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Better ways to connect peopleAnnual report and accounts 2012/13

KCOM

Group PLC A

nnual report and accounts 2012/13

_0_KCOM_ar13_cover (RB.JW).indd 3 6/20/2013 11:14:18 AM

02>Learn more about our business on page 02

Better ways to connect peopleKCOM Group is a leading provider of communications services to organisations and consumers.

We apply the collective knowledge and expertise of our people and our partners to help customers harness the power of communications.

We are passionate about delivering inspiring customer experiences, and our innovative and flexible approach means we are always finding new and better ways to connect people.

Our ambitionTo become an acknowledged leader, and the partner of choice, for organisations and consumers in the markets we serve.

Providing a range of communications services that

1 Facilitates innovation

2 Enables new ways of working

3 Increases opportunities for collaboration

4 Drives productivity

5 Enhances personal and organisational interaction

6 Delights customers

Learn more about our business on page 2


KCOM Group PLC Annual report and accounts 2012/13Highlights

Improving quality and long-term sustainability of the business

Net debt (£m)

£88.2m

75.3

20122013

88.2

Proposed full-year dividend per share (p)

4.44p 11.0%

4.0

20122013

4.44

Revenue (£m)

£372.9m 3.7%

387.

3

20122013

372.

9*EBITDA (£m)

£76.9m 1.3%

77.9

20122013

76.9

* Before exceptionals

Overview

01 Highlights

02 Our business at a glance

04 Market overview

06 Strategy and business model

08 Key performance indicators

Directors’ reportBusiness review

10 Chairman’s statement

12 Brand review

20 Performance review

24 Risk management

28 Corporate responsibility

Directors’ reportGovernance

34 Board of Directors

36 Corporate governance

42 Other disclosures

44 Remuneration report

Financials

57 Independent auditors’ report

58 Consolidated income statement

58 Consolidated statement of comprehensive income

59 Balance sheets

60 Consolidated statement of changes in shareholders’ equity

61 Parent company statement of changes in shareholders’ equity

62 Cash flow statements

63 Notes to the financial statements

91 Five-year summary of consolidated figures

92 Shareholder information

Contents

� Group performance in line with expectations

� Strengthening competitive position in target markets

� Strong performance in KC

� Progress in Kcom strategic focus areas

� Full-year dividend, of 4.44 pence per share an increase of 11 per cent

� Commitment to grow dividend at 10 per cent per annum to 2016

Access this report onlineGo to www.kcomplc.com/ar13 for an easy-to-digest overview.

Operating profit (£m)

£55.0m 4.8%

57.8

20122013

55.0

*Profit before tax (£m)

£52.7m 3.1%

51.1

20122013

52.7


Overview

01

_2_KCOM_ar13_front (RB.JW).indd 1 6/20/2013 11:14:46 AM

KCOM Group PLC Annual report and accounts 2012/13Our business at a glance

Using our knowledge and insight, we aim to deliver inspiring customer experiences across the markets we serve

KC segment

What we doWe provide communications services to organisations and consumers through four brands, organised into two segments

Kcom segment

Our KC brand provides communications services to consumers and businesses in Hull and East Yorkshire. As well as phone and broadband packages, these include business services such as hosting and security.

Our Kcom brand works with the UK’s biggest names, providing them with the communications services that enable organisations to be flexible, efficient and more responsive to their customers.

Our Smart421 brand delivers high‑end consultancy, integration and management of business‑critical systems for enterprise customers.

More on pages 12 and 13

Visit: www.kc.co.uk


Visit: www.kcom.com


Visit: www.smart421.com

In 2012, the first phase of KC’s installation of superfast fibre broadband, using Fibre to the Premise (FTTP) technology, made the UK’s fastest download speeds available to more than 15,000 homes and businesses.

With customer take-up well above initial expectations, the Group has committed to pass a further 30,000 premises by March 2015 and the latest phase of the deployment is under way.

During the year there was continued strong demand for KC’s bundled phone and broadband services as more customers recognised the improved value for money they offer.

During the year, Kcom launched a portfolio of cloud-based ‘Workplaces’ services. Based on Cisco’s Hosted Collaboration Services, they give Kcom customers a world-class communications platform and tools they can adapt and integrate according to their needs and IT environment.

The new services give customers the scalability and robustness of the cloud, complementing Kcom’s enterprise platforms and solutions, carrier-class connectivity, next-generation network operation and management capability.

Kcom’s innovative approach and exceptional customer service helped it secure significant contract renewals and new contracts during the year.

Smart421 employs its business agility and passion for delivery to help its customers solve business and technical problems reliably.

It specialises in consultancy to help customers optimise their enterprise architecture for greater flexibility and return on investment and the provision of managed services that improve system performance and reliability.

It has extensive knowledge and expertise in numerous sectors including telecommunications, financial services, energy and utilities, transport and logistics and the public sector.

02


KCOM Group PLC Annual report and accounts 2012/13

Visit: www.eclipse.net.uk

Where we operateWe serve customers across the UK from our eight main locations

Who we work withOur customers are central to all that we do

Our Eclipse brand provides communications services to small and medium‑sized businesses connecting them to customers, partners and suppliers, improving productivity and flexibility, and helping them grow.

As well as tens of thousands of consumers and small businesses, our customers include public sector organisations and some of the UK’s biggest names across a range of sectors:

– Asda

– Domino’s

– Dorset Public Services Network

– East Midlands Public Services Network

– Manchester Airport

– Morrisons

– National Farmers Union Mutual

– Phones4U

– United Utilities

– University Hospitals Birmingham

We employ more than

people across the UK

1,800

5

1

36

2

48

7

More on pages 18 and 19Read our customer case studies in our brand review pages

During the year, Eclipse continued its evolution from a traditional broadband supplier to a provider of broader internet-based communications services.

Existing customers drive an increasing proportion of new business revenue, reflecting Eclipse’s commitment both to expanding its product portfolio and providing outstanding customer service.

The continued development of its Partner Portal and unique Sentinel broadband monitoring tool has helped Eclipse to extend further its reseller channel.

Our main locations

1 Brighton

2 Exeter

3 Hemel Hempstead

4 Hull

5 Ipswich

6 London

7 Reading

8 Wakefield

Overview

03


KCOM Group PLC Annual report and accounts 2012/13Market overview

We offer our customers an insight into what the future might look like and support them at every stage of the journey

“ Kcom proactively approached us with the best solution for us as a business and advised us through its implementation, which is why we continue to work with Kcom and value our account team as an extension of our team internally.”

Simon Odell, IT Director, Vendor and Service Management at Molson Coors

04



Focusing on the futureWe offer our customers a unique combination of the expertise of our people, the capability of our partners and access to a range of services and technologies that we can apply appropriately to their particular requirements.

As a Group we are focused on the delivery of value-added services to our customers, whether they are consumers in our regional market, or organisations across the UK.

We don’t think just about what customers might need right now, we help shape their thinking to help them keep pace with their communications needs in the future.

Technology plays an increasingly important role in our daily lives, both at home and at work. Our role is to help our customers to harness the power of evolving technology to become better connected. We do this by staying at the forefront of future thinking and then helping our customers to build their own roadmap, based on the technology available today and in the future. We offer our customers an insight to what the future might look like and how they might adapt and innovate the way their organisation will work in the future.

There are some key trends in the market and we advise our customers on how to make the most of technology to become more successful:

� customers want increasingly to connect with businesses in a multitude of ways, whenever they want – phones, mobiles, websites, social media, smartphones and tablets. Successful organisations of the future will be able to interact across all those platforms and track every interaction with the customer irrespective of which channels

they use. Closeness to the customer will be key and building a robust contact strategy, supported by the right technology solution, helps customers start that journey. Our retail customers are leading the way in embracing those multi-channel interactions with their customers;

� already we see the world of business evolving at a faster pace. To keep ahead, organisations need to be agile and flexible, with processes and systems they can adapt and shape depending on how their markets develop. The ability to scale requirements accordingly will become an important way of maintaining a competitive edge. Many of our clients are looking to the cloud as a cost-effective way of increasing flexibility while managing the level of investment needed to move to a new architecture; and

� as customers become ever more service-driven, the contribution of employees becomes one of the biggest differentiators. Giving employees access to the right collaboration, mobility, systems and technology tools enables them to create high performing teams wherever they are located. We help customers with a distributed network of employees to get better connected, bringing in collaboration tools and robust connections to give them flexible working practices with access to all their business applications.

As the future evolves, we are helping customers understand how they can adapt to those trends. Connectivity is increasingly the key to enabling all of the interaction and collaboration. Our connectivity relationships give us access to the largest network across the UK. Building on that solid foundation, we work with our customers to understand where they want to take their business. We bring together experts across our Group to create the right balance of technology and service delivery that our customers need to start their journey to the future.

Real world thinking for new world challenges, enabling...

The future of...business processes

The future of...connected life

The future of...partnerships

The future of...IT services

The future of...work

The future of...customer services

Overview

05


KCOM Group PLC Annual report and accounts 2012/13Strategy and business model

We have an established strategic vision to passionately pursue better ways to connect people and to deliver inspiring customer experiences

Our strategy: our long-term plan

The Group’s vision is underpinned by four strategic pillars that support our ambition and focus our investment. Those pillars support us in our pursuit of operational excellence, as we seek to achieve a market‑leading position in our selected markets and deliver increasing shareholder value.

Our strategic IT investment will underpin our growth plans and strengthen those exceptional customer experiences for which we aim to be recognised.

Customers

Across our brands we understand and anticipate the needs of our customers and align our products, services and solutions to meet those needs and create a unique brand experience.

People

Our business is built upon the excellence of our people, the core asset of our Group.

Partners

We harness the skills and capabilities of our partners to support the focus of our brands.

Processes and systems

Our pursuit of customer service excellence is underpinned by our processes and systems.

Description

Our focus on exceptional service delivery has resulted in increasing customer advocacy, delivery of the fastest broadband in the UK for consumers, new contracts with large corporate customers and further business from existing customers.

We target and align our capabilities to the requirements of our brands’ customers and markets.

We continue to invest in creating an environment that enables people to develop and fulfil their potential. During the past year, that investment has focused on cultivating the leadership, talent, values and culture that will put excellent business performance and world-class customer experience at the centre of everything we do.

We have strong relationships in place with organisations including BT, Phoenix IT Group, Microsoft, IBM, Cisco, Avaya and Amazon Web Services. With access to their skills, experience and technologies, overlaid with our managed service capability, we are able to fulfil our long-term vision. As a result of those relationships, leading organisations increasingly are recognising the capabilities of the Group and its exceptional service delivery.

To achieve our long-term aims, we are focused on ensuring we have market-leading processes and systems that are both efficient and scalable, to enable us both to grow our business and continue to drive operational efficiency.

Progress

In each of our markets, we have focused on developing additional service offerings, including significantly faster broadband speeds and a new suite of hosted managed communication services.

Increasingly, we see customers wanting to benefit from the specialist consultancy provided by Smart421 alongside communication services from our Kcom brand.

During the year we have focused on how small individual change can effect large-scale improvement. Our teams have taken part in the second phase of our ‘It Starts with Me’ programme designed to help them see how their role, and in particular innovative thinking, plays a significant part in the achievement of our long-term ambitions. This programme will continue to run over the coming year.

Our market-leading partnerships support our ability to achieve a level of innovation and deliver solutions and experiences that cannot be gained elsewhere, as customers experience improved ways to connect, collaborate and interact, using the power of technology.

Our £3.0 million investment in tools for our industry-leading service management centre will help us to build on our reputation for service excellence.

Priorities

� to deliver growth in managed services to UK based multi-site organisations;

� to continue the phased deployment and take-up of ‘superfast’ fibre-based broadband services to customers in Hull and East Yorkshire; and

� to continue to grow market share through our ongoing focus on inspiring customer experiences across all brands.

� to reward and recognise employees who demonstrate excellence in their performance;

� to invest in a communications programme that explains clearly our Group values, ambitions and culture; and

� to continue developing the skills and capabilities of our leadership team that drives the achievement of strategic objectives in line with our growth ambition.

� to invest in partnerships that support our customers’ objectives;

� to continue to exploit those strategic relationships; and

� to leverage our hosted and cloud collaboration services and unified communication services offerings.

� initially to implement efficient scalable back-office processes and systems;

� to extend and improve our customer self-service capability; and

� to deliver best-in-class levels of customer service.

1 2

06



Our business model: how we operate daily

3 4

Work with our partners to create innovative service solutions for

people and businesses

Apply extensive expertise to deliver

high quality services across the UK

Successfully win new contracts with new and

existing customers

KPIs on page 8

4 1

23

How we measure our performanceWe track a series of financial and non-financial metrics that demonstrate the progress we are making against our four strategic pillars.

Customers

Across our brands we understand and anticipate the needs of our customers and align our products, services and solutions to meet those needs and create a unique brand experience.

People

Our business is built upon the excellence of our people, the core asset of our Group.

Partners

We harness the skills and capabilities of our partners to support the focus of our brands.

Processes and systems

Our pursuit of customer service excellence is underpinned by our processes and systems.

Description

Our focus on exceptional service delivery has resulted in increasing customer advocacy, delivery of the fastest broadband in the UK for consumers, new contracts with large corporate customers and further business from existing customers.

We target and align our capabilities to the requirements of our brands’ customers and markets.

We continue to invest in creating an environment that enables people to develop and fulfil their potential. During the past year, that investment has focused on cultivating the leadership, talent, values and culture that will put excellent business performance and world-class customer experience at the centre of everything we do.

We have strong relationships in place with organisations including BT, Phoenix IT Group, Microsoft, IBM, Cisco, Avaya and Amazon Web Services. With access to their skills, experience and technologies, overlaid with our managed service capability, we are able to fulfil our long-term vision. As a result of those relationships, leading organisations increasingly are recognising the capabilities of the Group and its exceptional service delivery.

To achieve our long-term aims, we are focused on ensuring we have market-leading processes and systems that are both efficient and scalable, to enable us both to grow our business and continue to drive operational efficiency.

Progress

In each of our markets, we have focused on developing additional service offerings, including significantly faster broadband speeds and a new suite of hosted managed communication services.

Increasingly, we see customers wanting to benefit from the specialist consultancy provided by Smart421 alongside communication services from our Kcom brand.

During the year we have focused on how small individual change can effect large-scale improvement. Our teams have taken part in the second phase of our ‘It Starts with Me’ programme designed to help them see how their role, and in particular innovative thinking, plays a significant part in the achievement of our long-term ambitions. This programme will continue to run over the coming year.

Our market-leading partnerships support our ability to achieve a level of innovation and deliver solutions and experiences that cannot be gained elsewhere, as customers experience improved ways to connect, collaborate and interact, using the power of technology.

Our £3.0 million investment in tools for our industry-leading service management centre will help us to build on our reputation for service excellence.

Priorities

� to deliver growth in managed services to UK based multi-site organisations;

� to continue the phased deployment and take-up of ‘superfast’ fibre-based broadband services to customers in Hull and East Yorkshire; and

� to continue to grow market share through our ongoing focus on inspiring customer experiences across all brands.

� to reward and recognise employees who demonstrate excellence in their performance;

� to invest in a communications programme that explains clearly our Group values, ambitions and culture; and

� to continue developing the skills and capabilities of our leadership team that drives the achievement of strategic objectives in line with our growth ambition.

� to invest in partnerships that support our customers’ objectives;

� to continue to exploit those strategic relationships; and

� to leverage our hosted and cloud collaboration services and unified communication services offerings.

� initially to implement efficient scalable back-office processes and systems;

� to extend and improve our customer self-service capability; and

� to deliver best-in-class levels of customer service.

Overview

07


KCOM Group PLC Annual report and accounts 2012/13Key performance indicators

The success of our strategy will be measured over time and has other KPIs. These measures show the immediate and near term result of it

Financial KPIs

Revenue (£m)

DescriptionThe total amount of money that the Group earns from the sale of goods or services.

Measures strategic priority:

Performance

2013 372.9m

2012 387.3m

CommentThe bulk of the difference relates to a previously disclosed one-off network build contract in the prior year.

EBITDA (£m)*

DescriptionEarnings before interest, tax, depreciation and amortisation. A measure of profitability.


Performance

2013 76.9m

2012 77.9m

CommentReduced 1.3 per cent as a result of our increased investment in the business and the slightly lower revenue achievement.

Profit before tax (£m)*

DescriptionA measure of profit that looks at a Group’s profits before it has to pay corporation tax.


Performance

2013 52.7m

2012 51.1m

CommentIncreased 3.1 per cent, due to lower depreciation and amortisation alongside lower finance costs, offsetting the reduction in EBITDA.

Net cash inflow from operations (£m)

DescriptionCash flow from operating activities adjusted for non-cash items.


Performance

2013 50.3m

2012 56.0m

CommentReduced mainly as a result of the timing of working capital movements offset by lower pension deficit payments. As anticipated, the Group has seen a stronger net cash inflow in the second half of the year.

Net debt (£m)

DescriptionA metric that shows the Group’s indebtedness.


Performance

2013 88.2m

2012 75.3m

CommentRepresenting an EBITDA ratio of 1.1 times (2012: 0.9 times). The majority of the increase reflects the purchase of shares associated with share scheme satisfaction.



08


Find the latest investor information onlineVisit www.kcomplc.com/investors for the latest news, reports, presentations and share price information. We are committed to providing our investors with the latest information about the KCOM Group.

Non-financial KPIs

Employee satisfaction

DescriptionOverall results of our employee satisfaction survey.


Performance

2013 62

2011* 61

CommentOverall employee satisfaction has increased to 62 out of 100 (2011: 61) in the two years since our last survey.

Employee Group and brand strategy awareness

DescriptionResults of Group and brand awareness from our employee satisfaction survey.


Performance

2013 70

2011* 66

CommentAwareness of the Group and brand strategy from our employee satisfaction survey has increased to 70 out of 100 (2011: 66) reflecting the increased internal communications in this area.

Environmental impact CO2e emissions

DescriptionTotal gross emissions in CO2e.


Performance

2013 26,600

2012 28,445

CommentOur total emissions have reduced by 6.49 per cent mainly as a result of a reduction in our electricity consumption in the year.

Community volunteering hours

DescriptionNumber of hours our employees have donated to volunteering projects.


Performance

2013 1,500

2012 2,000

CommentReduction reflects a move to regular volunteering sessions rather than one off community volunteering days.

PartnersPeople Processes and systems

Customers

Strategic prioritiesThese can be found in more detail on pages 6 and 7

* Previous survey ran in 2011

* Previous survey ran in 2011

Overview

09



In summaryContinued strong performance in KC

Key customer wins show the strengthening competitive position in target markets

Disciplined financial management gives the Group a positive outlook

Commitment to 10 per cent per annum dividend increase through to 2016

Investing in support of longer term goals

Chairman’s statementfrom Bill Halbert, Executive Chairman

Further progress in improving the quality and long-term sustainability of the business

10



“ Our Board continues to place great importance on having appropriate governance in place and during the year we have complied with all but one of the provisions of the UK Corporate Governance Code.”

Dear ShareholderLast financial year marked another stage in the transformation of the KCOM Group. We remain committed to investing in the four pillars that support our strategic vision. Over the year we worked hard to complete programmes of activity within each area.

As a result, we have seen clear progress in strengthening our competitive position across each of our four brands.

We have continued the programme of developing and investing in our people, laying the foundations for strategic IT change, to deliver scalability and efficiency and deepening our partner relationships, all with the aim of supporting our first strategic pillar, customer focus.

Customer focusIn KC, we continue to see demand for our bundled broadband and talk packages. We have seen also strong take-up of our fibre based broadband services. Following the successful completion of the initial fibre deployment to 15,000 premises in the Hull and East Yorkshire region, we have started the second phase which will bring the total premises passed in the region to 45,000 by March 2015.

Across our Kcom reporting segment, we continue to win market share and have signed new and extended contracts with customers including the Association of Train Operating Companies, Phones4U, The Link Consortium and Morrisons. Post year-end, we signed a significant five-year managed services contract with National Farmers Union Mutual, one of our largest managed services contracts to date.

Developing our peopleIn March, we undertook an all-employee survey as a sense check on the progress we have made since the last survey in 2011.

It is pleasing to see an increase in the overall employee satisfaction measure, along with other important measures of improvement in cross Group collaboration, communication and a deeper understanding of our strategy and aims as a Group.

As always, the value of such surveys is to identify those areas where there is opportunity to make even greater progress and over the coming year, we will be investing further in the area of individual personal development.

Leveraging our partnershipsPartnerships remain a key part of our strategy, giving us the right scale and breadth of service offering that our customers want. We are working hard to make sure all our partners understand our strategy and values, as they play an important part in us achieving collective success.

Processes and systems investmentOver the course of the next two years, we will be investing in back-office systems and processes that will enable more collaboration and consistency across the Group. This investment will provide also flexibility and scalability of our processes, which are key to our profitable growth ambitions.

The four investment pillars, and the strategic vision they support, will be fundamental in delivering Group success and long-term sustainability. We remain focused on executing the strategy we set out at the start of our transformation programme.

Final dividend and future policyThe Board is proposing a final dividend of 2.97 pence per share (2012: 2.67 pence per share). In addition, due to the cash-generative nature of the Group, the Board is pleased to confirm its commitment to continuing to deliver a 10 per cent increase in dividends each year to 2016, underlining its confidence and commitment to delivering increasing returns to shareholders.

Board updateOur Board continues to place great importance on having appropriate governance in place and during the year we have complied with all but one of the provisions of the UK Corporate Governance Code. The area of non-compliance is in relation to my role as both Chairman and Chief Executive. Once again this has been kept under review by our Nomination Committee and I have been asked for the moment to continue

in my role, which I am delighted to do. Further information on the rationale for combining the role is on page 36.

We continue to have an extremely effective Board at KCOM Group, with strong, experienced and diverse Non-Executive Directors and an open culture which encourages debate and challenge. This once again was highlighted as a key strength in our annual Board evaluation process. Further information on how the Board operates can be found on our Corporate Governance pages.

OutlookWe remain focused on executing our strategy for market leadership and profitable growth across each of our brands, creating opportunities to provide more value-added services across all target markets. This will be underpinned by continued investment in those areas that support scalable and efficient delivery of service to customers.

Finally, on behalf of the Board, I would like to thank everyone across the Group for their commitment and passion during a year that, whilst being undoubtedly challenging, marks a further successful step in the overall transformation of the Group.

Bill HalbertExecutive Chairman18 June 2013

Business review

11

Directors’ report


KCOM Group PLC Annual report and accounts 2012/13Brand review:

KC segment

During the year our KC brand achieved market-leading growth among fixed-line operators. This was driven chiefly by the continued shift of customers to bundled phone and broadband services, and by increasing take-up of broadband among our customer base.

Following previous investment in our core Next Generation Network to deliver a better online experience and improved reliability, we have now migrated to it all of our business and residential broadband customers.

Customer satisfaction has been a key area of focus during the year. We have used insight and feedback from regular face-to-face customer forums and from online and telephone surveys to inform an ongoing programme of improvements to our products and our business processes.

The result has been increased customer satisfaction, as measured by our Net Promoter Score, across both our business and residential customer base. Meanwhile, customer service across our business broadband products was recognised with a 2012 Internet Service Provider Association (ISPA) award. This year our KC brand has been shortlisted for five ISPA awards.

We have expanded our product offering to include the YouView-based service KC TV and have begun the deployment of KC Wi-Fi to selected areas of the region.

Our KC brand’s business operation secured some important contracts with local organisations during the year, including Humberside Fire and Rescue Service.

Our KC brand has provided communications services in Hull and East Yorkshire since 1904.

Services for residential customers include a range of talk plans, including the UK’s cheapest plan, plus broadband packages, phone and broadband bundles and a new TV service.

For businesses, we provide phone, broadband and ethernet connectivity, internet security and web hosting, all with business-standard service levels.

Visit: www.kc.co.uk

What we’re doing:In November 2012 the KC brand completed the first phase of our installation of our superfast fibre broadband service – KC Lightstream – to 15,000 homes and businesses in Hull and East Yorkshire, and announced plans to continue to invest in expanding it to a further 30,000 premises in the region by March 2015.

KC’s Lightstream packages use Fibre to the Premise technology to deliver a range of superfast packages with guaranteed download speeds including 100Mbps and 350Mbps – the UK’s fastest fibre broadband service.

Take-up has been significantly higher than for other UK fibre deployments, with more than one in five of the customers passed by the initial roll-out signing up for the service.

Our future focusThe continued take-up of our KC Lightstream fibre broadband services by residential areas and business parks.

Continued take-up of bundled broadband.

Increase market share among the small and medium-sized business market.

KC: Our flagship KC Lightstream service is giving customers in Hull and East Yorkshire the best-connected homes and businesses in the UK

12



Humberside Fire and Rescue ServiceKC has been chosen by Humberside Fire and Rescue Service (HFRS) to install and manage a new communications network that will connect its 32 sites securely to each other and to its key computer applications.

The five-year contract includes also the provision of a private broadband back-up service and a Virtual Private Network so that employees can work remotely, creating a more flexible working environment.

HFRS Chief Fire Officer Richard Hannigan said: “The skills, expertise and dedication of our firefighters and staff need to be backed

up with systems that are secure, reliable and enable the fastest possible response to emergencies.

“We rely heavily on the technical solutions that are put in place to carry out our work, ensuring the safety of the community, from mobilising fire engines to allowing our non-operational staff to access the systems to carry out their jobs. KC demonstrated an understanding of our specific needs and we are confident they can deliver a service that meets them.”

“ KC demonstrated an understanding of our specific needs.”

Richard Hannigan, Chief Fire Officer, Humberside Fire and Rescue Service

Business review

13

Directors’ report



Kcom segment

Kcom: Our Kcom brand uses its expertise and innovation to help organisations exploit the power of communications

Despite the market conditions remaining challenging, Kcom has made progress in its strategic focus areas. During the year our Kcom brand secured a number of key contract wins and renewals, underlining its position and reputation in its chosen markets.

New contracts secured in the period include an important five-year managed service with National Farmers Union Mutual. We have provided also additional services to Morrisons in support of their expansion into the convenience store market capabilities.

Kcom’s growing presence in the Public Services Network (PSN) market was reinforced with its selection by East Sussex County Council to provide a hosted managed communications service for the Link Consortium. The consortium is a collaborative IT programme that connects public sector organisations in the region, including local authorities, education and health providers and the police.

The five-year contract will see Kcom providing cloud-based voice services over Link’s existing connectivity infrastructure. The solution will save money for the organisations within the consortium and give them access to better communications services.

Kcom has completed also the successful migration of 1,000 schools and more than 400 local government sites onto the new East Midlands PSN (emPSN).

The network has delivered significant savings already through cheaper technology costs and by enabling shared working across public sector organisations.

Our Kcom brand works with some of the UK’s biggest names in retail, finance, IT, legal services and the public sector, delivering communications solutions that help organisations achieve their objectives.

It gives customers access to the UK’s largest, most advanced network, managed IT services supported by a world-class operational support system, and the benefits of Kcom’s ongoing investment in the development of market-leading services.

Visit: www.kcom.com

What we’re doing:Kcom brand’s new suite of hosted, managed communication services, called Workplaces, delivers a range of cloud-based services including telephony, unified communications and contact centre tools that enable enterprises to transform their customer contact or business collaboration capabilities.

Powered by Cisco technologies, Workplaces services can be bought on a per-seat basis. This gives customers, including the Link Consortium mentioned above, a flexible costing model without the barriers associated with investing in capital intensive on-site solutions, but with the tailoring and security of an in-house enterprise platform and the world-class operational support services in Kcom’s Service Management Centre.

Our future focusGrow our share of the UK multi-site enterprise market in the provision of over the top solutions as well as connectivity services.

Build reputation for hosted, collaboration services through Workplaces.

Build upon and demonstrate our expertise in the PSN market, securing new contracts and implementing networks for existing customers.

14



Domino’sKcom has a three-year contract to provide managed communications services to Domino’s.

Domino’s is one of the world’s most successful franchise businesses, and as it continued to grow its number of outlets, technology became a key challenge.

It chose Kcom to monitor and manage its network and provide proactive service and support on a 24/7 basis.

Colin Rees, IT Director at Domino’s, said: “What we were looking for was a partner to help us deal with those areas our internal team didn’t have the time to focus on.

“It was very much about designing a solution that was flexible enough to scale with our growth, and we’ve really had none of the normal challenges of moving from one supplier to another.

“We expect the deal with Kcom to provide us all of our networking services into the future.”

“ It was very much about designing a solution that was flexible enough to scale with our growth.”

Colin Rees, IT Director, Domino’s

Business review

15

Directors’ report



Kcom segment

Smart421: Our Smart421 brand continues to grow market share and build its reputation within its chosen customer segments

During the year our Smart421 brand became the first Advanced Consulting Partner in the UK as part of the Amazon Partner Network (APN).

