THIS DOCUMENT AND ANY ACCOMPANYING DOCUMENTS ARE IMPORTANT AND REQUIRE YOUR IMMEDIATE ATTENTION. If you are in any doubt as to the action you should take, you are recommended to seek your own personal financial advice from your stockbroker, bank manager, solicitor, accountant or other independent financial adviser authorised under the Financial Services and Markets Act 2000, as amended, if you are resident in the United Kingdom, or, if not, from another appropriately authorised independent financial adviser.

Subject to the restrictions below, if you sell or transfer or have sold or have otherwise transferred all of your Existing Ordinary Shares held in certificated form (other than ex-Rights) before 8:00 a.m. on 2 December 2014 (the “Ex-Rights Date”), please send this document and any Provisional Allotment Letter (duly renounced), if and when received, at once to the purchaser or transferee or to the bank, stockbroker or other agent through whom the sale or transfer was effected for delivery to the purchaser or transferee except that such documents should not be sent in or into any jurisdiction where to do so might constitute a violation of local securities laws or regulations, including, but not limited to, the United States or any of the Excluded Territories. If you are a Shareholder who holds Ordinary Shares in certificated form and you sell or transfer or have sold or have otherwise transferred only part of your holding of Existing Ordinary Shares held in certificated form (other than ex-Rights) before the relevant Ex-Rights Date, you should immediately consult the bank, stockbroker or other agent through whom the sale or transfer was effected and refer to the instructions regarding split applications in paragraph 3.6 of Part IX (Terms and Conditions of the Rights Issue) of this document and in the Provisional Allotment Letter. If you are a Shareholder who holds Ordinary Shares in uncertificated form and you sell or transfer or have sold or have otherwise transferred all or some of your Existing Ordinary Shares (other than ex-Rights) held in uncertificated form before the relevant Ex-Rights Date, a claim transaction will automatically be generated by Euroclear which, on settlement, will transfer the appropriate number of Nil Paid Rights to the purchaser or transferee.

The distribution of this document or the Provisional Allotment Letter (or both) and the transfer of Nil Paid Rights, Fully Paid Rights or New Ordinary Shares (or any of them) into jurisdictions other than the United Kingdom may be restricted by law and, therefore, persons into whose possession this document (and any accompanying documents) comes should inform themselves about and observe any such restrictions. The Nil Paid Rights, the Fully Paid Rights, the Provisional Allotment Letters and the New Ordinary Shares are not transferable except in accordance with the restrictions set out in paragraph 7 of Part IX (Terms and Conditions of the Rights Issue) of this document. Any failure to comply with any such restrictions may constitute a violation of the securities laws or regulations of such jurisdictions. In particular, subject to certain exceptions, this document and the Provisional Allotment Letter and any other related documents should not be distributed, forwarded to or transmitted in or into the United States or any of the Excluded Territories.

A copy of this document, which comprises (i) a circular prepared in accordance with the Listing Rules of the Financial Conduct Authority (“FCA”) for the purposes of the General Meeting convened pursuant to the Notice of Meeting set out at the end of this document; and (ii) a prospectus (the “Prospectus”) relating to Connect Group PLC (the “Company” or “Connect”), prepared in accordance with the Prospectus Rules of the FCA made pursuant to section 73A of the Financial Services and Markets Act 2000, as amended (“FSMA”), has been filed with the FCA and made available to the public in accordance with Rule 3.2 of the Prospectus Rules. This document has been approved as a prospectus by the FCA under section 87A of the FSMA.

The Existing Ordinary Shares have been admitted to the premium listing segment of the Official List of the FCA (the “Official List”) and to trading on the London Stock Exchange’s main market for listed securities. Applications will be made to the UK Listing Authority for the New Ordinary Shares to be admitted to the premium listing segment of the Official List and to the London Stock Exchange for the New Ordinary Shares to be admitted to trading on the London Stock Exchange’s main market for listed securities (together “Admission”). It is expected that Admission will become effective and that dealings in the New Ordinary Shares (nil paid) will commence by 8.00 a.m. on 2 December 2014 and in the New Ordinary Shares (fully paid) by 8.00 a.m. on 17 December 2014.

CONNECT GROUP PLC

(incorporated and registered in England and Wales under the Companies Act 1985 with registered number 05195191)

PROPOSED ACQUISITION OF TUFFNELLS PARCELS EXPRESS

AND

2 FOR 7 RIGHTS ISSUE OF 54,136,442 NEW ORDINARY SHARES AT 102 PENCE PER NEW ORDINARY SHARE

AND

NOTICE OF GENERAL MEETING

Joint Sponsor, Financial Adviser and Bookrunner
J.P. Morgan Cazenove

Joint Sponsor, Financial Adviser and Bookrunner
Liberum

Financial Adviser in connection with the Rights Issue
Lazard & Co., Limited

Shareholders should read the whole of this document, and the information incorporated by reference into this document in full. Your attention is drawn to the letter from the Chairman of Connect Group PLC which is set out on pages 49 to 61 of this document and which contains a recommendation from your Board that you vote in favour of the Resolution to be proposed at the General Meeting. Your attention is also drawn to Part II (Risk Factors) on pages 22 to 38 for a discussion of certain risks and other factors that should be considered in connection with the matters referred to in this document.

A notice convening the General Meeting to be held at Herbert Smith Freehills LLP, Exchange House, Primrose Street, London, EC2A 2EG on Monday 1 December 2014 at 10:00 a.m. is set out at the end of this document. A Form of Proxy for use in connection with the General Meeting is enclosed with this document. Whether or not you intend to attend the General Meeting in person, to be valid, the Form of Proxy should be completed, signed and returned in accordance with the instructions printed on it so as to be received by Equiniti, as soon as possible, and in any event, by no later than 10:00 a.m. on 27 November 2014 (or, in the case of an adjournment, not later than 48 hours before the time fixed for the holding of the adjourned meeting). You may also submit your proxy electronically at www.sharevote.co.uk using the Voting ID, Task ID and Shareholder Reference Number (“SRN”) on the Form of Proxy. Alternatively, if you have already registered with Equiniti’s online portfolio service, Shareview, you can submit your Form of Proxy at www.shareview.co.uk. Full instructions are given on both websites. If you hold Existing Ordinary Shares in CREST, you may appoint a proxy by completing and transmitting a CREST Proxy Instruction to Equiniti (CREST participant ID RA19) so that it is received by no later than 10:00 a.m. on 27 November 2014. The completion and return of a Form of Proxy (or the electronic appointment of a proxy) will not preclude you from attending and voting in person at the General Meeting or any adjournment thereof, if you wish to do so and are so entitled.

The latest time and date for acceptance and payment in full for the New Ordinary Shares by holders of the Nil Paid Rights is expected to be 11:00 a.m. on 16 December 2014. The procedures for delivery of the Nil Paid Rights, acceptance and payment are set out in Part IX (Terms and Conditions of the Rights Issue) of this document and, for Qualifying Non-CREST Shareholders other than, subject to certain exceptions, those with registered addresses in the United States or the Excluded Territories only, also in the Provisional Allotment Letter. Qualifying CREST Shareholders other than, subject to certain exceptions, those with registered addresses in the United States or the Excluded Territories should refer to paragraph 4 of Part IX (Terms and Conditions of the Rights Issue) of this document.

No action has been or will be taken by the Company, J.P. Morgan Securities plc, or J.P. Morgan Limited which both conduct their UK investment banking business as J.P. Morgan Cazenove (“J.P. Morgan Cazenove”), Lazard & Co., Limited (“Lazard”) or Liberum Capital Limited (“Liberum”) that would permit possession or distribution of this document or any other material relating to the Nil Paid Rights, the Fully Paid Rights, the Provisional Allotment Letters or the New Ordinary Shares in any country or jurisdiction where action for that purpose is required, other than in the United Kingdom. This document does not constitute an offer of, or the solicitation of an offer to buy or subscribe for, Nil Paid Rights, Fully Paid Rights, Provisional Allotment Letters or New Ordinary Shares in any jurisdiction in which such offer or solicitation is unlawful and, in particular, is not for distribution in or into the United States or any of the Excluded Territories.

The New Ordinary Shares will, upon Admission, rank pari passu in all respects with each other and with the Existing Ordinary Shares, and will rank in full for all dividends and other distributions declared, made or paid in respect of the Existing Ordinary Shares following Admission.

Subject to the passing of the Resolution at the General Meeting, it is expected that Qualifying Non-CREST Shareholders other than, subject to certain exceptions, those with registered addresses in the United States or any of the Excluded Territories, will be sent a Provisional Allotment Letter on 1 December 2014, and that Qualifying Shareholders who hold their Ordinary Shares in uncertificated form other than, subject to certain exceptions, those with registered addresses in the United States or any of the Excluded Territories, will receive a credit to their appropriate stock accounts in CREST in respect of the Nil Paid Rights to which they are entitled on 2 December 2014.

Qualifying Non-CREST Shareholders should retain this document for reference pending receipt of a Provisional Allotment Letter. Qualifying CREST Shareholders should note that they will receive no further written communication from the Company in respect of the Rights Issue. They should accordingly retain this document for, among other things, details of the action they should take in respect of the Rights Issue. Qualifying CREST Shareholders who are CREST sponsored members should refer to their CREST sponsors regarding the action to be taken in connection with this document and the Rights Issue.

J.P. Morgan Securities plc, which is authorised in the United Kingdom by the Prudential Regulatory Authority (“PRA”) and regulated by the PRA and the FCA in the United Kingdom, and J.P. Morgan Limited and Liberum, which are each authorised and regulated in the United Kingdom by the FCA, are each acting exclusively for the Company and no-one else in connection with the Acquisition, Rights Issue and Admission, will not regard any other person (whether or not a recipient of this document) as a client in relation to the Acquisition, the Rights Issue or Admission and will not be responsible to anyone other than the Company for providing the protections afforded to their respective clients, or for providing advice, in relation to the Acquisition, the Rights Issue, Admission or any other transaction or arrangement referred to herein.

Lazard which is authorised and regulated in the United Kingdom by the FCA, is acting exclusively for the Company and no-one else in connection with Rights Issue and Admission, will not regard any other person (whether or not a recipient of this document) as a client in relation to the Rights Issue or Admission and will not be responsible to anyone other than the Company for providing the protections afforded to their respective clients, or for providing advice, in relation to the Rights Issue, Admission or any other transaction or arrangement referred to herein.

NOTICE TO OVERSEAS SHAREHOLDERS

The Nil Paid Rights, the Fully Paid Rights, the Provisional Allotment Letters and the New Ordinary Shares have not been and will not be registered under the securities laws of any Excluded Territory and may not be offered, sold, taken up, exercised, resold, pledged, renounced, transferred or delivered, directly or indirectly, within such jurisdictions except pursuant to an applicable exemption, from and in compliance with (or in a transaction not subject to), any applicable securities laws. There will be no public offer of the Nil Paid Rights, the Fully Paid Rights, the New Ordinary Shares or the Provisional Allotment Letters in any of the Excluded Territories.

All Overseas Shareholders and any person (including, without limitation, a nominee or trustee) who has a contractual or legal obligation to forward this document, or any Provisional Allotment Letter if and when received, or any other document relevant to the Rights Issue, to a jurisdiction outside the United Kingdom should read the information set out in paragraph 7 of Part IX (Terms and Conditions of the Rights Issue) of this document.

The Nil Paid Rights, the Fully Paid Rights, the Provisional Allotment Letters and the New Ordinary Shares have not been and will not be registered under the US Securities Act of 1933 (the “Securities Act”), or with any securities regulatory authority or under the relevant laws of any state or other jurisdiction of the United States, and may not be offered, sold, taken up, exercised, resold, pledged, renounced, transferred or delivered, directly or indirectly, into or within the United States except pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act and in compliance with any applicable securities laws of any state or other jurisdiction of

the United States. The New Ordinary Shares are being offered and sold (i) outside the United States in reliance on Regulation S under the Securities Act (“Regulation S”); and (ii) in the United States to persons reasonably believed to be “qualified institutional buyers” (“QIBs”) as defined in Rule 144A under the Securities Act (“Rule 144A”) in reliance on Rule 144A or another exemption from the registration requirements of the Securities Act. Prospective investors are hereby notified that the sellers of the Ordinary Shares may be relying upon the exemption from the provisions of Section 5 of the Securities Act provided by Rule 144A.

Neither the US Securities and Exchange Commission (“SEC”), nor any securities regulatory authority of any state of the United States, has approved the Nil Paid Rights, Fully Paid Rights, the Provisional Allotment Letters, New Ordinary Shares or passed upon the adequacy or accuracy of this document. Any representation to the contrary is a criminal offence in the United States.

In addition, until 40 days after the commencement of the Rights Issue, an offer, sale or transfer of the Nil Paid Rights, the Fully Paid Rights, the Provisional Allotment Letters or the New Ordinary Shares within the United States by a dealer (whether or not participating in the Rights Issue) may violate the registration requirements of the Securities Act.

NOTICE TO NEW HAMPSHIRE RESIDENTS

NEITHER THE FACT THAT A REGISTRATION STATEMENT OR AN APPLICATION FOR A LICENSE HAS BEEN FILED UNDER CHAPTER 421 B OF THE NEW HAMPSHIRE REVISED STATUTES (“RSA 421 B”) WITH THE STATE OF NEW HAMPSHIRE NOR THE FACT THAT A SECURITY IS EFFECTIVELY REGISTERED OR A PERSON IS LICENSED IN THE STATE OF NEW HAMPSHIRE CONSTITUTES A FINDING BY THE SECRETARY OF STATE THAT ANY DOCUMENT FILED UNDER RSA 421 B IS TRUE, COMPLETE AND NOT MISLEADING. NEITHER ANY SUCH FACT NOR THE FACT THAT AN EXEMPTION OR EXCEPTION IS AVAILABLE FOR A SECURITY OR A TRANSACTION MEANS THAT THE SECRETARY OF STATE HAS PASSED IN ANY WAY UPON THE MERITS OR QUALIFICATIONS OF, OR RECOMMENDED OR GIVEN APPROVAL TO, ANY PERSON, SECURITY OR TRANSACTION. IT IS UNLAWFUL TO MAKE, OR CAUSE TO BE MADE, TO ANY PROSPECTIVE INVESTOR, CUSTOMER OR CLIENT ANY REPRESENTATION INCONSISTENT WITH THE PROVISIONS OF THIS PARAGRAPH.

NOTICE TO ALL INVESTORS

Any reproduction or distribution of this document, in whole or in part, and any disclosure of its contents or use of any information contained in or incorporated by reference into this document for any purpose other than in considering an investment in the Nil Paid Rights, the Fully Paid Rights, the Letters of Allocation and the New Ordinary Shares (or any of them) is prohibited. By accepting delivery of this document, each recipient agrees to the foregoing.

The contents of this document should not be construed as legal, financial or tax advice. Each prospective investor should consult his, her or its own legal adviser, independent financial adviser or tax adviser for legal, financial or tax advice.

This document is dated 12 November 2014.

Clause	Headings	Page
PART I	SUMMARY	5
PART II	RISK FACTORS	22
PART III	IMPORTANT INFORMATION	39
PART IV	EXPECTED TIMETABLE OF PRINCIPAL EVENTS	45
PART V	RIGHTS ISSUE STATISTICS	46
PART VI	DIRECTORS, COMPANY SECRETARY, REGISTERED OFFICE AND ADVISERS	47
PART VII	CHAIRMAN'S LETTER	49
PART VIII	SOME QUESTIONS AND ANSWERS ABOUT THE RIGHTS ISSUE	62
PART IX	TERMS AND CONDITIONS OF THE RIGHTS ISSUE	69
PART X	TERMS OF THE ACQUISITION	95
PART XI	INFORMATION ON THE COMPANY AND THE GROUP	98
PART XII	INFORMATION ON THE TUFFNELLS GROUP	112
PART XIII	OPERATING AND FINANCIAL REVIEW OF CONNECT	119
PART XIV	OPERATING AND FINANCIAL REVIEW OF TUFFNELLS	130
PART XV	HISTORICAL FINANCIAL INFORMATION RELATING TO THE CONNECT GROUP	138
PART XVI	HISTORICAL FINANCIAL INFORMATION RELATING TO THE TUFFNELLS GROUP	139
PART XVII	UNAUDITED PRO FORMA FINANCIAL INFORMATION IN RESPECT OF THE ENLARGED GROUP	187
PART XVIII	CAPITALISATION AND INDEBTEDNESS	193
PART XIX	TAXATION	195
PART XX	DIRECTORS, SENIOR MANAGERS AND CORPORATE GOVERNANCE	205
PART XXI	ADDITIONAL INFORMATION	210
PART XXII	DEFINITIONS	240
APPENDIX 1	CONNECT GROUP'S FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 AUGUST 2014	249

PART I

SUMMARY

Summaries are made up of disclosure requirements known as “Elements”. These Elements are numbered in Sections A-E (A.1-E.7). This summary contains all the Elements required to be included in a summary for this type of securities and issuer. Because some Elements are not required to be addressed, there may be gaps in the numbering sequence of the Elements. Even though an Element may be required to be inserted in the summary because of the type of securities and issuer, it is possible that no relevant information can be given regarding the Element. In this case a short description of the Element is included in the summary with the mention of “not applicable”.

Section A – Introduction and Warnings
A.1	Introduction and warnings	This summary should be read as an introduction to and in conjunction with the full text of this document, including the documents incorporated herein by reference. Any decision to invest in the transferable securities should be based on consideration of the prospectus as a whole by the investor. Where a claim relating to the information contained in a prospectus is brought before a court within the EEA, the plaintiff investor might, under the national legislation of the EEA States, have to bear the costs of translating the prospectus before the legal proceedings are initiated. Civil liability attaches to those persons who are responsible for the summary, including any translations of the summary, but only if the summary is misleading, inaccurate or inconsistent when read together with other parts of the prospectus or it does not provide, when read together with other parts of the prospectus, key information in order to aid investors when considering whether to invest in such securities.
A.2	Consent for intermediaries	Not applicable; no consent is given for the use of this document for any resale or final placement of securities by financial intermediaries.
Section B – Issuer
---	---	---
B.1	Legal and commercial name	Connect Group PLC.
B.2	Domicile, legal form, applicable legislation and country of incorporation	The Company is a public limited company, incorporated in England and Wales with registered number 05195191 and with its registered office in England. The Company operates under the Companies Act.
B.3	Key factors of the Company’s current operations and principal activities	Connect
Connect is a leading specialist distributor operating in large and diverse markets. In April 2014, the Company renamed and rebranded to “Connect Group PLC”. The change of name reflects the Connect Group’s progress since its Demerger from WH Smith PLC in 2006 and the Connect Group’s ambitions for the future to be a more diversified specialist distribution company.

The Connect Group currently has three separate divisions, connecting suppliers to customers in an efficient, knowledgeable and service-oriented way: |

Section B – Issuer
	• Connect News & Media: Encompassing Smiths News and Dawson Media Direct. Smiths News is the UK’s largest newspaper and magazine wholesaling business with an approximate 55 per cent. market share. It distributes newspapers and magazines on behalf of the majority of the major national publishers as well as a large number of regional publishers serving approximately 30,000 customers across England and Wales, including large general retailers as well as smaller independent newsagents with approximately 40 million newspapers supplied weekly 364 days a year; Dawson Media Direct is an international media direct business supplying newspapers, magazines and inflight entertainment technology and content to over 80 airlines in 50 countries. In October 2014, the Connect Group announced the launch of Pass my Parcel, a new wholly-owned ‘click and collect’ delivery service to be operated by the News Business with Amazon as its first client. The Directors consider it to be an important organic opportunity with significant potential; • Connect Books: Combining a number of recognised brands in print and digital bookselling, including Bertrams, Dawson Books and Wordery. A leading distributor of physical and digital books, the division serves over 8,200 customers in approximately 100 countries, with over 156,000 in stock titles and access to over a further seven million consumer and 20 million academic titles; and • Connect Education & Care: A leading independent supplier of consumable products through The Consortium and West Mercia Supplies. The division currently holds an approximate five per cent. market share of the estimated addressable market, comprising the consumables element of the total Government education budget and serves over 30,000 customers with an extensive range of over 40,000 products across a branded, own-brand and value range, including stationery, arts and craft and cleaning. The Connect Group is headquartered in Swindon and as at 31 August 2014 had more than 4,100 employees, made up of 3,092 employees in the News & Media Division, 573 employees in the Books Division and 438 employees in the Education & Care Division. Underlying revenue for the Connect Group increased by 0.1 per cent. to £1,808.5 million for the year ended 31 August 2014 compared to £1,806.9 million for the year ended 31 August 2013. Underlying profit before tax of £50.0 million was up 0.2 per cent. compared to the prior year and statutory profit before tax of £43.1 million, was up 10.8 per cent. compared to the prior year.

Section B – Issuer

• Connect News & Media: Encompassing Smiths News and Dawson Media Direct. Smiths News is the UK’s largest newspaper and magazine wholesaling business with an approximate 55 per cent. market share. It distributes newspapers and magazines on behalf of the majority of the major national publishers as well as a large number of regional publishers serving approximately 30,000 customers across England and Wales, including large general retailers as well as smaller independent newsagents with approximately 40 million newspapers supplied weekly 364 days a year; Dawson Media Direct is an international media direct business supplying newspapers, magazines and inflight entertainment technology and content to over 80 airlines in 50 countries. In October 2014, the Connect Group announced the launch of Pass my Parcel, a new wholly-owned ‘click and collect’ delivery service to be operated by the News Business with Amazon as its first client. The Directors consider it to be an important organic opportunity with significant potential; • Connect Books: Combining a number of recognised brands in print and digital bookselling, including Bertrams, Dawson Books and Wordery. A leading distributor of physical and digital books, the division serves over 8,200 customers in approximately 100 countries, with over 156,000 in stock titles and access to over a further seven million consumer and 20 million academic titles; and • Connect Education & Care: A leading independent supplier of consumable products through The Consortium and West Mercia Supplies. The division currently holds an approximate five per cent. market share of the estimated addressable market, comprising the consumables element of the total Government education budget and serves over 30,000 customers with an extensive range of over 40,000 products across a branded, own-brand and value range, including stationery, arts and craft and cleaning. The Connect Group is headquartered in Swindon and as at 31 August 2014 had more than 4,100 employees, made up of 3,092 employees in the News & Media Division, 573 employees in the Books Division and 438 employees in the Education & Care Division. Underlying revenue for the Connect Group increased by 0.1 per cent. to £1,808.5 million for the year ended 31 August 2014 compared to £1,806.9 million for the year ended 31 August 2013. Underlying profit before tax of £50.0 million was up 0.2 per cent. compared to the prior year and statutory profit before tax of £43.1 million, was up 10.8 per cent. compared to the prior year.

Section B – Issuer
		Tuffnells
The Big Green Parcel Holding Company Limited, whose principal trading subsidiary is Tuffnells Parcels Express Limited (“Tuffnells”), is a leading UK provider of next day business-to-business delivery of mixed freight/parcel consignments, specialising in the distribution of IDW items. Tuffnells offers distribution network coverage throughout the UK through its depot network and operates a largely depot-to-depot operational model, providing services to a diversified customer base. The business operates from 34 depots utilising a fleet of over 930 vehicles and 800 trailers and containers serving over 4,200 customers across a range of industry sectors. As a specialist IDW freight/parcel handler, Tuffnells differentiates itself through its ability to sort mixed freight (for example, parcels and pallets) within one organisation, then deliver the same in one delivery whilst providing a next-day delivery service.

The business, which is headquartered in Sheffield, UK operates from 34 locations across the United Kingdom with over 2,000 employees. The business handles in excess of 10.2 million consignments each year.

Tuffnells’ total revenues for the year ended 31 December 2013 was £127.8 million, with a three year CAGR of 7.6 per cent. Profit for the year ended 31 December 2013 was £6.6 million, up 18.3 per cent. on the prior year. Adjusted EBITDA for the year ended 31 December 2013 was £15.2 million, with a three year CAGR of 9.8 per cent. |
| B.4a | Significant recent trends affecting the Company and its industry | Connect
In year ended 31 August 2014 the Connect Group delivered a steady financial performance whilst continuing to enhance shareholder returns. The News & Media Division, Connect Group’s largest division, delivered an 8.1 per cent. increase in underlying operating profit, with better than forecast sales coupled with a continued delivery of its efficiency plans.

The Books Division had a disappointing year, suffering from market weakness as well as changes to sales mix impacting margin and cost pressures. The Directors believe that the Connect Group’s recovery actions are now taking effect and have stabilised the business.

The Education & Care Division delivered a 5.0 per cent. increase in underlying operating profit, with good growth in the division core education categories which was maintained across the vital peak trading period.

Tuffnells
In the six month period ended 30 June 2014 Tuffnells continued to grow sales and profit before tax in line with trends seen over the last few years. This growth was driven by a combination of increased consignment volumes compared to the same period in the prior year, which has been further enhanced by an increase in the revenue per consignment. During this period the business has continued to increase capacity by opening new depots. |

Section B – Issuer

B.5
Name of subsidiary/associated undertakings
Bertram Trading Limited
Bluebox Avionics Limited
Dawson Books Limited
Dawson Espana Agencia de Ediciones SL
Dawson France SAS
Dawson Holdings Limited
Dawson Media Direct Limited
Dawson Media Direct China Limited
Dawson Media Direct GmbH
Dawson Media Direct Iberica SL
Dawson Media Direct Inc
Dawson Media Direct NV
Dawson Media Direct SAS
Erasmus Antiquariaat en Boekhandel BV
Erasmus Buchhandlung GmbH
FMD Limited
Hedgelane Limited
Houtschild Internationale Boekhandel BV
Magpie Investments Limited
Martin Lavell Limited
Phantom Media Limited
Rascal Solutions Limited
Smiths News Holdings Limited
Smiths News Trading Limited
The Consortium for Purchasing and Distribution Limited
B.6
Name of Shareholder
Silchester International Investors LLP
Prudential plc (M&G)
Henderson Global Investors
Ameriprise Financial, Inc
Aberforth Partners LLP
Hargreave Hale Limited

Section B – Issuer

There are no differences between the voting rights enjoyed by the Shareholders described above and those enjoyed by any other holder of Ordinary Shares. |
| B.7 | Selected historical financial information | Connect
The selected historical financial information for the Connect Group set forth below relates to the Connect Group for the years ended 31 August 2014, 2013 and 2012. The income statement, balance sheet and cash flow data have been extracted without material adjustment from the Connect Group’s historical financial information prepared in accordance with International Financial Reporting Standards as adopted by the European Commission for use in the European Union (“IFRS”).

Consolidated income statement
The tables below set out the consolidated income statement of the Connect Group for the three years ended 31 August 2014, 2013 and 2012 using IFRS and Underlying measurements respectively.

IFRS – continuing operations

Financial years ended
31 August
20142013(restated)^{(1)}31 August
£m£m£m |
| Revenue | 1808.5 | 1810.8 | 1803.9 |
| | Operating profit | 48.6 | 45.6 | 40.3 |
| | Profit before tax | 43.1 | 38.9 | 36.6 |
| | Profit for the year | 34.8 | 28.7 | 27.5 |
| | Basic earnings per share | 18.6p | 15.7p | 15.2p |
| | Note: |
| | (1) Restatement in respect of retirement benefit obligations. |
| | Underlying – continuing operations

Financial years ended
31 August
20142013(restated)^{(1)}31 August
£m£m |
| | Revenue | 1,808.5 | 1,806.9 | 1,803.9 |
| | Operating profit | 55.5 | 56.4 | 51.2 |
| | Profit before tax | 50.0 | 49.9 | 47.5 |
| | Profit for the year | 40.7 | 38.4 | 36.1 |
| | Basic earnings per share | 21.7p | 21.1p | 19.9p |
| | Note: |
| | (1) Restatement in respect of retirement benefit obligations and disposal of MMC business. |

Section B – Issuer
	Consolidated balance sheet
The table below sets out extracts from the consolidated balance sheets of the Connect Group as at 31 August 2014, 2013 and 2012.

Financial years ended
31 August 2014 31 August 2013
(restated)(1) 31 August 2012
(restated)(1)
Total assets 300.9 289.0 276.1
Total liabilities (343.0) (345.9) (353.7)
Total net liabilities (42.1) (56.9) (77.6)

Note:
(1) Restatement in respect of retirement benefit obligations.

Consolidated cash flow statement
The table below sets out extracts from the consolidated statements of cash flows of the Connect Group for the three years ended 31 August 2014, 2013 and 2012.

Financial years ended
31 August 2014 31 August 2013
(restated) 31 August 2012
(restated)
Net cash from operating activities 47.4 37.9 28.5
Closing net cash 20.4 10.1 5.1
Net debt (93.0) (98.5) (100.5)

Note:
(1) Restatement in respect of retirement benefit obligations.

The summary below presents certain significant changes in Connect’s financial condition and results of operations during the years ended 31 August 2014, 2013 and 2012.

Connect’s underlying revenue was £1,808.5 million, £1,810.8 million (restated) and £1,803.9 million for the years ended 31 August 2014, 2013 and 2012, respectively. Growth in underlying revenue during the periods under review was achieved despite the decline in the market for newspapers and magazines. This was primarily due to stronger than expected newspaper sales as a result of new contracts entered into, World Cup sticker sales, and cover price inflation in the News & Media Division; strong growth in direct to consumer propositions through Wordery in the Books Division; and continued good performance in the Education & Care Division.

Connect had a gross profit of £199.0 million for the year ended 31 August 2014, which was a decrease of 1.6 per cent compared to £202.3 million (restated) for the year ended 31 August 2013. This decrease was primarily due to the decline in revenue for the News & Media Division. Gross profit increased by 6.4 per cent. for the year ended 31 August 2013 compared to £190.2 million for the year ended 31 August 2012, reflecting the inclusion of a full 12 months of the higher margin Education & Care Division in the year ended 31 August 2013 compared to the five months included in the year ended 31 August 2012 following its acquisition in April 2012. | | |

Section B – Issuer

Connect’s administrative expenses were £76.8 million, £73.0 million (restated) and £58.4 million for the years ended 31 August 2014, 2013 and 2012, respectively. The increase in administrative expenses during the periods under review was primarily due to the increase in expenses as a result of the acquisition of the Education & Care Division in April 2012.

Connect’s underlying operating profit decreased by 1.6 per cent. to £55.5 million for the year ended 31 August 2014 compared to £56.4 million (restated) for the year ended 31 August 2013. Underlying operating profit for the year ended 31 August 2013 increased by 10.6 per cent. compared to £51.2 million for the year ended 31 August 2012. The decline of £0.9 million in underlying operating profit for the year ended 31 August 2014 compared to 2013 was primarily due to a larger than expected decline in operating profit for the Books Division, which was partially offset by the greater than expected increase in the News & Media Division and slight increase in the Education & Care Division. The increase of £5.2 million in underlying operating profit for the year ended 31 August 2013 compared to 2012 was primarily due to the full-year impact of the Education & Care Division following its acquisition in April 2012.

Connect has generated positive net cash inflow from operating activities during each of the periods under review. Net cash inflow from operating activities amounted to £47.4 million, £37.9 million and £28.5 million for the years ended 31 August 2014, 2013 and 2012, respectively. Connect’s operating activities benefitted from net improvements in working capital during the periods under review, which were primarily driven by a continued focus on improving working capital cash generation.

There has been no significant change in Connect’s financial condition or results of operations since 31 August 2014.

Tuffnells

The selected historical financial information for Tuffnells set forth below relates to the Tuffnells Group for the years ended 31 December 2011, 2012 and 2013 and the six months ended 30 June 2014 and 2013. The income statement, balance sheet and cash flow data have been extracted from Tuffnells Group’s historical financial information.

	Year ended 31 December 2013 £'000	Year ended 31 December 2012 £'000	Year ended 31 December 2011 £'000	6 months ended 30 June 2014 £'000	6 months ended 30 June 2013 £'000
Continuing operations
Revenue	127,801	114,647	109,286	69,174	61,613
Operating profit	11,022	10,492	9,196	6,016	5,112
Profit before tax	8,582	7,445	5,520	4,875	3,844
Profit for the year/period	6,563	5,551	3,944	3,804	3,073

Section B – Issuer
	31 December 31 December 31 December 30 June 30 June
	2013
£'000	2012
£'000	2011
£'000	2014
£'000	2013
£'000
Total assets	57,728	57,578	57,132	63,664	58,155
Total liabilities	(39,321)	(45,196)	(50,073)	(41,068)	(42,845)
Net assets	18,407	12,382	7,059	22,596	15,310
	Year ended 31 December 2013
£'000	Year ended 31 December 2012
£'000	Year ended 31 December 2011
£'000	6 months ended 30 June 2014
£'000	6 months ended 30 June 2013
£'000
Net cash from operating activities	11,963	9,529	6,099	3,876	4,006
Closing cash and cash equivalents	1,395	823	412	1,954	46
Net debts	(21,575)	(29,631)	(35,634)	(21,145)	(27,282)
The summary below presents certain significant changes in the Tuffnells Group’s financial condition and results of operations during the years ended 31 December 2013, 2012 and 2011 and the six months ended 30 June 2014 and 2013.
Revenue for the six months ended 30 June 2014 was £69.2 million, an increase of 12.3 per cent. compared to £61.6 million for the six months ended 30 June 2013. Growth in revenue during the periods under review was primarily due to an increase of 10.9 per cent. in volumes of collected consignments.
In the six-month period ended 30 June 2014, average consignment weights stabilised following the recent introduction of a new pallet promotion which resulted in increased sales of pallet consignments, which have a higher average weight and cost of delivery. This stabilisation of average consignment weight, together with higher collected consignment volumes, contributed to the growth in revenue for the six months ended 30 June 2014 compared to the same period in 2013.
Operating profit increased by 5.1 per cent. to £11.0 million for the year ended 31 December 2013 compared to £10.5 million for the year ended 31 December 2012, and by 14.1 per cent. for the year ended 31 December 2012 compared to £9.2 million for the year ended 31 December 2011. The increase in operating profit for the periods under review was primarily due to higher volumes of collected consignments, with average revenue per consignment remaining largely constant, as well as managing the growth of the business in a controlled manner with respect to net operating costs.
Tuffnells has generated positive net cash from operating activities during each of the periods under review. Tuffnells’ net cash inflow from operating activities for the six months ended 30 June 2014 was £3.9 million compared to £4.0 million for the same period in 2013. The improvements in working capital were primarily driven by a continued focus on improving working capital cash generation and reduced debtor days. Tuffnells’ net cash inflow from operating activities for the years ended 31 December 2013, 2012 and 2011 was £12.0 million, £9.5 million and £6.1 million, respectively. Tuffnells’ operating activities benefited from net improvements in working capital.

Section B – Issuer

B.8

The pro forma statement of profit and loss has been prepared to illustrate the effect on the earnings of the Connect Group as if the proposed acquisition had taken place on 1 September 2013.

The pro forma statement of net assets has been prepared to illustrate the effect on the net assets of the Connect Group as if the proposed acquisition had taken place on 31 August 2014.

The pro forma statement of net assets and statement of profit and loss have been prepared for illustrative purposes only and, because of that nature, address a hypothetical situation and do not, therefore, represent the Connect Group’s or the Enlarged Group’s actual financial position or results. The pro forma financial information have been prepared on the basis set out in the notes below and in accordance with Annex II to the PD regulation. The pro forma financial information is stated on the basis of the accounting policies of Connect. |
| Summarised Unaudited Pro Forma net assets statement |
| Connect as at 31 August 2014 £m (Note 1) | Debt Drawn down £m (Note 2) | Rights Issue £m (Note 3) | Subtotal £m (Note 4) | Tuffnells as at 31 December 2013 £m (Note 5) | Acquisition Adjustments £m (Note 5) | Total £m |
| ASSETS |
| Non-current assets | 107.1 | - | - | 107.1 | 44.0 | 74.5 | 225.6 |
| Current assets | 193.8 | 64.7 | 52.1 | 310.6 | 13.8 | (116.8) | 207.6 |
| Total assets | 300.9 | 64.7 | 52.1 | 417.7 | 57.8 | (42.3) | 433.2 |
| LIABILITIES |
| Current liabilities | (267.7) | - | - | (267.7) | (17.3) | 1.5 | (283.5) |
| Non-current liabilities | (75.3) | (64.7) | - | (140.0) | (22.1) | 19.0 | (143.1) |
| Total liabilities | (343.0) | (64.7) | - | (407.7) | (39.4) | 20.5 | (426.6) |
| Total net assets/liabilities | (42.1) | | 52.1 | 10.0 | 18.4 | (21.8) | 6.6 |
| Notes: |
| (1) | The figures for the Connect Group have been extracted without material adjustment from the audited financial statements of Connect for the year ended 31 August 2014 set forth in Appendix 1. |
| (2) | The net proceeds from debt drawdowns, £50.0 million of which is from the new term loan with the remaining £15.4 million being funded out of existing Group facilities, net of £0.7 million of debt arrangement fees. |

Section B – Issuer

(3) The net proceeds of the Rights Issue of £52.3 million are calculated on the basis that the Company issues 54,136,442 New Ordinary Shares at a price of 102 pence per share, net of estimated expenses in connection with the Rights Issue of approximately £2.9 million.

(4) The figures for the Tuffnells Group have been extracted without material adjustment from the historical financial information of the Tuffnells Group for the year ended 31 December 2013.

(5) Adjustments arising as a result of the Acquisition are set out below:

The adjustment to cash and cash equivalents of £116.8 million represents the aggregate of the £113.4 million cash consideration payable for the Acquisition of The Big Green Parcel Holding Company Limited and the settlement of debt plus estimated transaction costs of £7 million, less £0.7 million capitalised against the bank loan and £2.9 million offset against the rights issue.
The adjustment to current bank loans and other borrowings of £1.5 million representing the The Big Green Parcel Holding Company Limited’s bank loan shown in current liabilities which will be repaid at Acquisition.
The adjustment to non-current bank loans of £19.0 million represents the The Big Green Parcel Holding Company Limited’s bank loan which will be repaid at Acquisition.
The adjustment to goodwill has been calculated as follows:
Cash outflow at acquisition 113.4
Net assets acquired (18.4)
Bank loans < 1 year (1.5)
Bank loans > 1 year (19.0)
Pro forma goodwill adjustment 74.5

The Acquisition has been accounted for using the acquisition method of accounting. The excess of consideration over the book value of assets has been reflected as goodwill. A fair value exercise will be completed post Acquisition. Therefore, no account has been taken of any fair value adjustments that may arise on Acquisition; in particular, no intangible assets have been recognised in the pro forma financial information.

In addition to the cash consideration there is £15.3 million of contingent consideration that, as a result of future financial performance and employment, will be treated as remuneration.

(6) No account has been taken of the financial performance or any other transactions of Connect for the period since 31 August 2014, nor that of Tuffnells since 31 December 2013.

Unaudited Pro Forma statement of profit and loss

Revenue	Connect for the year ended 31 August 2014 £m (Note 1)	Rights issue/ New term loan £m (Note 2)	Adjustments
			Subtotal	Tuffnells for the year ended 31 December 2013 £m (Note 3)	Acquisition Adjustments £m (Note 4)
Revenue	1,808.5		1,808.5	127.8	- 1,936.3
Operating profit	48.6	-	48.6	11.0	(14.2) 45.4
Investment revenues	0.4	-	0.4	-	0.4
Finance costs	(5.9)	(2.2)	(8.1)	(2.4)	2.2 (8.3)
Profit before tax	43.1	(2.2)	40.9	8.6	(12.0) 37.5
Income tax expense	(8.3)	0.5	(7.8)	(2.0)	(0.2) (10.0)
Profit for the year	34.8	(1.7)	33.1	6.6	(12.2) 27.5

Section B – Issuer
		Notes:
(1) The figures for the Connect Group have been extracted without material adjustment from the audited financial statements of Connect for the year ended 31 August 2014 set forth in Appendix 1.
(2) The proceeds of the Rights Issue would not have been used to repay debt and therefore no adjustment has been made to reduce finance costs in relation to the Rights Issue. Interest costs of £2.2 million have been included in respect of the New term loan, the tax adjustment of £0.5 million represents the tax impact on the adjustments to finance costs calculated at 22.2 per cent., the statutory tax rate for the year to 31 August 2014.
(3) The figures for the Tuffnells Group have been extracted without material adjustment from the historical financial information of the Tuffnells Group for the year ended 31 December 2013 set forth in Part XVI.
(4) The adjustments arising as a result of the Acquisition are set out below:
Adjustments expected not to have a continuing impact:
a. The adjustment represents an expense of (£3.4 million) reflecting estimated transaction costs payable in respect of the Acquisition. Transaction costs are estimated to be £7.0 million in total however only £3.4 million will be recognised in the P&L with £2.9 million of costs relating directly to the raising of equity being recognised in reserves and the remaining £0.7 million relating to the new debt being recorded on the balance sheet.
b. The adjustment also reflects an expense of £10.8 million reflecting the first years charge for contingent consideration which is being accounted for as remuneration. The total maximum contingent consideration of £15.3 million is expected to be incurred over the three year period post acquisition, £10.8 million in the year ending 31 August 2015 (being an allocation of year 1, 2 and 3), £3.2 million in the year ending 31 August 2016 (being an allocation of year 2 and 3) and £1.3 million in the year ending 31 August 2017 (being an allocation of year 3 only).
Adjustments expected to have a continuing impact:
a. The credit to finance costs of £2.2 million represents the interest payable on the bank loan which will be repaid at Acquisition. This charge related to a loan of £28.0 million as at 31 December 2012 and £20.5 million as at 31 December 2013.
b. The tax adjustment of £0.2 million represents the combined tax impact of the adjustments to non-recurring items, reducing the tax charge by £0.3 million, and the adjustment to finance costs increasing the tax charge by £0.5 million, applying the statutory tax rate of 22.2 per cent. for the year to 31 August 2014.
(5) No account has been made to reflect the trading results of Connect for the period since 31 August 2014, nor that of the Tuffnells Group since 31 December 2013.
B.9	Profit forecast or estimate	Not applicable; no profit forecast or estimate is included in this document.
B.10	Nature of any qualifications in audit report	Not applicable; no qualifications are included in any audit report on the historical financial information included in this document.
B.11	Explanation in respect of insufficient working capital	Not applicable; the Company is of the opinion that, taking into account the net proceeds of the Rights Issue from the Underwritten Ordinary Shares and the bank and other facilities available to the Connect Group, the Connect Group has sufficient working capital for its present requirements, that is, for at least twelve months following the date of publication of this document.

Section B – Issuer
		The Company is of the opinion that, taking into account the net proceeds of the Rights Issue from the Underwritten Ordinary Shares and the bank and other facilities available to the Enlarged Group, the Enlarged Group has sufficient working capital for its present requirements, that is, for at least twelve months following the date of publication of this document.
Section C – Securities
---	---	---
C.1	Type and class of securities being offered and admitted to trading	The Company will issue 54,136,442 New Ordinary Shares pursuant to the Rights Issue.
When admitted to trading, the New Ordinary Shares will be registered with ISIN GB00B17WCR61.
C.2	Currency	The Ordinary Shares are denominated in pounds sterling and will be quoted and traded in pounds sterling.
C.3	Issued share capital	As at the Latest Practicable Date, the Company has in issue 189,477,548 fully paid Ordinary Shares of 5 pence each.
C.4	Rights attached to the Ordinary Shares	The Ordinary Shares rank equally in all respects and have the following rights attaching to them:
• on a show of hands at a general meeting every member present in person has one vote and every proxy or representative present who has been duly appointed by a member entitled to vote has one vote; and on a poll every member (whether present in person or by proxy or representative) has one vote per Ordinary Share;
• the right to receive dividends on a pari passu basis; and
• if the Company is wound up, with the sanction of a special resolution and any other sanction required by law and subject to the Companies Act, the liquidator may divide among the members in specie the whole or any part of the assets of the Company, and for that purpose may value any assets and determine how the division shall be carried out as between the members or different classes of members.
C.5	Restrictions on free transferability of the securities	There are no restrictions on the free transferability of the Ordinary Shares set out in the constitutional documents of the Company.
C.6	Admission to trading on regulated market	Applications will be made to:
(i) the FCA for admission of the New Ordinary Shares to the premium listing segment of the Official List; and
(ii) the London Stock Exchange for admission of the New Ordinary Shares to trading on the London Stock Exchange’s main market for listed securities.
It is expected that Admission will become effective by 8.00 am. on 2 December 2014. No application has been, or is currently intended to be, made for the New Ordinary Shares to be admitted to listing or trading on any other stock exchange.

Section C - Securities
C.7	Dividend policy	Connect paid dividends per Ordinary Share of 9.3 pence and 8.6 pence for the years ended 31 August 2013 and 31 August 2012, respectively. The proposed final dividend of 6.6 pence per Ordinary Share for the year ended 31 August 2014 announced on 15 October 2014 in Connect's Preliminary Results Announcement will be adjusted to reflect the impact of the Rights Issue in connection with the Acquisition. The proposed final dividend will be adjusted to 6.0 pence per Ordinary Share to reflect the bonus element associated with the Rights Issue and both Existing Ordinary Shares and New Ordinary Shares will be entitled to receive this dividend. The proposed final adjusted dividend of 6.0 pence per Ordinary Share is subject to approval by Shareholders at the Annual General Meeting on 4 February 2015 and, if approved, will be paid on 6 February 2015 to Shareholders on the register of members of at close of business on 9 January 2015. Following the Acquisition, Connect intends to maintain its existing progressive dividend policy, having regard to the availability of distributable reserves and cash, and taking into account the Enlarged Group's working capital and investment requirements.
Section D - Risks
---	---	---
D.1	Key information on the key risks that are specific to the Company and its industry	Prior to making an investment decision in relation to the New Ordinary Shares, prospective investors should consider, together with the other information contained in this document, the factors and risks attaching to an investment in the Company, including the following risks: · Connect Group's News Business and Books Division may be further impacted by structural market changes including the on-going migration from print to digital. The continuation or acceleration of consumers seeking to purchase newspapers, magazines or books for use only in electronic form will have a material adverse effect on Connect Group's News Business' business. In addition, the majority of the News Business' revenue is dependent upon the volume of sales and the cover price of newspapers and magazine and a material decrease in either could adversely affect Connect Group's News Business. Historically declines in circulation have been significantly offset by price increases, and Connect has also taken measures to reduce Connect Group's cost base. However, Connect Group's ability to offset the declines in revenue may not be sustainable. · Forecasting parcel volumes is a complex process that is subject to significant uncertainty. Forecasts may change over time due to changes in the assumptions on which they are based. If parcel volumes in the UK fail to grow as fast as forecast or decline, Tuffnells' growth prospects will be materially adversely affected. · Connect Group's News Business generally enters into long-term supply contracts with distributors of magazines and the publishers of newspapers and a significant

Section D – Risks
	proportion of Connect Group’s revenue and profit is attributable to these contracts. The majority of these contracts contain change of control clauses giving various rights to the relevant publisher or distributor in the event of a takeover of the Company. The Books Division and the Education & Care Division also have a number of significant contracts with third parties for shorter terms. The loss of any significant contract could adversely affect the sales, profits and results of Connect Group.
	• Tuffnells does not generally commit significant customers to spend minimum volumes through its delivery networks and therefore there can be no certainty that historical volumes will be maintained or that customers will continue to trade with Tuffnells. The Connect Group’s Book Division and Education & Care Division customers generally trade on terms that do not oblige customers to commit to minimum order volumes and as such there is also a lack of certainty that historical volumes will be maintained for these customers.
	• Connect Group and Tuffnells, and following Completion the Enlarged Group, could be adversely affected by general economic conditions, declines in consumer expenditure or changes in Government policies and initiatives and interest rate movements.
	• Connect Group’s News Business could be affected adversely by the application of UK and EU competition laws to any agreements or practices to which the News Business may have been, or is, party or otherwise engaged. The newspaper and magazine wholesaling industry has previously been the subject of scrutiny from the UK competition authorities and may be subject to further review.
	• Connect Group is reliant upon the continued services and performance of directors, its senior management as well as its key joint venture partners, whose knowledge and skills have been, and continue to be, valuable to Connect Group. The unexpected departure or loss of any such key personnel, including following Completion, any senior manager of Tuffnells, could have a material adverse effect on the business, financial condition and results of operations of the Connect Group or Tuffnells, and following Completion the Enlarged Group.
	• Connect Groups’ News Business is reliant upon, and Tuffnells engages an increasing number of, independent contractors in connection with their businesses. The self-employed status of Connect Group’s or Tuffnells’ independent contractors could be subject to challenge, for example due to a change in existing law and regulation or a change in interpretation of existing law and regulation. Any change to the status of such independent contractors could have a material adverse effect on the business of Connect Group or Tuffnells, and following Completion, the Enlarged Group.

Section D – Risks
		• Connect Group and Tuffnells are required to comply with laws and regulations relating to health and safety. The nature of Connect Group’s and Tuffnells’ operations exposes them to certain risks arising out of the performance of operational activities by their employees. Non-compliance with health and safety laws and regulations may affect the reputation and profitability of Connect Group or Tuffnells, and following Completion, the Enlarged Group.
• Connect Group and Tuffnells are, and following Completion the Enlarged Group will be, dependent on their information technology systems and the security of those systems. System performance, data capacity, temporary or permanent loss of systems could seriously affect Connect Group’s ability to carry out its business. Any compromise in the security measures of Connect Group or Tuffnells may also harm the reputation of the Connect Group or Tuffnells, or following Completion the Enlarged Group.
• Connect Group and Tuffnells, and following Completion the Enlarged Group, may face unexpected increases in operating and other expenses (such as fuel costs), which may reduce their profitability.
D.3	Key risks related to the Rights Issue and the Ordinary Shares	• The value of an investment in New Ordinary Shares may be subject to significant fluctuations due to a change in sentiment in the market regarding the New Ordinary Shares, resulting in a decline in the market price of the New Ordinary Shares.
• Shareholders who do not participate in the Rights Issue will suffer a reduction in their proportionate ownership and voting interests in the Company due to the issue of the New Ordinary Shares, with the effect that the percentage that their Ordinary Shares represent of the total issued share capital of the Company being reduced accordingly.
• Shareholders in certain jurisdictions outside the UK may not be able to take up New Ordinary Shares in the Rights Issue.
• The ability of Overseas Shareholders to bring actions or enforce judgments against the Enlarged Group or its directors or officers may be limited.
Section E – Rights Issue
---	---	---
E.1	Total net proceeds and estimate of total expenses	The Company expects to receive net proceeds of approximately £52.3 million, after estimated total expenses of approximately £2.9 million (exclusive of VAT). No expenses will be charged to investors by the Company.
E.2a	Reasons for the Rights Issue and use of proceeds	It is intended that the proceeds of the Rights Issue will be used towards financing the Acquisition, subject to certain conditions being met.

Section E – Rights Issue
		If the Acquisition completes, the consideration received by the Sellers will be up to £128.7 million comprising:
• initial cash consideration of £113.4 million payable on Completion; and
• deferred consideration of up to a further maximum amount of £15.3 million is payable in cash or Ordinary Shares to the Tuffnells Management Sellers and Option Sellers subject to the achievement of certain financial targets and (in respect of certain of the Tuffnells Management Sellers) their continued employment over set periods of time (comprising cash and Ordinary Shares).
The Company proposes to finance the Initial Consideration through:
• its recently extended debt facilities of £50 million; and
• the net proceeds of the 2 for 7 Rights Issue at 102 pence per New Ordinary Share, being approximately £52.3 million, net of expenses.
E.3	Terms and conditions of the Rights Issue	The Company proposes to raise approximately £52.3 million (net of expenses) by way of a rights issue of up to 54,136,442 New Ordinary Shares. The Rights Issue is being underwritten by the Underwriters pursuant to the Underwriting Agreement.
The New Ordinary Shares will be offered for subscription to Qualifying Shareholders at 102 pence (“Issue Price”) per New Ordinary Share payable in full on acceptance on the basis of:
2 New Ordinary Shares for every 7 Ordinary Shares
held by and registered in the names of Qualifying Shareholders at the close of business on the Record Date.
The Issue Price represents a 33.7 per cent. discount to the theoretical ex-Rights price based on the closing middle-market price of 168.75 pence per Ordinary Share on 11 November 2014. Under the Rights Issue, the New Ordinary Shares will be offered by way of rights to certain Qualifying Shareholders of the Company. Subject to certain exceptions, Shareholders with a registered address, resident, or otherwise believed to be in the United States or any other Excluded Territories will not be entitled to participate in the Rights Issue.
The Rights Issue is conditional, inter alia, upon:
• the Underwriting Agreement having become unconditional in all respects save for the condition relating to Admission;
• Admission of the Nil Paid Rights becoming effective by not later than 8:00 a.m. on 2 December 2014 (or such later time and date as the Joint Sponsors and the Company may agree); and
• the passing, without material amendment, of the Resolution.

Section E – Rights Issue
		Entitlements to New Ordinary Shares will be rounded down to the nearest whole number and fractional entitlements will not be allotted to Shareholders and will be disregarded. Holdings of Ordinary Shares in certificated and uncertificated form will be treated as separate holdings for the purpose of calculating entitlements under the Rights Issue.

The New Ordinary Shares, when issued and fully paid, will rank pari passu in all respects with the existing issued Ordinary Shares, including the right to receive dividends or distributions made, paid or declared after the date of issue of the New Ordinary Shares. Application will be made to the FCA and to the London Stock Exchange for the New Ordinary Shares to be admitted to the Official List and to trading on the London Stock Exchange.

It is expected that Admission will occur and that dealings in the New Ordinary Shares (nil paid) on the London Stock Exchange will commence at 8.00 a.m. on 2 December 2014 and in the New Ordinary Shares (fully paid) by 8.00 am on 17 December 2014. |
| E.4 | Material interests to the Rights Issue | Not applicable. There is no interest, including any conflicting interest, that is material to the Rights Issue or Acquisition. |
| E.5 | Name of persons offering to sell the securities:

Lock up arrangements: | There will be no selling shareholders.

There are no lock-up arrangements in place in connection with the Rights Issue. |
| E.6 | Amount and percentage of dilution | Following the issue of the New Ordinary Shares to be allotted pursuant to the Rights Issue, Qualifying Shareholders who take up their full entitlement will not suffer a dilution of their interests in the Company.

Qualifying Shareholders who do not take up any of their entitlements will suffer a dilution of up to 22 per cent. in their interests in the Company. |
| E.7 | Estimated expenses charged to investor | Not applicable; no expenses will be charged to the investor by the Company in respect of the Rights Issue. |

PART II

RISK FACTORS

Any investment in the Company and its Ordinary Shares is subject to a number of risks. Accordingly, investors should consider and review this document carefully and in its entirety (together with the documents incorporated by reference into it) including the following risks and uncertainties prior to making any investment decision or deciding whether to vote in favour of the Acquisition at the General Meeting. A number of factors affect the operating results, financial condition and prospects of each of the Connect Group and the Tuffnells Group and, following Completion, the Enlarged Group. This section describes the risk factors considered to be material in relation to the Connect Group and the Tuffnells Group as discrete groups based on the information known as at the date of this document. Each of these risks will continue to be relevant to the Enlarged Group following Completion. If any of the following risks actually materialise, the Enlarged Group's business, financial condition or operating or financial results could be materially adversely affected and the value of the Ordinary Shares could decline. The risks and uncertainties described below are not the only ones faced and should be used as guidance only. Additional risks and uncertainties not presently known to the Directors or that the Directors currently deem immaterial may also, whether individually or cumulatively, have a material adverse effect on the Connect Group's business, financial condition or operating or financial results, or following Completion the Enlarged Group, and could negatively affect the price of the Ordinary Shares and investors could lose all or part of their investment.

Investors should note that the risks relating to the Connect Group, the Tuffnells Group, their respective industries, and the Ordinary Shares summarised in the section of this document headed Part I (Summary) are the risks that the Directors believe to be the most essential to an assessment by a prospective investor of whether to invest in the New Ordinary Shares. However, as the risks which the Connect Group and Tuffnells Group face relate to events and depend on circumstances that may or may not occur in the future, prospective investors should consider not only the information on the key risks summarised in the section of this document headed Part I (Summary) but also, among other things, the risks and uncertainties described below.

The information given is as at the date of this document and, except as requested by the FCA or required by, the Listing Rules, the Disclosure Rules or any other applicable law, will not be updated. Any forward-looking statements are made subject to the reservations specified under the heading "Forward-looking statements" of Part III (Important Information) on page 40.

1. RISKS RELATING TO THE BUSINESSES AND INDUSTRIES IN WHICH THE CONNECT GROUP AND TUFFNELLS OPERATES AND, FOLLOWING COMPLETION, THE ENLARGED GROUP WILL OPERATE

1.1 The Connect Group's News Business and Books Division may be further impacted by structural market changes including the on-going migration from print to digital and the Connect Group's News Business could be affected by a material decrease in the prices or volumes of newspapers or magazines which the Connect Group may be unable to continue to offset.

In the year ended 31 August 2014, the Connect Group's News Business accounted for 77 per cent. of the Connect Group's underlying operating profits. The majority of the News Business' revenue is dependent upon the volume of sales and the cover price of newspapers and magazines. Newspaper and magazine circulation volumes in the UK have generally been declining since the 1980s due to changing consumer habits and the growth of alternative sources of news such as TV and the internet. Physical book sales in the UK have also been decreasing due to price competition, the move to e-books and reduced government spending for education and libraries. The Connect Group's News Business and Books Division are largely dependent on the distribution of newspapers and magazines, and books, respectively, in printed form and such items, which previously were purchased and delivered only in physical form, are now increasingly being purchased by customers for viewing and use electronically, whether through websites or in downloadable form. This change in favour of digital

products has led to sales declines in printed newspapers and magazines and books, with expectations of further declines in the future.

In addition, the increasing trend for advertisers to place their advertisements on the internet or other digital platforms, rather than in print media such as newspapers and magazines given the decline in circulation of print media, could impact the sustainability of the on-going business models of publishers and distributors of newspapers and magazines, and could lead to further declines in newspaper and magazine circulation which would have a consequential impact on the News Business. These trends are expected to continue and may accelerate in coming years as consumers, whether for reasons of cost, convenience or otherwise, seek to purchase newspapers, magazines or books for use only in electronic form. The continuation or acceleration of these trends would have a material adverse effect on the Connect Group's results of operations, financial condition and prospects.

Historically, declines in circulation have been significantly offset by price increases; however these are not within the control of the News Business and a material decrease could impact the News Business by reducing revenue, margins and economies of scale. To the extent that newspaper and magazine cover price increases do not continue significantly to offset lower circulation figures, the Connect Group may have to consider factors within its control so as to preserve profitability and mitigate the impact of any further declines in circulation, for example, reducing the Connect Group's cost base. In the year ended 31 August 2014, the Connect Group's News Business made annual cost savings of £6 million so as to offset in part the impact on profitability due to the decline in revenue attributable to the decline in newspaper and magazine sales. Such measures may offset the financial effect of lower circulation figures to an extent and for a period, but a significant proportion of the Connect Group's cost base is related to its delivery infrastructure and as such is essentially fixed. Therefore such reductions are not guaranteed and may not be sustainable over time, and there may become a time where such reductions may not be possible. To the extent that there is a material decrease in the prices or volumes of newspapers or magazines which the Connect Group is not able to offset, this could have a material adverse effect on the Connect Group's results of operations, financial condition and prospects.

1.2 Parcel volumes in the UK may not grow as forecast and so adversely affect Tuffnells' growth prospects.

Tuffnells operates in the parcel delivery industry, specialising in the handling and express delivery of irregular dimension and weight ("IDW") freight on a UK-wide basis. The Directors believe that Tuffnells operates in a large and growing market, and estimate that its core addressable market was worth circa £740 million in 2013, with forecast growth of 3-4 per cent per annum. Forecasting parcel volumes is a complex process that is subject to significant uncertainty. Forecasts of the volume growth of UK parcel markets published by third parties may diverge from, and in some cases be lower than, the Connect Group's own forecasts in this area. Forecasts, including the Connect Group's, may change over time due to changes in the assumptions on which they are based. There can be no assurance that parcel volumes will grow in line with the Connect Group's forecasts.

It is possible that parcel volumes in the UK may fail to grow as forecast by the Connect Group, grow at rates different from the Connect Group's forecasts, or decline. If parcel volumes in the UK fail to grow as fast as forecast by the Connect Group or decline, Tuffnells' results of operations, financial condition and prospects would be materially adversely affected. Moreover, there can be no assurance that the Tuffnells Group, or following Completion the Enlarged Group, will maintain or increase its share of the parcel markets in which it operates, and its share of those markets may decline in the future.

1.3 The Connect Group's customers and Tuffnells' customers may cease to continue trading with them or may reduce their level of demand for their products or services.

Tuffnells has a very broad customer base, with few instances where single customers account for a significant part of Tuffnells' revenue of any business or product areas. However, in order to retain existing customers, Tuffnells is required to satisfy customer requirements and remain competitive in

the market, and a failure to do so may lead to a loss of customers or a reduction in the volume of items they choose to send through Tuffnells' networks.

Tuffnells' contracts do not generally commit significant customers to send minimum volumes through Tuffnells' delivery networks (although pricing discounts do apply depending on the volume of items a customer despatches through the networks) and so there can be no certainty that historical volumes will be maintained. The majority of Tuffnells' customers either contract with Tuffnells on an ad-hoc basis or do not have a formal contract in place and as such are not obliged to provide a minimum volume level in their arrangements with Tuffnells and there is therefore a lack of certainty regarding revenue derived from these customers.

As a result of these factors, there is a lack of certainty in respect of the retention of certain existing customers who may elect not to continue contracting with Tuffnells, and the volume with which they will continue to trade with Tuffnells. Any loss of a substantial number of customers, or the loss of any key customers that generate substantial revenue or profits for Tuffnells, could have a material adverse effect on Tuffnells', and following Completion the Enlarged Group's, results of operations, financial condition and prospects.

Both the Connect Group's Books Division and Education & Care Division have very broad customer bases with customers generally trading on the standard terms and conditions of the relevant business. These standard terms and conditions do not oblige the customer to commit to minimum committed order volumes, and as such there is therefore a lack of certainty regarding revenue the Connect Group will derive from these customers and no certainty that historical volumes will be maintained. Any loss of a substantial number of customers, or the loss of any key customers who generate substantial revenue or profits for the relevant Business, could have a material adverse effect on the Connect Group's results of operations, financial condition and prospects.

1.4 The Connect Group and Tuffnells could be adversely affected by the loss of key personnel and the loss of their specialist knowledge and contacts.

The Connect Group is reliant upon the continued services and performance of its directors, its senior management as well as its key joint venture partners, whose knowledge and skills have been, and continue to be, valuable to the Connect Group. These key personnel play an important role in maintaining the Connect Group's culture, in setting the Connect Group's strategic direction and in managing operations and performance amongst other things. Tuffnells is also reliant on the continued service and performance of its directors, senior management and other key employees.

The unexpected departure or loss of any such key personnel could have a material adverse effect on the business, financial condition and results of operations of the Connect Group or Tuffnells, and following Completion the Enlarged Group. While provision has been made in the Acquisition Agreement to incentivise Tuffnells' key personnel to remain with the Enlarged Group for a period of at least three years (one year in the case of Lloyd Dunn) and incentive plans are in place for the Connect Group's key personnel, there can be no assurance that such key personnel will not depart from the Connect Group or Tuffnells or, following Completion, the Enlarged Group.

Although succession planning is, and will be, regularly considered and development plans established, there can be no assurance that the Connect Group or Tuffnells, or following Completion the Enlarged Group, will be able to attract or retain suitable replacement personnel in a timely manner or at all. The Connect Group or Tuffnells, and following Completion the Enlarged Group, may also incur significant additional costs in recruiting and retaining suitable replacements. The loss of a significant number of management or key employees could adversely affect the Enlarged Group's ability to conduct its businesses (through an inability to execute business operations and strategies effectively) and the value of those businesses.

The Connect Group is committed to corporate governance best practice and as such, in accordance with the provisions of the UK Corporate Governance Code, it is anticipated that once a non-executive director has served on the Board for nine years, he will not normally seek re-election to the role.

Although the Connect Group’s Nominations Committee regularly considers succession planning and commenced a process to replace the Chairman and two non-executive directors who will have served for nine years in August 2015, there can be no assurance that the Connect Group will be able to attract suitable replacements in a timely manner, which may have an adverse effect on the management of the Enlarged Group given the skills and qualities that non-executive directors bring to the Board.

1.5 The Connect Group’s businesses could be adversely affected by the loss or termination of its key contracts.

The Connect Group’s News Business generally enters into long-term supply contracts, typically for approximately five years, with the distributors of magazines and the publishers of newspapers. The News Business’ existing contracts generally operate as exclusive geographic arrangements. The News Business has secured contracts with publishers and distributors representing approximately 84 per cent. of revenue (as at the year ended 31 August 2014) until at least 2019. In the next contract tender processes, the loss of a material contract, a change in the legal or regulatory environment, a significant reduction in the geographic area of the wholesale arrangements or a reduction in the News Business’ margins under a contract could impact the financial performance of the Connect Group by reducing the News Business’ revenue and profits.

The majority of the News Business’ existing contracts with publishers and distributors contain change of control clauses giving various rights to the relevant publisher or distributor (such as termination of the contract) in the event of a successful takeover bid for the Company. Given that a significant proportion of the Connect Group’s revenue and profit is attributable to these contracts, these change of control clauses could impact the appetite of third parties to make an offer for the Company’s Ordinary Shares.

The Connect Group’s Books Division has a number of significant contracts with third parties, such as Amazon and WH Smith PLC, to supply books. These contracts are for shorter terms than the Connect Group’s newspaper and magazine distribution contracts (typically for any period of time from 12 months to three years) and are not geographically exclusive arrangements. The loss of any of these significant contracts could adversely affect the sales, profits and results of the Books Division and ultimately the results of the Connect Group.

The Connect Group’s Education & Care Division also has a number of significant contracts with third parties that are for relatively short fixed terms or contain no minimum volume commitments, the loss of which could adversely affect the sales, profits and results of the Education & Care Division and ultimately the results of the Connect Group.

1.6 The Connect Group may not be able to identify and successfully execute new growth strategies and attempts by the Connect Group to diversify through merger and acquisition activity, or through joint ventures or other collaborative activities, may be unsuccessful.

The Connect Group’s strategic ambition is to diversify into carefully chosen markets so as to achieve 50 per cent. of profits outside newspaper and magazine wholesaling. The proposed acquisition of Tuffnells helps towards achieving this strategic ambition. Following Completion, the Enlarged Group may seek to expand its business by exploiting organic growth opportunities or through merger and acquisition activity. The Connect Group may be unable to expand its business in these ways in a cost-effective or timely manner, for example, because of a lack of suitable targets or opportunities. Any such expansion of the Connect Group’s business would also be likely to require significant additional investment, together with operations and resources, which could strain the Connect Group’s management, financial and operational resources. In addition, there can be no assurance that any mergers or acquisitions will successfully achieve their aims, or the Connect Group’s strategy outlined above.

In identifying potential merger and acquisition targets, the Connect Group endeavours to ensure appropriate due diligence is carried out, but acquisitions would necessarily leave the Connect Group exposed, at least to some degree, to any operational failings of the target company and potentially to

overpaying for any such target. Any payment for such target company with Ordinary Shares could dilute the interests of Shareholders.

In addition, the Connect Group may expand through joint ventures and other collaborative activities with third parties. Participation in joint projects contains an inherent risk in their management and the partners may fail to achieve their joint goals. Similarly, co-operating in this way with third parties may require the Connect Group to rely on its partners to help achieve its aims and maintain the Connect Group's reputation.

The Connect Group may also seek to grow organically, developing new business opportunities in new industries or sectors from its existing operations, or following Completion, the Enlarged Group's operations. The Connect Group's ability to implement successfully any new business initiatives may be adversely impacted by a number of factors, including regulatory and other considerations. In addition, any new initiatives may not achieve the revenue or profitability that justify the original investment made by the Connect Group.

Mergers and acquisitions and joint ventures, including the difficulties involved in integrating companies, businesses or assets, and implementing new business opportunities, may be unsuccessful or may divert financial and management resources from the Connect Group's core business, which could have a material adverse effect on the Connect Group's businesses, financial condition, results of operations and prospects.

1.7 The Connect Group's businesses and Tuffnells operate in increasingly competitive markets which could adversely affect prices and demand for their services, resulting in a decrease of the Connect Group's market share.

The Connect Group's News Business, Books Division and Education & Care Division operate in increasingly competitive marketplaces. The Directors believe that the Connect Group's market scale and expertise enables it to compete primarily on the basis of factors such as quality and range of products, price, product availability and service. If the Connect Group fails to compete effectively, it may lose existing customers and fail to attract new customers resulting in reduced sales growth opportunities and loss of margins. In addition, as a result of the price discounting that is required in order to remain competitive, sales growth opportunities may be reduced and margins eroded.

The broader parcel market in which Tuffnells operates is highly competitive and there is significant competition in the UK from companies with established delivery capabilities. Tuffnells' main competitors in the broader parcel market include FedEx, TNT, Parcel Force, DHL, City Link and DX Group, many of whom currently have financial resources substantially greater than those of Tuffnells, and following Completion, the Enlarged Group. The size and established nature of Tuffnells' competitors could result in Tuffnells losing market share if they pursue growth options in the IDW segment of the parcel market on which Tuffnells focuses, or by the use of aggressive pricing strategies in that segment or if its competitors merge or form strategic partnerships, which could increase competition for Tuffnells. Tuffnells primarily competes on the basis of factors such as price, speed of delivery and ability to distribute IDW consignments. If Tuffnells, and following Completion the Enlarged Group, fails to compete effectively in any one of these areas, it may lose existing customers or fail to attract new customers.

Many existing and potential customers of the Connect Group's Education & Care Division are public bodies which are required to comply with the formalities of the Public Contracts Regulations 2006 (the "Public Contracts Regulations") when procuring goods and services under contracts above specified values. Where they apply, the Public Contracts Regulations restrict the ability of customers to place orders for goods or services without first conducting a formal competitive tendering exercise. A number of competitors of the Connect Group's Education & Care Division are themselves public bodies and, as such, have a particular status under the Public Contracts Regulations which, in certain cases, enables customers that are subject to the Public Contracts Regulations to place orders with those competitors without the need for a prior competitive tender. As the Education & Care Division is not a public body it may be at a disadvantage relative to certain of its competitors when competing

for new and existing business and, consequently, there is a risk that the Connect Group’s Education & Care Division may lose existing customers or fail to attract new customers or both.

The Connect Group believes there is a strong link between the quality of the service which customers receive from a particular service provider and their willingness to use that provider again in the future. The failure by the Connect Group or Tuffnells, or following Completion, the Enlarged Group, to deliver to the service quality standards expected by customers may lead to customers using alternative delivery providers.

Such competitive pressures from one or more of the Connect Group’s competitors or Tuffnells’ competitors, or the inability to adapt effectively and quickly to a changing competitive landscape, could affect the prices, margins and demand for the Connect Group’s or Tuffnells’ products and related services, which may have a material adverse effect on the Connect Group’s or Tuffnells’, and following Completion the Enlarged Group’s, business, financial condition, results of operations and prospects.

1.8 The Connect Group and Tuffnells, and following Completion the Enlarged Group, could be adversely affected by general economic conditions, declines in consumer expenditure or changes in Government policies and initiatives and interest rate movements.

The performance of the Connect Group and Tuffnells, and following Completion the Enlarged Group, is dependent on a number of macroeconomic factors outside their control, including political, financial and economic factors. These include interest rates, inflation and consumer, business and Government spending, all of which affect the business and economic environment, the demand for and prices of the Connect Group and Tuffnells’ products and services and, ultimately, the future results of operations and prospects of the Connect Group and Tuffnells, and following Completion the Enlarged Group.

As a wholesaler of magazines and newspapers, the News Business is sensitive to general economic, consumer spending and business conditions as well as to the condition of the retail market for newspapers and magazines. Demand by the consumers for the products which the News Business wholesales to retailers has in the past been sensitive to consumer confidence which may or may not be linked to economic conditions.

The Connect Group’s Books Division supplies books to customers including public libraries and academic institutions, and the Connect Group’s Education & Care Division is a distributor of consumable products to the education market and care market which are largely dependent on Government funding. Any reduction in Government funding may adversely affect the Connect Group.

Parcel volumes have historically been linked to levels of economic activity, and latterly by the increase in online purchasing, and as such Tuffnells’ business and operating results are affected by macroeconomic conditions. Weak economic conditions could have a material adverse impact on the results of operations of Tuffnells. Low levels of economic growth may have a number of effects on the business of the Connect Group, including leading customers to adopt cheaper service options.

These factors may have a material adverse effect on the Connect Group’s, Tuffnells’, and following Completion the Enlarged Group’s, business, financial condition, results of operations and prospects.

1.9 The Connect Group could be adversely affected by the application of competition laws.

The Connect Group’s News Business could be affected adversely by the application of competition laws to any agreements or practices to which the News Business may have been, or is, party or otherwise engaged. The Competition Act contains two prohibitions which are modelled on and are required to be applied consistently with Articles 101 and 102 of the Treaty on the Functioning of the European Union (the main provisions of EU competition law dealing with anti-competitive agreements and conduct). Chapter I of the Competition Act prohibits anti-competitive agreements. The Chapter I prohibition can apply, for example, to exclusive agreements, in particular long-term exclusive agreements. Chapter II of the Competition Act prohibits conduct which amounts to abusive

behaviour by a company (or companies) in a dominant position. The News Business' appointments as exclusive wholesaler for various newspaper publishers and magazine distributors in defined territories, as well as other associated arrangements, may be subject to review under the Chapter I or Chapter II prohibitions (or both). If the Connect Group was found to be, or to have been, party to any agreements or practices which infringe the Chapter I or the Chapter II prohibitions (or both), those agreements could be found to be void and unenforceable in whole or in part, and could lead to substantial fines being imposed and in the receipt by the Connect Group of claims for damages, and may have a material adverse effect on the Connect Group's results of operations, financial condition and prospects.

The newspaper and magazine wholesaling industry has previously been the subject of scrutiny from the UK competition authorities and may be subject to further review. The most recent UK review placed responsibility on wholesalers, distributors and publishers to self-assess their own agreements for compliance with competition law. If the Connect Group fails correctly to self-assess its agreements, an adverse Competition and Markets Authority decision or adverse judgment could have an impact on the manner in which the Connect Group conducts its business and could lead to substantial fines being imposed and claims for damages from third parties, and may have a material adverse effect on the Connect Group's results of operations, financial condition and prospects. The regulatory environment in which the Connect Group's News Business operates is further described in paragraph 7.2.5 of Part XI (Information on the Company and the Group) of this document.

1.10

The Connect Group is reliant upon, and Tuffnells engages an increasing number of, independent contractors in connection with their businesses and could see operating costs adversely affected by changes in the self-employment status of these independent contractors which may reduce their profitability.

The Connect Group's News Business utilises independent contractors to make substantially all of its deliveries, using vehicles owned or leased by the independent contractors. Tuffnells utilises independent contractors to make approximately 30 per cent. of its deliveries using vehicles owned or leased by the independent contractors. As independent contractors, however, they may choose to provide delivery or related services to other companies outside of the Connect Group or Tuffnells, or may choose to cease making deliveries for the Connect Group or Tuffnells at any time (subject to contractual notice provisions). If the Connect Group or Tuffnells lost a significant number of its independent contractor delivery teams and was unable to recruit a sufficient number of qualified replacement delivery teams in a timely manner, the ability of the Connect Group or Tuffnells, and following Completion the Enlarged Group, to make deliveries would be materially adversely affected.

The self-employed status of the Connect Group's or Tuffnells' independent contractors could be subject to challenge by (for example) HMRC or the independent contractors themselves (or both), for example due to a change in existing law and regulation or a change in interpretation of existing law and regulation. The independent contractors could seek to assert status as employees in order to access certain statutory employment rights which would not otherwise be available to them, such as the right to receive a redundancy payment upon termination in certain circumstances. In addition, if HMRC deemed the independent contractors to be employees within the Connect Group or Tuffnells, the Connect Group or Tuffnells, or following Completion the Enlarged Group, could (i) face additional tax obligations in respect of National Insurance contributions, potentially including obligations and/or penalties in respect of prior periods; or (ii) face allegations for failure properly to deduct Pay As You Earn which could lead to financial penalties being imposed (or both). Any change to the status of the Connect Group's or Tuffnells' independent contractors, as well as any awards of compensation or additional tax obligations or penalties, could have a material adverse effect on the business, financial condition, results of operations and prospects of the Connect Group or Tuffnells, and following Completion the Enlarged Group.

1.11 Non-compliance with health and safety laws and regulations may affect the reputation and profitability of the Connect Group or Tuffnells, and following Completion the Enlarged Group.

The Connect Group and Tuffnells are required to comply with laws and regulations relating to health and safety. The nature of the Connect Group’s and Tuffnells’ operations exposes them to certain risks arising out of the performance of operational activities by their employees. In particular, a large proportion of the Connect Group’s and Tuffnells’ employees are involved in the performance of labour-intensive manual tasks (including for example, the lifting and handling of parcels) and the use of road and industrial vehicles. Investigations by the Health and Safety Executive in relation to health and safety issues over the past five years has led to Tuffnells being served with three improvement notices. Following receipt of these improvement notices, Tuffnells has taken steps to address the issues raised.

A violation of health and safety laws or regulations relating to the operations of the Connect Group or Tuffnells, or following Completion the Enlarged Group, a failure to comply with the instructions of the relevant health and safety authorities or the occurrence of incidents involving the safety of the Connect Group’s or Tuffnells’, or following Completion the Enlarged Group’s, employees in the workplace could lead to, among other things, negative publicity and reputational damage, litigation and damages claims, fines, costly compliance procedures and, in extreme cases, a temporary shutdown of part of a business.

The Connect Group’s and Tuffnells’ operations depend on road transport and as such utilise a significant number of road vehicles in the UK. These vehicles, and their drivers, could be involved in accidents causing fatalities, injuries and property damage. Adverse weather conditions and increased road traffic volumes may contribute to increases in the number of accidents involving these vehicle fleets in the future. The Connect Group or Tuffnells, and following Completion the Enlarged Group, may suffer civil, criminal and regulatory liability (including fines and other financial penalties) arising from accidents involving its vehicles and the reputation and brand of the Connect Group or Tuffnells, and following Completion the Enlarged Group, may be affected. The Connect Group’s or Tuffnells’, and following Completion the Enlarged Group’s, external insurance costs may also increase following a rise in the number of accidents. Such violations, failures and incidents could therefore have a material adverse effect on the results of operations, financial condition and prospects of the Connect Group, Tuffnells, or following Completion the Enlarged Group.

1.12 Asbestos is present in certain of the Connect Group’s and Tuffnells’ properties.

The Connect Group’s and Tuffnells’ property portfolio includes properties where materials containing asbestos are present. Pursuant to applicable law and regulations relating to asbestos, the Connect Group and Tuffnells are subject to duties to manage the risks of asbestos in its premises, which include ensuring that so far as reasonably practicable no person can come to harm from the presence of asbestos on the premises. This may involve isolating, encapsulating or removing asbestos that is found to be in a poor condition. Each of the Connect Group and Tuffnells have developed and have been implementing an asbestos management plan which incorporates a set of policies and procedures to assist it to manage the asbestos risks in its properties. The on-going management of asbestos by the Connect Group and Tuffnells will involve additional expenditure over forthcoming years and may in certain circumstances require full or partial closure of certain properties. Any failure to manage the asbestos in its properties could result in the Connect Group or Tuffnells, or following Completion the Enlarged Group, incurring fines or other liabilities, adversely affect its reputation or cause the full or partial closure of such properties (or both), which could have a material adverse effect on the financial condition or results of operations of the Connect Group or Tuffnells, or following Completion the Enlarged Group.

1.13 The Connect Group, and Tuffnells are, and following Completion the Enlarged Group will be, dependent on their information technology systems and the security of those systems.

The Connect Group and Tuffnells rely on information technology systems to operate their businesses, such as in the case of the Connect Group relying on its SAP enterprise system which underpins the

News Business' operation and support services. System performance, data capacity, temporary or permanent loss of systems could seriously affect the Connect Group's ability to carry out its business. Although the SAP enterprise system in the Connect Group's News Business was upgraded in 2013 on time and without interruption to service, further system upgrades may be more complex and any interruption could materially affect the Connect Group's businesses, or following Completion the Enlarged Group's businesses.

The Connect Group and Tuffnells may also be susceptible to cyber-attacks that may cause their websites or other systems to experience service outages, loss of intellectual property rights or other interruptions. The Connect Group and Tuffnells take measures designed to prevent the occurrence of such breaches and disruptions. If, however, any compromise in the security measures of the Connect Group or Tuffnells were to occur, the reputation of the Connect Group or Tuffnells, or following Completion the Enlarged Group, may be harmed, customer service and/or satisfaction could be adversely impacted and there could be increased costs for rectification and requirement for future investment. As result the Connect Group's business, financial condition and results of operations may be materially adversely affected.

The Connect Group suffered a material IT systems failure in June 2014 in its data storage systems. Any future material failure in the Connect Group's or Tuffnells' IT applications, systems and infrastructure or any failure to maintain, invest in or improve them over the coming years may lead to material operational and systems disruptions. Any of these could have a material adverse effect on the Connect Group's, Tuffnells' or following Completion the Enlarged Group's, results of operations, financial condition, reputation and reporting accuracy.

The Connect Group and Tuffnells also process personal data, some of which may be sensitive, as part of its business. There is a risk that such data could become public if there were a security breach in respect of such data and, if one were to occur, the Connect Group or Tuffnells, or following Completion the Enlarged Group, could face liability under data protection laws. The Connect Group and Tuffnells also process credit card payments and so are subject to payment card association operating rules, certification requirements, Payment Card Industry Data Security Standards and rules governing electronic funds transfers, which could change or be reinterpreted to make them difficult or impossible to comply with. If the Connect Group or Tuffnells, or following Completion, the Enlarged Group, fails to comply with these rules or requirements, it may be subject to fines or higher transaction fees. Any such breaches may have a material adverse effect on the reputation, business, financial condition, results of operations and prospects of the Connect Group or Tuffnells, or following Completion the Enlarged Group.

1.14 The Connect Group remains exposed to potential liabilities arising from its Demerger from WH Smith PLC.

The terms of the Demerger Agreement entered into to effect the demerger of the Connect Group from WH Smith PLC provide that the Connect Group will be liable, in certain circumstances, for activities prior to the Demerger becoming effective. For example, the Connect Group had total contingent lease liabilities of £55 million as at 31 August 2006, which has reduced over time to £6.3 million as at 31 August 2014 in respect of previous assignments of leases used by various businesses of the WH Smith Group whereby the lease liability would revert to the Connect Group if the assignee defaulted. This contingent lease liability represents the most significant remaining liability to which the Company is exposed as a result of its Demerger from WH Smith PLC. Pursuant to the terms of the Demerger Agreement, any such contingent liability which becomes an actual liability will be apportioned between the Connect Group and the WH Smith Group in the ratio 35:65 (provided that the actual liability of the Connect Group cannot exceed £5 million in any 12 month period). Although the Demerger Agreement contained certain other indemnities granted by WH Smith PLC in favour of the Company, certain of these indemnities are now time-barred. Therefore, the Company may not be able to recover from WH Smith PLC any sums it is liable for in relation to activities prior to the Demerger becoming effective, which could have a material adverse effect on the reputation, business, financial condition, results of operations and prospects of the Connect Group.

1.15 The Connect Group and Tuffnells, and following Completion the Enlarged Group, could be adversely affected by environmental legislation.

Environmental sustainability is likely to be of continuing importance to governments, regulators and other interested or influential bodies. The Connect Group and Tuffnells utilise a number of vehicles which contribute to carbon dioxide in the environment and, in recent years, measures have been adopted at the UK and EU level aimed at reducing greenhouse gas emissions, reducing energy usage and ensuring that greater use is made of energy from renewable sources which could adversely affect the Connect Group’s or Tuffnells’, and following Completion the Enlarged Group’s, operations and conduct of its business, particularly in relation to its use of energy and the management of its vehicles or buildings, in particular in relation to the level of carbon emissions from its vehicles and buildings. Changes to environmental legislation may increase the Connect Group’s or Tuffnells’, and following Completion the Enlarged Group’s, costs, which may adversely affect the results of operations, financial condition and prospects of the Connect Group or Tuffnells, and following Completion the Enlarged Group.

The Connect Group’s and Tuffnells’ property portfolios comprise properties that have been constructed at various times and a number of its properties have been constructed in areas that have historically been the subject of commercial or industrial use. It is possible that on-site pollution or contamination could have been caused by such previous uses, or in limited circumstances by current uses, for which it is possible that the Connect Group or Tuffnells could be held liable. Although the Directors are not aware of any relevant liability, claims or actions, a claim or regulatory action against the Connect Group, Tuffnells, or following Completion, the Enlarged Group, for pollution or contamination could have a material adverse effect on its financial condition and results of operations.

1.16 The Connect Group and Tuffnells, and following Completion the Enlarged Group, may face unexpected increases in fuel costs, which may increase the costs of delivery and which may reduce their profitability.

The Connect Group’s and Tuffnells’ operations depend on road transport and as such they utilise a significant number of road vehicles in the UK. The Connect Group currently imposes a fixed fee covering fuel costs and Tuffnells currently adds a variable fuel supplement in connection with its delivery services. The fuel costs and expenses of the Connect Group or Tuffnells, and following Completion the Enlarged Group, in connection with utilising road vehicles could increase, and there can be no certainty that they will be able to pass such increases on to customers. Any such increase in fuel costs, if not passed on to customers, could have a material impact on the business, financial condition, results of operations and prospects of the Connect Group or Tuffnells, and following Completion the Enlarged Group.

