THE PHONE CO-OP LIMITED ANNUAL REPORT … Balance Sheet 28 ... services to the former SAGA customers who moved to us in ... Personnel costs declined by £50k to £1.41 million or

THE PHONE CO-OP LIMITEDANNUAL REPORTAND FINANCIAL STATEMENTS 2011-12

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Contents

Society Information 3

Directors’ Report 5

Remuneration Report 18

Six Year Comparison 21

Report of the Auditors 25

Consolidated Revenue Account 26

Consolidated Balance Sheet 27

Society Balance Sheet 28

Consolidated Cash Flow Statement 29

Consolidated Statement of Total Recognised Gains and Losses 30

Notes to the Financial Statements 31

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Society Informationas at 31 August 2012

Directors Linda Ward (Chairperson)Justin Andersen (Vice-Chairperson)Matthew ArrowsmithRichard CoxKate O’DonoghueMick TaylorShelagh Young

Chief Executive Vivian Woodell

Secretary, Membership andCo-operative Affairs Manager Amanda Beard

Management Team:

Chief Financial Officer Lisa Logan

Product and Services Manager Fiona Ravenscroft

Corporate Sales Manager Guy Ohlenschlager

Customer Services Manager Marianne O’Brien

Marketing and Partnerships Manager Matthew Lane

Registered office 5 MillhouseElmsfield Business CentreWorcester RoadChipping NortonOxfordshireOX7 5XL

Registered number 28965R

Auditors Shaw Gibbs LLPChartered Certified AccountantsRegistered Auditors264 Banbury RoadOxfordOX2 7DY

Incorporated under the Industrial and Provident Societies Acts.

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This has been arecord year... both sales andprofitabilityreached new highs.

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Overview

2012 is the United Nations International Year of Co-operatives.It is perhaps no coincidence that this has been a record yearfor The Phone Co-op. Both sales and profitability reached newhighs, as we built on the work done over the previous year toimprove our sales, purchasing terms and business processes.The year saw us undertake extensive preparatory work, priorto launching under The Co-operative brand, an important newstep, which we believe will bring benefits in the long term. Inaddition, we were able to reflect our values as a business bymaking a significant investment in renewable energy generation.

Sales grew partly as a result of the take-up of additionalservices to the former SAGA customers who moved to us inthe previous financial year, and we continued to invest intraining and roll out a programme of multi-skilling in ourCustomer Services department. The benefits of theinvestment made in the previous year in our new billing andcustomer management system began to flow through as well.

Trading Performance

Sales rose by £386k (4.6%) overall, taking turnover to £10.66million, a new record, and a considerable achievement againstthe background of falling telecoms expenditure in the UK,particularly in the fixed-line products which make up the bulkof our turnover. In January we acquired thetelecommunications business of Your Connection Limited, asmall Kent-based reseller. Greater operating efficienciestogether with improved buying margins meant that we wereable to improve our trading performance markedly. Weachieved an operating profit of £276k, also a record, after a

small loss last year. Within both the business and theresidential customer bases, the number of customers showeda small decline. In terms of sales, however, the picture wasmore mixed, with residential sales rising by 4% and businesssales falling by 3.3%. The average revenue per user (ARPU)for residential customers rose significantly but fell marginally for business customers. Overall sales werelifted by £185k as a result of the one-off procurement ofrenewable energy plant for Co-operative Renewables Limited,a co-operative of which we were founder-members during theyear. Other income, about which additional details areprovided below, totalled £185k, an increase of £174k.

An analysis of the sales by product shows a continuation ofrecent trends, in line with the rest of the industry. Sales ofswitched minutes fell by £290k (9.2%) to £2.85 million, whileline rental sales increased by 5.3% to £3.44 million, and salesof internet services increased by 6.9% to £1.80 million. Salesof systems and maintenance fell by 31.5% to £100k, and webelieve this was partly the result of many of our voluntarysector customers cutting back on investment due to fallingincomes from the public sector. By contrast, our Mobile VirtualNetwork Operator (MVNO) agreement contributed to a sharprise in sales of mobile services, which were up by 62.8% at£291k, making it once again the star performer.

During the year, we also made a significant investment inrenewable energy generation, with the installation of solarpanels at five sites. Three of these were the result of aground-breaking partnership between four co-operatives,under which Co-operative Renewables Limited installed solarpanels on the roofs of Anglia Regional Co-operative Societyfood stores. The panels remain the property of The Phone

Sales of mobileservices were upby 62.8%.

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3.00%

2.50%

2.00%

1.50%

1.00%

0.50%

0.00%

2001

BAD DEBT CHARGE AS A PERCENTAGE OF SALES1

0.33%

2002

2.80%

2003

0.50%

2004

1.10%

2005

1.54%

2006

1.45%

2007

0.44%

2008

1.40%

2009

1.83%

2010

0.38%

2011

0.56%

2012

0.85%

Co-op and the Feed-in-Tariff income is received via Co-operative Energy, part of the Midcounties Co-operative.The income from all of our installations during the year was£51k, ahead of our expectations, and is also included in sales.We also made charges to Co-operative Renewables forproviding accounting services and for work in connection withprojects. In February 2012, following the announcement ofsubstantial postage price increases, we implemented someprice changes which included the introduction of a charge forsending bills to residential customers by post. This step wastaken with some reluctance but we held out as long as wepossibly could in not charging for this service, and only tookthe step at a point where no significant competitors wereoffering to send postal bills free of charge. This has led to asignificant increase in the number of customers receiving theirbills by email, reducing our costs, and it has also providedsome income to cover the cost of mailing bills to thosecustomers who prefer to receive them that way. These factorscontributed to a rise in other income from £11k to £185k inthe year under review.

Margin improved during the year, due to a combination offactors. Improved buying rates for calls and broadband,(where, as with calls, a continuing shift to LLU services alsohelped bring costs down) combined with the increasingimportance of residential sales in the mix to push grossmargin up from 27.6% last year to 29.7% in the year underreview. Margin on fixed line rental (our most significantproduct in terms of sales) fell slightly but this was more thanoffset by increases in margin on fixed line and mobile calls,and on internet services, where we have focused onimproving the way we buy our services. The overall level ofmargin was also lifted by the sales related to energygeneration, the charges for sending paper bills, and incomefrom the supply of services to Co-operative Renewables Ltd.

Direct expenses increased by £25k (12.8%) to £221k, drivenby a 57% increase in router amortisation costs. At £89k, thisexpense (which represents the charge during the year relatingto the provision of broadband routers to customers) is now asignificant item of expenditure. Greater operational efficiencyenabled us to manage with fewer employees than in theprevious year, despite bringing some previously outsourcedactivities in-house, a £38k increase in staff profit-share (dueto the better results) and a significant increase in trainingcosts. Personnel costs declined by £50k to £1.41 million or15.9% of sales, a reduction from 17.3% of sales in theprevious year. Indirect costs increased by 1.6% to £699k, withthe biggest factor being an increase in the bad debt charge,from 0.56% of sales to 0.85% of sales. This is still low by thestandards of our industry, but management neverthelessintends to give this area increased focus to ensure that thesecosts do not continue to rise. See graph 1

There were also increases in software maintenance costs andOfcom subscription charges, and we had some additionalmaintenance and insurance costs associated with the solarpower generation plant we now own, but these were partlyoffset by declining costs in other areas. The significantinvestment in renewables generating plant and the acquisitionof the business of Your Connection Limited, together with thefull-year impact of the SAGA acquisition which took placeearly in the previous year contributed to a £15k rise indepreciation and amortisation costs. Overall, indirect costs fellas a percentage of sales, from 8.1% in the previous year to7.9% in the year under review.

In total, costs fell by £14k to £2.34 million, or 26.3% of sales,down appreciably from 27.8% of sales last year.

Interest receivable and similar income was boosted by adividend of £20k received from Co-operative Renewables

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Limited, taking the profit before distributions to a new recordlevel of £424k, up £313k (283%) on last year. Based on theseimproved results, the Directors are pleased to recommend thepayment of a dividend of £66,641, representing 2% of eligiblesales (up from 1% last year). The board is also pleased torecommend the allocation of the same amount (£66,641) tothe Co-operative and Social Economy Development Fund. Forthe last three years, no allocations have been made to theFund, which provides financial support to new and expandingco-operatives, in order to ensure we could maintain ameaningful level of dividend, and the board is pleased that theproposed allocation this year restores the previous positionwhere the same amount was allocated to the Fund as waspaid in dividend to members.

Taxation

We believe that businesses should bear their share of thecosts of government, and unlike some in our industry, webelieve we should pay our fair share of taxation. Our improvedfinancial performance means that corporation tax charge inthe year under review increased by 344%, from £16k to £55k.

