In 2010/11 we raised 45,000 for The Stroke Association. Across the country, our people have achieved this through a series of fundraising events and activities which are organised through our network of charity champions, employees who dedicate some of their time to supporting and organising regional activities. For the financial year 2011/12 we will be partnering with Help the Hospices and hope to raise similar levels of support. Our people chose Help the Hospices because of the charity s strong local links to all our major offices, meaning the money raised at each office can be channelled directly to a local hospice. Help the Hospices wants the very best care for everyone facing the end of life. It is there to support member hospices and other organisations as they strive to grow and improve end of life care throughout the UK. The money raised will help the hospices provide vital care that is tailored to patients individual needs that supports their friends and family. A large part of our community investment programme is delivered in East Yorkshire through our KC brand. The KCOM Group is one of the largest employers in this area. We believe there is a valuable role for our business in helping to make the region a better place to live, work and visit. We play a part in the regeneration of the area through our KC in the Community programme. This regionally focused programme has two main aims; firstly, to help raise the aspirations of children and young people and secondly, to involve our business and employees in our regional communities. Investing time as well as financial assistance in communities is an inherent part of our responsible business agenda. During 2010/11 our people donated 183 hours per month. During 2011/12 our Group community objectives are to: raise in excess of 45,000 for our Group charity partner; increase volunteering opportunities through our KC in the Community programme; and recruit more business partners into the Hull & Humber KC Cares programme. Group charity partner 2011 Corporate governance Remuneration report Financial statements Shareholder information

26 22 Corporate social responsibility continued Children s University The challenge: to create an inspiring facility where learning could take place. What we did: refurbished one of our city centre training rooms, to provide a dedicated, fully ICT equipped classroom. Achievement: Hull Children s University now has a state of the art facility where children taking part in the programme can learn through specifically designed education modules. Community continued Key regional programmes include: Hull & Humber KC Cares (Cares) Cares offers well established expertise in employee engagement that delivers benefits for companies, employees and communities. In addition to providing a brokerage service for high quality volunteering opportunities, Cares also campaigns nationally to increase the impact of employee volunteering in communities of greatest need and to address social issues including education, employability and economic renewal. Our partnership with Cares has seen regional membership more than double over the past year as we have used our business resources and contacts to better highlight the programme to other organisations. Throughout the year, we have helped Cares identify and approach potential new members. Our knowledge of the business sector is helping to encourage a new approach to marketing Cares as we are able to use the skills of our people to increase awareness of the business benefits of the programme. Cat Zero Cat Zero is a not for profit organisation which creates opportunities for young adults aged living in Hull who are not currently in education, employment or training. The programme helps them to develop skills and prepares them for the work environment. Participants take part in challenging educational and personal development programmes which use sailing as a focal point. The experience is designed to motivate and bring about attitudinal change. Our KC brand joined the Cat Zero programme as a business partner when it launched in We are helping to deliver the programme by providing mentors and three day work placements. One of our senior executives has been appointed recently to the Cat Zero board to help support its fundraising programme. In the past year, we have delivered a telephony solution to enable the young people on the programme to contact their mentors directly and one of our employees has become a mentor for young people on the Cat Zero programme. Hull Children s University (HCU) Hull Children s University is an innovative and dynamic project, aimed at children aged 7 14 years old, which raises their self esteem, achievements and learning aspirations through the delivery of inspiring learning programmes. We have worked with the organisation for a number of years and have witnessed the value that it brings to young people in the region. Kevin Walsh is a member of the board of the Hull Children s University and in December 2010 we officially opened the HCU KC Learning Zone, a dedicated classroom in the city centre where learning can take place and children can gain access to ICT equipment. During the past year, our people have developed two new learning modules and we have provided financial support by funding two posts within HCU. We are proud to support

27 23 Our employees are key to the success of the Group and this principle guides our decision making and how we approach the management of people. Overview Business review Other disclosures Our people Our value based culture seeks to attract and retain the very best people, with each and every individual understanding and being rewarded for their contribution. Our employees are key to the success of the Group and this principle guides our decision making and how we approach the management of people. Recognising and celebrating the achievements of employees is an important part of our workplace ethos. Across the Group we have employee recognition schemes focused around our four brands promises. Employees nominate the person that best demonstrates our brand and Group s core behaviours. At the end of the year, these schemes culminate in one employee being recognised and rewarded as our Group Employee of the Year. In 2010/11 we commenced work on designing a people strategy that aims to create a workplace in which every employee is recognised as an individual and inspired to deliver exceptional business performance. That strategy is built around our Group values and long term vision enabling every individual to contribute in creating excellence together. In 2011/12 we will focus on embedding our culture and testing ourselves against our values, further development of outstanding leadership capability across the business and concentrating on resource planning, talent management and organisational development. In accordance with our people strategy, over 44 employees attended our leadership programme, Engage, this year. Also this year we undertook a Group wide employee survey to gain feedback on issues relating to employment in keeping with our open and flexible values achieving an 84% response rate. Plans are underway also to review our new starter and induction processes. We encourage our employees to participate in the success of the Group through share ownership. Our award winning Share Incentive Plan (SIP) scheme is now entering its fifth year with 1,157 of the Group s employees owning shares in the business through the scheme. Recognising that our employees have individual and differing requirements we have entered into our eighth year of offering a flexible benefits programme and take up of the scheme remains high with the most popular choice being the ability to buy or sell holiday entitlement. Through effective people policies and planning we are pleased that 56% of employees have been with the Group in excess of five years with 31% having ten years or more service. Through effective management and return to work initiatives, our Group sickness absence remains at 2% of total working days. Wellbeing The Group s wellbeing initiative is now in its third year. In 2010/11 the percentage of people who attended the Group s wellbeing sessions increased from 27% to 30%. The sessions consist of checks on blood pressure, cholesterol, weight, body fat percentage, lung age and diabetes tests. The roll out of monthly health awareness and wellbeing campaigns was very well received and was supported by giving all employees a desktop health and wellbeing calendar with each month highlighting a different focus. A new calendar of campaigns commenced in April. At the end of last year we started also an employee assistance programme which provides independent advice to employees and line managers on a range of topics including: bereavement, debt, legal problems, family issues, stress and anxiety. Employee absence Employee absence in 2010/11 has reduced from 2009/ /11: 2.0% 2009/10: 2.2% Employee turnover Figures exclude employees that have TUPE transferred to our partner organisations. 2010/11: 9.6% 2009/10: 7.3% Corporate governance Remuneration report Financial statements Shareholder information

28 24 Corporate social responsibility continued The KCOM Group is one of the first companies within the industry to have a Group wide BS OHSAS compliant health and safety management system. Creating excellent environmental standards Environmental management At KCOM Group we take environmental matters very seriously and for a number of years we have worked hard to minimise our impact on the environment. We have ISO accreditation and an environmental management system in place that helps us to manage our environmental responsibilities effectively. We have an Environmental Operations team with membership from across the Group, which meets regularly to monitor our progress against our environmental plan and to ensure that environmental initiatives are communicated to all our employees. Each year we set ourselves targets to try to ensure that we protect the environment as much as we can. These targets, and our achievements, are shown below. We are very proud of exceeding our targets in relation to landfill, the proportion of waste recycled, business travel and the printer and photocopier paper used. The increase in overall CO 2 emissions is due to an increase in recorded electricity consumption. This is due to two main factors: during the year we have implemented automatic meter readers across the Group which has enabled us to measure our consumption more accurately, rather than using estimates; and as a Group we have seen more activity in relation to our data centres, which has had an inevitable impact on the amount of electricity consumed. As noted on page 9, the Group has plans for growth and therefore some of our targets for 2011/12 are simply to maintain figures at current levels. We believe that these represent challenging targets but we are committed to working hard to minimise the environmental impact of our growth in future years. Energy During the year we have engaged with our power supplier, npower, to provide us with regular management information on our electricity consumption. The Group continues also to purchase good quality combined heat power. Last year we completed a request for information from the Carbon Disclosure Project. This required us to provide information on our strategic awareness about climate change, our carbon reduction ambition, our reporting capabilities and our implementation practices. Our response was benchmarked against over 1,100 other suppliers and, thanks to the robustness of our environmental programmes, we achieved a score of 60 against an average of 48. Waste Waste management is an essential part of our sustainability commitments. This year we have reduced the amount of CO 2 generated from waste by 18%. We have several waste management initiatives in place, such as cable, mobile phone and battery recycling. In 2010/11 we recycled 200 tonnes of batteries from telephone exchanges. We raised also 2,500 for our 2010/11 Group charity, The Stroke Association, through recycling mobile phones. We will continue to work with our partners and look at ways to generate revenue from waste streams to fund our chosen charities and internal initiatives during 2011/12. In 2010/11 we recycled 200 tonnes of batteries from telephone exchanges. We raised also 2,500 for our 2010/11 Group charity, The Stroke Association, through recycling mobile phones.

29 25 Targets and achievements Target 2010/11 Achieved Actual 2010/11 Actual 2009/10 Target 2011/12 Total CO 2 emissions Landfill Proportion of waste recycled CO 2 arising from business travel Printer and photocopier paper used To reduce by 3% from 2009/ % from 2009/10 To maintain landfill at 2009/10 levels To maintain at 2009/10 levels To reduce by 10% from 2009/10 To reduce from 2009/10 levels -2.58% from 2009/ % from 2008/ % from 2008/09 Proportion recycled +6.93% -21.2% from 2008/09-41% from 2009/ % from 2009/ % from 2008/ % from 2008/09 To maintain at 2010/11 levels To maintain at 2010/11 levels To increase proportion recycled by 3% on 2010/11 levels To maintain at 2010/11 levels To maintain at 2010/11 levels Overview Business review Other disclosures Business travel Following on from the significant progress we made in this area last year, we asked each individual brand to specifically target reducing unnecessary travel. This, combined with our continued use of Microsoft OCS technology as well as audio and video conferencing, has meant that we have successfully reduced our business travel in the year by 41%. 10:10 Our commitment to the 10:10 initiative has continued this year. The 10:10 project unites the UK in working together to reduce the UK s carbon emissions. To support this, the Group introduced cycle to work and Institute of Advanced Motorists Cycle schemes. Health and safety Health and safety awareness and best practice is embedded within the Group s culture, values and behaviour. This is demonstrated by the commitment of our employees to health and safety training and professional qualifications and through our various accreditations and standards. The KCOM Group is one of the first companies within the industry to have a Group wide BS OHSAS compliant health and safety management system. To achieve accreditation, the Group underwent a vigorous external audit process with BSI that was conducted across our sites and operations. Our Health and Safety team is approved and registered to run in house accredited courses covering health and safety in the workplace and manual handling. A large number of our managers attend a two day health and safety training workshop and work towards a CIEH Level 2 risk assessment qualification. Our risk assessors are also CIEH Level 3 qualified. There were no work related fatalities or health and safety enforcement notices during the year. Risk management and procurement We recognise that in order to be a responsible business we need to support our suppliers in meeting the highest environmental and ethical standards. Our Group Purchasing and Supplier Management Policy helps us to implement the processes and tools we need to work responsibly with our suppliers and to ensure that we are all working together under the same vision and values. We undertake also supplier evaluations to ascertain their environmental practices and health and safety standards. Working days lost due to accidents Reduction due in part to the transfer of some engineering staff to BT and Phoenix in 2009/10. Excluding this, working days lost have remained consistent year-on-year. This year: 18 Last year: 32.5 Reportable accidents Reportable accidents have remained at the same level as 2009/10. 1 This year: Last year: 1 Corporate governance Remuneration report Financial statements Shareholder information

30 26 Other disclosures Principal activities The principal activities of the Group are described on pages 2 to 5 and in the Business review on pages 10 to 17. Disclosure of all relevant information to auditors The Directors who approved this report are satisfied that there is no relevant audit information (as defined in the Companies Act 2006) of which the Company s auditors are unaware. Each of the Directors has taken all reasonable steps to make themselves aware of any relevant audit information and to establish that the Company s auditors are aware of that information. Directors The names and biographical details of our Directors as at 31 March 2011 are on pages 28 and 29. Further information regarding the Directors who served during the year can be found on page 30 and on pages 38 to 44 in the Remuneration report. Creditor payment policies The Group seeks to agree payment terms with each supplier when we start doing business with them. We always aim to pay our suppliers within a reasonable period of the invoice being received and in accordance with the Prompt Payment Code, which can be found at org.uk. At 31 March 2011, the Company had no trade creditors (2010: Nil). Group creditor days represented 72 days (2010: 54 days). Charitable and political donations The Group made a number of charitable donations throughout the year to support community organisations and initiatives, totalling 9,015 (2010: 12,189). No political donations were made. Employees Our employment strategies are linked to business needs and have been designed to deliver the growth and development of the Group and our people. Our employment policies are designed to provide equal opportunities irrespective of age, disability, ethnicity, gender, gender reassignment, marital status and civil partnership, nationality, pregnancy and maternity, race, religion and belief and sexual orientation. All employees, whether part time or full time, temporary or permanent, are treated fairly and equally. We select employees for employment, promotion, training or other matters affecting their employment on the basis of aptitude and ability. All employees are assisted and encouraged to develop to their full potential so that their combined talents and resources of the workforce are fully utilised to maximise the efficiency of the organisation. We take every opportunity to involve and consult with our employees and we believe that employee involvement is an essential contributor to the development of our business. Our Executive Directors regularly visit our different office locations to meet with our employees, provide updates on the performance of the Company and to receive suggestions and feedback, through both roadshow presentations and informal meetings. Our quarterly online magazine called Insight helps to raise awareness of activities across the Group and is supported by a weekly round up bulletin which is distributed to all employees. In March 2011 we undertook a Group wide employee survey to obtain feedback from our employees on a range of topics. The results of this will be fed back to employees once these have been collated and will be used to enhance employee interaction in the future and to feed into any decision making which may affect the interests of our employees. We encourage our employees to become shareholders by offering a Share Incentive Plan as we believe this encourages greater employee engagement. More information about this can be found on page 44. Share capital The Company has a single class of share capital which is divided into ordinary shares of 10 pence. Rights and obligations attaching to shares In a general meeting of the Company voting is as follows: on a show of hands, every member present in person shall have one vote; on a show of hands, every proxy present who has been duly appointed by one or more members shall have one vote; and on a poll, every member who is present in person or by proxy shall have one vote for every share of which he or she is the holder. A member is not entitled to vote in respect of any share in the capital of the Company held by him or her, if there are sums payable to the Company in respect of such share which remain unpaid. Full details of the deadline for exercising voting rights in respect of the resolutions to be considered at the AGM to be held on Friday 22 July 2011 are set out in the Notice of Meeting. All dividends are paid proportionately to the amounts paid up on the shares and are paid to those members whose names are on the share register at the date at which the dividend is declared, or at such other date as determined by the Directors or by an ordinary resolution of the Company. If the Company is wound up, the liquidator, with the sanction of a special resolution of the Company or any other sanction required by law, may divide the whole or any part of the assets of the Company amongst the shareholders and may determine how the division of the assets will be carried out. Transfer of shares All transfers of uncertificated shares must be made in accordance with, and be subject to, the Uncertificated Securities Regulations 2001 and in accordance with any arrangements made by the Board. All transfers of certificated shares must be in writing in a form which has been approved by the Directors; this is known as the Instrument of Transfer. The Instrument of Transfer must be signed by, or on behalf of, the transferor and the transferor will remain as the holder of the share until the name of the transferee is entered into the share register. The Directors may refuse to register the transfer of any share which is not fully paid or which is in favour of more than four persons jointly. The Directors may also refuse to recognise an Instrument of Transfer if it is not lodged at the Company s registered office or at any other place which the Directors have determined. If the Directors refuse to register a transfer they will send to the transferee a notice of the refusal and the Instrument of Transfer within two months of the date on which the transfer was lodged with the Company. Shares held by Employee Share Trusts (EST) The trustees of the Kingston Communications 2000 EST vote any shares held in the EST as they wish, having due regard to the interests of the employees as potential beneficiaries. The trustees of the KCOM Group PLC EST consult with participants regarding the voting of any

31 27 Overview investment shares, but may vote any co investment shares held in the EST as they wish, having due regard to the interests of the participants. Allotment of shares At the AGM in 2010, the Company was authorised by the members to allot shares up to an aggregate nominal amount of 17,220,130. Authority was also given at the same time for the partial disapplication of pre emption rights, up to a maximum aggregate value of 2,583,019. As at the date of this report no shares had been allotted under this authority, however the Company intends to allot sufficient shares to meet requirements in relation to our Executive Incentive Plan prior to the AGM. As at 31 March 2011 the number of shares that were required was 1,496,000 with a nominal value of 149,600. Repurchase of shares At the AGM in 2010, the Company was authorised by members to purchase its own shares, up to a maximum of 51,660,391. During the year, the Company purchased 181,370 (2010: 2,580,000) shares on the London Stock Exchange at a cost of 88,871 in order to meet its obligations under the Company s share schemes. These shares represent 0.04% of the called up share capital and are held in trust until they vest; therefore the purchase of these shares does not reduce the share capital in issue. The total number of shares held in trust to meet obligations under the Company s share schemes is: Number As at 1 April ,074,780 As at 31 March ,060,230 Further details around the purchase of shares in the year are set out in note 27 to the financial statements. Significant agreements change of control The following significant agreements contain provisions entitling the counterparties to exercise termination or other rights in the event of a change of control of the Company: under our 200 million multi currency revolving facility agreement dated 19 November 2010, the Company must notify Lloyds TSB Bank PLC, the Agent of the agreement, within seven days of becoming aware of a change of control of the Company. Any bank or financial institution named within the facility agreement may then notify the Agent within seven days that they wish to cancel their commitments. The Agent must then give at least 21 days notice to the Company of this and all outstanding amounts due to that bank or financial institution will become immediately due and payable. For these purposes, a change of control occurs if any person or group of persons acting in concert gains control of the Company; and the Company s share schemes, details of which are contained in the Directors remuneration report on pages 39 to 44, contain provisions which take effect in the event of a change of control, as a result of which options and awards may vest and become exercisable. The provisions do not entitle participants to a greater interest in the shares of the Company than that created by the initial grant or award under the relevant scheme. The Company does not have any agreements with any Director or employee that would provide compensation for loss of office or employment resulting from a takeover. Annual General Meeting Our AGM will be held at the KC Stadium, Kingston upon Hull on Friday 22 July 2011 at 11.00am. The Notice of Meeting accompanies this Annual Report and is also available on our Group website at Four resolutions will be proposed as special business. Explanatory notes on these resolutions are set out in the Notice of Meeting. The Directors consider that all the resolutions proposed are in the best interests of the Company and it is their recommendation that shareholders support these proposals as they intend to do so in respect of their own holdings. This report has been reviewed and approved by the Board of KCOM Group PLC. Signed on behalf of the Board Kathy Smith Company Secretary 8 June 2011 Business review Other disclosures Corporate governance Remuneration report Financial statements Shareholder information

32 28 Board of directors Martin Towers Non Executive Director Audit Committee Chairman Nomination Committee Remuneration Committee Martin Towers joined the Board in He is a fellow of the Institute of Chartered Accountants in England and Wales and has held a number of senior finance roles including Group Finance Director at Kelda Group PLC, Allied Textile Group PLC and the Spring Ram Corporation PLC. He is currently Non Executive Director of RPC Group PLC and Lupus Capital PLC. Martin is aged 58. Kevin Walsh Executive Director Kevin Walsh joined the KCOM Group in 2000 and the Group s Board in He is responsible for the Group s KC and Eclipse brands. Prior to joining the KCOM Group, Kevin was Managing Director of a new media start up and held a number of senior director roles within the Electrolux Group. Kevin is a member of Business in the Community s Yorkshire and Humber Advisory Board. He sits also on the board of East Yorkshire based charity, Hull Children s University, which aims to inspire children to achieve their full potential. Kevin is aged 58. Tony Illsley Senior Independent Non Executive Director Nomination Committee Chairman Remuneration Committee Audit Committee Tony Illsley joined the Board in He has held a variety of senior business positions including Chief Executive Officer of Telewest Communications PLC and President of Pepsi Cola Asia Pacific. He is currently Chairman of Plastic Logic Ltd and Datalase Ltd and is a Non Executive Director of Sepura PLC, Camelot Global Services Limited and Camelot UK Lotteries Limited. Tony is aged 54.