1.17 The Connect Group and Tuffnells, and following Completion the Enlarged Group, may face unexpected increases in operating and other expenses, which may reduce their profitability.

The operating and other expenses of the Connect Group or Tuffnells, and following Completion the Enlarged Group, could increase without a corresponding increase in revenue. Factors which could increase operating and other expenses include unforeseen increases in:

third-party couriers;
restrictions on the News Business’ carriage charges;
the national minimum wage, other payroll expenses (for example, National Insurance and, following a recent UK legal ruling, in the amount of remuneration payable in respect of statutory holiday entitlement) or further changes to the UK pensions regime;
costs associated with the Connect Group’s or Tuffnells’ independent contractors;
advertising costs;
business rates;

interest rates affecting the cost of the Connect Group’s or Tuffnells’ vehicle and equipment leases;
property taxes and other statutory charges;
insurance premiums;
tax charges (including road usage and haulage taxes and tariffs);
legislation; and
the rate of general inflation,

together with changes in laws, regulations or Government policies (including those relating to health and safety (for example, driver working hours regulations), financial services, planning and environmental compliance) which increase the costs of compliance with such laws, regulations or policies. In addition, DMD could face increased costs if additional security requirements are implemented in relation to the supply of products to airlines. To the extent that such increases in operating and other expenses exceed or are not in line with increases in the Connect Group’s or Tuffnells’, or following Completion the Enlarged Group’s, revenue, their profitability will be reduced and reduction could have a material adverse effect on the business, financial condition, results of operations and prospects of the Connect Group or Tuffnells, and following Completion the Enlarged Group.

1.18

The Connect Group and Tuffnells, and following Completion the Enlarged Group, may not be able to distribute or deliver its products and services due to circumstances outside their control.

The Connect Group and Tuffnells are subject to the risks associated with their ability to provide distribution and delivery services. In particular, the businesses are almost entirely reliant on deliveries by road and as a result, the Connect Group and Tuffnells are exposed to the risk of fuel shortages, traffic congestion, road works, congestion charging and inclement weather, particularly snow, all of which could render deliveries difficult or even impossible.

In addition, Tuffnells is subject to regulations governing the number of hours that its drivers can work on consecutive days and, as a result, Tuffnells may not have enough drivers available to work during periods of high demand or adverse weather conditions. Any major disruption could lead to Tuffnells failing to meet its regulatory obligations. Such breaches could lead to fines and other regulatory enforcement action.

Any significant interruption to the Connect Group’s or Tuffnells’, and following Completion the Enlarged Group’s, distribution or delivery services may have a material adverse effect on the reputation, business, financial condition and results of operations of the Connect Group or Tuffnells, and following Completion the Enlarged Group.

1.19

The Connect Group and Tuffnells both rely, and following Completion the Enlarged Group will rely, on a large number of operational sites in the UK, and disruptions to the efficient operation of these sites may adversely affect the Connect Group or Tuffnells, and following Completion the Enlarged Group.

The Connect Group relies on 48 distribution sites in the UK, and Tuffnells relies on 34 depots, some of which are fundamental to their business operations. Disruption to the efficient operation of these sites may affect its ability to distribute or deliver (as applicable), or to do so economically. Disruptions may arise for a number of reasons including strike action and other industrial relations actions, power or equipment failures, fires, floods, adverse health pandemic outbreaks, terrorist incidents, extreme weather events and other natural disasters and other unforeseen events that may not be covered by insurance. Any such disruptions or failures could have a material adverse effect on the financial condition, results of operations, prospects and reputation of the Connect Group or Tuffnells, and following Completion the Enlarged Group.

A key part of Tuffnells' growth strategy is to increase the number of its depots. Tuffnells opened two new depots in 2013, three in the year to date, and proposes to open three new depots in the next eighteen months. Tuffnells' ability to open new depots is dependent on various factors, including the ability to identify attractive depot sites and locations in which to open depots, overcoming competition, successfully negotiating for appropriate terms with landlords, obtaining appropriate planning approvals and licences, having adequate financial resources and meeting construction schedules. Any new depots will also be subject to the disruptions to the efficient operation of sites outlined above. There can be no guarantee that Tuffnells, or following Completion the Enlarged Group, will be able to achieve such a rate of new depot openings or that it will be able to increase the number of its depots in the future. If Tuffnells, or following Completion the Enlarged Group, is unable to open new depots, it could have a material adverse effect on its business, results of operations or financial condition.

1.20

The Connect Group and Tuffnells are exposed to various risks in connection with their pension commitments, which could have a material adverse effect on the Connect Group's business, financial condition and results of operations.

The Connect Group operates three defined benefit pension schemes. The Smiths News Defined Benefit Scheme, the Pension Trust, represents over 96 per cent. of the total obligation as at 31 August 2014. As part of the acquisition of The Consortium (now the Connect Group's Education & Care Division), the Connect Group became responsible for sponsoring two further defined benefit pension schemes, the Consortium CARE and Platinum schemes. All three schemes are closed to new entrants, and the Pension Trust and Consortium CARE are both closed to future accrual. Valuations of all UK defined benefit pension schemes are required to be conducted on at least a triennial basis in accordance with legislative requirements. The last valuation of the Pension Trust took place as at 31 March 2012, of Consortium CARE took place as at 31 December 2013, and of Platinum took place as at 31 December 2012. The Connect Group is currently in compliance with its funding obligations in relation to the Connect Group Defined Benefit Schemes. However, the Connect Group is exposed to the risk that its pension funding commitments may increase over time in the context of subsequent valuations of the Connect Group Defined Benefit Schemes. This could have a material adverse effect on the Connect Group's business, financial condition and results of operations. In addition, a funding obligation can arise if a relevant trigger occurs, such as a scheme wind-up, employer insolvency or the last active member of the scheme ceases to be employed.

Tuffnells operates a single defined benefit pension scheme (the "Tuffnells Scheme"). The Tuffnells Scheme is closed to new entrants but still open to future accrual for current members. The last valuation of the Tuffnells Scheme took place as at 1 April 2013. Tuffnells is currently in compliance with its funding obligations in relation to the Tuffnells Scheme, however Tuffnells is exposed to the risk that its pension funding commitments may increase over time in the context of subsequent valuations of the Tuffnells Scheme, which could have a material adverse effect on its business, financial condition and results of operations. In addition, a funding obligation can arise if a relevant trigger occurs, such as a scheme wind-up, employer insolvency or the last active member of the scheme ceases to be employed.

The powers of the Pensions Regulator may also have an impact in respect of the Connect Group Defined Benefit Schemes and the Tuffnells Scheme. For example, the Pensions Regulator has powers (where it considers it reasonable) to issue contribution notices and financial support directions in certain circumstances on employers (or any party which is, or has been (within certain time limits), associated or connected with any of the employers) in order to ensure that additional contributions are paid into defined benefit pension schemes or that other financial support is put in place for the benefit of defined benefit pension schemes. If the Company and the trustees of the Connect Group Defined Benefit Schemes (or Tuffnells and the trustees of the Tuffnells Scheme) are unable to agree the assumptions to be used in calculating the current funding level or contributions to be paid as part of a triennial funding valuation, the Pensions Regulator's powers allow it to set assumptions and contribution levels. Even when the relevant employers and the trustees of a scheme reach agreement on the current funding level and contributions any funding agreement needs to be reflected in the

valuation documentation of the relevant scheme, which must be submitted to the Pensions Regulator who may exercise certain powers if it considers such agreed levels are not compliant with the relevant legislation.

1.21 Connect Group and Tuffnells, and following Completion the Enlarged Group, is subject to the risk of fraud.

Connect Group and Tuffnells, and following Completion the Enlarged Group, are exposed to the risk of actual and attempted fraud, both internally and externally from a range of sources including suppliers, customers, employees, sub-contractors and other third parties. This risk may be exacerbated during poor economic conditions.

Connect Group and Tuffnells, and following Completion the Enlarged Group, are also at risk from employees and staff members who fail to follow, or avoid, procedures designed to prevent fraudulent and criminal activities. Connect Group and Tuffnells, and following Completion the Enlarged Group, could incur fines and penalties imposed by regulatory and governmental bodies and enforcement agencies. The occurrence or persistence of fraud, criminal activity or other misconduct in any part of the Connect Group's business, or the perception thereof, or the failure of the Connect Group to detect such conduct and activity, could damage its brand and reputation and could have a material adverse effect on its business, results of operations, financial condition and prospects.

Connect Group and Tuffnells, and following Completion the Enlarged Group, could also suffer loss through poor management of debtors and stock if operational processes are not consistently applied.

2. RISKS RELATING TO THE ACQUISITION

2.1 The Acquisition may not proceed.

The Acquisition is conditional upon the satisfaction or, if applicable, waiver of certain conditions precedent (including, amongst other things, the passing of the Resolution, the receipt by the Company of the proceeds of the Rights Issue, and there not having occurred any event having a material adverse change on the Tuffnells Group between the date of the Acquisition Agreement and Completion) which are described more fully in Part X (Terms of the Acquisition) of this document. The parties to the Acquisition Agreement also have certain termination rights, details of which are also set out in Part X (Terms of the Acquisition) of this document.

There can be no assurance that any of the conditions will be satisfied or, if applicable, waived or that the termination rights will not be exercised.

2.2 The Connect Group will not have full recourse to the Tuffnells Management Sellers under the Acquisition Agreement against all potential liabilities in Tuffnells, whether identified or unidentified.

Under the terms of the Acquisition Agreement, the Tuffnells Management Sellers have provided certain indemnities and warranties in relation to the Tuffnells Group. However, these indemnities and warranties may not cover all potential liabilities associated with the Tuffnells business, whether identified or unidentified, and they are, in certain circumstances, limited in their scope, duration, amount or a combination of these. Accordingly, the Connect Group may not have full recourse against, or otherwise recover in full from, the Tuffnells Management Sellers in respect of all losses which it may suffer in respect of a breach of those warranties, or in respect of the subject matter of any of the indemnities, or otherwise in respect of the Acquisition. In addition, given that the Tuffnells Management Sellers are individuals, the Connect Group will be dependent on their on-going solvency to the extent it seeks to recover amounts in respect of claims brought under such indemnities and warranties.

2.3 Acquisition-related costs may exceed the Connect Group's expectations.

The Connect Group expects to incur costs in relation to the Acquisition, including integration and post-closing costs in order successfully to incorporate the operations of Tuffnells into the Connect

Group. The actual costs of this process may exceed those estimated and there may be further additional and unforeseen expenses incurred in connection with the Acquisition. In addition, the Connect Group will incur legal, accounting and transaction fees and other costs relating to the Acquisition, some of which are payable whether or not the Acquisition completes.

2.4 The Enlarged Group may not realise the anticipated benefits and synergies of the Acquisition.

The Enlarged Group may not realise the anticipated benefits and synergies that the Connect Group expects will arise as a result of the Acquisition as set out in more detail in paragraph 4.3 of Part VII (Chairman’s Letter) of this document. The Connect Group may also encounter difficulties in achieving these anticipated benefits and synergies in accordance with anticipated timeframes or such benefits and synergies may not materialise in part or at all, or the assumptions upon which the Board determined the consideration payable for the Acquisition may prove to be incorrect. To the extent that the Connect Group incurs higher integration costs than anticipated or the anticipated synergies and benefits attributable to the Acquisition do not materialise, the business, results of operations and financial condition of the Enlarged Group may be adversely affected.

2.5 The Enlarged Group may experience difficulties in incorporating Tuffnells into the Connect Group.

The Connect Group and Tuffnells currently operate and, until Completion, will continue to operate, as two separate and independent businesses. Following Completion, Tuffnells will operate as a separate division of the Connect Group but will be established within the Connect Group’s existing structures, adopting the Connect Group’s current policies and practices and the success of the Enlarged Group will depend, in part, on the effectiveness of this process and the ability of the Enlarged Group to realise the anticipated benefits and cost savings from the acquisition of Tuffnells. Some of the potential challenges in incorporating Tuffnells as a new division may not become known until after Completion, due to the substantial increase in the size and scale of the operations of the Connect Group and the operational complexity of the Enlarged Group.

The Connect Group anticipates that the key potential difficulties of combining the businesses could include the following:

ensuring the Connect Group’s existing senior management team are able to supervise the incorporation of Tuffnells into the Connect Group as well as continue to perform their existing roles and responsibilities;
integration of Tuffnells’ IT systems and IT security standards with the Connect Group’s existing IT systems and IT security standards;
ensuring the alignment of Tuffnells’ current health and safety processes to the Connect Group’s requirements;
aligning Tuffnells’ approach to management of contractors and employees to that of the Connect Group;
embedding a risk management framework and associated processes to meet the standards of the Connect Group (including Health and Safety);
adapting Tuffnells’ specialist product market knowledge which is currently limited to a small number of senior employees;
adapting Tuffnells’ fleet management processes, and their associated costs, so as to ensure compliance to regulatory requirements; and
aligning Tuffnells’ corporate culture and values to the Connect Group’s corporate culture and values.

The process of incorporating Tuffnells into the Connect Group could potentially lead to the interruption of operations of the Connect Group or Tuffnells, or a loss of customers or key personnel, which could have a material adverse effect on the business, results of operations or financial condition of the Enlarged Group. Any delays or difficulties encountered in connection with this process could also lead to reputational damage to the Enlarged Group. Nothing in this risk factor should be construed as implying that (i) the Company will be unable to comply with its obligations as a company with securities admitted to the Official List; or (ii) that the Acquisition will adversely affect the ability of the Enlarged Group, after Completion, to comply with the requirements of the Listing Rules, the Disclosure Rules and Transparency Rules.

2.6 Following Completion, the indebtedness and financial leverage of the Enlarged Group will increase.

The Connect Group will part-finance the Acquisition through an extension of its existing debt facilities. Consequently, the Acquisition will increase the overall indebtedness and financial leverage of the Enlarged Group, which will result in increased repayment commitments and borrowing costs. This could limit the Enlarged Group's commercial and financial flexibility, causing it to reprioritise the uses to which its capital is put to the potential detriment of its business. Therefore, depending on the level of the Enlarged Group's borrowings, prevailing interest rates and exchange rate fluctuations, this could result in reduced funds being available for expansion, dividend payments and other general corporate purposes.

2.7 Failure to obtain third party consents from Tuffnells' contractual counterparties may have an adverse impact on the Enlarged Group.

Tuffnells has business-related agreements which contain change-of-control clauses that entitle the relevant counterparties to terminate or enforce other rights under the agreements if a third party acquires control of Tuffnells. Following Completion, such counterparties may seek to exercise these rights or seek to withhold consent to the change of control except on unfavourable terms. The termination of such business contracts could materially or adversely affect Tuffnells' business, which in turn could have an adverse impact on the business, results of operations and financial condition of the Enlarged Group.

RISKS RELATING TO THE RIGHTS ISSUE AND THE ORDINARY SHARES

3.1 The value of an investment in New Ordinary Shares may go down as well as up and any fluctuations may be material and may not reflect the underlying asset value.

The market price of the New Ordinary Shares could be subject to significant fluctuations due to a change in sentiment in the market regarding the New Ordinary Shares. The fluctuations could result from national and global economic and financial conditions, the market's response to the Rights Issue, market perceptions of the Connect Group, Tuffnells and/or the Acquisition and various other factors and events, including but not limited to regulatory changes affecting the Connect Group's operations, variations in the Connect Group's operating results, business developments of the Connect Group or its competitors and the liquidity of the financial markets. Furthermore, the Connect Group's operating results and prospects from time to time may be worse than the expectations of market analysts and investors. Any of these events could result in a decline in the market price of the New Ordinary Shares.

3.2 The market price for Ordinary Shares may decline below the Issue Price, and an active market in the Nil Paid Rights may not develop.

There is no assurance that the public trading market price of the New Ordinary Shares will not decline below the Issue Price. Should that occur, relevant Shareholders will suffer an immediate, unrealised loss as a result. Moreover, there can be no assurance that, following Shareholders' acquisition of New Ordinary Shares, Shareholders will be able to sell their New Ordinary Shares at a price equal to or greater than the acquisition price for those shares. In addition, an active trading market on the London Stock Exchange in the Nil Paid Rights may not develop during the trading period and the Nil Paid

Rights price may be volatile as it is subject to the same risks outlined above in relation to the trading price of the Ordinary Shares.

3.3 Shareholders who do not acquire New Ordinary Shares in the Rights Issue will experience dilution in their ownership of the Company.

If Qualifying Shareholders do not participate in the Rights Issue to take up their entitlements under the Rights Issue or are not eligible to participate in the Rights Issue, their proportionate ownership and voting interests in the Company will be reduced and the percentage that their Ordinary Shares will represent of the total issued share capital of the Company will be reduced accordingly.

3.4 Shareholders in certain jurisdictions outside the UK may not be able to take up the New Ordinary Shares in the Rights Issue.

While the Rights Issue is in general terms a pre-emptive offering, securities laws of certain jurisdictions may restrict the Company's ability to allow participation by certain Shareholders in such jurisdictions in the Rights Issue or any future issue of shares carried out by the Company. In particular, Shareholders who are located in the United States may not be able to exercise their pre-emption rights unless a registration statement under the Securities Act is effective with respect to such rights or an exemption from the registration requirements is available thereunder. The Rights Issue will not be registered under the Securities Act.

Qualifying Shareholders who have a registered address in or who are resident in countries other than the United Kingdom should consult their professional advisers as to whether they require any governmental or other consents, or need to observe any other formalities to enable them to take up their Nil Paid Rights or to subscribe for New Ordinary Shares.

3.5 Future issues of Ordinary Shares may dilute the holdings of Shareholders.

Other than the proposed Rights Issue and the issue of the Consideration Shares to certain of the Tuffnells Management Sellers pursuant to the Acquisition Agreement, the Company has no current plans for a further offering of Ordinary Shares. It is possible, however, that the Company may decide to offer additional Ordinary Shares in the future, either to raise capital, in consideration for further acquisitions, or for other purposes. Subject to any applicable statutory pre-emption rights, any future issues of Ordinary Shares may have a dilutive effect on the holdings of Shareholders and could have a material adverse effect on the market price of Ordinary Shares as a whole.

3.6 An investment in Ordinary Shares by an investor whose principal currency is not pounds sterling may be affected by exchange rate fluctuations.

The Ordinary Shares are, and any dividends to be paid in respect of them will be, denominated in pounds sterling. An investment in Ordinary Shares by an investor whose principal currency is not sterling exposes the investor to foreign currency exchange rate risk. Any depreciation of sterling in relation to such foreign currency will reduce the value of the investment in the Ordinary Shares or any dividends in relation to such foreign currency.

3.7 The rights, including the pre-emptive rights, of US and other non-UK holders of Ordinary Shares may be limited or not capable of exercise, which could have a material adverse effect on the Connect Group's business as well as on the liquidity and price of the Ordinary Shares.

The Connect Group could undertake future equity issues that could have a material adverse effect on the market price of the Ordinary Shares and may reduce the percentage ownership and voting interests of Shareholders. Moreover, the Connect Group may issue new shares that have rights, preferences or privileges senior to those of the Ordinary Shares. In the case of certain increases in the Company's share capital, the existing holders of the Ordinary Shares generally would be entitled to pre-emption rights pursuant to the Companies Act unless such rights have been waived by a special resolution of the Shareholders at a general meeting or, in certain circumstances, pursuant to the Articles. Should the Connect Group undertake such a future offer, holders of Ordinary Shares outside the United Kingdom

may not be able to exercise their pre-emption rights in respect of Ordinary Shares unless exemptions from any overseas securities law requirements are available and the Company decides to comply with local law and regulations. In particular, US holders of the Ordinary Shares may not be able to exercise pre-emption rights unless the Ordinary Shares or other securities issued by the Company are registered under the Securities Act or an exemption from the registration requirements is available. The Company cannot assure prospective investors that any such registration would be made or exemption from such overseas securities law requirements would be available to enable US and other non-UK holders to exercise such pre-emption rights or, if available, that the Company would utilise any such exemption.

3.8 Admission of the New Ordinary Shares may not occur when expected.

The applications for Admission are subject to the approval (subject to satisfaction of any conditions to which such approval is expressed) of the UK Listing Authority and the London Stock Exchange; and Admission will become effective as soon as a dealing notice has been issued by the UK Listing Authority and the London Stock Exchange has acknowledged that the New Ordinary Shares will be admitted to trading. There can be no guarantee that any conditions to which Admission is subject will be met or that Admission will occur in the expected timeframe. See Part IV (Expected Timetable of Principal Events) on page 45 of this document for further information on the expected dates of these events.

3.9 The ability of Overseas Shareholders to bring actions or enforce judgments against the Enlarged Group or its directors or officers may be limited.

The ability of an Overseas Shareholder to bring an action against the Enlarged Group may be limited under law. The Company is a public limited company incorporated in England and Wales. The rights of Shareholders are governed by English law and the Articles. These rights differ from the rights of shareholders in typical US corporations and some other non-UK corporations. An Overseas Shareholder may not be able to enforce a judgment against some or all of the Directors or executive officers. The Directors and executive officers are residents of the UK. Consequently, it may not be possible for an Overseas Shareholder to effect service of process upon the Directors or the executive officers within the Overseas Shareholder's country of residence or to enforce against the Directors or the executive officers judgments of courts of the Overseas Shareholder's country of residence based on civil liabilities under that country's securities laws. Overseas Shareholders may not be able to enforce any judgments in civil and commercial matters or any judgments under the securities laws of countries other than the UK against the Directors or the executive officers who are residents of the UK or countries other than those in which judgment is made. In addition, English or other courts may not impose civil liability on the Directors or the executive officers in any original action based solely on foreign securities laws brought against the Enlarged Group or the Directors or the executive officers in a court of competent jurisdiction in England or other countries.

PART III

IMPORTANT INFORMATION

NOTICE TO INVESTORS

In connection with the Rights Issue, the Underwriters and any of their respective affiliates may engage in trading activity in connection with their roles under the Underwriting Agreement and, in that capacity, may retain, purchase, sell, offer to sell or otherwise deal for their own account in securities of the Company and related or other securities and instruments (including Ordinary Shares, Nil Paid Rights and Full Paid Rights) for the purpose of hedging their underwriting exposure or otherwise. Accordingly, references in this document to Nil Paid Rights, Fully Paid Rights or New Ordinary Shares being issued, offered, subscribed, acquired, placed or otherwise dealt in should be read as including any issue or offer to, or subscription, acquisition, placing or dealing by, the Underwriters and any of their affiliates acting as investors for their own account. Except as required by applicable law or regulation, none of the Underwriters propose to make any public disclosure in relation to such transactions. In addition, certain of the Underwriters or their affiliates may enter into financing arrangements (including swaps or contract for differences) with investors in connection with which such Underwriters (or their affiliates) may from time to time acquire, hold or dispose of Ordinary Shares.

Investors should rely solely on the information contained in this document and the information incorporated by reference into this document (and any supplementary prospectus produced to supplement the information contained in this document) when making a decision as to whether to purchase New Ordinary Shares. No person has been authorised to give any information or make any representation other than those contained in this document and, if given or made, such information or representation must not be relied upon as having been so authorised by the Company, the Directors, J.P. Morgan Securities plc, J.P. Morgan Limited, Lazard or Liberum. In particular, the content of the Connect Group's websites and the Tuffnells Group's websites do not form part of this document and prospective investors should not rely on such content. Without prejudice to any obligation of the Company to publish a supplementary prospectus pursuant to section 87G(1) of FSMA and Rule 3.4 of the Prospectus Rules, neither the delivery of this document nor any issue or sale made under this document shall, under any circumstances, create any implication that there has been no change in the business or affairs of the Company or of the Company and its subsidiaries taken as a whole since the date of this document or that the information contained herein is correct as at any time subsequent to its date.

No statement in this document or incorporated by reference into this document is intended as a profit forecast or profit estimate for any period and no statement in this document or incorporated by reference into this document should be interpreted to mean that the earnings or earnings per share will necessarily be greater or lesser than those for the relevant preceding financial reports for Connect.

Apart from the responsibilities and liabilities, if any, which may be imposed on J.P. Morgan Securities plc, J.P. Morgan Limited, Lazard or Liberum by FSMA or the regulatory regime established thereunder, none of J.P. Morgan Securities plc, J.P. Morgan Limited, Lazard or Liberum (and none of their respective directors, officers, employees or advisers) accepts any responsibility whatsoever, or makes any representation or warranty, express or implied, in relation to the contents of this document, including its accuracy, completeness or for any other statement made or purported to be made by it or on behalf of it, the Company, the Directors or any other person, in connection with the Company, the Ordinary Shares, the Acquisition, the Rights Issue or Admission and nothing in this document shall be relied upon as a promise or representation in this respect, whether as to the past or the future. Each of J.P. Morgan Securities plc, J.P. Morgan Limited, Lazard and Liberum (and none of their respective directors, officers, employees or advisers) accordingly disclaims to the fullest extent permitted by law all and any responsibility or liability whatsoever, whether arising in tort, contract or otherwise (save as referred to above), which it might otherwise have in respect of this document or any such statement.

Investors in the Rights Issue shall be deemed to have made certain representations, warranties, undertakings, agreements and acknowledgements. See paragraphs 4.2.4 and 7.5 of Part IX (Terms and Conditions of the Rights Issue) of this document.

2. FORWARD LOOKING STATEMENTS

This document contains forward looking statements regarding the financial condition, results of operations, cash flows, dividends, financing plans, business strategies, operating efficiencies, budgets, capital and other expenditures, competitive positions, growth opportunities, plans and objectives of management and other matters relating to the Connect Group and Tuffnells. Statements in this document that are not historical facts are hereby identified as “forward looking statements”. In some instances, these forward looking statements can be identified by the use of forward looking terminology, including the terms “projects”, “forecasts”, “anticipates”, “expects”, “believes”, “intends”, “may”, “will” or “should” or, in each case, their negative or other variations or comparable terminology. Such forward looking statements, including, without limitation, those relating to the future strategy business prospects, revenue, and/or capital needs, in each case relating to the Connect Group and Tuffnells wherever they occur in this document, are necessarily based on assumptions reflecting the views of the Company, involve a number of risks and uncertainties that could cause actual results to differ materially from those suggested by the forward looking statements and speak only as at the respective dates on which they are made.

Important factors which may cause actual results to differ include, but are not limited to, those described in Part II (Risk Factors) of this document.

Save as required by law, or by the Listing Rules, the Prospectus Rules, the Disclosure Rules or the Transparency Rules, the Company undertakes no obligation to release publicly the results of any revisions to any forward looking statements in this document that may occur due to any change in the Company’s expectations or to reflect events or circumstances after the date of this document.

3. PRESENTATION OF FINANCIAL INFORMATION

3.1 General

The Connect Group and the Tuffnells Group prepare their financial statements in pounds sterling.

The audited consolidated financial statements of the Connect Group for the years ended 31 August 2013 and 31 August 2012, which were prepared in accordance with IFRS, are incorporated into this document by reference as set out in Part XV (Historical Financial Information Relating to Connect). The audited consolidated financial statements of the Connect Group for the year ended 31 August 2014, which were prepared in accordance with IFRS, are set out in Appendix 1 of this document.

3.2 Restated figures in the financial information for Connect

The financial information for Connect for the year ended 31 August 2013 has been restated in the consolidated financial statements for the year ended 31 August 2014, included at Appendix 1 of this document.

The financial information for the year ended 31 August 2012, has been restated in the audited financial statements included in the Company’s 2013 Annual Report.

The Historical Financial information for the Connect Group, unless otherwise stated has been extracted from the following:

For the year ended 31 August 2014 referred to as “FY2014”, the amounts have been extracted from the 2014 financial information appended to this document at Appendix 1.
For the year ended 31 August 2013, referred to as “FY2013”, the amounts have been extracted from the 2014 financial information appended to this document at Appendix 1. The FY2013 amounts, as presented in the comparative period therein, have been restated due to Connect’s adoption of IAS 19 (revised) and the reclassification of the disposed MMC business (disposed of in April 2013) into non-recurring. See note 34 of the financial information at Appendix 1 of

this document for a detailed explanation. Due to this restatement, the financial information for the years ended 31 August 2013 and 2014 are not directly comparable to the amounts in any prior reporting year. Furthermore, the amounts presented for the year ended 31 August 2013 in the consolidated financial statements at Appendix 1 are not directly comparable to the amounts presented in the audited financial statements included in the Company's 2013 Annual Report, parts of which have been incorporated by reference into this document.

For the year ended 31 August 2012, referred to as "FY2012", the amounts have been extracted from the 2013 Annual Report, parts of which have been incorporated by reference into this document. The FY2012 amounts, as presented in the comparative period therein, have been restated. The restatement related to Connect's reconsideration of its accounting for deficit contributions of pension schemes which resulted in future agreed deficit contributions being recognised as an IFRIC 14 liability on the balance sheet. See note 34 of the Company's 2013 Annual Report for a detailed explanation. Due to this restatement, the results for the year ended 31 August 2012 included in this document are not directly comparable to the amounts presented in the audited financial statements included in the Company's 2012 Annual report, parts of which have been incorporated by reference into this document.

3.3 Tuffnells – Non-IFRS Financial Measures

This document contains certain unaudited supplementary measures of the Tuffnells Group's performance that are not required by, or presented in accordance with, IFRS or generally accepted accounting principles in the United Kingdom, including the following:

"Adjusted EBITDA", which means earnings before interest, taxes, depreciation and amortisation and is calculated by income tax expense, other gains and losses, finance income, finance costs, exceptional items, depreciation and amortisation and profit/(loss) on disposal of non-current assets to profit for the year, in each case to be determined in accordance with IFRS. Adjusted EBITDA is an unaudited supplementary measure of performance that is not required by, or presented in accordance with IFRS.

The following table presents the reconciliation of Adjusted EBITDA to profit for the year for the Tuffnells Group for the periods indicated:

	Six months ended 30 June
	Year ended 31 December			2013
	2013	2012	2011 (£'000)	2014	(unaudited)
Profit of the year	6,563	5,551	3,944	3,804	3,073
Income tax expense	2,019	1,894	1,576	1,071	771
Finance income	(3)	(2)	(7)	(3)	(3)
Finance costs	2,443	3,049	3,683	1,144	1,271
Group operating profit	11,022	10,492	9,196	6,016	5,112
Exceptional items (2013 – Loyalty reward)	1,566	0	0	0	0
Amortisation of owned computer software	303	243	207	136	152
Depreciation of owned assets	1,415	1,521	1,041	905	816
Depreciation of assets held on finance leases and hire purchase contracts	940	750	1,038	343	325
(Profit)/loss on disposal of non-current assets	1	9	(82)	1
Adjusted EBITDA	15,247	13,015	11,400	7,401	6,405

Statements in relation to CAGR are derived from the Tuffnells Group Historical Financial Information set out in Part XVI of this document and the audited accounts for the year ended 31 December 2010. The Tuffnells Group's audited accounts for year ended 31 December 2010 were prepared using UK

GAAP, however the adjustments required will not have impacted the relevant figures for the purpose of the revenue and Adjusted EBITDA CAGR. Last twelve months sales and Adjusted EBITDA are calculated under UK GAAP.

3.4 Connect – Non-IFRS Financial Measures

This document contains certain measures and ratios, including certain “underlying” measures, “free cash flow” and “net debt”, as defined by the Connect Group. These measures are termed non-IFRS measures because they are not required by, or prepared in accordance with IFRS and they exclude amounts that are included in, or include amounts that are excluded from, the most directly comparable measure calculated and presented in accordance with IFRS, or are calculated using financial measures that are not calculated in accordance with IFRS. A reconciliation table is presented below for each of the non-IFRS measures to the most directly comparable measure calculated and presented in accordance with IFRS. Connect believes non-IFRS financial measures are helpful to investors and financial analysts in highlighting trends in the Company’s overall business because it believes that the items excluded in calculating such measures distort trends in its day-to-day operating performance. Further, the management of Connect uses certain of these measures to evaluate the performance of the group for internal reporting purposes and incentive arrangements.

The Connect Group’s non-IFRS measures, as defined by the Connect Group, are as follows:

“Underlying” measures are defined as the relevant IFRS measure before “non-recurring and other items”. “Non-recurring and other items” are material items of income or expense and include certain mergers and acquisitions related costs, business restructuring costs and network re-organisation costs including those relating to strategy changes which are not normal operating costs of the underlying business. They are disclosed and described separately in the accounts where it is necessary to do so to provide further understanding of the financial performance of the Connect Group.

“Free cash flow” is defined as cash flows from operating activities less non-recurring and other items that had a cash impact on operating cash flows, purchases of property plant and equipment, purchases of intangible assets and interest paid.

“Net Debt” is defined as total bank loans and other borrowings and finance lease liabilities less cash and cash equivalents.

Connect presents certain “underlying” measures because they exclude non-recurring and other items that Connect believes mask trends in the Connect Group’s day-to-day operating performance. Underlying operating profit is the measure used by the Connect Board to assess the trading performance of the Connect Group’s businesses and is therefore the measure of segment profit that Connect presents under IFRS. Underlying measures are also presented on a consolidated basis because management believes it is important to consider the Connect group’s profitability on a basis consistent with that of its operating segments. When presented on a consolidated basis, underlying measures are non-IFRS measures. Connect management believes that these underlying measures should, therefore, be made available to securities analysts, investors and other interested parties to assist in their assessment of the trading performance of our businesses.

Connect presents “Free cash flow” because free cash flow allows us and external parties to evaluate our liquidity and the cash generated by our operations. Free cash flow does not include cash amounts related to non-recurring and other items, which are determined independently of the ongoing business, and items which are deemed discretionary, such as cash flows relating to acquisitions and disposals or financing activities. In addition, it does not necessarily reflect the amounts which we have an obligation to incur. However, it does reflect the cash available for such discretionary activities, to strengthen the consolidated statement of financial position or to provide returns to shareholders in the form of dividends or share purchases. Free cash flow facilitates comparability of results with other companies although our measure of free cash flow may not be directly comparable to similarly titled measures used by other companies. This measure is also useful in connection with discussion with the investment analyst community and debt rating agencies.

Connect presents net debt as it represents its obligations to banks and other similar liabilities, such as finance lease obligations, after deducting our available cash balances.

An investor should not consider such items as alternatives to the applicable IFRS measures. In particular, an investor should not consider these non-IFRS measures as a measure of the Connect Group's financial performance or liquidity under IFRS as an alternative to net income or any other performance measures derived in accordance with IFRS or as an alternative to cash flow from operating activities as a measure of the Company's liquidity. Furthermore, they may not be comparable with similarly titled non-IFRS measures reported by other companies.

The following table presents Net Debt for Connect for the periods indicated:

	As of 31 August
	2014	2013	2012
	(£ in millions)
Bank loans and other borrowings	109.3	106.8	103.1
Finance lease liabilities	4.1	1.8	2.5
Less: Cash and cash equivalents	(20.4)	(10.1)	(5.1)
Net Debt	93.0	98.5	100.5

The following table presents the reconciliation of cashflow to free cashflow for Connect for the periods indicated:

	Year ended 31 August
	2014	2013	2012
	(£ in millions)
Net cash inflow from operating activities	47.4	37.9	28.5
Adjusted for:
Purchase of property, plant and equipment	(6.8)	(5.0)	(4.0)
Purchase of intangible assets	(3.5)	(2.8)	(2.3)
Interest paid	(6.1)	(4.0)	(4.0)
Impact of non-recurring and other items	6.2	6.5	9.1
Free cashflow	37.2	32.6	27.2

4. MARKET SHARE DATA

Information in this document about Connect's market share in its News & Media Division reflects management estimates based on publicly available information and relates only to the wholesale segment of the market, excluding direct subscriptions and sales through online and multimedia platforms.

5. DEFINITIONS

Certain terms used in this document, including capitalised terms and certain technical terms, are defined and explained in Part XXII (Definitions).

Reference to any statute or statutory provision includes a reference to that statute or statutory provision as from time to time amended, extended or re-enacted.

6. ROUNDING

Certain data in this document, including financial, statistical, and operating information, has been rounded. As a result of the rounding, the totals of data presented in this document may vary slightly from the actual arithmetic totals of such data. Percentages in tables have been rounded and accordingly may not add up to 100 per cent.

In addition, certain percentages presented in the tables in this document reflect calculations based upon the underlying information prior to rounding, and, accordingly, may not confirm exactly to the percentages that would be derived if the relevant calculations were based upon the rounded numbers.

7. CURRENCY

Unless otherwise indicated, all references in this document to "sterling", "pounds sterling", "GBP", "£", "pence" or "p" are to the lawful currency of the United Kingdom.

The abbreviations "£m" or "£ million" represent millions of Pounds Sterling, and references to "pence" and "p" represent pence in Pounds Sterling.

8. NO INCORPORATION OF WEBSITE INFORMATION

Neither the content of the Connect Group's website nor the Tuffnells Group's website, nor the content of any website accessible from hyperlinks on the Connect Group's website or the Tuffnells Group's website, is incorporated into, or forms part of, this document and investors should not rely on them, without prejudice to the documents incorporated by reference into this document which will be made available on Connect's website.

9. CONNECT GROUP'S DIVISIONS

Connect has three operating divisions, as described in this document as Connect News & Media, Connect Books and Connect Education and Care. However, the Connect Group reports Connect News and Connect Media as separate operating segments in its accounts. Therefore, in the Connect Group's Historical Financial Information, there are four separate operating segments for the group; the Books Division, the Education & Care Division, the Media Business and the News Business.

PART IV

EXPECTED TIMETABLE OF PRINCIPAL EVENTS

All references to time in this document are to the time in London, United Kingdom on the relevant date, unless otherwise stated. Each of the times and dates in the table below are indicative only and may be subject to change. Please read the notes for this timetable below.

Announcement of the Acquisition and the Rights Issue	12 November 2014
Publication and posting of this document, the Notice of General Meeting and the Form of Proxy	12 November 2014
Record Date for entitlements under the Rights Issue	close of business on 27 November 2014
Latest time and date for receipt of Forms of Proxy for the General Meeting	10:00 a.m. on 27 November 2014
General Meeting	10:00 a.m. on Monday 1 December 2014
Date of despatch of Provisional Allotment Letters (to Qualifying Non-CREST Shareholders only)(1)	1 December 2014
Admission of the New Ordinary Shares (nil paid)	2 December 2014
Dealings in New Ordinary Shares, nil paid, commence on the London Stock Exchange	8:00 a.m. on 2 December 2014
Ordinary Shares marked ex-Rights	8:00 a.m. 2 December 2014
Nil Paid Rights credited to stock accounts in CREST (Qualifying CREST Shareholders only)	As soon as practicable after 8:00 a.m. on 2 December 2014
Nil Paid Rights and Fully Paid Rights enabled in CREST	As soon as practicable after 8:00 a.m. on 2 December 2014
Recommended latest time for requesting withdrawal of Nil Paid Rights or Fully Paid Rights from CREST (i.e. if your Nil Paid Rights or Fully Paid Rights are in CREST and you wish to convert them into certificated form)	4:30 p.m. on 10 December 2014
Latest time and date for depositing renounced Provisional Allotment Letters, nil paid or fully paid, into CREST or for dematerialising Nil Paid Rights into a CREST stock account	3:00 p.m. on 11 December 2014
Latest time and date for splitting Provisional Allotment Letters	3:00 p.m. on 12 December 2014
Latest time and date for acceptance and payment in full and registration of renounced Provisional Allotment Letters	11:00 a.m. on 16 December 2014
Expected date of announcement of results of the Rights Issue through a Regulatory Information Service	17 December 2014
Dealings in the New Ordinary Shares to commence on the London Stock Exchange fully paid	8:00 a.m. on 17 December 2014
New Ordinary Shares credited to CREST stock accounts (uncertificated holders only)(1))	As soon as practicable after 8:00 a.m. on 17 December 2014
Despatch of definitive share certificates for New Ordinary Shares in certificated form (to Qualifying Non-CREST Shareholders only)(1))	by no later than 30 December 2014

Note:
(1) Subject to certain restrictions relating to Overseas Shareholders. See paragraph 7 of Part IX (Terms and Conditions of the Rights Issue).

PART V

RIGHTS ISSUE STATISTICS

Price per New Ordinary Share	102 pence
Basis of Rights Issue	2 New Ordinary Shares for every 7 Ordinary Shares
Discount to the theoretical ex-Rights price based on the closing middle-market price of 168.75 pence per Ordinary Share on 11 November 2014	33.7 per cent.
Number of Existing Ordinary Shares in issue at the date of this document	189,477,548
Number of New Ordinary Shares to be issued by the Company	54,136,442
Number of Ordinary Shares in issue immediately following completion of the Rights Issue^{(1)}	243,613,990
New Ordinary Shares as a percentage of enlarged issued share capital of the Company immediately following completion of the Rights Issue^{(1)}	22 per cent.
Estimated net proceeds receivable by the Company after expenses	£52.3 million
Estimated expenses in connection with the Rights Issue	£2.9 million

Note:
(1) Assuming that no Ordinary Shares are issued as a result of the exercise of any options between 10 November 2014, being the latest practicable date prior to the publication of this document, and the completion of the Rights Issue.

PART VI

DIRECTORS, COMPANY SECRETARY, REGISTERED OFFICE AND ADVISERS

Directors

Dennis Millard, Chairman
John Worby, Senior Independent Non-Executive Director
Andrew Brent, Independent Non-Executive Director
Anthony Cann, Independent Non-Executive Director
Mark Cashmore, Group Chief Executive
Nick Gresham, Chief Financial Officer
Jonathan Bunting, Managing Director, Connect News & Media

Company Secretary & General Counsel

Stuart Marriner

Registered Office and Directors' Business Addresses

Connect Group PLC
Rowan House
Cherry Orchard North
Kembrey Park
Swindon
SN2 8UH

Joint Sponsor and Bookrunner

J.P. Morgan Securities plc
25 Bank Street
London
E14 5JP

Financial Adviser to the Company

J.P. Morgan Limited
25 Bank Street
London
E14 5JP

Joint Sponsor, Financial Adviser and Bookrunner

Liberum Capital Limited
Ropemaker Place
Level 12
25 Ropemaker Street
London
EC2Y 9LY

Financial Adviser to the Company in relation to the Rights Issue

Lazard & Co., Limited
50 Stratton St
London
W1J 8LL

Legal advisers to the Company as to English law and US law

Herbert Smith Freehills LLP
Exchange House
Primrose Street
London
EC2A 2EG

Legal advisers to the Joint Sponsors and Bookrunners as to English law and US law

Simmons & Simmons LLP
CityPoint
One Ropemaker Street
London
EC2Y 9SS

Reporting accountants and auditors to the Company
Deloitte LLP
Abbots House
Abbey Street
Reading
RG1 3BD

Reporting accountants and auditors to The Big Green Parcel Holding Company
PricewaterhouseCoopers LLP
1 East Parade
Sheffield
S1 2ET

Registrar and Receiving Agent to the Company
Equiniti Limited
Aspect House
Spencer Road
Lancing
West Sussex
BN99 6DA

PART VII

CHAIRMAN'S LETTER

(incorporated and registered in England and Wales under the Companies Act 1985 with registered number 05195191)

12 November 2014

To: Shareholders and, for information only, Connect optionholders

Dear Shareholder,

PROPOSED ACQUISITION OF TUFFNELLS AND UNDERWRITTEN RIGHTS ISSUE

1. INTRODUCTION

On 12 November 2014, Connect announced the proposed acquisition of the entire issued share capital of The Big Green Parcel Holding Company Limited, whose principal trading subsidiary is Tuffnells Parcels Express Limited ("Tuffnells") on a debt-free basis for a total consideration of up to £128.7 million comprising initial consideration of £113.4 million payable on Completion (the "Initial Consideration"), and deferred consideration of up to a further maximum amount of £15.3 million. The total Initial Consideration is payable in cash to the Sellers on Completion and the balance (the "Deferred Consideration") is payable in cash or Ordinary Shares to the Tuffnells Management Sellers and Option Sellers subject to the achievement of certain financial targets and (in respect of certain of the Tuffnells Management Sellers) their continued employment over set periods of time (comprising cash and Ordinary Shares). The Connect Group's strategic ambition is to achieve 50 per cent. of profits from activities outside newspaper and magazine wholesaling. The proposed acquisition of Tuffnells represents a significant step towards achieving this ambition.

Tuffnells is a leading provider of next-day business-to-business delivery of mixed freight/parcel consignments, specialising in items of irregular dimension and weight ("IDW"), examples of which include bulky furnishings, building materials and automotive parts. Tuffnells offers distribution coverage throughout the UK through a network of 34 depots and operates a largely depot-to-depot operational model, providing services to a diverse customer base. As a specialist IDW freight/parcel handler, Tuffnells differentiates itself through its ability to sort mixed freight (for example, parcels and pallets) within one organisation, then deliver the same in one delivery whilst providing a next-day delivery service.

Tuffnells has an experienced and proven management team with an established track record that has delivered strong financial performance underpinned by continued strong revenue and profit growth as well as attractive cash generation, with considerable potential for future growth. For the year ended 31 December 2013 revenue was £127.8 million, up 11.5 per cent. on the prior year, with a three-year CAGR of 7.6 per cent. Adjusted EBITDA for the year ended 31 December 2013 was £15.2 million, up 17.1 per cent. on the prior year, with a three-year CAGR of 9.8 per cent. The business continued to perform strongly in the current financial year and as at 31 August had generated last twelve month sales of £138.5 million (unaudited) producing an Adjusted EBITDA of £16.0 million (unaudited).

The Acquisition represents a significant strategic opportunity for the Connect Group and, in the opinion of the Directors, offers the following benefits:

a clear strategic fit with the Connect Group’s existing core competencies in time-sensitive specialist distribution, and in line with the Company’s strategic ambition to diversify further away from the Connect Group’s traditional newspaper and magazine markets;
a business with a strong track record, well positioned for further growth, and able to build upon its leading position in a market with sustainable growth characteristics and opportunities over time for organic growth across the Enlarged Group;
the opportunity to achieve pre-tax cost synergies across the Enlarged Group of £2.0 million per annum within three years and the potential to generate revenue synergies from shared infrastructure; and
creating attractive financial returns for Connect Shareholders.

Following Completion, Tuffnells will operate within the Enlarged Group as a separate division, adding scale and supporting future organic opportunities.

The Company proposes to finance the Initial Consideration through:

its recently extended debt facilities of £50.0 million; and
the net proceeds of the 2 for 7 Rights Issue at 102 pence per New Ordinary Share, being approximately £52.3 million, net of expenses.

As more fully described in Part X (Terms of the Acquisition), the Deferred Consideration payable to the Tuffnells Management Sellers and Option Sellers, which is contingently payable over the three year period following Completion, will be satisfied by the issue of Ordinary Shares in the Company or cash. A minimum of fifty per cent of the Deferred Consideration payable to Tuffnells Management Sellers and Option Sellers is to be satisfied by the issue of Ordinary Shares in the Company. Each of these Ordinary Shares will be credited as fully paid and will upon issue rank pari passu in all respects with the other Ordinary Shares in issue at that time, including a deemed right to receive a cash amount equal to the aggregate value of all accrued dividends and other distributions (if any) paid on one Ordinary Share in respect of the period between either (i) Completion or (ii) the beginning of the relevant financial year for the calculation of the Deferred Consideration, and the date of the allotment of the Consideration Shares.

Due to the size of the Acquisition in relation to the Company, the Acquisition is classified as a Class 1 transaction for the purposes of the Listing Rules, and therefore requires the approval of Connect Shareholders. Accordingly, the General Meeting has been convened for 10.00 a.m. on Monday 1 December 2014. The notice convening the General Meeting is set out at the end of this document and an explanation of the Resolution to be proposed at the General Meeting is set out in paragraph 15 below. This document also explains why the Board considers that the Resolution to be proposed at the General Meeting is in the best interests of Connect Shareholders and why the Board unanimously recommends that Shareholders vote in favour of the Resolution, as the Directors have agreed to do in respect of their own Ordinary Shares.

The purpose of this document is to explain the background to, and reasons for, the Acquisition and the Rights Issue, set out the terms and conditions of the Acquisition and the Rights Issue and provide the Notice of General Meeting to be held to consider and, if thought fit, to pass the Resolution required to enable and authorise the Company to carry out the Acquisition. This document, together with the information incorporated by reference herein, should be read in its entirety and you should not rely solely on the information contained in this Part VII. Your attention in particular is drawn to the risk factors set out in Part II (Risk Factors) of this document.

2. SUMMARY INFORMATION ON CONNECT

Connect is a leading specialist distributor operating in large and diverse markets. In April 2014, the Company renamed and rebranded to “Connect Group PLC” from Smiths News plc. The change of name reflects the

Connect Group's progress since its Demerger from WH Smith PLC in 2006 and the Connect Group's ambitions for the future to be a more diversified specialist distribution company.

The Connect Group currently has three separate divisions, connecting suppliers to customers in an efficient, knowledgeable and service oriented way:

Connect News & Media: Encompassing Smiths News and Dawson Media Direct. Smiths News is the UK's largest newspaper and magazine wholesaling business with an approximate 55 per cent. market share. It distributes newspapers and magazines on behalf of the majority of the major national publishers as well as a large number of regional publishers serving approximately 30,000 customers across England and Wales, including large general retailers as well as smaller independent newsagents with approximately 40 million newspapers supplied weekly 364 days a year; Dawson Media Direct is an international media direct business supplying newspapers, magazines and inflight entertainment technology and content to over 80 airlines in 50 countries. In October 2014, the Connect Group announced the launch of Pass my Parcel, a new wholly-owned 'click and collect' delivery service to be operated by the News Business with Amazon as its first client. The Directors consider it to be an important organic opportunity with significant potential.

Connect Books: Combining a number of recognised brands in print and digital bookselling, including Bertrams, Dawson Books and Worderly. A leading distributor of physical and digital books, the division serves over 8,200 customers in approximately 100 countries, with over 156,000 in stock titles and access to over a further seven million consumer and 20 million academic titles; and

Connect Education & Care: A leading independent supplier of consumable products through The Consortium and West Mercia Supplies. The division currently holds an approximate five per cent. market share of the estimated addressable market, comprising the consumables element of the total Government education budget and serves over 30,000 customers with an extensive range of over 40,000 products across a branded, own-brand and value range, including stationery, arts and craft and cleaning.

Further information on Connect is set out in Part XI (Information on the Company and the Group) of this document.

3. SUMMARY INFORMATION ON TUFFNELLS

Tuffnells is a leading UK provider of next day business-to-business delivery of mixed freight/parcel consignments, specialising in the distribution of IDW items. Tuffnells offers distribution network coverage throughout the UK through its depot network and operates a largely depot-to-depot operational model, providing services to a diversified customer base. The business operates from 34 depots utilising a fleet of over 930 vehicles and 800 trailers and containers serving over 4,200 customers across a range of industry sectors.

Tuffnells' total revenue for the year ended 31 December 2013 was £127.8 million, with a three-year CAGR of 7.6 per cent. Adjusted EBITDA for the year ended 31 December 2013 was £15.2 million, with a three-year CAGR of 9.8 per cent. As at 31 August 2014 the business had generated last twelve month sales of £138.5 million (unaudited) producing an Adjusted EBITDA of £16.0 million (unaudited).

	Year ended 31 December			Six months ended 30 June
	2013	2012	2011	2014	2013*
	(£'000)
Revenue	127,801	114,647	109,286	69,174	61,613
Operating Profit	11,022	10,492	9,196	6,016	5,112
Profit before Tax	8,582	7,445	5,520	4,875	3,844
Profit for the Year/Period	6,563	5,551	3,944	3,804	3,073
Adjusted EBITDA	15,247	13,015	11,400	7,401	6,405

unaudited.

Tuffnells operates in the large and growing freight/parcel market which the Directors believe is valued at over £5 billion. The Directors estimate that the segment of the core addressable market in which Tuffnells currently operates is worth approximately £740 million in 2013 and is forecast to grow at between 3-4 per

cent. per annum driven by growth in Tuffnells' core customer sectors, such as bulky furnishings, building materials and automotive parts. However the Directors believe that there is a more positive outlook for small and medium enterprises ("SMEs"), which is Tuffnells' largest customer segment in these sectors. Tuffnells holds, a leading market position in IDW consignment handling, delivering over 10 million consignments per annum.

Tuffnells' business model focuses on its ability to be a one stop shop for the handling and express delivery of IDW freight on a national basis. Tuffnells' network coverage across the UK enables it to provide next day delivery to all parts of the United Kingdom.

Tuffnells differentiates itself from other business-to-business delivery providers in that it specialises in the IDW segment of the market. The IDW segment typically requires the use of mechanical lifting or manual handling, in contrast to the automated sortation processes generally adopted by typical parcel operators. As such, most other established delivery services in the UK either do not take, or only occasionally deal with, IDW consignments because their automated operational systems designed for high volume regular parcels lack the capability and flexibility to deal with any significant volume of IDW consignments. Conversely, Tuffnells is well-suited to handle efficiently such IDW consignments, through its manual handling capability, and largely depot-to-depot operational model. Tuffnells also differentiates itself from other standard parcel operators in that it is able to handle all types of freight in one collection, and is not limited to one category uniform in nature or size. Tuffnells has the ability to provide sortation for all types of traffic within one organisation, while maintaining a next-day service with strong customer service. This commercial model is underpinned by a rate card process and a discipline quoting system to produce strong operating margins.

Tuffnells specialises in next-day nationwide delivery, but it also offers a wide range of delivery services which it believes addresses its customer needs and provides opportunities for future growth. These services include guaranteed (by 9.30am) next day delivery, Saturday delivery, an economy service delivered within 72 hours and offshore delivery services. Alongside domestic delivery services, Tuffnells offers a distinctive proposition tailored around localness, one-stop shop, directional trunking and towards SMEs.

Further information on Tuffnells is set out in Part XII (Information on the Tuffnells Group) of this document.

4. BACKGROUND TO AND REASONS FOR THE ACQUISITION

The Acquisition represents a significant strategic opportunity for the Connect Group and, in the opinion of the Directors, offers the following benefits.

4.1 A clear strategic fit with the Connect Group's existing core competencies in specialist distribution, and in line with the Company's strategic ambition to diversify further away from the Connect Group's traditional newspaper and magazine markets

Connect aims to be a leading supply chain, trading and distribution specialist in its chosen industry sectors and plans to achieve this by providing an unrivalled customer experience, coupled with market-leading expertise which the Directors believe will allow Connect to continue growing and consistently deliver strong returns to Shareholders.

The Connect Group operates in large markets which the Directors believe favour the role of a specialist distributor, connecting customers with suppliers and adding value through bespoke services and industry expertise. The chosen markets are characterised by a large number of suppliers, a complex-to-manage product range and a diverse and dispersed customer base, typically requiring an efficient and time sensitive distribution service.

The Connect Group has diversified over time from being exclusively a newspaper and magazine wholesale operation, into a provider of time-sensitive specialist distribution services. Connect's strategic ambition is to achieve 50 per cent. of profits from outside the newspaper and magazine wholesaling business and the Acquisition represents a significant step towards achieving this strategy. The acquisition will increase Connect's percentage of underlying operating profits from outside newspaper and magazine wholesaling from 23 per cent. (for the year ended 31 August 2014) to 38 per cent. on a pro forma basis.

Connect intends to achieve its strategic ambition by creating and growing a balanced portfolio of businesses, making progress in each division by increasing profitability across all core markets. In addition the Company will look to develop organic growth opportunities.

Diversification seeks to protect the Connect Group from risks related to its current operations in the newspaper and magazine markets. Whilst these markets offer the ability at least to maintain profits in the medium term, the Directors believe that the core operation does not provide the Connect Group with sufficient growth potential. The Directors believe that diversifying the Connect Group’s revenue and profit through organic and acquisitive growth should lower its risk profile and increase growth opportunities.

The Acquisition provides a significant milestone for the Connect Group, by enabling the Connect Group to achieve a more diversified profit mix as well as incorporating into the Connect Group a business which fits its core competencies and has future growth opportunities.

4.2 A business with a strong track record, well positioned for further growth, and able to build upon its leading position in a market with sustainable growth characteristics and opportunities over time for organic growth across the Enlarged Group

Tuffnells has an established track record and has delivered a strong financial performance underpinned by continued strong revenue and profit growth and offers considerable potential for continued future growth. For the year ended 31 December 2013 revenue was £127.8 million, up 11.5 per cent. on the prior year, with a three-year CAGR of 7.6 per cent. Adjusted EBITDA for the year ended 31 December 2013 was £15.2 million, with a three-year CAGR of 9.8 per cent.

Tuffnells has a diversified customer base of over 4,200 customers across a range of industry sectors. Tuffnells’ scale of infrastructure and market expertise developed over many years have helped to form long-term and sustainable customer relationships.

Tuffnells offers a strong customer service proposition, regularly out-performing competitors, in a service orientated market. The Directors believe there is a strong link between the quality of the service which customers receive from a particular service provider and their willingness to use that provider again in the future, and as such believe the acquisition of a customer focussed business such as Tuffnells will be beneficial to the Connect Group as a whole.

Following Completion, the Enlarged Group’s network will comprise 82 distribution centres and depots and 2.03 million square feet of warehouse space, utilising over 3,072 vehicles with 3,050 drivers (including sub-contractors) and the Enlarged Group will have access to the whole of mainland UK.

4.3 The opportunity to achieve pre-tax cost synergies across the Enlarged Group of £2.0 million per annum within three years and to generate revenue synergies from shared infrastructure

The Directors believe that the Acquisition will produce a number of synergies for the Enlarged Group, building to an annual pre-tax cost saving of approximately £2.0 million per annum within three years.

Based on the current integration plan, cost savings are expected to arise in the following areas:

application of Group operational capability, for example in relation to vehicle routing and scheduling and use of sub-contract drivers, and greater utilisation of Tuffnells’ parcel distribution capability across Connect’s existing estate;
procurement savings arising from the increased size and purchasing power of the Enlarged Group, for example in relation to leasing and repairs and maintenance of vehicles; and
general and administrative savings, for example in relation to administration and insurance costs, without any cash investment required.

The Board expects to realise the above synergies on a phased basis as follows:

approximately £0.2 million of the pre-tax cost synergies will be realised in the year ending 31 August 2015;
approximately £1.0 million of the pre-tax cost synergies will be realised in the year ending 31 August 2016; and
approximately £2.0 million of the pre-tax cost synergies (being the full pre-tax cost synergies) will be realised in the year ending 31 August 2017.

The Board expects that the integration process and the realisation of these synergies will result in non-recurring costs of approximately £1.0 million incurred over two years starting in the year commencing 1 September 2015.

Given the Connect Group’s track record and the nature of Tuffnells, the Board is confident that the integration of Tuffnells into the Connect Group can be achieved without undue disruption to the underlying operations of either business whilst still ensuring its strong customer service performance is maintained. Tuffnells will operate as a separate division to help in retaining clear accountability and transparency of performance.

The Board also believes that there is a potential for longer-term network opportunities as well as a number of revenue synergies achievable from greater sharing of resources and infrastructure between Connect divisions and Tuffnells, including for example, in connection with the recently announced ‘Pass my Parcel’ click and collect offering from the News Business with Amazon being the first client of this service. The Board believes that this process of integration will be facilitated by existing service relationships between Tuffnells and Connect divisions. For example, the Group’s Education & Care Business is already a customer of Tuffnells.

The anticipated costs savings outlined above are contingent on Completion and could not be achieved independently. The estimated synergies reflect both the beneficial elements and the relevant cost.

4.4 Creating attractive financial returns for Connect Shareholders

The Board believes that, taking into account the business and prospects of the Enlarged Group, the expected synergy benefits and associated costs of achieving them and the impact of the New Ordinary Shares that will be in issue following the Rights Issue, the Acquisition will be earnings enhancing in the year ending 31 August 2015 and significantly earnings enhancing in the year ending 31 August 2017, as well as achieving a post-tax return on invested capital that is higher than the Connect Group’s cost of capital in its first full year following Completion on a full year pro-forma basis.¹ The Board believes that the consideration payable in connection with the Acquisition implies an attractive valuation multiple, producing a multiple of 6.3 (based on the Initial Consideration alone) and a multiple of 7.1 (based on the maximum consideration payable in connection with the Acquisition), in each case taking into account projected synergies of £2.0 million per annum.²

Tuffnells has a history of strong profit and cash generation, with future growth opportunities. The Tuffnells business is not capital intensive and Connect can continue to invest for growth in the Tuffnells business whilst maintaining a strong cash yield, supporting the Enlarged Group’s ability to maintain its existing progressive dividend policy.

¹ This statement is not intended as a profit forecast.

² Calculated on the basis of (i) The Big Green Parcel Holding Company 12 month Adjusted EBITDA for the 12 months to 31 August 2014 (unaudited) of £16.0 million, and (ii) Initial Consideration of £113.4 million, maximum consideration of £128.7 million and anticipated synergies of £2.0 million, each as described in more detail in this document.

5. KEY TERMS OF THE ACQUISITION

Under the terms of the Acquisition, Smiths News Holdings Limited, a wholly-owned subsidiary of the Company, will acquire the entire issued and to be issued share capital of The Big Green Parcel Holding Company (the holding company for Tuffnells Parcels Express Limited) on a debt-free basis. The consideration payable by the Company to the Sellers is up to £128.7 million (comprising initial cash consideration of £113.4 million payable on Completion, and deferred consideration of up to a further maximum amount of £15.3 million is payable to the Tuffnells Management Sellers and Option Sellers in cash and Ordinary Shares subject to the achievement of certain financial targets and (in respect of certain of the Tuffnells Management Sellers) their continued employment for set period of times of at least 12 months in the case of Lloyd Dunn, the managing director of Tuffnells, and up to three years for the other Tuffnells Management Sellers.

The Acquisition Agreement contains customary warranties, undertakings and conditions for a transaction of this nature.

Completion of the Acquisition is conditional upon certain conditions being satisfied, including:

the Resolution being passed by Shareholders approving the Acquisition;
admission of the New Ordinary Shares to the Official List of the UKLA, trading on the London Stock Exchange becoming effective and receipt by the Company of the proceeds of the Rights Issue;
there not having occurred any event having a material adverse change on Tuffnells Group between the date of the Acquisition Agreement and the date of Completion; and
no indication having been received from the CMA between the date of the Acquisition Agreement and the date of Completion that it is or may be considering a merger control investigation in respect of the Acquisition, or if there has been any such indication then:
there is no initial enforcement order in force for the purpose of preventing or reserving preemptive action with respect to the Acquisition; and
the CMA has issued a decision in terms satisfactory to the Purchaser that it has no intention to make a Phase 2 reference (such decision being either unconditional or conditional on the CMA's acceptance of undertakings in lieu which are satisfactory to the Purchaser) or the applicable time period for the CMA to make such a reference has expired without it having made such a reference.
In the event that such conditions are not satisfied (or, where capable of waiver, waived) and Completion has not occurred before 1 January 2015, the Acquisition Agreement will terminate with immediate effect.

Further details of the key terms of the Acquisition are set out in Part X (Terms of the Acquisition) of this document.

6. FINANCING THE ACQUISITION

The Company proposes to finance the Initial Consideration required for the Acquisition through a combination of:

Debt Facilities: the Connect Group has recently extended its bank facilities, supported by four of its existing banking syndicate. Together these banks have agreed to provide a £50.0 million extension to the Company's existing £200 million of committed facilities. The new facility of £250 million is committed through to November 2018, which provides funding for the Acquisition and significant future headroom for the Enlarged Group going forward. Details of the extended debt facilities are set out in 16.1.3 of Part XXI (Additional Information); and

Rights Issue: the net proceeds of the 2 for 7 Rights Issue at 102 pence per New Ordinary Share, being approximately £52.3 million, net of expenses. The key terms of the Rights Issue are set out in paragraph 8 of this letter.

7. FINANCIAL EFFECTS OF THE RIGHTS ISSUE AND THE ACQUISITION

A pro forma statement of net assets which illustrates the effect of each of the Acquisition and Rights Issue on the Connect Group’s net assets as at 31 August 2014 as if they had been undertaken at that date and a pro forma statement of profit and loss, which illustrates the effect of each of the Acquisition and the Rights Issue on the Connect Group’s profit for the year ended 31 August 2014 as if they had been undertaken on 1 September 2013, are set out in Part XVII (Unaudited Pro Forma Financial Information in respect of the Enlarged Group) of this document. This pro forma information is unaudited and has been prepared for illustrative purposes only. It shows that the Acquisition would have led to a pro forma increase in net assets of £48.7 million as at 31 August 2014 to a net asset position of £6.6 million reflecting the impact of the Rights Issue, Tuffnells’ acquired net assets, the drawdown of debt and the impact of associated transaction fees. The pro-forma Connect Group’s net debt: EBITDA ratio would have been 2.0 as at 31 August 2014.

8. KEY TERMS OF THE RIGHTS ISSUE

The Connect Group is proposing to raise approximately £52.3 million, net of expenses, from the Rights Issue. Pursuant to the Rights Issue, the Company is proposing to offer 54,136,442 New Ordinary Shares to Qualifying Shareholders other than to those Shareholders with a registered address, or resident in, one of the Excluded Territories or, subject to certain exceptions, the United States. The offer is to be made at 102 pence per New Ordinary Share, payable in full on acceptance by no later than 11:00 a.m. on 16 December 2014. The Rights Issue Price represents a 33.7 per cent. discount to the theoretical ex-Rights price based on the closing middle-market price of 168.75 pence per Ordinary Share on 11 November 2014.

The Rights Issue will be made on the basis of:

2 New Ordinary Shares at 102 pence per New Ordinary Share for every 7 Ordinary Shares

held by Qualifying Shareholders at the close of business on the Record Date.

Entitlements to New Ordinary Shares will be rounded down to the nearest whole number and fractional entitlements will not be allotted to Shareholders and will be disregarded.

The New Ordinary Shares, when issued and fully paid, will rank pari passu in all respects with the Existing Ordinary Shares, including the right to receive dividends or distributions made, paid or declared after the date of issue of the New Ordinary Shares.

The Rights Issue is underwritten by the Underwriters pursuant to the Underwriting Agreement. The principal terms of the Underwriting Agreement are summarised in Part XXI (Additional Information) of this document.

The Rights Issue will result in up to 54,136,442 New Ordinary Shares being issued (representing approximately 29 per cent. of the existing issued share capital and 22 per cent. of the enlarged issued share capital immediately following completion of the Rights Issue).

The Rights Issue is conditional, inter alia, upon:

the Underwriting Agreement having become unconditional in all respects save for the condition relating to Admission;

³ This statement is not intended as a profit forecast.

Admission of the Nil Paid Rights becoming effective by not later than 8:00 a.m. on 2 December 2014 (or such later time and date as the Joint Sponsors and the Company may agree); and
the passing, without material amendment, of the Resolution.

Connect can give notice that it wishes to terminate the Acquisition Agreement prior to Completion of the Acquisition if certain conditions, as detailed within the Acquisition Agreement and explained further in Part X (Terms of the Acquisition) of this document, are not satisfied. It is therefore possible that the Rights Issue could proceed but the Acquisition does not. In such circumstances, and to the extent possible in the circumstances, the Company intends to refund the net proceeds raised by the Right Issue to Shareholders in a tax efficient way.

Certain resolutions authorising the allotment of further shares in the Company and the waiver of pre-emption rights in connection with a rights issue were passed at the annual general meeting of the Company held on 23 January 2014. These authorities will be relied upon for the purposes of the Rights Issue.

Applications will be made to the UKLA for the New Ordinary Shares to be admitted to the premium listing segment of the Official List and to the London Stock Exchange for the New Ordinary Shares to be admitted to trading on the London Stock Exchange’s main market for listed securities. It is expected that Admission will become effective and that dealings in the New Ordinary Shares (nil paid) will commence by 8.00 a.m. on 2 December 2014 and in the New Ordinary Shares (fully paid) by 8.00 a.m. on 17 December 2014.

The Directors are fully supportive of the Rights Issue. Each of the Directors who hold Ordinary Shares either intends, to the extent that they are able, to take up in full their rights to subscribe for New Ordinary Shares under the Rights Issue or to sell a sufficient number of their Nil Paid Rights during the nil paid dealing period to meet the costs of taking up the balance of their entitlements to New Ordinary Shares.

9. MANAGEMENT AND EMPLOYEES

The senior management of both Connect and Tuffnells possess significant experience and success in the distribution industry, with the Tuffnells senior management team having between them over 100 years’ experience in the industry. The majority of the Tuffnells senior management team have agreed to remain with the Tuffnells business following Completion (save for those senior managers anticipated to retire in the ordinary course of the business). The Directors believe that the combined knowledge and expertise of the existing Tuffnells senior management team and the Connect senior management team will help Tuffnells’ anticipated growth, assist a smooth transition into the Enlarged Group and assist in the delivery on the Enlarged Group’s strategy. Following Completion, the Board will review and provide appropriate support for the continuing development of Tuffnells’ management team, as well as considering the appropriate management structure for Tuffnells in the longer-term, utilising the skills and experiences of Tuffnells and Connect’s existing management teams.

The Board is pleased that Lloyd Dunn, the managing director of Tuffnells, has agreed to join the Connect Group Executive Committee for a period of at least 12 months following Completion. As part of the Enlarged Group’s succession planning Lloyd Dunn will assist with the recruitment of his successor. It is expected that once such successor has been appointed Mr Dunn will become executive chairman of Tuffnells before retiring from the Enlarged Group on or around 31 March 2016. No changes will be made to the Board as a result of the Acquisition.

The Board believes there is strong alignment and close business fit between Connect and Tuffnells, with a consistent belief in striving for market leading excellence through providing high quality customer service and valuing long term partnerships. As such, the Board attaches importance to the skills and experience of Tuffnells’ existing management and employees, and believes that there will be opportunities for them to excel within the Enlarged Group. As further detailed in Part X (Terms of the Acquisition), the Acquisition Agreement provides for the Deferred Consideration which is payable to the Tuffnells Management Sellers and Option Sellers to be paid to the Tuffnells Management Sellers and Option Sellers, subject to certain conditions including (in respect of certain of the Tuffnells Management Sellers) continuation of employment for set periods and the financial performance of Tuffnells over the three-year period following Completion.

The Board does not currently anticipate any significant headcount reductions for the Enlarged Group following Completion and the Board intends to invest in and grow the Tuffnells business offering greater development opportunities.

Following Completion, the Enlarged Group’s headquarters and registered office will remain the current registered offices of the Company.

10. DIVIDEND POLICY OF THE ENLARGED GROUP

Connect paid dividends per Ordinary Share of 9.3 pence and 8.6 pence for the years ended 31 August 2013 and 31 August 2012, respectively. The proposed final dividend of 6.6 pence per Ordinary Share for the year ended 31 August 2014 announced on 15 October 2014 in Connect’s Preliminary Results Announcement will be adjusted to reflect the impact of the Rights Issue in connection with the Acquisition. The proposed final dividend will be adjusted to 6.0 pence per Ordinary Share to reflect the bonus element associated with the Rights Issue and both Existing Ordinary Shares and New Ordinary Shares will be entitled to receive this dividend.⁴ The proposed final adjusted dividend of 6.0 pence per Ordinary Share is subject to approval by Shareholders at the Annual General Meeting on 4 February 2015 and, if approved, will be paid on 6 February 2015 to Shareholders on the register of members of at close of business on 9 January 2015.

Following the Acquisition, Connect intends to maintain its existing progressive dividend policy, having regard to the availability of distributable reserves and cash, and taking into account the Enlarged Group’s working capital and investment requirements.

11. CURRENT TRADING, TRENDS AND PROSPECTS

11.1 Connect

On 15 October 2014, the Connect Group announced its audited preliminary results for the year ended 31 August 2014.

In the year ending 31 August 2014 the Connect Group delivered a steady financial performance whilst continuing to enhance shareholder returns. Total underlying revenue of £1.8 billion, was marginally ahead of the prior year, underlying profit before tax of £50.0 million was up 0.2 per cent. versus the prior year reflecting a good performance in both the News & Media Division and the Education & Care Division, offset by under-performance in the Books Division. Statutory profit before tax for the year was £43.1 million, up from £38.9 million from the previous year.

Underlying earnings per Ordinary Share at 21.7 pence is up 2.8 per cent. with a lower effective tax rate, predominantly due to prior year releases, enhancing earnings growth.

Free cash flow was a strong result at £37.2 million, up 14.1 per cent. on last year.

The News & Media Division, our largest division, delivered an 8.1 per cent. increase in underlying operating profit, with better than forecast sales coupled with continued delivery of its efficiency plans. News distribution underlying operating profit was up 7.3 per cent. to £42.9 million supported by strong supermarket promotions and World Cup sales. The Connect Group made a number of investments that leverage the core skills and infrastructure of the business, the highlight being the launch of ‘Pass my Parcel’, an innovative parcel delivery service with potential for significant growth. DMD, the media distribution business, delivered underlying operating profit of £2.3 million, up 22.8 per cent.; the business now has over 50 per cent. of revenues secured on long-term contracts.

The Books Division had a disappointing year, suffering from market weakness as well as changes to sales mix impacting margin and cost pressures. Underlying operating profit decreased from £7.2 million to £2.5 million. The Directors believe that the Connect Group’s recovery actions are now taking effect and have stabilised the business. A new Managing Director has recently been appointed and will be supported by a strengthened management team. The Board remains confident there are opportunities for growth in this market, highlighted by the trading of Wordery.

⁴ DPS adjusted for Rights Issue Bonus Factor Adjustment of 91.2 per cent.

Education & Care Division delivered a 5.0 per cent. increase in underlying operating profit, with good growth in the division's core education categories which was maintained across the vital peak trading period. The Education & Care Division made significant development to its service proposition and saw strong levels of growth in core categories, performing well in the key peak trading period.

We maintain our ambition of achieving 50 per cent. of profits from activities outside of newspaper and magazine wholesaling through a combination of both organic and acquisitive growth. 'Pass my Parcel' highlights the opportunity of future organic revenue streams with scalable growth, and the Connect Group continues to evaluate potential future acquisitions from a pipeline of opportunities across a range of markets.

In the year ended 31 August 2014 the Connect Group's strong cash flow generation reduced net debt and strengthened our financial position; making more of our committed bank facility available for future acquisitions.

The Connect Group is committed to generating strong shareholder returns and in the year ended 31 August 2014 delivered EPS and DPS growth. Recent trading is in line with current management expectations and we remain in a good position to build on the progress made in the last financial year.

11.2 Tuffnells

Part XVI (Historical Financial Information relating to the Tuffnells Group) of this document provides financial information on Tuffnells for the six month period to 30 June 2014.

In the six month period ended 30 June 2014 Tuffnells continued to grow sales and EBITDA in line with trends seen over the last few years. Total revenue of £69.2 million was £7.6 million or 12.3 per cent ahead of the six month period ended 30 June 2013, resulting in an Adjusted EBITDA of £7.4 million which was £1.0 million or 15.6 per cent. ahead of the same period last year. This growth was driven by increased consignment volumes compared to the same period in the prior year, which has been further enhanced by an increase in the revenue per consignment. During this period the business has continued to increase capacity by opening new depots. In the six month period ended 30 June 2014 profit before tax was £4.9 million which was £1.1 million or 25.6 per cent. ahead of the prior year.

Since the 30 June 2014 the business has continued to trade strongly.

Recent trading remains in line with management expectations and trends from the first six months.

12. OVERSEAS SHAREHOLDERS

The attention of Shareholders who have registered addresses outside the United Kingdom, or who are citizens or residents of or located in countries other than the United Kingdom, is drawn to the information in paragraph 7 of Part IX (Terms and Conditions of the Rights Issue) of this document.

New Ordinary Shares will be provisionally allotted (nil paid) to all Qualifying Shareholders on the register at the Record Date, including Overseas Shareholders. However, subject to certain exceptions, Provisional Allotment Letters will not be sent to Qualifying Non-CREST Shareholders with registered addresses in the United States or the Excluded Territories, nor will the CREST stock account of Qualifying CREST Shareholders with registered addresses in the United States or the Excluded Territories be credited.

Notwithstanding any other provision of this document or the Provisional Allotment Letter, the Company reserves the right to permit any Shareholder on the register at the Record Date to take up his rights if the Company in its sole and absolute discretion is satisfied that the transaction in question will not violate applicable laws.

In particular, persons who have registered addresses in or who are resident in, or who are citizens of, countries other than the United Kingdom should consult their professional advisers whether they require any governmental or other consents or need to observe any formalities to enable them to take up their entitlements in the Rights Issue.

13. TAXATION

Certain information about United Kingdom and United States taxation in relation to the Rights Issue is set out in Part XIX (Taxation) of this document. If you are in any doubt as to your tax position, or you are subject to tax in a jurisdiction other than the United Kingdom or the United States, you should consult your own independent tax adviser without delay.

14. SHARE SCHEMES

The options and awards granted under the Company's Share Schemes may be adjusted in such a way as the Remuneration Committee considers appropriate to compensate option and award holders for any effect the Rights Issue will have on those options and awards (as permitted by the rules of the relevant Share Schemes). Any adjustments will be made on or after the ex-rights date and will be subject to the approval of HMRC and the Company's auditors where required. Where options and awards are subject to performance conditions, adjustments may, if appropriate be made to the conditions. Participants in the Share Schemes will be contacted separately with further information on how their options and awards may be affected by the Rights Issue.

15. GENERAL MEETING

A notice convening a General Meeting to be held at the offices of Herbert Smith Freehills LLP, Exchange House, Primrose Street, London, EC2A 2EG at 10:00 a.m. on Monday 1 December 2014 at which the Resolution will be proposed is set out at the end of this document. The purpose of the General Meeting is to consider and, if thought fit, pass the Resolution as set out in full in the Notice of General Meeting.

Because of the size of Tuffnells when compared with Connect, the Acquisition is classified under the Listing Rules as a Class 1 transaction and therefore requires the approval of Shareholders. The Resolution will be proposed as an ordinary resolution requiring a simple majority of votes in favour. The Resolution proposes that the Acquisition be approved and the Directors be authorised to take all steps and enter into all agreements and arrangements necessary or desirable to implement the Acquisition.

Your attention is again drawn to the fact that the Rights Issue and Acquisition are each conditional and dependent upon the Resolution being passed (there are also additional conditions which must be satisfied before the Acquisition and the Rights Issue can be completed).

Shareholders should be aware that it is possible that, subsequent to the Admission becoming effective, the Acquisition could fail to complete. This possibility is discussed further in paragraph 5 above and paragraph 8 of Part X (Terms of the Acquisition) of this document.

For further information in relation to the Resolution to be proposed at the General Meeting, see the Notice of General Meeting at the end of this document.

16. ACTION TO BE TAKEN

16.1 General Meeting

If you are a Shareholder, you will find enclosed with this document a Form of Proxy for use at the General Meeting. Whether or not you intend to be present at the General Meeting, you are asked to complete the Form of Proxy in accordance with the instructions printed on it and to return it to the Company's registrar, Equiniti, at Equiniti Limited, Aspect House, Spencer Road, Lancing, West Sussex, BN99 6DA as soon as possible and, in any event, so as to arrive not later than 10am on 27 November 2014.

You may also submit your proxies electronically at www.sharevote.co.uk or by logging into your share portal account at www.shareview.co.uk or registering for the share portal if you have not already done so. To register for the share portal you will need your investor code set out on the form of proxy.

If you hold shares in CREST, you may appoint a proxy by completing and transmitting a CREST Proxy Instruction to the issuer's agent, ID RA19, so that it is received no later than 10am 27 November 2014.

The completion and return of the Form of Proxy, or completion of a proxy electronically, will not preclude you from attending the General Meeting and voting in person if you wish to do so.

Further details relating to voting by proxy are set out in the Notice of General Meeting at the end of this document.

16.2 Rights Issue

The latest time for acceptance by Qualifying Shareholders under the Rights Issue is 11.00 a.m. 16 December 2014. The procedure for acceptance and payment is set out in Part IX (Terms and Conditions of the Rights Issue) of this document. Further details also appear in the Provisional Allotment Letter which will be sent to all Qualifying Non-CREST Shareholders (other than, subject to certain exceptions, those Qualifying Non-CREST Shareholders with a registered address in the United States or Excluded Territories).

If you are in any doubt as to the action you should take, you are recommended to seek your own personal financial advice immediately from your stockbroker, bank manager, solicitor, accountant, fund manager or other independent financial adviser authorised under FSMA if you are in the United Kingdom or, if you are not, from another appropriately authorised independent financial adviser.

17. FURTHER INFORMATION

Your attention is drawn to Part II (Risk Factors) of this document. You should read all of the information contained in, or incorporated by reference into, this document before deciding the action to take in respect of the General Meeting or the Rights Issue (or both). If you are a Qualifying Shareholder, and, subject to certain exceptions, unless you have a registered address in, or are resident in, the United States or any of the Excluded Territories, your attention is drawn in connection with the Rights Issue to the further information contained in Part IX (Terms and Conditions of the Rights Issue) of this document.

The results of the votes cast at the General Meeting will be announced as soon as possible once known through a Regulatory Information Service and on the Connect website (www.connectgroupplc.com). It is expected that this will be on 1 December 2014.

18. FINANCIAL ADVICE

The Board has received financial advice from J.P. Morgan Cazenove and Liberum in relation to the Acquisition. In providing advice to the Board, J.P. Morgan Cazenove and Liberum have relied upon the Directors' commercial assessments of the Acquisition. In addition, the Board has received financial advice from J.P. Morgan Cazenove, Liberum and Lazard in relation to the Rights Issue. In providing advice to the Board, J.P. Morgan Cazenove, Liberum and Lazard have relied upon the Directors' commercial assessments of the Rights Issue.

19. RECOMMENDATION

The Board believes the Acquisition and the Rights Issue to be in the best interests of the Company and its Shareholders as a whole. Accordingly, the Board unanimously recommends that Shareholders vote in favour of the Resolution to be put to the General Meeting as they intend to do (or seek to procure to be done) in respect of their own beneficial holdings of 822,040 Connect Ordinary Shares in aggregate, representing approximately 0.43 per cent. of the existing issued ordinary share capital of Connect.

The Directors are fully supportive of the Rights Issue. Each of the Directors who hold Ordinary Shares either intends, to the extent that he is able, to take up in full his or her rights to subscribe for New Ordinary Shares under the Rights Issue or to sell a sufficient number of their Nil Paid Rights during the nil paid dealing period to meet the costs of taking up the balance of their entitlements to New Ordinary Shares.

Yours faithfully,

Dennis Millard

Chairman

PART VIII

SOME QUESTIONS AND ANSWERS ABOUT THE RIGHTS ISSUE

The questions and answers set out in this Part VIII are intended to be in general terms only and, as such, you should read Part IX (Terms and Conditions of the Rights Issue) of this document for full details of what action you should take. If you are in any doubt as to what action you should take, you are recommended to seek your own personal financial advice from your stockbroker, bank manager, solicitor, accountant or other independent financial adviser, authorised under FSMA, as amended, if you are resident in the UK or, if not, from another appropriately authorised independent financial adviser.

This Part VIII deals with general questions relating to the Rights Issue and more specific questions relating to Ordinary Shares held by persons resident in the UK who hold their Ordinary Shares in certificated form only. If you are an Overseas Shareholder, you should read paragraph 7 of Part IX (Terms and Conditions of the Rights Issue) of this document and you should take professional advice as to whether you are eligible to take up your rights and if so, whether you need to observe any formalities to enable you to do so. If you hold your Ordinary Shares in uncertificated form (that is, through CREST) you should read Part IX (Terms and Conditions of the Rights Issue) of this document for full details of what action you should take. If you are a CREST sponsored member, you should also consult your CREST sponsor. If you do not know whether your Ordinary Shares are in certificated or uncertificated form, please contact the Shareholder helpline on 0871 384 2771 (calls to this number cost 8p per minute plus network extras. Lines are open 8.30 a.m. to 5.30 p.m., Monday to Friday, excluding UK bank holidays) or if calling from outside the UK on +44 121 415 7565. Calls to the Shareholder Helpline from outside the UK will be charged at the applicable international rate. Different charges may apply to calls from mobile telephones and calls may be recorded and randomly monitored for security and training purposes. Please note that the Shareholder Helpline operators cannot provide advice on the merits of the Rights Issue nor give financial, tax, investment or legal advice.

1. WHAT IS A RIGHTS ISSUE?

A rights issue is a way for companies to raise money. Companies do this by giving their existing shareholders a right to buy further shares in proportion to their existing shareholdings.

If you hold Ordinary Shares on the Record Date, other than those Shareholders with a registered address in the United States or the Excluded Territories, you will be entitled to buy New Ordinary Shares under the Rights Issue. If you hold your Existing Ordinary Shares in certificated form, your entitlement will be set out in your Provisional Allotment Letter.

New Ordinary Shares are being offered to Qualifying Shareholders in the Rights Issue at a discount to the price of Ordinary Shares on the last Dealing Day before the terms of the Rights Issue were announced on 12 November 2014. The Issue Price of 102 pence per New Ordinary Share represents:

a 39.6 per cent. discount to the closing price of an Existing Ordinary Share; and
a 33.7 per cent. discount to the theoretical ex-Rights price of an Ordinary Share,

in each case based on the closing middle-market price of 168.75 pence on the London Stock Exchange on 11 November 2014, being the day prior to the date of announcement of the terms of the Rights Issue. As a result of this discount, and while the market value of the Existing Ordinary Shares exceeds the Issue Price, the right to buy the New Ordinary Shares is potentially valuable.

The Rights Issue is on the basis of 2 New Ordinary Shares for every 7 Existing Ordinary Shares held by Qualifying Shareholders on the Record Date.