Capital investment

Once again, we have set a record for the level of capitalinvestment, with over £0.5 million being committed during theyear mainly due to the decision to make a substantialinvestment in renewable electricity generation. A total of£565k was invested, of which £440k was in solarphotovoltaic installations. The directors still have a long-termambition to acquire our own offices but conditions remaindifficult and we have not been able to identify a suitableproject, so the board approved a proposal to expand ourcurrent office in Chipping Norton where we had theopportunity to take on space adjacent to our own on the upperfloor, giving us control of the whole of the Millhouse building.The works associated with this necessitated some investmentand we also replaced our telephone system with a state-of-the-art one with improved functionality better suited to thecurrent size of our operation. Taken together, we invested£41k in IT equipment, and other fixtures and fittings.Investment in intangible assets was more modest this year at£29k, which relates to the acquisition of the business assetsof Your Connection Ltd. Accounting rules governing thepayment of revenue share as part of the consideration for abusiness also triggered a £17k revaluation of the assetsassociated with the SAGA acquisition. As mentioned above,The Phone Co-op was a joint founder during the year of a newco-operative, Co-operative Renewables Limited, and weinvested £5k in the share capital of this new venture. Inaddition we made a further £50k of investments in other co-operatives and social enterprises, mainly drawn from ourCo-operative and Social Economy Development Fund. These

included £20k in Westmill Solar Co-operative and £20k in theEnergy Saving Co-operative, £5k in FC United of Manchester,£2,500 in Cybermoor Networks Limited and £2,250 inRevolver World Co-operative. Despite depreciation andamortisation charges which also reached a record level of£213k, the net book value of fixed assets rose by £370k,exceeding £1 million for the first time.

Following the positive outcome of our consultation withmembers regarding the possibility of expanding our activitiesin other European countries, we continued to explore theopportunity for a number of months. However, we eventuallyconcluded that the obstacles to concluding a successful dealwere too great, and decided to focus our energies on othergrowth areas.

Balance sheet

It is evidence of the strongly cash-positive nature of ourbusiness and the commitment of members, who continue toinvest in share capital of The Phone Co-op, that, despite thesubstantial amount of fixed asset investment during the year,our net current assets ended the year £254k higher at £3.49million, putting us in a strong position to develop the businessfurther. Net assets rose even more, by £624k (16.2%) to£4.54 million. Share capital increased by 11.6% (£374k, oursecond-highest ever net inflow) to £3.60 million, (helped by astrong inflow of new members), with the average share capitalholding per member rising by 1.9% to £380. Pleasingly, wesaw also the biggest ever increase in reserves, which rose by£260k to £764k, providing additional protection for ourmembers. See graph 2

Management team

There was only one change in the make-up of theManagement Team during the year, which was the departureof our Chief Operating Officer, Chris Herbert, who left at theend of April. The board would like to place on record itsappreciation for his contribution to the Society since hisappointment to the Management Team in 2009. It was

In total, costs fellto 26.3% of sales,down from 27.8%last year.

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decided to take time to evaluate the best future structure forthe management team in the medium and longer term, andtherefore a direct replacement has not been sought, soreporting lines have been directly to the Chief Executive sinceChris Herbert’s departure.

Employees

We employed slightly fewer people during the year, with theaverage monthly number of people employed falling from 68to 62. The main decrease was in the area of customerservices, where efficiencies have enabled us to handle thework load with fewer employees, meaning that people whohave left have not all been replaced. The board would like topay tribute to the hard work and dedication of all ouremployees, as without this, The Phone Co-op could not haveachieved the success it has. See graph 3

Employee engagement and stakeholding

The Phone Co-op operates a profit-sharing scheme and asales-related bonus scheme which are available to allpermanent employees after six months’ service. The PhoneCo-op also has an elected Employee Council, which holdsperiodic meetings and is encouraged to feed its ideas intostrategy. Membership of a trade union is encouraged, and wehave a partnership agreement with The National Associationof Co-operative Officials (NACO) which all employees areeligible to join.

Membership

The board has a long-term aim that 50% of our trade shouldbe with members, and during the year we undertook anumber of campaigns to recruit non-member customers into

£400

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2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

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AVERAGE NUMBER OF EMPLOYEES3

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Part time

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membership, including a renewed focus on former SAGAcustomers and also on business customers, as well as aredesign of our recruitment communications, and training ofour customer services team to equip them to recruit memberswhen the opportunity arises during conversations withcustomers. Pleasingly, these efforts bore fruit and we saw ahigher rate of increase in the number of members for thethird year running, and the rate of net member recruitmentreached double the level achieved from 2007 to 2010. 934members joined and 114 accounts were closed, giving a netincrease of 820, taking the number of members at the year-end to 9445. We are also pleased to report that trade withmembers rose from 36% to 37.6% of sales, after a fall lastyear following the SAGA acquisition. With the introduction ofThe Co-operative brand, we recognise that there will need tobe additional focus on communicating our identity as anindependent co-operative, and on member recruitment andengagement. In the year ahead, we plan to make it possiblefor members to join online, and we believe this will remove afurther barrier to increasing the number of members. We arealso working on increasing the engagement of our membersin their co-operative.

During the year, legal changes meant it became possible forpeople of any age to become members of The Phone Co-op(previously the minimum age was 16). We welcome thischange and look forward to an increasing number of youngermembers joining. See graph 4

Outlook

The services we offer are increasingly commoditised, butcustomers are also keen to buy from businesses whosevalues reflect their own and which offer good service. Webelieve that, with the adoption, shortly after the year-end, ofThe Co-operative brand, we are in a good position to

communicate our co-operative difference to potentialcustomers even better than in the past. We plan to work inpartnership with established co-operative societies to reachnew people and grow our customer base. Since the end of theyear, we have also agreed terms to move our Manchesteroffice premises to Holyoake House, the home of Co-operativesUK,which will put us at the heart of the Co-operative Movement,facilitating both business sales to other co-operatives, andpartnerships that will help us reach residential customers.

The difficult economic climate will undoubtedly continue tochallenge us, since it results in many problems for ourcustomers. However we believe that the economic crisis iscreating a vital opportunity for the Co-operative Movement,including The Phone Co-op, to get its message across, aspeople are increasingly looking for models which do not havethe flaws people see in large shareholder-driven corporatebusinesses. Co-operatives are growing faster than theeconomy as a whole, and we plan to reflect that trend.

At the close of the year we were exploring a number ofpotential acquisitions and partnerships with the potential toadd significantly to The Phone Co-op’s business, and we are

1200

1400

1000

800

600

400

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0

1998

RATE OF MEMBERSHIP GROWTH4

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Our move toHolyoake House inManchester willput us at the heartof the Co-operativeMovement.

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very hopeful that some of these will come to fruition duringthe year ahead. Our strong cash position means we do nothave to arrange financing for acquisitions, and makes us anattractive potential buyer.

Our projections (which do not include potential acquisitions, or further investments in renewables generation) for the yearahead assume that price pressures will continue to affect ourindustry, but that we will maintain our level of margin as weexpect wholesale prices to fall as well. We are also predictinga rise in costs, and therefore a modest fall in profitability.Over the longer-term, we expect that our investment inrenewable power generation will provide a growing incomestream, as the income rises in line with inflation. This providesa long-term predictable income which we see as beneficialgiven the fast-changing nature of our maintelecommunications business.

Influencing our industry

We operate in a regulated industry which means we need tobe vigilant to try to ensure that regulation does not placeunfair obstacles in our way. As a customer-owned telecomsprovider we are unique in having the perspective that comeswith being an industry player and a consumer-basedorganisation. We seek, both directly and through our tradeassociation, the Federation of Communications Services, toinfluence our industry for the better. We have continued tocampaign for changes to the regulation of the mobile market,which in our view remains skewed in favour of large networkoperators rather than independent suppliers, and to underlinethe importance of smaller, innovative service providers, both infixed line and mobile, such as ourselves, in creating diversity,choice and innovation, all of which benefit consumers.

Wider recognition

Once again we received recognition from our industry thisyear, following a number of awards in recent years. For thefourth year running, we won the Green Award, at the AGM ofthe Federation of Communications Services.

We also regard our agreement with Co-operative BrandsLimited under which we will be adopting The Co-operativebrand, as a form of recognition in itself, since the guardians of the Movement’s brand only permit it to be used by co-operatives that offer high standards of service.

We feel honoured to receive this continued recognition for ourservice, innovation, and ethical approach, and recognise thatthis has only been possible to achieve through the efforts ofour staff as well as the loyalty and support of our membersand customers, which we greatly appreciate.

Board of Directors

Two directors, Pete Turnbull and Paul Hopewell, reached theend of their terms of office at the AGM, and there was also acasual vacancy caused by the decision of Jamie Hartzell tostand down in May 2011. Peter Turnbull, who has served onthe board almost since it was founded, decided not to offerhimself for re-election, and the board would like to express itsthanks to him for his contribution over this time. Eightnominations were received: Shelagh Young and Richard Coxwere elected to serve for three years, while Matt Arrowsmithwas elected to serve for two years. Paul Hopewell was notsuccessful in being re-elected on this occasion, and the boardwould also like to thank him for his work and commitmentduring his term of office.