The status was awarded by Amazon Web Services (AWS), a global leader in cloud computing. It is the highest certification possible under the APN programme and means that Smart421’s customers have the highest level of access to Amazon’s design, architecture, integration and managed services.

As more UK enterprises turn to the cloud to replace up-front capital infrastructure expenses with lower, variable costs that scale with their business, Smart421’s partnership with Amazon gives it a valuable opportunity to combine its specialist consultancy and integration services in cloud architecture with AWS’s enterprise-grade cloud infrastructure.

Smart421 is using the AWS cloud computing platform to deliver a five-year contract to develop and support a sales management system to handle ticket on departure services for Rail Settlement Plan Ltd, a division of the Association of Train Operating Companies.

National Rail Enquiries has also chosen Smart421 to deliver an AWS-based solution as part of a three-year service integration and management contract to support the migration of its online services and the majority of its technology infrastructure to the cloud.

Our Smart421 brand delivers high-end consultancy, integration and management services to large enterprises, helping customers optimise their enterprise architecture for greater flexibility and better return on investment. It helps also organisations looking to improve the performance and reliability of their IT systems and gives support in delivering complex and bespoke IT projects.

Visit: www.smart421.comWhat we’re doing:Following a successful year that saw some significant new contract wins, the Smart421 brand will continue to develop its reputation in the fields of enterprise architecture and integration consultancy and the management of mission critical enterprise services.

Its status as the UK’s first Advanced Consulting Partner within the APN, and its growing expertise in delivering services using the AWS platform, mean it is well-positioned to exploit growth in the enterprise-grade cloud services market.

This is reinforced further by its shortlisting in the 2012 UK IT Industry Awards in the ‘Best Use of Cloud Services’ category for an AWS-based business continuity and disaster recovery solution it implemented for energy firm Haven Power.

Our future focusContinue to seek and exploit opportunities in high value, high growth markets, including identity and access management.

Develop further our strategic partnership with AWS for cloud-based solutions.

Maintain our position as thought leaders in our field by anticipating customer needs and matching these with relevant, intelligent technology solutions.

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National Rail EnquiriesNational Rail Enquiries (NRE) has chosen Smart421 to deliver a three-year service integration and management contract to support the migration of NRE’s online services to the cloud, achieving significant productivity efficiencies and associated cost savings.

NRE is the UK’s leading train information service. Growing use by consumers of its comprehensive real-time travel information prompted NRE to move the majority of its technology infrastructure to AWS.

The contract with Smart421 includes service design and readiness, service migration of three business critical applications from current data centres to the AWS cloud, and provision of 24/7 service management.

“This contract with Smart421 and AWS acknowledges the very significant consumer uptake we have experienced,” said Chris Scoggins, Chief Executive of National Rail Enquiries.

“By working with Smart421 to move to AWS we will be able to support this growth well into the future.

“Getting the most from the cloud means having a partner that understands how to exploit the flexibility and elasticity it offers.”

“ Getting the most from the cloud means having a partner that understands how to exploit the flexibility and elasticity it offers.”

Chris Scoggins, Chief Executive, National Rail Enquiries

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Kcom segment

Eclipse: Our Eclipse brand is increasing its range of connectivity, cloud and communications services for small and medium businesses (SMBs) across the UK

Our Eclipse brand continued to win new SMB customers during the year, while at the same time its focus on developing a broader product portfolio led to a growing proportion of new revenue coming from existing customers.

The increased range of connectivity options the Eclipse brand now offers has attracted a number of larger businesses to the brand. Furniture Village, the RSPB and Foot Anstey are among the new customers the brand has secured contracts with, for the provision of connectivity including managed network services.

Eclipse has continued to see growth in the reseller market, supported both by connectivity services it offers and the ongoing development of its Partner Portal, an easy-to-use interface through which resellers can manage their Eclipse accounts and their own customers’ connections.

A growing number of customers with multiple connections, including resellers, are using the Eclipse Sentinel broadband monitoring tool. Via this portal, customers including Wessex Water are benefiting from improved visibility of potential and actual problems affecting broadband network performance.

The continued focus of the Eclipse brand on delivering an exceptional customer experience was reflected during the year in the industry-leading satisfaction levels reported by its customers.

Our Eclipse brand provides connectivity and communications services to SMBs across the UK to connect them to customers, partners and suppliers, improve their productivity and flexibility, and help them grow.

It continues also to provide high-quality broadband services to consumers who value its ethos of exceptional customer service.

Visit: www.eclipse.net.uk

What we’re doing:Following the successful launch of new connectivity services in 2012, the Eclipse brand will continue to expand its product offering with the development and launch of further new services in 2013 and beyond.

These will include cloud-based, hosted business productivity and collaboration tools, as well as unified communications and mobility services.

The development of these and other services will allow our Eclipse brand to meet the growing demand among SMBs for flexible and scalable communications services. This will support the continued evolution of the Eclipse brand from a traditional ISP focused on broadband connectivity to a provider of a broader range of subscription-based IT and communications services.

Our future focusDevelop the range of cloud-based business productivity and collaboration tools we offer SMBs.

Bring to market unified communications tools and mobility services to meet the needs of SMB customers.

Continue to increase sales of our expanded product offering to existing customers.

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Furniture VillageFurniture Village has chosen Eclipse to provide and manage a wide area network to connect its 40-plus retail and office sites across the UK.

The three-year contract includes the provision of access services including ethernet leased lines, private fibre, bonded DSL and traditional broadband. These have been integrated within a single network to give Furniture Village the right mix of connectivity to meet the demands of its busiest trading times.

The new network means Furniture Village can roll-out new communications services and business applications cost-effectively to sites that previously didn’t have the connectivity to support them.

Ian McBeth, Group IT Controller at Furniture Village, said: “Eclipse has brought a level of dynamism to our data communications which is sorely needed in today’s retail environment. Eclipse has been extremely helpful, professional and has become an integral part of our team.”

“ Eclipse offered us not just an impressive technical solution but also a flexible approach.”

Ian McBeth, Group IT Controller, Furniture Village

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Directors’ report


KCOM Group PLC Annual report and accounts 2012/13Performance review

from Paul Simpson, Chief Financial Officer

In summaryProgressive dividend policy maintained

Investment in people, IT and service management

Profit before tax (pre-exceptional) increased 3.1 per cent to £52.7 million

Completion of £10 million asset backed partnership with Defined Benefit Pension Schemes

Net debt at 1.1 x EBITDA

Evidence of improving quality and sustainability of business across our brands

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“ The cash-generative capacity of the Group means it is able to continue with a progressive dividend policy and at the same time, meet its funding commitments whilst continuing to invest in those areas that support the Group’s ambition.”

During the year, the Group has remained focused on improving the quality and sustainability of business across its brands and, as a result, each has demonstrated progress in its key strategic areas.

KC has continued its successful deployment of fibre, achieving take-up rates well in excess of our initial expectations.

In Kcom, key customer wins, including a managed service contract with National Farmers Union Mutual (signed post year-end), and further success in the PSN market, are improving Kcom’s profile, reputation and market share in its target markets.

Smart421’s reputation as a leading consultant in the integration of applications in the cloud is evidenced by its strengthening relationship with Amazon Web Services. Our Eclipse brand is building an increasingly strong presence, as a provider of a range of broadband based communications services in the SMB market.

Group revenue was 3.7 per cent lower at £372.9 million (2012: £387.3 million), the bulk of the decline relating to a previously disclosed one-off network build contract in the prior year of £11.7 million. Group EBITDA before exceptional items reduced 1.3 per cent to £76.9 million (2012: £77.9 million) as a result of our continued investment in the business and the slightly lower revenue achievement. Group profit before tax and pre-exceptional items increased 3.1 per cent to £52.7 million (2012: £51.1 million).

Net debt increased across the year to £88.2 million (2012: £75.3 million), mainly as a result of share purchases to satisfy the vesting of certain Group share schemes.

The cash-generative capacity of the Group means it is able to continue with a progressive dividend policy and, at the same time, meet its funding commitments whilst continuing to invest in those areas that support the Group’s ambition to achieve market leadership positions across all four brands.

As part of our longer-term development programme, investments during the year

include the implementation of a suite of tools to support managed services customers, upgrades to desktop and server infrastructure and IT improvements that will support our plans to implement scalable, efficient back-office processes. We have invested also in people, developing further our leadership capability to support and implement our focus on value creation within our strategic focus areas.

In the coming year, the Group will be focused on:

� delivery of value-added services across our brands’ target markets, with the aim of generating profitable growth and establishing strong market positions;

� driving operational effectiveness and scale through enhanced back-office processes and systems;

� investing further in the development of the talent and leadership in the business; and

� further exploration of our partners.

Strategic IT investment, coupled with some overhang of committed capital expenditure from the prior year, may see capital expenditure slightly above the previous guidance of £30 million. In the longer term, we would anticipate total investment of approximately £25 million per annum.

KCThe KC segment covers the performance of our KC brand which operates telephony and broadband over our Hull and East Yorkshire network.

Our KC brand continues to perform very well compared to other incumbent operators, delivering an increase in revenue of 0.9 per cent to £104.6 million (2012: £103.6 million), reflecting the continued demand for bundled services within the consumer market.

Alongside the demand for our consumer services, KC has made progress in the business market over the year. New contracts for business and contact centre services have been secured with organisations including

Humberside Fire and Rescue, Network Rail and Victoria Plumb.

The growth in revenue combined with lower operating costs resulted in EBITDA increasing by 2.4 per cent to £54.5 million (2012: £53.2 million).

The uptake of our fibre-based services Lightstream remains above the levels of our initial expectations, with over 20 per cent of premises passed taking our high-speed services. There are currently 3,600 customers using our Lightstream services. Unlike other fibre offerings, our deployment of Fibre to the Premises technology allows us to deliver guaranteed download speeds, including one at 350Mbps, the UK’s fastest broadband package.

Our next financial year’s fibre deployment is expected to reach a further 15,000 homes and premises. We remain on-target to make the service available to a total of 45,000 homes in the region, by March 2015.

The KC brand is focused on increasing revenue through higher broadband penetration and continued take-up of bundled services.

Kcom Our Kcom segment covers the performance of our national business communications activities, delivered to customers through our Kcom, Eclipse and Smart421 brands.

Revenue in the Kcom segment was 5.5 per cent lower at £273.4 million (2012: £289.3 million). The economic conditions continue to slow down the market, but we have seen growth in our managed services revenue, while certain voice services have declined reflecting a combination of price and regulatory factors. Also, as previously reported, 2012 included a one-off network build contract of £11.7 million (2013: £Nil) and that represents the majority of the difference.

As a consequence of those effects and our continued support of growth investment activities, EBITDA reduced 5.2 per cent to £29.4 million (2012: £31.0 million).

Business review

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Directors’ report



Net debt

£88.2m2012: £75.3m

Basic Earnings per share

7.49p2012: 7.41p

Performance review continued

Kcom continuedThe challenging market conditions have resulted in a slowing of customer opportunities and longer buying cycles, particularly in the enterprise market. Despite those challenges, Kcom has secured a number of new customers as well as winning further opportunities within its existing customer relationships, while at all times maintaining a strong focus on the type of contracts that are targeted.

Of particular note during the year, we signed contracts to provide value-added services to new and existing customers including Morrisons, to support its entry into the convenience store market through its M-stores brand, and Phones4U. Across the public sector, we won a PSN contract to provide services to the Link Consortium and completed the successful implementation of the East Midlands PSN (emPSN).

Having been informed last August of our successful bid, our Kcom brand has recently signed an important five-year managed services contract with National Farmers Union Mutual. Contracts of this nature are important in building a strong multi-year backlog of committed revenue and margin.

Smart421 and Eclipse have continued their prior year progress, delivering a growth in order book of 17 and 39 per cent respectively, demonstrating the progress that those brands continue to make in executing their competitive strategies. New customers during the period include Furniture Village, RSPB and two consultancy and integration contracts with the Association of Train Operating Companies (ATOC).

We continue to build relationships with our key partners, with for example, Amazon Web Services being increasingly recognised as a key part of Smart421’s go-to-market strategy.

Over the year, we will remain focused on building order backlog across all brands within the Kcom segment, and to improve the medium-term quality of the business. This focus will be supported by the investment we have made in previous years, including our

suite of Workplaces services and the deployment of new tools that support our managed services customers.

PLC and associated costs (PLC) This segment includes public company, central and share scheme expenses and the costs, excluding current and past service costs, associated with the Group’s defined benefit pension schemes.

The net pre-exceptional costs incurred in the PLC segment have increased to £7.0 million (2012: £6.3 million) due mainly to a revision in the allocation of certain property costs between the reporting segments.

The overall cost includes a net £1.5 million credit (2012: £1.6 million credit) associated with the financing of the Group’s defined benefit pension schemes. With the accounting rule changes to IAS 19, taking effect from the financial year ending 31 March 2014, the PLC segment will reflect only the administrative costs of operating the defined benefit scheme. The current year credit of £1.5 million includes such costs of £0.5 million (2012: £0.5 million). As a consequence, the net PLC costs would have been £2.0 million (2012: £2.1 million) under the revised basis. Any financing charge or credit (which will be based on one discount rate) in future years will be reflected in the net interest line of the income statement.

Group operating profit Group operating profit decreased to £55.0 million (2012: £57.8 million) reflecting a:

� £1.0 million decrease in Group EBITDA before exceptional items;

� £2.3 million charge from exceptional items (2012: £Nil) reflecting restructuring costs incurred in the period, implementation costs associated with the establishment of the asset backed partnership to support the ongoing funding of the Group’s defined benefit schemes, less the profit on disposal from a fixed asset investment; and

� £0.5 million reduction in depreciation and amortisation.

“ Over the year, we will remain focused on building order backlog across all brands within the Kcom segment and improve the medium-term quality of the business.”

Operating profit*

£57.3m2012: £57.8m

Profit before tax*

£52.7m2012: £51.1m


22



Finance costsFinance costs for the period have reduced to £4.6 million (2012: £6.6 million) primarily as a result of new interest rate swaps which came into effect from January 2012. In order to provide certainty over future interest costs to the end of the Group’s current bank facility in July 2015, the Group has hedged £60.0 million of debt at a weighted average rate of 2.7 per cent. The Group had entered previously into fixed rate swap arrangements for £80.0 million of debt at a weighted average rate of 5.5 per cent.

TaxationThe taxation charge of £12.5 million (2012: £13.4 million) reflects the ongoing unwind of the deferred tax asset and corporation tax liability for the year ended 31 March 2013 of £0.7 million (2012: £Nil), which will be paid across the first half of the next financial year. This liability would have been higher had it not been for the significant benefits arising from the vesting of share options during the period and the asset backed funding arrangement established with the pension schemes.

The effective rate of 24.8 per cent (2012: 26.2 per cent) is higher than the current corporation tax rate of 24 per cent as it reflects the re-measurement of the deferred tax asset balance as a result of the reduction in corporation tax rates from 24 per cent to 23 per cent from the next financial year.

DividendThe Board is proposing a final dividend of 2.97 pence per share (2012: 2.67 pence per share) resulting in a total dividend for the year of 4.44 pence per share (2012: 4.0 pence per share). This represents an 11 per cent year on year growth in the total dividend, in accordance with the Group’s original commitment in 2010.

In addition, the Board has made a further commitment to a 10 per cent per annum dividend growth over the next three financial years, ending 31 March 2016.

Subject to shareholder approval at our Annual General Meeting on the 26 July 2013, the final dividend will be payable on 2 August 2013 to shareholders registered at the close of business on 28 June 2013.

Pension schemeNet liabilities associated with the Group’s retirement benefit obligations have reduced to £9.8 million (2012: £13.9 million). The decrease arises as a result of a growth in the scheme assets of £8.0 million partially offset by an increase in liabilities of £3.9 million.

Shortly before the end of the last financial year, the Group paid £6.9 million in respect of committed deficit contributions due in respect of the current financial year. Payment in the year of £0.6 million (2012: £16.9 million) reflects committed deficit contributions for the month of March 2012, which was payable in arrears.

During the year, the Group reached an agreement with the Trustees of its defined benefit pension schemes (the ‘Schemes’) to create an asset backed partnership. The Group transferred into the partnership its interest in certain freehold properties, entitling the Schemes to an annual distribution of £1.05 million, rising in line with the Consumer Price Index over a potential period of 15 years. The total value of this income distribution to the Schemes is £10.0 million which provided an immediate improvement to the funding deficit. In recognition of that value and the security to be provided to the Schemes, the Group agreed with the Trustees that no deficit repair contributions will be due in respect of the next financial year. The £10.0 million has also reduced the corporation tax liability for the year ended 31 March 2013 by £2.4 million. The establishment of the asset backed partnership has no accounting impact on the Group’s financial statements, with the ongoing distribution being treated as deficit repair payments against the IAS 19 deficit.

The triennial actuarial valuation of the Group’s defined benefit schemes began on 1 April 2013. Existing committed deficit recovery payments due over the financial years ended 31 March 2015 and 31 March 2016 are £8.0 million per annum. The Group continues to engage in positive discussions with the Trustees in order that it can provide further funding to the Schemes through additional assets and income streams from the partnership. Discussions are focused on ensuring that any income stream provides sufficient security to pension scheme members’ interests

whilst providing an efficient and longer-term pension funding approach for the Group.

Cash flow and net debtNet debt increased across the year to £88.2 million (2012: £75.3 million), representing an EBITDA ratio of 1.1 times (2012: 0.9 times). The majority of this increase reflects the purchase of shares associated with share scheme satisfaction amounting to £10.9 million (2012: £0.4 million). Across the next financial year, a further 2.2 million shares vest under Group share schemes, which the Group anticipates purchasing to satisfy this requirement. Net cash inflow from operations has reduced to £50.3 million (2012: £56.0 million) mainly as a result of the timing of working capital movements offset by lower pension deficit payments. As anticipated, the Group has seen a stronger net cash inflow in the second half of the year.

Strong receivables management remains in evidence with average Days Sales Outstanding at the year-end of 30 (2012: 35 days). Much of the movement in working capital during the year reflected a number of unconnected factors, primarily in relation to trade payables.

Cash outflows associated with the purchase of tangible and intangible assets have increased to £28.0 million (2012: £22.1 million). Overall spend was lower than previous guidance of £30.0 million due to timing of activity around a number of the Group’s more significant capital projects.

Capital investmentThe Group now anticipates that capital investment levels will be slightly above £30.0 million per annum over the next two financial years. This reflects existing commitments (such as fibre investment for the KC brand) plus strategic IT investment. Such investment will allow the Group to move towards common systems and processes that efficiently support all our brands’ existing activities and whose scalability match our growth ambitions.

Paul SimpsonChief Financial Officer18 June 2013

Business review

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Directors’ report


KCOM Group PLC Annual report and accounts 2012/13Risk management

We work hard to protect our business but believe also that by anticipating and managing our risks effectively we are able to operate more competitively.

We have a Risk team within the Group, which has specific responsibility for matters relating to legal risk, health, safety and environmental risk, internal audit, insurance, governance and all matters relating to standards and compliance.

As a Group, we aim to identify, evaluate and manage the risks facing the business, rather than try to eliminate all risk. We recognise that our internal control systems can provide only reasonable and not absolute assurance against material misstatement or loss.

Risk management frameworkOur risk management framework enables us to identify, assess, measure, manage and monitor any risks which may prevent the business from meeting its objectives. The framework has been developed in accordance with guidance from the Financial Reporting Council and provides us with a single picture of the threats, uncertainties and opportunities we face. This enables the Board and senior management to make appropriate decisions to limit and control the impact that these risks may have on our goals and objectives.

Internal auditOur internal audit team consists of two qualified accountants, both with a ‘Big Four’ background. The internal audit plan is linked closely to the risk management framework with audits designed to give assurance around the key risk areas identified through the framework.

Each potential audit area is assessed according to the risk associated with it and the level of assurance already in place; this then enables the audit to be appropriately prioritised and built into the audit plan as necessary.

The way in which the work of internal audit fits into the risk management framework is shown on the opposite page.

Responsibilities in relation to risk managementThe BoardThe Board has overall responsibility for deciding the acceptable level of risk that the Group may take to achieve its objectives. It is responsible also for ensuring that the Group maintains sound internal control and risk management systems, as well as reviewing the effectiveness of those systems. In order to do this, the Board receives regular reports from senior management, the internal audit team and the external auditors, via the Audit Committee, on the effectiveness of the systems of internal control and risk management. The Board is satisfied that the systems are embedded within the day-to-day activities of the business and cover all material controls, including financial, operational and compliance controls and that the Group continues to be compliant with the provisions of the UK Corporate Governance Code relating to internal control.

Risk CommitteeThe Risk Committee consists of senior management from across the Group and meets bi-monthly to consider all types of risk. The Committee is responsible for reviewing progress in mitigating risks and discussing and

agreeing actions relating to any new risks that have been identified. The Committee prepares a report for the Board after each meeting.

Audit CommitteeThe membership and attendance at Committee meetings during the year is shown on page 39.

The Audit Committee meets three times a year and is chaired by Martin Towers, who has significant recent financial experience. He is a fellow of the Institute of Chartered Accountants in England and Wales and has held a number of senior finance roles, including working as Group Finance Director at Kelda Group PLC until 2008. The Board considers therefore that he has the relevant financial experience to fulfil the role of Chairman of the Audit Committee.

The meetings are also attended by the Executive Directors, the Finance Director for Group Services, the Company Secretary, the Head of Internal Audit and representatives from the external auditors. The external auditors meet also with individual members of the Audit Committee during the year without the other attendees present.

The internal auditors report to the Committee at each meeting on the adequacy and effectiveness of the financial, operational and compliance controls in place across the Group. The internal and external audit teams work closely together to ensure that all key risk areas are covered and that the work performed by one team feeds into the work of the other. The external auditors report also to the Audit Committee any material risks identified during their interim review and the full year audit.

Effective risk management is seen as key to the KCOM Group and central to what we do

In the year under review, the Audit Committee considered the following significant matters in relation to the financial statements:

Matter How this was addressed

Accounting under the IAS 19 standard in relation to employee benefits and the assumptions made in relation to this.

The assumptions and rationale were discussed and agreed as reasonable.

The capitalisation of internal project costs. The Group has a clear policy in relation to the capitalisation of internal costs which has been applied consistently to project costs in the year. The reasonableness of the approach was discussed and approved.

The impairment analysis for the cash-generating units for disclosure in the report and accounts.

The assumptions made were reviewed and agreed as reasonable.

The classification of costs as exceptional. These were discussed and it was noted that there was a clear policy in place in relation to the classification of costs as exceptional and that this had been consistently followed.

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The Audit Committee reports to the Board after

each meeting.

The risk registers are reported three times a

year to the Board.

Risk investigationIf the risk is auditable, it will be added

to the internal audit plan which is approved by the Audit Committee

at each meeting.

Issue ownershipAny audit issues raised are assigned a senior management owner who

determines an action plan and timescales to mitigate the issue.

Issue reportingAudit issues and management

responses are reported to the Audit Committee three times a year.

Mitigation monitoringProgress against action plans is monitored closely and reported to the Audit Committee at each

meeting until the issue has been closed.

Risk ownershipAll risks are assigned a senior

management owner who is responsible for the mitigation of the risk to an

acceptable level. The mitigation plan is documented on the risk register.

Mitigation monitoringThe risk registers across the Group are reviewed and updated by the

relevant senior management owner on a regular basis.

Risk reportingThe risk registers are collated and reviewed by the Risk Committee three times a year to check for consistency in ratings and to

identify any potential omissions.

Risk recordingThe risk will be added to the risk register and rated for probability

and impact.

Our risk management process

Risk identificationRisks may be identified in a variety of ways:

by anyone within the business;

through our whistle-blowing process; or

through external or internal audits.

Auditing risk Managing risk

Each year the Audit Committee also:

� seeks the view of the external auditors on any accounting judgements made in the year;

� considers the consistency and appropriateness of the accounting policies adopted;

� reviews the financial statements of the Group and the clarity of the disclosures made, although the ultimate responsibility for reviewing and approving the annual report and financial statements remains with the Board;

� monitors and reviews the effectiveness of the internal audit team, considers and approves the internal audit plan, the resourcing of the team and the adequacy of management responses to the audit issues raised;

� reviews the adequacy of the whistle-blowing procedures in place to enable employees and third parties to raise concerns in confidence, as well as the effectiveness and independence of any investigations undertaken as a result of such concerns being raised;

� reviews the procedures in place for the detection of fraud and the prevention of bribery across the Group; and

� oversees the relationship with the external auditors, as noted in more detail on page 26.

The Committee’s Terms of Reference are in line with the recommendations in the UK Corporate Governance Code and the Institute of Chartered Secretaries and Administrators Guidance on Terms of Reference for Audit Committees. Copies of the Terms of Reference are available from the Company Secretary and are on our website at www.kcomplc.com.

Board reporting

Business review

25

Directors’ report


KCOM Group PLC Annual report and accounts 2012/13Risk management continued

The relationship with the external auditorsThe Audit Committee is responsible for overseeing the relationship with the external auditors to ensure that the external auditors continue to be independent, objective and effective in their work, as well as considering the re-appointment of the auditors each year.

During the year the UK Corporate Governance Code was updated to include a new requirement for FTSE 350 companies to put the external audit contract out to tender at least every ten years. It is the intention of the Audit Committee to comply with this requirement and the transitional arrangements put forward by the Financial Reporting Council.

PricewaterhouseCoopers LLP were appointed as auditors in 2006 following a comprehensive tender process. The Audit Committee has reviewed the effectiveness of the external audit process in the year through the reports received from the external auditors and the close working of the internal audit team with the external auditors. The Committee has concluded that the external audit process was effective.

In addition PricewaterhouseCoopers LLP have formally confirmed their continued independence to the Audit Committee and the measures they have taken to ensure that they comply with best practice and professional and regulatory requirements in this area. The Committee believes that audit partner rotation is key to ensuring continued independence and objectivity by reducing the risk of familiarity while retaining the detailed understanding of the business which the external auditors have gained over time; in the light of this the current audit partner, Ian Morrison, was appointed to the audit in 2011.

We have an ‘Engagement of External Auditors’ policy which covers the selection of firms to perform non-audit work. This policy excludes the auditors from providing certain services, such as internal audit services, litigation support, remuneration advice and legal advice services. All other non-audit work is assessed separately and is awarded to the firm considered best suited to perform the work. Any such work with a fee greater than 25 per cent of the annual audit fee must be approved by the Chairman of the Audit Committee before the external auditors may be appointed.

During the year the fee for the external audit of the Group and its subsidiaries, along with other services pursuant to legislation, was £228,000 (2012: £228,000). In addition to

this, the external auditors provided services to the value of £21,000 (2012: £59,000) relating to tax services and pensions advice. In both areas, the auditors were considered the most appropriate firm to perform the work.

Financial risk managementEach part of our business produces an annual budget which is reviewed by senior management and ultimately approved by the Board. A longer-term five-year plan is also in place which is updated annually and approved by the Board to enable them to have a clear longer-term view of financial projections.

We also prepare a quarterly forecast and performance against budget and quarterly forecast is monitored at monthly senior management meetings and reported to, and reviewed by, the Board each month. Further information about the financial risk management policies in place, and in particular the way in which credit risk, liquidity risk, interest rate risk and foreign currency risk are managed, is in note 27 to the accounts.

Controls around consolidationThe basis of consolidation for the financial statements is detailed in note 2 to the accounts. Strong controls are in place around the process for preparing consolidated accounts. The work of consolidation is performed by experienced, qualified accountants and a review of the consolidation forms part of the audit work performed by our external auditors.

Principal risks and uncertaintiesAs with all businesses, we are affected by a number of risks and uncertainties, of which some are beyond our control. The table on the right shows the principal risks and uncertainties which could have a material adverse effect on the Group and have been identified through the risk management framework.

This is not an exhaustive list and there may be risks and uncertainties of which currently we are unaware, or which are believed to be immaterial, which could have an adverse effect on the business.

Area Change in level of risk

Why is it important? What are we doing to mitigate the risk?

Risks continuing from last year

Customer service and delivery

The level of service we provide to our customers is central to everything that we do and is a key differentiator between us and our competitors.

We have continued to make improvements to the customer operations part of our business, aligning customers to the right teams and investing in our systems to enable us to provide a more efficient and seamless service.

Recruitment and retention of the right people

People continue to be our most valuable asset and the success of the Group is dependent on recruiting and retaining the right people in all areas of our business.

In the year we have successfully recruited key people at all levels of the organisation and have attracted significant talent to the Group. We have continued also to invest in training in relation to leadership capability and developing our core values throughout the Group to ensure that our high calibre people remain with us.

Reliance on key third party partners and suppliers

Our business model means that we are dependent on significant partnerships, such as with BT, Phoenix IT Group, Cisco, Avaya, Amazon Web Services, Microsoft and IBM.