33 29 Overview Bill Halbert Executive Chairman Bill Halbert was appointed Executive Chairman of the KCOM Group in July 2009 having joined the Board as a Non Executive Director in September He has worked in the information technology industry for over 40 years and has a wealth of experience and strategic insight. He founded and for the next 13 years was CEO of Syntegra, BT s global consultancy and systems integration subsidiary. Bill s other directorships include Excelsys Ltd, Jade Communications Ltd and Tacit Connexions Ltd. Bill is aged 63. Business review Other disclosures Paul Simpson Chief Financial Officer Executive Director Paul Simpson was appointed Chief Financial Officer in May 2004, having joined the Group in In addition to his Group wide finance responsibilities, Paul has responsibility for the management of the Group s Kcom and Smart421 brands and our relationship with BT. Paul is a graduate in Economics and qualified as a Chartered Accountant with Price Waterhouse. Paul is aged 42. Corporate governance Remuneration report Graham Holden Non Executive Director Remuneration Committee Chairman Audit Committee Nomination Committee Graham Holden joined the Board in November He is Chief Executive of Marshalls PLC, Britain s leading supplier of hard landscape products. He has been with Marshalls for 23 years and was Group Financial Director from 1992 until Graham is a Chartered Accountant and graduate of the Harvard Advanced Management Programme. He is the chairman of the Yorkshire and Humber Regional Advisory Board of Business in the Community and was appointed as the 2010 Prince s Ambassador to the region. He serves also on the boards of the Construction Products Association and the Mineral Products Association. Graham is aged 51. Financial statements Shareholder information

34 30 Corporate governance Our Board We have six Directors on our Board, which is led by Bill Halbert, our Executive Chairman. Information on each of our Directors can be found on pages 28 and 29. Of the six Directors, three are Executive and three are Non executive. Paul Renucci served also as an Executive Director until his resignation on 14 December At the Annual General Meeting (AGM) on 22 July 2011 shareholders will be asked to re elect Graham Holden and Bill Halbert to the Board. Both are retiring by rotation in accordance with the Articles of Association. The Nomination Committee and the Board as a whole have reviewed the performance and contribution of both and have no hesitation in proposing their re appointment to the Board. Appointment and replacement of Directors The Articles of Association of the Company require that one third of the Directors retire by rotation at each AGM; those who have been longest in office since their last appointment or re appointment must retire first. As a minimum each Director must retire from office and put themselves forward for re election every third year. The Board may appoint a new Director at any time but the new Director will only hold office until the next AGM when he or she must stand for election or vacate the office. The Articles of Association state also that the Company may remove a Director by ordinary resolution with special notice before the expiration of his or her period of office. Independence All three of the Non executive Directors are considered to be independent in relation to the criteria set out in provision B.1.1 of the UK Corporate Governance Code and the NAPF Corporate Governance Voting Policy and Guidelines. Martin Towers and Tony Illsley were appointed in 2009 and Graham Holden was appointed in The Board reviews Non executive Director independence on an annual basis and takes into account the length of tenure, relationships and circumstances as well as the behaviour of the individual at Board meetings and their contribution to unbiased and independent debate. All of the Non executive Directors were independent upon appointment and the Board believes that all three remain wholly independent. UK Corporate Governance Code Bill Halbert was appointed as Executive Chairman in July Combining the roles of Chairman and Chief Executive is not in accordance with the UK Corporate Governance Code provision A.2.1; however we chose to do this to benefit from Bill s leadership during a period of significant business transformation. Now that the Group s transformation programme has been successfully completed, Bill has agreed to remain in the role of Executive Chairman until the 2012 AGM so that he can oversee the transition into the early stages of the Group s growth plans. To mitigate the risk created by combining the roles we have a Senior Independent Director, Tony Illsley, who, along with the Executive Chairman and the other Non executive Directors, ensures that there is a culture of openness, debate and challenge amongst the Board members. Tony is available to any shareholders who request a meeting or who have concerns that contact through the normal channels has failed to resolve, or where such contact is inappropriate. No such requests or concerns were received from shareholders during the year. Apart from the exception noted above, the Board considers that it has complied with all the detailed provisions of the UK Corporate Governance Code throughout the year ended 31 March 2011 and the Board as a whole is entirely committed to the principle of achieving and maintaining a high standard of corporate governance. Commitments of the Executive Chairman Our Executive Chairman, Bill Halbert, works full time for the Company. He sits on the boards of a number of smaller private limited companies but these do not require a significant time commitment and he successfully manages these alongside his role at KCOM Group. His commitments have not changed significantly in the year. How the Board operates The Board meets nine times a year and considers all aspects of Company performance. The Board considers both past performance and the future long term success of the Company and sets the strategic aims of the Company accordingly. The Board receives regular reports from the business on financial performance, human resources, health, safety and environmental matters, investor relations, governance and risk, along with regular updates on key projects and strategic programmes. There is a schedule of Matters Reserved for the Board which is reviewed and updated annually. This schedule requires that specific matters relating to budgets, strategy, performance against objectives, financial reporting, internal controls, communications, remuneration and governance, along with any proposed changes to business operations or the structure and capital of the Company, are referred to the Board for consideration and approval. The Group also operates within contracting principles which are set by the internal Legal Services team and these require certain contractual clauses to be subject to Board approval. Business cases of a certain value are also submitted to the Board for approval, in accordance with our Group wide delegations of authority. The Non executive Directors are given regular and direct access to key senior managers within the business, both through presentations at Board meetings and through formal and informal ad hoc meetings. In July 2010 Paul Simpson stepped down from the role of Company Secretary to focus on his Executive Director responsibilities and we appointed Kathy Smith as Company Secretary in his place. Kathy is a Chartered Accountant who previously worked as our Director of Internal Audit and Risk Management and has been with the Group for over five years. The appointment of a new Company Secretary indicates the importance the Board places on the role of the Company Secretary in helping the Group and the Board to ensure it has the right governance in place.

35 31 How the Board operates continued All the Directors have access to the advice and services of the Company Secretary and she ensures that Board processes are followed and that good corporate governance standards are maintained. The Company Secretary has met with each of the Directors individually since appointment to discuss governance related matters and provides a governance report to the Board on a monthly basis. The Directors are able also to obtain independent professional advice at the Group s expense whenever necessary. The balance of the Board It is the responsibility of the Nomination Committee to review continually the composition and balance of the Board to ensure that it is optimal to meet the requirements of the Company. Our objective when appointing a new Director is to find the best possible candidate for the role, regardless of gender. Whilst we currently do not have any female representation on the Board of the Company, one third of our Group Leadership team, which sits just below Board level, is female and we strive to ensure that our talented female employees are given every opportunity to develop and progress within the Company. Training and development The Board receives monthly updates on governance related matters and more formal training where appropriate. As an example, during the year the Board received formal training in relation to Directors duties. Potential training needs are discussed as part of individual performance evaluation, plus the Company Secretary meets with each Board member individually on an annual basis to discuss any training requirements which they may have identified. Performance evaluation For the past eight years the Board has undertaken a formal internal process to evaluate the effectiveness of its own performance, as well as that of its various Committees. Each year a questionnaire is drawn up by the Company Secretary which covers all the different areas of responsibility to enable each Board member to provide detailed feedback on how they feel the Board and the Committees have performed. The feedback from the questionnaire is collated and discussed by the whole Board at a subsequent meeting; in addition the Executive Chairman meets with each Board member individually to go through the feedback from the questionnaire and to discuss individual performance. The Non executive Directors meet to discuss the performance of the Executive Chairman. The Senior Independent Director discusses this feedback with the Executive Chairman. Last year the areas for focus that were identified were: Area identified What have we done? The Board requested greater visibility of customer feedback. The Board requested that Board composition is considered more formally. More information of specific customer performance is now provided at each Board meeting. During the year a customer satisfaction survey was performed and the results of this were fed back to the Board in a detailed presentation. Also a quarterly complaints report is now submitted to the Board which shows volumes of complaints and the speed of resolution. During the year the Nomination Committee met four times to formally consider matters such as Board composition. This has enabled there to be more focus and discussion around these matters, whereas in the prior year the Board as a whole had considered such matters. The results of the performance evaluation process this year indicated that the Board members are satisfied with the effectiveness of the Board and its Committees, as well as the effectiveness and commitment of each Director. Particular areas of strength were identified during the evaluation, including the culture of challenge and open debate amongst Board members, the effectiveness of the Chairman and the way in which the views of shareholders are communicated to the Board. The process identified the following areas for focus in the coming year: the Board has requested increased visibility of succession planning for key senior management outside the Board; and the Board has proposed obtaining more formal 360 degree feedback on Board performance from senior management in 2011/12. Meetings The record of Directors attendance at Board meetings is set out below. During the year the Board held nine scheduled meetings. Number of Out of Director meetings possible Bill Halbert 9 9 Graham Holden 9 9 Tony Illsley 8 9 Paul Renucci 6 6 Paul Simpson 9 9 Martin Towers 9 9 Kevin Walsh 9 9 Seven of the meetings were preceded the evening before by an informal meeting allowing more time to debate issues in depth. The Non executive Directors have a regular dialogue concerning Board matters and the Executive Chairman meets with the Non executive Directors without the other Executive Directors present at regular intervals. The Non executive Directors also met formally twice during the year without any of the Executive Directors present to discuss matters, including the performance of the Executive Chairman. Overview Business review Other disclosures Corporate governance Remuneration report Financial statements Shareholder information

36 32 Corporate governance continued Board Committees The Board has established and delegated specific responsibilities to the following Committees and takes care to regularly review Committee membership to ensure continued effectiveness. Each Committee reports back to the Board after each meeting and minutes of Committee meetings are circulated to all Board members, where appropriate, to ensure that the whole Board is aware of the matters considered by the Committees. Remuneration Committee The membership and attendance at Committee meetings during the year is shown below: Number of Out of Director meetings possible Graham Holden (Chairman) 6 6 Tony Illsley 5 6 Martin Towers 6 6 The report of the Remuneration Committee and details of its role are given on pages 35 to 44. Audit Committee The membership and attendance at Committee meetings during the year is shown below: Number of Out of Director meetings possible Martin Towers (Chairman) 3 3 Graham Holden 3 3 Tony Illsley 3 3 Martin Towers has considerable recent financial experience, as noted on page 28, and therefore the Board considers that he has the relevant financial experience required to fulfil the role of Chairman of the Audit Committee. The Audit Committee meets three times a year, with the Executive Chairman, the Chief Financial Officer, the Group Financial Controller, the Company Secretary and representatives from the external Auditors also in attendance at each meeting. The external auditors also meet with members of the Audit Committee during the year without the other attendees present. The Committee hears reports from the external Auditors and the Internal Auditors on the adequacy and effectiveness of the financial controls in place across the Group as well as the internal controls and risk management systems around the Group. The Committee also reviews the financial statements of the Group and reviews and challenges the accounting policies used and the clarity of the disclosures made; although the ultimate responsibility for reviewing and approving the Annual Report and financial statements remains with the Board. The Committee is responsible for monitoring and reviewing the effectiveness of the Group s Internal Audit team. The Internal Audit plan is based on the risk profile of the business and is approved at each Audit Committee meeting. All internal and external audit issues raised are reported to the Audit Committee and then followed up to ensure that each is satisfactorily resolved. Reports on all outstanding audit issues are presented to the Audit Committee at each meeting. The Audit Committee oversees the relationship with the external Auditors to ensure that the external Auditors continue to be independent, objective and effective in their work and considers the re appointment of the Auditors each year in light of this. This includes ensuring that the Engagement of External Auditors Policy is adhered to when selecting firms to perform non audit work. This policy excludes the Auditors from providing certain services, such as internal audit services, litigation support, remuneration advice and legal advice services. All other non audit work is separately assessed and is awarded to the firm considered best suited to perform the work. Any such work with a fee greater than 25% of the annual audit fee must be approved by the Chairman of the Audit Committee before the external Auditors may be appointed. The proportion by value of non audit services provided by the Auditors during the year was 50% (2010: 50%). In the prior year a significant piece of work was undertaken in relation to the Group s pensions strategy. A component of the current year non audit fees relates to the continuation of the pensions work started in the previous year. In addition, a fee of 93,000 (2010: 15,000) was paid for restructuring advice in relation to a simplification of the Group structure and the strike off of a number of dormant subsidiary companies. The Auditors existing knowledge of the Group was considered to be a key factor when selecting the firm to perform the work. The Audit Committee believes that audit partner rotation is a key control in ensuring continued independence and objectivity. Steve Denison was appointed as the audit partner in 2006/07 and therefore is rotating away from the KCOM Group audit following the conclusion of the 2010/11 year end audit work. PricewaterhouseCoopers LLP formally confirm their continued independence to the Audit Committee each year and the measures they have taken to ensure that they comply with best practice and professional and regulatory requirements in this area. The Committee s Terms of Reference are in line with the recommendations in the UK Corporate Governance Code and the ICSA Guidance on Terms of Reference for Audit Committees. Copies of the Terms of Reference are available from the Company Secretary and are on our website, Independent auditors PricewaterhouseCoopers LLP have advised of their willingness to continue in office and have confirmed their continued independence. Following consideration of the matters noted above, the Audit Committee has recommended to the Board that PricewaterhouseCoopers LLP are re appointed and a resolution to re appoint them will be proposed at the AGM. They have provided an independent audit opinion on these accounts which can be found on page 45.

37 33 Nomination Committee The membership and attendance at Committee meetings during the year is shown below: Number of Out of Director meetings possible Tony Illsley (Chairman) 4 4 Graham Holden 4 4 Martin Towers 4 4 The Nomination Committee meets as often as required and is responsible for reviewing the structure, size and composition of the Board and ensuring that the balance of skills, knowledge and experience of the Board is right for the Company. The Committee also gives full consideration to succession planning for Directors and key senior managers within the Group. When Board vacancies arise, the Nomination Committee is responsible for identifying and nominating candidates for the approval of the Board. In order to identify suitable candidates the Committee uses open advertising or the services of external advisors to facilitate the search. The Nomination Committee is fully committed to considering candidates from a wide range of backgrounds and to ensuring that due regard is given to the benefits of diversity on the Board, including gender; however, the priority is always to appoint on merit so that the best candidate available is appointed to the role. The Nomination Committee reviews annually the time required from each of the Directors to perform their role effectively. Following this review in the year, the Committee is satisfied that each of the Directors committed sufficient time during the year to fulfil their duties as Directors of the Company. The Committee reviews the re appointment of any Non executive Director at the end of their specified term of office, or of any Director retiring by rotation in accordance with the Articles of Association, giving regard to their performance and ability to continue to contribute to the Board, taking into consideration the balance of skills, knowledge and experience required. The Committee s Terms of Reference are in line with the recommendations in the UK Corporate Governance Code and the ICSA Guidance on Terms of Reference for Nomination Committees. Copies of the Terms of Reference are available from the Company Secretary and are on our website, Risk management and internal control The required corporate governance disclosures in respect of risk management and internal control are made within the risk management section of the Directors report on pages 18 to 20. Powers of the Directors The business of the Company is managed by the Directors, who may exercise all the powers of the Company, subject to the provisions of the Articles of Association, relevant statutes and any special resolution of the Company. The Articles of Association give the Directors the power to authorise conflicts of interest in relation to transactions or arrangements with the Company, in accordance with the Companies Act Conflicts of interest are a standing agenda item at Board meetings and each Director proposes any potential conflicts for consideration as soon as they become aware of them. The Director with the potential conflict is excluded from the vote to authorise the transaction or arrangement. Any conflicts that are authorised are then logged on a register, along with details of any specific terms imposed upon authorisation. Internal controls are in place to ensure that transactions or arrangements which may lead to a potential conflict of interest are conducted on an arm s length basis. Relations with shareholders We place a great deal of importance on communicating with our shareholders and understanding their views. Our Executive Chairman and Chief Financial Officer meet regularly with our institutional shareholders to discuss the strategy, performance and governance of the Company, and to obtain feedback. There are also general presentations following the interim and final results announcements each year. During the year, meetings have been held with 28 such shareholders. We also met with representatives from the UK Shareholders Association during the year to discuss Company performance, governance and risk management. We have a large number of shareholders in Hull and East Yorkshire and, as a Group, are very much involved in local life in the Hull and East Yorkshire region. More information about our community activities is on pages 21 and 22. Being a part of local life enables us to learn more about our local shareholders and the issues that matter to them. All of our Company announcements are published on our website, together with presentation materials and financial reports, so that all of our shareholders can keep up to date with our news. Feedback from meetings with shareholders is discussed as a standing agenda item at each Board meeting, along with details of any analyst reports, to ensure that each of our Directors has a clear understanding of the views of our shareholders. Our Non executive Directors are available to meet face to face with our institutional shareholders if requested to do so, although no such requests have been received during the year. We consider our AGM to be an important means of communication between our shareholders and our Directors. Our Directors are all available at the AGM to answer questions and we seek to encourage shareholder participation by inviting questions in advance. We believe that voting on a show of hands at our AGM provides a valuable opportunity for local sentiment and concerns to be expressed, but we will keep under review developing best practice with regard to voting of all resolutions on a poll. The results of proxy voting are made available at the AGM and subsequently on our website, Overview Business review Other disclosures Corporate governance Remuneration report Financial statements Shareholder information

