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A year of successful business KCOM Group PLC Annual Report and Accounts 2009/10 Accounts and Report PLC Annual Group KCOM transformation and improved financial performance

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The KCOM Group is a leading provider of communications services to both consumer and business markets across the UK. Our aim is to help our customers exploit communications and associated technologies to improve the performance of their businesses Company information Registered office and organisations and to enhance their KCOM Group PLC 37 Carr Lane personal communications experience. Hull HU1 3RE Our success is built on solid foundations, Registered in England and Wales borne of our heritage in East Yorkshire where Company number we have more than 100 years experience 2150618 of providing telecommunications services. Investor Relations KCOM Group PLC 37 Carr Lane Hull HU1 3RE

Email: [email protected] Tel: 01482 602711

Website: www.kcomplc.com

Advisers Auditors PricewaterhouseCoopers LLP Benson House 33 Wellington Street Leeds LS1 4JP

Registrar Capita Registrars Northern House Woodsome Park Fenay Bridge Contents Huddersfield HD8 0GA

Introduction Independent Auditors’ report Email: [email protected] 01 Highlights 47 Independent Auditors’ report Tel: 0871 664 0300 02 Our businesses Calls cost 10p per minute plus network charges 04 Fact file: KC Financial statements 06 Fact file: Kcom 48 Consolidated income statement Financial Advisors 08 Chairman’s statement 48 Consolidated statement of JP Morgan Cazenove comprehensive income 20 Moorgate Review of Business 49 Balance sheets 09 Chairman’s Q&A 50 Consolidated statement of changes London EC2R 6DA 11 Key performance indicators in shareholders’ equity 51 Cash flow statements Liberum Capital Directors’ Report 52 Notes to the financial statements CityPoint 10th Floor 12 Business and financial review 70 Five year summary of consolidated figures One Ropemaker Street 14 Operational review London EC2Y 9HT 22 Risk management Shareholder information 24 Board of Directors 71 Glossary 26 Corporate and Social Responsibility 72 Analysis of Ordinary Shareholders 32 Corporate Governance 72 Financial calendar 73 Company information Remuneration 73 Advisers 37 Remuneration report Introduction 01

Highlights

The KCOM Group has achieved a number of significant milestones over the past financial year, all driven by the outcome of the strategic review undertaken in 2008. The emphasis has been to strengthen and underpin business fundamentals and to improve the quality of the Group’s activities, positioning the Group for profitable growth.

>> More efficient cost structure – the reduction >> Strengthened balance sheet – the higher rate in operating costs, together with the improved of cash conversion and sustainably lower levels balance of fixed and variable costs and lower capital of debt creates a stronger balance sheet and an expenditure requirement, creates a more efficient improved ability to meet all liabilities. and flexible cost structure. >> Lower capital risk – the reduced capital >> Sustainable revenue – exiting low value add, requirement underpins the sustainability of cash non-recurring services has helped create a more returns, reduces capital risk and together with the sustainable revenue base, with strong forward visibility. approach to partnering, creates more capacity >> Value added focus – the focus on recurring higher to invest in developing core strengths. quality revenues creates superior operating margins and >> Strengthened competitive position – the actions longer term, more sustainable customer relationships. taken all improve the competitive position of the >> Cash conversion – the changed mix of business, the Group and its ability to grow successfully. approach to strategic partnerships and a disciplined >> Improved returns to shareholders – the approach to working capital management, results in a sustainability of financial outcomes achieved offers higher rate of conversion of trading activities into cash. an improving outlook for total shareholder returns.

Revenue -12.6% Operating profit* +22.3% EBITDA* +7.2%

£472.4m £36.7m £69.8m £65.1m £412.8m £30.0m

2009 2010 2009 2010 2009 2010

Profit before tax* +64.2% Net debt -£41.1m Total dividend +0.25p

£29.4m £157.9m 1.75p** 1.50p £116.8m £17.9m

2009 2010 2009 2010 2009 2010

* Operating profit, EBITDA and Profit before tax are stated before exceptional items. ** Comprising proposed final dividend of 1.25 pence and interim dividend of 0.5 pence.

KCOM Group PLC Annual Report and Accounts 2009/10 02 Introduction

Our businesses What we do The KCOM Group is a leading provider of communications services to both consumer and business markets across the UK. We want to enable our customers to exploit the communications revolution to enhance their personal communications experience and to help businesses and organisations improve their performance.

KCOM Group operates through two principle business units:

Kingston Communications

Kcom

Our strategic relationships: BT and Phoenix IT new competitive propositions and Our strategic relationships Our strategic relationship with BT services throughout the UK. demonstrate our commitment to gives us extended market reach and focusing on the core activities that new services. By combining the The relationship means that BT help us to deliver the value added footprint of KCOM’s national network undertakes the management of our services our customers expect. with BT’s, we are able to offer an network and provides KCOM Group extended network reach and develop with access to BT’s network across

KCOM Group PLC Annual Report and Accounts 2009/10 Introduction 03

Our customers Our goal Our strategy We are passionate about serving our Our goal is to become an acknowledged In recent years the strategy of our Group customers. Our customers are at the leader in the markets we serve and has been driven by the changing centre of everything we do – we seek an automatic partner of choice for communications needs of our customers. to understand their requirements, match individual consumers and organisations As a result, we are successfully creating our capabilities and those of our partners in those markets. a trusted and profitable communication to their requirements and to deliver on services business. our promises better than the competition. By structuring our organisation around the markets we serve, we aim to deliver a high-quality customer experience, a key ingredient in the creation of long term, sustainable relationships.

The markets we serve:

Our Kingston Communications business provides >> Small businesses and consumers a range of communications services to businesses nationally through Eclipse and consumers in Hull and East Yorkshire. These are delivered through our KC brand. In the rest >> Businesses in Hull of the UK, we deliver a portfolio of internet based and East Yorkshire communications services to predominately smaller businesses and consumers through our Eclipse >> Consumers in Hull Internet brand. In addition, we provide a range of and East Yorkshire information services including contact handling services, directory enquiries and specialist directory publishing solutions.

Our Kcom business provides communications >> Public sector organisations services for enterprise and public sector organisations across the UK. As an independent >> Small, medium and large provider of these services, supported by our enterprises across the UK BT relationship, Kcom offers advanced network capability and related added value services, coupled with a flexible approach to meeting customers’ requirements.

the UK. Going forward, we will be able Our partnership with Phoenix gives us to offer our customers complete access to industry leading field service access to a set of differentiated Next engineering and maintainence Generation Network products and services, an integral and essential services based around BT’s 21st component of our propositions. Century Network programme.

KCOM Group PLC Annual Report and Accounts 2009/10 04 Introduction

Fact file: KC

Proud to be a part of local life

KC is proud to provide 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 is one of the founding UK providers of broadband internet. KC is consistently at the forefront of communications to deliver the best quality customer experience.

Our strategic focus: >> To grow revenues through new products and services, including bundled propositions and the roll out of a minimum broadband speed of 2Mbps to all customers. >> To achieve targeted geographic expansion. >> To establish a revitalised brand experience. >> To champion the Digital Agenda in the regeneration of Hull and East Yorkshire and to shape the future of broadband services.

Our customers: 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, free local directory enquiries and one of the fastest broadband services in the country. According to independent tests by broadband benchmarking company Epitiro, Karoo consistently offers the fastest speeds of any UK broadband provider.

KC Business recently launched KC Cloud, a range of services for businesses which deliver hosted Microsoft applications via a broadband connection. KC also delivers the fastest response and highest fix rate performance for local businesses in the country and is the UK’s largest wholesale directory enquiries (D2) provider.

The business has committed to a multi-million pound upgrade to the core network infrastructure in Hull and its surrounding areas to provide a platform for the launch of new products and services.

KC is committed to delivering on its corporate and social responsibilities to help to break the barriers to an inclusive society. We have a programme of activities designed to raise the aspirations of young people in the region. Using our skills and technology, we believe we have the opportunity to make a real difference to the local community.

Further information: >> The new KC brand was launched in May 2010. >> KC is part of the Kingston Communications reporting section, which includes also Eclipse Internet. >> To find out more about KC and its activities, go to www.k-c.com

KCOM Group PLC Annual Report and Accounts 2009/10 Introduction 05

KC Home KC Business KC (Hull) Colour Pages KC Contact Centre Services

Karoo Hosting Colour Pages DQ Services KC Talk KC Cloud Services White Pages Outsourced Contact Centre solutions Hosted IP Telephony Online Pages

KCOM Group PLC Annual Report and Accounts 2009/10 06 Introduction

Fact file: Kcom

We aim to lead the market in the management of critical communications

Kcom is dedicated to helping customers realise their ambitions by taking care of their critical communications so they are free to think, plan and progress. We understand that our customers’ success relies upon them having the freedom to concentrate on their business and not being caught up in technology issues. We take the time to understand the business goals of our customers and deliver tailored solutions that meet their needs.

Our strategic focus: >> To lead the market in the delivery of Managed Communications Services. >> To achieve significant revenue and margin growth by introducing compelling communications-based propositions and services to the market that leverage our relationship with BT, our managed services capability and our expertise in specific customer verticals. >> To differentiate ourselves in the market by delivering an industry leading customer experience. >> To transform our internal operational processes and systems, to drive efficiencies and underpin the delivery of a differentiated customer experience. >> To become a business renowned for uniting, energising and inspiring its employees to deliver a best in class experience for its customers.

Our customers: Our focus is on multi-site private and public sector organisations that have complex networking requirements but often lack IT resources in their own businesses to meet their increasingly complex communications needs.

The outsourcing of our network to BT gives us extensive network reach in the UK, access to new customers and allows us to focus on the experience we deliver our customers.

Further information: >> The Kcom brand was launched in November 2009. >> Kcom is part of the Kcom reporting segment which includes also Smart421. >> For more information about Kcom and its activities, go to www.kcom.com.

KCOM Group PLC Annual Report and Accounts 2009/10 Introduction 07

Time to create tomorrow

Enterprise Public sector Channel partners

Businesses with single Organisations delivering Communication Providers, or multi-site locations public services Media Solutions and Carrier Partners Large organisations with complex requirements Kcom Capabilities

Connectivity Communications Contract Centre Hosting Managed Advisory Solutions & Collaboration Solutions Services Services Services

LAN Communications Inbound contact Infrastructure Managed WAN Business IT platforms hosting consultancy WAN Proactive contact Managed LAN Unified Hosted back up Advanced Internet access Self service Managed security communications and recovery professional Mobile services Workforce Managed contact services Mobility solutions Hosted Voice services optimisation centre Collaborative applications Lifestyle services Desktop applications Hosted integration Customer training collaboration

KCOM Group PLC Annual Report and Accounts 2009/10 08 Introduction

Chairman’s statement

Dear Shareholder

Our emphasis this past year was to strengthen and “We will stay focused on our remaining underpin business fundamentals, to continue to improve milestones... this year gives us confidence the quality of the Group’s activities and position the Group for future profitable growth and increasing shareholder for the future.” value. Our results show positive progress in all those Bill Halbert Executive Chairman respects. The actions we have taken see the Group begin the new financial year in a stronger competitive and financial position, with a simplified business In March, we announced an agreement with Phoenix structure and a clear strategic focus. IT Group, a market leading provider of maintenance services. Their nationwide scope and scale enhances The transformation of the Group began with the strategic both the coverage and levels of service we are able to review in 2008. Good progress has been made, but we offer our customers. are not yet complete. Through the coming year we will remain focused on our remaining milestones. However, the Those new agreements, alongside existing strong performance this year gives us confidence for the future and relationships with our vendor partners such as Cisco, consequently your Board is recommending a final dividend Microsoft and Avaya, mean we are able now to offer of 1.25 pence. a unique and competitive range of services to our target customers. Progress during the year During the first half of the year, we created our two newly Looking forward focused business units – our managed communications Whilst we have simplified the business, improved its business, Kcom, including our Kcom brand and Smart421, profitability and reduced the level of debt, we still have positioned to target multisite national businesses and public more to do. We will be seeking to improve further sector organisations and Kingston Communications, which the overall performance of the Group ahead of our includes KC, our East Yorkshire based business which scheduled re-financing this year. provides telephone and internet services and Eclipse, our national ISP, both operating in a mass market environment. In particular we will be focused on:

This new structure is designed to provide our customers, >> Building on our reputation for service excellence partners, employees and investors with a clearer >> Improving operational execution within the business understanding of our capabilities and strategic focus. >> Growing both our Kcom and Kingston Communications Supported by two key strategic agreements with market businesses in their target markets leading organisations, the Group’s competitive position >> Continuing to strengthen the financial position of has strengthened considerably. the Group, including the introduction of new pension arrangements across the business Our partners The first of those strategic agreements was signed in I would like to thank everyone within KCOM Group for June last year. BT Wholesale is now responsible for the their determination and commitment over the past year. management of and, where needed, investment in our This has been a challenging time for the Group, but we national network infrastructure. This relationship gives us have achieved a great deal in a relatively short time. not only comprehensive national coverage, but also access to BT’s 21st Century Network products and services. Our financial results show an improved performance for the Group; stronger margins, greater profitability, improved From a financial perspective, it removes the burden cash flows and substantially lower levels of debt. We look of investing in next generation network capability for forward to building on this solid foundation. our national network and makes our cost base much more flexible. Bill Halbert Executive Chairman

KCOM Group PLC Annual Report and Accounts 2009/10 Review of Business 09

Chairman’s Q&A

Q: How would you sum up the past year’s activities? and access to next generation network technologies, products and services, without the investment. A: Challenging, focused and successful. The strategic review we undertook in 2008 helped us identify the actions We announced more recently our agreement also with we needed to take to put the Group into a healthy, stable Phoenix IT Group, to provide field engineering services position. Over the last year, we’ve made some of the most to customers on our behalf. important changes needed and, I’m pleased to say, that these have been successful. Now we are beginning the second year of our transformation plan and there is more to do, but the It is testament to the creativity and determination of past year has seen substantial progress and puts everyone across the Group that we have been able to us in a strong position. deliver such progress in a relatively short period of time. Q: You said this was a two year transformation. Q: What sort of activities have you been undertaking? What lies ahead for the next twelve months?

A: From the strategic review, we identified two levels of A: We have some remaining key milestones to achieve. action – firstly, those needed to deliver improved short term Firstly, we are due to re-finance the business this year. financial results and to strengthen our underlying financial We want to be in as strong a position as possible to position. These were primarily concerned with cost reduction secure the necessary funding on the best possible and realignment and exiting low margin business activities. terms. That means further management of our debt and generating profitable growth. The second set of actions was concerned with building a sustainable business. This involved having a clear focus, We have also a tri-annual valuation due for our main restructuring and reorganising and putting in place key defined benefit scheme, which was closed to new partnerships to support and complement our core members in the mid 1990s. As you would expect, this competencies and strengths while enhancing our scheme is in deficit and we are pleased to have reached competitive position. an in principle agreement with the Trustees, on funding for the next three years. Q: What have you achieved so far? In order to limit the continuing exposure of the business A: As our results show, we’ve made considerable progress to such risks and uncertainties, particularly the ability of financially. We have achieved a substantial reduction in the this deficit to grow in the future, and to harmonise pension overall cost base of the Group, turned a material amount of arrangements for all our people, we have undertaken fixed cost into variable cost, reduced the Group’s capital a consultation with all our employees. We are planning expenditure requirements, reduced working capital and its to move to a single Group pension scheme, closing all volatility, improved both cash conversion and collection and our existing schemes to future accrual. This will reduce made a very significant reduction in the Group’s net debt. significantly those risks and allow us to introduce an affordable and fairer, more equitable scheme for all In terms of creating a platform for growth and a sustainable our employees. business, most of the main building blocks of a successful transformation are now in place. We have restructured the Finally, of course, there is the process of continuous business into two units, each with a clear market focus, improvement, investing for example, in our processes making the business simpler and easier to understand and and systems, in order to keep raising the bar in terms operate more cost effectively. We have focused those units of customer service. on their core competitive strengths and underpinned them with market leading strategic relationships.

First, we announced our agreement with BT, a relationship that has already made a clear difference both financially and strategically to the Group. Not only do we no longer have the financial burden of investing in our own national network, but we have access to extensive national network reach

KCOM Group PLC Annual Report and Accounts 2009/10 10 Review of Business

Chairman’s Q&A continued

Q: The strategic review was motivated primarily as a accept is set to decline gradually, albeit over a long period result of poor performance in the national business of time. That core service will continue to be the backbone activities. Are you confident that the changes made of KC well into the future, but does not mean there are no can turn that business around? other growth opportunities available. The introduction of new products and services and controlled expansion of A: Yes, we have formed our new Kcom business, coverage, offer the ability for KC to grow in future years. underpinning it with a lower and more flexible cost structure and the key relationships with BT and Phoenix. Its position Over the last six months, KC has launched a range of is now transformed from that of a year earlier. From a new offerings for both consumers and businesses – new financial perspective, the changes we have made are broadband packages, hosted services and data back-up. delivering higher margins, and generating more cash, We have committed also an investment of £2.8 million to despite the lower revenue that has resulted from our upgrade the IP core of the network, which will increase the decision to exit commodity activities. resilience of our Karoo broadband service and provide a platform on which to launch new services. In the autumn, Our focus for Kcom is on building longer term, value added the KC team is hoping to launch bundled consumer services, relationships with our target customers, where we are subject to the regulator Ofcom granting permission. measured on our ability to support their business and on the level of service we provide. We are no longer engaged In terms of geography, the business has a strong market in low margin commoditised activities, such as simple share within its original licensed area of Hull and some product resale. Now we have a stronger, higher quality surrounding parts of East Yorkshire, but there are clear value added services business. opportunities to stretch the brand out into other parts of the region. Some of those adjacent areas are typically Q: Do you think Kcom can compete in that market? underserved by other competitors in the market. Our relationship with BT will benefit KC here, as we A: We have a great opportunity now to provide a range can address these markets in a cost effective way. of services to multi-site national organisations, in multiple sectors including retail, manufacturing, financial services Q: At the last AGM, you took on the role of Executive and the public sector. Chairman for a period of two years. What is the plan after that? Through our relationship with BT, we can provide network connectivity and carrier services across the UK very A: Clearly that is a question for Shareholders and the Board competitively, which means we can link branch offices rather than me! When I became Executive Chairman, across the country. This, coupled with our key strengths acknowledging both the needs of the business and good and competencies, means we can create propositions to governance, we committed that the combined role would suit customers’ requirements including hosting, contact be in place only for the two year transformation period, centre solutions, applications integration and support in and would subsequently be reviewed. Again, subject to navigating the way through an increasingly rich and shareholder agreement, we would then assume the complex communications mix. more traditional Board structure. My personal focus and commitment is on delivering our transformation plan, In response to our customers’ needs, we are developing the core objective of which is shareholder value. offerings specific to market sectors, helping solve the business and communications challenges being faced Q: How would you sum up the focus for this year? – handling customer calls effectively, reducing costs and improving internal collaboration and flexibility. The signs A: While we have some key milestones to be achieved are that organisations are looking increasingly for the in this second year of the plan, our emphasis turns to level of service that we can now provide. growth. Over the past 12 months, we’ve built the foundations of a strong and profitable business, and now Q: Kcom is clearly a growth part of the business. we have to grow it. Our commitment at the time of the What about KC? strategic review was to generate increased shareholder value, and we remain committed to continuing to deliver A: Our KC business has grown successfully on the back on that promise. of its fixed line telephone service, a service which we all

KCOM Group PLC Annual Report and Accounts 2009/10 Review of Business 11

Key performance indicators

Category Indicator 2010 2009

Financial Group •• Revenue (£m) 412.8 472.4 •• EBITDA before exceptionals (£m) 69.8 65.1 •• Net cash inflow from operations (£m) 74.6 62.3 •• Net debt (£m) 116.8 157.9

Kingston Communications •• Revenue (£m) 123.5 128.0 •• EBITDA before exceptionals (£m) 57.3 57.9 •• EBITDA margin to revenue 46.4% 45.2%

Kcom •• Revenue (£m) 291.0 345.6 •• EBITDA before exceptionals (£m) 22.7 14.2 •• EBITDA margin to revenue 7.8% 4.1%

Employees Breakdown by age group Aged 16-25 9% 9% Aged 26-45 65% 64% Aged 46+ 26% 27%

Employee turnover 7.3% 10.9%

Number of training days per year 3,338 4,314

KCOM Group PLC Annual Report and Accounts 2009/10 12 Directors’ Report

Business and financial review

Group overview The increase in EBITDA reflects the higher profitability of retained KCOM Group has achieved a number of significant milestones customer relationships, in addition to a reduction in the cost base over the last financial year, all driven by the outcome of the strategic across the Group. The simplified operating model that has been review. The emphasis has been to strengthen and underpin business established as a result of actions taken by the Board ensures revenue fundamentals, to continue the improvement in the quality of the growth can be achieved with much smaller increases in cost. Group’s activities and to position the Group for profitable growth. Continued strong working capital management coupled with lower This is in support of our overriding objective of increasing shareholder overall borrowing costs has seen net financing costs reduce by value. During the financial year, we have delivered: £4.7 million to £7.4 million (2009: £12.1 million).

>> Clear Group business model – we have created two clearly Group profit before taxation and exceptional items has increased focused business units; Kingston Communications which includes £11.5 million to £29.4 million (2009: £17.9 million) reflecting the the KC and Eclipse Internet brands (addressing the needs of our improvement in EBITDA and lower financing costs. East Yorkshire customers and UK small business market) and Kcom, our managed communications business, including Net debt has reduced to £116.8 million (2009: £157.9 million) reflecting Smart421, (serving enterprise and public sector organisations). a combination of the reduction in product only sales (and associated >> An extension in both the reach and range of our working capital unwind), improved supplier terms, strong receivables communications services – our agreements with BT Wholesale management and the underlying cash generative nature of the Group’s and Phoenix IT Group give us access to extensive national network activities. The Group has consistently over performed during the year coverage and market leading products and field support services. in the management of receivables and working capital. >> A significant reduction in the ongoing capital investment and fixed cost requirements of the business – we no longer have PLC and associated costs (‘PLC’) a requirement to make large, ongoing investments in our national This segment includes Public Company, central and share scheme network infrastructure. This provides us with the opportunity and expenses and the costs, excluding current and past service costs, flexibility to invest in developing further our core strengths. associated with the Group’s defined benefit pension schemes. The net >> Tightened focus – we have re-positioned the Kcom business, costs from the PLC segment amounted to £10.2 million (2009 restated: moving it away from lower margin products and services. We now £7.0 million). The increase is due to a pension charge of £4.6 million focus on those activities that our customers value most and where (2009: £1.2 million) which represents the net cost of the interest charge we have market leading expertise. These include hosted and on plan liabilities and the expected return on scheme assets, driven managed services and applications and contact centre integration. mainly by the fall in value of assets within the scheme at March 2009 and a lower assumption on the expected return on assets. Outlook While the focus for the past financial year was to improve the overall PLC also includes a credit from a pension curtailment gain of quality of our activities and to strengthen our financial position, it is £1.7 million (2009: £Nil) which has arisen due to the TUPE transfer of now time for us to shift our emphasis, during the coming year. employees to BT and Phoenix during the year. This credit is broadly equivalent to a £1.5 million credit that arose in the prior year due to a Our aims for this year are to return to growth and to provide medium release of provisions held in respect of Group long term incentive plans. term certainty around our pension funding position. At the same time, we will continue to improve the overall financial position of the Group Group Operating Profit through an appropriate combination of measures, including debt and Group operating profit before exceptional items has increased 22.3 working capital management and expenditure control. per cent to £36.7 million (2009: £30 million).

Group financial overview Group operating profit is £26.5 million (2009: loss of £99.2 million). The Group revenue has reduced by 12.6 per cent to £412.8 million (2009: overall movement in Group operating profit of £125.7 million is a result of: £472.4 million), reflecting the decision to exit low margin services and focus on services that deliver higher margin recurring revenue. >> £4.6 million improvement in Group EBITDA before exceptional items >> £106.9 million exceptional cost incurred in 2009 in respect of the Despite the planned reduction in revenue, Group EBITDA before impairment of goodwill exceptional items has increased to £69.8 million (2009: £65.1 million). >> £12.1 million reduction in other exceptional costs Included within EBITDA is £4.6 million (2009: £0.4 million) of costs in >> £2.1 million reduction in depreciation and amortisation respect of pensions (IAS 19) and share schemes. Excluding these, EBITDA has increased to £74.4 million (2009: £65.5 million).

KCOM Group PLC Annual Report and Accounts 2009/10 Directors’ Report 13

The £106.9 million impairment arose at September 2008. The Board Pension Scheme has undertaken a review of the residual carrying value of goodwill at Net liabilities associated with the Group’s retirement benefit obligations the year end and as a result of the actions taken over the last eighteen have reduced to £50.4 million (2009: £61.0 million). This reduction months, has concluded that no further impairment is required. arises as a result of an increase in scheme assets of £21.9 million offset by an increase in retirement benefit liabilities of £11.3 million. Other exceptional costs amount to £10.2 million (2009: £22.3 million) and comprise: The increase in the valuation of scheme liabilities is a result of the reduction in discount rate to 5.6 per cent (2009: 6.5 per cent) due >> £5.0 million (2009: £12.6 million) of restructuring costs relating to falling yields on AA corporate bonds. to employees. >> £2.1 million (2009: £Nil) loss arising on the disposal of Aghoco Both the movement in assets and liabilities are net of the impact of 1000 Ltd to Phoenix IT Group. The subsidiary contained certain the enhanced transfer value exercise, which resulted in a one-off customer contracts and working capital associated with field contribution into the Kingston Communications Pension Scheme engineering services. of £4.9 million. >> £1.1 million (2009: £1.8 million) of other restructuring costs relating to one-off expenses associated with activities to transform the As a result of the TUPE transfer of staff to BT and Phoenix, a Group, including costs associated with establishing the strategic curtailment gain of £1.7 million (2009: £Nil) has arisen. This has relationship with BT and re-branding. been fully recognised in the Income Statement during the year. >> £2.0 million (2009: £7.0 million) in respect of provisions for onerous leases. The tri-annual valuation of the Kingston Communications Pension Scheme commenced on 1 April 2010. Meanwhile, we are in active and As part of the transformation activities, the Group has continued to constructive dialogue with the Trustees to agree an appropriate funding review the number of properties required for operational purposes, with plan which addresses the need to reduce the current deficit. We have £1.5 million of the charge reflecting the decision to exit further leasehold reached an in principle agreement, subject to the final outcome of properties during the year. In addition the Group has managed to sub-let the actuarial valuation, that the Group will make total deficit repair or surrender a number of previously vacant properties which has led to an payments to this Scheme of £21 million over the three years to March additional charge of £0.5 million against assumptions previously made, but 2013 (current deficit funding is £2.9 million per annum). In parallel, we in all cases leads to an overall reduction in the cash liabilities of the Group. are in consultation on proposals to close the Group’s two defined benefit pension schemes to future accrual whilst breaking the link to Depreciation and amortisation has reduced by 6.0 per cent to £33.0 final salary alongside other changes to our pension arrangements. million (2009: £35.1 million), with depreciation broadly consistent at £20.1 million (2009: £20.3 million). Amortisation of intangible assets Balance Sheet has fallen to £12.9 million (2009: £14.8 million), of which amortisation of The increase in total consolidated equity to £35.8 million (2009: intangibles relating to acquisitions has fallen to £7.5 million (2009: £8.4 £20.6 million) primarily results from the profit after tax for the year million). At the year end, the net book value of intangibles arising on and the reduction in net liabilities associated with the Group’s acquisition amounts to £6.0 million (2009: £13.5 million). These will be pension schemes. fully charged to the Income Statement by 31 March 2014. The balance of amortisation of intangibles relates to software and development Cash flow and net debt costs. This has reduced to £5.4 million (2009: £6.4 million), reflecting Net debt has reduced to £116.8 million (2009: £157.9 million) due the reduction in capital spend over historic levels. to strong net cash inflow from operations of £74.6 million (2009: £62.3 million). This improvement in operating cashflow is despite Finance costs cash outgoings in respect of exceptional costs of £14.9 million (2009: Net finance costs for the year amounted to £7.4 million (2009: £7.7 million) and £4.9 million (2009: £Nil) paid on the pension scheme £12.1 million) reflecting both the lower level of net bank debt and lower enhanced transfer exercise. The improvement in working capital borrowing costs. In order to provide certainty over future costs, the across the year reflects the actions taken, in particular the reduction Group had previously entered into fixed rate swap agreements with in product resale. This has lead to a permanent reduction in the £80 million of debt at a fixed interest rate until 31 March 2012. absolute level of working capital required by the Group and the level of volatility within and between months. In addition, the year Taxation end debt position benefits from consistent second half over The taxation charge of £1.5 million (2009: £4.9 million credit to the performance in the management of trade receivables. Income Statement) reflects the ongoing unwind of the deferred taxation asset as the Group moves towards a tax payment position. Cash outflows associated with the purchase of tangible and intangible assets have reduced to £17.6 million (2009: £24.8 million) reflecting Dividend the benefits of lower capital spend through our partnership with BT, The Board is proposing a final dividend of 1.25 pence per share continued focus over capital spend as part of the drive to reduce debt (2009: 1.0 pence per share) resulting in a total dividend for the year and delayed payments relating to various capital projects amounting of 1.75 pence per share (2009: 1.5 pence per share). to approximately £2.0 million.

