Completely CarbonNeutral®. The unavoidable CO2 generated by the printing and distribution of this Report has been reduced to net zero through verified carbon offset projects. The paper used is Revive Pure White Silk, a 100% recycled paper. All pulps used are Totally Chlorine Free (TCF). The printer and the manufacturing mill are both accredited with the ISO 14001 standard for environmental management, and both are FSC certified. A year of successful business KCOM Group Annual PLC Report and Accounts 2009/10 transformation and improved financial performance Designed by Addison www.addison.co.uk Printed by Royle Corporate Print For more information please visit KCOM Group PLC www.kcomplc.com Annual Report and Accounts 2009/10 K = PMS187EC 210mm KIN001_marque PB2_187+440.eps COM= PMS440EC 75mm, 50mm 25mm PMS Coated Euro Solid to Process. Values from Pantone® color bridge™ 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 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