38 34 Corporate governance continued Substantial shareholdings As at 15 May 2011, the Company had been notified of the following interests amounting to 3% or more of the voting rights in the issued ordinary share capital of the Company: Number of % shares with Total voting rights voting rights Invesco Asset Management 60,469, SVG Capital 34,647, Aberforth Partners 22,953, Standard Life Investments 20,089, Aviva Investors Global Services 19,746, Legal & General Investment Management 18,963, Schroder Investment Management 18,308, Scottish Widows Investment Partnership 17,655, Blackrock Investment Management 15,905, Directors responsibilities statement The Directors are responsible for preparing the Annual Report, the Directors remuneration report and the financial statements in accordance with applicable law and regulations. Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have prepared the Group and Company financial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union (EU). Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and the Company and of the profit or loss of the Group for that period. In preparing these financial statements, the Directors are required to: select suitable accounting policies and then apply them consistently; make judgements and accounting estimates that are reasonable and prudent; state whether applicable IFRSs as adopted by the EU have been followed, subject to any material departures disclosed and explained in the financial statements; and prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business. The Directors are responsible for keeping proper accounting records that are sufficient to show and explain the Company s transactions and disclose with reasonable accuracy at any time the financial position of the Company and the Group and to enable them to ensure that the financial statements and the Remuneration report comply with the Companies Act 2006 and, as regards the Group financial statements, Article 4 of the IAS Regulation. They are also responsible for safeguarding the assets of the Company and the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The Directors are responsible for the maintenance and integrity of the Company s website, Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. Directors statement purusant to the Disclosure and Transparency Rules Each of the Directors whose names and functions are listed on pages 28 and 29 confirm that, to the best of each person s knowledge and belief: the financial statements, which have been prepared in accordance with IFRSs as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and profit of the Group and Company; and the Directors report includes a fair review of the development and performance of the business and the position of the Group and Company, together with a description of the principal risks and uncertainties that they face. Amendments to the Company s Articles of Association Any amendments to the Company s Articles of Association may be made by passing a special resolution at a general meeting of the shareholders. Going concern The Directors confirm that, having reviewed the Group s budget and forecasts along with the principal risks and uncertainties facing the Group, they are satisfied that the Group has adequate resources to continue in operational existence for the foreseeable future. Accordingly the Group continues to adopt the going concern basis in preparing the financial statements. Signed on behalf of the Board Kathy Smith Company Secretary 8 June 2011

39 35 Remuneration report This report is presented in the following sections: letter from the Chairman of the Remuneration Committee; the role of the Remuneration Committee; executive remuneration at a glance: high level information accompanied by a synopsis of key information; remuneration explained: our approach to remuneration, key building blocks, current year performance and expected future changes; and audited information. Overview Business review Other disclosures Letter from the Chairman of the Remuneration Committee Dear shareholder The Committee has reviewed the performance of the Executive Directors against 2010/11 targets and objectives. The Committee has reviewed also the market positioning, appropriateness and effectiveness of the Executive reward arrangements, in order to determine whether or not changes are needed for the following year. Accordingly the Committee has set similarly appropriate measures and reward structures for 2011/12. The outcomes from this review are summarised in this report. Last year we noted that 2009/10 was the first full year of an agreed two year restructuring and transformation plan and in that year, the Company had performed strongly against its financial and operational targets and objectives, at the same time as completing a number of significant transformational milestones. Having completed the second year of the plan successfully and achieved the objective of creating a strong, resilient base from which to grow, the focus of the Group over the next five years is on delivering profitable growth and increased shareholder returns. Nevertheless, for 2010/11, though performance was ahead of market expectations in many respects, the Group s internal targets for bonus purposes were set at very challenging levels and were not achieved, so no bonus accrued for the Executive Directors. As agreed last year: we are maintaining our constraint on Executive Directors base pay and the emphasis on variable performance related pay; having introduced the Executive Incentive Plan (EIP) in 2009, which is a three year plan, there is no intention to make any further awards under any other long term incentive to any EIP participant within three years of the EIP Award; and likewise, having reduced the amount of on target bonus and increased the stretch element of the bonus package on 1 April 2009 in light of the introduction of the EIP, we do not intend to make any changes to those arrangements in 2011/12. Following our review and given that we had frozen base pay levels for two years since 2008/09; we have decided to approve a 3% inflation linked increase to the base pay of the Executive Directors based on benchmarking data that demonstrated an average award of 3.1% for Executive Directors in 2010/11 and a forecast range of 2% 4% for the forthcoming year. In undertaking our review we considered the general reward arrangements for the Company as a whole against those of our competitors and other relevant market comparators. We considered then our requirements to retain and motivate talented employees before making any decision. We believe that both Executives and other employees must be aligned with and motivated by the Company s success so that they continue to work together as a productive team. As part of an effectiveness review for the entire Board, an evaluation of the Remuneration Committee was also undertaken. We are pleased to report this review concluded that the Committee has operated effectively. This forthcoming year we are planning also to undertake a full review of remuneration in general. Graham Holden Chairman, Remuneration Committee 8 June 2011 by Graham Holden Chairman, Remuneration Committee Corporate governance Remuneration report Financial statements Shareholder information

40 36 Remuneration report continued The role of the Remuneration Committee The membership and attendance at Committee meetings is shown on page 32. The Committee is responsible for: determining and agreeing the remuneration policy for the Executive Chairman, the Executive Directors and senior executives across the Group, taking into account relevant legal and regulatory requirements, the provisions and recommendations of the UK Corporate Governance Code and associated guidance and the need to reward individuals fairly and responsibly for their individual contributions to the success of the Company; having regard to remuneration trends across the Group and remuneration in other companies when setting remuneration policy, as well as to environmental, social and governance matters when appropriate; selecting, appointing and setting the terms of reference for any remuneration consultants who advise the Committee; approving the design of, and determining targets for, any performance related pay schemes operated by the Company and approving the total annual payments made under such schemes; reviewing the design of all share incentive plans for approval by the Board and shareholders and determining each year whether awards will be made and, if so, the overall amount of such awards, the individual awards and the performance targets to be used; determining the policy for, and scope of, pension arrangements for each Executive Director and senior executive; and ensuring that contractual terms on termination, and any payments made, are fair to the individual and the Company, that failure is not rewarded and that the duty to mitigate loss is fully recognised. The Committee s Terms of Reference are in line with the recommendations in the UK Corporate Governance Code and the ICSA Guidance on Terms of Reference for Remuneration Committees. Copies of the Terms of Reference are available from the Company Secretary or on our website, The Committee regularly consults with the Executive Chairman and the Group HR Director, although neither are present when their own reward is under discussion. The Committee received advice over the year on all aspects of remuneration including both specific and general market trends and data from independent remuneration consultants Kepler Associates, who were appointed in February 2008 and provide no other services to the Company. Executive remuneration at a glance The KCOM Group reward package has a number of elements. Base salaries and benefits for all employees are determined with reference to the Company s reward principles and through benchmarking against relevant comparators. In order to align an individual s reward to the long term success of the Company s performance, other components annual bonuses and long term incentives are linked to the Company s strategy and determined by the levels of performance achieved against key targets. The Committee reviews the remuneration structure annually to ensure that it remains aligned with business needs and is appropriately positioned relative to the market, to ensure that it retains and motivates talented employees. We use target performance to estimate the total potential reward and benchmark our reward package against those of KCOM Group s competitors. The Committee also reviews pay and employment conditions across the Group when determining Executive Directors and senior executives remuneration each year. What are the principles of our remuneration policy? Our remuneration policy aims to be: competitively geared: median salaries plus median bonuses and above median long term incentives provide an opportunity for highly geared and competitive total reward for superior performance. performance linked: a significant part of Executive Directors reward is determined by the Company s success. Failure to achieve threshold levels of performance results in no payout under short or long term incentives. shareholder aligned: a considerable part of the reward is related to the measurement of a shareholder return measure. simple and transparent: all aspects of the remuneration structure are clear to employees and openly communicated. This supports our aim of engendering fairness and teamwork across the organisation. aligned to the business: the Committee designs the remuneration policy to ensure that it does not encourage unnecessary risk taking or irresponsible behaviour, but is aligned to the strategic objectives of the business, including maintaining an appropriate risk profile for the Company and ensuring the long term success of the Company. Annual bonus scheme The majority of employees have the opportunity to earn an annual cash bonus. With effect from 1 April 2009 the award of the bonus was dependent upon achievement of Group financial performance targets with the level of benefit calculated at the end of the period. All employees are now bonused on the same Group targets apart from those employed by Smart421. The Executive Chairman, with input from the Chief Financial Officer, recommends the percentage earned by senior executives against their financial targets. These recommendations are considered by the Remuneration Committee. The targets are also monitored at various intervals during the performance period and the final calculation is thoroughly checked by both the Remuneration and Audit Committees. With effect from 1 April 2011 bonuses are payable annually, following publication of the Company s full year results. We believe the timing of payments emphasises the link between the Company s results and an individual s reward. It is the Company s policy that bonuses and other incentives are not pensionable. At the start of 2010, we commenced a Group wide consultation which proposed to close all current Group pension schemes to future accrual and to introduce a Group wide Stakeholder Plan with harmonised terms. Following the completion of the consultation exercise all employees who wished to be in a pension scheme became members of the Group wide Stakeholder Plan with effect from 1 October 2010 and all employees across the Group are now pensioned on basic salary.

41 37 Executive remuneration at a glance continued What are the components of reward? Overview Fixed Base salary Benefits including pensions Available to all KCOM Group employees Annual bonus Available to all KCOM Group employees apart from those eligible for commission Variable Equity based long term incentives Available to senior executives and Executive Directors only How has the Executive Director reward structure changed year on year? Components 2009/10 reward 2010/11 reward 2011/12 reward Base salary Held at 2008/09 levels Held at 2008/09 levels 3% Inflation linked award Business review Annual bonus Maximum potential on target performance earns 50% of salary Maximum potential on target performance earns 50% of salary Maximum potential on target performance earns 50% of salary Performance criteria based upon Group targets Above target stretch opportunity of 50% of salary Performance criteria based upon Group targets Performance criteria based upon Group targets Above target stretch opportunity of 50% of salary Performance criteria based upon Group targets Performance criteria based upon Group targets Above target stretch opportunity of 50% of salary Performance criteria based upon Group targets Other disclosures Long term incentive Continued participation in the EIP Continued participation in the EIP Continued participation in the EIP How do the elements of variable reward align with KCOM Group s strategy? Percentage of maximum Variable component Key elements of strategy Measured by Performance target achieved Bonus Sustainability of performance Reduction in Group debt 1.5x EBITDA Operational excellence Growth in Group EBITDA Significant and stretching improvement year on year Long term incentive Shareholder value Growth in share price + dividend 1.00 Nil 40% of total reward What past awards have vested in 2010/2011? One long term incentive award scheme expired in June 2011: the Long Term Performance Plan (LTPP) No Executive Director was a member of this scheme. Please see page 44 for further details of the schemes. Remuneration explained How are the rewards structured? Assessing what is competitive The peer group companies are noted on page 40; this is the main group against which we monitor whether our rewards for Executive Directors and senior executives are competitive relative to our performance and it includes those that we use for monitoring the Company s business performance. We also look at reward arrangements in other types of telecoms and technology based companies, as these are potential competitors for talent. For completeness, we also examine market reward data for UK industrial companies of a similar market capitalisation to the Group to help ensure we do not inadvertently lose talent by falling behind the broader marketplace. The total number of companies in the peer group including the KCOM Group is 21. For more information, see page 40. Balancing short and long term remuneration Based on our view of current market practice, and the principles of our remuneration policy, we have established the remuneration structure set out in the table on the next page. Fixed annual elements (including salary, pension and benefits) are to recognise the status of our Executive Directors and senior executives and to enable them to undertake current and future lifestyle planning. The short and long term incentives are to motivate and reward Executive Directors and senior executives for delivering strong and sustainable performance to the Group s shareholders. The long term incentive arrangement with its Total Shareholder Return linkage ensures that there is good alignment between shareholders, Executive Directors and senior executives. In previous years the Executive Directors participated in and contributed to the Long Term Co Investment Plan (LTCIP). Contributions to this scheme ceased in 2009/10 following several of the Company s largest shareholders expressing a preference for a scheme which would reinforce the delivery of stretching Total Shareholder Return targets. Corporate governance Remuneration report Financial statements Shareholder information

42 38 Remuneration report continued Remuneration explained continued Key elements of Executive Director short and long term remuneration Element Objective Market positioning How much? Conditions Base salary To recognise status and responsibility Median Historically increased only with increased responsibility None Benefits To provide lifestyle benefits that are market competitive Median Cost of life assurance, income protection, car or cash allowance, fully expensed fuel card, medical insurance and medical screening None Annual bonus To reinforce the achievement of stretching Company objectives Market median for delivering objectives Target 50% of salary maximum 100% Achievement of Group EBITDA targets and Group revenue targets Pension To provide funding for retirement Median Cost of employer pension contribution at 20% None Long term incentive EIP To augment shareholder alignment, ensure direct link between reward and superior shareholder returns Above median 2009 grant of 22 million shares split: one third Executive Chairman one third Executive Directors one third senior executives Vesting of 10% at a TSR of 45p with straight line proportionate vesting to a maximum of 1 Linking reward to Company performance The Company s remuneration strategy is to align rewards closely with sustainable shareholder value creation. This is achieved by incentivising and motivating the delivery against targets, designed to create financial stability, resilience and growth in specific shareholder return measures. Having created strong financial underpinning through 2009/10, the emphasis on growth measures will increase, as part of the mix, but always with core fundamentals as the priority. All Executive Directors bonus payments are linked to performance against financial targets and the delivery of future growth. With effect from 1 April 2011 the financial targets were changed and whilst we continue to use growth in Group EBITDA as a measure of sustainable operational excellence we replaced our net debt to EBITDA target with growth in Group revenue. How did our performance drive Executive Director reward in 2010/11? 2010/11 saw continued challenges in the market. Despite those sustained pressures, the business saw improvements in operating margins, profitability and cash generation with a substantial reduction in overall indebtedness. The EIP will deliver value for improvement in shareholder value. Performance highlight KCOM Group KC and Eclipse Kcom and Smart421 Substantial net debt and pension liability reduction Significant improvement in Group profitability measure Investment to drive improved profitability Increase in dividend with medium term growth commitment Continued and substantial business profitability performance and growth Contract wins alongside growth in profitability What did Executive Directors receive in 2010/11? Annual bonus Benefits Compensation Maximum Above target excluding for loss potential stretch Base salary pensions Pension of office on target maximum Actual Total Current Directors Bill Halbert ¹ Paul Simpson 252² Kevin Walsh Previous Director Paul Renucci ³ Elected not to be a member of the Company pension scheme. Instead receives cash. 2. Base salary includes allowance for dual responsibilities. 3. Contractual entitlement paid for the notice period and Good Leaver status granted.

43 39 Remuneration explained continued Long term incentives in which the Executive Directors participate The Executive Directors participate in two share schemes: the EIP and the LTCIP. The EIP was introduced in 2009 and replaced the LTCIP as the Company s main long term incentive following extensive consultation with shareholders. The Company also operates other share schemes which are available either to all employees or to specific groups of employees (including the Executive Directors) at the discretion of the Committee. Any share schemes with no Executive Director participation are covered in more detail on page 44. Executive Incentive Plan The EIP was introduced in 2009 following an extensive consultation with shareholders who expressed a preference for a scheme which would reinforce the delivery of stretching Total Shareholder Return (TSR) targets. A participant is granted a conditional right to a number of ordinary shares in the Company which vest after three years to the extent that the associated performance condition is met. EIP awards vest according to a performance condition based on the Company s TSR (i.e. share price plus dividends paid (TSR)) measured over any three months during the three year performance period, as follows: EIP awards vest at 10% of the maximum award for a TSR of 45 pence and vests in full for a TSR of 100 pence, with straight line vesting between 45 pence and 100 pence. The total maximum number of shares under the EIP which will vest on the achievement of a TSR of 100 pence is limited to 19.4 million shares as at 31 March 2011 (2010: 22 million shares). For the majority of participants, vested shares are released 50% after three years and 25% equally after four and five years; vested shares held by the Executive Chairman are released in full after three years to ensure better alignment with his expected tenure in this role. Dividends are accrued on vested shares. Vesting is also subject to the Committee being satisfied that there has been a demonstrable and sustainable improvement in the Company s financial and non financial performance over the performance period. EIP vesting schedule Overview Business review Other disclosures 100% % vesting Corporate governance 10% 45p 100p KCOM Group share price plus dividends (pence) EIP three-month average share price and TSR to 31 March 2011 Remuneration report 70 Pence Jul 04 Sep 16 Oct 27 Nov 14 Jan 25 Feb 08 Apr 20 May 01 Jul 12 Aug 23 Sep 04 Nov 16 Dec 27 Jan 10 Mar Three-month average share price (pence) TSR (pence) TSR at 31 March 2011 (pence) Financial statements Shareholder information

44 40 Remuneration report continued Remuneration explained continued Long term incentives in which the Executive Directors participate continued During the year ended 31 March 2011, a TSR of pence was achieved. This current performance would, subject to the Committee s final discretion, result in a total 7.8 million shares vesting (40% of the maximum number of shares), as detailed in the table below, the balance being shared by the remaining senior executive participants. EIP grant holding Potential vesting as at 31 March Date of grant Award 2011 Current Directors Bill Halbert 24 July ,480,000 2,992,000 Paul Simpson 24 July ,420, ,000 Kevin Walsh 24 July ,420, ,000 Previous Director Paul Renucci 24 July ,028, ,316 Long Term Co Investment Plan (LTCIP) The LTCIP was established in 2007 and was replaced by the EIP as the Company s main long term incentive scheme in Participation in the LTCIP was restricted to the Executive Directors and required an Executive Director to purchase and hold KCOM Group shares for up to five years (either by transferring existing shares or through new share purchases). Purchased shares ( investment shares ) must be held in the plan for a minimum of three years, and dependent upon meeting the performance criteria, up to 6.66 matching shares are awarded for each investment share. Transferred-in shares ( investment shares ) must be held in the plan for a minimum of three years, and dependent upon meeting the performance criteria, up to four matching shares are awarded for each investment share. The value of investment shares is limited to 150% of maximum bonus entitlement per year (scaled back in years four and five to 100% and 75% respectively). The plan is subject to the usual ABI dilution limits, as well as a limit of the value of awards at 2.5% of the market value of the Company. Following the introduction of the EIP, no further investment into the LTCIP was allowed from 1 September 2009, thus concluding the LTCIP investment opportunity three years earlier than had been planned at its introduction. The LTCIP performance condition has three elements: 1. Earnings per share (EPS) underpin EPS growth (as defined in the scheme rules) must equal or exceed the growth in RPI over the relevant performance period. 2. TSR Upon achievement of the EPS underpin matching shares ( co investment shares ) may vest depending upon the comparative TSR performance of the Company against its comparator group. TSR is calculated by comparing the average share price over the three month period prior to the start of the scheme (1 September 2007) with the final average share price over the three month period prior to the end of the relevant performance period and adding back dividends. Vesting is calculated as follows: KCOM Group TSR rank Number of matching shares that vest per transferred-in share Number of matching shares that vest per share purchased Below median Nil Nil At median Between median and upper quartile Between 1 and 3 on a straight line basis Between and 5 on a straight line basis Upper quartile and above 3 5 The Remuneration Committee agreed on 26 March 2010 to adopt a revised comparator group of companies due to prior consolidation in the market and the likelihood of further consolidation. JP Morgan Cazenove s report demonstrated that the participants in the LTCIP would be neither advantaged or disadvantaged by the amendments. The revised comparator group is as follows: Anite Group Dimension Data Timeweave XChanging Pace Spirent Communications Cable and Wireless Worldwide Micro Focus Cable and Wireless Communications Logica BT Group Phoenix IT Colt Telecom Morse Telecom Plus RM Computacenter Telecity Group Qinetiq Group Tribal Group 3. Actual growth in share price If the Company achieves share price growth of 25% compound per annum over the relevant performance period then a further matching share may vest for each investment share in the following ratio. Additional matching share awarded per share transferred-in Additional matching share per share purchased