Subject to Shareholder approval at the KCOM Group PLC Annual General Meeting on 16 July 2010, the final dividend will be payable on 30 July to Shareholders registered at the close of business on 18 June 2010.

KCOM Group PLC Annual Report and Accounts 2009/10 14 Directors’ Report

Operational review Kingston Communications

Kingston Communications (‘Kingston’) The Kingston reporting segment includes the financial results of the Hull and East Yorkshire Licensed Area activities, the Eclipse Internet business (‘Eclipse’) and the Information Services business. The Kingston results have been historically reported under the Telecoms and Internet and Information Services segments.

Kingston Communications has refreshed its brand identity, adopting the brand KC for its East Yorkshire activities. East Riding College This reflects the renewed focus and opportunities for The challenge: East Riding College growth available to the business. wanted to bring together all their methods of communication to facilitate improved Overall the Kingston businesses have reported a 3.5 per internal collaboration between employees. cent decline in revenue to £123.5 million (2009 restated: £128.0 million). This reduction is primarily driven by Eclipse The solution: KC Business and Kcom consultants recommended the use of and Information Services. In the Hull and East Yorkshire Microsoft Unified Communications centred market, decline in fixed line call volumes consistent with on their Office Communication Server trends across the entire UK market have been offset by (OCS). This enables the college to integrate gains in revenue from broadband and data services. traditional telephony services such as dial-in conference calls with IP network EBITDA before exceptional items has reduced by 1 per based facilities such as instant messaging cent to £57.3 million (2009 restated: £57.9 million). This is capabilities. This has significantly reduced as a result of a £0.5 million reduction from the contribution costs, through reducing the need for travel of the Information Services business following a reduction and telephone calls. It has also led to in outsourced Directory Enquiry volumes and the renewal improved communication within project teams because callers can see availability of a specific contact centre contract. of intended recipients. For KC, there are three areas of focus, designed to achieve “We realise that a single unified platform for growth for the business: communications is the best way forward for the college... providing every member of staff >> Development and deployment of new services – with unified messaging capability, improving The focus and investment within our East Yorkshire communication and productivity.” network has been concerned with delivering a platform for future product and service enhancements. As Steve Bucknall IT Manager at East Riding College announced at the interim results, we have started to implement a £2.8 million IP Core upgrade programme, designed to improve network performance and facilitate new services. Examples of new services include a wider range of Karoo broadband packages to address the differing requirements of customers and KC Cloud, a range of services for businesses which deliver Microsoft applications via a broadband connection.

KCOM Group PLC Annual Report and Accounts 2009/10 Directors’ Report 15

“Kingston Communications has refreshed its brand identity... to reflect the renewed focus and opportunities for growth available to the business.” Kevin Walsh Executive Director

>> Expansion of geographic reach – There is a clear opportunity for our KC business to grow through expansion into targeted nearby geographic locations either through Karoo customer network investment or via our partnership with BT. The challenge: In line with the rest of the UK, >> Bundling of consumer and business services – broadband customers are increasing the We are in active consultation with Ofcom regarding our amount of material they download and are request to offer bundled internet and telephony services to looking for ISP providers that can support increased usage at a competitive price. customers in East Yorkshire. Subject to their agreement, our aim is to start offering these services in the autumn. The solution: KC provides 98 per cent of its customers with access to faster ADSL2+ broadband services, that can achieve speeds of up to 24Mbps, compared to approximately 60 per cent availability in the rest of the UK. In the past financial year, KC has delivered six new and improved download packages.

“We don’t have to worry about how much we’re downloading anymore, which is fantastic. It is important people have a choice of packages to meet their needs. Karoo Internet has always been very quick.” KC Talk The challenge: Mr and Mrs Wilson had Lee Jenkinson moved to the Hull area and wanted a Karoo customer, Hull telephone line installation with broadband.

The solution: Having called the KC customer service team to discuss their requirements, their telephone and broadband packages were connected quickly and with minimum disruption.

“It is with great appreciation and thanks that this letter is being sent to congratulate your staff in all departments concerned with our connections and for the fantastic teamwork that was evident in getting us online. The service we received was excellent, first class and your staff are a credit to the company.”

Mr and Mrs Wilson New telecommunications and broadband customers

KCOM Group PLC Annual Report and Accounts 2009/10 16 Directors’ Report

Operational review continued Kcom

Kcom The Kcom reporting segment comprises the financial results of the newly created Kcom managed communications services brand (‘Kcom’), and the Smart421 business (‘Smart’). These results were previously reported as Integration and Managed Services, with the mid-market enterprise activities previously included in the Telecoms and Internet Services segment.

As expected following the decision to cease product only sales, reported revenue shows a 15.8 per cent Daisy Group decline to £291.0 million (2009 restated: £345.6 million). The challenge: Daisy wanted to achieve This reduction relates to the planned exit of product operational efficiencies and a higher degree and associated field engineering services. of automation for number translation services (NTS). EBITDA before exceptional items increased to £22.7 million (2009 restated: £14.2 million). This EBITDA improvement The solution: Kcom will provide Daisy with inbound call handling and routing services reflects the significant steps taken to reduce the cost via Myriad, Kcom’s advanced call routing base, including the 150 employee headcount reduction and voice response platform. Daisy will undertaken in January 2009 and the development of use the flexibility of the Myriad platform to the strategic relationship with BT. develop their own range of inbound call solutions and meet the ever evolving Kcom has been at the centre of the transformation activities requirements of their customers. identified during the strategic review and now has a clear focus in the following areas: “For the first time our customers will have access to their own portal that will allow >> Key customer segments – Kcom is able to offer a them to make moves, adds and changes to their NTS services, making the process range of managed communication services to its target more simple.” markets, namely mid-market and enterprise scale customers in the public and private sectors. These are Gareth Kirkwood typically multi-site UK organisations. We have been Chief Operating Officer, Daisy Group particularly successful within the retail, automotive, police and local government segments. >> Development of tailored propositions – By leveraging our relationship with BT Wholesale (BTW) and combining it with Kcom’s extensive service capabilities we are able to provide complete communication services ranging from managed connectivity to collaborative solutions in areas such as customer interaction, social media and cloud services. >> Customer Experience – Kcom differentiates itself by being innovative and responsive with its customers and is committed to providing them with the best service experience available in the industry.

KCOM Group PLC Annual Report and Accounts 2009/10 Directors’ Report 17

“We have a clear focus on our core customers by developing tailored propositions and leveraging our relationship with BT.” Paul Renucci Executive Director

Hermes The challenge: Hermes was moving location and needed a partner to provide network infrastructure and a call centre at their new site. They needed also help to migrate 270 people to the new location.

The solution: Kcom helped enable the seamless transition to the new office including the provision of a LAN infrastructure, back office IP telephony and IP contact centre capability within a tight timescale. The new technical capabilities provided by the new systems have created a springboard for Hermes making it possible to train staff more proficiently and more cost-effectively. This has enabled Hermes to be pro-active, operating University Hospital of North Staffordshire in a more efficient style, working smarter. The challenge: Two newly-built hospitals in Staffordshire required a new communications “Kcom was chosen because of its infrastructure, that was highly-efficient and reputation, experience and commitment flexible enough to meet future needs. to the task. We knew the team would go the extra mile.” The solution: As part of a Private Finance Initiative, Kcom delivered the voice and data Simon Townley services to approximately 5,000 users at the Head of Infrastructure, Hermes new hospitals as a managed service. This is a flexible solution allowing extra services to be added when required, at a predictable cost. The new maternity and oncology units’ networks include wireless technology allowing x-rays and scan images to be shown at the bedside, improving patient care.

“Kcom’s managed service has allowed us to focus on our priorities, providing first-rate care to our patients.”

Lorraine Whitehead Deputy Director of Corporate Services

KCOM Group PLC Annual Report and Accounts 2009/10 18 Directors’ Report

Operational review continued

This section provides information about the way we operate represented nil days of trade purchases (2009: Nil days). and manage our business. It includes information on financial Group creditor days represented 54 days (2009: 51 days). and risk management and governance. Charitable and political donations Disclosure of all relevant information to auditors The Group made a number of charitable donations The Directors who approved this Report are satisfied that throughout the year to support community organisations there is no relevant audit information (as defined in the and initiatives totalling £12,189 (2009: £9,190). No political Companies Act 2006) of which the Company’s auditors donations were made. are unaware. Each of the Directors has taken all reasonable steps to make themselves aware of any relevant audit In addition to the figure quoted above, the Group information and to establish that the Company’s auditors undertakes sponsorship and support activities with are aware of that information. organisations across the UK. We also funded a number of employee and customer activities as part of our support Going concern of Children’s Hospices UK, our Group charity of the year The Directors confirm that, having reviewed the Group’s for 2009/10. Together we raised £40,127 for the charity. budget and forecasts, they consider that the Group has adequate resources to continue in operational existence for Shares and interests the foreseeable future. Accordingly they continue to adopt the No shareholder has waived or agreed to waive any dividends going concern basis in preparing the financial statements. or future dividends during the period under review. There are no other disclosable share interests notified to the Company Directors and Directors’ Interests as at 7 June 2010. During the year, the Company purchased The names and biographical details of the Directors of shares on the London Stock Exchange in order to meet the Company at 31 March 2010 are given on pages 24 and obligations under the Company’s Share Incentive Plan (SIP). 25. The Directors who served during the year are detailed Details are set out in note 27 of the financial statements. on page 43 of the Remuneration Report. The Statement There is no reduction in share capital in issue as these of Directors’ Responsibilities is given on page 35. purchased shares are held in trust until they vest.

Details of Directors’ interests in the share capital of the Except for these, the Company has not acquired any of its Company and in share ownership plan arrangements are shares during the period and there is currently no intention given in the Remuneration Report on pages 41 to 45. to purchase its own shares or undertake any sale or proposed sale in treasury shares. Financial Information and Control Our business units budget on an annual basis and these At the Company’s Annual General Meeting on 24 July budgets are updated at least quarterly. The performance of 2009, authority was given for the Company to purchase businesses against these forecasts is monitored by Senior up to 51,660,391 of its own shares. This authority expires Executive management at their periodic business reviews on the earlier of the next AGM or 15 months from the and reported to the Board. Key financial and non-financial date the authority was given. measures (including KPIs listed in this Report) are reviewed by the Board monthly in order to monitor performance Employees against objectives. There are established procedures for Employment strategies within the Group are linked to investment evaluation to ensure Board approval for all business needs and have been designed to deliver the major capital expenditure commitments and delegations growth and development of the Group and its people. of signing authority for contracts and other documents. Employment policies are designed to provide equal opportunities irrespective of colour, ethnic or national origin, The system of internal financial control described above sex, sexual orientation, age, religion, marital, parental or was in place for the financial year and continues to be in disabled status. Full consideration is given to applications place for the current financial year. for employment, the continuing employment, training and career development of disabled persons. Creditor payment policies The Group aims to pay its suppliers within a reasonable All employees, whether part time, full time or temporary period of the invoice being received and in accordance are treated fairly and equally. Selection of employees for with the Confederation of British Industry prompt payment employment, promotion, training or other matters affecting code. At 31 March 2010, the Company’s trade creditors their employment is on the basis of aptitude and ability.

KCOM Group PLC Annual Report and Accounts 2009/10 Directors’ Report 19

All employees are assisted and encouraged to develop their Additional information for shareholders full potential and the talents and resources of the workforce Following the implementation of the EU Takeovers Directive are fully utilised to maximise the efficiency of the organisation. into UK law, the following description provides the required information for shareholders where not already provided The Group takes every opportunity to involve and elsewhere in this Report. This summary is based on consult with its employees and we believe that employee applicable English law concerning the Companies Act involvement is an essential contributor to the development 2006 and the Company’s Articles of Association (‘Articles’). of the Group’s businesses. We have undertaken a range of initiatives including employee ‘roadshows’ hosted by the Share Capital Executive Chairman, and regular meetings for employees at The Company has a single class of share capital which is which suggestions are actively encouraged. divided into ordinary shares of ten pence.

We encourage also our employees to become stakeholders Rights and obligations attached to shares by offering share schemes such as the Share Incentive In a general meeting of the Company, subject to the Plan (SIP) as we believe this encourages greater employee provisions of the Articles, and to any special rights or engagement. restrictions as to voting attached to any class of shares in the Company (of which there are none), voting is In 2007 we enhanced our SIP and more than 60 per cent as follows: of our employees are now shareholders. Over 40 per cent are actively buying Company shares on a monthly basis. >> On a show of hands, every member present in person shall have one vote; and Health and Safety is an integral part of good business >> On a poll, every member who is present in person or management and well established systems of safety by proxy shall have one vote for every share of which management are in place throughout the business. he or she is the holder. Relevant performance data is included in the CSR section of this Report. No member shall be entitled, in respect of any share in the capital of the Company held by him or her, to be present or Key performance indicators to vote at any general meeting or class meeting if any call We review a number of key performance indicators on or other sum then payable by him or her to the Company in an ongoing basis. These KPIs are on page 11 of this respect of that share remains unpaid. Currently, all shares Report and Accounts and are consistent with the KPIs are fully paid up. used by management in measuring the performance of the business. Deadline for voting rights Full details of the deadline for exercising voting rights in Substantial shareholdings respect of the resolutions to be considered at the Annual As at 7 June 2010, the Company had been notified of General Meeting to be held on Friday 16 July 2010 are set the following interests amounting to 3 per cent or more out in the Notice of Meeting. of the voting rights in the issued ordinary share capital of the Company: Dividends and distributions Subject to the provisions of the Companies Act 2006, No of % the Company may, by ordinary resolution, declare shares with Total voting rights voting rights dividends to be paid to members not exceeding the Invesco Ltd 61,483,093 11.90 amount recommended by the Board. The Board may GAM International Management Ltd 30,345,079 5.87 pay interim dividends, and also any fixed rate dividend, SVG Investment Management Ltd 29,144,823 5.64 whenever the financial position of the Company, in the Aberforth Partners LLP 25,332,556 4.90 opinion of the Board, justifies its payment. All dividends shall be apportioned and paid pro rata according to the amounts paid up on the shares. Directors’ indemnities There have been no qualifying third party indemnity provisions (within the meaning of Section 236 of the Companies Act 2006) in force during the year and up to the date on which this Report was approved by the Directors.

KCOM Group PLC Annual Report and Accounts 2009/10 20 Directors’ Report

Operational review continued

Liquidation the KCOM Group PLC Employee Share Trust consult Under the Articles, if the Company is in liquidation, the with participants regarding the voting of any investment liquidator may (with the sanction of a special resolution of shares, but may vote any co-investment shares held in the Company and any other sanction required by statute): the EST as they wish, having due regard to the interests of the participants. >> Divide amongst the members in specie or in kind the whole or any part of the assets of the Company; or Amendments of the Company’s Articles >> Vest the whole or any part of the assets of the Company of Association in trustees upon such trusts for the benefit of the Any amendments to the Company’s Articles of Association members as the liquidator, with the like authority, may be made by passing a special resolution at a general shall think fit. meeting of its shareholders.

Transfer of shares Appointment and replacement of Directors All transfers of uncertificated shares shall be made in Unless the Company in general meeting shall otherwise accordance with, and be subject to, the Uncertificated determine, the number of Directors shall be no less than Securities Regulations 2001 and the facilities and two in number. There is currently no maximum number of requirements of the relevant system and in accordance Directors, although the Company may, in general meeting, with any arrangements made by the Board. fix a maximum.

Subject to the Articles, any member may transfer all or Directors may be appointed by the Company by ordinary any of their certificated shares by an instrument of transfer resolution or by the Board. A Director appointed by the in writing in any usual or common form or in any other form Board holds office only until the next following Annual which the Board may approve. The Board may, in its General Meeting and is then eligible for election by the absolute discretion and without giving any reason, decline members. The Board may from time to time appoint one to register any instrument of transfer of any share (whether or more Directors to hold employment or executive office certificated or uncertificated) which is not a fully paid share for such period and on such terms as they may determine or on which the Company has a lien. The Board may also and may revoke or terminate any such appointment. decline to register a transfer of a certificated share unless the instrument of transfer is left at the Company’s registered At each Annual General Meeting of the Company, one office, or at such other place as the Board may determine, third of the Directors, or if their number is not three or a for registration, accompanied by the certificate of the multiple of three, then the nearest to but not exceeding one shares to which it relates and such other evidence as the third, shall retire from office. Where the number is less than Board may reasonably require to show the right of the three, one Director shall retire. The Directors retiring by transferor to transfer the shares. The Board may also refuse rotation each year shall be those who have been the longest to register any transfer of shares (whether certificated or in office since their last appointment or re-appointment unless uncertificated), whether fully paid or not, in favour of more they have indicated they do not wish to stand for re-election. than four persons jointly. If at any Annual General Meeting where a Director retires in rotation the position has not been otherwise filled, then the If the Board refuses to register a transfer they shall, in the retiring Director may, if willing, be reappointed. case of certificated shares, within two months of the date on which the transfer was lodged with the Company, The Company may by ordinary resolution with special send to the transferee a notice of refusal and return the notice remove a Director. instrument of transfer. In the case of uncertificated shares, the Board will notify such persons as may be required Powers of the Directors by the Uncertificated Securities Regulations 2001 and The business of the Company will be managed by the requirements of the relevant system concerned. Board which may exercise all the powers of the Company, subject to the provisions of the Company’s Articles, the Shares held by Employee Share Trusts (‘EST’) Company’s Act 2006 and any ordinary resolution of The trustees of the Kingston Communications 2000 the Company. Employee Share Trust, 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

KCOM Group PLC Annual Report and Accounts 2009/10 Directors’ Report 21

Allotment of shares Company than that created by the initial grant or At the Annual General Meeting in 2009, the Company award under the relevant scheme. (and thereby the Directors) was authorised by the members to allot shares up to an aggregate nominal amount of Compensation for loss of office – change of control £17,220,130 (representing approximately one third of the The Company does not have any agreements with any Company’s issued share capital at the time). Authority was Director or employee that would provide compensation for also given at the same time for the partial disapplication of loss of office or employment resulting from a takeover. pre-emption rights, up to a maximum aggregate value of £2,583,020 (representing approximately five per cent of Re-election of Directors the Company’s issued share capital at the time). As at the Paul Simpson and Paul Renucci retire from the Board at date of this report the Company has issued nil shares the Annual General Meeting and, being eligible, offer since that date. themselves for re-election.

Repurchase of shares Annual General Meeting At the Annual General Meeting in 2009, the Company was The Annual General Meeting will be held at the KC authorised by members to purchase its own shares, up to Stadium, Kingston upon Hull on Friday 16 July 2010 at a maximum of 51,660,391 (representing approximately ten 11am. The Notice of Meeting accompanies this Annual per cent of the Company’s issued share capital at the time). Report and is also available on our Group website at During the year, the Company purchased shares on the www.kcomplc.com. Five resolutions will be proposed London Stock Exchange in order to meet its obligations as special business. Explanatory notes on these under the Company’s SIP. Details are set out in note 27 of resolutions are set out in the Notice of Meeting. the financial statements. There is no reduction in the share capital in issue as these purchased shares are held in trust The Directors consider that all the resolutions proposed until they vest. are in the best interests of the Company and it is their recommendation that shareholders support these Significant agreements – change of control proposals as they intend to do so in respect of their The following significant agreements contain provisions own holdings. entitling the counterparties to exercise termination or other rights in the event of a change of control of the Company: Auditors PricewaterhouseCoopers LLP has advised of its willingness >> Under the £250,000,000 multi-currency revolving loan to continue in office and a resolution to re-appoint them facility agreement dated 28 February 2007 between, will be proposed at the Annual General Meeting. amongst others, the Company, The Royal Bank of Scotland PLC (as the facility agent) and the banks and They have provided an independent audit opinion on financial institutions named therein as lenders (the these accounts which can be found on page 47. ‘Credit Facility’), the facility agent may, if the majority of the lenders so require, by no less than seven days’ This report has been reviewed and approved by the notice to the Company, cancel the total commitments Board of KCOM Group PLC. of the lenders under the Credit Facility and declare all outstanding loans made under the Credit Facility, Signed on behalf of the Board together with accrued interest, and all other amounts accrued under the Credit Facility immediately due and Paul Simpson payable. For these purposes, a ‘change of control’ Company Secretary occurs if any person or group of persons acting in 7 June 2010 concert gains control of the Company. >> The Company’s share schemes, details of which are contained in the Directors’ Remuneration Report on pages 37 to 46 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 on a change of control. The provisions do not entitle participants to a greater interest in the shares of the

KCOM Group PLC Annual Report and Accounts 2009/10 22 Directors’ Report

Risk management

Business and risk management The Risk Register for each business unit is reviewed and KCOM Group takes risk management very seriously and there updated by senior management on an ongoing basis, with has been significant investment made to ensure that we have a combined Group Risk Register presented to the Board the right skills in place across the Group to effectively manage every quarter. This enables the Board to assess whether our risks. Our philosophy is to identify, evaluate and manage the overall risk profile of the Group is being maintained at the risks facing the business, rather than to eliminate all risks. an appropriate level.

The Board has overall responsibility for ensuring that the Internal Audit Group maintains an adequate system of internal control We have an Internal Audit function which performs financial and risk management and for reviewing its effectiveness. and operational reviews across the business and reports three times a year to the Audit Committee. The audit plan The Board is satisfied that the system of internal control is risk-based and audit testing is designed to ensure that and risk management is embedded within the day-to-day the controls in place are operating effectively. The Internal activities of the business and that the Group continues to Audit function is led by the Director of Internal Audit and be compliant with the provisions of the Combined Code Risk Management who reports to the Chief Financial relating to internal control. Officer, with a direct reporting line also to the Chairman of the Audit Committee. Risk Registers We have a Risk Management framework in place which is Additionally our external auditors report to the Audit based on the guidance in the Turnbull Report. Following this Committee any material risks identified during their interim framework, each business unit is required to record the review and the full year audit. These, together with any significant risks it faces on a Risk Register. Each risk is significant risks identified by the Internal Audit function, then assessed on the basis of the probability of it occurring are highlighted to the Board. and the impact should it do so. All risks are also assigned a senior management owner responsible for monitoring Principal risks and uncertainties and evaluating the risk and the mitigation strategies. As with all businesses, we are affected by a number of risks and uncertainties, some of which are beyond our control. This section sets out the principal risks and The Risk Management Process uncertainties which could have a material adverse effect on the Group and have been identified through the Risk Management Framework.

This is not an extensive list and there may be risks and uncertainties of which we are currently unaware, or which are believed to be immaterial, which may also adversely affect the business.

KCOM Group PLC Annual Report and Accounts 2009/10 Directors’ Report 23

Risk Action taken

Increasing pensions deficits We have commenced a consultation which proposes We operate ten pension schemes including two defined to close all current Group schemes to future accrual benefit schemes. Volatility of equity returns combined and to introduce a Group-wide Stakeholder Plan. with changing actuarial assumptions has resulted in The Group has reached an in principle agreement significant adverse movements in the scheme funding with the Trustees of the largest of the defined benefit position requiring additional deficit repair payments. schemes to increase deficit repair contributions.

Security and resilience of IT, networks and data We have appropriate monitoring and development We operate networks across the UK and host data for forums in place including standards compliance many customers, alongside operating billing platforms where appropriate. We have held the ISO 27001: and other IT systems internally. This means that we are Information Security Management standard since dependent on the secure operation and resilience 2007, which demonstrates the robustness of our of our information systems, networks and data. security processes. Comprehensive business continuity planning further mitigates any risk.

Reliance on key third party suppliers We have dedicated relationship teams within the We have entered into strategic agreements with BT business who are responsible for maintaining and Phoenix and are consequently dependent on the close relationships with our key suppliers. We have performance of these third parties in those areas. appropriate contracts and service levels in place and continually monitor performance to ensure that our customers are receiving the best possible service at all times.

Compliance with Health and Safety legislation We have a dedicated Health and Safety team Like all businesses, we have to ensure that committed to ensuring that the correct Health and we provide a safe working environment for all of Safety procedures are followed by all employees and our employees as far as practicable, including the Board considers Health and Safety matters on a the engineers working on our networks. quarterly basis. We are currently working towards BS OHSAS 18001: Health and Safety Management.

KCOM Group PLC Annual Report and Accounts 2009/10 24 Directors’ Report

Board of Directors

01 02 03

01 Tony Illsley 02 Martin Towers 03 Kevin Walsh Senior Independent Non-Executive Director Executive Director Non-Executive Director Audit Committee Chairman Allotment Committee Nomination Committee Nomination Committee Kevin Walsh joined the KCOM Chairman Remuneration Committee Group in 2000 and joined the Remuneration Committee Martin Towers joined the Board in 2004. Kevin is the Audit Committee Board in 2009. He is a fellow Executive Director responsible Tony Illsley joined the Board in of the Institute of Chartered for Kingston Communications. 2009. He has held a variety Accountants in England and Prior to joining the KCOM of senior business positions Wales and has held a number Group, Kevin was Managing including Chief Executive of senior finance roles including Director of a web-based Officer of Telewest Group Finance Director at Kelda content provider and he Communications PLC and Group PLC, Allied Textile Group has held a number of Senior President of Pepsi Cola Asia PLC and the Spring Ram Director roles with the Pacific. He is currently Corporation PLC. He is currently Electrolux Group. Kevin is Chairman of Plastic Logic Ltd Non-Executive Director of RPC actively involved with Business and Datalase Ltd and is a Non Group PLC and Lupus Capital in the Community and sits on Executive Director of Sepura PLC, and Chief Executive Officer the Board of the Hull Children’s PLC and Northern Foods PLC. of Spice PLC. Martin is aged 57. University. Kevin is aged 57. Tony is aged 53.