Non-financial measures

Key Social and Co-operative Performance Indicators

Our Ethical Policy sets out our values and intentions whenconducting business. We have developed a set of indicatorsbased on Co-operativesUK’s Key Social & Co-operativePerformance Indicators, which will allow members to monitorour performance.

Co-operativesUK’s indicators are:

Indicator 1: Member economic involvement

Indicator 2: Member democratic participation

Indicator 3: Participation of employees and members intraining and education

Indicator 4: Staff injury and absentee rates

Indicator 5: Staff profile – gender and ethnicity

Indicator 6: Customer satisfaction

Indicator 7: Consideration of ethical issues inprocurement and investment

Indicator 8: Investment in community and co-operativeinitiatives

Indicator 9: Net carbon dioxide emissions arising fromoperations

Indicator 10: Proportion of waste recycled/reused.

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The Phone Co-op’s indicators, measures and performance were:

Indicator The Phone Co-op Measure 2012 2011 2010

Our Values

Membership Number of members at the end of the year 9,445 8,625 7,961

Growth in membership (%) 9.5 8.3 5.6

Member economic Trade with members as % of sales 37.6 36.04 (a) 39.15involvement (1)

Member democratic Number of candidates for Board 8 (3) 7 (3) 7 (2)participation (2) (number of vacancies in brackets)

Voting turnout (%) 23 23.3 22.5

Our Employees

Employee Council Number of grants made to employees 3 8 14for non-vocational training

Participation of employees Number of training days per full time 5.4 17.6 2.8in training and education employee per year (b)schemes (3)

Staff injury and Average number of days leave recorded due to 4.9 5.6 3.05absentee rates (4) injury, illness etc per full time employee per year (b)

Diversity

Staff profile – ethnicity (5) Non-white as % of all staff 3 7 11

Staff profile – gender (5) Women as % of all management and 60 48 57supervisory staff

Women as % of all staff 56 56 47

Director profile – ethnicity Non-white as % of all directors 0 0 0

Director profile – gender Women as % of all directors 43 22 14

Customer Service

Customer satisfaction (6) % rating average, very good and excellent 0 (c) 0 0

% rating very good and excellent 0 0 0

Social responsibility

Consideration of ethical issues Purchases with other Co-operatives as 42.9 11.3 9.9in procurement and % of costs (non-personnel overhead)investment decisions (7)

Sales to other Co-operatives as % of total 12.7 12.2 13.3

Investment in community and Co-operative and Social Economy 0 0 0co-operative initiatives (8) Development Fund (£ in year)

Co-operative and Social Economy 167,504 167,504 167,504Development Fund value to date (£)

Share capital investments in community 195,221 141,960 142,460and co-operative initiatives (long term, excluding ICOF Community Capital/CCF) (£)

Other investments in co-operatives 3,037,815 2,764,908 2,751,510(short term, including fixed-term loans) (£)

continued

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The Phone Co-op’s indicators, measures and performance continued

Indicator The Phone Co-op Measure 2012 2011 2010

Revenue paid to Affinity Partners £ revenue share in year 75,480 53,067 58,518

Other charitable donations £ total in year 0 35 1,272

Environment

Business journeys by rail, bus, % of journeys 70 68 66bicycle or foot

% of miles travelled 87 86 84

Proportion of waste % of paper waste recycled/reused 100 100 100recycled/reused (10)

Electricity use kWh per m2 of treated floor area 100 110 (d) 100 (e)(total of all offices)

KgCO2 per m2 of treated floor area (e) 0 0 0

Gas use (LPG) kWh per m2 of treated floor area 84.6 78 73

Kg CO2 per m2 of treated floor area (e) 18 16.9 15.6

Net carbon dioxide emissions Kg CO2(e) 7,940 7,441 6,119arising from electricity and gas use (9)

Voluntary carbon offset levy Tonnes CO2 equivalent arising from 308.87 319.14 293.78operations (including suppliers)

Notes:1. Co-operatives UK Social & Co-operative performance indicators are noted in brackets

(a) The reduction in 2010-11 reflects the impact of the SAGA acquisition (b) Average monthly number of employees was 62 (43 full time).(c) No large-scale customer survey was undertaken in these years(d) The Withers Building was used as fulltime office space from March 2010 to August 2011 (e) All electricity is purchased from renewable energy suppliers. Electricity based on landfill gas, hydro and wind is considered to have zero net

carbon dioxide emissions. LPG is 0.21 kgCO2 per kWh. Source http://www.defra.gov.uk/

For the fourth yearrunning, we wonthe Federation ofCommunicationsServices GreenAward.

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Environmental and other ethical measures

In addition, for the past seven years we have been reportingon specific environmental policies, and on other non-financialmeasures, and we are pleased to do so again this year.

Environmental issues

This year we have invested heavily in solar PV renewableelectricity generating plant, installing nearly 200 kWp(kilowatts at peak output) of solar photovoltaic capacity. Thisinvestment cost £441k, and was the most significant of anyinvestment of any kind we have made to date. We calculatethat these installations will result in a reduction of CO2emissions of 91 tonnes per year (2,275 tonnes over thelifetime of the schemes). We continue to look for newopportunities to invest in such schemes.

Together with others, we also established a new co-operative, Co-operative Renewables Limited, whichspecialises in solar PV installations. In addition toconstructing four of the five schemes we invested in thisyear, Co-operative Renewables built a number of otherschemes involving retail co-operative premises.

We have made a number of investments in renewableenergy co-operatives, including Westmill Wind Farm Co-operative, Torrs Hydro, Westmill Solar Co-op (a newinvestment of £20k this year), and the Energy ProspectsCo-op. In addition, we invested £20k this year in the Energy Saving Co-operative, which installs energy-savingmeasures in domestic properties, working with localauthorities and community-based groups.

It is our policy to encourage the use, where practical, ofpublic transport for business journeys, rather than cars.During the year under review, 70% of journeys were madeby less environmentally damaging transport modes (rail,bus, cycling or walking). If the analysis is done by distancetravelled, 87% of business miles travelled were by lessenvironmentally damaging transport modes, compared with86% last year. We are pleased that this is the second year

running in which we are able to report an improvement.Overall, travel was reduced and we were therefore able toreport a significant drop in the absolute volume of moreenvironmentally damaging travel.

In support both of our aim of promoting the use of publictransport, and of the introduction of co-operative ownershipmodels, we have invested £20.5k in the GoCo (formerlyknown as The Go Co-operative), a new venture which aimsto start rail and bus services run along consumer co-operative lines. In addition, the board agreed to use theFund to support the GoCo by joining with others to providea guarantee to enable them to enter into a track accessagreement with Network Rail. The Phone Co-op’s agreedshare of this guarantee will be £10,000.

We provide bicycles free of charge for the use of ouremployees for commuting and for business journeys. We also offer a mileage payment for cycling and walking on business journeys.

In 2007 we launched a new initiative, our SustainabilityFund. The aim of this is to create a ring-fenced fund whichenables us to finance initiatives to improve ourenvironmental performance which would not otherwisehave been financially viable. In relation to capitalexpenditure this will mean the Fund will finance thedifference between an investment which would have beenjustified by the financial return the investment will produce,and the actual cost of the investment. The SustainabilityFund received support in various ways:

Members waived their dividend and share interest infavour of the FundMembers and customers contributed directly to the Fund

By the end of August 2012 over £44k had been raised, up from £30k a year earlier. These funds are held on ourbalance sheet. We would like to thank our members andcustomers for the strong support they have shown for this initiative.

The Phone Co-op pays a voluntary levy to offset all thecarbon dioxide emissions resulting directly from its

This year we haveinvested heavily in solar PVrenewableelectricitygenerating plant.

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activities, as well as from the activities of the upstreamtelecoms providers whose networks we utilise in theprovision of our telephony service. The levy is being paid toPURE, a charity which uses the funds to purchase andcancel carbon credits from emissions reduction projectsworldwide, which are audited and verified by the UnitedNations Clean Development Mechanism.

We purchase almost all of our paper and envelopes fromPaperback Ltd., a worker co-operative which specialises inrecycled paper products.

We recycle our own paper office waste, and other wastewhere possible.

We aim to use our influence to promote co-operation in theeconomy generally.