All of our partnerships are monitored closely by dedicated teams and we have a strong relationship with each partner, supported by appropriate contractual service levels. We have also multiple partners in key risk areas to mitigate the risk in the event of failure of one partner.

Business continuity

It is essential to many of our customers that we can continue to provide service even when a significant incident has occurred. It is therefore vital that we have comprehensive business continuity plans in place which have been tested and can be implemented easily when necessary.

We have been focusing on business continuity for a number of years and have achieved the BS 25999 Business Continuity standard in key parts of the Group, which we are now working on converting to the new ISO 22301 Business Continuity standard. We undertake regular tests on our plans and feedback from those tests is used to continually improve and update the plans as necessary.

Security and resilience of IT, networks and data

Much of our business relates to communications networks and handling data, both for our customers and internally. It is therefore essential that our information systems, networks and data are secure and resilient.

We are continually working to improve the security and resilience of our systems and have held the ISO 27001 Information Security Management standard since 2007. All of our employees are required to undertake mandatory online training relating to information security and the Risk Committee considers information security at each meeting and monitors the ongoing mitigation of any specific risks identified. During the year we appointed a Head of Data Governance to have specific responsibility for the quality and handling of data across the Group and this will continue to be a key area of focus in the future.

Increased risks this year

Increasing compliance requirements from customers

Increasingly our customers are requesting compliance with new standards, particularly those in the public sector.

We have a dedicated Standards and Compliance team that has a significant amount of experience in interpreting, implementing and maintaining standards. The team has worked hard in the year to ensure that we have achieved compliance in the required areas and this work will continue as more requests are received. We have also a comprehensive standards audit programme to ensure that we continue to meet the requirements of the standards going forward.

Competition in the Hull and East Yorkshire area

During the year there has been an increase in the amount of competition in the business services market in the Hull and East Yorkshire area. To date the impact of this has been minimal.

Our focus continues to be on providing the best value for money and the best customer service in order to retain our customers. The fibre deployment in Hull and East Yorkshire continues, delivering ‘superfast’ broadband through KC Lightstream. This has been extremely well received and the deployment will continue over the coming year.

26



Area Change in level of risk

Why is it important? What are we doing to mitigate the risk?

Risks continuing from last year

Customer service and delivery

The level of service we provide to our customers is central to everything that we do and is a key differentiator between us and our competitors.

We have continued to make improvements to the customer operations part of our business, aligning customers to the right teams and investing in our systems to enable us to provide a more efficient and seamless service.

Recruitment and retention of the right people

People continue to be our most valuable asset and the success of the Group is dependent on recruiting and retaining the right people in all areas of our business.

In the year we have successfully recruited key people at all levels of the organisation and have attracted significant talent to the Group. We have continued also to invest in training in relation to leadership capability and developing our core values throughout the Group to ensure that our high calibre people remain with us.

Reliance on key third party partners and suppliers

Our business model means that we are dependent on significant partnerships, such as with BT, Phoenix IT Group, Cisco, Avaya, Amazon Web Services, Microsoft and IBM.

All of our partnerships are monitored closely by dedicated teams and we have a strong relationship with each partner, supported by appropriate contractual service levels. We have also multiple partners in key risk areas to mitigate the risk in the event of failure of one partner.

Business continuity

It is essential to many of our customers that we can continue to provide service even when a significant incident has occurred. It is therefore vital that we have comprehensive business continuity plans in place which have been tested and can be implemented easily when necessary.

We have been focusing on business continuity for a number of years and have achieved the BS 25999 Business Continuity standard in key parts of the Group, which we are now working on converting to the new ISO 22301 Business Continuity standard. We undertake regular tests on our plans and feedback from those tests is used to continually improve and update the plans as necessary.

Security and resilience of IT, networks and data

Much of our business relates to communications networks and handling data, both for our customers and internally. It is therefore essential that our information systems, networks and data are secure and resilient.

We are continually working to improve the security and resilience of our systems and have held the ISO 27001 Information Security Management standard since 2007. All of our employees are required to undertake mandatory online training relating to information security and the Risk Committee considers information security at each meeting and monitors the ongoing mitigation of any specific risks identified. During the year we appointed a Head of Data Governance to have specific responsibility for the quality and handling of data across the Group and this will continue to be a key area of focus in the future.

Increased risks this year

Increasing compliance requirements from customers

Increasingly our customers are requesting compliance with new standards, particularly those in the public sector.

We have a dedicated Standards and Compliance team that has a significant amount of experience in interpreting, implementing and maintaining standards. The team has worked hard in the year to ensure that we have achieved compliance in the required areas and this work will continue as more requests are received. We have also a comprehensive standards audit programme to ensure that we continue to meet the requirements of the standards going forward.

Competition in the Hull and East Yorkshire area

During the year there has been an increase in the amount of competition in the business services market in the Hull and East Yorkshire area. To date the impact of this has been minimal.

Our focus continues to be on providing the best value for money and the best customer service in order to retain our customers. The fibre deployment in Hull and East Yorkshire continues, delivering ‘superfast’ broadband through KC Lightstream. This has been extremely well received and the deployment will continue over the coming year.

Business review

27

Directors’ report


KCOM Group PLC Annual report and accounts 2012/13Corporate responsibility

The way we do business is as important in achieving our Group vision as what we do

Community People

We use our resources and skills to make a difference to the communities

in which we operate

We attract, develop, recognise and retain the right people by providing an environment

where everyone can achieve their potential

Environmental sustainability

We seek to minimise our impact on the environment through behavioural

change and the use of technology

Our areas of focus for Corporate Responsibility (CR)

We work collaboratively with our suppliers and customers to achieve our goals and build sustainable partnerships

Supply chain

28



Our performance is intrinsically linked to that of our people, our partners and our communities. By placing sustainability at the core of our strategy we can manage our economic, environmental and social impact.

While we have no material social issues, during the year we reviewed and evolved our approach to CR. As a result of the review, we have expanded our areas of focus to include supply chain in addition to people, community and environmental sustainability.

We have Group-wide programmes in place covering each of our focus areas. As well as these, each of our brands is able to pursue CR activity that helps them achieve their specific business strategy.

We have expanded the membership of the CR Steering Group that we established in 2011 to include representation from the four brands as well as the four areas of focus.

The CR Steering Group will continue to develop and drive the implementation of our strategy to achieve our CR objectives:

� to use our knowledge and expertise to create a positive impact on all our stakeholders and the communities in which we operate;

� to develop and promote a value-driven culture that is reflected in how we conduct our business; and

� to engage, enable and empower our people so that they can make a positive contribution to our CR strategy and the causes that matter to them.

Responsibility for CR at Board level remains with our Executive Chairman, Bill Halbert.

CommunityThrough our community activities we want to build sustainable partnerships and support projects that make the communities we serve better places to live, work and invest in.

Our people are key to our success in achieving these aims, and we want to encourage and support them to use their skills and time to benefit their local communities.

Our community strategy covers engagement and support at both a Group-wide and brand level.

The KCOM Group works with a charity partner and this is chosen by our people voting on a shortlist of UK-registered national charities.

In April 2012 the Group began a two-year partnership with Sparks, a charity dedicated to funding pioneering research into conditions affecting babies, children and mums-to-be. We see a match in values between the KCOM Group and Sparks in our dedication and commitment to pioneering innovation in our respective areas of focus. Their focus is on improving the quality of life for children and families affected by serious illness or disability, while seeking ways to better diagnose, treat and prevent these conditions in the future through medical research. The medical breakthroughs they make possible will deliver a difference to thousands of women, children and families around the world.

During the year we raised £68,000 for this worthwhile charity, the largest amount the Group has raised in a year for a charity partner. It was achieved through the dedication of our people, who raised funds through sporting challenges, dress down days, charity auctions, cake bakes and many other activities.

Meanwhile, our quarterly employee grants scheme awarded £3,600 to community projects, events and charities chosen by our people, helping them support causes close to their heart.

The grants funded, among other things, the purchase of equipment for a youth sports club, a scouting group and a playgroup, and days out for pupils of a special school.

During the year the Group continued also its patronage of the Prince’s Trust, the UK’s leading youth charity. Our patronage helps the Trust achieve its goal of changing lives by offering training, personal development, business start-up support, mentoring and advice to young people.

We supported a number of other charitable events including Movember for Prostate Cancer, the Jeans for Genes appeal, Comic Relief and Children in Need.

Volunteering and community projectsVolunteering and community work is central to the Group’s CR programme and our people get involved in many varied projects across the year.

The Group has formal partnerships in place with schools, charities and projects in areas where we operate across the UK. In Hull and East Yorkshire, where we are one of the largest employers in the region, our people donated 1,500 hours to community volunteering through our KC in the Community programme.

The programme has three aims: to involve our employees in events, projects and activities that matter to local people; to inspire local young people and get them interested in, and excited about, the future; and to support growth in the local economy by supporting entrepreneurship and providing practical support and advice to start-ups and growing business.

The programme won the community category of the 2012 Yorkshire Business Masters Awards run by TheBusinessDesk.com.

Business review

29

Directors’ report


KCOM Group PLC Annual report and accounts 2012/13Corporate responsibility continued

PeopleOur people are vital to the success of the Group. We support wholeheartedly the principles of equality, diversity and inclusiveness in employment and we empower our leaders to attract, retain and motivate talented people from all backgrounds and cultures and with a wide variety of mindsets.

Investors in PeopleOur Investors in People accreditation is central to ensuring we are doing the right things to help our people become even more customer focused, enabling us to achieve our long-term vision and deliver inspiring customer experiences.

Health, safety and wellbeingThe health, safety and wellbeing of our people, partners, contractors, customers and members of the public is important to us.

Our BS OHSAS 18001 Health and Safety management system continues to function effectively and is audited by the British Standards Institute.

During the year there were no fatalities or health and safety enforcement notices. We experienced one RIDDOR incident (2012: 3). There were 17.5 working days lost in the year as a result of health and safety incidents (2012: 61).

We aim to continue the improvement in our incident trends in 2013/14 by increasing audits and inspections not only at Group sites but also at customers’ sites where our people are based.

We have continued our annual health and wellbeing screening sessions for the fifth consecutive year, with 590 colleagues attending in 2012/13.

“ We aim to create a workplace where every employee is recognised as an individual and inspired to deliver exceptional business performance.”

Our people strategy

In 2010 we launched a programme of work aimed at developing our people to support them in fulfilling their potential.

It has been focused on: �Value-driven culture This workstream has consisted of activities to communicate and

embed the Group’s values. During the year more than 1,000 employees attended an ‘It Starts with Me’ workshop, where these values and associated behaviours were explored through discussion and activities.

�Leadership development The comprehensive leadership development programme we began

in 2011/12 continued during the year, with 233 people managers participating in learning sessions covering areas including motivation and performance management. We launched also a toolkit for people managers to support them in their ongoing development beyond the formal training aspect.

�Considering the future of work and how future technological and cultural developments will impact upon the way in which our people work

The successful organisations of tomorrow will be those that make the most of the collaborative potential of technology to empower their people, supporting new ways of working and organising themselves to create a high performance workplace. During the year our membership of the Future of Work Consortium gave us access to thought leaders and best practice in this field, equipping us with the knowledge we need to capitalise on opportunities created by new technologies.

For the forthcoming year: We will continue to focus on building a value-driven culture

and developing our leadership and management capabilities. In addition, the establishment of a competency based framework to underpin our work to provide appropriate opportunities for career progression across the Group and to support all of our brands.

30



We have also continued to run monthly health and wellbeing campaigns to encourage a positive health and wellbeing culture, and to offer information and support through our mental health and wellbeing microsite and our confidential employee assistance programme.

Our cycle2work scheme continued to be popular, with 83 new enrolments during the year. Post year-end, we upgraded our cycle facilities at our head office to encourage increased participation.

Supply chainDuring the year we expanded our CR focus to include supply chain. By taking account of environmental, social and ethical considerations in our purchasing processes, we aim to minimise risks and identify opportunities for innovation and cost reduction.

We have a Supplier and Partner Code of Conduct to ensure that our suppliers and partners support our principles and commitment to responsible business practice. Our aim is to reassure customers that products and services purchased through the Group have been produced and delivered responsibly and lawfully in decent working conditions without exploiting the people who make or deliver them and without damaging the environment.

Compliance with the Code is achieved through self-evaluation. Where necessary we undertake independent inspections and audits to ensure that our suppliers and partners are adhering to the Code’s principles and that we are all working together under the same responsible values.

During 2013/14, we will continue to develop the supply chain aspect of our CR strategy to maximise the benefits that responsible procurement principles and processes can deliver.

Environmental sustainabilityDuring the year we have strengthened our approach to environmental sustainability by identifying Green Champions across the Group. Together they form a network of enthusiastic volunteers who are helping to raise environmental awareness in their locations around the country.

Energy and waste Our most significant environmental impacts are in the areas of energy and waste. During the year we have achieved all of our targets in those areas, including a reduction of 1,491 tonnes of CO2e in relation to electricity consumption, as a result of the following activities:

Energy-related activities � our key network partner, BT, has invested in

energy efficient telephony power systems;

� installation of automatic meter readers has enabled us to capture usage and target improvements;

� we have upgraded some of our IT infrastructure with virtual servers located in our own data centres and accessible via the cloud, reducing our impact on the environment; and

� new energy-efficient boilers have been installed at our Carr Lane office in the latter part of the year and passive infra-red motion detectors linked to lighting in common areas have also been installed.

Waste-related activities � we have improved our ability to recycle

in our Hull offices though access to a new recycling facility and this has had a significant impact on the overall proportion of waste that we have recycled in the year;

� we also expanded our recycling facilities across the Group to include household electrical equipment, building environmental awareness beyond the workplace; and

� our deployment of a ‘managed print’ programme to provide a network of printer photocopiers has led to a reduction in the amount of paper and toner used across the Group through the use of default settings for double-sided and non-colour printing, alongside ‘follow me’ printing to reduce the number of unclaimed prints. Energy consumption has also reduced through the automatic power-down of printers during periods of little or no activity.

Colleague participation in annual health and wellbeing sessions

29%

Leadership development (attendees to date)

233

It Starts with Me (attendees to date)

1,007 Business review

31

Directors’ report


KCOM Group PLC Annual report and accounts 2012/13Corporate responsibility continued

Environmental sustainability continuedTargets and achievementsOur emissions calculations include the following activities:

� day-to-day running of our offices and network sites (including the Group’s own data and co-location facilities);

� waste generated at our sites;

� delivery of services to our customers;

� operation of company vehicles;

� employee travel and hotel accommodation;

� equipment operated at customer sites;

� equipment operated at hosted facilities such as third party data centres and co-location centres; and

� sites where we are tenants and do not have responsibility for the electricity bills.

Methodology and assumptionsThe data below has been calculated using KCOM Group PLC’s 2012/13 Greenhouse Gas (GHG) Report which has been produced by Verco Advisory Services Limited. This follows the requirements of ISO 14064 and also the GHG Protocol: Corporate Accounting and Reporting Standard GHG accounting methodologies.

Assumptions were made in relation to:

� running loads for racks in third party data centres;

� electricity consumption where data from an automatic meter reader has not been available;

� price of diesel, petrol and LPG; and

� fuel consumption of vehicles.

“ Environmental sustainability is a real focus for us and this year we have managed to achieve all the targets we have set ourselves.”

GHG emissionsIn accordance with the draft regulations from the Department for Environment, Food and Rural Affairs, on the reporting of GHG emissions, we have set out below our total tonnes of CO2e produced in the year. We have selected 2011/12 as our baseline year as this is the year in which we completed our installation of automatic meter readers at over 90 per cent of our estate, therefore enabling us to record our electricity consumption much more accurately.

Current reporting year2012/13

Tonnes of CO2e*

Baseline year 2011/12

Tonnes of CO2e*

Total gross emissions 26,600 28,445

Intensity ratio (Tonnes of CO2e per total £ million sales revenue)

71.33 73.44

* CO2e is a universal unit of measurement used to indicate the global warming potential of a greenhouse gas expressed in terms of global warming potential of one unit of carbon dioxide.

32



Our environmental sustainability targets and achievements

Area of focus Target 2012/13

Achieved Actual 2012/13

Actual 2011/12

Percentage change

Target 2013/14

Total CO2e

emissions

To maintain at 2011/12 levels

26,600 CO2e

28,445 CO2e

6.49% To maintain at 2012/13 levels

CO2e arising from

business travel

To maintain 2011/12 levels through promotion and use of our internal communication technology

1,882 CO2e

2,225 CO2e


Landfill

To reduce landfill by 5% from 2011/12 levels

16.25 tonnes

80.85 tonnes


Proportion of waste recycled

To increase proportion recycled by 5% on 2011/12 levels

93.93% 66.49% 27.44% To maintain at 2012/13 levels

Printer and photocopier paper used

To reduce paper used by 10% from 2011/12 levels through the introduction of managed print

15.61 tonnes

19.26 tonnes


All of our carbon emissions data is audited by our internal audit team.

Comprehensive information on how we behave responsibly can be found at www.kcomplc.com/our-responsibility

Business review

33

Directors’ report



34

Board of Directors

Graham HoldenNon-Executive Director

Term of officeGraham joined the Board in November 2007.

Previous experienceGraham is a Chartered Accountant and graduate of the Harvard Advanced Management Programme. He is Chief Executive of Marshalls PLC, having been with the Company for 26 years, serving as Group Financial Director from 1992 until 2001.

External appointmentsAs well as being the Chief Executive of Marshalls PLC, Graham also serves on the Boards of the Construction Products Association and the Mineral Products Association. He is also the Chairman of the Yorkshire and Humber Regional Advisory Board of Business in the Community and served as the Prince’s Ambassador to the region until 21 June 2012. Graham is also a Visiting Fellow in the School of Management at Cranfield University.

Board CommitteesRemuneration (Chairman), Audit and Nomination.

Graham is aged 53.

Bill HalbertExecutive Chairman

Term of officeBill was appointed Executive Chairman of the KCOM Group in July 2009 having joined the Board as a Non-Executive Director in September 2006.

Previous experienceBill has worked in the information technology industry for over 40 years and brings a wealth of experience and strategic insight to the KCOM Group Board. During his time in the industry he founded and was the CEO for 13 years for Syntegra, BT’s global consultancy and systems integration subsidiary.

External appointmentsBill’s other directorships include Excelsys Ltd, Jade Communications Ltd and Tacit Connexions Ltd.

ResponsibilitiesAs Chairman, Bill is responsible for leading the Board. He has overall executive responsibility for the day-to-day management of the Group and its brands.

Bill is aged 65.

Tony IllsleySenior Independent Non-Executive Director

Term of officeTony joined the Board in June 2009.

Previous experienceTony has held a variety of senior business positions including Chief Executive Officer of Telewest Communications PLC, President of Pepsi Cola Asia Pacific and Senior Independent Non-Executive Director of easyJet plc.

External appointmentsTony is currently Chairman of Plastic Logic Ltd and is a Non-Executive Director of Sepura PLC, Camelot Global Services Limited and Camelot UK Lotteries Limited.

Board CommitteesNomination (Chairman), Audit and Remuneration.

Tony is aged 56.

Group Investment CommitteeApproves funding of Group business cases greater than £25,000 and up to a maximum of £100,000. Escalates any cases that may need Executive Management Board approval or have impact on the Group’s growth-enabling programme.

Executive Management BoardOversees performance of the Group and its brands

and refers matters to the PLC Board as required.

Brand and Group Services management teamsResponsible for the definition and delivery of strategies and operational plans.

Programme reviewEnsures that projects and programmes are progressing well in terms of delivery, benefit realisation and overall business case.

Board and management structure

_1_KCOM_ar13_middle (RB.JW).indd 1 6/20/2013 11:14:30 AM


35

Overview

Business reviewFinancials

Governance

Directors’ report

Kevin WalshExecutive Director

Term of officeKevin joined the KCOM Group Board in May 2004, having joined the Group in 2000.

Previous experienceKevin was Managing Director of a new media start-up and held a number of senior director roles within the Electrolux Group. He brings to the KCOM Group Board a wealth of business knowledge including a significant amount of consumer business experience.

External appointmentsKevin is a member of Business in the Community’s Yorkshire and Humber Advisory Board. He is also a member of the City Leadership Board of Hull City Council.

ResponsibilitiesKevin has responsibility for the management of the Group’s KC brand.

Kevin is aged 60.

Paul SimpsonChief Financial Officer

Term of officePaul was appointed Chief Financial Officer in May 2004, having joined the Group in 2000.

Previous experiencePaul is a graduate in Economics and qualified as a Chartered Accountant with Price Waterhouse. Prior to joining the Group, Paul worked in transaction services at Ernst and Young, which included working on the flotation of the KCOM Group.

External appointmentsNone.

ResponsibilitiesPaul has responsibility for all finance matters across the Group. In addition, he has responsibility for the management of the IT, project management and risk teams.

Paul is aged 44.

Martin TowersNon-Executive Director

Term of officeMartin joined the Board in June 2009.

Previous experienceMartin is a fellow of the Institute of Chartered Accountants in England and Wales and has held a number of senior finance roles including Group Finance Director at Kelda Group PLC, Allied Textile Group PLC and the Spring Ram Corporation PLC.

External appointmentsMartin is currently Non-Executive Director of RPC Group PLC and Tyman PLC and Chairman of Norcros plc. In January 2013, Martin was awarded the Non-Executive Director of the Year award at the Grant Thornton Quoted Company Awards for his work with Tyman PLC.

Board CommitteesAudit (Chairman), Nomination and Remuneration.

Martin is aged 60.

ExecutiveBill Halbert (Chairman)Paul SimpsonKevin Walsh

Non-ExecutiveGraham HoldenTony IllsleyMartin Towers

Kathy Smith – Company Secretary

KCOM Group PLC BoardEnsures delivery of shareholder value and sets overall strategic direction and governance.

Visit www.kcomplc.com for the latest news, reports, presentations and share price information. We are committed to providing our investors with the latest information about the KCOM Group.



36

Appointment and replacement of DirectorsIn accordance with Provision B.7.1 of the UK Corporate Governance Code, the Board has resolved that all of the Directors will be standing for re-election at the 2013 AGM.

The Nomination Committee, and the Board as a whole, has reviewed the performance and contribution of each Director and has no

hesitation in proposing the re-appointment of the entire Board.

In accordance with the Articles of Association, the Board may appoint a new Director at any time but the new Director will only hold office until the next Annual General Meeting (AGM) at which point they must stand for election or vacate the office. The Articles of Association state also that the Company may remove a Director by ordinary

resolution with special notice before the expiration of their period of office.

IndependenceAll three of the Non-Executive Directors are considered to be independent in relation to the criteria set out in Provision B.1.1 of the UK Corporate Governance Code and the NAPF Corporate Governance Voting Policy and Guidelines.

Corporate governancefrom Kathy Smith, Company Secretary

The combined roles of Chairman and Chief Executive

In July 2009 Bill Halbert was appointed as our Executive Chairman, combining the roles of Chairman and Chief Executive. Given the particular circumstances of the Group at the time, the decision to combine the two roles was taken, with the support of our largest shareholders, to provide strong leadership through a period of transformation for the business. The intention at the time of appointment was for the dual role to be maintained throughout the transformation, which had been anticipated to take a period of approximately two years. However, in the face of a continued economic downturn, it became clear that the full transformation would take longer and so in both 2011 and 2012, consultation with our largest shareholders indicated that there was strong support for Bill to continue in his dual role. This reflected the strong performance that the Group has delivered under Bill’s leadership and the desire to ensure that Bill continued to lead the business through the early stages of our growth plan.

The combined role is regularly reviewed by the Nomination Committee and discussed with our largest shareholders and we believe that the dual role continues to be in the best interests of the Group, while not inhibiting the performance of the Board in any way. We will continue to review this and to consult with our largest shareholders in the coming year.

The combined role is in breach of Provision A.2.1 of the UK Corporate Governance Code. The main principle of the Code, which is supported by Provision A.2.1, is ‘There should be a clear division of responsibilities at the head of the Company between the running of the Board and the executive responsibility for the running of the Company’s business. No one individual should have unfettered powers of decision.’ To ensure that we comply with this principle while combining the roles of the Chairman and Chief Executive, we have put the following measures in place:

� we have a strong Board, which includes experienced Non-Executive Directors. Our Senior Independent Director, Tony Illsley, along with the Executive Chairman and the other Non-Executive Directors, is responsible for ensuring that there is a culture of openness, debate and challenge among the Board members. Tony and the other Non-Executive Directors are available to any shareholders who request a meeting or who have concerns that contact through the normal channels has failed to resolve, or where such contact is inappropriate;

� we have an equal number of Executive and Non-Executive Directors on the Board and a clear schedule of Matters Reserved for the Board so that no single group or individual is able to dominate decision-making;

� the Company Secretary, along with the Executive Chairman, takes responsibility for ensuring that there is the right flow of information to the Board and that the Board agenda covers all of the topics that the Board should be considering;

� each of our four operating brands has its own Managing Director, separate from the Executive Chairman, who all have access to the other Executive Directors on a regular basis and, along with other members of senior management, meet with the Non-Executive Directors on a regular basis to enable information to be exchanged first hand and to provide the Non-Executive Directors with greater insight and understanding of Group operations outside of the boardroom; and

� our Executive Chairman has received training on his responsibilities as an Executive Director and as the Chairman of the Board and is careful to ensure that he does not perform one role at the expense of the other. The Senior Independent Director supports him in this and acts as a sounding board for the Executive Chairman when required, as well as an intermediary for the other Directors if necessary, to mitigate further any potential problems arising out of the dual role.

“ The performance evaluation process this year indicated the mutual respect among Board members which encourages an open environment for challenge and debate.”



37

Overview


Governance

Directors’ report

The Board reviews the independence of the Non-Executive Directors each year, taking into account the length of tenure, relationships and circumstances as well as considering the behaviour of each Director at Board meetings and whether or not they contribute to unbiased and independent debate. All of the Non-Executive Directors were independent upon appointment and the Board believes that all three remain wholly independent.

Commitments of the Executive ChairmanBill Halbert works full-time for the Company. He sits on the boards of a number of smaller private limited companies but these do not require a significant time commitment and he manages successfully these commitments alongside his role at KCOM Group. His commitments have not changed significantly in the year.

UK Corporate Governance CodeApart from the exception noted opposite, the Board considers that it has complied with all the detailed provisions of the UK Corporate Governance Code throughout the year ended 31 March 2013 and the Board as a whole is committed entirely to the principle of achieving and maintaining a high standard of corporate governance. The UK Corporate Governance Code is available on the Financial Reporting Council website at www.frc.org.uk.

How the Board operatesThe Board meets nine times a year. The attendance at the meetings during the year is shown in the table on page 38. At each meeting the Board considers all aspects of Group performance, including past performance and the future long-term success and strategic aims of the Group.

The business reports regularly to the Board on financial performance, human resources, health, safety and environmental matters, investor relations, governance, compliance and risk. There are also regular updates on key projects and strategic programmes.

There is a schedule of Matters Reserved for the Board which is reviewed and updated each year. This schedule requires that specific matters relating to budgets, strategy, performance against objectives, financial reporting, internal controls, communications, remuneration and governance, along with any proposed changes to business operations or the structure and capital of the Company, are referred to the Board for consideration and approval.

The Board reviews also contractual clauses escalated to the Board through our contracting risk framework and business cases escalated in accordance with our Group-wide delegations of authority.

Our Company Secretary, Kathy Smith, was appointed to her current role in 2010 and has been with the Group for over seven years. She is a Chartered Accountant and Graduate member of the Institute of Chartered Secretaries and Administrators. The Board considers the role of the Company Secretary to be of great importance in ensuring that the Group and the Board has the right governance in place and that Board processes are correctly followed.

The Company Secretary meets with each of the Directors individually as necessary to discuss governance related matters and provides a governance report to the Board on a monthly basis. The Directors are able also to obtain independent professional advice at the Group’s expense whenever necessary.

The balance of the BoardThe Nomination Committee is responsible for reviewing the balance of the Board to ensure that it continues to meet the requirements of the Group.

There is a Board Appointments policy in place, which sets out the procedure that will be followed in the event of a Board vacancy being identified, along with the approach of the Board to diversity.

Group Leadership team by gender (as at 31 March)

Balance of Executive and Non-Executive Directors

Executive Directors 50% Bill Halbert Paul Simpson Kevin Walsh

Non-Executive Directors 50% Graham Holden Tony Illsley Martin Towers

Female 44%

Male 56%

Board length of service

Appointment 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Bill Halbert 1 September 2006

Graham Holden 27 November 2007

Tony Illsley 2 June 2009

Paul Simpson 24 May 2004

Martin Towers 2 June 2009

Kevin Walsh 24 May 2004



38

The balance of the Board continuedThe key principle set out in the policy is that the Board will seek always to appoint on merit, in line with the current and foreseeable future requirements of the Group. The Board recognises the benefits of diversity of all types, including gender diversity, and will aim always to develop the diversity of the Board, while remaining true to the key principle of appointing on merit. The Board believes that setting specific targets for the proportion of women on the Board may lead to recruitment decisions being made that are not aligned with this key principle.