If you are a Qualifying Shareholder other than a Shareholder with a registered address, or who is resident, in the United States or one of the Excluded Territories and you do not want to buy the New Ordinary Shares to which you are entitled, you can instead sell or transfer your rights (called Nil Paid Rights) to those New

Ordinary Shares and receive the net proceeds, if any, of the sale or transfer in cash. This is referred to as "dealing nil paid".

2. WHAT HAPPENS NEXT?

The Company has called a General Meeting to be held at the offices of Herbert Smith Freehills LLP, Exchange House, Primrose Street, London EC2A 2EG at 10:00 a.m. on Monday 1 December 2014. Please see the notice of the General Meeting at the end of this document. As you will see from the contents of the notice of the General Meeting, the Directors are seeking shareholder approval for the Acquisition.

If the Acquisition is approved at the General Meeting, the Rights Issue will proceed (subject to certain conditions). The Provisional Allotment Letters are due to be despatched on 1 December 2014 to Qualifying Non-CREST Shareholders and the Nil Paid Rights are due to be credited to the CREST stock accounts of Qualifying CREST Shareholders as soon as practicable after 8.00 a.m. on 2 December 2014.

3. CAN I SELL SOME RIGHTS AND USE THE PROCEEDS TO TAKE UP MY REMAINING RIGHTS?

This is known as a cashless take-up or "tail-swallowing". You should contact your stockbroker or financial adviser who may be able to help if you wish to do this. Please note that your ability to sell your rights is dependent on demand for such rights and that the price for Nil Paid Rights may fluctuate. Please ensure that you allow enough time so as to enable the person acquiring your rights to take all necessary steps in connection with taking up the entitlement prior to 11.00 a.m. on 16 December 2014.

4. WILL MY CURRENT SHAREHOLDING IN CONNECT REMAIN THE SAME FOLLOWING THE RIGHTS ISSUE?

If you decide to take up all of your Rights to acquire the New Ordinary Shares to which you are entitled, the proportion of your holding in the Company will, subject to fractional entitlements, remain the same as it was before the Rights Issue. If your entitlement to New Ordinary Shares is not a whole number, your entitlement will be rounded down.

If you decide to sell or not to take up some or all of your Rights, the proportion of your holding in Connect will be smaller once the Rights Issue has been completed, as New Ordinary Shares are being issued. In these circumstances your interest in the Company will be diluted, and the maximum dilution you may suffer (in the event you do not take up any of your Rights) will be 22 per cent.

5. I HOLD MY ORDINARY SHARES IN CERTIFICATED FORM. HOW DO I KNOW IF I AM ABLE TO ACQUIRE NEW ORDINARY SHARES UNDER THE RIGHTS ISSUE?

If you receive a Provisional Allotment Letter and are not a holder with a registered address in the United States or the Excluded Territories, then you should be eligible to acquire New Ordinary Shares under the Rights Issue (as long as you have not sold all of your Ordinary Shares before 8.00 a.m. on 2 December 2014 (the time when the Ordinary Shares are expected to be marked "ex-rights" by the London Stock Exchange) in which case you will need to follow the instructions on the front page of this document).

6. I HOLD MY ORDINARY SHARES IN CERTIFICATED FORM. HOW WILL I BE INFORMED OF HOW MANY NEW ORDINARY SHARES I AM ENTITLED TO BUY?

Subject to Shareholders passing the Resolution at the General Meeting to be held on 1 December 2014, if you hold your Ordinary Shares in certificated form and do not have a registered address in the United States or one of the Excluded Territories, you will be sent a Provisional Allotment Letter that shows:

how many Ordinary Shares you held at the close of business on 27 November 2014 (the Record Date for the Rights Issue);
how many New Ordinary Shares you are entitled to buy; and

how much you need to pay if you want to take up your right to buy all the New Ordinary Shares provisionally allotted to you in full.

If you have a registered address in the United States or one of the Excluded Territories, you will not receive a Provisional Allotment Letter.

7. I AM A QUALIFYING SHAREHOLDER WITH A REGISTERED ADDRESS IN THE UK AND I HOLD MY ORDINARY SHARES IN CERTIFICATED FORM. WHAT ARE MY CHOICES AND WHAT SHOULD I DO WITH THE PROVISIONAL ALLOTMENT LETTER?

7.1 If you want to take up all of your rights

If you want to take up all of your rights to acquire the New Ordinary Shares to which you are entitled, all you need to do is send the Provisional Allotment Letter, together with your cheque or banker’s draft for the full amount, payable to “Equiniti Limited re: Connect Group PLC-Rights Issue a/c” and crossed “A/C payee only”, by post or by hand (during normal business hours) to Equiniti Limited, Corporate Actions, Aspect House, Spencer Road, Lancing, BN99 6DA, to arrive by no later than 11.00 a.m. on 16 December 2014. Within the UK only, you can use the reply-paid envelope which will be enclosed with the Provisional Allotment Letter. Full instructions are set out in Part IX (Terms and Conditions of the Rights Issue) of this document and will be set out in the Provisional Allotment Letter.

Please note third party cheques will not be accepted other than building society cheques or banker’s drafts.

If payment is made by building society cheque (not being drawn on an account of the applicant) or a banker’s draft, the building society or bank must endorse on the cheque or draft the applicant’s name and the number of an account held in the applicant’s name at the building society or bank, such endorsement being validated by a stamp and an authorised signature.

A definitive share certificate will then be sent to you in respect of the New Ordinary Shares that you take up. Your definitive share certificate for New Ordinary Shares is expected to be despatched to you by no later than 30 December 2014. You will need your Provisional Allotment Letter to be returned to you if you want to deal in your Fully Paid Rights. Your Provisional Allotment Letter will not be returned to you unless you tick the appropriate box on the Provisional Allotment Letter.

7.2 If you do not want to take up your rights at all

If you do not want to take up your rights, you do not need to do anything. If you do not return your Provisional Allotment Letter subscribing for the New Ordinary Shares to which you are entitled by 11.00 a.m. on 16 December 2014, we have made arrangements under which the Underwriters will try to find investors to take up your rights and the rights of others who have not taken up their rights. If the Underwriters do find investors who agree to pay a premium above the Issue Price and the related expenses of procuring those investors (including any applicable brokerage and commissions and amounts in respect of value added tax), you will be sent a cheque for your share of the amount of that premium provided that this amount is £5.00 or more. Cheques are expected to be despatched by no later than 30 December 2014 and will be sent to your address appearing on the Company’s register of members (or to the first-named holder if you hold your Ordinary Shares jointly). If the Underwriters cannot find investors who agree to pay a premium over the Issue Price and related expenses so that your entitlement would be £5.00 or more, you will not receive any payment, and any amounts of less than £5.00 will be aggregated and ultimately paid to the Company. Alternatively, if you do not want to take up your rights, you can sell or transfer your Nil Paid Rights (see paragraph 7.4 below).

7.3 If you want to take up some but not all of your rights

If you want to take up some but not all of your rights and wish to sell some or all of those you do not want to take up, you should first apply to have your Provisional Allotment Letter split by completing Form X on the Provisional Allotment Letter, and returning it by post or by hand (during normal

business hours) to Equiniti Limited, Corporate Actions, Aspect House, Spencer Road, Lancing, BN99 6DA, to be received by 3.00 p.m. on 12 December 2014, together with a covering letter stating the number of split Provisional Allotment Letters required and the number of Nil Paid Rights to be comprised in each split Provisional Allotment Letter. You should then deliver the split Provisional Allotment Letter representing the New Ordinary Shares that you wish to accept together with your cheque or banker's draft to Equiniti Limited, Corporate Actions, Aspect House, Spencer Road, Lancing, BN99 6DA to be received by 11.00 a.m. on 16 December 2014.

Shareholders who wish to effect a cashless take-up of their Nil Paid Rights (which may be achieved through the sale of such portion of their Nil Paid Rights as will raise sufficient funds to allow the relevant Shareholder to take up their remaining Nil Paid Rights) should contact their broker, who may be able to assist with such arrangements. Please note that your ability to sell your rights is dependent on demand for such rights and that the price for Nil Paid Rights may fluctuate. Please ensure that you allow enough time so as to enable the person acquiring your rights to take all necessary steps in connection with taking up the entitlement prior to 11.00 a.m. on 16 December 2014.

Alternatively, if you want to take up some of your rights but not sell any of the rest, you should complete Form X on the Provisional Allotment Letter and return it with a cheque or banker's draft together with an accompanying letter indicating the number of Nil Paid Rights that you wish to take up, in accordance with the provisions set out in the Provisional Allotment Letter.

Further details are set out in Part IX (Terms and Conditions of the Rights Issue) and will be set out in the Provisional Allotment Letter.

7.4 If you want to sell all of your rights

If you want to sell all of your rights, you should complete and sign Form X on the Provisional Allotment Letter (if it is not already marked "Original Duly Renounced") and pass the entire letter to your stockbroker, bank manager or other appropriate financial adviser or to the transferee (provided they are not in the United States or any of the Excluded Territories).

Please ensure that you allow enough time so as to enable the person acquiring your rights to take all necessary steps in connection with taking up the entitlement prior to 11.00 a.m. on 16 December 2014.

8. I ACQUIRED MY ORDINARY SHARES PRIOR TO THE RECORD DATE AND HOLD MY ORDINARY SHARES IN CERTIFICATED FORM. WHAT IF I DO NOT RECEIVE A PROVISIONAL ALLOTMENT LETTER?

If Shareholders approve the Resolution at the General Meeting to be held on 1 December 2014, and you do not receive a Provisional Allotment Letter but hold your Ordinary Shares in certificated form, this probably means that you are not able to take up New Ordinary Shares under the Rights Issue. Some Non-CREST Shareholders, however, will not receive a Provisional Allotment Letter but may still be eligible to acquire New Ordinary Shares under the Rights Issue, namely:

Qualifying CREST Shareholders who held their Ordinary Shares in uncertificated form on 27 November 2014 and who have converted them to certificated form;
Shareholders who bought Ordinary Shares before 27 November 2014 and who hold such Ordinary Shares in certificated form but were not registered as the holders of those Ordinary Shares at the close of business on 27 November 2014; and
certain Overseas Shareholders.

If you do not receive a Provisional Allotment Letter but think that you should have received one, please contact the Shareholder helpline on 0871 384 2771 (calls to this number cost 8p per minute plus network extras. Lines are open 8.30 a.m. to 5.30 p.m., Monday to Friday, excluding UK bank holidays) or if calling from outside the UK on +44 121 415 7565. Calls to the Shareholder Helpline from outside the UK will be charged at the applicable international rate. Different charges may apply to calls from mobile telephones and

calls may be recorded and randomly monitored for security and training purposes. Please note that the Shareholder Helpline operators cannot provide advice on the merits of the Rights Issue nor give financial, tax, investment or legal advice.

9. IF I BUY ORDINARY SHARES AFTER THE RECORD DATE WILL I BE ELIGIBLE TO PARTICIPATE IN THE RIGHTS ISSUE?

If you bought Ordinary Shares after the Record Date but prior to 8.00 a.m. on 2 December 2014 (the time when the Ordinary Shares are expected to start trading ex-Rights on the London Stock Exchange), you may be eligible to participate in the Rights Issue.

If you are in any doubt, please consult your stockbroker, bank or other appropriate financial adviser, or whoever arranged your share purchase, to ensure you claim your entitlement.

If you buy Ordinary Shares at or after 8.00 a.m. on 2 December 2014, you will not be eligible to participate in the Rights Issue in respect of those Ordinary Shares.

10. I HOLD MY ORDINARY SHARES IN CERTIFICATED FORM. IF I TAKE UP MY RIGHTS, WHEN WILL I RECEIVE THE CERTIFICATE REPRESENTING MY NEW ORDINARY SHARES?

If you take up your rights under the Rights Issue, share certificates for the New Ordinary Shares are expected to be posted by no later than 30 December 2014.

11. WHAT IF THE NUMBER OF NEW ORDINARY SHARES TO WHICH I AM ENTITLED IS NOT A WHOLE NUMBER? AM I ENTITLED TO FRACTIONS OF NEW ORDINARY SHARES?

Your entitlement to New Ordinary Shares will be calculated at the Record Date (other than in the case of those who bought shares after the Record Date but prior to 8.00 a.m. on 2 December 2014 who are eligible to participate in the Rights Issue). If the result is not a whole number, you will not be provisionally allotted a New Ordinary Share in respect of the fraction of a New Ordinary Share and your entitlement will be rounded down to the nearest whole number. The New Ordinary Shares representing the aggregated fractions that would otherwise be allotted to Shareholders will be disregarded.

12. WILL I BE TAXED IF I TAKE UP OR SELL MY RIGHTS OR IF MY RIGHTS ARE SOLD ON MY BEHALF?

If you are resident in the UK for tax purposes, you should not have to pay UK tax when you take up your rights, although the Rights Issue will affect the amount of UK tax you may pay when you subsequently sell your Ordinary Shares.

However, assuming that you hold your Ordinary Shares as an investment, rather than for the purposes of a trade, you may (subject to any available exemption or relief) be subject to capital gains tax on any proceeds that you receive from the sale of your rights. Similarly, assuming that you hold your Ordinary Shares as an investment, if you allow, or are deemed to allow, your rights to lapse and receive a cash payment in respect of them you may (subject to any available exemption or relief) be subject to capital gains tax on any proceeds.

However if the proceeds are 'small' as compared to the value of the Ordinary Shares in respect of which the rights arose (broadly, the proceeds do not exceed £3,000 or five per cent, of the value of the Ordinary Shares), a capital gains tax charge should not generally arise at that time. Rather, the proceeds will be deducted from the base cost of the holding of the Ordinary Shares for the purposes of computing a chargeable gain or allowable loss on a subsequent disposal. This treatment will not apply if the proceeds are greater than the base cost of the holding of Ordinary Shares.

Further information for Qualifying Shareholders who are resident in the UK for tax purposes is contained in Part XIX (Taxation) of this document. This information is intended as a general guide to the current tax

position in the UK and Qualifying Shareholders should consult their own tax advisers regarding the tax treatment of the Rights Issue in light of their own circumstances. Qualifying Shareholders who are in any doubt as to their tax position, or who are subject to tax in any other jurisdiction, should consult an appropriate professional adviser as soon as possible. Please note that the Shareholder Helpline will not be able to assist you with taxation issues.

13. I UNDERSTAND THAT THERE IS A PERIOD WHEN THERE IS TRADING IN THE NIL PAID RIGHTS. WHAT DOES THIS MEAN?

If you do not want to take up the New Ordinary Shares being offered to you under the Rights Issue, you can instead sell or transfer your rights (called “Nil Paid Rights”) to those New Ordinary Shares and receive the net proceeds of the sale or transfer in cash. This is referred to as “dealing nil paid”. This means that, during the Rights Issue offer period (being between 2 December and 11:00 a.m. on 16 December 2014) you can either purchase Ordinary Shares (which will not carry any entitlement to participate in the Rights Issue) or you can trade in the Nil Paid Rights.

14. I HOLD MY ORDINARY SHARES IN CERTIFICATED FORM. WHAT IF I WANT TO SELL THE NEW ORDINARY SHARES FOR WHICH I HAVE PAID?

Provided the New Ordinary Shares have been paid for and you have requested the return of the receipted Provisional Allotment Letter, you can transfer the Fully Paid Rights by completing Form X (the form of renunciation) on the receipted Provisional Allotment Letter in accordance with the instructions set out in the Provisional Allotment Letter until 11:00 a.m. on 16 December 2014. After that time, you will be able to sell your New Ordinary Shares in the normal way. The share certificate relating to your New Ordinary Shares is expected to be despatched to you by no later than 30 December 2014. Pending despatch of the share certificate, instruments of transfer will be certified by the Registrar against the register;

Further details are set out in Part IX (Terms and Conditions of the Rights Issue) of this document.

15. CAN I CHANGE MY DECISION TO TAKE UP MY RIGHTS?

Once you have returned your Provisional Allotment Letter to the relevant Receiving Agent, you cannot withdraw your application or change the number of New Ordinary Shares that you have applied for, save in accordance with paragraph 5 of Part IX (Terms and Conditions of the Rights Issue).

16. WHAT SHOULD I DO IF I LIVE OUTSIDE THE UK?

Whilst you have an entitlement to participate in the Rights Issue, your ability to take up or sell rights to New Ordinary Shares may be affected by the laws of the country in which you live and you should take professional advice as to whether you require any governmental or other consents or need to observe any other formalities to enable you to take up your rights. Shareholders with registered addresses in the United States or one of the Excluded Territories are, subject to certain exceptions, not able to acquire New Ordinary Shares under the Rights Issue. Your attention is drawn to the information in paragraph 7 of Part IX (Terms and Conditions of the Rights Issue) of this document.

The Company has made arrangements under which the Underwriters will try to find investors to take up your rights and those of other Shareholders who have not taken up their rights. If the Underwriters do find investors who agree to pay a premium above the Issue Price and the related expenses of procuring those investors (including any applicable brokerage and commissions and amounts in respect of value added tax), you will be sent a cheque for your share of the amount of that premium provided that this is £5.00 or more. Cheques are expected to be despatched by no later than 30 December 2014 and will be sent to your address appearing on the Company's register of members (or to the first-named holder if you hold your Ordinary Shares jointly). If the Underwriters cannot find investors who agree to pay a premium over the Issue Price and related expenses so that your entitlement would be £5.00 or more, you will not receive any payment, and any amounts of less than £5.00 will be aggregated and ultimately paid to the Company.

WILL THE RIGHTS ISSUE AFFECT THE FUTURE DIVIDENDS THE COMPANY PAYS?

The proposed final dividend of 6.6 pence per Ordinary Share for the year ended 31 August 2014 announced on 15 October 2014 in Connect's Preliminary Results Announcement will be adjusted to reflect the impact of the Rights Issue in connection with the Acquisition. The proposed final dividend will be adjusted to 6.0 pence per Ordinary Share to reflect the bonus element associated with the Rights Issue and both Existing Ordinary Shares and New Ordinary Shares will be entitled to receive this dividend. The proposed final adjusted dividend of 6.0 pence per Ordinary Share is subject to approval by Shareholders at the Annual General Meeting on 4 February 2015 and, if approved, will be paid on 6 February 2015 to Shareholders on the register of members of at close of business on 9 January 2015.

WHAT IF I HOLD OPTIONS AND AWARDS UNDER THE SHARE SCHEMES?

Participants in the Share Schemes will be contacted separately with further information on how their options and awards granted under such plans may be affected by the Rights Issue.

HOW DO I TRANSFER MY RIGHTS INTO THE CREST SYSTEM?

If you are a Qualifying Non-CREST Shareholder, but are a CREST member and want your New Ordinary Shares to be in uncertificated form, you should complete Form X and the CREST Deposit Form (both on the Provisional Allotment Letter), and ensure they are delivered to CREST Courier and Sorting Service to be received by 3.00 p.m. on 11 December 2014 at the latest. CREST sponsored members should arrange for their CREST sponsors to do this.

If you have transferred your rights into the CREST system, you should refer to paragraph 4 of Part IX (Terms and Conditions of the Rights Issue) for details on how to pay for the New Ordinary Shares.

WHAT SHOULD I DO IF I THINK MY HOLDING OF ORDINARY SHARES IS INCORRECT?

If you have recently bought or sold Ordinary Shares, your transaction may not be entered on the register of members in time to appear on the register at the Record Date. If you are concerned about the figure in the Provisional Allotment Letter or otherwise concerned that your holding of Ordinary Shares is incorrect, please contact the Shareholder helpline on 0871 384 2771 (calls to this number cost 8p per minute plus network extras. Lines are open 8.30 a.m. to 5.30 p.m., Monday to Friday, excluding UK bank holidays) or if calling from outside the UK on +44 121 415 7565. Calls to the Shareholder Helpline from outside the UK will be charged at the applicable international rate. Different charges may apply to calls from mobile telephones and calls may be recorded and randomly monitored for security and training purposes. Please note that the Shareholder Helpline operators cannot provide advice on the merits of the Rights Issue nor give financial, tax, investment or legal advice.

PART IX

TERMS AND CONDITIONS OF THE RIGHTS ISSUE

1. DETAILS OF THE RIGHTS ISSUE

The Company proposes to raise approximately £52.3 million (net of expenses) by way of a rights issue of up to 54,136,442 New Ordinary Shares.

Subject to the satisfaction or waiver of the conditions of the Underwriting Agreement and the terms and conditions set out below, including passing of the Resolution by Shareholders, the New Ordinary Shares will be offered for subscription to Qualifying Shareholders at 102 pence per New Ordinary Share payable in full on acceptance on the basis of:

2 New Ordinary Shares for every 7 Ordinary Shares

held by and registered in the names of Qualifying Shareholders (other than, subject to certain exceptions, Qualifying Shareholders resident or with registered addresses in the United States or any of the Excluded Territories) on the Record Date (and so in proportion to any other number of Ordinary Shares each Qualifying Shareholder then holds) and otherwise on the terms and conditions set out in this document and, in the case of Qualifying Non-CREST Shareholders holding certificated shares (other than, subject to certain exceptions, such Shareholders resident or with registered addresses in the United States or any of the Excluded Territories), the Provisional Allotment Letters.

Times and dates referred to in this Part IX have been included on the basis of the expected timetable for the Rights Issue set out in Part IV (Expected Timetable of Principal Events).

The Issue Price of 102 pence per New Ordinary Share represents:

a 39.6 per cent. discount to the closing price of an Existing Ordinary Share; and
a 33.7 per cent. discount to the theoretical ex-Rights price of an Existing Ordinary Share,

in each case based on the closing middle-market price of 168.75 pence on the London Stock Exchange on 11 November 2014, the last business day prior to the date of announcement of the terms of the Rights Issue.

Qualifying Shareholders who do not take up their entitlements to New Ordinary Shares will have their proportionate shareholdings in the Company diluted by approximately 22 per cent. Those Qualifying Shareholders who take up their Rights in full will, following completion of the Rights Issue, as nearly as practicable, have the same proportional voting rights and entitlements to distributions as they had on the Record Date.

The Nil Paid Rights are entitlements to subscribe for New Ordinary Shares subject to payment of the Issue Price. The Fully Paid Rights are entitlements to receive the New Ordinary Shares, for which a subscription and payment has already been made.

Holdings of Ordinary Shares in certificated form or uncertificated form will each be treated as separate holdings for the purpose of calculating entitlements under the Rights Issue. New Ordinary Shares representing fractional entitlements will not be allotted to Qualifying Shareholders and, where necessary, entitlements to New Ordinary Shares will be rounded down to the nearest whole number (or to zero in the case of shareholders holding less than 7 Ordinary Shares at the Record Date). Such fractions will be disregarded.

The Rights Issue is being underwritten (save in respect of those New Ordinary Shares which the Directors and the Employee Benefit Trust intend to take up under the Rights Issue) by the Underwriters in accordance with the terms and subject to the conditions of the Underwriting Agreement and is conditional upon:

the passing of the Resolution without amendment by the Shareholders at the General Meeting;

Admission of the Nil Paid Rights becoming effective by not later than 8:00 a.m. (London time) on 2 December 2014 or such later time and date as the Company and the Joint Sponsors may agree (but provided that the acceptance date is no later than 9 December 2014, in accordance with the Underwriting Agreement); and
the Underwriting Agreement otherwise becoming unconditional in all respects (other than in regard to Admission) and not having been terminated in accordance with its terms prior to Admission.

The EBT has confirmed its intention to take up its rights in full and to acquire further Ordinary Shares (in the event that a sufficient number of Ordinary Shares are not taken up in the Rights Issue) such that in total, it acquires 3,000,000 Ordinary Shares (or such lesser number as it is able to acquire). The EBT is funded by a loan from the Group and Smiths News Holdings Limited, a wholly-owned subsidiary of the Company, has agreed to extend a loan to fund the EBT's participation in the Rights Issue.

The Underwriters may arrange sub-underwriting for some, all or none of the New Ordinary Shares. The Underwriting Agreement is conditional upon certain matters being satisfied or not occurring prior to Admission and may also be terminated by the Underwriters prior to Admission upon the occurrence of certain specified events, in which case the Rights Issue will not proceed. After Admission of the Nil Paid Rights, however, the Underwriting Agreement will not be subject to any right of termination with respect to the Rights Issue. A summary of certain terms and conditions of the Underwriting Agreement is set out in paragraph 17.1 of Part XXI (Additional Information) of this document.

The Underwriters and any of their respective affiliates may engage in trading activity in connection with their roles under the Underwriting Agreement and, in that capacity, may retain, purchase, sell, offer to sell or otherwise deal for their own account in securities of the Company and related or other securities and instruments (including Ordinary Shares, Nil Paid Rights and Fully Paid Rights) for the purpose of hedging their underwriting exposure or otherwise. Accordingly, references in this document to Nil Paid Rights, Fully Paid Rights or New Ordinary Shares being issued, offered, subscribed, acquired, placed or otherwise dealt in should be read as including any issue or offer to, or subscription, acquisition, placing or dealing by, the Underwriters and any of their affiliates acting as investors for their own account. Except as required by applicable law or regulation, none of the Underwriters propose to make any public disclosure in relation to such transactions. In addition, certain of the Underwriters or their affiliates may enter into financing arrangements (including swaps or contract for differences) with investors in connection with which such Underwriters (or their affiliates) may from time to time acquire, hold or dispose of Ordinary Shares.

Connect can give notice that it wishes to terminate the Acquisition Agreement prior to Completion of the Acquisition if certain conditions, as detailed within the Acquisition Agreement and explained further in Part X (Terms of the Acquisition) of this document, are not satisfied. It is therefore possible that the Rights Issue could proceed but the Acquisition does not. In such circumstances, and to the extent possible in the circumstances, the Company intend to refund the net proceeds raised by the Right Issue to Shareholders in a tax efficient way.

Subject to, amongst other things, the aforementioned conditions to the Rights Issue being satisfied, and save as provided in this Part IX, it is expected that:

(i) Provisional Allotment Letters in respect of Nil Paid Rights will be despatched to Qualifying Non-CREST Shareholders (other than, subject to certain exceptions, such Qualifying Non-CREST Shareholders with a registered address in the United States or any of the Excluded Territories) at their own risk on 1 December 2014;

(ii) the Receiving Agent will instruct Euroclear to credit the appropriate stock accounts of Qualifying CREST Shareholders (other than, subject to certain exceptions, such Qualifying CREST Shareholders with a registered address in the United States or any of the Excluded Territories) with such Shareholders' entitlements to Nil Paid Rights, with effect from 8:00 a.m. on 2 December 2014;

(iii) the Nil Paid Rights and the Fully Paid Rights will be enabled for settlement by Euroclear on 2 December 2014, as soon as practicable after the Company has confirmed to Euroclear that all the conditions for admission of such Rights to CREST have been satisfied;

(iv) New Ordinary Shares will be credited to the appropriate stock accounts of relevant Qualifying CREST Shareholders (or their renounces) who validly take up their Rights by no later than 8:00 a.m. (London time) on 17 December 2014; and

(v) share certificates for the New Ordinary Shares will be despatched to relevant Qualifying Non-CREST Shareholders (or their renounces) who validly take up their Rights by no later than 30 December 2014, at their own risk.

The offer will be made to Qualifying Non-CREST Shareholders by way of the Provisional Allotment Letter (as described in (i) above) and to Qualifying CREST Shareholders by way of the enablement of the Nil Paid Rights and the Fully Paid Rights (as described in (iv) above) (such Shareholders' stock accounts having been credited as described in (iii) above), such offer being made on the terms and conditions set out in this document (and, in the case of Qualifying non CREST Shareholders any relevant Provisional Allotment Letter) and based on the information contained in this document.

The offer of New Ordinary Shares pursuant to the Rights Issue is not being, and will not be, made by means of this document into the United States or any of the Excluded Territories or any other jurisdiction outside the United Kingdom in which it would be illegal to make an offer.

The New Ordinary Shares will be issued pursuant to the authority to be granted under the resolutions duly passed at the Company's Annual General Meeting held on 23 January 2014. The New Ordinary Shares will, when issued and fully paid, be ordinary shares ranking pari passu in all respects with the Existing Ordinary Shares, including the right to all future dividends or other distributions made, paid or declared after the date of their issue. The rights attaching to the New Ordinary Shares are governed by the Articles, a summary of which is set out in paragraph 5 of Part XXI (Additional Information) of this document.

The attention of Shareholders with a registered address in, or who are resident or located in countries other than the United Kingdom, or who are holding Ordinary Shares in the Company for the benefit of such a person, and any person (including, without limitation, custodians, nominees, agents and trustees) who has a contractual or other legal obligation to forward this document (or any Provisional Allotment Letter) into a jurisdiction other than the United Kingdom is drawn to paragraph 7 of this Part IX. In particular, subject to the provisions of paragraph 7 of this Part IX and certain exceptions, Qualifying Shareholders with a registered address in the United States or any of the Excluded Territories will not be sent Provisional Allotment Letters and will not have their CREST stock accounts credited with Nil Paid Rights.

Applications will be made to the UK Listing Authority for the New Ordinary Shares to be admitted to the premium listing segment of the Official List and to the London Stock Exchange for the New Ordinary Shares to be admitted to trading on the London Stock Exchange's main market for listed securities. It is expected that Admission will become effective and that dealings in the New Ordinary Shares (nil paid) will commence by 8.00 a.m. on 2 December 2014 and in the New Ordinary Shares (fully paid) by 8.00 a.m. on 17 December 2014.

The New Ordinary Shares and the Existing Ordinary Shares are in registered form and can be held in certificated form or uncertificated form via CREST. No further application to CREST is required for the New Ordinary Shares and all the Ordinary Shares when issued and fully paid may be held and transferred by means of CREST.

Applications will be made for the Nil Paid Rights and the Fully Paid Rights to be admitted to CREST. Euroclear requires the Company to confirm that certain conditions (imposed by the CREST manual) are satisfied before Euroclear will admit the Nil Paid Rights and the Fully Paid Rights to CREST. It is expected that these conditions will be satisfied on Admission. As soon as practicable after Admission, the Company will confirm this to Euroclear.

The ISIN code for the New Ordinary Shares will be the same as that of the Existing Ordinary Shares, being GB00B17WCR61. The ISIN code for the Nil Paid Rights is GB00BSHYX237 and for the Fully Paid Rights is GB00BSHYX120.

All documents including Provisional Allotment Letters and cheques and definitive share certificates posted to, by or from Qualifying Shareholders and/or their transferees or renouncees (or their agents, as appropriate) will be posted at their own risk.

Any person who accepts and/or renounces a Provisional Allotment Letter or who requests registration of the New Ordinary Shares comprised therein, or who makes a valid acceptance in accordance with the procedures set out in this Part IX will be deemed by doing so to make the representations and warranties to the Company and the Underwriters contained in paragraph 7.5 of this Part IX. Shareholders taking up their Rights by sending an MTM instruction to Euroclear will also be deemed to have given the representations and warranties set out in paragraph 4.2.4 of this Part IX, unless the requirement is waived by the Company and the Underwriters.

The attention of Overseas Shareholders is drawn to paragraph 7 of this Part IX.

2. ACTION TO BE TAKEN

Subject to the passing of the Resolution by the Company's Shareholders at the General Meeting, the action to be taken in respect of New Ordinary Shares depends on whether, at the relevant time, the Qualifying Shareholder holds his Ordinary Shares in certificated form or uncertificated form (that is, in CREST).

If you are a Qualifying Shareholder and you have any queries about the Rights Issue or the procedure for acceptance and payment, you should contact the Shareholder helpline on 0871 384 2771 (calls to this number cost 8p per minute plus network extras. Lines are open 8.30 a.m. to 5.30 p.m., Monday to Friday, excluding UK bank holidays) or if calling from outside the UK on +44 121 415 7565. Calls to the Shareholder Helpline from outside the UK will be charged at the applicable international rate. Different charges may apply to calls from mobile telephones and calls may be recorded and randomly monitored for security and training purposes. Please note that the Shareholder Helpline operators cannot provide advice on the merits of the Rights Issue nor give financial, tax, investment or legal advice.

If you hold your Ordinary Shares in CREST and you have any questions regarding the CREST procedures, please telephone the CREST Service Desk on 0845 9645 648 (+44 845 9645 648, if you are calling from outside the United Kingdom). The CREST Service Desk is available from 5:00 a.m. to 8:00 p.m. (London time), Monday to Friday (excluding public holidays). Calls to the 0845 9645 648 number cost 8 pence per minute (excluding VAT) or 10 pence per minute (including VAT) in addition to any service provider charges. Calls to the UK CREST Service Desk from outside the United Kingdom will be charged at applicable international rates. Different charges may apply to calls from mobile telephones and calls may be recorded and randomly monitored for security and training purposes. Please note that the CREST Service Desk operators cannot provide advice on the merits of the Rights Issue nor give financial, tax, investment or legal advice.

If you are a Qualifying Non-CREST Shareholder, have received a Provisional Allotment Letter, and, subject to certain exceptions, are not resident in and do not have a registered address in the United States or any of the Excluded Territories, please refer to paragraphs 3 and 7 of this Part IX.

If you are a Qualifying CREST Shareholder, and, subject to certain exceptions, are not resident in and do not have a registered address in the United States or any of the Excluded Territories, please refer to paragraphs 4 and 7 inclusive of this Part IX and to the CREST manual for further information on the CREST procedures referred to below.

If you are Qualifying Shareholder resident in and/or with a registered address in the United States or any of the Excluded Territories, please refer to paragraph 7 of this Part IX.

CREST sponsored members should refer to their CREST sponsors, as only their CREST sponsors will be able to take the necessary actions specified below to take up the entitlements or otherwise to deal with the Nil Paid Rights or Fully Paid Rights of CREST sponsored members.

3. ACTION TO BE TAKEN BY QUALIFYING NON-CREST SHAREHOLDERS IN RELATION TO NIL PAID RIGHTS REPRESENTED BY PROVISIONAL ALLOTMENT LETTERS

3.1 General

Subject to the Resolution being passed at the General Meeting, the Company intends that the Provisional Allotment Letters will be despatched to Qualifying Non-CREST Shareholders (other than, subject to certain exceptions, such Qualifying Non-CREST Shareholders with a registered address in the United States or any of the Excluded Territories) on 1 December 2014.

The personalised Provisional Allotment Letter, which constitutes a temporary document of title, will set out:

the holding of Ordinary Shares at the Record Date on which the Qualifying Non-CREST Shareholder’s entitlement to New Ordinary Shares has been based;
the aggregate number and cost of New Ordinary Shares in certificated form which have been provisionally allotted to such Qualifying Non-CREST Shareholder;
the procedures to be followed if a Qualifying Non-CREST Shareholder wishes to dispose of all or part of his entitlement or to convert all or part of his entitlement into uncertificated form; and
instructions regarding acceptance and payment, consolidation, splitting and registration of renunciation.

On the basis that Provisional Allotment Letters are posted on 1 December 2014 and that dealings commence on 2 December 2014, the latest time and date for acceptance and payment in full will be 11:00 a.m. on 16 December 2014.

If the Rights Issue is delayed so that Provisional Allotment Letters cannot be despatched on 1 December 2014, the expected timetable set out in Part IV (Expected Timetable of Principal Events) of this document may be adjusted accordingly and the revised dates will be set out in the Provisional Allotment Letters and announced through a Regulatory Information Service. References to dates and times in this document should be read as subject to any such adjustment.

3.2 Procedure for acceptance and payment

3.2.1 Qualifying Non-CREST Shareholders who wish to accept in full

Holders of Provisional Allotment Letters who wish to take up all of their Nil Paid Rights must complete and return the Provisional Allotment Letter, together with a cheque or bankers’ draft in pounds sterling made payable to “Equiniti Limited re: Connect Group PLC Rights Issue a/c” and crossed “A/C payee only” for the full amount payable on acceptance, in accordance with the instructions printed on the Provisional Allotment Letter, by post or hand (during normal business hours only) to Corporate Actions, Equiniti, Aspect House, Spencer Road, Lancing BN99 6DA so as to be received as soon as possible and in any event not later than 11:00 a.m. on 16 December 2014, being the last date and time for acceptances. A reply-paid envelope will be enclosed with the Provisional Allotment Letter for use within the UK only. If you post your Provisional Allotment Letter within the UK by first class post, it is recommended that you allow at least four days for delivery.

3.2.2 Qualifying Non-CREST Shareholders who wish to accept in part

Holders of Provisional Allotment Letters who wish to take up some but not all of their Nil Paid Rights should refer to paragraph 3.6 of this Part IX.

3.2.3 Company’s discretion as to validity of acceptances

If payment is not received in full by 11:00 a.m. on 16 December 2014, the provisional allotment will be deemed to have been declined and will lapse. The Company and the

Underwriters may (in their absolute discretion) treat a Provisional Allotment Letter as valid and binding on the person(s) by whom or on whose behalf it is lodged even if it is not completed in accordance with the relevant instructions or is not accompanied by a valid power of attorney (where required).

The Company and the Underwriters reserve the right to treat as invalid any acceptance or purported acceptance of the offer of New Ordinary Shares that appears to the Company and the Underwriters or their respective agents to have been executed in, despatched from, or that provides an address for the delivery of definitive share certificates for New Ordinary Shares in, the United States or an Excluded Territory.

The Company may elect, but shall not be obliged, to treat as a valid acceptance the receipt of appropriate remittance by 11:00 a.m. on 16 December 2014, from an authorised person (as defined in FSMA) specifying the number of New Ordinary Shares to be acquired and containing an undertaking by that person to lodge the relevant Provisional Allotment Letters, duly completed, in due course.

The Company may also (in its sole discretion) treat a Provisional Allotment Letter as valid and binding on the person(s) by whom or on whose behalf it is lodged even if it is not completed in accordance with the relevant instructions or is not accompanied by a valid power of attorney where required.

A Qualifying Non-CREST Shareholder who makes a valid acceptance and payment in accordance with this paragraph 3.2 is deemed to request that the Fully Paid Rights or New Ordinary Shares (or both) to which he will become entitled be issued to him on the terms set out in this document and subject to the Company's Memorandum of Association and Articles of Association.

3.2.4 Payments

All payments must be made in pounds sterling by (i) cheque or (ii) banker's draft drawn on an account at a branch in the UK of a bank or building society and bear a UK bank or building society sort code number in the top right hand corner.

Cheques, which must be drawn on the personal account of the individual investor where they have sole or joint title to the funds, should be made payable to "Equiniti Limited re: Connect Group PLC Rights Issue a/c" and crossed "A/C payee only". Third party cheques may not be accepted with the exception of building society cheques or bankers' drafts where the building society or bank has confirmed the name of the account holder by stamping or endorsing the building society cheque or banker's draft to such effect. The account name should be the same as that shown on the Provisional Allotment Letter. Neither post-dated cheques nor payments via CHAPS, BACS or electronic transfer will be accepted. All documents, cheques and bankers' drafts sent through the post will be sent at the risk of the sender.

The Company reserves the right to have cheques and bankers' drafts presented for payment on receipt and to instruct Equiniti to seek special clearance of cheques to allow the Company to obtain value for remittances at the earliest opportunity. Interest will not be paid on payments made before they are due but will accrue for the benefit of the Company.

Return of the Provisional Allotment Letter with a remittance in the form of a cheque or banker's draft will constitute a warranty that the cheque or banker's draft will be honoured on first presentation. The Company may elect, in its absolute discretion, to treat as invalid any acceptances in respect of which cheques or bankers' drafts are notified to it or its agent as not having been so honoured. If New Ordinary Shares have already been allotted to Qualifying Non-CREST Shareholders prior to any payment not being so honoured and such acceptances being treated as invalid, the Company may (in its absolute discretion as to manner, timing and terms) make arrangements for the sale of such shares on behalf of such Qualifying Non-CREST Shareholders and hold the proceeds of sale (net of the Company's reasonable

estimate of any loss that it has suffered as a result of the acceptance being treated as invalid and of the expenses of sale including, without limitation, any stamp duty or SDRT payable on the transfer of such shares, and of all amounts payable by such Qualifying Non-CREST Shareholders pursuant to the provisions of this Part IX in respect of the subscription of such shares) on behalf of such Qualifying Non-CREST Shareholders. In these circumstances neither the Company nor any other person shall be responsible for, or have any liability for, any loss, expenses or damage suffered by Qualifying Non-CREST Shareholders as a result.

3.2.5 Further representations and warranties

Holders of Provisional Allotment Letters who accept and/or renounce their Provisional Allotment Letter also make the representations and warranties set out in paragraph 7.5.1 of this Part IX, except in the circumstances described in that paragraph.

3.3 Money Laundering Regulations

It is a term of the Rights Issue that, to ensure compliance with the Money Laundering Regulations, Equiniti may require, at its absolute discretion, verification of the identity of the person lodging the Provisional Allotment Letter and, where relevant, its beneficial owner or ultimate controller and/or of any person on whose behalf the Provisional Allotment Letter is lodged with payment and, where relevant, its beneficial owner or ultimate controller (which requirements are referred to below as the "verification of identity requirements"). If an application is made by a UK regulated broker or intermediary acting as agent and which is itself subject to the Money Laundering Regulations, any verification of identity requirements are the responsibility of such broker or intermediary and not of Equiniti. In such case, the lodging agent's stamp should be inserted on the Provisional Allotment Letter.

The person lodging the Provisional Allotment Letter with payment (the "applicant"), including any person who appears to Equiniti to be acting on behalf of some other person, shall thereby be deemed to agree to provide Equiniti with such information and other evidence as Equiniti may require to satisfy the verification of identity requirements and agree for Equiniti to make a search using a credit reference agency for the purposes of confirming such identity; where deemed necessary a record of the search will be retained. Return of the Provisional Allotment Letter with the appropriate remittance will constitute a warranty from the applicant that the Money Laundering Regulations will not be breached by acceptance of such remittance.

If Equiniti determines that the verification of identity requirements apply to any applicant or application, the relevant New Ordinary Shares (notwithstanding any other term of the Rights Issue) will not be issued to the relevant applicant unless and until the verification of identity requirements have been satisfied in respect of that applicant or application. Equiniti is entitled, in its absolute discretion, to determine whether the verification of identity requirements apply to any applicant or application and whether such requirements have been satisfied, and none of Equiniti, the Company or the Banks will be liable to any person for any loss or damage suffered or incurred (or alleged), directly or indirectly, as a result of the exercise of such discretion.

If the verification of identity requirements apply, failure to provide the necessary evidence of identity within a reasonable time may result in delays and potential rejection of an application. If, within a reasonable period of time following a request for verification of identity, Equiniti has not received evidence satisfactory to it as aforesaid, the Company may, in its absolute discretion, treat the relevant application as invalid, in which event the application money will be returned (at the applicant's risk) without interest to the account of the bank or building society on which the relevant cheque or bankers' draft was drawn.

The verification of identity requirements will not usually apply if:

the applicant is a regulated UK broker or intermediary acting as agent and is itself subject to the Money Laundering Regulations;

the applicant is an organisation required to comply with the EU Money Laundering Directive (2005/60/EC);
the applicant is a Company whose securities are listed on a regulated market subject to specified disclosure obligations;
the applicant (not being an applicant who delivers his application in person) makes payment through an account in the name of such applicant with a credit institution which is subject to the EU Money Laundering Directive (2005/60/EC) or with a credit institution situated in a non-EEA state which imposes requirements equivalent to those laid down in the EU Money Laundering Directive (2005/60/EC); or
the aggregate subscription price for the relevant New Ordinary Shares is less than €15,000 (or its pounds sterling equivalent, approximately £12,000).

Where the verification of identity requirements apply, please note the following, as this will assist in satisfying the requirements. Satisfaction of these requirements may be facilitated in the following ways:

payments must be made by cheque or bankers' draft in pounds sterling drawn on a branch in the UK of a bank or building society and bear a UK bank or building society sort code number in the top right hand corner. Cheques, which must be drawn on the personal account of the individual investor where they have sole or joint title to the funds, should be made payable to "Equiniti Limited re: Connect Group PLC Rights Issue a/c" and crossed "A/C payee only". Third party cheques may not be accepted with the exception of building society cheques or bankers' drafts where the building society or bank has confirmed the name of the account holder by stamping or endorsing the building society cheque/bankers' draft to such effect. The account name should be the same as that shown on the application;
if the Provisional Allotment Letter is lodged with payment by an agent which is an organisation required to comply with the EU Money Laundering Directive (2005/06/EC) or which is subject to anti-money laundering regulations in a country which is a member of the Financial Action Task Force (the non-EU members of which are Argentina, Australia, Brazil, Canada, members of the Gulf Co-operation Council (being Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates), Hong Kong, Iceland, Japan, Korea, Mexico, New Zealand, Norway, the Russian Federation, Singapore, South Africa, Switzerland, Turkey and the United States), the agent should provide written confirmation that it has that status with the Provisional Allotment Letter(s) and written assurances that it has obtained and recorded evidence of the identity of the person for whom it acts and that it will on demand make such evidence available to Equiniti and/or any relevant regulatory or investigatory authority; or
if a Provisional Allotment Letter is lodged by hand by the applicant in person, he should ensure that he has with him evidence of identity bearing his photograph (for example, his passport) and evidence of his address.

In order to confirm the acceptability of any written assurance referred to above, or in any other case, the applicant should contact the Shareholder helpline on 0871 384 2771 (calls to this number cost 8p per minute plus network extras. Lines are open 8.30 a.m. to 5.30 p.m., Monday to Friday, excluding UK bank holidays) or if calling from outside the UK on +44 121 415 7565. Calls to the Shareholder Helpline from outside the UK will be charged at the applicable international rate. Different charges may apply to calls from mobile telephones and calls may be recorded and randomly monitored for security and training purposes. Please note that the Shareholder Helpline operators cannot provide advice on the merits of the Rights Issue nor give financial, tax, investment or legal advice.

3.4 Dealings in Nil Paid Rights

Subject to the Rights Issue otherwise becoming unconditional, dealings on the London Stock Exchange in the Nil Paid Rights are expected to commence at 8:00 a.m. on 2 December 2014.

A transfer of Nil Paid Rights can be made by the renunciation of the Provisional Allotment Letter (including one or more split Provisional Allotment Letters) in accordance with the instructions printed on it and delivery of the renounced Provisional Allotment Letter to the transferee, up to the latest time for acceptance and payment in full stated in the Provisional Allotment Letter, which is 11:00 a.m. on 16 December 2014.

3.5 Dealings in Fully Paid Rights

After acceptance of the provisional allotment and payment in full in accordance with the provisions set out in this document and the Provisional Allotment Letter, the Fully Paid Rights may be transferred by renunciation of the relevant Provisional Allotment Letter and delivering it by hand (during normal business hours only) or by post to Corporate Actions, Equiniti, Aspect House, Spencer Road, Lancing, BN99 6DA by not later than 11:00 a.m. on 16 December 2014. From 17 December 2014, the New Ordinary Shares will be registered and transferable by written instrument of transfer in the usual common form or, if they have been issued in or converted into uncertificated form, in electronic form under CREST.

Fully paid Provisional Allotment Letters will not be returned to Shareholders unless their return is requested by ticking the relevant box in the Provisional Allotment Letter.

3.6 Renunciation and splitting of Provisional Allotment Letters

The Provisional Allotment Letters are fully renounceable and may be split up to 3:00 p.m. on 12 December 2014, nil paid and fully paid.

Qualifying Non-CREST Shareholders who wish to transfer all of their Nil Paid Rights or, after acceptance of the provisional allotment and payment in full, Fully Paid Rights comprised in a Provisional Allotment Letter may renounce such allotment by completing and signing Form X of the Provisional Allotment Letter (if it is not already marked "Original Duly Renounced") and passing the entire Provisional Allotment Letter to their stockbroker or bank or other appropriate financial adviser or to the transferee (provided they are not in the United States or any of the Excluded Territories). Once a Provisional Allotment Letter has been so renounced, it will become a negotiable instrument in bearer form and the Nil Paid Rights or Fully Paid Rights (as appropriate) comprised in such letter may be transferred by delivery of such letter to the transferee. The latest time and date for registration of renunciation of Provisional Allotment Letters is 11:00 a.m. on 16 December 2014 and after such date the New Ordinary Shares will be in registered form, transferable by written instrument of transfer in the usual common form or, if they have been issued in or converted into uncertificated form, in electronic form under CREST. Qualifying Non-CREST Shareholders should note that no fully paid Provisional Allotment Letter will be returned to them unless its return is requested, by completing the appropriate box on the Provisional Allotment Letter.

If a holder of a Provisional Allotment Letter wishes to have only some of the New Ordinary Shares registered in his name and to transfer the remainder, or wishes to transfer all the Nil Paid Rights, or (if appropriate) Fully Paid Rights, but to different persons, he may have the Provisional Allotment Letter split, for which purpose he must sign and date Form X of the Provisional Allotment Letter. The Provisional Allotment Letter must then be delivered by hand (during normal business hours only) or by post to Corporate Actions Equiniti, Aspect House, Spencer Road, Lancing, BN99 6DA so as to be received as soon as possible and in any event not later than 3:00 p.m. on 12 December 2014, to be cancelled and exchanged for the number of split Provisional Allotment Letters required. The number of split Provisional Allotment Letters required and the number of Nil Paid Rights or (as appropriate) Fully Paid Rights to be comprised in each split Provisional Allotment Letter should be stated in an accompanying letter. Form X of split Provisional Allotment Letters will be marked "Original Duly Renounced" before issue. The aggregate number of Nil Paid Rights or (as appropriate) Fully Paid Rights comprised in the split Provisional Allotment Letters must equal the number of New Ordinary Shares set out in the original Provision Allotment Letter (less the number of New Ordinary Shares representing rights that the holder wishes to take up if taking up his entitlement in part). The holder of the split Provisional Allotment Letters should then follow the instructions in paragraph 3.2.1 of this

Part IX in relation to the Nil Paid Rights he wishes to take up and the instructions in the preceding paragraphs in relation to transferring the Nil Paid Rights or Fully Paid Rights (as appropriate) comprised in each of the Provisional Allotment Letters.

The Company and the Underwriters reserve the right to refuse to register any renunciation in favour of any person in respect of which the Company and the Underwriters believe such renunciation may violate applicable legal or regulatory requirements including (without limitation) any renunciation in the name of any person with an address in the United States or any of the Excluded Territories.

Alternatively, Qualifying Non-CREST Shareholders who wish to take up some of their Nil Paid Rights, without transferring the remainder, should complete Form X of the Provisional Allotment Letter and return it, together with a covering letter confirming the number of Nil Paid Rights to be taken up and a cheque or bankers' draft in pounds sterling made payable to “Equiniti re: Connect Group PLC Rights Issue a/c” for the amount payable in respect of the number of Nil Paid Rights to be taken up by hand (during normal business hours only) or by post to Corporate Actions, Equiniti, Aspect House, Spencer Road, Lancing, BN99 6DA so as to be received as soon as possible and, in any event, not later than 11:00 a.m. on 16 December 2014, being the last date and time for acceptances.

3.7 Registration in names of Qualifying Non-CREST Shareholders

A Qualifying Non-CREST Shareholder who wishes to have all his entitlement to New Ordinary Shares registered in his name must accept and make payment for such New Ordinary Shares prior to the latest time for acceptance and payment in full, which is 11:00 a.m. on 16 December 2014, in accordance with the provisions set out in the Provisional Allotment Letter and this document, but need take no further action. A definitive share certificate shall be sent to such Qualifying Shareholder by post not later than 30 December 2014.

3.8 Registration in names of persons other than Qualifying Non-CREST Shareholders originally entitled

A renouncee who wishes to have the New Ordinary Shares comprised in a Provisional Allotment Letter registered in his name, or his agent's name, must complete Form Y of the Provisional Allotment Letter (unless the renouncee is a CREST member who wishes to hold such shares in uncertificated form, in which case, the CREST Deposit Form must be completed, as set out in paragraph 3.9 of this Part IX) and must deliver the entire letter when fully paid by hand (during normal business hours only) or by post to Corporate Actions, Equiniti, Aspect House, Spencer Road, Lancing, BN99 6DA by not later than the latest time for registration of renunciation which is 11:00 a.m. on 16 December 2014.

Registration cannot be effected unless and until the New Ordinary Shares comprised in a Provisional Allotment Letter are fully paid.

The New Ordinary Shares comprised in several renounced Provisional Allotment Letters (duly renounced where applicable) may be registered in the name of one holder (or joint holders) if Form Y on the Provisional Allotment Letter is completed on one Provisional Allotment Letter (the “Principal Letter”) and all Provisional Allotment Letters are lodged in one batch. Details of each Provisional Allotment Letter (including the Principal Letter) should be listed in an accompanying letter and the allotment number of the Principal Letter should be entered in the space provided on each of the other Provisional Allotment Letters.

3.9 Deposit of Nil Paid Rights or Fully Paid Rights into CREST

The Nil Paid Rights or Fully Paid Rights represented by a Provisional Allotment Letter may be converted into uncertificated form, that is, deposited into CREST (whether such conversion arises as a result of a renunciation of those Rights or otherwise). Similarly, Nil Paid Rights or Fully Paid Rights held in CREST may be converted into certificated form, that is, withdrawn from CREST. Subject as provided in the next paragraph or in the Provisional Allotment Letter, normal CREST procedures and

timings apply in relation to any such conversion. You are recommended to refer to the CREST manual for details of such procedures.

The procedure for depositing the Nil Paid Rights or Fully Paid Rights represented by a Provisional Allotment Letter into CREST, whether such Rights are to be converted into uncertificated form in the name(s) of the person(s) whose name(s) and address(es) appear on page 1 of the Provisional Allotment Letter or in the name of a person or persons to whom the Provisional Allotment Letter has been renounced, is as follows: Form X and the CREST Deposit Form (both set out in the Provisional Allotment Letter) will need to be completed and the Provisional Allotment Letter must be deposited with the CREST Courier and Sorting Service (“CCSS”). In addition, the normal CREST stock deposit procedures will need to be carried out, except that: (a) it will not be necessary to complete and lodge a separate CREST Transfer Form (prescribed under the Stock Transfer Act 1963) with the CCSS; and (b) only the whole of the Nil Paid Rights or Fully Paid Rights represented by the Provisional Allotment Letter may be deposited into CREST. If you wish to deposit only some of the Nil Paid Rights or Fully Paid Rights represented by the Provisional Allotment Letter into CREST, you must first apply for split Provisional Allotment Letters. If the Rights represented by more than one Provisional Allotment Letter are to be deposited, the CREST Deposit Form on each Provisional Allotment Letter must be completed and deposited. A consolidation listing form (as defined in the CREST Regulations) must not be used.

A holder of the Nil Paid Rights or Fully Paid Rights represented by a Provisional Allotment Letter who is proposing to convert those Rights into uncertificated form (whether following a renunciation of such Rights or otherwise) is recommended to ensure that the conversion procedures are implemented in sufficient time to enable the person holding or acquiring the Nil Paid Rights or Fully Paid Rights in CREST following the conversion to take all necessary steps in connection with taking up the entitlement prior to 11:00 a.m. on 16 December 2014. In particular, having regard to processing times in CREST and on the part of Equiniti, the latest recommended time for depositing a renounced Provisional Allotment Letter (with Form X and the CREST Deposit Form in the Provisional Allotment Letter duly completed) with the CCSS (in order to enable the person acquiring the Nil Paid Rights or Fully Paid Rights in CREST as a result of the conversion to take all necessary steps in connection with taking up the entitlement prior to 11:00 a.m. on 16 December 2014) is 3:00 p.m. on 11 December 2014.

When Form X and the CREST Deposit Form (both in the Provisional Allotment Letter) have been completed, title to the Nil Paid Rights or the Fully Paid Rights represented by the Provisional Allotment Letter will cease forthwith to be renounceable or transferable by delivery and for the avoidance of doubt any entries in Form Y of the Provisional Allotment Letter will not be recognised or acted upon by Equiniti. All renunciations or transfers of the Nil Paid Rights or Fully Paid Rights must be effected through the means of the CREST system once such Rights have been deposited into CREST.

CREST sponsored members should contact their CREST sponsor as only their CREST sponsor will be able to take the necessary action to take up the entitlement or otherwise to deal with the Nil Paid Rights or Fully Paid Rights of CREST sponsored members.

3.10 Issue of New Ordinary Shares in definitive form

Definitive share certificates in respect of the New Ordinary Shares to be held in certificated form are expected to be despatched by post by 30 December 2014 at the risk of the person(s) entitled to them, to accepting Qualifying Non-CREST Shareholders and renounces or their agents or, in the case of joint holdings, to the first-named Shareholder at their registered address (unless a lodging agent’s stamp or details appear in the relevant box of the Provisional Allotment Letter). After despatch of definitive share certificates, Provisional Allotment Letters will cease to be valid for any purpose whatsoever. Pending despatch of definitive share certificates, instruments of transfer of the New Ordinary Shares will be certified by Equiniti against the lodgement of fully paid Provisional Allotment Letters or, in the case of renunciations, against the Provisional Allotment Letters held by Equiniti.

4. ACTION TO BE TAKEN IN RELATION TO NIL PAID RIGHTS OR FULLY PAID RIGHTS IN CREST

4.1 General

Subject to the Resolution being passed at the General Meeting and subject as provided in paragraph 7 of this Part IX in relation to certain Overseas Shareholders, each Qualifying CREST Shareholder is expected to receive a credit to his CREST stock account of his entitlement to Nil Paid Rights on 2 December 2014. The CREST stock account to be credited will be an account under the Participant ID and member account ID that apply to the Ordinary Shares held on the Record Date by the Qualifying CREST Shareholder in respect of which the Nil Paid Rights are provisionally allotted. The maximum number of New Ordinary Shares that a Qualifying CREST Shareholder may take up is that which has been provisionally allotted to that Qualifying CREST Shareholder and for which he receives a credit of entitlement into his stock account in CREST. The minimum number of New Ordinary Shares a Qualifying CREST Shareholder may take up is one.

The Nil Paid Rights will constitute a separate security for the purposes of CREST and can accordingly be transferred, in whole or in part, by means of CREST in the same manner as any other security that is admitted to CREST.

If for any reason it is impracticable to credit the stock accounts of Qualifying CREST Shareholders or to enable the Nil Paid Rights by 8:00 a.m. on 2 December 2014, Provisional Allotment Letters shall, unless the Company and the Underwriters agree otherwise, be sent out in substitution for the Nil Paid Rights which have not been so credited or enabled and the expected timetable as set out in this document may be adjusted as appropriate. References to dates and times in this document should be read as subject to any such adjustment.

The Company will make an appropriate announcement to a Regulatory Information Service approved by the UKLA giving details of the revised dates but Qualifying CREST Shareholders may not receive any further written communication.

CREST Members who wish to take up all or part of, or otherwise to transfer, all or part of their Nil Paid Rights or Fully Paid Rights or both held by them in CREST should refer to the CREST Manual for further information on the CREST procedures referred to below. If you are a CREST sponsored member, you should consult your CREST Sponsor if you wish to take up your entitlement as only your CREST Sponsor will be able to take the necessary action to take up your entitlements or otherwise to deal with your Nil Paid Rights or Fully Paid Rights.

4.2 Procedure for acceptance and payment

4.2.1 MTM Instructions

CREST members who wish to take up all or part of their entitlement in respect of Nil Paid Rights in CREST must send (or, if they are CREST sponsored members, procure that their CREST sponsor sends) an MTM instruction to Euroclear which, on its settlement, will have the following effect:

(A) the crediting of a stock account of Equiniti under the Participant ID and member account ID specified below, with the number of Nil Paid Rights to be taken up;

(B) the creation of a settlement bank payment obligation (as this term is defined in the CREST manual), in accordance with the CREST RTGS payment mechanism (as this term is defined in the CREST manual), in favour of the RTGS settlement bank (as this term is defined in the CREST manual) of Equiniti in pounds sterling, in respect of the full amount payable on acceptance in respect of the Nil Paid Rights referred to in paragraph (A) above; and

(C) the crediting of a stock account of the accepting CREST member (being an account under the same Participant ID and member account ID as the account from which the Nil Paid Rights are to be debited on settlement of the MTM instruction) of the

corresponding number of Fully Paid Rights to which the CREST member is entitled on taking up his Nil Paid Rights referred to in paragraph (A) above.

4.2.2 Contents of MTM Instructions

The MTM instruction must be properly authenticated in accordance with Euroclear specifications and must contain, in addition to the other information that is required for settlement in CREST, the following details:

the number of Nil Paid Rights to which the acceptance relates;
the Participant ID of the accepting CREST member;
the member account ID of the accepting CREST member from which the Nil Paid Rights are to be debited;
the Participant ID of Equiniti, in its capacity as a CREST receiving agent. This is 2RA36;
the member account ID of Equiniti, in its capacity as a CREST receiving agent. This is RA184601;
the number of Fully Paid Rights that the CREST member is expecting to receive on settlement of the MTM instruction. This must be the same as the number of Nil Paid Rights to which the acceptance relates;
the amount payable by means of the CREST assured payment arrangements on settlement of the MTM instruction. This must be the full amount payable on acceptance in respect of the number of Nil Paid Rights to which the acceptance relates;
the intended settlement date (which must be on or before 11:00 a.m. on 16 December 2014);
the Nil Paid Rights ISIN. This is GB00SBHYX237;
the Fully Paid Rights ISIN. This is GB00BSHYX120;
the Corporate Action Number (as this term is defined in the CREST manual) for the Rights Issue. This will be available by viewing the relevant corporate action details in CREST;
a priority of at least 80; and
the contact name and telephone numbers in the shared notes field.

4.2.3 Valid acceptance

An MTM instruction complying with each of the requirements as to authentication and contents set out in paragraph 4.2.2 of this Part IX will constitute a valid acceptance where either:

the MTM instruction settles by not later than 11:00 a.m. on 16 December 2014; or
at the discretion of the Company: (i) the MTM instruction is received by Euroclear by not later than 11:00 a.m. on 16 December 2014; and (ii) the number of Nil Paid Rights inserted in the MTM instruction is credited to the CREST stock member account of the accepting CREST member specified in the MTM instruction at 11:00 a.m. on 16 December 2014; and (iii) the relevant MTM instruction settles by 2:00 p.m. on 16 December 2014 (or such later time and date as the Company may determine). An MTM instruction will be treated as having been received by Euroclear for these purposes at the time at which the instruction is processed by the Network Provider's

Communications Host (as this term is defined in the CREST manual) at Euroclear of the network provider used by the CREST Member (or by the CREST sponsored member’s CREST sponsor). This will be conclusively determined by the input time stamp applied to the MTM instruction by the Network Provider’s Communications Host.

4.2.4 Representations, warranties and undertakings of CREST members

A CREST member or CREST sponsored member who makes a valid acceptance in accordance with this paragraph 4.2 represents, warrants and undertakes to the Company and the Underwriters that he has taken (or procured to be taken), and will take (or will procure to be taken), whatever action is required to be taken by him or by his CREST sponsor (as appropriate) to ensure that the MTM instruction concerned is capable of settlement at 11:00 a.m. on 16 December 2014 and remains capable of settlement at all times after that until 2:00 p.m. on 16 December 2014 (or until such later time and date as the Company and the Underwriters may determine). In particular, the CREST member or CREST sponsored member represents, warrants and undertakes that at 11:00 a.m. on 16 December 2014 and at all times thereafter until 2:00 p.m. on 16 December 2014 (or until such later time and date as the Company and the Underwriters may determine) there will be sufficient Headroom within the Cap (as those terms are defined in the CREST manual) in respect of the cash memorandum account to be debited with the amount payable on acceptance to permit the MTM instruction to settle. CREST sponsored members should contact their CREST sponsor if they are in any doubt.

A CREST member or CREST sponsored member who makes a valid acceptance in accordance with this paragraph 4.2 also makes the representations and warranties set out in paragraph 7.5 of this Part IX, except in the circumstances described in that paragraph.

If there is insufficient Headroom within the Cap (as those terms are defined in the CREST manual) in respect of the cash memorandum account of a CREST member or CREST sponsored member for such amount to be debited or the CREST member’s or CREST sponsored member’s acceptance is otherwise treated as invalid and New Ordinary Shares have already been allotted to such CREST Member or CREST sponsored member, the Company may (in its absolute discretion as to manner, timing and terms) make arrangements for the sale of such shares on behalf of that CREST member or CREST sponsored member and hold the proceeds of sale (net of the Company’s reasonable estimate of any loss that it has suffered as a result of the acceptance being treated as invalid and of the expenses of sale including, without limitation, any stamp duty or SDRT payable on the transfer of such shares, and of all amounts payable by the CREST member or CREST sponsored member pursuant to the provisions of this Part IX in respect of the subscription of such shares) on behalf of such CREST Member or CREST sponsored member. In these circumstances, neither the Company nor any other person shall be responsible for, or have any liability for, any loss, expenses or damage suffered by such CREST member or CREST sponsored member as a result.

4.2.5 CREST procedures and timings

CREST Members and CREST Sponsors (on behalf of CREST sponsored members) should note that Euroclear does not make available special procedures in CREST for any particular corporate action.

Normal system timings and limitations will therefore apply in relation to the input of an MTM instruction and its settlement in connection with the Rights Issue. It is the responsibility of the CREST Member concerned to take (or, if the CREST Member is a CREST sponsored member, to procure that his CREST Sponsor takes) the action necessary to ensure that a valid acceptance is received as stated above by 11:00 a.m. on 16 December 2014. In connection with this, CREST Members and (where applicable) CREST Sponsors are referred in particular to those sections of the CREST Manual concerning practical limitations of the CREST system and timings.

4.2.6 CREST Member's undertaking to pay

A CREST Member or CREST sponsored member who makes a valid acceptance in accordance with the procedures set out in this paragraph 4.2: (a) undertakes to pay to the Company or procure the payment to the Company of, the amount payable in pounds sterling on acceptance in accordance with the above procedures or in such other manner as the Company may require (it being acknowledged that, where payment is made by means of the RTGS payment mechanism, (as defined in the CREST Manual), the creation of a RTGS settlement bank (as defined in the CREST Manual) payment obligation in pounds sterling in favour of Equiniti’s RTGS settlement bank (as defined in the CREST Manual), in accordance with the RTGS payment mechanism shall, to the extent of the obligation so created, discharge in full the obligation of the CREST Member (or CREST sponsored member) to pay to the Company the amount payable on acceptance); and (b) requests that the Fully Paid Rights or New Ordinary Shares or both, to which they will become entitled, be issued to them on the terms set out in this document and subject to the Memorandum of Association and Articles of Association.

If the payment obligations of the relevant CREST Member in relation to such New Ordinary Shares are not discharged in full and such New Ordinary Shares have already been issued to the CREST Member or CREST sponsored member, the Company may (in its absolute discretion as to the manner, timing and terms) make arrangements for the sale of such shares on behalf of that CREST Member or CREST sponsored member and hold the proceeds of sale (net of expenses including, without limitation, any stamp duty or SDRT payable on the transfer of such shares, and of all amounts payable by the CREST Member or CREST sponsored member pursuant to the provisions of this Part IX in respect of the subscription of such shares) or an amount equal to the original payment of the CREST Member or CREST sponsored member (whichever is lower) on trust for such CREST Member or CREST sponsored member. In these circumstances, neither the Company nor any other person shall be responsible for, or have any liability for, any loss, expenses or damage suffered by any CREST Member or CREST sponsored member as a result.

4.2.7 Discretion as to rejection and validity of acceptances

The Company having consulted with the Underwriters may:

reject any acceptance constituted by an MTM instruction, which is otherwise valid, in the event of breach of any of the representations, warranties and undertakings set out or referred to in this paragraph 4.2. Where an acceptance is made as described in this paragraph 4.2 which is otherwise valid, and the MTM instruction concerned fails to settle by 10:00 a.m. on 17 December 2014 (or by such later time and date as the Company and the Underwriters may determine), the Company shall be entitled to assume, for the purposes of its right to reject an acceptance as described in this paragraph 4.2, that there has been a breach of the representations, warranties and undertakings set out or referred to in this paragraph 4.2;
treat as valid (and binding on the CREST Member or CREST sponsored member concerned) an acceptance which does not comply in all respects with the requirements as to validity set out or referred to in this paragraph 4.2;
accept an alternative properly authenticated dematerialised instruction from a CREST Member or (where applicable) a CREST Sponsor as constituting a valid acceptance in substitution for, or in addition to, an MTM instruction and subject to such further terms and conditions as the Company and the Underwriters may determine;
treat a properly authenticated dematerialised instruction (the “first instruction”) as not constituting a valid acceptance if, at the time at which Equiniti receives a properly authenticated dematerialised instruction giving details of the first instruction, either the Company or Equiniti has received actual notice from Euroclear of any of the matters

specified in CREST Regulation 35(5)(a) in relation to the first instruction. These matters include notice that any information contained in the first instruction was incorrect or notice of lack of authority to send the first instruction; and

accept an alternative instruction or notification from a CREST Member or (where applicable) a CREST Sponsor, or extend the time for acceptance and/or settlement of an MTM instruction or any alternative instruction or notification if, for reasons or due to circumstances outside the control of any CREST Member or CREST sponsored member or (where applicable) CREST Sponsor, the CREST Member or CREST sponsored member is unable validly to take up all or part of his Nil Paid Rights by means of the above procedures. In normal circumstances, this discretion is only likely to be exercised in the event of any interruption, failure or breakdown of CREST (or of any part of CREST) or on the part of facilities and/or systems operated by Equiniti in connection with CREST.

4.3 Money Laundering Regulations

If you hold your Nil Paid Rights in CREST and apply to take up all or part of your entitlement as agent for one or more persons and you are not a UK or EU regulated person or institution (e.g. a bank, a broker or another UK financial institution), then, irrespective of the value of the application, Equiniti is required to take reasonable measures to establish the identity of the beneficial owner or ultimate controller of the person or persons on whose behalf you are making the application. Such Qualifying CREST Shareholders must therefore contact Equiniti before sending any MTM instruction or other instruction so that appropriate measures may be taken.

Submission of an MTM instruction which constitutes, or which may on its settlement constitute, a valid acceptance as described above constitutes a warranty and undertaking by the applicant to provide promptly to Equiniti any information Equiniti may specify as being required for the purposes of the Money Laundering Regulations or FSMA. Pending the provision of evidence satisfactory to Equiniti as to identity, Equiniti, having consulted with the Company and the Underwriters, may take, or omit to take, such action as it may determine to prevent or delay settlement of the MTM instruction. If satisfactory evidence of identity has not been provided within a reasonable time, Equiniti will not permit the MTM instruction concerned to proceed to settlement without prejudice to the right of the Company and/or any one or more of the Underwriters to take proceedings to recover any loss suffered by it/them as a result of failure by the applicant to provide satisfactory evidence.

4.4 Dealings in Nil Paid Rights

Subject to the Resolution being passed at the General Meeting and the Rights Issue otherwise becoming unconditional, dealings in the Nil Paid Rights on the London Stock Exchange are expected to commence at 8:00 a.m. on 2 December 2014. A transfer (in whole or part) of Nil Paid Rights can be made by means of CREST in the same manner as any other security that is admitted to CREST. The Nil Paid Rights are expected to be disabled in CREST after the close of CREST business on 16 December 2014.

4.5 Dealings in Fully Paid Rights

After acceptance of the provisional allotment and payment in full in accordance with the provisions set out in this document and (where appropriate) the Provisional Allotment Letter, the Fully Paid Rights may be transferred (in whole or in part) by means of CREST in the same manner as any other security that is admitted to CREST. The last date for settlement of any transfer of Fully Paid Rights in CREST is expected to be 11:00 a.m. on 16 December 2014. The Fully Paid Rights are expected to be disabled in CREST after the close of CREST business on 16 December 2014. After 17 December 2014, the New Ordinary Shares will be registered in the name(s) of the person(s) entitled to them in the Company's register of members and will be transferable by means of CREST in the usual way.

4.6 Withdrawal of Nil Paid Rights or Fully Paid Rights from CREST

Nil Paid Rights or Fully Paid Rights held in CREST may be converted into certificated form, that is withdrawn from CREST. Normal CREST procedures (including timings) apply in relation to any such conversion.

The recommended latest time for receipt by Euroclear of a properly authenticated dematerialised instruction requesting withdrawal of Nil Paid Rights or, if appropriate, Fully Paid Rights from CREST is 4.30 p.m. on 10 December 2014, so as to enable the person acquiring or (as appropriate) holding the Nil Paid Rights or, if appropriate, the Fully Paid Rights following the conversion to take all necessary steps in connection with taking up the entitlement prior to 11.00 a.m. on 16 December 2014. You are recommended to refer to the CREST Manual for details of such procedures.

4.7 Issue of New Ordinary Shares in CREST

New Ordinary Shares will be issued in uncertificated form to those persons registered as holding Fully Paid Rights in CREST at the close of business on the date on which the Fully Paid Rights are disabled. Equiniti will instruct Euroclear to credit the appropriate stock accounts of those persons (under the same Participant ID and member account ID that applied to the Fully Paid Rights held by those persons) with their entitlements to New Ordinary Shares with effect from the next Dealing Day (expected to be 17 December 2014).

4.8 Right to allot/issue in certificated form

Despite any other provision of this document, the Company reserves the right to allot and to issue any Nil Paid Rights, Fully Paid Rights or New Ordinary Shares in certificated form. In normal circumstances, this right is only likely to be exercised in the event of an interruption, failure or breakdown of CREST (or of any part of CREST) or of a part of the facilities or systems operated by Equiniti in connection with CREST.

PROCEDURE IN RESPECT OF RIGHTS NOT TAKEN UP AND WITHDRAWAL RIGHTS

5.1 Procedure in respect of Rights not taken up

If an entitlement to New Ordinary Shares (whether in whole or in part) is not validly taken up in accordance with the procedure laid down for acceptance and payment, then that provisional allotment (or that part of the provisional allotment not taken up, as the case may be) will be deemed to have been declined and will lapse. Subject to the terms and conditions of the Underwriting Agreement, the Underwriters shall, acting severally and not jointly (or jointly and severally) and as agents for the Company, use their respective reasonable endeavours to procure, by not later than 5:00 p.m. on the second Dealing Day after 16 December 2014, subscribers for all of those Underwritten Ordinary Shares not taken up at an aggregate price for all the relevant New Ordinary Shares which is at least equal to the total of the Issue Price and the expenses of procuring the relevant subscribers (including any applicable brokerage and other commissions and any amounts attributable to VAT).

Notwithstanding the above, the Underwriters may cease to endeavour to procure any such subscribers if, in the reasonable opinion of the Underwriters, it is unlikely that any such subscriber(s) can be so procured at such a price by such time.

Any premium obtained over the aggregate of the Issue Price and the expenses of procuring subscribers (including any applicable brokerage and other commissions and any amounts attributable to VAT) shall be paid (subject as provided in this paragraph 5):

where the Nil Paid Rights were, at the time they lapsed, in certificated form on the UK Register, to the person whose name and address appeared on page 1 of the Provisional Allotment Letter relating to those Nil Paid Rights;
where the Nil Paid Rights were, at the time they lapsed, in uncertificated form on the UK Register, to the person registered as the holder of those Nil Paid Rights at the time of their disablement in CREST; and

to the extent not provided above, where an entitlement to New Ordinary Shares was not taken up by an Overseas Shareholder, to such Overseas Shareholder.

New Ordinary Shares for which subscribers are procured on this basis will be re-allotted to such subscribers and the aggregate of any premiums (being the amount paid by such subscribers after deducting the Issue Price and the expenses of procuring such subscribers including any applicable brokerage and other commissions and any amounts attributable to VAT), if any, will be paid (without interest) to those persons entitled (as referred to above) pro rata to the relevant lapsed provisional allotments, save that no payment will be made of amounts of less than £5.00, which amounts will be aggregated and ultimately paid to the Company. Cheques for the amounts due will be sent in pounds sterling, by post, at the risk of the entitled person(s)), to their registered address(es) (the registered address of the first named in the case of joint holders), provided that where any entitlement concerned was held in CREST, the amount due will, unless the Company (in its absolute discretion) otherwise determines, be satisfied by the Company procuring the creation of an assured payment obligation in favour of the relevant CREST Member's (or CREST sponsored member's) RTGS settlement bank (as defined in the CREST Manual) in respect of the cash amount concerned in accordance with the RTGS payment mechanism (as defined in the CREST Manual) or broker's account is credited with the cash amount concerned.

If and to the extent that subscribers cannot be procured on the basis outlined above, the relevant New Ordinary Shares will be subscribed for by the Underwriters, acting severally but not jointly (or jointly and severally), as principals pursuant to the Underwriting Agreement or by sub-underwriters or other subscribers (if any) procured by the Underwriters, in each case, at the Issue Price on the terms and subject to the conditions of the Underwriting Agreement.

Any transactions undertaken pursuant to this paragraph 5.1 shall be deemed to have been undertaken at the request of the persons entitled to the lapsed provisional allotments and none of the Company, the Underwriters nor any other person procuring subscribers shall be responsible for any loss or damage (whether actual or alleged) arising from the terms of or timing of any subscription, any decision not to endeavour to procure subscribers or the failure to procure subscribers on the basis described above. The Underwriters will be entitled to retain any brokerage fees, commissions, or other benefits received in connection with these arrangements.

5.2 Withdrawal rights

Qualifying CREST Shareholders and Qualifying Non-CREST Shareholders or their renouncees who have the right to withdraw their acceptances under Section 87Q(4) of FSMA after a supplementary prospectus (if any) has been published and who wish to exercise such right of withdrawal must deposit a written notice of withdrawal (which shall not include a notice sent by any form of electronic communication other than facsimile), which must include the full name and address of the person wishing to exercise such right of withdrawal and, if such person is a CREST Member, the Participant ID and the member account ID of such CREST Member, by post or by hand (during normal business hours) to Corporate Actions Equiniti Limited, Aspect House, Spencer Road, Lancing, BN99 6DA, United Kingdom, or, after calling the Shareholder helpline, arrange to send a fax, in each case so as to be received before the end of the period of two business days beginning with the first business day after the date on which the supplementary prospectus (if any) was published. Notice of withdrawal of acceptance given by any other means or which is deposited with, or received by, the Receiving Agent after the end of the period of two business days beginning with the first business day after the date on which the supplementary prospectus (if any) was published will be invalid.

If such right to withdraw would apply at any time after the last date for valid acceptance such date shall be postponed to a new date announced by the Company being not earlier than two business days following publication of any supplementary prospectus.

Furthermore, the exercise of withdrawal rights will not be permitted after payment by the relevant person of his subscription price in full and the allotment of the New Ordinary Shares to such person becoming unconditional, save as required by statute. In such circumstances, Shareholders are advised

to consult their professional advisers. Provisional allotments of entitlements to New Ordinary Shares which are the subject of a valid withdrawal notice will be deemed to be declined and will therefore be subject to the provisions of this paragraph 5 as if the entitlement to New Ordinary Shares had not validly been taken up. In such circumstances, to the extent that Shareholders have paid monies to the Company in respect of an acceptance which they wish to withdraw, the Company will remit such monies to Shareholders, without interest, within 14 Business Days. Any interest earned on such monies will be retained for the benefit of the Company.

6. TAXATION

Information on United Kingdom, and United States taxation with regard to the Rights Issue is set out in Part XIX (Taxation) of this document and is intended only as a general guide to the current tax position in the United Kingdom and the United States. If you are in any doubt as to your tax position, you should consult your own independent adviser immediately.

7. OVERSEAS SHAREHOLDERS

This document has been approved by the FCA, being the competent authority in the United Kingdom.

The making of the proposed offer of New Ordinary Shares to persons resident in or who have a registered address in countries other than the UK may be affected by the law or regulatory requirements of the relevant jurisdiction. Any Shareholder who is in any doubt as to his position should consult an appropriate professional adviser without delay.

7.1 General

The making or acceptance of the proposed offer of New Ordinary Shares to persons who have registered addresses outside the United Kingdom, or who are resident in countries other than the United Kingdom, may be affected by the laws of the relevant jurisdiction. Those persons should consult their professional advisers as to whether they require any governmental or other consents or need to observe any other formalities to enable them to take up their Rights.

It is also the responsibility of any person (including, without limitation, custodians, nominees and trustees) outside the United Kingdom wishing to take up Rights under the Rights Issue to satisfy himself as to the full observance of the laws of any relevant territory in connection therewith, including the obtaining of any governmental or other consents which may be required, the compliance with other necessary formalities and the payment of any issue, transfer or other taxes due in such territories. The comments set out in this paragraph 7 are intended as a general guide only and any Overseas Shareholder who is in doubt as to his position should consult his professional adviser without delay and take independent professional advice in relation thereto. Receipt of this document or a Provisional Allotment Letter or the crediting of Nil Paid Rights to a stock account in CREST will not constitute an offer in those jurisdictions in which it would be illegal to make or accept an offer and, in those circumstances, this document or the Provisional Allotment Letter or both must be treated as sent (or made available) for information only and should not be copied or redistributed.

No action has been or will be taken in any jurisdiction (other than the United Kingdom) that would permit a public offer or distribution of the New Ordinary Shares, the Nil Paid Rights or the Fully Paid Rights or the Provisional Allotment Letters or possession or distribution of this document or any other offering material in any country or jurisdiction where action for that purpose is required. Accordingly, the New Ordinary Shares, the Nil Paid Rights, the Fully Paid Rights and the Provisional Allotment Letters, may not be distributed, offered or sold, directly or indirectly, and this document may not be distributed or published in or from any country or jurisdiction except under circumstances that will result in compliance with any and all applicable rules and regulations of any such country or jurisdiction. Persons into whose possession this document comes (or who otherwise access this document) should inform themselves about and observe any restrictions on the distribution of this document and the offer or distribution of the New Ordinary Shares, the Nil Paid Rights the Fully Paid

Rights and the Provisional Allotment Letters contained in this document. Any failure to comply with these restrictions may constitute a violation of the securities laws of any such jurisdiction.

This document does not constitute an offer to acquire any, or a distribution, of the New Ordinary Shares, the Nil Paid Rights, the Fully Paid Rights and the Provisional Allotment Letters to any person in any jurisdiction to whom it is unlawful to make or accept such offer, distribution or solicitation in such jurisdiction.

New Ordinary Shares will be provisionally allotted (nil paid) to all Shareholders on the Register as at the Record Date (including, for the avoidance of doubt, any Overseas Shareholders). However, the Provisional Allotment Letters will not be sent to Qualifying Shareholders with registered addresses in the United States or any Excluded Territory and Nil Paid Rights will not be credited to CREST accounts of Shareholders with registered addresses in the United States or any Excluded Territory, except where the Company is satisfied that such action would not result in the contravention of any registration or other legal requirement in any jurisdiction.

No person in the United States or in any Excluded Territory receiving or being given access to a copy of this document or a Provisional Allotment Letter and/or receiving a credit of Nil Paid Rights to a stock account in CREST may treat the same as constituting an invitation or offer to him nor should he in any event use the Provisional Allotment Letter or deal with Nil Paid Rights or Fully Paid Rights in CREST unless such an invitation or offer could lawfully be made to and accepted by him or the Provisional Allotment Letter could lawfully be used or dealt with without contravention of any registration or other legal requirements. In such circumstances, this document and the Provisional Allotment Letter are to be treated as sent (or made available) for information only and should not be copied or redistributed.

Accordingly, persons (including, without limitation, custodians, nominees and trustees) receiving or being given access to a copy of this document or a Provisional Allotment Letter or both or whose stock account in CREST is credited with Nil Paid Rights should not, in connection with the Rights Issue, distribute or send the same or transfer Nil Paid Rights or Fully Paid Rights in or into any jurisdiction where to do so would or might contravene local securities laws or regulations including, but not limited to, those of the United States and the Excluded Territories. If a Provisional Allotment Letter or a credit of Nil Paid Rights or Fully Paid Rights is received by any person in any such territory, or by his agent or nominee, he must not seek to take up the Rights referred to in the Provisional Allotment Letter or in this document or renounce the Provisional Allotment Letter or transfer the Nil Paid Rights or Fully Paid Rights unless the Company and the Underwriters determine that such actions would not violate applicable legal or regulatory requirements. Any person (including, without limitation, custodians, nominees and trustees) who does forward this document or a Provisional Allotment Letter or transfer Nil Paid Rights or Fully Paid Rights into any such territories (whether pursuant to a contractual or legal obligation or otherwise) should draw the recipient's attention to the contents of this paragraph 7.

Any person (including, without limitation, agents, nominees and trustees) outside the UK wishing to take up his Rights under the Rights Issue must satisfy himself as to full observance of the applicable laws of any relevant territory including obtaining any requisite governmental or other consents, observing any other requisite formalities and paying any issue, transfer or other taxes due in such territories. The Company, in consultation with the Underwriters, reserves the right to treat as invalid and will not be bound to allot or issue any New Ordinary Shares in respect of any acceptance or purported acceptance of the offer of New Ordinary Shares which:

appears to the Company or its agents to have been executed, effected or despatched from the United States or any of the Excluded Territories; or
in the case of a Provisional Allotment Letter provides an address for delivery of the definitive share certificates in, or, in the case of a credit of New Ordinary Shares in CREST, to a CREST member or CREST sponsored member whose registered address is in the United States or any of the Excluded Territories or any other jurisdiction outside the United Kingdom in which it

would be unlawful to deliver such definitive share certificates or make such a credit or which does not make the warranty set out in the Provisional Allotment Letter to the effect that the person accepting and/or renouncing and/or otherwise disposing of the provisional allotment does not have a registered address and is not otherwise resident in the United States or one of the Excluded Territories and is not acquiring the Nil Paid Rights, the Fully Paid Rights, Letters of Allocation or the New Ordinary Shares with a view to the offer, sale, resale, transfer, delivery or distribution, directly or indirectly, of any such Nil Paid Rights, Fully Paid Rights or New Ordinary Shares in the United States or one of the Excluded Territories or where the Company believes acceptance of such Provisional Allotment Letter may infringe applicable legal or regulatory requirements.