KCOM Group PLC Annual Report and Accounts 2009/10 Directors’ Report 25

04 05 06 07

04 Bill Halbert 05 Paul Simpson 06 Paul Renucci 07 Graham Holden Executive Chairman Chief Financial Officer Executive Director Non-Executive Director Nomination Committee Company Secretary Paul Renucci joined the KCOM Remuneration Committee Bill Halbert was appointed Allotment Committee Chairman Group in April 2007 and joined Chairman Executive Chairman of the KCOM Paul Simpson was appointed the Board in November 2007. Audit Committee Group in July 2009. Bill joined Chief Financial Officer in May Paul is the Executive Director Nomination Committee the Board as a Non-Executive 2004, having joined the Group responsible for Kcom. Paul has Graham Holden joined the Director in September 2006. in 2000. In addition to his over 20 years of industry Board in November 2007. He is He has worked in the information Group-wide finance experience, through roles that Chief Executive of Marshalls PLC, technology industry for over responsibilities, Paul has have included Managing Director Britain’s leading supplier of hard 30 years and has a wealth of responsibility for the management of Damovo and President of landscape products. He has experience and strategic insight. of our relationship with BT and Nortel’s Enterprise division in been with Marshalls for 23 years He founded and for the next 13 for PLC and Group Services. EMEA. Paul is aged 46. and was Group Financial Director years was CEO of Syntegra, BT’s Paul is a graduate in Economics from 1992 until 2001. He is a global consultancy and systems and qualified as a Chartered member of the Yorkshire and integration subsidiary. Bill’s other Accountant with Price Humber Regional Advisory Board Directorships include Excelsys Waterhouse. Paul is aged 41. of Business in the Community Ltd, Jade Communications Ltd, and also serves on the Boards Northern Technology Investments of the Construction Products Ltd and Tacit Connexions Ltd. Association and the Mineral Bill is aged 62. Products Association. Graham is aged 50.

KCOM Group PLC Annual Report and Accounts 2009/10 26 Directors’ Report

Corporate and Social Responsibility

Our CSR activities are focused around four key areas: community, workplace, environment and ethics.

Community Everyone across the KCOM Group has the opportunity to take part in our community programme and we actively encourage involvement in a variety of activities including competitions, sponsored events and monthly dress down days.

Annually, across the Group, we adopt a national charity and organise a series of events and activities to raise funds. Last year, we reached our highest fundraising level yet when our employees raised an impressive £40,127 for Childrens Hospices UK, a national charity that supports the network of hospices providing palliative and respite care for children and their families.

For the financial year 2010/11, we will be working with the Stroke Association and hope that we can achieve a similar “We believe there is a clear role for KC in level of support. Our Group Charity of the Year is always supporting the regeneration of the region and to help raise the aspirations and selected through an employee voting system and we have opportunities available to children and a network of volunteer charity champions across the young people.” business to help organise events and collect donations.

As well as our Group charity, we recognise that there are many community activities that employees are involved in during their own time. We offer quarterly community grants of £150, £250 and £500 and invite applications from across the Group. In the past year, we have awarded 12 grants including financial assistance supporting an afterschool club’s purchase of IT equipment, security fencing for a cricket ground and funding a day-trip for a local mencap group.

KC As a business founded in Hull in 1904, we remain committed to Hull and East Yorkshire and focus a great deal of our community activity on supporting this area.

We believe there is a clear role for our business in supporting the regeneration of the region and to help raise the aspirations and opportunities available to children and young people. We focus the majority of our community relations effort in supporting these two key areas.

Our KC in the Community programme seeks to engage people at every level within the organisation, involving everyone from members of the management team who sit on the Boards of our community partnerships to people with particular skills and knowledge providing support and advice. There is also the opportunity for everyone to take part in volunteering programmes.

KCOM Group PLC Annual Report and Accounts 2009/10 Directors’ Report 27

Our CSR activities are focused around four key areas: This year we have appointed a dedicated Community community, workplace, environment and ethics. Relations Manager, whose responsibility is to identify projects and programmes where we can provide financial Community assistance and resources to improve the environment Everyone across the KCOM Group has the opportunity in which many of our people live and work. to take part in our community programme and we actively encourage involvement in a variety of activities including Our volunteering programme not only benefits the competitions, sponsored events and monthly dress community, it also gives everyone in the business the down days. opportunity to develop new skills and to feel a part of the wider community, by contributing time and resources Annually, across the Group, we adopt a national charity to worthwhile causes and projects. and organise a series of events and activities to raise funds. Last year, we reached our highest fundraising level yet We have three main community partnerships to which when our employees raised an impressive £40,127 for we have committed financial support and resources for Childrens Hospices UK, a national charity that supports the next two years: the network of hospices providing palliative and respite care for children and their families. Hull & Humber KC Cares (Cares) KC has partnered with Cares, the volunteering programme For the financial year 2010/11, we will be working with the of Business in the Community (BiTC), to strengthen and Stroke Association and hope that we can achieve a similar develop their presence in the Hull & Humber region. level of support. Our Group Charity of the Year is always selected through an employee voting system and we have Cares offers well-established expertise in employee a network of volunteer charity champions across the engagement that delivers benefits for companies, business to help organise events and collect donations. employees and communities. In addition to providing a brokerage service for high-quality volunteering As well as our Group charity, we recognise that there are opportunities, Cares also campaigns nationally to increase many community activities that employees are involved in the impact of employee volunteering in communities of during their own time. We offer quarterly community grants greatest need and to address social issues including of £150, £250 and £500 and invite applications from across education, employability and economic renewal. the Group. In the past year, we have awarded 12 grants including financial assistance supporting an afterschool We have been working with the Cares team for three club’s purchase of IT equipment, security fencing for a cricket years and are delighted to be increasing our support and ground and funding a day-trip for a local mencap group. developing our partnership. One of our aims is to use our business resources and contacts to engage with other KC businesses to highlight the programme and see how As a business founded in Hull in 1904, we remain they too can get involved. committed to Hull and East Yorkshire and focus a great deal of our community activity on supporting this area. We are proud to work with a wide variety of community Groups throughout the region and want other businesses We believe there is a clear role for our business in to reap the business benefits and the personal development supporting the regeneration of the region and to help raise opportunities that the Cares programme offers. the aspirations and opportunities available to children and young people. We focus the majority of our community Cat Zero relations effort in supporting these two key areas. KC joined the Cat Zero programme as a business partner when it launched in 2009 and helps deliver the programme Our KC in the Community programme seeks to engage by providing mentors and three day work placements. people at every level within the organisation, involving The not for profit organisation is focused on creating everyone from members of the management team who opportunities for young adults aged 17-19 living in Hull, sit on the Boards of our community partnerships to people who are not currently in education, employment or training. with particular skills and knowledge providing support and advice. There is also the opportunity for everyone to take part in volunteering programmes.

KCOM Group PLC Annual Report and Accounts 2009/10 28 Directors’ Report

Corporate and Social Responsibility continued

The programme aims to help young people develop >> To recruit six more business partners into the their skills and prepare them for the work environment. Hull & Humber KC Cares programme Participants take part in challenging educational and personal development programmes, which use sailing Workplace as a focal point. The experience is designed to motivate We recognise that our employees are key to the success and bring about attitudinal change. of the Group and this principle guides our decision making on how we approach the management of people, Following a work placement with KC earlier this year, one particularly during difficult economic times. Last year we student on the Cat Zero training initiative impressed the were delighted to achieve re-accreditation of the Investors team so much, he has now been employed as a Trainee in People award, an award which recognises business Customer Services Advisor within our KC business. success through its people. This year we are developing a new team of internal reviewers to support this and we Hull Children’s University (‘CU’) continue to use the information gathered to help us Hull Children’s University is an innovative and dynamic shape future improvements. project, aimed at children aged 7-13 years old, which raises their self-esteem, achievements and learning Recognising and celebrating the achievements of aspirations through the delivery of out-of-school-hours employees is an important part of our workplace ethos. literacy programmes. Each business in the Group has developed an appropriate employee recognition scheme. The majority are designed We have worked with the organisation for a number of so that employees can regularly nominate, and vote for, years and have witnessed the value that the organisation the person within their business that best demonstrates can bring to young people in the region. Kevin Walsh has the Group’s core behaviours. At the end of the year, these recently joined the Board of the Children’s University and schemes culminate in one employee being recognised we are currently re-fitting one of our city centre offices to and rewarded as our Group Employee of the Year. provide them with a dedicated Learning Zone, giving them city centre facilities where they can deliver modules and We encourage our employees to participate in the success have access to ICT equipment. of the Group through share ownership. Our award winning SIP scheme enters its fourth year with over 60 per cent of Teams from our KC business have also designed and the Group’s employees owning shares in the business. delivered modules to pupils attending CU including creating social networking pages and looking at the In line with recognising that our employees have individual use of the Internet by different age groups. and differing requirements we have entered into our seventh year of offering a Flexible Benefits programme and Community grants take up of the scheme remains high with the most popular Every three months we invite schools, local projects and choice being the ability to buy or sell annual leave. Through organisations to apply for one of three community grants. effective people policies and planning we are pleased that The scheme covers the areas we serve in Hull and East over 55 per cent of employees have been with the Group in Yorkshire and has been designed to reward smaller excess of five years with over 26 per cent having ten years projects, that may have struggled to raise funding or more service. Through effective interventions and return elsewhere, to get off the ground. Each quarter, three to work initiatives, our Group sickness absence remains at grants of £500, £250 or £150 are on offer. less than 2.2 per cent of total working days.

Group objectives For the second year in a row we have held Wellbeing We continue to develop our Group community relations Sessions that were open to all employees. These provided programme and have set ourselves some key targets testing of body fat percentage, lung age, blood pressure, for the coming year: cholesterol, diabetes, height and weight. These sessions were attended by 27 per cent of our employees, compared >> To raise in excess of £45,000 for our Group Charity to 22 per cent in the previous year. We are now planning to of the Year hold further Wellbeing Sessions in November 2010 which >> To increase volunteering opportunities within our will form part of a calendar of campaigns. This has been KC in the Community programme supported by giving all employees a desktop Health and Wellbeing calendar with each month highlighting a different

KCOM Group PLC Annual Report and Accounts 2009/10 Directors’ Report 29

There were no work related fatalities or health and safety focus or initiative. We were also pleased to note last year enforcement notices during the year. that we gained the Tommy’s pregnancy accreditation for supporting pregnant employees in the workplace. 2009/10 2008/09 2007/08 Working days lost due to accidents 32.5 30.5 55.0 Despite the economic challenges, we have continued to Reportable accidents (to HSE) 1 4 8 recruit and invest in new skills across the Group. We have continued to invest in our leadership capability with over 50 employees taking part in our leadership programme. Procurement Our procurement process follows the principles of As a result of the strategic review undertaken in November our CSR policy. All our suppliers undertake a detailed 2008 and our change in market focus the Group did make questionnaire to ensure that they engage in ethical trading a number of TUPE transfers and a number of compulsory and sustainable practice. We subscribe to the BiTC Market redundancies during the financial year. It is a key Board Place principles and are committed to complying with objective that the Group manages such programmes these key principles to ensure that we meet best practice. with dignity and respect for those leaving the business. Each employee is offered and encouraged to take up Environment external outplacement support to help them secure Since 2005/2006 we have been calculating our annual future employment. carbon footprint so that we can measure our carbon emissions. For the fifth consecutive year, we have As we enter the next financial year, the Group is developing successfully reduced our total carbon emissions and the an updated people strategy which will be centred around volume of waste generated across the Group. The results the following areas: for the last two years are shown in the table below:

CO2 tonnes 2008/09 2008/09 >> Culture and employee engagement generated 2009/10 Restated* Reported >> Succession planning Waste 111 171 171 >> Improving organisational effectiveness. Business travel 3,297 5,327 5,327 Third party deliveries 31 64 64 Health and Safety Premises 20,412 19,835 13,794 During the year we gained SAFE contractor status following Total 23,851 25,397 19,356 completion of the contractor accreditation process. * The 2008-2009 figures have been restated using the same methodology for calculating electricity emissions as has been used this year. This has been Our Health and Safety team also became a registered explained further below. centre with the Chartered Institute of Environmental Health For 2010/11, we are committed to reducing CO emissions enabling us to run in-house accredited courses covering 2 health and safety in the workplace and manual handling. by 3 per cent below 2009/10 levels and maintaining our landfill and waste recycled at 2009/10 levels. This year has also seen significant strategic changes and we now have two new partners in BT and Phoenix. Waste We are heavily focused on building strong and co-operative During the year we undertook a review of our refuse relationships with these companies from a health and arrangements and frequency of collections at all of our safety perspective. sites. By doing this we have managed to reduce the number of collections which in turn has significantly reduced the amount of CO tonnage arising from waste. We have also signed up to the Health and Safety 2 Executive’s pledge which commits us to playing our part in reducing the number of related deaths, During the year we introduced also a new KPI to reduce injuries and ill-health instances in the workplace. the amount of copier and printer paper purchased across the Group. This resulted in the average amount of paper Implementation of our BS OHSAS 18001 compliant Health purchased reducing by 22.5 per cent. and Safety Management System has continued and we are currently planning for our final audits with the BSI with the intention of gaining formal certification to this standard.

KCOM Group PLC Annual Report and Accounts 2009/10 30 Directors’ Report

Corporate and Social Responsibility continued

Our other environmental KPIs focus on the amount of waste generated in tonnes and the proportion of waste which is recycled. These are shown below:

2009/10 2008/09 Waste generated (tonnes) 334 650 Waste recycled (%) 44.3 56.2

The proportion of waste recycled has decreased in the year which relects the significant reduction in paper waste, “We have significantly reduced the amount which is fully recycleable, and a reduction in the amount of Waste Electrical and Electronic Equipment (WEEE) in of CO2 tonnage arising from waste... we have also reduced the amount of comparison to the prior year. paper purchased across the Group by 22.5 per cent.” Business Travel Business travel has decreased by 38.1 per cent in the year which is a reflection of reduced employee numbers but also of a Group-wide campaign to reduce unnecessary travel whilst the implementation of Microsoft OCS technology across the Group has enabled employees to meet with colleagues through Live Meetings and share documents electronically without the need to meet face-to-face. The benefits generated from this investment have exceeded our original targets and expectations.

This reduction in travel has contributed to a reduction in Group travel costs of 40 per cent in comparison to last year.

Premises Electricity represents 92.3 per cent of our emissions in relation to premises. The increase in the carbon footprint of our premises appears significant; however new Defra Corporate Guidelines were introduced in September 2009

which removed the lower CO2 rate which historically had been applied to Good Quality Combined Heat & Power (CHP). Approximately 94 per cent of the electricity bought by the Group is Good Quality CHP. This means therefore that the methodology used to calculate our emissions has changed rather than there being a significant increase in our electricity consumption.

In fact our electricity consumption in KWh has increased by just 1.25 per cent in the year. This minimal increase in consumption is a reflection of more customers using our data centres, partially offset by the effect of various internal campaigns, such as our ‘Switch Off & Save’ campaign which has encouraged our employees to switch off lights and equipment when not in use. We have invested also in the replacement of inefficient computer equipment and monitors across the Group, alongside deployment of our OCS technology.

KCOM Group PLC Annual Report and Accounts 2009/10 Directors’ Report 31

Despite the removal of the reduced rate for measuring We insist upon compliance with the relevant Ofcom

CO2 emissions, we remain committed to purchasing this mandatory and voluntary codes, such as the broadband more environmentally friendly power. Speeds Code of Practice and the PhonePay Plus Code of Practice covering premium rate and other value added Environmental Management System revenue share telephony services. As these rules evolve, Our ISO 14001 compliant Environmental Management we will continue to ensure our continuing compliance. System continues to ensure we manage our environmental responsibilities effectively, and our Environmental Plan Our Internet customers have been offered a free filtering ensures clear objectives are set. service providing protection from Internet viruses and offensive or intrusive emails. This year has also seen a much greater focus on the Carbon Reduction Commitment (CRC) and work has During the year we have made preparations for the taken place in a number of areas to ensure we have a introduction of the Bribery Act 2010. This has included full programme in place to capture the data required performing a bribery risk assessment and ensuring to meet our obligations under CRC. that our policies and procedures reflect compliance with the new legislation. The Group has also signed up to the 10:10 initiative. This is a project aimed at uniting every sector of British society to achieve a 10 per cent cut in the UK’s carbon emissions in 2010.

There have been no environmental enforcement notices in the year.

Ethics We have an Ethics and Anti-Fraud Policy confirming our commitment to a culture of openness, trust and integrity and to treat employees fairly and with respect. It confirms our commitment to protect employees, partners, suppliers, customers and shareholders from illegal or damaging actions by individuals. The Policy also sets out the Group’s zero tolerance approach to fraud.

The Group has operated throughout the year a ‘Whistleblowing Policy’ whereby all employees of the Group are able to confidentially report any malpractice or matters of concern they have regarding the actions of management and employees. The Audit Committee and the Board regularly review the effectiveness of this Policy and both the Ethics and Whistleblowing policies are included in our employee induction programme.

There have been no breaches of the Ethics and Anti-Fraud Policy, and one incident reported under the Whistleblowing Policy during the last year.

As a provider of communications connectivity, we are conscious of our responsibility to ensure and, where we can, exercise control over content and service providers to ensure they observe acceptable standards.

KCOM Group PLC Annual Report and Accounts 2009/10 32 Directors’ Report

Corporate Governance

Introduction The Board discharges its responsibilities by providing Whilst we recognise that the current Board structure is not leadership of the Group within a framework of prudent and strictly in accordance with the Combined Code, in that Bill effective controls, which enables risk to be assessed and Halbert combines the roles of Chairman and Chief Executive, managed. It sets the Company’s strategic aims, ensures we believe that we can and do maintain robust governance, that the necessary financial and human resources are in while at the same time benefiting from Bill’s leadership during place for the Company to meet its objectives and reviews a period of transformation within the business. This report management performance. It also defines the Company’s sets out how we achieve this and demonstrates our values and standards and ensures that its obligations to commitment to the principle of achieving and maintaining its shareholders are understood and met. a high standard of corporate governance. The Board reviews strategic issues on a regular basis and Good Governance and the Code of Best Practice exercises control over the performance of each operating This report describes how the Principles of Good business within the Group by agreeing budgetary targets Governance, which are set out in Section 1 of the and monitoring performance against those targets. Combined Code, are applied by the Group. The Board Certain matters are specifically reserved for approval by considers that it has complied with the detailed provisions the Board and the Board has overall responsibility for the of the revised Combined Code, which was amended in Group’s system of internal control and risk management. June 2008, throughout the year ended 31 March 2010, These matters include strategic plans, annual budgets, with the following exceptions: review of operating and financial performance, individual appraisal of significant new projects, risk management >> For part of the year, the balance of the Board between policies, funding, health and safety, environment, social Executive and Non-Executive Directors was not and governance matters. compliant with the Combined Code (A.3.2). This was rectified in June 2009 with the appointment of two All Directors have access to the advice and services of additional independent Non-Executive Directors. the Company Secretary and his team, who ensures >> For part of the year, membership of the Board that Board processes are followed and good corporate Committees was not compliant with the Combined governance standards are maintained. Any Director may Code. Specifically, for part of the year the Remuneration take independent professional advice at the Group’s Committee had only one independent Non-Executive expense where they judge it necessary to discharge their Director (B.2.1) and the Audit Committee had only one responsibility as Directors. None of the Directors sought independent Non-Executive Director (C.3.1). This was such advice in the year. Non-Executive Directors also get rectified in June 2009, as above. open and direct access to the management team through >> The roles of Chairman and Chief Executive are not presentations at Board and Committee meetings and separate (A.2.1). any ad hoc meetings at their request.

The Board of Directors In recognition of the importance and independence of At the date of this report the Board consists of seven the role of the Group Company Secretary, the Board is Directors whose names, responsibilities and other details currently in the process of identifying and appointing appear on pages 24 and 25 of this report. Four of the a new Company Secretary in order that the current Directors, including the Chairman, are Executive and three Company Secretary’s responsibilities may be separated of the Directors are Non-Executive. All of the Non-Executive from his other Executive Director responsibilities. Directors are wholly independent, and have been appointed since 2007. Each has a tenure of less than Training and development three years. Two of the Non-Executive Directors were The Board received appropriate training and updates on appointed during the year under review, including the various matters relevant to its role as and when required Senior Independent Non-Executive Director. during the year. Training needs are reviewed as part of the performance evaluation process and on an ongoing basis. Michael Abrahams served as Non-Executive Chairman until his retirement on 24 July 2009. He was succeeded by Bill Board balance and independence Halbert who was appointed Executive Chairman as at that With reference to the criteria set out at A.3.1 of the date. Neil Gower served as an Executive Director until his Combined Code, each of the three Non-Executive resignation on 31 August 2009. Directors are considered wholly independent.

KCOM Group PLC Annual Report and Accounts 2009/10 Directors’ Report 33

The Senior Independent Non-Executive Director is Tony Director No of meetings Out of possible Illsley, who was appointed to this role on 2 June 2009. Michael Abrahams 3 4 He is available to shareholders if they request a meeting Neil Gower 4 4 or have concerns which contact through the normal Bill Halbert 10 10 channels has failed to resolve or where such contact is Graham Holden 10 10 inappropriate. No such requests or concerns were received Tony Illsley 7 8 from shareholders during the year. Tony Illsley is Chairman Paul Renucci 10 10 of the Nomination Committee and is also a member of Paul Simpson 10 10 the Audit and Remuneration Committee. Martin Towers 7 8 Kevin Walsh 10 10 The Board discharges its responsibilities by providing The Non-Executive Directors are responsible for bringing leadership of the Group within a framework of prudent and independent and objective judgement and scrutiny to Seven of the meetings were preceded, the evening before, effective controls, which enables risk to be assessed and all matters before the Board and its Committees, using by an informal meeting allowing more time to debate issues managed. It sets the Company’s strategic aims, ensures their substantial and wide-ranging experience. Each of in depth. that the necessary financial and human resources are in the Non-Executive Directors has at all times acted place for the Company to meet its objectives and reviews independently of management and has no relationship The Non-Executive Directors have a regular dialogue management performance. It also defines the Company’s which would materially affect the exercise of his concerning Board matters and the Executive Chairman values and standards and ensures that its obligations to independent judgement and decision-making. The Board meets the Non-Executive Directors without the Executive its shareholders are understood and met. reviews Non-Executive Director independence on an Directors present. annual basis and takes into account the individual’s The Board reviews strategic issues on a regular basis and professional characteristics, their behaviour at Board Board Committees exercises control over the performance of each operating meetings and their contribution to unbiased and The Board has established and delegated specific business within the Group by agreeing budgetary targets independent debate. responsibilities to the following Committees and takes and monitoring performance against those targets. care to regularly review Committee membership to Certain matters are specifically reserved for approval by During the annual Board evaluation for the year, each Director ensure continued effectiveness. the Board and the Board has overall responsibility for the agreed that the balance of power and authority between the Group’s system of internal control and risk management. Executive Chairman and Board was appropriate. Each Committee’s Terms of Reference are in line with These matters include strategic plans, annual budgets, recommendations in the Combined Code and other best review of operating and financial performance, individual Whenever any Director considers that he is interested in practice. These are available on request from the Company appraisal of significant new projects, risk management any contract or arrangement to which the Group is or Secretary and also on the Group’s website (www.kcomplc.com). policies, funding, health and safety, environment, social may be a party, due notice is given to the Board. No such and governance matters. instances of any significance have arisen during the year. Remuneration Committee Graham Holden (Chairman), Tony Illsley (appointed 2 June All Directors have access to the advice and services of Time commitment 2009), Martin Towers (appointed 2 June 2009). Michael the Company Secretary and his team, who ensures The Board is satisfied that each of the Non-Executive Abrahams (retired 24 July 2009). that Board processes are followed and good corporate Directors committed sufficient time during the year to governance standards are maintained. Any Director may fulfilment of their duties as Directors of the Company. The report of the Remuneration Committee and details of take independent professional advice at the Group’s None of the Non-Executive Directors has any conflict of its role are given on pages 37 to 46. The Committee met on expense where they judge it necessary to discharge their interest which has not been disclosed to the Board in five occasions. Out of possible attendance, each member’s responsibility as Directors. None of the Directors sought accordance with the Company’s Articles of Association. participation was: such advice in the year. Non-Executive Directors also get open and direct access to the management team through Performance evaluation Director No of meetings Out of possible presentations at Board and Committee meetings and For the past seven years the Board has undertaken a Graham Holden (Chairman) 5 5 any ad hoc meetings at their request. formal process to evaluate the effectiveness of its own Tony Illsley 3 3 performance, as well as that of its various Committees. Martin Towers 2 3 In recognition of the importance and independence of Each year the Directors complete a comprehensive survey Michael Abrahams (retired 24/07/09) 2 2 the role of the Group Company Secretary, the Board is and the results are collated and assessed against previous currently in the process of identifying and appointing results. Following a review of the results, a prioritised a new Company Secretary in order that the current action plan is drawn up to implement improvements. Audit Committee Company Secretary’s responsibilities may be separated Martin Towers (Chairman) (appointed 2 June 2009), Graham from his other Executive Director responsibilities. The Board and its Committees reviewed the results of Holden, Tony Illsley (appointed 2 June 2009). (In accordance these evaluations and are satisfied with the evidence with the Combined Code, Bill Halbert resigned from the Training and development they provided about the balance, effectiveness and Committee on 2 June 2009 following the appointment of The Board received appropriate training and updates on performance of the Board and its Committees, and two additional independent Non-Executive Directors). various matters relevant to its role as and when required the effectiveness and commitment of each Director. during the year. Training needs are reviewed as part of the Martin Towers is a fellow of the Institute of Chartered performance evaluation process and on an ongoing basis. Meetings Accountants in England and Wales and has held a number The record of Directors’ attendance at Board meetings of senior finance roles including Group Finance Director at Board balance and independence is set out below. During the year the Board held ten Kelda Group PLC, Allied Textile Group PLC and the Spring With reference to the criteria set out at A.3.1 of the scheduled meetings. Ram Corporation PLC. The Board is satisfied that Martin Combined Code, each of the three Non-Executive has sufficient, relevant and current financial experience to Directors are considered wholly independent. carry out this role.

KCOM Group PLC Annual Report and Accounts 2009/10 34 Directors’ Report

Corporate Governance continued

The Audit Committee supports the Board in the execution The Nomination Committee did not formally meet during of its responsibilities to establish and monitor financial the year. Matters that may have been considered within reporting and internal control procedures. Its responsibilities the Committee’s remit were discussed at the meeting of include to consider the appointment/re-appointment of the the full Board. external auditors and assess their independence each year, to recommend the audit fee to the Board, to oversee the The Nomination Committee makes recommendations to process for selecting the external auditors and making the Board regarding appointment of Non-Executive and appropriate recommendations through the Board to the Executive Directors. It ensures that any appointments or Shareholders for consideration at the AGM. re-appointments are made on merit through a formal, rigorous and transparent process against objective criteria. It meets three times a year with the external auditors in The appointment of a Non-Executive Director is for a attendance. Arrangements are agreed with the Board to specified term and re-appointment is not automatic and allow time for review of any issues and concerns raised by is made on the recommendation of the Committee. the Committee. The Chief Financial Officer and Director of The Committee also guides the whole Board in arranging Internal Audit and Risk Management attend each meeting. orderly succession for appointments to the Board. The Committee monitors the Company’s relationship with its external auditors. The Board has been pleased to note that a number of senior management roles have recently been filled through The Audit Committee meets with the Director of Internal the promotion of internal candidates. Following this, the Audit and Risk Management to review work undertaken Board has identified the need for further formal succession by the Internal Audit function and to define and agree the planning particularly for these senior managers and scope of future work. The Committee also meets informally Executive Directors and is currently in the process of on other occasions, when necessary, with the internal developing this plan. and external auditors. All Directors are required to stand for re-election at least Audit Committee members are offered both induction and every three years with one third of the Board required to ongoing training as required. They also receive specific training stand for re-election each year. The re-appointment of on any relevant matters as needs arise. The Committee’s Non-Executive Directors is subject to consideration by Terms of Reference are in line with the recommendations in the the Nomination Committee, prior to Board approval. Combined Code and other best practice. These are available The Committee has retained external advisors to assist from the Company Secretary upon request. We are satisfied and advise it regarding appointments. The external that the Audit Committee arrangements meet the requirements advisors carry out initial interviews and select suitable of the Combined Code. applicants for consideration by the Nomination Committee. The Committee also relies on professional assistance The Committee met on three occasions and out of the from specialists such as psychometric analysts to possible attendance each member’s participation was: assist with the selection process.