The policy states also that the Nomination Committee will ensure that it only uses executive search firms that have signed up to the voluntary Code of Conduct addressing gender diversity and best practice, that female applicants are given the same consideration and opportunity as male applicants and that gender diversity is considered specifically when drawing up a list of potential candidates.

In addition, through the Board Appointments policy, the Board has committed to:

� continue to seek to identify and develop the talented individuals in the Group, regardless of gender;

� review regularly the proportion of women at each level in the organisation to ensure that equal opportunities are being presented to individuals at every level; and

� ensure always that there is a confidential way in which concerns can be raised without fear of repercussion if anyone, regardless of gender, has a concern about the opportunities available to them.

While we do not have currently any female representation on the Group’s Board of Directors, 44 per cent of our senior management team is female. This is broadly consistent with the proportion of women across the Group as a whole, which sits at 39 per cent.

Training and developmentThe Board receives monthly updates on governance related matters and more formal training where appropriate. Potential training needs are discussed as part of individual performance evaluation, plus each Director is given the opportunity to flag any additional training requirements which they may have identified as part of the annual Board evaluation process.

Performance evaluationFor the past ten years the Board has undertaken a formal internal process to evaluate the effectiveness of its own performance, as well as that of its various Committees. Significant value has been derived from the internal evaluation process in 2011 and 2012 and therefore the Board chose to once again use an internal process in 2013. The Board, however, acknowledges that since the Group became part of the FTSE 350 in 2011, there is a requirement for an externally facilitated evaluation to be performed within three years; therefore the 2014 evaluation will be externally facilitated in accordance with the requirements of the UK Corporate Governance Code.

The evaluation process in 2013 was conducted by the Company Secretary and involved face-to-face meetings with each Director, covering all areas of Board and Committee responsibility. The feedback from the meetings was collated and presented back to the Board for discussion.

In addition to the evaluation process, the Executive Chairman meets with each Board member individually to discuss their own performance and the Non-Executive Directors meet separately to discuss the performance of the Executive Chairman. The feedback from this meeting is then passed on to the Executive Chairman by the Senior Independent Director.

Corporate governance continued

In 2012 the areas of focus that were identified through the Board evaluation process were:

Area identified What have we done?

More formal industry updates were to be provided to the Board.

Industry updates were a key area of focus for the Board during the year with many discussions around current and potential future developments in the industry.

Regular review of the long-term milestone plan by the Board as part of the consideration of the long-term success of the Group.

The Board has received regular updates on the key projects being undertaken as part of the long-term milestone plan and these are now a standing agenda item for each meeting. In addition the Board regularly considers the five-year financial plan for the Group and the impact on the plan is a key consideration in all decision-making by the Board.

Attendance at Board meetingsDirector Number of meetings Out of possible

Bill Halbert (Chairman) 9 9

Graham Holden 9 9

Tony Illsley 9 9

Paul Simpson 9 9

Martin Towers 9 9

Kevin Walsh 9 9



39

Overview


Governance

Directors’ report

The results of the performance evaluation process this year indicated that the Board members are satisfied with the effectiveness of the Board and its Committees, as well as the effectiveness and commitment of each Director. Particular areas of strength were identified during the evaluation, including the mutual respect among Board members which encourages an open environment for challenge and debate and the quality of information provided to the Board.

The process identified the following for focus in the coming year:

� succession planning at both a Board and senior management level will continue to be an area for Board focus; and

� future brand strategy in relation to changing customer requirements as a result of developing technology will also continue to be a key area for focus.

MeetingsDuring the year the Board held nine scheduled meetings.

Four of the meetings were preceded the evening before by an informal meeting allowing more time to debate issues in depth.

The Non-Executive Directors have a regular dialogue concerning Board matters and the Executive Chairman meets with the Non-Executive Directors, without the other Directors present, at regular intervals. The Non-Executive Directors met formally during the year without any of the Executive Directors present to discuss matters, including the performance of the Executive Chairman.

Board CommitteesThe Board has established and delegated specific responsibilities to the following Committees. Each Committee reports back to the Board after each meeting and minutes of Committee meetings are circulated to all Board members, where appropriate, to ensure

that the whole Board is aware of the matters considered by the Committees.

Audit CommitteeThe membership and attendance at Committee meetings during the year is shown in the above table. Details of the role of the Audit Committee are given on pages 24 and 25.

Nomination CommitteeThe membership and attendance at Committee meetings during the year is shown in the above table.

The Nomination Committee meets as often as required and is responsible for reviewing the structure, size and composition of the Board and ensuring that the balance of skills, knowledge and experience of the Board is right for the Group, both in terms of the current challenges and opportunities facing the Group and the skills and expertise that are expected to be needed on the Board in the future. The approach of the Nomination Committee to diversity on the Board is noted on pages 37 and 38.

When Board vacancies arise, the Nomination Committee is responsible for preparing a description of the role and capabilities required for a particular appointment and then identifying and nominating candidates for the approval of the Board. In order to identify suitable candidates the Committee uses open advertising or the services of external advisors to facilitate the search, where appropriate.

The Committee is responsible also for considering succession planning for the Directors and for key senior management across the Group, although this is a matter considered also by the full Board.

The Nomination Committee reviews annually the time required from each of the Directors to perform their role effectively. Following this review in the year, the Committee is satisfied that each of the Directors has committed sufficient time during the year to fulfil their duties as Directors of the Company.

The Committee reviews the re-appointment of all of the Directors standing for re-election at the AGM, giving regard to their performance and ability to continue to contribute to the requirements of the Board. The Nomination Committee then makes recommendations to the Board on whether each Director should be put forward for re-election.

The Committee’s Terms of Reference are in line with the recommendations in the UK Corporate Governance Code and the ICSA Guidance on Terms of Reference for Nomination Committees. Copies of the Terms of Reference are available from the Company Secretary and are on our website, www.kcomplc.com.

Remuneration CommitteeThe membership and attendance at Committee meetings during the year is shown in the above table. The report of the Remuneration Committee and details of its role are given on page 46.

Risk management and internal controlThe required corporate governance disclosures in respect of risk management and internal control are made within the risk management section of the Directors’ report on pages 24 to 27.

Details of our business model can be found on pages 6 and 7 and our key performance indicators are on pages 8 and 9.

Proposal to re-appoint the external auditorsPricewaterhouseCoopers LLP have advised of their willingness to continue in office and have confirmed their continued independence. Following consideration of the relationship with the external auditors, as described on page 26, the Audit Committee has recommended to the Board that PricewaterhouseCoopers LLP are re-appointed and a resolution to re-appoint them will be proposed at the AGM. They have provided an independent audit opinion on these accounts which can be found on page 57.

Attendance at Committee meetings

Audit Committee

Director Number of meetings

Out of possible

Martin Towers (Chairman)

3 3

Graham Holden 3 3

Tony Illsley 3 3

Nomination Committee


Out of possible

Tony Illsley (Chairman)

5 5

Graham Holden 5 5

Martin Towers 5 5

Remuneration Committee


Out of possible

Graham Holden (Chairman)

6 6

Tony Illsley 6 6

Martin Towers 6 6



40

Powers of the DirectorsThe business of the Company is managed by the Directors, who may exercise all the powers of the Company, subject to the provisions of the Articles of Association, relevant statutes and any special resolution of the Company.

The Articles of Association give the Directors the power to authorise conflicts of interest in relation to transactions or arrangements with the Company, in accordance with the Companies Act 2006. Conflicts of interest are a standing agenda item at Board meetings and each Director proposes any potential conflicts for consideration as soon as they become aware of them. The Director with the potential conflict is excluded from the vote to authorise the transaction or arrangement.

Any conflicts that are authorised are then logged on a register, along with details of any specific terms imposed upon authorisation. Internal controls are in place to ensure that transactions or arrangements which may lead to a potential conflict of interest are conducted on an arm’s length basis.

Directors’ responsibilities statementThe Directors are responsible for preparing the annual report, the Directors’ Remuneration report and the financial statements in accordance with applicable law and regulations. Company law requires the Directors to prepare financial statements for each financial year. Under that law, the Directors have prepared the Group and Company financial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union (EU). Under company law, the Directors must not approve the financial statements unless

they are satisfied that they give a true and fair view of the state of affairs of the Group and the Company and of the profit or loss of the Group for that period.

In preparing these financial statements, the Directors are required to:

� select suitable accounting policies and then apply them consistently;

� make judgements and accounting estimates that are reasonable and prudent;

� state whether applicable IFRSs as adopted by the EU have been followed, subject to any material departures disclosed and explained in the financial statements; and

� prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business.

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Company and the Group and enable them to ensure that the financial statements and the Directors’ Remuneration report comply with the Companies Act 2006 and, as regards the Group financial statements, Article 4 of the IAS Regulation. They are also responsible for safeguarding the assets of the Company and the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

The Directors are responsible for the maintenance and integrity of the Group’s website, www.kcomplc.com. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

Directors’ statement pursuant to the Disclosure and Transparency RulesEach of the Directors whose names and functions are listed on pages 34 and 35 confirm that, to the best of their knowledge:

� the Group financial statements, which have been prepared in accordance with IFRSs as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and profit of the Group; and

� the Directors’ report includes a fair review of the development and performance of the business and the position of the Group, together with a description of the principal risks and uncertainties that it faces.

Amendments to the Company’s Articles of AssociationAny amendments to the Company’s Articles of Association may be made by passing a special resolution at a general meeting of the shareholders.

Corporate governance continued

Substantial shareholdings

As at 31 March 2013, the Company had been notified of the following interests amounting to three per cent or more of the voting rights in the issued ordinary share capital of the Company. As at 18 June 2013, there had been no additional disclosures received.

Number of shares with voting rights

% of total voting rights

Invesco Asset Management 62,409,214 12.08

Aviva Investors 33,441,521 6.47

Fidelity Worldwide Investment 30,357,652 5.88

Aberforth Partners LLP 23,699,383 4.59

Legal & General Investment Management 17,915,133 3.47

Scottish Widows Investment Partnerships 16,466,358 3.19



41

Overview


Governance

Directors’ report

Going concernThe Directors confirm that, having reviewed the Group’s budget and forecasts along with the principal risks and uncertainties facing the Group, they are satisfied that the Group has adequate resources to continue in operational existence for the foreseeable future. Accordingly the Group continues to adopt the going concern basis in preparing the financial statements.

Signed on behalf of the Board

Kathy SmithCompany Secretary18 June 2013

“ A large number of our shareholders live in the Hull and East Yorkshire region and, as a Group, we are very much involved in local life in the area.”

Relations with shareholders

We place a great deal of importance on communicating with our shareholders and understanding their views. Our Executive Chairman and Chief Financial Officer meet regularly with our institutional shareholders to discuss the strategy, performance and governance of the Company and to obtain feedback. During the year, meetings have been held with 25 such shareholders. There are also general presentations following the interim and final results announcements each year.

Feedback from meetings with shareholders is included as part of the monthly report to the Board and discussed at each Board meeting, along with details of any analyst reports, to ensure that each of our Directors has a clear understanding of the views of our shareholders. Our Non-Executive Directors are available to meet face-to-face with our institutional shareholders if requested to do so, although no such requests have been received during the year.

A large number of our shareholders live in the Hull and East Yorkshire region and, as a Group, we are very much involved in local life in the area. More information about our community activities is on page 29. We believe that being a part of local life enables us to learn more about our local shareholders and the issues that matter to them.

We consider our AGM to be an important means of communication between our shareholders and Directors. All of our Directors are available at the AGM to answer questions and we seek to encourage shareholder participation by inviting questions in advance.

In 2012 we introduced electronic voting for the first time at our AGM and we intend to use this again at our AGM on 26 July 2013. The results of voting, including the proxy votes lodged, are shown to shareholders in the meeting and are made available subsequently on our website.

All of our Company announcements are published on our website, together with presentation materials and financial reports, so that all of our shareholders can keep up to date with our news.



42

Principal activitiesThe principal activities of the Group and its subsidiary companies are described on pages 2 and 3 and in the Brand review on pages 12 to 19. The principal activity of the Company is that of a holding company.

Disclosure of all relevant information to auditorsThe Directors who approved this report are satisfied that, as far as they are aware, there is no relevant audit information (as defined in the Companies Act 2006) of which the Company’s auditors are unaware. Each of the Directors has taken all the steps that they ought to have taken as a Director in order to make themselves aware of any relevant audit information and to establish that the Company’s auditors are aware of that information.

DirectorsThe names and biographical details of our Directors as at 31 March 2013 are on pages 34 and 35. Further information regarding the Directors who served during the year can be found on pages 36 to 39 and on pages 44 to 56 in the Remuneration report.

Creditor payment policiesThe Group seeks to agree payment terms with each supplier when we start doing business with them. We always aim to pay our suppliers within a reasonable period of the invoice being received and in accordance with the Prompt Payment Code, which can be found at www.promptpaymentcode.org.uk. At 31 March 2013, the Company had no trade creditors (2012: £Nil). Group creditor days represented 72 days (2012: 87 days).

Charitable and political donationsThe Group made a number of charitable donations throughout the year to support community organisations and initiatives, totalling £7,025 (2012: £11,640). No political donations were made. Further information relating to our community activities can be found on page 29.

EmployeesOur people are our most valuable asset and therefore we take great care to design employment strategies that are

both linked to our business needs and are also designed to develop our people to their full potential. Our employment policies are designed to provide equal opportunities irrespective of age, disability, ethnicity, gender, gender reassignment, marital status and civil partnership, nationality, pregnancy and maternity, race, religion and belief and sexual orientation.

All employees, whether part-time or full-time, temporary or permanent, are treated fairly and equally. We select employees for employment, promotion, training or other matters affecting their employment on the basis of aptitude and ability.

We take every opportunity to involve and consult with our employees and we believe that employee involvement is an essential contributor to the development of our business. Our Executive Directors regularly visit our different office locations to meet with our employees, provide updates on the performance of the Group and to receive suggestions and feedback, through both roadshow presentations and informal meetings.

Regular video and news updates are provided to all employees through our intranet, to keep them informed of activities and Group performance. There is also a monthly briefing document for managers to share with their teams and a weekly round-up bulletin which is distributed to all employees by email.

In March 2013 we undertook our second Group-wide employee survey in two years, to obtain feedback on a range of topics. The results of this are currently being fed back to employees and action plans are being developed to address the key matters raised.

We encourage our employees to become shareholders by offering a Share Incentive Plan as we believe this is one opportunity to encourage greater employee engagement. More information about this can be found on page 47.

Share capitalThe Company has a single class of share capital which is divided into ordinary shares of 10 pence.

Rights and obligations attaching to sharesIn a general meeting of the Company voting is as follows:

� on a show of hands, every member present in person shall have one vote;

� on a show of hands, every proxy present who has been duly appointed by one or more members shall have one vote; and

� on a poll, every member who is present in person or by proxy shall have one vote for every share of which he or she is the holder.

A member is not entitled to vote in respect of any share in the capital of the Company held by him or her, if there are sums payable to the Company in respect of such share which remain unpaid.

Full details of the deadline for exercising voting rights in respect of the resolutions to be considered at the AGM to be held on 26 July 2013 are set out in the Notice of Meeting.

All dividends are paid proportionately to the amounts paid up on the shares and are paid to those members whose names are on the share register at the date at which the dividend is declared, or at such other date as determined by the Directors or by an ordinary resolution of the Company.

If the Company is wound up, the liquidator, with the sanction of a special resolution of the Company or any other sanction required by law, may divide the whole or any part of the assets of the Company among the shareholders and may determine how the division of the assets will be carried out.

Transfer of sharesAll transfers of uncertificated shares must be made in accordance with, and be subject to, the Uncertificated Securities Regulations 2001 and in accordance with any arrangements made by the Board.

Other disclosuresfrom Kathy Smith, Company Secretary

“ We take every opportunity to involve and consult with our employees and we believe that employee involvement is an essential contributor to the development of our business.”



43

Overview


Governance

Directors’ report

All transfers of certificated shares must be in writing in a form which has been approved by the Directors; this is known as ‘the Instrument of Transfer’. The Instrument of Transfer must be signed by, or on behalf of, the transferor and the transferor will remain as the holder of the share until the name of the transferee is entered into the share register.

The Directors may refuse to register the transfer of any share which is not fully paid or which is in favour of more than four persons jointly. The Directors may also refuse to recognise an Instrument of Transfer if it is not lodged at the Company’s registered office or at any other place which the Directors have determined.

If the Directors refuse to register a transfer they will send to the transferee a notice of the refusal and the Instrument of Transfer within two months of the date on which the transfer was lodged with the Company.

Allotment of sharesAt the AGM in 2012, the Company was authorised by the members to allot shares up to an aggregate nominal amount of £17,220,130. Authority was also given at the same time for the partial disapplication of pre-emption rights, up to a maximum aggregate value of £2,583,019. As at the date of this report no shares had been allotted under this authority.

Repurchase of sharesAt the AGM in 2012, the Company was authorised by members to purchase its own shares, up to a maximum of 51,660,391. During the year, the Company did not purchase any of its own shares.

The Company funds Employee Share Trusts (ESTs) to meet its obligations under the Company’s share schemes. During the year the ESTs purchased 15,130,000 (2012: 600,000) shares on the London Stock Exchange at a cost of £11,053,000 (2012: £426,000) with a nominal value of £1,513,000 (2012: £60,000). These shares represent 2.9 per cent of the called-up share capital and are held in trust until they vest; therefore the purchase of these shares does not

reduce the share capital in issue. The total number of shares held in trust to meet obligations under the Company’s share schemes is:

000’s of

shares

As at 1 April 2012 7,811

As at 31 March 2013 9,524

Further details around the purchase of shares in the year are set out in note 26 to the financial statements.

Shares held by ESTsThe trustees of the Kingston Communications 2000 EST and the Kingston Communications All Employee Share Plan vote any shares held in the ESTs as they wish, having due regard to the interests of the employees as potential beneficiaries.

There are two other ESTs, the Kingston Communications Qualifying Employee Share Ownership Trust and the KCOM Group PLC Employee Benefit Trust, that are currently dormant and hold no shares.

Significant agreements – change of controlThe following significant agreements contain provisions entitling the counterparties to exercise termination or other rights in the event of a change of control of the Company:

� under our £200 million multi-currency revolving facility agreement dated 19 November 2010, the Company must notify Lloyds TSB Bank PLC, the Agent of the agreement, within seven days of becoming aware of a change of control of the Company. Any bank or financial institution named within the facility agreement may then notify the Agent within seven days that they wish to cancel their commitments. The Agent must then give at least 21 days’ notice to the Company of this and all outstanding amounts due to that bank or financial institution will become immediately due and payable. For these purposes, a ‘change of control’ occurs if any

person or group of persons acting in concert gains control of the Company; and

� the Company’s share schemes, details of which are contained in the Remuneration report on pages 44 to 56, contain provisions which take effect in the event of a change of control, as a result of which options and awards may vest and become exercisable. The provisions do not entitle participants to a greater interest in the shares of the Company than that created by the initial grant or award under the relevant scheme.

The Company does not have any agreements with any Director or employee that would provide compensation for loss of office or employment resulting from a takeover.

Annual General MeetingOur AGM will be held at the KC Stadium, Hull on 26 July 2013 at 11.00am. The Notice of Meeting accompanies this annual report and is also available on our Group website at www.kcomplc.com. Four resolutions will be proposed as special business. Explanatory notes on these resolutions are set out in the Notice of Meeting.

The Directors consider that all the resolutions proposed are in the best interests of the Company and it is their recommendation that shareholders support these proposals as they intend to do so in respect of their own holdings.

This report has been reviewed and approved by the Board of KCOM Group PLC.

Signed on behalf of the Board


“ We encourage our employees to become shareholders by offering a Share Incentive Plan as we believe this is one opportunity to encourage greater employee engagement.”



44

Dear ShareholderThe Remuneration Committee has had many matters to consider this year, including the vesting of awards under two of the Group’s long-term incentive schemes, the launch of a new long-term incentive scheme and the impending changes to remuneration reporting, as drafted by the Department for Business, Innovation and Skills. Our approach to all of these is set out in more detail below.

In addition, the Committee has reviewed the remuneration packages of the Executive Directors to ensure these continue to attract, retain and motivate talented people, while recognising wider shareholder interests. The Committee has sought also to reflect developing best practice in the area of remuneration, to recognise the importance of alignment with shareholder objectives and to encourage behaviours that will ensure the sustainability and long-term health of the business and avoid inappropriate risk taking. The Committee has taken into account the reward arrangements across the rest of the Group when making the final decisions in relation to Executive Director pay.

At the most recent review the Committee decided that there would be no increases to Executive Director salaries at the current time. This will continue to be kept under review, in line with the rest of the Group.

The effectiveness of the Committee has been reviewed as part of our annual Board evaluation and we are pleased to report that the review concluded that the Committee has operated effectively throughout the year.

Vesting of long-term incentive schemesThere were two long-term incentive schemes which vested in the year: the Long-Term Co Investment Plan (LTCIP) and the Executive Incentive Plan (EIP). The LTCIP was launched in 2007 prior to any of the current members of

the Remuneration Committee being appointed. The scheme was open to all of the Executive Directors at that time and, of our current Directors, Paul Simpson and Kevin Walsh were members of the scheme. On review of the scheme in 2009, it was apparent that many of our shareholders felt that the scheme should be closed and a new scheme be put in place. The scheme was therefore closed to further investment at that point; however, under the rules of the scheme it continued to be necessary to measure the scheme over three performance periods, ending on 31 August in 2010, 2011 and 2012. In 2010 and 2011 the performance conditions required for vesting were not met; however, in the period which ended on 31 August 2012, two of the three performance conditions were met and the scheme therefore vested in part.

A new long-term incentive scheme, the EIP, was introduced in 2009 to replace the LTCIP. This was introduced after extensive consultation with our shareholders and specifically designed as a one-off scheme to incentivise our Executive Directors and key senior management to deliver stretching Total Shareholder Return (TSR) targets through a period of significant business transformation. The share price at the launch of the scheme was 28.25 pence and the TSR at which the scheme would vest was set as a minimum of 45 pence, with vesting on a straight-line basis up to a maximum of 100 pence. The performance period was for three years to July 2012 with TSR being measured on a rolling three-month basis. The maximum TSR achieved over the period was 81.26 pence which meant that 69.34 per cent of the scheme was eligible to vest on 24 July 2012.

The Remuneration Committee met to consider the vesting of the scheme and noted that £248.7 million of shareholder value had been created over the three-year performance period as a result of a rise in share price and

Remuneration report

“ The effectiveness of the Committee has been reviewed as part of our annual Board evaluation and we are pleased to report that the review concluded that the Committee has operated effectively throughout the year.”

Graham Holden Chairman, Remuneration Committee

This report is presented in the following sections:

Letter from the Chairman of the Remuneration Committee

The role of the Remuneration Committee

Policy report

Implementation report

Letter from the Chairman of the Remuneration Committee



45

Overview


Governance

Directors’ report

the dividend payments that had been made. The total awards vesting for the Executive Directors had a market value at 24 July 2012 of £6.8 million, which represented just 2.4 per cent of the total shareholder value created. Taking this into account, along with information on the financial and non-financial performance of the Group over the three years, the Committee concluded that there had been a demonstrable and sustainable improvement in the Group’s performance over the period of the scheme and therefore the scheme should vest.

New long-term incentive schemeAs a Committee we believe that it is important to incentivise the Executive Directors through long-term incentive schemes to ensure that the Directors are always considering the long-term success of the Group and not just the short-term performance. Now that the period of significant business transformation has been completed, the Committee consulted with shareholders and proposed a new long-term incentive scheme, the Long-Term Incentive Plan (LTIP), which was designed with our remuneration consultants, New Bridge Street, and approved by our shareholders at our AGM on 19 July 2012.

The LTIP awards granted in 2012 measure TSR performance over a three-year performance period relative to the TSR performance of a comparator group, made up of the FTSE 250 as at 19 July 2012 excluding investment trusts. It is intended that there will be no change to the performance conditions when the second award is made in July 2013.

Under the scheme, nil cost options were granted to the Executive Directors and key senior management, which will vest on a straight-line basis if the TSR performance ranks at median or above.

If the performance target is met, the Committee will still have ultimate discretion regarding whether or not the scheme vests and must be satisfied that there has been financial

and non-financial performance that warrants the level of vesting set out in the vesting schedule. When reviewing this the Committee will consider, among other things, the Group’s share price progression, dividend policy and Earnings Per Share (EPS) performance.

Annual bonusThe annual bonus for 2012/13 required stretching targets to be met in relation to the growth of Group revenue and Group EBITDA. These targets were not met and therefore no bonus is payable for the 2012/13 financial year.

New reporting requirementsThe Department for Business, Innovation and Skills has drafted new reporting requirements in relation to remuneration, which the Committee has reviewed with interest. The Committee wholeheartedly supports transparency in remuneration reporting and has chosen to adopt the new draft requirements early where we believe these will help a reader of the report to better understand our remuneration policy and how it has been implemented in the year. We will continue to monitor developments in relation to remuneration reporting and would welcome any feedback or comments on our Remuneration report, which may be directed to our Company Secretary, Kathy Smith.

As in prior years, we will be seeking your support for the whole Remuneration report by way of a single advisory vote at our AGM on 26 July 2013.

Graham HoldenChairman, Remuneration Committee18 June 2013

“ The Committee wholeheartedly supports transparency in remuneration reporting and has chosen to adopt the new draft requirements early where it helps a reader to better understand our remuneration policy.”



46

The membership and attendance at Committee meetings is shown on page 39. Meetings are attended also by the Executive Chairman and the Group HR Director, although neither is present when their own reward is under discussion.

Each year there are three scheduled meetings and additional meetings are then held as and when required. There were six meetings held in the year; the three additional meetings were held to specifically consider the vesting of the EIP and LTCIP schemes during the year and to review the proposed new long-term incentive scheme, which was presented to shareholders and approved at the AGM on 19 July 2012.

The Committee received advice over the year on all aspects of remuneration from independent remuneration consultants New Bridge Street, an Aon Hewitt company, who were appointed by the Committee in August 2011 following a comprehensive tender process. Aon Hewitt also provide actuarial and investment consultancy advice to the Trustees of the Group’s two defined benefit pension schemes, which the Committee considers does not produce a conflict of interest.

In accordance with its Terms of Reference, the Committee is responsible for:

� determining and agreeing the remuneration policy for the Executive Chairman, the Executive Directors and senior management across the Group;

� having regard to remuneration trends across the Group and remuneration in other companies when setting remuneration policy, as well as to environmental, social and governance matters when appropriate;

� selecting, appointing and setting the Terms of Reference for any remuneration consultants who advise the Committee;

� approving the design of, and determining targets for, any performance related pay schemes operated by the Group and approving the total annual payments made under such schemes;

� reviewing the design of all share incentive plans for approval by the Board and shareholders and determining each year whether awards will be made and, if so, the overall amount of such awards, the individual awards and the performance targets to be used;

� determining the policy for, and scope of, pension arrangements for each Executive Director and senior management; and

� ensuring that contractual terms on termination, and any payments made, are fair to the individual and the Group, that failure is not rewarded and that the duty to mitigate loss is fully recognised.

The Committee’s Terms of Reference are in line with the recommendations in the UK Corporate Governance Code and the Institute of Chartered Secretaries and Administrators’ Guidance on Terms of Reference for Remuneration Committees. Copies of the Terms of Reference are available from the Company Secretary or on our website, www.kcomplc.com.

Remuneration report continued

Other matters considered by the Committee during the year were:

Description What the Committee has done

Reviewing the new disclosure proposals from the Department of Business Innovation and Skills in relation to remuneration.

The Committee reviewed the draft proposals in detail and has adopted the draft proposals early in this Remuneration report where it was believed that doing so would assist the reader of the report in understanding the remuneration policy and its implementation during the year.

Reviewing the remuneration policy for each Executive Director.

The Committee benchmarked the base salary and total remuneration of each Executive Director against two groups - a cross-sector group of companies with similar market capitalisation and a specific telecommunications and technology-based group of companies. This exercise indicated that the remuneration of the Executive Directors was in line with the median market range of the comparator groups. The Committee also reviewed remuneration trends elsewhere in the Group to ensure that Executive Director remuneration continued to be set at an appropriate level.

Receiving updates on remuneration trends and any new guidance in relation to remuneration.

This is a standing agenda item for the Committee and updates are received as and when changes arise or new guidance is released.

The role of the Remuneration Committee



47

Overview


Governance

Directors’ report

The Committee designs the remuneration policy to ensure that it does not encourage unnecessary risk taking or irresponsible behaviour, but is aligned to the strategic objectives of the business, including maintaining an appropriate risk profile for the Group and ensuring its long-term success.