45 41 Remuneration explained continued Long term incentives in which the Executive Directors participate continued First performance measurement period There are three performance periods for TSR and absolute share price growth, all starting from the adoption date of the plan, 1 September 2007, and ending consecutively on 31 August 2010, 2011 and At the end of the first performance, whilst TSR performance was at the median, the Remuneration Committee determined that the EPS underpin had not been met and therefore no matching shares vested. Performance graph The following graph shows, for the financial year ended 31 March 2011 and for each of the previous four financial years, the TSR on a holding of the Company s ordinary shares compared with a hypothetical holding of shares in the FTSE Fixed Line Telecommunications Services Sector Index and the FTSE techmark Sector Index. These indices have been chosen as appropriate comparators because they reflect the performance of other companies most similar to KCOM Group in terms of product and service offering. Overview Business review TSR performance since 1 April 2005 KCOM Group vs. FTSE Fixed Line Telecommunications Services Index and FTSE techmark Value of 100 invested on 1 April Other disclosures Value ( ) Mar 06 Mar 07 Mar 08 Mar 09 Mar 10 Mar 11 KCOM Group FTSE Fixed Line ASX FTSE techmark ASX General Unvested EIP awards, LTCIP awards and share option awards are forfeited if an Executive Director or senior executive resigns from employment or is terminated for cause. Awards continue on a pro rata basis (though still subject to the performance condition) if an Executive Director or senior executive leaves for reasons of retirement, ill health or Good Leaver status is granted at the Remuneration Committee s absolute discretion. If control of the Company changes, EIP shares will vest pro rata based on the proportion of the vesting period elapsed to the change of control, and be also subject to the Group s TSR performance achieved up to the time of the event. Keeping Directors and shareholders interests aligned Minimum shareholding The interests of the Executive Directors are closely aligned with those of shareholders through linking the vesting of EIP shares to TSR. Furthermore, the LTCIP encouraged Executive Directors to purchase and hold KCOM Group shares as a prerequisite for the potential to earn a matching award, which in addition is itself contingent predominately on the Company s relative TSR. Share dilution and headroom We adhere to both the latest ABI guidelines and our own share scheme rules in limiting the level of share dilution. The issue of shares to satisfy discretionary share schemes will not exceed 5% of the Company s issued ordinary share capital in any rolling ten year period. Additionally, the issue of shares to satisfy all the Company s employee share schemes will not exceed 10% of the Company s issued ordinary share capital in any rolling ten year period. The Committee regularly reviews the current dilution level, available headroom and general trends. Non executive Directors Non executive Directors do not participate in any of the Company s incentive or benefit plans. Their fees are reviewed every year against those for companies of similar scale and complexity to the KCOM Group and their fees are set by the Board as a whole. Fees were reviewed at the end of the 2010/11 financial year and an increase of 2,000 was agreed in order to bring the fees in line with the market median. Outside appointments We believe that where Board members hold directorships in other companies the Company can benefit from their experience. As a result, and subject to the Board s prior approval, Executive Directors may take on more than one external non executive directorship and retain the fees earned. In 2010/11, Bill Halbert received no direct remuneration for his external non executive positions. Corporate governance Remuneration report Financial statements Shareholder information

46 42 Remuneration report continued Remuneration explained continued Other senior executives In addition to the contribution made by the Executive Directors, the Committee recognises that other senior executives also have a direct and significant influence on the ability of the Company to achieve its goals. Consequently, in addition to setting the reward packages for Directors, the Committee also reviews the packages for those senior employees to: ensure that market competitive reward packages are being made; and review the relativity of reward packages to both the Board and the rest of the employees. The Committee is satisfied that an appropriate reward structure exists below Board level to motivate and retain our top talent. Directors Service Agreements Service Agreements for Executive Directors have a maximum notice period of twelve months apart from the Executive Chairman, whose notice period is six months. The notice period for Non executive Directors is six months. All Non executive Directors are appointed for an initial period of three years. They are subject to re appointment every three years and annually after nine years. The Executive Directors Service Agreements allow for payment in lieu of notice (twelve months) in the event of loss of office. During 2010/11 a review was undertaken of the Executive Directors Service Agreements and the payment in lieu of notice clause was amended in line with recommended good practice to specifically give the Company the express ability to pay in lieu of notice or to pay in instalments. No payment in lieu of notice is payable by the Company if an Executive Director is dismissed for serious breach of contract, serious misconduct or for serious underperformance or acts that bring the Executive Director or Company into serious disrepute. The Non executive Directors Contract for services does not include any compensation for loss of office. The Executive Directors Service Agreements were amended during 2010/11 to include the provision that permits the Company to reclaim variable components in the exceptional circumstance of misstatement. Notice Date of Board period Years since appointment (months) re election Executive Directors Paul Simpson 24/05/ Kevin Walsh 24/05/ Bill Halbert 01/09/ ¹ Non executive Directors Graham Holden 27/11/ ¹ Tony Illsey 02/06/ Martin Towers 02/06/ Bill Halbert and Graham Holden are standing for re election at the AGM on 22 July Audited information In this section we have included the information that is required by statute or recommended by best practice guidelines and not disclosed elsewhere in the Remuneration report. The information that is required to be audited is specifically labelled as audited information. We consider that we have complied with the disclosure recommendations. Directors emoluments Compensation Salaries/ Taxable for loss of Total Total fees benefits Bonuses office 2010/ / Current Directors Bill Halbert Paul Simpson Kevin Walsh Graham Holden Tony Illsley Martin Towers Total 1, ,057 1,360 Previous Directors Paul Renucci Michael Abrahams 44 Neil Gower 438 Total 1, ,591 2,177

47 43 Audited information continued Pensions 2010/ /2010 Company Company contributions contributions Directors pensions Executive Directors Bill Halbert 85¹ 82¹ Paul Simpson Kevin Walsh Previous Director Paul Renucci Overview Business review 1. Bill Halbert has elected not to be a member of any of the Company pension schemes and, accordingly, the Company made no contributions on his behalf. Instead, he received cash payments totalling 84,600 (2010: 81,780). This was in addition to the salaries and fees included in the table on page 38. Directors interests The table below sets out the interests of Directors (as listed on pages 28 and 29) and their families in the Company s shares at 31 March 2011, other than with respect to options to acquire ordinary shares which are detailed separately. All of the interests held by Directors and their families are beneficial. At At March 2011 March 2010 ordinary ordinary shares shares Executive Directors Bill Halbert Nil Nil Kevin Walsh 712,827¹ 677,697¹ Paul Simpson 470,650¹ 445,402¹ Non executive Directors Graham Holden 50,000 50,000 Tony Illsley Nil Nil Martin Towers 50,000² 50,000² 1. This includes matching shares awarded under the share incentive plan which may be subject to forfeiture in certain circumstances. 2. Purchased via a self invested pension plan. The only change that has taken place since the end of the year is where the Executive Directors participate in the Share Incentive Plan (SIP), for which we make monthly announcements as required under Section of the Disclosure and Transparency Rules. This has resulted in the following additional shares being held: SIP holdings Executive Directors Paul Simpson 724 Kevin Walsh 724 Other disclosures Corporate governance Remuneration report Executive Directors interest in share options Details of Executive Directors share options as at 31 March 2011 are summarised below. Paul Simpson: Approved Scheme Held at Exercised Granted Lapsed Held at 1 April 2010 in period in period in period 31 March 2011 Option price 15,000 15, p Market price Quantity Performance at date grant Date of grant Vesting date Lapse date unexpired conditions 82.5p 20/08/ /08/ /08/ , Tech None of the other Executive Directors, including Paul Renucci, held share options at the beginning of the year and have not been granted further options during the year. Financial statements Shareholder information

48 44 Remuneration report continued Audited information continued Share awards under long term incentive plans held at 31 March 2011 Total number Total number of shares of shares held at Lapsed held at Share price Scheme and Directors 1 April 2010 in year 1 April 2011 Normal vesting dates on grant Bill Halbert EIP 7,480,000 7,480,000 24/07/ /07/ p Paul Simpson EIP¹ 2,420,000 2,420,000 24/07/ /07/ p LTCIP TSR² 1,619,303 1,619,303 01/09/ /09/ p LTCIP growth in share price² 539, ,768 01/09/ /09/ p Kevin Walsh EIP¹ 2,420,000 2,420,000 24/07/ /07/ p LTCIP TSR² 2,460,519 2,460,519 01/09/ /09/ p LTCIP growth in share price² 820, ,173 01/09/ /09/ p Paul Renucci³ EIP¹ 2,420,000 (1,391,711) 1,028,289 24/07/ /07/ p LTCIP TSR² 1,510,407 1,510,407 01/09/ /09/ p LTCIP growth in share price² 503, ,469 01/09/ /09/ p 1. Vested shares are released in three tranches: 50% after three years, and 25% equally after four and five years. 2. LTCIP price on grant is an average price based on the share price at the date when investment shares are entered into the plan and potential share awards are granted. 3. Allowed to remain in the scheme under the Good Leaver terms subject to the underlying performance conditions of the scheme rules. MyShare Share Incentive Plan (SIP) The SIP was introduced in 2003 and was fundamentally redesigned in 2007 in an effort to embed a culture of share ownership throughout the Company. We offered 200 free shares to each eligible employee during The scheme is open to all employees and offers free, dividend, partnership and matching shares. Matching shares are offered on a sliding scale of between 2:1 for contributions of 20 per month and to 1:3 for contributions of over 51 per month. Currently 1,157 employees (including two Directors and six Persons Discharging Managerial Responsibilities (PDMRs) participate in this scheme with an average allocation of 75 matching shares per employee per month. Historic long term incentive schemes with no Executive Director participation LTPP 2008 Long Term Performance Plan (LTPP) This scheme was introduced in The intention was that this scheme would replace the LTIP and LTRS and was aimed at the two tiers of management directly below the Board. The scheme allowed participants to receive a number of KCOM Group shares at Nil cost, providing the performance conditions were achieved over the relevant three year period. The move to a share based scheme was to improve alignment with both shareholders and our management team. 26 participants were included in the 2008 award, with 5,614,156 Nil cost share options being granted. The plan s performance target measures Group EBITA (earnings before amortisation of intangible assets on acquisition) and the shares were due to vest on an incremental basis of between 25% and 100% depending on the level of EBITA achieved. The plan did not meet the performance conditions and therefore no awards have vested. General information The closing mid market price of KCOM Group PLC shares on 31 March 2011 was 61.5 pence. The high and low closing mid market share prices during the year were 65.5 pence and 41.0 pence respectively. Kathy Smith Company Secretary 8 June 2011

49 45 Independent auditors report to the members of KCOM Group PLC We have audited the financial statements of KCOM Group PLC for the year ended 31 March 2011 which comprise the Consolidated income statement, the Consolidated statement of comprehensive income, the Consolidated and Parent company balance sheets, the Consolidated and Parent company statement of changes in shareholders equity, the Consolidated and Parent company Cash flow statements and the related notes. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union and, as regards the Parent company financial statements, as applied in accordance with the provisions of the Companies Act Respective responsibilities of directors and auditors As explained more fully in the Directors Responsibilities Statement set out on page 34, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board s Ethical Standards for Auditors. This report, including the opinions, has been prepared for and only for the company s members as a body in accordance with Chapter 3 of Part 16 of the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, 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. Scope of the audit of the financial statements An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the Group s and the Parent company s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the directors; and the overall presentation of the financial statements. In addition, we read all the financial and non-financial information in the annual report to identify material inconsistencies with the audited financial statements. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report. Opinion on financial statements In our opinion: the financial statements give a true and fair view of the state of the Group s and of the Parent company s affairs as at 31 March 2011 and of the Group s profit and Group s and Parent company s cash flows for the year then ended; the Group financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union; the Parent company financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union and as applied in accordance with the provisions of the Companies Act 2006; and the financial statements have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the Group financial statements, Article 4 of the las Regulation. Opinion on other matters prescribed by the Companies Act 2006 In our opinion: the part of the Directors Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006; and the information given in the Directors Report for the financial year for which the financial statements are prepared is consistent with the financial statements. Matters on which we are required to report by exception We have nothing to report in respect of the following: Under the Companies Act 2006 we are required to report to you if, in our opinion: adequate accounting records have not been kept by the Parent company, or returns adequate for our audit have not been received from branches not visited by us; or the Parent company financial statements and the part of the Directors Remuneration Report to be audited are not in agreement with the accounting records and returns; or certain disclosures of directors remuneration specified by law are not made; or we have not received all the information and explanations we require for our audit. Under the Listing Rules we are required to review: the directors statement, set out on page 34, in relation to going concern; the parts of the Corporate Governance Statement relating to the company s compliance with the nine provisions of the June 2008 Combined Code specified for our review; and certain elements of the report to shareholders by the Board on directors remuneration. Steve Denison (Senior Statutory Auditor) for and on behalf of PricewaterhouseCoopers LLP Chartered Accountants and Statutory Auditors Leeds 8 June 2011 Overview Business review Other disclosures Corporate governance Remuneration report Financial statements Shareholder information

50 46 Consolidated income statement for the year ended 31 March Notes Continuing operations Revenue 4 395, ,800 Operating expenses 5 (355,118) (386,250) Operating profit 40,294 26,550 Analysed as: EBITDA before exceptional items 4 75,963 69,795 Exceptional items 7 (8,337) (10,205) Depreciation of property, plant and equipment 4 (18,464) (20,074) Amortisation of intangible assets 4 (8,868) (12,966) Finance costs 9 (7,393) (7,368) Share of profit/(loss) of associates (12) Profit before taxation 4 32,912 19,170 Taxation 10 (10,291) (1,477) Profit for the year attributable to equity holders 28 22,621 17,693 Earnings per share from continuing operations Basic p 3.47p Diluted p 3.38p The Company has elected to take the exemption under Section 408 of the Companies Act 2006 not to present the Parent company income statement or statement of comprehensive income. The profit for the Parent company for the year was 26,217,000 (2010: 35,179,000). Consolidated statement of comprehensive income for the year ended 31 March Notes Profit for the year 22,621 17,693 Other comprehensive income Cash flow hedges 28 3, Actuarial gains on retirement benefit obligation 31 31,504 5,620 Tax on items taken directly to equity 28 (10,269) (1,832) Total comprehensive income for the year attributable to equity holders 47,324 22,401 The notes on pages 51 to 78 are an integral part of these consolidated financial statements.

51 47 Balance sheets as at 31 March 2011 Consolidated Parent company Overview Notes Assets Non current assets Goodwill 14 85,272 85,272 Intangible assets 15 4,659 10,547 Property, plant and equipment , ,057 Investments 17 1,065 1, , ,215 Deferred tax assets 26 35,297 56,115 14,104 Amounts owed from subsidiary undertakings ,267 Business review 242, , , ,586 Current assets Inventories 18 2,150 3,608 Trade and other receivables 19 70,793 76, Cash and cash equivalents 23 6,535 13,890 79,478 94, Total assets 321, , , ,818 Liabilities Current liabilities Trade and other payables 20 (147,843) (144,657) Derivative financial instruments 29 (3,703) (21) Non current liabilities Bank loans 21 (88,004) (129,458) Retirement benefit obligation 31 (6,927) (50,373) (50,373) Derivative financial instruments 29 (7,150) Long term provisions and other payables 21 (2,079) (4,054) Total liabilities (248,556) (335,713) (50,373) Net assets 73,194 35, , ,445 Equity Capital and reserves attributable to equity holders of the Company Share capital 27, 28 51,660 51,660 51,660 51,660 Share premium account , , , ,231 Hedging and translation reserve 28 (2,883) (6,351) Accumulated losses/retained earnings 28 (328,814) (362,783) 89,580 53,554 Other disclosures Corporate governance Remuneration report Total equity 28 73,194 35, , ,445 The notes on pages 51 to 78 are an integral part of these consolidated financial statements. The financial statements were approved by the Board of Directors and authorised for issue on 8 June They were signed on its behalf by: Bill Halbert Paul Simpson Executive Chairman Chief Financial Officer 8 June 2011 Financial statements KCOM Group PLC Registered Number: Shareholder information

52 48 Consolidated statement of changes in shareholders equity for the year ended 31 March 2011 Share Hedging and Share premium translation Accumulated capital account reserve losses Total Notes As at 1 April , ,231 (7,271) (377,001) 20,619 Profit for the year 17,693 17,693 Decrease in fair value of financial derivative instruments Actuarial gains on defined benefit pension schemes 31 5,620 5,620 Tax on actuarial gains on defined benefit pension schemes 26 (1,574) (1,574) Tax on movement in cash flow hedges 26 (258) (258) Total comprehensive income for the year ended 31 March ,481 22,401 Purchase of ordinary shares (820) (820) Employee share schemes 1,282 1,282 Dividends 11 (7,725) (7,725) Transactions with owners (7,263) (7,263) At 31 March , ,231 (6,351) (362,783) 35,757 Profit for the year 22,621 22,621 Decrease in fair value of financial derivative instruments 29 3,468 3,468 Actuarial gains on defined benefit pension schemes 31 31,504 31,504 Tax on actuarial gains on defined benefit pension schemes 26 (9,333) (9,333) Tax on movement in cash flow hedges 26 (936) (936) Total comprehensive income for the year ended 31 March ,468 43,856 47,324 Tax credit relating to share schemes Employee share schemes 2,027 2,027 Dividends 11 (12,140) (12,140) Transactions with owners (9,887) (9,887) At 31 March , ,231 (2,883) (328,814) 73,194 The notes on pages 51 to 78 are an integral part of these consolidated financial statements.

53 49 Parent company statement of changes in shareholders equity for the year ended 31 March 2011 Share Share premium Retained capital account earnings Total Notes Overview As at 1 April , ,231 23, ,051 Profit for the year 35,179 35,179 Actuarial gains on defined benefit pension schemes 31 5,620 5,620 Tax on actuarial gains on defined benefit pension schemes 26 (1,574) (1,574) Total comprehensive income for the year ended 31 March ,225 39,225 Purchase of ordinary shares (820) (820) Employee share schemes (286) (286) Dividends 11 (7,725) (7,725) Business review Transactions with owners (8,831) (8,831) At 31 March , ,231 53, ,445 Profit for the year 26,217 26,217 Actuarial gains on defined benefit pension schemes 31 31,504 31,504 Tax on actuarial gains on defined benefit pension schemes 26 (9,333) (9,333) Total comprehensive income for the year ended 31 March ,388 48,388 Other disclosures Employee share schemes (222) (222) Dividends 11 (12,140) (12,140) Transactions with owners (12,362) (12,362) At 31 March , ,231 89, ,471 The notes on pages 51 to 78 are an integral part of these consolidated financial statements. Corporate governance Remuneration report Financial statements Shareholder information

54 50 Cash flow statements for the year ended 31 March 2011 Consolidated Parent company Notes Cash flows from operating activities Operating profit 40,294 26,550 18,845 3,600 Adjustments for: depreciation and amortisation 5 27,332 33,040 decrease/(increase) in working capital 17,035 35,877 (18,847) (27,454) restructuring cost and onerous lease payments (7,507) (14,886) pension enhanced transfer value payment (4,900) pension deficit payment (9,773) (3,247) Taxation received 483 Loss on sale of businesses 2,136 Loss on sale of property, plant and equipment Net cash generated from operations 68,009 74,612 (2) (23,854) Cash flows from investing activities Proceeds from sale of business 1,092 Earn out payment on acquisition (942) Purchase of property, plant and equipment (10,920) (14,567) Purchase of intangible assets (3,028) (3,011) Addition to investments (17) Net cash used in investing activities (13,948) (17,445) Cash flows from financing activities Dividends paid 11 (12,140) (7,725) (12,140) (7,725) Dividends received 12,142 31,579 Interest paid (8,574) (7,302) Capital element of finance lease repayments (702) (758) Repayment of bank loans (40,000) (45,000) Net cash used in financing activities (61,416) (60,785) 2 23,854 (Decrease) in cash and cash equivalents (7,355) (3,618) Cash and cash equivalents at the beginning of the year 13,890 17,508 Cash and cash equivalents at the end of the year 23 6,535 13,890 The notes on pages 51 to 78 are an integral part of these consolidated financial statements.