Director No of meetings Out of possible It has been decided by the Board that Paul Renucci Martin Towers (Chairman) 2 2 and Paul Simpson will stand for rotational re-election Graham Holden 3 3 this year. The Board believes that Paul Renucci has Tony Illsley 2 2 demonstrated considerable leadership skills and expertise Bill Halbert (resigned 02/06/09) 1 1 in the repositioning and improved performance of Kcom. The Board believes that Paul Simpson has demonstrated There has been no disagreement between the Audit similar aptitude in the overall management of many of the Committee and the Board. Should there be disagreement Group’s key stakeholders and in improving the strength on any material issue, the Audit Committee would be able to of the Group’s financial position. report that issue to the shareholders in the Annual Report. Due to the relatively small size of the Board, matters which Nomination Committee are included in the Nomination Committee’s Terms of Tony Illsley (Chairman) (appointed 2 June 2009), Bill Halbert, Reference are often discussed by the Board as a whole. Graham Holden, Martin Towers (appointed 2 June 2009). Michael Abrahams (retired 24 July 2009).

KCOM Group PLC Annual Report and Accounts 2009/10 Directors’ Report 35

Allotment Committee the Chairman of the Audit Committee prior to the Paul Simpson (Chairman), Kevin Walsh. appointment of the external auditors. Denise Robinson (resigned 3 April 2009). The proportion by value of non-audit services provided The Committee supports the Board in the execution of its by the auditors during the year was 50 per cent (2009: duties and responsibilities considering, and if appropriate, 61 per cent). In the prior year a significant piece of work authorising the allotment of shares and any associated was undertaken in relation to Group pensions strategy. administration. Before any allotment is considered, the A component of the current year non audit fees relates Committee ensures that the total number of shares to be to the continuation of the pensions work started in the issued does not exceed the authority given by shareholders previous year. The non-audit work carried out during the The Nomination Committee did not formally meet during at the last Annual General Meeting, in accordance with s.551 year under review was instructed having undertaken an the year. Matters that may have been considered within of the Companies Act 2006. The quorum for this meeting is appropriate tender process in recognition of the Policy the Committee’s remit were discussed at the meeting of two, one of which must be the Company Secretary. noted above. Non-audit fees are a standing agenda item the full Board. for the Audit Committee. In addition, the external auditors The Board is satisfied that the Committee has carried report to the Audit Committee annually on the actions they The Nomination Committee makes recommendations to out its duties in a satisfactory manner. have taken to comply with professional and regulatory the Board regarding appointment of Non-Executive and requirements and best practice designed to ensure their Executive Directors. It ensures that any appointments or The Committee met on 12 occasions and out of the independence, and formally confirm their independence re-appointments are made on merit through a formal, possible attendance, each member’s participation was: to the Committee. The Audit Committee members in rigorous and transparent process against objective criteria. turn satisfy themselves that the external auditors are The appointment of a Non-Executive Director is for a Director No of meetings Out of possible independent and this is minuted on an annual basis. specified term and re-appointment is not automatic and Paul Simpson (Chairman) 12 12 is made on the recommendation of the Committee. Kevin Walsh 12 12 Directors’ responsibilities in relation to the The Committee also guides the whole Board in arranging financial statements orderly succession for appointments to the Board. Internal control The Directors are responsible for preparing the Annual Full details of our internal controls can be found in the Report, the Directors’ Remuneration Report and the The Board has been pleased to note that a number of Directors’ Report on page 22. financial statements in accordance with applicable law senior management roles have recently been filled through and regulations. the promotion of internal candidates. Following this, the Share Capital Structures Board has identified the need for further formal succession Full details of share capital structures can be found in the Company law requires the Directors to prepare financial planning particularly for these senior managers and Director’s Report on page 19. statements for each financial year. Under that law the Executive Directors and is currently in the process of Directors have prepared the Group and parent Company developing this plan. Appointment of Auditors to non-audit engagements financial statements in accordance with International The Company’s external auditors are currently Financial Reporting Standards (IFRSs) as adopted by the All Directors are required to stand for re-election at least PricewaterhouseCoopers LLP, who were appointed in European Union. Under Company law the Directors must every three years with one third of the Board required to 2006/07. The Company’s auditors are approved at the not approve the financial statements unless they are stand for re-election each year. The re-appointment of Annual General Meeting each year and their appointment is satisfied that they give a true and fair view of the state of Non-Executive Directors is subject to consideration by reviewed on a regular basis. If the Board feels it is appropriate, affairs of the Group and the Company and of the profit or the Nomination Committee, prior to Board approval. the audit process is put out to tender and other audit firms loss of the Group for that period. In preparing these The Committee has retained external advisors to assist are then invited to tender for the audit. The selection of new financial statements, the Directors are required to: and advise it regarding appointments. The external auditors is then made via a strict and rigorous process. advisors carry out initial interviews and select suitable >> select suitable accounting policies and then apply them applicants for consideration by the Nomination Committee. The Board is aware of the need to maintain an appropriate consistently; The Committee also relies on professional assistance degree of independence on the part of the auditors when >> make judgements and accounting estimates that are from specialists such as psychometric analysts to engaged on non-audit assignments and throughout the reasonable and prudent; assist with the selection process. year had in place an ‘Engagement of External Auditors >> state whether applicable IFRSs as adopted by the Policy’, which sets out the rules of engagement around European Union have been followed, subject to any It has been decided by the Board that Paul Renucci non-audit work. material departures disclosed and explained in the and Paul Simpson will stand for rotational re-election financial statements; this year. The Board believes that Paul Renucci has The Policy sets out services from which the auditors >> prepare the financial statements on the going concern demonstrated considerable leadership skills and expertise are specifically excluded. These include internal audit basis unless it is inappropriate to presume that the in the repositioning and improved performance of Kcom. services, litigation support, remuneration advice and Company will continue in business. The Board believes that Paul Simpson has demonstrated legal advice services. similar aptitude in the overall management of many of the The Directors are responsible for keeping adequate Group’s key stakeholders and in improving the strength Every other piece of non-audit work is assessed separately accounting records that are sufficient to show and explain of the Group’s financial position. and is awarded depending on which professional services the Company’s transactions and disclose with reasonable firm is considered best suited to perform the work. accuracy at any time the financial position of the Company Due to the relatively small size of the Board, matters which This takes into account any potential loss of shareholder and the Group and enable them to ensure that the financial are included in the Nomination Committee’s Terms of value if the auditors do not perform the work, as well as any statements and the Directors’ Remuneration Report Reference are often discussed by the Board as a whole. potential independence issues if they do perform the work. comply with the Companies Act 2006 and, as regards the In addition any non-audit work with a total fee greater than Group financial statements, Article 4 of the IAS Regulation. 25 per cent of the annual audit fee must be approved by They are also responsible for safeguarding the assets

KCOM Group PLC Annual Report and Accounts 2009/10 36 Directors’ Report

Corporate Governance continued

of the Company and the Group and hence for taking The Board regards the discussions of the Company’s reasonable steps for the prevention and detection of strategy as primarily the role of the Executive Chairman fraud and other irregularities. and this forms part of the regular meetings held with the institutional shareholders. The Board is briefed monthly The Directors are responsible for the maintenance and on investor relations, receiving copies of analysts’ integrity of the Company’s website. Legislation in the reports on the Company and are notified of any relevant United Kingdom governing the preparation and shareholder concerns. dissemination of financial statements may differ from legislation in other jurisdictions. The Board considers that the Company’s Annual General Meeting represents an important forum for communication Responsibility statement between the Company’s Shareholders and its Directors. Each of the Directors, whose names and functions are The Company’s Chairman and Directors will be available listed on pages 24 and 25, confirm that, to the best of to answer questions at the AGM. The Board has sought to their knowledge: encourage shareholder participation by inviting questions in advance and referring minority interest questions for later >> the Group financial statements, which have been detailed response. Details of the resolutions to be proposed prepared in accordance with IFRSs as adopted by at the AGM are set out in the separate notice of AGM sent the EU, give a true and fair view of the assets, liabilities, to all shareholders. financial position and profit of the Group; and >> the Business and financial review contained in this The results of proxy voting are made available at the AGM Annual Report includes a fair review of the development and subsequently on the Company website. and performance of the business and the position of the Group, together with a description of the principal The Company welcomes the opportunity for active risks and uncertainties that it faces. shareholder participation at its AGM. With approximately 41,000 shareholders in Hull and East Yorkshire, many of Relations with shareholders whom are also customers, the Board believes that voting The Company places a great deal of importance on on a show of hands provides a valuable opportunity for communicating with its stakeholders and is committed to local sentiment and concerns to be expressed, but will establishing constructive dialogue with investors in order keep under review developing best practice with regard to assist it in developing an understanding of the views to voting of all resolutions on a poll. of its shareholders. Meetings are regularly held with the institutional shareholders to discuss the Company’s Signed on behalf of the Board strategy and performance, and to obtain feedback as well as general presentations after the interim and preliminary Paul Simpson results. During the year, meetings have been held with Company Secretary 45 such shareholders. All Company announcements 7 June 2010 are published on the Company’s website, together with presentation materials and financial reports.

The Executive Chairman is always available to meet with shareholders to discuss strategy and governance matters if required. While other Non-Executive Directors do not ordinarily attend meetings with major shareholders, they would do so if this were requested by shareholders.

KCOM Group PLC Annual Report and Accounts 2009/10 Remuneration 37

Remuneration report

This report is presented in five sections. “We believe both Executives and other >> An introductory letter from the Remuneration employees must be aligned with, and Committee Chairman >> An overview of the role and activities of the motivated by, the Company’s success.” Remuneration Committee Graham Holden Chairman, Remuneration Committee >> A summary of our approach to Executive remuneration >> Details on the structure of Executive rewards >> Required audited remuneration disclosures

Section 1: Letter from the Chairman of the >> Having introduced in 2009 the Executive Incentive Plan Remuneration Committee (‘EIP’) which is a three-year plan, there is no intention Dear Shareholder to make any further awards under any other long term incentive to any EIP participant within three years of the The Committee has reviewed the performance of the EIP award. Executive Directors against 2009/10 targets and objectives. >> Likewise, having reduced the amount of on-target The Committee has also reviewed the market positioning, bonus and increased the stretch element of the bonus appropriateness and effectiveness of the Executive reward package on 1 April 2009 in light of the introduction arrangements, in order to determine whether or not of the EIP, we do not intend to make any changes changes are needed for the following year. Accordingly the to these arrangements in 2010/11. Committee has set similarly appropriate measures and reward structures for 2010/11. The outcomes from this In undertaking our review, we considered the general review are summarised in this report. reward arrangements for the Company as a whole against those of our competitors and other relevant market In this first full year of an agreed two year restructuring and comparators. We then considered our requirements to transformation plan, the Company has performed strongly retain and motivate talented employees before making against its financial and operational targets and objectives, any decision. We believe that both Executives and other at the same time as completing a number of significant employees must be aligned with and motivated by the transformational milestones. The focus has been very Company’s success so that they continue to work much on underpinning business fundamentals, in order together as a productive team. to create a strong, resilient base from which to grow. This same focus will continue to apply through 2010/11, As part of an effectiveness review for the entire Board, the second year of the plan, though other internal targets an evaluation of the Remuneration Committee was will be designed to support growth, following the initial also undertaken. We are pleased to report this review necessary period of refocus and re-alignment. concluded that the Committee has operated effectively. The Remuneration Committee also reviewed the As agreed last year: effectiveness of its advisers and concluded that they were satisfied with the quality and timeliness of the >> Even though some Executives have taken on increased advice received from external sources. responsibilities through the year, we are maintaining our constraint on Executive base pay and the emphasis on Graham Holden variable performance related pay. However, with effect Chairman, Remuneration Committee from 1 April 2010, the base pay of Paul Renucci will be 7 June 2010 aligned to that of Kevin Walsh.

KCOM Group PLC Annual Report and Accounts 2009/10 38 Remuneration

Remuneration report continued

Section 2: What is the role of the The Committee considers that the Executive reward Remuneration Committee? arrangements for 2009/10 were successful in incentivising The members of the Committee during 2009/10 were a focus on creating strong underpinning fundamentals and Graham Holden (Committee Chairman), Tony Illsley and significant growth in shareholder value. This approach will Martin Towers. Tony and Martin joined the Committee on continue through 2010/11. 2 June 2009. All members are independent Non-Executive Directors. The Committee met five times during the year Section 3: Executive remuneration at a glance under review and attendance at the meetings is shown The KCOM Group reward package has a number of in the attendance table on page 33. elements. Base salaries and benefits for all staff are determined with reference to the Company’s reward Under its terms of reference (published in the Corporate principles and through benchmarking against relevant Governance section of our website at www.kcomplc.com) comparators. In order to align an individual’s reward with the Committee is responsible for: Company performance, other components – annual bonuses and long term incentives – are linked to the >> Reviewing and approving the remuneration and terms of Company’s strategy and determined by the levels of employment (including any termination arrangements) of performance achieved against key targets. Executive Directors and Senior Executives of the Company >> Reviewing the Company’s overall reward strategy, The Committee reviews the remuneration structure annually including incentive and benefit plans to ensure that it remains aligned with business needs and >> Approving all Company share arrangements is appropriately positioned relative to the market, to ensure >> Approving Senior Executives pension plan arrangements that it retains and motivates talented employees. We use >> Reviewing the Company’s risk management and target performance to estimate the total potential reward assurance processes for reward and benchmark our reward package against those of KCOM Group’s competitors. The Board has reviewed compliance with the Combined Code on reward-related matters and confirms that the What are the principles of our remuneration policy? Company has complied with all aspects. The Committee Our remuneration policy aims to be: regularly consults with the Executive Chairman and the Group HR Director, although none are present when their Competitively geared: own reward is under discussion. The Committee received >> Median salaries plus median bonuses and above advice over the year on all aspects of remuneration median long term incentives provide an opportunity including both specific and general market trends and for highly geared and competitive total reward for data from independent remuneration consultants Kepler superior performance. Associates, who were appointed in February 2008 and provide no other services to the Company. Performance linked: >> A significant part of Executive Directors’ reward is During 2009/10, Committee meetings covered the determined by the Company’s success. Failure to following items: achieve threshold levels of performance results in no payout under short or long term incentives. >> Reviewing external competitiveness of Senior Executive reward structures and payments Shareholder aligned: >> Reviewing Executive Directors’ and Senior Executives’ >> A considerable part of the reward is aligned to the salaries measurement of a shareholder return measure. >> Determining awards under the 2009/10 bonus plan and setting award levels and targets for 2010/11 Simple and transparent: >> Reviewing and agreeing the performance conditions >> All aspects of the remuneration structure are clear to for historic long term incentive plans employees and openly communicated. This supports >> Reviewing all plans for compliance with new pensions/ our aim of engendering fairness and teamwork across tax legislation the organisation. >> Reviewing and amending the style and content of the remuneration report to shareholders

KCOM Group PLC Annual Report and Accounts 2009/10 Remuneration 39

Annual bonus scheme At the start of 2010, we have commenced a Group-wide The majority of employees have the opportunity to earn an consultation which proposes to close all current Group annual cash bonus. With effect from 1 April 2009 the award pension schemes to future accrual and to introduce a of the bonus was dependent upon achievement of Group Group-wide Stakeholder Plan with harmonised terms. financial performance targets with the level of benefit calculated at the end of the period. All employees are now Directors’ Service Contracts bonused on the same Group targets, apart from those Service contracts for Executive Directors have a maximum employed by Smart421. The Executive Chairman with input notice period of 12 months apart from the Executive from the Chief Financial Officer recommends the percentage Chairman, whose notice period is six months. The notice earned by Senior Executives against their financial targets. period for Non-Executive Directors is six months. All Non- These recommendations are considered by the Remuneration Executive Directors are appointed for a term of no more than Committee in consultation with the Audit Committee. three years before re-election by shareholders and in practice The targets are also monitored at various intervals during they stand for re-election more frequently. All Directors’ the performance period and the final calculation is thoroughly Service Contracts include a clause that notice or pay in lieu of checked by both Committees. Bonuses are payable twice notice may be forfeited for a serious breach or continued yearly, following publication of the Company’s financial results, material breach. Details are provided on page 43. for all staff other than Directors and Senior Executives who may only receive their bonus payment in June, following What are the components of reward? publication of the Company’s full year results. We believe the timing of payments emphasises the link between the Fixed >>Base Salary >>Available to all KCOM Group employees (although employees Company’s results and an individual’s reward. >>Benefits including excluding Senior Executives and pensions Directors, have the potential to It is the Company’s policy that bonuses and other incentives earn a H1 bonus following the are not pensionable. The Company has, however, preserved publication of the H1 results) the terms and conditions of some of the employees of some Variable >>Annual bonus acquired businesses, which set out that those particular >>Equity-based >>Available to Senior Executives bonuses and benefits are pensionable. long term and Directors only incentives

How has the Executive Director reward structure changed year on year?

Changes to 2008/09 reward 2009/10 reward 2010/11 reward Base salary >>Held at 2008/09 levels >>Held at 2008/09 levels >>Held at 2008/09 levels Annual >>On target percentage reduced from >>On target performance earns >>On target performance earns bonus 75% to 50% of salary 50% of salary 50% of salary >>Performance criteria based upon >>Performance criteria based upon >>Performance criteria based upon Group targets Group targets Group targets >>Above target ‘stretch’ opportunity >>Above target ‘stretch’ opportunity >>Above target ‘stretch’ opportunity increased from 25% to 50% of 50% of salary. of 50% of salary. >>Performance criteria based upon >>Performance criteria based upon >>Performance criteria based upon Group targets Group targe Group targets Long term >>EIP introduced >>Continued participation in the EIP >>Continued participation in the EIP incentive >>Further investment into the LTCIP stopped from 1 September 2009 >>No further share options granted

How do the elements of variable reward align with KCOM Group’s strategy?

Percentage Key elements Measured Performance of maximum Variable components of strategy by target achieved Bonus Sustainability Reduction in Group Debt 2x EBITDA Operational excellence Growth in Group EBITDA Significant and stretching 40% improvement year on year Long term incentive Shareholder value Growth in share price + dividend £1.00 20%

KCOM Group PLC Annual Report and Accounts 2009/10 40 Remuneration

Remuneration report continued

What did the Executive Directors receive in 2009/10?

Annual bonus Base salary Benefits excluding On Above target £’000 pensions Pension Target ‘stretch’ Maximum Actual Total Bill Halbert 363 15 821 182 363 145 605 Paul Simpson 248 20 46 124 248 99 413 Kevin Walsh 235 18 44 118 235 94 391 Paul Renucci 225 20 42 113 225 90 377

1 Elected not to be a member of a Company pension scheme. Instead receives cash.

What past awards have vested in 2010? Total number of companies in the peer Group including There are no past long term incentive awards that the KCOM Group is 23. For more information, see page 42. Executive Directors participate in that have vested in 2009/10. The two long term incentive award schemes that are due to Balancing short and long term remuneration expire in June 2010 are the LTRS 2007 and LTIP 2007 details Based on our view of current market practice, and the of which can be found on page 46. principles of our remuneration policy, we have established the remuneration structure set out in the table below. Fixed annual Section 4: Remuneration explained elements (including salary, pension and benefits) are to How are the rewards structured? recognise the status of our Executives and to enable them to Assessing what is ‘competitive’ undertake current and future lifestyle planning. The short and The peer Group companies are noted on page 42 – this is the long term incentives are to motivate and reward Executives main Group against which we monitor whether our rewards for for delivering strong and sustainable performance to the Executive Directors are competitive relative to our performance Group’s shareholders. The long term incentive arrangement and it includes those that we use for monitoring the Company’s with its Total Shareable Return linkage ensures that there is business performance. We also look at reward arrangements good alignment between shareholders, Executive Directors in other types of telecoms and technology-based companies, and senior management. as these are potential competitors for talent. For completeness, we also examine market reward data for UK industrial In previous years the Executives participated in and contributed companies of a similar market capitalisation to the Group to the LTCIP. Contributions to this scheme ceased in 2009/10 to help ensure we do not inadvertently lose talent by falling following several of the Company’s largest shareholders behind the broader marketplace. expressing a preference for a scheme which would reinforce the delivery of stetching total shareholder return targets.

Key elements of Executive Director short and long term remuneration

Element Objective Market positioning How much? Conditions Base salary To recognise status Median Historically increased only with None and responsibility increased responsibility Benefits To provide lifestyle benefits Median Cost of life assurance, income None that are market competitive protection, car or cash allowance, fully expensed fuel card, medical insurance and medical screening Annual bonus To reinforce the Market median for Target 50% of salary Achievement of Group achievement of stretching delivering objectives maximum 100% EBITDA targets and Group Company objectives EBITDA to net debt ratio Pension To provide funding Median Cost of employer pension None for retirement contribution at 20% Long term To augment shareholder Above median 2009 grant of 22 million Vesting of 10% at a TSR incentive – EIP alignment, ensure direct link shares split; of 45p with straight line between reward and 1/3 Executive Chairman proportionate vesting to superior shareholder returns 1/3 Executive Directors a maximum of £1 1/3 Senior Executives

KCOM Group PLC Annual Report and Accounts 2009/10 Remuneration 41

Linking reward to Company performance delivery of stretching TSR targets. A participant is granted The Company’s remuneration strategy is to align rewards a conditional right to a number of ordinary shares in the closely with sustainable shareholder value creation. Company which vest after three years to the extent that This is achieved by incentivising and motivating the delivery the associated performance condition is met. against targets, designed to create financial stability and resilience and growth in specific shareholder return EIP awards vest according to a performance condition based measures. Having created strong financial performance on the Company’s Total Shareholder Return (i.e. share price through 2009/10, the emphasis on growth measures plus dividends paid, ‘TSR’) measured over any three months will increase, as part of the mix, but always with core during the three-year performance period, as follows; fundamentals as the priority. EIP award vests at ten per cent of the maximum award for All Executives’ bonus payments are linked to performance a TSR of 45 pence and vests in full for a TSR of 100 pence, against financial targets and the delivery of future growth. with straight line vesting between 45 pence and 100 pence. The total maximum number of shares under the EIP which How did our performance drive Executive Director will vest on the achievement of a TSR of 100 pence is limited reward in 2009/10? to 22 million shares. For the majority of participants, vested 2009/10 saw continued challenges in the market. shares are released 50 per cent after three years, and 25 Despite those sustained pressures, the business saw per cent equally after four and five years; vested shares held improvements in operating margins, profitability and cash by the Executive Chairman are released in full after three generation along with a substantial reduction in overall years to ensure better alignment with his expected tenure indebtedness. The short term bonus reflects improvement in this role. Dividends are accrued on vested shares. in reported EBITDA and a significant reduction in net debt. The EIP will deliver value for improvement in Vesting is also subject to the Committee being satisfied shareholder value. that there has been a demonstrable and sustainable improvement in the Company’s financial and non-financial Performance highlight performance over the performance period. KCOM Group >>Substantial net debt reduction >>Significant improvement in Group EIP vesting scheme profitability measure Kingston Communications >>Continued and substantial business profitability performance 100% Kcom >>Material improvement in profitability

Bonus payments In line with the Company’s performance against the % vesting targets for 2009/10 the Committee confirmed the following bonus awards:

Annual bonus 10% Maximum Actual Bill Halbert 364 145 45p 100p Paul Simpson 248 99 KCOM Group share price plus partial dividends (p) Kevin Walsh 236 94 Paul Renucci 226 90 During the year ended 31 March 2010, a TSR of 50.4 pence was achieved. This current performance would, Long term incentives in which the Executive subject to the Committee’s final discretion, result in a Directors participate total 4.4 million shares vesting (20 per cent of the total The Executive Directors participate in two share schemes; award), as detailed in the table below, the balance being the EIP and the LTCIP. The EIP was introduced in 2009 shared by the remaining Senior Executive participants. and replaced the LTCIP as the Company’s main long term EIP grant holding incentive following extensive consultation with shareholders. Potential The Company also operates other share schemes which vesting as at are available either to all employees or to specific groups Date of grant Award 31 March 2010 of employees (including the Executive Directors) at the Bill Halbert 24 July 2009 7,480,000 1,496,000 discretion of the Committee. Any share schemes in which Paul Simpson 24 July 2009 2,420,000 484,000 Executive Directors do not participate are covered in more Kevin Walsh 24 July 2009 2,420,000 484,000 detail on page 45 and 46. Paul Renucci 24 July 2009 2,420,000 484,000

Executive Incentive Plan Long term co-investment plan ‘LTCIP’ The EIP was introduced in 2009 following an extensive The LTCIP was established in 2007 and was replaced by the consultation with shareholders who expressed a EIP as the Company’s main long term incentive scheme in preference for a scheme which would reinforce the 2009. Participation in the LTCIP is restricted to the Executive

KCOM Group PLC Annual Report and Accounts 2009/10 42 Remuneration

Remuneration report continued

Directors and requires an Executive to purchase and hold The comparator Group of companies are as follows: KCOM Group shares for up to five years (either by transferring existing shares or through new share purchases). Anite Group Vanco Purchased shares (‘investment shares’) must be held in the Axon Group Horizon Technology plan for a minimum of three years, and dependent upon Cable & Wireless BT Group meeting the performance criteria, up to four matching shares Colt Telecom Telecom Plus are awarded for each investment share. The value of Computacenter BNS Telecom Group investment shares is limited to 150 per cent of maximum Detica Group Electronic Data Proc bonus entitlement per year (scaled back in years four and Dimension Data Microgen five to 100 per cent and 75 per cent respectively). The plan Logica CMG Phoenix IT Group is subject to the usual ABI dilution limits, as well as a limit of Morse RM the value of awards at 2.5 per cent of the market value of the Northgate Info Tribal Group Company. Following the introduction of the EIP, no further Thus Group XChanging investment into the LTCIP is allowed from 1 September 2009, thus concluding the LTCIP investment opportunity three years earlier than had been planned at its introduction. 3. Actual growth in share price If the Company achieves share price growth of 25 per The LTCIP performance condition has three elements: cent compound per annum over the relevant performance period then a further matching share may vest for each 1. EPS Underpin investment share. EPS growth (as defined in the scheme rules) must equal or exceed the growth in RPI over the relevant General performance period. >> There is no re-testing of performance conditions for any incentive programme. 2. TSR >> Unvested EIP awards, LTCIP awards and share option Upon achievement of the EPS underpin up to three awards are forfeited if an Executive resigns or his co-investment shares may vest depending upon the employment is terminated for cause. Awards continue comparative TSR performance of the Company against on a pro-rata basis (though still subject to the its comparator Group (as established at the start of the performance condition) if an Executive leaves for scheme). TSR is calculated by comparing the average reasons of retirement, redundancy or ill-health. share price over the three-month period prior to the start of >> If control of the Company changes, EIP shares will vest the scheme (1 September 07) with the final average share pro-rata based on the proportion of the vesting period price over the three-month period prior to the end of the elapsed to the change of control, and be also subject relevant performance period and adding back dividends. to the Group’s TSR performance achieved up to the Vesting is calculated as follows: time of the event.