The Committee reviews continually the remuneration structure to ensure that it remains aligned with business needs and is appropriately positioned relative to the market to ensure that it retains and motivates talented employees. We use target performance to estimate the total potential reward and benchmark our reward package against those of our competitors and companies with a similar market capitalisation.

Key elements of remuneration are shown in the table overleaf.

Other employees As for the Executive Directors, the basic pay for each employee is reviewed twice a year in

comparison to market rate information and individual performance and increased as appropriate. This is a change from 2012/13 when a two per cent increase was awarded to employees across the Group.

All employees are entitled to pension contributions from the Group, which increase as the employee contribution increases. In addition senior employees are entitled to private medical insurance, either as part of their package or as an option to purchase as a flexible benefit. Other flexible benefits that may be purchased each year include dental cover, childcare vouchers, additional life assurance, additional income protection and employees also have the opportunity to buy or sell holiday entitlement.

All employees, other than those eligible for commission payments, are entitled to participate in the bonus scheme in which the Executive Directors participate, with awards as a percentage of salary, depending on seniority. Performance is measured in the same way as for the Executive Directors with more

challenging targets for the Executive Directors to achieve maximum payout.

Selected senior managers are also invited to participate in the LTIP scheme. 18 employees were granted awards on 19 July 2012. The performance targets and performance period for these awards are the same as that for the Executive Directors.

The Group Share Incentive Plan (SIP) is open to all employees and offers free matching shares on a sliding scale from 2:1 for monthly contributions of £20 to 1:3 for monthly contributions over £51. Currently over 760 employees participate in the scheme, including two of the Executive Directors.

A regular employee satisfaction survey is conducted across the Group, which includes questions around remuneration policy. The latest survey was held in March 2013. The results of this are taken into consideration when making decisions around remuneration.

1,400

1,200

1,000

800

600

400

200

0

100% 62% 38%

31%

31%

Fixed On-target Maximum

1,400

1,200

1,000

800

600

400

200

0

100% 64%

30%


30%

1,400

1,200

1,000

800

600

400

200

0

100% 64% 40%

30%


30%

Bill Halbert Paul Simpson Kevin Walsh

What might Executive Directors be paid under the current remuneration policy?These charts show what each Executive Director would be paid annually under the remuneration policy in three scenarios: where they receive the fixed remuneration only, remuneration for on-target performance and the maximum remuneration that can be received for performance above-target.

Fixed remuneration Annual bonus Long-term share awards

Policy report

40%

13%

12%

£000

’s

Chart assumptionsThe charts show remuneration policy under the new LTIP scheme, for which awards will not vest until 19 July 2015. The long-term share awards are valued using the share price at the grant date (74.5 pence).

The on-target long-term share awards are 25 per cent, which represents the amount that

would be received for TSR performance that ranks at median against the comparator group.

There are two historic long-term incentive schemes, the LTCIP and EIP, which have vested in the year under review. In addition, awards under the EIP scheme will be paid to Paul Simpson and Kevin Walsh in the financial years ending

31 March 2014 and 31 March 2015. These have not been reflected in the below charts.

On-target performance allows for up to 50 per cent of the annual bonus to be paid out. In the below charts on-target performance has been shown as resulting in a 50 per cent payout to reflect this.

12%24%

25%

24%



48


Key elements of remuneration:

How does this link to the KCOM Group strategy?

How does this operate? What is the maximum potential value to the Directors?

Have there been policy changes in the year?

What is the performance target? Why was this target chosen?

Over what time period is this measured?

Fixed – Non-Executive Directors

Fees to recognise the responsibility and experience of the individual.

By helping us to attract and retain the right individuals for the roles.

Fees are reviewed twice annually and adjusted as necessary to align with market rate.

Fees are aligned to market rate with additional fees paid for additional responsibility, such as the role of Senior Independent Director.

There has been no change to the policy in the year.

— — — — — —

Fixed – Executive Directors

Base salaryto recognise status, responsibility and the experience of the individual.


Salaries are reviewed twice annually and assessed by comparison with peer companies and companies of similar market capitalisation, while taking into account a number of other specific factors, including the experience and performance of the individual, the criticality of the individual to the success of the Group, pay and conditions throughout the Group and the wider economic climate. The policy of the Committee is to pay salaries around the median.

Increases will not exceed the general level of increase for the Group’s employees other than where increases are identified as necessary to align with the market median or to reflect specific circumstances as described.


— — — — — —

Benefits to provide lifestyle benefits that are market competitive.


Executive Directors are entitled to life assurance, income protection, a cash-for-car allowance, a fully expensed fuel card, medical insurance and medical screening.

Full cost of annual benefits. We are phasing out the provision of company cars across the Group and moving to a cash-for-car allowance for all eligible employees, including Executive Directors.

— — — — — —

Pension to provide funding for retirement.


Executive Directors are entitled to an employer pension contribution of 20 per cent, or the cash equivalent, of basic salary. It is the Group’s policy that only basic salary is pensionable.

Employer contributions of 20 per cent of base salary.


— — — — — —

Variable – Executive Directors

Annual bonus to reinforce the achievement of stretching Company objectives.

By rewarding operational excellence.

The annual bonus is dependent on the achievement of Group financial performance targets around growth in Group EBITDA and Group revenue. Up to 10 per cent of bonus entitlement is dependent on achieving a targeted level of Group EBITDA. Once that is achieved, further bonus awards accrue on a straight-line basis up to 50 per cent of salary, dependent on the amount of Group EBITDA achieved and with an underpin of Group revenue growth. Further stretching Group EBITDA targets must then be achieved for the Executive Directors to receive a higher percentage on a straight-line basis, up to a maximum of 100 per cent of salary. Payments are considered and approved by the Committee and are payable annually following publication of the Group’s full-year results.

Target performance receives up to 50 per cent of salary. Performance above-target results in a higher percentage up to a maximum of 100 per cent of salary.

The performance targets for the annual bonus scheme have been revised for 2013/14 although the previous scheme also targeted growth in Group revenue and Group EBITDA. The policy in relation to the maximum bonus achievable is unchanged.

To achieve growth in Group EBITDA and Group revenue above targeted levels.

The Committee believes rewarding growth in Group EBITDA and Group revenue aligns Executive Director and shareholder interests and is important to the long-term success of the Group.

Bonus performance is measured annually at the end of each financial year.

Long-term incentives to ensure a direct link between reward and superior shareholder returns.

By rewarding growth in shareholder value.

The policy of the Committee is to pay median long-term incentives to reward superior performance. Awards are made annually in July each year. Performance is then measured over a three-year period.

Awards up to 150 per cent of salary can be made each year.

Actual awards in 2012 were 100 per cent of salary.

The new LTIP was approved by shareholders at the AGM in 2012.

KCOM Group’s TSR must rank at least median to the TSR performance of the companies within a comparator group. Performance at median would result in 25 per cent of the awards vesting, with performance between median and upper quartile resulting in a vesting of awards on a straight-line basis with 100 per cent vesting at upper quartile performance. In addition there is an underpin that the Remuneration Committee must be satisfied that the Company’s financial and non-financial performance over the performance period warrants the level of vesting, having regard to share price progression, dividend policy and EPS performance.

The Committee believes that a relative TSR measure offers a robust measure of performance over the long-term as it takes into account changes in the economic cycle, while maintaining a focus on shareholder returns.

The first performance period is three years ending on 19 July 2015. The Remuneration Committee was given approval by the shareholders at the AGM on 19 July 2012 to grant further awards on an annual basis, each with a three-year performance period.



49

Overview


Governance

Directors’ report

Key elements of remuneration:

How does this link to the KCOM Group strategy?

How does this operate? What is the maximum potential value to the Directors?

Have there been policy changes in the year?

What is the performance target? Why was this target chosen?

Over what time period is this measured?

Fixed – Non-Executive Directors

Fees to recognise the responsibility and experience of the individual.


Fees are reviewed twice annually and adjusted as necessary to align with market rate.

Fees are aligned to market rate with additional fees paid for additional responsibility, such as the role of Senior Independent Director.


— — — — — —

Fixed – Executive Directors

Base salaryto recognise status, responsibility and the experience of the individual.


Salaries are reviewed twice annually and assessed by comparison with peer companies and companies of similar market capitalisation, while taking into account a number of other specific factors, including the experience and performance of the individual, the criticality of the individual to the success of the Group, pay and conditions throughout the Group and the wider economic climate. The policy of the Committee is to pay salaries around the median.

Increases will not exceed the general level of increase for the Group’s employees other than where increases are identified as necessary to align with the market median or to reflect specific circumstances as described.


— — — — — —

Benefits to provide lifestyle benefits that are market competitive.


Executive Directors are entitled to life assurance, income protection, a cash-for-car allowance, a fully expensed fuel card, medical insurance and medical screening.

Full cost of annual benefits. We are phasing out the provision of company cars across the Group and moving to a cash-for-car allowance for all eligible employees, including Executive Directors.

— — — — — —

Pension to provide funding for retirement.


Executive Directors are entitled to an employer pension contribution of 20 per cent, or the cash equivalent, of basic salary. It is the Group’s policy that only basic salary is pensionable.

Employer contributions of 20 per cent of base salary.


— — — — — —

Variable – Executive Directors

Annual bonus to reinforce the achievement of stretching Company objectives.

By rewarding operational excellence.

The annual bonus is dependent on the achievement of Group financial performance targets around growth in Group EBITDA and Group revenue. Up to 10 per cent of bonus entitlement is dependent on achieving a targeted level of Group EBITDA. Once that is achieved, further bonus awards accrue on a straight-line basis up to 50 per cent of salary, dependent on the amount of Group EBITDA achieved and with an underpin of Group revenue growth. Further stretching Group EBITDA targets must then be achieved for the Executive Directors to receive a higher percentage on a straight-line basis, up to a maximum of 100 per cent of salary. Payments are considered and approved by the Committee and are payable annually following publication of the Group’s full-year results.

Target performance receives up to 50 per cent of salary. Performance above-target results in a higher percentage up to a maximum of 100 per cent of salary.

The performance targets for the annual bonus scheme have been revised for 2013/14 although the previous scheme also targeted growth in Group revenue and Group EBITDA. The policy in relation to the maximum bonus achievable is unchanged.

To achieve growth in Group EBITDA and Group revenue above targeted levels.

The Committee believes rewarding growth in Group EBITDA and Group revenue aligns Executive Director and shareholder interests and is important to the long-term success of the Group.

Bonus performance is measured annually at the end of each financial year.

Long-term incentives to ensure a direct link between reward and superior shareholder returns.

By rewarding growth in shareholder value.

The policy of the Committee is to pay median long-term incentives to reward superior performance. Awards are made annually in July each year. Performance is then measured over a three-year period.

Awards up to 150 per cent of salary can be made each year.

Actual awards in 2012 were 100 per cent of salary.

The new LTIP was approved by shareholders at the AGM in 2012.

KCOM Group’s TSR must rank at least median to the TSR performance of the companies within a comparator group. Performance at median would result in 25 per cent of the awards vesting, with performance between median and upper quartile resulting in a vesting of awards on a straight-line basis with 100 per cent vesting at upper quartile performance. In addition there is an underpin that the Remuneration Committee must be satisfied that the Company’s financial and non-financial performance over the performance period warrants the level of vesting, having regard to share price progression, dividend policy and EPS performance.

The Committee believes that a relative TSR measure offers a robust measure of performance over the long-term as it takes into account changes in the economic cycle, while maintaining a focus on shareholder returns.

The first performance period is three years ending on 19 July 2015. The Remuneration Committee was given approval by the shareholders at the AGM on 19 July 2012 to grant further awards on an annual basis, each with a three-year performance period.



50

Service contractsThe dates and notice periods for Directors’ service contracts are set out in the above table. Executive Director service contracts operate on a rolling basis equal to the length of the notice period. All Non-Executive Directors are appointed by a letter of appointment for an initial period of three years, but are subject to annual re-appointment at the AGM, in line with the UK Corporate Governance Code.

Salary, pension and benefits are included in the contracts and are treated as described on pages 48 and 49. There is no contractual entitlement to a payment of an annual bonus

or long-term incentive awards. Individuals are notified of these discretionary schemes as and when these commence.

Variable pay awards in the current yearVariable pay awards are reviewed on an ongoing basis to ensure that grant levels, performance criteria and vesting schedules remain appropriate to the Company’s current circumstances and prospects. This has resulted in a new long-term incentive scheme being introduced in the year. This is described in more detail on page 55.

BonusesThe annual bonus was dependent on the achievement of stretching targets in relation to growth in Group EBITDA and Group revenue which were not met. Therefore no bonus is payable in relation to the year ended 31 March 2013.

Shareholder viewsAt the AGM on 19 July 2012 there was a vote by shareholders to receive and approve the 2012 Directors’ Remuneration report. The number of votes in favour was equivalent to 98.88% of votes cast. The votes cast were equivalent to 69.39% of the total issued share capital at that date.


Service contracts

Date of Board appointment

Date of current service contract or letter of appointment

Notice period (months)

Executive Directors

Bill Halbert 1 September 20061 17 June 2011 6

Paul Simpson 24 May 2004 20 June 2011 12

Kevin Walsh 24 May 2004 6 June 2011 12

Non-Executive Directors

Graham Holden 27 November 2007 26 November 2007 6

Tony Illsley 2 June 2009 29 May 2009 6

Martin Towers 2 June 2009 1 June 2009 6

1. Bill Halbert was a Non-Executive Director until his appointment as Executive Deputy Chairman on 25 November 2008. He was appointed to his current role on 24 July 2009.

Recruitment policy

This table sets out the Company’s policy on recruitment of new Executive Directors for each element of the remuneration package.

Remuneration element Policy on recruitment

Base salary The Remuneration Committee will offer salaries in the median range for comparative roles while also considering the experience of the individual, the wider economic climate and pay and conditions throughout the Group, in line with its policy for existing Executive Directors.

Benefits The Remuneration Committee will offer a benefits package that will be set in line with its policy for existing Executive Directors.

Pension Maximum contribution will be set in line with the Company’s policy for existing Executive Directors.

Bonus The Remuneration Committee will offer the ability to earn a bonus of up to the median for comparative roles in line with its policy for existing Executive Directors. In exceptional circumstances the committee may offer awards up to 200 per cent of salary per annum.

Long-term incentives The normal maximum annual grant is up to 100 per cent of salary per annum in line with the Company’s policy for existing Executive Directors. In exceptional circumstances the committee may offer awards up to 200 per cent of salary per annum.

‘Buy-outs’ The Remuneration Committee’s policy on the ‘buying-out’ of existing incentives granted by the Executive’s previous employer will depend on the circumstances of recruitment and will be negotiated on a case-by-case basis. There will not be a presumption in favour of buy-out but it will be considered if necessary to attract the right candidate.



51

Overview


Governance

Directors’ report

Exit payments

This table sets out the policy on exit payments in relation to each remuneration element for Executive Directors.

The Committee will ensure that a consistent approach to exit payments is adopted so that there is no reward for poor performance and the liabilities of the Group are minimised where appropriate.

No amount is payable if an Executive Director is dismissed for serious breach of contract, serious misconduct or under-performance or acts that bring the Executive Director or Group into serious disrepute. The Group is able also to reclaim variable components of remuneration in the exceptional circumstance of misstatement. There is no agreement between the Company and its Directors, or employees, providing for compensation for loss of office or employment that occurs because of a takeover bid. The Non-Executive Directors’ letters of appointment do not include any compensation for loss of office.

Remuneration element Treatment on exit

Base salary Salary will be paid over the notice period. The Company has discretion to make a lump sum payment on termination of the salary payable during the notice period. In all cases the Company will seek to mitigate any payments due.

Benefits Benefits will normally be provided over the notice period. The Company has discretion to make a lump sum payment on termination equal to the value of the benefits payable during the notice period. In all cases the Company will seek to mitigate any payments due.

Pension / salary supplement Company pension contributions / salary supplements will normally be provided over the notice period. The Company has discretion to make a lump sum payment on termination equal to the value of the Company pension contribution / salary supplement during the notice period. In all cases the Company will seek to mitigate any payments due.

Bonus Whether a bonus payment is made is entirely at the discretion of the Remuneration Committee and would be pro-rated to the time employed in the year of cessation.

LTIP Normally awards will lapse on cessation of employment, unless the Company determines and the Remuneration Committee agrees that the Executive is a Good Leaver. Good Leaver status is usually conferred for one of the following reasons; death, injury or disability, retirement, redundancy, or at the discretion of the Committee (if exercised a full explanation will be provided to shareholders). Good leavers will be treated in accordance with the rules of the LTIP, as approved by shareholders.



52

Long-term incentivesDuring the year, two long-term incentive schemes vested: the LTCIP and the EIP. In addition a new scheme, the LTIP, was approved by shareholders at the AGM on 19 July 2012.

LTCIPThe LTCIP was established in 2007. Participation in the LTCIP was restricted to the Executive Directors and required an Executive Director to purchase and hold KCOM Group shares for up to five years (either by transferring existing shares or through new share purchases). Purchased shares and transferred-in shares had to be held in the plan for a minimum of twelve months. Following the introduction of the EIP in 2009 no further shares could be lodged in the plan. The total value of purchased and transferred-in shares was limited to 150 per cent of maximum bonus entitlement per year (scaled back in

years four and five to 100 per cent and 75 per cent respectively). The plan was subject to the usual ABI dilution limits, as well as a limit on the value of awards at 2.5 per cent of the market value of the Group.

There were three performance periods for TSR and absolute share price growth, all starting from the adoption date of the plan, 1 September 2007, and ending consecutively on 31 August 2010, 2011 and 2012.

The LTCIP performance conditions had three elements shown in the opposite table.

The maximum awards and amounts vested for the LTCIP were as shown in the opposite table.

The Remuneration Committee met on 6 September 2012 to approve the vesting and the vested shares were released on 10 September 2012.


Pensions (audited)

Total 2012/13

£’000

Total 2011/12

£’000

Paul Simpson 46 58

Kevin Walsh 32 55

Total 78 113

Implementation report (audited)

Fixed remuneration

Salaries / fees £’000

Taxable benefits

£’000Bonuses

£’000

Total 2012/13

£’000

Total 2011/12

£’000

Executive Directors

Bill Halbert 386 821 — 468 522

Paul Simpson 2732 223 — 295 317

Kevin Walsh 242 403 — 282 289


Graham Holden 47 — — 47 47

Tony Illsley 52 — — 52 52

Martin Towers 47 — — 47 47

Total 1,047 144 — 1,191 1,274

1. Bill Halbert has elected not to be a member of the Group pension scheme and, accordingly, the Group made no contributions on his behalf. Instead he received cash payments totalling £65,905 (2012: £85,350) which are disclosed above within taxable benefits.

2. Paul Simpson’s salary includes an allowance for dual responsibility in relation to his temporary responsibility for the Kcom brand. This allowance is not pensionable or subject to bonus and ceased on 1 April 2013.

3. Paul Simpson and Kevin Walsh have elected for their remaining pension balance of £5,000 and £14,000 respectively to be paid in cash payments due to their Pension Life Time Allowance contributions being reached.



53

Overview


Governance

Directors’ report

LTCIP performance conditions

Condition Measurement Vesting

Outcome for performance period ending on 31 August 2012

EPS growth EPS growth must equal or exceed the growth in the Retail Price Index (RPI) over the relevant performance period.

This condition must be met in order for there to be any vesting under the scheme.

The EPS growth underpin was met with growth of 23.7 per cent compared to growth in RPI of 17.8 per cent.

TSR growth The TSR performance was measured against that of a comparator group. TSR was calculated by comparing the average share price over the three-month period prior to the start of the scheme on 1 September 2007 with the final average share price over the three-month period prior to the end of the relevant performance period, and adding back dividends.

Below median performance: No vesting.

Median performance: 1 matching share for each transferred-in share and 1.6666 matching shares for each purchased share.

Between median and upper quartile performance: Between 1 and 3 matching shares on a straight-line basis for each transferred-in share and between 1.6666 and 5 matching shares on a straight-line basis for each purchased share.

Upper quartile performance: 3 matching shares for each transferred-in share and 5 matching shares for each purchased share.

The growth in TSR was 33.9 per cent, which was between the median and upper quartile of performance among the comparator group.

Actual share price growth

Compound growth in share price per annum over the relevant performance period.

Achievement of 25 per cent compound growth per annum or more would mean 1 additional matching share per transferred-in share and 1.6666 additional matching shares per purchased share.

Actual compound annual share price growth in the performance period was less than 25 per cent. Therefore this performance condition was not met.

The maximum awards and amounts vested for the LTCIP (audited)

Date of grantMarket price at

date of grant1

Maximum potential

vesting at 31 March 2012 000’s of shares

Vested on 31 August 2012 000’s of shares

Lapsed on 31 August 2012 000’s of shares

Market price at date of vesting

Current Directors

Paul Simpson 1 September 2007 40.86p 2,159 1,267 892 81.5p

Kevin Walsh 1 September 2007 40.86p 3,281 2,097 1,184 81.5p

Previous Director

Paul Renucci 1 September 2007 40.86p 1,376 732 644 81.5p

1. The price on grant is an average price based on the share price at the date when purchased or transferred-in shares were entered into the plan and potential share awards were granted.



54

Movement in shareholder value

EIP The EIP was introduced in 2009 and replaced the LTCIP as the Group’s main long-term incentive scheme. It was introduced following an extensive consultation with shareholders who expressed a preference for a scheme with stretching TSR targets. All the Executive Directors participated in this scheme and were granted a conditional right to a number of ordinary shares in the Group which would vest after three years to the extent that the associated TSR performance condition was met.

For full vesting, KCOM Group’s average TSR over any three-month period in the three years to 24 July 2012 had to equal or exceed 100 pence. This reduced to 10 per cent vesting on a straight-line basis for a TSR of 45 pence, with no vesting below 45 pence. During the performance period the highest rolling three-month TSR achieved was 81.26 pence which meant that 69.34 per cent of the maximum awards vested on 24 July 2012.

Vesting was also subject to the Remuneration Committee being satisfied that there had been a demonstrable and sustainable improvement in the Group’s financial and non-financial performance over the performance period. This was considered and the Remuneration Committee took into account the increase in shareholder value over the same period, comparing the market capitalisation of the Group at 24 July 2009 of £145.9 million with the market capitalisation of the Group at 24 July 2012 of £382.3 million, showing a 162.0 per cent increase. In addition over the performance period, dividends of £48.3 million had been paid, resulting in a total increase in shareholder value over the performance period of £284.7 million. The awards granted to the Executive Directors on the vesting of the scheme on 24 July 2012 had a market value on vesting of £6.8 million, representing just 2.4 per cent of the total increase in shareholder value over the three years of the scheme.

The below graph illustrates how shareholder value increased over the performance period of the EIP scheme.

The vested shares were released in full to Bill Halbert at the end of the performance period as at the time the scheme was introduced, this timescale was better aligned to his expected tenure in his role.

The maximum awards and amounts vested for the EIP (audited)

Date of grant

Market price at date of

grant

Maximum award

000’s of shares

Actual award vested at

24 July 2012 000’s of

shares


vesting

Released on 24 July 2012

000’s of shares

To be released on

24 July 2013 000’s of

shares

To be released on

24 July 2014 000’s of

shares

Current Directors

Bill Halbert 24 July 2009 28.25p 7,480 5,187 74.0p 5,187 — —

Paul Simpson 24 July 2009 28.25p 2,420 1,678 74.0p 839 420 420

Kevin Walsh 24 July 2009 28.25p 2,420 1,678 74.0p 839 420 420

Previous Director

Paul Renucci 24 July 2009 28.25p 1,0281 713 74.0p 357 178 178


Movement in Shareholder Value

24 July 2009 24 July 2010

£mill

ion

350

300

250

200

150

100

50

0

(50)24 July 201224 July 2011

1. The maximum award for Paul Renucci was pro-rated to the date of his leaving the Group, in accordance with the rules of the scheme.



55

Overview


Governance

Directors’ report

Awards made under the LTIP scheme (audited)

Date of grant


grant

Nil cost options

outstanding on 1 April 2012

000’s of options

Nil cost options

awarded in the year

000’s of options

Facevalue of

maximumaward1

£’000

Nil cost options

outstanding on 31 March 2013

000’s of options

Award that would vest at

threshold performance

000’s of options

End of performance

period

Bill Halbert 19 July 2012 76.35p — 518 402 518 130 19 July 2015

Paul Simpson 19 July 2012 76.35p — 342 265 342 86 19 July 2015

Kevin Walsh 19 July 2012 76.35p — 325 252 325 81 19 July 2015

1. Face value has been calculated using the average share price over the last quarter of the reporting year.

TSR performance since 31 March 2008 – KCOM Group vs. FTSE Fixed Line All-Share and FTSE 250

Value of £100 invested at 31 March 2008

LTIPOn 19 July 2012 a new long-term incentive scheme, the LTIP, was approved by shareholders. Under the scheme, nil-cost share options were granted to the Executive Directors and selected senior employees at the discretion of the Remuneration Committee.

The scheme measures TSR performance over a three-year performance period relative to the TSR performance of each company within a comparator group, comprising those companies within the FTSE 250 (excluding investment trusts) as at the start of the performance period.

No part of the awards may vest unless the Company’s TSR performance ranks at least median to the TSR performance of the comparator group. Performance at median would result in 25 per cent of the awards

vesting, with performance between median and upper quartile resulting in a vesting of awards on a straight-line basis with 100 per cent vesting at upper quartile performance.

In addition, regardless of TSR performance, no awards shall vest unless the Remuneration Committee is satisfied that the Company’s financial and non-financial performance over the performance period warrants the level of vesting set out in the vesting schedule. The Committee will consider the Company’s share price progression, dividend policy and EPS performance as part of this review.

The awards made on 19 July 2012 under this scheme to the Executive Directors are set out above. The maximum award granted to each Director was equivalent to 100 per cent of salary at the time of the award.

None of the Executive Directors held any other share options at the start or end of the year.

Relative Group performanceThe below graph shows, for the financial year ended 31 March 2013 and for each of the previous four financial years, the TSR on a holding of the Group’s ordinary shares compared with a hypothetical holding of shares in the FTSE Fixed Line All-Share and the FTSE 250. 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 and in market capital.



56

Directors’ interests (audited)The above table sets out the interests of all the Directors (as listed on pages 34 and 35) and their families in the Group’s shares as at 31 March 2013.

There has been a change since the end of the year where the Executive Directors participate in the SIP, for which we make monthly announcements as required under Section 5.6.1 of the Disclosure and Transparency Rules. This has resulted in the following additional shares being held:

Executive Directors SIP holdings

Paul Simpson 805

Kevin Walsh 810

The interests of the Executive Directors are aligned closely with those of shareholders through linking the vesting of long-term incentive schemes to TSR. During the year the Committee introduced share ownership guidelines for the Executive Directors to have a minimum level of shareholding equivalent to 100 per cent of their salary.

The above table shows the share ownership as at 31 March 2013, calculated using the closing mid-market price of KCOM Group PLC shares on 31 March 2013 and only those shares owned outright by the Executive Directors.

Outside appointmentsWe believe that where Board members hold directorships in other companies the Group can benefit from their experience. As a result, and subject to the Board’s prior approval, Executive Directors may take on more than one external non-executive directorship and retain the fees earned. In 2012/13, Bill Halbert received no direct remuneration for his external non-executive positions.

General information (audited)The closing mid-market price of KCOM Group PLC shares on 31 March 2013 was 81.2 pence. The high and low closing mid-market share prices during the year were 85.2 pence and 67.0 pence respectively.

Signed on behalf of the Board.


Directors’ interests (audited)

Ordinary shares and share options at 31 March 2013 Ordinary shares and share options at 31 March 2012

Owned outright

Subject todeferral3

Subject to performance

conditionsOwned

outrightSubject to

deferral

Subject to performance

conditions

Executive Directors

Bill Halbert 2,482,371 — 518,456 — — 7,480,000

Paul Simpson 1,025,3671 839,014 342,430 497,2621 — 4,579,071

Kevin Walsh 1,184,5981 839,014 324,899 751,1271 — 5,700,692


Graham Holden 50,000 — — 50,000 — —

Tony Illsley — — — — — —

Martin Towers 160,4902 — — 95,0002 — —

1. This includes matching shares awarded under the Share Incentive Plan which may be subject to forfeiture in certain circumstances.

2. Includes shares purchased via a self-invested pension plan.

3. Shares subject to deferral which may be subject to forfeiture.

Actual share ownership as a percentage

of salary on 31 March 2013

Guideline on share ownership as a

percentage of salary

Guideline met?