55 51 Notes to the financial statements 01 General information KCOM Group PLC is a public limited company, which is listed on the London Stock Exchange and incorporated and domiciled in the United Kingdom. The address of the registered office is 37 Carr Lane, Hull, HU1 3RE. The nature of the Group s operations is described within the Our business section on page Accounting policies The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. Basis of accounting The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards as adopted by the European Union (IFRS as adopted by the EU), IFRIC interpretations and the Companies Act 2006 applicable to companies reporting under IFRS. The consolidated financial statements have been prepared under the historical cost convention, as modified by the revaluation of financial assets and financial liabilities (including derivative instruments) at fair value through reserves. The consolidated financial statements have been prepared on a going concern basis. The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements, are disclosed in note 3. Except as described below, the accounting policies applied are consistent with those of the annual financial statements for the year ended 31 March 2010, as described in those annual financial statements. The following new standards, amendments to standards and interpretations are mandatory for the first time for the financial year beginning 1 April 2010, but are not currently relevant for the Group. IFRS 3 (revised) Business combinations, and consequential amendments to IAS 27 Consolidated and separate financial statements, IAS 28 Investments in associates and IAS 31 Interests in joint ventures. IAS 1 (amendment) Presentation of financial statements. IAS 36 (amendment) Impairment of assets. IFRS 2 (amendments) Group cash settled share based payments transactions. The amendments incorporate IFRIC 18 Scope of IFRS2 and IFRIC 11 IFRS 2 Group and treasury share transactions. IFRS 5 (amendment) Non current assets held for sale and discontinued operations. IFRIC 9 (amendment) Reassessment of embedded derivatives and IAS 39 Financial Instruments: Recognition and Measurement. IFRIC 16 Hedges of a net investment in a foreign operation. IFRIC 17 Distributions of non cash assets to owners. IFRIC 18 Transfers of assets from customers. The following new standards, amendments to standards and interpretations have been issued, but are not effective for the financial year beginning 1 April 2010 and have not been early adopted: IFRS 9 Financial instruments, issued in December This addresses the classification and measurement of financial assets and is likely to affect the Group s accounting for its financial assets. The standard is not applicable until 1 January Revised IAS 24 Related party disclosures, issued in November It supersedes IAS 24 Related party disclosures, issued in The revised IAS 24 is required to be applied for annual periods beginning on or after 1 January Prepayments of a minimum funding requirement (Amendments to IFRIC 14), issued in November The amendments correct an unintended consequence of IFRIC 14 IAS 19 The limit on a defined benefit asset, minimum funding requirements and their interaction. Without the amendments, entities are not permitted to recognise as an asset some voluntary prepayments for minimum funding contributions. This was not intended when IFRIC 14 was issued, and the amendments correct the problem. The amendments are effective for annual periods beginning 1 January IFRIC 19 Extinguishing financial liabilities with equity instruments. This clarifies the requirements of IFRS when an entity renegotiates the terms of a financial liability with its creditor and the creditor agrees to accept the entity s shares or other equity instruments to settle the financial liability fully or partially. The interpretation is effective for annual periods beginning on or after 1 July The Directors anticipate that the adoption of the above standards and interpretations on the effective date will not have a significant impact on the Group s financial results. Basis of consolidation Subsidiaries are entities controlled by the Company. Control exists when the Company has the power, directly or indirectly, to govern the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing control, potential voting rights that are currently exercisable or convertible are taken into account. The consolidated financial statements include the financial statements of the Company and its undertakings made up to 31 March The results of new subsidiary undertakings are included from the dates of acquisition using the purchase method of consolidation. Where a company has ceased to be a subsidiary undertaking during the year, its results are included to the date of cessation. On acquisition, the assets, liabilities and contingent liabilities of a subsidiary are measured at their fair values at the date of acquisition. Any excess of the cost of acquisition over the fair values of the identifiable net assets acquired is recognised as goodwill. Any deficiency of the cost of acquisition below the fair values of the identifiable net assets acquired (i.e. discount on acquisition) is credited to the income statement in the period of acquisition. Where necessary, adjustments are made to the financial statements of subsidiaries to bring the accounting policies used into line with those used by the Group. All intra Group transactions, balances, income and expenses are eliminated on consolidation. Overview Business review Other disclosures Corporate governance Remuneration report Financial statements Shareholder information

56 52 Notes to the financial statements continued for the year ended 31 March Accounting policies continued Basis of consolidation continued Associates are entities over which the Group has significant influence but not control, generally accompanying a shareholding of between 20% and 50% of the voting rights. Investments in associates are accounted for using the equity method of accounting and are initially recognised at cost. The Group s share of its associates profits or losses is recognised in the income statement. The cumulative post acquisition movements are adjusted against the carrying amount of the investment. Segment reporting Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision maker (CODM). The CODM, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the KCOM Group PLC Board of Directors. Revenue recognition Group revenue, which excludes value added tax, comprises the value of services provided and equipment sales by Group undertakings, excluding those between them. The Group enters into contractual arrangements that include various components which operate independently of each other. Revenue is recognised in respect of the Group s right to consideration for each individual component where a reliable fair value can be attributed to these components. Revenue from calls is recognised in the consolidated income statement at the time the call is made over the Group s network. Revenue from rentals is recognised evenly over the rental period. Revenue from product sales is recognised at the point of effective transfer of risk and reward. Revenue from production of directories is recognised at the point when the directory is published. Revenue from long term build or construction contracts is recognised based on the percentage of completion method. The stage of completion is estimated using an appropriate measure according to the nature of the contract. Revenue arising from the provision of other services, including maintenance contracts, is recognised over the periods in which the service is provided to the customer, based on the stage of completion and the respective proportion of costs incurred. Dividend income is recognised when the right to receive payment is established. Exceptional items Exceptional items are those significant items which are separately disclosed by virtue of their size or incidence to enable a full understanding of the Group s financial performance and relate to items of expenditure included within the income statement which arise outside the ordinary course of business. In particular costs associated with organisational restructuring, costs and provisions associated with onerous contracts, profits or losses on the sale of an operation and pension related curtailment gains are treated as exceptional items. Intangible assets Goodwill Goodwill represents amounts arising on acquisition of subsidiary undertakings and is the difference between the cost of the acquisition and the fair value of the net identifiable assets at the date of acquisition. Goodwill is stated at cost less any accumulated impairment losses and is tested annually for impairment. Impairment losses on goodwill are not reversed. Goodwill arising on acquisitions before the date of transition to IFRS has been retained at the previous UK GAAP amounts subject to being tested for impairment at that date. Goodwill written off to reserves under UK GAAP prior to 1998 has not been reinstated and is not included in determining any subsequent profit or loss on disposal. Goodwill is allocated to cash generating units for the purpose of impairment testing. The allocation is made to those cash generating units that are expected to benefit from the business combination in which the goodwill arose identified according to operating segment. Development costs An internally generated intangible asset arising from the Group s internal development activities is recognised only if all of the following conditions are met: an asset is created that can be identified (such as software and new processes); it is probable that the asset created will generate future economic benefits; and the development cost of the asset can be measured reliably. Internally generated intangible assets are amortised on a straight line basis over their useful lives. Where no internally generated intangible asset can be recognised, development expenditure is recognised as an expense in the period in which it is incurred. Research costs are expensed to the income statement as and when they are incurred. Customer and supplier relationships Contractual customer and supplier relationships acquired in a business combination are recognised at fair value at the acquisition date. The contractual customer and supplier relations have a finite useful life and are carried at cost less accumulated amortisation. Amortisation is calculated using the straight-line method over the expected life of the relationship. Technology and brand Technology and brand acquired through business combinations are recorded at fair value at the date of acquisition. Assumptions are used in estimating the fair values of acquired intangible assets and include management s estimates of revenue and profits to be generated by the acquired businesses. Software Software comprises computer software purchased from third parties and also the cost of internally developed software. Computer software purchased from third parties and internally developed software is initially recorded at cost. Development costs that are directly attributable to the design and testing of identifiable and unique software products controlled by the Group are recognised as intangible assets when the criteria detailed above is met. Other development expenditures that do not meet these criteria are recognised as an expense as incurred. Development costs previously recognised as an expense are not recognised as an asset in a subsequent period.

57 53 02 Accounting policies continued Intangible assets continued Amortisation Amortisation of intangible assets is charged to the income statement on a straight line basis over the estimated useful lives of each intangible asset. Intangible assets are amortised from the date they are available for use. The estimated useful lives are as follows: Customer and supplier relationships Technology and brand Software Development costs up to 8 years up to 10 years up to 5 years 1 year Property, plant and equipment Property, plant and equipment is stated at historical cost less accumulated depreciation and any provision for impairment. Network infrastructure and related equipment is recorded at cost plus labour costs directly attributable to the cost of the network construction. Depreciation is provided so as to write off the cost of assets to residual values on a straight line basis over the assets useful estimated lives as follows: Overview Business review Freehold buildings Leasehold buildings and improvements Exchange equipment External plant Vehicles, other apparatus and equipment 40 years period of lease 10 years 10 to 20 years 3 to 10 years Other disclosures Freehold land is not depreciated. The residual value, if not insignificant, is reassessed annually. Depreciation of network infrastructure and related equipment is provided for from the date the network comes into operation. Assets held under finance leases are depreciated over their expected useful lives on the same basis as owned assets or, where shorter, over the term of the relevant lease. Fixed asset investments Fixed asset investments are shown at cost less provision for impairment. They are reviewed at each reporting date for possible reversal of the impairment. Impairment of non financial assets Assets that have an indefinite useful life for example, goodwill are not subject to amortisation and are tested annually for impairment. Assets that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset s carrying amount exceeds its recoverable amount. Recoverable amount is the higher of fair value less selling costs and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted. An impairment loss is recognised whenever the carrying amount of an asset exceeds its recoverable amount. Impairment losses are recognised in the income statement. Impairment losses recognised in respect of cash generating units (CGU) are allocated first to reduce the carrying amount of any goodwill allocated to cash generating units and then to reduce the carrying amount of other assets in the unit on a pro rata basis. Inventories Inventories are valued at the lower of cost or net realisable value. Cost is determined using the first in, first out (FIFO) method. Costs include raw materials and, where appropriate, direct overhead expenses. Net realisable value represents the estimated selling price less all estimated costs of completion and costs to be incurred in marketing, selling and distribution. Provision is made for obsolete, slow moving or defective items where appropriate. Trade receivables Trade receivables are recognised initially at fair value and subsequently restated for any impairment. A provision for impairment of trade receivables is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of the receivables. Cash and cash equivalents Cash and cash equivalents includes cash in hand, short term deposits and other short term highly liquid investments with original maturities of three months or less, and bank overdrafts. Bank overdrafts are shown within borrowings in current liabilities on the balance sheet, unless a right of offset exists. Trade payables Trade payables are recognised initially at fair value and subsequently measured at amortised cost. Share capital Ordinary shares are classified as equity. Corporate governance Remuneration report Financial statements Shareholder information

58 54 Notes to the financial statements continued for the year ended 31 March Accounting policies continued Taxation The tax expense represents the sum of the tax currently payable and deferred tax. The tax currently payable is based on taxable profit for the year. Taxable profit differs from net profit as reported in the income statement because it excludes items of income or expense that are taxable or deductible in other years and/or items that are never taxable or deductible. The Group s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date. Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the tax profit nor the accounting profit. The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced or increased to the extent that sufficient taxable profits will be available to allow all or part of the asset to be recovered. Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries and associates, and interests in joint ventures, except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised. Deferred tax is charged or credited in the income statement, except when it relates to items recognised in other comprehensive income or directly to equity. In this case the deferred tax is also recognised in other comprehensive income or directly in equity respectively. Deferred tax is not discounted. Financial instruments and hedge accounting Financial assets and liabilities are recognised in the Group s balance sheet when the Group becomes a party to the contractual provisions of the instrument. The Group uses derivative financial instruments to hedge its exposure to foreign exchange and interest rate risks arising from operational, financing and investment activities. In accordance with its Treasury Policy, the Group does not hold or issue derivative financial instruments for trading purposes. Derivative financial instruments are initially recognised at fair value. Any gain or loss on remeasurement to fair value is recognised immediately in the income statement. However, where derivatives qualify for hedge accounting, recognition of the resultant gain or loss depends on the nature of the item being hedged. The fair value of the interest rate swaps is the estimated amount that the Group would receive or pay to terminate the swap at the balance sheet date, taking into account current interest rates and the current creditworthiness of the swap counterparties. The fair value of forward exchange contracts is their quoted market price at the balance sheet date, being the present value of the quoted forward price. Changes in the fair value of derivative financial instruments that are designated and effective as hedges of future cash flows are recognised directly in other comprehensive income and the ineffective portion is recognised immediately in the income statement. If the cash flow hedge of a firm commitment or forecasted transaction results in the recognition of an asset or liability, then, at the time the asset or liability is recognised, the associated gains or losses on the derivative that had previously been recognised in other comprehensive income are included in the initial measurement of the asset or liability. For hedges that do not result in recognition of an asset or a liability, amounts deferred in equity are recognised in the income statement in the same period in which the hedged item affects net profit or loss. Hedge accounting is discontinued when the hedging instrument expires or is sold, terminated, or exercised, or no longer qualifies for hedge accounting. At that time, any cumulative gain or loss on the hedging instrument recognised in equity is retained in equity until the forecasted transaction occurs. If a hedged transaction is no longer expected to occur, the net cumulative gain or loss recognised in equity is transferred to the income statement in the period. Foreign currency translation These financial statements are presented in Pounds Sterling which is the currency of the primary economic environment in which the Group operates. Transactions in foreign currencies are recorded at the rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the rate of exchange ruling at the balance sheet date. The accounts of overseas subsidiary undertakings are translated at the rate of exchange ruling at the balance sheet date. The exchange difference arising on the retranslation of opening net assets is taken directly to reserves. All other translation differences are taken to the income statement with the exception of differences on foreign currency borrowings to the extent that they are used to finance or provide a hedge against Group equity investments in foreign enterprises, which are taken directly to reserves together with the exchange difference on the net investment in these enterprises. Leasing and hire purchase commitments Leases where the Group assumes substantially all of the risks and rewards of ownership are classified as finance leases. Assets held under finance leases and hire purchase contracts are capitalised in the balance sheet at their fair value or, if lower, the present value of the future minimum lease payments, and are depreciated over their useful economic lives. The capital elements of future obligations under finance leases and hire purchase contracts are included as liabilities in the balance sheet. The interest elements of the rental obligations are charged to the income statement over the periods of the leases and hire purchase contracts. The finance charge is allocated to each period during the lease so as to produce a constant periodic rate of interest on the remaining balance of the liability. Rentals payable under operating leases are charged to the income statement on a straight line basis over the lease term.

59 55 02 Accounting policies continued Bank borrowings and issue costs Bank borrowings are stated at the amount of proceeds after deduction of issue costs, which are amortised over the period of the loan. Finance charges, including premiums payable on settlement or redemption and direct issue costs, are accounted for in the income statement on an accruals basis and are added to the carrying amount of the instrument to the extent that they are not settled in the period in which they arise. Pensions Defined contribution Obligations for contributions to the defined contribution (money purchase) scheme are charged to the income statement in the period they fall due. Prepaid contributions are recognised as an asset to the extent that a cash refund or a reduction in the future payments is available. Defined benefit For defined benefit retirement schemes, the cost of providing benefits is determined using a building block approach, with actuarial valuations being carried out at each balance sheet date. Actuarial gains and losses are recognised in full in the period in which they occur, and are recognised in equity and presented in the consolidated statement of comprehensive income. The current and past service costs of the scheme (the increase in the present value of employees future benefits attributable to the current or prior periods) are charged to the income statement in the period. The cost or benefit of committed settlements and curtailments is recognised immediately in the income statement. The interest cost of the scheme (the expected return on scheme assets, less interest on scheme liabilities) is recognised in the income statement in the period to which it relates. The retirement benefit obligation recognised in the balance sheet represents the present value of the defined benefit obligation as adjusted for unrecognised past service cost, and as reduced by the fair value of scheme assets. Any asset resulting from this calculation is limited to past service cost, plus the present value of available refunds and reductions in future contributions to the plan. Employee share schemes and share based payments The Group has applied the requirements of IFRS 2. In accordance with the transitional provisions, IFRS 2 has been applied to all grants of equity instruments after 7 November 2002 that were unvested as of 1 April The Group issues equity settled and cash settled share based payments to certain employees. Equity settled employee schemes, including employee share options and discretionary long term incentive schemes provide employees with the option to acquire shares of the Company. Employee share options and long term incentive schemes are generally subject to performance or service conditions. The fair value of equity settled share based payments is measured at the date of grant and charged to the income statement over the period during which performance or service conditions are required to be met, or immediately where no performance or service criteria exist. The fair value of equity settled share based payments granted is measured using either the Black Scholes or Monte Carlo model, depending on the terms under which the options were granted. The amount recognised as an expense is adjusted to reflect the actual number of employee share options that vest, except where forfeiture is only due to market based performance criteria not being met. For cash settled share based payments, a liability equal to the portion of the goods or services received is recognised at the current fair value determined at each balance sheet date. The Group also operates a SIP under which employees have the option to purchase shares in the Company each month and offers employees free matching and partnership shares on a sliding scale of between 1:3 to 2:1. The Group recognises the free shares as an expense over the period of any applicable service condition, or immediately when no service condition exists. Dividends Dividend distribution to the Company s shareholders is recognised as a liability in the Group s financial statements in the period in which the dividends are approved by the Company s shareholders. Provisions A provision is recognised in the balance sheet when the Group has a present, legal or constructive obligation as a result of a past event, and it is probable that an outflow of economic benefits will be required to settle the obligation. If the effect is material, provisions are determined by discounting the expected future cash flows at a pre tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. 03 Critical accounting judgements and key sources of estimation uncertainty Impairment of non current assets Determining whether a non current asset is impaired requires an estimation of the value in use and/or the estimated recoverable amount of the asset derived from the business, or part of the business, CGU, to which the non current asset has been allocated. The value in use calculation requires an estimate of the present value of future cash flows expected to arise from the CGU, by applying an appropriate discount rate to the timing and amount of future cash flows. The Directors are required to make judgements regarding the timing and amount of future cash flows applicable to the CGU, based on current budgets and forecasts, and extrapolated for an appropriate period taking into account growth rates and expected changes to selling prices and operating costs. The Directors estimate the appropriate discount rate using pre tax rates that reflect current market assessments of the time value of money and the risks specific to the individual CGU. Intangible assets arising on acquisition In determining the fair value of intangible assets arising on acquisition the Directors are required to make judgements regarding the timing and amount of future cash flows applicable to the businesses being acquired, discounted using an appropriate discount rate. Such judgements are based on current budgets and forecasts, extrapolated for an appropriate period taking into account growth rates and expected changes to selling prices and operating costs. The Directors estimate the appropriate discount rate using pre tax rates that reflect current market assessments of the time, value of money and the risks specific to the businesses being acquired. Overview Business review Other disclosures Corporate governance Remuneration report Financial statements Shareholder information