Subject to paragraphs 7.2 to 7.4 of this Part IX below, any person (including, without limitation, agents, nominees and trustees) outside the United Kingdom wishing to take up their Rights under the Rights Issue must satisfy himself as to full observance of the applicable laws of any relevant territory including obtaining any requisite governmental or other consents, observing any other requisite formalities and paying any issue, transfer or other taxes due in such territories. The comments set out in this paragraph 7 are intended as a general guide only and any Overseas Shareholders who are in any doubt as to their position should consult their professional advisers without delay.

The attention of Overseas Shareholders resident or with registered addresses in the United States or in any of the Excluded Territories is drawn to paragraphs 7.2 to 7.4 of this Part IX below. Entitlements to Nil Paid Rights to which Shareholders with registered addresses in the United States or in any of the Excluded Territories would otherwise be entitled will be aggregated with entitlements to Nil Paid Rights which have not been taken up by other Shareholders and, if possible, sold as described in paragraph 5 of this Part IX above. The net proceeds of such sales (after deduction of expenses) will be paid to the relevant Shareholders pro-rated to their holdings of Ordinary Shares at the Record Date as soon as practicable after receipt, except that (i) individual amounts of less than £5.00 per holding; and (ii) fractional entitlements will be disregarded. None of the Company, the Underwriters or any other person shall be responsible or have any liability whatsoever for any loss or damage (actual or alleged) arising from the terms or the timing of the acquisition or the procuring of it or any failure to procure subscribers.

Despite any other provision of this document or the Provisional Allotment Letter, the Company reserves the right to permit any Shareholder to take up his Rights if the Company, in consultation with the Underwriters, is satisfied that the transaction in question is exempt from or not subject to the legislation or regulations giving rise to the restrictions in question. These Shareholders who wish, and are permitted, to take up their entitlement should note that payments must be made as described in paragraphs 3 and 4 of this Part IX above.

Overseas Shareholders who are Qualifying Non-CREST Shareholders or Qualifying CREST Shareholders should note that all subscription monies must be in pounds sterling by cheque or banker's draft and should be drawn on a bank in the United Kingdom. For more information regarding payment details see paragraphs 3 and 4 of this Part IX.

7.2 United States

The Nil Paid Rights, the Fully Paid Rights, the Provisional Allotment Letters and the New Ordinary Shares have not been and will not be registered under the US Securities Act, or with any securities regulatory authority or under the relevant securities laws of any state or other jurisdiction of the United States, and may not be offered, sold, taken up, exercised, resold, pledged, renounced, transferred or delivered, directly or indirectly, into or within the United States except pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act and in compliance with any applicable securities laws of any state or other jurisdiction of the United States. There will be no public offer of the Nil Paid Rights, the Fully Paid Rights or the New Ordinary Shares in the United States.

Accordingly, the Company is not extending the offer under the Rights Issue into the United States unless an exemption from the registration requirements of the Securities Act is available and, subject to certain exceptions, neither this document or the Provisional Allotment Letter constitutes or will constitute an offer or an invitation to apply for, or an offer or an invitation to acquire, any Nil Paid Rights, Fully Paid Rights or New Ordinary Shares in the United States. Subject to certain exceptions, neither this document nor a Provisional Allotment Letter will be sent to any Qualifying Shareholder in, or with a registered address in, the United States. Subject to certain exceptions, Provisional Allotment Letters or renunciations thereof sent from or post-marked in the United States will be deemed to be invalid and all persons acquiring New Ordinary Shares and wishing to hold such Ordinary Shares in registered form must provide an address for registration of the New Ordinary Shares issued upon exercise thereof outside the United States.

Subject to certain exceptions, any person who acquires Nil Paid Rights, Fully Paid Rights or New Ordinary Shares will be deemed to have declared, warranted and agreed, by accepting delivery of this document and the Provisional Allotment Letter, and taking up their entitlement or accepting delivery of the Nil Paid Rights, the Fully Paid Rights or the New Ordinary Shares that it is not, and that at the time of acquiring the Nil Paid Rights, the Fully Paid Rights, the Letters of Allocation or the New Ordinary Shares it is not and will not be, in the United States or acting on behalf of, or for the account or benefit of a person on a non-discretionary basis in the United States or any state of the United States.

The Company, in consultation with the Underwriters, reserves the right to treat as invalid any Provisional Allotment Letter (or renunciation thereof) that appears to the Company or its agents to have been executed in or dispatched from the United States, or that provides an address in the United States for the acceptance or renunciation of the Rights Issue, or which does not make the warranty set out in the Provisional Allotment Letter to the effect that the person accepting and/or renouncing the Provisional Allotment Letter or exercising the Nil Paid Rights does not have a registered address and is not otherwise located in the United States and is not acquiring the Nil Paid Rights, the Fully Paid Rights or the New Ordinary Shares with a view to the offer, sale, resale, transfer, delivery or distribution, directly or indirectly, of any such Nil Paid Rights, Fully Paid Rights or New Ordinary Shares in the United States or where the Company believes acceptance of such Provisional Allotment Letter may infringe applicable legal or regulatory requirements. The Company will not be bound to allot (on a non-provisional basis) or issue any New Ordinary Shares, Nil Paid Rights or Fully Paid Rights to any person with an address in, or who is otherwise located in, the United States in whose favour a Provisional Allotment Letter or any Nil Paid Rights, Fully Paid Rights or New Ordinary Shares may be transferred or renounced. In addition, the Company and the Underwriters reserve the right to reject any MTM instruction sent by or on behalf of any CREST member with a registered address in the United States in respect of the Nil Paid Rights.

In addition, until 40 days after the commencement of the Rights Issue, an offer, sale or transfer of the New Ordinary Shares, the Nil Paid Rights, the Fully Paid Rights or the Provisional Allotment Letters within the United States by a dealer (whether or not participating in the Rights Issue) may violate the registration requirements of the US Securities Act.

None of the Nil Paid Rights, the Fully Paid Rights, the New Ordinary Shares, the Provisional Allotment Letters, this document or any other offering document relating to the Existing Ordinary Shares or to the New Ordinary Shares have been approved or disapproved by the US Securities and Exchange Commission, any securities regulatory authority of any state of the United States or any other US regulatory authority, nor have any of the foregoing authorities passed upon or endorsed the merits of the offering of the Fully Paid Rights, the Nil Paid Rights, the New Ordinary Shares or the Rights Issue or passed upon the accuracy or adequacy of this document. Any representation to the contrary is a criminal offence.

The provisions of paragraph 5 of this Part IX will apply to any Rights not taken up. Accordingly, subject to certain exceptions, Qualifying Shareholders with registered addresses in the United States

will be treated as holders who are not participating in the Rights Issue, and the Underwriters will endeavour to sell the Rights relating to such holders' entitlements on such holders' behalf.

7.3 European Economic Area

In relation to each EEA State which has implemented the Prospectus Directive (each, a “relevant member state”) (except for the United Kingdom), no New Ordinary Shares, Nil Paid Rights or Fully Paid Rights have been offered or will be offered pursuant to the Rights Issue to the public in that relevant member state prior to the publication of a prospectus in relation to the New Ordinary Shares, Nil Paid Rights and Fully Paid Rights which has been approved by the competent authority in that relevant member state or, where appropriate, approved in another relevant member state and notified to the competent authority in the relevant member state, all in accordance with the Prospectus Directive, except that, offers of New Ordinary Shares, Nil Paid Rights or Fully Paid Rights may be made to the public in that relevant member state:

to any legal entity which is a qualified investor as defined in the Prospectus Directive;
to fewer than 100 or, if the relevant Member State has implemented the relevant provision of the 2010 PD Amending Directive, 150 natural or legal persons (other than qualified investors as defined in the Prospectus Directive) in such relevant member state; or
in any other circumstances falling within Article 3(2) of the Prospectus Directive,

provided that no such offer of New Ordinary Shares, Nil Paid Rights or Fully Paid Rights shall result in a requirement for the publication by the Company or any Underwriter of a prospectus pursuant to Article 3 of the Prospectus Directive or any measure implementing the Prospectus Directive in that relevant member state.

7.4 Excluded Territories

Due to restrictions under the securities laws of the Excluded Territories, no Provisional Allotment Letters will be sent to, and no Nil Paid Rights or Fully Paid Rights will be credited to a stock account in CREST of, any Qualifying Shareholder with a registered address in any of the Excluded Territories (unless such Qualifying Shareholder can satisfy the Company and the Underwriters that receipt, and acceptance, of the offer in such jurisdiction will not breach applicable securities laws as described in this paragraph 7.4) and their entitlements to New Ordinary Shares will be sold in the market as if they were New Ordinary Shares not taken up, in accordance with paragraph 5 of this Part IX. The Nil Paid Rights, the Fully Paid Rights, the New Ordinary Shares and the Provisional Allotment Letters also have not been and will not be registered under the securities laws of any Excluded Territory and may not be offered, sold, taken up, exercised, resold, pledged, renounced, transferred or delivered, directly or indirectly, within such jurisdictions except pursuant to an applicable exemption, from and in compliance with (or in a transaction not subject to), any applicable securities laws. There will be no public offer of the Nil Paid Rights, the Fully Paid Rights, or the New Ordinary Shares in any of the Excluded Territories and no offer of New Ordinary Shares is being made by virtue of this document or the Provisional Allotment Letters into the Excluded Territories.

No offer or sale of New Ordinary Shares, Nil Paid Rights or Fully Paid Rights will be made in Australia and no Provisional Allotment Letters will be sent to any Shareholder in or with a registered address in Australia, nor will any Nil Paid Rights be credited to a stock account in CREST on behalf of any Shareholder with a registered address in Australia.

Neither the New Ordinary Shares, Nil Paid Rights nor the Fully Paid Rights have been or will be qualified by prospectus for offer or sale to the public in Canada under applicable Canadian securities laws and, accordingly, no offer or sale of New Ordinary Shares, Nil Paid Rights or Fully Paid Rights will be made in Canada and no Provisional Allotment Letters or Forms of Instructions will be sent to any Shareholder in or with a registered address in Canada, nor will any Nil Paid Rights be credited to a stock account in CREST on behalf of any Shareholder with a registered address in Canada.

No offer or sale of New Ordinary Shares, Nil Paid Rights or Fully Paid Rights will be made in New Zealand and no Provisional Allotment Letters will be sent to any Shareholder in or with a registered address in New Zealand, nor will any Nil Paid Rights be credited to a stock account in CREST on behalf of any Shareholder with a registered address in New Zealand.

The New Ordinary Shares, the Nil Paid Rights, the Fully Paid Rights and the Provisional Allotment Letters have not been and will not be registered under the Financial Instruments and Exchange Law of Japan, as amended (the "FIEL"). The New Ordinary Shares, the Nil Paid Rights, the Fully Paid Rights and the Provisional Allotment Letters may not be offered or sold, directly or indirectly, in Japan or to, or for the benefit of, any resident of Japan or to others for reoffer or resale, directly or indirectly, in Japan or to, or for the benefit of, any resident in Japan, except pursuant to an exemption from the registration requirements under the FIEL and otherwise in compliance with such law and any other applicable laws, regulations and ministerial guidelines in Japan. Therefore, subject to certain exceptions, the Rights Issue will not be made within Japan and Provisional Allotment Letters will not be sent to any Shareholder in or with a registered address in Japan, nor will any Nil Paid Rights be credited to a stock account in CREST on behalf of any Shareholder with a registered address in Japan. As used in this paragraph, the term "resident of Japan" means any natural person having his place of domicile or residence in Japan, or any corporation or other entity organised under the laws of Japan or having its main office in Japan.

Due to restrictions under the Republic of South Africa securities laws, no Provisional Allotment Letters in relation to the New Ordinary Shares will be sent to Qualifying non-CREST Shareholders who have registered addresses, or are resident or located, in the Republic of South Africa. Similarly, Nil Paid Rights will not be credited to the CREST accounts of Qualifying CREST Shareholders who have registered addresses, or are resident or located in the Republic of South Africa. Qualifying Shareholders who have a registered address, or are resident or located in the Republic of South Africa will not be entitled to take up rights in the Rights Issue. The Provisional Allotment Letters, the Nil Paid Rights, the Fully Paid Rights and the New Ordinary Shares may not be transferred or sold to, or renounced or delivered in, the Republic of South Africa. No offer of New Ordinary Shares is being made by virtue of this document or the Provisional Allotment Letters into the Republic of South Africa.

Notwithstanding the foregoing, if a Qualifying Shareholder with a registered address in any of the Excluded Territories can demonstrate to the satisfaction of the Company and the Underwriters that receipt, and acceptance, of the offer in such jurisdiction will not breach applicable securities laws then the Company in its absolute discretion (in consultation with the Underwriters) may either arrange for such Qualifying Shareholder to be sent a Provisional Allotment Letter if he is a Qualifying Non-CREST Shareholder holding his Ordinary Shares in certificated form (as the case may be) or, if he is a Qualifying CREST Shareholder who holds Ordinary Shares in uncertificated form, arrange for Nil Paid Rights to be credited to the relevant CREST stock account.

7.5 Further representations and warranties

7.5.1 Qualifying Non-CREST Shareholders

Any person accepting and/or renouncing a Provisional Allotment Letter makes the representations and warranties set out below to the Company and the Underwriters, except where proof has been provided to the Company's and the Underwriters' satisfaction that such person's use of the Provisional Allotment Letter will not result in the contravention of any applicable regulatory or legal requirement in any jurisdiction. Documentation for establishing such proof may be obtained from the Company or Equiniti. In the absence of such proof, the representations and warranties referred to above are that such person: (a) is not located or resident in, and is not accepting and/or renouncing the Provisional Allotment Letter, or requesting registration of the relevant New Ordinary Shares, from within the United States or any of the Excluded Territories; (b) is not in any jurisdiction in which it is unlawful to make or accept an offer to acquire or subscribe for New Ordinary Shares or to use the Provisional Allotment Letter in any manner in which such person has used or will use it; (c) is

not accepting, renouncing or requesting registration on a non-discretionary basis for a person located or resident in the United States or any of the Excluded Territories or any jurisdiction referred to in (b) above at the time the instruction to accept, renounce or request was given; and (d) is not acquiring New Ordinary Shares with a view to the offer, sale, resale, transfer, delivery or distribution, directly or indirectly, of any such New Ordinary Shares into the United States or any of the Excluded Territories or any jurisdiction referred to in (b) above. The Company, in consultation with the Underwriters, may treat as invalid any acceptance or purported acceptance of the allotment of New Ordinary Shares comprised in, or renunciation or purported renunciation of, a Provisional Allotment Letter if it (a) appears to the Company to have been executed in or despatched from the United States or any of the Excluded Territories or otherwise in a manner which may involve a breach of the laws of any jurisdiction or if it believes the same may violate any applicable legal or regulatory requirement in any jurisdiction; (b) provides an address in the United States or any of the Excluded Territories for delivery of definitive share certificates for New Ordinary Shares (or any jurisdiction outside the United Kingdom in which it would be unlawful to deliver such certificates); or (c) purports to exclude any of the representations and warranties required by this paragraph 7.5.1.

7.5.2 Qualifying CREST Shareholders

A CREST member or a CREST sponsored member who makes a valid acceptance in accordance with the procedures set out in paragraph 4 of this Part IX makes the representations and warranties set out below to the Company and the Underwriters, except where proof has been provided to the Company's and the Underwriters' satisfaction that such person's acceptance will not result in the contravention of any applicable regulatory or legal requirement in any jurisdiction. Documentation for establishing such proof may be obtained from the Company or Equiniti. In the absence of such proof, the representations and warranties referred to above are that: such person (a) is not located within or resident in the United States or any of the Excluded Territories; (b) is not in any jurisdiction in which it is unlawful to make or accept an offer to acquire or subscribe for Nil Paid Rights, Fully Paid Rights or New Ordinary Shares; (c) is not accepting on a non-discretionary basis for a person located within or resident in the United States or any of the Excluded Territories or any jurisdiction referred to in (b) above at the time the instruction to accept was given; and (d) is not acquiring Nil Paid Rights, Fully Paid Rights or New Ordinary Shares with a view to the offer, sale, resale, transfer, delivery or distribution, directly or indirectly, of any such Nil Paid Rights, Fully Paid Rights, Letters of Allocation or New Ordinary Shares into the United States or any of the Excluded Territories or any jurisdiction referred to in (b) above. The Company, in consultation with the Underwriters, may treat as invalid any MTM instruction if it: (a) appears to the Company to have been despatched from the United States or any of the Excluded Territories or otherwise in a manner which may involve a breach of the laws of any jurisdiction or if it believes the same may violate any applicable legal or regulatory requirement in any jurisdiction; or (b) purports to exclude any of the representations and warranties required by this paragraph.

For the purposes of this paragraph 7.5, any natural person having his place of domicile or residence in Japan, or any corporation or other entity organised under the laws of Japan or having its main office in Japan, would be resident in Japan.

7.6 Times and dates

The Company shall, at its discretion and after consultation with its financial and legal advisers, be entitled to amend the dates that Provisional Allotment Letters are despatched or dealings in Nil Paid Rights commence and amend or extend the latest date for acceptance under the Rights Issue and all related dates set out in this document and in such circumstances shall announce such amendment via a Regulatory Information Service and notify the UKLA and, if appropriate, Shareholders.

7.7 Waiver

The provisions of paragraph 7 of this Part IX and of any other terms of the Rights Issue relating to Qualifying Shareholders with registered addresses in, or who are located in, the United States or any of the Excluded Territories may be waived, varied or modified as regards specific Qualifying Shareholder(s) or on a general basis by the Company in consultation with the Underwriters. Subject to this, the provisions of this paragraph 7.7 which refer to Qualifying Shareholders shall include references to the person or persons executing a Provisional Allotment Letter and, in the event of more than one person executing a Provisional Allotment Letter, the provisions of this paragraph 7.7 shall apply jointly to each of them.

7.8 Governing law

The terms and conditions of the Rights Issue as set out in this document and, where appropriate, the Provisional Allotment Letter, and any non-contractual obligation relating thereto shall be governed by, and construed in accordance with, English law. The New Ordinary Shares will be created pursuant to the Articles of Association and under the Companies Act.

7.9 Jurisdiction

The Courts of England and Wales are to have exclusive jurisdiction to settle any dispute which may arise out of or in connection with the Rights Issue, this document, and, where appropriate, the Provisional Allotment Letter (including, without limitation, disputes arising relating to any non-contractual obligations arising out of or in connection with the Rights Issue, this document or the Provisional Allotment Letter). By accepting rights under the Rights Issue in accordance with the instructions set out in this document and, in the case of Qualifying Non-CREST Shareholders (but no other Qualifying Shareholders), the Provisional Allotment Letter, Qualifying Shareholders irrevocably submit to the jurisdiction of the Courts of England and Wales and waive any objection to proceedings in any such court on the ground of venue or on the ground that proceedings have been brought in an inconvenient forum.

PART X

TERMS OF THE ACQUISITION

OVERVIEW

The Acquisition Agreement was entered into on 12 November 2014 between the Tuffnells Management Sellers, the Investor Sellers and the Purchaser (a wholly-owned subsidiary of Connect Group PLC) pursuant to which the Purchaser will acquire the entire issued and to be issued share capital of The Big Green Parcel Holding Company Limited at Completion. The principal terms of the Acquisition are described below.

OPTION SELLERS

Tuffnells Group operates an option plan under which 35 employees currently hold options over a proportion of The Big Green Parcel Company's ordinary shares. The Tuffnells Management Sellers have agreed to procure that immediately prior to Completion, the Option Sellers will exercise all such options and adhere to the Acquisition Agreement as Sellers such that, as at Completion, the entire issued share capital of The Big Green Parcel Company is transferred to the Purchaser.

CONSIDERATION

The aggregate consideration payable under the Acquisition Agreement is up to £128.7 million. On Completion, initial consideration of £113.4 million is payable to the Sellers in cash. In addition, Deferred Consideration of up to a further maximum amount of £15.3 million is payable in cash or Ordinary Shares to the Tuffnells Management Sellers and Option Sellers subject to the achievement of certain conditions including (i) continuation of employment for at least one year (in the case of Lloyd Dunn) and at least three years (in the case of the other Tuffnells Management Sellers (other than Chris Atkinson and Paul Watson who are not subject to any condition regarding continued employment) and Option Sellers), and (ii) the financial performance of Tuffnells over the three-year period following Completion.

A minimum of fifty per cent. of the Deferred Consideration to be received by the Tuffnells Management Sellers and Option Sellers is to be satisfied by the issue of Ordinary Shares. Each of these Ordinary Shares will be credited as fully paid and will upon issue rank pari passu in all respects with the Company's Ordinary Shares in issue at that time, including a deemed right to receive a cash amount equal to the aggregate value of all accrued dividends and other distributions (if any) paid on one Ordinary Share in respect of the period between either (i) Completion or (ii) the beginning of the relevant financial year for the calculations of the Deferred Consideration, and the date of allotment.

CONDITIONS

Completion of the Acquisition is conditional upon:

the Resolution being passed by Shareholders approving the Acquisition;
admission of the New Ordinary Shares to the Official List of the UKLA, trading on the London Stock Exchange becoming effective and receipt by the Company of the proceeds of the Rights Issue;
there not having occurred any event having a material adverse change on Tuffnells Group between the date of the Acquisition Agreement and the date of Completion; and
no indication having been received from the CMA between the date of the Acquisition Agreement and the date of Completion that it is or may be considering a merger control investigation in respect of the Acquisition, or if there has been any such indication then:
there is no initial enforcement order in force for the purposes of preventing or reversing preemptive action with respect to the Acquisition; and

the CMA has issued a decision in terms satisfactory to the Purchaser that it has no intention to make a Phase 2 reference (such decision being either unconditional or conditional on the CMA's acceptance of undertakings in lieu which are satisfactory to the Purchaser) or the applicable time period for the CMA to make such a reference has expired without it having made such a reference.

In the event that such conditions are not satisfied (or, where capable of waiver, waived) and Completion has not occurred before 1 January 2015 the Acquisition Agreement will terminate with immediate effect.

5. WARRANTIES

The Tuffnells Management Sellers and the Investor Sellers have given, and at Completion all the Sellers will give, warranties as to title and ownership of their respective shares in Tuffnells Group.

In addition to those warranties, the Tuffnells Management Sellers have given warranties in regard to the business of the Tuffnells Group, which are customary for a transaction of this kind.

The aggregate liability of the Sellers in respect of all the warranties shall not exceed the aggregate of the value of the consideration paid or issued or to be paid or issued to them by the Purchaser. The aggregate liability of the Tuffnells Management Sellers in respect of the warranties relating to the business of Tuffnells Group shall not exceed fifty per cent. of the value of the consideration paid or issued or to be paid or issued to them by the Purchaser.

6. RESTRICTIVE COVENANTS

The Tuffnells Management Sellers and their connected persons have given customary non-compete, non-solicitation and non-hire undertakings which prevent the Tuffnells Management Sellers from competing with Connect in the United Kingdom or the Republic of Ireland, or soliciting or hiring the employees of Tuffnells Group, from Completion:

until 30 June 2017; and
until the expiration of 12 months from the date of receipt by that Tuffnells Management Seller of any Deferred Consideration.

7. CONDUCT OF THE TUFFNELLS BUSINESS PRIOR TO COMPLETION

The Tuffnells Management Sellers have undertaken, pursuant to the terms of the Acquisition Agreement, that during the period prior to Completion, they will carry on the business of Tuffnells Group in the normal course and substantially in the same manner as carried on prior to the date of the Acquisition Agreement. The Tuffnells Management Sellers have also agreed to procure that no company of Tuffnells Group shall carry out certain acts without the Purchaser's consent.

8. TERMINATION

The Purchaser may terminate the Acquisition Agreement before Completion with immediate effect in the event that:

it becomes aware that any of the title and ownership warranties was at the date on which the Acquisition Agreement was entered into, or has since become, untrue or misleading or has been breached;
it becomes aware that any of the warranties relating to the business of the Tuffnells Group, was at the date on which the Acquisition Agreement was entered into, or has since become, untrue or misleading or has been breached, where such warranty becoming untrue or having been breached has a material adverse effect on the business of the Tuffnells Group;
any of the Sellers is in material breach of any term of the Acquisition Agreement where such breach has a material adverse effect on the business of the Tuffnells Group;

any event occurs which would have, or could reasonably be expected to have or result in, a material adverse change;
the conditions referred to in paragraph 4 of this Part X have not been waived or satisfied by, or become impossible to satisfy on or before 31 December 2014; and
the Sellers have failed to comply with their obligations at Completion,

and provided that the Purchaser has given the Sellers notice that it wishes to terminate the Acquisition Agreement.

The Sellers may terminate the Acquisition Agreement before Completion with immediate effect in the event that the conditions referred to in paragraph 4 of this Part X have not been waived or satisfied by, or became impossible to satisfy on or before, 31 December 2014 and the Sellers (through their representative) have given the Purchaser notice that they wish to terminate the Acquisition Agreement).

The Acquisition Agreement shall terminate with immediate effect if Completion has not occurred before 1 January 2015.

9. TAX COVENANT

Pursuant to a tax deed, the Tuffnells Management Sellers have covenanted to pay the Purchaser an amount equal to certain tax liabilities in Tuffnells Group, primarily being those tax liabilities arising prior to 31 August 2014 (and not provided for in the Locked Box Accounts) and those tax liabilities arising outside the ordinary course of business of Tuffnells Group between 31 August 2014 and Completion. The tax deed contains customary limitation and conduct provisions, alongside provisions ensuring that there is no double compensation or double recovery for Purchaser. Under the terms of the tax deed the Purchaser will be responsible for the preparation and filing of all tax returns to the filed after Completion, with the Tuffnells Management Sellers having rights of input into returns broadly where Tuffnells Management Sellers have a potential liability under the tax deed.

10. COSTS

The Sellers and the Purchaser have each agreed to pay the costs and expenses incurred by them in connection with the preparation, negotiation, entering into and completion of the Acquisition Agreement and ancillary documents.

PART XI

INFORMATION ON THE COMPANY AND THE GROUP

INTRODUCTION

Connect is a leading specialist distributor operating in large and diverse markets. In April 2014, the Company renamed and rebranded as Connect Group PLC to reflect the Connect Group's progress and diversification since its Demerger from WH Smith PLC and its strategy for the future.

The Connect Group has three separate divisions, connecting suppliers to customers in an efficient, knowledgeable and service oriented way:

Connect News & Media: Encompassing: Smiths News, the UK's largest newspaper and magazine wholesaling business with an approximate 55 per cent. market share. It distributes newspapers and magazines on behalf of the majority of the major national publishers as well as a large number of regional publishers. Smiths News serves approximately 30,000 customers across England and Wales, supplying large general retailers as well as smaller independent newsagents; and Dawson Media Direct, an international media direct business supplying newspapers, magazines and inflight entertainment technology and content to over 80 airlines in 50 countries. In October 2014, the Connect Group announced the launch of Pass my Parcel, a new wholly-owned 'click and collect' delivery service to be operated by the News Business with Amazon as its first client;
Connect Books: Combining a number of recognised brands in print and digital bookselling, including Bertrams, Dawson Books and Wordery. A leading distributor of physical and digital books, the division serves over 8,200 customers in approximately 100 countries, with over 156,000 in stock titles and access to over a further seven million consumer and 20 million academic titles; and
Connect Education & Care: A leading independent supplier of consumables through The Consortium and West Mercia Supplies with an approximate 5 per cent. market share of the estimated addressable market, comprising the consumables element of the total Government education budget and serves over 30,000 customers with an extensive range of over 40,000 products across a branded, own brand and value range, including stationery, arts and craft and cleaning.

The Connect Group's strategic ambition is to achieve 50 per cent. of its profits from activities outside of newspaper and magazine wholesaling.

HISTORY AND DEVELOPMENT

The Connect Group's origins can be traced back to 1792 when WH Smith PLC was founded, originally as a newspaper stand. Later generations of the founding Smith family established the first newspaper distribution warehouse and used a fleet of small carts and fast horses to collect the daily papers and transport them to stagecoach stops around London.

The then News Business was, until the 1970s, dominated by newspaper distribution; magazines at that time being a much smaller sector. The newspaper distribution industry across the UK was, at that time, characterised by many "custom and practice" agreements and was typically split between daily wholesalers, of which the then News Business was the largest, and a plethora of smaller Sunday wholesalers. In the early 1980s there were a large number of wholesalers operating throughout the UK, many of them small independents.

The UK newspaper and magazine distribution industry saw significant changes in the 1980s and 1990s. The majority of the independent wholesalers that handled all publishers' titles in a particular territory were acquired by the major wholesalers or had exited the market, resulting in consolidation amongst magazine publishers and distributors. The wholesaling of newspaper and magazines also become a technological and information driven process as well as a manual logistical one. The use of data for forecasting and allocation

of supplies became crucial to maximising sales and efficiency for publishers/distributors, wholesalers and retailers.

In 2006, WH Smith PLC announced its intention to separate its retail business from its newspaper and magazine wholesale and distribution business, so as to create Smiths News PLC. The Demerger became effective on 31 August 2006.

The principal events in the Connect Group’s history following the Demerger are listed below:

Year	Event
2008	Acquired a 50 per cent. stake in Rascal Systems, a specialist in automated tracking of sales and returns, helping retailers to minimise waste, enhance ordering accuracy and reduce paperwork
2009	The Connect Group acquired the business and assets of the Bertram group of companies, formerly part of the Woolworths group of companies, comprising Bertram’s wholesale book business and library services business
2009	The Connect Group acquired certain assets of Surridge Dawson, a newspaper and magazine distributor, adding 20 depots to its distribution network
2011	The Connect Group acquired Dawson Holdings, including its “Dawson Books” division, a leading supplier of books to Universities and further education institutions around the world
2012	The Connect Group acquired The Consortium, a supplier of consumable products predominantly to the education market and to the care and early years nursery markets
	Acquisition and international expansion of books division through the acquisition of Houtschild Internationale Boekhandel B.V., a leading supplier of books and journals into both academic libraries and Government Institutions across Northern Europe
	Launch of direct to consumer books proposition through new “Wordery” branded joint venture
2013	Acquisition and international expansion of books division through the acquisition of Erasmus Antiquariaat en Boekhandel B.V., based in the Netherlands and the acquisition of certain European and African academic library services contracts from Blackwell UK Limited
	Signed exclusive WH Smith Online contract to 2016, growing internet fulfilment
2014	Rebranded as Connect Group PLC
	Launched Pass my Parcel and Jack’s Beans, two new organic offerings which leverage the Connect Group’s network and capabilities

3. STRATEGY

3.1 The Connect Group

The Connect Group’s strategy is to be a leading specialist distributor in each of the Connect Group’s chosen markets and over the past five years, the Connect Group’s strategy has been to diversify into new specialist distribution sectors. Since 2006, the Group has expanded its core businesses into carefully chosen sectors that complement and leverage the Connect Group’s skills and assets. The Connect Group’s longer-term strategy is to achieve a more balanced portfolio of business interests which facilitate the sharing of skills, expertise and resources across the Connect Group’s businesses, strengthening the individual businesses of the Connect Group, and creating a platform for sustainable growth. The Connect Group’s strategic ambition is to achieve 50 per cent. of profits from activities outside of newspaper and magazine wholesaling.

In order to achieve these aims, the Connect Group has built a strategy around organic revenue streams that leverage and enhance its infrastructure, skills and competencies, and acquisitions that grow its businesses and broaden the Connect Group’s services across a range of distribution sectors. Details of the Connect Group’s recent acquisitions and organic investments are set out in paragraph 2 of this Part XI (Information on the Company and the Group). To pursue this strategy, the Connect Group will

identify and pursue opportunities to acquire businesses in new but complementary specialist distribution markets, complementing the Connect Group's existing businesses and adding scale and capability in existing markets. Further growth may be achieved by acquisitions, the expansion of the existing divisions with 'bolt-on' opportunities, and investment in new products and services which utilise the Connect Group's existing brand, supply chains and customer relationships. The Connect Group will seek to ensure the rapid integration of new businesses, exploiting synergies and maximising value. Acquisitions will be pursued as and when the timing is right for the Connect Group.

The Connect Group's other strategic aims are:

Deliver profitable top line growth. The Connect Group intends to increase profitability by winning new customers, renewing existing contracts and regularly reviewing the profitability of products and services supplied. The Connect Group also aims to secure sustainable cost efficiencies that are compatible with its service commitments and marketplace strategies. In addition, as noted above, the Connect Group intends to continue its targeted acquisition strategy focusing on complementary markets, which enhance and leverage the skills and competencies of the Connect Group and to grow new organic revenue streams, with a particular focus on expanding ventures launched in 2014.
Develop digital and other online propositions. The Connect Group intends to continue its investment in digital propositions that enhance its customer offer and provide both competitive advantage through service improvement and efficiency gains. In particular, the Connect Group aims to develop the e-commerce capability of the News & Media Division and Education & Care Division and to grow further Wordery in UK and international markets; increasing the share of Wordery sales achieved through its bespoke website, Wordery.com. Maximising productivity and efficiency gains from the introduction of new supply chain technology across all the Connect Group's divisions is another focus.
Invest in new processes and systems. The Connect Group will seek to maintain its competitive advantage in the application of industry leading technology and to innovate to achieve further service and cost leadership which deliver benefits to the Connect Group but also across its supply chains. The Connect Group is also focussed on developing its information systems and business intelligence to understand better and respond to customer needs and market dynamics and intends to continue its investment in its distribution networks to optimise the size, quality and location of its distribution centres.
Maintain competitive advantage through our people. Investing to ensure the recruitment, retention and developments of the right people and supporting them in their career aspirations and providing opportunity for personal growth is a focus of the Connect Group. A further focus is improving the speed and quality of communications with staff; implementing a business-wide 'team talk' programme encompassing regular briefings and local action planning; encouraging a forward looking, and growth orientated culture. The Connect Group also aims to maintain its investment in key individuals and leadership roles which are crucial to its success and future capability and ensure that the Connect Group Values are embedded across its existing and any newly acquired businesses.

Each of these aims is intended to deliver growing and sustainable shareholder returns.

3.2 Connect News & Media

The Connect Group's strategy for its News & Media Division is to continue to offer a leading newspaper and magazine wholesale service to its publisher and retail customers and to further support the division by investment in carefully researched opportunities to use the division's network for other products and services, complementing the revenue of newspapers and magazines, but without impacting core operations. To ensure the wholesale operation can continue to offer its market leading service to publishers and retail customers, the Connect Group plans to continue its on-going

100

investment in News Business' infrastructure and technology, continue to secure its long-term revenue contracts, and continue to deliver on the current cost efficiency programme as well as explore the potential for further efficiencies.

In October 2014, the Connect Group announced the launch of Pass my Parcel, a new wholly-owned 'click and collect' delivery service. Pass my Parcel is a solution developed by the News & Media Division and over time has the potential to be a key part of the long term diversification strategy for the News & Media Division. Pass my Parcel has secured Amazon, the UK's leading on-line retailer, as its first client.

Pass my Parcel utilises the News Business' current specialist time sensitive distribution capability, physical network, and its daily relationship with thousands of local retailers across the UK, enabling the development and rollout to be achieved in a more cost effective way than for most other companies. "Pass my Parcel" will offer a unique twice daily distribution to participating independent retail outlets, 7 days a week, 364 days a year.

When selecting Pass my Parcel as a delivery option, customers ordering from Amazon on-line by 7:45 p.m. will be able to collect their parcel from 6:30 a.m. the next morning, or, if ordered by 11:45 a.m. will be able to collect from 4 p.m. the same day. This service of two time sensitive deliveries per day, (once on a Sunday), offers customers a convenient and secure way to pick up their parcels, with a level of service and flexibility unlike any other scale offering in the market today.

Pass my Parcel will also utilise the News Business' information systems, invoicing and communication facilities. The launch starts with 500 independent retail outlets being serviced by 12 of the News Business' depots. The Connect Group has further plans to launch into thousands more stores within the existing network over the coming year.

In February 2014, the Smiths News Business launched Jack's Beans, a wholly owned an internally developed premium vended coffee offer specifically developed for smaller independent retailers and addresses a market need in a sector with considerable potential. The UK coffee shop market was worth an estimated £1.4 billion in 2013. Using the News Business' network, Jack's Beans provides coffee vending machines, branding and maintenance support to selected independent retailers. Supplies for daily replenishment are delivered and invoiced through the News Business' existing infrastructure. By integrating the sales and replenishment with the core Newspaper and Magazine distribution the News Business can provide high quality service at a low incremental cost.

The Jack's Beans brand in internally developed and wholly owned by the News Business and has a distinctive identity. There are currently 120 stores signed up to the proposition and the Connect Group plans to expand potentially up to 500 in the next phase.

3.3 Connect Books

The Books Division has faced challenging conditions over the last 12 months. Action has been taken to respond to these challenges, including reducing costs, evaluating margins and investment returns and re-negotiating contracts where necessary. The Directors believe the division has now stabilised and along with a new Managing Director and a strengthened management team for the Books Division. The Connect Group will continue to implement management action plans to improve the profitability, efficiency and productivity of the Books Division. In addition the Connect Group's future strategy for the Books Division will be based around (i) further growth of Wordery in the UK and international markets increasing the share of Wordery sales achieved through its bespoke website, Wordery.com; (ii) improving the digital offering; and (iii) international expansion of our academic service.

3.4 Education & Care

The Connect Group's strategy for the Education & Care Division will see continued investment to win new customers and grow share of wallet by providing an outstanding service, offering a market leading range and offering promotions in the market, as well as further acquisitions that would

101

complement the division’s existing businesses. The Connect Group’s future strategy for the Education & Care Division will be based around investment in supply chain and information systems, further development of the product range and own brand offerings, and creating partnerships with key suppliers that build classroom authority.

4. KEY STRENGTHS

4.1 A market leader in specialist distribution markets

Connect is a leader in its chosen markets. Smiths News is the UK’s largest newspaper and magazine wholesaling business with an approximate 55 per cent. market share. It distributes newspapers and magazines on behalf of the majority of the major national publishers as well as a large number of regional publishers.

In addition, Connect is a leading distributor of consumer and academic books in the UK and is a growing player in international and digital markets. The Company is also a leading independent supplier of consumables with an approximate five per cent. market share of the estimated addressable market, comprising the consumables element of the Government education budget.

4.2 Strong financial performance

Over the past five years, Connect has delivered strong returns to its shareholders, growing underlying operating profit by 50 per cent., a four-year compound annual growth rate of 11 per cent. whilst revenues have remained broadly in line across the same period. Connect’s News Business also has secured contracts with publishers and distributors representing approximately 84 per cent. of revenue (as at the year ended 31 August 2014) until at least 2019.

4.3 Increasingly diverse business

Connect has three separate divisions with each operating in separate markets. In the year ended 31 August 2014, Connect derived 23 per cent. of its underlying operating profit from activities outside of newspaper and magazine wholesaling. Connect continues to diversify its business by pursuing organic growth opportunities within its existing businesses and acquisitions, and the Company’s strategic ambition is to achieve 50 per cent. of the Connect Group’s underlying operating profit from outside of newspaper and magazine wholesaling. As a result, the Directors believe that the Connect Group is well-placed to pursue its growth ambitions whilst off-setting the expected decline in revenue derived from newspaper and magazine wholesaling with other businesses which benefit from Connect’s extensive distribution network, which covers the more highly populated regions of the UK.

4.4 Experienced senior management team

The senior management team at Connect has a long and successful track-record of delivering service improvements, customer partnerships in the distribution industry and strong financial returns for shareholders. Management has developed a strategy to ensure that Connect is well placed in the current market environment, having rationalised the number of depots from which it operates, implemented a significant cost reduction program within the News Business, expanded into new markets, continued to invest in technology and increased the revenue and profitability of the business over the past five years.

4.5 Technological investment

Connect has a track record of continual investment in technology solutions, including a ten year £40 million investment in one of the UK’s largest SAP transactional databases. This delivers measurable service improvements to customers and technology is regularly improved to ensure that Connect is at the forefront of the industry technology.

102

103

5. FINANCIAL PERFORMANCE

In the year ended 31 August 2014, the Connect Group delivered a steady financial performance whilst continuing to enhance shareholder returns. Total revenue of £1.8 billion, was unchanged from the prior year, resulting in an underlying profit before tax of £50.0 million, up 0.2 per cent. from the year ended 31 August 2013. Underlying earning per share at 21.7 pence represented an increase of 2.8 per cent., reflecting a good performance in both News & Media Division and Education & Care Division, offset by an underperformance in the Books Division.

6. ORGANISATIONAL STRUCTURE

Connect is the holding company for the Connect Group, headquartered in Swindon, UK. A full list of Connect's principal subsidiaries and associated undertakings, which are considered by Connect to be likely to have a significant effect on the assessment of the assets, liabilities, financial position and the profits and losses of Connect, is set out in paragraph 3 of Part XXI (Additional Information) of this document. Following Completion, Tuffnells will be a wholly-owned subsidiary of Connect. Further information on Tuffnells is set out in Part XII (Information on the Tuffnells Group).

7. DESCRIPTION OF THE BUSINESS

7.1 Overview

The Connect Group is a leading specialist distributor and operates in three principal divisions:

Connect News & Media: the UK's leading wholesaler of newspapers and magazines by share by value. DMD, the division's specialist media supply business, is the world's largest supplier of newspapers and magazines to airlines.
Connect Books: a leading distributor of printed and digital books to customers in the UK and worldwide; and
Connect Education & Care: a leading distributor of consumable products to the education & care markets.

7.2 Connect News

The News Business is a wholesaler of newspapers and magazines. The News Business receives newspapers and magazines in bulk from publishers/distributors on a daily basis and then re-packs and distributes them to retail customers. The News Business also provides a number of value-added services including copy management, information provision, merchandising and sales-based replenishment.

The Connect Group is the UK's largest newspaper and magazine wholesaler with a share by value of approximately 55 per cent., of the national newspaper wholesale sector and a share by value of approximately 55 per cent., of the consumer magazine wholesale sector.

7.2.1 Key supply partners

The News Business is supplied by the publishers of newspapers and the magazine distributors under publisher and wholesaler distribution agreements.

Newspapers

Newspaper publishers typically grant contracts to wholesalers on an exclusive regional basis, based on aggregations of individual postcodes across the UK, typically for a term of five years. The News Business wholesales (predominantly on a sale or return basis) mostly national newspapers, with regional newspapers accounting for nearly 10 per cent. of its newspaper wholesaling revenue. The News Business currently has seven major contracts for the supply of national newspapers. The table below gives the percentage UK market share by value of each publisher's titles covered by News Business contracts as at the Latest Practicable Date.

Publisher	(per cent.)
Associated Newspapers	57.0
Financial Times	63.0
Guardian News & Media	63.0
MGN (Trinity Mirror)	55.0
News UK	48.6
Northern & Shell	56.0
Telegraph Media Group	63.0

Magazines

Magazine distributors currently grant contracts to wholesalers on an exclusive regional basis based on aggregation of individual postcodes across the UK typically for a term of five years. The News Business receives most of its magazines on a sale or return basis and wholesales them to retailers in the same way. The News Business has four major magazine wholesale contracts. The table below gives the News Business' approximate percentage UK market share by value of each distributor's titles covered by News Business contracts as at the Latest Practicable Date.

Distributor	(per cent.)
Conde Nast & National Magazine Distributors (Comag)	55.0
Frontline	55.0
Marketforce UK	55.0
Seymour Distribution	55.0

7.2.2 Delivery, picking, packing and distribution

Newspapers

Daily newspapers are generally delivered from the publishers by third party logistics companies (for example, TNT) to each of the News Business' warehouses. They are then allocated and packed manually into customer-specific parcels before being loaded onto the News Business' or contractors' delivery vehicles, along with the magazine boxes, for distribution to the retailers.

The number of supplements in most weekend newspapers means that they cannot physically be delivered to the warehouses in one night without substantially increasing the size of the delivery fleet and the resources with which to process them. Individual supplements are therefore produced by publishers several days before issue and are delivered in advance to the warehouses. Following delivery to the warehouses the supplements are prepared for delivery and despatched to the retailers along with the normal daily newspaper deliveries who then assemble the full weekend newspaper.

Magazines

Magazines are delivered by the distributors and publishers using their appointed third party logistics carriers throughout the day. Due to the number of titles and the diversity of each individual retailer's magazine range, the picking and packing process is more complex than the process for newspapers. Retailers also generally stock a wider range of titles than newspapers but have fewer copies of each. In addition, magazines are increasingly sold in different sizes and with cover mounts/gifts making bulk packing increasingly complex.

Magazines to be delivered to each individual retailer are picked separately along either semi-automated picking lines or by hand. As they are picked, they are packed into magazine boxes which are separately identifiable by their contents and destination via a barcoding system.

As magazines have a longer shelf life than newspapers, stocks of magazines are kept in the magazine and newspaper warehouses, from which retailers can be re-supplied. As a result, there is a magazine stock management function in the magazine and newspaper warehouse.

Historically, a retailer's entire magazine stock requirement was supplied on the first day of the "on sale" period for a magazine.

7.2.3 Distribution to retailers

The News Business distributes to approximately 30,000 retail outlets on a daily basis, using approximately 1,400 delivery contractors.

7.2.4 Returns (unsold) and waste

As the supply basis of newspapers and magazines is predominantly on "sale or return", the News Business manages the process of returns of unsold copies from retailers. The increased use of cover mounts makes the recycling process for magazine returns more complicated and expensive than the process for newspapers. The magazine returns process is semi-automated with each magazine and newspaper scanned via barcode into the Connect Group's SAP system.

7.2.5 Regulatory environment

As described in paragraph 1.9 of Part II (Risk Factors) of this document, the News Business could be adversely affected by the application of competition laws to any agreements or practices to which the News Business may have been, or is, party or otherwise engaged. The Competition Act 1998 (the "Competition Act") contains two prohibitions which are modelled on and are required to be applied consistently with Articles 101 and 102 of the Treaty on the Functioning of the European Union ("TFEU") (the main provisions of EU competition law dealing with anti-competitive agreements and conduct). Chapter I of the Competition Act prohibits anti-competitive agreements. Chapter II of the Competition Act prohibits conduct which amounts to abusive behaviour by a company (or companies) in a dominant position.

Under the Enterprise Act, the CMA also has the power to review a feature or combination of features of a market where it considers that the market may not be working well ("market study"). Market studies may lead to a range of outcomes including a clean bill of health, encouraging businesses to self-regulate and referring the market for further scrutiny ("market investigation reference"). A market investigation can last up to 18 months (extendable by six months in certain circumstances). Depending on the conclusions which are reached, market investigation references can lead to a wide range of remedies being imposed, including price controls and divestments, which, in some cases, can significantly change the way in which businesses that have been the subject of the investigation operate.

The newspaper and magazine wholesaling industry has previously been the subject of interest from the UK competition authorities and may be subject to further review. In 2008-2009 following receipt of a complaint, the OFT (the OFT's competition functions now lie with the CMA), carried out a review of newspaper and magazine distribution in the UK to assess whether it should refer the market to the Competition Commission for a market investigation reference (this function also now lies with the CMA). In 2008, the OFT published an Opinion giving guidance as to how participants in the newspaper and magazine distribution sector should self-assess the provisions of their agreements, and related practices, for compliance with competition law. In 2009, the OFT concluded its market investigation with a "no reference decision", meaning that the market would not be referred for an in-depth review by the Competition Commission.

The OFT's 2009 decision on the market investigation reference noted concerns over features of the market, including: (i) the use of contractual provisions providing for absolute territorial protection ("ATP") in agreements between publishers and distributors, and wholesalers; (ii) copy allocation, being the degree of control exercised by newspaper and magazine publishers over the allocation of titles and copy numbers to retailers; and (iii) the printing of retail prices on the cover of publications. The OFT found that each of these features might have the effect of preventing, restricting or distorting competition in the market. Provisions for ATP might remove the potential for competition to emerge between wholesalers; copy allocation in

105

magazines might reduce scope for competition between retailers on the basis of the range of titles offered; and the printing of cover prices could both reduce the ability of retailers to price independently and control their margins, and reduce incentives to engage in non-price competition. In addition, the OFT found that there was a relatively high degree of publisher control over magazine distribution, and that this could affect the ability of retailers to influence the range of magazines they offered and their ability to promote particular titles, offer different types of discount and improve the availability of titles. However, despite these concerns, the OFT exercised its discretion not to refer the market for investigation by the Competition Commission, as: (i) ATP provisions had substantially been removed from magazine distribution agreements, following a process of self-assessment by publishers, and “...where ATP is retained in respect of newspaper and magazine distribution agreements, then provided there has been a correct self-assessment by parties, ATP will provide offsetting customer benefits that exceed the likely detriment...”; (ii) for cover price maintenance, a reference would not be proportionate as the offsetting customer benefits also exceeded the likely detriment, being likely to lead to lower prices than if prices were set by retailers; and (iii) changes were taking place in the market as a result of the self-assessment of competition compliance being undertaken in the industry and consequential changes to practices. The market was thus in a state of flux, which meant that it would not be feasible for the Competition Commission to gather the requisite evidence to allow it properly to assess the market at that time. The OFT’s 2009 decision places responsibility on parties to self-assess their own agreements for compliance with competition law.

The 2009 decision also stated that the OFT would consider whether to update its review and, in March 2012 the OFT announced that it would not carry out such an update review, based on a prioritisation assessment. A prioritisation assessment is based on the OFT’s Prioritisation Principles, a set of principles concerning the work to be taken on by the OFT and which were intended to ensure that the OFT’s work reflected the best use of its resources in terms of outcomes for consumers. Factors that the OFT referred to in announcing its decision not to update its review were (i) improvements in in-store availability in newspapers and magazines; (ii) real-terms declines in newspaper and magazine prices since the 2009 decision; and (iii) the fact that there had been “...further steps towards self-regulation, including the establishment of the Press Distribution Charter, which includes minimum wholesaler service level standards for retailers.” The Press Distribution Charter remains in force, and the Connect Group’s News Business has signed up to the Charter via Smiths News’ membership of the Press Distribution Forum.

7.3 Media

The Media Business is a distributor of newspapers, magazines and digital publications to airlines and international rail operators. The Media Business is supported by the News Business’ resources and operations. It receives newspapers and magazines in bulk from publishers and distributors on a daily basis and distributes them to business customers via distribution hubs located around the world and carefully selected third party resources.

In addition, the Media Business provides inflight entertainment applications and other digital content solutions to airlines. Its key airline customers include British Airways, Cathay Pacific, Delta and United Airlines. Businesses in the Media Division include:

Bluebox Avionics: a leader in digital content solutions, utilising the latest consumer technology to deliver low cost, high value inflight entertainment applications for multiple platforms;
DMD Phantom: which manages a full range of premium on-board content and production services to airlines and travel operators around the world, delivering value, creativity and innovation. Its content services include sourcing and compiling television and audio content in all genres and major languages as well as offering a full multimedia production service creating

106

bespoke inflight entertainment and communication content, including film and video production, for airline clients;

Digiredoo Digital Reader: which enhances the travel media proposition digitally, through its online offering of an internet portal with integrated reader, delivering digital media (including newspaper applications) to laptops, tablets and smartphones, through its inseat offering of fitted inflight entertainment and communications systems and through its on board offering of premium press content for wireless delivery onboard aircraft and trains.

In the year ended 31 August 2014, the Media Business generated approximately £11.2 million of revenue from its UK operations and £13.9 million from its international operations. In the year ended 31 August 2014, the Media Business generated approximately 1 per cent. of the Connect Groups revenue and 4 per cent. of the Connect Group's underlying operating profit.

7.4 Books

The Books Division is a book wholesaler to independent, online and multiple retailers. Its principal business activities are book wholesale and distribution and library services. The Books Division supplies books to independent and multiple booksellers and to leading internet retailers for whom it provides a bespoke service of branding, packaging and posting direct to customers. The Books Division's library services business supplies books to significant regional library services and purchasing consortia, typically under four year agreements. The division dispatches approximately 20 million books annually.

The Books Division is managed under four channels:

Bertrams Books: supplies UK and export consumer books, wholesaling to independent and multiple booksellers and to leading internet retailers for whom it provides a bespoke service of branding, packaging and posting direct to customers;
Dawson Books and Library Services: supplies books to significant regional library services and purchasing consortia, typically under four year agreements and to academic institutions across the UK and internationally, including through its recent acquired Erasmus and Household International businesses;
Digital: supplies of academic and professional eBooks through its Dawsonera business which has over 330,000 eBook titles on its platforms; and
Direct to Consumer: in 2012, the Connect Group launched Worderly joint-venture, a direct-to-consumer online bookshop and a third-party seller on websites like Amazon and eBay. The company has already sold three million books and its customer base is growing by the day.

In the year ended 31 August 2014, the Books Division generated approximately 50 per cent. of revenue from Bertrams Books, 35 per cent. from Dawson Books and Library Services, 4 per cent. from Digital and 11 per cent. Direct to Consumer. In the year ended 31 August 2014, the Books Division generated approximately 11 per cent. of the Connect Group's revenue and 4 per cent. of the Group's underlying operating profit.

7.5 Education & Care

The Education & Care Division is a specialist distributor of consumable products to the educational market and the care market. It supplies consumables such as stationery, art and craft, janitorial and curriculum products principally to the education market. The Education & Care Division has a product range of over 40,000 products, accessible through both a catalogue and website offering. The division produces approximately 30,000 catalogues annually.

107

The Education and Care Division trades under three main channels:

Education: through its The Consortium and West Mercia Supplies business, supplying schools and colleges throughout the UK and internationally with the products that are essential to their daily operational needs, supporting them in the delivery of their curricular activities and care of their pupils;
Early years: supporting nurseries with an extensive range of specialist and engaging early years products and equipment available online store as well as through more traditional channels; and
Care: with an extensive range of products to support care homes covering everything from hygiene to specialist dementia activities.

In the year ended 31 August 2014, the Education & Care Division generated approximately 76 per cent. of revenue from education, 8 per cent. from early years, 7 per cent. from care and 9 per cent. from other sales. In the year ended 31 August 2014, the Education & Care Division generated approximately 4 per cent. of the Groups revenue and 14 per cent. of the Connect Group's underlying operating profit.

8. PROPERTY, PLANT AND EQUIPMENT

The Connect Group's News Business operates a national network of 43 distribution centres situated across two regions – North and South. The distribution model is a hub and spoke model and consists of 13 hub locations packaging newspapers and magazines and a further 30 newspaper distribution centres ("NDCs"). These regions and hubs have been created in order to optimise service levels and operating processes, maximise cost savings and to ensure operational best practice within the regions, and to bring together regional expertise.

The Media Business is based at the Connect Group's London Travel Distribution Centre near Heathrow Airport (approximately 21,000 sq. ft.).

The Books Division operates from its Norwich distribution hub with approximately 225,000 sq. ft. with two mezzanine floors.

The Education & Care Division operates three distribution centres, two in Trowbridge, Wiltshire totalling approximately 196,000 sq. ft. and one in Shrewsbury, West Midlands of approximately 71,000 sq. ft.

The Connect Group's ten largest distribution centres by square footage are listed below.

Site	Division	Freehold/Leasehold	Sq. ft.
Norwich Warehouse	Books Division	Leasehold	225,039
Trowbridge Avon Way	Education & Care Division	Leasehold	103,274
Trowbridge Hammond Way	Education & Care Division	Freehold	92,797
Shrewsbury	Education & Care Division	Freehold	71,386
Stockport	News Business	Leasehold	57,453
Birmingham	News Business	Leasehold	54,720
Newport	News Business	Leasehold	52,750
Nottingham	News Business	Leasehold	47,781
Borehamwood	News Business	Leasehold	46,199
Wednesbury	News Business	Leasehold	40,159

The Connect Group had total contingent lease liabilities of £55 million as at 28 February 2006, which has reduced over time to £6.3 million as at 31 August 2014, in respect of previous assignments of leases used by various businesses of the WH Smith PLC group of companies whereby the lease liability would revert to the Connect Group if the assignee defaulted. Pursuant to the terms of the Demerger Agreement, any such contingent liability which becomes an actual liability will be apportioned between the Connect Group and

108

WH Smith PLC in the ratio 35:65 (provided that the actual liability of the Connect Group cannot exceed £5 million in any 12 month period).

The Connect Group owns or leases over 366 vehicles, comprising 277 cars, 72 light commercial vehicles and 17 commercial vehicles.

9. ENVIRONMENT

The Connect Group continues to make good progress in reducing its environmental impact. In August 2014 the Connect Group was recertified by the Carbon Trust, recording an absolute reduction of 13.4 per cent. in carbon emissions over the compliance period as a result of a programme to control and monitor fuel and utilities, continual re-evaluation of operational practices, improved recycling and the introduction of additional energy saving measures. The Connect Group is committed to finding further sustainable reductions in our environmental footprint. For the period 1 March 2013 to 28 February 2014, the Connect Group's total carbon emissions were 25,120 tCO2e.

10. EMPLOYEES

As at 31 August 2014, the Connect Group had more than 4,100 employees made up of 3,092 employees in the News & Media Division, 573 employees in the Books Division and 438 employees in the Education & Care Division:

Year-ending	News Business	Media Business	Employees
			Books Division	Education & Care Division	Total
31 August 2010	4,900	-	400	-	4,900
31 August 2011	4,200	-	400	-	4,600
31 August 2012	3,900	200	600	340	5,040
31 August 2013	3,350	100	700	410	4,560
31 August 2014	2,989	103	573	438	4,103

In addition to full-time and part-time employees, the Connect Group also makes use of subcontractors, and for the year ended 31 August 2014, subcontractor costs comprised 3.3 per cent. of the Connect Group's total revenue.

11. MARKETS

The Connect Group operates in large and specialist markets which the Directors believe are resilient and which require on-going investment in systems and infrastructure. In the Connect Group's largest market, newspapers and magazines, the business model is further underpinned by long-term contracts. Since the Demerger, the Connect Group has diversified into new products, sectors and geographies, and now operates in a variety of markets with long-term growth fundamentals, providing opportunities to increase revenue and market share.

11.1 News Distribution

The News Business distributes newspapers and magazines on behalf of the majority of the major national publishers as well as a large number of regional publishers. It supplies 30,000 customers including large multiple retailers and independent newsagents anywhere in England and Wales within 90 minutes from its 48 distribution centres, with approximately 40 million newspapers supplied weekly 364 days per year. The newspaper and magazine market is large and mature. Sales have been in gradual decline for many years, with an anticipated decline of between three and five per cent. per year forecast. This market remains challenged by growth of online media and a number of titles cease publication each year. Price increases, new launches and new retailer promotions help to offset volume reductions in established newspaper titles. These trends have continued in recent years with newspaper sales performing more strongly than magazines helped by price increases. The magazines market is challenging, negatively impacted by title closures and price discounting. The Smiths News proportion of the market, representing 55 per cent. of the whole market, showed underlying sales of

newspapers down 0.7 per cent. on a like-for-like basis and magazines down 6.4 per cent. on a like-for-like basis in 2014.

11.2 Media

Dawson Media Direct is a specialist international media distributor supplying newspapers, magazines and inflight entertainment technology and content to airline and rail customers. The market for inflight print media is broadly stable. The majority of customers are served by long term contracts and the sector as a whole shows less volatility to unit price and promotions. The inflight digital media sector is a fast changing market, however Dawson Media Direct has seen increased interest and demand for new digital solutions, with Dawson Media Direct launching Digireedoo, a digital publication sourcing and supply solution for travelling customers, in 2013. Through its joint venture business, Bluebox Avionics, Dawson Media Direct also now supplies over 13,000 iPads to 17 airlines, supplementing these with media content wherever possible. Revenue for the twelve-month period ended 31 August 2014 was £25.1 million, down 3.3 per cent. on the previous year.

11.3 Books

The consumer books market is in a period of transition, affected by the emergence of eBooks and a shift from high street to internet retailers. This shift towards digital has affected the operating model of publishers as well as traditional retailers, with independent booksellers, in particular, struggling in the face of increased competition, albeit this is largely as a result of physical books being sold online which has had a larger impact than physical sales migrating to digital sales. As of October 2014, approximately 1,000 established independent book retailers remain across the UK. In addition, supermarkets and high street chain retailers have become increasingly active in this market. The academic and public library sectors have also been affected by changes to Government funding, further increasing the pressure on sales and margins. The total consumer market for books in the UK fell by 2.8 per cent. in the year ending 31 August 2014. The Books Division performed broadly in line with like-for-like sales decreasing by 2.5 per cent., although our total sales increased by 3.1 per cent. in the year ended 31 August 2014. In the year ended 31 August 2013, the Connect Group launched Wordery which sells books online directly to consumers which had sales in the year ending 31 August 2014 of £24.7 million, up 50.9 per cent. on last year on a like-for-like basis.

11.4 Education & Care

The Education & Care Division operates in markets which are large and growing with compelling fundamentals with population growth driving growing numbers of school places, nurseries and care homes. The Education & Care Division has an approximate 5 per cent. market share in the £1 billion education market with opportunity to grow through share of spend and increased geographical reach. The market is also highly fragmented, one fifth of which is supplied by the public sector and over 250 private sector businesses.

The Education & Care markets continue to show strong fundamentals for growth, supported by demographic trends that predict a steady increase in schools, nurseries and care homes. Education sales increased 4.8 per cent. on a like-for-like basis. In the short term, the market for education consumables has been affected by reductions to public spending and there has been some disruption resulting from the move of many schools to 'academy' status. Early years sales increased 13.8 per cent. in the year ended 31 August 2014. The early years sector is well suited to the Education & Care Division's "one stop" and customer focused offering. The Education & Care Division made contract gains with a number of large customers in the year ended 31 August 2014 including a greater mix of 'group nurseries' compared to the smaller independent providers.

12. DIVIDEND POLICY

The Company may by ordinary resolution from time to time declare dividends not exceeding the amount recommended by the Board. Subject to the Companies Act, the Company may pay interim dividends, and also any fixed rate dividend, whenever the financial position of the Company, in the opinion of the Board, justifies its payment.

110

The Connect Group has a progressive dividend policy, expecting to grow future dividends as the Connect Group achieves future profit growth.

For the year ended 31 August 2014, the Board has proposed an increased final dividend of 6.6 pence per share (2013: 6.3 pence per share) representing a fifth successive year of increase. This proposed final dividend will be adjusted to reflect the impact of the Rights Issue in connection with the Acquisition. The proposed final dividend will be adjusted to 6.0 pence per Ordinary Share to reflect the bonus element associated with the Rights Issue and both Existing Ordinary Shares and New Ordinary Shares will be entitled to receive this dividend. The proposed final adjusted dividend of 6.0 pence per Ordinary Share is subject to approval by Shareholders at the Annual General Meeting on 4 February 2015 and, if approved, will be paid on 6 February 2015 to Shareholders on the register of members of at close of business on 9 January 2015.

The New Ordinary Shares issued pursuant to the Rights Issue will rank pari passu in all respects with the Existing Ordinary Shares and rank in full for all other dividends and other distributions declared in respect of the ordinary share capital of the Company.

111

PART XII

INFORMATION ON THE TUFFNELLS GROUP

INTRODUCTION

Tuffnells is a leading provider of next day business-to-business delivery of mixed freight/parcel consignments, specialising in IDW items. Tuffnells offers distribution coverage throughout the UK through an extensive network of 34 depots and operates a largely depot-to-depot operational model, providing expedited services to a diverse customer base. As a specialist IDW freight handler, Tuffnells differentiates itself through its ability to sort mixed freight such as data bags, parcels and pallets within one organisation, then deliver this freight in one delivery whilst providing a next day delivery service.

The business, which is headquartered in Sheffield, UK, operates from 34 locations across the United Kingdom with over 2,000 employees and utilising a fleet of over 930 vehicles and 866 trailers and containers. In the twelve months ended 31 May 2014, the business handled in excess of 10.2 million consignments serving over 4,200 customers. Tuffnells’ revenue for the year ended 31 December 2013 was £127.8 million, with a three-year CAGR of 7.6 per cent. Profit for the year ended 31 December 2013 was £6.6 million, up 18.3 per cent. on the prior year. Adjusted EBITDA for the year ended 31 December 2013 was £15.2 million, with a three-year CAGR of 9.8 per cent.

HISTORY AND DEVELOPMENT

Established in 1914, Tuffnells is one of the longest established express parcels carriers in the UK.

In 2005, a management buy-out backed by Bank of Scotland Integrated Finance (part of what was formerly the HBOS group) and an existing management team led by Lloyd Dunn purchased the entire issued share capital of the then Tuffnells group of companies.

In 2010, following the purchase of HBOS by Lloyds Banking Group during the 2008 financial crisis, Lloyds transferred its interest in Bank of Scotland Integrated Finance (and as a result its indirect interest in Tuffnells) to a new business called Cavendish Square Partners and then sold a seventy per cent. stake in Cavendish Square Partners to Coller Capital.

Since the management buy-out in 2005, the business has pursued a strategy of investing in its depot network and workforce. It opened nine new depots in the period 2011 to date, expanding its network to 34 depots across the UK, and plans to expand to 40 depots in the next three years. Tuffnells has also invested in a number of technological advancements in parcel tracking such as electronic proof of delivery and depot track and trace in order to improve efficiencies and customer service levels.

STRATEGY

Tuffnells specialises in the express delivery of IDW items, being items of irregular dimension and weight. Tuffnells specialises in business-to-business deliveries, allowing it to develop its business model around business-critical deliveries and cost-effective operational procedures.

Tuffnells operates a largely direct trunking operational model (whereby 65 per cent. of consignments are delivered direct from collection depot to delivery depot, some using cross-docking) which differs from the industry standard hub and spoke model (whereby following collection items are then taken to a central depot for sorting and dispatch). This direct trunking model has the advantage of being able to efficiently handle out of gauge items which are not easily processed through automated hubs. The dynamic and adaptable nature of the model means that the network has more flexibility to respond to changes in demand than the hub and spoke model. The commercial model is underpinned by a rate card process and disciplined quoting system, which has produced consistent operating margins.

112

KEY STRENGTHS

The Directors believe that the key strengths of Tuffnells are as follows.

4.1 A bespoke offering amongst delivery providers—the only dedicated B2B delivery provider in the UK specialising in IDW

Tuffnells is differentiated from other delivery providers in the UK in that it specialises in the IDW segment of the market. IDW freight handlers such as Tuffnells are able to handle all types of freight including data bags, parcels and pallets in one collection, and are able to sort the above freight in one organisation whilst being able to achieve next day service. Most other delivery services in the UK with a focus on business-to-customer (B2C) delivery rather than business-to-business (B2B) delivery, either do not take IDW consignments or only occasionally deal with IDW items because their operational systems lack the capability and flexibility to deal with IDW items in any significant volume. As a result, Tuffnells’ customers include other third party logistics providers, parcel carriers and freight forwarders who are unwilling or unable to make the necessary investment required to develop an operational network that can handle IDW freight profitably in the UK and Connect expects Tuffnells to benefit from this trend towards outsourcing by other delivery companies.

4.2 Developed infrastructure provides scale and operational efficiency – extensive network of depots and decentralised business model enable next day national coverage

Tuffnells’ nationwide network of 34 depots enables it to provide next day delivery to all parts of the UK. The depots are concentrated in the south of England which also offers easy access to European markets, however, the depot network extends into the midlands, north-east and north-west, as well as Scotland. In addition, one of Tuffnells’ strengths is its decentralised business model, which emphasises the importance of strong, locally-based, entrepreneurial management teams in each of the regions of the UK in which Tuffnells operates. The Connect Board believes that Tuffnells’ existing network of depots combined with Connect’s network of UK depots provides opportunities for organic growth of the existing Connect and Tuffnells businesses following Completion.

4.3 A business with a strong track record – well positioned for further growth, and able to build upon its leading position in a market with sustainable growth characteristics

Tuffnells operates in a large and sustainable growing market. The Directors estimate that the segment of the core addressable market in which Tuffnells currently operates was worth approximately £740 million in 2013 and is forecast to grow at between 3-4 per cent. per annum driven by growth in its core customer verticals sectors with complex distribution requirements across a range of industries, being bulky furnishings and textiles, building, metals and engineering, and automotive parts, and a more positive outlook for SMEs in these sectors. Tuffnells’ growth in recent years has outperformed the market averaging 6.8 per cent. over the last 8 years. Tuffnells holds a leading market position in the IDW segment of the parcel delivery industry, which is a growing niche sector, with approximately 10.2 million consignments being delivered per annum.

4.4 A strong management team – Tuffnells’ senior management have over 100 years of experience in the distribution industry

Tuffnells has an experienced and proven management team.

Lloyd Dunn – Managing Director

Having joined Tuffnells in 2002, Lloyd led a management buy-out in 2005 and has been the Managing Director since then
Lloyd has spent his whole career in the parcel industry, gaining extensive and in-depth experience. He previously worked at Nightfreight since its foundation in 1985 and was part of the team that later took Nightfreight public

113

Lloyd oversees all aspects of the business, liaising with his management team who ensure that the business runs profitably. In particular he has experience in assisting the sales team to expand their client base
Lloyd has agreed to join the Connect Group Executive Committee for a period of at least one year following Completion

Ian Brewer – Finance Director

Ian joined Tuffnells as Financial Controller in June 1997, and was promoted to Finance Director in 2007
Ian was instrumental in developing the forecasts that facilitated the 2005 management buy-out, and in guiding the company through the Due Diligence process. In 2007 he facilitated an equity release to shareholders
Ian has overall responsibility for the financial aspects of the business
Ian graduated from the University of East Anglia with a BA (Hons) in Economics in 1987 and qualified as a Chartered Accountant in 1991

Robin Batchford – Systems Director

Robin joined Tuffnells in October 2004 and is an experienced management professional with a broad skill set covering commercial and technology strategic planning, project design, and risk analysis
Robin began his career at Lombard Tricity in 1985 and has since worked at Mansfield Brewery, Experian, DRS plc, Biron and Pall-Ex where he was IT Director before joining Tuffnells
Robin manages the IT department as well as the development and delivery of IT strategy and the management of technology capital and revenue budgets aligned to strategy. He also oversees the management of all technology suppliers and contracts
Robin completed a Business Studies Foundation at Nottingham Trent University, graduating in 1992. He qualified as a Chartered Engineer (CEng) in 2002 and became a Chartered IT Professional (CITP) in 2004. He gained his MBA from Loughborough University Business School in 2005

Graham Hollingdrake – Operations Director

Graham joined Tuffnells in 1989 as General Manager of the Carnforth Depot. He held a number of Regional Director positions before being appointed Operations Director in 2009
Graham has 37 years' experience in the parcels industry. Prior to joining Tuffnells, Graham worked at Ripponden & District Motors Ltd from 1976 to 1989, becoming Company Sales Manager in 1987
Graham is responsible for setting and monitoring the company's KPIs, negotiating and purchasing equipment and services, as well as setting operational objectives, cost objectives and profit targets
Graham has an extensive range of certificates covering Management Techniques, Essential Sales Techniques, Man Management and Negotiation Skills and Professional Competence

Chris Tresadern – Sales & Commercial Director

Chris joined Tuffnells in 2002 as Regional Director for the South East of England. Prior to joining Tuffnells Chris held various key positions in both sales and operational management at

114

Regional General Management levels and has 27 years' experience within the distribution and parcel sectors

Chris played a key role in the integration of the Insurance Courier Services business with Hayes DX in 1996 during and after the sale and purchase
Chris is responsible for all the company's sales and commercial activities, including setting and monitoring company KPIs, setting sales targets and incentives and has overall responsibility for Customer Services. Chris also heads up the Tuffnells International division
Chris has an extensive range of certificates for his successful participation on various professional management courses, including the Dale Carnegie leadership course, TMI Presentation skills course and the Institute of Directors Negotiation Skills course.

4.5 Diverse customer base which means Tuffnells is not reliant on one or two key customers

Tuffnells serves a wide range of customers ranging from multi-national corporations to small and medium-sized enterprises. As such the business is not reliant on one or two customers. In the year ended 31 December 2013, Tuffnells served over 4,000 customers. Tuffnells' top 50 customers by revenue accounted for 18.4 per cent. of its 2013 revenue with the top 100 representing only 27.2 per cent. The Connect Board believe that this large and diverse customer base means that Tuffnells is less susceptible to market conditions and credit risk. In addition, Tuffnells' customers come from a variety of industries and include other delivery companies who are unable or unwilling to transport IDW consignments.

5. FINANCIAL PERFORMANCE

The Tuffnells Group's total revenues for the year ended 31 December 2013 was £127.8 million, with a three year CAGR of 7.6 per cent. Adjusted EBITDA for the year ended 31 December 2013 was £15.2 million, with a three year CAGR of 9.8 per cent.

	Year ended 31 December			Six months ended 30 June
	2013	2012	2011	2014	2013*
	(£'000)
Revenue	127,801	114,647	109,286	69,174	61,613
Operating Profit	11,022	10,492	9,196	6,016	5,112
Profit before Tax	8,582	7,445	5,520	4,875	3,844
Profit for the Year/Period	6,563	5,551	3,944	3,804	3,073
Adjusted EBITDA	15,247	13,015	11,400	7,401	6,405

unaudited.

As at 31 August 2014 the business had generated last twelve month sales of £138.5 million (unaudited) producing an Adjusted EBITDA of £16.0 million (unaudited).

6. ORGANISATIONAL STRUCTURE

Tuffnells' headquarters are in Sheffield, UK. Its group-level management functions are spread across four core competence areas: Operations, Sales, Finance and Systems. One of Tuffnells' strengths is its decentralised business model, which emphasises the importance of strong, locally-based, entrepreneurial management teams in each of the regions of the UK in which Tuffnells operates.

Tuffnells' operations are divided into six regions of the UK. Each of these regions has a dedicated regional director who reports to the Operations Director. Dedicated regional sales directors, regional operations and

regional sales managers report to the UK Sales Director. Tuffnells employs around 45 sales staff in total across the business.

Tuffnells incentivises staff on a depot basis with incentives based on outperforming profit and sales targets, as well as rewards for operational excellence.

7. DESCRIPTION OF TUFFNELLS' BUSINESS

Tuffnells' business is primarily focused on the express B2B delivery of items of IDW. In addition, a small part of Tuffnells' business (10 per cent. of revenue for the year ended 31 December 2013) involves a B2C delivery service.

7.1 Services

Tuffnells provides a full range of delivery services primarily across the UK, but also in Europe and worldwide.

7.1.1 UK services

Tuffnells' UK delivery service comprised 99 per cent. of total revenue in the six months ended 30 June 2014. Tuffnells' UK services include guaranteed next day delivery, Saturday delivery, economy delivery (delivery within 72 hours), offshore delivery (which includes delivery to the Isle of Wight, Isle of Man, Scilly Isles, Channel Islands and Scottish islands). In addition, Tuffnells provides specialist collection and delivery services for customers in the form of FastBak and Fast4ward. FastBak involves the collection of goods from a UK location on behalf of, and then delivery to, the customer whilst Fast4ward involves collection of goods from a UK location and then delivery to a third party.

7.1.2 European services

Tuffnells' European delivery service comprised less than 1 per cent. of total revenue in the six months ended 30 June 2014. Tuffnells' European services include Euro Parcel Express and Euro Freight Express.

7.1.3 Worldwide services

Tuffnells' worldwide delivery service comprised less than 1 per cent. of total revenue in the six months ended 30 June 2014. Tuffnells' worldwide services include Worldwide Air Express, an international service by air and Worldwide Logistics being air, road or ocean logistics services.

7.2 Manner of delivery

There are four key elements to the way Tuffnells delivers its services: order generation, collection and trunking, delivery and cash collection.

7.2.1 Order generation

Each region has a sales manager tasked with developing new customer leads and maintaining contact with existing customers to reduce lost business.

Customers are given access to Tuffnells' customer ordering system and 98.5 per cent. of all orders are input by the customer. Management incentivise staff to ensure customer recorded entries are accurate.

7.2.2 Collection and Trunking

Tuffnells collects packages directly from the customer after the order is placed. Typically collection drivers will have specific postcodes which they are responsible for and will then deliver the item to the local depot. On collection from the customer the package is scanned before being loaded into the van.

116

In the local depot all packages are scanned to acknowledge receipt. They are then manually sorted before being loaded onto the relevant trunk going to another depot or cross deck. There are four cross deck centres being Haydock, Northampton, Coventry and Bristol where the packages to certain depots are consolidated. Trunking happens overnight and is typically revised when new depots are opened.

7.2.3 Delivery

Once received into the delivery depot the item is manually sorted before being scanned onto the relevant delivery vehicle. If certain items are required to be delivered before certain times they are prioritised in the depots and on the delivery route. The consignments are delivered directly to the delivery address by Tuffnells or by a subcontractor. On delivery the consignment is signed for and tracked in Tuffnells' customer interfacing system to allow the customer to check the package has been delivered.

7.2.4 Cash collection

Credit control is monitored centrally and has the responsibility to establish that the trading terms proposed are satisfactory.

8. PROPERTY, PLANT AND EQUIPMENT

In addition to its head office in Sheffield, Tuffnells' properties are comprised mainly of its depots. Tuffnells has 34 depots of which 21 are leasehold and the remainder freehold.

As at 30 June 2014, the book value of freehold land and buildings on The Big Green Parcel Company's balance sheet was £15.0 million.

Tuffnells has over 930 vehicles held on five year leases (of which the average age is approximately two years) to ensure that the fleet is modern and operates efficiently. In addition, Tuffnells utilises approximately 250 subcontractor delivery vehicles as well as hiring vehicles on daily spot hire rates from time to time.

9. MANAGEMENT AND EMPLOYEES

Tuffnells benefits from a senior management team with many years of experience in the distribution industry. In particular, Lloyd Dunn has over 40 years of experience in the distribution industry including almost 10 years as the managing director of Tuffnells.

As at 31 December 2013, Tuffnells had more than 2,000 employees.

In addition to full-time and part-time employees, Tuffnells also makes use of subcontractors. For the financial year ended 31 December 2013, subcontractor costs comprised 16.1 per cent. of Tuffnells' total revenue.

Depending on the depot size, total staff at each depot are usually in the range of between 65 and 130 comprising drivers, porters and salaried staff such as management and sales executives.

10. MARKETS

Tuffnells operates in a large and sustainable growing market. The Directors estimate that the segment of the core addressable market in which Tuffnells currently operates is worth approximately £740 million in 2013, forecast to grow at between 3-4 per cent. per annum driven by growth in its core customer verticals sectors, being bulky furnishings and textiles, building, metals and engineering, and automotive parts, and a more positive outlook for SMEs in these sectors. Tuffnells holds a leading market position in the IDW segment of the parcel delivery industry, which is a growing niche sector, with approximately 10.2 million consignments being delivered per annum.

Whilst the market for delivery services is highly fragmented with a large number of smaller operators, within the IDW segment there are generally only a few providers that have sufficient resources and coverage to

117

provide a next day service. In general, Tuffnells' main competitors in the IDW segment are national or regional service providers such as DX Group, XDP and Aspray24.

11. CUSTOMERS

Tuffnells has a large and well diversified customer base (with over 4,000 customers) operating across a wide range of industries. Tuffnells' customers range in size from large, multi-national customers to smaller customers.

In the year ended 31 December 2013, Tuffnells' top 50 customers accounted for 18.4 per cent. of total revenue. This diversified customer base means that Tuffnells is not reliant on one or two key customers. The table below sets out the turnover size band for Tuffnells' top 50 customers:

Turnover size band	Percentage of top 50 customers
Under £5 million	0 per cent.
£5 million to £20 million	42 per cent.
£20 million to £35 million	19 per cent.
£35 million to £50 million	10 per cent.
£50 million to £65 million	10 per cent.
£65 million to £80 million	6 per cent.
Over £80 million	13 per cent.

Tuffnells' customers operate in a number of industries, and the sector accounting for the largest amount of Tuffnells' total revenue represents only 19 per cent. of total revenues in the years ended 31 December 2013. Such customer base diversity ensures that Tuffnells' business is not dependent on any particular industry segment. The Directors believe that this diverse customer base limits financial and credit risk, and reduces Tuffnells' exposure to any inability to pay on the part of its customers.

118

PART XIII

OPERATING AND FINANCIAL REVIEW OF CONNECT

The following is a discussion of Connect's financial condition and results of operations as at and for the years ended 31 August 2014, 2013 and 2012. This discussion should be read in conjunction with Part XV (Historical Financial Information Relating to Connect) of this document and the audited consolidated financial statements and related notes thereto included or incorporated by reference elsewhere in this document.

The financial information as at and for each of the three years ended 31 August 2014, 2013 and 2012 has been prepared in accordance with IFRS.

This discussion contains forward-looking statements that involve risks and uncertainties. For additional information regarding these risks and uncertainties, please refer to the section headed "Forward-looking statements" in Part III (Important Information) of this document. Investors should also read Part II (Risk Factors) of this document for a discussion of certain factors that may affect Connect's business, financial condition and results of operations.

OVERVIEW

Connect is a leading specialist distributor operating in large and diverse markets. In April 2014, the Company renamed and rebranded as Connect Group PLC to reflect the Group's progress and diversification since its Demerger from WH Smith PLC and its strategy for the future.

The Connect Group has three separate divisions, connecting suppliers to customers in an efficient, knowledgeable and service oriented way:

Connect News & Media: Encompassing: Smiths News, the UK's largest newspaper and magazine wholesaling business with an approximate 55 per cent. market share. It distributes newspapers and magazines on behalf of the majority of the major national publishers as well as a large number of regional publishers. Smiths News serves approximately 30,000 customers across England and Wales, supplying large general retailers as well as smaller independent newsagents; and Dawson Media Direct, an international media direct business supplying newspapers, magazines and inflight entertainment technology and content to over 80 airlines in 50 countries. In October 2014, the Connect Group announced the launch of Pass my Parcel, a new wholly-owned 'click and collect' delivery service to be operated by the News Business with Amazon as its first client;
Connect Books: Combining a number of recognised brands in print and digital bookselling, including Bertrams, Dawson Books and Wordery. A leading distributor of physical and digital books, the division serves over 8,200 customers in approximately 100 countries, with over 156,000 in stock titles and access to over a further seven million consumer and 20 million academic titles; and
Connect Education & Care: A leading independent supplier of consumable products through The Consortium and West Mercia Supplies with an approximate 5 per cent. market share. The division serves over 30,000 customers with an extensive range of over 40,000 products across a branded, own brand and value range, including stationery, arts and craft and cleaning.

The Connect Group's strategic ambition is to achieve 50 per cent. of its profits from activities outside of newspaper and magazine wholesaling by 2016.

SIGNIFICANT FACTORS AFFECTING RESULTS OF OPERATIONS

The Directors believe that the following factors have had, and may continue to have, a material effect on Connect's results of operations across the three divisions.

120

2.1 Connect News & Media

Decline in newspaper and magazine sales

The long-term decline in sales of newspapers and magazines has had a direct impact on revenue for the News and Media division during the periods under review, despite partially offsetting factors of cover price inflation, retailer promotions and one-off sales increases related to specific events such as the World Cup and the Olympics. Revenue for the News and Media division constitutes the largest component of the Connect Group’s revenue and amounted to 85.7 per cent., 86.1 per cent. and 88.9 per cent. of revenue for the years ended 31 August 2014, 2013 and 2012, respectively. Sales volumes for both newspapers and magazines declined throughout the periods under review, with magazine sales volumes declining at a greater rate, which resulted in decreased revenue for the News & Media division.

Cost savings

The News business within the News & Media division has been able to increase its underlying operating profit during the periods under review despite the sales reductions noted above, with underlying operating profit of £42.9 million, £40.0 million and £39.0 million for the years ended 31 August 2014, 2013 and 2012, respectively. The increase in operating profit was primarily due to the continued focus and delivery by the business on operating efficiencies and reducing the number of depots. As a result, profit for the year ended 31 August 2014 for the News business benefitted from £6 million of sustainable cost savings compared to the prior year, with the year ended 31 August 2013 also benefitting from £8.7 million of cost savings compared to the prior year. The cost savings achieved related to network and fleet reduction efficiencies, consolidation of newspaper and magazine pack activities and a reduction in the level of overtime relating to newspaper and magazine returns. The business incurs approximately £3 million per annum of non-recurring and other restructuring and integration costs to enable it to achieve sustainable costs savings from depot rationalisation and network reorganisation costs.

2.2 Connect Books

Trading conditions in the book retailing market

During the periods under review, there have been a number of changes and challenges experienced in the book retailing market, which have resulted in declining profitability for the Books division. The market has experienced a continued move away from sales of books in high street shops to sales of books over the internet, as well as the on-going growth in sales of e-books. These difficult market conditions and changes in book purchasing channels contributed to the decline in underlying operating profit for the Books division to £2.5 million for the year ended 31 August 2014 compared to £7.2 million for the year ended 31 August 2013 and £6.8 million for the year ended 31 August 2012. Revenue has also declined as a result of challenges in the markets for UK library and academic books, although this decline has been partially offset by revenue increases for the direct to consumer Wordery business.

Impact of acquisitions

During the periods under review, the results of operations for the Books division have been impacted by a number of bolt-on acquisitions. In June 2012, Connect acquired the share capital of Houtschild Boekhandel BV and in June 2013, Connect acquired the share capital of Erasmus Antiquariaat en Boekhandel BV. The revenue from these acquired businesses partially accounted for the 3 per cent. increase in revenue for the year ended 31 August 2014 compared to 2013 and the 7 per cent. increase in revenue for the year ended 31 August 2013 compared to 2012.