Means of Recorded Percentage of Miles % of total transport journeys total journeys travelled miles

2011-12 2010-11 2011-12 2010-11 2011-12 2010-11 2011-12 2010-11

Rail (including underground 714 765 40.9% 49.7% 59,971 72,147 84.7% 83.6%and tram)

Bus/Ferry/Riverbus 206 230 14.6% 14.9% 1,740 2,151 2.5% 2.5%

Cycle and walking 60 57 4.3% 3.7% 63 73 0.1% 0.1%

Sub-total – less environmentally 980 1052 69.6% 68.4% 61,774 74,370 87.3% 86.1%damaging transport modes:

Personal car or motorbike 253 234 18.0% 15.2% 5,738 6,814 8.1% 7.9%

Taxi 176 249 12.5% 16.2% 3,328 1,288 4.7% 1.5%

Air 0 4 0% 0.3% 0 3,870 0% 4.5%

Sub-total – more environmentally 429 487 30.4% 31.6% 9,066 11,972 12.7% 13.9%damaging transport modes:

Total (all recorded journeys) 1,409 1,539 100.0% 100.0% 70,840 86,342 100% 100.0%

Figures taken from expense claims submitted to The Phone Co-op

JOURNEYS BY PUBLIC TRANSPORT AS A PROPORTION OF TOTAL RECORDED BUSINESS JOURNEYS

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Promoting a co-operative economy

We aim to use our influence to promote co-operation in theeconomy generally. 2012 was the United Nations InternationalYear of Co-operatives, which has provided us with anopportunity to highlight the benefits of the co-operativebusiness model. One of the most important ways in which we can do this is by using our purchasing power to procuregoods and services from other co-operatives, an approachwhich is recognised in the 6th principle of co-operationapproved by the International Co-operative Alliance. We arepleased to be able to report that purchases from other co-operatives as a percentage of non-personnel overheadsincreased from 11% last year to 43% this year. This increasedsignificantly because of the purchases during the year of solarphotovoltaic equipment from Co-operative RenewablesLimited: without this the figure would have been 9%. Sales to other co-operatives and co-op movement organisationstotalled 13% of total sales (2010: 12%). Again, this figure was boosted by a one-off purchase of solar panels for Co-operative Renewables. Without the impact of this, thefigure would have been 11%.

We have also sought to promote co-operation by using ourCo-operative and Social Economy Development Fund, whichhas been voted by members over the years, to invest in newand developing co-operatives. During 2011-12 we madesignificant new investments from the Fund.

Other Ethical Issues

In addition to trading with co-operatives, we aim to workwith other organisations with similar and compatible values.Examples include our partnership with the Ethical PropertyCompany, (EPC), which provides affordable office space forvoluntary and campaigning groups. We have worked withthem to provide a low-cost telecommunications service fortheir tenants, as well as generating revenue for EPC tocover overheads. We supply as host of charitable and otherThird Sector organisations. We have invested £50,000 intheir share capital.

We aim to act fairly in our dealings with others. For example,unlike many telecoms providers, we do not impose salestargets on our agents or affinity partners as a condition oftheir continuing to receive revenue.

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This report is prepared in accordance with the Code of BestPractice adopted by Co-operativesUK in 2005. The Code setsout the recommended best practice on issues of governancefor organisations in the co-operative sector and performanceis assessed every year.

Board Composition

The Society’s Rules provide for seven directors, including theChairperson and Vice-Chairperson, and the term of office isthree years with annual elections held by postal ballotpreceding the Annual General Meeting.

Role and Responsibilities of the Board

The Board directs the affairs of the Society and works with theChief Executive and management team to define the Society’sobjectives within the framework of the Society’s Rules,developing policies and strategies to achieve those objectives.The directors are responsible for devising and maintaining aneffective system of internal control and for the preparation offinancial statements each year.

The Board ensures compliance with the provisions of theIndustrial and Provident Societies Acts and other relevantlegislation and encourages the growth of membership andmember involvement in the affairs of the society, and isresponsible for the Society’s rules and all aspects ofmembership policy as well as identifying and managing risk.

The Board approves all business and property acquisitions as well as the appointment of the Chief Executive and theSociety Secretary, and, in conjunction with the ChiefExecutive, appoints other senior managers reporting to theChief Executive.

Board Procedures

The Board holds a minimum of ten meetings each year with four conducted face-to-face and others by telephoneconference. The directors also meet in private session as necessary.

The Board receives reports from the management team andreviews financial performance regularly as well as consideringstrategy, annual budgets and forecasting at relevant times ofthe year. Papers are circulated to directors in advance of eachmeeting and minutes are circulated afterwards. Decisionsmade are actioned by management as appropriate.

The Society’s Rules provide that the Board of Directors shallhave and keep under review a code of conduct for Boardmembers. All Directors, on election, are required to sign adocument agreeing to abide by this code.

Board Training and Development

A skills audit is conducted on a regular basis and a trainingplan has been implemented that looked at the organisation as a whole with particular emphasis placed on the Board andits relationship with the management team. As part of thisprocess, the board took part in a number of training anddevelopment sessions during the year.

Independence

The Society’s Rules state that a director, or his or her partneror family member, cannot be engaged in a senior managerialcapacity for any business that competes in a material waywith any business trade or undertaking carried on by ThePhone Co-op or has business interests or undertakesactivities which, in the opinion of the Board, would render that person's service on the Board prejudicial to the interestsof the Society. The Rules provide that a maximum of twomembers who are employees or who are considered to bematerially dependent on the Society can serve as directors at any time. Directors are asked to register any conflicts ofinterest on an annual basis, and are required to declarespecific conflicts as and when they arise.

Amanda BeardSecretary6 December 2012

Governance Report

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Industrial and Provident Society law requires the directors toprepare financial statements for each financial year whichgive a true and fair view of the state of affairs of the Societyand of the profit or loss of the Society for that period. Inpreparing those financial statements, the directors arerequired to:

select suitable accounting policies and then apply themconsistently;

make judgements and estimates that are reasonable and prudent;

state whether applicable accounting standards have been followed;

prepare the financial statements on the going concernbasis unless it is inappropriate to presume that the Societywill continue in business.

The directors are responsible for ensuring the keeping ofproper accounting records which disclose with reasonableaccuracy at any time the financial position of the Society andwhich enable them to ensure that the financial statementscomply with the Industrial and Provident Societies Acts. Theyare also responsible for taking such steps as are reasonablyopen to them to safeguard the assets of the Society and toprevent and detect fraud and other irregularities.

Principal activity

The principal activity of the Society during the year underreview was the provision of telecommunications and internetservices and equipment, on a co-operative basis, to membersand customers.

Auditors

The Co-operativesUK Code of Governance requires that theaudit engagement partner should be changed every fiveyears. Our current audit engagement partner completed fiveyears’ service with the audit of last year’s accounts. At theAnnual General Meeting, the members granted the boardauthority to appoint the auditor for 2011-12. After a tenderand selection process, Shaw Gibbs were re-appointed asauditors, but with a new audit partner.

Statement of Directors’ responsibilities

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This report, which is published in accordance with the Code of Best Practice adopted by the Co-operative Congress in May 2005, aims to provide members with an overview of theSociety’s remuneration policies and practices for its seniormanagement, together with details of their remuneration,pension and other benefits.

The report also provides details of the fees and other benefitspaid to the Society’s directors, and provides an overview ofperformance-related benefits available to employees generally.

The Board considers that it is not appropriate, given the sizeof the Society, to establish a separate RemunerationCommittee, and these functions are carried out by the Board

as a whole. The Board is responsible for setting theremuneration of the Chief Executive and Secretary, and, in conjunction with the Chief Executive, for setting theremuneration of other members of the Management Team.External advice is taken from time to time, usually fromsources within the co-operative movement.

Management remuneration

Remuneration packages for the management team comprisebasic salary, participation in the Society’s incentive schemeand pension provision. Details for the Management Team aregiven below (the notes form an integral part of the table):

Name Employment Basic Performance Pension Total Total commenced salary related emoluments emoluments

2011-12 2010-11

Vivian Woodell 01/07/1998 £29,404 £301 £39,704 £69,410 £69,067

Lisa Logan 04/07/2011 £48,250 £70 £5,940 £54,260 £8,136

Chris Herbert 30/03/2009 £37,247 £257 £4,097 £41,601 £62,393

Amanda Beard 18/09/1999 £34,513 £301 £3,796 £38,611 £38,545

Guy Ohlenschlager 09/02/2004 £37,880 £301 £4,206 £42,387 £43,224

Fiona Ravenscroft 21/07/2004 £36,117 £301 £3,973 £40,391 £39,879

Marianne O’Brien 12/03/2007 £32,566 £301 £3,608 £36,475 £15,245

Matt Lane 06/07/2009 £26,542 £301 £2,920 £29,763 £12,239

Note: the figures shown relate only to the period during the year when each of the above was a member of the Management Team

GeneralMarianne O’Brien and Matt Lane joined the Management Team on 1 April 2011.Chris Herbert left the society on 30th April 2012. The payments disclosed are for the period 1 September 2011 to 30th April 2012.

Basic salaryBasic salary is the amount paid during the year.

Performance relatedPayments shown relate to financial year 2011/12. Where a member of the Management Team served for part of the year only, performance relatedamounts which were paid monthly are shown for the months when they served on the Management Team, and those which were paid annually areshown pro-rata to their length of service on the Management Team during the year.