60 56 Notes to the financial statements continued for the year ended 31 March Critical accounting judgements and key sources of estimation uncertainty continued Post employment benefits The Group operates two defined benefit schemes. All post employment benefits associated with these schemes have been accounted for in accordance with IAS 19 Employee benefits. As detailed within the accounting policies note, in accordance with IAS 19, all actuarial gains and losses have been recognised immediately through the Consolidated statement of comprehensive income. For all defined benefit pension schemes, pension valuations have been performed using specialist advice obtained from independent qualified actuaries. In performing these valuations, judgements, assumptions and estimates have been made. These assumptions have been disclosed within note 31. Share based payments The Company provides share based payments under six separate schemes. In accordance with IFRS 2, share options are measured at fair value at the date of grant. The fair value determined is then expensed in the consolidated income statement on a straight line basis over the vesting period, with a corresponding increase in equity. The valuation of these share based payments requires several judgements to be made in respect of the number of options that are expected to be exercised. Details of the assumptions made in respect of each of the share based payment schemes are disclosed in note 13. Provisions Using information available at the balance sheet date, the Directors make judgements, based on experience, on the level of provision required to satisfy all onerous lease and dilapidation commitments, to account for potential uncollectable receivables, to account for the potential for unsaleable inventories and to account for known restructuring costs and known restructuring costs relating to employees. Deferred taxation The amount of the deferred tax asset included in the balance sheet of the Group is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. In estimating the amount of the deferred tax asset that may be recognised the Directors make judgements, based on current budgets and forecasts, about the amount of future taxable profits and the timing of when these will be realised. The Directors consider the Group will become tax paying in the future at which time the asset will begin to unwind. 04 Segmental analysis Management has determined the operating segments based on the reports reviewed by the KCOM Group PLC Board that are used to make strategic decisions. KCOM Group PLC operates four brands and a PLC function. The brands are reported as KC & Eclipse, which address the needs of our East Yorkshire customers and UK small business market respectively, and Kcom & Smart421 which serve enterprise and public sector organisations across the UK. These brands have separate management teams and each offers tailored propositions to their target market, based on the Group s range of products and services. The chief operating decision maker of the Group is the KCOM Group PLC Board. The Board considers the performance of KC & Eclipse and Kcom & Smart421 in assessing the performance of the Group and making decisions about the allocation of resources. Segment disclosures have been presented on this basis. The segment information provided to the KCOM Group PLC Board for the reportable segments, for the year ended 31 March 2011 and for the year ended 31 March 2010, is as follows: Revenue EBITDA Before exceptional items KC & Eclipse 122, ,536 57,862 57,277 Kcom & Smart , ,973 25,751 22,693 PLC¹ (4,342) (1,709) (7,650) (10,175) Activities before exceptional items 395, ,800 75,963 69,795 Exceptional items KC & Eclipse (149) (1,422) Kcom & Smart421 (10,951) (5,420) PLC¹ 2,763 (3,363) Total (note 7) (8,337) (10,205) Total 395, ,800 67,626 59, PLC includes Public Company central and share scheme expenses, inter segment eliminations and the costs, excluding current and past service costs, associated with the Group s defined benefit pension schemes and the related assets and liabilities.

61 57 04 Segmental analysis continued A reconciliation of total EBITDA to profit before tax is provided as follows: Notes Overview EBITDA post-exceptional items 67,626 59,590 Depreciation 16 (18,464) (20,074) Amortisation 15 (8,868) (12,966) Finance costs 9 (7,393) (7,368) Share of profit/(loss) of associate (12) Profit before tax 32,912 19,170 Disclosure has not been made of segmental assets and liabilities. This is in accordance with IFRS 8 as this measure is not regularly provided to the KCOM Group PLC Board. The split of total revenue between external customers and inter segment revenue is as follows: Revenue from external customers KC & Eclipse 118, ,070 Kcom & Smart , ,858 PLC¹ Business review Other disclosures Total 395, ,800 Inter segment revenue KC & Eclipse 4,731 1,466 Kcom & Smart ,115 PLC¹ (5,120) (2,581) Total Group total 395, , PLC includes Public Company central and share scheme expenses, inter segment eliminations and the costs, excluding current and past service costs, associated with the Group s defined benefit pension schemes and the related assets and liabilities. Inter segment sales are charged at prevailing market prices. None of the revenue, operating profit or net operating assets arising outside the United Kingdom are material to the Group. The Group is not dependent upon a single or small number of external customers. The analysis of the Group s revenue between sale of goods and provision of services is as follows: Sale of goods 20,226 29,839 Provision of services 375, ,961 Group total 395, ,800 Corporate governance Remuneration report Financial statements Shareholder information

62 58 Notes to the financial statements continued for the year ended 31 March Operating expenses Consolidated Notes Staff costs 88, ,517 Restructuring costs relating to employees 1,249 4,980 Total staff costs 8 89, ,497 Own work capitalised 8 (2,285) (3,299) Other external charges 233, ,968 Other exceptional items 7 7,088 5,225 Non employee related pension charges 245 2,819 Depreciation and amortisation 27,332 33,040 Total 355, ,250 Non employee related pension charges are the total of interest costs, expected return on assets and curtailment and settlement gains as set out in note Operating profit Operating profit from continuing operations is stated after charging/(crediting): Consolidated Operating lease rentals: hire of plant and machinery other operating leases 4,171 4,800 Auditors remuneration (see below) Cost of inventories recognised as an expense 14,207 22,289 Net (decrease)/increase in provision for receivables (214) 530 Foreign exchange gain (348) (214) Depreciation of property, plant and equipment 18,464 20,074 Amortisation of intangible assets 8,868 12,966 Loss on disposal of property, plant and equipment Employee share schemes 2,586 1,647 Auditors remuneration During the year the Group obtained the following services from the Group s Auditors: Consolidated Fees payable to the Company s Auditors for the audit of the Company s annual financial statements and the consolidated financial statements Fees payable to the Company s Auditors and its associates for other services: the audit of the Company s subsidiaries pursuant to legislation other services pursuant to legislation tax services restructuring advice pensions advice Total Pensions advice reflects the continuation of projects approved by the Board in the previous year.

63 59 07 Exceptional items Consolidated Notes Loss on Network Build 7,088 Restructuring costs relating to employees 4,199 4,980 Pension curtailment gain (2,950) Loss on sale of business 2,136 Onerous leases 25 2,018 Restructuring costs 1,071 Charged to profit before taxation 8,337 10,205 Restructuring costs and costs relating to employees arise as a result of organisational changes within the Group. The pension curtailment gain arose on the closure of the Group s two defined benefit schemes to future accrual. The loss on Network Build relates to the forecast loss arising on the build stage of a contract to build and manage a broadband network on behalf of a third party provider. This contract has now been revised, in terms of reducing the scope of, and changes to, its network design and reflecting also certain operational challenges on the build element. The remaining build phase of this contract is envisaged to be completed by the end of this financial year after which Kcom will have a profitable ten year managed service contract. As part of the agreement to re scope the network, we have been able to reduce materially the level of work in progress on this contract. The loss on sale of business relates to the loss arising on the disposal of Aghoco 1000 Ltd to Phoenix IT Group. The subsidiary contained certain customer contracts and associated assets for break fix maintenance services. Aghoco 1000 Ltd was sold for a cash consideration of 1,800,000. The total net proceeds from the sale of Aghoco 1000 Ltd was 1,092,000 after legal fees. The loss on disposal taking into account net assets disposed (including goodwill of 2,080,000) and other associated costs amounting to 2,136,000. Onerous lease provisions arise as a result of continued rationalisation of the Group s property portfolio. The combined tax effect of these items is Nil (2010: Nil) in respect of current tax and a credit of 2,334,000 (2010: 1,274,000) in respect of deferred tax. 08 Employees and remuneration The average monthly numbers employed by the Group during the year were as follows: Number of employees KC & Eclipse Kcom & Smart ,245 PLC Total 1,801 2,094 The costs incurred in respect of these employees were: Wages and salaries 75,384 86,808 Social security costs 6,961 8,292 Other pension costs 3,534 4,770 Share scheme costs 2,586 1,647 Restructuring costs relating to employees 1,249 4,980 Total 89, ,497 Less own work capitalised (2,285) (3,299) Charged to income statement 87, ,198 All the Group s employees are employed by the Company with the exception of 286 (2010: 328) employees employed by KC Contact Centres Limited, Smart421 Technology Group Limited and JAM I P Ltd. Disclosures required by the Companies Act 2006 on Directors remuneration, including salaries, performance related bonuses, pension contributions and pension entitlements, including disclosure in respect of the highest paid Director, are to be found in the tables on pages 42 to 44 within the Remuneration report, and form part of these financial statements. Overview Business review Other disclosures Corporate governance Remuneration report Financial statements Shareholder information

64 60 Notes to the financial statements continued for the year ended 31 March Finance costs Consolidated On bank loans, overdrafts and other loans (6,081) (6,635) Finance lease and hire purchase contracts (56) (71) (6,137) (6,706) Amortisation of loan arrangement fees (1,256) (662) Total (7,393) (7,368) 10 Taxation Analysis of tax charge in the year The charge based on the profit for the year comprises: Consolidated Notes UK corporation tax: adjustment in respect of prior years (484) Total current tax (484) UK deferred tax: Origination and reversal of timing differences in respect of: profit for the year 10,709 7,874 adjustment in respect of prior years (617) (5,703) credit in respect of intangible asset amortisation (2,287) (2,094) charge in respect of retirement benefit obligation 2,970 1,400 Total deferred tax 26 10,775 1,477 Total taxation charge for the year 10,291 1,477 Factors affecting tax charge for the year Consolidated Profit before taxation 32,912 19,170 Profit before taxation at the standard rate of corporation tax in the UK of 28% (2010: 28%) 9,215 5,368 Effects of: permanent differences 824 1,812 adjustments relating to prior year corporation tax (484) adjustments relating to prior year deferred tax (617) (5,703) change in rate reflected in the deferred tax asset 1,353 Total taxation charge for the year 10,291 1,477 Factors affecting the current and future tax charges As a result of the change in the UK main corporation tax rate from 28% to 26% that was substantively enacted at the balance sheet date and that became effective from 1 April 2011, the relevant deferred tax balances have been remeasured. Further reductions to the UK corporation tax rate were announced in the June 2010 and March 2011 Budgets. The changes, which we expected to be enacted separately each year, propose to reduce the rate by 1% per annum to 23% by April The changes have not been substantively enacted at the balance sheet date and, therefore, are not recognised in the financial statements.

65 61 11 Dividends Overview Amounts recognised as distributions to equity holders in the period: final dividend for the year ended 31 March 2009 of 1.0 pence per share 5,142 interim dividend for the year ended 31 March 2010 of 0.5 pence per share 2,583 final dividend for the year ended 31 March 2010 of 1.25 pence per share 6,457 interim dividend for the year ended 31 March 2011 of 1.1 pence per share 5,683 Total 12,140 7,725 The proposed final dividend for the year ended 31 March 2011 is 2.5 pence per share, amounting to a total dividend of 12,915,000. In accordance with IAS 10 Events after the balance sheet date, dividends declared after the balance sheet date are not recognised as a liability in these financial statements. 12 Earnings per share The calculation of basic and diluted earnings per share is based on the following numbers of shares and earnings: Consolidated Number Number Weighted average number of shares For basic earnings per share 509,452, ,389,977 Share options in issue 21,238,004 12,452,341 Business review Other disclosures For diluted earnings per share 530,690, ,842, Earnings Profit attributable to equity holders of the Company 22,621 17,693 Adjustments: Exceptional items 8,337 10,205 Tax on exceptional items (2,334) (1,274) Corporate governance Adjusted profit attributable to equity holders of the Company 28,624 26, Consolidated Pence Pence Earnings per share Basic Diluted Remuneration report Adjusted basic Adjusted diluted Basic earnings per share is calculated by dividing the profit attributable to equity holders of the Company by the weighted average number of ordinary shares in issue during the year excluding ordinary shares purchased by the Company and held in trust. Adjusted basic earnings per share is calculated by adjusting the profit attributable to equity holders of the Company by the exceptional items net of taxation and dividing this adjusted figure by the weighted average number of ordinary shares in issue during the year excluding ordinary shares purchased by the Company and held in trust. Financial statements Shareholder information

66 62 Notes to the financial statements continued for the year ended 31 March Share based payments The Group had five share based payment schemes (2010: six) in existence during the year ended 31 March The Group recognised a total charge of 2,586,000 (2010: 1,647,000) in the year relating to equity settled share based payment transactions issued after 7 November The total value at the year end of liabilities for which the counterparty s right to cash or other assets had vested was Nil (2010: Nil). Details of each of the schemes are provided below. Share Options and Long Term Incentive Scheme (LTIS) Share options including LTIS (issued after 7 November 2002) Options Weighted average exercise price (pence) Outstanding at the beginning of year 46,617 Nil Lapsed during the year (9) Nil Exercised in the year (4,419) Nil Outstanding at the end of the year 42,189 Nil The share options, including LTIS, outstanding at 31 March 2011 had a weighted average exercise price of Nil pence and a weighted average remaining contractual life of Nil years (the Directors have assumed all shares will vest at the earliest available date). Options were granted at Nil cost for this equity settled scheme. No options were granted in the year ended 31 March The options become exercisable between three and ten years from grant date, provided that the employee remains in employment. Out of the 42,189 outstanding options (2010: 46,617), all were exercisable at 31 March The assumptions used in the Monte Carlo model for the options outstanding at the beginning of the year are as follows: grant grant grant grant Share price (on date of official grant) (pence) Exercise price (pence) Nil Nil Nil 56.8 Expected dividend payments (%) 2 1 Nil Nil Expected term (years) Share Incentive Plan (SIP) The SIP is open to all employees and offers partnership, matching and free shares (the basis depends on the individual s contribution into the scheme). No performance criteria are attached to these matching shares other than an employee must remain employed by the Group for five years from the date of grant to be able to have their free and matching shares. In 2010/11 1,114,173 (2010: 2,213,514) matching shares were granted during the year. Weighted average exercise price Number (pence) Outstanding at the beginning of year 7,259,478 Nil Granted during the year 1,114,173 Nil Outstanding at the end of the year 8,373,651 Nil Long Term Co Investment Plan (LTCIP) Directors are required to hold or subscribe monthly for investment shares and depending on meeting performance criteria up to four matching shares are awarded for each investment share. 75% of performance is based on relative TSR measured over three years and 25% is based on EPS growth (CAGR) over a three, four and five year period. The notional amount of matching shares awarded during the year are as follows: Number of EPS CAGR Relative TSR participants Number FV (pence) Number FV (pence) Total Outstanding at the beginning of the year 4 2,496, ,488, ,984,545 Lapsed (1) (632,726) 0.06 (1,898,180) 0.26 (2,530,906) Outstanding at the end of the year 3 1,863, ,590, ,453, Average FV (pence). The above shares are subject to forfeiture under certain circumstances. For further information see the Remuneration report on page 40 to 41.

67 63 13 Share based payments continued Long-Term Co Investment Plan (LTCIP) continued As both parts of the awards made under this plan are subject to a market-based performance condition under IFRS 2, the awards have been valued using a Monte Carlo simulation model. The average assumptions used are as follows: Share price at date of grant (pence) 29 Exercise price (pence) Nil Volatility (%) Risk free rate (%) 3.66 Dividend yield (%) 8.00 Long-Term performance plan (LTPP) For information on this scheme see Remuneration report on page 44. Weighted average exercise price (pence) Outstanding at the beginning of year 4,603,650 Nil Lapsed during the year (4,603,650) Nil Outstanding at the end of the year Nil Executive incentive plan (EIP) A participant is granted a conditional right to a number of ordinary shares in the Company which vest after three years to the extent that the associated performance condition is met. EIP awards vest as to 10% for a Total Shareholder Return (TSR) (measured as share price plus dividends) of 45 pence and vest in full for a TSR of 100 pence. Certain elements of the award were granted under a CSOP and an unapproved option to provide a tax effective reward to senior management. For further information see the Remuneration report on page 39. As at 31 March 2011, 40% of the EIP shares had potentially vested. The Group has not issued or purchased shares in respect of this given the conditional nature of any potential vesting. Similarly no provision has been made for the cost of the potential dividend that vested shares would attract. Vesting Number of Number at Outstanding at the Outstanding at the Award date release date participants date of grant beginning of the year Lapsed end of the year FV (pence) EIP awards 24/07/ /07/ ,041,520 5,041,520 5,041, /07/ /07/ ,438,480 2,438,480 2,438, /07/ /07/ ,630,000 3,630,000 (596,168) 3,033, /07/ /07/ ,815,000 1,815,000 (374,761) 1,440, /07/ /07/ ,815,000 1,815,000 (420,782) 1,394, /11/ /11/ ,038,364 3,038,364 (491,535) 2,546, /11/ /11/ ,519,182 1,519,182 (260,459) 1,258, /11/ /11/ ,519,182 1,519,182 (269,276) 1,249, CSOP and unapproved 25/02/ /02/ , ,636 (97,827) 493, /02/ /02/ , ,818 (49,917) 245, /02/ /02/ , ,818 (50,517) 245, Total 22,000,000 22,000,000 (2,611,242) 19,388,758 None of these awards were exercisable at the year end. The awards have been valued using a Monte Carlo simulation model. The weighted average assumptions used during the year are as follows: Share price at valuation date (pence) 33 Exercise price (pence) 3 Expected volatility (%) Risk free rate (%) 2.43 Number Overview Business review Other disclosures Corporate governance Remuneration report Financial statements Shareholder information