2.3 Connect Education & Care

The market for education consumables

The market for consumable products in the education sector has continued to grow as a result of both population dynamics and the commitment of Government policy. As a result, revenue for the Education & Care business increased slightly, by 1.7 per cent., for the year ended 31 August 2014

compared to 2013, which was its first full year of operation within the Connect Group. The Education & Care division has nevertheless been impacted by greater competition over recent years, with increased activity from both independent operators and the Public Sector Buying Organisations.

Seasonality

The results of operations for the Education & Care division are subject to seasonal fluctuations across the year. Sales across the education consumables market are generally highest during the two months of July and September, when teachers and schools are preparing for the upcoming academic year just before the summer holidays or purchasing consumables at the beginning of a new academic year. Sales tend to be lower for the months of August and December, during the school holidays. As a result of these seasonal fluctuations, comparisons of Connect's operating results over any interim periods may not be meaningful and such comparisons may not be an accurate indicator of the Connect Group's future performance for any annual period.

Integration of West Mercia Supplies

The Connect Group acquired the Education & Care division in April 2012 and, just prior to its acquisition by Connect, that business had acquired West Mercia Supplies, another education consumables business (formerly a Public Sector Buying Organisation) based in Shrewsbury. Since its acquisition, the Education & Care division has undertaken a number of integration exercises to enhance the efficiency of the combined business, including the implementation of a new ERP system and stock range rationalisation. This integration process has incurred certain integration costs, which are presented as non-recurring costs for the Connect Group for the years ended 31 August 2014 and 2013.

3. RESULTS OF OPERATIONS FOR THE YEARS ENDED 31 AUGUST 2014, 2013 AND 2012

The following table sets forth the Connect Group's consolidated results of operations for the periods indicated:

	Year ended 31 August 2013
	Year ended 31 August 2014			Restated^{1}			Year ended 31 August 2012
		Non-recurring and other			Non-recurring and other			Non-recurring and other
£ in millions	Underlying	items	Total	Underlying	items*	Total	Underlying	items	Total
Revenue	1,808.5	–	1,808.5	1,806.9	3.9	1,810.8	1,803.9	–	1,803.9
Operating profit	55.5	(6.9)	48.6	56.4	(10.8)	45.6	51.2	(10.9)	40.3
Net finance costs	(5.5)	–	(5.5)	(6.5)	(0.2)	(6.7)	(3.7)	–	(3.7)
Profit before tax	50.0	(6.9)	43.1	49.9	(11.0)	38.9	47.5	(10.9)	36.6
Income tax expense	(9.3)	1.0	(8.3)	(11.5)	1.3	(10.2)	(11.4)	2.3	(9.1)
Profit for the year	40.7	(5.9)	34.8	38.4	(9.7)	28.7	36.1	(8.6)	27.5

Notes:

Non-recurring and other items includes £3.0 million of restructuring and integration costs in relation to News & Media Division depot rationalisation. Similar levels of cost are expected to accrue in future years to deliver future sustainable cost savings.
The income statement for the year ended 31 August 2013 has been restated to reflect the adoption of IAS 19 (as revised in June 2011) "Employee Benefits" and the disposal of MMC. The impact was to reduce underlying profit before tax by £3.1 million and statutory profit before tax by £3.0 million for the year ended 31 August 2013, as shown in note 34 to the consolidated financial statements presented under Part XV (Historical Financial Information Relating to Connect). Due to this restatement, the financial information for the years ended 31 August 2013 and 2014 are not directly comparable to the amounts in any prior reporting year.

3.1 Revenue

Connect generates revenue from each of its three main divisions: Connect News & Media, Connect Books, and Connect Education & Care. Underlying revenue for the Connect Group increased by 0.1 per cent. to £1,808.5 million for the year ended 31 August 2014 compared to £1,806.9 million for the year ended 31 August 2013. Underlying revenue for the Connect Group for the year ended 31 August 2013 increased by 0.2 per cent. compared to £1,804 million for the year ended 31 August 2012.

Underlying revenue for the year ended 31 August 2012 included £6 million of sales that related to the MMC business which was disposed of in April 2013 and, as such, the comparative sales of £3.9 million for the year ended 31 August 2013 have been excluded from the restated underlying revenue for the year ended 31 August 2013. Growth in revenue during the periods under review was achieved despite the decline in the markets for newspapers and magazines. This was primarily due to stronger than expected newspaper sales as a result of new contracts entered into, World Cup sticker sales, and cover price inflation in Connect News & Media; strong growth in direct to consumer propositions through Wordery in Connect Books; and continued good performance in Connect Education & Care.

3.1.1 Revenue by operating segment

Connect has three divisions: Connect News & Media, Connect Books and Connect Education & Care, which accounted for 85.7 per cent., 10.7 per cent. and 3.6 per cent. of the Connect Group's revenue, respectively, for the year ended 31 August 2014.

The following table presents a breakdown of revenue by operating segment for the periods indicated.

	Year ended 31 August
	2014	2013	2012
	(£ in millions)
Connect News & Media – News	1,524.8	1,529.3	1,570.7
Connect News & Media – Media	25.1	26.0	32.4
Connect News & Media – Total	1,549.9	1,555.3	1,603.1
Connect Books	193.7	187.9	174.3
Connect Education & Care	64.9	63.8	26.5
Revenue – underlying	1,808.5	1,806.9	1,803.9
Disposed business – MMC	-	3.9	-
Revenue	1,808.5	1,810.8	1,803.9

(A) Connect News & Media

Connect News & Media has two main businesses, News (Smiths News) and Media (Dawson Media Direct). Smiths News is the UK's largest newspaper and magazine distributor and distributes on behalf of the majority of the major publishers, with 55 per cent. share of the market.

Revenue for the News business decreased by 0.3 per cent. to £1,524.8 million for the year ended 31 August 2014 compared to £1,529.3 million for the year ended 31 August 2013. Revenue for the year ended 31 August 2013 decreased by 2.7 per cent. compared to £1,570.7 million for the year ended 31 August 2012. Decline in revenue during the periods under review was primarily due to the continuing long-term decline in the volume of newspaper and magazine sales. Connect's performance, however, stayed ahead of management's medium-term strategic forecast of a three to five per cent. decline in the overall market. During the periods under review, newspaper sales benefited from a combination of price increases, strong retailer promotions and increased sales for the regional press. Magazine sales continued to be weaker by comparison, although the decline in magazine sales for the year ended 31 August 2014 was 3 per cent. less compared to the decline for the year ended 31 August 2013. Sales for the year ended 31 August 2014 also benefited from one-off increases associated with the World Cup, which are not expected to be repeated in 2015.

For the year ended 31 August 2013 compared to 2012, the daily newspaper market experienced a reduction of 2.7 per cent. in sales volumes, which was offset by price increases and revenue from the extended News International contract and increased sales for the regional press, such that sales value increased by 1.3 per cent. during this period. The strong newspaper sales performance was more than offset by magazine sales, which

122

experienced a reduction of 9.9 per cent. in sales volumes, partly due to the comparatively high sales volumes for the year ended 31 August 2012 which benefitted from sales relating to the European 2012 football championships, the Queen's Diamond Jubilee and the Olympics.

Underlying revenue for the Media business decreased by 3.3 per cent. to £25.1 million for the year ended 31 August 2014 compared to £26.0 million for the year ended 31 August 2013. Revenue for the year ended 31 August 2013 decreased by 19.8 per cent. compared to £32.4 million for the year ended 31 August 2012. Decline in revenue between the year ended 31 August 2013 and the year ended 31 August 2012 was primarily due to the disposal of the MMC business, which represented £6.0 million of sales for the year ended 31 August 2012 and whose sales have been excluded from the restated underlying revenue for the year ended 31 August 2013 and presented within non-recurring items. The decrease in sales elsewhere in the Media business relates to the loss of certain Spanish and German contracts amounting to approximately £0.7 million of revenue. During the year ended 31 August 2014, Connect secured and renewed contracts with a number of major customers, with over 50 per cent. of revenue secured under contract until at least 2019 (measured at values equivalent to those for the year ended 31 August 2014). The contract with British Airways, the News & Media division's largest customer, was secured until 2019. The loss of the Spanish and German contracts, which were not successfully renewed, had an adverse impact on revenue for the year ended 31 August 2014. These contracts were high volume, but relatively low margin; as a result, the decline in revenue did not result in lower profit during the period.

(B) Connect Books

Connect Books combines a number of recognised brands in both print and digital bookselling. The division is a leading distributor of physical and digital books and serves a wide variety of customers. The division derives revenue from five main businesses: Trade, Direct to Consumer, UK Library, Academic and Digital.

Revenue for Connect Books increased by 3.1 per cent. to £193.7 million for the year ended 31 August 2014 compared to £187.9 million for the year ended 31 August 2013. Revenue for the year ended 31 August 2013 increased by 7.8 per cent. compared to £174.3 million for the year ended 31 August 2012. The increase in revenue during the periods under review was primarily due to the continued growth of Wordery, in the Direct to Consumer business, as well as acquisitions made in the year ended 31 August 2013. Wordery has begun to establish its own web presence to complement its position as a leading marketplace supplier, and 15 per cent. of sales are now made directly through the higher margin Wordery.com. The revenue growth from Wordery was offset, however, by declining revenue in the UK Library business as a result of continued budgetary pressure and declining revenue in the Academic business, where the demand for academic e-books has begun to stall following five years of growth. As a result of the challenging conditions, underlying operating profit declined to £2.5 million for the year ended 31 August 2014 compared to £7.2 million for the year ended 31 August 2013 and £6.8 million for the year ended 31 August 2012.

Connect Education & Care is a leading independent supplier of consumable products through its two main businesses, The Consortium and West Mercia Supplies. Connect Education & Care derives revenue from four subdivisions: Education, Early Years (nurseries and pre-school), Care and Other, with the core categories of the division being Education, Early Years and Care. As the division is primarily engaged in supplying consumable products to primary and secondary schools, there is a large degree of seasonality in the results of operations, predominantly in the summer months before each school year, which is the peak trading period for the division.

123

Revenue for Connect Education & Care increased by 1.7 per cent. to £64.9 million for the year ended 31 August 2014 compared to £63.8 million for the year ended 31 August 2013. Revenue for the year ended 31 August 2013 increased by 147 per cent. compared to £26.5 million for the year ended 31 August 2012. The increase in revenue for the year ended 31 August 2014 compared to 2013 was primarily due to increased sales in the core categories of 4.7 per cent., after a robust peak trading period. The Early Years subdivision continues to perform strongly with increased revenue throughout the periods under review. The Consortium has continued to rationalise its product ranges, produce more comprehensive catalogues and focus on customer service. As a result, these initiatives have attracted new customers, in particular academy schools, and have resulted in framework agreements in new territories in Northern Ireland and Scotland, all of which have resulted in higher revenue. Increases in revenue have been offset, however, by the loss of certain non-core contracts involving the supply of stationery to local authorities, which was a legacy of the previous ownership of West Mercia Supplies. The increase in revenue for the year ended 31 August 2013 reflects the inclusion of only five months (following the April 2012 acquisition of the Education & Care division) in the comparative period in 2012.

The following table presents an analysis of the Connect Group's results of operations for the periods indicated.

£ in millions	Year ended 31 August 2013
	Non-Recurring			Restateda			Year ended 31 August 2012
	Underlying	Total	Underlying	Non-recurring*	Total	Underlying	Non-recurring	Total
Revenue	1,808.5	-	1,808.5	1,806.9	3.9	1,810.8	1,803.9	-	1,803.9
Cost of sales	(1,609.5)	-	(1,609.5)	(1,606.3)	(2.2)	(1,608.5)	(1,613.7)	-	(1,613.7)
Gross profit	199.0	-	199.0	200.6	1.7	202.3	190.2	-	190.2
Distribution costs2	(73.9)	-	(73.9)	(81.0)	(2.9)	(83.9)	(89.5)	(2.0)	(91.5)
Administrative expenses3	(69.9)	(6.9)	(76.8)	(63.4)	(9.6)	(73.0)	(49.5)	(8.9)	(58.4)
Share of profits from jointly controlled entities	0.3	-	0.3	0.2	-	0.2	0.3	-	0.3
Operating profit	55.5	(6.9)	48.6	56.4	(10.8)	45.6	51.2	(10.9)	40.3

Notes:

Non-recurring and other items includes £3.0 million of restructuring and integration costs in relation to News & Media Division depot rationalisation. Similar levels of cost are expected to accrue in future years to deliver future sustainable cost savings.
The income statement for the year ended 31 August 2013 has been restated to reflect the adoption of IAS 19 (as revised in June 2011) "Employee Benefits" and the disposal of MMC. The impact was to reduce underlying profit before tax by £3.1 million and statutory profit before tax by £3.0 million for the year ended 31 August 2013, as shown in note 34 to the consolidated financial statements presented under Part XV (Historical Financial Information Relating to Connect). Due to this restatement, the financial information for the years ended 31 August 2013 and 2014 are not directly comparable to the amounts in any prior reporting year.
Distribution costs for the year ended 31 August 2012 presented above are presented in accordance with the change in presentation adopted in the consolidated financial statements for the year ended 31 August 2014.
Administrative expenses for the year ended 31 August 2012 presented above are presented in accordance with the change in presentation adopted in the consolidated financial statements for the year ended 31 August 2014.

3.2 Underlying cost of sales

Cost of sales for the Connect Group represents the purchase of goods and services for resale net of the expected level of returns, overriders or discounts on these transactions. Cost of sales amounted to £1,609.5 million for the year ended 31 August 2014, which was consistent compared to £1,608.5 million for the year ended 31 August 2013. Cost of sales for the year ended 31 August 2013 decreased by 0.3 per cent. compared to £1,613.7 million for 2012, primarily due to a shift in the sales mix towards higher margin lines with lower cost of sales.

124

125

3.3 Underlying gross profit

Gross profit decreased by 1.6 per cent. to £199.0 million for the year ended 31 August 2014 compared to £202.3 million for the year ended 31 August 2013, primarily due to the decline in revenue for the News & Media division. Gross profit increased by 6.4 per cent. for the year ended 31 August 2013 compared to £190.2 million for the year ended 31 August 2012, reflecting the inclusion of a full 12 months of the higher margin Education & Care division in the year ended 31 August 2013 compared to the five months included in the year ended 31 August 2012 following its acquisition in April 2012.

3.4 Underlying distribution Costs

Distribution costs consist of carriage costs, packing costs, direct staff costs and warehouse costs. Underlying distribution costs decreased by 8.8 per cent. to £73.9 million for the year ended 31 August 2014 compared to £81.0 million for the year ended 31 August 2013, primarily as a result of network cost saving initiatives, including the reduction of operational staff numbers by 15 per cent. year on year. Underlying distribution costs were £89.5 million for the year ended 31 August 2012, again due to network cost saving initiatives.

3.5 Underlying administrative expenses

Administrative expenses consist of share-based payment expenses, amortisation of intangibles, profit on disposal of operations, share of profits from jointly controlled entities and associates and administrative expenses, which include staff, marketing and head office costs. Underlying administrative expenses increased by 10.0 per cent. to £69.9 million for the year ended 31 August 2014 compared to £63.4 million for the year ended 31 August 2013, due to an increase in support staff numbers and also reflecting property provision releases during the year ended 31 August 2013 that were not repeated in the following year. Underlying administrative expenses for the year ended 31 August 2013 increased by 28.0 per cent. compared to £49.5 million for the year ended 31 August 2012, primarily as a result of the acquisition of the Education & Care division in April 2012.

The following table presents a breakdown of administrative expenses for the periods indicated.

	Year ended 31 August
	2014	2013	2012
	(£ in millions)
Share-based payment expenses	(1.5)	(1.9)	(1.8)
Amortisation of intangibles	(5.8)	(5.0)	(4.0)
Profit on disposal of operations	–	–	0.5
Administrative expenses	(69.5)	(66.1)	(53.1)
Administrative expenses	(76.8)	(73.0)	(58.4)

3.6 Operating profit

The following table presents a breakdown of the Connect Group's operating profit by division for the periods indicated.

	Operating profit
	2014	2013¹	2012
£ in millions	Restated
Connect News & Media – News	42.9	40.0	39.0
Connect News & Media – Media	2.3	1.8	1.8
Connect News & Media – Total	45.2	41.8	40.8
Book wholesaling	2.5	7.2	6.8
Education and care	7.8	7.4	3.6
Total operating profit – underlying	55.5	56.4	51.2

Note:
1 Restatement excludes £0.1 million of profit from the MMC business disposed of in April 2013.

Connect's underlying operating profit decreased by 1.6 per cent. to £55.5 million for the year ended 31 August 2014 compared to £56.4 million (restated) for the year ended 31 August 2013. Underlying operating profit for the year ended 31 August 2013 increased by 10.6 per cent. compared to £51.2 million for the year ended 31 August 2012. The decline of £0.9 million in underlying operating profit for the year ended 31 August 2014 compared to 2013 was primarily due to a larger than expected decline in operating profit for the Books Division, which was partially offset by the greater than expected increase in the News & Media Division and slight increase in the Education & Care Division. The increase of £5.2 million in underlying operating profit for the year ended 31 August 2013 compared to 2012 was primarily due to the full-year impact of the Education & Care Division following its acquisition in April 2012.

4. LIQUIDITY AND CAPITAL RESOURCES

4.1 Cash flow

Connect has generated positive net cash from operating activities during each of the periods under review. The following table summarises the principal components of the Company's consolidated cash flows for the periods indicated.

	Year ended 31 August
	2014	2013	2012
	(£ in millions)
Net cash inflow from operating activities	47.4	37.9	28.5
Net cash used in investing activities	(10.4)	(12.9)	(44.6)
Net cash (used in)/from financing activities	(26.6)	(19.9)	17.4
Net increase in cash and cash equivalents	10.4	5.1	1.3
Closing net cash and cash equivalents	20.4	10.1	5.1

4.1.1 Net cash from operating activities

For the years ended 31 August 2014, 2013 and 2012, net cash inflow from operating activities was £47.4 million, £37.9 million and £28.5 million, respectively. Connect's operating activities benefitted from net improvements in working capital with an inflow of £0.9 million for the year ended 31 August 2014, with an outflow of £6.1 million for the year ended 31 August 2013 and an outflow of £9.2 million for the year ended 31 August 2012. The improvements in working capital were primarily driven by a continued focus on improving working capital cash generation.

4.1.2 Net cash used in investing activities

For the year ended 31 August 2014, net cash used in investing activities was £10.4 million. This included purchases of property, plant and equipment and intangible assets amounting to £10.3 million (an increase of 32.1 per cent. compared to the year ended 31 August 2013) primarily in relation to investments in IT hardware and organic revenue opportunities, such as Jacks Beans and Pass my Parcel.

For the year ended 31 August 2013, net cash used in investing activities was £12.9 million, consisting primarily of purchases of property, plant and equipment and intangible assets amounting to £7.8 million (an increase of 23.8 per cent. compared to the year ended 31 August 2012) primarily in relation to replacement equipment for the Connect News & Media division.

For the year ended 31 August 2012, net cash used in investing activities was £44.6 million, consisting primarily of acquisition costs and consideration relating to the acquisition of Hedgelane Limited (the parent company of The Consortium) amounting to £40.1 million. Purchases of property, plant and equipment and intangible assets amounted to

126

£6.3 million, primarily in relation to depot resites (the largest being Birmingham) amounting to £1.2 million and the SAP upgrade amounting to £1.0 million.

4.1.3 Net cash (used in)/from financing activities

For the year ended 31 August 2014, net cash from financing activities was £26.6 million, primarily consisting of the payment of £17.7 million relating to dividends during the year, £6.1 million of interest payments and £6.3 million relating to the purchase of shares.

For the year ended 31 August 2013, net cash used in financing activities was £19.9 million, primarily consisting of the payment of £16.0 million relating to dividends during the year, £4.0 million of interest payments and £2.0 million of payments relating to finance leases, which were partially offset by a net increase in borrowings.

For the year ended 31 August 2012, net cash from financing activities was £17.4 million, due to the net increase in borrowings of £37.9 million, which more than offset the payment of £14.9 million relating to dividends during the year, £3.3 million of interest payments and £1.6 million of payments relating to finance leases.

5. OPERATING LEASE ARRANGEMENTS

Connect leases various distribution properties and plant and equipment under non-cancellable operating leases. Rentals paid under operating leases are charged to income on a straight-line basis over the lease term. The benefits of rent free periods and similar incentives are credited to the income statement on a straight-line basis over the full lease term.

The leases relating to distribution properties have a typical remaining length of nine years, and reflect market value at the time they were entered into.

The following table presents Connect's outstanding commitments under non-cancellable operating leases as at the date indicated.

| | Total | Payments due by period
In the second
to fifth years
inclusive | | After five
years |
| --- | --- | --- | --- | --- |
| | | Within
one year | (£ in millions) | |
| As at 31 August 2014 | | | | |
| Land and buildings | 57.6 | 7.7 | 25.6 | 24.3 |
| Equipment and vehicles | 3.6 | 2.1 | 1.5 | – |
| Operating lease commitments | 61.2 | 9.8 | 27.1 | 24.3 |
| As at 31 August 2013 | | | | |
| Land and buildings | 61.0 | 8.1 | 26.2 | 26.7 |
| Equipment and vehicles | 3.2 | 1.6 | 1.6 | – |
| Operating lease commitments | 64.2 | 9.7 | 27.8 | 26.7 |

6. TOTAL BORROWINGS

Total borrowings as at 31 August 2014, 2013 and 2012 were £109.3 million, £106.8 million and £103.1 million, respectively.

127

The following table presents total borrowings as at the dates indicated.

	As at 31 August
	2014	2013	2012
	(£ in millions)
Cash and cash equivalents	20.4	10.1	5.1
Term loan – disclosed within current liabilities	-	(3.0)	(3.0)
Term loan disclosed with non-current liabilities	(48.4)	(34.0)	(37.0)
Revolving credit facility	(60.9)	(62.9)	(60.1)
Asset backed facility	-	(6.9)	(3.0)
Total borrowings	(107.4)	(106.8)	(103.1)
Net borrowings	(89.7)	(96.7)	(98.0)

The table below presents the maturity profiles of the borrowings as at the date indicated.

	Amounts due for settlement
	Total	Within 12 months (£ in millions)	After 12 months
As at 31 August 2013
Total borrowings	106.8	72.8	34.0
As at 31 August 2014
Total borrowings	109.3	60.9	48.4

As at 31 August 2014, the Group had £200 million of committed bank facilities in place, compared to £177 million as at 31 August 2013.

Bank facilities currently comprise:

a £50 million syndicated term loan with £5 million repayable in each of February 2017, August 2017, February 2018 and August 2018 and the balance repayable in November 2018;
a £150 million syndicated revolving credit facility which is also repayable in November 2018.

The revolving credit facility described above is subject to the following covenants:

Leverage cover – the net debt: consolidated EBITDA ratio must remain below 2.75x. At 31 August 2014 the ratio was 1.4x.
Interest cover – the consolidated net interest: consolidated EBITDA ratio must remain above 3.0x. At 31 August 2014 the ratio was 11.8x.
Fixed charge cover – the consolidated EBITDA: consolidated fixed charges ratio must be not less than 2.00 to 1. At 31 August 2014 the ratio was 4.6x.
Guarantor cover – the annual turnover, gross assets and pre-tax profits of the Guarantors contribute at any time 80 per cent. or more of the annual consolidated turnover, gross assets and pre-tax profits of the Group for each of its financial years (ending 31 August of each calendar year).

Connect has complied with its financial covenants for each of the years ended 31 August 2014, 2013 and 2012 and has not defaulted on, or breached the terms of, any loans during each of the three years.

7. CRITICAL ACCOUNTING JUDGEMENTS

In the application of Connect's accounting policies, which are described in note 1 to the consolidated financial statements presented under Part XV (Historical Financial Information Relating to Connect), the

Directors are required to make judgements, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates.

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods. The key assumptions concerning the future and other key sources of estimation uncertainty are detailed in note 1(c) to the consolidated financial statements presented under Part XV (Historical Financial Information Relating to Connect).

8. FINANCIAL RISK MANAGEMENT

Connect’s activities expose it to a number of financial risks, which are detailed in note 20 to the consolidated financial statements presented under Part XV (Historical Financial Information Relating to Connect).

129

130

PART XIV

OPERATING AND FINANCIAL REVIEW OF TUFFNELLS

The following is a discussion of the Tuffnells Group’s financial condition and results of operations as at and for the six months ended 30 June 2014 and the years ended 31 December 2013, 2012 and 2011. This discussion should be read in conjunction with the selected historical consolidated financial information included herein and the consolidated historical financial information, including the notes thereto, presented under Part XVI (Historical Financial Information Relating to the Tuffnells Group).

The financial information as at and for the six months ended 30 June 2014 and each of the three years ended 31 December 2013, 2012 and 2011 has been prepared in accordance with IFRS.

This discussion contains forward-looking statements that involve risks and uncertainties. For additional information regarding these risks and uncertainties, please refer to the section headed “Forward-looking statements” in Part III (Important Information) of this document. Investors should also read Part II (Risk Factors) of this document for a discussion of certain factors that may affect Tuffnells’ business, financial condition and results of operations.

1. OVERVIEW

The business, which is headquartered in Sheffield, UK, operates from 34 locations across the United Kingdom with over 2,000 employees and utilising a fleet of over 930 vehicles and 866 trailers and containers. The business handles in excess of 10.2 million consignments each year serving over 4,000 customers. Tuffnells’ revenue for the year ended 31 December 2013 was £127.8 million, with a three-year CAGR of 7.6 per cent. Profit for the year ended 31 December 2013 was £6.6 million, up 18.3 per cent. on the prior year. Adjusted EBITDA for the year ended 31 December 2013 was £15.2 million, with a three-year CAGR of 9.8 per cent.

2. SIGNIFICANT FACTORS AFFECTING RESULTS OF OPERATIONS

The Directors believe that the following factors have had, and may continue to have, a material effect on Tuffnells’ results of operations.

2.1 Increase in volume of collected consignments

Over the periods under review, increases in revenue for the Tuffnells Group were primarily due to growth in the volume of collected consignments. Tuffnells both acquired new customers and received more repeat orders from existing customers, which resulted in higher consignment volumes. For the six months ended 30 June 2014 compared to the same period in 2013, the volume of collected consignments increased by 10.9 per cent. and, correspondingly, revenue increased by 12.3 per cent. For the year ended 31 December 2013 compared to 2012 and for 2012 compared to 2011, the volume of collected consignments increased by 11.7 per cent. and 5.4 per cent., respectively. While revenue increased by 11.5 per cent. and 4.9 per cent., respectively. The Directors believe that the increase in volume of collected consignments during the periods under review was due to a combination of the general economic recovery and customers becoming less price-sensitive as a result, such that they responded positively to Tuffnells’ focus on customer service.

131

2.2 Reduction in average consignment weight

While the volume of collected consignments increased for Tuffnells over the periods under review, the average consignment weight decreased by 4.9 per cent. to 32.3 kg for the year ended 31 December 2013 compared to 34.0 kg for 2012 and by 2.5 per cent. for 2012 compared to 34.8 kg for 2011, continuing a trend of declining average consignment weights since 2005. The decline in average consignment weight reflects the changing mix in traffic, as customers' ordering systems have improved to enable them to ship more often but in smaller parcels. In addition, the introduction of conveyor systems in depots has facilitated the processing of and attracted higher numbers of lower weight items, which do not need to be manually handled, again contributing to the changing mix towards lighter items. In recent months, Tuffnells has seen a stabilisation in average consignment weight as a result of a new pallet tariff, which has increased the volume of higher weight pallet consignments. The Directors expect, however, that the decline in average consignment weight will continue, albeit at a lower rate of decline, and that revenue growth will continue to be largely dependent on increasing consignment volumes.

2.3 Changes in price charged per kilogram and per consignment

Tuffnells' current and historic pricing is based on the weight of the consignment to be delivered and, during the periods under review, Tuffnells increased the average price charged per kilogram by an average of 3.3 per cent. every year (although there has been no price increase implemented for the year ending 31 December 2014). The price increases per kilogram have been offset, however, by reductions in the average weight per consignment, as described above. As a result, the average price charged per consignment has decreased by an average of 0.5 per cent. every year during the periods under review. As the parcels market has been price sensitive since 2008, Tuffnells' strategy has focused on growing the business through the volume of collected consignments rather than by way of price increases, whilst also improving levels of service, in particular delivery performance. From time to time, management determines whether to implement any price increases on the basis of whether customers would be receptive to a possible price increase.

2.4 Seasonality

The results of operations for Tuffnells are subject to seasonal fluctuations across the year. Volumes of collected consignments tend to be highest around May, when businesses such as garden centres and construction firms tend to become more active with the end of winter, and November, in the build-up towards Christmas when businesses are again generally busier. Conversely, consignment volumes are lower in January/February, post-Christmas and in the middle of winter, and also in July/August during the summer holidays. As a result of these seasonal fluctuations, comparisons of Tuffnells' operating results over any interim periods may not be meaningful and such comparisons may not be an accurate indicator of Tuffnells' future performance for any annual period.

132

3. RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED 30 JUNE 2014 AND UNAUDITED RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED 30 JUNE 2013

The following table sets forth the Tuffnells Group's consolidated results of operations for the periods indicated.

	Six months ended 30 June
	2014	2013 (unaudited)
	(£'000)
Revenue	69,174	61,613
Net operating costs	(63,158)	(56,501)
Operating profit	6,016	5,112
Net finance costs	(1,141)	(1,268)
Profit before tax	4,875	3,844
Income tax expense	(1,071)	(771)
Profit for the year/period	3,804	3,073

3.1 Revenue

Tuffnells derives revenue from the delivery of consignments, with pricing based on the weight of the consignment to be delivered. Revenue for the six months ended 30 June 2014 was £69.2 million, an increase of 12.3 per cent. compared to £61.6 million for the six months ended 30 June 2013. Growth in revenue during the periods under review was primarily due to an increase of 10.9 per cent. in volumes of collected consignments.

In the six-month period ended 30 June 2014, average consignment weights stabilised following the recent introduction of a new pallet promotion which resulted in increased sales of pallet consignments, which have a higher average weight and cost of delivery. This stabilisation of average consignment weight, together with higher collected consignment volumes, contributed to the growth in revenue for the six months ended 30 June 2014 compared to the same period in 2013.

3.2 Net operating costs

Net operating costs for the Tuffnells Group consist of distribution costs and administrative expenses. Distribution costs are costs associated with the movement of parcels, including vehicle and vehicle related costs such as drivers, fuel and insurance, as well as salaries for warehouse staff associated with managing deliveries. For the six months ended 30 June 2014 and 2013, distribution costs were 62.8 per cent. and 61.6 per cent. of revenue, respectively. Administrative expenses are related to warehouse rental fees and staff costs including management, customer service and customer support staff, as well as bonus payments for staff. For the six months ended 30 June 2014 and 2013, administrative expenses were 28.5 per cent. and 30.1 per cent. of revenue, respectively.

The following table presents a breakdown of net operating costs for the periods indicated.

	Six months ended 30 June
	2014	2013 (unaudited)
	(£'000)
Revenue	69,174	61,613
Distribution costs	(43,439)	(37,967)
Administrative expenses	(19,719)	(18,525)
Operating Profit	6,016	5,112

In line with the increase in revenue due to higher volumes of collected consignments during the periods under review, net operating costs amounted to £63.2 million for the six months ended 30 June 2014, an increase of 11.8 per cent. compared to £56.5 million for the six months ended 30 June 2013.

3.3 Operating profit

Operating profit accounts for depreciation, amortisation of owned computer software, loss/profit on disposal of property, plant and equipment, operating lease expenses and auditors' remuneration. Operating profit for the six months ended 30 June 2014 was £6.0 million, an increase of 17.6 per cent. compared to £5.1 million for the six months ended 30 June 2013, primarily due to the increase in volume of collected consignments and the resulting growth in revenue.

3.4 Net finance costs

Net finance costs represent the total costs of all borrowing activities for the Tuffnells Group incurred during the periods under review. Net finance costs for the six months ended 30 June 2014 were £1.1 million, a decrease of 15.4 per cent. compared to £1.3 million for the six months ended 30 June 2013, primarily as a result of the repayment of borrowings.

4. RESULTS OF OPERATIONS FOR THE YEARS ENDED 31 DECEMBER 2013, 2012 AND 2011

The following table sets forth the Tuffnells Group consolidated results of operations for the periods indicated.

	Year ended 31 December
	2013	2012	2011
	(£'000)
Revenue	127,801	114,647	109,286
Net operating costs	(116,779)	(104,155)	(100,090)
Operating profit	11,022	10,492	9,196
Net finance costs	(2,440)	(3,047)	(3,676)
Profit before tax	8,582	7,445	5,520
Income tax expense	(2,019)	(1,894)	(1,576)
Profit for the year/period	6,563	5,551	3,944

4.1 Revenue

Revenue increased by 11.5 per cent. to £127.8 million for the year ended 31 December 2013 compared to £114.6 million for the year ended 31 December 2012. Revenue for the year ended 31 December 2012 increased by 4.8 per cent. compared to £109.3 million for the year ended 31 December 2011. The increases in revenue during the periods under review were primarily due to the increase in volume of collected consignments of 11.7 per cent. and 5.4 per cent., respectively.

During the periods under review, the average revenue per consignment has remained constant at approximately £13.10, despite Tuffnells' implementation of an annual price increase of 2.5 per cent., primarily due to the impact of the decrease in average consignment weight of 4.9 per cent. and 2.5 per cent. for the years ended 31 December 2013 and 31 December 2012, respectively. As a result, the growth in revenue for Tuffnells over the periods under review has been primarily due to increases in consignment volume.

Over the periods under review, Tuffnells' has achieved higher revenue per new customer, with new customers averaging approximately £11,000 in annual sales per customer compared to an average of £6,900 in annual sales per lost customer.

133

134

4.2 Net operating costs

As the Tuffnells business has grown, net operating costs have increased by 12.1 per cent. for the year ended 31 December 2013 compared to 2012 and increased by 4.1 per cent. for the year ended 31 December 2012 compared to 2011. The average cost per depot has remained relatively consistent over the periods under review, with the increase in costs reflecting the increase in the number of depots only.

The following table presents a breakdown of net operating costs for the periods indicated.

	Year ended 31 December
	2013	2012	2011
	(£'000)
Revenue	127,801	114,647	109,286
Distribution costs	(79,540)	(72,592)	(70,925)
Administrative expenses	(37,239)	(31,563)	(29,156)
Operating Profit	11,022	10,492	9,196

For the years ended 31 December 2013, 2012 and 2011, distribution costs were 62.2 per cent., 63.3 per cent. and 64.9 per cent. of revenue, respectively. Distribution costs decreased as a percentage of revenue during the periods under review even as the business grew and costs increased, primarily as a result of improvements in capacity utilisation at the depots and in delivery logistics. Administrative expenses were 29.1 per cent., 27.5 per cent and 26.7 per cent. of revenue for the years ended 31 December 2013, 2012 and 2011, respectively. The increase in administrative expenses for the year ended 31 December 2013 was primarily due to the payment of one-off loyalty bonuses totalling £1.6 million to certain employees of Tuffnells.

4.3 Operating Profit

Operating profit increased by 5.1 per cent. to £11.0 million for the year ended 31 December 2013 compared to £10.5 million for the year ended 31 December 2012, and by 14.1 per cent. for the year ended 31 December 2012 compared to £9.2 million for the year ended 31 December 2011. The increase in operating profit for the periods under review was primarily due to higher volumes of collected consignments, with average revenue per consignment remaining largely constant, as well as managing the growth of the business in a controlled manner with respect to net operating costs.

4.4 Net finance costs

Net finance costs decreased by 20.0 per cent. to £2.4 million for the year ended 31 December 2013 compared to £3.0 million for the year ended 31 December 2012. Net finance costs for the year ended 31 December 2012 decreased by 18.9 per cent. compared to £3.7 million for the year ended 31 December 2011. The decline in net finance costs over the periods under review was the result of accelerating repayments on borrowings by Tuffnells.

LIQUIDITY AND CAPITAL RESOURCES

5.1 Cash flow

The Tuffnells Group has generated positive net cash from operating activities during each of the periods under review. The following table summarises the principal components of the Tuffnells Group's consolidated cash flows for the periods indicated.

	Year ended 31 December			Six months ended 30 June
	2013	2012	2011	2014	2013 (unaudited)
	(£'000)
Cash generated from operations	15,907	13,426	10,324	5,585	6,161
Net cash from operating activities	11,963	9,529	6,099	3,876	4,006
Net cash used in investing activities	(2,264)	(1,138)	(1,353)	(670)	(835)
Net cash used in financing activities	(9,127)	(7,980)	(6,287)	(2,647)	(3,948)
Net increase/(decrease) in cash and cash equivalents	572	411	(1,541)	559	(777)
Closing net cash and cash equivalents	1,395	823	412	1,954	46

5.1.1 Cash generated from operations

For the years ended 31 December 2013, 2012 and 2011, cash generated from operations was £15.9 million, £13.4 million and £10.3 million, respectively, representing increases of 18.7 per cent. for the year ended 31 December 2013 compared to 2012 and 30.0 per cent. for the year ended 31 December 2012 compared to 2011. The increase in cash generated from operations was primarily due to improvements in debtor collection to an average of 25.6 days in the year ended 31 December 2013 compared to 27.5 days in 2012 and 28.9 days in 2011. Cash generated from operations for the six months ended 30 June 2014 was £5.6 million compared to £6.2 million for the same period in 2013. Average debtor days for the six months ended 30 June 2014 decreased to 24.1 days, and overall working capital increased by £1.8 million, with the growth in debtors due to increased revenue.

5.1.2 Net cash from operating activities

For the years ended 31 December 2013, 2012 and 2011, net cash inflow from operating activities was £12.0 million, £9.5 million and £6.1 million, respectively. Tuffnells' operating activities benefitted from net improvements in working capital, with an inflow of £2.3 million for the year ended 31 December 2013, £0.5 million for the year ended 31 December 2012 and a decline of £1.0 million for the year ended 31 December 2011. The net cash inflow from operating activities for the six months ended 30 June 2014 was £3.9 million compared to £4.0 million for the same period in 2013. The improvements in working capital were primarily driven by a continued focus on improving working capital cash generation and reduced debtor days.

5.1.3 Net cash used in investing activities

For the year ended 31 December 2013, net cash used in investing activities was £2.3 million, an increase of 109 per cent. compared to £1.1 million for the year ended 31 December 2012, primarily due to purchases of property, plant and equipment and IT hardware in relation to the expansion of the depot network, with three new depots having opened in 2013 compared to no depot openings in 2012. For the year ended 31 December 2012, net cash used in investing activities was £1.1 million, a decrease of 21.4 per cent. compared to £1.4 million for the year ended 31 December 2011, which reflects the lack of new depot openings in 2012 compared to three new depots having opened in 2011. For the six months ended 30 June 2014, net cash used in investing activities was £0.7 million compared to £0.8 million for the same period in 2013.

135

5.1.4 Net cash (used in)/from financing activities

For the year ended 31 December 2013, net cash used in financing activities was £9.1 million, an increase of 13.8 per cent. compared to £8.0 million for the year ended 31 December 2012. Net cash used in financing activities for the year ended 31 December 2012 increased by 27.0 per cent. compared to £6.3 million for the year ended 31 December 2011. The increases in net cash used in financing activities over the periods under review reflect Tuffnells' policy to de-leverage and accelerate repayment of bank loans. For the six months ended 30 June 2014, net cash used in financing activities was £2.6 million compared to £3.9 million for the same period in 2013.

5.2 Capital expenditure

Tuffnells' capital expenditure is comprised of recurring and non-recurring capex. Recurring capex consists of spending on equipment and IT capex, while non-recurring capex is incurred in relation to various capital projects, such as new depots being opened, trailer projects, and upgrades to existing depots. For each of the years ended 31 December 2013, 2012 and 2011, capital expenditure was £2.5 million, £2.0 million and £2.3 million, respectively, and amounted to 2.0 per cent., 1.7 per cent. and 2.1 per cent. of revenue, respectively. Changes in capital expenditure during the periods under review were primarily related to new depot openings, with three new depots added in each of 2013 and 2011 and no depots added in 2012. For the six months ended 30 June 2014, capital expenditure was £2.8 million, which reflects the opening of two new depots and trailer expansion during the period.

6. OPERATING LEASE ARRANGEMENTS

Tuffnells leases various distribution properties and plant and equipment under non-cancellable operating leases. Rentals paid under operating leases are charged to income on a straight-line basis over the lease term. The benefits of rent free periods and similar incentives are credited to the income statement on a straight-line basis over the full lease term.

The distribution property leases have an average remaining length of nine years, and reflect market value at the time they were entered into.

The following table presents Tuffnells' outstanding commitments under non-cancellable operating leases as at the dates indicated.

	Total	Payments due by period		After five years
		Within one year	In the second to fifth years inclusive (£'000)
As at 30 June 2014
Land and buildings	11,884	107	273	11,504
Plant and equipment	24,122	1,592	15,719	6,811
As at 31 December 2013
Land and buildings	10,926	-	536	10,390
Plant and equipment	25,050	1,027	17,119	6,904

7. BORROWINGS

Total borrowings for the Tuffnells Group as at 31 December 2013, 2012 and 2011 were £23.0 million, £30.5 million and £36.0 million, respectively. Total borrowings as at 30 June 2014 and 2013 were £23.1 million and £27.2 million, respectively.

The following table presents total amounts outstanding as at the dates indicated.

	As at 31 December			As at 30 June
	2013	2012	2011	2014	2013
			(£'000)		(unaudited)
Current
Short term borrowings	1,119	2,177	2,539	-	2,325
Bank loan	975	-	4,716	19,564	-
Obligations under finance leases and hire purchase contracts	862	1,019	1,029	1,259	864
Preference share capital	100	-	-	100	-
	3,056	3,196	8,284	20,923	3,189
Non-current
Bank loan	18,953	25,711	26,169	-	22,820
Obligations under finance leases and hire purchase contracts	961	1,447	1,493	2,176	1,119
Preference share capital	-	100	100	-	100
	19,914	27,258	27,762	2,176	24,039
Total borrowings	22,970	30,454	36,046	23,099	27,228

Total borrowings for the Tuffnells Group consist of both current and non-current borrowings. Current borrowings consist of short term facilities usually repayable within one year. Short term borrowings as a percentage of total borrowings were 13.3 per cent., 10.5 per cent. and 23.0 per cent. as at 31 December 2013, 2012 and 2011, respectively.

The Tuffnells Group non-current, long term, borrowings are predominantly in the form of bank loans. The bank facilities comprise mezzanine debt with covenants attaching to cashflow generation (at least 105 per cent.), interest cover (at least 3x) and gearing ratios (no greater than 2.5x).

Tuffnells has complied with applicable financial covenants throughout the years ended 31 December 2013, 2012 and 2011 and has not defaulted on, or breached the terms of, any loans during each of the three years.

8. CRITICAL ACCOUNTING JUDGEMENTS

In the application of the Tuffnells Group's accounting policies, which are described in note 1 to the consolidated historical financial information presented under Part XVI (Historical Financial Information Relating to the Tuffnells Group), the Directors are required to make judgements, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates.

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods. The key assumptions concerning the future and other key sources of estimation uncertainty are detailed in note 22 to the consolidated historical financial information presented under Part XV (Historical Financial Information Relating to the Tuffnells Group).

9. FINANCIAL RISK MANAGEMENT

Tuffnells' activities expose it to a number of financial risks, which are detailed in note 15 to the consolidated historical financial information presented under Part XVI (Historical Financial Information Relating to Tuffnells).

138

PART XV

HISTORICAL FINANCIAL INFORMATION RELATING TO THE CONNECT GROUP

SECTION A: HISTORICAL FINANCIAL INFORMATION FOR THE FINANCIAL YEARS ENDED 31 AUGUST 2013 AND 2012

The following documents, which have been previously published and filed with the FCA and which are available for inspection in accordance with paragraph 21 of Part XXI (Additional Information), contain information which is relevant to this document:

The Company’s Annual Reports for the years ended 31 August 2013 and 31 August 2012.

The table below sets out the sections of the above documents, which contain information incorporated by reference into, and forming part of this document. Only information in the parts of the above documents identified in the list below is incorporated into and forms part of this document. Information in other parts of the above documents is either covered elsewhere in this document or is not relevant to an investor’s assessment of the assets and liabilities, financial position, profit and losses and prospects of the Company.

The consolidated financial statements of the Company for the year ended 31 August 2013, including the group income statement, the group statement of comprehensive income, the group balance sheet, the group statement of changes in equity, the group cash flow statement, and the notes to the financial statements and the independent auditors report thereon by Deloitte LLP;

The consolidated financial statements of the Company for the year ended 31 August 2012, including the group income statement, the group statement of comprehensive income, the group balance sheet, the group statement of changes in equity, the group cash flow statement, and the notes to the financial statements and the independent auditors report thereon by Deloitte LLP;

Pages 61 to 100 (inclusive) of the Company's Annual Report 2013

Pages 78 to 121 (inclusive) of the Company's Annual Report 2012

Copies of the documents of which part or all are incorporated by reference herein are available in electronic format through the Company’s corporate website at www.connectgroupplc.com.

To the extent that any information incorporated by reference itself incorporates any information by reference, either expressly or impliedly, such information will not form part of this document for the purposes of the Prospectus Rules, except where such information is stated within this document as specifically being incorporated by reference or where this document is specifically defined as including such information.

Any statement which is deemed to be incorporated by reference into this document shall be deemed to be modified or superseded for the purpose of this document to the extent that a statement contained in this document (or in a later document which is incorporated by reference into this document) modifies or supersedes such earlier statement (whether expressly, by implication or otherwise). Any statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this document.

Except as set forth above, no other portion of these documents is incorporated by reference into this document and those portions which are not specifically incorporated by reference in this document are either not relevant for prospective investors or the relevant information is included elsewhere in this document.

SECTION B: HISTORICAL FINANCIAL INFORMATION FOR THE FINANCIAL YEAR ENDED 31 AUGUST 2014

The financial information of the Company for the year ended 31 August 2014 and the auditor’s report thereto appears in Appendix 1 of this document.

Deloitte LLP, the auditors of the Company, issued unqualified audit opinions in respect of the years ended 31 August 2014, 2013 and 2012.

139

PART XVI

HISTORICAL FINANCIAL INFORMATION RELATING TO THE TUFFNELLS GROUP

BASIS OF FINANCIAL INFORMATION

The financial information in this Part XVI contains consolidated financial information of Tuffnells for the year ended 31 December 2013, 2012 and 2011 and the sixth months ended 30 June 2014 and 2013.

The Directors confirm that the Historical Financial Information relating to Tuffnells is prepared in a form consistent with the accounting policies adopted in the Company's latest annual consolidated accounts.

pwc

SECTION A: ACCOUNTANTS' REPORT ON THE HISTORICAL FINANCIAL INFORMATION RELATING TO TUFFNELLS

The Directors

Connect Group plc

Rowan House

Cherry Orchard North

Kembrey Park

Swindon

SN2 8UH

Liberum Capital Limited

Ropemaker Place, Level 12

25 Ropemaker Street

London

EC2Y 9LY

J.P. Morgan Securities plc

25 Bank Street

London

E14 5JP

12 November 2014

Dear Sirs

Historical Financial Information relating to The Big Green Parcel Holding Company Limited

We report on the financial information of The Big Green Parcel Holding Company Limited and its subsidiaries (the "Target Group") set out below (the "IFRS Financial Information Table"). The IFRS Financial Information Table has been prepared for inclusion in the combined Class 1 Circular and Prospectus dated 12 November 2014 (the "Investment Circular") of Connect Group plc (the "Company") on the basis of the accounting policies set out in note 1 of the IFRS Financial Information Table. This report is required by item 13.5.21R of the Listing Rules and is given for the purpose of complying with that item and for no other purpose.

Responsibilities

The Directors of the Company are responsible for preparing the IFRS Financial Information Table in accordance with International Financial Reporting Standards as adopted by the European Union.

It is our responsibility to form an opinion as to whether the IFRS Financial Information Table gives a true and fair view, for the purposes of the Investment Circular and to report our opinion to you.

Save for any responsibility which we may have to those persons to whom this report is expressly addressed and for any responsibility arising under item 5.5.3R(2)(f) of the Prospectus Rules to any person as and to the extent there provided, to the fullest extent permitted by law we do not assume any responsibility and will not accept any liability to any other person for any loss suffered by any such person as a result of, arising out of, or in accordance with this report or our statement, required by and given solely for the purposes of complying

PricewaterhouseCoopers LLP, Benson House, 33 Wellington Street, Leeds, LS1 4JP
T: +44 (0) 113 289 4000, F: +44 (0) 113 289 4460, www.pwc.co.uk

PricewaterhouseCoopers LLP is a limited liability partnership registered in England with registered number OC303525. The registered office of PricewaterhouseCoopers LLP is 1 Embankment Place, London WC2N 6RH. PricewaterhouseCoopers LLP is authorised and regulated by the Financial Conduct Authority for designated investment business.

pwc

with item 13.4.1R(6) of the Listing Rules and item 23.1 of Annex 1 to the PD Regulation, consenting to its inclusion in the Investment Circular.

Basis of opinion

We conducted our work in accordance with the Standards for Investment Reporting issued by the Auditing Practices Board in the United Kingdom. Our work included an assessment of evidence relevant to the amounts and disclosures in the financial information. It also included an assessment of significant estimates and judgments made by those responsible for the preparation of the financial information and whether the accounting policies are appropriate to the Target Group's circumstances, consistently applied and adequately disclosed.

We planned and performed our work so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the financial information is free from material misstatement whether caused by fraud or other irregularity or error.

Our work has not been carried out in accordance with auditing standards generally accepted in the United States of America or auditing standards of the Public Company Accounting Oversight Board (United States) and accordingly should not be relied upon as if it had been carried out in accordance with those standards.

Opinion

In our opinion, the IFRS Financial Information Table gives, for the purposes of the Investment Circular dated 12 November 2014, a true and fair view of the state of affairs of the Company as at the dates stated and of its profits, cash flows and changes in equity for the periods then ended in accordance with International Financial Reporting Standards as adopted by the European Union.

Declaration

For the purposes of Prospectus Rule 5.5.3R(2)(f) we are responsible for this report as part of the Investment Circular and declare that we have taken all reasonable care to ensure that the information contained in this report is, to the best of our knowledge, in accordance with the facts and contains no omission likely to affect its import. This declaration is included in the Investment Circular in compliance with item 1.2 of Annex I to the PD Regulation.

Yours faithfully

PricewaterhouseCoopers LLP

Chartered Accountants

PricewaterhouseCoopers LLP, Benson House, 33 Wellington Street, Leeds, LS1 4JP
T: +44 (0) 113 289 4000, F: +44 (0) 113 289 4460, www.pwc.co.uk

SECTION B: HISTORICAL FINANCIAL INFORMATION RELATING TO TUFFNELLS
Consolidated income statement

	Notes	Year ended 31 December 2011	Year ended 31 December 2012	Year ended 31 December 2013	6 months ended 30 June 2014	6 months ended 30 June 2013
		£'000	£'000	£'000	£'000	£'000
Continuing operations
Revenue		109,286	114,647	127,801	69,174	61,613
Net operating costs	2	(100,090)	(104,155)	(116,779)	(63,158)	(56,501)
Operating profit	3	9,196	10,492	11,022	6,016	5,112
Net finance costs	4	(3,676)	(3,047)	(2,440)	(1,141)	(1,268)
Profit before tax		5,520	7,445	8,582	4,875	3,844
Income tax expense	5	(1,576)	(1,894)	(2,019)	(1,071)	(771)
Profit for the year/period		3,944	5,551	6,563	3,804	3,073

Consolidated statement of comprehensive income

	Year ended			6 months ended 30 June 2014	6 months ended 30 June 2013
	31 December 2011	31 December 2012	31 December 2013
Notes	£'000	£'000	£'000	£'000	£'000
Profit for the year/period	3,944	5,551	6,563	3,804	3,073
Other comprehensive (expense)/income:
Items that will not be reclassified to profit or loss
Re-measurement loss on employee benefit obligations	(391)	(302)	(682)	(310)	(230)
Tax relating to re-measurement loss on employee benefit obligations	67	74	144	109	85
Other comprehensive expense for the year	(324)	(228)	(538)	(201)	(145)
Total comprehensive income for the year	3,620	5,323	6,025	3,603	2,928

143

Consolidated statement of financial position

	31 December 2011 £'000	31 December 2012 £'000	31 December 2013 £'000	6 months ended 30 June 2014 £'000	6 months ended 30 June 2013 £'000 (Unaudited)
Assets
Non-current assets
Intangible assets	8	22,495	22,559	22,470	22,409
Property, plant and equipment	9	20,809	20,523	20,637	22,148
Deferred tax assets	16	724	795	866	1,535
		44,028	43,877	43,973	46,092
Current assets
Inventories	11	488	456	751	685
Trade and other receivables	12	12,204	12,422	11,609	14,933
Cash and cash equivalents	13	412	823	1,395	1,954
		13,104	13,701	13,755	17,572
Total assets		57,132	57,578	57,728	63,664
Current liabilities
Trade and other payables	14	(10,770)	(11,612)	(13,152)	(14,654)
Current tax liabilities		(765)	(989)	(1,015)	(1,068)
Bank loans and other borrowings	15	(7,255)	(2,177)	(2,194)	(19,664)
Obligations under finance leases	15	(1,029)	(1,019)	(862)	(1,259)
Derivative financial instrument	15	-	-	-	(209)
		(19,819)	(15,797)	(17,223)	(36,854)
Non-current liabilities
Bank loans and other borrowings	15	(26,269)	(25,811)	(18,953)	-
Obligations under finance leases	15	(1,493)	(1,447)	(961)	(2,176)
Derivative financial instruments	15	(1,710)	(1,076)	(442)	-
Employee benefit obligations	20	(782)	(1,065)	(1,742)	(2,038)
		(30,254)	(29,399)	(22,098)	(4,214)
Total liabilities		(50,073)	(45,196)	(39,321)	(41,068)
Net assets		7,059	12,382	18,407	22,596

144

	31 December 2011	31 December 2012	31 December 2013	6 months ended 30 June	6 months ended 30 June
				2014	2013
Notes	£'000	£'000	£'000	£'000	£'000
					(Unaudited)
Equity
Called up share capital	17	150	150	150	150
Share premium account		5,829	5,829	5,829	5,829
Capital redemption reserve		25	25	25	25
Retained earnings		1,055	6,378	12,403	16,592
Total equity		7,059	12,382	18,407	22,596

Consolidated statement of changes in equity

	Share capital £'000	Share premium £'000	Capital redemption reserve £'000	Retained earnings £'000	Total £'000
Balance at 1 January 2011	118	5,829	25	(2,565)	3,407
Profit for the period from 1 January 2011 to 31 December 2011	–	–	–	3,944	3,944
Other comprehensive expense for the period, net of income tax	–	–	–	(324)	(324)
Transactions with owners: Issue of shares	32	–	–	–	32
Balance At 31 December 2011	150	5,829	25	1,055	7,059
Profit for the period from 1 January 2012 to 31 December 2012	–	–	–	5,551	5,551
Other comprehensive expense for the period, net of income tax	–	–	–	(228)	(228)
Balance At 31 December 2012	150	5,829	25	6,378	12,382
Profit for the period from 1 January 2013 to 30 June 2013 (Unaudited)	–	–	–	3,073	3,073
Other comprehensive expense for the period, net of income tax (Unaudited)	–	–	–	(145)	(145)
Balance At 30 June 2013 (Unaudited)	150	5,829	25	9,306	15,310
Balance At 31 December 2012	150	5,829	25	6,378	12,382
Profit for the period from 1 January 2013 to 31 December 2013	–	–	–	6,563	6,563
Other comprehensive expense for the period, net of income tax	–	–	–	(538)	(538)
Balance At 30 December 2013	150	5,829	25	12,403	18,407
Profit for the period	–	–	–	3,804	3,804
Other comprehensive expense for the period, net of income tax	–	–	–	(201)	(201)
Deferred tax asset relating to share option scheme				586	586
Balance At 30 June 2014	150	5,829	25	16,592	22,596

146

Consolidated cash flow statement

	Year ended 31 December 2011 £'000	Year ended 31 December 2012 £'000	Year ended 31 December 2013 £'000	6 months ended 30 June 2014 £'000	6 months ended 30 June 2013 £'000
					(Unaudited)
Operating activities
Profit before tax	5,520	7,445	8,582	4,875	3,844
Adjustments for:
Net finance costs	3,124	2,867	2,434	1,133	1,272
Depreciation	2,079	2,271	2,355	1,248	1,141
Amortisation of intangible assets	207	243	303	136	152
Fair value adjustments	552	180	6	8	(4)
(Profit)/loss on disposal of property, plant and equipment	(82)	9	1	1	-
Employee benefit obligations	(66)	(42)	(55)	(48)	(28)
Changes in working capital:
Change in inventories	(92)	32	(295)	66	(195)
Change in trade and other receivables	(1,459)	(218)	813	(3,324)	(1,328)
Change in trade and other payables	541	639	1,763	1,490	1,307
Cash generated from operations	10,324	13,426	15,907	5,585	6,161
Interest paid	(2,865)	(2,229)	(2,024)	(717)	(1,161)
Income tax paid	(1,360)	(1,668)	(1,920)	(992)	(994)
Net cash from operating activities	6,099	9,529	11,963	3,876	4,006
Investing activities
Purchase of property, plant and equipment	(1,249)	(834)	(2,050)	(595)	(728)
Proceeds from sale of property, plant and equipment	169	3	-	-
Purchase of intangible assets	(273)	(307)	(214)	(75)	(107)
Net cash used in investing activities	(1,353)	(1,138)	(2,264)	(670)	(835)
Financing activities
Proceeds of issue of ordinary shares	32	-	-	-	-
Proceeds from borrowings	-	-	-	-	-
Repayments of borrowings	(5,125)	(6,762)	(8,058)	(2,095)	(3,352)
Repayments of obligations under finance leases	(1,194)	(1,218)	(1,069)	(552)	(596)
Net cash used in financing activities	(6,287)	(7,980)	(9,127)	(2,647)	(3,948)
Net increase/(decrease) in cash and cash equivalents	(1,541)	411	572	559	(777)
Opening cash and cash equivalents	1,953	412	823	1,395	823
Closing cash and cash equivalents	412	823	1,395	1,954	46

	Year ended 31 December 2011 £'000	Year ended 31 December 2012 £'000	Year ended 31 December 2013 £'000	6 months ended 30 June 2014 £'000	6 months ended 30 June 2013 £'000 (Unaudited)
Analysis of Net Debts
Cash and cash equivalents	412	823	1,395	1,954	46
Current borrowings	(7,255)	(2,177)	(2,094)	(19,564)	(2,325)
Non-current borrowings	(26,169)	(25,711)	(18,953)	-	(22,920)
Preference share capital	(100)	(100)	(100)	(100)	(100)
Finance lease liabilities	(2,522)	(2,466)	(1,823)	(3,435)	(1,983)
Net Debts	(35,634)	(29,631)	(21,575)	(21,145)	(27,282)

149

1. ACCOUNTING POLICIES

Basis of accounting

General Information

The Big Green Parcel Holding Company Limited (“The Big Green Parcel Holding Company”) is incorporated and domiciled in the UK. The address of the registered office is Shepcote House, Shepcote Lane, Sheffield, S9 1UW. The Big Green Parcel Holding Company and its subsidiaries’ (collectively the “Tuffnells Group”) principal activity is express parcel collection and delivery throughout the UK, Ireland and internationally.

Basis of preparation

This special purpose consolidated historical financial information presents the financial track record of the Tuffnells Group for the years ended 31 December 2011, 2012, 2013 and for the six months interim periods ended 30 June 2014 and 2013, and is prepared for the purposes of inclusion in the Prospectus of the proposed acquirer of the Tuffnells Group.

This special purpose consolidated financial information has been prepared in accordance with the Listing Rules of the London Stock Exchange and International Financial Reporting Standards as adopted by the European Union (“IFRS”), and with those parts of the Companies Act 2006 as applicable to companies reporting under IFRS.

The Tuffnells Group’s deemed transition date to IFRS is 1 January 2011. The principles and requirements for the first time adoption of IFRS are set out in IFRS1. IFRS1 allows certain exemptions in the application of particular standards to prior periods in order to assist companies with the transition process. This is the first financial information prepared in accordance with IFRS.

This special purpose consolidated historical financial information is prepared on a going concern basis and under the historical cost convention, as modified for the revaluation of certain financial instruments. The special purpose consolidated historical financial information is presented in thousands of pounds sterling (“£’000”), except where otherwise indicated.

The preparation of the special purpose consolidated historical financial information in conformity with IFRS requires the use of estimates and assumptions that affect the reported amount of assets, liabilities, revenue and expenses during the reporting period. Although these estimates are based on management’s reasonable knowledge of the amounts, events or actions, actual results may differ from those estimates.

A summary of the main accounting policies, which have been applied consistently, is set out below:

Going concern

At 30 June 2014 the Tuffnells Group had net current liabilities of £19,282,000 (2013: £2,337,000). The Directors, in forming their conclusions on going concern, have taken into account the outcome of the transaction to which this document relates. Taking into account the proposed financing in connection with the Acquisition and the net proceeds of the Rights Issue, the Directors have a reasonable expectation that the Tuffnells Group has adequate resources to continue in operational existence for the foreseeable future. Accordingly, the Directors have adopted the going concern basis in preparing the special purpose consolidated historical financial information.

Basis of consolidation

The special purpose consolidated historical financial information consolidates the financial statements of The Big Green Parcel Company Limited and its subsidiary companies for the years ended 31 December 2011, 2012, 2013 and for the six months interim periods ended 30 June 2014 and 2013. Uniform accounting policies are applied across the Tuffnells Group. Any profits or losses on intra Group transactions have been eliminated.

Changes in accounting policies

New standards and interpretations not yet adopted.

At the date of finalisation of this special purpose consolidated historical financial information, the following Standards and Interpretations which have not been applied in preparing the special purpose consolidated historical financial information were in issue but not yet effective (and in some cases had not yet been adopted by the EU):

IFRS 9 ‘Financial Instruments’; and

IFRS 15 ‘Revenue from contracts with customers’

The directors anticipate that the adoption of these standards and interpretations in future periods will have no material impact on the financial information of the Tuffnells Group.

Intangible assets

Intangible assets purchased separately are capitalised at cost and amortised on a straight line basis over their useful economic life. Intangible assets acquired through a business combination are initially measured at fair value and amortised on a straight line basis over their useful economic life.

Impairment of goodwill

Determining whether goodwill is impaired requires an estimation of the value in use of the cash generating units to which goodwill has been allocated. The value in use calculation requires the entity to estimate the future cash flows expected to arise from the cash generating unit and a suitable discount rate in order to calculate present value. The carrying amount of goodwill at the statement of financial position date 30 June 2014 was £22,007,000 (2013: £22,007,000). No impairment loss was recognised as the present value of the CGU was greater than the carrying amount that was held on the statement of financial position. Details of the value in use calculation are provided in Note 8.

Valuation of intangibles

Computer software and internal development costs which are not integral to the related hardware are capitalised separately as an intangible asset and stated at cost less accumulated amortisation and impairment losses.

Software and development costs – 2.5 to 10 years

All intangible assets are reviewed for impairment in accordance with IAS 36 ‘Impairment of Assets’ when there are indications that the carrying value may not be recoverable.

Property, plant and equipment

Property, plant and equipment are stated in the balance sheet at historic cost less provision for depreciation and any impairment. Cost includes expenditure that is directly attributable to the acquisition of the asset and bringing the asset to a working condition for its intended use. The Tuffnells Group capitalises directly attributable borrowing costs.

No depreciation has been charged on freehold land. Other assets are depreciated, to a residual value, on a straight-line over their estimated useful lives, as follows:

Freehold and long leasehold land:	Nil
Freehold and long leasehold buildings:	20–50 years
Short-term leasehold properties:	Shorter of the lease period and the estimated remaining economic life.
Motor vehicles and trailers:	4–8 years
Plant, fixtures and fittings:	2.5–10 years

Depreciation is not provided on assets in the course of construction. 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. All property, plant and equipment is reviewed for impairment in accordance with IAS 36 ‘Impairment of Assets’ when there are indications that the carrying value may not be recoverable.

150

151

Impairment reviews

When there is any indication of impairment, the Tuffnells Group reviews the carrying amounts of its tangible and intangible assets to determine their recoverable amount. If the carrying value is in excess of the recoverable amount the asset is then written down to its recoverable amount.

Recoverable amount is the higher of value in use or fair value less costs to sell. Value in use is assessed using discounted cash flow forecasts that the asset is expected to generate.

Where the asset does not generate cash flows that are independent from other assets, for example goodwill, the Tuffnells Group allocates these assets to cash generating units. Goodwill is allocated to cash generating units upon acquisition, based on the synergies expected to arise from the business combination.

Leases

Leases are classified as finance leases whenever the terms of the lease transfer substantially all of the risks and rewards of ownership to the lessee. All other leases are classified as operating leases. Property, plant and equipment held under finance leases is capitalised in the balance sheet at the lower of cost or present value of minimum lease payments and is depreciated over the shorter of the lease term or their useful life. The capital element of future obligations under leases are included as liabilities in the balance sheet. Lease payments are apportioned between finance charges and reduction of the lease obligation so as to achieve a constant rate of interest on the remaining balance of the liability. Rentals paid under operating leases are charged to income statement on a straight-line basis over the lease term. The benefit of rent free periods and similar incentives are credited to the income statement on a straight-line basis over the full lease term.

Inventories

Inventories principally comprise diesel with a rapid and high turnover which are valued at the lower of purchase cost and net realisable value. The cost of inventories is determined using a weighted average cost method. Costs represent the direct cost of inventories.

Financial instruments

Financial assets and financial liabilities are recognised on the Tuffnells Group's balance sheet when the Tuffnells Group becomes a party to the contractual obligations of the instrument.

Borrowings

Borrowings are recognised initially at fair value, net of transaction costs incurred. Borrowings are subsequently carried at amortised cost; any difference 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.

Borrowings are classified as current liabilities unless the Tuffnells Group has an unconditional right to defer settlement of the liability for at least twelve months after the reporting date.

Preference shares, which are mandatorily redeemable on a specific date and carry a mandatory coupon, are classified as liabilities. The dividends on these preference shares are recognised in the income statement as interest expense.

Derivative financial instruments

The Tuffnells Group uses derivative financial instruments to reduce exposure to interest rate movements. Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently re-measured at their fair value. The resulting gain or loss is recognised in the income statement as the group does not designate derivatives for hedge accounting. The fair values of derivative instruments are disclosed in note 15.

Fair value estimates

The fair value of financial instruments that are not traded in an active market (for example, over-the-counter derivatives) is determined by using valuation techniques. The Tuffnells Group uses its judgement to select a

variety of methods and make assumptions that are mainly based on market conditions existing at each reporting date. Please refer to Note 15.

Equity instruments

Equity instruments issued by the Tuffnells Group are recorded at the proceeds received, net of direct issue costs. An equity instrument is any contract that evidences a residual interest in the assets of the Tuffnells Group after deducting all of its liabilities.

Cash and cash equivalents

Cash and cash equivalents comprise cash balances and call deposits. Bank overdrafts that are repayable on demand and form an integral part of the Tuffnells Group's cash management are included as a component of cash and cash equivalents for the purpose of the statement of cash flows.

Trade payables and receivables

Trade receivables and trade payables do not carry any interest and are stated at their nominal value. Provision is made for estimated irrecoverable receivables.

Segmental reporting

Operating segments are reported in a manner consistent with the internal reporting to the Board of Directors, which has been identified as the Chief Operating Decision Maker.

The Board of Directors consider that there is one principal activity being express parcel collection and delivery. All segment revenue, profit before taxation, assets and liabilities are attributable to the operating segment.

Income recognition

In the income statement, revenue comprises the invoiced amount of sales, net of credits and discounts, and is stated net of VAT and other sales taxes and constitutes one class of business. Revenue is recognised upon satisfactory delivery of parcels collected.

Bank interest receivable is accrued on the effective interest method taking account of the principal outstanding and the interest rate applicable.

Taxation

Income tax on the profit or loss for the year comprises current and deferred tax. Current tax is the expected tax payable based on the taxable profit for the year, using tax rates enacted—or substantively enacted at the balance sheet date and any adjustment to tax payable in respect of previous years.

Deferred tax is provided using the balance sheet liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The amount of deferred tax provided is calculated using tax rates enacted or substantively enacted at the balance sheet date and that are expected to apply when the related deferred tax asset is realised or the deferred tax liability is settled.

Deferred tax assets are recognised to the extent that it is probable that future taxable profits will be available against which these temporary differences can be utilised.

Retirement benefit (pension) costs

For defined benefit schemes, the amounts charged to operating profit are the current service costs and gains and losses on settlements and curtailments. They are included as part of staff costs. Finance cost on defined benefit schemes is determined by reference to the net pension liability (or asset) and the discount rate. Remeasurement gains and losses on pension obligations are recognised immediately in the Statement of Comprehensive Income.

152

Defined benefit schemes are funded, with the assets of the scheme held separately from those of the Tuffnells Group, in separate trustee administered funds. Pension scheme assets are measured at fair value and liabilities are measured on an actuarial basis using the projected unit credit method and discounted at a rate equivalent to the current rate of return on a high quality corporate bond of equivalent currency and term to the scheme liabilities. The actuarial valuations are obtained at least triennially and are updated at each balance sheet date.

For defined contribution schemes the amount charged to the Income Statement in respect of pension costs and other post-retirement benefits is the contributions payable in the year. Differences between contributions payable in the year and contributions paid are shown as either accruals or prepayments in the Statement of Financial Position.

Provisions

Provisions are recognised when the Tuffnells Group has a present legal or constructive obligation as a result of past events and it is probable that the Tuffnells Group will have to settle that obligation. The provision represents the current best estimate of the net expenditure required to settle the obligation.

Share based payments

The Tuffnells Group operates an equity-settled, share-based compensation plan.

Equity-settled share-based schemes are measured at fair value at the date of the grant. The fair value is expensed with a corresponding increase in equity on a straight-line basis over the period during which the employees become unconditionally entitled to the options. The fair values are calculated using an appropriate pricing model. The income statement charge is then adjusted to reflect expected and actual levels of vesting based on non-market performance related criteria.

At the date of the grant the fair value of the options were assessed at nil, using a Black Scholes valuation methodology, therefore no expense is recognised in respect of employee services received in exchange for the grant of the options.

Risks and uncertainties

Financial risks are set out in note 15 to the special purpose consolidated historical financial information and key judgements and potential uncertainties are set out in note 22 to the special purpose consolidated historical financial information.

2. NET OPERATING COSTS

	Year ended 31 December 2011 £'000	Year ended 31 December 2012 £'000	Year ended 31 December 2013 £'000	6 months ended 30 June 2014 £'000	6 months ended 30 June 2013 £'000 (Unaudited)
Revenue	109,286	114,647	127,801	69,174	61,613
Distribution costs	(70,925)	(72,592)	(79,540)	(43,439)	(37,976)
Administrative expenses	(29,165)	(31,563)	(37,239)	(19,719)	(18,525)
Operating Profit	9,196	10,492	11,022	6,016	5,112

All revenue is generated in the UK.

OPERATING PROFIT

	Year ended 31 December 2011 £'000	Year ended 31 December 2012 £'000	Year ended 31 December 2013 £'000	6 months ended 30 June 2014 £'000	6 months ended 30 June 2013 £'000 (Unaudited)
Operating profit is stated after charging/(crediting):
Depreciation
- owned assets	1,041	1,521	1,415	905	816
- assets held on finance leases and hire purchase contracts	1,038	750	940	343	325
Amortisation of owned computer software	207	243	303	136	152
Loss/(profit) on disposal of property plant and equipment	(82)	9	1	1	-
Operating lease expense
- plant and machinery	9,583	8,786	9,186	4,899	4,965
- other	977	1,137	1,385	951	680
Auditors' remuneration:
- audit of parent company and consolidation	10	10	10	5	5
- audit of subsidiaries	23	25	27	13	12
- taxation	8	85	85	8	4
- other fees	5	1	1	1	-

FINANCE INCOME AND COSTS

	Year ended 31 December 2011 £'000	Year ended 31 December 2012 £'000	Year ended 31 December 2013 £'000	6 months ended 30 June 2014 £'000	6 months ended 30 June 2013 £'000 (Unaudited)
Interest income	(7)	(2)	(3)	(3)	(3)
Finance income	(7)	(2)	(3)	(3)	(3)
Interest on short term borrowings	2,931	2,671	2,247	1,034	1,173
Fair value losses/(gains) on interest swap agreements	552	180	6	8	(4)
Interest payable on finance leases and hire purchase contracts	169	169	134	65	74
Preference dividend	6	6	6	3	3
Finance cost/ (income) on pension scheme	25	23	50	34	25
Finance costs	3,683	3,049	2,443	1,144	1,271
Net finance costs	3,676	3,047	2,440	1,141	1,268

INCOME TAX EXPENSE

Analysis of taxation charge for the period.

| | 31 December 2011
Total
£'000 | 31 December 2012
Total
£'000 | 31 December 2013
Total
£'000 | 6 months ended 30 June 2014
Total
£'000 | 6 months ended 30 June 2013
Total
£'000 |
| --- | --- | --- | --- | --- | --- |
| (Unaudited) | | | | | |
| Current tax | | | | | |
| Current tax for the year: | 1,532 | 1,895 | 1,992 | 1,045 | 915 |
| Adjustments with respects to prior years | 2 | (4) | (46) | – | (46) |
| Total current tax charge | 1,534 | 1,891 | 1,946 | 1,045 | 869 |
| Deferred Tax | | | | | |
| Deferred Tax – current year | 42 | 3 | 73 | 32 | (29) |
| Adjustments with respects to prior years | – | – | – | (6) | (69) |
| Total deferred tax | 42 | 3 | 73 | 26 | (98) |
| Income tax expense | 1,576 | 1,894 | 2,019 | 1,071 | 771 |

Factors affecting the tax charge for the period

The standard rate of current tax for the period, based on the UK standard rate of corporation tax, is 22.00% (2013: 23.25%; 2012: 24.50%; 2011: 26.50%). The effective current tax rate for the period is 21.08% (2013: 2012: 28%) owing to the factors set out in the following reconciliation:

| | 31 December 2011
Total
£'000 | 31 December 2012
Total
£'000 | 31 December 2013
Total
£'000 | 6 months ended 30 June 2014
Total
£'000 | 6 months ended 30 June 2013
Total
£'000 |
| --- | --- | --- | --- | --- | --- |
| Profit before tax | 5,520 | 7,445 | 8,582 | 4,875 | 3,844 |
| Profit before tax multiplied by standard rate of corporation tax in the UK of 22.00% 30 June 2014, 23.50% 31 Dec 2013, 23.50% 30 June 2013, 24.50% 31 Dec 2012, and 26.50% 31 Dec 2011 | 26.50% | 24.50% | 23.25% | 22.00% | 23.50% |
| Tax effects of Adjustments in respects of prior periods | 1,463 | 1,824 | 1,995 | 1,073 | 903 |
| Expenses not deductible | 2 | (4) | (46) | (6) | (115) |
| Income not taxable | 115 | 76 | 74 | 7 | 13 |
| Effects of other tax rates | – | – | – | – | (30) |
| Income tax expense | (4) | (2) | (4) | (3) | – |

DIRECTOR'S REMUNERATION

	Year ended 31 December 2011 £'000	Year ended 31 December 2012 £'000	Year ended 31 December 2013 £'000	6 months ended 30 June 2014 £'000	6 months ended 30 June 2013 £'000 (Unaudited)
Salary	321	376	886	229	251
Pension costs	32	32	32	17	16
	353	408	918	246	267

Pensions

Two directors were members of the Group's defined benefit pension scheme in each period.

Highest paid director

In the period ended 30 June 2014 the highest paid director earned emoluments of £151,000 (Period to 30 June 2013: £208,000 (Unaudited), FY 2013: £545,000, FY 2012: £208,000, FY 2011: £198,000) and had an accrued pension of £22,000 in the defined benefit scheme in each period.

Key management remuneration is shown in note 19.

STAFF COSTS AND EMPLOYEES

The average total monthly number of employees (including directors) was:

	Year ended 31 December 2011 No.	Year ended 31 December 2012 No.	Year ended 31 December 2013 No.	6 months ended 30 June 2014 No.	6 months ended 30 June 2013 No. (Unaudited)
Haulage	1,434	1,447	1,543	1,697	1,479
Office management	446	450	486	523	469
	1,880	1,897	2,029	2,220	1,948

The aggregate remuneration for employees (excluding directors) for the period was:

	Year ended 31 December 2011 £'000	Year ended 31 December 2012 £'000	Year ended 31 December 2013 £'000	6 months ended 30 June 2014 £'000	6 months ended 30 June 2013 £'000 (Unaudited)
Wages and salaries	35,138	37,111	42,413	22,749	20,649
Social security costs	3,150	3,231	3,578	1,988	1,723
Pension costs	136	245	266	275	130
	38,424	40,587	46,257	25,012	22,502

All employee remuneration is included in distribution costs and administrative expenses within net operating costs.

INTANGIBLE ASSETS

| | Computer software
£'000 | Goodwill
£'000 | Total
£'000 |
| --- | --- | --- | --- |
| Cost | | | |
| At 1 January 2011 | 1,271 | 22,007 | 23,278 |
| Additions during the year | 273 | – | 273 |
| At 31 December 2011 | 1,544 | 22,007 | 23,551 |
| Additions during the year | 307 | – | 307 |
| At 31 December 2012 | 1,851 | 22,007 | 23,858 |
| Additions during the period (Unaudited) | 107 | – | 107 |
| At 30 June 2013 (Unaudited) | 1,958 | 22,007 | 23,965 |
| At 31 December 2012 | 1,851 | 22,007 | 23,858 |
| Additions during the year | 214 | – | 214 |
| At 31 December 2013 | 2,065 | 22,007 | 24,072 |
| Additions during the period | 75 | – | 75 |
| At 30 June 2014 | 2,140 | 22,007 | 24,147 |
| Accumulated amortisation and impairment | | | |
| At 1 January 2011 | (849) | – | (849) |
| Amortisation for the year | (207) | – | (207) |
| At 31 December 2011 | (1,056) | – | (1,056) |
| Amortisation for the year | (243) | – | (243) |
| At 31 December 2012 | (1,299) | – | (1,299) |
| Amortisation for the period (Unaudited) | (151) | – | (151) |
| At 30 June 2013 (Unaudited) | (1,450) | – | (1,450) |
| At 31 December 2012 | (1,299) | – | (1,299) |
| Amortisation for the year | (303) | – | (303) |
| At 31 December 2013 | (1,602) | – | (1,602) |
| Amortisation for the period | (136) | – | (136) |
| At 30 June 2014 | (1,738) | – | (1,738) |
| Net book amount | | | |
| At 30 June 2014 | 402 | 22,007 | 22,409 |
| At 31 December 2013 | 463 | 22,007 | 22,470 |
| At 30 June 2013 (Unaudited) | 508 | 22,007 | 22,515 |
| At 31 December 2012 | 552 | 22,007 | 22,559 |
| At 31 December 2011 | 488 | 22,007 | 22,495 |

Goodwill and intangibles by CGU

Goodwill of £22.0m relates to the acquisition of the business and assets of The Big Green Parcel Group Limited on 20 March 2008, and the carrying amount is based on the historical cost of goodwill recorded under previous GAAP at initial adoption of IFRS. Refer to note 27 "Transistion to IFRS".

The Tuffnells Group operates a single integrated network of depots for collecting and delivering parcels, and substantially all collections and deliveries occur within the United Kingdom. Accordingly, management reviews the business performance of the Tuffnells Group as a single entity, and there is only one operating segment. Goodwill is therefore evaluated for impairment at the Group level.

Goodwill is not amortised, but tested annually for impairment with the recoverable amount being determined from a value in use calculation. The Tuffnells Group prepares cash flow forecasts derived from the most recent budgets and forecasts for the following 5 years, approved by the directors, and extrapolates these cash flows on an estimated growth rate of $2\%$ into perpetuity. The discount rate used is pre-tax and reflects the specific risks relating to the operating segment. The calculation of value in use is most sensitive to the discount rate and growth rates used.

The key assumptions used for value-in-use calculations are as follows:

	31 December 2011 %	31 December 2012 %	31 December 2013 %	6 months ended 30 June 2014 %	6 months ended 30 June 2013 % (Unaudited)
Compound annual growth rate	5.8	5.5	6.6	3.8	4.8
Terminal value growth rate	2.0	2.0	2.0	2.0	2.0
Pre-tax discount rate	10.7	10.9	11.6	10.9	11.6

Management determined compound annual volume growth rate for the CGU covering over the 5 year forecast period to be a key assumption. The volume of sales in each period is the main driver for revenue and costs. The compound annual volume growth rate is based on past performance and management's expectations of market development. The long term growth rates used are consistent with the forecasting included in industry reports. The discount rates used are pre-tax and reflect specific risks relating to the relevant operating segments.

Management believes that no reasonable potential change in any of the above assumptions would cause the carrying value to exceed its recoverable amount.

9. PROPERTY, PLANT AND EQUIPMENT

	Land and buildings			Motor vehicles and trailers £'000	Plant fixtures and fittings £'000	Total £'000
	Freehold £'000	Long leasehold £'000	Short leasehold £'000
Cost
At 1 January 2011	14,280	1,418	213	4,854	5,238	26,003
Additions	369	14	262	734	899	2,278
Disposals	(125)	-	-	(336)	(95)	(556)
At 31 December 2011	14,524	1,432	475	5,252	6,042	27,725
Additions	430	-	50	674	842	1,996
Disposals	-	-	-	(182)	(62)	(244)
At 31 December 2012	14,954	1,432	525	5,744	6,822	29,477
Additions (Unaudited)	-	20	61	281	478	840
Disposals (Unaudited)	-	-	-	(22)	(26)	(48)
At 30 June 2013 (Unaudited)	14,954	1,452	586	6,003	7,274	30,269

	Land and buildings			Motor vehicles and trailers	Plant fixtures and fittings	Total
	Freehold £'000	Long leasehold £'000	Short leasehold £'000
At 31 December 2012	14,954	1,432	525	5,744	6,822	29,477
Additions	14	43	541	447	1,431	2,476
Disposals	-	-	-	(12)	(80)	(92)
At 31 December 2013	14,968	1,475	1,066	6,179	8,173	31,861
Additions	32	-	101	1,752	875	2,760
Disposals	-	-	-	-	(26)	(26)
At 30 June 2014	15,000	1,475	1,167	7,931	9,022	34,595
Accumulated depreciation
At 1 January 2011	(578)	(74)	(42)	(1,831)	(2,778)	(5,303)
Charge for the year	(221)	(27)	(44)	(917)	(870)	(2,079)
Disposals	40	-	-	332	94	466
At 31 December 2011	(759)	(101)	(86)	(2,416)	(3,554)	(6,916)
Charge for the year	(223)	(28)	(79)	(963)	(978)	(2,271)
Disposals	-	-	-	171	62	233
At 31 December 2012	(982)	(129)	(165)	(3,208)	(4,470)	(8,954)
Charge for the period (Unaudited)	(112)	(14)	(37)	(503)	(477)	(1,143)
Disposals (Unaudited)	-	-	-	17	26	43
At 30 June 2013 (Unaudited)	(1,094)	(143)	(202)	(3,694)	(4,921)	(10,054)
At 31 December 2012	(982)	(129)	(165)	(3,208)	(4,470)	(8,954)
Charge for the year	(224)	(28)	(94)	(842)	(1,167)	(2,355)
Disposals	-	-	-	12	73	85
At 31 December 2013	(1,206)	(157)	(259)	(4,038)	(5,564)	(11,224)
Charge for the period	(112)	(14)	(66)	(438)	(618)	(1,248)
Disposals	-	-	-	-	25	25
At 30 June 2014	(1,318)	(171)	(325)	(4,476)	(6,157)	(12,447)
Net book amount
At 30 June 2014	13,682	1,304	842	3,455	2,865	22,148
At 31 December 2013	13,762	1,318	807	2,141	2,609	20,637
At 30 June 2013 (Unaudited)	13,860	1,309	384	2,309	2,353	20,215
At 31 December 2012	13,972	1,303	360	2,536	2,352	20,523
At 31 December 2011	13,765	1,331	389	2,836	2,488	20,809

The net book value of assets held under finance leases and hire purchase contracts at 30 June 2014 amounted to £3,349,000 (FY 2013: £2,209,000; FY 2012: £2,636,000; FY 2011: £3,096,000).

No borrowing costs had been capitalised during the periods as no assets were constructed by the Tuffnells Group in the periods. At the year end the Tuffnells Group held no assets under construction (FY 2013, FY 2012, FY 2011: Nil).