PensionsDuring the year, all members of the Management Team who had completed six months service were members of the Society’s group personal pensionscheme. This is a non-contributory scheme, and the Society’s contributions are set at a level determined by the Board from time to time. Contributions inthe year were paid at the rate of 11% of basic salary.

Remuneration Report Remuneration Report

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The Phone Co-op operates a salary sacrifice option in connection with its defined contribution pension scheme. Employees may opt to reduce theirgross salary and have the salary foregone, together with an additional amount equivalent to the National Insurance contributions which would havebeen payable by the employer in respect of the salary foregone, contributed to their pension. This option is available to all employees for whompension contributions are paid.

The following employees opted for salary sacrifice under this scheme during the year. If they had not done so, their gross basic salary and theirpension contributions would have been as follows:

Name Basic Pension Total Basic Pension Total salary

2011-12 2011-12 2011-12 2010-11 2010-11 2010-11

Vivian Woodell £58,627 £6,449 £65,076 £58,376 £6,421 £64,797

Lisa Logan £50,250 £3,664 £53,914 – – £0

No other members of the Management Team opted for salary sacrifice during the year.

Pay differentials

There has been considerable focus and disquiet in the mediaof late on about the increasing pay differentials in manyorganisations. The Phone Co-op’s board has always sought toensure fair rates of pay and benefits for all. To this end,management pay rates have been moderate by the standardsof our industry, while pay at the lower end of the scale hasbeen relatively generous. In addition, both the general sales-related bonus schemes, and the profit share are paid inrelation to contracted hours, meaning that everyone receivesthe same amount, subject to qualifying periods. Our pensionscheme is non-contributory, which means that everyonebenefits, avoiding the situation in many businesses wherelower-paid employees opt out because they are unable toafford the employee-contributions, and therefore lose out on

the employer-contributions as well. Furthermore, given thedifficult economic environment, in which it is not possible forus to award pay increases which match the rate of inflation,the pay settlement in 2011-12, as in the previous year, havebeen modest flat cash amounts paid across the board, ratherthan percentage increases. This has further narrowed paydifferentials, which we feel has been the right approach at atime when everyone must unfortunately suffer reductions inliving standards. The board wishes to express its appreciationto management for taking a lead in adopting this progressiveapproach, which reflects our values, and which we believe, ifit were adopted as a model in the economy in general, wouldgo a long way towards re-building the broken trust in ourbusiness community in general. The rate of remuneration paidto directors has not increased since 2008.

Performance-related benefits

The Society operates a profit sharing scheme and two sales-related bonus schemes.

Profit sharing scheme: Under this scheme, 11% of theSociety’s profit before distributions, less share interest, butbefore deduction of the cost of the scheme, is dividedbetween all employees on permanent contracts, subject to aqualification period of 6 months’ service. Payments are pro-rata to the number of full calendar months of service in theyear (after completion of the waiting period, where applicable),and to contracted basic hours for part-time employees. Seniormanagers participate in this scheme on the same basis as all

Service ContractsThe employment contracts of the Management Team members provide for a notice period of three months, except in the case of the Chief Executive,where the notice period is 6 months.

We have narrowedpay differentials in real terms.

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other employees. The percentage of profit paid under thisscheme is discretionary and is fixed by the Board from time to time. Certain exceptions and conditions apply.

Sales-related bonus scheme (general): The Societypays an amount equal to a percentage, (fixed by the Boardfrom time to time), of the increase in sales in the previousmonth, compared with the same month in the previous year,which is divided between all employees on permanentcontracts in proportion to their contracted basic hours, subjectto a waiting period of 6 months. The percentage paid was 2%throughout the year. Certain exceptions and conditions apply.Members of the Management Team participate in this bonusscheme on the same basis as other employees.

Sales-related bonus scheme (business sales staff):A separate additional scheme is in place for Business SalesTeam members, which is based on sales revenues generatedby individual sales staff, subject to meeting a minimumthreshold for business generated. A commission scheme isalso in place for phone systems, whereby 1% of the salesvalue of the system installed is paid to the sales person.

Remuneration of Directors

In accordance with a resolution approved by members at the AGM in 2008, Directors receive a fee of £1,150 per year (£1,725 for the Chairperson). They are also entitled toclaim reasonable out-of-pocket expenses incurred in theperformance of their duties. Details of the total value of feesand expenses paid to the Directors are provided in the Notesto the Accounts.

On behalf of the Board of DirectorsLinda Ward, ChairpersonJustin Andersen, Vice-ChairpersonVivian Woodell, Chief Executive Amanda Beard, Secretary

6 December 2012

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Six year comparison for the period ended 31 August 2012

2007 2008 2009 2010 2011 2012

Membership 6,735 7,160 7,538 7,961 8,625 9,445

Revenue Account

Turnover 6,980,800 7,645,888 8,341,116 9,101,233 10,079,942 10,662,721

Depreciation 88,315 123,368 59,331 108,730 197,257 212,643

Operating Profit/(Loss) 232,436 239,398 36,113 (37,433) (11,015) 276,036

Profit/(Loss) before distributions 305,567 338,158 181,640 83,094 110,751 424,160

Recommended distributions for year 112,383 150,199 133,367 87,975 99,950 143,676

Transfer to/(from) reserves 262,548 212,477 66,792 34,212 66,413 338,824

Balance Sheet

Fixed Assets 214,754 131,681 392,519 507,071 675,707 1,045,857

Current Assets 3,095,317 3,779,430 4,583,213 4,535,075 4,840,312 5,075,253

Net Current Assets 1,917,857 2,388,585 2,901,252 3,051,426 3,235,782 3,489,630

Net Assets 2,132,611 2,520,266 3,293,771 3,558,497 3,901,648 4,535,486

Share Capital 1,637,130 1,866,522 2,592,756 2,884,119 3,230,310 3,603,993

Reserves 423,124 543,583 532,673 506,874 503,833 763,989

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£400,000

£300,000

£200,000

£100,000

£0

-£100,000

1998

PROFIT BEFORE DISTRIBUTION6

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

£150,000

£100,000

£50,000

£0

1998

RECOMMENDED DISTRIBUTIONS RELATING TO THE YEAR7

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

£12,000,000

£10,000,000

£8,000,000

£6,000,000

£4,000,000

£2,000,000

£0

1998

TURNOVER 5

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

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£1,000,000

£800,000

£600,000

£400,000

£200,000

£0

1998

FIXED ASSETS8

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

£2,500,000

£3,000,000

£2,000,000

£1,500,000

£1,000,000

£500,000

£0

1998

NET CURRENT ASSETS9

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

£3,500,000

£4,000,000

£3,000,000

£2,000,000

£1,000,000

£0

1998

NET ASSETS10

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

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10,000

8,000

6,000

4,000

2,000

0

1998

MEMBERSHIP12

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

NET ASSETS11

Share Capital

83%

17%

Reserves

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We have audited the financial statements of The Phone Co-opLimited for the year ended 31 August 2012, which comprisethe Consolidated Revenue Account, Consolidated BalanceSheet, Society Balance Sheet, Consolidated Cash FlowStatement and related notes. These financial statements havebeen prepared under the historical cost convention and theaccounting policies set out therein.

This report is made solely to the Society’s members, as abody, in accordance with Section 9 of the Friendly andIndustrial and Provident Societies Act 1968. Our audit workhas been undertaken so that we might state to the Society’smembers those matters we are required to state to them in anauditor’s report and for no other purpose. To the fullest extentpermitted by law, we do not accept or assume responsibility toanyone other than the Society and the Society’s members asa body, for our audit work, for this report, or for the opinionswe have formed.

Respective responsibilities of directors and auditors

As described on page 17, the Society's directors areresponsible for the preparation of financial statements inaccordance with applicable law and United KingdomAccounting Standards.

Our responsibility is to audit the financial statements inaccordance with relevant legal and regulatory requirementsand International Standards on Auditing (UK and Ireland).

We report to you our opinion as to whether the financialstatements give a true and fair view and are properly preparedin accordance with the Industrial and Provident Societies Act1965 to 2002 and the Friendly and Industrial and ProvidentSocieties Act 1968. We also report to you if, in our opinion, asatisfactory system of control over transactions has not beenmaintained or if proper books of account have not been keptby the Society. In addition we state if we have not obtained allthe information and explanations necessary for the purposesof our audit or if the Society’s balance sheet and its revenueaccount are not in agreement with the books of account.

We read other information contained in the Report of theCommittee of Management and consider whether it isconsistent with the audited financial statements. We consider

the implications for our report if we become aware of anyapparent misstatements or material inconsistencies with thefinancial statements. Our responsibilities do not extend to anyother information.