68 64 Notes to the financial statements continued for the year ended 31 March Share based payments continued Share options issued before November 2002 Approved options Outstanding at the Option price beginning Exercise pence of the year Exercised Lapsed Balance period 23/05/ ,745 (243,745) /07/ ,911 (5,911) /08/ ,463 (10,000) 190, Total 450,119 (259,656) 190,463 Unapproved options Outstanding at the Option price beginning Exercise pence of the year Exercised Lapsed Balance period 26/07/ to ,976 (53,976) /08/ to 655 2,000 (2,000) Total 55,976 (55,976) 14 Goodwill Consolidated 000 Cost and carrying amount At 1 April 2010 and at 31 March ,272 Goodwill acquired in a business combination is allocated at the date of acquisition to the CGU that are expected to benefit from that business combination. The Group tests goodwill annually for impairment, or more frequently if there are indications that goodwill might be impaired. The recoverable amounts of the CGUs are determined from value in use calculations. The key assumptions for these value in use calculations are those regarding discount rates, growth rates and expected changes to selling prices and direct costs. The Directors estimate discount rates using pre tax rates that reflect current market assessments of the time value of money and the risks specific to the individual CGU. The Group prepares cash flow forecasts using the current operating budget approved by the Directors which covers a five year period and an appropriate extrapolation of cash flows beyond this. The carrying amount of goodwill of 85,272,000 (2010: 85,272,000) has been allocated across multiple CGUs as follows: 000 KC & Eclipse 8,077 Kcom & Smart421 77,195 At 31 March ,272 An impairment review was undertaken at the year end in accordance with IAS 36 and no impairment was required. Furthermore, this review indicates that a reasonable possible change in a key assumption would not remove any remaining headroom in the impairment calculation. The discount rate and growth rate (in perpetuity) used for value in use calculations are as follows: Discount rate (pre tax) % Growth rate (in perpetuity) %

69 65 15 Intangible assets Customer Development and supplier Technology costs Software relationship and brand Total Consolidated Cost At 1 April ,303 47,991 49,257 6, ,845 Additions 1,239 1,239 Own work capitalised 702 1,070 1,772 At 31 March ,005 50,300 49,257 6, ,856 Additions 1,085 1,085 Own work capitalised 796 1,146 1,942 Disposals (516) (26,673) (27,189) Overview Business review At 31 March ,285 25,858 49,257 6,294 84,694 Amortisation At 1 April ,868 41,402 36,960 5,113 85,343 Charge for the year 788 4,700 7, ,966 At 31 March ,656 46,102 44,044 5,507 98,309 Charge for the year 767 2,609 5, ,868 Disposals (516) (26,626) (27,142) Other disclosures At 31 March ,907 22,085 49,257 5,786 80,035 Carrying amount At 31 March , ,659 At 31 March ,198 5, ,547 Development costs are predominantly capitalised staff costs associated with new products and services. 16 Property, plant and equipment Vehicles, other Land and Exchange External apparatus and buildings equipment plant equipment Total Consolidated Cost At 1 April , , ,861 85, ,732 Additions 740 8,543 2,854 12,137 Own work capitalised 485 1,042 1,527 Disposals (56,732) (8,031) (14,533) (79,296) At 31 March , , ,415 73, ,100 Additions 2,408 5,182 2,551 10,141 Own work capitalised Disposals (543) (96,993) (87,545) (25,095) (210,176) Transfers (7) 79,641 (84,491) 4,857 At 31 March , , ,904 55, ,408 Accumulated depreciation At 1 April , , ,483 71, ,723 Charge for the year ,080 6,657 20,074 Disposals (56,732) (8,031) (13,991) (78,754) At 31 March , , ,532 64, ,043 Charge for the year 536 4,229 6,224 7,475 18,464 Disposals (543) (96,993) (87,553) (24,989) (210,078) Transfers 1,608 71,924 (75,212) 1,680 At 31 March , ,438 85,991 48, ,429 Net book value At 31 March ,392 42,602 59,913 7, ,979 Corporate governance Remuneration report Financial statements Shareholder information At 31 March ,543 36,706 69,883 8, ,057

70 66 Notes to the financial statements continued for the year ended 31 March Property, plant and equipment continued The figures stated overleaf include the following amounts in respect of assets held under finance leases and hire purchase contracts: Vehicles, other Land and Exchange External apparatus and buildings equipment plant equipment Total Cost At 31 March ,241 8,289 2, ,195 At 31 March ,241 8,504 5, ,301 Accumulated depreciation At 31 March ,289 2, ,687 At 31 March ,504 4, ,215 Carrying amount At 31 March ,508 At 31 March , Investments Unlisted Shares in investments associates Total Consolidated Cost At 1 April , ,755 Additional investment Share of net loss for the period (12) (12) At 31 March , ,760 Share of net profit for the period At 31 March , ,771 Amounts written off At 1 April 2009, 31 March 2010 and 31 March ,706 1,706 Net book value At 31 March , ,065 At 31 March , ,054 Shares in subsidiary undertakings Parent company 000 Cost At 31 March ,265 Additions 260,246 At 31 March ,511 Amounts written off At 31 March 2010 and Net book value At 31 March ,461 At 31 March ,215 During the year ended 31 March 2011, the Parent company subscribed for an additional 260,246,441 1 shares in KCH (Holdings) Limited, a wholly owned subsidiary. In consideration of this, KCOM Group PLC released and extinguished an inter-company loan due from KCH (Holdings) Limited of 260,246,441.

71 67 17 Investments continued Subsidiary undertakings (as at 31 March 2011) The shares in subsidiary undertakings are held in KCH (Holdings) Limited, an intermediary holding company, registered in England. Details of the principal trading subsidiaries of the Group are listed below. A full list will be appended to the Company s next Annual Return. All of the following companies are indirectly 100% owned by the Company via KCH (Holdings) Limited and are all registered in England. Overview Name of company Business activity Kingston Communications Limited Affiniti Integrated Solutions Ltd Kingston Information Services Limited KC Contact Centres Limited Smart421 Limited Telecommunications services Operation of telecommunications infrastructure Publication of telephone directories Provision of call centre services Software consultancy Business review All subsidiary undertakings are included in the consolidation of the Group. Associates The Group s associate is Smartintegrator Technology Limited, in which the Company indirectly holds 50% of the ordinary shares. Under an agreement between the shareholders of Smartintegrator Technology Limited, neither the Group nor the shareholders are able to exercise control over the operational and financial policies of Smartintegrator Technology Limited. The associate is registered in England and its main business activity is software development. 18 Inventories Consolidated Parent company Other disclosures Raw materials and consumables 1,150 1,137 Equipment for resale 1,000 2,471 Total 2,150 3,608 There is no material difference between the carrying value and the replacement cost of inventories. 19 Trade and other receivables Consolidated Parent company Trade receivables 36,986 41,563 Other receivables 1,641 1,609 Prepayments and accrued income 32,166 33, Total 70,793 76, All of the Group s receivables are due within one year in both 2011 and An allowance has been made for estimated irrecoverable amounts from the sale of goods and services of 4,670,000 (2010: 6,782,000). The Directors consider that the carrying amount of trade and other receivables approximate to their fair value. During the year the Parent company released and extinguished an inter-company loan due from KCH (Holdings) Limited of 260,246,441 (2010: 260,267,000) in consideration of additional shares as set out in note 17. Movements on the Group provision for impairment of trade receivables are as follows: At 1 April 2010 (6,782) Written off in the year 2,326 Unused amounts reversed Amounts provided for in the year (214) At 31 March 2011 (4,670) The majority of the Group s trade and other receivables are denominated in Sterling. Corporate governance Remuneration report Financial statements Shareholder information

72 68 Notes to the financial statements continued for the year ended 31 March Trade and other receivables continued Credit risk The Group s principal financial assets are cash balances and trade and other receivables. The Group s credit risk is primarily attributable to its trade receivables for which an allowance has been made for the estimated irrecoverable amounts. The credit risk on liquid funds is limited because the counterparties are banks with high credit ratings assigned by international credit rating agencies. The Group has no significant concentration of credit risk, with exposure spread over a large number of customers. The maximum exposure to credit risk at the reporting date is the carrying value of each class of receivable mentioned above. The Group does not hold any collateral as security. As of 31 March 2011, trade receivables of 6,139,000 were impaired (2010: 6,812,000). The amount of the provision was 4,670,000 as of 31 March 2011 (2010: 6,782,000). The individually impaired receivables mainly relate to customers who are in unexpectedly difficult economic situations. It was assessed that a portion of the impaired balance is expected to be recovered. The ageing of these receivables is as follows: months months 5,351 5,650 6 months ,139 6,812 As of 31 March 2011, trade receivables of 7,842,000 (2010: 11,044,000) were past due but not impaired. These relate to a number of independent customers of whom there is no recent history of default. The ageing analysis of these trade receivables is as follows: months 5,573 9, months 2, months + 1,124 7,842 11, Trade and other payables Consolidated Parent company Notes Obligations under finance leases and hire purchase contracts Trade payables 42,673 36,320 Other taxes and social security costs 6,640 6,504 Other payables 4,833 4,588 Provisions 25 4,815 6,007 Accruals and deferred income 88,490 90,541 Total 147, ,657 Trade payables and accruals principally comprise amounts outstanding for trade purchases and ongoing costs. The Directors consider that the carrying amount of current liabilities approximates to their fair value. 21 Non current liabilities Consolidated Parent company Notes Bank borrowings 22 88, ,458 Retirement benefit obligation 31 6,927 50,373 50,373 94, ,831 50,373 Obligations under finance leases and hire purchase contracts Provisions 25 1,944 3,523 Derivative financial instruments 29 7,150 Other non current liabilities 2,079 11,204 Total 97, ,035 50,373

73 69 22 Borrowings Consolidated Parent company Overview Bank borrowings Amount falling due: between one and two years 130,000 between two and five years 90,000 90, ,000 Loan issue costs (1,996) (542) Business review 88, ,458 The loan facility was secured by guarantees given by all material subsidiaries of KCOM Group PLC in favour of the lending banks. The bank borrowings are fully repayable in July 2015 and attract an interest rate of LIBOR plus a margin dependent on specific covenants. For further information on interest rate swaps see note 29. The Directors consider that the carrying value of bank borrowings approximates fair value as the interest rates on the borrowing are linked to the UK bank base rate. 23 Net debt Consolidated Other disclosures Notes Cash 3,531 10,788 Short term deposits 3,004 3,102 Cash and cash equivalents 6,535 13,890 Borrowings 22 (88,004) (129,458) Finance leases 24 (527) (1,228) Total net debt (81,996) (116,796) Cash and cash equivalents, which are presented as a single class of assets on the face of the balance sheet, comprise cash at bank, short term deposits and other short term highly liquid investments with maturity of three months or less. Amounts held in short term deposits represent sums receivable from a customer that are required to be held in an Escrow account as security during the build stage of the service. They can only be withdrawn by the customer if the Group fails to deliver against specific contractual requirements after the Group has been given time to remedy such failure. 24 Obligations under finance leases and hire purchase contracts Consolidated Parent company Corporate governance Remuneration report Finance lease liabilities minimum lease payments: within one year between 1 and 5 years ,283 Future finance charges on finance leases (20) (55) Financial statements Present value of finance lease liabilities 527 1,228 The present value of finance lease liabilities is as follows: within one year between 1 and 5 years ,228 Shareholder information

74 70 Notes to the financial statements continued for the year ended 31 March Provisions for liabilities and charges Onerous leases Restructuring Total At 1 April ,738 3,792 9,530 Established in the year 4,103 4,103 Utilised in the year (2,460) (4,414) (6,874) At 31 March ,278 3,481 6,759 Total provisions for liabilities and charges Included in current liabilities 2,453 2,362 4,815 Included in non current liabilities 825 1,119 1,944 At 31 March ,278 3,481 6,759 Provision has been made for the estimated fair value of unavoidable lease payments on unoccupied buildings. It is expected that these payments will arise over the next one to seven years. This includes an amount arising out of a guarantee of liabilities under a lease of property entered into by a former subsidiary. The restructuring provision represents the future costs of the Group s ongoing restructuring programme which are committed to at the balance sheet date. 26 Deferred taxation assets Intangible Accelerated Other assets Retirement capital timing arising on benefit allowances differences acquisition obligation Total Consolidated At 1 April ,842 3,017 (4,513) 17,078 59,424 (Charged)/credited to the income statement (note 10) (2,518) 347 2,094 (1,400) (1,477) Charged directly to equity (258) (1,574) (1,832) At 31 March ,324 3,106 (2,419) 14,104 56,115 (Charged)/credited to the income statement (note 10) (11,536) 1,444 2,287 (2,970) (10,775) Charged directly to equity (710) (9,333) (10,043) At 31 March ,788 3,840 (132) 1,801 35,297 Parent company At 1 April ,078 17,078 Charged to the income statement (1,400) (1,400) Charged directly to equity (1,574) (1,574) At 31 March ,104 14,104 Charged to the income statement (4,771) (4,771) Charged directly to equity (9,333) (9,333) At 31 March 2011 The Parent company balance on deferred tax has been fully written off to the income statement following the transfer of liabilities associated with the Group s two defined benefit schemes to KCH (Holdings) Limited, a wholly owned subsidiary. For more details see note 31. The major components of the deferred taxation asset not recognised are as follows: Not recognised Losses 1,241 1,336 Deferred tax assets relating to accelerated capital allowances and short term timing differences of 30.3 million (2010: 41.3 million) have been recognised in those subsidiary companies in which there is sufficient available evidence that suitable taxable profits will arise against which these assets are expected to reverse. There are additional deferred tax assets of 1.3 million which have not been recognised, as there is insufficient evidence as to the generation of suitable profits against which these assets can be offset. The utilisation of these assets would reduce the Group s tax charge in future periods. All deferred tax assets and liabilities are provided for at the future rate of corporation tax being 26% (2010: 28%).

75 71 27 Called up share capital Overview Authorised 1,000 million ordinary shares of 10 pence each 100, ,000 Allotted, called up and fully paid 516,603,910 (2010: 516,603,910) ordinary shares of 10 pence each 51,660 51,660 During the financial year, the Company purchased 181,370 (2010: 2,580,000) of the Company s ordinary shares through purchases on the London Stock Exchange for a total cash consideration of 88,871 (2010: 826,000) to satisfy the 2007 LTRS release. The total amount paid to acquire the shares has been deducted from liabilities as this has been accrued for in prior years. 28 Share capital, share premium and reserves Share Hedging and Share premium translation Accumulated capital account reserve losses Total Consolidated At 1 April , ,231 (7,271) (377,001) 20,619 Employee share schemes 1,282 1,282 Purchase of ordinary shares (820) (820) Actuarial gain on defined benefit pension schemes 5,620 5,620 Tax on actuarial gain on defined pension schemes (1,574) (1,574) Decrease in fair value of financial derivative instruments Tax on movement in cash flow hedges (258) (258) Profit for the year 17,693 17,693 Dividends (7,725) (7,725) At 31 March , ,231 (6,351) (362,783) 35,757 Employee share schemes 2,027 2,027 Actuarial gain on defined benefit pension schemes 31,504 31,504 Tax on actuarial gain on defined pension schemes (9,333) (9,333) Decrease in fair value of financial derivative instruments 3,468 3,468 Tax credit relating to share schemes Tax on movement in cash flow hedges (936) (936) Profit for the year 22,621 22,621 Dividends (12,140) (12,140) At 31 March , ,231 (2,883) (328,814) 73,194 Share Share premium Retained capital account earnings Total Parent company At 1 April , ,231 23, ,051 Employee share schemes (286) (286) Purchase of ordinary shares (820) (820) Actuarial gain on defined benefit pension schemes 5,620 5,620 Tax on actuarial gain on defined pension schemes (1,574) (1,574) Profit for the year 35,179 35,179 Dividends (7,725) (7,725) At 31 March , ,231 53, ,445 Employee share schemes (222) (222) Actuarial gain on defined benefit pension schemes 31,504 31,504 Tax on actuarial gain on defined pension schemes (9,333) (9,333) Profit for the year 26,217 26,217 Dividends (12,140) (12,140) At 31 March , ,231 89, ,471 Business review Other disclosures Corporate governance Remuneration report Financial statements Shareholder information

76 72 Notes to the financial statements continued for the year ended 31 March Financial instruments and risk management The Group s principal financial instruments during the year comprised bank loans, cash on short term deposits, interest rate swaps and forward foreign exchange contracts. The main purpose of these financial instruments is to finance the Group s operations, to manage the interest rate risk arising from its sources of finance and to minimise the impact of fluctuations in exchange rates on future cash flows. The Group has various other financial instruments such as short term receivables and payables which arise directly from its operations. The Group regularly reviews its exposure to interest, liquidity and foreign currency risk. Where appropriate the Group will take action, in accordance with a Board approved Treasury Policy, to minimise the impact on the business of movements in interest rates and currency rates. The Group only enters into derivative instruments with members of the banking group to ensure appropriate counterparty credit quality. Liquidity risk The Group keeps its short, medium and long term funding requirements under constant review. Its policy is to have sufficient committed funds available to meet medium term requirements, with flexibility and headroom to make minor acquisitions for cash if the opportunity should arise. The Group s bank facilities were refinanced in November 2010 to replace the existing facilities. These bank facilities comprise a multi currency revolving credit facility of million, provided by a group of six core relationship banks. The facility matures in July The Group considers that this facility will provide sufficient funding to meet the organic investment needs of the business. In addition, short term flexibility of funding is available under the 10.0 million overdraft facility provided by the Group s clearing bankers. The net debt position of million at the beginning of the financial year has decreased during the year to net debt of 82.0 million. The Group generated positive cash flow from its operating activities after capital expenditure of 54.1 million for the year (2010: 57.0 million). The table below analyses the Group s financial liabilities which will be settled on a net basis into relevant maturity groupings based on the remaining period at the balance sheet date to the contractual maturity date. Notional interest is included for the period from the year end up to the contractual maturity date of the debt, calculated on the amount of debt drawn down at the year end. Less than One to Over one year three years three years At 31 March 2010 Borrowings 5, ,661 Finance leases Trade and other payables 137,953 Financial instruments 21 7,150 Provisions 6,007 3,523 Total 150, , At 31 March 2011 Borrowings 6,090 7,519 95,013 Finance leases Trade and other payables 142,636 Financial instruments 3,703 Provisions 4,815 1,944 Total 157,636 9,598 95,013 The table below sets out the year end fair value of derivative financial instruments by category: Assets Liabilities Assets Liabilities Interest rate swaps cash flow hedges 3,638 7,167 Forward foreign exchange contracts cash flow hedges 65 4 Total 3,703 7,171 Less non current portion: Interest rate swaps cash flow hedges 7,150 7,150 Current portion 3,703 21