159

10. PRINCIPAL SUBSIDIARY UNDERTAKINGS

At 30 June 2014, 31 December 2013, 30 June 2013, 31 December 2012, and 31 December 2011, The Big Green Parcel Holding Company Limited owned 100% of the ordinary share capital of the following principal subsidiary undertakings, all of which are included in the special purpose consolidated historical financial information:

Name of company	Country of Registration	Principal Activity	Class and percentage of shares held
The Big Green Parcel Group Limited	England	Non-trading	Ordinary 100%

In addition The Big Green Parcel Holding Company Limited has an indirect holding of 100% in

Name of company	Country of Registration	Principal Activity	Class and percentage of shares held
The Big Green Euro Machine Limited	England	Non-trading	Ordinary 100%
Tuffnells Parcels Express Limited	England	Express Parcel Carrier	Ordinary 100%
The Big Green Parcel Machine Limited	England	Non-trading	Ordinary 100%

11. INVENTORIES

	31 December 2011 £'000	31 December 2012 £'000	31 December 2013 £'000	6 months ended 30 June 2014 £'000	6 months ended 30 June 2013 £'000 (Unaudited)
Consumables	488	456	751	685	651

12. TRADE RECEIVABLES

	31 December 2011 £'000	31 December 2012 £'000	31 December 2013 £'000	6 months ended 30 June 2014 £'000	6 months ended 30 June 2013 £'000 (Unaudited)
Trade receivables	8,030	7,852	8,338	11,956	10,397
Allowance for doubtful receivables	(57)	(20)	(108)	(121)	(68)
Trade receivables (net)	7,973	7,832	8,230	11,835	10,329
Prepayment and other debtors	4,231	4,590	3,379	3,098	3,421
	12,204	12,422	11,609	14,933	13,750

The average credit period taken on invoices raised is 24 days at 30 June 2014 (FY 2013: 26 days, FY 2012: 29 days, FY 2011: 29 days). Trade receivables are generally non-interest bearing.

The carrying value of trade and other receivables approximates their fair value. As of 30 June 2014, trade receivables of £11,835,000 were considered fully collectible (31 December 2013: £8,230,000, 30 June 2013: £10,329,000 (Unaudited), 31 December 2012: £7,832,000, 31 December 2011: £7,973,000).

The Tuffnells Group has recognised a provision of £121,000 for the impairment of its trade receivables at the period end 30 June 2014. (At 31 December 2013: £108,000; 30 June 2013: £68,000 (Unaudited); 31 December 2012: £20,000, 31 December 2011: £57,000). The creation and release of provision for impaired receivables has been included in 'administrative expense' in the income statement. The ageing of balances provided is as follows:

	31 December 2011 £'000	31 December 2012 £'000	31 December 2013 £'000	6 months ended 30 June 2014 £'000	6 months ended 30 June 2013 £'000 (Unaudited)
Age of balances provided for past due
Considered past due (30-60 days old)	18	5	-	-	-
Considered past due (over 60 days old)	39	15	108	121	68
Total balance provided for past due	57	20	108	121	68

Movements on the provision for impairment of trade receivables are as follows:

	31 December 2011 £'000	31 December 2012 £'000	31 December 2013 £'000	6 months ended 30 June 2014 £'000	6 months ended 30 June 2013 £'000 (Unaudited)
Movement in the allowance for doubtful receivables
Allowance for doubtful receivables at 1 January	92	57	20	108	20
Release	(35)	(37)	-	-	-
Impairment recognised in the income statement	-	-	88	13	48
Allowance for doubtful receivables at the end of the period	57	20	108	121	68

Provisions against specific balances:

Significant balances are assessed for evidence that the customer is in significant financial difficulty. Examples of facts that the Tuffnells Group considers are high probability of bankruptcy, breaches of contract or major concession being sought by the customer.

Instances of significant single customer related bad debts are very rare and there is no significant concentration of risk associated with particular customers.

Providing against the remaining population of customers:

Historic data is monitored and applied as the primary source of evidence to assess the level of losses incurred, although impairments cannot yet be identified with individual receivables. Adverse changes in the payment status of customers that correlate with defaults on receivables in the Tuffnells Group may also provide a basis for increase of the level of provision above historic losses. However, the fact that payments are made late by customers does not automatically provide evidence that a provision should be recognised.

162

	31 December 2011 £'000	31 December 2012 £'000	31 December 2013 £'000	6 months ended 30 June 2014 £'000	6 months ended 30 June 2013 £'000 (Unaudited)
Age analysis of net trade receivables
Not overdue	5,807	5,949	6,740	10,659	9,090
Considered past due (30-60 days old)	2,181	1,848	1,494	1,203	1,196
Considered past due (60-90 days old)	24	6	(7)	4	131
Considered past due (over 90 days old)	18	49	111	90	(20)
Allowance for doubtful receivables at the end of the period	(57)	(20)	(108)	(121)	(68)
Total net trade receivables	7,973	7,832	8,230	11,835	10,329

There were no significant concentrations of customer accounts in at 30 June 2014, 31 December 2013, 30 June 2013, 31 December 2012, or 31 December 2011 within trade receivables.

13. CASH AND CASH EQUIVALENTS

Cash and cash equivalents comprise cash held by the Tuffnells Group and short-term bank deposits with an original maturity of three months or less. The carrying amount of these assets approximates their fair value.

	31 December 2011 £'000	31 December 2012 £'000	31 December 2013 £'000	6 months ended 30 June 2014 £'000	6 months ended 30 June 2013 £'000 (Unaudited)
Cash and cash equivalent: Sterling	412	823	1,395	1,954	46

The credit risk on cash and cash equivalents is deemed to be low.

14. TRADE AND OTHER PAYABLES

	31 December 2011 £'000	31 December 2012 £'000	31 December 2013 £'000	6 months ended 30 June 2014 £'000	6 months ended 30 June 2013 £'000 (Unaudited)
Trade payables	6,168	5,840	5,944	6,922	6,205
Other taxation and social security liabilities	2,334	2,920	3,341	3,704	3,396
Other creditors	1,319	1,800	2,802	2,568	1,535
Accruals	949	1,052	1,065	1,460	1,595
	10,770	11,612	13,152	14,654	12,731

Trade and other payables principally comprise amounts outstanding for trade purchases and ongoing costs. The average credit period taken for trade purchases is 31 days at 30 June 14 (FY 2013: 31 days; Period to 30 June 13: 30 days (Unaudited); FY 2012: 33 days; FY 2011: 35 days). No interest is charged on trade payables. The carrying amounts of trade and other payables approximate their fair values.

15. FINANCIAL INSTRUMENTS

Financial assets and financial liabilities are recognised on the Tuffnells Group's balance sheet when the Tuffnells Group becomes a party to the contractual obligations of the instrument.

Bank borrowings mature in 2015 and bear floating rate coupons between 2.5%–5.0% above the LIBOR rate. Total borrowings include secured liabilities (bank and collateralised short term borrowings). Bank borrowings are secured by the land and buildings of the Tuffnells Group. Short term borrowings are secured by trade receivables (note 12).

Amounts outstanding in relation to finance leases and hire purchase contracts are secured by the assets to which they relate.

The Tuffnells Group issued 100,000 cumulative redeemable preference shares with a subscription price of £1 per share in 2008. The shares are mandatorily redeemable at their subscription value, plus any dividend arrears, at the earlier of the mezzanine discharge date, the final repayment date being 31 December 2014, or a sale, listing or refinancing event.

Where required, the Tuffnells Group uses the following hierarchy of valuation techniques, as applicable, for determining and disclosing the fair values of financial instruments:

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).
Inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs) (Level 3).

The carrying amounts of the current and non-current borrowings are as follows:

	31 December 2011 £'000	31 December 2012 £'000	31 December 2013 £'000	6 months ended 30 June 2014 £'000	6 months ended 30 June 2013 £'000 (Unaudited)
Current
Short term borrowings	2,539	2,177	1,119	-	2,325
Bank loan	4,716	-	975	19,564	-
Obligations under finance leases and hire purchase contracts	1,029	1,019	862	1,259	864
Preference share capital	-	-	100	100	-
	8,284	3,196	3,056	20,923	3,189

164

	31 December 2011 £'000	31 December 2012 £'000	31 December 2013 £'000	6 months ended 30 June 2014 £'000	6 months ended 30 June 2013 £'000 (Unaudited)
Non-current
Bank loan	26,169	25,711	18,953	–	22,820
Obligations under finance leases and hire purchase contracts	1,493	1,447	961	2,176	1,119
Preference share capital	100	100	–	–	100
	27,762	27,258	19,914	2,176	24,039
Total borrowings	36,046	30,454	22,970	23,099	27,228

The carrying value of short term borrowings, obligations under finance leases and hire purchase contracts and preference shares capital approximate to their fair values.

The Tuffnells Group considered its bank loans and determined that the carrying amounts approximated their fair values because i) there has been no significant change in the Tuffnells Group’s credit standing over the periods reported and; ii) the bank loans carry floating rate coupons as described above thereby minimising fluctuations in fair value resulting from movements in market interest rates.

Treasury policy & capital risk management

The Tuffnells Group’s operations expose it to a variety of financial risks that include the effects of credit risk, interest rate risk and liquidity risk. Given the size of the Tuffnells Group the directors have not delegated the responsibility of monitoring financial risk management to a sub-committee of the Board. The policies set by the Board of Directors are implemented by the Tuffnells Group’s finance department.

The Tuffnells Group’s objectives when managing capital are to safeguard the Tuffnells Group’s ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital.

Credit risk

Credit risk arises from deposits with banks and financial institutions as well as credit exposures to customers, including outstanding receivables.

	31 December 2011 £'000	31 December 2012 £'000	31 December 2013 £'000	6 months ended 30 June 2014 £'000	6 months ended 30 June 2013 £'000 (Unaudited)
Bank deposits	412	823	1,395	1,945	46
Trade receivables	7,973	7,832	8,230	11,835	10,329
	8,385	8,655	9,625	13,780	10,375

See Note 12 for additional information on trade receivables.

Interest rate risk

The Tuffnells Group’s interest rate risk arises from long-term borrowings. Borrowings issued at variable rates expose the Tuffnells Group to cash flow interest rate risk. The Tuffnells Group manages its variability in cash flows by using floating-to-fixed interest rate swaps. Such interest rate swaps have the economic effect

of converting borrowings from floating rates to fixed rates. Under the interest rate swaps, the Tuffnells Group agrees with other parties to exchange, at specified intervals, the difference between fixed contract rates and floating-rate interest amounts calculated by reference to the agreed notional principal amounts. The fair value of interest rate swaps at the reporting date is disclosed below.

	Fixed interest rate		Notional principal amount		Fair value
	30 June	30 June	30 June	30 June	30 June	30 June
	2014	2013	2014	2013	2014	2013
		Unaudited		Unaudited		Unaudited
			£'000	£'000	£'000	£'000
Derivative financial instrument
Interest rate swap	5.2%	5.2%	9,394	10,706	209	730
	Fixed interest rate		Notional principal amount		Fair value
	31 Dec	31 Dec	31 Dec	31 Dec	31 Dec	31 Dec
	2013	2012	2013	2012	2013	2012
			£'000	£'000	£'000	£'000
Derivative financial instrument
Interest rate swap	5.2%	5.2%	10,706	15,506	442	1,076
	Fixed interest rate		Notional principal amount		Fair value
	31 Dec	1 Jan	31 Dec	1 Jan	31 Dec	1 Jan
	2011	2011	2011	2011	2011	2011
			£'000	£'000	£'000	£'000
Derivative financial instrument
Interest rate swap	5.2%	5.2%	20,569	24,506	1,710	2,179

The Tuffnells Group analyses its interest rate exposure by calculating the impact on profit and loss of a defined interest rate shift. Based on the simulations performed, the impact on post tax profit of a 0.5% shift would be a maximum increase of £9k for the period to June 2014 (FY 2013: £29,000; Period to June 2013: £51,000 (Unaudited); FY 2012: £78,000; FY 2011: £143,000) or decrease of £9,000 for the period to June 2014 (FY 2013: £28,000; Period to June 2013: £50,000 (Unaudited); FY 2012: £77,000; FY 2011: £141,000), respectively.

The Tuffnells Group determines the fair values of its derivative instruments using level 2 inputs.

At 30 June 2014, the fixed interest rate is 5.2% (FY 2013: 5.2%; FY 2012: 5.2%; FY 2011: 5.2%), and the floating rate is LIBOR. Gains and losses from the mark to market valuation of the interest rate swap are recognised in the income statement.

Liquidity risk

Current and projected working capital demand is reviewed in conjunction with existing financing facilities to determine cash requirements as part of the routine reporting process. Future funding requirements will be provided as and when required. The Board is satisfied that the facilities are adequate for the foreseeable future based on the Tuffnells Group's current working capital requirements.

Surplus cash held over and above balances required for working capital management are invested in interest bearing current accounts. At the reporting date, the Tuffnells Group held interest bearing funds of £1,945,000 (FY 2013: £1,395,000; Period to 30 June 2013: £46,000 (Unaudited); FY 2012: £823,000; FY 2011: £1,935,000) that are readily available for managing liquidity risk (note 13).

165

The table below analyses the Tuffnells Group's non-derivative and derivative financial liabilities into relevant maturity groupings based on the remaining period at the balance sheet date to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows.

	Year ended 31 December 2011 £'000	Year ended 31 December 2012 £'000	Year ended 31 December 2013 £'000	6 months ended 30 June 2014 £'000	6 months ended 30 June 2013 £'000 (Unaudited)
Non-derivative financial liabilities
Short term borrowings
- Within one year	2,539	2,177	1,119	-	2,325
- Between two and five years	-	-	-	-	-
	2,539	2,177	1,119	-	2,325
Bank loans
- Within one year	4,716	-	975	19,683	-
- Between two and five years	26,940	26,182	19,191	-	23,174
- Greater than five years	-	-	-	-	-
- Less prepaid finance charges	(771)	(471)	(238)	(119)	(354)
	30,885	25,711	19,928	19,564	22,820
Finance leases and hire purchase contracts
- Within one year	1,029	1,019	862	1,259	864
- Between two and five years	1,493	1,447	961	2,176	1,119
	2,522	2,466	1,823	3,435	1,983
Preference share capital
- Within one year	-	-	100	100	-
- Between two and five years	100	100	-	-	100
	100	100	100	100	100
Total: Non-derivative financial liabilities	36,046	30,454	22,970	23,099	27,228
Derivative financial liabilities
Interest rate swap
- Within one year	-	-	-	209	-
- Between two and five years	1,710	1,076	442	-	730
Total: Derivative financial liabilities	1,710	1,076	442	209	730
Total:	37,756	31,530	23,412	23,308	27,958

The Tuffnells Group has a working capital facility relating to short term borrowings as disclosed in the table above. The maximum amount available from this facility during the year was £8.5m (FY 2013: £8.5m, FY 2012: £8.5m, FY 2011: £8.5m). This facility carries a fixed interest of 1.5% above base rate (FY 2013, FY 2012, FY 2011: 1.5%). The facility is available until 31 December 2014.

16. DEFERRED TAX

The analysis of deferred tax assets is as follows:

	31 December 2011 £'000	31 December 2012 £'000	31 December 2013 £'000	6 months ended 30 June 2014 £'000	6 months ended 30 June 2013 £'000 (Unaudited)
Deferred tax assets:
Deferred tax assets to be recovered after more than 12 months	724	795	866	1,535	978
Deferred tax assets to be recovered within 12 months	-	-	-	-	-
Deferred tax asset	724	795	866	1,535	978

The gross movement on the deferred income tax account is as follows:

	Year ended 31 December 2011 £'000	Year ended 31 December 2012 £'000	Year ended 31 December 2013 £'000	6 months ended 30 June 2014 £'000	6 months ended 30 June 2013 £'000 (Unaudited)
At 1 January	699	724	795	866	795
Income statement charge	(42)	(3)	(73)	(26)	98
Tax charge/(credit) relating to component of other comprehensive income (note 5)	67	74	144	109	85
Tax charge/(credit) directly to equity	-	-	-	586	-
At the end of the period:	724	795	866	1,535	978

Deferred tax assets arise on the defined benefit pension scheme, fair value movements on derivative financial instruments, capital allowances, share based payments and other timing differences. The movement in deferred income tax assets and liabilities during the periods is as follows:

	Employee benefit obligations	Fair value movements	Other	Total
Deferred tax asset	£'000	£'000	£'000	£'000
At 1 January 2011	117	501	81	699
Charged/(credited) to the income statement	12	(108)	54	(42)
Charged/(credited) to the other comprehensive income	67	-	-	67
Charged/(credited) to equity	-	-	-	-
At the end of the year: 31 December 2011	196	393	135	724

	Employee benefit obligations £'000	Fair value movements £'000	Other £'000	Total £'000
Deferred tax asset
At 1 January 2012	196	393	135	724
Charged/(credited) to the income statement	5	(146)	138	(3)
Charged/(credited) to the other comprehensive income	44	-	30	74
Charged/(credited) to equity	-	-	-	-
At the end of the year 31 December 2012:	245	247	303	795
At 1 January 2013	245	247	303	795
Charged/(credited) to the income statement	13	(159)	73	(73)
Charged/(credited) to the other comprehensive income	90	-	54	144
Charged/(credited) to equity	-	-	-	-
At the end of the year 31 December 2013:	348	88	430	866
At 1 January 2013	245	247	303	795
Charged/(credited) to the income statement – Unaudited	(7)	(79)	184	98
Charged/(credited) to the other comprehensive income – Unaudited	85	-	-	85
Charged/(credited) to equity – Unaudited	-	-	-	-
At the end of the period 30 June 2013 (Unaudited):	323	168	487	978
At 1 January 2014	348	88	430	866
Charged/(credited) to the income statement	(50)	(46)	70	(26)
Charged/(credited) to the other comprehensive income	109	-	-	109
Charged/(credited) to equity	-	-	586	586
At the end of the period 30 June 2014:	407	42	1,086	1,535

17. CALLED UP SHARE CAPITAL

(a) Share Capital

	31 December 2011 £'000	31 December 2012 £'000	31 December 2013 £'000	6 months ended 30 June 2014 £'000	6 months ended 30 June 2013 £'000 (Unaudited)
Issued and fully paid in the period
813,574 Ordinary shares of 10p each (813,574 FY 2013, FY 2012, FY 2011)	82	82	82	82	82
364,286 A Ordinary shares of 10p each (364,286 FY 2013, FY 2012, FY 2011)	36	36	36	36	36
246,800 B Ordinary shares of 10p each (246,800 FY, 2013, FY 2012, FY 2011)	25	25	25	25	25
73,800 C Ordinary shares of 10p each (73,800 FY 2013, FY 2012, FY 2011)	7	7	7	7	7
	150	150	150	150	150

The A Ordinary shares and the B Ordinary shares stand equally with the Ordinary shares in relation to voting and dividend rights. The C Ordinary shares have no voting or dividend rights.

In February 2011, The Big Green Parcel Holding Company Limited issued 246,800 B Ordinary shares at 10 pence each and 73,000 C Ordinary shares of 10 pence each for cash consideration of £32,060. There have been no subsequent changes in the number of shares in issue since February 2011.

(b) Movement in share capital

	31 December 2011 £'000	31 December 2012 £'000	31 December 2013 £'000	6 months ended 30 June 2014 £'000	6 months ended 30 June 2013 £'000 (Unaudited)
Balance at 1 January	118	150	150	150	150
Movement	32	-	-	-	-
Balance at period end	150	150	150	150	150

(c) Share premium

	31 December 2011 £'000	31 December 2012 £'000	31 December 2013 £'000	6 months ended 30 June 2014 £'000	6 months ended 30 June 2013 £'000 (Unaudited)
Balance at 1 January	5,829	5,829	5,829	5,829	5,829
Movement	-	-	-	-	-
Balance at period end	5,829	5,829	5,829	5,829	5,829

18. OPERATING LEASE ARRANGEMENTS

	31 December 2011		31 December 2012		31 December 2013
	Plant and Equipment £'000	Land & Buildings £'000	Plant and Equipment £'000	Land & Buildings £'000	Plant and Equipment £'000	Land & Buildings £'000
Total future minimum lease payments under non cancellable operating leases
Within one year	975	-	756	-	1,027	-
In the second to fifth year	14,946	585	13,474	851	17,119	536
In more than five years	6,609	9,876	10,282	8,423	6,904	10,390
	22,530	10,461	24,512	9,274	25,050	10,926

	30 June 2014		30 June 2013
	Plant and Equipment £'000	Land & Buildings £'000	Plant and Equipment £'000 (Unaudited)	Land & Buildings £'000 (Unaudited)
Total future minimum lease payments under non cancellable operating leases
Within one year	1,592	107	662	-
In the second to fifth year	15,719	273	13,161	695
In more than five years	6,811	11,504	10,073	9,332
	24,122	11,884	23,896	10,027

19. RELATED PARTY DISCLOSURES

Transactions between businesses within the Tuffnells Group, which are related parties, have been eliminated on consolidation and are not disclosed in this Note.

Aggregate remuneration of key management personnel

The remuneration of the executive management team, who are the key management personnel of the Tuffnells Group, is set out below in aggregate for each of the categories specified in IAS24 'Related Party Disclosures.'

	31 December 2011 £'000	31 December 2012 £'000	31 December 2013 £'000	6 months ended 30 June 2014 £'000	6 months ended 30 June 2013 £'000 (Unaudited)

Short term employee benefits	840	1,211	2,062	744	719
Pension costs	55	57	63	33	28
	895	1,268	2,125	777	747

20. EMPLOYEE BENEFIT OBLIGATIONS

Defined benefit pension scheme

The Tuffnells Group operates one defined benefit pension scheme. The Tuffnells Parcels Express Pension Scheme is a defined benefit scheme operated for existing members and senior members of staff. The last formal valuation of the scheme had an effective date of 1 April 2013. The scheme is closed to new entrants.

The total pension charge for the period to June 2014 was £85,000 (FY 2013: £298,000; Period to June 2013: £53,000 (Unaudited); FY 2012: £277,000; FY 2011: £167,000).

The amounts recognised in the balance sheet are determined as follows:

	31 December	31 December	31 December	6 months ended 30 June	6 months ended 30 June
	2011	2012	2013	2014	2013
	£'000	£'000	£'000	£'000	£'000
					(Unaudited)
Present value of defined benefit obligations	(9,149)	(9,694)	(10,818)	(11,508)	(10,164)
Fair value of plan assets	8,367	8,629	9,076	9,470	8,872
Liability in the balance sheet	(782)	(1,065)	(1,742)	(2,038)	(1,292)

The movement in the defined benefit obligation and fair value of plan assets during the periods is as follows:

	Present value of obligation £'000	Fair value of plan assets £'000	Total £'000
At 1 January 2014	(10,818)	9,076	(1,742)
Current service cost	(65)	-	(65)
Administrative expenses	-	(6)	(6)
Interest expense	(239)	205	(34)
Recognised in the Income Statement	(304)	199	(105)
Remeasurements:
- Return on plan assets including amounts included in interest expense/(income)	-	122	122
-(Gain)/loss from change in demographic assumptions	-	-	-
-(Gain)/loss from change in financial assumptions	(459)	-	(459)
- Experience (gains)/losses	27	-	27
Recognised in the Statement of Comprehensive Income	(432)	122	(310)
Exchange differences
Contributions:
- Employers	-	119	119
- Plan participants	(30)	30	-
Payments from plans:
- Benefit payments	76	(76)	-
At 30 June 2014	(11,508)	9,470	(2,038)

	Present value of obligation £'000	Fair value of plan assets £'000	Total £'000
At 1 January 2013	(9,694)	8,629	(1,065)
Current service cost	(116)	–	(116)
Administrative expenses	–	(12)	(12)
Interest expense	(436)	386	(50)
Recognised in the Income Statement	(552)	374	(178)
Remeasurements:
– Return on plan assets including amounts included in interest expense/(income)	–	(20)	(20)
– (Gain)/loss from change in demographic assumptions	(331)	–	(331)
– (Gain)/loss from change in financial assumptions	(481)	–	(481)
– Experience (gains)/losses	150	–	150
Recognised in the Statement of Comprehensive Income	(662)	(20)	(682)
Contributions:
– Employers	–	183	183
– Plan participants	(59)	59	–
Payments from plans:
– Benefit payments	149	(149)	–
At 31 December 2013	(10,818)	9,076	(1,742)
	Present value of obligation (Unaudited)	Fair value of plan assets (Unaudited)	Total (Unaudited)
	£'000	£'000	£'000
At 1 January 2013	(9,694)	8,629	(1,065)
Current service cost	(58)	–	(58)
Administrative expenses	–	(6)	(6)
Interest expense	(218)	193	(25)
Recognised in the Income Statement	(276)	187	(89)
Remeasurements:
– Return on plan assets including amounts included in interest expense/(income)	–	9	9
– (Gain)/loss from change in demographic assumptions	–	–	–
– (Gain)/loss from change in financial assumptions	(229)	–	(229)
– Experience (gains)/losses	(10)	–	(10)
Recognised in the Statement of Comprehensive Income	(239)	9	(230)
Contributions:
– Employers	–	92	92
– Plan participants	(30)	30	–
Payments from plans:
– Benefit payments	75	(75)	–
At 30 June 2013	(10,164)	8,872	(1,292)

	Present value of obligation £'000	Fair value of plan assets £'000	Total £'000
At 1 January 2012	(9,149)	8,367	(782)
Current service cost	(126)	–	(126)
Administrative expenses	–	(17)	(17)
Interest expense	(452)	429	(23)
Recognised in the Income Statement	(578)	412	(166)
Remeasurements:
– Return on plan assets including amounts included in interest expense/(income)	–	(139)	(139)
– (Gain)/loss from change in demographic assumptions	–	–	–
– (Gain)/loss from change in financial assumptions	(204)	–	(204)
– Experience (gains)/losses	41	–	41
Recognised in the Statement of Comprehensive Income	(163)	(139)	(302)
Contributions:
– Employers	–	185	185
– Plan participants	(62)	62	–
Payments from plans:
– Benefit payments	258	(258)	–
At 31 December 2012	(9,694)	8,629	(1,065)
	Present value of obligation £'000	Fair value of plan assets £'000	Total £'000
At 1 January 2011	(7,987)	7,555	(432)
Current service cost	(107)	–	(107)
Administrative expenses	–	(3)	(3)
Interest expense	(441)	416	(25)
Recognised in the Income Statement	(548)	413	(135)
Remeasurements:
– Return on plan assets including amounts included in interest expense/(income)	–	266	266
– (Gain)/loss from change in demographic assumptions	–	–	–
– (Gain)/loss from change in financial assumptions	(757)	–	(757)
– Experience (gains)/losses	100	–	100
Recognised in the Statement of Comprehensive Income	(657)	266	(391)
Contributions:
– Employers	–	176	176
– Plan participants	(67)	67	–
Payments from plans:
– Benefit payments	110	(110)	–
At 31 December 2011	(9,149)	8,367	(782)

The assets of the scheme, were comprised of:

	Quoted	Unquoted	Total £'000	%
30 June 2014
Growth Portfolio	4,997	2,172	7,169	76
Matching Portfolio	–	2,269	2,269	23
Cash and cash equivalents	–	32	32	1
Total fair value of assets			9,470
31 December 2013
Growth Portfolio	4,913	2,036	6,949	76
Matching Portfolio	–	2,055	2,055	23
Cash and cash equivalents	–	72	72	1
Total fair value of assets			9,076
30 June 2013 (Unaudited)
Growth Portfolio	4,685	2,027	6,712	76
Matching Portfolio	–	2,091	2,091	23
Cash and cash equivalents	–	69	69	1
Total fair value of assets			8,872
31 December 2012
Growth Portfolio	2,815	2,379	5,194	60
Matching Portfolio	–	2,087	2,087	24
Cash and cash equivalents	–	1,348	1,348	16
Total fair value of assets			8,629
31 December 2011
Growth Portfolio	2,601	2,060	4,661	56
Matching Portfolio	–	3,399	3,399	41
Cash and cash equivalents	–	307	307	4
Total fair value of assets			8,367

The growth portfolio is an actively managed Diversified Growth Fund. It contains a range of asset classes which could include, but is not limited to, hedge funds, corporate bonds, equity and derivatives. The matching fund is made up of gilts and swaps and is selected to provide protection against movements in interest rates and inflation. The matching portfolio will be tailored to match the liability cash flows as far as is practically possible, and will use geared swap funds to extend the matching characteristics where appropriate.

The full actuarial valuation of the defined benefit scheme, carried out as at 1 April 2013, has been updated to 30 June 2014 by a qualified independent actuary to comply with International Accounting Standard 19 Revised (IAS19R) Employee benefits. The significant assumptions used for the actuarial valuation were:

	31 December 2011	31 December 2012	31 December 2013	6 months ended 30 June 2014	6 months ended 30 June 2013 (Unaudited)
Rate of increase in salaries	3.80%	3.30%	3.60%	3.50%	3.70%
Rate of increase of pensions in payment	3.30%	3.20%	3.40%	3.40%	3.50%
Discount rate	4.90%	4.50%	4.40%	4.15%	4.60%
Inflation assumptions
- Retail Price Index	3.30%	3.30%	3.60%	3.50%	3.70%
- Consumer Price Index	2.40%	2.60%	2.60%	2.50%	2.70%
The assumed life expectations on retirement are:
Retiring today:
- Males	84.9	85.0	87.3	87.3	85.0
- Females	87.6	87.8	89.5	91.0	87.8
Retiring in 20 years:
- Males	86.7	86.8	89.0	89.0	86.8
- Females	89.4	89.6	91.4	93.3	89.6

The sensitivities regarding the principal assumptions used to measure the scheme liabilities as at the period end 30 June 2014:

Assumption	Change in assumptions	Impact on scheme liabilities
Discount rate	Increase by 1.0% per year	Decrease by 20.0%
Rate of inflation	Decrease by 0.1% per year	Reduce by 1.5%
Rate of salary growth	Increase by 0.1% per year	Increase by 0.5%

As at the period end 30 June 2013 – Unaudited:

Assumption	Change in assumptions	Impact on scheme liabilities
Discount rate	Increase by 1.0% per year	Decrease by 20.0%
Rate of inflation	Decrease by 0.1% per year	Reduce by 1.5%
Rate of salary growth	Increase by 0.1% per year	Increase by 0.5%

As at 31 December 2013:

Assumption	Change in assumptions	Impact on scheme liabilities
Discount rate	Increase by 1.0% per year	Decrease by 19.0%
Rate of inflation	Decrease by 0.1% per year	Reduce by 1.5%
Rate of salary growth	Increase by 0.1% per year	Increase by 0.5%

As at 31 December 2012:

Assumption	Change in assumptions	Impact on scheme liabilities
Discount rate	Increase by 1.0% per year	Decrease by 21.0%
Rate of inflation	Decrease by 0.1% per year	Reduce by 2.0%
Rate of salary growth	Increase by 0.1% per year	Increase by 0.5%

As at 31 December 2011:

Assumption	Change in assumptions	Impact on scheme liabilities
Discount rate	Increase by 1.0% per year	Decrease by 23.0%
Rate of inflation	Decrease by 0.1% per year	Reduce by 1.3%
Rate of salary growth	Increase by 0.1% per year	Increase by 0.6%

The above sensitivity analyses are based on a change in an assumption while holding all other assumptions constant. In practice, this is unlikely to occur, and changes in some of the assumptions may be correlated. When calculating the sensitivity of the defined benefit obligation to significant actuarial assumptions the same method (present value of the defined benefit obligation calculated with the projected unit credit method at the end of the reporting period) has been applied as when calculating the pension liability recognised within the statement of financial position.

The methods and types of assumptions used in preparing the sensitivity analysis did not change compared to the previous period.

Through its defined benefit pension plan, the Tuffnells Group is exposed to a number of risks, the most significant of which are detailed below in note 22.

The contribution rates throughout the year were 13.9% plus £160,000 (2013: 13.9% plus £60,000; 2012: 13.9% plus £60,000; 2011: 13.9% plus £60,000) for the employer and 5.0% (2013: 5.0%; 2012: 5.0%; 2011: 5.0%) for employees.

The scheme is a closed scheme and therefore under the projected unit credit method the current service cost would be expected to increase as the members of the scheme approach retirement.

Cumulative actuarial losses since the start of the scheme are not available.

Expected maturity analysis of undiscounted pension benefits:

	Less than a year £'000	Between 1-2 years £'000	Between 2-5 years £'000	Over 5 years £'000	Total £'000
At 31 December 2013
Pension benefits	152	178	928	30,593	31,851
Total	152	178	928	30,593	31,851
At 30 June 2014
Pension benefits	166	193	937	28,308	29,604
Total	166	193	937	28,308	29,604

Defined contribution pension scheme

Until 1 September 2013 other members of staff were eligible to join the Scottish Widows Money Purchase Pension Scheme, a defined contribution scheme. There is also a Stakeholder scheme with Norwich Union which all relevant employees are eligible to join. From 1 September 2013, the Tuffnells Group became eligible for Auto Enrolment. All eligible staff are automatically enrolled into a defined contribution pension scheme after a three month deferment period. The first contributions were made in December 2013.

The charge for defined contribution schemes was £206,000 (FY 2013: £182,000; Period to June 2013: £93,000 (Unaudited); FY 2012: £151,000; FY 2011: £35,000).

21. SHARE BASED PAYMENTS

Management Award Plan

The plan involves the grant of a fixed number of options (36,426) to key management at an exercise price set by the board at the time of the grant. The options vest at the event of a sale, listing or significant re-financing.

The contractual life of the options is 10 years, and there are no cash settlement alternatives.

The options granted were calculated has having a £nil fair value at the date of grant.

The net expense recognised for future share-based payments in respect of employee service during the period ended 30 June 2014 was £nil (31 December 2013, 30 June 2013, 31 December 2012, 31 December 2011: £nil).

The weighted average exercise price for the options is £1.38 and the weighted average remaining contractual life is 4.5 years as at 30 June 2014 (FY 2013: 5 years, FY 2012: 6 years FY 2011: 7 years).

The fair value of the share options granted were calculated as at the date of grant by use of the Black-Scholes model, taking into account the terms and conditions upon which the options were granted. The following table lists the key assumptions used for calculating the value of share options granted:

	2008
Dividend yield	Nil
Expected share price volatility	45.0%
Risk free investment rate	3.5%
Expected life of options	10 years

The expected share volatility has been calculated with reference to the market volatility of similar private companies.

22. KEY JUDGEMENTS AND POTENTIAL UNCERTAINTIES

The preparation of the special purpose consolidated historical financial information in conformity with IFRS requires management to make judgements, estimates and assumptions that affect the application of policies and reported amount of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form a basis for making the judgments about carrying value of assets and liabilities that are not readily apparent from other sources.

The directors have reviewed the estimates and assumptions used in the preparation of the special purpose consolidated historical financial information.

The directors do not believe that there is a significant risk which would lead to material adjustments to the carrying value of any assets and liabilities in the next financial year due to the changes on the estimates or assumptions.

The significant judgements made in the special purpose consolidated financial information as as follows:

Goodwill impairment – In assessing impairment of goodwill annually, the Tuffnells Group uses a discounted cash flow analysis (value in use calculation) based on forecast cash flows and discount rates. Key management judgments underlying these inputs are summarised below:

Forecast cash flows – The Tuffnells Group estimates future cash flows for five years subsequent to each reporting date for use in its discounted cash flow calculations. In making its forecasts, the Tuffnells Group estimates receipts from customers with appropriate cash outflows for distribution costs, employee salaries and benefits, and other expenses to be incurred in the normal course of business. In addition, management estimates required capital maintenance spend and debt service costs (the latter excluded from cash flows used in the analysis) based on current and planned operating levels and existing debt arrangements.
Discount rate – the Sprit Group used the Weighted Average Cost of Capital formula (WACC) in determining its discount rate. Key inputs in the WACC formula include the debt to equity ratio, beta (i.e., measure of volatility relative to the market), and estimated market risk premium. These inputs are not directly observable for the Tuffnells Group because its shares are not publicly traded. As a result, the Tuffnells Group considered publicly available information for comparable companies in the parcel delivery industry to determine its WACC. Significant management judgment is required to determine the appropriate companies for consideration in calculating the Tuffnells Group's WACC.

177

The Tuffnells Group also applies judgment in allocating Goodwill, and determined that no allocation below the Group level was appropriate. Tuffnells Group management monitor the results of the business on a Group-wide basis.

Operating segments – The Tuffnells Group has determined that it has only one operating segment representing the Group as a whole. No further disaggregation of the business is performed in the financial information reviewed by the Chief Operating Decision Maker (CODM).

Impairment of property, plant and equipment – Tuffnells Group management has determined that the Tuffnells Group is comprised of only one cash generating unit (CGU) on the basis that each depot, while serving as an individual collection point for customers, ultimately supports the broader network of depots across the UK. Substantially all of the Tuffnells Group’s revenues are generated in the UK. The Tuffnells Group has not identified any impairment indicators in any period subject to IFRS conversion.

Leases – There is significant management judgment in determining whether the Tuffnells Group’s delivery vehicle leases should be classified as operating or finance leases. In making its determination for each lease agreement, the Tuffnells Group considered:

Lease term as compared to useful economic life of the leased asset(s);
Lease payments as compared to the asset’s fair value;
Purchase provisions, if any, included in the lease agreement; and,
Other indicators, if present, that suggest the risks and rewards related to the asset have been substantially transferred to the Tuffnells Group.

The Tuffnells Group has determined that substantially all of its delivery vehicle leases are operating leases.

Pension obligations – The Tuffnells Group’s accounting for pensions requires the determination of key assumptions including discount rate, inflation, expected employee pay rises, and mortality. The Tuffnells Group considers the advice provided by its actuaries and determines the assumptions that are most suitable for its pension scheme based on a number of factors including the Tuffnells Group’s experience with the plan, any plan amendments made, the underlying demographics of the pension scheme participants, and applicable market trends.

23. CONTINGENT LIABILITIES AND CAPITAL COMMITMENTS

	31 December 2011 £'000	31 December 2012 £'000	31 December 2013 £'000	6 months ended 30 June 2014 £'000	6 months ended 30 June 2013 £'000 (Unaudited)
Bank and other loans guaranteed	35,946	27,888	21,047	19,564	22,820

The Tuffnells Group is not involved in any significant litigation. Certain of the Tuffnells Group’s subsidiary undertakings have guaranteed the loans and bank overdrafts of the Tuffnells Group by way of a cross-guarantee dated 20 March 2008 and a debenture providing legal charges over the Tuffnells Group’s properties.

The directors do not expect any loss to arise from these contingent liabilities.

178

Contracts placed for future capital expenditure approved by the directors but not provided for amount to:

				6 months ended	6 months ended
31 December	31 December	31 December	30 June	30 June	30 June
2011	2012	2013	2014	2013
£'000	£'000	£'000	£'000	£'000	(Unaudited)
Authorised and contracted for	177	72	501	322	519

The Tuffnells Group has also committed to purchase land in Sheffield for £1,200,000 that is subject to the receipt of certain planning permissions.

24. CAPITAL MANAGEMENT

The statement of financial position shows equity attributed to the shareholders of £22,596,000 at the end of June 2014 (FY 2013: £18,407k; Period to 30 June 13; £15,310k (Unaudited); FY 2012: £12,382k; FY 2011: £7,059k). The Tuffnells Group is not subject to any externally imposed capital requirement.

25. ULTIMATE CONTROLLING PARTY

In the opinion of the directors, the Tuffnells Group does not have an ultimate controlling party. The Big Green Parcel Holding Company Limited is the parent company of the smallest and largest group to consolidate the financial statements of The Big Green Parcel Holding Company Limited.

26. POST BALANCE SHEET EVENT

The directors are of the opinion that there are no significant post balance sheet events that require disclosure in this special purpose consolidated financial information.

27. TRANSITION TO IFRS

This is the Tuffnells Group's first consolidated financial information prepared in accordance with IFRS.

The accounting policies set out on pages 149 to 153 have been applied in preparing the special purpose consolidated financial information for the years ended 31 December 2011, 2012 and 2013, and the six month interim periods ended 30 June 2013 and 2014, and in the preparation of the opening IFRS balance sheet at 1 January 2011, the Tuffnells Group's date of transition.

In preparing its opening balance sheet, the Tuffnells Group has adjusted amounts reported previously in financial statements prepared in accordance with UK GAAP. An explanation of how the translation from UK GAAP to IFRS has affected the Tuffnells Group's consolidated statement of financial position, consolidated income statement and consolidated cash flow statement is set out in the following tables and notes.

Group consolidated income statement

	Transition Notes	Year ended 31 December 2013
		UK GAAP £'000	Effect of transition to IFRS £'000	IFRS £'000
Continuing operations
Revenue		127,801	–	127,801
Net operating costs	1	(118,063)	1,284	(116,779)
Operating profit		9,738	1,284	11,022
Net finance costs	2,4	(3,029)	589	(2,440)
Profit before tax		6,709	1,873	8,582
Income tax expense	3, 4	(1,873)	(146)	(2,019)
Profit for the year		4,836	1,727	6,563

Consolidated statement of comprehensive income

	Transition Notes	Year ended 31 December 2013
		UK GAAP £'000	Effect of transition to IFRS £'000	IFRS £'000
Profit for the year		4,836	1,727	6,563
Other comprehensive income:
Items that will not be reclassified to profit or loss
Re-measurement loss on employee benefit obligations	4	(739)	57	(682)
Tax relating to re-measurement loss on employee benefit obligations	3,4	157	(13)	144
Other comprehensive income for the year		(582)	44	(538)
Total comprehensive income and for the year		4,254	1,771	6,025

Consolidated statement of financial position

As at 31 December 2013

	Transition Notes	UK GAAP £'000	Effect of transition to IFRS £'000	IFRS £'000
Non-current assets
Intangible assets	1,5	18,119	4,351	22,470
Property, plant and equipment	5	21,100	(463)	20,637
Deferred tax assets	3	-	866	866
		39,219	4,754	43,973
Current assets
Inventories		751	-	751
Trade and other receivables	3	12,039	(430)	11,609
Cash and cash-equivalents		1,395	-	1,395
		14,185	(430)	13,755
Total assets		53,404	4,324	57,728
Current liabilities
Trade and other payables	5	(13,012)	(140)	(13,152)
Current tax liabilities		(1,015)	-	(1,015)
Bank loans and other borrowings		(2,194)	-	(2,194)
Obligations under finance leases		(862)	-	(862)
		(17,083)	(140)	(17,223)
Non-current liabilities
Bank loans and other borrowings		(18,953)	-	(18,953)
Obligations under finance leases		(961)	-	(961)
Derivative financial instruments	2	-	(442)	(442)
Employee benefit obligations	4	(1,394)	(348)	(1,742)
		(21,308)	(790)	(22,098)
Total liabilities		(38,391)	(930)	(39,321)
Net assets		15,013	3,394	18,407
Equity
Called up share capital		150	-	150
Share premium account		5,829	-	5,829
Capital redemption reserve		25	-	25
Retained earnings		9,009	3,394	12,403
Total equity		15,013	3,394	18,407

181

Consolidated statement of financial position

As at 1 January 2011

	Transition Notes	UK GAAP £'000	Effect of transition to IFRS £'000	IFRS £'000
Non-current assets
Intangible assets	1,5	22,007	422	22,429
Property, plant and equipment	5	21,122	(422)	20,700
Deferred tax assets	3	-	699	699
		43,129	699	43,828
Current assets
Inventories		396	-	396
Trade and other receivables	3	10,826	(81)	10,745
Cash and cash-equivalents		1,953	-	1,953
		13,175	(81)	13,094
Total assets		56,304	618	56,922
Current liabilities
Trade and other payables	4	(10,085)	(140)	(10,225)
Current tax liabilities		(591)	-	(591)
Bank loans and other borrowings		(5,436)	-	(5,436)
Obligations under finance leases		(1,115)	-	(1,115)
		(17,227)	(140)	(17,367)
Non-current liabilities
Bank loans and other borrowings		(31,965)	-	(31,965)
Obligations under finance leases		(1,572)	-	(1,572)
Derivative financial instruments	2	-	(2,179)	(2,179)
Employee benefit obligations	4	(315)	(117)	(432)
		(33,852)	(2,296)	(36,148)
Total liabilities		(51,079)	(2,436)	(53,515)
Net assets		5,225	(1,818)	3,407
Equity
Called up share capital		118	-	118
Share premium account		5,829	-	5,829
Capital redemption reserve		25	-	25
Retained earnings		(747)	(1,818)	(2,565)
Total equity		5,225	(1,818)	3,407

182

Consolidated cash flow statement

As at 31 December 2013

	Transition Notes	UK GAAP £'000	Effect of transition to IFRS £'000	IFRS £'000
Operating activities
Profit for the year before taxation		9,738	(1,156)	8,582
Adjustments for:
Net finance costs		-	2,434	2,434
Depreciation		2,658	(303)	2,355
Amortisation of intangible assets	1	1,296	(993)	303
Fair value adjustments	2	-	6	6
Profit on sale of property, plant and equipment		1	-	1
Post-employment obligations	4	(67)	12	(55)
Changes in working capital
Change in inventories		(295)	-	(295)
Change in trade and other receivables		813	-	813
Change in trade and other payables		1,763	-	1,763
Cash generated from operating activities		15,907	-	15,907
Interest paid	5	(2,024)	-	(2,024)
Income tax paid	5	(1,920)	-	(1,920)
Net cash generated from operating activities		11,963	-	11,963
Investing activities
Purchase of property, plant and equipment		(2,264)	214	(2,050)
Proceeds from sale of property, plant and equipment		-	-	-
Purchase of intangible assets		-	(214)	(214)
Net cash used in investing activities		(2,264)	-	(2,264)
Financing activities
Proceeds from issue of ordinary shares			-	-
Repayments of borrowings		(8,058)	-	(8,058)
Repayments of obligations under finance leases		(1,069)	-	(1,069)
Net cash used in financing activities		(9,127)	-	(9,127)
Net (decrease)/increase in cash and cash equivalents		572	-	572
Opening net cash and cash equivalents		823	-	823
Closing net cash and cash equivalents		1,395	-	1,395

UK GAAP requires cash flows to be presented under seven different headings whereas IAS7 'Cash Flow Statements' require cash flows to be presented under three headings: cash flow from operating, investing and financing activities. Consequently there are a number of reclassifications.

The key adjustments in the cash flow statement relate to the reconciliation from Operating Activities to Cash generated from operating activities. Under UK GAAP, the reconciliation commenced at Profit for the year, before taxation and interest, whereas the IFRS reconciliation commences at profit before tax.

These include the following:

(1) Due to the reclassification of software from tangible fixed assets under UK GAAP to intangibles under IFRS, the associated depreciation charge of £207,000 has been reclassified as amortisation.

(2) Due to the above reclassification of software to intangible fixed assets under IFRS, within the cash flow statement the purchases of Property, Plant and Equipment has been split between Property, Plant and Equipment and Intangible assets of £273,000.

(3) As part of the IFRS adjustment to remove the amortisation of goodwill, the effect has been reflected in the cash flow statement reducing the amortisation in the reconciliation by £1,296,000, with the corresponding entry increasing profit for the year. See note 1: Business combinations below for further details of this adjustment.

(4) The non-cash movement effect of the recognition of the fair value movement on the interest rate swap agreement has been reflected in the reconciliation of operating activities.

(5) Interest and tax paid are now reflected in net cash generated from operations in accordance with IFRS, whereas under UK GAAP these were presented under separate headings.

All other adjustments to the Cash Flow statement are immaterial.

Adjustments on adoption of IFRS

The following adjustments were made as at 1 January 2011 and in subsequent periods in accordance with the Tuffnells Group's adoption of IFRSs.

1. BUSINESS COMBINATIONS

Goodwill is not amortised under IFRS 3 'Business Combinations', but is subject to an annual impairment review.

The Tuffnells Group has applied the exemption with IFRS 1 'First-time adoption of International Financial Reporting Standards' not to restate its business combinations prior to the transition date. Consequently, under IFRS, goodwill previously amortised to profit or loss prior to the transition date has not been reversed and the goodwill remains at the amount at which it was stated under UK GAAP at the date of transition, 1 January 2011, with a value of £22,007,000.

This has resulted in the annual amortisation expense from the date of transition being added back in determining operating profit, an adjustment of £1,296,000 each year.

2. INTEREST RATE SWAP

Under UK GAAP, derivative financial instruments, such as interest rate swaps, are not accounted for at fair value. IFRS requires derivatives not designated for hedge accounting to be measured at fair value through profit or loss. As a result, the fair value of the interest rate swap has been recognised as a financial liability as at 1 January 2011 as a liability of £2,179,000. For each subsequent period, the related fair value losses (gains) have been recognised in finance costs. For IFRS reporting, the Tuffnells Group's interest rate swap arrangements are not designated as hedging instruments, and accordingly hedge accounting is not applied. As at 31 December 2013, the interest rate swap had a fair value of £442,000, with a fair value adjustment of £634,000 reducing the interest charge in the year to 31 December 2013.

As a consequence of recognition of the fair value of the interest rate swap, a deferred tax asset of £501,000 has been recognised as at 1 January 2011. Subsequently, the change in carrying amount of the deferred tax asset relating to changes in the fair value of the derivative financial instruments was recognised in the Income statement, amounting to £159,000 in the year to 31 December 2013. This along with amounts recognised in year ended 31 December 2011 and 2012 had reduced the deferred tax asset balance to £88,000 recognised within the Statement of financial position at 31 December 2013.

184

185

3. DEFERRED TAXATION

UK GAAP required deferred taxation to be recognised on timing differences whereas IFRS requires that deferred taxation is provided on all temporary differences, including the revaluation of non-monetary assets.

Under IFRS, all deferred tax assets and liabilities are required to be disclosed as non-current; this has resulted in the following reclassifications in the Statement of Financial Position.

In the 1 January 2011 Statement of financial position, a deferred tax asset of £81,000 was reclassified from current assets to non-current assets and a deferred tax asset of £117,000 was reclassified from being off-set against the defined benefit pension obligation as reported under UK GAAP. With the recognition of the deferred tax asset on the interest rate swap of £501,000, and reclassifications above, this resulted in the presentation of a £699,000 deferred tax asset as at 1 January 2011.

In the 31 December 2013 Statement of financial position, a deferred tax asset of £430,000 was reclassified from current assets to non-current assets and a deferred tax asset of £348,000 was reclassified from being off-set against the defined benefit pension obligation as reported under UK GAAP. With the recognition of the deferred tax asset on the interest rate swap of £501,000 and subsequent release of (£159,000) in the year and (£254,000) in prior years, along with the reclassifications above, this resulted in the presentation of a £866,000 deferred tax asset as at 31 December 2013.

In the Income statement for the period ended 31 December 2013, a net adjustment of £146,000 has been recognised. This comprises the release of £159,000 from the deferred tax asset in relation to the fair value movement on the interest rate swap, plus a £13,000 increase in the tax expenses recognised in the Income statement in relation to the impact of IAS19R changing the recognition of the movement in the defined benefit obligation between the Income statement and Statement of comprehensive income (see note 4 below). The corresponding £13,000 entry reduces the tax benefit recognised in the Statement of comprehensive income following the reduction of the actuarial loss on the defined benefit pension scheme.

Furthermore, under IFRS an additional deferred tax asset is recognised when it is probable that the non-market based condition of the Share-based payment would result in the vesting of the Share-based payment being probable. This is calculated based on the difference in the market price of a Tuffnells Limited share at the balance sheet date and the option exercise price, following the application of IFRS 2 'Share-based Payments' At the 1 January 2011 as management deemed that it was not probable that the non-market conditions of the Share-based payments would be met and therefore a deferred tax asset was not recognised.

4. LONG TERM EMPLOYEE BENEFITS

On transition to IFRS, the Tuffnells Group has applied IAS 19 Revised, for all periods presented. The standard requires that interest cost is determined by reference to the net pension liability (or asset), and that the cost of administering the pension scheme in the year is charged to the income statement directly rather than as an addition to service cost or a reduction of the expected return on assets. The application of the revised standard has resulted in the following adjustments compared to the UK GAAP standard, FRS 17.

In the 2013 income statement, £12,000 of administrative expenses has been recognised, and £45,000 additional finance charge has been recognised. There has been a corresponding reduction of £57,000 against the actuarial loss relating to the pension fund recognised in the Statement of comprehensive income. A corresponding adjustment to the taxation recognised in the income statement and the statement of comprehensive income was made reducing the tax charge in the income statement by £13,000 and decreasing the income tax benefit in the statement of comprehensive income by £13,000. Overall there is no impact on net equity.

As part of the conversion to IFRS, holiday that has been accrued by an employee through their service, but has yet to take the holiday at the reporting period is recognised, this has resulted in £140,000 being accrued as at 1 January 2011 and 31 December 2013 respectively.

COMPUTER SOFTWARE

Under IFRS computer software and internally generated development costs which are not integral to the related hardware are capitalised separately as an intangible asset rather than being held as part of fixed assets under UK GAAP. The assets are stated at cost less accumulated amortisation and in periods subsequent to the initial period of adoption, amortisation expense has been reclassified from depreciation of property, plant and equipment to amortisation of intangible assets. A carrying value of £422,000 as at 1 January 2011 and £463,000 as at 31 December 2013 has been reclassified; this has resulted in no impact on net equity.

186

187

PART XVII

UNAUDITED PRO FORMA FINANCIAL INFORMATION IN RESPECT OF THE ENLARGED GROUP

SECTION A: UNAUDITED PRO FORMA FINANCIAL INFORMATION FOR THE ENLARGED GROUP

The following unaudited pro forma statement of net assets and pro forma statement of profit and loss (together the “Pro Forma Financial Information”) have been prepared to show the effect on the consolidated net assets of Connect of the acquisition of The Big Green Parcel Holding Company Limited and the Rights Issue as if they had occurred on 31 August 2014 and on profit and losses of Connect as if the acquisition of The Big Green Parcel Holding Company Limited and the Rights Issue had occurred on 1 September 2013.

The Pro Forma Financial Information has been prepared for illustrative purposes only and in accordance with Annex II of the Prospectus Directive Regulation, and should be read in conjunction with the notes set out below. Due to its nature, the Pro Forma Financial Information addresses a hypothetical situation and, therefore, does not represent the Enlarged Group’s actual financial position or results.

For the purpose of the preparation of the Pro Forma Financial Information, the Company has attributed the excess of the purchase price paid over the book value of Tuffnells’ net assets entirely to goodwill. On apportionment of the purchase price, fair values ascribed to intangible assets, in-process research and development, PP&E, inventory and any other assets acquired or liabilities assumed, may result in material changes to the goodwill and the net asset position as recorded in this Pro Forma Financial Information for the Enlarged Group.

The Pro Forma Information has been prepared for illustrative purposes only and, by their nature address a hypothetical situation and do not, therefore, represent the Enlarged Group’s actual financial position or results.

The Pro Forma Information does not constitute financial statements within the meaning of Section 434 of the Companies Act. Shareholders should read the whole of this document and not rely solely on the summarised financial information contained in this Part XVII. Deloitte LLP’s report on the Pro Forma Financial Information is set out on Section B of this Part XVII.

The Pro Forma Financial Information has not been prepared, or shall not be construed as having been prepared, in accordance with the Regulation S-X under the Securities Act. In addition, the Pro Forma Financial Information does not purport to represent what the Enlarged Group’s financial position and results of operations actually would have been if the Acquisition had been completed on the dates indicated nor do they purport to represent the results of operations for any future period or the financial condition at any future date.

In addition to the matters noted above, the Pro Forma Financial Information does not reflect the effect of anticipated synergies and efficiencies associated within the Acquisition.

The statement of pro forma net assets set out below is based on the audited consolidated balance sheet of the Connect Group as at 31 August 2014 (as set out in Appendix 1) of this document) adjusted to reflect the net assets of Tuffnells as at 31 December 2013 presented in accordance with the Company’s accounting policies (as set out in Part XVI (Historical Financial Information relating to Tuffnells)) of this document) and other adjustments as described in the notes below.

The statement of pro forma profit and loss set out below is based on the audited consolidated income statement of the Connect Group as at 31 August 2014 (as set out in Appendix 1) of this document) adjusted to reflect the income statement of Tuffnells as at 31 December 2013 presented in accordance with the Company’s accounting policies (as set out in Part XVI (Historical Financial Information relating to Tuffnells)) of this document) and other adjustments as described in the notes below.

Unaudited Pro Forma statement of net assets

	Connect as at 31 August 2014 £m (Note 1)	Debt drawdown	Rights issue	Subtotal	Adjustments
					Tuffnells as at 31 December 2013 £m (Note 4)	Acquisition Adjustments £m (Note 5)	Total £m
Non-current assets
Intangible assets	65.7	-	-	65.7	22.5	74.5	162.7
Property, plant and equipment	29.0			29.0	20.6		49.6
Interest in jointly controlled entities and associates	4.3	-	-	4.3	-	-	4.3
Derivative financial instruments	0.6	-	-	0.6	-	-	0.6
Retired benefit net assets	0.3	-	-	0.3	-	-	0.3
Deferred tax assets	7.2	-	-	7.2	0.9	-	8.1
	107.1	-	-	107.1	44.0	74.5	225.6
Current assets
Inventories	45.3	-	-	45.3	0.8	-	46.1
Trade and other receivables	128.1	-	-	128.1	11.6	-	139.7
Cash and cash equivalents	20.4	64.7	52.1	137.2	1.4	(116.8)	21.8
	193.8	64.7	52.1	310.6	13.8	(116.8)	207.6
Total assets	300.9	64.7	52.1	417.7	57.8	(42.3)	433.2
Current liabilities
Trade and other payables	(192.3)	-	-	(192.3)	(13.2)	-	(205.5)
Current tax liabilities	(6.1)	-	-	(6.1)	(1.0)	-	(7.1)
Bank loans and other borrowings	(60.9)	-	-	(60.9)	(2.2)	1.5	(61.6)
Obligations under finance leases	(0.9)	-	-	(0.9)	(0.9)	-	(1.8)
Retirement benefit obligations	(4.1)	-	-	(4.1)	-	-	(4.1)
Provisions	(3.4)	-	-	(3.4)	-	-	(3.4)
	(267.7)	-	-	(267.7)	(17.3)	1.5	(283.5)
Non-current liabilities
Retirement benefit obligations	(17.2)		-	(17.2)	(1.7)	-	(18.9)
Bank loans and other borrowings	(48.4)	(64.7)	-	(113.1)	(19.0)	19.0	(113.1)
Obligations under finance leases	(3.2)	-	-	(3.2)	(1.0)	-	(4.2)
Other non-current liabilities	(1.4)	-	-	(1.4)	-	-	(1.4)
Deferred tax liabilities	(3.2)	-	-	(3.2)	-	-	(3.2)
Derivative financial instruments	-	-	-	-	(0.4)	-	(0.4)
Non-current provisions	(1.9)	-	-	(1.9)	-	-	(1.9)
	(75.3)	(64.7)	-	(140.0)	(22.1)	19.0	(143.1)
Total liabilities	(343.0)	(64.7)	-	(407.7)	(39.4)	20.5	(426.6)
Total net assets/(liabilities)	(42.1)	-	52.1	10.0	18.4	(21.8)	6.6

Notes:
(1) The figures for the Connect Group have been extracted without material adjustment from the audited financial statements of Connect for the year ended 31 August 2014 set forth in Appendix 1.
(2) The net proceeds from debt drawdowns, £50.0 million of which is from the new term loan with the remaining £15.4 million being funded out of existing Group facilities, net of £0.7 million of debt arrangement fees.
(3) The net proceeds of the Rights Issue of £52.1 million are calculated on the basis that the Company issues 54,136,442 New Ordinary Shares at a price of 102 pence per share generating a gross value of £55.0 million, net of estimated expenses in connection with the Rights Issue of approximately £2.9 million.
(4) The figures for Tuffnells have been extracted without material adjustment from the historical financial information of Tuffnells for the year ended 31 December 2013 set forth in Part XVI.

(5) Adjustments arising as a result of the Acquisition are set out below:

The adjustment to cash and cash equivalents of £116.8 million represents the aggregate of the £113.4 million cash consideration payable for the Acquisition of Tuffnells and the settlement of debt plus estimated transaction costs of £7 million, less £0.7 million capitalised against the bank loan and £2.9 million offset against the rights issue.
The adjustment to current bank loans and other borrowings of £1.5 million representing the Tuffnells bank loan shown in current liabilities which will be repaid at Acquisition.
The adjustment to non-current bank loans of £19.0 million represents the Tuffnells bank loan which will be repaid at Acquisition.
The adjustment to goodwill has been calculated as follows:

Cash outflow at acquisition	113.4
Net assets acquired	(18.4)
Bank loans < 1 year	(1.5)
Bank loans > 1 year	(19.0)
Pro forma goodwill adjustment	74.5

In addition to the cash consideration there is £15.3 million of contingent consideration that will, as a result of future financial performance and employment, be treated as remuneration.

(6) No account has been taken of the financial performance or any other transactions of Connect for the period since 31 August 2014, nor that of Tuffnells since 31 December 2013.

Unaudited Pro Forma statement of profit and loss

	Connect for the year ended 31 August 2014		Adjustments Tuffnells for the year ended 31 December 2013		Total £m
	£m (Note 1)	Rights issue/debt drawdown (Note 2)	Subtotal £m (Note 3)	Acquisition £m (Note 4)
Revenue	1,808.5	-	1,808.5	127.8	-
Operating profit	48.6	-	48.6	11.0	(14.2)
Investment revenues	0.4		0.4	-
Finance costs	(5.9)	(2.2)	(8.1)	(2.4)	2.2
Profit before tax	43.1	(2.2)	40.9	8.6	(12.0)
Income tax expense	(8.3)	0.5	(7.8)	(2.0)	(0.2)
Profit for the year	34.8	(1.7)	33.1	6.6	(12.2)

Notes:

(1) The figures for the Connect Group have been extracted without material adjustment from the audited financial statements of Connect for the year ended 31 August 2014 set forth in Appendix 1.

(2) The proceeds of the Rights Issue would not have been used to repay debt and therefore no adjustment has been made to reduce finance costs in relation to the Rights Issue. Interest costs of £2.2m have been included in respect of the new term loan, the tax adjustment of £0.5 million represents the tax impact on the adjustments to finance costs calculated at 22.2 per cent., the statutory tax rate for the year to 31 August 2014.

(3) The figures for Tuffnells have been extracted without material adjustment from the historical financial information of Tuffnells for the year ended 31 December 2013 set forth in Part XVI.

(4) The adjustments arising as a result of the Acquisition are set out below:

Adjustments expected not to have a continuing impact:

a. The adjustment represents an expense of (£3.4 million) reflecting estimated transaction costs payable in respect of the Acquisition. Transaction costs are estimated to be £7.0 million in total however only £3.4 million will be recognised in the P&L with £2.9 million of costs relating directly to the raising of equity being recognised in reserves and the remaining £0.7 million relating to the new debt being recorded on the balance sheet.

b. The adjustment also reflects an expense of £10.8 million reflecting the first years charge for contingent consideration which is being accounted for as remuneration. The total maximum contingent consideration of £15.3 million is expected to be incurred over the three year period post acquisition, £10.8 million for the year ending 31 August 2015 (being an allocation of year 1, 2 and 3), £3.2 million for the year ending 31 August 2016 (being an allocation of year 2 and 3) and £1.3 million for the year ending 31 August 2017 (being an allocation of year 3 only).

Adjustments expected to have a continuing impact:

a. The credit to finance costs of £2.2 million represents the interest payable on the bank loan which will be repaid at Acquisition. This charge related to a loan of £28.0 million as at 31 December 2012 and £20.5 million as at 31 December 2013.

b. The tax adjustment of £0.2 million represents the combined tax impact of the adjustments to non-recurring items, reducing the tax charge by £0.3 million, and adjustment to finance costs increasing the tax charge by £0.5 million applying the statutory tax rate of 22.2 per cent. for the year to 31 August 2014. The remuneration is assumed not to be tax deductible.

(5) No account has been made to reflect the trading results of Connect for the period since 31 August 2014, nor that of Tuffnells since 31 December 2013.

190

191

SECTION B: ACCOUNTANTS' REPORT ON THE UNAUDITED PRO FORMA FINANCIAL INFORMATION ON THE ENLARGED GROUP

Deloitte

Report on Pro Forma Financial Information

Deloitte LLP
Abbots House
Abbey Street
Reading
RG1 3BD

The Board of Directors
Connect Group plc
Rowan House
Cherry Orchard North
Kembrey Park
Swindon
SN2 8UH

J.P. Morgan Securities plc
25 Bank Street
London
E14 5JP

Liberum Capital Limited
Ropemaker Place, Level 12
25 Ropemaker Street
London
EC2Y 9LY

12 November 2014

Dear Sirs,

Connect Group plc (the "Company")

We report on the pro forma financial information (the "Pro forma financial information") set out in Part XVII of the combined class 1 circular prospectus dated 12 November (the "Prospectus"), which has been prepared on the basis described in the notes to the Pro forma financial Information, for illustrative purposes only, to provide information about how the transaction might have affected the financial information presented on the basis of the accounting policies adopted by the Company in preparing the financial statements for the periods ended 31 August 2013 and 31 August 2014. This report is required by the Commission Regulation (EC) No 809/2004 (the "Prospectus Directive Regulation") and is given for the purpose of complying with that requirement and for no other purpose.

Responsibilities

It is the responsibility of the directors of the Company (the "Directors") to prepare the Pro forma financial information in accordance with Annex II items 1 to 6 of the Prospectus Directive Regulation

It is our responsibility to form an opinion, as to the proper compilation of the Pro forma financial information and to report that opinion to you in accordance with Annex II item 7 of the Prospectus Directive Regulation.

Save for any responsibility arising under Prospectus Rule 5.5.3R (2)(f) to any person as and to the extent there provided, to the fullest extent permitted by law we do not assume any responsibility and will not accept any liability to any other person for any loss suffered by any such other person as a result of, arising out of,

or in connection with this report or our statement, required by and given solely for the purposes of complying with Annex I item 23.1 of the Prospectus Directive Regulation, consenting to its inclusion in the Prospectus.

In providing this opinion we are not updating or refreshing any reports or opinions previously made by us on any financial information used in the compilation of the Pro forma financial information, nor do we accept responsibility for such reports or opinions beyond that owed to those to whom those reports or opinions were addressed by us at the dates of their issue.

Basis of Opinion

We conducted our work in accordance with the Standards for Investment Reporting issued by the Auditing Practices Board in the United Kingdom. The work that we performed for the purpose of making this report, which involved no independent examination of any of the underlying financial information, consisted primarily of comparing the unadjusted financial information with the source documents, considering the evidence supporting the adjustments and discussing the Pro forma financial information with the Directors.

We planned and performed our work so as to obtain the information and explanations we considered necessary in order to provide us with reasonable assurance that the Pro forma financial information has been properly compiled on the basis stated and that such basis is consistent with the accounting policies of the Company.

Our work has not been carried out in accordance with auditing or other standards and practices generally accepted in jurisdictions outside the United Kingdom, including the United States of America, and accordingly should not be relied upon as if it had been carried out in accordance with those standards or practices.

Opinion

In our opinion:

(a) the Pro forma financial information has been properly compiled on the basis stated; and
(b) such basis is consistent with the accounting policies of the Company.

Declaration

For the purposes of Prospectus Rule 5.5.3R(2)(f) we are responsible for this report as part of the Prospectus and declare that we have taken all reasonable care to ensure that the information contained in this report is, to the best of our knowledge, in accordance with the facts and contains no omission likely to affect its import. This declaration is included in the Prospectus in compliance with Annex I item 1.2 of the Prospectus Directive Regulation.

Yours faithfully

Deloitte LLP

Chartered Accountants

Deloitte LLP is a limited liability partnership registered in England and Wales with registered number OC303675 and its registered office at 2 New Street Square, London EC4A 3BZ, United Kingdom. Deloitte LLP is the United Kingdom member firm of Deloitte Touche Tohmatsu Limited ("DTTL"), a UK private company limited by guarantee, whose member firms are legally separate and independent entities. Please see www.deloitte.co.uk/about for a detailed description of the legal structure of DTTL and its member firms.

192

193

PART XVIII

CAPITALISATION AND INDEBTEDNESS

1. CAPITALISATION AND INDEBTEDNESS

The following table does not reflect the impact of the Rights Issue on the Group’s capitalisation and indebtedness (including receipt of the net proceeds of the Rights Issue by the Company). Please refer to Part XVI (Unaudited Pro Forma Financial Information) for an analysis of the impact of the Rights Issue on the consolidated net assets of the Group.

Investors should read this table together with Part XII (Operating and Financial Review of Connect) and Part XIV (Historical Financial Information Relating to Connect) of this document.

The following table sets out the capitalisation, indebtedness and net financial indebtedness of the Group as at 31 August 2014 as extracted without material adjustment from the financial information in Part XIV (Historical Financial Information Relating to Connect):

	As at 31 August 2014 £m
Total Current debt
Guaranteed term loan	–
Secured finance lease obligations	(0.9)
Secured revolving credit facility	(60.9)
Total Non-Current debt
Guaranteed term loan	(48.4)
Secured finance lease obligations	(3.2)
Secured revolving credit facility	–
Shareholder’s equity:
Share capital	9.5
Share premium account	5.3
Demerger reserve	(280.1)
ESOP reserve	(5.2)
Hedging & translation reserve	(0.3)
Retained earnings	228.5
Total shareholder’s equity	(42.3)
Non-controlling interests in equity	0.2
Total equity	(42.1)
Total capitalisation and indebtedness	(155.5)
Cash	20.4
Cash equivalent	–
Trading securities	–
Liquidity	20.4
Current Financial Receivable
Bank loans and other borrowings	(60.9)
Obligations under finance leases	(0.9)
Current Financial Debt	(61.8)
Net Current Financial Indebtedness	(41.4)
Bank loans and other borrowings	(48.4)
Obligations under finance leases	(3.2)
Non current Financial Indebtedness	(51.6)
Net Financial Indebtedness	(93)

194

Notes:

The Group’s obligations under finance leases are secured by the lessor’s charge over the leases assets. The finance lease bears interest at a fixed contract rate.
Guaranteed term loan: The annual turnover, gross assets and pre-tax profits of the Guarantors contribute at any time 80 per cent. or more of the annual consolidated turnover, gross assets and pre-tax profits of the Group for each of its financial years. The guarantors, which are all 100 per cent. owned or wholly owned subsidiaries of the Connect Group PLC, are Connect Group PLC, Dawson Holdings Limited, Hedgelane Limited, Smiths News Holdings Limited, Smiths News Investments Limited, Smiths News Trading Limited, Bertram Trading Limited, Connect2U Limited, The Consortium for Purchasing and Distribution Limited, Smiths News Instore Limited and Dawson Books Limited.

PART XIX

TAXATION

PART A: UNITED KINGDOM

INTRODUCTION

The following paragraphs are intended as a general guide only, are not exhaustive and are based on current law and HM Revenue and Customs practice (which may not be binding) as at the date of this document, both of which are subject to change, possibly with retrospective effect. They summarise the position of Shareholders who (unless the position of non-resident Shareholders is expressly referred to) are resident (and in the case of individual Shareholders, resident and domiciled) in (and only in) the United Kingdom for tax purposes, who are the absolute beneficial owners of their Ordinary Shares and any dividends paid on them and who hold their Ordinary Shares as an investment (other than under an Individual Savings Account). The discussion below does not address all possible tax consequences relating to an investment in shares. Certain Shareholders, such as traders, brokers, dealers in securities, banks, financial institutions, investment companies, those that are exempt from taxation, employees and officers of the Company (or a connected company), insurance companies, persons holding Ordinary Shares as part of hedging or conversion transactions, Shareholders who are not domiciled or resident in the UK, collective investment vehicles, trusts and those who hold 5 per cent. or more of the Ordinary Shares may be taxed differently and are not considered. Nor do the following statements consider the tax position of any person holding investments in any HMRC approved arrangements or schemes, including the enterprise investment scheme, venture capital scheme or business expansion scheme, able to claim any inheritance tax relief or holding Ordinary Shares in connection with a trade, profession or vocation carried on in the UK (whether through a branch or agency or, in the case of a corporate shareholder, a permanent establishment or otherwise).

If you are in any doubt as to your tax position or you are subject to tax in a jurisdiction outside the United Kingdom, you should consult an appropriate professional adviser before taking any actions.

1.1 Dividends

Under current law, no tax will be withheld by the Company when it pays a dividend.

A Shareholder’s liability to tax on dividends will depend on the individual circumstances of the Shareholder.

1.1.1 Individuals

A UK resident individual Shareholder who receives a dividend from the Company will be entitled to a tax credit, currently at the rate of 1/9th of the cash dividend paid (which is equivalent to 10 per cent. of the gross dividend, being the cash dividend received plus the related tax credit). The individual is treated as receiving for tax purposes the gross dividend, which is taxed as the highest part of the individual’s income. The tax credit is then set against the individual’s tax liability on the gross dividend.

A UK resident individual Shareholder who is a basic rate taxpayer will be liable to income tax on the receipt of the gross dividend currently at the rate of 10 per cent. The tax credit will be set against this tax liability and as a result, such a shareholder will have no further income tax liability in respect of the dividend.

A UK resident individual Shareholder who is a higher rate taxpayer will be liable to income tax on the gross dividend currently at the rate of 32.5 per cent, to the extent that such sum, when treated as the top slice of that Shareholder’s income, exceeds the threshold for higher rate income tax. After taking account of the tax credit, this equates to an effective tax rate of 25 per cent. on the net cash dividend. For example, a dividend of £90 will carry a tax credit of £10. The income tax payable by a higher rate taxpayer would be 32.5 per cent. of £100, namely £32.5, less the tax credit of £10, leaving a net tax liability of £22.5.

195

A UK resident individual Shareholder who is an additional rate taxpayer will be liable to income tax on the gross dividend currently at a rate of 37.5 per cent, to the extent that such sum, when treated as the top slice of that Shareholder's income, exceeds the threshold for additional rate income tax. After taking into account the tax credit, the effective tax rate is therefore 30.56 per cent. of the net cash dividend. For example a dividend of £90 will carry a tax credit of £10. The income tax payable by an additional rate taxpayer would be 37.5 per cent. of £100, namely £37.5 less the tax credit of £10, leaving a net tax liability of £27.5.

UK resident Shareholders who do not pay income tax or whose liability to income tax on the dividend and related tax credit is less than the tax credit (including pension funds, charities and certain individuals) are not entitled to claim repayment of any part of the tax credit associated with the dividend from HM Revenue and Customs.

1.1.2 Companies

UK resident corporate Shareholders which are "small companies" (for the purposes of UK taxation of dividends) will not generally expect to be subject to tax on dividends from the Company. Other UK resident corporate Shareholders will not generally be subject to tax on dividends received from the Company as long as the dividends fall within one of a number of statutory exemptions. Examples of dividends that fall within an exemption are dividends paid on shares that are 'ordinary share capital' for UK tax purposes and are not redeemable and dividends paid to a person holding less than 10 per cent. of the issued share capital of the payer (or any class of that share capital, as long as those shares carry rights to less than 10 per cent. of the profits available for distribution and less than 10 per cent. of the assets on a winding up in the payer). The exemptions described above are not comprehensive and are subject to anti avoidance rules. Where the conditions for the exemption are not met or cease to be satisfied, or such Shareholder elects for an otherwise exempt dividend to be taxable, the Shareholder will be subject to UK corporation tax on dividends received at the rate of corporation tax applicable to that Shareholder (currently 21 per cent. reducing to 20 per cent. for companies paying the full corporation tax rate with effect from 1 April 2015).

1.1.3 Non-residents

Non UK resident individual Shareholders (other than those carrying on a trade, profession or vocation in the UK) will not generally be subject to UK tax on any dividends received from the Company. Whether a Shareholder who is not resident in the United Kingdom for tax purposes is entitled to a tax credit in respect of dividends paid by the Company and to claim payment of any part of the tax credit will depend, in general, on the existence and terms of any double taxation convention between the Shareholder's country of residence for tax purposes and the United Kingdom. A non UK resident Shareholder may also be subject to foreign taxation on dividend income under their local law.

1.2 Taxation of Chargeable Gains

Shareholders who acquire shares

For the purposes of UK taxation of chargeable gains, the issue of New Ordinary Shares should be regarded as a reorganisation of the share capital of the Company.

Accordingly, a Shareholder should not be treated as making a disposal of any part of their existing holding of Ordinary Shares by reason of taking up all or part of their rights to Ordinary Shares. No liability to UK taxation of chargeable gains should arise in respect of the issue of Ordinary Shares to the extent that a Shareholder takes up their entitlement to Ordinary Shares.

For UK taxation of chargeable gains purposes the Ordinary Shares will be treated as the same asset as the Shareholder's existing holding of Ordinary Shares, acquired at the same time as the existing Ordinary Shares. The subscription money for the Ordinary Shares will be added to the base cost of the Shareholder's existing holding of Ordinary Shares.

196

Shareholders who dispose of all or some of their New Ordinary Shares may be subject to UK taxation of chargeable gains on any chargeable gain which arises on the disposal. Alternatively an allowable loss may arise. In the case of UK resident individual Shareholders, subject to any annual exemption or relief, UK CGT will apply to gains above the annual exempt amount at a rate of 18 per cent. or 28 per cent. depending on the total amount of the individual's taxable income. Trustees and personal representatives pay CGT at 28 per cent.

For shareholders who are within the charge to corporation tax, in calculating the chargeable gain or allowable loss arising on a future disposal of Ordinary Shares, indexation allowance will apply to the amount paid for the Ordinary Shares only from, generally, the date the subscription money is paid (or is liable to be paid).

Shareholders who sell or renounce their rights or who allow their rights to lapse

If a Shareholder sells all or any of their rights to subscribe for the Ordinary Shares provisionally allotted to them, or if a Shareholder allows their rights to lapse and receives a cash payment in respect of them, this will, subject to the following paragraph, constitute a disposal for the purposes of UK taxation of chargeable gains. Such a disposal may give rise to a liability to a tax.

If a Shareholder disposes of all or part of his rights, or allows them to lapse and receives a cash payment, then if the proceeds resulting from such a lapse or sale of the rights are "small" as compared with the market value (on the date of lapse or sale) of a Shareholder's existing Ordinary Shares in respect of which the rights arose, the Shareholder should not generally be treated as making a disposal for CGT purposes. Instead the proceeds received will be deducted from the acquisition cost of the existing holding of Ordinary Shares. HM Revenue and Customs' current practice is to regard a sum as "small" for these purposes where either (i) the proceeds of the sale or lapse of rights do not exceed 5 per cent. of the market value (at the date of the sale or lapse) of the Ordinary Shares in respect of which the rights arose or (ii) the sum received is £3,000 or less, regardless of whether the 5 per cent. test is satisfied.

Any sum received by a Shareholder in respect of an entitlement to a fraction of a Share will normally be "small" for these purposes

Non-Residents

A Shareholder who is not a UK resident will not generally be subject to UK tax on any gain accruing to them as a result of disposal of the Ordinary Shares unless (i) the Shareholder carries on a trade, profession or vocation in the UK through a branch, agency, or permanent establishment and, broadly holds their Ordinary Shares for the purposes of the trade, profession or vocation or (ii) the Shareholder falls within the anti-avoidance rules applying to temporary non-residents.

1.3 Inheritance Tax

The Ordinary Shares will be assets situated in the United Kingdom for the purposes of UK inheritance tax. A gift of Ordinary Shares by, or on the death of, an individual Shareholder may (subject to certain exemptions and reliefs) be subject to UK inheritance tax, even if the Shareholder is neither domiciled nor deemed to be domiciled in the United Kingdom. For inheritance tax purposes, a transfer of assets at less than full market value may be treated as a gift.

1.4 Stamp Duty and Stamp Duty Reserve Tax

The Rights Issue

No stamp duty or SDRT will be payable on the issue of New Ordinary Shares pursuant to the Rights Issue, other than as explained in the paragraphs below.

No stamp duty or SDRT will be payable by Shareholders on the issue of Provisional Allotment Letters, split letters of allotment or definitive shares certificates, on the registration of the original holders of Provisional Allotment Letters or their renouncees, on the crediting of the Nil Paid Rights

197

or Fully Paid Rights to stock accounts in CREST or on issue in uncertificated form of New Ordinary Shares.

The purchase of Nil Paid Rights or Fully Paid Rights represented by a Provisional Allotment Letter or held in CREST on or before the latest time for registration of renunciation or transfer will not be subject to stamp duty but the purchaser will normally be liable to SDRT at the rate of 0.5 per cent of the actual consideration paid in money or money's worth. Where the purchase is effected through a stockbroker or other financial intermediary that person will normally account for the SDRT and will indicate that this has been done in any contract note issued to a purchaser. In other cases, the purchaser is liable to pay the SDRT and must account for it to HM Revenue and Customs. In the case of transfer within CREST, any SDRT due will be collected through CREST in accordance with the CREST rules.

Subsequent Transfers

Any subsequent conveyance or transfer on sale of Ordinary Shares will usually be subject to stamp duty, at the rate of 0.5 per cent. (rounded up to the nearest multiple of £5) of the amount or value of the consideration paid in the form of cash, shares or the assumption, satisfaction or release of debt. Stamp duty is normally paid by the purchaser. There is an exemption where the consideration for a transfer is £1,000 or less and that transfer does not form part of a larger transaction or a series of transactions where the combined consideration exceeds £1,000 and this is certified on the instrument of transfer. A charge to SDRT at the rate of 0.5 per cent. of the amount or value of the consideration paid in money or money's worth will also arise in relation to an unconditional agreement to transfer Ordinary Shares. SDRT is also normally a liability of the purchaser. However, if within six years of the date of the agreement (or, if the agreement was conditional, the date on which the agreement became unconditional) an instrument of transfer is executed pursuant to the agreement and is duly stamped (unless it is exempt), the stamping of the transfer will normally cancel the SDRT liability and any SDRT already paid should be refunded.

Ordinary Shares held through CREST

A transfer of Ordinary Shares effected on a paperless basis through CREST will generally be subject to SDRT (rather than stamp duty) at the rate of 0.5 per cent. of the amount or value of the consideration paid in money or money's worth. Euroclear will ordinarily collect SDRT on relevant transactions settled through CREST and will account for the SDRT to HM Revenue and Customs.

There will be no stamp duty or SDRT on a transfer of Ordinary Shares into or out of CREST where such a transfer is made for no consideration.

Ordinary Shares held through Clearance Systems or Depositary Receipt Arrangements

UK domestic law provides that where Ordinary Shares are issued or transferred to issuers of depositary receipts or providers of clearance services (or their nominees or agents) stamp duty or SDRT may be payable, broadly, at the higher rate of 1.5 per cent. of the amount or value of the consideration payable or, in certain circumstances, 1.5 per cent. of the value of the Ordinary Shares (rounded up to the nearest multiple of £5 in the case of stamp duty). Following a decision of the European Court of Justice (in HSBC Holdings plc and Vidacos Nominees Ltd v HMRC (Case C 569/07)) and the First Tier Tribunal in HSBC Holdings plc and the Bank of New York Mellon Corporation v HMRC ([2012] UK FTT 163) HM Revenue and Customs has confirmed that it will not seek to apply the 1.5 per cent. stamp duty and/or SDRT charge where new shares are issued into an EU or non EU depositary receipt system or clearance system. HMRC has also confirmed that it will not seek to apply the 1.5 per cent. stamp duty and/or SDRT charge where shares are transferred into an EU or no EU depositary receipt system or clearance system where the transfer is integral to the raising of new capital.

The sale of the Existing Ordinary Shares by the Selling Shareholders will give rise to a liability to stamp duty and/or SDRT as explained above. Pursuant to the terms of the Underwriting Agreement certain Selling Shareholders have agreed to meet the liability to stamp duty and/or SDRT on behalf of the original purchasers of Existing Ordinary Shares which will arise on such initial sale at no more

198

than the rate of 0.5 per cent. of the Rights Issue Price (rounded up to the nearest multiple of £5 in the case of stamp duty).

Special rules apply to agreements made by market intermediaries and to certain sale and repurchase and stock borrowing arrangements. Charities are exempt from stamp duty and SDRT on the acquisition of shares.

199

200

PART B: CERTAIN US FEDERAL INCOME TAX CONSIDERATIONS

1. INTRODUCTION

The following is a summary of certain US federal income tax consequences of the receipt, exercise and disposition of Nil Paid Rights or Fully Paid Rights (together, “Rights”) pursuant to the Rights Issue, as well as the acquisition, ownership and disposition of New Ordinary Shares by a US Holder (as defined below). This summary deals only with US Holders that receive Rights in the Rights Issue and will hold the Rights and New Ordinary Shares as capital assets, within the meaning of Section 1221 of the US Internal Revenue Code of 1986 (the “Code”). The discussion does not cover all aspects of US federal income taxation that may be relevant to, or the actual tax effect that any of the matters described herein will have on, the receipt, exercise and disposition of Rights or the acquisition, ownership or disposition of New Ordinary Shares by particular investors (including consequences under the alternative minimum tax or net investment tax), and does not address state, local, foreign or other tax laws. This summary also does not address tax considerations applicable to investors that own (directly or indirectly) 10 per cent. or more of the voting stock of the Company, nor does this summary discuss all of the tax considerations that may be relevant to certain types of investors subject to special treatment under the US federal income tax laws (such as financial institutions, insurance companies, individual retirement accounts and other tax-deferred accounts, tax-exempt organisations, dealers in securities or currencies, investors that will hold the New Ordinary Shares as part of straddles, hedging transactions or conversion transactions for US federal income tax purposes or investors whose functional currency is not the US dollar).

As used herein, the term “US Holder” means a beneficial owner of Rights or New Ordinary Shares that is, for US federal income tax purposes, (i) an individual citizen or resident of the United States, (ii) a corporation (or other entity treated as a corporation for US federal income tax purposes) created or organised under the laws of the United States or any State thereof or the District of Columbia, (iii) an estate the income of which is subject to US federal income tax without regard to its source or (iv) a trust if a court within the United States is able to exercise primary supervision over the administration of the trust and one or more US persons have the authority to control all substantial decisions of the trust, or the trust has validly elected to be treated as a domestic trust for US federal income tax purposes.