Bill Halbert 521.9% 100% Yes

Paul Simpson 305.0% 100% Yes

Kevin Walsh 397.5% 100% Yes




57

Overview


Governance

Independent auditors’ report

To the members of KCOM Group PLC

We have audited the financial statements of KCOM Group PLC for the year ended 31 March 2013 which comprise the Consolidated income statement, the Consolidated statement of comprehensive income, the Consolidated and Parent company balance sheets, the Consolidated and Parent company statements of changes in shareholders’ equity, the Consolidated and Parent company Cash flow statements and the related notes. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union and, as regards the Parent company financial statements, as applied in accordance with the provisions of the Companies Act 2006.

Respective responsibilities of directors and auditors As explained more fully in the Directors’ responsibilities statement set out on page 40, the Directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors.

This report, including the opinions, has been prepared for and only for the Company’s members as a body in accordance with Chapter 3 of Part 16 of the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.

Scope of the audit of the financial statements An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the Group’s and the Parent company’s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the Directors; and the overall presentation of the financial statements. In addition, we read all the financial and non-financial information in the annual report and accounts to identify material inconsistencies with the audited financial statements. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report.

Opinion on financial statements In our opinion:

� the financial statements give a true and fair view of the state of the Group’s and of the Parent company’s affairs as at 31 March 2013 and of the Group’s profit and Group’s and Parent company’s cash flows for the year then ended;

� the Group financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union;

� the Parent company financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union and as applied in accordance with the provisions of the Companies Act 2006; and

� the financial statements have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the Group financial statements, Article 4 of the lAS Regulation.

Opinion on other matters prescribed by the Companies Act 2006 In our opinion:

� the part of the Remuneration report to be audited has been properly prepared in accordance with the Companies Act 2006; and

� the information given in the Directors’ report for the financial year for which the financial statements are prepared is consistent with the financial statements.

Matters on which we are required to report by exception We have nothing to report in respect of the following:

Under the Companies Act 2006 we are required to report to you if, in our opinion:

� adequate accounting records have not been kept by the Parent company, or returns adequate for our audit have not been received from branches not visited by us; or

� the Parent company financial statements and the part of the Remuneration report to be audited are not in agreement with the accounting records and returns; or

� certain disclosures of Directors’ remuneration specified by law are not made; or

� we have not received all the information and explanations we require for our audit.

Under the Listing Rules we are required to review:

� the Directors’ statement, set out on page 41, in relation to going concern;

� the parts of the Corporate governance statement relating to the Company’s compliance with the nine provisions of the UK Corporate Governance Code specified for our review; and

� certain elements of the report to shareholders by the Board on Directors’ remuneration.

Ian Morrison (Senior Statutory Auditor)for and on behalf of PricewaterhouseCoopers LLPChartered Accountants and Statutory AuditorsLeeds18 June 2013

_1_KCOM_ar13_back (RB.JW).indd 1 6/20/2013 11:14:10 AM


58

Consolidated income statement

for the year ended 31 March 2013

2013 2012 Notes £’000 £’000

Revenue 4 372,869 387,316

Operating expenses 5 (317,914) (329,546)

Operating profit 54,955 57,770

Analysed as:

EBITDA before exceptional items 4 76,877 77,875

Exceptional items 7 (2,310) —

Depreciation of property, plant and equipment 4 (15,890) (17,591)

Amortisation of intangible assets 4 (3,722) (2,514)

Finance costs 9 (4,589) (6,633)

Share of profit/(loss) of associates 4 10 (15)

Profit before taxation 4 50,376 51,122

Taxation 10 (12,478) (13,395)

Profit for the year attributable to owners of the parent 37,898 37,727

Earnings per share

Basic 12 7.49p 7.41p

Diluted 12 7.39p 7.13p

The Company has elected to take the exemption under Section 408 of the Companies Act 2006 not to present the Parent company income statement or statement of comprehensive income.

The profit for the Parent company for the year was £32,785,000 (2012: £19,786,000).

Consolidated statement of comprehensive incomefor the year ended 31 March 2013

2013 2012Notes £’000 £’000

Profit for the year 37,898 37,727

Other comprehensive income

Cash flow hedges fair value movements 582 (62)

Actuarial gains/(losses) on retirement benefit obligation 29 2,038 (25,466)

Tax on actuarial gains/(losses) on defined benefit pension schemes 25 (979) 5,602

Tax on movement in cash flow hedges (133) 14

Total comprehensive income for the year attributable to owners of the parent 39,406 17,815

The notes on pages 63 to 90 are an integral part of these consolidated financial statements.



59

Overview


Governance

Balance sheets

as at 31 March 2013

Consolidated Parent company

2013 2012 2013 2012 Notes £’000 £’000 £’000 £’000

Assets

Non-current assets

Goodwill 14 85,272 85,272 — —

Other intangible assets 15 14,354 7,044 — —

Property, plant and equipment 16 119,270 117,901 — —

Investments 17 22 1,050 494,461 494,461

Deferred tax assets 25 16,528 28,372 — —

235,446 239,639 494,461 494,461

Current assets

Inventories 18 2,244 3,663 — —

Trade and other receivables 19 70,214 71,867 4 1

Cash and cash equivalents 22 15,719 8,333 — —

Derivative financial instruments 27 52 — — —

88,229 83,863 4 1

Total assets 323,675 323,502 494,465 494,462

Liabilities

Current liabilities

Trade and other payables 20 (121,671) (144,134) — —

Derivative financial instruments 27 — (17) — —

Provisions for other liabilities and charges 24 (1,921) (2,352) — —

Non-current liabilities

Trade and other payables 20 — (388) (801) (423)

Bank loans 21 (103,937) (83,464) — —

Retirement benefit obligation 29 (9,758) (13,886) — —

Derivative financial instruments 27 (3,235) (3,748) — —

Provisions for other liabilities and charges 24 (511) (2,056) — —

Total liabilities (241,033) (250,045) (801) (423)

Net assets 82,642 73,457 493,664 494,039

Equity

Capital and reserves attributable to owners of the parent

Share capital 26 51,660 51,660 51,660 51,660

Share premium account 353,231 353,231 353,231 353,231

Hedging and translation reserve 27 (2,363) (2,945) — —

(Accumulated losses)/retained earnings (319,886) (328,489) 88,773 89,148

Total equity 82,642 73,457 493,664 494,039


The financial statements were approved by the Board of Directors and authorised for issue on 18 June 2013.

They were signed on its behalf by:

Bill Halbert Paul SimpsonExecutive Chairman Chief Financial Officer18 June 2013

KCOM Group PLCRegistered number: 2150618



60

Consolidated statement of changes in shareholders’ equity


Share Hedging and Share premium translation Accumulated capital account reserve losses Total

Notes £’000 £’000 £’000 £’000 £’000

At 1 April 2011 51,660 353,231 (2,883) (328,814) 73,194

Profit for the year — — — 37,727 37,727

Increase in fair value of financial derivative instruments — — (62) — (62)

Actuarial losses on defined benefit pension schemes 29 — — — (25,466) (25,466)

Tax on actuarial losses on defined benefit pension schemes 25 — — — 5,602 5,602

Tax on movement in cash flow hedges 25 — — — 14 14

Total comprehensive income for the year ended 31 March 2012 — — (62) 17,877 17,815

Tax credit relating to share schemes 25 — — — 854 854

Purchase of ordinary shares — — — (420) (420)

Employee share schemes — — — 1,800 1,800

Dividends 11 — — — (19,786) (19,786)

Transactions with owners — — — (17,552) (17,552)

At 31 March 2012 51,660 353,231 (2,945) (328,489) 73,457

Profit for the year — — — 37,898 37,898

Increase in fair value of financial derivative instruments 27 — — 582 — 582

Actuarial gains on defined benefit pension schemes 29 — — — 2,038 2,038

Tax on actuarial losses on defined benefit pension schemes 25 — — — (979) (979)

Tax on movement in cash flow hedges 25 — — — (133) (133)

Total comprehensive income for the year ended 31 March 2013 — — 582 38,824 39,406

Deferred tax charge relating to share schemes 25 — — — (996) (996)

Current tax credit relating to share schemes — — — 2,092 2,092

Purchase of ordinary shares — — — (10,872) (10,872)

Employee share schemes — — — 942 942

Dividends 11 — — — (21,387) (21,387)

Transactions with owners — — — (30,221) (30,221)

At 31 March 2013 51,660 353,231 (2,363) (319,886) 82,642




61

Overview


Governance

Parent company statement of changes in shareholders’ equity


Share Share premium Retained

capital account earnings Total Notes £’000 £’000 £’000 £’000

At 1 April 2011 51,660 353,231 89,580 494,471

Profit for the year — — 19,786 19,786

Total comprehensive income for the year ended 31 March 2012 — — 19,786 19,786

Purchase of ordinary shares — — (420) (420)

Employee share schemes — — (12) (12)

Dividends 11 — — (19,786) (19,786)

Transactions with owners — — (20,218) (20,218)

At 31 March 2012 51,660 353,231 89,148 494,039

Profit for the year — — 32,785 32,785

Total comprehensive income for the year ended 31 March 2013 — — 32,785 32,785

Purchase of ordinary shares — — (10,872) (10,872)

Employee share schemes — — (901) (901)

Dividends 11 — — (21,387) (21,387)

Transactions with owners — — (33,160) (33,160)

At 31 March 2013 51,660 353,231 88,773 493,664




62

Cash flow statements



2013 2012 2013 2012 Notes £’000 £’000 £’000 £’000

Cash flows from operating activities

Operating profit 54,955 57,770 — —

Adjustments for:

– depreciation and amortisation 4 19,612 20,105 — —

– (increase)/decrease in working capital (18,226) (629) 372 420

– restructuring cost and onerous lease payments (4,462) (3,451) — —

– pension deficit payment (575) (16,888) — —

Profit on sale of property, plant and equipment (138) (913) — —

Profit on sale of investments (857) — — —

Net cash generated from operations 50,309 55,994 372 420

Cash flows from investing activities

Purchase of property, plant and equipment (16,964) (17,249) — —

Purchase of intangible assets (11,032) (4,899) — —

Proceeds from sale of property, plant and equipment 477 913 — —

Proceeds from sale of investments 17 1,895 — — —

Dividends received — — 32,785 19,786

Net cash used in investing activities (25,624) (21,235) 32,785 19,786

Cash flows from financing activities

Dividends paid 11 (21,387) (19,786) (21,387) (19,786)

Dividend equivalent paid to participants of share schemes (898) — (898) —

Interest paid (4,006) (7,363) — —

Capital element of finance lease repayments (136) (392) — —

Drawdown/(repayment) of bank loans 20,000 (5,000) — —

Purchase of ordinary shares 26 (10,872) (420) (10,872) (420)

Net cash used in financing activities (17,299) (32,961) (33,157) (20,206)

Increase in cash and cash equivalents 7,386 1,798 — —

Cash and cash equivalents at the beginning of the year 8,333 6,535 — —

Cash and cash equivalents at the end of the year 22 15,719 8,333 — —




63

Overview


Governance

Notes to the financial statements


01 General information KCOM Group PLC is a public limited company, which is listed on the London Stock Exchange and incorporated and domiciled in the United Kingdom. The address of the registered office is 37 Carr Lane, Hull, HU1 3RE. The nature of the Group’s operations is described within the ‘Business Review’ on page 12.

02 Accounting policies The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated.

Basis of accounting The consolidated and Parent company financial statements have been prepared in accordance with International Financial Reporting Standards as adopted by the European Union (IFRSs as adopted by the EU), IFRIC interpretations and the Companies Act 2006 applicable to companies reporting under IFRS. The consolidated financial statements have been prepared under the historical cost convention, as modified by the revaluation of financial assets and financial liabilities (including derivative instruments) at fair value through profit and loss. The consolidated financial statements have been prepared on a going concern basis.

The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group’s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements, are disclosed in note 3.

There were no new standards, amendments and interpretations that were adopted by the Group and effective for the first time for the financial year beginning 1 April 2013 that were material to the Group.

A number of new standards, amendments and interpretations are effective for annual periods beginning after 1 January 2013 and have not yet been applied in preparing these financial statements. None of these are expected to have a significant effect on the financial statements of the Group, with the exception of the amendments to IAS 19, Employee Benefits. This standard will replace the interest cost on pension scheme liabilities and expected return on pension scheme assets with a net interest amount that is calculated by applying the discount rate to the net defined benefit liability/asset. Had this standard been applied in preparing the financial statements for the year ended 31 March 2013, the net impact would have been an additional charge of £2.7 million to profit before tax in the income statement.

The Directors anticipate that the adoption of the other standards and interpretations on the effective date will not have a significant impact on the Group’s financial results.

Basis of consolidationSubsidiaries are entities controlled by the Company. Control exists when the Company has the power, directly or indirectly, to govern the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing control, potential voting rights that are currently exercisable or convertible are taken into account. The consolidated financial statements include the financial statements of the Company and its undertakings made up to 31 March 2013. The results of new subsidiary undertakings are included from the dates of acquisition using the purchase method of consolidation. Where a company has ceased to be a subsidiary undertaking during the year, its results are included to the date of cessation.

On acquisition, the assets, liabilities and contingent liabilities of a subsidiary are measured at their fair values at the date of acquisition. Any excess of the cost of acquisition over the fair values of the identifiable net assets acquired is recognised as goodwill. Any deficiency of the cost of acquisition below the fair values of the identifiable net assets acquired (i.e. discount on acquisition) is credited to the income statement in the period of acquisition.

Where necessary, adjustments are made to the financial statements of subsidiaries to bring the accounting policies used into line with those used by the Group. All intra-Group transactions, balances, income and expenses are eliminated on consolidation.

Associates are entities over which the Group has significant influence but not control, generally accompanying a shareholding of between 20% and 50% of the voting rights. Investments in associates are accounted for using the equity method of accounting and are initially recognised at cost. The Group’s share of its associates’ profits or losses is recognised in the income statement. The cumulative post-acquisition movements are adjusted against the carrying amount of the investment.

Partnerships are controlled when the Group has the power, directly or indirectly, to govern the financial and operating policies of the partnership so as to obtain benefits from its activities. In assessing control, potential voting rights that are currently exercisable or convertible are taken into account. The consolidated financial statements include the financial statements of the KCOM Central Asset Reserve Limited Partnership and its undertakings made up to 31 March 2013. The results of new partnership undertakings are included from the dates of acquisition using the purchase method of consolidation. Where a company has ceased to be a partnership undertaking during the year, its results are included to the date of cessation.

Segment reporting Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker (CODM). The CODM, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the KCOM Group PLC Board of Directors. As described in note 4, the Board assessed that Kcom, Smart421 and Eclipse brands are aggregated together and reported as the 'Kcom' segment. The remaining brands of KC and the PLC function are reported respectively in the 'KC' segment and 'PLC' segment.

Revenue recognition Revenue is measured at the fair value of the consideration received or receivable and represents amounts receivable for goods supplied, stated net of discounts, returns and value-added taxes. The Group recognises revenue when the amount of revenue can be reliably measured when it is probable that future economic benefits will flow to the entity and when specific criteria have been met for each of the Group's activities, as described below. The Group bases its estimate of return on historical results, taking into consideration the type of customer, the type of transaction and the specifics of each arrangement.

Revenue from calls is recognised in the Consolidated income statement at the time the call is made over the Group’s network. Revenue from rentals is recognised evenly over the rental period.



64

Notes to the financial statements continued


02 Accounting policies continuedRevenue recognition continuedRevenue from product sales is recognised at the point of effective transfer of risk and reward. Revenue from production of directories is recognised at the point when the directory is published. Revenue from the long-term network build contract is recognised based on the percentage of completion method. The stage of completion is estimated using an appropriate measure according to the nature of the contract, being installation or in-life. For large long-term annuity and multiple element customer contracts the Group is able to distinguish between the installation and the in-life service phases of a contract. Revenue is allocated based on the fair value of the consideration which represents the market value of such services, or amounts per contracts, and will be recognised on the following basis for each phase:

� installation – within this phase revenue relating to resources and services is accounted for on a stage of completion basis where revenue is recognised with reference to the proportion of total costs incurred to date. Revenue related to equipment is accounted for based on the point of effective transfer of risks and rewards (shipment); and

� in-life service – revenue for this phase is recognised in line with the obligation to provide service as dictated by customer contracts.

Pre-contract costs, such as bid costs, on key contract wins are expensed as and when incurred.

Revenue arising from the provision of other services, including maintenance contracts, is recognised in the accounting period in which services are rendered, by reference to stage of completion of the specific transaction and assessed on the basis of the actual service provided as a proportion of the total services to be provided.

Exceptional items Exceptional items are disclosed separately in the financial statements where it is necessary to do so to provide better understanding of the financial performance of the Group. They are material items of income or expense that have been shown separately due to the significance of their nature or amount. In particular costs associated with organisational restructuring, costs and provisions associated with onerous contracts, profits or losses on the sale of an operation and one-off pension costs and credits are treated as exceptional items.

Intangible assets Goodwill Goodwill represents amounts arising on acquisition of subsidiary undertakings and is the difference between the cost of the acquisition and the fair value of the net identifiable assets at the date of acquisition.

Goodwill is stated at cost less any accumulated impairment losses and is tested annually or more frequently if events or changes in circumstances indicate potential impairment. Impairment losses on goodwill are not reversed.

Goodwill is allocated to cash-generating units (CGUs) for the purpose of impairment testing. The allocation is made to those CGUs that are expected to benefit from the business combination in which the goodwill arose. Each unit or group of units to which the goodwill is allocated represents the lowest level within the entity at which the goodwill is monitored for internal management purposes.

Development costs An internally generated intangible asset arising from the Group’s internal development activities is recognised only if all of the following conditions are met:

� an asset is created that can be identified (such as software and new processes);

� it is probable that the asset created will generate future economic benefits; and

� the development cost of the asset can be measured reliably.

Internally generated intangible assets are carried at cost less accumulated amortisation and are amortised on a straight-line basis over their useful lives. Where no internally generated intangible asset can be recognised, development expenditure is recognised as an expense in the period in which it is incurred. Research costs are expensed to the income statement as and when they are incurred.

Customer and supplier relationshipsContractual customer and supplier relationships acquired in a business combination are recognised at fair value at the acquisition date. The contractual customer and supplier relations have a finite useful life and are carried at cost less accumulated amortisation. Amortisation is calculated using the straight-line method over the expected life of the relationship. These intangible assets are amortised on a straight-line basis over their useful lives.

Technology and brandTechnology and brand acquired through business combinations are recorded at fair value at the date of acquisition. Assumptions are used in estimating the fair values of acquired intangible assets and include management’s estimates of revenue and profits to be generated by the acquired businesses. These intangible assets are amortised on a straight-line basis over their useful lives.

SoftwareSoftware comprises computer software purchased from third parties and also the cost of internally developed software. Computer software purchased from third parties and internally developed software is initially recorded at cost.

Development costs that are directly attributable to the design and testing of identifiable and unique software products controlled by the Group are recognised as intangible assets when the criteria detailed above is met. These intangible assets are amortised on a straight-line basis over their useful lives.



65

Overview


Governance

02 Accounting policies continuedIntangible assets continuedSoftware continuedOther development expenditures that do not meet these criteria are recognised as an expense as incurred. Development costs previously recognised as an expense are not recognised as an asset in a subsequent period.

Amortisation Amortisation of intangible assets is charged to the income statement on a straight-line basis over the estimated useful lives of each intangible asset. Intangible assets are amortised from the date they are available for use.

The estimated useful lives are as follows:

Customer and supplier relationships up to 8 years

Technology and brand up to 10 years

Software up to 5 years

Development costs 3 years

Property, plant and equipment Property, plant and equipment is stated at historical cost less accumulated depreciation and any provision for impairment. Cost includes the original purchase price of the asset and the costs attributable to bringing the asset to its working condition for its intended use. Network infrastructure and related equipment (included within exchange equipment and external plant) is recorded at cost including labour costs directly attributable to the cost of the network construction. Depreciation is provided so as to write off the cost of assets to residual values on a straight-line basis over the assets’ useful estimated lives as follows:

Freehold buildings 40 years

Leasehold buildings and improvements period of lease

Exchange equipment 10 years

External plant 10 to 20 years

Vehicles, other apparatus and equipment 3 to 10 years

Freehold land is not depreciated.

The residual value, if not insignificant, is reassessed annually. Depreciation of network infrastructure and related equipment is provided for from the date the network comes into operation.

Assets held under finance leases are depreciated over their expected useful lives on the same basis as owned assets or, where shorter, over the term of the relevant lease.

Fixed asset investments Fixed asset investments are shown at cost less provision for impairment. They are reviewed at each reporting date for possible reversal of the impairment.

Impairment of non-financial assetsAssets that have an indefinite useful life – for example, goodwill – are not subject to amortisation and are tested annually for impairment. Assets that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.

Recoverable amount is the higher of fair value less selling costs and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted.

An impairment loss is recognised whenever the carrying amount of an asset exceeds its recoverable amount. Impairment losses are recognised in the income statement. Impairment losses recognised in respect of cash-generating units (CGUs) are allocated first to reduce the carrying amount of any goodwill allocated to CGUs and then to reduce the carrying amount of other assets in the unit on a pro-rata basis.

Inventories Inventories are stated at the lower of cost or net realisable value. Cost is determined using the first in, first out (FIFO) method. Costs include raw materials and, where appropriate, direct overhead expenses. Net realisable value represents the estimated selling price less all estimated costs of completion and costs to be incurred in marketing, selling and distribution. Provision is made for obsolete, slow moving or defective items where appropriate.

Trade receivables Trade receivables are recognised initially at fair value and measured subsequently at amortised cost, using the effective interest method, less any impairment. A provision for impairment of trade receivables is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of the receivables. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganisation, and default or delinquency in payments are considered indicators that the trade receivable is impaired. The amount of provision is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate. The carrying amount of the asset is reduced through the use of an allowance account, and the amount of the loss is recognised in the income statement within operating expenses. When a trade receivable is uncollectible, it is written off against the allowance account for trade receivables. Subsequent recoveries of amounts written off are credited against operating expenses in the income statement.



66



02 Accounting policies continuedCash and cash equivalents Cash and cash equivalents includes cash in hand, short-term deposits and other short-term highly liquid investments with original maturities of three months or less and bank overdrafts. Bank overdrafts are shown within borrowings in current liabilities on the balance sheet, unless a right of offset exists.

Trade payables Trade payables are recognised initially at fair value and measured subsequently at amortised cost using the effective interest method.

Share capitalOrdinary shares are classified as equity.

Taxation The tax expense represents the sum of the tax currently payable and deferred tax.

The tax payable is currently based on taxable profit for the year. Taxable profit differs from profit before tax as reported in the income statement because it excludes items of income or expense that are taxable or deductible in other years and/or items that are never taxable or deductible. The Group’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date.

Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit and is accounted for using the balance sheet liability method. Deferred tax liabilities are recognised generally for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the tax profit nor the accounting profit.

The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced or increased to the extent that sufficient taxable profits will be available to allow all or part of the asset to be recovered.

Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries and associates, and interests in joint ventures, except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future.

Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised. Deferred tax is charged or credited in the income statement, except when it relates to items recognised in other comprehensive income or directly to equity. In this case the deferred tax is also recognised in other comprehensive income or directly in equity respectively. Deferred tax is not discounted.

Financial instruments and hedge accounting Financial assets and liabilities are recognised in the Group’s balance sheet when the Group becomes a party to the contractual provisions of the instrument.

The Group uses derivative financial instruments to hedge its exposure to foreign exchange and interest rate risks arising from operational, financing and investment activities. In accordance with its Treasury Policy, the Group does not hold or issue derivative financial instruments for trading purposes.

Foreign currency translationDerivative financial instruments are initially and subsequently recognised at fair value. Any gain or loss on remeasurement to fair value is recognised immediately in the income statement. However, where derivatives qualify for hedge accounting, recognition of the resultant gain or loss depends on the nature of the item being hedged.

The fair value of the interest rate swaps is the estimated amount that the Group would receive or pay to terminate the swap at the balance sheet date, taking into account current interest rates and the current creditworthiness of the swap counterparties. The fair value of forward exchange contracts is their quoted market price at the balance sheet date, being the present value of the quoted forward price.

Changes in the fair value of derivative financial instruments that are designated and effective as hedges of future cash flows are recognised directly in other comprehensive income and the ineffective portion is recognised immediately in the income statement. If the cash flow hedge of a firm commitment or forecasted transaction results in the recognition of an asset or liability, then, at the time the asset or liability is recognised, the associated gains or losses on the derivative that had previously been recognised in other comprehensive income are included in the initial measurement of the asset or liability. For hedges that do not result in recognition of an asset or a liability, amounts deferred in equity are recognised in the income statement in the same period in which the hedged item affects net profit or loss.

Hedge accounting is discontinued when the hedging instrument expires or is sold, terminated or exercised or no longer qualifies for hedge accounting. At that time, any cumulative gain or loss on the hedging instrument recognised in equity is retained in equity until the forecasted transaction occurs. If a hedged transaction is no longer expected to occur, the net cumulative gain or loss recognised in equity is transferred to the income statement in the period.

These financial statements are presented in Pounds Sterling which is the currency of the primary economic environment in which the Group operates.

Transactions in foreign currencies are recorded at the rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the rate of exchange ruling at the balance sheet date.



67

Overview


Governance

02 Accounting policies continuedLeasing and hire purchase commitments Leases where the Group assumes substantially all of the risks and rewards of ownership are classified as finance leases. Assets held under finance leases and hire purchase contracts are capitalised in the balance sheet at their fair value or, if lower, the present value of the future minimum lease payments and are depreciated over their useful economic lives. The capital elements of future obligations under finance leases and hire purchase contracts are included as liabilities in the balance sheet. The interest elements of the rental obligations are charged to the income statement over the periods of the leases and hire purchase contracts. The finance charge is allocated to each period during the lease so as to produce a constant periodic rate of interest on the remaining balance of the liability.

Rentals payable under operating leases are charged to the income statement on a straight-line basis over the lease term.

Bank borrowings and issue costs Bank borrowings are stated at the amount of proceeds after deduction of issue costs, which are amortised over the period of the loan. Finance charges, including direct issue costs are accounted for in the income statement on an accruals basis and are added to the carrying amount of the instrument to the extent that they are not settled in the period in which they arise.

Borrowings are carried subsequently at amortised cost and any differences between the proceeds (net of transaction costs) and the redemption value is recognised in the income statement over the period of the borrowings using the effective interest method.

Pensions Defined contribution Obligations for contributions to the defined contribution (money purchase) scheme are charged to the income statement in the period they fall due. Prepaid contributions are recognised as an asset to the extent that a cash refund or a reduction in the future payments is available.

Defined benefit For defined benefit retirement schemes, the cost of providing benefits is determined using a building block approach, with actuarial valuations being carried out at each balance sheet date. Actuarial gains and losses are recognised in full in the period in which they occur and are recognised in equity and presented in the Consolidated statement of comprehensive income.

The current and past service costs of the scheme (the increase in the present value of employees’ future benefits attributable to the current or prior periods) are charged to the income statement in the period. The cost or benefit of committed settlements and curtailments is recognised immediately in the income statement. The interest cost of the scheme (the expected return on scheme assets, less interest on scheme liabilities) is recognised in the income statement in the period to which it relates.

The retirement benefit obligation recognised in the balance sheet represents the present value of the defined benefit obligation as adjusted for unrecognised past service cost and as reduced by the fair value of scheme assets. Any asset resulting from this calculation is limited to past service cost, plus the present value of available refunds and reductions in future contributions to the plan.

Employee share schemes and share-based payments The Group has applied the requirements of IFRS 2. In accordance with the transitional provisions, IFRS 2 has been applied to all grants of equity instruments after 7 November 2002 that were unvested as of 1 April 2005.

The Group issues equity settled share-based payments to certain employees.

Equity-settled employee schemes, including employee share options and discretionary long-term incentive schemes, provide employees with the option to acquire shares of the Company. Employee share options and long-term incentive schemes are generally subject to performance or service conditions.

The fair value of equity-settled share-based payments is measured at the date of grant and charged to the income statement over the period during which performance or service conditions are required to be met, or immediately where no performance or service criteria exist. The fair value of equity settled share-based payments granted is measured using either the Black-Scholes or Monte Carlo model, depending on the terms under which the options were granted. The amount recognised as an expense is adjusted to reflect the actual number of employee share options that vest, except where forfeiture is only due to market-based performance criteria not being met.

At the end of each reporting period, the Group revises its estimates of the number of options that are expected to vest based on the non-market vesting conditions. It recognises the impact of the revision to original estimates, if any, in the income statement, with a corresponding adjustment to equity.

The Group also operates a Share Incentive Plan (SIP) under which employees have the option to purchase shares in the Company each month and offers employees free matching and partnership shares on a sliding scale of between 1:3 to 2:1. The Group recognises the free shares as an expense over the period of any applicable service condition, or immediately when no service condition exists.

Dividends Dividend distribution to the Company’s shareholders is recognised as a liability in the Group’s financial statements in the period in which the dividends are approved by the Company’s shareholders or, in the case of interim dividends, paid.