77 73 29 Financial instruments and risk management continued Interest rate risks Sterling interest rate swaps were held during the year that fixed approximately 98% (2010: 69%) of the year end net debt. The weighted average fixed interest rate payable was 5.5% (2010: 5.5%). Maturity dates of the interest rate swaps are all January 2012 and reflect the forecast profile of net debt over the period. The weighted average period over which the interest rates are fixed is 0.8 years (2010: 1.8 years). Interest rate exposures will continue to be hedged in accordance with the Treasury Policy. The impact of an increase in interest rates of 100 basis points is shown in the following table: Reduction in profit before tax (9) 368 Increase in fair value of derivatives taken to equity (9) 1,424 Overview Business review The sensitivity of profit before tax is calculated based on floating rate borrowings at the balance sheet date, after deducting floating rate financial assets and amounts hedged into fixed rates by interest rate swaps. The Group entered into new interest rate hedging arrangements from 5 January 2012, the maturity date of existing hedges. An amount of 60.0 million was hedged to a maturity date of 31 July 2015 with four relationship banks at a weighted average rate of 2.71%. Foreign currency risk Cash flow exposure The Group s only major foreign currency risk arises due to the purchase of equipment invoiced in US Dollars. Whenever possible the Group resells this equipment in US Dollars. The remaining exposure is managed principally through the use of forward foreign exchange contracts in order to minimise the impact of fluctuations in exchange rates on future cash flows and gross margin. The Group also has some Euro cash flows but these are not material on a net basis and are not hedged. Net asset exposure The Dollar denominated trading described above results in a balance sheet exposure since debtor days are longer than creditor days. It is the Group s policy not to hedge this exposure. If Sterling strengthened by 5% against both the US Dollar and the Euro this would reduce net assets at the balance sheet date by Nil (2010: reduced by Nil). Credit risk Credit risk arises from cash and cash equivalents and derivative financial instruments, as well as credit exposures to business and retail customers. Credit ratings of institutions which hold the Group s financial assets are regularly monitored to ensure they meet the minimum credit criteria set by the Board through the Group Treasury Policy. At the year end all the institutions holding the Group s financial assets were rated A+/A 1 or higher by Standard and Poor s. The credit quality of customers is assessed by taking into account their financial position, past experience and other factors. Individual risk limits are set and the utilisation of credit limits monitored regularly. Interest rate risk profile of financial assets and financial liabilities Financial assets The Group had financial assets of 6.5 million at the year end (2010: 13.9 million), comprising cash on overnight money market deposits and cash at bank. This attracts floating rates of interest. The currency profile of the Group s financial assets at 31 March 2011 and 31 March 2010 was: Currency Sterling 5,660 13,036 US Dollar Euro Total 6,535 13,890 Foreign currency cash balances are held on a short term basis to fund cash flow requirements in these currencies. At the year end 1.3 million (2010: 1.8 million) of cash collateral was held by Barclays in respect of a bank guarantee given under OFCOM s Funds for Liabilities regulations. Other disclosures Corporate governance Remuneration report Financial statements Shareholder information

78 74 Notes to the financial statements continued for the year ended 31 March Financial instruments and risk management continued Interest rate risk profile of financial assets and financial liabilities continued Financial liabilities The currency and interest rate risk profile of the Group s financial borrowings at 31 March 2011 and 31 March 2010 was: Floating Fixed Total Floating Fixed Total Sterling 8,004 80,527 88,531 49,458 81, ,686 Undrawn committed borrowing facilities at the year end were million (2010: million). Interest on amounts drawn under the committed borrowing facility is based on the relevant LIBOR. Fair values of financial assets and financial liabilities The mark to market value of the interest rate swaps and forward contracts at 31 March 2011 was a liability of 3.7 million (2010: liability of 7.2 million). Interest rate swaps are accounted for by adjusting the interest cost on the floating debt return. The fair value of financial assets and financial liabilities is obtained from third party sources. The movement in mark to market value is reflected in reserves and is shown below: Hedging reserve 31 March 2010 (6,351) Movement in the year 3, March 2011 (2,883) The effectiveness of the interest rate swaps was tested quarterly throughout the period, and at the year end, and all are considered to be effective cash flow hedges. There are no other significant differences between the fair value of the Group s financial assets and liabilities and their book value. IFRS 7 requires disclosure of fair value measurements by level of the following fair value measurement hierarchy: quoted prices (unadjusted) in active markets for identical assets or liabilities (level 1); inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices) (level 2); and inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs) (level 3). All of the Group s financial instruments fall into hierarchy level 2. Capital risk management The Group s objectives when managing capital are to safeguard the Group s ability to continue as a going concern, support the growth of the business and to maintain an optimal capital structure to reduce the cost of capital. Consistent with others in the industry, the Group monitors capital on the basis of its gearing ratio. This ratio is calculated as net debt divided by total capital. Net debt is calculated as total borrowings (including current and non current borrowings as shown in the consolidated Balance sheet) less cash and cash equivalents. Total capital is shown in the table below, and is calculated as equity as shown in the consolidated Balance sheet plus net debt Net debt 81, ,796 Total equity 73,194 35,757 Total capital 155, ,553 Under the Group s million revolving credit facility the Group is required to comply with certain financial and non financial covenants annually. The Group is required to maintain a minimum interest cover ratio and a maximum net debt: EBITDA ratio. Both financial covenants were tested and complied with throughout the year and at the year end. The Board monitors both covenant compliance and net debt performance on a regular basis. 000

79 75 30 Financial commitments Authorised future capital expenditure and financial investment amounted to: Consolidated Parent company Overview Contracted The Group as lessee The future aggregate lease rental commitments under non cancellable operating leases were as follows: Consolidated Parent company Leasehold buildings: within 12 months 4,555 4,917 in 1 to 5 years 11,603 13,952 after 5 years 8,510 10,413 Total 24,668 29,282 Plant and equipment: within 12 months 2,145 1,388 in 1 to 5 years 2,657 1,533 Business review Other disclosures Total 4,802 2,921 None of the Group s lease arrangements include any contingent rent payments and there are no renewal or purchase options or escalation clauses. There are also no restrictions imposed by the Group s lease arrangements. 31 Retirement benefit obligation consolidated Defined contribution schemes The Company operates defined contribution schemes, which are open to all eligible employees. Contributions charged to the income statement in respect of defined contribution schemes amounted to 2.9 million (2010: 3.2 million). Defined benefit schemes The principal defined benefit scheme at 31 March 2011 was the Kingston Communications Pension Scheme, which is a funded scheme and provides defined benefits based on final pensionable salary. The assets of the scheme are held separately from the assets of the Group in trustee administered funds. The Company also operates a second funded defined benefit scheme, the Kingston Communications (Data) Pension Scheme. Both schemes are closed to new members. Parent company At 31 March 2011, the Parent company ceased to be the principal employer of both of the Group s defined benefit schemes, with KCH (Holdings) Limited, a wholly owned subsidiary of the Parent, becoming responsible for all obligations and liabilities of the schemes. As a result of this, the outstanding liability to the schemes at that date was released to the profit and loss account of the Parent company. An equivalent liability has been provided in the accounts of KCH (Holdings) Limited. At the same time as ceasing to be the principal employer, the Parent company provided a guarantee to both defined benefit schemes, whereby if KCH (Holdings) Limited is unable to meet its obligations to the schemes, such obligations would be met by the Parent company. No contingent liability has been recognised in respect of the guarantee at 31 March At 31 March 2010, the Parent company accounts reflected the full liability of both of the Group s defined benefit schemes of 50.4 million. Corporate governance Remuneration report Financial statements Shareholder information

80 76 Notes to the financial statements continued for the year ended 31 March Retirement benefit obligation consolidated continued Most recent valuations The most recent formal valuation for the Kingston Communications Pension Scheme was at 1 April The main long term financial assumptions used in that valuation were: Per annum % Rate of return on scheme assets 5.50 Rate of future salary inflation 4.90 Rate of future pension increases¹ On the excess over the guaranteed minimum pension. The most recent formal valuation for the Kingston Communications (Data) Pension Scheme was at 1 April The main long term financial assumptions used in that valuation were: Per annum % Rate of return on scheme assets 5.20 Rate of future salary inflation 4.90 Rate of future pension increases 3.90 The disclosures below are for the two schemes combined. Employer contributions for the year ended 31 March 2011 Contributions into the two defined benefit schemes during the year were as follows: Normal employee contributions 187 1,250 Past service costs 1,100 Deficit payments 9,773 3,247 Enhanced Transfer exercises 4,900 9,960 10,497 Effective from 1 April 2010, the Group increased its ongoing deficit contributions into both schemes for the next three years to 6.9 million per annum (previously 3.5 million per annum). The Group made also a one-off contribution of 3.3 million in the first half of the year ended 31 March 2011 into the Kingston Communications Pension Scheme, the Group s main defined benefit scheme. Main financial assumptions per annum per annum % % RPI Inflation CPI Inflation 2.60 Rate of general long term increase in salaries 4.50 Rate of increase to pensions in payment Discount rate for scheme liabilities Expected return on plan assets The UK Government announced in July 2010 that future increases in pensions would be linked to the Consumer Price Index (CPI), rather than the Retail Price Index (RPI). Under their respective rules, this impacts on certain pension increases in both schemes. In accordance with UTIF Abstract 48 this has been reflected as a change in assumptions, with the corresponding reduction in liabilities forming part of the overall actuarial gain of 31.5 million in the Statement of changes in shareholders equity.

81 77 31 Retirement benefit obligation consolidated continued Expected return on assets Long term rate of return expected at Overview 2011 Value at 2010 Value at per annum 2011 per annum 2010 % 000 % 000 Equities , ,845 Fixed interest gilts , ,374 Index linked gilts , ,200 Corporate bonds , ,274 Other , ,175 Business review Total fair value of assets 168, ,868 History of asset values, defined benefit obligation, deficit in scheme and experience gains and losses As at 31 March Present value of defined benefit obligation (175,716) (207,241) (196,005) (177,133) (187,760) Fair value of plan assets 168, , , , ,095 Deficit (6,927) (50,373) (60,993) (9,138) (12,665) Other disclosures Experience losses on plan assets (507) (33,350) (41,497) (15,658) (6,794) Experience gains/(losses) on plan liabilities 32,011 1,670 (1,653) (3,762) (2,892) The Group employs a building block approach in determining the long term rate of return on pension plan assets. Historical markets are studied and assets with higher volatility are assumed to generate higher returns consistent with widely accepted capital market principles. The overall expected rate of return on assets is derived by aggregating the expected return for each asset class over the actual asset allocation for the Scheme as at 31 March The mortality assumptions are based on standard mortality tables, which allow for future improvements in life expectancy. The effect of these tables are that: a future pensioner aged 65 at retirement will live on average to age 88.7 (2010: 87.2) if they are male and on average to age 90.4 (2010: 89.1) if they are female; and a current pensioner aged 65 will live on average to age 86.8 (2010: 89.5) if they are male and on average to age 88.6 (2010: 90.5) if they are female. The defined benefit obligation reflects the assumption that 20% (2010: 20%) of deferred members will transfer out of the Scheme over its life. Where such transfers take place, the value of such transfers are assumed to be 0% (2010: 0%) above the current IAS 19 value for individual members. Reconciliation of funded status to balance sheet Fair value of assets 168, ,868 Present value of funded defined benefit obligations (175,716) (207,241) Liability recognised on the balance sheet (6,927) (50,373) Analysis of income and expenditure charge: current service cost 644 1,578 past service cost 79 1,100 curtailment and settlement gain 1 (2,950) (1,734) interest cost 10,664 12,455 expected return on assets (10,419) (7,902) (Income)/expense recognised in income statement (1,982) 5, During the year ended 31 March 2011, the curtailment and settlement gain arose from the closure of the Group s two defined benefit schemes to future accrual and breaking the salary link. This has been treated as an exceptional item due to its incidence and size. At 31 March 2010, a curtailment gain of 1.7 million was recognised as a result of the TUPE transfer of employees to BT and Phoenix. Corporate governance Remuneration report Financial statements Shareholder information

82 78 Notes to the financial statements continued for the year ended 31 March Retirement benefit obligation consolidated continued Reconciliation of funded status to balance sheet continued Changes to the present value of the defined benefit obligation during the year Opening defined benefit obligation 207, ,005 Current service cost 644 1,578 Interest cost 10,664 12,455 Contributions by members Actuarial (gains)/losses on scheme liabilities (32,011) 27,730 Net benefits paid out (8,065) (30,246) Past service cost 79 1,100 Curtailment and settlement gain (2,950) (1,734) Closing defined benefit obligation 175, , Changes to the fair value of scheme assets Opening fair value of assets 156, ,012 Expected return on assets 10,419 7,902 Actuarial (losses)/gains (507) 33,350 Contributions by the employer 9,960 10,497 Contributions by members Net benefits paid out (8,065) (30,246) Closing fair value of assets 168, ,868 Actual return on plan assets Expected return on assets 10,419 7,902 Actuarial (losses)/gains (507) 33,350 Actual return on assets 9,912 41,252 Analysis of amounts recognised in Consolidated statement of comprehensive income Value at Value at Total actuarial gains in Consolidated statement of comprehensive income 31,504 5,620 Movement in related deferred tax asset (9,333) (1,574) Total gains in Consolidated statement of comprehensive income 22,171 4,046 Cumulative amount of losses recognised in Consolidated statement of comprehensive income gross of deferred tax (12,064) (43,568) Deferred tax asset 1,801 14,104 Cumulative amount of losses recognised in Consolidated statement of comprehensive income (10,263) (29,464) 32 Other commitments and contingent liabilities Contingent liabilities existed at 31 March 2011 in respect of guarantees given by the Parent company on behalf of subsidiary undertakings, together with contingencies arising in the normal course of the Group s business in respect of overdraft facilities. None of these guarantees are considered material in the context of the net assets of the Group. 33 Related party transactions Remuneration of key management personnel The remuneration of the Directors who are the key management personnel of KCOM Group PLC is provided in the audited part of the Directors remuneration report on pages 35 to 44. Intra Group transactions Amounts receivable by the Company from subsidiaries totalled Nil (2010: million) as at 31 March 2011.

83 79 Five year summary of consolidated figures as at 31 March Overview Income statement (total operations) Revenue 395, , , , ,195 EBITDA before exceptional items 75,963 69,795 65,141 69,300 70,972 Group operating profit before exceptional items 48,631 36,755 30,021 21,661 31,403 Profit after taxation before exceptional items 30,958 27,898 22,788 22,764 30,790 Profit/(loss) after taxation (reported) 22,621 17,693 (106,482) 18,776 23,969 Balance sheet Non current assets 242, , , , ,882 Current assets (excluding cash) 72,944 80,535 90, ,705 97,953 Current liabilities (excluding finance leases) (151,154) (143,981) (136,378) (156,165) (137,662) Net debt (including finance leases) (81,996) (116,796) (157,900) (168,905) (164,240) Provisions and other non current liabilities (excluding finance leases) (8,871) (61,046) (74,083) (12,078) (18,332) Total equity 73,194 35,757 20, , ,601 Movement in debt Net cash flow from: operating activities 68,009 74,612 62,260 49,997 59,128 capital expenditure (13,948) (17,595) (24,958) (31,172) (30,217) net proceeds/(purchase costs) associated with the purchase and sale of businesses (700) (43,064) interest (8,574) (7,302) (13,474) (11,164) (12,651) equity dividends paid (12,140) (7,725) (12,295) (11,540) (7,356) other 1,453 (1,036) (1,087) (86) (2,400) Reduction/(increase) in net debt 34,800 41,104 11,005 (4,665) (36,560) Ratios and other key information Average number of employees 1,801 2,094 2,312 2,617 2,693 EBITDA before exceptional items to revenue (%) Group operating profit before exceptional items to revenue (%) Basic earnings/(loss) per share (pence) (20.70) Dividend per share relating to the financial year (pence) Business review Other disclosures Corporate governance Remuneration report Financial statements Shareholder information

84 80 Shareholder information Analysis of ordinary shareholders (at 31 March 2011 by category) Number of Number of % of holders shares capital Private shareholders 60,313 53,467, Insurance company 2 89, Investment trust 6 88, Pension fund 1 1, Nominee companies ,785, Limited company 79 1,076, Bank and bank nominees 18 62,249, Other institutions , Financial calendar 61, ,603, Annual General Meeting 22 July 2011 Interim results 2011 announcement (provisional) 22 November 2011 Final results announcement (provisional) 22 May 2012 Information relating to beneficial owners of shares with information rights Please note that beneficial owners of shares who have been nominated by the registered holder of those shares to receive information rights under Section 146 of the Companies Act 2006 are required to direct all communications to the registered holder of their shares rather than to the Group s registrar, Capita Registrars, or to KCOM Group PLC directly. Company information Registered office KCOM Group PLC 37 Carr Lane Hull HU1 3RE Registered in England and Wales Company number Investor Relations KCOM Group PLC 37 Carr Lane Hull HU1 3RE investor.relations@kcom.com Tel: Website: Advisors Independent Auditors PricewaterhouseCoopers LLP Chartered Accountants and Statutory Auditors Benson House 33 Wellington Street Leeds LS1 4JP Registrar Capita Registrars Northern House Woodsome Park Fenay Bridge Huddersfield HD8 0GA shareholder.services@capitaregistrars.com Tel: Calls cost 10 pence per minute plus network charges Financial Advisors JP Morgan Cazenove 20 Moorgate London EC2R 6DA Liberum Capital CityPoint 10th Floor One Ropemaker Street London EC2Y 9HT

85 Glossary Financial Amortisation The allocation of cost of intangible assets to the Income Statement over time. Auditor An independent individual qualified to examine and provide an opinion on a company s financial and accounting records and supporting documents. Balance sheet A statement of the assets and liabilities of an organisation at a point in time (the year end of KCOM Group PLC is 31 March). Cash flow statement A summary of the money received and spent by the Group during the year. Capital expenditure (capex) Money spent to purchase new or upgrade existing physical assets such as equipment or property. Company KCOM Group PLC (formerly Kingston Communications (HULL) PLC). Current assets Assets held by the Group other than for long term use such as stocks, debtors and cash. Depreciation The allocation of cost of an asset to the Income Statement such as equipment or property because of general wear and tear over time. Dividend The income from a share investment that is given to shareholders out of a company s retained earnings. Earnings/(loss) per share This figure is calculated by dividing profits or losses attributable to members of the Company by the number of shares in issue. EBITDA (earnings before interest, tax, depreciation and amortisation) A measure of profitability, favoured by companies undergoing major investment programmes. It shows the profits before interest, tax, depreciation and amortisation are deducted. Exceptional items Transactions included in a company s income statement, which are outside the ordinary course of business such as profit or losses on the sale of an operation or costs of a fundamental organisation. Financial Reporting Council Guidance (formerly known as Turnbull Report) A report giving guidance to company directors on implementing Stock Exchange rules on internal controls and risk management. Goodwill The difference between what a company pays for another company and the fair value of the acquired assets of that company. Group KCOM Group PLC (formerly Kingston Communications (HULL) PLC) and all its operating businesses. Income statement A financial document showing the income, expenses and net profit or loss generated by an organisation over a given period of time. Intangible assets Items of value that cannot be physically touched, such as software, patents, licences or specific development costs. Investments Ownership interests held in other companies either for income or capital appreciation. Ordinary shares The principal type of shares bought by investors and representing part ownership of a company. Operating assets Items of value owned by a company that contribute to the regular income from its operations. Payables Amounts payable to suppliers and other organisations providing services to the Group. Property, plant and equipment A long term asset held for business use such as property, network and exchange equipment. Receivables Amounts which we have billed customers but not yet received. Retained earnings The final result for the year, after deducting tax, minority interests and dividends, which is then added to (or taken away from if it is a loss) total equity at the end of the year. Technology Broadband Network technology that allows the transmission of large amounts of data. Broadband internet Technology that enables faster internet access, and as a result allows services such as interactive digital TV, video conferencing and video. Converged communications Data and voice communications carried over a single IP network. Data Information sent across communications networks from computer to computer. ISP (Internet Service Provider) A company which provides users with access to the internet. Leased line A reliable, dedicated network connection offered at various speeds depending on the customer s requirements. Voice Fixed line or mobile telephone calls. Overview Business review Other disclosures Corporate governance Remuneration report Financial statements Shareholder information

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