Basis of opinion

We conducted our audit in accordance with InternationalStandards on Auditing (UK and Ireland) issued by the AuditingPractices Board. An audit includes examination, on a testbasis, of evidence relevant to the amounts and disclosures inthe financial statements. It also includes an assessment of thesignificant estimates and judgements made by the directors inthe preparation of the financial statements, and of whether the accounting policies are appropriate to theSociety's circumstances, consistently applied and adequatelydisclosed.

We planned and performed our audit so as to obtain all theinformation and explanations which we considered necessaryin order to provide us with sufficient evidence to givereasonable assurance that the financial statements are freefrom material misstatement, whether caused by fraud or otherirregularity or error. In forming our opinion we also evaluatedthe overall adequacy of the presentation of information in thefinancial statements.

Opinion

In our opinion the financial statements give a true and fairview of the Society's and its group’s affairs at 31 August 2012and of its profit for the year then ended and have beenproperly prepared in accordance with the Industrial andProvident Societies Act 1965 to 2002 and the Friendly andIndustrial and Provident Societies Act 1968 .

Stephen Howard Neal FCCA ACASenior Statutory AuditorFor and on behalf of Shaw Gibbs LLPChartered Certified AccountantsRegistered Auditors264 Banbury RoadOxford OX2 7DY6th December 2012

Report of the Independent Auditors to the members of the Phone Co-op Limited

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Consolidated Revenue Account for the year ended 31 August 2012

31.8.12 31.8.11

Notes £ £

TURNOVER 10,662,720 10,079,942

Less Value Added Tax (1,809,999) (1,613,608)

NET SALES 8,852,721 8,466,334

Cost of sales 6,241,087 6,127,745

Gross profit 2,611,635 2,338,589

Administrative expenses 2,335,599 2,349,604

OPERATING (LOSS) / PROFIT 3 276,036 (11,015)

Interest receivable and similar income 148,124 121,766

Profit before distributions 424,160 110,751

Members’ dividend 4 30,516 27,964

Co-operative and Social Economy Development Fund – –

PROFIT ON ORDINARY ACTIVITIES BEFORE TAXATION 393,644 82,787

Tax on profit on ordinary activities 5 54,820 16,373

TRANSFER TO RESERVES 338,824 66,413

Continuing OperationsThe results for 2012 and 2011 relate wholly to continuing operations.

The notes on pages 31 to 40 form part of these financial statements

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Consolidated Balance Sheet for the year ended 31 August 2012

31.8.12 31.8.11Notes £ £ £ £

FIXED ASSETS:Tangible assets 6 554,661 147,288Intangible assets 7 293,975 386,459Investments 8 197,221 141,960

1,045,857 675,707CURRENT ASSETS:Stock 2,074 3,622Debtors 9 1,391,035 2,573,836Investments 10 2,346,957 1,174,049Cash at bank 11 1,335,187 1,088,805

5,075,253 4,840,312CREDITORS: Amounts falling due within one year 12 1,585,624 1,604,530

NET CURRENT ASSETS: 3,489,630 3,235,782

TOTAL ASSETS LESS CURRENT LIABILITIES: 4,535,486 3,911,489

CREDITORS: Amounts falling due after one year 13 – 9,841

TOTAL ASSETS LESS TOTAL LIABILITIES: 4,535,486 3,901,648

CAPITAL AND RESERVES:Members’ share capital 14 3,603,993 3,230,310Co-operative and Social EconomyDevelopment Fund 15 167,504 167,504Revenue reserve 16 763,989 503,834

4,535,486 3,901,648

Board CertificationThe financial statements on pages26 to 40 are hereby signed on behalfof the Board pursuant to Section 3(5) (c) of the Friendly and Industrialand Provident Societies Acts 1968.

Linda Ward, ChairpersonJustin Andersen, Vice ChairpersonVivian Woodell, Chief Executive Amanda Beard, Secretary6th December 2012

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Society Balance Sheet for the year ended 31 August 2012

31.8.12 31.8.11Notes £ £ £ £

FIXED ASSETS:Tangible assets 6 554,661 147,288Intangible assets 7 293,975 386,459Investments 8 198,322 143,061

1,046,958 676,808CURRENT ASSETS:Stock 2,074 3,622Debtors 9 1,390,835 2,573,636Investments 10 2,346,957 1,174,049Cash at bank 11 1,334,947 1,088,565

5,074,813 4,839,872CREDITORS: Amounts falling due within one year 12 1,601,464 1,620,371

NET CURRENT ASSETS: 3,473,349 3,219,501

TOTAL ASSETS LESS CURRENT LIABILITIES: 4,520,307 3,896,309

CREDITORS: Amounts falling due after one yea 13 – 9,841

TOTAL ASSETS LESS TOTAL LIABILITIES: 4,520,307 3,886,468

CAPITAL AND RESERVES:Members’ share capital 14 3,603,993 3,230,310Co-operative and Social EconomyDevelopment Fund 15 167,504 167,504Revenue reserve 16 748,810 488,654

4,520,307 3,886,468

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Consolidated Cash Flow Statement

2012 2011£ £

RECONCILIATION OF OPERATING PROFIT TO NET CASH INFLOWFROM OPERATING ACTIVITIESOperating Profit 276,036 (11,015)Depreciation charges 74,041 64,822Amortisation 138,602 132,436Profit on disposal of fixed assets (47) (50)(Increase)/decrease in stocks 1,548 (752)(Increase)/decrease in debtors 1,108,571 (432,315)Increase/(decrease) in creditors (107,240) 109,475

Increase/(decrease) in creditors 1,491,511 (137,399)

CASH FLOW STATEMENTNet cash inflow from operating activities 1,491,511 (137,399)Returns on Investments and Servicing of Finance:Interest received 202,354 89,266Dividend received 20,000 –

222,354 89,266

Taxation (7,703) (126)

Capital Expenditure, disposals and Financial Investment:Purchase of tangible fixed assets (462,529) (77,359)Purchase of intangible fixed assets (33,708) (176,456)Purchase of fixed asset investments (55,261) (99,960)Proceeds from sale of fixed assets 130 550

(551,369) (353,225)Financing:Contributions to share capital by members 1,281,307 645,394Withdrawals of share capital by members (1,016,810) (404,239)

264,497 241,155Management of liquid resourcesPurchase of investments (1,172,908) (13,398)

Increase/(decrease) in cash 246,382 (173,727)

RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET DEBTCash as at 31/08/2011 1,088,805 1,262,532Cash as at 31/08/2012 1,335,187 1,088,805

Increase/(decrease) in cash 246,382 (173,727)

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Consolidated Statement of TotalRecognised Gains and Losses for the year ended 31 August 2012

31.8.12 31.8.11

£ £

Retained profit for the year 338,824 66,413

Share interest (78,676) (69,433)

Total recognised gains and losses in the year 260,148 (3,020)

Total recognised gains and losses since last annual report 260,148 (3,020)

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1. ACCOUNTING POLICIES

Accounting basis and changes in presentation during the year

The following accounting policies have been applied consistently in dealing with the items which are considered material in relation tofinancial statements. The financial statements are prepared in accordance with applicable accounting standards, using the historical costconvention.

Turnover

Society turnover, which includes value added tax, comprises the value of services provided and equipment sales by the society.

Turnover from calls is recognised in the Consolidated Revenue Account at the time the call is made over the Group’s carrier network. Turnoverfrom rentals is recognised evenly over the rental period. Turnover arising from other services, including broadband and maintenancecontracts, is recognised evenly over the periods in which the service is provided to the customer.

Goodwill

a) Goodwill relating to business acquired is amortised over its useful economic life. Where goodwill is regarded as having an indefinite usefuleconomic life, it is subject to an annual impairment review.

b) In accordance with FRS7 goodwill includes a reasonable estimate of the fair value of amounts expected to be payable in the future.

Impairment of fixed assets and goodwill

Fixed assets and goodwill are subject to review for impairment in accordance with FRS11, Impairment of Fixed Assets and Goodwill. Anyimpairment is recognised in the revenue account in the year in which it occurs.

Tangible fixed assets

Depreciation is provided at the following annual rates in order to write off each asset over its estimated useful life.

Diallers, routers & programming - 33% on costFixtures and fittings - at varying rates on costComputer equipment - at varying rates on costRenewable Energy installations - 4% on cost

Investments

Fixed asset investments are stated at cost less any provision for diminution in value.

Current assets investments are stated at the lower of cost and net realisable value.

Pensions

The Society operates a defined contribution pension scheme. Contributions payable for the year are charged in the revenue account.

Leasing

Rentals paid under operating leases are charged over the life of the lease.

Foreign currency translation

Transactions in foreign currencies are translated at the exchange rate in effect at the time of the transaction. Monetary items in foreigncurrencies are translated at the exchange rate in effect on the balance sheet date. All exchange differences are dealt with in the revenueaccount.

Stock

Stock is stated at the lower of cost and net realisable value.