Dividend income is recognised when the right to receive payment is established.

Provisions A provision is recognised in the balance sheet when the Group has a present, legal or constructive obligation as a result of a past event and it is probable that an outflow of economic benefits will be required to settle the obligation. If the effect is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability.



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03 Critical accounting judgements and key sources of estimation uncertainty Impairment of non-current assets Determining whether a non-current asset is impaired requires an estimation of the value in use and/or the estimated recoverable amount of the asset derived from the business, or part of the business, CGU, to which the non-current asset has been allocated. The value in use calculation requires an estimate of the present value of future cash flows expected to arise from the CGU, by applying an appropriate discount rate to the timing and amount of future cash flows.

The Directors are required to make judgements regarding the timing and amount of future cash flows applicable to the CGU, based on current budgets and forecasts, and extrapolated for an appropriate period taking into account growth rates and expected changes to selling prices and operating costs. The Directors estimate the appropriate discount rate using pre-tax rates that reflect current market assessments of the time value of money and the risks specific to the individual CGU.

Intangible assets arising on acquisition In determining the fair value of intangible assets arising on acquisition the Directors are required to make judgements regarding the timing and amount of future cash flows applicable to the businesses being acquired, discounted using an appropriate discount rate.

Such judgements are based on current budgets and forecasts, extrapolated for an appropriate period taking into account growth rates and expected changes to selling prices and operating costs. The Directors estimate the appropriate discount rate using pre-tax rates that reflect current market assessments of the time, value of money and the risks specific to the businesses being acquired.

Post-employment benefits The Group operates two defined benefit schemes. All post-employment benefits associated with these schemes have been accounted for in accordance with IAS 19 ‘Employee benefits’. As detailed within the accounting policies note, in accordance with IAS 19, all actuarial gains and losses have been recognised immediately through the Consolidated statement of comprehensive income.

For all defined benefit pension schemes, pension valuations have been performed using specialist advice obtained from independent qualified actuaries. In performing these valuations, judgements, assumptions and estimates have been made. These assumptions have been disclosed within note 29.

Share-based payments The Company provides share-based payments under five separate schemes. In accordance with IFRS 2, share options are measured at fair value at the date of grant. The fair value determined is then expensed in the Consolidated income statement on a straight-line basis over the vesting period, with a corresponding increase in equity.

The valuation of these share-based payments requires several judgements to be made in respect of the number of options that are expected to be exercised. Details of the assumptions made in respect of each of the share-based payment schemes are disclosed in note 13.

Provisions Using information available at the balance sheet date, the Directors make judgements, based on experience, on the level of provision required to satisfy all onerous lease and dilapidation commitments, to account for potential uncollectable receivables, to account for the potential for unsaleable inventories and to account for known restructuring costs.

Deferred taxation The amount of the deferred tax asset included in the balance sheet of the Group is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. In estimating the amount of the deferred tax asset that may be recognised the Directors make judgements, based on current budgets and forecasts, about the amount of future taxable profits and the timing of when these will be realised. The asset is unwinding as there are taxable profits against which the asset is utilised.

04 Segmental analysis Management has determined the operating segments based on the reports reviewed by the KCOM Group PLC Board that are used to make strategic decisions. The chief operating decision-maker of the Group is the KCOM Group PLC Board. The Board considers the performance of the four brands and the PLC function in assessing the performance of the Group and making decisions about the allocation of resources. These are the Group’s operating segments.

The KC brand addresses the needs of our Hull and East Yorkshire customers and the Eclipse, Kcom and Smart421 brands serve enterprise, public sector organisations and small business markets across the UK.

The Board assessed that the Eclipse, Kcom and Smart421 brands have similar profiles offering similar products and services, similar production and distribution processes and are operating in a consistent regulatory environment. In line with IFRS 8, the Eclipse, Kcom and Smart421 brands are aggregated together and reported as the ‘Kcom’ segment for the year ended 31 March 2013. The remaining brands of KC and the PLC function are reported respectively in the ‘KC’ segment and ‘PLC’ segment. This reporting is also consistent with the reporting to the KCOM Group PLC Board.



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04 Segmental analysis continuedThe segment information provided to the KCOM Group PLC Board for the reportable segments, for the year ended 31 March 2013 and for the year ended 31 March 2012, is as follows:

Revenue EBITDA

2013 2012 2013 2012 £’000 £’000 £’000 £’000

Before exceptional items

KC 104,564 103,595 54,483 53,223

Kcom 273,446 289,316 29,379 31,043

PLC¹ (5,141) (5,595) (6,985) (6,391)

Activities before exceptional items 372,869 387,316 76,877 77,875

Exceptional items

KC — — (788) —

Kcom — — (1,001) 1,100

PLC¹ — — (521) (1,100)

Total (note 7) — — (2,310) —

Total 372,869 387,316 74,567 77,875

A reconciliation of total EBITDA to profit before tax is provided as follows:2013 2012

Notes £’000 £’000

EBITDA post-exceptional items 74,567 77,875

Depreciation 16 (15,890) (17,591)

Amortisation 15 (3,722) (2,514)

Finance costs 9 (4,589) (6,633)

Share of profit/(loss) of associate 17 10 (15)

Profit before tax 50,376 51,122

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

The split of total revenue between external customers and inter-segment revenue is as follows:2013 2012

£’000 £’000

Revenue from external customers

KC 99,139 97,562

Kcom 273,034 288,916

PLC¹ 696 838

Total 372,869 387,316

Inter-segment revenue

KC 5,425 6,033

Kcom 412 400

PLC¹ (5,837) (6,433)

Total — —

Group total 372,869 387,316

1. PLC includes Public Company central and share scheme expenses, inter-segment eliminations and the costs, excluding current and past service costs, associated with the Group’s defined benefit pension schemes and the related assets and liabilities.



70



04 Segmental analysis continuedInter-segment sales are charged at prevailing market prices.

None of the revenue, operating profit or net operating assets arising outside the United Kingdom are material to the Group.

The Group is not dependent upon a single or small number of external customers.

The analysis of the Group’s revenue between sale of goods, the provision of services and revenue from its Network Build contract is as follows:2013 2012

£’000 £’000

Sale of goods 17,246 19,375

Provision of services 355,623 356,240

Revenue from Network Build contract — 11,701

Group total 372,869 387,316

05 Operating expenses2013 2012

Consolidated Notes £’000 £’000

Staff costs 84,618 83,224

Restructuring costs relating to employees 7 2,272 —

Total staff costs 8 86,890 83,224

Own work capitalised 8 (5,504) (4,899)

Costs relating to Network Build contract — 11,701

Other external charges1 201,518 203,701

Non-employee related pension charges 29 (1,515) (1,619)

Operating lease rentals 4,004 4,931

Auditors' remuneration 6 249 287

Cost of inventories recognised as an expense 13,074 14,272

Foreign exchange gain (314) (1,244)

Depreciation of property, plant and equipment 16 15,890 17,591

Amortisation of intangible assets 15 3,722 2,514

(Profit) on disposal of property, plant and equipment (138) (913)

(Profit) on disposal of investments 17 (857) —

Asset backed partnership implementation costs 7 895 —

Total 317,914 329,546

1. Other external charges mainly relate to costs from key partners, such as BT wholesale.

Non-employee related pension credits are the total of interest costs and expected return on assets (net of scheme expenses) as set out in note 29.



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06 Auditors’ remunerationDuring the year the Group obtained the following services from the Company’s Auditors:

2013 2012Consolidated £’000 £’000

Fees payable to the Company’s Auditors for the audit of the Company’s annual financial statements and the consolidated financial statements 62 62

Fees payable to the Company’s Auditors and its associates for other services:

– the audit of the Company’s subsidiaries 146 146

– audit-related assurance services 20 20

– tax advisory services 17 43

– other non-audit services 4 16

Total 249 287

07 Exceptional items2013 2012

Consolidated £’000 £’000

Profit on sale of investments (857) —

Restructuring costs relating to employees 2,272 —

Asset backed partnership implementation costs 895 —

Onerous leases — 1,100

(Credit) on network build loss provision — (1,100)

Charged to profit before taxation 2,310 —

Restructuring costs arose as a result of organisational changes.

The profit on sale of investments relates to the sale of the Group’s shareholding in Spectrum Venture Management Fund.

Asset backed partnership implementation costs relate to the costs incurred for the agreement reached with the Trustees of the Group’s defined benefit Pension Scheme to provide the Group with an efficient mechanism of funding the Schemes’ current deficit position. The level of costs reflects both company and Schemes advisor costs.

Onerous lease provisions arose as a result of continued rationalisation of the Group’s property portfolio.

The credit on the Network Build contract arose through improved operational focus and represents the reversal of a provision recorded in 2011 for losses.

The combined tax effect of these items is a credit of £760,000 (2012: £Nil) in respect of current tax and a credit of £Nil (2012: £Nil) in respect of deferred tax.



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08 Employees and remunerationThe average monthly numbers (including Executive Directors) employed by the Group during the year were as follows:

Number of employees

2013 2012

KC 605 559

Kcom 986 970

PLC 275 263

Total 1,866 1,792

The costs incurred in respect of these employees were:2013 2012

£’000 £’000

Wages and salaries 69,733 68,837

Social security costs 8,402 7,742

Other pension costs (note 29) 3,747 3,454

Share scheme costs (note 13) 2,736 3,191

Restructuring costs relating to employees (note 7) 2,272 —

Total 86,890 83,224

Less own work capitalised (note 15 and 16) (5,504) (4,899)

Charged to income statement 81,386 78,325

All the Group’s employees are employed by the Company with the exception of 324 (2012: 283) employees employed by KC Contact Centres Limited and Smart421 Limited.

Disclosures required by the Companies Act 2006 on Directors’ remuneration, including salaries, performance related bonuses, pension contributions and pension entitlements, including disclosure in respect of the highest paid Director, are to be found in the tables on pages 52 to 56 within the Remuneration report and form part of these financial statements.

09 Finance costs2013 2012


On bank loans, overdrafts and other loans 4,085 6,149

Finance lease and hire purchase contracts 31 24

4,116 6,173

Amortisation of loan arrangement fees 473 460

Total 4,589 6,633



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10 TaxationAnalysis of tax charge in the yearThe charge based on the profit for the year comprises:

2013 2012Consolidated Notes £’000 £’000

UK corporation tax:

– current tax on profits for the year 2,743 —

Total current tax 2,743 —

UK deferred tax:

Origination and reversal of timing differences in respect of:

– profit for the year 9,224 9,137

– change in rate 780 1,066

– adjustment in respect of prior years (315) (822)

– credit in respect of intangible asset amortisation (63) (56)

– charge in respect of retirement benefit obligation 109 4,070

Total deferred tax 25 9,735 13,395

Total taxation charge for the year 12,478 13,395

Factors affecting tax charge for the year2013 2012


Profit before taxation 50,376 51,122

Profit before taxation at the standard rate of corporation tax in the UK of 24% (2012: 26%) 12,090 13,292

Effects of:

– permanent differences (77) (141)

– adjustments relating to prior year deferred tax (315) (822)

– change in rate reflected in the deferred tax asset 780 1,066

Total taxation charge for the year 12,478 13,395

The current tax charge of £2,743,000 (2012: £Nil) includes a charge relating to the vesting of the share schemes of £2,092,000 (2012: £Nil) which is a reclassification from the reserves on the unwind of the deferred tax asset.

Factors affecting the current and future tax chargesAs a result of the change in the UK main corporation tax rate from 24% to 23% that was enacted substantively at the balance sheet date and that became effective from 1 April 2013, the relevant deferred tax balances have been remeasured. Further reductions to the UK corporation tax rate were announced in the March 2013 Budget. The changes, which we expect to be enacted separately each year, propose to reduce the rate by 2% to 21% by April 2014 and by a further 1% to 20% on 1 April 2015. The changes have not been enacted substantively at the balance sheet date and, therefore, are not recognised in the financial statements.

11 Dividends2013 2012

£’000 £’000

Amounts recognised as distributions to equity holders in the period:

– final dividend for the year ended 31 March 2011 of 2.50 pence per share — 12,915

– interim dividend for the year ended 31 March 2012 of 1.33 pence per share — 6,871

– final dividend for the year ended 31 March 2012 of 2.67 pence per share 13,793 —

– interim dividend for the year ended 31 March 2013 of 1.47 pence per share 7,594 —

Total 21,387 19,786

The proposed final dividend for the year ended 31 March 2013 is 2.97 pence per share, amounting to a total dividend of £15,343,000. 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.



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12 Earnings per share The calculation of basic and diluted earnings per share is based on the following numbers of shares and earnings:

2013 2012Consolidated Number Number

Weighted average number of shares

For basic earnings per share 506,268,452 509,443,836

Share options in issue 6,273,766 19,388,758

For diluted earnings per share 512,542,218 528,832,594

2013 2012 £’000 £’000

Earnings

Profit attributable to owners of the parent 37,898 37,727

Adjustments

Exceptional items 2,310 —

Tax on exceptional items (760) —

Adjusted profit attributable to owners of the parent 39,448 37,727

2013 2012Consolidated Pence Pence

Earnings per share

Basic 7.49 7.41

Diluted 7.39 7.13

Adjusted basic 7.79 7.41

Adjusted diluted 7.70 7.13

Basic earnings per share is calculated by dividing the profit attributable to equity holders of the Company by the weighted average number of ordinary shares in issue during the year excluding ordinary shares purchased by the Company and held in trust.

Adjusted basic earnings per share is calculated by adjusting the profit attributable to equity holders of the Company for the exceptional items net of taxation and dividing this adjusted figure by the weighted average number of ordinary shares in issue during the year, excluding ordinary shares purchased by the Company and held in trust.

Diluted earnings per share is calculated by adjusting the weighted average number of ordinary shares outstanding to assume conversion of all dilutive ordinary shares. The dilutive potential ordinary shares are in the form of share options. A calculation has been done to determine the number of shares that would have been issued assuming the exercise of the share options.

13 Share-based payments The Group had six share-based payment schemes (2012: five) in existence during the year ended 31 March 2013. The Group recognised a total charge of £2,736,000 (2012: £3,191,000) in the year relating to equity settled share-based payment transactions.

Details of each of the schemes are provided below.

Share options and Long-Term Incentive Scheme (LTIS)Share options including LTIS (issued after 7 November 2002)

Weightedaverageexercise

price Options (pence)

Outstanding at the beginning of year and end of year 42,189 Nil

The share options, including LTIS, outstanding at 31 March 2013 had a weighted average exercise price of Nil pence and a weighted average remaining contractual life of Nil years (the Directors have assumed all shares will vest at the earliest available date). Options were granted at £Nil cost for this equity settled scheme. No options were granted in the year ended 31 March 2013. The options become exercisable between three and ten years from grant date, provided that the employee remains in employment. Out of the 42,189 outstanding options (2012: 42,189), all were exercisable at 31 March 2013.

The assumptions used in the Monte Carlo model for the options outstanding at the beginning of the year are as follows: 2006 2005 2004 2003

grant grant grant grant

Share price (on date of official grant) (pence) 65.9 60.4 64.8 54.3

Exercise price (pence) Nil Nil Nil 56.8

Expected dividend payments (%) 2 1 Nil Nil

Expected term (years) 3 3 3 6.5



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13 Share-based payments continuedShare options and Long-Term Incentive Scheme (LTIS) continuedShare Incentive Plan (SIP)The SIP is open to all employees and offers partnership, matching and free shares (the basis depends on the individual’s contribution into the scheme). No performance criteria are attached to these matching shares other than an employee must remain employed by the Group for five years from the date of grant to be able to have their free and matching shares. In 2012/13, 1,524,850 (2012: 1,403,047) matching shares were granted during the year.


price Number (pence)

Outstanding at the beginning of year 7,733,763 Nil

Granted during the year 1,524,850 Nil

Lapsed during the year (578,295) Nil

Outstanding at the end of the year 8,680,318 Nil

Long-Term Co Investment Plan (LTCIP) The LTCIP scheme vested in part during the year after the Remuneration Committee met on 6 September 2012 to confirm that two of the three performance conditions had been met and that the shares could be released. The shares were released on 10 September 2012. For further information on the performance conditions and the vesting of the scheme see the Remuneration report on pages 52 and 53.

EPS CAGR Relative TSR

Number of FV1 FV participants Number (pence) Number (pence) Total

Outstanding at the beginning of the year 3 1,633,274 0.05 5,182,779 0.23 6,816,053

Lapsed2 — (1,633,274) — (1,086,432) — (2,719,706)

Vested (3) — — (4,096,347) — (4,096,347)

Outstanding at the end of the year — — — — — —

1. Average FV (pence).

2. Includes shares lapsed due to leavers and due to performance conditions not being met.

Smart421 Incentive Scheme (SIS)The SIS is an equity settled share-based payment scheme open to senior management in the Smart421 brand. The awards were granted at £Nil cost on 1 August 2011 and vest dependent on specific non-market performance conditions over a three-year performance period. The plans performance target measures annual and cumulative profit before tax of Smart421 Limited for the 2012, 2013 and 2014 financial years.



Outstanding at the beginning of the year and end of the year 1,500,000 Nil

None of these awards were exercisable at the year end.

The awards have been valued using a Black-Scholes model.

The average assumptions used are as follows:

Share price at date of grant (pence) 84

Exercise price (pence) Nil

Volatility (%) 50

Risk free rate (%) 2.00

Dividend yield (%) —



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13 Share-based payments continuedExecutive Incentive Plan (EIP) For the EIP, the performance condition was based on the TSR of share price plus dividends paid and was measured on a rolling three-month basis during a three-year performance period. For further information on the performance conditions and the vesting of the scheme see the Remuneration report on page 54.

Outstanding OutstandingVesting Number at at beginning of Vested at end of

Award date release date Number date of grant the year Lapsed1 and released the year FV (pence)

EIP awards

24/07/2009 24/07/2012 1 7,480,000 7,480,000 (2,293,368) (5,186,632) — 12

24/07/2009 24/07/2012 3 3,630,000 3,033,832 (999,296) (2,034,536) — 11

24/07/2009 24/07/2013 3 1,815,000 1,440,239 (422,971) — 1,017,268 11

24/07/2009 24/07/2014 3 1,815,000 1,394,218 (376,950) — 1,017,268 11

19/11/2009 19/11/2012 17 3,038,364 2,546,829 (498,117) (2,048,712) — 27

19/11/2009 19/11/2013 17 1,519,182 1,258,723 (307,136) — 951,587 26

19/11/2009 19/11/2014 17 1,519,182 1,249,906 (343,004) — 906,902 25

CSOP and unapproved

25/02/2010 25/02/2013 17 591,636 493,809 (118,222) (375,587) — 32

25/02/2010 25/02/2014 17 295,818 245,901 (70,178) — 175,723 31

25/02/2010 25/02/2015 17 295,818 245,301 (76,823) — 168,478 30

Total 22,000,000 19,388,758 (5,506,065) (9,645,467) 4,237,226

1. Includes shares lapsed due to leavers and due to performance conditions not being met.

The awards have been valued using a Monte Carlo simulation model.

The weighted average exercise price of these awards is £Nil (2012: £Nil).

The weighted average assumptions used during the year are as follows:

Share price at valuation date (pence) 33

Exercise price (pence) 3

Expected volatility (%) 51.00



Long-Term Incentive Plan (LTIP)The LTIP is an equity settled share-based payment scheme open to the Executive Directors and selected senior employees at the discretion of the Remuneration Committee. The Awards were granted at £Nil cost on 19 July 2012 and vest dependent on TSR performance over a three-year performance period relative to the TSR performance of each company within a comparator group. For further information on the grants and the performance conditions see the Remuneration report on pages 55.



Outstanding at the beginning of year — Nil

Granted during the year 2,036,542 Nil

Lapsed during the year — Nil

Outstanding at the end of the year 2,036,542 Nil

None of these awards were exercisable at the year end.

The awards have been valued using a Monte Carlo simulation model.

The average assumptions used are as follows:

Share price at date of grant (pence) 76.35

Exercise price (pence) Nil

Volatility (%) 33.28





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14 Goodwill Consolidated £’000

Cost and carrying amount

At 1 April 2012 and at 31 March 2013 85,272

Goodwill acquired in a business combination is allocated at the date of acquisition to the CGU that is expected to benefit from that business combination. The Group tests goodwill annually for impairment, or more frequently if there are indications that goodwill might be impaired. The recoverable amounts of the CGUs are determined from value in use calculations. The key assumptions for these value in use calculations are those regarding discount rates and growth rates . The Directors estimate discount rates using pre-tax rates that reflect current market assessments of the time value of money and the risks specific to the individual CGU.

The Group prepares cash flow forecasts using the current operating budget approved by the Directors which covers a five-year period and an appropriate extrapolation of cash flows beyond this. The key assumptions in the cash flow forecasts are revenue and EBITDA growth in line with our strategic priorities.

The carrying amount of goodwill of £85,272,000 (2012: £85,272,000) has been allocated across multiple CGUs as follows: CGUs £’000

Eclipse 7,862

Kcom 72,234

Smart421 5,086

At 1 April 2012 and 31 March 2013 85,272

An impairment review was undertaken at the year end in accordance with IAS 36 and no impairment was required. Furthermore, this review indicates that a reasonable possible change in a key assumption would not remove any remaining headroom in the impairment calculation.

The discount rate and growth rate (in perpetuity) used for value in use calculations are as follows: 2013 2012

Discount rate (pre-tax) % 11.3 10.7

Growth rate (in perpetuity) % 1.5 1.0

15 Other intangible assets Customer

Development and supplier Technologycosts Software relationship and brand Total

Consolidated £’000 £’000 £’000 £’000 £’000

Cost

At 1 April 2011 3,285 25,858 49,257 6,294 84,694

Additions 19 799 — — 818

Own work capitalised 1,274 2,807 — — 4,081

Disposals (142) (7,783) — — (7,925)

At 31 March 2012 4,436 21,681 49,257 6,294 81,668

Additions 115 5,841 — — 5,956

Own work capitalised (note 8) 2,005 3,071 — — 5,076

Disposals (2,345) (2,052) — — (4,397)

At 31 March 2013 4,211 28,541 49,257 6,294 88,303

Amortisation

At 1 April 2011 2,907 22,085 49,257 5,786 80,035

Charge for the year 1,024 1,256 — 234 2,514

Disposals (142) (7,783) — — (7,925)

At 31 March 2012 3,789 15,558 49,257 6,020 74,624

Charge for the year 1,613 1,835 — 274 3,722

Disposals (2,345) (2,052) — — (4,397)

At 31 March 2013 3,057 15,341 49,257 6,294 73,949

Carrying amount

At 31 March 2013 1,154 13,200 — — 14,354

At 31 March 2012 647 6,123 — 274 7,044

At 1 April 2011 378 3,773 — 508 4,659

Development costs are predominantly capitalised staff costs associated with new products and services.



78



16 Property, plant and equipmentVehicles,

otherapparatus

Land and Exchange External andbuildings equipment plant equipment Total

Consolidated £’000 £’000 £’000 £’000 £’000

Cost

At 1 April 2011 17,599 189,040 145,904 55,865 408,408

Additions 67 4,406 5,399 8,823 18,695

Own work capitalised — 174 387 257 818

Disposals (57) (615) — (27,468) (28,140)

At 31 March 2012 17,609 193,005 151,690 37,477 399,781

Additions — 8,371 5,784 3,015 17,170

Own work capitalised — 164 264 — 428

Disposals (1,657) (1,036) (4,402) (5,154) (12,249)

At 31 March 2013 15,952 200,504 153,336 35,338 405,130

Accumulated depreciation

At 1 April 2011 11,207 146,438 85,991 48,793 292,429

Charge for the year 490 3,659 8,597 4,845 17,591

Disposals (57) (615) — (27,468) (28,140)

At 31 March 2012 11,640 149,482 94,588 26,170 281,880

Charge for the year 468 4,293 8,387 2,742 15,890

Disposals (1,331) (1,036) (4,400) (5,143) (11,910)

At 31 March 2013 10,777 152,739 98,575 23,769 285,860

Net book value

At 31 March 2013 5,175 47,765 54,761 11,569 119,270

At 31 March 2012 5,969 43,523 57,102 11,307 117,901

At 1 April 2011 6,392 42,602 59,913 7,072 115,979

17 InvestmentsUnlisted Shares in

investments associates TotalConsolidated £’000 £’000 £’000

Cost

At 1 April 2011 2,744 27 2,771

Share of net (loss) for the year — (15) (15)

At 31 March 2012 2,744 12 2,756

Share of net profit for the year — 10 10

Disposals (2,744) — (2,744)

At 31 March 2013 — 22 22

Amounts written off

At 31 March 2011 and 31 March 2012 1,706 — 1,706

Disposals (1,706) — (1,706)

At 31 March 2013 — — —

Net book value

At 31 March 2013 — 22 22

At 31 March 2012 1,038 12 1,050



79

Overview


Governance

17 Investments continuedShares in

subsidiaryundertakings

Parent company £’000

Cost

At 31 March 2012 and 2013 494,511

Amounts written off

At 31 March 2012 and 2013 50

Net book value

At 31 March 2012 and 31 March 2013 494,461

Subsidiary undertakings (as at 31 March 2013)The shares in subsidiary undertakings are held in KCH (Holdings) Limited, an intermediary holding company registered in England. Details of the principal trading subsidiaries of the Group are listed below. A full list will be appended to the Company’s next Annual Return. All of the following companies are indirectly 100% owned by the Company via KCH (Holdings) Limited and are all registered in England.

Name of company Business activity

Kingston Communications Limited Telecommunications services

Affiniti Integrated Solutions Ltd Supplier of integrated and converged communication services

Kingston Information Services Limited Publication of telephone directories

KC Contact Centres Limited Provision of call centre services

Smart421 Limited Provision of IT solutions and application service management

All subsidiary undertakings are included in the consolidation of the Group.

AssociatesThe Group’s associate is Smartintegrator Technology Limited, in which the Company indirectly holds 50% of the ordinary shares. Under an agreement between the shareholders of Smartintegrator Technology Limited, neither the Group nor the shareholders are able to exercise control over the operational and financial policies of Smartintegrator Technology Limited. The associate is registered in England and its main business activity is software development.

18 Inventories2013 2012


Raw materials and consumables 1,811 1,787

Equipment for resale 433 1,876

Total 2,244 3,663

There is no material difference between the carrying value and the replacement cost of inventories.



80



19 Trade and other receivablesConsolidated Parent company

2013 2012 2013 2012 £’000 £’000 £’000 £’000

Trade receivables (net) 37,167 41,696 — —

Other receivables 737 1,249 — —

Prepayments 18,317 16,396 4 1

Accrued income 13,993 12,526 — —

Total 70,214 71,867 4 1

All of the Group’s receivables are due within one year in both 2013 and 2012. An allowance has been made for estimated irrecoverable amounts from the sale of goods and services of £2,065,000 (2012: £3,013,000). The Directors consider that the carrying amount of trade and other receivables approximate to their fair value.

Movements on the Group provision for impairment of trade receivables are as follows: 2013 £’000

At 1 April 2012 (3,013)

Written off in the year 1,051

Unused amounts reversed 479

Amounts provided for in the year (582)

At 31 March 2013 (2,065)

The majority of the Group’s trade and other receivables are denominated in Sterling.

Credit riskThe Group’s principal financial assets are cash balances and trade and other receivables. The Group’s credit risk is attributable primarily to its trade receivables for which an allowance has been made for the estimated irrecoverable amounts. The credit risk on liquid funds is limited because the counterparties are banks with high credit ratings assigned by international credit rating agencies. The Group has no significant concentration of credit risk, with exposure spread over a large number of customers.

The maximum exposure to credit risk at the reporting date is the carrying value of each class of receivable mentioned above. The Group does not hold any collateral as security.

As of 31 March 2013, trade receivables of £3,431,0000 were impaired (2012: £3,744,000). The amount of the provision was £2,065,000 as of 31 March 2013 (2012: £3,013,000). The individually impaired receivables mainly relate to customers who are in unexpectedly difficult economic situations. It was assessed that a portion of the impaired balance is expected to be recovered.

The ageing of these receivables is as follows: 2013 2012 £’000 £’000

0–3 months 434 732

3–6 months 1,178 748

6 months + 1,819 2,264

3,431 3,744



81

Overview


Governance

19 Trade and other receivables continuedCredit risk continuedAs of 31 March 2013, trade receivables of £6,295,000 (2012: £5,723,000) were past due but not impaired. These relate to a number of independent customers of whom there is no recent history of default. The ageing analysis of these trade receivables is as follows:

2013 2012 £’000 £’000

0–3 months 4,971 4,211

3–6 months 1,198 1,512

6 months + 126 —

6,295 5,723

20 Trade and other payablesConsolidated Parent company

2013 2012 2013 2012Notes £’000 £’000 £’000 £’000

Current

Obligations under finance leases and hire purchase contracts 23 — 136 — —

Trade payables 39,096 50,418 — —

Corporation tax 651 — — —

Other taxes and social security costs 4,915 5,627 — —

Other payables 4,478 5,482 — —

Accruals 45,736 47,867 — —

Deferred income 26,795 34,604 — —

Total 121,671 144,134 — —

Non-current

Other payables — 388 — —

Amounts due to subsidiary undertakings — — 801 423

Total — 388 801 423

Trade payables and accruals principally comprise amounts outstanding for trade purchases and ongoing costs. The Directors consider that the carrying amount of current liabilities approximates to their fair value.