KCOM Group’s Number of matching shares Performance Graph TSR rank that vest per investment share >> The following graph shows, for the financial year ended Below median Nil 31 March 2010 and for each of the previous four At median 1 financial years, the TSR on a holding of the Company’s Between median and Between 1 and 3 on a ordinary shares compared with a hypothetical holding upper quartile straight line basis of shares in the FTSE Fixed Line Telecommunications Upper quartile and above 3 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.

KCOM Group PLC Annual Report and Accounts 2009/10 every three years, and annually after nine years. nine after annually and years, three every period of three years. They are subject to reappointmentNon-Executive Directors’ appointments are for an initialNon-Executive Directors trends. general and headroom available level, dilution current the reviews regularly Committee The ten-year period. the Company’s issued ordinary share capital in any rolling of 10 cent exceed per not will schemes share employee Additionally, the issue of shares to satisfy all the Company’s period. ten-year rolling any in capital share ordinary issued Company’s of the cent 5 per exceed not will The issue of shares to satisfy discretionary share schemes dilution. of share level the limiting in rules scheme share We adhere to both the latest ABI guidelines and our own headroom and dilution Share TSR. relative Company’s the on predominately contingent itself is addition in which award, matching a to earn potential the for apre-requisite as shares Group KCOM hold and to purchase Executives LTCIP encourages the Furthermore, Return. to Total shares Shareholder EIP of vesting the linking through of shareholders those with aligned closely are Directors Executive of the interests The Minimum shareholding Keeping Directors’ and Shareholders’ interests aligned 2005 1April on £100 of Value invested and FTSE techMARK Index Services Telecommunications Line Fixed FTSE vs. –KCOM Group 2005 1April since performance TSR Board as awhole. as Board by the set are fees their and to KCOM Group complexity and scale of similar companies for those against year every reviewed are fees Their plans. benefit or incentive Company’s of the any in participate not do Directors Non-Executive reason. whatever for termination of early event the in compensation of form to any entitled not are and periods notice or of service contracts have not do Directors Non-Executive Value £ 100 150 200 50 Mar ‘05 0 FTSE techMARKASX KCOM Group Mar ‘06 Mar ‘07 FTSE FixedLineASX Mar ‘08 Mar ‘09

Mar ‘10

Section 5: Audited information Audited 5: Section Employment contracts top talent. our retain and to motivate level Board below exists structure reward appropriate an that satisfied is Committee The > > to: Executives Senior those for packages the reviews also Committee the Directors, for Consequently, in addition to setting the reward packages goals. its to achieve Company of the ability the on influence significant and adirect have also Executives Senior other that recognises Committee the Directors, Executive by the made contribution to the addition In Executives Senior Other earned. fees the retain and Directorship external one than more on take may Directors Executive approval, Board’s to prior the subject and aresult, As experience. in other companies the Company can benefitfrom their Directorships hold members Board where that We believe Outside appointments increase. anil at set been 2010/11 for Fees made. was change no already and have year 2009/10 of the financial end the at reviewed were Fees Bill Halbert Bill Renucci Paul Walsh Kevin Paul Simpson Executive Directors disclosure recommendations. the with complied wehave that We consider report. guidelines and not disclosed elsewhere in the remuneration practice by best recommended or by statute required is that information the included wehave section this In of office. loss for compensation any include not do Contracts Service Directors’ Non-Executive The of office. (12 of loss of notice event the in lieu in months) The Executive Directors’ Service Contracts allow for paymentSpecial Provisions 2 1 Graham Holden Graham Non-Executive Directors Michael Abrahams Towers Martin Tony Illsey Gower Neil Executive Chairman. until Director Was25/11/08 Non-Executive hewhen was as re-election. appointed an last aDirectors’ since term three-year anotional of balance the is This > > Board and the rest of the employees. of the rest the and Board to the both packages of reward relativity the Review made. being are packages reward market-competitive that Ensure 2 Annual Report and Accounts 2009/10 Accounts and Report Annual PLC Group KCOM 02/06/2009 02/06/2009 24/05/2004 24/05/2004 24/05/2004 01/09/2006 01/03/1999 27/11/2007 27/11/2007 appointment Date of Date

31/08/2009) 24/07/2009) term (years) term (resigned (resigned Unexpired 2 (2012) 2 (2012) 1 (2011) 1 (2011) 1 (2011) 1 (2011) 1 (2011) 1 1 1 1 1 1 1

Remuneration Notice period

(months)

12 12 12 12 12 6 6 6 6

43 44 Remuneration

Remuneration report continued

Directors’ emoluments

Salaries/ Taxable Compensation for Total Total fees benefits Bonuses loss of office 2010 2009 £’000 £’000 £’000 £’000 £’000 £’000 Current Directors Mr W Halbert 363 15 145 – 523 134 Mr P Simpson 248 20 99 – 367 329 Mr K Walsh 235 18 94 – 347 464 Mr P Renucci 225 20 90 – 335 284 Mr G Holden 45 – – – 45 45 Mr M Towers* 37 – – – 37 – Mr T Illsley* 41 – – – 41 – 1,194 73 428 – 1,695 1,256 Previous Directors Mr M Abrahams* 44 – – – 44 149 Mr M Fallen – – – – – 1,079 Mr N Gower* 781 18 31 311 438 246 Mr J Carrington – – – – – 15 122 18 31 311 482 1,489

Total 1,316 91 459 311 2,177 2,745

* Part period only. Details of appointment and resignation are shown in the employment contract table on page 43. 1 Excludes consultancy fee of £46,631 paid following resignation.

Directors’ interests The only change that has taken place since the end of The table below sets out the interests of Directors (as listed the year is where the Executive Directors participate in on pages 24 and 25) and their families in the Company’s the Share Incentive Plan (SIP), for which we make monthly shares at 31 March 2010, other than with respect to announcements as required under section 5.6.1 of the options to acquire ordinary shares which are detailed Disclosure and Transparency Rules. This has resulted separately. All of the interests held by Directors and their in the following additional shares being held: families are beneficial. Paul Simpson 944* under the SIP At March 2010 At March 2009 ordinary shares ordinary shares Kevin Walsh 472* under the SIP Paul Renucci 944* under the SIP B Halbert Nil Nil

G Holden 50,000 10,000 *This includes shares which may be subject to forfeiture in certain circumstances. P Simpson 445,4021 310,6101 Executive Directors’ interest in share options K Walsh 677,6971 386,8541 Details of Executive Directors’ share options as at 31 March P Renucci 403,9511 345,4351 2010 are summarised below. Full details of Directors’ T Illsey Nil Nil shareholdings and options are contained in the Register M Towers 50,0002 Nil of Directors Interests. 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.

KCOM Group PLC Annual Report and Accounts 2009/10 Remuneration 45

Market Held At Exercised Granted Lapsed in Held At Option Price at Date of Vesting Lapse Quantity Perform Scheme 01/04/09 in Period In Period Period 31/03/10 Price Grant Grant Date Date Unexpired Condition Paul Simpson Approved 15,000 – – – 15,000 82.5p 82.5p 20/08/01 20/08/04 19/08/11 15,000 100 Tech

None of the other three Executive Directors held share options at the beginning of the year and have not been granted further options during the year.

Shares awarded under long term incentive plans held at 31 March 2010

Total Number of shares Granted Total Number of shares Share Price Scheme held at 1 April 2009 in year held at 1 April 2010 Normal Vesting Dates on Grant Bill Halbert EIP – 7,480,000 7,480,000 24/07/2012 28.25p Paul Simpson EIP1 – 2,420,000 2,420,000 24/07/2012 – 24/07/2014 28.25p LTCIP – TSR2 858,573 277,0 0 6 1,135,579 01/09/2010 – 01/09/2012 40.86p LTCIP – Growth in Share Price2 95,397 30,778 126,175 01/09/2010 – 01/09/2012 40.86p Kevin Walsh EIP1 – 2,420,000 2,420,000 24/07/2012 – 24/07/2014 28.25p LTCIP – TSR2 1,193,303 593,642 1,786,945 01/09/2010 – 01/09/2012 40.86p LTCIP – Growth in Share Price2 132,589 65,960 198,549 01/09/2010 – 01/09/2012 40.86p Paul Renucci EIP1 – 2,420,000 2,420,000 24/07/2012 – 24/07/2014 28.25p LTCIP – TSR2 1,066,920 97,219 1,164,139 01/09/2010 – 01/09/2012 40.86p LTCIP – Growth in Share Price2 118,547 10,802 129,349 01/09/2010 – 01/09/2012 40.86p

1 Vested shares are released in three tranches: 50 per cent after three years, and 25 per cent 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. MyShare – Share Incentive Plan (SIP) Kevin Walsh The SIP was introduced in 2003 and was fundamentally Mr Walsh is a member of the KCOM Group Personal redesigned in 2007 in an effort to embed a culture of share Pension Plan. During the financial year, the Company ownership throughout the Company. We offered 200 free made contributions of £44,063 on behalf of Mr Walsh shares to each eligible employee during 2007. The scheme is (2009: £31,085). open to all employees and offers free, dividend, partnership and matching shares. Matching shares are offered on a Paul Renucci sliding scale of between 2:1 for contributions of £20 per Mr Renucci is a member of the KCOM Group Personal month and to 1:3 for contributions of over £51 per month. Pension Plan. During the financial year, the Company made contributions of £42,188 on behalf of Mr Renucci Currently 1,242 employees (including three Directors and (2009: 30,313). five Persons Discharging Managerial Responsibilities (PDMRs) participate in this scheme with an average Historic long term incentive schemes – with no allocation of 213 matching shares per month. Executive Director participation LTRS 2007 Pensions Long Term Reward Scheme (LTRS) Bill Halbert We introduced this scheme in 2005 and it is due to expire Mr Halbert has elected not to be a member of any of the in June 2010 and we do not intend to make any further Company pension schemes and accordingly, the Company awards under this scheme. It was aimed at the tier of made no contributions on his behalf. Instead, he received cash management immediately below our most Senior payments totalling £81,780 (2009: £17,766). This was in addition Executives. No individual will receive an award under both to the salaries and fees included in the table on page 44. the LTIP and the LTRS scheme in the same financial year.

Paul Simpson The scheme is a ‘mirror’ of the LTIP and is based on achieving Mr Simpson is a member of the KCOM Group Personal the same stretching performance conditions. Each participant Pension Plan. During the financial year, the Company is awarded points taking into account similar factors. If the made contributions of £46,440 on behalf of Mr Simpson target is met, the cash bonus pool is distributed amongst (2009: £33,864). participants on a pro-rata basis according to their points, but subject to a cap of 50 per cent of an individual’s basic salary. The benefits are paid partly in cash and partly in shares, the ratio being at the discretion of the Committee and agreed at

KCOM Group PLC Annual Report and Accounts 2009/10 46 Remuneration

Remuneration report continued

the time of grant. The cash element is payable at the end of Performance targets are based on Group EBITA (earnings the three-year period whilst the shares are not released for before interest tax and amortisation of intangible assets a further six months. on acquisition) and the award will vest in 2011 assuming the performance targets are met. Twenty eight participants were included in the 2007 award which was based on Group PBTA and payable in a ratio Performance conditions of 75 per cent cash, 25 per cent shares. This scheme LTIP & LTRS 2007 has vested at 6 per cent creating a pool of 5 per cent. The Base PBTA (profit before taxation and amortisation of Participants will receive the cash element of their entitlement intangible assets on acquisition) is taken from our audited in July 2010 and the share element of their entitlement in accounts (as at 31/03/07). The Final PBTA will be taken January 2011. from our audited accounts (as at 31/03/10). Growth in PBTA will generate a bonus pool as follows: LTIP 2007 Annual Compound % of increase in profit that % of increase in profit that Long Term Incentive Plan (LTIP) Growth Rate of PBTA becomes the pool (LTIP) becomes the pool (LTRS) This scheme was established in 2004, is due to expire Less than 2% 0 0 in June 2010 and we do not intend to make any further 2% 2 2 awards under this scheme. It is a cash bonus pool, based 4% 4 4 on achieving stretching performance conditions which 6% 5 5 are measured over three years. It is aimed at our most Senior Executives. Each participant is awarded points 8% 6 6 according to factors such as responsibility and potential 10% 8 8 ability to influence Company performance. Provided the 15% 10 10 target is met, the cash bonus pool is distributed amongst 20% and over 15 15 participants on a pro-rata basis according to their points, (And on a proportionate basis between points.) but subject to a cap of 200 per cent of any individual’s For 2007 awards the performance condition reflects the fact basic salary. The benefits are paid partly in cash and partly that the impact of the asset impairment charge made in our in shares, the ratio being at the discretion of the Committee financial results in March 2006 will not provide a favourable and agreed at the time of grant. The cash element is re-basing effect for awards granted after March 2007. payable at the end of the three-year period whilst the shares are not released for a further year. LTPP The 2008 performance condition measures Group EBITA Five participants were included in the 2007 award which (earnings before interest tax and amortisation of intangible was based on Group PBTA and payable in a ratio of 50 assets on acquisition). The shares will vest on an incremental per cent cash, 50 per cent shares. This scheme has vested basis of between 25 per cent and 100 per cent depending at 6 per cent creating a pool of 5 per cent. Participants will on the level of EBITA achieved. receive the cash element of their entitlement in July 2010 and the share element of their entitlement in July 2011. General information The closing mid-market price of KCOM Group PLC shares LTPP 2008 on 31 March 2010 was 49.0 pence. The high and low Long Term Performance Plan (LTPP) closing mid-market share prices during the year were This scheme was introduced in 2008. The intention was 55.25 pence and 18.25 pence respectively. that this scheme would replace the LTIP and LTRS, and is aimed at the two tiers of management directly below Paul Simpson the Board. The scheme allows participants to receive a Company Secretary number of KCOM Group shares at nil cost, providing the 7 June 2010 performance conditions are 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.

Twenty six participants were included in the 2008 award, with 5,614,156 nil cost share options being granted.

KCOM Group PLC Annual Report and Accounts 2009/10 Independent Auditors’ report 47

>> The Group financial statements have been properly Independent Auditors’ prepared in accordance with IFRSs as adopted by the European Union; report >> The Parent Company financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union and as applied in accordance To the members of KCOM Group PLC 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 We have audited the financial statements of KCOM Group statements, Article 4 of the lAS Regulation. PLC for the year ended 31 March 2010 which comprise the consolidated income statement, consolidated statement Opinion on other matters prescribed by the of comprehensive income, the consolidated and parent Companies Act 2006 Company balance sheets, the consolidated statement of In our opinion: changes in shareholders’ equity, the consolidated and parent Company cash flow statements and the related notes. >> The part of the Directors’ remuneration report to be The financial reporting framework that has been applied in audited has been properly prepared in accordance their preparation is applicable law and International Financial with the Companies Act 2006; Reporting Standards (IFRSs) as adopted by the European >> The information given in the Directors’ report for the Union and, as regards the parent Company financial financial year for which the financial statements are statements, as applied in accordance with the provisions prepared is consistent with the financial statements. of the Companies Act 2006. Matters on which we are required to report Respective responsibilities of Directors and auditors by exception As explained more fully in the Directors’ responsibilities We have nothing to report in respect of the following: statement set out on pages 35 and 36, the Directors are responsible for the preparation of the financial statements Under the Companies Act 2006 we are required to report and for being satisfied that they give a true and fair view. to you if, in our opinion: Our responsibility is to audit the financial statements in accordance with applicable law and International Standards >> Adequate accounting records have not been kept by the on Auditing (UK and Ireland). Those standards require us Parent Company, or returns adequate for our audit have to comply with the Auditing Practices Board’s Ethical not been received from branches not visited by us; or Standards for Auditors. >> The Parent Company financial statements and the part of the Directors’ remuneration report to be audited are not in This report, including the opinions, has been prepared agreement with the accounting records and returns; or for and only for the Company’s members as a body in >> Certain disclosures of Directors’ remuneration specified accordance with Chapter 3 of Part 16 of the Companies by law are not made; or Act 2006 and for no other purpose. We do not, in giving >> We have not received all the information and explanations these opinions, accept or assume responsibility for any we require for our audit. other purpose or to any other person to whom this report is shown or into whose hands it may come save where Under the Listing Rules we are required to review: expressly agreed by our prior consent in writing. >> The Directors’ statement, set out on page 18, in relation Scope of the audit of the financial statements to going concern; and An audit involves obtaining evidence about the amounts >> The parts of the corporate governance statement relating and disclosures in the financial statements sufficient to give to the Company’s compliance with the nine provisions of reasonable assurance that the financial statements are free the June 2008 Combined Code specified for our review. from material misstatement, whether caused by fraud or error. This includes an assessment of whether the accounting Steve Denison (Senior Statutory Auditor) policies are appropriate to the Group’s and the Parent for and on behalf of PricewaterhouseCoopers LLP Company’s circumstances and have been consistently Chartered Accountants and Statutory Auditors, Leeds applied and adequately disclosed; the reasonableness of 7 June 2010 significant accounting estimates made by the Directors; and the overall presentation of the financial statements.

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 2010 and of the Group’s profit and Group’s and Parent Company’s cash flows for the year then ended;

KCOM Group PLC Annual Report and Accounts 2009/10 48 Financial statements

Financial statements

Consolidated income statement For the year ended 31 March 2010

2010 2009 Notes £’000 £’000 Continuing operations Revenue 4 412,800 472,439

Operating expenses 5 (386,250) (571,688) Group operating profit/(loss) 26,550 (99,249)

Analysed as: Group EBITDA before exceptional items 4 69,795 65,141 Exceptional items – impairment of goodwill 7 – (106,890) Exceptional items – other 7 (10,205) (22,380) Depreciation of property, plant and equipment 4 (20,074) (20,331) Amortisation of intangible assets 4 (12,966) (14,789)

Finance costs 9 (7,368) (12,304) Finance income 9 – 197 Share of (loss)/profit of associates (12) 11 Profit/(loss) before taxation 4 19,170 (111,345)

Taxation 10 (1,477) 4,863 Profit/(loss) for the year 28 17,693 (106,482)

Profit/(loss) for the year attributable to equity holders of the Company 28 17,693 (106,482) Earnings/(loss) per share from continuing operations Basic 12 3.47p (20.70p) Diluted 12 3.38p (20.70p)

Consolidated statement of comprehensive income For the year ended 31 March 2010

2010 2009 Notes £’000 £’000 Profit/(loss) for the year 17,693 (106,482) Other comprehensive income Cash flow hedges 28 920 (6,568) Actuarial gains/(losses) on retirement benefit obligation 31 5,620 (53,550) Tax on items taken directly to equity 28 (1,832) 14,957 Total comprehensive income/(loss) for the year attributable to equity holders 22,401 (151,643)

The notes on pages 52 to 69 are an integral part of these consolidated financial statements.

KCOM Group PLC Annual Report and Accounts 2009/10 Financial statements 49

Balance sheets As at 31 March 2010

Consolidated Parent Company 2010 2009 2010 2009 Notes £’000 £’000 £’000 £’000 Non-current assets Goodwill 14 85,272 86,410 – – Intangible assets 15 10,547 20,502 – – Property, plant and equipment 16 124,057 131,009 – – Investments 17 1,054 1,049 234,215 234,215 Deferred tax assets 26 56,115 59,424 14,104 17,078 Amounts owed from subsidiary undertakings 19 – – 260,267 237,239 277,045 298,394 508,586 488,532 Current assets Inventories 18 3,608 4,117 – – Trade and other receivables 19 76,927 86,469 232 512 Cash and cash equivalents 23 13,890 17,50 8 – – 94,425 108,094 232 512 Total assets 371,470 406,488 508,818 489,044 Current liabilities Trade and other payables 20 (144,678) (136,944) – –

Non-current liabilities Bank loans 21 (129,458) (174,195) – – Retirement benefit obligation 31 (50,373) (60,993) (50,373) (60,993) Long term provisions and other payables 21 (11,204) (13,737) – – Total liabilities (335,713) (385,869) (50,373) (60,993) Net assets 35,757 20,619 458,445 428,051 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 28 353,231 353,231 353,231 353,231 Hedging and translation reserve 28 (6,351) ( 7,271) – – Retained earnings 28 (362,783) (377,0 01) 53,554 23,160 Total equity 28 35,757 20,619 458,445 428,051

The notes on pages 52 to 69 are an integral part of these consolidated financial statements.

The financial statements were approved by the Board of Directors and authorised for issue on 7 June 2010. They were signed on its behalf by:

B Halbert Executive Chairman

P Simpson Chief Financial Officer

7 June 2010

KCOM Group PLC Annual Report and Accounts 2009/10 50 Financial statements

Financial statements continued

Consolidated statement of changes in shareholders’ equity For the year ended 31 March 2010

Share Hedging and Share Premium Translation Retained Capital Account Reserve Earnings Total Notes £’000 £’000 £’000 £’000 £’000 As at 31 March 2008 51,627 353,111 (703) (219,350) 184,685 Loss for the year – – – (106,482) (106,482) Increase in fair value of financial derivative instruments – – (6,568) – (6,568) Actuarial losses on defined benefit pension schemes 31 – – – (53,550) (53,550) Tax on actuarial losses on defined pension scheme 26 – – – 13,118 13,118 Tax on movement in cashflow hedges 26 – – – 1,839 1,839 Total comprehensive loss for the year ended 31 March 2009 – – (6,568) (145,075) (151,643) Shares issued in the year 33 120 – – 153 Purchase of ordinary shares 27 – – – (795) (795) Employee share schemes – – – 514 514 Dividends 11 – – – (12,295) (12,295) Transactions with owners 33 120 – (12,576) (12,423) At 31 March 2009 28 51,660 353,231 ( 7,271) (377,0 01) 20,619 Profit for the year – – – 17,6 9 3 17,6 9 3 Decrease in fair value of financial derivative instruments 29 – – 920 – 920 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 cashflow hedges 26 – – – (258) (258) Total comprehensive income for the year ended 31 March 2010 – – 920 21,481 22,401 Purchase of ordinary shares 27 – – – (820) (820) Employee share schemes – – – 1,282 1,282 Dividends 11 – – – ( 7,725) ( 7,725) Transactions with owners – – – ( 7,26 3) ( 7,26 3) At 31 March 2010 28 51,660 353,231 (6,351) (362,783) 35,757

KCOM Group PLC Annual Report and Accounts 2009/10 Financial statements 51

Cash flow statements For the year ended 31 March 2010

Consolidated Parent Company 2010 2009 2010 2009 Notes £’000 £’000 £’000 £’000 Cashflows from operating activities Group operating profit/(loss) 26,550 (99,249) 3,600 2,195 Adjustments for – impairment of goodwill – 106,890 – – – depreciation and amortisation 5 33,040 35,120 – – – decrease/(increase) in working capital 31,816 26,478 (27,454) 10,100 – restructuring cost payment (14,886) ( 7,6 91) – pension enhanced transfer value payment (4,900) – – employee share schemes 820 712 – – Loss on sale of businesses 2,130 – Loss on sale of property, plant and equipment 42 – – – Cash inflow from operations 74,612 62,260 (23,854) 12,295 Cash flows from investing activities Proceeds from sale of business 1,092 1,450 – – Earn-out payment on acquisition (942) (891) – – Purchase of property, plant and equipment (14,567) (20,060) – – Proceeds from sale of property, plant and equipment – 25 – – Purchase of intangible assets (3,011) (4,747) – – Addition to investments (17) (176) – – Net cash used in investing activities (17,445) (24,399) – – Cash flows from financing activities Dividends paid 11 (7,725) (12,295) (7,725) (12,295) Dividends received – – 31,579 – Interest paid (7,302) (13,670) – – Interest received – 196 – – Capital element of finance lease repayments (758) (815) – – Repayment of bank loans (45,000) (25,000) – – Net cash used in financing activities (60,785) (51,584) 23,854 (12,295) Decrease in cash and cash equivalents (3,618) (13,723) – – Cash and cash equivalents at the beginning of the year 17,508 31,231 – – Cash and cash equivalents at the end of the year 23 13,890 17,50 8 – –

KCOM Group PLC Annual Report and Accounts 2009/10 52 Financial statements

Notes to the financial statements

01 General information employees and others providing similiar services. These features KCOM Group PLC is a public limited company incorporated and do not impact the number of awards expected to vest or valuation domiciled in the United Kingdom under the Companies Act 2006. thereof subsequent to the grant date. All cancellations, whether by The address of the registered office is 37 Carr Lane, Kingston upon the entity or by other parties, should receive the same accounting Hull, HU1 3RE. The nature of the Group’s operations is described treatment. The amendment does not have a material impact on within the ‘Our businesses’ section on page 2. the group or company’s financial statements.