The US federal income tax treatment of a partner or other owner of an entity treated as a partnership or other pass-through entity for US federal income tax purposes that holds Rights or New Ordinary Shares will depend on the status of the partner (or other owner) and the activities of the entity. Prospective purchasers that are entities treated as partnerships or other pass-through entities for US federal income tax purposes should consult their tax advisers concerning the US federal income tax consequences to their partners (or other owners) of the acquisition, ownership, exercise and disposition of Rights or New Ordinary Shares by the entity.

The summary assumes that the Company is not a passive foreign investment company (a “PFIC”) for US federal income tax purposes, which the Company believes to be the case. The Company’s possible status as a PFIC must be determined annually and therefore may be subject to change. If the Company were to be a PFIC in any year, materially adverse consequences could result for US Holders.

This summary is based on the tax laws of the United States, including the Code, as amended, its legislative history, existing and proposed regulations thereunder, published rulings and court decisions, as well as on the income tax treaty between the United States and the United Kingdom, all as in effect of the date hereof and all subject to change at any time, possibly with retroactive effect.

THE SUMMARY OF US FEDERAL INCOME TAX CONSEQUENCES SET OUT BELOW IS FOR GENERAL INFORMATION ONLY AND IS NOT INTENDED TO BE, NOR SHOULD IT BE CONSTRUED TO BE, LEGAL OR TAX ADVICE TO ANY SHAREHOLDER OR PROSPECTIVE SHAREHOLDER AND NO OPINION OR REPRESENTATION WITH RESPECT TO THE US FEDERAL INCOME TAX CONSEQUENCES TO ANY SUCH SHAREHOLDER OR PROSPECTIVE SHAREHOLDER IS MADE. ALL PROSPECTIVE PURCHASERS SHOULD CONSULT THEIR TAX ADVISERS AS TO THE PARTICULAR TAX CONSEQUENCES TO THEM OF OWNING THE RIGHTS AND NEW ORDINARY SHARES, INCLUDING THE

APPLICABILITY AND EFFECT OF FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX LAWS AND POSSIBLE CHANGES IN TAX LAW.

2. TAXATION IN RESPECT OF RIGHTS

2.1 Nil Paid Rights

2.1.1 Receipt of Nil Paid Rights

The tax consequences of the receipt of Nil Paid Rights by a US Holder are not free from doubt. In particular, it is not clear whether the sale of Rights by the Underwriters, and the remittance of the proceeds from that sale to certain holders whose Nil Paid Rights were sold, should be treated as a sale and distribution by the Company, or as a distribution of Nil Paid Rights by the Company and a subsequent sale of those Nil Paid Rights by the relevant holders. If the sale and distribution were considered to be made by the Company, then the receipt of Nil Paid Rights would be taxable to US Holders as a dividend to the extent of the Company's current or accumulated earnings and profits, as described below under "Taxation in Respect of New Ordinary Shares —Dividends". However, based on the particular facts relating to the Nil Paid Rights and the sale of Nil Paid Rights by the Underwriters, we believe it is proper to take the position that a US Holder is not required to include any amount in income for US federal income tax purposes as a result of the receipt of the Nil Paid Rights. It is possible that the US Internal Revenue Service will take a contrary view and require a US Holder to include in income the fair market value of the Nil Paid Rights on the date of their distribution. The remainder of this discussion assumes that the receipt of the Nil Paid Rights will not be a taxable event for US federal income tax purposes.

If, on the date of receipt, the fair market value of Nil Paid Rights is less than 15 per cent. of the fair market value of the Existing Ordinary Shares with respect to which Nil Paid Rights are received, Nil Paid Rights will be allocated a zero tax basis unless the US Holder affirmatively elects to allocate tax basis in proportion to the relative fair market values of the US Holder's shares and Nil Paid Rights received determined on the date of receipt. This election must be made in the US Holder's timely filed US federal income tax return for the taxable year in which Nil Paid Rights are received, in respect of all Nil Paid Rights received by the US Holder, and is irrevocable.

If, on the date of receipt, the fair market value of Nil Paid Rights is 15 per cent. or more of the fair market value of the Existing Ordinary Shares with respect to which the rights are received, then, except as discussed below under "Expiration of Nil Paid Rights", the basis in the US Holder's Existing Ordinary Shares must be allocated between the Existing Ordinary Shares and Nil Paid Rights received in proportion to their fair market values determined on the date of receipt.

2.1.2 Sale or Other Disposition of Nil Paid Rights

Upon a sale or other disposition of Nil Paid Rights, including a sale of Nil Paid Rights by the Underwriters, a US Holder will generally recognise capital gain or loss equal to the difference, if any, between the US dollar value of the amount realised (as determined on the date of the sale or other disposition) and the US Holder's adjusted tax basis in the Nil Paid Rights. Any gain or loss will generally be US source, and will be long-term capital gain or loss if the US Holder's holding period in the Nil Paid Rights exceeds one year. A US Holder's holding period in the Nil Paid Rights will include the holding period in the shares with respect to which the Nil Paid Rights were distributed.

2.1.3 Expiration of Nil Paid Rights

If a US Holder allows the Nil Paid Rights to expire without selling or exercising them and does not receive any proceeds, the holder will not recognise any loss upon the expiration of the Nil Paid Rights, and the holder will not be entitled to allocate any basis to the Nil Paid Rights.

201

202

2.1.4 Exercise of Nil Paid Rights

A US Holder will not recognise taxable income upon the receipt of Fully Paid Rights pursuant to the exercise of Nil Paid Rights. A US Holder’s basis in the Fully Paid Rights will equal the sum of the US dollar value of the exercise price determined at the spot rate on the date of exercise and the US Holder’s basis, if any, in the Nil Paid Rights exercised to obtain the Fully Paid Rights. A US Holder’s holding period in each Fully Paid Right will begin with and include the date of exercise of the Nil Paid Right.

2.1.5 Proceeds from Sale by Underwriters

The US federal income tax treatment of a US Holder that receives proceeds as a result of the sale by the Underwriters of Nil Paid Rights at a premium over the exercise price is not free from doubt. Generally, such a US Holder will be treated either as having sold the Nil Paid Rights (as described above) or as having exercised the Nil Paid Rights and sold the New Ordinary Shares. A US Holder that is treated as having sold the New Ordinary Shares will recognise a short-term capital gain or loss as described below under “Taxation in Respect of New Ordinary Shares —Sale or Other Disposition”, regardless of the holding period of the Nil Paid Rights. US Holders that receive amounts in respect of lapsed Nil Paid Rights should consult their own tax advisers regarding the US federal income tax treatment of such amounts.

2.2 Fully Paid Rights

2.2.1 Sale or Other Disposition of Fully Paid Rights

Upon a sale or other disposition of Fully Paid Rights, a US Holder will recognise capital gain or loss for US federal income tax purposes equal to the difference, if any, between the amount realised on the sale or other disposition and the US Holder’s adjusted tax basis in the Fully Paid Rights. Any such capital gain or loss will generally be US source short-term capital gain or loss.

2.2.2 Receipt of New Ordinary Shares

A US Holder will not recognise taxable income upon the receipt of New Ordinary Shares acquired through Fully Paid Rights. A US Holder’s basis in the New Ordinary Shares will equal the US Holder’s basis in the Fully Paid Rights with respect to which the New Ordinary Shares were acquired. A US Holder’s holding period in a New Share received will begin with and include the date of exercise of the underlying Nil Paid Right.

3. TAXATION IN RESPECT OF NEW ORDINARY SHARES

3.1 Dividends

3.1.1 General

Distributions paid by the Company out of current or accumulated earnings and profits (as determined for US federal income tax purposes) will generally be taxable to a US Holder as foreign source dividend income, and will not be eligible for the dividends received deduction allowed to corporations. Distributions in excess of current and accumulated earnings and profits will be treated as a non-taxable return of capital to the extent of the US Holder’s basis in the New Ordinary Shares and thereafter as capital gain. However, the Company does not maintain calculations of its earnings and profits in accordance with US federal income tax accounting principles. US Holders should therefore assume that any distribution by the Company with respect to New Ordinary Shares will constitute ordinary dividend income. US Holders should consult their own tax advisers with respect to the appropriate US federal income tax treatment of any distribution received from the Company.

Dividends paid by the Company will generally be taxable to a non-corporate US Holder at the special reduced rate normally applicable to long-term capital gains, provided the Company qualifies for the benefits of the Treaty. A US Holder will be eligible for this reduced rate only if it has held the New Ordinary Shares for more than 60 days during the 121-day period

beginning 60 days before the ex-dividend date. A US Holder will not be able to claim the reduced rate on dividends received from the Company if the Company is treated as a PFIC in the taxable year in which the dividends are received or in the preceding taxable year. See “Passive Foreign Investment Company Considerations” below.

Prospective purchasers should consult their tax advisers concerning the applicability of the foreign tax credit and source of income rules to dividends on the New Ordinary Shares.

3.1.2 Foreign Currency Dividends

Dividends paid in pounds sterling will be included in income in a US dollar amount calculated by reference to the exchange rate in effect on the day the dividends are received by the US Holder, regardless of whether the pounds sterling are converted into US dollars at that time. If dividends received in pounds sterling are converted into US dollars on the day they are received, the US Holder generally will not be required to recognise foreign currency gain or loss in respect of the dividend income.

3.2 Sale or other Disposition

Upon a sale or other disposition of New Ordinary Shares, a US Holder generally will recognise US source capital gain or loss for US federal income tax purposes equal to the difference, if any, between the amount realised on the sale or other disposition and the US Holder’s adjusted tax basis in the New Ordinary Shares. This capital gain or loss will be long-term capital gain or loss if the US Holder’s holding period in the New Ordinary Shares exceeds one year. However, regardless of a US Holder’s actual holding period, any loss may be long-term capital loss to the extent the US Holder receives a dividend that qualifies for the reduced rate described above under “Dividends—General”, and exceeds 10 per cent. of the US Holder’s basis in its New Ordinary Shares.

A US Holder’s tax basis in a New Share will generally be its US dollar cost. The US dollar cost of a New Share purchased with foreign currency will generally be the US dollar value of the purchase price on the date of purchase, or the settlement date for the purchase, in the case of New Ordinary Shares traded on an established securities market, within the meaning of the applicable Treasury Regulations, that are purchased by a cash basis US Holder (or an accrual basis US Holder that so elects). Such an election by an accrual basis US Holder must be applied consistently from year to year and cannot be revoked without the consent of the IRS. The amount realised on a sale or other disposition of New Ordinary Shares for an amount in foreign currency will be the US dollar value of this amount on the date of sale or disposition. On the settlement date, the US Holder will recognise US source foreign currency gain or loss (taxable as ordinary income or loss) equal to the difference (if any) between the US dollar value of the amount received based on the exchange rates in effect on the date of sale or other disposition and the settlement date. However, in the case of New Ordinary Shares traded on an established securities market that are sold by a cash basis US Holder (or an accrual basis US Holder that so elects), the amount realised will be based on the exchange rate in effect on the settlement date for the sale, and no exchange gain or loss will be recognised at that time.

3.3 Disposition of Foreign Currency

Foreign currency received on the sale or other disposition of a New Share will have a tax basis equal to its US dollar value on the settlement date. Foreign currency that is purchased will generally have a tax basis equal to the US dollar value of the foreign currency on the date of purchase. Any gain or loss recognised on a sale or other disposition of a foreign currency (including its use to purchase New Ordinary Shares or upon exchange for US dollars) will be US source ordinary income or loss.

3.4 Passive Foreign Investment Company Considerations

The Company does not believe that it should be treated as a PFIC for US federal income tax purposes but the Company’s possible status as a PFIC must be determined annually and therefore may be subject to change. If the Company were to be treated as a PFIC, US Holders of New Ordinary Shares would be required (i) to pay a special US addition to tax on certain distributions and gains on sale and

(ii) to pay tax on any gain from the sale of New Ordinary Shares at ordinary income (rather than capital gains) rates in addition to paying the special addition to tax on this gain. Additionally, dividends paid by the Company would not be eligible for the special reduced rate of tax described above under “Dividends—General”. Prospective purchasers should consult their tax advisers regarding the potential application of the PFIC regime.

3.5 Backup Withholding and Information Reporting

Payments of dividends and other proceeds with respect to New Ordinary Shares, by a US paying agent or other US intermediary will be reported to the IRS and to the US Holder as may be required under applicable regulations. Backup withholding may apply to these payments if the US Holder fails to provide an accurate taxpayer identification number or certification of exempt status or fails to report all interest and dividends required to be shown on its US federal income tax returns. Certain US Holders are not subject to backup withholding. US Holders should consult their tax advisers as to their qualification for exemption from backup withholding and the procedure for obtaining an exemption.

3.6 Transfer Reporting Requirements

If persons who take up the Nil Paid Rights or the Fully Paid Rights hold at least 80 per cent. of the Ordinary Shares immediately after the Rights Issue, a US Holder who exercises Nil Paid Rights or Fully Paid Rights may be required to file Form 926 (or similar form) with the IRS if the purchase, when aggregated with all transfers of cash or other property made by the US Holder (or any related person) to the Company within the preceding 12 month period, exceeds US$100,000 (or its equivalent). In certain circumstances, a US Holder that receives cash from the Underwriters may be deemed to have exercised its Rights and, thus, to have transferred cash to the Company. See “Taxation in Respect of Rights—Proceeds from the Sale by Underwriters”. Accordingly, US Holders should consult their own tax advisors with respect to whether they should file Form 926. A US Holder who fails to file any such required form could be required to pay a penalty equal to 10 per cent. of the gross amount paid for the New Ordinary Shares (subject to a maximum penalty of US$100,000, except in cases of intentional disregard). US Holders should consult their tax advisers with respect to this or any other reporting requirement that may apply to an acquisition of the New Ordinary Shares.

3.7 Foreign Financial Asset Reporting

US Holders are subject to reporting requirements on the holding of certain foreign financial assets, including equity of foreign entities, if the aggregate value of all of these assets exceeds US$50,000 at the end of the taxable year or US$75,000 at any time during the taxable year. The thresholds are higher for individuals living outside of the United States and married couples filing jointly. The New Ordinary Shares are expected to constitute foreign financial assets subject to these requirements unless the New Ordinary Shares are held in an account at a financial institution (in which case the account may be reportable if maintained by a foreign financial institution). US Holders should consult their tax advisors regarding the application of this legislation.

204

205

PART XX

DIRECTORS, SENIOR MANAGERS AND CORPORATE GOVERNANCE

1. DIRECTORS

The Directors of the Company as at the date of this document and their respective roles are set out below:

Name	Position
Dennis Millard	Chairman
John Worby	Senior Independent Non-executive Director
Andrew Brent	Independent Non-executive Director
Anthony Cann	Independent Non-executive Director
Mark Cashmore	Group Chief Executive
Nick Gresham	Chief Financial Officer
Jonathan Bunting	Managing Director, Connect News & Media

Dennis Millard, (65), Chairman

Dennis Millard joined the Board as a non-executive director and Deputy Chairman on 31 August 2006 and became Chairman on 6 February 2008. He is non-executive Chairman of Halfords Group PLC, non-executive Deputy Chairman of Pets at Home Group PLC and a non-executive director and Senior Independent Director of Debenhams plc and Premier Farnell plc. He was Finance Director of Cookson Group plc from 1996 to 2005 and was a non-executive director of Exel plc from 2003 until 2005 and Xchanging plc from 2005 until 2012. He is Chairman of Trustees of the charity The Holy Cross Children's Trust.

John Worby, (63), Senior Independent Non-executive Director

John Worby joined the Board on 31 August 2006 and is the Senior Independent Director. He retired as Group Finance Director of Genus plc in March 2013, having previously been Group Finance Director and Deputy Chairman of Uniq plc (formerly Unigate plc). He is a non-executive director and Chairman of the Audit Committee of Fidessa Group plc and a member of the Financial Reporting Review Panel.

Andrew Brent, (55), Independent Non-executive Director

Andrew Brent joined the Board on 1 September 2008. He was most recently Chief Customer and Marketing Officer at Barclays Bank and prior to that held senior marketing positions in a number of leading companies including BSkyB plc, Alliance Boots Plc, Burger King Inc., Iceland Frozen Foods Plc and Proctor and Gamble Inc.

Anthony Cann, (67), Independent Non-executive Director

Anthony Cann joined the Board on 31 August 2006. He is a solicitor, now non-practising, and was the worldwide Senior Partner of Linklaters, an international law firm, from 2001 until 2006. He is currently a non-executive director of Panmure Gordon & Co. plc, a Trustee of The Social Investment Business Foundation, a director of The Social Investment Business Ltd and Chairman of the Governors of Haberdashers' Adams' Federation Trust.

Mark Cashmore, (54), Group Chief Executive

Mark Cashmore joined the Board on 31 August 2006 as Group Chief Executive. He started his career with Pernod Ricard before moving to United News and Media in 1989. Between 1989 and 1999 he held senior positions in a number of news distribution businesses, including Sales Director of United Magazine

Distribution, USM and Seymour. He joined WH Smith News in 1999 and was appointed Magazine Sales Director in 2001 and Managing Director in June 2006.

Nick Gresham, (43), Chief Financial Officer

Nick Gresham joined the Connect Group and was appointed to the Board on 1 August 2010. Prior to joining, he held various senior financial roles in GUS plc and Home Retail Group plc over a ten year period, including Group Financial Controller, Finance Director of the Financial Services division and Finance Director of Homebase. Before joining GUS, Nick worked for Virgin Retail and Debenhams plc.

Jonathan Bunting, (42), Managing Director, Connect News & Media

Jonathan Bunting joined the Board on 1 April 2010. He joined WH Smith News as a graduate recruit in 1994. He rose through the organisation in a variety of sales and marketing managerial roles before being promoted to the executive management team in 2001 as Trade Marketing Director. He was appointed Commercial Director in August 2006, Chief Commercial Officer in April 2010 and Managing Director, Smiths News on 1 May 2012. In April 2014, Jonathan became Managing Director of the Connect News & Media Division.

Further information on the Directors, including the companies of which each of the Directors has been a director at any time in the past five years, is set out from paragraph 6 to 8 of Part XXI (Additional Information).

The business address for each of the Directors is Rowan House, Cherry Orchard North, Kembrey Park, Swindon, United Kingdom, SN2 8UH.

2. SENIOR MANAGERS

The Connect Group's Senior Managers as at the date of this document and their respective roles are set out below:

Name	Position
Glenn Leech	Managing Director, Connect Education & Care
Max Livingstone-Learmonth	Group Strategy Director
Sarah Miles	Group Human Resources Director
Graeme Underhill	Managing Director, Connect Books
Richard Webb	Group IT & Services Director
Justin Adams	Managing Director, Connect Books
Stuart Marriner	Company Secretary and General Counsel

Glenn Leech, (39), Managing Director, Connect Education & Care

Glenn Leech joined WH Smith News in 2004 as Human Resources Director. Prior to joining WH Smith News, Glenn spent seven years at Ford Motor Company, during which time he held a number of managerial positions in Employee Relations, HR Business Operations and as an HR Project Manager. He was appointed Group Human Resources Director on 1 September 2011 and Managing Director, The Consortium on 26 October 2013. In April 2014, Glenn became Managing Director of the Connect Education & Care Division.

Max Livingstone-Learmonth, (37), Group Strategy Director

Max Livingstone-Learmonth joined the Connect Group in March 2011 as Head of Corporate Development. Max has 15 years of strategy and corporate acquisitions experience and prior to joining the Connect Group was a director at PricewaterhouseCoopers. He was appointed Group Strategy Director and joined the Group Executive on 1 September 2014.

206

Sarah Miles, (46), Group Human Resources Director

Sarah Miles joined the Connect Group in August 2013. Prior to joining, Sarah led the Chartered Institute of Personnel and Development’s expansion into Asia. Prior to that, she spent 12 years at PepsiCo in a variety of HR leadership roles, most recently as Senior HR Director of PepsiCo’s UK Manufacturing & Logistics divisions where she also had HR responsibility for Finance, IT and Special Projects. Before joining PepsiCo she worked for Pearson and Marks and Spencer.

Graeme Underhill, (56), Managing Director, Connect Books

Graeme Underhill joined WH Smith News in 1975. Graeme managed a number of depots before moving to Head Office in 1997 as Project Manager for the Business Process Review. He held various senior central roles including SAP Project Manager, Operations Development Manager and Operations Director before being appointed Managing Director, Bertrams in August 2011. In April 2014, Graeme became Managing Director of the Connect Books Division. Having announced his intention to retire, Graeme will step down as Managing Director, Connect Books at the end of 2014. In the meantime, both Graeme and Justin Adams (who joined the Connect Group in November 2014) will hold the role of Managing Director of Connect Books.

Richard Webb, (49), Group IT & Services Director

Richard Webb joined WH Smith News as a graduate recruit in 1987. Richard worked in a variety of roles at warehouse locations and regional level before moving to Head Office in 1994 to join the Information Systems Department. He was appointed Information Systems Director in 2004 and Group Information Technology Director on 1 September 2011, assuming responsibility for Group Services on 1 May 2013.

Justin Adams, (49), Managing Director, Connect Books

Justin Adams joined the Connect Group in November 2014 from Sealskinz Ltd, where he was CEO. Sealskinz is a private equity backed business supplying the outdoor and sports market with a range of unique waterproof accessories. Prior to that, Justin sat on the Greene King plc board where he spent over 5 years as the Managing Director for the brewing company. He also worked for Diageo plc where he ran Guinness Germany and Maxxium Worldwide B.V. as Managing Director UK & Ireland.

Stuart Marriner, (34), Company Secretary and General Counsel

Stuart Marriner joined the Connect Group in October 2008 to lead the Company’s legal team. He joined from TLT Solicitors in Bristol where he had spent four years as a Corporate Finance Solicitor, including extensive periods on secondment with Somerfield Stores, the supermarket chain, and Punch Taverns, the pub company. Stuart was appointed as Company Secretary and General Counsel on 1 September 2011 and continues to provide business, legal and regulatory support.

The business address for each of the Senior Managers is Rowan House, Cherry Orchard North, Kembrey Park, Swindon, United Kingdom, SN2 8UH.

DIRECTORS’ AND SENIOR MANAGERS’ INTERESTS

Details of the interests of each Director and Senior Manager in the voting rights of the Company, together with what their respective interests are expected to be immediately following Admission, are set out in paragraph 6.2 of Part XXI (Additional Information).

CORPORATE GOVERNANCE

The Company is a smaller company for the purposes of the UK Corporate Governance Code. The UK Corporate Governance Code recommends that at least half the members of the Board, excluding the Chairman, should comprise non-executive directors determined by the Board to be independent. For the purposes of assessing compliance with the UK Corporate Governance Code, the Board considers that Andrew Brent, Anthony Cann and John Worby are non-executive directors who are independent of management and free from any business or other relationship that could materially interfere with the exercise

207

of their independent judgment. The Board also considers that the Chairman of the Company, Dennis Millard, was independent on appointment.

The senior independent director is John Worby, who serves as an additional point of contact for Shareholders should they feel that their concerns are not being addressed through the normal channels. Dennis Millard is, furthermore, available to fellow non-executive directors, either individually or collectively, should they wish to discuss matters of concern in a forum that does not include the executive directors.

The Connect Group is committed to corporate governance best practice and as such, in accordance with the provisions of the UK Corporate Governance Code, it is anticipated that non-executive directors shall not serve on the board for more than nine years. Dennis Millard, Anthony Cann and John Worby were all appointed on 31 August 2006, and therefore in order to comply with best practice in accordance with UK Corporate Governance Code, these directors are not expected to seek re-election after 31 August 2015.

The Board has established three principal committees, the Audit Committee, the Remuneration Committee and the Nominations Committee. The members of each committee are as follows:

Audit Committee	Remuneration Committee	Nominations Committee
Andrew Brent	Andrew Brent	Andrew Brent
Anthony Cann	Anthony Cann*	Anthony Cann
Dennis Millard	Dennis Millard	Dennis Millard*
John Worby*	John Worby	John Worby

Denotes Chairman.

Audit Committee

The UK Corporate Governance Code recommends that an Audit Committee is established which is comprised of at least three members, all of who are independent non-executive directors and at least one of whom will have recent and relevant financial experience. The chairman of the Audit Committee shall be an independent non-executive director and shall not be the Chairman of the Company. The chairman of the Audit Committee is John Worby. John has recent and relevant financial experience, being a member of the Financial Reporting Review and also having held the position of Group Finance Director of Genus plc, retiring in March 2013.

The terms of reference of the Audit Committee state that the Audit Committee shall meet as frequently as the Audit Committee deems appropriate, and in any event not less than three times a year. The quorum for meetings of the Audit Committee will be two members. The Audit Committee shall meet the external auditor at least once a year, without management being present, to discuss the auditor's remit and any issues arising out of the audit. The terms of reference of the Audit Committee also set out the authority of the Audit Committee to investigate any matter within its terms of reference.

The responsibilities of the Audit Committee will include monitoring the integrity of the Company's results and financial statements, reviewing the effectiveness of the Company's internal controls and risk management systems, reviewing the effectiveness of the Company's internal audit function and assessing the independence and objectivity of the external auditors and ensure their co-ordination with the internal audit function.

Remuneration Committee

The UK Corporate Governance Code recommends that a Remuneration Committee is established which is comprised of at least three members, each of who shall be independent non-executive directors (and may include the Chairman of the Company if he was considered independent upon his appointment). The chairman of the Remuneration Committee shall be an independent non-executive director and shall not be the Chairman of the Company. The chairman of the Remuneration Committee is Anthony Cann.

The terms of reference of the Remuneration Committee state that the Remuneration Committee shall meet as frequently as the Remuneration Committee deems appropriate, and in any event not less than three times a year. The quorum for meetings of the Remuneration Committee will be two members. The terms of

208

reference of the Remuneration Committee also set out the authority of the Remuneration Committee to investigate any matter within its terms of reference.

The Remuneration Committee shall be responsible for all elements of the remuneration of the executive directors and the chairman and for recommending and monitoring the structure and level of remuneration for senior management of the Connect Group.

Nominations Committee

The UK Corporate Governance Code recommends that a Nominations Committee is established which is comprised of a majority of non-executive directors. The Chairman or an independent non-executive director should chair the Nominations Committee, but the Chairman should not chair the Nominations Committee when it is dealing with the appointment of a successor to the chairmanship. The chairman of the Nominations Committee is Dennis Millard.

The terms of reference of the Nominations Committee state that the Nominations Committee shall meeting as often as the Nominations Committee deems appropriate, and in any event meetings shall be held not less than once a year. The quorum for meetings of the Nominations Committee will be two members, both of whom must be independent non-executive directors. The terms of reference of the Nominations Committee also set out the authority of the Nominations Committee to investigate any matter within its terms of reference.

The Nominations Committee shall be responsible for all aspects of the appointment of directors of the Company and for regularly reviewing the structure, size and composition of the Board (including evaluating the balance of skills, diversity, knowledge, independence and experience of the Board), giving full consideration to succession planning and leading the process for appointments to the Board and making recommendations to the Board.

209

210

PART XXI

ADDITIONAL INFORMATION

1. RESPONSIBILITY

The Company and the Directors, whose names appear in paragraph 1 of Part XX (Directors, Senior Managers and Corporate Governance), accept responsibility for the information contained in this document. To the best of the knowledge and belief of the Company and the Directors (who have taken all reasonable care to ensure that such is the case), the information contained in this document is in accordance with the facts and does not omit anything likely to affect the import of such information.

2. INCORPORATION AND REGISTERED OFFICE

The Company was incorporated and registered in England and Wales with the name Brightway Services Limited on 2 August 2004 as a private company limited by shares with registered number 05195191.

On 23 June 2006, by written resolution, the initial shareholders of the Company resolved to re-register it as a public limited company and to change the name from Brightway Services Limited to “Smiths News PLC”. This change of name and re-registration was effective on 23 June 2006.

On 11 April 2014, the Board resolved to change the name of the Company from “Smiths News PLC” to “Connect Group PLC” (as permitted by article 69 of the Company’s Articles). This change of name was effective from 22 April 2014.

The principal legislation under which the Company operates and under which the New Ordinary Shares will be issued is the Companies Act and the regulations made thereunder.

The Company is domiciled in the United Kingdom with its registered office and principal place of business at Rowan House, Cherry Orchard North, Kembrey Park, Swindon, SN2 8UH.

The telephone number of the Company’s registered office is 0845 128 8888.

3. ORGANISATIONAL STRUCTURE

The Company is the ultimate holding company of the Connect Group and, following Completion, will be the ultimate holding company of the Enlarged Group.

The Company’s principal subsidiaries and associated undertakings (each of which is considered by the Company to be likely to have a significant effect on the assessment of the assets and liabilities, the financial position or the profits and losses of the Connect Group) are as follows:

Name of subsidiary/undertaking	Country of incorporation	Proportion of voting rights held (per cent.)	Nature of business
Bertram Trading Limited	England	100	Wholesale trade
Bluebox Avionics Limited	England	50	Software development
Dawson Books Limited	England	100	Wholesale trade and ebook platform software
Dawson Espana Agencia de Ediciones S1	Spain	100	Sale and distribution
Dawson France SAS	France	100	Sale and distribution
Dawson Holdings Limited	England	100	Activities of head office
Dawson Media Direct Limited	England	100	Sale and distribution
Dawson Media Direct China Limited	Hong Kong	100	Sale and distribution
Dawson Media Direct Iberica SL	Spain	100	Sale and distribution
Dawson Media Direct GmbH	Germany	100	Sale and distribution

Name of subsidiary/undertaking	Country of incorporation	Proportion of voting rights held (per cent.)	Nature of business
Dawson Media Direct Inc.	United States	100	Sale and distribution
Dawson Media Direct NV	Belgium	99	Sale and distribution
Dawson Media Direct SAS	France	100	Sale and distribution
Erasmus Antiquariaat en Boekhandel BV	Netherlands	100	Sale and distribution
Erasmus Buchhandlung GmbH	Germany	100	Sale and distribution
FMD Limited	England	50	Wholesale trade
Hedgelane Limited	England	100	Activities of head office
Houtschild Internationale Boekhandel BV	Netherlands	100	Sale and distribution
Magpie Investments Limited	England	51	Retail sales
Martin Lavell Limited	England	100	Wholesale trade
Phantom Media Limited	England	100	Content service provider
Rascal Solutions Limited	England	50	Business support services and software provider
Smiths News Holdings Limited	England	100	Activities of head office
Smiths News Trading Limited	England	100	Wholesale trade
The Consortium for Purchasing and Distribution Limited	England	100	Wholesale trade

Tuffnells' principal subsidiaries and associated undertakings (each of which is considered by the Company to be likely to have a significant effect on the assessment of the assets and liabilities, the financial position or the profits and losses of the Tuffnells Group) are as follows:

Name of subsidiary/undertaking	Country of incorporation	Proportion of voting rights held (per cent.)	Nature of business
Tuffnells Parcels Express Limited	England	100	Distribution

4. SHARE CAPITAL

4.1 Issued share capital

The issued fully paid up share capital of the Company as at the Latest Practicable Date was 189,477,548, and following completion of the Rights Issue will be 243,613,990.

4.2 Share Capital History

As at 1 September 2011, being the first day covered by the historical financial information in Part XV (Historical Financial Information relating to Connect), the Company's issued share capital was 183,449,833 Ordinary Shares of 5 pence each.

Between 1 September 2011 and the Latest Practicable Date, the Company issued 6,027,715 Ordinary Shares in total, of which:

1,497,703 Ordinary Shares were issued pursuant to the Sharesave Scheme; and
4,530,012 Ordinary Shares were issued to the selling shareholders of The Consortium pursuant to The Consortium SPA, described in more detail in paragraph 16 of this Part XXI.

Other than these issues of Ordinary Shares, there have been no changes to the issued share capital of the Company between 1 September 2011 and the Latest Practicable Date.

The New Ordinary Shares will, when issued, be in registered form and, subject to the provisions of the CREST Regulations, the Directors may permit the holding of New Ordinary Shares in uncertificated form and title to the New Ordinary Shares may be transferred by means of a relevant system (as defined in the CREST Regulations). Where the New Ordinary Shares are held in certificated form, share certificates will be sent to the registered share owners by first class post. The New Ordinary Shares which are subject to the Rights Issue will be provisionally allotted (nil paid) to Qualifying Shareholders by a resolution of a committee of the Board in accordance with English Law. The New Ordinary Shares will have the same rights in all respects of the Existing Ordinary Shares (including the right to receive all dividends and other distributions declared after the date of issues of the New Ordinary Shares).

4.3 Share capital after the Rights Issue

Subject to Admission, the New Ordinary Shares will be issued with a nominal value of 5 pence each. This will result in the issued share capital of the Company increasing by approximately 29 per cent. (assuming no options or awards are exercised under the Connect Share Schemes between the Latest Practicable Date and Admission).

4.4 Existing shareholder authorities

At the annual general meeting of the Company held on 23 January 2014, resolutions were passed to authorise the Directors, pursuant to section 551 of the Companies Act, to allot (i) shares up to an aggregate nominal amount of £3,073,799; and (ii) equity securities (as defined in the Companies Act) up to a maximum aggregate nominal amount of £6,147,598 in connection with an offer by way of rights issue. Additionally, a resolution authorising the waiver of pre-emption rights in connection with such allotments was passed. These resolutions will be relied upon for the purposes of the Rights Issue.

5. MEMORANDUM AND ARTICLES OF ASSOCIATION

The Articles are available for inspection at the Company's registered office as described in paragraph 2 of this Part XXI.

The Articles contain provisions (amongst others) to the following effect:

5.1 Unrestricted objects

The Articles provide that the Company's objects are unrestricted.

5.2 Share capital

5.2.1 Liability of members

The liability of the members is limited to the amount (if any) unpaid on the Ordinary Shares held by them.

5.2.2 Further issues and rights attaching to Ordinary Shares

Ordinary Shares can be issued with rights or restrictions that the Company determines by ordinary resolution or, if the Company has not determined, as the directors may determine.

5.2.3 Changes to the share capital

The Company can increase, divide or consolidate its share capital in accordance with the Companies Act and determine that any shares resulting from a sub-division can have preference or advantage as compared with the others.

5.2.4 Redemption of shares

The Company can issue shares which are redeemable at the option of the Company, and the directors may determine the terms, conditions and manner of the redemption of such share.

212

5.3 Rights attaching to the Ordinary Shares of the Company

5.3.1 Dividends

The Company can by ordinary resolution declare dividends in accordance with the respective rights of the members but no dividend shall exceed the amount recommended by the directors. The directors may pay interim dividends or dividends payable at a fixed rate if it appears to them that they are justified by the financial position of the Company. If the directors act in good faith they will not incur any liability to the holders of shares conferring preferred rights for any loss they may suffer by the lawful payment of an interim dividend on any shares having deferred or non-preferred rights.

Except as otherwise provided by the Articles or the rights attached to shares, all dividends will be paid based on the amounts paid up on the shares during any period for which the dividend is paid.

A general meeting declaring a dividend may, upon the recommendation of the directors, direct that it shall be satisfied wholly or partly by the distribution of specific assets or can be settled as the directors think fit.

The directors may, with the authority of an ordinary resolution of the Company, offer any holders of Ordinary Shares the right to elect to receive Ordinary Shares instead of cash in respect of the whole (or some part, to be determined by the directors) of any dividend specified by the ordinary resolution.

Dividends or other money payable in respect of a share will not bear interest against the Company (unless otherwise provided by the rights attached to the share).

If a dividend has not been cashed or is returned to the Company (and the Company is unable to establish any new address or a new account for that person after reasonable enquiries), or is left uncashed or returned to the Company on two consecutive occasions, the Company can cease to make any payment in respect of that dividend.

Any dividend which has remained unclaimed for six years from the date when it was declared will be forfeited and go back to the Company.

5.3.2 Voting Rights

Shareholders are entitled to vote as follows (subject to any rights or restrictions attached to Ordinary Shares): (i) on a show of hands every member who is present in person has one vote; and every proxy present who has been duly appointed by one or more members entitled to vote on the resolution has one vote, except that if the proxy has been duly appointed by more than one member entitled to vote and is instructed by one or more of those members to vote for the resolution and by one or more others to vote against it, or is instructed by one or more of those members to vote in one way and is given discretion as to how to vote by one or more others (and wishes to use that discretion to vote in the other way) he has one vote for and one vote against the resolution. On a poll a member or proxy entitled to more than one vote need not cast all the votes he uses in the same way.

If more than one joint shareholder votes (including votes by proxy), the only vote which will count is the vote of the person whose name is listed before the other voters on the register of members.

5.3.3 Transfer of the shares

A share in certificated form may be transferred by an instrument of transfer which can be in any usual form or in any other form approved by the directors, executed by or on behalf of the transferor and, where the share is not fully paid, by or on behalf of the transferee. A share in uncertificated form may be transferred in accordance with the acts (as further defined in the Articles).

213

In their absolute discretion, the directors may refuse to register the transfer of a share in certificated form which is not fully paid provided that such refusal does not prevent dealings in the shares from taking place on an open and proper basis or on which the Company has a lien. The directors can also refuse to register a transfer of a share in certificated form (whether fully paid or not) unless the instrument of transfer (i) is lodged, duly stamped, at the registered office of the Company or such other place as the directors may appoint and is accompanied by the certificate for the share to which it relates and such other evidence as the directors may reasonably require to show the right of the transferor to make the transfer; and (ii) is in respect of only one class of share.

If the directors refuse to register a transfer of a share, they will send the transferee notice of that refusal with reasons within two months after the date on which the transfer was lodged with the Company.

5.3.4 Distribution of assets on a winding up

If the Company is in liquidation, the liquidator can, with the sanction of a special resolution and any other sanction required by law, divide among the members in specie the whole or any part of the assets of the Company. For this purpose, the liquidator may value any assets and determine how the division shall be carried out as between the members or different classes of members. The liquidator can, with the like sanction, vest the whole or any part of the assets in trustees upon such trusts for the benefit of the members as he may determine. A member will not be compelled to accept any assets which carry a liability.

5.3.5 Restrictions on rights: failure to respond to a section 793 notice

If a member, or any other person appearing to be interested in shares held by that member, fails to provide the information requested in a notice given to them under section 793 of the Companies Act in relation to their interest in Company's shares (the "Default Shares") within 14 days from the date of giving the notice, sanctions will apply. The sanctions available are; (i) where the Default Shares represent less than 0.25 per cent. of their class, the suspension of the right to attend or vote (whether in person or by proxy) at any Shareholders' meeting; and (ii) where the Default Shares represent at least 0.25 per cent. of their class, suspension of the right to attend or vote (in person or by proxy) at any general meeting and also the withholding of any dividend payable in respect of the Default Shares and the restriction of the transfer of any of the Default Shares (subject to certain exceptions).

5.3.6 Variation of Rights

If legislation allows, rights attached to any class of shares may be changed as may be provided by the rights or if there is no such provision by Shareholders holding at least three quarters in nominal value of the issued shares of that class, or with the sanction of a special resolution passed at a separate meeting of the holders such shares.

If new shares are created or issued which rank equally with any other existing shares, the rights of the existing shares will not be regarded as changed or abrogated unless the terms of the existing shares expressly say otherwise.

5.4 Directors of the Company

5.4.1 Appointment

The number of directors (other than alternate directors) shall be no more than 15 and shall not be less than two.

Directors may be appointed by ordinary resolution of the Company or by the Board. A director appointed in this way will retire at the next AGM and will then be eligible for reappointment.

Other than a director retiring, no one can be appointed or reappointed at any general meeting unless they are recommended by the Board or notice of an intention to appoint or reappoint such person is given, by a member qualified to vote on such appointment or reappointment, to the Company not less than 14 nor more than 42 days before the date of the meeting.

214

5.4.2 Retirement

At each AGM, a director will retire from office if it is the third annual general meeting following the annual general meeting at which he was elected or last re-elected.

If the Company, at the meeting at which a director retires under any provision of the Articles, does not fill the vacancy, the retiring director will (if willing to act) be deemed re-elected, unless at the meeting it is resolved not to fill the vacancy or a resolution for the reappointment of the director is put to the meeting and lost.

5.4.3 Removal

In addition to any power of removal under the acts (as further defined in the Articles), the Company may remove a director before the expiration of his period of office by special resolution or by ordinary resolution of which special notice has been given in accordance with the law.

A person ceases to be a director as soon as:

that person is prohibited from being a director by law;
a bankruptcy order is made against that person;
a composition is made with that person’s creditors generally in satisfaction of that person’s debts;
a registered medical practitioner who has examined him gives a written opinion to the Company stating that he has become physically or mentally incapable of acting as a director and may remain so for more than three months; or by reason of his mental health a court makes an order which wholly or partly prevents him from personally exercising any powers or rights which he would otherwise have and, in either case the board resolves that his office be vacated;
that person is absent without the permission of the other directors from meetings of the directors for more than six months and the other directors resolve that he should cease to be a director; or
notification is received from the Company from that person that he is resigning or retiring from his office as director, and such resignation or retirement has taken effect in accordance with its terms.

5.4.4 Powers of directors

The Board will manage the Company, subject to the Articles and any directions given by special resolution, and may exercise all the powers of the Company.

The directors may delegate any of the powers conferred on them by the Articles to any director or committee of persons as they think fit.

Any director (other than an alternate director) may appoint any other director, or any other person approved by a resolution of the directors and willing to act, to be an alternate director and may remove such an alternate director appointed from office.

The Company may change its name by resolution of the directors.

5.4.5 Borrowing powers

The directors shall restrict the borrowings of the Company so as to ensure that the aggregate amount outstanding of all money borrowed by the Connect Group (excluding intra group borrowings other than as specifically provided by the Articles) shall not at any time, save with the previous sanction of an ordinary resolution of the Company, exceed £300 million.

215

5.4.6 Voting at board meetings

If the quorum for Board meetings is not fixed by the directors, the quorum is two. A director will not be counted in the quorum present in relation to a matter or resolution on which he is not entitled to vote (or when his vote cannot be counted) but will be counted in the quorum present in relation to all other matters or resolutions considered or voted on at that meeting.

Questions arising at a meeting shall be decided by a majority of votes. In case of an equality of votes, the chairman shall have a second or casting vote.

5.4.7 Restrictions on voting

Subject to the provisions of the Articles, a director will not vote at a meeting of the directors on any resolution relating to any transaction or arrangement with the Company in which he has an interest which may be reasonably regarded as likely to give rise to a conflict of interest (unless the case falls within one or more of the exceptions contained in the Articles).

The Company may by ordinary resolution suspend or relax any provision of the Articles prohibiting a director from voting at a meeting of the directors or of a committee of the directors or ratify any transaction or arrangement not duly authorised by reason of a contravention of these restrictions on voting.

5.4.8 Directors' interests

Provided that he has disclosed to the directors the nature and extent of any material interest of his, a director may:

be a party to, or otherwise interested in, any transaction or arrangement with the Company;
hold any other office or place of profit with the Company (except that of auditor) in conjunction with his office of director for such period and on such terms as the board may decide;
act by himself or his firm in a professional capacity for the Company (except as auditor) and be entitled to remuneration for professional services as if he were not a director;
be a member or director or hold any other office or place of profit under, or otherwise be interested in any company in which the Company may be interested; and
be or become a director of any other company in which the Company does not have an interest if that cannot reasonably be regarded as likely to give rise to a conflict of interest at the time of his appointment as a director of that other company,

and (i) he will not, by reason of his office, be accountable to the Company for any remuneration, profit or other benefit arising from any such transaction or arrangement; and (ii) no such transaction or arrangement will be liable to be avoided on the ground of any such interest or benefit.

The directors can authorise (to the fullest extent permitted by law) any matter which would otherwise result in a director infringing his duty to avoid a conflict situation. They can also authorise (to the fullest extent permitted by law) a director to continue in any office, employment or position in addition to his office as a director of the Company, and may authorise the manner in which a conflict of interest arising out of such office, employment or position may be dealt with.

Such authorisation is only effective if quorum at the meeting at which the matter is considered is met without counting the director in question or any other interested director and the matter was agreed to without their voting (or would have been agreed to if they votes had not been counted).

216

5.4.9 Directors' remuneration and expenses

The directors will be paid fees for their services as the directors may decide and, not exceeding in aggregate an annual sum of £500,000 or such larger amount as the Company may by ordinary resolution decide, divided between the directors as they may determine, or, failing such determination, equally.

Any director who performs special or extra services to or at the request of the Company can be paid additional remuneration (whether by way of lump sum, salary, commission, participation in profits or otherwise) as the directors may decide.

The directors can also be paid all travelling, hotel and other expenses properly incurred by them in relation to their duties.

5.4.10 Directors' gratuities and benefits

The directors may provide benefits for any director or any former director of the Company or of any body corporate which is or has been a subsidiary undertaking of the Company or a predecessor in business of the Company or of any such subsidiary undertaking, and for any relatives or dependents and may (before as well as after he ceases to hold such office) contribute to any fund and pay premiums for the purchase or provision of any such benefit.

5.4.11 Indemnity

The Company may:

indemnify to any extent any person who is or was a director, or a director of any associated company, against any liability incurred by him in the actual or purported execution or discharge of his duties or powers or otherwise in relation to or in connection with his duties, powers or office;
indemnify to any extent any person who is or was a director of a company that is a trustee of an occupational pension scheme for employees of the Company or of an associated company, against any liability incurred by him in connection with the company's activities as trustee of an occupational pension scheme; and
purchase and maintain insurance for any person who is or was a director, or a director of any associated company, against any liability incurred by him in respect of any act or omission in the actual or purported exercise of his powers or in relation to the holding of the relevant office.

5.5 General Meetings

The directors can call general meetings. If there are not sufficient directors to form a quorum in order to call a general meeting, any director can call a general meeting. If there is no director, two members of the Company can call a general meeting.

An annual general meeting shall be called on no less than 21 clear days' notice and all other general meetings of the Company shall be called by no less than 14 clear days' notice or by not less than such minimum notice period as is permitted by the acts (as further defined in the Articles).

The notice shall specify: whether the meeting is an annual or general meeting, the place of the meeting, the time of the meeting, the general nature of the business to be conducted at that meeting, and that a member entitled to vote may appoint one or more parties to vote instead of him at that meeting.

No business will be transacted at any meeting unless a quorum is present. The quorum is two persons entitled to vote upon the business to be transacted, each being a member or a proxy for a member or a duly authorised representative of a corporation which is a member.

217

A member is entitled to appoint another person as his proxy to exercise all or any of his rights to attend and to speak and vote at a meeting of the Company. Subject to the provisions of the acts (as further defined in the Articles), any corporation (other than the Company itself) which is a member of the Company may authorise a person or persons to act as its representative(s) at any general meeting of the Company. The directors can in relation to uncertificated shares allow an appointment of proxy to be sent or supplied in electronic form subject to any conditions or limitations as the directors may specify.

Directors may attend and speak at general meetings and at any separate meeting of the holders of any class of shares, whether or not they are members.

A general meeting can be held at more than one place in accordance with the specific provisions of the Articles.

6. DIRECTORS' AND SENIOR MANAGERS' INTERESTS

6.1 Other Directorships

Save as set out below, none of the Directors or Senior Managers have been a member of any partnerships, or held any directorships of any other company (other than subsidiaries of the Company), at any time in the five years prior to the date of this document.

| Director/
Senior Manager | Current directorships and partnerships | Previous directorships and partnerships held in the previous five years |
| --- | --- | --- |
| Dennis Millard | Debenhams plc
Halfords Group PLC
Pets at Home Group PLC
Premier Farnell plc | Xchanging plc |
| John Worby | Fidessa Group PLC
Stoke Park Avenue Limited
Uniq Pension Scheme Trustees Limited | Brazilian Holdings Limited
Brazilian Properties Limited
Cranswick plc
Easicare Computers Limited
Fyfield (SM) Limited
Genus Animal Health Limited
Genus Breeding Limited
Genus Consulting Limited
Genus Investments Limited
Genus plc
Genus Quest Trustees Limited
Genus Trustees Limited
National Pig Development Company Limited
PIC (UK) Limited
PIC Fyfield Limited
Pig Improvement Company Overseas Limited
Pig Improvement Company UK Limited
Pigtales Limited
Progen Ltd
Promar International Limited
Spedivet Limited
Spillers Limited
Spillers Overseas Limited
Sygen International Limited |

219

Director/Senior Manager	Current directorships and partnerships	Previous directorships and partnerships held in the previous five years
Andrew Brent	Conkerco Limited	Andrew Brent Associates Limited
Greenbottle Limited
Squid Associates Limited
Anthony Cann	Haberdashers' Adams' Federation Trust
Panmure Gordon & Co. plc
Social Investment Business Foundation
The Social Investment Business Limited	Haberdashers' Aske's Federation Trust
The Social Investment Business Trading Company Limited(1)
Mark Cashmore	N/A	Bluebox Avionics Limited(2)
Nick Gresham	N/A	Beddington House (No. 4) Limited
Jonathan Bunting	Bluebox Avionics Limited(1)
Open-Projects Limited(1)
Rascal Solutions Limited(1)	N/A
Glenn Leech	N/A	N/A
Max Livingstone-Learmonth	N/A	N/A
Sarah Miles	Kingsford Smith Limited	N/A
Graeme Underhill	N/A	N/A
Justin Adams	Waterloo Street BPRA Property Fund LLP
Sealskinz Holdings Limited
Sealskinz Limited
Maxxium Worldwide B.V.
Morrells of Oxford Limited	Greene King Brewing and Retailing Limited
Greene King Leasing No. 1 Limited
Greene King Leasing No. 2 Limited
Greene King Neighbourhood Estate Pubs Limited
Greene King PLC
Greene King Retailing Limited
Greene King Retailing Parent Limited
Beards of Sussex Limited
Greene King Acquisitions No. 2 Limited
Greene King Acquisitions (No. 3) Limited
Premium Casual Dining Limited
Old English Inns Limited
Hardys & Hansons Limited
G.K. Holdings No. 1 Limited
Greene King GP Limited
OEI Inns Limited
T.D. Ridley & Sons Limited
Adamsco Limited
Richard Webb	Newstraid Benevolent Fund Field Number 5173 Limited	Rascal Solutions Limited(2)
Open-Projects Limited(2)
Stuart Marriner	N/A	Travelling Light Theatre Company

Note:
(1) On 17 July 2012, proceedings were commenced for The Social Investment Business Trading Company Limited to be voluntarily struck-off and on 6 November 2012 this company was dissolved. This company never traded and was solvent at the time that it was dissolved.
(2) Associated undertaking of Connect.

6.2 Interests of Directors and Senior Managers in share capital

As at the Latest Practicable Date, insofar as is known to the Company, the interests of each Director and Senior Manager, and their immediate families, (all of which are beneficial) in the number of Ordinary Shares and the associated voting rights of the Company are set out in the following table together with their expected interests in Ordinary Shares following the issuance of the New Ordinary Shares:

Name	Ordinary Shares as at the Latest Practicable Date		Ordinary Shares immediately following issuance of New Ordinary Shares
	No.	Percentage	No.	Percentage
Directors
Dennis Millard	85,000	0.04	109,285	0.04
John Worby	12,000	0.01	15,428	0.01
Andrew Brent	10,101	0.01	12,987	0.01
Anthony Cann	30,000	0.02	38,571	0.02
Mark Cashmore	444,756	0.23	520,103	0.21
Nick Gresham	152,221	0.08	195,712	0.08
Jonathan Bunting	87,962	0.05	113,094	0.05
Name	Ordinary Shares as at the Latest Practicable Date		Ordinary Shares immediately following issuance of New Ordinary Shares
	No.	Percentage	No.	Percentage
Senior Managers
Glenn Leech	80,000	0.04	102,857	0.04
Max Livingstone-Learmonth	49,464	0.03	63,596	0.03
Sarah Miles	-	-	-	-
Graeme Underhill	152,324	0.08	195,845	0.08
Richard Webb	130,257	0.07	167,473	0.07
Justin Adams	-	-	-	-
Stuart Marriner	-	-	-	-

The Directors and Senior Managers had the following options and awards relating to Ordinary Shares under the Connect Share Schemes as at the Latest Practicable Date (conditional on Admission):

Director/Senior Manager	Date of grant	Number Shares at 31 August 2014	Option Price (Pence)	Date from Which Exercisable	Expiry Date
Deferred Bonus Plan:
Jonathan Bunting
FY2011/12 Annual Bonus Plan	15 November 2012	36,348	0.00	15 November 2014	15 November 2015
FY2011/12 Economic Profit Plan	15 November 2012	27,730	0.00	15 November 2014	15 November 2015
FY2012/13 Annual Bonus Plan	14 November 2013	30,846	0.00	14 November 2015	14 November 2016
FY2012/13 Economic Profit Plan	14 November 2013	28,666	0.00	14 November 2015	14 November 2016
Mark Cashmore
FY2011/12 Annual Bonus Plan	15 November 2012	59,686	0.00	15 November 2014	15 November 2015
FY2011/12 Economic Profit Plan	15 November 2012	48,187	0.00	15 November 2014	15 November 2015
FY2012/13 Annual Bonus Plan	14 November 2013	41,464	0.00	14 November 2015	14 November 2016
FY2012/13 Economic Profit Plan	14 November 2013	40,260	0.00	14 November 2015	14 November 2016
Nick Gresham
FY2011/12 Annual Bonus Plan	15 November 2012	34,530	0.00	15 November 2014	15 November 2015
FY2011/12 Economic Profit Plan	15 November 2012	19,360	0.00	15 November 2014	15 November 2015
FY2012/13 Annual Bonus Plan	14 November 2013	30,561	0.00	14 November 2015	14 November 2016
FY2012/13 Economic Profit Plan	14 November 2013	28,031	0.00	14 November 2015	14 November 2016

220

Director/Senior Manager	Date of grant	Number Shares at 31 August 2014	Option Price (Pence)	Date from Which Exercisable	Expiry Date
Glenn Leech
FY2011/12 Annual Bonus Plan	15 November 2012	26,171	0.00	15 November 2014	15 November 2015
FY2011/12 Economic Profit Plan	15 November 2012	22,013	0.00	15 November 2014	15 November 2015
FY2012/13 Annual Bonus Plan	14 November 2013	20,610	0.00	14 November 2015	14 November 2016
FY2012/13 Economic Profit Plan	14 November 2013	18,942	0.00	14 November 2015	14 November 2016
Max Livingstone-Learmonth
FY2011/12 Annual Bonus Plan	15 November 2012	13,052	0.00	15 November 2014	15 November 2015
FY2012/13 Annual Bonus Plan	14 November 2013	6,853	0.00	14 November 2015	14 November 2016
Graeme Underhill
FY2011/12 Annual Bonus Plan	15 November 2012	21,798	0.00	15 November 2014	15 November 2015
FY2011/12 Economic Profit Plan	15 November 2012	23,683	0.00	15 November 2014	15 November 2015
FY2012/13 Annual Bonus Plan	14 November 2013	13,317	0.00	14 November 2015	14 November 2016
FY2012/13 Economic Profit Plan	14 November 2013	20,085	0.00	14 November 2015	14 November 2016
Richard Webb
FY2011/12 Annual Bonus Plan	15 November 2012	19,838	0.00	15 November 2014	15 November 2015
FY2011/12 Economic Profit Plan	15 November 2012	17,782	0.00	15 November 2014	15 November 2015
FY2012/13 Annual Bonus Plan	14 November 2013	14,824	0.00	14 November 2015	14 November 2016
FY2012/13 Economic Profit Plan	14 November 2013	15,921	0.00	14 November 2015	14 November 2016
Long Term Incentive Plan:
Jonathan Bunting
2011	17 November 2011	80,766	0.00	15 October 2014	17 November 2021
2012	15 November 2012	81,742	0.00	October 2015	15 November 2022
2013	14 November 2013	64,209	0.00	October 2016	14 November 2023
Mark Cashmore
2011	17 November 2011	173,339	0.00	15 October 2014	17 November 2021
2012	15 November 2012	107,736	0.00	October 2015	15 November 2022
2013	14 November 2013	92,747	0.00	October 2016	14 November 2023
Nick Gresham
2011	17 November 2011	87,340	0.00	15 October 2014	17 November 2021
2012	15 November 2012	77,655	0.00	October 2015	15 November 2022
2013	14 November 2013	63,615	0.00	October 2016	14 November 2023
Glenn Leech
2011	17 November 2011	67,618	0.00	15 October 2014	17 November 2021
2012	15 November 2012	52,969	0.00	October 2015	15 November 2022
2013	14 November 2013	42,806	0.00	October 2016	14 November 2023
Max Livingstone-Learmonth
2011	17 November 2011	45,079	0.00	15 October 2014	17 November 2021
2012	15 November 2012	28,221	0.00	October 2015	15 November 2022
2013	14 November 2013	21,641	0.00	October 2016	14 November 2023
Sarah Miles
2013	14 November 2013	36,385	0.00	October 2016	14 November 2023
Graeme Underhill
2011	17 November 2011	73,253	0.00	15 October 2014	17 November 2021
2012	15 November 2012	57,383	0.00	October 2015	15 November 2022
2013	14 November 2013	44,946	0.00	October 2016	14 November 2023
Richard Webb
2011	17 November 2011	54,282	0.00	15 October 2014	17 November 2021
2012	15 November 2012	43,405	0.00	October 2015	15 November 2022
2013	14 November 2013	36,385	0.00	October 2016	14 November 2023

Director/Senior Manager	Date of grant	Number Shares at 31 August 2014	Option Price (Pence)	Date from Which Exercisable	Expiry Date
Sharesave Scheme:
Glenn Leech
2011	1 June 2011	11,183	80.70	01 August 2014	31 January 2015
2014	25 June 2014	3,805	158.00	01 September 2017	28 February 2018
Max Livingstone-Learmonth
2011	1 June 2011	11,183	80.70	01 August 2014	31 January 2015
2014	25 June 2014	11,392	158.00	01 September 2017	28 February 2018
Stuart Marriner
2011	1 June 2011	3,355	80.70	01 August 2014	31 January 2015
2012	30 May 2012	3,435	78.60	01 August 2015	31 January 2016
2013	26 June 2013	2,571	140.00	01 September 2016	28 February 2017
2014	25 June 2014	2,278	158.00	01 September 2017	28 February 2018
Executive Share Option Scheme:
Stuart Marriner
2010	15 June 2011	24,411	92.17	15 June 2014	14 June 2021
2011	8 November 2011	27,151	93.92	08 November 2014	07 November 2021
2012	15 November 2012	17,134	152.92	15 November 2015 to 14 November 2022
2013	14 November 2013	14,269	210.25	14 November 2016	13 November 2023

Save as disclosed in this paragraph, no Director or Senior Manager has any interests (beneficial or non-beneficial) in the share capital of the Company or any of its subsidiaries.

Save as disclosed in this paragraph, no other person involved in the Rights Issue has an interest which is material to the Rights Issue.

6.3 Confirmations and conflicts of interest

Confirmations

As at the date of this document none of the Directors or Senior Managers has during at least the previous five years:

any convictions in relation to fraudulent offences;
save as set out in paragraph 6.1 of this Part XXI, been a member of the administrative, management, supervisory body or senior management of a company associated with any bankruptcies, receiverships or liquidations; or
been subject to any official public incrimination or sanctions by any statutory or regulatory authorities (including designated professional bodies) or been disqualified by a court from acting as a member of the administrative, management or supervisory bodies of an issuer or from acting in the management or conduct of the affairs of any issuer.

There are no family relationships between any of the Directors or Senior Managers.

Conflicts of interest

None of the Directors or Senior Managers has any potential conflict of interest between his or her duties to the Company and his or her private interests or other duties.

Transactions with Directors

None of the Directors or Senior Managers has, or has had, any interest in any transaction which is or was unusual in its nature or conditions or which is, or was, significant in relation to the business of the Connect Group and which was effected by any member of the Connect Group during the current or immediately preceding financial year, or during any earlier financial year, and remains in any respect outstanding or underperformed.

222

There are no outstanding loans granted by the Company or any Connect Group company to any of the Directors or Senior Managers nor has any guarantee been provided by the Company or any Connect Group company for their benefit.

Director appointment arrangements

There are no arrangements or understandings with major shareholders, customers, suppliers or others pursuant to which any Director or Senior Manager was selected as a director or senior manager (as the case may be).

7. SUMMARY OF REMUNERATION AND BENEFITS

A summary of the amount of remuneration paid to the Directors (including any contingent or deferred compensation) and benefits in kind for the year ended 31 August 2014 is set out in the table below. The Directors are categorised in their positions as at the Latest Practicable Date for these purposes.

Executive Directors	Salary	Annual Bonus	Other Benefits £'000	Economic Profit Plan and LTIP	Total
Jonathan Bunting	277	175	81	209	742
Mark Cashmore	410	52	108	40	970
Nick Gresham	276	56	73	220	625
Non-executive Directors			Salary	Other Benefits £'000	Total
Dennis Millard			110	0	110
John Worby			40	0	40
Anthony Cann			40	0	40
Andrew Brent			35	0	35

For the year ended 31 August 2014, the aggregate total remuneration paid (including contingent or deferred compensation) and benefits in kind granted (under any description whatsoever) to all of the Senior Managers was £2,117,617.57 which includes £1,003,980.58 in respect of salary/fees, £202,096.50 in respect of bonuses and £85,748.28 in respect of benefits in kind.

The aggregate amount set aside by the Connect Group to provide pension, retirement or similar benefits in relation to Directors and Senior Managers in the Company's last financial year, which ended 31 August 2014, was £223,384.91.

223

224

8. DIRECTORS' TERMS AND CONDITIONS

8.1 Executive Directors

Details of the service contracts entered into are set out below:

Director	Position	Date of commencement	Unexpired term	Notice period by Company	Notice period by director
Mark Cashmore	Group Chief Executive	5 September 2013	N/A	One year	Nine months
Nick Gresham	Chief Financial Officer	23 August 2010	N/A	One year	Nine months
Jonathan Bunting	Managing Director, Connect News & Media	1 April 2010	N/A	One year	Nine months

It is the Company's policy to enter into contracts of employment with executive directors which may be terminated at any time by the Company upon twelve months' notice and upon nine months' notice by the executive director.

The Company believes that any question of compensation payable in relation to termination of an executive director's service contract should be decided upon at the appropriate time, rather than in advance, so that the particular circumstances can be taken into consideration. As a result, there are no liquidated damages provisions in any of the executive directors' service contracts.

8.2 Non Executive Directors

Details of the terms of the letters of appointment of the non-executive directors are set out below:

Director	Date of Appointment	Current term	Notice period by Company	Notice period by director
Dennis Millard	6 February 2008	Three years	Three months	Three months
John Worby	31 August 2006	Three years	Three months	Three months
Andrew Brent	1 September 2008	Three years	Three months	Three months
Anthony Cann	31 August 2006	Three years	Three months	Three months

The Chairman and other non-executive directors, who have letters of appointment, are appointed for an initial term of three years, which may be terminated at any time upon three months' written notice on either side, and are subject to review thereafter. The letters of appointment of the non-executive directors are available for inspection at the Company's registered office during normal business hours and at the AGM. The Company does not provide benefits on termination of the non-executive directors' service agreements.

8.3 Directors' indemnities

All of the Directors have been granted indemnities by the Company to the maximum extent permitted by the Companies Act (including the right to recover costs on an "as incurred" basis), subject to certain exceptions, including that such indemnities will not apply to the extent that any recovery is made under any policy of insurance.

225

9. EMPLOYEE SHARE SCHEMES

9.1 Employee Share Schemes

Connect operates the following employee share schemes:

(i) the Connect Sharesave Scheme (the “Sharesave Scheme”), approved by shareholders on 30 August 2006;

(ii) the Connect Executive Share Option Scheme (“ESOS”), approved by shareholders on 30 August 2006;

(iii) the Connect LTIP (“LTIP”), approved by shareholders on 30 August 2006; and

(iv) the Connect Deferred Bonus Plan (“DBP”), approved by the Board on 15 October 2007,

(together the “Employee Share Schemes”).

The principal features of the Employee Share Schemes are summarised below. See also paragraph 6.2 of this Part XXI for details in relation to options/awards held by the Directors and Senior Managers under the Employee Share Schemes.

Awards under the Employee Share Schemes (other than the DBP) can be satisfied using new issue shares, treasury shares or shares purchased in the market in conjunction with the Connect Employee Benefit Trust (a trust established by the Company with independent trustees based in Jersey).

If new issue shares are used, the following limits will apply.

In any 10 year period, the number of Ordinary Shares which may be issued under the ESOS and the LTIP and any other executive (discretionary) share or option scheme established by the Company may not exceed five per cent. of the issued ordinary share capital of the Company from time to time.
In any 10 year period, the number of Ordinary Shares which may be issued under any employees’ share or option scheme established by the Company may not exceed 10 per cent. of the issued ordinary share capital of the Company from time to time.

Awards under the DBP can only be satisfied using Ordinary Shares purchased in the market.

Connect operates a share retention policy under which each executive director is expected to build up over a period of five years and then retain a holding in shares equal to 150 per cent. of his or her salary. In exceptional circumstances executive directors may seek permission from the Remuneration Committee temporarily to go below their target holding.

9.2 Connect Sharesave Scheme

9.2.1 General

The Sharesave Scheme is an HM Revenue and Customs tax-advantaged scheme. Under the Sharesave Scheme, employees are granted options to acquire Ordinary Shares in the Company using the proceeds of a monthly savings contract (minimum £5 per month, maximum £500 per month) over a period of three or five years (since 2012, the Company has offered only three-year savings contracts).

As at the Latest Practicable Date, a total of 1,574,965 Ordinary Shares were the subject of outstanding options under the Sharesave Scheme.

9.2.2 Eligibility

The Sharesave Scheme is open to all employees of participating companies with the relevant qualifying period of service (currently 12 months as at the end of the month prior to the date of invitation).

226

9.2.3 Exercise price

Under the Sharesave Scheme, employees are eligible to acquire Ordinary Shares in the Company at a discount of up to 20 per cent. of the market value at the date of invitation (it is current practice to grant options at a 20 per cent. discount).

9.2.4 Performance conditions

Consistent with the relevant legislation, no performance conditions apply.

9.2.5 Exercise of options

In normal circumstances, at the end of their savings contract, participants may use the proceeds of that contract to exercise their option. The rules contain provisions covering cessation of employment and change of control scenarios.

9.2.6 Variation of Capital

On any variation of the share capital of the Company the Board may make such adjustments as it considers appropriate to the number of Ordinary Shares in respect of which any option may be exercised and/or the exercise price.

9.2.7 Alterations

Except as noted below, the Board may at any time alter the Sharesave Scheme. Save for minor alterations to benefit the administration of the scheme, or alterations to comply with or take account of a change in legislation or to obtain or maintain favourable tax, exchange control or regulatory treatment, no alteration to the advantage of an existing or future participant shall be made to the provisions governing eligibility, overall limits, the basis for determining a participant's entitlement to shares, the ability to adjust on a variation of capital and the power of amendment without the prior approval of the Company's shareholders in general meeting.

9.3 Connect Executive Share Option Scheme

9.3.1 General

Share options may be granted under the ESOS with an exercise price equal to the market value of an Ordinary Share at the date of grant. Options may be granted as either HM Revenue and Customs tax-advantaged options (up to the statutory limit, currently of £30,000) or as non-tax advantaged options.

As at the Latest Practicable Date, a total of 4,482,216 Ordinary Shares were the subject of outstanding options under the ESOS.

9.3.2 Eligibility

Executive directors and other executives selected on a discretionary basis are eligible to participate in the ESOS. However, executive directors are no longer granted options under the ESOS and non-executive directors are not eligible to participate in the ESOS.

9.3.3 Overall limits

By legislation, the maximum value of tax-advantaged share options that may be granted to an individual at any time is, currently, £30,000. The maximum value of share options that may be granted to an individual in any financial year is 200 per cent. of annual base salary as at the date of grant.

9.3.4 Exercise of options

Options will generally become exercisable after a period of three years subject to the satisfaction of any applicable performance conditions. Following the grant of an option, the conditions may be waived or changed if an event or events happen which cause the Remuneration Committee reasonably to consider that (i) a changed condition would be a fairer measure of performance and would be no more difficult to satisfy or (ii) the condition should be waived.

The rules contain provisions covering cessation of employment and change of control scenarios.

9.3.5 Variation of Capital

On any variation in the share capital of the Company the number of shares comprised in each option and the exercise price may be adjusted in such manner as the Remuneration Committee deems appropriate.

9.3.6 Alterations

Except as noted below, the Remuneration Committee may at any time alter the ESOS. Except for minor alterations to benefit the administration of the ESOS, or alterations to comply with or take account of a change in legislation or to maintain favourable tax, exchange control or regulatory treatment, no alteration to the advantage of a participant will be made to the provisions concerning eligibility, the overall or individual limits, the basis for determining an option holder's entitlement to shares, the ability to adjust on a variation of capital and the power of amendment without the prior approval of the Company's shareholders in general meeting.

9.4 Connect LTIP

9.4.1 General

Under the LTIP, participants may be granted each year conditional share awards (in the form of nil cost options) to acquire Ordinary Shares in the Company.

As at the Latest Practicable Date, a total of 2,043,019 Ordinary Shares were the subject of outstanding awards under the LTIP.

9.4.2 Eligibility

Only executive directors and other senior executives, decided at the discretion of the Remuneration Committee, have been selected to participate in the LTIP. Non-executive directors are not eligible to participate in the LTIP.

9.4.3 Grant and exercise of awards

Under the LTIP, awards may be made in the form of options over Ordinary Shares which become exercisable after three years or a deferred entitlement to payment of a cash amount. Awards under the LTIP are subject to continued employment and the achievement of specified performance conditions. The rules contain provisions covering cessation of employment and change of control scenarios including the application of time pro-rating.

9.4.4 Performance conditions

The performance conditions applying to awards granted to the executive directors are summarised in the annual remuneration report and are based on the Company's aggregate earning per Ordinary Share exceeding prescribed targets.

The conditions may be changed following the grant of an award if an event or events happen which cause the Remuneration Committee reasonably to consider that a changed condition would be a fairer measure of performance or that an amended condition will be a more effective incentive.

9.4.5 Overall limits

Other than in exceptional circumstances, the maximum value of Ordinary Shares subject to an award to an individual in any financial year (when added to the market value of any options granted under the ESOS in that year) is 200 per cent. of annual base salary as at the award date. The limit may be increased to compensate a participant in circumstances where that participant is required to bear the liability for employers' National Insurance Contribution associated with the award.

227

228

9.4.6 Dividend equivalents

For awards granted from financial year 2013/14, on vesting, participants will also receive additional Ordinary Shares or a cash sum equivalent to the dividends that would have been paid on the number of Ordinary Shares that ultimately vest.

9.4.7 Malus and Clawback

For awards granted prior to 11 September 2014, in the event of: (i) a material misstatement of the financial results or; (ii) the gross misconduct of a participant resulting in serious reputational damage, the Remuneration Committee may prior to the issue or transfer of Ordinary Shares reduce, cancel or impose further conditions on an award, or after the issue or transfer of Ordinary Shares may take such action as it considers appropriate to put the Company and the participant in substantially the same overall financial position as they would have been in if the circumstances had occurred before the issue or transfer of Ordinary Shares.

For awards granted on or after 11 September 2014, the Remuneration Committee may, in its absolute discretion, determine at any time prior to the second anniversary of the date on which an award vests to reduce, cancel or impose further conditions on the award, or require a participant to pay cash or transfer Ordinary Shares to the Company, in the event of: (i) a material misstatement of the financial results of the Company or any member of the Connect Group; (ii) a material miscalculation of a performance metric; (iii) serious reputational damage to the Company or any member of the Connect Group as a result of the misconduct of a participant; (iv) the gross misconduct of a participant; or (v) in such other similar circumstances which the Committee (acting fairly and reasonably) considers to have a serious adverse effect on the Company, any other member of the Connect Group or a relevant business unit and in which the Remuneration Committee considers such action is appropriate.

9.4.8 Variation of Capital

On any variation of the share capital of the Company, the Remuneration Committee may make such adjustments as it considers appropriate to the number of Ordinary Shares comprised in an award.

9.4.9 Alterations

Except as noted below, the Remuneration Committee may at any time alter the LTIP. Save for minor alterations to benefit the administration of the LTIP, to take account of a change in legislation or to obtain or maintain favourable tax, exchange control or regulatory treatment, no alteration to the advantage of an individual participant shall be made to the provisions governing eligibility, overall or individual limits, the basis for determining the participant's entitlement to Ordinary Shares, the ability to adjust on a variation of capital and the power of amendment without the prior approval of the Company's Shareholders in general meeting.

9.5 Connect DBP

9.5.1 General

Under the DBP, participants may be granted each year share awards (in the form of nil cost options) representing a proportion of the bonuses earned under the Connect Group's annual bonus plan and/or the economic profit plan (under which a participant may receive each year a cash payment and/or be granted a share award under the terms of the DBP, based on the value of an economic profit pool the value of which is determined by the economic profit (calculated as profit after tax less the cost of capital employed) created in each financial year).

As at the Latest Practicable Date, a total of 941,385 Ordinary Shares were the subject of outstanding awards under the DBP.

229

9.5.2 Eligibility

Only executive directors and other senior executives, decided at the discretion of the Remuneration Committee, have been selected to participate in the DBP. Non-executive directors are not eligible to participate in the DBP.

9.5.3 Grant and exercise of awards

Under the DBP, awards may be made in the form of options over Ordinary Shares which become exercisable after two years. Awards under the DBP are subject to continued employment but not to any further achievement of performance conditions. The rules contain provisions covering cessation of employment and change of control scenarios.

9.5.4 Dividend equivalents

For awards granted from the financial year 2013/14, on vesting, participants will also receive additional Ordinary Shares or a cash sum equivalent to the dividends that would have been paid on the number of Ordinary Shares that ultimately vest.

9.5.5 Malus and Clawback

For awards granted on or after 11 September 2014, the Remuneration Committee may, in its absolute discretion, determine at any time prior to the second anniversary of the date on which an award vests to reduce, cancel or impose further conditions on the award, or require a participant to pay cash or transfer Ordinary Shares to the Company, in the event of: (i) a material misstatement of the financial results of the Company or any member of the Connect Group; (ii) a material miscalculation of a performance metric; (iii) serious reputational damage to the Company or any member of the Connect Group as a result of the misconduct of a participant; (iv) the gross misconduct of a participant; or (v) such other similar circumstances which the Remuneration Committee (acting fairly and reasonably) considers to have a serious adverse effect on the Company, any other member of the Connect Group or a relevant business unit and in which the Remuneration Committee considers such action is appropriate.

9.5.6 Variation of Capital

On any variation of the share capital of the Company, the Remuneration Committee may make such adjustments as it considers appropriate to the number of Ordinary Shares comprised in an award.

9.5.7 Alterations

Except as noted below, the Remuneration Committee may at any time alter the DBP save that no alteration shall be made if a plan containing such an alteration from the outset would have required prior shareholder approval other than minor alterations to benefit the administration of the DBP, or to take account of a change in legislation or to obtain or maintain favourable tax, exchange control or regulatory treatment.

9.6 Legacy Option Plan – WH Smith Executive Share Option Scheme 1999 (pre-Demerger)

One option remains outstanding under the WH Smith Executive Share Option Scheme 1999 which is currently exercisable in full.

As at the Latest Practicable Date, a total of 50,839 Ordinary Shares were the subject of outstanding options under the WH Smith Executive Share Option Scheme 1999.

9.7 Tuffnells 2009 Discretionary Share Option Plan (“Tuffnells Option Plan”)

The Tuffnells Option Plan allows the grant of HM Revenue and Customs tax-advantaged options up to a maximum of £30,000 worth of Tuffnells ordinary shares.

Tuffnells has granted options under the Tuffnells Option Plan over 36,426 ordinary shares, with exercise prices of either £1 or £2.79 per share.

Options become exercisable in the event of certain corporate transactions and to the extent not exercised lapse.

10. PENSIONS

10.1 Connect

The Connect Group operates three defined benefit schemes. The Smiths News Section of the WH Smith Pension Trust and the Consortium CARE Scheme are closed to accrual. A Prudential Platinum scheme is closed to new entrants but still open to accrual. The total cash contribution for defined benefit schemes and expenses for the year to 31 August 2013 was £6.5 million (FY2012: £6.8 million).

The Connect Group also operates or facilitates access to a number of defined contribution schemes: a Legal & General group personal pension scheme, the DMD Group Stakeholder scheme with Aviva, the Dawson's Books Group Stakeholder scheme with Aviva, two group personal pension schemes with Aegon, the WH Smith Retirement Savings Plan (also called the Pensionbuilder) and the money purchase section of the WH Smith Pension Trust. The Connect Group also makes contributions to certain employees personal pension arrangements. For the year ended 31 August 2013, Company contributions to the defined contribution schemes totalled £2.7 million (FY2012: £2.0 million).

The executive directors participate in two of the defined contribution schemes. Jonathan Bunting participates in the money purchase section of the WH Smith Pension Trust, and Mark Cashmore and Nick Gresham participate in the WH Smith Retirement Savings Plan. The Company will match the directors' pension contributions up to an amount equivalent to five per cent. of salary. Directors also receive a salary supplement which may be taken as an additional pension contribution or as an addition to basic pay.

10.2 Tuffnells

Tuffnells operates a defined benefit scheme, the Tuffnells Scheme, which is closed to new entrants but still open to accrual. The total pension charge for the year ended 31 December 2013 was £116,000 (year ended 31 December 2012: £126,000).

Tuffnells also provides access to a group personal pension scheme operated by Scottish Widows, participates in a defined contribution occupational pension scheme called The People's Pension Scheme for auto-enrolment purposes and makes contributions to personal pension arrangements in respect of nine employees. The total pension charge for all defined contribution schemes for the year ended 31 December 2013 was £182,000 (year ended 31 December 2012: £151,000).

11. SIGNIFICANT SHAREHOLDERS

As at the Latest Practicable Date, insofar as is known to the Company, the following persons had an interest which represented three per cent. or more of the voting share capital of the Company:

Name of Shareholder	Number of Ordinary Shares	Percentage of total voting rights
Silchester International Investors LLP	18,332,319	9.68
Prudential plc (M&G)	18,080,038	9.54
Henderson Global Investors	15,522,275	8.19
Ameriprise Financial, Inc	10,012,566	5.29
Aberforth Partners LLP	10,051,763	5.31
Hargreave Hale Limited	9,656,422	5.10

Save as disclosed in this paragraph 11, the Directors are not aware of any interest which will represent an interest in the Company's share capital or voting rights which is notifiable under the Disclosure Rules and Transparency Rules following the transaction becoming effective and Admission occurring.

230

So far as the Company is aware, on Admission, no person or persons, directly or indirectly, jointly or severally, will exercise or could exercise control over the Company.

There are no differences between the voting rights enjoyed by the shareholders described in this paragraph 11 and those enjoyed by any other holder of the Company’s Ordinary Shares.

12. MANDATORY BIDS AND COMPULSORY ACQUISITION

The City Code is issued and administered by the Panel on Takeovers and Mergers. The Company is subject to the City Code and therefore shareholders are entitled to the protection afforded by the City Code.

Other than as provided by the Companies Act and the City Code, there are no rules or provisions relating to mandatory bids and/or squeeze-out and sell-out rules in relation to the Ordinary Shares. There is not in existence any current mandatory takeover bid in relation to the Company. There have been no public takeover bids by third parties in respect of the share capital of the Company in the last or current financial year.

13. WORKING CAPITAL

The Company is of the opinion that, taking into account the net proceeds of the Rights Issue from the Underwritten Ordinary Shares and the bank and other facilities available to the Connect Group, the Connect Group has sufficient working capital for its present requirements, that is, for at least twelve months following the date of publication of this document.

The Company is of the opinion that, taking into account the net proceeds of the Rights Issue from the Underwritten Ordinary Shares and the bank and other facilities available to the Enlarged Group, the Enlarged Group has sufficient working capital for its present requirements, that is, for at least twelve months following the date of publication of this document.

14. NO SIGNIFICANT CHANGE

14.1 Connect

There has been no significant change in the financial or trading position of the Connect Group since 31 August 2014, being the date to which the last financial information reported on by the Connect Group’s auditors has been published (see Appendix 1).

14.2 Tuffnells

There has been no significant change in the financial or trading position of the Tuffnells Group since 30 June 2014, being the date to which the Historical Financial Information of Tuffnells, as set out in Part XVI (Historical Financial Information relating to Tuffnells) of this document was prepared.

15. RELATED PARTY TRANSACTIONS

15.1 Connect

A description of the related party transactions that Connect has entered into during the financial years ended 31 August 2014, 2013 and 2012 are given in note 34 on page 120 to Connect Group’s 2012 Annual report and Accounts, note 32 on page 98 of Connect Group’s 2013 Annual Report and note 32 in Appendix 1.

There have been no additional related party transactions by Connect during the period between 1 September 2014 and the Latest Practicable Date.

15.2 Tuffnells

A description of the related party transactions that Tuffnells has entered into for the year ended 31 December 2013, 2012 and 2011 and the sixth months ended 30 June 2014 is given in note 19 to Tuffnells’ Historical Financial Information at Part XVI (Historical Financial Information relating to Tuffnells) on page 170 of this Document. There have been no additional related party transactions by Tuffnells during the period between 1 July 2014 and the Latest Practicable Date.

231

232

16. MATERIAL CONTRACTS

16.1 Connect

The following contracts (not being contracts entered into in the ordinary course of business) have been entered into by the Company or a member of the Connect Group within the two years immediately preceding the date of publication of this document and are, or may be, material or have been entered into at any time by the Company or any member of the Connect Group and contain provisions under which the Company or any member of the Connect Group has an obligation or entitlement which is, or may be, material to the Company or the Connect Group as at the date of this document.

16.1.1 Underwriting Agreement

Details of the Underwriting Agreement are set out at paragraph 17.1 of this Part XXI.

16.1.2 Consortium Acquisition

On 23 April 2012, Connect through its wholly owned subsidiary, Smiths News Holdings Limited, acquired 100 per cent. of the share capital and voting rights in Hedgelane Limited whose principal subsidiary trades as The Consortium for Purchasing and Distribution Limited (the "Consortium").

The Consortium supplies consumable products predominately to the education market and also to the care and early years nursery markets.

Hedgelane Limited was acquired from its four management shareholders, Melanie Teal, Mark Barnett, Mike Gahan and Joe Caddell.

The aggregate consideration was £38 million comprising £32 million initial cash consideration financed through existing available debt facilities; up to £2 million of deferred consideration (payable dependent on certain conditions) financed through available existing debt facilities and paid in January 2013; and up to £4 million of deferred consideration satisfied in the Company's Ordinary Shares (dependent on certain conditions) which were issued in January 2014. The sale and purchase agreement contained customary representations and warranties, covenants and undertakings for a transaction of this nature. In addition, the management shareholders agreed to indemnify Smiths News Holdings Limited in relation to certain matters, subject to customary limitations.

16.1.3 Senior Facility Agreement

On 31 January 2014, the Company, Dawson Holdings Limited, Hedgelane Limited, Smiths News Holdings Limited, Smiths News Investments Limited and Smiths News Trading Limited entered into a £200 million multicurrency term and revolving facilities agreement as borrowers and guarantors (together with certain other subsidiaries of the Company as guarantors) with, amongst others, Barclays Bank PLC, HSBC Bank plc, The Royal Bank of Scotland plc, Clydesdale Bank PLC and ING Bank N.V., London Branch as the lenders and HSBC Bank plc as the agent (the "Facilities Agreement").

The Facilities Agreement was amended and restated on 10 November 2014 (the amended and restated Facilities Agreement being the "Restated Facilities Agreement") and now provides a £100,000,000 term facility and a £150,000,000 revolving facility. The rate of interest on each loan for each interest period is the percentage rate per annum which is the aggregate of the margin (1.6 per cent. per annum for term facility loans, and 1.35 per cent. per annum for revolving facility loans but, following a drawing of the Acquisition Commitment (as defined in the Restated Facilities Agreement), the margin for term facility loans will be 2.1 per cent. per annum and for revolving facility loans will be 1.85 per cent. per annum and such adjustment shall take place on the later of (i) 31 December 2014, and (ii) the utilisation date for the first drawing under the Acquisition Commitment (as defined in the Restated Facilities Agreement)) and LIBOR (or in relation to loans in euros, EURIBOR). After the delivery of periodic compliance certificates under the Restated Facilities Agreement, if no event of default has

occurred that is continuing, the margin varies depending upon the Connect Group’s leverage over the period of 12 months ending on the Company’s financial year end date or the Company’s financial half-year end date, as applicable (1.35 per cent. to 2.35 per cent. per annum for the term loan facility and 1.1 per cent. to 2.1 per cent. per annum for the revolving facility).

The Restated Facilities Agreement require that the Company complies with certain financial covenants and also contains certain other undertakings which, amongst other things, restrict further borrowings of non-obligors (with permitted exceptions), creation of security (with permitted exceptions), disposal of assets (with permitted exceptions), pensions, insurance, intellectual property, arm’s length dealings, mergers, change of business, and acquisitions above a certain threshold.

The amounts borrowed under the term facility are to be repaid in instalments of £5,000,000 (or, provided that the Acquisition Loans (as defined in the Restated Facilities Agreement) have been drawn, instalments of £10,000,000) each on 28 February 2017, 31 August 2017, 28 February 2018, 31 August 2018, and the final instalment of the remaining outstanding amount is due on 30 November 2018. The amount borrowed under the revolving facility is repayable on the last day of its interest period.

16.1.4 Magpie Investment Put and Call Option

On 11 September 2012, Connect through its wholly-owned subsidiary, Bertram Trading Limited (“BTL”), entered into a joint venture agreement with William Jones, Steven Porter, Robert Johnson, Lee Valentine and Timothy Williams (the “Minority Shareholders”) in relation to Magpie Investments Limited (“Magpie”). BTL holds a 51 per cent. shareholding of Magpie with the Minority Shareholders holding the remaining 49 per cent. shareholding.