Amounts owed to subsidiary undertakings are unsecured and have no fixed date of repayment. However, the subsidiary undertakings have confirmed that none of the amounts are due within one year. Interest at market rates is charged on amounts due to subsidiary undertakings due after more than one year, except for amounts due to dormant entities where nil interest is charged.

21 Bank loansConsolidated Parent company

2013 2012 2013 2012 £’000 £’000 £’000 £’000

Bank borrowings

Amount falling due:

– between two and five years 105,000 85,000 — —

105,000 85,000 — —

Loan issue costs (1,063) (1,536) — —

103,937 83,464 — —

The loan facility was secured by guarantees given by all material subsidiaries of KCOM Group PLC in favour of the lending banks.

The bank borrowings are fully repayable in July 2015 and attract an interest rate of LIBOR plus a margin dependent on specific covenants. For further information on interest rate swaps see note 27.

The fair value of bank borrowings is £96.5 million (2012: £72.0 million). The fair value of cash flows has been estimated using a rate based on the weighted average borrowing rate of 3.6% (2012: 4.9%).



82



22 Net debtConsolidated

2013 2012 Notes £’000 £’000

Cash 15,719 5,326

Short-term deposits — 3,007

Cash and cash equivalents 15,719 8,333

Borrowings 21 (103,937) (83,464)

Finance leases 23 — (136)

Total net debt (88,218) (75,267)

Cash and cash equivalents, which are presented as a single class of assets on the face of the balance sheet, comprise cash at bank, short-term deposits and other short-term highly liquid investments with maturity of three months or less.

Amounts held in short-term deposits represent sums receivable from a customer that are required to be held in an Escrow account as security during the build stage of the Network Build Contract. They can only be withdrawn by the customer if the Group fails to deliver against specific contractual requirements after the Group has been given time to remedy such failure. This amount has been released from Escrow during the year.

23 Obligations under finance leases and hire purchase contractsConsolidated

2013 2012 £’000 £’000

Finance lease liabilities – minimum lease payments:

– within one year — 138

– between 1 and 5 years — —

— 138

Future finance charges on finance leases — (2)

Present value of finance lease liabilities — 136

The present value of finance lease liabilities is as follows:

– within one year — 136

– between 1 and 5 years — —

— 136

24 Provisions for liabilities and chargesOnerous

leases Restructuring Total £’000 £’000 £’000

At 1 April 2012 2,921 1,487 4,408

Established in the year — 2,272 2,272

Utilised in the year (1,874) (2,374) (4,248)

At 31 March 2013 1,047 1,385 2,432

Total provisions for liabilities and charges 2013

Included in current liabilities 569 1,352 1,921

Included in non-current liabilities 478 33 511

At 31 March 2013 1,047 1,385 2,432

Total provisions for liabilities and charges 2012

Included in current liabilities 1,429 923 2,352

Included in non-current liabilities 1,492 564 2,056

At 31 March 2012 2,921 1,487 4,408

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 three years.

The restructuring provision represents the future costs of the Group’s ongoing restructuring programme which are committed to at the balance sheet date. The amounts included within current liabilities above are expected to be utilised within the next 12 months.



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Overview


Governance

25 Deferred taxation assetsIntangible

Property, Other assets Retirementplant and timing arising on benefit

equipment differences acquisition obligation TotalConsolidated £’000 £’000 £’000 £’000 £’000

At 1 April 2011 29,788 3,840 (132) 1,801 35,297

(Charged)/credited to the income statement (note 10) (9,801) 420 56 (4,070) (13,395)

Credited directly to equity and other comprehensive income — 868 — 5,602 6,470

At 31 March 2012 19,987 5,128 (76) 3,333 28,372

(Charged)/credited to the income statement (note 10) (6,147) (3,542) 63 (109) (9,735)

(Charged) directly to equity and other comprehensive income — (1,129) (1) (979) (2,109)

At 31 March 2013 13,840 457 (14) 2,245 16,528

There are £Nil deferred tax assets in the Parent company (2012: £Nil).

The analysis of deferred tax assets is as follows:

2013 2012 £’000 £’000

Deferred tax assets to be recovered after more than 12 months 8,410 8,948

Deferred tax assets to be recovered within 12 months 8,118 19,424

16,528 28,372

The major components of the deferred taxation asset not recognised are as follows:Not recognised

2013 2012 £’000 £’000

Losses 1,295 1,356

Deferred tax assets relating to property, plant and equipment and short-term timing differences of £14.6 million (2012: £21.5 million) have been recognised in those subsidiary companies in which there is sufficient available evidence that suitable taxable profits will arise against which these assets are expected to reverse. There are additional deferred tax assets of £1.3 million (2012: £1.4 million) which have not been recognised, as there is insufficient evidence as to the generation of suitable profits against which these assets can be offset. The utilisation of these assets would reduce the Group’s tax charge in future periods. All deferred tax assets and liabilities are provided for at the future rate of corporation tax that is substantively enacted at the balance sheet date, being 23% (2012: 24%).

26 Called-up share capital2013 2012

£’000 £’000

Allotted, called-up and fully paid

516,603,910 (2012: 516,603,910) ordinary shares of 10 pence each 51,660 51,660

During the financial year, the Company did not purchase any of its own shares (2012: Nil), however the Company funds Employee Share Trusts to meet its obligations under the Company’s share schemes. During the year the Trusts purchased 15,130,000 (2012: 600,000) of the Company’s ordinary shares through purchases on the London Stock Exchange for a total cash consideration of £11,053,000 (2012: £426,000) in order to meet future obligations under the Company’s SIP, EIP and LTCIP schemes. The total amount paid to acquire the shares, net of expenses and cash received for the exercise of share options, of £10,872,000 (2012: £420,000) has been deducted from retained earnings.

As of 31 March 2013, the total number of ordinary shares held by the Trusts to meet obligations under the Company's share schemes was 9,524,000 (2012: 7,811,000).



84



27 Financial instruments and risk managementThe Group’s principal financial instruments during the year comprised bank loans, cash on short-term deposits, interest rate swaps and forward foreign exchange contracts. The main purpose of these financial instruments is to finance the Group’s operations, to manage the interest rate risk arising from its sources of finance and to minimise the impact of fluctuations in exchange rates on future cash flows. The Group has various other financial instruments such as short-term receivables and payables which arise directly from its operations.

The Group regularly reviews its exposure to interest, liquidity and foreign currency risk. Where appropriate the Group will take action, in accordance with a Board approved Treasury Policy, to minimise the impact on the business of movements in interest rates and currency rates.

The Group only enters into derivative instruments with members of the banking group to ensure appropriate counterparty credit quality.

Liquidity riskThe Group keeps its short, medium and long-term funding requirements under constant review. Its policy is to have sufficient committed funds available to meet medium-term requirements, with flexibility and headroom to make minor acquisitions for cash if the opportunity should arise.

The Group’s bank facilities comprise a multi-currency revolving credit facility of £200.0 million, provided by a group of six core relationship banks. The facility matures in July 2015. The Group considers that this facility will provide sufficient funding to meet the organic investment needs of the business. In addition, short-term flexibility of funding is available under the £10.0 million overdraft facility provided by the Group’s clearing bankers.

The net debt position of £75.3 million at the beginning of the financial year has increased during the year to net debt of £88.2 million. The Group generated positive cash flow after investing activities of £24.7 million for the year (2012: £34.8 million).

The below table analyses the Group’s financial liabilities which will be settled on a net basis into relevant maturity groupings based on the remaining period at the balance sheet date to the contractual maturity date. Notional interest is included for the period from the year end up to the contractual maturity date of the debt, calculated on the amount of debt drawn down at the year end.

Less than One to Overone year three years three years

£’000 £’000 £’000

At 31 March 2012

Borrowings 3,075 6,150 86,025

Finance leases 136 — —

Trade and other payables 138,371 388 —

Cash flow hedges 17 12 3,736

Total 141,599 6,550 89,761

At 31 March 2013

Borrowings 3,485 109,635 —

Trade and other payables 116,105 — —

Cash flow hedges — 3,235 —

Total 119,590 112,870 —

The below table sets out the year-end fair value of derivative financial instruments by category:2013 2012

Assets Liabilities Assets Liabilities £’000 £’000 £’000 £’000

Interest rate swaps – cash flow hedges — 3,235 — 3,736

Forward foreign exchange contracts – cash flow hedges 52 — — 29

Total 52 3,235 — 3,765

Less non-current portion:

Interest rate swaps – cash flow hedges — 3,235 — 3,719

Forward foreign exchange contracts – cash flow hedges — — — 29

— 3,235 — 3,748

Current portion 52 — — 17



85

Overview


Governance

27 Financial instruments and risk management continuedInterest rate risksSterling interest rate swaps were held during the year that fixed approximately 68% (2012: 80%) of the year-end net debt. The weighted average fixed interest rate payable (including margin) was 3.60% (2012: 4.90%). The weighted average rate of current interest rate swaps in place at the year end was 2.71% (excluding margin). Maturity dates of the current interest rate swaps are all July 2015 and reflect the forecast profile of net debt over the period. The weighted average period over which the interest rates are fixed is 2.3 years (2012: 3.3 years). Interest rate exposures will continue to be hedged in accordance with the Treasury Policy.

The impact of an increase in interest rates of 100 basis points is shown in the following table:2013 2012

£’000 £’000

Reduction in profit before tax (282) (154)

Increase in fair value of derivatives taken to equity — (2)

The sensitivity of profit before tax is calculated based on floating rate borrowings at the balance sheet date, after deducting floating rate financial assets and amounts hedged into fixed rates by interest rate swaps.

Foreign currency riskCash flow exposureThe Group’s only major foreign currency risk arises due to the purchase of equipment invoiced in US Dollars. Whenever possible the Group resells this equipment in US Dollars. The remaining exposure is managed principally through the use of forward foreign exchange contracts in order to minimise the impact of fluctuations in exchange rates on future cash flows and gross margin.

The Group has also some Euro cash flows but these are not material on a net basis and are not hedged.

Net asset exposureThe Dollar denominated trading described above results in a balance sheet exposure since debtor days are longer than creditor days. It is the Group’s policy not to hedge this exposure. If Sterling strengthened by 5% against both the US Dollar and the Euro this would reduce net assets at the balance sheet date by £69,808 (2012: £134,179).

Credit riskCredit risk arises from cash and cash equivalents and derivative financial instruments, as well as credit exposures to business and retail customers.

Credit ratings of institutions which hold the Group’s financial assets are regularly monitored to ensure they meet the minimum credit criteria set by the Board through the Group Treasury Policy. At the year end all the institutions holding the Group’s financial assets were rated A-/A- or higher by Standard and Poor’s.

The credit quality of customers is assessed by taking into account their financial position, past experience and other factors. Individual risk limits are set and the utilisation of credit limits monitored regularly.

Currency and interest rate risk profile of financial assets and financial liabilitiesFinancial assetsThe Group had financial assets of £15.7 million at the year end (2012: £8.3 million), comprising cash on overnight money market deposits and cash at bank. This attracts floating rates of interest.

The currency profile of the Group’s financial assets at 31 March 2013 and 31 March 2012 was:2013 2012

£’000 £’000

Currency

Sterling 13,616 6,706

US Dollar 1,871 1,357

Euro 232 270

Total 15,719 8,333

Foreign currency cash balances are held on a short-term basis to fund cash flow requirements in these currencies.

At the year end £1.3 million (2012: £1.3 million) of cash collateral was held by Barclays in respect of a bank guarantee given under OFCOM’s ‘Funds for Liabilities’ regulations.

Financial liabilitiesThe currency and interest rate risk profile of the Group’s financial borrowings at 31 March 2013 and 31 March 2012 was:

2013 2012

Floating Fixed Total Floating Fixed Total £’000 £’000 £’000 £’000 £’000 £’000

Sterling 43,937 60,000 103,937 23,464 60,136 83,600

Undrawn committed borrowing facilities at the year end were £95.0 million (2012: £115.0 million).

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



86



27 Financial instruments and risk management continuedFair values of financial assets and financial liabilitiesThe mark to market value of the interest rate swaps and forward contracts at 31 March 2013 was a liability of £3.2 million (2012: £3.8 million). Interest rate swaps are accounted for by adjusting the interest cost on the floating debt return. The fair value of financial assets and financial liabilities is obtained from third party sources. The movement in mark to market value is reflected in reserves and is shown below:

£’000

Hedging reserve

31 March 2012 (2,945)

Movement in the year 582

31 March 2013 (2,363)

The effectiveness of the interest rate swaps was tested quarterly throughout the period, and at the year end, and all are considered to be effective cash flow hedges. There are no other significant differences between the fair value of the Group’s financial assets and liabilities and their book value.

IFRS 7 requires disclosure of fair value measurements by level of the following fair value measurement hierarchy:

� quoted prices (unadjusted) in active markets for identical assets or liabilities (level 1);

� inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices) (level 2); and

� inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs) (level 3).

All of the Group’s financial instruments fall into hierarchy level 2.

Capital risk managementThe Group’s objectives when managing capital are to safeguard the Group’s ability to continue as a going concern, support the growth of the business and to maintain an optimal capital structure to reduce the cost of capital.

Consistent with others in the industry, the Group monitors capital on the basis of its gearing ratio. This ratio is calculated as net debt divided by total capital. Net debt is calculated as total borrowings (including ‘current and non-current borrowings’ as shown in the Consolidated balance sheet) less cash and cash equivalents.

Total capital is shown in the below table and is calculated as ‘equity’ as shown in the Consolidated balance sheet plus net debt. 2013 2012 £’000 £’000

Net debt 88,218 75,267

Total equity 82,642 73,457

Total capital 170,860 148,724

Under the Group’s £200 million revolving credit facility the Group is required to comply annually with certain financial and non-financial covenants. The Group is required to maintain a minimum interest cover ratio and a maximum net debt: EBITDA ratio. Both financial covenants were tested and complied with throughout the year and at the year end. The Board monitors both covenant compliance and net debt performance on a regular basis.

28 Financial commitmentsAuthorised future capital expenditure and financial investment amounted to:


2013 2012 2013 2012 £’000 £’000 £’000 £’000

Property, plant and equipment 1,146 1,481 — —

Intangible assets 270 349 — —

Total 1,416 1,830 — —



87

Overview


Governance

28 Financial commitments continuedThe Group as lesseeThe future aggregate minimum lease rental commitments under non-cancellable operating leases were as follows:


2013 2012 2013 2012 £’000 £’000 £’000 £’000

Leasehold buildings:

– within 12 months 3,730 4,682 — —

– in 1 to 5 years 8,405 11,029 — —

– after 5 years 6,363 7,657 — —

Total 18,498 23,368 — —

Plant and equipment:

– within 12 months 1,777 1,221 — —

– in 1 to 5 years 3,665 1,637 — —

Total 5,442 2,858 — —

None of the Group’s lease arrangements include any contingent rent payments and there are no renewal or purchase options or escalation clauses. There are also no restrictions imposed by the Group’s lease arrangements.

29 Retirement benefit obligation – consolidatedDefined contribution schemesThe Company operates defined contribution schemes, which are open to all eligible employees. Contributions charged to the income statement in respect of defined contribution schemes amounted to £3.7 million (2012: £3.5 million).

Defined benefit schemesThe principal defined benefit scheme at 31 March 2013 was the Kingston Communications Pension Scheme, which is a funded scheme and provides defined benefits based on final pensionable salary. The assets of the scheme are held separately from the assets of the Group in trustee administered funds. The Company operates also a second funded defined benefit scheme, the Kingston Communications (Data) Pension Scheme. Both schemes are closed to both new members and future accrual.

Parent companyKCH (Holdings) Limited, a wholly owned subsidiary of the Parent, is responsible for all obligations and liabilities of the schemes. An equivalent liability has been provided in the accounts of KCH (Holdings) Limited.

The Parent company provide a guarantee to both defined benefit schemes, whereby if KCH (Holdings) Limited is unable to meet its obligations to the schemes, such obligations would be met by the Parent company. No liability has been recognised in respect of the guarantee at 31 March 2013 (2012: £Nil).

Most recent valuationsThe most recent formal valuation for the Kingston Communications Pension Scheme was at 1 April 2010. The main long-term financial assumptions used in that valuation were:

Per annum %

Rate of return on scheme assets 5.50

Rate of future salary inflation 4.90

Rate of future pension increases¹ 3.90

1. On the excess over the guaranteed minimum pension.

The most recent formal valuation for the Kingston Communications (Data) Pension Scheme was at 1 April 2010. The main long-term financial assumptions used in that valuation were:

Per annum %

Rate of return on scheme assets 5.20

Rate of future salary inflation 4.90

Rate of future pension increases 3.90



88



29 Retirement benefit obligation – consolidated continuedFundingAsset backed partnershipOn 31 March 2013, the Group reached an agreement with the Trustees to provide the Group with an efficient mechanism of funding the schemes' current deficit position.

The Group has established a general partner, KCOM (General Partner) Limited, and a partnership, KCOM Central Asset Reserve Limited Partnership, which are both consolidated within these financial statements. The Group has taken advantage of the exemption conferred by regulation 7 of the Partnerships (Accounts) Regulations 2008 and has therefore not appended the accounts of the Partnership to these accounts. Separate accounts for the Partnership are not required to be filed at Companies House.

Together with another Group company, KCH (Holdings) Limited, KCOM (General Partner) Limited has provided sufficient capital to the Partnership to enable it to procure freehold property assets with a market value of £12.6 million owned by fellow Group subsidiaries, Kingston Communications Limited (KCL) and Affiniti Integrated Solutions Limited (AISL). These properties were immediately leased back to KCL and AISL and continue to be operated by those Group companies and not by the Partnership. The Group retains control over these properties including the flexibility to substitute the freehold property assets with other assets.

As partner in the Partnership, the pension schemes are entitled to an annual income distribution of £1.05 million, rising in line with the Consumer Price Index (CPI) over a potential period of 15 years. The total value of this income distribution to the Schemes is £10.0 million which provided an immediate improvement to the funding deficit. As part of the agreement with the Trustees, there is no requirement for the Group to pay any deficit payments in the year ended 31 March 2014.

Under IAS 19, the investment held by the pension schemes in the Partnership does not represent a plan asset for the purpose of the Group’s consolidated accounts. Accordingly, the pension deficit position presented in these financial statements does not reflect the £10.0 million investment in the Partnership held by the pension schemes. The distribution of the Partnership’s profits to the pension schemes will be reflected as pension contributions in these Group accounts on a cash basis.

Employer contributions for the year ended 31 March 2013The disclosures below are for the two schemes combined.

Contributions into the two defined benefit schemes during the year were as follows:2013 2012

£’000 £’000

Deficit payments 575 16,888

The £16.9 million paid during the year ended 31 March 2012 included £6.9 million advance payment of previously committed deficit contributions in respect of the financial year ended 31 March 2013 and an additional one-off contribution of £3.1 million. Existing committed deficit recovery payments due over the financial years ending 31 March 2015 and 31 March 2016 are £8.0 million per annum.

Main financial assumptions2013 2012

per annum per annum % %

RPI inflation 3.40 3.10

CPI inflation 2.40 2.40

Rate of increase to pensions in payment 2.40 2.30

Discount rate for scheme liabilities 4.60 4.70

Expected return on plan assets 5.56 6.10

Fair value of assetsValue at Value at

2013 2012 £’000 £’000

Equities 59,100 61,639

Hedge funds 27,458 16,700

Fixed interest gilts — 3,036

Index linked gilts 27,400 24,600

Corporate bonds 39,900 40,936

Other 39,684 38,580

Total fair value of assets 193,542 185,491



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29 Retirement benefit obligation – consolidated continuedFair value of assets continuedHistory of asset values, defined benefit obligation, deficit in scheme and experience gains and losses

2013 2012 2011 2010 2009 £’000 £’000 £’000 £’000 £’000

As at 31 March

Present value of defined benefit obligation (203,300) (199,377) (175,716) (207,241) (196,005)

Fair value of plan assets 193,542 185,491 168,789 156,868 135,012

Deficit (9,758) (13,886) (6,927) (50,373) (60,993)

Experience gains/(losses) on plan assets 5,048 (2,860) (507) (33,350) (41,497)

Experience (losses)/gains on plan liabilities (3,010) (22,606) 32,011 1,670 (1,653)

The Group employs a building block approach in determining the long-term rate of return on pension plan assets. Historical markets are studied and assets with higher volatility are assumed to generate higher returns consistent with widely accepted capital market principles. The overall expected rate of return on assets is derived by aggregating the expected return for each asset class over the actual asset allocation for the scheme as at 31 March 2013.

The mortality assumptions are based on standard mortality tables, which allow for future improvements in life expectancy. The effect of these tables are that:

� a future pensioner aged 65 at retirement will live on average to age 89.0 (2012: 88.9) if they are male and on average to age 90.9 (2012: 90.8) if they are female; and

� a current pensioner aged 65 will live on average to age 87.2 (2012: 87.1) if they are male and on average to age 89.1 (2012: 89.0) if they are female.

The defined benefit obligation reflects the assumption that 20% (2012: 20%) of deferred members will transfer out of the scheme over its life. Where such transfers take place, the value of such transfers are assumed to be 0% (2012: 0%) above the current IAS 19 value for individual members.

Reconciliation of funded status to balance sheet2013 2012

£’000 £’000

Fair value of assets 193,542 185,491

Present value of funded defined benefit obligations (203,300) (199,377)

Liability recognised on the balance sheet (9,758) (13,886)

Analysis of income and expenditure charge:

– interest cost 9,215 9,417

– expected return on assets (10,730) (11,036)

(Credit) recognised in income statement (1,515) (1,619)

2013 2012 £’000 £’000

Changes to the present value of the defined benefit obligation during the year

Opening defined benefit obligation 199,377 175,716

Interest cost 9,215 9,417

Actuarial losses on scheme liabilities 3,010 22,606

Net benefits paid out (8,302) (8,362)

Closing defined benefit obligation 203,300 199,377



90



29 Retirement benefit obligation – consolidated continuedFair value of assets continuedReconciliation of funded status to balance sheet continued

2013 2012 £’000 £’000

Changes to the fair value of scheme assets

Opening fair value of assets 185,491 168,789

Expected return on assets 10,730 11,036

Actuarial gains/(losses) 5,048 (2,860)

Contributions by the employer 575 16,888

Net benefits paid out (8,302) (8,362)

Closing fair value of assets 193,542 185,491

Actual return on plan assets

Expected return on assets 10,730 11,036

Actuarial gains/(losses) 5,048 (2,860)

Actual return on assets 15,778 8,176

Analysis of amounts recognised in Consolidated statement of comprehensive incomeValue at Value at

2013 2012 £’000 £’000

Total actuarial gains/(losses) in Consolidated statement of comprehensive income 2,038 (25,466)

Movement in related deferred tax asset 979 5,602

Total gains/(losses) in Consolidated statement of comprehensive income 3,017 (19,864)

Cumulative amount of losses recognised in Consolidated statement of comprehensive income gross (28,911) (31,928)

Deferred tax asset 2,245 3,333

Cumulative amount of losses recognised in Consolidated statement of comprehensive income (26,666) (28,595)

30 Other commitments and contingent liabilitiesContingent liabilities existed at 31 March 2013 and at 31 March 2012 in respect of guarantees given by the Parent company on behalf of subsidiary undertakings, together with contingencies arising in the normal course of the Group’s business in respect of overdraft facilities. None of these guarantees are considered material in the context of the net assets of the Group.

31 Related party transactionsRemuneration of key management personnelThe remuneration of the Directors who are the key management personnel of KCOM Group PLC is provided in the audited part of the Directors’ Remuneration report on pages 52 to 56 and form part of these financial statements.

Intra-Group transactionsAmounts payable by the Company to subsidiaries totalled £0.8 million (2012: £0.4 million) as at 31 March 2013.



91

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Governance

Five-year summary of consolidated figures

as at 31 March 2013

2013 2012 2011 2010 2009 £’000 £’000 £’000 £’000 £’000

Income statement (total operations)

Revenue 372,869 387,316 395,412 412,800 472,439

EBITDA before exceptional items 76,877 77,875 75,963 69,795 65,141

Group operating profit before exceptional items 57,265 57,770 48,631 36,755 30,021

Profit after taxation before exceptional items1 39,448 37,727 28,624 26,624 16,526

Profit/(loss) after taxation (reported) 37,898 37,727 22,621 17,693 (106,482)

Balance sheet

Non-current assets 235,446 239,639 242,272 277,045 298,394

Current assets (excluding cash) 72,510 75,530 72,943 80,535 90,586

Current liabilities (excluding finance leases) (123,592) (146,367) (151,154) (143,981) (136,378)

Net debt (including finance leases) (88,218) (75,267) (81,996) (116,796) (157,900)

Provisions and other non-current liabilities (excluding finance leases) (13,504) (20,078) (8,871) (61,046) (74,083)

Total equity 82,642 73,457 73,194 35,757 20,619

Movement in debt

Net cash flow from:

– operating activities 50,309 55,994 68,009 74,612 62,260

– capital expenditure (27,996) (22,148) (13,948) (17,595) (24,958)

– interest (4,006) (7,363) (8,574) (7,302) (13,474)

– equity dividends paid (21,387) (19,786) (12,140) (7,725) (12,295)

– other (9,871) 33 1,452 (886) (528)

(Increase)/reduction in net debt (12,951) 6,730 34,799 41,104 11,005

Ratios and other key information

Average number of employees 1,886 1,792 1,801 2,094 2,312

EBITDA before exceptional items to revenue (%) 20.6 20.1 19.2 16.9 13.8

Group operating profit before exceptional items to revenue (%) 15.3 14.9 12.3 8.9 6.4

Basic earnings/(loss) per share (pence) 7.49 7.41 4.44 3.47 (20.70)

Dividend per share relating to the financial year (pence) 4.44 4.00 3.60 1.75 1.50

1. Including the tax impact of exceptional items.



92

Shareholder information

Analysis of ordinary shareholders(at 31 March 2013 by category)

Number of Number of % of holders shares held total shares

Private shareholders 55,682 53,855,048 10.42

Insurance companies 2 89,344 0.02

Investment trusts 6 108,901 0.02

Nominee companies 968 390,760,300 75.64

Limited companies 67 1,382,413 0.27

Bank and bank nominees 18 69,561,931 13.47

Other institutions 12 845,973 0.16

Total 56,755 516,603,910 100.0

Financial calendar

Annual General Meeting 26 July 2013

Interim results 2013 announcement (provisional) 26 November 2013

Final results announcement (provisional) 6 June 2014

Information relating to beneficial owners of shares with ‘information rights’Please note that beneficial owners of shares who have been nominated by the registered holder of those shares to receive information rights under Section 146 of the Companies Act 2006 are required to direct all communications to the registered holder of their shares rather than to the Group’s registrar, Capita Registrars, or to KCOM Group PLC directly.

Company informationRegistered officeKCOM Group PLC37 Carr Lane Hull HU1 3RE

Registered in England and Wales

Company number2150618

Investor relationsKCOM Group PLC37 Carr Lane Hull HU1 3RE

Email: [email protected] Tel: 01482 602711 Website: www.kcomplc.com

Corporate responsibilityKCOM Group PLC37 Carr Lane Hull HU1 3RE

AdvisorsIndependent auditorsPricewaterhouseCoopers LLPChartered Accountants and Statutory Auditors Benson House 33 Wellington Street Leeds LS1 4JP

RegistrarCapita RegistrarsThe Registry 34 Beckenham Road Beckenham Kent BR3 4TU

Email: [email protected] Tel: 0871 664 0300 (calls cost 10 pence per minute plus network extras; lines are open 9.00am – 5.30pm Monday – Friday) Website: www.capitaregistrars.com

Financial advisorsBarclays1 Churchill Place Canary Wharf London E14 5HP

Espirito Santo10 Paternoster Square London EC4M 7AL


For more information please visit

www.kcomplc.com

This document is completely CarbonNeutral®.

The unavoidable CO2e generated by this document has been reduced to net zero through verified carbon offset projects.

The papers used in this report are Claro Silk and Edixion Offset. All pulps used are Elemental Chlorine Free (ECF). The printer and the manufacturing mills are accredited with the ISO 14001 standard for environmental management and both are FSC certified. KCO

M G

roup PLC Annual report and accounts 2012/13


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