These financial statements are presented in pounds sterling which Other changes that have been published and are mandatory as of is the currency of the primary economic environment in which the 1 April 2009 but are not relevant for the Group’s operations include: Group operates. >> IAS 23 (revised), ‘Borrowing costs’ 02 Accounting policies >> IFRS 1 (amendment), ‘First time adoption of IFRS’ and IAS 27 The principal accounting policies applied in the preparation of these (revised), ‘Consolidated and separate financial statements’ consolidated financial statements are set out below. These policies >> IAS 32 (amendment), ‘Financial Instruments: presentation’ and IAS have been consistently applied to all the years presented, unless 1 (amendment), ‘Presentation of Financial Statements – puttable otherwise stated. financial instruments and obligations arising on liquidation’. >> IFRIC 13, ‘Customer loyalty programmes relating to IAS 18, Revenue’ Basis of accounting >> IFRIC 14, ‘The limit on a defined benefit asset, minimum funding The consolidated financial statements have been prepared in requirements and their interaction’. accordance with International Financial Reporting Standards as adopted by the European Union (IFRSs as adopted by the EU), IFRIC In addition, various standards and amendments to existing standards interpretations and the Companies Act 2006 applicable to companies have been published and are mandatory for the group’s accounting reporting under IFRS. The consolidated financial statements have periods beginning on or after 1 April 2010 or later periods, but the been prepared under the historical cost convention, as modified by group has not early adopted them. These include: the revaluation of financial assets and financial liabilities (including derivative instruments) at fair value through reserves. >> IFRIC 17, ‘Distribution of non-cash assets to owners’. This interpretation provides guidance on accounting for arrangements The preparation of financial statements in conformity with IFRS whereby an entity distributes non-cash assets to shareholders requires the use of certain critical accounting estimates. It also requires either as a distribution of reserves or as a dividend. management to exercise its judgement in the process of applying the >> IFRS 3 (revised), ‘Business combinations’. The revised standard Group’s accounting policies. The areas involving a higher degree of continues to apply the acquisition method to business combinations, judgement or complexity, or areas where assumptions and estimates with some significant changes. For example, all payments to purchase are significant to the consolidated financial statements are disclosed a business are to be recorded at fair value at the acquisition date, with in note 3. contingent payments classified as debt subsequently re-measured through the income statement. The Group has adopted the following new and amended IFRSs as of >> IAS 38 (amendment), ‘Intangible Assets’. The amendment clarifies 1 April 2009: guidance in measuring the fair value of an intangible asset acquired in a business combination. >> IFRS 8 ‘Operating Segments’ – IFRS 8 is a new standard that >> IFRS 5 (amendment), ‘Non-current assets held for sale and requires operating segments to be reported in a manner consistent discontinued operations’. The amendment provides clarification with the internal reporting provided to the chief operating decision that IFRS 5 specifies the disclosures required in respect of maker. This has not had a significant impact on the Group’s non-current assets (or disposal groups) classified as held for segmental disclosures. sale or discontinued operations. >> IFRS 7 ‘Financial instruments – Disclosures’ (amendment). >> IAS 1 (amendment), ‘Presentation of financial statements’. The amendment requires enhanced disclosures about fair value The amendment provides clarification that the potential settlement measurement and liquidity risk. In particular, the amendment of a liability by the issue of equity is not relevant to its classification requires disclosure of fair value measurements by level of a fair as current or non-current. value measurement hierarchy. >> IFRS 2 (amendments), ‘Group cash-settled share-based payment >> IAS 1 (revised). ‘Presentation of financial statements’. The revised transaction. The amendments incorporate IFRIC 8 ‘Scope of IFRS 2 standard prohibits the presentation of items of income and and IFRIC 11, IFRS 2 – Group and treasury share transactions’. expenses (that is, ‘non-owner changes in equity’) in the statement of changes in equity, requiring ‘non-owner changes in equity’ to be The Directors anticipate that the adoption of the above Standards and presented separately from owner changes in equity in a statement Interpretations on the effective date will not have a significant impact of comprehensive income. on the Group’s financial results. >> IFRS 2 (amendment), ‘Share-based payment’ deals with vesting conditions and cancellations. It clarifies that vesting conditions are service conditions and performance conditions only. Other features of a share-based payment are not vesting conditions. These features need to be included in the grant date fair value for transactions with

KCOM Group PLC Annual Report and Accounts 2009/10 Financial statements 53

Basis of consolidation Exceptional items Subsidiaries are entities controlled by the Company. Control exists Exceptional items are those significant items which are separately when the Company has the power, directly or indirectly, to govern disclosed by virtue of their size or incidence to enable a full the financial and operating policies of an entity so as to obtain benefits understanding of the Group’s financial performance and relate to from its activities. In assessing control, potential voting rights that items of expenditure included within the income statement which are currently exercisable or convertible are taken into account. arise outside the ordinary course of business. In particular costs The consolidated financial statements include the financial statements associated with organisational restructuring, costs and provisions of the Company and its undertakings made up to 31 March 2010. associated with onerous contracts and profits or losses on the The results of new subsidiary undertakings are included from the dates sale of an operation are treated as exceptional items. of acquisition using the purchase method of consolidation. Where a Company has ceased to be a subsidiary undertaking during the year, Intangible assets its results are included to the date of cessation. Goodwill Goodwill represents amounts arising on acquisition of subsidiary On acquisition, the assets, liabilities and contingent liabilities of a undertakings and is the difference between the cost of the acquisition subsidiary are measured at their fair values at the date of acquisition. and the fair value of the net identifiable assets and liabilities acquired. Any excess of the cost of acquisition over the fair values of the identifiable net assets acquired is recognised as goodwill. Goodwill is stated at cost less any accumulated impairment losses Any deficiency of the cost of acquisition below the fair values of and is tested annually for impairment. the identifiable net assets acquired (i.e. discount on acquisition) is credited to the income statement in the period of acquisition. Goodwill arising on acquisitions before the date of transition to IFRS has been retained at the previous UK GAAP amounts subject to being Where necessary, adjustments are made to the financial statements tested for impairment at that date. Goodwill written off to reserves of subsidiaries to bring the accounting policies used into line with under UK GAAP prior to 1998 has not been reinstated and is not those used by the Group. All intra-Group transactions, balances, included in determining any subsequent profit or loss on disposal. income and expenses are eliminated on consolidation. Goodwill is allocated to cash-generating units for the purpose of Associates are entities over which the Group has significant influence impairment testing. The allocation is made to those cash-generating but not control, generally accompanying a shareholding of between units that are expected to benefit from the business combination in 20 per cent and 50 per cent of the voting rights. Investments in which the goodwill arose identified according to operating segment. associates are accounted for using the equity method of accounting and are initially recognised at cost. The Group’s share of its associates’ Development costs profits or losses is recognised in the income statement. The cumulative An internally-generated intangible asset arising from the Group’s post-acquisition movements are adjusted against the carrying amount internal development activities is recognised only if all of the following of the investment. conditions are met:

Segment reporting >> An asset is created that can be identified (such as software Operating segments are reported in a manner consistent with the and new processes). internal reporting provided to the chief operating decision maker >> It is probable that the asset created will generate future (CODM). The CODM, who is responsible for allocating resources economic benefits. and assessing performance of the operating segments, has been >> The development cost of the asset can be measured reliably. identified as the KCOM Group PLC Board of Directors. Internally-generated intangible assets are amortised on a straight-line Revenue recognition basis over their useful lives. Where no internally-generated intangible Group revenue, which excludes value added tax, comprises the value asset can be recognised, development expenditure is recognised as of services provided and equipment sales by Group undertakings, an expense in the period in which it is incurred. Research costs are excluding those between them. The Group enters into contractual expensed to the income statement as and when they are incurred. arrangements that include various components which operate independently of each other. Revenue is recognised in respect of the Amortisation Group’s right to consideration for each individual component where Amortisation of intangible assets is charged to the income statement a reliable fair value can be attributed to these components. on a straight-line basis over the estimated useful lives of each intangible asset. Intangible assets are amortised from the date they are available Revenue from calls is recognised in the consolidated income statement for use. at the time the call is made over the Group’s network. Revenue from rentals is recognised evenly over the rental period. Revenue from The estimated useful lives are as follows: product sales is recognised at the point of effective transfer of risk and reward. Revenue from production of directories is recognised at Assets arising on acquisition the point when the directory is published. Revenue from long term Customer and supplier relationships up to 8 years build or construction contracts is recognised based on the percentage Technology and brand up to 10 years of completion method. The stage of completion is estimated using an appropriate measure according to the nature of the contract. Other assets Revenue arising from the provision of other services, including Software up to 5 years maintenance contracts, is recognised over the periods in which the service is provided to the customer, based on the stage of completion Development costs 1 year and the respective proportion of costs incurred.

Interest income is accrued on a time basis, by reference to the principal outstanding and at the effective interest rate applicable.

KCOM Group PLC Annual Report and Accounts 2009/10 54 Financial statements

02 Accounting policies continued Group will not be able to collect all amounts due according to the Property, plant & equipment original terms of the receivables. Property, plant and equipment is stated at historical cost less accumulated depreciation and any provision for impairment. Cash and cash equivalents Network infrastructure and related equipment is recorded at cost Cash and cash equivalents includes cash in hand, short term deposits plus labour costs directly attributable to the cost of the network and other short term highly liquid investments with original maturities of construction. Depreciation is provided so as to write off the cost three months or less, and bank overdrafts. Bank overdrafts are shown of assets to residual values on a straight-line basis over the assets’ within borrowings in current liabilities on the Balance Sheet. useful estimated lives as follows: Trade payables Trade payables are recognised initially at fair value and subsequently Freehold buildings 40 years measured at amortised cost. Leasehold buildings and improvements period of lease Taxation Exchange equipment 10 years The tax expense represents the sum of the tax currently payable and deferred tax. External plant 10 to 20 years Vehicles, other apparatus and equipment 3 to 10 years The tax currently payable is based on taxable profit for the year. Taxable profit differs from net profit as reported in the income Freehold land is not depreciated. statement because it excludes items of income or expense that are taxable or deductible in other years and/or items that are never taxable The residual value, if not insignificant, is reassessed annually. or deductible. The Group’s liability for current tax is calculated using Depreciation of network infrastructure and related equipment is tax rates that have been enacted or substantively enacted by the provided for from the date the network comes into operation. balance sheet date.

Assets held under finance leases are depreciated over their expected Deferred tax is the tax expected to be payable or recoverable on useful lives on the same basis as owned assets or, where shorter, differences between the carrying amounts of assets and liabilities in over the term of the relevant lease. the financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the balance Fixed asset investments sheet liability method. Deferred tax liabilities are generally recognised Fixed asset investments are shown at cost less provision for for all taxable temporary differences and deferred tax assets are impairment. They are reviewed at each reporting date for possible recognised to the extent that it is probable that taxable profits will be reversal of the impairment. available against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary Impairment difference arises from goodwill or from the initial recognition (other than At each balance sheet date, the Group reviews the carrying amounts in a business combination) of other assets and liabilities in a transaction of its tangible and intangible assets to determine whether there is any that affects neither the tax profit nor the accounting profit. indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated The carrying amount of deferred tax assets is reviewed at each balance in order to determine the extent of the impairment loss (if any). 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. 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 Deferred tax liabilities are recognised for taxable temporary differences are discounted to their present value using a pre-tax discount rate that arising on investments in subsidiaries and associates, and interests in reflects current market assessments of the time value of money and joint ventures, except where the Group is able to control the reversal the risks specific to the asset for which the estimates of future cash of the temporary difference and it is probable that the temporary flows have not been adjusted. difference will not reverse in the foreseeable future.

An impairment loss is recognised whenever the carrying amount Deferred tax is calculated at the tax rates that are expected to apply in of an asset exceeds its recoverable amount. Impairment losses are the period when the liability is settled or the asset is realised. Deferred recognised in the income statement. Impairment losses recognised tax is charged or credited in the income statement, except when it in respect of cash-generating units are allocated first to reduce the relates to items charged or credited directly to equity, in which case the carrying amount of any goodwill allocated to cash generating units deferred tax is also dealt within equity. Deferred tax is not discounted. and then to reduce the carrying amount of other assets in the unit on a pro rata basis. Financial instruments and hedge accounting Financial assets and liabilities are recognised in the Group’s balance Inventories sheet when the Group becomes a party to the contractual provisions Inventories are valued at the lower of cost or net realisable value. of the instrument. Cost is determined on a number of bases, including standard cost, The Group uses derivative financial instruments to hedge its exposure average cost and first in, first out (FIFO) method. Costs include, where to foreign exchange and interest rate risks arising from operational, appropriate, direct overhead expenses. Net realisable value represents financing and investment activities. In accordance with its treasury the estimated selling price less all estimated costs of completion and policy, the Group does not hold or issue derivative financial instruments costs to be incurred in marketing, selling and distribution. Provision is for trading purposes. made for obsolete, slow-moving or defective items where appropriate. Derivative financial instruments are initially recognised at fair value. Trade receivables Any gain or loss on remeasurement to fair value is recognised Trade receivables are recognised initially at fair value and subsequently immediately in the income statement. However, where derivatives restated for any impairment. A provision for impairment of trade qualify for hedge accounting, recognition of the resultant gain or receivables is established when there is objective evidence that the loss depends on the nature of the item being hedged.

KCOM Group PLC Annual Report and Accounts 2009/10 Financial statements 55

The fair value of the interest rate swaps is the estimated amount that Pensions the Group would receive or pay to terminate the swap at the balance Defined contribution sheet date, taking into account current interest rates and the current Obligations for contributions to the defined contribution (money purchase) creditworthiness of the swap counterparties. The fair value of forward scheme are charged to the income statement in the period they fall due. exchange contracts is their quoted market price at the balance sheet date, being the present value of the quoted forward price. Defined benefit For defined benefit retirement benefit schemes, the cost of providing Changes in the fair value of derivative financial instruments that are benefits is determined using a building block approach, with designated and effective as hedges of future cash flows are actuarial valuations being carried out at each balance sheet date. recognised directly in equity, and the ineffective portion is recognised Actuarial gains and losses are recognised in full in the period in immediately in the income statement. If the cash flow hedge of a firm which they occur, and are recognised in equity and presented in commitment or forecasted transaction results in the recognition of an the consolidated statement of comprehensive income. asset or liability, then, at the time the asset or liability is recognised, the associated gains or losses on the derivative that had previously The current and past service costs of the scheme (the increase in the been recognised in equity are included in the initial measurement of present value of employees’ future benefits attributable to the current the asset or liability. For hedges that do not result in recognition of or prior periods) are charged to the income statement in the period. an asset or a liability, amounts deferred in equity are recognised in The cost or benefit of committed settlements and curtailments is the income statement in the same period in which the hedged item recognised immediately in the income statement. The interest cost affects net profit or loss. of the scheme (the expected return on scheme assets, less interest on scheme liabilities) is recognised in the income statement in the Hedge accounting is discontinued when the hedging instrument period to which it relates. expires or is sold, terminated, or exercised, or no longer qualifies for hedge accounting. At that time, any cumulative gain or loss on the The retirement benefit obligation recognised in the balance sheet hedging instrument recognised in equity is retained in equity until the represents the present value of the defined benefit obligation as forecasted transaction occurs. If a hedged transaction is no longer adjusted for unrecognised past service cost, and as reduced by the expected to occur, the net cumulative gain or loss recognised in fair value of scheme assets. Any asset resulting from this calculation equity is transferred to the income statement in the period. is limited to past service cost, plus the present value of available refunds and reductions in future contributions to the plan. Foreign currencies Transactions in foreign currencies are recorded at the rate ruling at the Employee share schemes and share based payments date of the transaction. Monetary assets and liabilities denominated in The Group has applied the requirements of IFRS 2 Share-based foreign currencies are retranslated at the rate of exchange ruling at the Payments. In accordance with the transitional provisions, IFRS 2 balance sheet date. has been applied to all grants of equity instruments after 7 November 2002 that were unvested as of 1 April 2005. The accounts of overseas subsidiary undertakings are translated at the rate of exchange ruling at the balance sheet date. The exchange The Group issues equity-settled and cash-settled share-based difference arising on the retranslation of opening net assets is taken payments to certain employees. directly to reserves. All other translation differences are taken to the income statement with the exception of differences on foreign currency Equity-settled employee schemes, including employee share borrowings to the extent that they are used to finance or provide a options, discretionary long term incentive schemes, Save As You hedge against Group equity investments in foreign enterprises, which Earn schemes, LTCIP and the EIP, provide employees the option to are taken directly to reserves together with the exchange difference acquire shares of the Company. Employee share options and long on the net investment in these enterprises. term incentive schemes are generally subject to performance or service conditions. Leasing and hire purchase commitments Leases where the Group assumes substantially all of the risks and The fair value of equity-settled Share-based Payments is measured rewards of ownership are classified as finance leases. Assets held at the date of grant and charged to the income statement over the under finance leases and hire purchase contracts are capitalised in period during which performance or service conditions are required the balance sheet at their fair value or, if lower, the present value of to be met, or immediately where no performance or service criteria the future minimum lease payments, and are depreciated over their exist. The fair value of equity-settled share-based payments granted useful economic lives. The capital elements of future obligations under is measured using either the Black-Scholes or Monte Carlo model, finance leases and hire purchase contracts are included as liabilities depending on the terms under which the options were granted. in the balance sheet. The interest elements of the rental obligations The amount recognised as an expense is adjusted to reflect the actual are charged to the income statement over the periods of the leases number of employee share options that vest, except where forfeiture and hire purchase contracts. The finance charge is allocated to each is only due to market based performance criteria not being met. period during the lease so as to produce a constant periodic rate of interest on the remaining balance of the liability. For cash-settled Share-based Payments, including the LTIP and LTRS a liability equal to the portion of the goods or services Rentals payable under operating leases are charged to the income received is recognised at the current fair value determined at statement on a straight-line basis over the lease term. each balance sheet date.

Bank borrowings and issue costs The Group also operates a Share Incentive Plan (SIP) under which Bank borrowings are stated at the amount of proceeds after employees have the option to purchase shares in the Company each deduction of issue costs, which are amortised over the period of the month and offers employees free matching and partnership shares loan. Finance charges, including premiums payable on settlement or on a sliding scale of between 1:3 to 2:1. The Group recognises the redemption and direct issue costs, are accounted for in the income free shares as an expense over the period of any applicable service statement on an accruals basis and are added to the carrying amount condition, or immediately when no service condition exists. of the instrument to the extent that they are not settled in the period in which they arise.

KCOM Group PLC Annual Report and Accounts 2009/10 56 Financial statements

02 Accounting policies continued The fair value of the options is measured by use of the Black-Scholes Dividends and Monte Carlo option pricing models. Dividend distribution to the Company’s Shareholders is recognised as a liability in the Group’s financial statements in the period in which The valuation of these share-based payments requires several the dividends are approved by the Company’s Shareholders. 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 Provisions each of the Share-based payment schemes are disclosed in note 13. 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 Provisions it is probable that an outflow of economic benefits will be required to Using information available at the balance sheet date, the Directors make settle the obligation. If the effect is material, provisions are determined judgements, based on experience, on the level of provision required to by discounting the expected future cash flows at a pre-tax rate that satisfy all onerous lease and dilapidation commitments, to account reflects current market assessments of the time value of money and, for potential uncollectible receivables, to account for the potential for where appropriate, the risks specific to the liability. unsaleable inventories, and to account for known restructuring costs and known restructuring costs relating to employees. 03 Critical accounting judgements and key sources of estimation uncertainty Deferred taxation Impairment of non-current assets The amount of the deferred tax asset included in the balance sheet Determining whether a non-current asset is impaired requires an of the Group is recognised only to the extent that it is probable that estimation of the value in use and/or the estimated recoverable future taxable profits will be available against which the asset can be amount of the asset derived from the business, or part of the business, utilised. In estimating the amount of the deferred tax asset that may (cash generating unit (CGU)), to which the non-current asset has been be recognised the Directors make judgements, based on current allocated. The value in use calculation requires an estimate of the budgets and forecasts, about the amount of future taxable profits present value of future cash flows expected to arise from the CGU, and the timing of when these will be realised. The Directors consider by applying an appropriate discount rate to the timing and amount the Group will become tax paying in the future at which time the of future cash flows. asset will begin to unwind.

The Directors are required to make judgements regarding the timing 04 Segmental analysis and amount of future cash flows applicable to the CGU, based on Management has determined the operating segments based on the current budgets and forecasts, and extrapolated for an appropriate reports reviewed by the KCOM Group PLC Board that are used to period taking into account growth rates and expected changes to make strategic decisions. selling prices and operating costs. The Directors estimate the appropriate discount rate using pre tax rates that reflect current KCOM Group PLC operates two separate businesses and a PLC market assessments of the time value of money and the risks function. The businesses are Kingston Communications which specific to the individual CGU. includes the KC and Eclipse Internet brands (addressing the needs of our East Yorkshire customers and UK small business market) and Intangible assets arising on acquisition Kcom, our managed communications business (serving enterprise In determining the fair value of intangible assets arising on acquisition and public sector organisations). These businesses have separate the Directors are required to make judgements regarding the timing management teams serving different customer segments. and amount of future cash flows applicable to the businesses being The chief operating decision-maker of the Group is the KCOM Group acquired, discounted using an appropriate discount rate. PLC Board. The Board considers the performance of Kingston Such judgments are based on current budgets and forecasts, Communications and Kcom in assessing the performance of the extrapolated for an appropriate period taking into account growth Group and making decisions about the allocation of resources. rates and expected changes to selling prices and operating costs. Segment disclosures have been presented on this basis. The Directors estimate the appropriate discount rate using pre tax The reporting segments have changed in the year following rates that reflect current market assessments of the time value of the reorganisation of the Group’s operations. As a result, the money and the risks specific to the businesses being acquired. comparative information has been restated and aligns with the new segmental disclosure. Post-employment benefits The Group operates two defined benefit schemes. All post-employment The Kingston Communications reporting segment includes the benefits associated with these schemes have been accounted for in financial results of the KC business, the Eclipse Internet business accordance with IAS 19 ‘Employee benefits’. As detailed within the (‘Eclipse’) and the Information Services business. The Kingston accounting policies note, in accordance with IAS 19, all actuarial Communications results have been historically reported under the gains and losses have been recognised immediately through the Telecoms and Internet (T & IS) and Information Services segments. consolidated statement of comprehensive income. The Kcom reporting segment comprises the financial results of the For all defined benefit pension schemes, pension valuations have been newly created Kcom managed communications services business performed using specialist advice obtained from independent qualified (‘Kcom’), including the Smart421 business (‘Smart’). These results actuaries. In performing these valuations, judgements, assumptions were previously reported as Integration & Managed Services, with and estimates have been made. These assumptions have been the exception of certain customers and activities within Kcom that disclosed within note 31. were previously reported within T & IS. 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.

KCOM Group PLC Annual Report and Accounts 2009/10 Financial statements 57

The segment information provided to the KCOM Group PLC Board The split of total revenue between external customers and inter-segment for the reportable segments, for the year ended 31 March 2010 and revenue is as follows: for the year ended 31 March 2009 (restated) is as follows: Restated 2010 2009 Revenue EBITDA £’000 £’000 Restated Restated 2010 2009 2010 2009 Revenue from external customers £’000 £’000 £’000 £’000 Kingston Communications 122,070 126,337 Before exceptional items Kcom 289,858 345,223 Kingston Communications 123,536 127,9 6 9 57,277 57,8 92 PLC 872 879 Kcom 290,973 345,568 22,693 14,203 Total 412,800 472,439 PLC1 (1,709) (1,098) (10,175) (6,954) Inter-segment revenue Activities before exceptional Kingston Communications 1,466 1,632 items 412,800 472,439 69,795 65,141 Kcom 1,115 345 Exceptional items PLC (2,581) (1,977) Kingston Communications – – (1,422) (2,728) Total – – Kcom2 – – (5,420) (118,374) Group total 412,800 472,439 PLC1 – – (3,363) (8,168) Total (Note 7) – – (10,205) (129,270) Inter-segment sales are charged at prevailing market prices. Total 412,800 472,439 59,590 (64,129) None of the revenue, operating profit or net operating assets arising outside 1 PLC includes head office costs, shared services and eliminations. the United Kingdom are material to the Group. 2 Included in the 2009 Kcom exceptional items is a goodwill impairment of £106,890,000. A reconciliation of total EBITDA to profit/(loss) before income tax is The Group is not dependent upon a single or small number of external provided as follows: customers.

2010 2009 The analysis of the Group’s revenue between sale of goods and provision Notes £’000 £’000 of services is as follows: EBITDA post exceptional items 59,590 (64,129) Depreciation 16 (20,074) (20,331) 2010 2009 £’000 £’000 Amortisation 15 (12,966) (14,789) Sale of goods 29,839 61,627 Finance costs (7,368) (12,304) Provision of services 382,961 410,812 Finance income – 197 Group total 412,800 472,439 Share of (loss)/profit of associate (12) 11 Group profit/(loss) before tax 19,170 (111,345) 05 Group operating costs 2010 2009 Restated Notes £’000 £’000 2010 2009 £’000 £’000 Staff costs 101,517 109,810 Assets Restructuring costs relating to employees 4,980 12,587 Kingston Communications 91,675 101,216 Total staff costs 8 106,497 122,397 Kcom 185,276 198,557 Own work capitalised 8 (3,299) (5,879) PLC 23,460 28,734 Other external charges 241,968 302,145 Total segmental assets 300,411 328,507 Other exceptional items 5,225 116,683 Unallocated assets 71,059 77,9 81 Non employee related pension charges3 2,819 1,222 Total assets 371,470 406,488 Depreciation and amortisation 33,040 35,120 Total 386,250 571,688 Unallocated assets include fixed asset investments, cash and cash equivalents and deferred taxation. 3 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 31. Restated 2010 2009 £’000 £’000 Unallocated assets Investments 1,054 1,049 Deferred tax 56,115 59,424 Cash and short term deposits 13,890 17,50 8 Total unallocated assets 71,059 77,9 81

Disclosure has not been made of segmental liabilities. This is in accordance with IFRS 8 as this measure is not regularly provided to the KCOM Group PLC Board.

KCOM Group PLC Annual Report and Accounts 2009/10 58 Financial statements

06 Group operating profit The loss on sale of business relates to the loss arising on the disposal Profit from continuing operations is stated after charging/(crediting): of Aghoco 1000 Ltd to Phoenix IT Group. The subsidiary contained certain customer contracts and associated assets for break-fix 2010 2009 £’000 £’000 maintenance services. Aghoco 1000 Ltd was sold for a cash consideration of £1,800,000. The total net proceeds from sale of Operating lease rentals: Aghoco 1000 Ltd was £1,092,000 after legal fees. The loss on – hire of plant and machinery 66 133 disposal taking into account net assets disposed (including Goodwill – other operating leases 4,800 5,491 of £2,080,000) and other associated costs amounting to £2,136,000. Auditors’ remuneration (see below) 459 533 The loss of £1.0 million on Lehman Brothers in the prior year arose Cost of inventories recognised as an expense 22,289 54,822 through a combination of the loss incurred on specific project work in Increase in provision for receivables 530 2,335 progress and the write off of outstanding trade receivables following Foreign exchange gain (214) (337) its bankruptcy in the period. Depreciation of owned property, plant and equipment 19,377 19,761 Onerous lease provisions arise as a result of continued rationalisation Depreciation of leased property, plant and equipment 697 570 of the Group’s property portfolio. Amortisation of capitalised development expenditure 788 661 Amortisation of other intangible assets 12,178 14,128 In the prior year Goodwill was impaired by £106,890,000. An impairment Employee share schemes 1,647 712 review was undertaken at the year end in accordance with IAS 36 and no further impairment was required (note 14). Long term incentive plans – (1,500) The combined tax effect of these items is £nil (2009: £Nil) in respect The Parent Company has taken advantage of Section 408 of the of current tax and a credit of £1,274,000 (2009: credit of £6,262,000) Companies Act 2006 and has not included its own income statement in respect of deferred tax. in these financial statements. The profit dealt within the accounts of the Parent Company is £35,179,000 (2009: £2,195,000). 08 Employees & remuneration The average numbers employed by the Group during the year were Auditors’ remuneration as follows: During the year the Group obtained the following services from the Group’s auditor: Number of employees Restated 2010 2009 2010 2009 £’000 £’000 Kingston Communications 580 609 Fees payable to the Company’s auditor for the Kcom 1,245 1,424 audit of the Company’s annual financial statements 63 61 PLC 269 279 Fees payable to the Company’s auditor Total 2,094 2,312 and its associates for other services: – the audit of the Company’s subsidiaries The costs incurred in respect of these employees were: pursuant to legislation 164 144 – other services pursuant to legislation 18 18 2010 2009 £’000 £’000 – tax services 85 42 Wages and salaries 86,808 94,882 – restructuring advice 15 – Social security costs 8,292 10,499 – pensions advice 114 268 Other pension costs 4,770 5,217 Total 459 533 Share scheme cost/(credit) 1,647 (788) Restructuring costs relating to employees 4,980 12,587 Pensions advice reflects the continuation of projects approved by the Board in the previous year. Total 106,497 122,397 Less own work capitalised (3,299) (5,879) 07 Exceptional items Charged to income statement 103,198 116,518

2010 2009 £’000 £’000 All the Group’s employees are employed by the Company with the Restructuring costs 1,071 1,800 exception of 328 (2009: 340) employees employed by KCOM Contact Restructuring costs relating to employees 4,980 12,587 Centres Ltd, Smart421 Technology Group Ltd, and JAM IP Ltd. Loss on sale of business 2,136 210 Disclosures required by the Companies Act 2006 on Directors’ Loss on Lehman Brothers – 1,000 Remuneration, including salaries, performance related bonuses, Onerous leases (note 25) 2,018 6,977 pension contributions and pension entitlements, are to be found Reversal of impairment of unlisted fixed asset investment – (194) in the tables on pages 43 to 46 within the Remuneration Report, and form part of these financial statements. Exceptional items – other 10,205 22,380 Exceptional items – impairment of goodwill – 106,890 Charged to operating profit/(loss) 10,205 129,270 Charged to profit/(loss) before taxation 10,205 129,270

Restructuring costs and costs relating to employees arise as a result of organisational changes within the Group.