Basis of Consolidation

The Group financial statements consolidate the financial statements of The Phone Co-op Limited and its wholly owned subsidiaries, whichremain dormant.

Notes to the Financial Statements for the year ended 31 August 2012

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2. STAFF COSTS

31.8.12 31.8.11£ £

Wages and salaries 1,092,984 1,131,647Severance costs 33,975 31,500Social security costs 101,497 103,804Other pension costs 137,900 140,693

1,366,356 1,407,644

The average monthly number of employees during the year was as follows:

31.8.12 31.8.11

Full-time staff 43 51Part-time staff 19 17

62 68

3. OPERATING PROFIT

The operating profit is stated after charging/(crediting):

31.8.12 31.8.11£ £

Depreciation – owned assets 74,041 64,822Amortisation – intangible fixed assets 138,602 132,436Operating leases – land & buildings 46,989 45,944Foreign exchange gains & losses 1,447 239Fees paid to auditors:

Audit 8,500 8,300Other – –

Directors’ remuneration

The total remuneration of the directors for their Board duties was as follows:

Fees 8,132 8,344

Expenses 6,982 11,271

The following annual fees were payable to directors during the year under review:

Chairman 1,725 1,725Board Directors 1,150 1,150

The average number of directors during the year was 7

4. MEMBERS’ DIVIDEND

31.8.12 31.8.11£ £

Members’ dividend 30,516 27,694

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5. TAXATION

The tax charge on the profit on ordinary activities for the year was as follows: 31.8.12 31.8.11£ £

UK corporation tax – current taxation 61,100 13,984Adjustments in respect of previous years (6,280) 2,389

54,820 16,373

Factors affecting tax charge for the year

The tax assessed for the period is lower than the standard rate of corporation tax in the UK (21%).

The differences are explained below: 31.8.12 31.8.11£ £

Profit on ordinary activities before distributions 424,160 110,750

Profit on ordinary activities multiplied by small companies rate corporation tax in the UK of 20% (2011:20%) 84,832 22,793

Effects of:Expenses/income not deductible for tax purposes – –Depreciation for period in excess of capital allowances 5,239 5,481Members’ distributions (28,735) (14,290)Adjustments to tax charge in respect of previous years (6,280) 2,389Other timing differences (236) –

Current tax charge for period 54,820 16,373

6. TANGIBLE FIXED ASSETS

Group and Society

Diallers, Fixtures & Computer Renewable Totalsrouters & Fittings Equipment & energy

programming software installations

COST:At 1 September 2011 55,386 96,268 513,051 – 664,705 Additions – 33,458 7,205 440,832 481,496 Disposals – (4,950) 0 0 (4,950)

At 31 August 2012 55,386 124,776 520,256 440,832 1,141,251

DEPRECIATION:At 1 September 2011 55,384 84,451 377,582 – 517,417Charge for year – 10,372 54,621 9,048 74,041Eliminated on disposals – (4,868) 0 0 (4,868)

At 31 August 2012 55,384 89,955 432,203 9,048 586,590

NET BOOK VALUE:At 31 August 2012 2 34,822 88,053 431,785 554,661

At 31 August 2011 2 11,817 135,469 0 147,288


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7. INTANGIBLE FIXED ASSETS

Group and Society

Goodwill Number Ranges Totals

COST:At 1 September 2011 665,242 14,500 679,742Additions 28,708 – 28,708 Revaluation 17,410 – 17,410 Disposals – – 0

At 31 August 2012 711,360 14,500 725,860

DEPRECIATION:At 1 September 2011 293,284 – 293,284 Charge for year 138,602 – 138,602 Eliminated on disposals – – 0

At 31 August 2012 431,886 0 431,886

NET BOOK VALUE:At 31 August 2012 279,475 14,500 293,975

At 31 August 2011 371,959 14,500 386,459

8. FIXED ASSET INVESTMENTS

Group£

COST:At 1 September 2011 143,016Additions 55,261Disposals –

At 31 August 2012 198,277

PROVISIONS:At 1 September 2011 1,056

NET BOOK VALUE:

At 31 August 2012 197,221

At 31 August 2011 141,960


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Society£

COST:At 1 September 2011 144,117Additions 55,261Disposals –

At 31 August 2012 199,378

PROVISIONS:At 1 September 2011 1,056

NET BOOK VALUE:

At 31 August 2012 198,322

At 31 August 2011 143,061

Society only:31.8.12 31.8.11

£ £

Investment in subsidiary undertaking 1,101 1,101

Group and Society:

Investments in other Industrial and Provident Societies:Shares in the Co-operative Group (CWS) Limited 19,955 19,955Community Broadband Network Limited 2,500Westmill Wind Farm Co-operative Limited 20,000 20,000Torrs Hydro New Mills Limited 7,500 7,500Anglia Farmers Limited 20 5Energy Prospects Co-operative Limited 20,000 20,000Go! Co-operative Limited 20,496 20,000Co-operative Renewables Limited 5,000 –Revolver Co-operative Limited 2,250 –Energy Saving Co-operative 20,000 –Westmill Solar 20,000 –Football Club United of Manchester 5,000 –Cybermoor Networks Ltd 2,500 –

Other investments: 31.8.12 31.8.11£ £

ICO Fund plc 2,000 2,000The Ethical Property Company Limited 50,000 50,000Other 2,500 –


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The Society’s investments at the balance sheet date in the share capital of unlisted companies include the following:

Ecobilling Limited

Nature of business: DormantCountry of incorporation: United Kingdom

% holdingClass of shares:Ordinary & Preference shares of 10p 100

Avoco UK Limited

Nature of business: Telecommunication servicesCountry of incorporation: United Kingdom

Class of shares:Ordinary of £1 each 100

Phone Co-op Numbering Limited

Nature of business: Telecommunication servicesCountry of incorporation: United Kingdom

Class of shares:Ordinary of £1 each 100

9. DEBTORS: AMOUNTS FALLING DUE WITHIN ONE YEAR

Group Society

31.8.12 31.8.11 31.8.12 31.8.11£ £ £ £

Trade Debtors 1,102,053 1,184,870 1,102,053 1,184,870Prepayments and accrued income 217,544 312,585 217,344 312,385Loans to other co-operatives – 1,000,000 – 1,000,000Other debtors 71,438 76,382 71,438 76,383

1,391,035 2,573,836 1,390,835 2,573,636

10. CURRENT ASSET INVESTMENTS

Group Society

31.8.12 31.8.11 31.8.12 31.8.11£ £ £ £

Investments in other Industrial and Provident Societies:Shares, ICOF Community Capital Limited 59,142 59,142 59,142 59,142

Share bond, The Midcounties Co-operative Limited 250,000 500,000 250,000 500,000Corporate investor shares, the Co-operative Group (CWS) Ltd. 2,037,815 614,907 2,037,815 614,907

2,346,957 1,174,049 2,346,957 1,174,049


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11. CASH AT BANK

Cash and bank balances include the following share account balances held with other Industrial and Provident Societies:

Group Society

31.8.12 31.8.11 31.8.12 31.8.11£ £ £ £

The Midcounties Co-operative LimitedCommunity membership account 1 1 1 1

Chelmsford Star Co-operative LimitedMembership share account 750,000 650,000 750,000 650,000

12. CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR

Cash and bank balances include the following share account balances held with other Industrial and Provident Societies:

Group Society

31.8.12 31.8.11 31.8.12 31.8.11£ £ £ £

Trade creditors: 431,933 521,643 431,933 521,643Value added tax 120,486 81,754 120,486 81,754Social security & other taxes 30,625 27,558 30,625 27,558Corporation tax 63,393 16,277 61,100 13,984Accrued expenses and deferred income 927,764 918,087 927,764 918,087Other creditors 11,423 39,211 29,557 57,345

1,585,624 1,604,530 1,601,464 1,620,371

13. CREDITORS: AMOUNTS FALLING DUE AFTER ONE YEAR

Group Society

31.8.12 31.8.11 31.8.12 31.8.11£ £ £ £

Other creditors – 9,841 – 9,841

14. MEMBERS’ SHARE CAPITAL

Group Society

31.8.12 31.8.11 31.8.12 31.8.11£ £ £ £

As at 1 September 2011 as previously reported 3,230,310 2,884,119 3,230,310 2,884,119Share interest 76,878 69,433 76,878 69,433Contributions in the year 1,316,570 686,025 1,316,570 686,025Withdrawals in the year (1,019,764) (409,267) (1,019,764) (409,267)

As at 31 August 2012 3,603,993 3,230,310 3,603,993 3,230,310

(i) Share capital is comprised entirely of non-equity shares of £1 each (as defined in Financial Reporting Standard 4).

(ii) At the year-end, Shares attracted interest of 2.25 % per annum, payable annually after the financial year-end.

(iii) Shares are withdrawable on notice of 1 week. The Rules give the Board the power to suspend withdrawals.


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(iv) Each member is entitled to one vote irrespective of the number of shares held.

(v) In the event of a solvent winding-up of the Society, the Rules state that a surplus remaining after all liabilities, including paid up sharecapital, have been settled, would not be distributed to members of the Society, but that they would be transferred to some other non-profit, Co-operative or charitable body or bodies subject to at least the same degree of restriction on the distribution of surpluses andassets as is imposed on this co-operative. Any assets not so transferred would be paid to the Co-operativesUK Limited or itssuccessor organisation.

(vi) Dividends payable to members are related to eligible purchases from the Society.

(vii) The position that a shareholder of this Society occupies is no different from that of a shareholder in any other corporate body in thesense that, if the Society fails, not all or any of their investment may be returned to them. Investments are withdrawable withoutpenalty. The Society, unlike banks and building societies, is not subject to prudential supervision by the Financial Services Authority.

15. CO-OPERATIVE AND SOCIAL ECONOMY DEVELOPMENT FUND

Group Society

31.8.12 31.8.11 31.8.12 31.8.11£ £ £ £

Brought forward 167,504 167,504 167,504 167,504Transferred in the year – – – –

As at 31 August 2012 167,504 167,504 167,504 167,504

16. MOVEMENTS IN RESERVES

Group SocietyRevenue Reserve Revenue Reserve

31.8.12 31.8.12£ £

As at 31 August 2011 503,841 488,662Retained profit for the year 338,824 338,824Share interest (78,676) (78,676)

As at 31 August 2012 763,989 748,810

17. OPERATING LEASE COMMITMENTS

The following annual payments are committed to be paid within:

Group Society

Land & Buildings Land & Buildings Land & Buildings Land & Buildings

31.8.12 31.8.11 31.8.12 31.8.11£ £ £ £

Expiring:Within one year 5,494 2,300 5,494 2,300Between two and five years 8,654 – 8,654 –


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18. CAPITAL COMMITMENTS

Group Society

31.8.12 31.8.11 31.8.12 31.8.11£ £ £ £

Expenditure contracted but not provided for 12,000 10,301 12,000 10,301

19. PENSION COMMITMENTS

The Society operates a defined contribution pension scheme. The contributions charged to the profit and loss account during the yearamounted to £137,900 (2011: £140,693). There were no unpaid contributions at the balance sheet date.

20. CONTINGENT LIABILITIES

At the year-end there were no contingent liabilities. (last year: none).

20. RELATED PARTY DISCLOSURES

Good corporate governance requires that material transactions involving related parties as defined by Financial Reporting Standard 8 shouldbe disclosed to members. The following were considered to fall into this category during the year. All amounts shown are excluding VAT. TheBoard has resolved that only transactions involving related parties with a value of £2,000 or more are disclosed in the Annual Report.

Contracts with related parties

Throughout the year, The Phone Co-op had a contract for the supply of telecommunications services to The Midcounties Co-operative Ltd., ofwhich Vivian Woodell (The Phone Co-op’s Chief Executive) was a director during the year. Justin Andersen (director of The Phone Co-op duringthe year) was in receipt of pensions from The Midcounties Co-operative’s pension scheme during the year. The value of services providedunder this contract during the year was £751,427 (last year: £746,472). Amounts outstanding at the balance sheet date, included in TradeDebtors, totalled £85,003 (last year: £149,604).

During the year, The Phone Co-op purchased office supplies from The Midcounties Co-operative to the value of £4,246 (last year: £2,768).

The Phone Co-op received Feed-in-Tariff income from Co-operative Energy which is part of Mid-Counties of £23,648 (last year: nil).

Throughout the year, The Phone Co-op supplied finance services and office facilities to Co-operative Renewables, of which both VivianWoodell and Paul Hopewell are directors. The value of these service charges in the year was £6,175 (last year: nil). The Phone Co-op alsomade a wholesale supply of solar photovoltaic equipment to Co-operative Renewables to the value of £185,650 in the year (last year: nil).

The Phone Co-op purchased solar panels from Co-operative Renewables in the year of £311,585 (last year: nil).

Peter Turnbull, a Director until Feb 2012, was an Agent for The Phone Co-op during the year, and received income of £1,750 fromcommissions on sales generated under his agency (last year: £2,216). He also provided credit control services to the Society for which hereceived an income £60 (last year: £964).

Treasury/Financial

The Phone Co-op invested £250,000 (last year: £500,000) in a share bond issued by The Midcounties Co-operative Ltd. The Midcounties Co-operative Ltd. also had a share account with The Phone Co-op (the balance of which was almost entirely made up of accrued dividends andinterest), and the balance at the year-end was £ 70,444(last year £61,591). The Phone Co-op paid interest on this share capital of £1,386(last year: £1,386) and dividend on purchases of £7,467 (last year: £7,681).

The Phone Co-op has an investment of £5,000 in Co-operative Renewables Ltd, of which Vivian Woodell and Paul Hopewell (a director untilFebruary 2012) are directors.

The Phone Co-op received a dividend of £20,000 from Co-operative Renewables in the year.

Co-operative Renewables Ltd also had a share account with the Phone Co-op and the balance at the year-end was £30,365 (last year: nil).The Phone co-op paid interest on this share capital of £2,327 (last year: nil).

Paul Hopewell, a director until February 2012, was a director of Torrs Hydro New Mills in which the Phone Co-op has an investment of £7,500(last year £7,500).

The above transactions were carried out at arm’s length and under normal commercial terms.


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21 CORPORATE GOVERNANCE

The Society subscribes to the Code of Good Practice on Corporate Governance for Retail Co-operative Societies published by Co-operativesUK, and strives to comply with it. In the year under review, the Board believes that it complied in all respects, except the following:

a. The Society does not publish interim financial statements. This is because, in the Board’s view, taking account of the size of the Society,the benefits of doing so are outweighed by the costs. This policy is kept under review.

b. The Society has not established a separate Audit Committee. Again, this is considered not to be appropriate in view of the small size of theSociety and the limited number of Board members. The Board is responsible for recommendations to members on the appointment ofauditors, and for oversight of the Society’s risk management policies. The Board holds a private meeting with the auditor at least annually.

c. The Society’s Rules do not provide for a compulsory retirement age, or prescribe a maximum period of continuous service for directors.The Board believes that The Phone Co-op has a vigorous democracy, with contested elections for the Board of Directors being the norm.The make-up of the board has changed considerably over the years, and the directors believe that further measures to promote changeare neither required, nor desirable.

Board training: The Corporate Governance Code requires that a statement be made each year on the arrangements in place for Boardtraining. The Board recognises that the Society is operating in a complex and rapidly changing industry, and that training is needed to ensurethat Directors remain abreast of key developments. Details of recent actions taken are provided in the Directors’ Report.

22. SUPPLIER PAYMENT POLICY

It is our policy to agree the terms of payment at the start of business with that supplier and then pay according to those terms once wereceive an accurate invoice. Trade creditor days for the year under review were 24 days (last year: 32 days)

This is based on the ratio of trade creditors at the end of the year to the amounts invoiced during the year by trade creditors.


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Notes

The Phone Co-op LimitedNotice of Annual General MeetingSaturday 2 February 2013The Annual General Meeting will be held from 2pm to 4pm on Saturday 2 February 2013 at Chipping Norton School, Burford Road, Chipping Norton, Oxfordshire, OX7 5DY

Please note that informal workshops will take place from 12 noon to 1pm and a buffet lunch will be available from 1pm

Preliminary Agenda1 Introductions and welcome

2 Appointment of Tellers

3 Apologies

4 To approve the minutes of the Annual General Meeting held on 4 February 2012

5 Matters arising

6 Guest Speakers: Maggie Cole Director, Torrs Hydro New Mills Limited Andy Walsh General Manager, FC United of Manchester

7 To receive the Directors’ Report and Accounts for the year ended 31 August 2012

8 To approve the following appropriations recommended by the Board of Directors:Share interest: £78.676.12Dividend: £66,641

9 To consider the following proposal submitted by the Board of Directors:To increase directors’ fees from £1,150 to £1,200 and the Chair’s fees from £1,725 to £1,800 and to introduce an additional fee for the role of vice-chair of £1,500 to take effect from 01 February 2013

10 Election of Directors: declaration of the result

11 Election of Scrutineers

12 Any other business

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The Phone Co-op

Registered office5 MillhouseElmsfield Business CentreWorcester RoadChipping NortonOxon OX7 5XL

Manchester officeHolyoake HouseHanover StreetManchester M60 0AS

T 0845 458 9000F 0845 458 9001E [email protected]

www.thephone.coop

Cover designed by Wave. Printed by Calverts.Paper supplied by Paperback.All these organisations are workers’ co-operatives.

Documents

THE PHONE CO-OP LIMITED ANNUAL REPORT … Balance Sheet 28 ... services to the former SAGA customers who moved to us in ... Personnel costs declined by £50k to £1.41 million or