KCOM Group PLC Annual Report and Accounts 2009/10 Financial statements 59

09 Finance costs & income 12 Earnings/(loss) per share 2010 2009 The calculation of basic and diluted earnings per share is based on the £’000 £’000 following numbers of shares and earnings. On bank loans, overdrafts and other loans (6,635) (11,656) Finance lease and hire purchase contracts (71) (104) 2010 2009 number number (6,706) (11,760) Weighted average number of shares Interest receivable and similar income – 197 For basic earnings per share 510,389,977 514,388,032 (6,706) (11,563) Share options in issue 12,452,341 1,962,524 Amortisation of loan arrangement fees (662) (544) For diluted earnings per share 522,842,318 516,350,556 Group total (7,368) (12,107) 2010 2009 10 Taxation £’000 £’000 Analysis of tax credit in the year Earnings The credit based on the profit for the year comprises: Profit/(loss) attributable to equity holders of the company 17,693 (106,482) 2010 2009 Notes £’000 £’000 UK corporation tax: pence pence – adjustment in respect of prior years – 54 Earnings/(loss) per share Basic 3.47 (20.70) Total current tax – 54 Diluted 3.38 (20.70) UK deferred tax: Origination and reversal of timing Basic earnings per share is calculated by dividing the profit attributable differences in respect of: to equity holders of the company by the weighted average number – profit for the year 7,874 1,071 of ordinary shares in issue during the year excluding ordinary shares – adjustment in respect of prior years (5,703) (3,124) purchased by the company and held as treasury shares. – credit in respect of intangible asset amortisation (2,094) (2,364) The share options in issue has increased due to the grant of options – credit/(charge) in respect of retirement benefit obligation 1,400 (500) under the Executive Incentive Plan. During the year ended 31 March Total deferred tax 26 1,477 (4,917) 2010, the 22,000,000 shares granted have been weighted according to date granted. In the next financial year the share options in issue Total taxation charge/(credit) for the year 1,477 (4,863) will increase reflecting the full year impact of the 22,000,000 shares. Factors affecting tax charge/(credit) for the year Group profit/(loss) before taxation 19,170 (111,345) 13 Share-based payments Group profit/(loss) before taxation at the standard The Group had six share-based payment schemes (2009: five) in rate of corporation tax in the UK of 28% (2009: 28%) 5,368 (31,176) existence during the year ended 31 March 2010. The Group Effects of: recognised a total charge of £1,647,000 (2009: charge of £712,000) in the year relating to equity-settled share-based payment transactions – exceptional write down of goodwill not deductible issued after 7 November 2002 with a corresponding entry to retained for tax purposes – 29,929 earnings. Details of each of the schemes are provided below: – permanent differences 1,812 (546) – adjustments relating to prior year corporation tax – 54 Save As You Earn (‘SAYE’) scheme – adjustments relating to prior year deferred tax (5,703) (3,124) The Company operated a SAYE scheme within the UK which was open to all UK employees and linked to a monthly savings contract over three Total taxation charge/(credit) for the year 1,477 (4,863) years. Options were granted to scheme participants at ten per cent discount to the prevailing market price. The market price was taken 11 Dividends approximately one month prior to the official grant date. There were no 2010 2009 performance conditions attached to the exercise of these options. £’000 £’000 Amounts recognised as distributions to equity holders SAYE options (issued after 7 November 2002) in the period: – final dividend for the year ended 31 March 2008 Weighted average exercise of 1.88 pence per share – 9,712 Options price (pence) – interim dividend for the year ended 31 March 2009 of – 2,583 Outstanding at the beginning of year 24,293 58.6 0.5 pence per share Lapsed during the year (24,293) 58.6 - final dividend for the year ended 31 March 2009 of 1.0 5,142 – Outstanding at the end of the year – – pence per share - interim dividend for the year ended 31 March 2010 of 0.5 pence per share 2,583 – There were no SAYE options outstanding at the end of the year. Total 7,725 12,295

The proposed final dividend for the year ended 31 March 2010 is 1.25 pence per share, amounting to a total dividend of £6,458,000. 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.

KCOM Group PLC Annual Report and Accounts 2009/10 60 Financial statements

13 Share-based payments continued Number of EPS CAGR Relative TSR Share Options and Long Term Incentive Scheme participants Number FV (pence) Number FV (pence) Total These grants and their criteria are described on pages 37 to 46 of Brought the accounts in the Remuneration Report. forward 4 594,702 0.04* 5,352,323 0.20* 5,9 47,025 April 4 7,476 0.00 67,28 0 0.08 74,756 Share options including LTIS (issued after 7 November 2002) May 4 5,335 0.00 48,013 0.11 53,348 Weighted June 4 5,180 0.00 46,622 0.12 51,802 average exercise price July 4 94,795 0.00 853,159 0.11 9 47,9 54 Options (pence) August 4 1,179 0.00 10,608 0.12 11,787 Outstanding at the beginning of year 58,879 Nil Total 708,667 6,378,005 7,086,672 Lapsed during the year (3,808) Nil Exercised in the year (8,454) Nil * Average FV (pence) from previous year. Outstanding at the end of the year 46,617 Nil The above shares are subject to forfeiture under certain circumstances. For further information see the Remuneration report on page 41 to 43.

The share options, including LTIS, outstanding at 31 March 2010 had a As both parts of the awards made under this plan are subject to a weighted average exercise price of nil pence, and a weighted average market based performance condition under IFRS 2 the awards have remaining contractual life of nil years (the Directors have assumed all been valued using a Monte Carlo simulation model. shares will vest at the earliest available date). No options were granted in the year ended 31 March 2010. Out of the 46,617 outstanding The average assumptions used are as follows: options (2009: 58,879) all were exercisable at 31 March 2010. Share price at date of grant (pence) 29 The assumptions used in the Monte Carlo model for the options Exercise price (pence) Nil outstanding at the beginning of the year are as follows: Volatility (%) 40.44 2006 2005 2004 2003 Risk free rate (%) 3.66 grant grant grant grant Dividend yield (%) 8.00 Share price (on date of official grant) (pence) 65.9 60.4 64.8 54.3 Exercise price (pence) Nil Nil Nil 56.8 Long Term Performance Plan For information on this scheme see Remuneration report on pages Expected dividend 37 to 46. payments (%) 2 1 0 0 Expected term (years) 3 3 3 6.5 Number Granted during the year 5,332,105 Share Incentive Plan Lapsed during the year (728,455) The Share Incentive Plan is open to all employees and offers partnership, Outstanding at the end of the year 4,603,650 matching and free shares (the basis depends on the individual’s contribution into the scheme). No performance criteria are attached to The fair value of awards granted is 31.5 pence using the Black-Scholes these matching shares other than an employee must remain employed model. by the Group for five years from the date of grant to be able to have their free and matching shares. In 2010, 2,213,514 (2009: 3,900,261) matching The average assumptions used are as follows: shares were granted during the year. Given the nature of the scheme, the fair value of the matching shares equates to the cost (£826,000) (2009: £806,000) of the Company acquiring or issuing these shares. Share price at date of grant (pence) 37.75

Number Exercise price (pence) Nil Outstanding at the beginning of year 5,045,964 Volatility (%) 45.39 Granted during the year 2,213,514 Risk free rate (%) 4.53 Dividend yield (%) 5.99 Outstanding at the end of the year 7,259,478

Long Term Co-Investment Plan (LTCIP) Executive Incentive Plan (EIP) Directors are required to hold or subscribe monthly for investment A participant is granted a conditional right to a number of ordinary shares and depending on meeting performance criteria up to four shares in the company which vest after three years to the extent that matching shares are awarded for each investment share. 75 per cent the associated performance condition is met. EIP awards vest as to of performance is based on relative TSR measured over three years ten per cent for a Total Shareholder Return (TSR) (measured as share and 25 per cent is based on EPS growth (CAGR) over a three, four price plus dividends) of 45 pence and vest in full for a TSR of 100 pence. and five year period. The notional amount of matching shares Certain elements of the award were granted under a CSOP and awarded during the year are as follows: an unapproved option to provide a tax effective reward to senior management. For further information see the Remuneration report on page 41.

KCOM Group PLC Annual Report and Accounts 2009/10 Financial statements 61

As set out in the Remuneration report on page 41, as at 31 March 2010, 14 Goodwill – consolidated 20 per cent of the EIP shares had potentially vested. The Group has not £’000 issued or purchased shares in respect of this given the conditional nature Cost of any potential vesting. Similarly no provision has been made for the cost At 1 April 2009 86,410 of the potential dividend that vested shares would attract. Additions 942 Vesting Number of Disposal of subsidiary undertaking (2,080) Award date release date participants Number FV (pence) At 31 March 2010 85,272 EIP awards 24/07/2009 24/07/2011 1 5,041,520 £0.11 Carrying amount 24/07/2009 24/07/2012 1 2,438,480 £0.12 At 31 March 2010 85,272 24/07/2009 24/07/2012 3 3,630,000 £0.11 At 31 March 2009 86,410 24/07/2009 24/07/2013 3 1,815,000 £0.11 Adjustments comprise: 24/07/2009 24/07/2014 3 1,815,000 £0.11 19/11/2009 19/11/2012 17 3,038,364 £0.27 >> £942,000 addition comprises deferred consideration paid during 19/11/2009 19/11/2013 17 1,519,182 £0.26 the year in respect of JAM IP Ltd. 19/11/2009 19/11/2014 17 1,519,182 £0.25 >> £2,080,000 disposal relates to the sale of Aghoco 1000 Ltd to Phoenix IT Group. This subsidiary contained certain customer CSOP & contracts and associated working capital. unapproved 25/02/2010 25/02/2013 17 591,636 £0.32 Goodwill acquired in a business combination is allocated at the date of acquisition to the cash-generating units (‘CGU’) that are expected 25/02/2010 25/02/2014 17 295,818 £0.31 to benefit from that business combination. The Group tests goodwill 25/02/2010 25/02/2015 17 295,818 £0.30 annually for impairment, or more frequently if there are indications that Total 22,000,000 goodwill might be impaired. The recoverable amounts of the CGUs are determined from value in use calculations. The key assumptions None of these awards were exercisable at the year end. The awards for these value in use calculations are those regarding discount rates, have been valued using a Monte Carlo simulation model. growth rates and expected changes to selling prices and direct costs. The Directors estimate discount rates using pre tax rates that reflect The weighted average assumptions used during the year are as follows: current market assessments of the time value of money and the risks specific to the individual CGU. Share price at valuation date (pence) 33 In 2009 Goodwill was impaired by £106,890,000. Exercise price (pence) 3 Expected volatility (%) 51.00 The Group prepares cash flow forecasts using the current operating Risk free rate (%) 2.43 budget approved by the Directors which covers a three year period and an appropriate extrapolation of cashflows beyond this.

Share options issued before November 2002 The carrying amount of goodwill of £85,272,000 (2009: £86,410,000) has been allocated across multiple CGUs as follows: Approved options £’000 Outstanding Kingston Communications 8,077 at the Option price beginning Exercise Kcom 77,19 5 pence of the year Exercised Lapsed Balance period At 31 March 2010 85,272 16/07/99 280 207,13 3 – (207,133) – 2002–09 23/05/00 535 329,235 – (85,490) 243,745 2003–10 An impairment review was undertaken at the year end in accordance 06/07/00 655 5,911 – – 5,911 2003–10 with IAS 36 and no further impairment was required. 20/08/01 82.5 215,463 – (15,000) 200,463 2004–11 Total 757,742 – (307,623) 450,119 The discount rate and growth rate (in perpetuity) used for value in use calculations are as follows:

Unapproved options 2010 2009 Discount rate (pre tax) 11.8% 14.0% Outstanding at the Growth rate (in perpetuity) 1.0% – Option price beginning of Exercise pence the year Exercised Lapsed Balance period 26/07/00 0 to 591 75,843 – (21,867) 53,976 2003–10 17/08/00 0 to 655 2,000 – – 2,000 2001–10 Total 77,843 – (21,867) 55,976

KCOM Group PLC Annual Report and Accounts 2009/10 62 Financial statements

15 Intangible assets – consolidated The figures stated above include the following amounts in respect of assets held under finance leases and hire purchase contracts: Customer Development and supplier Technology Vehicles, other costs Software relationship and brand Total Land and Exchange External apparatus and £’000 £’000 £’000 £’000 £’000 buildings equipment plant equipment Total Cost £’000 £’000 £’000 £’000 £’000 At 1 April 2008 2,592 44,182 49,257 6,982 103,013 Cost Additions – 2,945 – – 2,945 At 31 March 2010 1,241 8,504 5,726 830 16,301 Own work capitalised 746 864 – – 1,610 At 31 March 2009 1,241 8,504 4,514 830 15,089 Disposal (1,035) – – – (1,035) Accumulated Disposal of subsidiaries – – – (688) (688) depreciation At 31 March 2009 2,303 47,9 91 49,257 6,294 105,845 At 31 March 2010 556 8,504 4,769 386 14,215 Additions – 1,239 – – 1,239 At 31 March 2009 508 8,504 4,278 229 13,519 Own work capitalised 702 1,070 – – 1,772 Carrying amount At 31 March 2010 3,005 50,300 49,257 6,294 108,856 At 31 March 2010 685 – 957 444 2,086 Amortisation At 31 March 2009 733 – 236 601 1,570 At 1 April 2008 2,242 35,717 29,521 4,247 71,727 Charge for the year 661 5,685 7,4 39 1,004 14,789 17 Investments Disposal (1,035) – – – (1,035) Unlisted Shares in Disposal of subsidiaries – – – (138) (138) investments associates Total £’000 £’000 £’000 At 31 March 2009 1,868 41,402 36,960 5,113 85,343 Cost Charge for the year 788 4,700 7,0 8 4 394 12,966 At 1 April 2008 2,710 37 2,747 At 31 March 2010 2,656 46,102 44,044 5,507 98,309 Additional investment 17 – 17 Carrying amount Share of net profit for the period – 11 11 At 31 March 2010 349 4,198 5,213 787 10,547 Disposals – (20) (20) At 31 March 2009 435 6,589 12,297 1,181 20,502 At 31 March 2009 2,727 28 2,755 Additional investment 17 – 17 Development costs are predominantly capitalised staff costs Share of net loss for the period – (12) (12) associated with new products and services. At 31 March 2010 2,744 16 2,760 16 Property, plant and equipment – consolidated Amounts written off

Vehicles other At 1 April 2008 1,900 – 1,900 Land and Exchange External apparatus and Impairment reversal (194) – (194) buildings equipment plant equipment Total £’000 £’000 £’000 £’000 £’000 Disposals – – – Cost At 31 March 2009 and 31 March 2010 1,706 – 1,706 At 1 April 2008 19,759 252,677 305,250 133,462 711,148 Net book value Additions – 5,441 6,472 3,789 15,702 At 31 March 2010 1,038 16 1,054 Own work capitalised – 1,373 2,896 – 4,269 At 31 March 2009 1,021 28 1,049 Disposals (1,610) – (3,757) (52,020) (57,3 87 )

At 31 March 2009 18,149 259,491 310,861 85,231 673,732 Shares in subsidiary Additions – 740 8,543 2,854 12,137 undertakings Own work capitalised – 485 1,042 – 1,527 £’000 Disposals – (56,732) (8,031) (14,533) (79,296) Parent Company Cost At 31 March 2010 18,149 203,984 312,415 73,552 608,100 At 31 March 2009 and 2010 234,265 Accumulated depreciation Amounts written off At 1 April 2008 10,126 220,300 232,698 116,617 579,741 At 31 March 2009 and 2010 50 Charge for the year 568 2,895 9,506 7,3 62 20,331 Net book value Disposals (1,610) – (3,721) (52,018) (57,3 49) At 31 March 2009 and 2010 234,215 At 31 March 2009 9,084 223,195 238,483 71,961 542,723 Charge for the year 522 815 12,080 6,657 20,074 Disposals – (56,732) (8,031) (13,991) (78,754) At 31 March 2010 9,606 167,278 242,532 64,627 484,043 Carrying amount At 31 March 2010 8,543 36,706 69,883 8,925 124,057 At 31 March 2009 9,065 36,296 72,378 13,270 131,009

KCOM Group PLC Annual Report and Accounts 2009/10 Financial statements 63

The figures stated above include the following amounts in respect of Subsidiary undertakings (as at 31 March 2010) Movements on the Group provision for impairment of trade assets held under finance leases and hire purchase contracts: Details of the principal trading subsidiaries of the Group are listed receivables are as follows: below. A full list will be appended to the Company’s next Annual Vehicles, other Return. All of the following companies are 100 per cent owned by 2010 Land and Exchange External apparatus and £’000 buildings equipment plant equipment Total the Company and are all registered in England. £’000 £’000 £’000 £’000 £’000 At 1 April 2009 (6,252) Cost Name of Company Business activity Written off in the year 1,627 Kingston Communications Ltd Telecommunications services At 31 March 2010 1,241 8,504 5,726 830 16,301 Unused amounts reversed 83 Affiniti Integrated Solutions Ltd Operation of telecommunications Amounts provided for in the year (2,240) At 31 March 2009 1,241 8,504 4,514 830 15,089 infrastructure (6,782) Accumulated Kingston Information Services Ltd Publication of telephone directories depreciation KCOM Contact Centres Ltd Provision of call centre services The majority of the Group’s trade and other receivables are At 31 March 2010 556 8,504 4,769 386 14,215 Smart421 Technology Group Ltd Software consultancy denominated in sterling. At 31 March 2009 508 8,504 4,278 229 13,519 JAM IP Ltd Software consultancy Carrying amount Credit risk The Group’s principal financial assets are cash balances and trade At 31 March 2010 685 – 957 444 2,086 All subsidiary undertakings are included in the consolidation of the Group. and other receivables. The Group’s credit risk is primarily attributable At 31 March 2009 733 – 236 601 1,570 to its trade receivables for which an allowance has been made for Associates the estimated irrecoverable amounts. The credit risk on liquid funds 17 Investments The Group’s associate is SmartIntegrator Technology Ltd, in which the is limited because the counter-parties are banks with high credit Company indirectly holds 50 per cent of the ordinary shares. Under an ratings assigned by international credit rating agencies. The Group Unlisted Shares in agreement between the shareholders of Smartintegrator Technology has no significant concentration of credit risk, with exposure spread investments associates Total over a large number of customers. £’000 £’000 £’000 Ltd neither the Group nor the shareholders are able to exercise control over the operational and financial policies of Smartintegrator Cost The maximum exposure to credit risk at the reporting date is Technology Ltd. The associate is registered in England and its main At 1 April 2008 2,710 37 2,747 the carrying value of each class of receivable mentioned above. business activity is software development. Additional investment 17 – 17 The Group does not hold any collateral as security. Share of net profit for the period – 11 11 18 Inventories As of 31 March 2010, trade receivables of £6,812,000 were impaired Disposals – (20) (20) Consolidated Parent Company (2009: £6,299,000). The amount of the provision was £6,782,000 At 31 March 2009 2,727 28 2,755 2010 2009 2010 2009 as of 31 March 2010 (2009: £6,252,000). The individually impaired £’000 £’000 £’000 £’000 receivables mainly relate to customers who are in unexpectedly Additional investment 17 – 17 Raw materials and consumables 1,137 1,303 – – difficult economic situations. It was assessed that a portion of the Share of net loss for the period – (12) (12) Equipment for resale 2,471 2,814 – – impaired balance is expected to be recovered. At 31 March 2010 2,744 16 2,760 Total 3,608 4,117 – – The ageing of these receivables is as follows: Amounts written off At 1 April 2008 1,900 – 1,900 2010 2008 There is no material difference between the carrying value and the £’000 £’000 Impairment reversal (194) – (194) replacement cost of inventories. 0 – 3 months 969 2,112 Disposals – – – 19 Trade & other receivables 3 – 6 months 5,650 3,886 At 31 March 2009 and 31 March 2010 1,706 – 1,706 6 months + 193 301 Consolidated Parent Company Net book value 6,812 6,299 2010 2009 2010 2009 At 31 March 2010 1,038 16 1,054 £’000 £’000 £’000 £’000 At 31 March 2009 1,021 28 1,049 Trade receivables 41,563 44,905 – – As of 31 March 2010, trade receivables of £11,044,000 (2009: Other receivables 1,609 1,369 – – £13,405,000) were past due but not impaired. These relate to a Shares in number of independent customers of whom there is no recent Prepayments and accrued income 33,755 40,195 232 512 subsidiary history of default. The ageing analysis of these trade receivables undertakings £’000 Total 76,927 86,469 232 512 is as follows:

Parent Company 2010 2009 All of the Group’s receivables are due within one year in both 2010 Cost £’000 £’000 and 2009. An allowance has been made for estimated irrecoverable 0 – 3 months 9,778 11,457 At 31 March 2009 and 2010 234,265 amounts from the sale of goods and services of £6,782,000 (2009: 3 – 6 months 142 1,614 Amounts written off £6,252,000). The Directors consider that the carrying amount of 6 months + 1,124 334 At 31 March 2009 and 2010 50 trade and other receivables approximate to their fair value. 11,044 13,405 Net book value In addition, within the Parent Company, there are amounts owed At 31 March 2009 and 2010 234,215 from subsidiary undertakings of £260,267,000 (2009: £237,239,000). These amounts become due after more than one year.

KCOM Group PLC Annual Report and Accounts 2009/10 64 Financial statements

20 Trade & other payables 23 Net debt Consolidated Consolidated Parent Company 2010 2009 2010 2009 2010 2009 £’000 £’000 Notes £’000 £’000 £’000 £’000 Cash 10,788 17,50 8 Obligations under Short term deposits 3,102 – finance leases and hire Cash and cash equivalents 13,890 17,50 8 purchase contracts 24 697 566 – – Borrowings 22 (129,458) (174,195) Trade payables 36,320 38,899 – – Finance leases 24 (1,228) (1,213) Other taxes and social Total net debt (116,796) (157,9 0 0) security costs 6,504 6,052 – – Other payables 4,588 4,434 – – Cash and cash equivalents, which are presented as a single class of Provisions 25 6,007 9,883 – – assets on the face of the balance sheet, comprise cash at bank, short Financial instruments 21 320 – – term deposits and other short term highly liquid investments with Accruals and deferred income 90,541 76,790 – – maturity of three months or less.

Total 144,678 136,944 – – Amounts held in short term deposits represent sums receivable from a customer that are required to be held in an Escrow account as security Trade payables and accruals principally comprise amounts during the build stage of the service. They can only be withdrawn by outstanding for trade purchases and ongoing costs. The Directors the customer if the Group fails to deliver against specific contractual consider that the carrying amount of current liabilities approximate requirements after the Group has been given time to remedy such failure. to their fair value. 24 Obligations under finance leases & hire purchase contracts 21 Non-current liabilities Consolidated Parent Company Consolidated Parent Company 2010 2009 2010 2009 2010 2009 2010 2009 £’000 £’000 £’000 £’000 Notes £’000 £’000 £’000 £’000 Finance lease liabilities – Bank borrowings 22 129,458 174,195 – – minimum lease payments: Retirement benefit obligation 31 50,373 60,993 50,373 60,993 – within one year 734 634 – – 179,831 235,188 50,373 60,993 – between 1 and 5 years 549 706 – – Obligations under 1,283 1,340 – – finance leases and hire Future finance charges on purchase contracts 24 531 647 – – finance leases (55) (127) – – Provisions 25 3,523 5,319 – – Present value of finance lease liabilities 1,228 1,213 – – Financial instruments 7,150 7,771 – – The present value of finance lease Other non-current liabilities 11,204 13,737 – – liabilities is as follows: Total 191,035 248,925 50,373 60,993 – within one year 697 566 – – – between 1 and 5 years 531 647 – – 22 Borrowings 1,228 1,213 – –

Consolidated Parent Company 2010 2009 2010 2009 25 Provisions for liabilities and charges £’000 £’000 £’000 £’000 Onerous leases Restructuring Consolidated Bank borrowings £’000 £’000 £’000 At 1 April 2009 7,46 6 7,73 6 15,202 Amount falling due: Established in the year 2,018 6,051 8,069 Between one and two years 130,000 – – – Utilised in the year (3,746) (9,995) (13,741) Between two and five years – 175,000 – – At 31 March 2010 5,738 3,792 9,530 130,000 175,000 Total provisions for Loan issue costs (542) (805) – – liabilities and charges 129,458 174,195 – – Included in current liabilities 6,007 Included in non-current liabilities 3,523 The loan facility was secured by guarantees given by all material subsidiaries of KCOM Group PLC in favour of the lending banks. At 31 March 2010 9,530

The bank borrowings are fully repayable in February 2012 and Provision has been made for the estimated fair value of unavoidable attract an interest rate of LIBOR plus a margin dependent on specific lease payments on unoccupied buildings. It is expected that these covenants. For further information on interest rate swaps see note 29. 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 The Directors consider that the carrying value of bank borrowings entered into by a former subsidiary. approximates fair value as the interest rates on the borrowing are linked to the UK bank base rate. The restructuring provision represents the future costs of the Group’s ongoing restructuring programme which are committed to at the balance sheet date.

KCOM Group PLC Annual Report and Accounts 2009/10 Financial statements 65

23 Net debt 26 Deferred taxation assets/(liabilities) 27 Called up share capital Consolidated 2010 2009 Intangible 2010 2009 £’000 £’000 Accelerated Other assets Retirement £’000 £’000 capital timing arising on benefit Cash 10,788 17,50 8 allowances differences acquisition obligation Total Authorised Short term deposits 3,102 – £’000 £’000 £’000 £’000 £’000 1,000 million ordinary shares of 10 pence each 100,000 100,000 Consolidated Cash and cash equivalents 13,890 17,50 8 Allotted, called up and fully paid 516,603,910 (2009: At 1 April 2008 41,863 1,104 (7,043) 3,460 39,384 Borrowings 22 (129,458) (174,195) 516,603,910) ordinary shares of 10 pence each 51,660 51,660 Credited to the income Finance leases 24 (1,228) (1,213) statement (Note 10) 1,979 74 2,364 500 4,917 During the financial year, the Company purchased 2,580,000 (2009: Total net debt (116,796) (157,9 0 0) Credited directly – 1,839 – 13,118 14,957 3,710,000) of the Company’s ordinary shares, through purchases on to equity the London Stock Exchange for a total cash consideration of £826,000 Cash and cash equivalents, which are presented as a single class of Disposals – – 166 – 166 (2009: £806,000) in order to meet future obligations under the Company’s assets on the face of the balance sheet, comprise cash at bank, short SIP. The total amount paid to acquire the shares, net of expenses At 31 March 2009 43,842 3,017 (4,513) 17,078 59,424 term deposits and other short term highly liquid investments with (£820,000) (2009: £795,000) has been deducted from retained earnings. maturity of three months or less. Charged/(credited) to the income statement The Company has a number of share option schemes which grant Amounts held in short term deposits represent sums receivable from a (Note 10) (2,518) 347 2,094 (1,400) (1,477) Directors and other employees shares or options to subscribe for the customer that are required to be held in an Escrow account as security Charged directly Company’s shares. Details of these schemes are set out in note 13. during the build stage of the service. They can only be withdrawn by to equity – (258) – (1,574) (1,832) the customer if the Group fails to deliver against specific contractual 28 Statement of changes in shareholders’ equity At 31 March 2010 41,324 3,106 (2,419) 14,104 56,115 requirements after the Group has been given time to remedy such failure. Parent Company Share Hedging & Share premium translation Retained 24 Obligations under finance leases & hire purchase contracts At 1 April 2008 – – – 3,460 3,460 capital account reserve earnings Total Credited to the £’000 £’000 £’000 £’000 £’000 Consolidated Parent Company Consolidated 2010 2009 2010 2009 income statement – – – 500 500 £’000 £’000 £’000 £’000 Credited directly At 1 April 2008 51,627 353,111 (703) (219,350) 184,685 Finance lease liabilities – to equity – – – 13,118 13,118 Employee share schemes – – – 514 514 minimum lease payments: At 31 March 2009 – – – 17,078 17,078 Shares issued in the year 33 120 – – 153 – within one year 734 634 – – Charged to the Purchase of ordinary shares – – – (795) (795) – between 1 and 5 years 549 706 – – income statement – – – (1,400) (1,400) Actuarial loss on defined 1,283 1,340 – – Charged directly benefit pension schemes – – – (53,550) (53,550) Future finance charges on to equity – – – (1,574) (1,574) Tax on actuarial loss on finance leases (55) (127) – – At 31 March 2010 – – – 14,104 14,104 defined pension schemes – – – 13,118 13,118 Present value of finance lease liabilities 1,228 1,213 – – Increase in fair value The major components of the deferred taxation asset not recognised of financial derivative The present value of finance lease instruments – – (6,568) – (6,568) liabilities is as follows: are as follows: Tax on movement in – within one year 697 566 – – Not recognised cashflow hedges – – – 1,839 1,839 – between 1 and 5 years 531 647 – – 2010 2009 £’000 £’000 Loss for the year – – – (106,482) (106,482) 1,228 1,213 – – Losses 1,336 1,336 Dividends – – – (12,295) (12,295) Total 1,336 1,336 At 31 March 2009 51,660 353,231 ( 7,271) (377,0 01) 20,619 25 Provisions for liabilities and charges Employee share schemes – – – 1,282 1,282 Onerous leases Restructuring Consolidated Deferred tax assets relating to accelerated capital allowances and Purchase of ordinary shares – – – (820) (820) £’000 £’000 £’000 short term timing differences of £41.3 million have been recognised Actuarial gain on defined At 1 April 2009 7,46 6 7,73 6 15,202 in those subsidiary companies in which there is sufficient available benefit pension schemes – – – 5,620 5,620 Established in the year 2,018 6,051 8,069 evidence that suitable taxable profits will arise against which these Tax on actuarial gain on Utilised in the year (3,746) (9,995) (13,741) assets are expected to reverse. There are additional deferred tax defined pension schemes – – – (1,574) (1,574) assets of £1.3 million which have not been recognised, as there is At 31 March 2010 5,738 3,792 9,530 insufficient evidence as to the generation of suitable profits against Decrease in fair value of financial derivative Total provisions for which these assets can be offset. The utilisation of these assets instruments – – 920 – 920 liabilities and charges would reduce the Group’s tax charge in future periods. All deferred Tax on movement in Included in current liabilities 6,007 tax assets and liabilities are provided for at the future rate of corporation tax being 28 per cent (2009: 28 per cent). cashflow hedges – – – (258) (258) Included in non-current liabilities 3,523 Profit for the year – – – 17,6 9 3 17,6 9 3 At 31 March 2010 9,530 Dividends – – – ( 7,725) ( 7,725) At 31 March 2010 51,660 353,231 (6,351) (362,783) 35,757 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.

KCOM Group PLC Annual Report and Accounts 2009/10 66 Financial statements

28 Statement of changes in shareholders’ equity continued The table below analyses the Group’s financial liabilities which will be settled on a net basis into relevant maturity groupings based on the Share Hedging & Share premium translation Retained remaining period at the balance sheet date to the contractual maturity capital account reserve earnings Total date. Notional interest is included for the period from the year end up £’000 £’000 £’000 £’000 £’000 to the contractual maturity date of the debt, calculated on the amount Parent company of debt drawn down at the year end. At 1 April 2008 51,627 353,111 – 74,834 479,572 Less than 1 yr 1-3 yrs Over 3 yrs Employee share schemes – – – (347) (347) £’000 £’000 £’000 Shares issued in the year 33 120 – – 153 At 1 April 2009 Purchase of ordinary shares – – – (795) (795) Borrowings 8,237 182,894 – Actuarial loss on defined Finance leases 566 481 166 benefit pension schemes – – – (53,550) (53,550) Trade and other payables 136,378 – – Tax on actuarial loss on Total 145,181 183,375 166 defined pension schemes – – – 13,118 13,118 Profit for the year – – – 2,195 2,195 At 31 March 2010 Dividends – – – (12,295) (12,295) Borrowings 5,806 132,661 – At 31 March 2009 51,660 353,231 – 23,160 428,051 Finance leases 697 396 135 Trade and other payables 143,981 – – Employee share schemes – – – (286) (286) Purchase of ordinary shares – – – (820) (820) Total 150,484 133,057 135 Actuarial gain on defined benefit pension schemes – – – 5,620 5,620 The table below provides an analysis of the Group’s derivative financial instruments which will be settled on a gross basis. Tax on actuarial gain on defined pension schemes – – – (1,574) (1,574) Less than 1 yr Profit for the year – – – 35,179 35,179 2010 2009 £’000 £’000 Dividends – – – ( 7,725) ( 7,725) Forward foreign exchange contracts At 31 March 2010 51,660 353,231 – 53,554 458,445 held as cashflow hedges Inflow 1,692 5,721 29 Financial instruments & risk management Outflow (1,696) (5,648) The Group’s principal financial instruments during the year comprised bank loans, cash on short term deposit, interest rate swaps and forward foreign exchange contracts. The main purpose of these Interest rate risks financial instruments is to finance the Group’s operations, to manage Sterling interest rate swaps were held during the year that fixed the interest rate risk arising from its sources of finance and to minimise approximately 69 per cent (2009: 58 per cent) of the year end net debt. the impact of fluctuations in exchange rates on future cash flows. The weighted average fixed interest rate payable was 5.5 per cent The Group has various other financial instruments such as short (2009: 5.5 per cent). Maturity dates of the interest rate swaps are all term debtors and creditors which arise directly from its operations. January 2012 and reflect the forecast profile of net debt over the period. The weighted average period over which the interest rates are The Group regularly reviews its exposure to interest, liquidity and foreign fixed is 1.8 years (2009: 2.5 years). Interest rate exposures will continue currency risk. Where appropriate the Group will take action, in accordance to be hedged in accordance with the Treasury Policy. with a Board approved Treasury Policy, to minimise the impact on the business of movements in interest rates and currency rates. The impact of an increase in interest rates of 100 basis points is shown in the following table: The Group only enters into derivative instruments with members of 2010 2009 the banking group to ensure appropriate counterparty credit quality. £’000 £’000 Reduction in profit before tax 368 679 Liquidity risk The Group keeps its short, medium and long term funding requirements Increase in fair value of derivatives taken to equity 1,424 2,809 under constant review. Its policy is to have sufficient committed funds available to meet medium term requirements, with flexibility and The sensitivity of profit before tax is calculated based on floating headroom to make minor acquisitions for cash if the opportunity rate borrowings at the balance sheet date, after deducting floating should arise. rate financial assets and amounts hedged into fixed rates by interest rate swaps. The Group’s bank facilities were refinanced in February 2007, taking advantage of better terms available generally in the bank market at the Foreign currency risk time and the Group’s improving credit profile. These bank facilities Cash flow exposure comprise a multi-currency revolving credit facility of £250 million, provided The Group’s only major foreign currency risk arises due to the purchase by a group of five core relationship banks. The facility matures in February of equipment invoiced in US dollars. Whenever possible the Group 2012. The Group considers that this facility will provide sufficient funding resells this equipment in US dollars. The remaining exposure is to meet the organic investment needs of the business. In addition, short managed principally through the use of forward foreign exchange term flexibility of funding is available under the £10 million overdraft facility contracts in order to minimise the impact of fluctuations in exchange provided by the Group’s clearing bankers. rates on future cash flows and gross margin.

The net debt position of £157.9 million at the beginning of the financial The Group also has some euro cashflows but these are not material year has decreased during the year to net debt of £116.8 million. The on a net basis and are not hedged. Group generated positive cash flow from its operating activities after capital expenditure of £57.0 million for the 12 months (2009: £37.3 million).

KCOM Group PLC Annual Report and Accounts 2009/10 Financial statements 67

Net asset exposure Fair values of financial assets and financial liabilities The dollar-denominated trading described above results in a balance The mark-to-market value of the interest rate swaps and forward sheet exposure since debtor days are longer than creditor days. It is contracts at 31 March 2010 was a liability of £7.2 million (2009: liability the Group’s policy not to hedge this exposure. If sterling strengthened of £8.1 million). Interest rate swaps are accounted for by adjusting the by five per cent against both the US dollar and the euro this would interest cost on the floating debt return. The fair value of financial reduce net assets at the balance sheet date by £nil (2009: increase assets and financial liabilities is obtained from third party sources. of £0.2 million). The movement in mark-to-market value is reflected in reserves and is shown below: Credit risk Credit risk arises from cash and cash equivalents and derivative Hedging reserve £’000 financial instruments, as well as credit exposures to business and 31 March 2009 (8,091) retail customers. Movement in the year 920 Credit ratings of institutions which hold the Group’s financial assets are 31 March 2010 (7,171) 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 The effectiveness of the interest rate swaps was tested quarterly institutions holding the Group’s financial assets were rated A+/A-1 or throughout the period and at the year end, and all are considered higher by Standard and Poor’s. to be effective cash flow hedges.

The credit quality of customers is assessed by taking into account their There are no other significant differences between the fair value of financial position, past experience and other factors. Individual risk the Group’s financial assets and liabilities and their book value. limits are set and the utilisation of credit limits monitored regularly. Capital risk management Interest rate risk profile of financial assets & financial liabilities The Group’s objectives when managing capital are to safeguard the Financial assets Group’s ability to continue as a going concern, support the growth of The Group had financial assets of £13.9 million at the year end (2009: the business and to maintain an optimal capital structure to reduce £17.5 million), comprising cash on overnight money market deposits the cost of capital. and cash at bank. This attracts floating rates of interest. Consistent with others in the industry, the Group monitors capital on The currency profile of the Group’s financial assets at 31 March 2010 the basis of its gearing ratio. This ratio is calculated as net debt divided and 31 March 2009 was: by total capital. Net debt is calculated as total borrowings (including ‘current and non-current borrowings’ as shown in the consolidated 2010 2009 £’000 £’000 balance sheet) less cash and cash equivalents. Total capital is calculated as ‘equity’ as shown in the consolidated balance sheet Currency plus net debt. Sterling 13,036 12,691 US dollar 130 4,280 Total capital is shown in the table below, and is calculated as ‘equity’ Euro 724 537 as shown in the consolidated balance sheet plus net debt. Total 13,890 17,50 8 2010 2009 £’000 £’000 Foreign currency cash balances are held on a short term basis to fund Net debt 116,796 157,9 0 0 cash flow requirements in these currencies. Total equity 35,757 20,619 Total capital 152,553 178,519 At the year end £1.8 million (2009: £1.8 million) of cash collateral was held by Barclays in respect of a bank guarantee given under OFCOM’s ‘Funds for Liabilities’ regulations. Under the Group’s £250 million revolving credit facility the Group is required to comply with certain financial and non-financial covenants Financial liabilities quarterly. The Group is required to maintain a minimum interest cover The currency and interest rate risk profile of the Group’s financial ratio and a maximum net debt: EBITDA ratio. Both financial covenants liabilities at 31 March 2010 and 31 March 2009 were: were tested and complied with throughout the year and at the year end.

2010 2009 30 Financial commitments Floating Fixed Total Floating Fixed Total Authorised future capital expenditure and financial investment £’000 £’000 £’000 £’000 £’000 £’000 amounted to: Sterling 49,458 81,228 130,686 84,195 91,213 175,408 Consolidated Parent Company Total 49,458 81,228 130,686 84,195 91,213 175,408 2010 2009 2010 2009 £’000 £’000 £’000 £’000 Undrawn committed borrowing facilities at the year end were £120 Contracted – – – – million (2009: £75 million).

Interest on amounts drawn under the committed borrowing facility is based on the relevant LIBOR.

KCOM Group PLC Annual Report and Accounts 2009/10 68 Financial statements

30 Financial commitments continued Employer contributions for the year ended 31 March 2010 The Group as lessee Contributions into the two defined contributions scheme during the year The future aggregate lease rental commitments under non-cancellable were as follows: operating leases were as follows: 31 March 2010 31 March 2009 £’000 £’000 Consolidated Parent Company 2010 2009 2010 2009 Normal employee contributions 1,230 1,699 £’000 £’000 £’000 £’000 Past service costs 1,100 775 Leasehold buildings Deficit payments 3,290 2,900 – within 12 months 4,917 5,679 – – Enhanced Transfer excercises 4,877 – – in 1 to 5 years 13,952 16,547 – – 10,497 5,374 – after 5 years 10,413 12,682 – – Total 29,282 34,908 – – For the Kingston Communications Pension Scheme, an agreement in Plant and equipment principal has been reached, subject to the final outcome of the next – within 12 months 1,388 1,955 – – actuarial valuation, that the Group will make total deficit payments to this scheme of £21 million over the three years to 31 March 2013 – in 1 to 5 years 1,533 1,408 – – (current deficit funding is £2.9 million per annum). Total 2,921 3,363 – – Current deficit funding into the Kingston Communications (Data) None of the Group’s lease arrangements include any contingent rent Pension Scheme is £0.5 million per annum. payments and there are no renewal or purchase options or escalation clauses. There are also no restrictions imposed by the Group’s lease Main financial assumptions arrangements. 31 March 2010 31 March 2009 per annum % per annum % 31 Retirement benefit obligation Inflation 3.50 3.50 Defined contribution schemes Rate of general long term increase in salaries 4.50 4.50 The Company operates defined contribution schemes, which are open Rate of increase to pensions in payment to all eligible employees. Contributions charged to the income statement 2.25 3.50 in respect of defined contribution schemes amounted to £3.2 million Discount rate for scheme liabilities 5.60 6.50 (2009: £3.5 million). Expected return on plan assets 7.04 6.52

Defined benefit schemes Expected return on assets The principal defined benefit scheme at 31 March 2010 was the Kingston Communications Pension Scheme, which is a funded scheme and Long term rate of return expected at provides defined benefits based on final pensionable salary. The assets Value at Value at of the scheme are held separately from the assets of the Group in trustee 31 March 31 March 31 March 31 March 2010 per 2010 2009 per 2009 administered funds. The Company also operates a second funded annum % £’000 annum % £’000 defined benefit scheme, the Kingston Communications (Data) Pension Equities 7.99 105,845 7.52 83,853 Scheme. Both schemes are closed to new members. Fixed interest gilts 4.50 2,374 4.54 6,680 The Group is in consultation on proposals to close the two defined benefit Index linked gilts 4.50 19,200 4.00 17,40 0 schemes to future accrual whilst breaking the link to final salary. The year Corporate bonds 5.50 25,274 5.59 22,780 end balance sheet position does not reflect these proposed changes. Other 4.42 4,175 4.00 4,299 Most recent valuations Total fair value of assets 156,868 135,012 The most recent formal valuation for the Kingston Communications Pension Scheme was at 1 April 2007. The main long term financial History of asset values, defined benefit obligation, deficit in scheme assumptions used in that valuation were: and experience gains and losses

Per annum % Rate of return on scheme assets 6.55 2010 2009 2008 2007 2006 £’000 £’000 £’000 £’000 £’000 Rate of future salary inflation 3.90 As at 31 March 1 Rate of future pension increases 3.00 Present value 1 On the excess over the guaranteed minimum pension. of defined benefit obligation (207,241) (196,005) (177,133) (187,76 0) (189,060) The most recent formal valuation for the Kingston Communications (Data) Pension Scheme was at 1 April 2008 using the attained age method. Fair value of The main long term financial assumptions used in that valuation were: plan assets 156,868 135,012 167,9 9 5 175,095 172,390 Deficit (50,373) (60,993) (9,138) (12,665) (16,670) Per annum % Experience Rate of return on scheme assets 7.0 0 (losses)/gains on Rate of future salary inflation 4.25 plan assets (33,350) (41,497) (15,658) (6,794) 26,049 Rate of future pension increases 3.25 Experience (losses)/gains on The disclosures below are for the two schemes combined. plan liabilities 1,670 (1,653) (3,762) (2,892) (3,577)

KCOM Group PLC Annual Report and Accounts 2009/10 Financial statements 69

The Group employs a building block approach in determining the 31 March 31 March 2010 2009 long term rate of return on pension plan assets. Historical markets £’000 £’000 are studied and assets with higher volatility are assumed to generate Changes to the fair value of scheme assets higher returns consistent with widely accepted capital market principles. The overall expected rate of return on assets is derived Opening fair value of assets 135,012 167,9 9 5 by aggregating the expected return for each asset class over the Expected return on assets 7,902 10,822 actual asset allocation for the Scheme as at 31 March 2010. Actuarial gains/(losses) 33,350 (41,497) Contributions by the employer 10,497 5,374 The mortality assumptions are based on standard mortality tables, which allow for future improvements in life expectancy. The effect Contributions by members 353 481 of these tables are that: Net benefits paid out (30,246) (8,163) Closing fair value of assets 156,868 135,012 >> A future pensioner aged 65 at retirement will live on average to age 87.2 (2009: 89.4) if they are male and on average to Actual return on plan assets age 89.1 (2009: 90.4) if they are female. Expected return on assets 7,902 10,822 >> A current pensioner aged 65 will live on average to age Actuarial gains/(losses) 33,350 (41,497) 89.5 (2009: 87.1) if they are male and on average to age Actual return on assets 41,252 (30,675) 90.5 (2009: 89.0) if they are female.

The defined benefit obligation reflects the assumption that 20 per Analysis of amounts recognised in Consolidated Statement of cent (2009: 40 per cent) of deferred members will transfer out of the Comprehensive Income Scheme over its life. Where such transfers take place, the value of such transfers are assumed to be zero per cent (2009: 30 per cent) Value at Value at 31 March 31 March above the current IAS 19 value for individual members. 2010 2009 £’000 £’000 Reconciliation of funded status to balance sheet Total actuarial gains/(losses) in consolidated statement of comprehensive income 5,620 (53,550) 31 March 31 March 2010 2009 Movement in related deferred tax asset (1,574) 13,118 £’000 £’000 Total gains/(losses) in consolidated statement of Fair value of assets 156,868 135,012 comprehensive income 4,046 (40,432) Present value of funded defined benefit obligations (207,241) (196,005) Cumulative amount of gains/(losses) recognised Liability recognised on the balance sheet (50,373) (60,993) in consolidated statement of comprehensive Analysis of income and expenditure charge: income gross of deferred tax (43,568) (49,188) Current service cost 1,578 1,682 Deferred tax asset 14,104 17,078 Past service cost 1,100 775 Cumulative amount of gains/(losses) recognised in consolidated statement of comprehensive income (29,464) (32,110) Curtailment and settlement gain (1,734) – Interest cost 12,455 12,044 Expected return on assets (7,902) (10,822) 32 Other commitments and contingent liabilities Contingent liabilities existed at 31 March 2010 in respect of guarantees Expense recognised in income statement 5,497 3,679 given by the Parent Company on behalf of subsidiary undertakings, together with contingencies arising in the normal course of the Group’s 31 March 31 March business in respect of overdraft facilities. None of these guarantees are 2010 2009 considered material in the context of the net assets of the Group. £’000 £’000 Changes to the present value of the defined 33 Related party transactions benefit obligation during the year Remuneration of key management personnel Opening defined benefit obligation 196,005 177,13 3 The remuneration of the Directors who are the key management Current service cost 1,578 1,682 personnel of KCOM Group PLC is provided in the audited part of the Directors’ Remuneration Report on pages 43 to 46. Interest cost 12,455 12,044 Contributions by members 353 481 Intra-group transactions Actuarial losses on scheme liabilities 27,730 12,053 >> Amounts receivable by the Company from subsidiaries totalled Net benefits paid out (30,246) (8,163) £260.3 million (2009: £237.2 million) as at 31 March 2010. Past service cost 1,100 775 Curtailment and settlement gain (1,734) – Closing defined benefit obligation 207,241 196,005

KCOM Group PLC Annual Report and Accounts 2009/10 70 Shareholder information

Five year summary of consolidated figures

Five year summary of consolidated figures As at 31 March 2010

2010 2009 2008 2007 2006 £’000 £’000 £’000 £’000 £’000 Income statement (total operations) Revenue 412,800 472,439 517,297 483,195 463,835 EBITDA before exceptional items 69,795 65,141 69,300 70,972 71,060 Group operating profit before exceptional items 36,755 30,021 21,661 31,403 21,649 Profit after taxation before exceptional items 27,898 22,788 22,764 30,790 23,277 Profit/(loss) after taxation (reported) 17,693 (106,482) 18,776 23,969 (68,424) Balance sheet Non current assets 277,045 298,394 396,128 399,882 346,650 Current assets (excluding cash) 80,535 90,586 125,705 97,9 53 112,864 Current liabilities (excluding finance leases) (143,981) (136,378) (156,165) (137,6 62) (149,118) Net debt (including finance leases) (116,796) (157,9 0 0) (168,905) (164,240) (127,6 8 0) Provisions and other non current liabilities (excluding finance leases) (61,046) (74,083) (12,078) (18,332) (18,186) Total equity 35,757 20,619 184,685 177,6 01 164,530 Movement in debt Net cash flow from: Operating activities 74,612 62,260 49,997 59,128 68,688 Capital expenditure (17,595) (24,958) (31,172) (30,217) (45,004) Net proceeds/(purchase costs) associated with the purchase and sale of businesses 150 559 (700) (43,064) 26,177 Interest (7,302) (13,474) (11,164) (12,651) (8,472) Equity dividends paid (7,725) (12,295) (11,540) (7,356) (4,784) Other (1,036) (1,087) (86) (2,400) (686) Reduction/(increase) in net debt 41,104 11,005 (4,665) (36,560) 35,919 Ratios and other key information Average staff employed 2,094 2,312 2,617 2,693 2,835 EBITDA before exceptional items to revenue (%) 16.9 13.8 13.4 14.7 15.3 Group operating profit before exceptional items to revenue (%) 8.9 6.4 4.2 6.5 4.7 Basic earnings/(loss) per share (pence) 3.47 (20.70) 3.65 4.55 (13.87) Dividend per share relating to the financial year (pence) 1.75 1.50 2.82 1.95 1.17

KCOM Group PLC Annual Report and Accounts 2009/10 Shareholder information 71

Shareholder information

Glossary Group Financial KCOM Group PLC (formerly Kingston Communications (HULL) PLC) Amortisation and all its operating businesses. The allocation of cost of intangible assets to the Income Statement over time. Income statement A financial document showing the income, expenses and net profit Auditor or loss generated by an organisation over a given period of time. An independent individual qualified to examine and provide an opinion on a Company’s financial and accounting records and supporting Intangible assets documents. Items of value that cannot be physically touched, such as software, patents, licences or specific development costs. Balance sheet A statement of the assets and liabilities of an organisation at a point Investments in time (the year end of KCOM Group PLC is 31 March). Ownership interests held in other companies either for income or capital appreciation. Cash flow statement A summary of the money received and spent by the Group during Ordinary shares the year. The principal type of shares bought by investors, and representing part ownership of a company. Capital expenditure (capex) Money spent to purchase new or upgrade existing physical assets Operating assets such as equipment or property. Items of value owned by a company that contribute to the regular income from its operations. Company KCOM Group PLC (formerly Kingston Communications (HULL) PLC). Payables Amounts payable to suppliers and other organisations providing Current assets services to the Group. Assets held by the Group other than for long term use such as stocks, debtors and cash. Property, plant and equipment A long term asset held for business use such as property, network Depreciation and exchange equipment. The allocation of cost of an asset to the Income Statement – such as equipment or property – because of general wear and tear over time. Receivables Amounts which we have billed customers but not yet received. Dividend The income from a share investment that is given to shareholders out Retained earnings of a company’s 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) Earnings/(loss) per share total equity at the end of the year. This figure is calculated by dividing profits or losses attributable to members of the Company by the number of shares in issue. Turnbull Report A Report giving guidance to Company Directors on implementing EBITDA (earnings before interest, tax, depreciation and amortisation) Stock Exchange rules on internal controls and risk management. A measure of profitability, favoured by companies undergoing major investment programmes. It shows the profits before interest, tax, depreciation and amortisation are deducted.

Goodwill The difference between what a company pays for another company and the fair value of the acquired assets of that company.

KCOM Group PLC Annual Report and Accounts 2009/10 72 Shareholder information

Technology Analysis of Ordinary Shareholders Backbone network (at 31 March 2010 by category) A major transmission path that can carry a very high volume of traffic. Number of Number of % of It ensures that all smaller networks that are connected to the backbone holders shares Capital are also connected to each other. Private shareholders 61,321 55,988,075 10.8 Insurance Company 2 89,344 0.1 Broadband Network technology that allows the transmission of large amounts Investment Trust 6 88,901 0.1 of data. Pension Fund 2 2,375 – Nominee Companies 1,016 382,424,088 74.0 Broadband internet Limited Company 91 2,0 47,979 0.3 Technology that enables faster internet access, and as a result allows Bank and Bank Nominees 16 75,456,744 0.2 services such as interactive digital TV, video conferencing and video. Other institutions 14 506,404 14.5 Converged communications 62,468 516,603,910 100 Data and voice communications carried over a single IP network. Financial calendar Data Information sent across communications networks from computer to computer. Annual General Meeting 16 July 2010 Interim results 2010 announcement 23 November 2010 IN (Intelligent network) Preliminary results announcement (provisional) 24 May 2011 A network that allows the fast and flexible introduction of new services and customisation capabilities for users of that network. Information relating to beneficial owners of shares with IP (Internet Protocol) ‘information rights’ A standard specification for transmitting voice and data over the internet. Please note that beneficial owners of shares who have been nominated by the registered holder of those shares to receive ISP (Internet Service Provider) information rights under section 146 of the Companies Act 2006 are A company which provides users with access to the internet. required to direct all communications to the registered holder of their shares rather than to the Group’s registrar, Capita Registrars, or to Leased line KCOM Group PLC directly. A reliable, dedicated network connection offered at various speeds depending on the customer’s requirements.

Voice Fixed line or mobile telephone calls.

KCOM Group PLC Annual Report and Accounts 2009/10 Shareholder information 73

The KCOM Group is a leading provider of communications services to both consumer and business markets across the UK. Our aim is to help our customers exploit communications and associated technologies to improve the performance of their businesses Company information Registered office and organisations and to enhance their KCOM Group PLC 37 Carr Lane personal communications experience. Hull HU1 3RE Our success is built on solid foundations, Registered in England and Wales borne of our heritage in East Yorkshire where Company number we have more than 100 years experience 2150618 of providing telecommunications services. Investor Relations KCOM Group PLC 37 Carr Lane Hull HU1 3RE

Email: [email protected] Tel: 01482 602711

Website: www.kcomplc.com

Advisers Auditors PricewaterhouseCoopers LLP Benson House 33 Wellington Street Leeds LS1 4JP

Registrar Capita Registrars Northern House Woodsome Park Fenay Bridge Contents Huddersfield HD8 0GA

Introduction Independent Auditors’ report Email: [email protected] 01 Highlights 47 Independent Auditors’ report Tel: 0871 664 0300 02 Our businesses Calls cost 10p per minute plus network charges 04 Fact file: KC Financial statements 06 Fact file: Kcom 48 Consolidated income statement Financial Advisors 08 Chairman’s statement 48 Consolidated statement of JP Morgan Cazenove comprehensive income 20 Moorgate Review of Business 49 Balance sheets 09 Chairman’s Q&A 50 Consolidated statement of changes London EC2R 6DA 11 Key performance indicators in shareholders’ equity 51 Cash flow statements Liberum Capital Directors’ Report 52 Notes to the financial statements CityPoint 10th Floor 12 Business and financial review 70 Five year summary of consolidated figures One Ropemaker Street 14 Operational review London EC2Y 9HT 22 Risk management Shareholder information 24 Board of Directors 71 Glossary 26 Corporate and Social Responsibility 72 Analysis of Ordinary Shareholders 32 Corporate Governance 72 Financial calendar 73 Company information Remuneration 73 Advisers 37 Remuneration report Completely CarbonNeutral®.

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