BTL and the Minority Shareholders also entered into a put and call option agreement relating to Magpie (the “Put/Call Agreement”), dated 11 September 2012, under which BTL was granted the option to require the Minority Shareholders’ to sell their 49 per cent. shareholding to BTL (the “Call Option”) and the Minority Shareholders were granted the option to require BTL to purchase their remaining 49 per cent. shareholding (the “Put Option”). If either of these options are exercised by the respective party, the transaction must be structured so that the whole of the Minority Shareholders’ 49 per cent. is transferred to BTL in a single purchase.

In relation to the exercise of the Call Option by BTL:

BTL is able to exercise its option during the period within a limited 30 day period between 2 May 2017 to 31 May 2017 (the “First Option Period”). In this case, the value of the shares will be determined in accordance with a specified valuation matrix (“Valuation Matrix”), which is based on the net sales and EBITDA of Magpie. In accordance with this Valuation Matrix, the shares can have a maximum value of £15,000,000;
if the option is exercised after expiry of the First Option Period but before 11 September 2022, the value of the shares will be subject to a maximum of £6,000,000. However, if the value of the shares (in accordance with the Valuation Matrix) is less than £6,000,000, William Jones will need to consent to the sale; and
if the option is exercised after 11 September 2022, then the value of the shares will be the lower of £6,000,000 and the value in accordance with the Valuation Matrix.

In relation to the exercise of the Put Option by the Minority Shareholders:

the Minority Shareholders are only able to exercise their option during the First Option Period and only if certain financial performances have been met; and

233

the value of the shares will be determined in accordance with the Valuation Matrix, and therefore BTL, could have to pay up to £15,000,000 for the shares.

16.2 Tuffnells

The following contracts (not being contracts entered into in the ordinary course of business) have been entered into by Tuffnells or a member of the Tuffnells Group within the two years immediately preceding the date of publication of this document and are, or may be, material or have been entered into at any time by Tuffnells or any member of the Tuffnells Group and contain provisions under which Tuffnells or any member of the Tuffnells Group has an obligation or entitlement which is, or may be, material to Tuffnells or the Tuffnells Group as at the date of this document.

16.2.1 Mezzanine Loan Agreements

Tuffnells has two mezzanine loan agreements in place with the Bank of Scotland plc (“BoS”):

(i) dated 16 May 2005 for an amount of £8,000,000 (the “2005 Loan”); and
(ii) dated 20 March 2008 for an amount of £2,775,000 (the “2008 Loan”),

together, the “Mezzanine Loan Agreements”.

The Mezzanine Loan Agreements and other BoS financings are covered by an overarching common terms agreement dated 16 May 2005 (as amended and/or restated from time to time) (the “CTA”) between the Tuffnells Group companies and BoS.

The entire principal amount has been drawn down under the Mezzanine Loan Agreements and the final repayment date for each Mezzanine Loan Agreement is 1 January 2015. A redemption premium of 105 per cent. of the principal amount of the 2005 Loan is payable and a redemption premium of 36.03 per cent. of the principal amount of the 2008 Loan is payable on repayment of the loan (whether this is an early repayment (mandatory or voluntary) or repayment on the final repayment date).

The Mezzanine Loan Agreements are secured and each of the Tuffnells Group companies has granted an unconditional guarantee in favour of BoS for the payment and discharge of all monies and liabilities owed by the Tuffnells Group companies pursuant to the lender.

On Completion, part of the purchase price consideration will be applied by Tuffnells toward the repayment of all amounts payable under the Mezzanine Loan Agreements. Upon repayment, the facilities under the CTA, including the Mezzanine Loan Agreements, will be cancelled and all security granted over assets of and guarantees granted by the Tuffnells Group will be released.

16.2.2 The 2010 BACS and Corporate Card Facilities Agreement

The Tuffnells Group companies have a BACS and corporate card facility dated 2 March 2010 with BoS which was amended from time to time including, without limitation, by an amendment letter dated 14 October 2014. The facility is secured by security and an unconditional guarantee granted by each of the Tuffnells Group companies in favour of BoS in respect of all monies and liabilities owed by Tuffnells Group companies to BoS from time to time. It offers to the borrowers, among other things, a BACS facility of up to £5,000,000 and up to £450,000 can be drawn by the use of BoS corporate credit cards. The borrowers are required to pay BoS bank charges in relation to the facilities in accordance with the standard terms and conditions of BoS from time to time. The facilities may be cancelled by BoS at any time.

These facilities will continue post Completion and, therefore, the related security and guarantees will remain in place.

234

235

16.2.3 Receivables Financing Agreement

Tuffnells Parcels Express Limited (“TPEL”) entered into a receivables financing agreement dated 13 November 2009 (the “Receivables Financing Agreement”) with Lloyds TSB Commercial Finance Limited (“Lloyds”) with a maximum amount of £10,000,000. The Receivables Financing Agreement will continue until terminated by either party by giving notice of three months. Lloyds may also terminate the Receivables Financing Agreement at any time after the occurrence of a termination event which includes a material change to TPEL’s board of directors or partners or senior management or any change in direct ownership of 10 per cent. or more of TPEL’s shares or constitution or composition, without Lloyds’ prior written consent.

Under the Receivables Financing Agreement, Lloyds may accept a termination notice with a notice period of less than three months. If an early termination notice is accepted, or following the occurrence of a termination event, Lloyds may charge a termination fee in addition to fees and charges due under the Receivables Financing Agreement.

The Receivables Financing Agreement has been secured by, amongst other things: (i) all asset debentures in respect of all monies, liabilities and obligations owed by TPEL to Lloyds from time to time; and (ii) a mortgage over all present and future intellectual property rights of TPEL in respect of all monies, liabilities and obligations owed by TPEL to Lloyds from time to time. Each of the Tuffnells Group companies except TPEL has granted an on demand guarantee and indemnity in favour of Lloyds.

The Receivables Financing Agreement will be cancelled at, or prior to, Completion and all related security granted by the Tuffnells Group companies in favour of Lloyds will be released.

17. UNDERWRITING AND LOCK UP

17.1 Underwriting Arrangements

On 11 November 2014, the Company entered into the Underwriting Agreement with the Underwriters. Pursuant to the terms and conditions of the Underwriting Agreement:

the Underwriters have severally agreed, subject to certain conditions, to use reasonable endeavours to procure subscribers, or failing which, the Underwriters will themselves severally subscribe for their proportionate share of Underwritten Ordinary Shares not taken up under the Rights Issue or will procure sub-underwriters to do so, in each case, at the Rights Issue Price; and
the Company has also appointed the Joint Sponsors in connection with the Acquisition, the approval by the UKLA of this document and the Company’s applications for Admission.

In consideration of the services of the Underwriters under the Underwriting Agreement, and subject to their obligations under the Underwriting Agreement having become unconditional and the Underwriting Agreement not being terminated, the Company has agreed to pay a commission of 3.4 per cent. payable on the Underwritten Ordinary Shares at such times and in such proportions as between the Underwriters as contained in the Underwriting Agreement.

The Company shall pay the costs and expenses of, or in connection with, the Rights Issue on the basis contained in the Underwriting Agreement.

The Company has given certain customary representations and warranties to the Underwriters as to the accuracy of the information contained in this document and other relevant documents, and in relation to other matters relating to the Cantor Group, the Tuffnells Group and the Enlarged Group. In addition, the Company has given customary indemnities to the Underwriters and certain indemnified persons connected with each of them.

The obligations of the Underwriters under the Underwriting Agreement are subject to certain customary conditions including, amongst others:

the fulfilment by the Company of certain of its obligations under the Underwriting Agreement including the delivery of certain documents to the Underwriters, by the times and dates specified in the Underwriting Agreement; and
Admission of the Nil Paid Rights having occurred by not later than 8.00 a.m. on 2 December 2014 (or such later time and/or date as the Company may agree with the Underwriters but being no later than 9 December 2014).

In certain circumstances, prior to the Admission of the Nil Paid Rights, including where any of the conditions are not satisfied (or, where capable of being waived, are not waived by the Underwriters) or shall have become incapable of being satisfied by the required time and date, the Underwriters may terminate the Underwriting Agreement.

The Company has given certain undertakings including an undertaking that it will not, without the prior written consent of the Underwriters, undertake certain actions in relation to its share capital, including issuing further Ordinary Shares, for a period of 90 days from Completion, subject to certain exceptions, including the issue of the New Ordinary Shares.

18. LITIGATION

18.1 Connect

Save as set out below, there are no governmental, legal or arbitration proceedings (including such proceedings which are pending or threatened of which Connect is aware) during the period covering the 12 months preceding the date of this document which may have, or have had in the recent past, significant effects on the financial position or profitability of the Connect Group.

On 20 February 2012, Topland Portfolio No. 1 Limited (“Topland”) commenced proceedings in the High Court against Smiths News Trading Limited (“SNTL”), a wholly-owned subsidiary of the Company, in its capacity as a surety of a lease of commercial property in Morecambe leased by WH Smith Do-It-All Ltd (later known as Payless DIY Ltd) (“Payless”). Payless entered administration on 5 May 2011 and, on 8 October 2012, Topland gave notice to SNTL requiring it to take a new lease for the remainder of the term of the lease and commenced the High Court action claiming £2,500,000 comprising (i) unpaid rent at a rate of £310,000 per annum for the period from 1 May 2011 to 4 May 2016 (£1,550,000 in total); (ii) unpaid rates for the period from 1 May 2011 to 4 May 2016 (£682,000 in total); and (iii) unpaid dilapidations of £10 per square foot (£321,000 in total).

On 6 June 2013, the High Court found in favour of SNTL. Topland subsequently appealed this decision and, on 18 December 2013, the Court of Appeal upheld the decision of the High Court and refused Topland’s application to appeal. Topland has not appealed this decision to the Supreme Court. Due to this liability arising in connection with obligations arising prior to the Company’s demerger from WH Smith PLC, pursuant to the Demerger Agreement, any liability attributable to SNTL would have been shared between the Company (35 per cent.) and WH Smith PLC (65 per cent.).

18.2 Tuffnells

Save as set out below, there are not and have not been, since the date 12 months prior to the date of the document, any governmental, legal or arbitration proceedings (including any such proceedings which are pending or threatened of which the Company is aware), which may have, or have had in the recent past, significant effects on Tuffnells and/or the Tuffnells Group’s financial position or profitability.

In 2006, Tuffnells established a mobility allowance scheme (“MAS”) as an income tax and National Insurance free daily allowance for employees whose work required them to regularly travel. A dispensation agreement was applied for and agreed with HMRC. In 2013, HMRC initiated an enquiry into the operation of the MAS on the basis that the underlying dispensation agreement was

236

not appropriate or fully complied with, or both. In February 2014, HMRC issued determinations in respect of tax years 2007/8 through to 2012/13 for PAYE of £2,556,000 and determinations for primary and secondary Class 1 National Insurance contributions of £2,642,000. Tuffnells is in advanced discussions with HMRC with a view to resolving this issue for a sum very significantly below the amounts claimed by HMRC and expects that, subject to approval from the HMRC Dispute Resolution Board, a satisfactory outcome will be reached before the end of the year.

19. AUDITORS

The auditor and reporting accountant of the Company is Deloitte LLP, whose address is at Abbots House, Abbey Street, Reading, RG1 3BD, and who is a member firm of the Institute of Chartered Accountants of England and Wales.

The auditor and reporting accountant of The Big Green Parcel Holding Company Limited is PricewaterhouseCoopers LLP, whose address is at 1 East Parade, Sheffield, S1 2ET, and who is a member firm of the Institute of Chartered Accountants of England and Wales.

20. CONSENTS

J.P. Morgan Securities plc has given and has not withdrawn its written consent to the inclusion in this document of its name and the references to it in the form and context in which they appear.

J.P. Morgan Limited has given and has not withdrawn its written consent to the inclusion in this document of its name and the references to it in the form and context in which they appear.

Liberum has given and has not withdrawn its written consent to the inclusion in this document of its name and the references to it in the form and context in which they appear.

Lazard has given and has not withdrawn its written consent to the inclusion in this document of its name and the references to it in the form and context in which they appear.

Deloitte LLP has given and has not withdrawn its written consent to the inclusion of its report set out in Part B of Part XVII (Unaudited Pro Forma Financial Information in respect of the Enlarged Group) of this document in the form and context in which it appears and has authorised the contents of its report for the purposes of item 5.5.3R(2)(f) of the Prospectus Rules. A written consent under the Prospectus Rules is different from a consent filed with the SEC under Section 7 of the Securities Act. As the New Ordinary Shares have not been and will not be registered under the Securities Act, Deloitte LLP has not filed a consent under Section 7 of the Securities Act.

PricewaterhouseCoopers LLP has given and has not withdrawn its written consent to the inclusion of its report set out in Part XVI (Historical Financial Information relating to Tuffnells) of this document in the form and context in which it appears and has authorised the contents of its report for the purposes of item 5.5.3R(2)(f) of the Prospectus Rules. A written consent under the Prospectus Rules is different from a consent filed with the US Securities and Exchange Commission under section 7 of the Securities Act. As the New Ordinary Shares have not and will not be registered under the Securities Act, PricewaterhouseCoopers LLP has not filed a consent under section 7 of the Securities Act.

237

238

21. DOCUMENTS INCORPORATED BY REFERENCE

This document should be read and construed in conjunction with the following documents which have been previously published and filed with the FCA and which shall be deemed to be incorporated in, and form part of, this document:

Reference Documents	Information incorporated by reference into this document	Page number in reference document
Connect Group PLC’s Annual Report for the year ended 31 August 2012	Group income statement	80
	Group statement of comprehensive income	80
	Group balance sheet	81
	Group statement of changes in equity	82
	Group cash flow statement	83
	Notes to the accounts	84
	Independent Auditor's report	124
	Reconciliation of movements in shareholders’ funds	125
Connect Group PLC’s Annual Report for the year ended 31 August 2013	Group income statement	62
	Group statement of comprehensive income	62
	Group balance sheet	63
	Group statement of changes in equity	64
	Group cash flow statement	65
	Notes to the accounts	66
	Independent Auditor's report	102
	Reconciliation of movements in shareholders' funds	104

The documents incorporated by reference into this document have been incorporated in compliance with Listing Rule 13.1.6.

The documents incorporated by reference in this document have been incorporated in compliance with Prospectus Rule 2.4.1. Information that is itself incorporated by reference or referred or cross-referred to in the documents referred to above is not incorporated by reference into this document. Except as set forth above, no other portion of the documents referred to above is incorporated by reference into this document and those portions which are not specifically incorporated by reference in this document are either not relevant for prospective investors or the relevant information is included elsewhere in this document.

239

22. DOCUMENTS AVAILABLE FOR INSPECTION

Copies of the following documents will be available for inspection during normal business hours on any Business Day (public holidays excepted), at the Company's registered office at Rowan House, Cherry Orchard North, Kembrey Park, Swindon, SN2 8UH, and also at the offices of Herbert Smith Freehills LLP at Exchange House, Primrose Street, London EC2A 2EG, for a period from and including the date of publication of this document until the date of Admission:

(i) The Articles;
(ii) The Acquisition Agreement;
(iii) The Annual Reports of Connect Group for the years ended 31 August 2012 and 31 August 2013;
(iv) The audited financial statements of the Tuffnells Group for the years ended 31 December 2011, 31 December 2012 and 31 December 2013 and the audited financial information of the Tuffnells Group for the six month period to 30 June 2014;
(v) The Accountants' Report on the Historical Financial Information on the Tuffnells Group set out in Part XVI (Historical Financial Information Relating to Tuffnells);
(vi) The Accountants' Report on the Unaudited Pro Forma Information on the Enlarged Group set out at Part XVII (Unaudited Pro Forma Statement in respect of the Enlarged Group);
(vii) The letters of consent referred to in Section 20 of this Part XXI; and
(viii) This document and the Form of Proxy.

Copies of this document are also available for inspection on the National Storage Mechanism at http://www.morningstar.co.uk/uk/NSM.

For the purposes of paragraph 3.2.4 of the Prospectus Rules, this document will be published in printed form and available free of charge until the date of Admission at the Company's registered office Rowan House, Cherry Orchard North, Kembrey Park, Swindon, SN2 8UH. In addition this document will be published in electronic form and available on the Company's website at www.connectgroupplc.com subject to certain access restrictions.

This document is dated 12 November 2014.

240

PART XXII

DEFINITIONS

The following definitions shall apply throughout this document unless the context requires otherwise:

“Acquisition”
the proposed acquisition of The Big Green Parcel Holding Company Limited which constitutes a Class 1 acquisition for the purposes of the Listing Rules

“Acquisition Agreement”
the agreement dated 12 November 2014 between the Purchaser, the Tuffnells Management Sellers and the Investor Sellers for the acquisition of the entire issued share capital of Tuffnells

“Adjusted EBITDA”
has the definition set out in Part III (Important Information)

“Admission and Disclosure Standards”
the requirements contained in the publication “Admission and Disclosure Standards” dated 16 April 2013 containing, among other things, the admission requirements to be observed by companies seeking admission to trading on the London Stock Exchange’s main market for listed securities

“Admission”
the admission of the New Ordinary Shares to the Official List and to trading on the London Stock Exchange’s main market for listed securities and “Admission becoming effective” means it becoming effective in accordance with paragraph 3.2.7 of the Listing Rules and the Admission and Disclosure Standards

“AGM” or “Annual General Meeting”
the annual general meeting of the Company as required under the Companies Act

“Articles of Association” or “Articles”
the articles of association of the Company

“Audit Committee”
the audit committee established by the Board to monitor financial risks in the Company’s businesses, as described in paragraph 4 of Part XX (Directors, Senior Managers and Corporate Governance)

“Auditors”
Deloitte LLP

“Board”
the board of Directors of the Company

“Bookrunners”
J.P. Morgan Cazenove and Liberum

“Books Division”
the Company’s books division

“Business Day”
a day (other than a Saturday or Sunday) on which banks are open for general business in London

“Connect Group”
Connect Group PLC and its subsidiary undertakings (as defined in the Companies Act)

“Connect Group Defined Benefit Schemes”
the Consortium CARE, Platinum and Pension Trust schemes

“CGT”
capital gains tax

“City Code”
the City Code on Takeovers and Mergers issued from time to time by or on behalf of the Panel on Takeovers and Mergers

“CMA”
Competition and Markets Authority

“Companies Act”	Companies Act 2006, as amended
“Company” or “Connect“	Connect Group PLC (formerly Smiths News PLC), a company registered in England and Wales with registered number 05195191
“Competition Act”	the Competition Act 1998
“Completion”	completion of the Acquisition
“Consortium CARE”	means The Consortium CARE Scheme, which is a defined benefit pension arrangement operated by The Consortium for the benefit of its employees
“CREST”	the system of paperless settlement of trades in securities and the holding of uncertificated securities operated by Euroclear in accordance with the Uncertificated Securities Regulations 2001 (SI 2001 No. 3755), as amended
“CREST Proxy Instruction”	has the meaning given to it in the Notice of General Meeting appended to this document
“CREST Regulations” or “Uncertificated Securities Regulations”	the Uncertificated Securities Regulations 2001
“DBP”	the Connect Deferred Bonus Plan approved by the Board on 15 October 2007
“Deferred Consideration”	deferred payment of up to £15.3 million payable in cash and Ordinary Shares to the Tuffnells Management Sellers and Option Sellers as part of the Acquisition, subject to the achievement of certain targets
“Demerger”	the demerger of WH Smith PLC from the Connect Group which became effective on 31 August 2006
“Dealing Day”	a day on which dealings in domestic equity market securities may take place on the London Stock Exchange
“Demerger Agreement”	the agreement dated 7 July 2006 between WH Smith PLC, Smiths News PLC and New WH Smith PLC entered into to effect the demerger of the Connect Group from WH Smith PLC
“Directors”	the directors of the Company whose names appear in paragraph 1 of Part XX (Directors, Senior Managers and Corporate Governance) of this document
“Disclosure Rules“	the disclosure rules of the FCA made pursuant to section 73A of FSMA, as amended from time to time
“DMD”	Dawson Media Direct
“EBITDA”	Earnings before interest, taxation, depreciation and amortisation
“Education & Care Division”	the Company’s education and care division
“EEA State”	a state which is a contracting party to the agreement on the European Economic Area signed on 2 May 1992, as it has effect for the time being
“EEA”	the European Economic Area

“Employee Benefit Trust” or “EBT”	the Smiths News Employee Benefit Trust established 14 December 2006
“Enlarged Group”	the Connect Group plus the Tuffnells Group, following Completion
“Equiniti”	Equiniti Limited
“ESOS”	the Connect Executive Share Option Scheme, approved by shareholders on 30 August 2006
“EU”	the European Union
“Euroclear”	Euroclear UK & Ireland Limited, the operator of CREST
“Excluded Territories”	Australia, Canada, New Zealand, Japan, South Africa and any other jurisdiction where the extension or availability of the Rights Issue (and any other transaction contemplated thereby) would breach any applicable law or regulation
“Existing Ordinary Shares”	the Ordinary Shares in issue as at the date of this document
“Ex-Rights Date”	the date on which the New Ordinary Shares are expected to commence trading ex-Rights, being 8:00 a.m. on 2 December 2014
“FCA”	the Financial Conduct Authority
“Form of Proxy”	the personalised form of proxy accompanying this document for use by the Shareholders in connection with the General Meeting
“FSMA”	the Financial Services and Markets Act 2000, as amended
“Fully Paid Rights”	rights to acquire the New Ordinary Shares, fully paid
“GAAP”	Generally Accepted Accounting Principles
“GBP” or “£”	the lawful currency of the United Kingdom
“General Meeting”	the general meeting of the Company proposed to be held at Herbert Smith Freehills LLP, Exchange House, Primrose Street, London, EC2A 2EG at 10:00 a.m. on Monday 1 December 2014 to approve the Resolution, the notice of which is contained in this document, or any adjournment thereof
“Group Executive Committee”	the Company’s group executive committee
“Historical Financial Information”	the IFRS historical financial information for the Connect Group set out in Part XV (Historical Financial Information Relating to Connect) and Appendix 1
“HM Revenue and Customs”or “HMRC”	Her Majesty’s Revenue and Customs
“IDW”	items of irregular dimension and weight
“IFRS”	International Financial Reporting Standards as adopted by the European Commission for use in the European Union
“Initial Consideration”	£113.4 million payable on Completion
“Investor Sellers”	Cavendish Square Partners Limited Partnership and Peter Ashton
“IRS”	the United States Internal Revenue Service

"ISIN"	International Security Identification Number
"J.P. Morgan Cazenove"	(i) in the capacity as Join Sponsor, Underwriter and/or Bookrunner, J.P. Morgan Securities plc, which conducts its UK investment banking business as J.P. Morgan Cazenove, or (ii) in the capacity as Financial Adviser, J.P. Morgan Limited, which conducts its UK investment banking business as J.P. Morgan Cazenove, as the context may require
"Joint Sponsors"	J.P. Morgan Cazenove and Liberum
"Latest Practicable Date"	10 November 2014, being the latest practicable date prior to publication of this document
"Lazard"	Lazard & Co., Limited
"Liberum"	Liberum Capital Limited
"Listing Rules"	the listing rules of the FCA made pursuant to section 73A of FSMA, as amended from time to time
"Locked Box Accounts"	the consolidated balance sheet for the Tuffnells Group as at 31 August 2014
"London Stock Exchange"	London Stock Exchange plc
"LTIP"	the Connect long-term incentive plan, approved by shareholders on 30 August 2006
"Media Business" or	the Company's media business
"Dawson Media Direct"
"Memorandum of Association"	the memorandum of association of the Company
"Money Laundering Regulations"	the Money Laundering Regulations 2007, as amended from time to time
"New Ordinary Shares"	the new Ordinary Shares to be issued by the Company pursuant to the Rights Issue
"News & Media Division"	the Company's news distribution and media businesses
"News Business" or "Smiths News"	the Company's news distribution business
"Nil Paid Rights"	New Ordinary Shares in nil paid form provisionally allotted to Qualifying Shareholders pursuant to the Rights Issue
"Nominations Committee"	the director nominations committee established by the Board to consider and make recommendations to the Board concerning the composition of the Board, as described in paragraph 4 of Part XX (Directors, Senior Managers and Corporate Governance)
"Notice" or "Notice of General Meeting"	the notice of a General Meeting of the Company appended to this document
"Official List"	the Official List of the FCA
"Option Sellers"	the 35 Tuffnells employees that currently hold options over a proportion of the Tuffnells ordinary shares
"Ordinary Shares"	the ordinary shares with a nominal value of five pence each in the share capital of the Company

“Overseas Shareholders”	Shareholders who are resident in, ordinarily resident in, or citizens of, jurisdictions outside the United Kingdom
“Pension Trust”	means the defined benefit section of the WH Smith Pension Trust, which is a defined benefit pension arrangement operated for the benefit of Connect Group employees
“Platinum”	means the Prudential Platinum scheme, which is a centralised defined benefit pension arrangement administered by Prudential, in which The Consortium participates in respect of its employees
“PRA”	the Prudential Regulation Authority
“Pro Forma Financial Information”	unaudited pro forma statement of net assets and pro forma statement of profit and loss in relation to the Enlarged Group
“Prospectus Directive”	Directive 2003/71/EC (as amended from time to time, including by Directive 2010/73/EC to the extent implemented in the relevant EEA state) and includes any relevant implementing measures in each EEA state that has implemented Directive 2003/71/EC
“Prospectus Directive Regulation”	Regulation number 809/2004 of the European Commission
“Prospectus Rules”	the prospectus rules of the FCA made pursuant to section 73A of the FSMA, as amended from time to time
“Provisional Allotment Letter”	the provisional allotment letter to be issued to Qualifying Non-CREST Shareholders
“Public Contracts Regulations”	Public Contracts Regulations 2006
“Purchaser”	Smith News Holdings Limited
“QIBs”	“qualified institutional buyers” as defined in Rule 144A
“Qualifying CREST Shareholders”	Qualifying Shareholders holding Ordinary Shares on the register of members of the Company on the Record Date which are in uncertified form
“Qualifying Non-CREST Shareholders”	Qualifying Shareholders holding Ordinary Shares on the register of members of the Company on the Record Date which are in certified form
“Qualifying Shareholders”	holders of Ordinary Shares who are on the Company’s register of members at the Record Date
“Receiving Agent”	Equiniti
“Record Date”	27 November 2014
“Registrar”	Equiniti
“Regulation S”	Regulation S under the Securities Act
“Regulatory Information Service”	a regulatory information service that is approved by the FCA and that is on the list of regulatory information services maintained by the FCA
“Remuneration Committee”	the remuneration committee established by the Board to consider and make recommendations to the Board as to the remuneration of Company’s directors and senior executives, as described in

245

paragraph 4 of Part XX (Directors, Senior Managers and Corporate Governance)

"Resolution"
the ordinary resolution to approve the Acquisition to be proposed at the General Meeting, the full text of which is set out in the notice of meeting contained in this document

"Rights"
the Nil Paid Rights or the Fully Paid Rights (or both) as the context may require

"Rights Issue"
the offer by way of rights to Qualifying Shareholders to acquire New Ordinary Shares on the terms and conditions set out in this document and, in the case of Qualifying Non-CREST Shareholders only, the Provisional Allotment Letter

"Rights Issue Price" or "Issue Price"
102 pence per New Ordinary Share

"RSA 421-B"
Chapter 421 B of the New Hampshire Revised Statutes

"Rule 144A"
Rule 144A under the Securities Act

"SDRT"
stamp duty reserve tax

"SEC"
the US Securities and Exchange Commission

"Securities Act"
the US Securities Act of 1933

"Sellers"
the Tuffnells Management Sellers, the Investor Sellers and the Option Sellers

"Senior Managers", each a "Senior Manager"
those members of the management bodies of the Company and its subsidiary undertakings who are relevant to establishing that the Company has the appropriate expertise and experience for the management of its business for the purposes of paragraph 14.1 of Annex 1 of the Prospectus Rules and whose names appear in paragraph 2 of Part XX (Directors, Senior Managers and Corporate Governance)

"Sharesave Scheme"
the Connect Sharesave Scheme approved by shareholders on 30 August 2006

"Share Schemes"
the Connect Sharesave Scheme, the Connect Executive Share Option Scheme, the Connect LTIP, and the Connect Deferred Bonus Plan

"Shareholders"
holders of the Ordinary Shares from time to time

"SMEs"
small and medium enterprises

"SRN"
Shareholder Reference Number

"TFEU"
Treaty on the Functioning of the European Union

"The Big Green Parcel Holding Company"
The Big Green Parcel Holding Company Limited, a company registered in England and Wales with registered number 06459283

"The Consortium SPA"
the sale and purchase agreement dated 23 April 2012 entered into between Smiths News Holdings Limited and Melanie Teal, Mark Barnett, Mike Gahan and Joe Caddell in respect of the purchase of Hedgelane Limited

“The Consortium”	the principal subsidiary of Hedgelane Limited who trades as the Consortium for Purchasing and Distribution Limited
“The Connect Group’s Businesses”	Connect Books Division, Connect Education & Care Division, Connect Media Business and Connect News Business
“TPEL”	Tuffnells Parcells Express Limited
“Transparency Rules”	the transparency rules of the FCA made pursuant to section 73A of FSMA, as amended from time to time
“Treaty”	income tax treaty between the United States and the United Kingdom
“Tuffnells”	Tuffnells Parcels Express Limited, a company registered in England and Wales with registered number 00319964
“Tuffnells Group”	The Big Green Parcel Holding Company Limited and its subsidiary undertakings (as defined in the Companies Act)
“Tuffnells Management Sellers”	has the meaning given to it in the Acquisition Agreement
“UK Corporate Governance Code”	the UK Corporate Governance Code issued by the Financial Reporting Council in September 2012
“UK Listing Authority” or “UKLA”	the FCA when it is exercising its powers under Part 6 of FSMA
“Underwriters”	J.P. Morgan Cazenove and Liberum
“Underwriting Agreement”	the underwriting and sponsor agreement dated 11 November 2014 between and among the Company and the Underwriters
“Underwritten Ordinary Shares”	the New Ordinary Shares save in respect of those New Ordinary Shares which the Directors and the Employee Benefit Trust intend to take up under the Rights Issue
“United Kingdom” or “UK”	the United Kingdom of Great Britain and Northern Ireland
“United States” or “US”	the United States of America, its territories and possessions, any state of the United States of America and the District of Columbia

NOTICE OF GENERAL MEETING

CONNECT GROUP PLC

(the "Company")

NOTICE IS HEREBY GIVEN that a General Meeting of the Company will be held at 10:00 a.m. on Monday 1 December 2014 at Herbert Smith Freehills LLP, Exchange House, Primrose Street, London, EC2A 2EG to consider and, if thought fit, pass the following Resolution as an ordinary resolution:

ORDINARY RESOLUTION

THAT the proposed acquisition by Smiths News Holdings Limited, a wholly-owned subsidiary of the Company, of the entire issued share capital of The Big Green Parcel Holding Company Limited pursuant to the Acquisition Agreement (as defined in the prospectus and circular to shareholders dated 12 November 2014, a copy of which has been produced to the meeting and initialled by the Chairman of the meeting for the purposes of identification only (the "Circular"), in the manner and on the terms and conditions set out in the Acquisition Agreement and related agreements and documentation, be and is hereby approved and that the board of directors of the Company (or a duly authorised committee thereof) be and are hereby authorised to take all such steps as may be necessary or desirable in relation thereto and to carry the same into effect with such modifications, variations, revisions or amendments (providing such modifications, variations or amendment are not of a material nature) as they shall deem necessary or desirable.

By order of the Board

Stuart Marriner

Company Secretary

Registered Office:

Rowan House, Cherry Orchard North,

Kembrey Park, Swindon, Wiltshire SN2 8UH

Registered Number: 5195191

12 November 2014

IMPORTANT NOTES FOR SHAREHOLDERS

Shareholders are entitled to appoint one or more proxies (who need not be shareholders) to exercise all or any of their rights to attend and to speak and vote on their behalf at the meeting provided that if more than one proxy is appointed, each proxy is appointed to exercise the rights attached to a different Ordinary Share or Ordinary Shares.
Shareholders should use the enclosed Proxy Form to make the appointment referred to in Note 1 above. Before completing the Proxy Form shareholders should read the guidance notes on the Form.
As an alternative to completing and returning the printed Proxy Form, you may submit your proxy appointment electronically by accessing the website www.sharevote.co.uk, where full details of the procedure are given. You will need to have your Proxy Form to hand when you log on as it contains information which will be required to validate your submission. For further information, see the guidance notes on the Proxy Form.
To be valid any Proxy Form and power of attorney or other authority, if any, under which it is signed or a notarially certified or office copy of such power or authority or other instrument appointing a proxy must be received by post or (during normal business hours only) by hand at Equiniti or at the electronic address provided on the Proxy Form, in each case no later than 10:00 a.m. on 27 November 2014. Completion and return of a Proxy Form, or electronic proxy appointment, or any CREST Proxy Instruction (as described in Note 6) will not prevent you attending and voting at the meeting, if you wish. A member must inform the Company in writing of any termination of the authority of a proxy. The deadline for receipt of proxy appointments also applies in relation to amended instructions.
If two or more valid but differing appointments of a proxy are received in respect of the same Ordinary Share for use at the same meeting, the one which is last received (regardless of its date or the date of its signature) shall be treated as replacing and revoking the others as regards that Ordinary Share; if the Company is unable to determine which was last received, none of them shall be treated as valid in respect of that Ordinary Share.
CREST members who wish to appoint a proxy or proxies through the CREST electronic proxy appointment service may do so by using the procedures described in the CREST Manual. CREST personal members or other CREST sponsored members, and those CREST members who have appointed a service provider(s), should refer to their CREST sponsor or voting service provider(s), who will be able to take the appropriate action on their behalf.
In order for a proxy appointment or instruction made using the CREST service to be valid, the appropriate CREST message (a "CREST Proxy Instruction") must be properly authenticated in accordance with Euroclear specifications, and must contain the information required for such instruction, as described in the CREST manual (available via www.euroclear.com). The

247

message, regardless of whether it constitutes the appointment of a proxy or is an amendment to the instruction given to a previously appointed proxy must, in order to be valid, be transmitted so as to be received by Equiniti (CREST participant ID RA19) by 10:00 a.m. on 27 November 2014. For this purpose, the time of receipt will be taken to be the time (as determined by the time stamp applied to the message by the CREST application host) from which the issuer's agent is able to retrieve the message by enquiry to CREST in the manner prescribed by CREST. After this time any change of instructions to proxies appointed through CREST should be communicated to the appointee through other means.

CREST members and, where applicable, their CREST sponsors, or voting service providers should note that Euroclear does not make available special procedures in CREST for any particular message. Normal system timings and limitations will, therefore, apply in relation to the input of CREST Proxy Instructions. It is the responsibility of the CREST member concerned to take (or, if the CREST member is a CREST personal member, or sponsored member, or has appointed a voting service provider, to procure that his CREST sponsor or voting service provider(s) take(s)) such action as shall be necessary to ensure that a message is transmitted by means of the CREST system by any particular time. In this connection, CREST members and, where applicable, their CREST sponsors or voting system providers are referred, in particular, to those sections of the CREST manual concerning practical limitations of the CREST system and timings.
The Company may treat as invalid a CREST Proxy Instruction in the circumstances set out in Regulation 35(5)(a) of the Uncertificated Securities Regulations 2001.
Any member with more than one shareholding registered in his/her name should, to the extent that such member has elected to receive copies of relevant documentation, receive only one Proxy Form. The Proxy Form will be valid in respect of all his/her holdings. If you do not have a Proxy Form and believe that you should have one, or if you require additional forms, please contact the Shareholder helpline details of which are shown on page 72 of this document.
Pursuant to Regulation 41 of the Uncertificated Securities Regulations 2001, the Companies Act 2006 and the Articles of Association of the Company, the Company specifies that only those shareholders registered in the register of members of the Company as at 6:00 p.m. on 27 November 2014 (or 6.00 p.m. on the day that is two days before any adjourned meeting, ignoring any non-working days) shall be entitled to attend (either in person or by proxy) and vote at the meeting in respect of the number of Ordinary Shares registered in their names at that time. Changes to the register of members after 6.00 p.m. on 27 November 2014 (or 6.00 p.m. on the day that is two days before any adjourned meeting, ignoring any non-working days) shall be disregarded in determining the right of any person to attend and vote at the General Meeting.
Any person to whom this Notice is sent who is a person nominated under Section 146 of CA 2006 to enjoy information rights (a "Nominated Person") may, under an agreement between him/her and the shareholder by whom he/she was nominated, have a right to be appointed (or to have someone else appointed) as a proxy for the General Meeting. If a Nominated Person has no such proxy appointment right or does not wish to exercise it, he/she may, under any such agreement, have a right to give instructions to the shareholder as to the exercise of voting rights.
In the absence of an agreement described in Note 12 above, the statement of the rights of shareholders in relation to the appointment of proxies in Notes 1 to 3 above does not apply to Nominated Persons. The rights described in these paragraphs can only be exercised by shareholders of the Company.
Nominated persons are reminded that they should contact the registered holder of their Ordinary Shares (and not the Company) on matters relating to their investments in the Company.
Any corporation which is a member can appoint one or more corporate representatives who may exercise on its behalf all of its powers as a member provided that they do not do so in relation to the same Ordinary Shares.
Please note that the Company takes all reasonable precautions to ensure no viruses are present in any electronic communication it sends out but the Company cannot accept responsibility for loss or damage arising from the opening or use of any email or attachments from the Company and recommend that the shareholders subject all messages to virus checking procedures prior to use. Any electronic communication received by the Company, including the lodgement of an electronic proxy form, that is found to contain any virus will not be accepted.
As at 10 November 2014 (being the latest practicable date prior to publication of this Notice), the Company's issued share capital consists of 189,477,548 Ordinary Shares carrying one vote each. Therefore the total voting rights in the Company as at 10 November 2014 are 189,477,548.
You may not use any electronic address provided either in this Notice of Meeting or any related documents (including the Proxy Form) to communicate with the Company for any purposes other than those expressly stated.
Any member attending the meeting has the right to ask questions. The Company must cause to be answered any such question relating to the business being dealt with at the meeting but no such answer need be given if (a) to do so would interfere unduly with the preparation for the meeting or involve the disclosure of confidential information; (b) the answer has already been given on a website in the form of an answer to a question; or (c) it is undesirable in the interests of the company or the good order of the meeting that the question be answered.
A copy of this Notice, and other information required by Section 311A of the Companies Act 2006, can be found on the Company's website www.connectgroupplc.com.

248

APPENDIX 1

CONNECT GROUP'S FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 AUGUST 2014

INDEPENDENT AUDITOR'S REPORT TO THE MEMBERS OF CONNECT GROUP PLC (FORMERLY SMITHS NEWS PLC)

Opinion on financial statements of Connect Group plc

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 August 2014 and of the group's profit for the year then ended;
the group financial statements have been properly prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union;
the parent company financial statements have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice; 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 IAS Regulation.

The financial statements comprise the Group Income Statement, the Group Statement of Comprehensive Income, the Group and Parent Company Balance Sheets, the Group Cash Flow Statement, the Group Statement of Changes in Equity, the Parent Company Statement of Total Recognised Gains and Losses, the Parent Company Reconciliation of Movements in Shareholders' Funds and the related notes 1 to 34. The financial reporting framework that has been applied in the preparation of the group financial statements is applicable law and IFRSs as adopted by the European Union. The financial reporting framework that has been applied in the preparation of the parent company financial statements is applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice).

Going concern

As required by the Listing Rules we have reviewed the directors' statement contained within the financial review that the group is a going concern. We confirm that:

we have concluded that the directors' use of the going concern basis of accounting in the preparation of the financial statements is appropriate; and
we have not identified any material uncertainties that may cast significant doubt on the group's ability to continue as a going concern.

249

250

Our assessment of risks of material misstatement

Risk

Impairment of Goodwill and Other Intangibles

The Group's assessment of impairment of goodwill and other intangibles arising on historical acquisitions is a judgemental matter which requires estimates concerning the estimated future cash flows and associated discount rates, and growth rates based on management's view of future business prospects.

This is further heightened in the year with the decline in performance within Connect Books.

This is discussed within management's key sources of judgement and estimation uncertainty within Note 1.

However, because not all future events or conditions can be predicted, this statement is not a guarantee as to the group's ability to continue as a going concern.

The assessed risks of material misstatement described below are those that had the greatest effect on our audit strategy, the allocation of resources in the audit and directing the efforts of the engagement team:

How the scope of our audit responded to the risk

We challenged the adequacy and reasonableness of assumptions used in management's impairment calculations and the appropriateness of judgements and forecasts used to conclude on asset impairment including a specific review and challenge of discount rates and growth rates, the appropriateness of the level of aggregation of individual cash generating units and the methodology applied.

We benchmarked the discount rates with published rates for the external peer group and agreed the cash generating unit (CGU) groupings to information reviewed by management to make decisions about their business and the level at which goodwill is monitored. We also challenged the forecast cashflows used in the model against historical performance, post period trading data, and external market trend data.

We used internal valuation specialists to challenge the key assumptions relating to growth rates and the discount rate applied to the separate cash generating units through comparing against industry benchmarks on similar assets and comparison against the prevailing group cost of capital at the year end.

Having audited the assumptions within management's annual impairment assessment, we checked the arithmetical accuracy of the impairment model.

We finally considered reasonable possible changes in assumptions and compared these to management's sensitivity analysis. We recalculated these sensitised scenarios, and challenged by considering the highest discount rate applied by peer group companies, capping the short term growth rates at long term rates and capping the growth assumed in the budgets at historical growth levels.

Based on the above we assessed whether the annual report disclosure included specific growth and discount rates for those deemed to be significant CGUs, and whether there was appropriate disclosure in respect of sensitised scenarios.

In respect of Connect Books, we specifically challenged the cashflow forecast assumptions based on management's latest approved budgets in light of the performance of the Books division. This involved understanding the reason for the poor performance in the year and its impact on the forecast assumptions.

251

Defined Benefit Pension Schemes

The determination of the value of the retirement benefit obligations (which at 31 August 2014 for the Pension Trust stood at £431.6m) requires significant judgement in the selection of key assumptions and is highly sensitive to such assumptions. Management made significant judgements in respect of mortality, price inflation and discount rates in deriving the value of the retirement benefit obligations.

In addition on the Pension Trust there are two further main aspects. Firstly, given the surplus position on the scheme on an IAS19 basis, there is a judgement taken whereby this surplus of £75.7m at 31 August 2014 is not available for use by the Group, and therefore it is restricted to nil.

Secondly, due to there also being a schedule of contributions in place to fund the Pension Trust, separate to the surplus above, there is a requirement under IFRIC14 to recognise a liability in respect of this funding commitment.

This is discussed within management's key sources of judgement and estimation uncertainty within Note 1.

Revenue Recognition

Revenue recognition represents a risk due to the high volume of revenue transactions that exist through the year, and the sale or return basis on which the News business operates. As a result therefore the risk is focused on cut-off at the year-end date.

This requires significant management judgement to determine the level of returns anticipated at the end of the year, and therefore appropriate cut-off of revenue.

This is discussed within management's key sources of judgement and estimation uncertainty within Note 1.

We used our internal actuarial experts to assist us in assessing the assumptions applied in determining the pension obligations, particularly given recent market volatility, and determined whether the key assumptions were reasonable. This included benchmarking the assumptions in respect of the discount rate, inflation and mortality assumptions to those used in the market, and reviewing available yield curves and inflation data to recalculate a reasonable range for the key assumptions.

We challenged management to understand the sensitivity of changes in assumptions and quantify a range of reasonable rates that could be used in their calculation. Further, we discussed the output of sensitivity analysis with management and the third party actuarial advisers.

Specifically for the Pension Trust we have reviewed the agreements with the pension trustees to identify the availability of any funding surplus to the Group, and in addition, confirmed the schedule of contributions, which is recognised in accordance with IFRIC 14 as a liability on the balance sheet.

We use internal IT specialists to assist us in providing assurance over the automation of controls within the revenue cycle.

In addition we use external industry data to evaluate the sales trends within the business, to identify any anomalies or unusual transactions which could impact on the cut-off of revenue.

In respect of goods sold on a sale or return basis, we evaluate management's judgement with regards to the level of sale returns through the use of historical return data and evidence of actual returns post year-end.

Proof 7 Wednesday, November 12, 2014 03:00

Inventory Provisioning

Assessing net realisable value is an area of significant judgement, with specific consideration in relation to the estimate of provision for slow-moving and obsolete stock.

This is further heightened in the year with the decline in performance within the Books division.

This is discussed within management's key sources of judgement and estimation uncertainty within Note 1.

Our application of materiality

For all divisions including the Books division we have assessed the appropriateness of the inventory provision by initially understanding the methodology and then challenging management on this methodology in reference to historical accuracy of the provision against actual losses.

We assessed the accuracy of the application of the provisioning methodology by recalculation, assessing the assumptions made to provisioned inventory lines to check that the provision percentage applied is appropriate and in line with the documented provisioning policy. We have also considered the ageing of inventory compared with applicable returns periods to identify any non-returnable inventory.

We also attended inventory counts at the major warehouses to independently verify inventory existence and any indicators of obsolescence.

The Audit Committee's consideration of these risks is set out on page $\bullet$.

Our audit procedures relating to these matters were designed in the context of our audit of the financial statements as a whole, and not to express an opinion on individual accounts or disclosures. Our opinion on the financial statements is not modified with respect to any of the risks described above, and we do not express an opinion on these individual matters.

We define materiality as the magnitude of misstatement in the financial statements that makes it probable that the economic decisions of a reasonably knowledgeable person would be changed or influenced. We use materiality both in planning the scope of our audit work and in evaluating the results of our work.

We determined materiality for the group to be £2.2m, which equates to 5% of statutory profit before tax.

We agreed with the Audit Committee that we would report to the Committee all audit differences in excess of £44,500, as well as differences below that threshold that, in our view, warranted reporting on qualitative grounds. We also report to the Audit Committee on disclosure matters that we identified when assessing the overall presentation of the financial statements.

An overview of the scope of our audit

Our group audit was scoped by obtaining an understanding of the group and its environment, including group-wide controls, and assessing the risks of material misstatement at the group level. Based on that assessment, we focused our group audit scope primarily on the audit work at five components. All five of these components were subject to a full audit. These five components represent the principal business units and account for 99% of the group's net liabilities, 96% of the group's revenue and 97% of the group's profit before tax. They were also selected to provide

Proof 7 Wednesday, November 12, 2014 03:00

an appropriate basis for undertaking audit work to address the risks of material misstatement identified above. Our audit work at the five components was executed at levels of materiality applicable to each individual entity which were lower than group materiality.

At the parent entity level we also tested the consolidation process and carried out analytical procedures to confirm our conclusion that there were no significant risks of material misstatement of the aggregated financial information of the remaining components not subject to audit or audit of specified account balances.

The group audit team continued to follow a programme of planned visits that has been designed so that the Senior Statutory Auditor or a senior member of the group audit team visits each component at least once a year.

Opinion on other matters prescribed by the Companies Act 2006

In our opinion:

the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006; and
the information given in the Strategic Report and 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

Adequacy of explanations received and accounting records

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

we have not received all the information and explanations we require for our audit; or
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 are not in agreement with the accounting records and returns.

We have nothing to report in respect of these matters.

Directors’ remuneration

Under the Companies Act 2006 we are also required to report if in our opinion certain disclosures of directors’ remuneration have not been made or the part of the Directors’ Remuneration Report to be audited is not in agreement with the accounting records and returns. We have nothing to report arising from these matters.

Corporate Governance Statement

Under the Listing Rules we are also required to review the part of the Corporate Governance Statement relating to the company’s compliance with nine provisions of the UK Corporate Governance Code. We have nothing to report arising from our review.

Proof 7 Wednesday, November 12, 2014 03:00

Our duty to read other information in the Annual Report

Under International Standards on Auditing (UK and Ireland), we are required to report to you if, in our opinion, information in the annual report is:

materially inconsistent with the information in the audited financial statements; or
apparently materially incorrect based on, or materially inconsistent with, our knowledge of the group acquired in the course of performing our audit; or
otherwise misleading.

In particular, we are required to consider whether we have identified any inconsistencies between our knowledge acquired during the audit and the directors’ statement that they consider the annual report is fair, balanced and understandable and whether the annual report appropriately discloses those matters that we communicated to the audit committee which we consider should have been disclosed. We confirm that we have not identified any such inconsistencies or misleading statements.

Respective responsibilities of directors and auditor

As explained more fully in the Directors’ Responsibilities Statement, 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. We also comply with International Standard on Quality Control 1 (UK and Ireland). Our audit methodology and tools aim to ensure that our quality control procedures are effective, understood and applied. Our quality controls and systems include our dedicated professional standards review team, strategically focused second partner reviews and independent partner reviews.

This report is made solely to the company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company’s members as a body, for our audit work, for this report, or for the opinions we have formed.

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

Proof 7 Wednesday, November 12, 2014 03:00

applied and adequately disclosed; the reasonableness of significant accounting estimates made by the directors; and the overall presentation of the financial statements. In addition, we read all the financial and non-financial information in the annual report to identify material inconsistencies with the audited financial statements and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report.

Alexander Butterworth ACA (Senior statutory auditor)
for and on behalf of Deloitte LLP
Chartered Accountants and Statutory Auditor
Reading, United Kingdom

15 October 2014

256

Connect Group PLC (formerly Smiths News PLC)

Group Income Statement for the year ended 31 August 2014

£m	Note	2014			2013 Restated¹
		Underlying*	Non-recurring and other items	Total	Underlying*	Non-recurring and other items	Total
Continuing operations
Revenue	2	1,808.5	–	1,808.5	1,806.9	3.9	1,810.8
Operating profit	2.3	55.5	(6.9)	48.6	56.4	(10.8)	45.6
Investment revenue	7	0.4	–	0.4	0.3	–	0.3
Finance costs	7	(5.9)	–	(5.9)	(6.8)	(0.2)	(7.0)
Profit before tax		50.0	(6.9)	43.1	49.9	(11.0)	38.9
Income tax expense	8	(9.3)	1.0	(8.3)	(11.5)	1.3	(10.2)
Profit for the year		40.7	(5.9)	34.8	38.4	(9.7)	28.7
Profit attributable to equity shareholders		40.5	(5.9)	34.6	38.4	(9.7)	28.7
Profit attributable to non-controlling interest		0.2	–	0.2	–	–	–
		40.7	(5.9)	34.8	38.4	(9.7)	28.7
Earnings per share
---	---	---	---	---	---
Basic	10	21.7p	18.6p	21.1p	15.7p
Diluted	10	21.0p	18.0p	19.8p	14.8p
Equity dividends per share (paid and proposed)	9		9.7p		9.3p

Note:
* Before non-recurring and other items. Non-recurring and other items are set out in Note 4 to the accounts. These measures are described in Note 1d of the accounting policies.
1 Restatement in respect of retirement benefit obligations and disposal of MMC business, see Note 34.

257

Connect Group PLC (formerly Smiths News PLC)

Group Statement of Comprehensive Income for the year ended 31 August 2014

£m	Note	2014	2013 Restated^{1}
Items that will not be reclassified to the Group Income Statement
Actuarial gain on defined benefit pension scheme	6	14.8	4.3
Impact of IFRIC 14 on defined benefit pension scheme	6	(16.2)	3.4
Tax relating to components of other comprehensive income that will not be reclassified	8	0.1	(2.7)
		(1.3)	5.0
Items that may be reclassified to the Group Income Statement
Gain on cash flow hedges	29	0.6	1.7
Currency translation differences		(0.2)	–
Tax relating to components of other comprehensive income that may be reclassified	8	(0.1)	0.2
		0.3	1.9
Other comprehensive income for the year		(1.0)	6.9
Profit for the year		34.8	28.7
Total comprehensive income for the year		33.8	35.6
Total comprehensive income attributable to equity shareholders		33.6	35.6
Total comprehensive income attributable to non controlling interest		0.2	–

Note:
1 Restatement in respect of retirement benefit obligations and disposal of MMC business, see Note 34.

258

Connect Group PLC (formerly Smiths News PLC)

Group Balance Sheet at 31 August 2014

£m	Note	2014	2013
Non-current assets
Intangible assets	11a	65.7	68.2
Property, plant and equipment	14	29.0	26.6
Interest in jointly controlled entities and associates	15	4.3	4.1
Derivative financial instruments	20	0.6	0.4
Retirement benefit assets	6	0.3	0.2
Deferred tax assets	23	7.2	8.1
		107.1	107.6
Current assets
Inventories	16	45.3	44.2
Trade and other receivables	17	128.1	127.1
Cash and cash equivalents	19	20.4	10.1
		193.8	181.4
Total assets		300.9	289.0
Current liabilities
Trade and other payables	18	(192.3)	(188.7)
Current tax liabilities		(6.1)	(8.1)
Bank loans and other borrowings	19	(60.9)	(72.8)
Obligations under finance leases	21	(0.9)	(1.0)
Derivative financial instruments	20	–	(0.8)
Retirement benefit obligations	6	(4.1)	(4.1)
Provisions	24	(3.4)	(7.5)
		(267.7)	(283.0)
Non-current liabilities
Retirement benefit obligations	6	(17.2)	(19.2)
Bank loans and other borrowings	19	(48.4)	(34.0)
Obligations under finance leases	21	(3.2)	(0.8)
Other non-current liabilities	22	(1.4)	(1.6)
Deferred tax liabilities	23	(3.2)	(4.5)
Non-current provisions	24	(1.9)	(2.8)
		(75.3)	(62.9)
Total liabilities		(343.0)	(345.9)
Total net liabilities		(42.1)	(56.9)
Equity
Called up share capital	28(a)	9.5	9.2
Share premium account	28(c)	5.3	1.2
Demerger reserve
ESOP reserve	29(b)	(5.2)	(1.5)
Hedging & translation reserve	29(c)	(0.3)	(0.6)
Retained earnings	30	228.5	214.9
Total shareholders equity		(42.3)	(56.9)
Non-controlling interests in equity		0.2	–
Total equity		(42.1)	(56.9)

The accounts were approved by the Board of Directors and authorised for issue on 15 October 2014 and were signed on its behalf by:

Registered number – 05195191

Mark Cashmore
Group Chief Executive

Nick Gresham
Chief Financial Officer

259

260

Connect Group PLC (formerly Smiths News PLC)

Group Statement of Changes in Equity for the year ended 31 August 2014

£m	Share capital	Share Premium account	Demerger reserve	ESOP reserve	Hedging & translation reserve	Retained earnings	Non-controlling interests in equity	Total
Balance at 31 August 2012 – reported	9.2	0.6	(280.1)	(1.7)	(2.3)	196.7	-	(77.6)
Profit for the year	-	-	-	-	-	28.7	-	28.7
Gain on cash flow hedges	-	-	-	-	1.7	-	-	1.7
Actuarial gain on defined benefit pension scheme	-	-	-	-	-	4.3	-	4.3
Impact of IFRIC 14 on defined benefit pension scheme	-	-	-	-	-	3.4	-	3.4
Tax relating to components of other comprehensive income	-	-	-	-	-	(2.5)	-	(2.5)
Total comprehensive income for the year – Restated¹	-	-	-	-	1.7	33.9	-	35.6
Issue of share capital	-	0.6	-	-	-	-	-	0.6
Dividends paid	-	-	-	-	-	(16.0)	-	(16.0)
Employee share schemes	-	-	-	0.2	-	(0.2)	-	-
Recognition of share based payments	-	-	-	-	-	0.5	-	0.5
Balance at 31 August 2013 – Restated¹	9.2	1.2	(280.1)	(1.5)	(0.6)	214.9	-	(56.9)
Profit for the year	-	-	-	-	-	34.6	0.2	34.8
Gain on cash flow hedges	-	-	-	-	0.6	-	-	0.6
Actuarial gain on defined benefit pension scheme	-	-	-	-	-	14.8	-	14.8
Impact of IFRIC 14 on defined benefit pension scheme	-	-	-	-	-	(16.2)	-	(16.2)
Currency translation differences	-	-	-	-	(0.2)	-	-	(0.2)
Tax relating to components of other comprehensive income	-	-	-	-	(0.1)	0.1	-	-
Total comprehensive income for the year	-	-	-	-	0.3	33.3	0.2	33.8
Issue of share capital	0.3	4.1	-	-	-	-	-	4.4
Purchase of own shares	-	-	-	(6.3)	-	-	-	(6.3)
Dividends paid	-	-	-	-	-	(17.7)	-	(17.7)
Employee share schemes	-	-	-	2.6	-	(2.6)	-	-
Recognition of share based payments net of tax	-	-	-	-	-	0.6	-	0.6
Balance at 31 August 2014	9.5	5.3	(280.1)	(5.2)	(0.3)	228.5	0.2	(42.1)

Restatement in respect of retirement benefit obligations, see Note 34.

Note:

261

Connect Group PLC (formerly Smiths News PLC)

Group Cash Flow Statement for the year ended 31 August 2014

£m	Note	2014	2013
Net cash inflow from operating activities	27	47.4	37.9
Investing activities
Dividends received from associates		0.2	–
Acquisitions	12	(0.3)	(5.1)
Purchase of property, plant and equipment		(6.8)	(5.0)
Purchase of intangible assets		(3.5)	(2.8)
Net cash used in investing activities		(10.4)	(12.9)
Financing activities
Interest paid		(6.1)	(4.0)
Dividend paid		(17.7)	(16.0)
Repayments of obligations under finance leases		(1.3)	(2.0)
Proceeds on issue of shares		0.7	0.7
Purchase of shares for Employee Benefit Trust		(6.3)	(2.3)
Repayments of borrowings		(34.0)	–
New bank loans raised		50.0	–
Increase/(decrease) in borrowings		(11.9)	3.7
Net cash (used in)/from financing activities		(26.6)	(19.9)
Net increase in cash and cash equivalents		10.4	5.1
Effect of foreign exchange rate changes		(0.1)	(0.1)
		10.3	5.0
Opening net cash and cash equivalents		10.1	5.1
Closing net cash and cash equivalents	19	20.4	10.1
Analysis of net debt
Cash and cash equivalents	19	20.4	10.1
Current borrowings	19	(60.9)	(72.8)
Non-current borrowings	19	(48.4)	(34.0)
Net borrowings		(88.9)	(96.7)
Finance lease liabilities	21	(4.1)	(1.8)
Net debt		(93.0)	(98.5)

262

Connect Group PLC (formerly Smiths News PLC)

Notes to the accounts

1. Accounting policies

(a) Basis of consolidation

Connect Group PLC (“the Company”) is a company incorporated in the UK under Companies Act 2006. The Group accounts for the year ended 31 August 2014 comprise the Company and, its subsidiaries (together referred to as the “Group”) and the Group’s interests in jointly controlled entities and associates. Subsidiary undertakings acquired during the period are included in the Group Accounts from the date of acquisition. All significant subsidiary accounts are made up to 31 August and are included in the Group Accounts. Further to the EU IAS Regulation (Article 4) the Group accounts have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as adopted by the European Union (“adopted IFRS”) with those parts of the Companies Act 2006 applicable to companies reporting under IFRS. The Company Accounts continue to be prepared in accordance with UK Generally Accepted Accounting Practice (“UK GAAP”) and details of the Company Accounts, notes to the accounts and principal accounting policies are set out below.

Unless otherwise noted references to 2014 and 2013 relate to fiscal year ended 31 August 2013 and 31 August 2014 as opposed to calendar year.

The accounts were authorised for issue by the Directors on 15 October 2014.

(b) Basis of preparation

Accounting basis of preparation

The accounts are prepared on the historical cost basis except certain financial instruments detailed below and are presented in Pound Sterling and rounded to £0.1m, except where otherwise indicated. This document may contain some immaterial rounding differences in the tables.

The Group Accounts have been prepared in accordance with International Financial Report Standards (“IFRS”) as adopted for use by the European Union.

Intra-group balances and unrealised gains and losses or income and expenses arising from intra-group transactions, are eliminated in preparing Group Accounts. Unrealised gains arising from transactions with the jointly controlled entities are eliminated to the extent of the Group’s interest in the entities. Unrealised losses are eliminated in the same way as unrealised gains.

Going concern and net liabilities

As detailed in Note 20, at the year end the Group had committed bank facilities in place of £200m, with associated covenants. The Group’s forecasts and projections, taking account of reasonable potential variations in trading performance and the Group’s negative working capital position, show that the Group should be able to operate within the level of its current financing covenants for the foreseeable future.

Despite the uncertain economic environment the Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. Thus the Group continues to adopt the going concern basis in preparing its consolidated financial statements.

Business combinations and goodwill

The Group uses the acquisition method of accounting to account for business combinations. The cost of an acquisition is measured at the fair value of the assets given, equity instruments issued, liabilities incurred or assumed at the date of exchange. Acquisition related costs are recognised in profit or loss as incurred. Any deferred or contingent purchase consideration is recognised at fair value over the period of entitlement. If the contingent purchase consideration is classified as equity, it is not remeasured and settlement is accounted for in equity. Any deferred or contingent payment deemed to be remuneration as opposed to purchase consideration in nature is recognised in profit or loss as

incurred, and excluded from the acquisition method of accounting for business combinations. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured, initially, at their fair values at the acquisition date, irrespective of the extent of any non-controlling interest. The non-controlling interest is measured, initially, at the non-controlling interest's proportion of the net fair value of the assets, liabilities and contingent liabilities recognised.

Goodwill arising on all acquisitions is initially recognised as an asset at cost and is subsequently measured at cost less any accumulated impairment losses.

The carrying value is reviewed annually for impairment or whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Intangible assets arising under a business combination (acquired intangibles) are capitalised at fair value as determined at the date of exchange and are stated at fair value less accumulated amortisation and impairment losses. Amortisation of acquired intangibles is charged to the income statement on a straight-line basis over the estimated useful lives as follows:

Customer relationships	-	2.5 to 7.5 years
Trade name	-	5 to 7.5 years
Software and development costs	-	3 to 7 years

In the current year the estimated useful lives for customer relationships and trade names have been reduced from a maximum of 10 years to a maximum of 7.5 years based upon an assessment of future contractual renewal rates.

Computer software and internally generated development costs which are not integral to the related hardware are capitalised separately as an intangible asset and stated at cost less accumulated amortisation and impairment losses.

Assets held under finance leases are amortised over their expected useful lives on the same basis as owned assets or, where shorter, over the term of the relevant lease. All intangible assets are reviewed for impairment in accordance with IAS 36 'Impairment of Assets' when there are indications that the carrying value may not be recoverable.

Restatement of IAS 19 Revised – retirement benefit obligation

IAS 19 (as revised in June 2011) 'Employee Benefits' has been adopted by the Group for the financial year commencing 1 September 2013. The interest cost and expected return on defined-benefit pension scheme assets used in the previous version of IAS 19 are replaced with a 'net interest' amount, which is calculated by applying a discount rate to the net defined benefit liability or asset. Furthermore, IAS 19 (revised) also introduces more extensive disclosures in the presentation of the defined benefit cost, including the separate disclosure of the scheme's administrative expenses.

IAS 19 (revised) has been applied retrospectively in accordance with IAS 8. The comparative income statement has been restated, the impact being to reduce profits by £2.4m for the year ended 31 August 2013, as shown in Note 34. The impact to underlying earnings per share of the above changes for the year ended 31 August 2013 is a reduction of 1.3p. The impact on underlying diluted earnings per share for the year ended 31 August 2013 is a reduction of 1.3p. As the Company has always recognised actuarial gains and losses immediately, there is no effect on the prior year defined benefit obligation and balance sheet disclosure. Additionally, there is no impact on the pension liability or net assets, cash flows (including tax payments) or covenants as a result of this change.

(c) Estimates and judgements

The preparation of accounts requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities, income and expense. Actual results may differ from these estimates.

263

The significant judgements made in the accounts for the year ended 31 August 2014 are:

Retirement benefit obligation

The Group recognises and discloses its retirement benefit obligation in accordance with the measurement and presentational requirement of IAS 19 'Retirement Benefit Obligations'. The calculations include a number of judgements and estimations in respect of the expected rate of return on assets, the discount rate, inflation assumptions, the rate of increase in salaries and life expectancy, amongst others. Changes in these assumptions can have a significant effect on the value of the retirement benefit obligation. Management make these judgements in consultation with an independent actuary. Details of the judgements made in calculating the transactions are disclosed in Note 6.

In order to substantially reduce the volatility in the underlying investment performance and reduce the risk of a significant increase in the obligation, the Smiths News defined benefit scheme Pension Trust Trustee has adopted a Liability Driven Investment policy. This is discussed in more detail in Note 6.

Impairment of Goodwill

Determining whether goodwill is impaired requires an estimation of the value in use of the cash generating units to which goodwill has been allocated. The value in use calculation requires the entity to estimate the future cash flows expected to arise from the cash generating unit and a suitable discount rate in order to calculate present value. No impairment loss was recognised for any cash generating unit as the present value of the goodwill was greater than the carrying amount that was held on the balance sheet. However, an impairment of £0.5m was recognised for a customer relationship intangible assets with regard to the Blackwell contract. Details of the value in use calculation are provided in Note 11b.

Revenue recognition

Revenue from the sale of goods is recognised when goods are delivered and title has passed. Revenue represents the amounts receivable for goods and services provided in the normal course of business, net of discounts, returns, VAT and other sales related taxes.

The recognition of revenue involves a number of judgements and estimations, including the level of future returns. The Group records a returns reserve against the sales and cost of sales on the supply of newspapers and magazines on a sale or return basis. The provision is calculated in accordance with historical experience.

Valuation of acquired intangibles

The valuation of acquired intangibles requires an estimation of value based on discounted future cashflows. The cashflows modelled represent the stand alone business acquired and do not include any synergies that may be available to the Group. The discount rate used is specific to each class of asset and specific to each acquisition. The key judgements are future cash flows and the discount rate.

Onerous property contracts

Property provisions require an estimate to be made of the net present value of the future costs of vacant and sublet properties. The calculation includes estimates of future cost involved, including management's estimate of the long-term letting potential of the properties. Potential liabilities could crystallise in respect of previous assignments of leases where the liability could revert to the Group if the lessee defaulted. Pursuant to the terms of the Demerger Agreement any such contingent liability in respect of assignment prior to the demerger which becomes an actual liability will be apportioned between Connect Group PLC and WH Smith PLC in the ratio 35:65 (provided that the actual liability of Connect Group PLC in any 12 month period does not exceed £5m). The exposure to leases is reviewed on a regular basis and provisions are made when management estimate that it is probable that economic outflow will result.

264

Taxation judgements

The Group recognises provisions for uncertain tax positions in accordance with the recognition and measurement criteria of both IAS12 ‘Income Taxes’ and IAS37 ‘Provisions, Contingent Liabilities and Contingent Assets’. Provisions for uncertain tax positions are recognised when the Group has a present obligation as a result of a past event in respect of known tax risks (both UK and overseas) and when it is more likely than not that an outflow of economic benefits will be required to settle those obligations. Provisions for uncertain tax positions are measured based upon management’s best estimate of the economic outflow and are re-measured annually at each balance sheet date, which estimates inherently involve significant judgment.

(d) Adjusted measures

The Group uses certain measures for internal reporting purposes and employee incentive arrangements. The terms ‘net debt’, ‘free cash flow’, ‘underlying profit’, ‘Adjusted EBITDA’ and ‘non-recurring and other items’ are not defined terms under IFRS and may not be comparable with similar measures disclosed by other companies.

The following are the key non-IFRS measures identified by the Group:

Underlying profit

Profit before non-recurring and other items.

Non-recurring and other items

Non-recurring and other items are material items of income or expense and include certain Mergers & Acquisitions related costs, business restructuring costs and network re-organisation costs including those relating to strategy changes which are not normal operating costs of the underlying business. They are disclosed and described separately in the accounts where it is necessary to do so to provide further understanding of the financial performance of the Group.

Free cash flow

Free cash flow is calculated as group underlying operating profit adjusted for depreciation, amortisation, movements in working capital, capital expenditure, net interest, tax and cash pension funding and excludes non-recurring items, dividends, new finance lease, share purchases and any acquisition related costs.

Adjusted EBITDA

Adjusted EBITDA is calculated as operating profit before depreciation, amortisation and non-recurring items.

In line with loan agreements adjusted EBITDA used for covenant calculations is calculated as operating profit before depreciation, amortisation, non-recurring items and share based payments charge but after adjusting for the last 12 months of profits for any acquisitions or disposals made in the year.

Net debt

Net debt is calculated as total debt less cash and cash equivalents. Total debt includes loans and borrowings, overdrafts and obligations under finance leases.

(e) Revenue

265

(f) Operating profit

Operating profit is stated after charging non recurring and other items of an exceptional nature and after the share of results of associates but before investment income and finance costs.

(g) Taxation

Income tax on the profit or loss for the year comprises current and deferred tax. Current tax is the expected tax payable based on the taxable profit for the year, using tax rates enacted, or substantively enacted at the balance sheet date and any adjustment to tax payable in respect of previous years.

Deferred tax is provided on the balance sheet liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The amount of deferred tax provided is calculated using tax rates enacted or substantively enacted at the balance sheet date and are expected to apply when the related deferred tax asset is realised or the deferred tax liability is settled. Deferred tax assets are recognised to the extent that it is probable that future taxable profits will be available against which these temporary differences can be utilised.

(h) Dividends

Interim and final dividends are recorded in the financial statements in the period in which they are paid.

(i) Capitalisation of internally generated development costs

Expenditure on developed software is capitalised when the Group is able to demonstrate all of the following: the technical feasibility of the resulting asset; the ability (and intention) to complete the development and use it; how the asset will generate probable future economic benefits; and the ability to measure reliably the expenditure attributable to the asset during its development. Subsequently to initial recognition, internally generated intangible assets are reported at cost less accumulated amortisation and accumulated impairment losses, on the same basis as intangible assets that are acquired separately.

(j) Jointly controlled entities and associates

The Group Accounts include the Group's share of the total recognised gains and losses in its joint controlled entities and associates on an equity accounted basis.

Investments in jointly controlled entities and associates are carried in the balance sheet at cost adjusted by post-acquisition changes in the Group's share of the net assets of the jointly controlled entities and associates, less any impairment losses. The carrying values of investments in jointly controlled entities and associates include acquired goodwill. Losses in a jointly controlled entity or associate in excess of the Group's interest in the jointly controlled entity or associate are recognised only to the extent that the Group has incurred legal or constructive obligations or made payments on behalf of the jointly controlled entity or associate.

(k) Property, plant and equipment

Property, plant and equipment assets are stated at cost less accumulated depreciation and any recognised impairment losses. No depreciation has been charged on freehold land. Other assets are depreciated, to a residual value, on a straight-line over their estimated useful lives, as follows:

Freehold and long term leasehold properties	-	over 20 years
Fixtures and fittings	-	3 to 15 years
Equipment	-	5 to 12 years
Computer equipment	-	up to 5 years
Vehicles	-	up to 5 years

Short term leasehold properties – shorter of the lease period and the estimated remaining economic life.

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. All property, plant and equipment is reviewed for impairment in accordance with IAS 36 ‘Impairment of Assets’ when there are indications that the carrying value may not be recoverable.

(l) Leasing

Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases. Property, plant and equipment held under finance leases is capitalised in the balance sheet at the lower of the fair value or the present value of the minimum lease payments and is depreciated over its useful life. The capital elements of future obligations under leases are included as liabilities in the balance sheet. Lease payments are apportioned between finance charges and reduction of the lease obligation so as to achieve a constant rate of return on the remaining balance of the liability.

Rentals paid under operating leases are charged to income on a straight line basis over the lease term. The benefits of rent free periods and similar incentives are credited to the income statement on a straight-line basis over the full lease term.

(m) Inventories

Inventories comprise goods held for resale and are stated at the lower of cost or net realisable value. Inventories are valued using a weighted average cost method. Cost comprises direct materials and, where applicable, direct labour costs and those overheads that have been incurred in bringing the inventories to their present location and condition.

(n) Trade receivables

Trade receivables do not carry any interest and are stated at their fair value. They are measured at amortised cost using the effective interest rate method. Appropriate allowances for estimated irrecoverable amounts are recognised in the income statement when there is evidence that the asset is impaired.

(o) Trade payables

Trade payables are initially measured at fair value, and are subsequently measured at amortised cost, using the effective interest rate method.

(p) Treasury

Cash and cash equivalents

Cash and cash equivalents in the balance sheet comprise cash at bank and in hand and short term deposits with an original maturity of three months or less.

Financial liabilities and equity

Financial liabilities and equity instruments are classified according to the substance of the contractual arrangements entered into. An equity instrument is any contract that evidences a residual interest in the assets of the Group after deducting all of its liabilities. Equity instruments issued are recorded at the proceeds received, net of direct issue costs.

Bank borrowings

Interest bearing bank loans and overdrafts are initially measured at fair value (being proceeds received, net of direct issue costs), and are subsequently measured at amortised cost, using the effective interest rate method. Finance charges, including premiums payable on settlement or redemptions and direct issue costs are accounted for on an accruals basis and taken to the income

267

statement using the effective interest rate method and are added to the carrying value of the instrument to the extent that they are not settled in the period in which they arise.

Derivative financial instruments and hedge accounting

The Group uses derivative financial instruments to reduce exposure to interest rate movements. The Group does not hold derivative financial instruments for speculative purposes.

Derivative financial instruments are initially recognised at fair value on the date a derivative is entered into and are subsequently re-measured at fair value. The method of recognising the resulting gain or loss depends on whether the derivative is designated as a hedging instrument and, if so, the nature of the item being hedged.

Derivative financial instruments and hedge accounting (continued)

Where a derivative financial instrument is designated as a cash flow hedging instrument, the effective part of any gain or loss on the derivative financial instrument is recognised directly in equity. The ineffective part of any gain or loss is recognised immediately in the income statement. When the forecast transaction subsequently results in the recognition of a non-financial asset or liability the associated cumulative gain or loss is removed from equity and included in the initial cost of the non-financial asset or liability. When the forecast transaction subsequently results in the recognition of a financial asset or liability, the associated cumulative gain or loss that was recognised directly in equity is reclassified into the income statement in the same period during which the asset acquired or liability assumed affects the income statement. Changes in the fair value of derivative financial instruments, where they are not designated as hedging instruments, are recognised in the income statement as operating costs.

Hedge accounting is discontinued when the hedging instrument expires or is sold, terminated, 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 net income or expense for the year.

Derivatives embedded in other financial instruments or other host contracts are treated as separate derivatives when their risks and characteristics are not clearly and closely related to those of host contracts and the host contracts are not carried at fair value with unrealised gains or losses reported in the income statement.

Foreign currencies

Financial statements of foreign operations

The assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and are translated at foreign exchange rates ruling at the balance sheet date. The revenues and expenses of foreign operations are translated at an average rate for the period where this rate approximates to the foreign exchange rates ruling at the dates of the transactions.

Net investment in foreign operations

Exchange differences arising from this translation of foreign operations, and of related qualifying hedges are taken directly to equity. They are recycled into the income statement upon disposal.

Foreign currency transactions

Transactions in foreign currencies are recorded using the rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated at the foreign exchange rate ruling at that date. Foreign exchange differences arising on translation are recognised in the income statement. Non-monetary assets and liabilities that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction. Non-monetary assets and liabilities denominated in foreign currencies that are

268

stated at fair value are translated at foreign exchange rates ruling at the dates the fair value was determined.

(q) Provisions

Provisions are recognised 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. Provisions are measured at the Directors' best estimate of the expenditure required to settle the obligation at the balance sheet date and if this amount is capable of being reliably estimated. If such an obligation is not capable of being reliably estimated, no provision is recognised and the item is disclosed as a contingent liability where material. Where the effect is material, the provision is determined by discounting the expected future cashflows.

(r) Retirement benefit costs

The Group operates a number of defined contribution schemes for the benefit of its employees. Payments to the Group's schemes are recognised as an expense in the income statement as incurred. The Group operates 3 defined benefit pension schemes. The two largest schemes The WH Smith Pension Trust and The Consortium Care Scheme are closed to further accrual. The charge to the Group of providing benefits for these two schemes is determined by the Projected Unit Credit Method, with actuarial calculations being carried out at the balance sheet date. Actuarial gains and losses are recognised in full in the period in which they occur in the group statement of comprehensive income. The retirement benefit obligation recognised in the balance sheet represents the present value of the defined benefit obligation adjusted for unrecognised past service cost, reduced by the fair value of scheme assets.

The WH Smith Pension Trust is closed to further accrual and given the LDI policy adopted by the Pension Trustee, the present value of the economic benefits of the IAS 19 (revised) surplus in the pension scheme of £75.7m (2013: £53.2m) available on a reduction of future contributions is £nil (2013: £nil). The Group recognises an onerous liability for the future agreed deficit contributions, a liability of £17.3m (2013: £20.3m).

(s) Employee Benefit Trust

Smiths News Employee Benefit Trust

The shares held by the Smiths News Employee Benefit Trust are valued at the historical cost of the shares acquired. This value is deducted in arriving at shareholders' funds and presented as another reserve in line with IAS 32 'Financial Instruments: Disclosure and Presentation'.

(t) Share schemes

Share based payments

The Group operates several share-based payment schemes, the largest of which are the Sharesave Scheme, the Executive Share Option Plan, the Long Term Incentive Plan (LTIP) and the Deferred Bonus Plan. Details of these are provided in the Remuneration report.

Equity-settled share-based schemes and are measured at fair value at the date of grant. The fair value is expensed with a corresponding increase in equity on a straight-line basis over the period during which employees become unconditionally entitled to the options. The fair values are calculated using an appropriate option pricing model. The income statement charge is then adjusted to reflect expected and actual levels of vesting based on non-market performance related criteria.

Administrative expenses and distribution and marketing expenses include the cost of the share-based payment schemes.

(u) Changes in accounting policies

New Standards and Interpretations not yet applied.

269

At the date of authorisation of these financial statements, the following Standards and Interpretations that are potentially relevant to the Group and which have not been applied in these financial statements were in issue but not yet effective (and in some cases had not yet been adopted by the EU):

IFRS 9 “Financial Instruments: Classification and measurement” – effective for accounting periods beginning on or after 1 January 2018. – IFRS 10 “Consolidated Financial Statements”
IFRS 10, IFRS 12 and IAS 27 (amended) “Investment Entities”
IFRS 11 “Joint Arrangements”
IFRS 12 “Disclosure of Interest in Other Entities”
IAS 19 (amended) “Defined Benefit Plans: Employee Contributions”
IAS 27 (revised) “Separate Financial Statements”
IAS 28 (revised) “Investments in Associates and Joint Ventures”
IAS 32 (amended) “Offsetting Financial Assets and Financial Liabilities”
IAS 32 (amended) “Offsetting Financial Assets and Financial Liabilities”
IAS 39 (amended) “Novation of Derivatives and Continuation of Hedge Accounting”

The Directors anticipate that the adoption of these Standards and Interpretations in future periods will have no material impact on the financial statements of the Group, except for IFRS 9 “Financial Instruments”, which will introduce a number of changes in the presentation of financial instruments.

New Standards and Interpretations applied for the first time.

IAS 1 (revised) requires that items of Other comprehensive income that may in future be recycled to the Consolidated Income Statement are presented separately from those which will not. This presentational change has been made to the Consolidated Statement of Comprehensive Income in the current year.

The following Standards with an effective date of 1 January 2013 have been adopted without any significant impact on the amounts reported in these financial statements:

IFRS 7 (amended) “Disclosures – Offsetting Financial Assets and Financial Liabilities”
IFRS 13 “Fair Value Measurement”
IAS 12 (amended) “Deferred Tax: Recovery of Underlying Assets”

2. Segmental analysis

In accordance with IFRS 8 “Operating Segments”, Group management has identified its operating segments. The performance of these operating segments is reviewed, on a monthly basis, by the Board. The Board monitors the tangible, intangible and financial assets attributable to each segment to determine the allocation of resources and the performance of each segment.

These operating segments are:

Connect News & Media: News Distribution (referred to as Smiths News)

Connect News & Media: Media (referred to as DMD)

The UK market leading distributor of newspapers and magazines to 30,000 retailers across England and Wales from 43 distribution centres.

A supplier of newspaper and magazines to airlines and a provider of inflight services.

270

Connect Books (referred to as Bertram, Dawson Books and Wordery)

Connect Education and Care (referred to as The Consortium)

A leading UK distributor of physical and digital books to high street and on-line retailers, public libraries, academic institutions and direct to consumers with a strong international presence, supplying 100 countries.

A leading distributor of education and care consumable products servicing 30,000 customers across the UK.

The following is an analysis of the Group's revenue and results by reportable segment:

	Revenue		Operating profit
		2013¹		2013¹
£m	2014	Restated	2014	Restated
Connect News & Media: News Distribution	1,524.8	1,529.3	42.9	40.0
Connect News & Media: Media	25.1	25.9	2.3	1.8
Connect Books	193.7	187.9	2.5	7.2
Connect Education and Care	64.9	63.8	7.8	7.4
Total group – underlying	1,808.5	1,806.9	55.5	56.4
Non-recurring and other items (Note 4)	–	3.9	(6.9)	(10.8)
Total Group revenue and operating profit	1,808.5	1,810.8	48.6	45.6
Net finance expense			(5.5)	(6.7)
Profit before taxation			43.1	38.9

Note:
1 Restatement in respect of retirement benefit obligations, see Note 34.

The accounting policies of the reportable segments are the same as the Group's accounting policies described in Note 1.

Information about major customers

Included in revenues arising from newspaper and magazine wholesaling are revenues of approximately £162.1m.

(2013: £164.5m) which arose from sales to the Group's largest customer. No other single customer contributed 10% or more of the Group's revenue in either 2014 or 2013.

Segment assets and liabilities

	Assets		Liabilities		Net assets/ (liabilities)
£m	2014	2013	2014	2013	2014	2013
Connect News & Media: News	144.5	142.3	(261.1)	(266.5)	(116.6)	(124.2)
Connect News & Media: Media	18.8	16.0	(7.2)	(7.3)	11.6	8.7
Connect Books	79.8	75.7	(56.9)	(54.6)	22.9	21.1
Connect Education and Care	57.8	55.0	(17.8)	(17.5)	40.0	37.5
Consolidated assets/(liabilities)	300.9	289.0	(343.0)	(345.9)	(42.1)	(56.9)

Segment depreciation, amortisation and non-current asset additions

	Depreciation		Amortisation		Additions to non-current assets
£m	2014	2013	2014	2013	2014	2013
Connect News & Media: News	(4.0)	(4.3)	(1.4)	(1.3)	7.7	6.7
Connect News & Media: Media	(0.1)	(0.1)	(0.3)	(0.3)	–	–
Connect Books	(0.6)	(0.4)	(2.4)	(2.2)	2.5	5.6
Connect Education and Care	(0.5)	(0.5)	(1.7)	(1.2)	1.2	1.6
Consolidated total	(5.2)	(5.3)	(5.8)	(5.0)	11.4	13.9

Geographical analysis

	Revenue by destination		Non-current assets by location of operation
£m	2014	2013	2014	2013
United Kingdom	1,729.9	1,734.4	98.6	98.7
Europe	51.2	47.9	0.2	0.2
Rest of World	27.4	28.5	–	–
Consolidated total	1,808.5	1,810.8	98.8	98.9

3. Operating profit

The Group’s results are analysed as follows:

£m	Note	2014		Restated 2013^{1}
		Underlying	Non-Recurring	Total	Underlying	Non-Recurring	Total
Revenue		1,808.5	–	1,808.5	1,806.9	3.9	1,810.8
Cost of inventories recognised as an expense		(1,607.7)	–	(1,607.7)	(1,606.2)	–	(1,606.2)
Write down of inventories recognised as an expense		(0.6)	–	(0.6)	–	–	–
Other cost of sales		(1.2)	–	(1.2)	(0.1)	(2.2)	(2.3)
Cost of sales		(1,609.5)	–	(1,609.5)	(1,606.3)	(2.2)	(1,608.5)
Gross profit		199.0	–	199.0	200.6	1.7	202.3
Distribution costs		(73.9)	–	(73.9)	(81.0)	(2.9)	(83.9)
Administrative expenses		(65.6)	(3.4)	(69.0)	(59.3)	(6.8)	(66.1)
Share-based payment expense	31	(1.5)	–	(1.5)	(1.9)	–	(1.9)
Amortisation of intangibles	11	(2.8)	(3.0)	(5.8)	(2.2)	(2.8)	(5.0)
Impairment	11	–	(0.5)	(0.5)	–	–	–
Administrative expenses		(69.9)	(6.9)	(76.8)	(63.4)	(9.6)	(73.0)
Share of profits from jointly controlled entities	15	0.3	–	0.3	0.2	–	0.2
Operating profit		55.5	(6.9)	48.6	56.4	(10.8)	45.6

Note:
1. Restatement in respect of retirement benefit obligations, see Note 34.

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

£m	Note	2014	2013
Depreciation on property, plant & equipment	14	5.2	5.3
Amortisation of intangible assets	11	5.8	5.0
Operating lease charges
- occupied land and buildings		8.5	8.9
- vacant land and buildings		0.5	0.9
- equipment and vehicles		0.8	2.2
Operating lease rental income – land and buildings		(0.1)	(0.4)
Loss on disposal of fixed assets		-	0.2
Staff costs	5	93.4	103.6

Included in administrative expenses are amounts payable to Deloitte LLP and their associates by the Company and its subsidiary undertakings in respect of audit and non-audit services which are as follows:

£m	2014	2013
Fees payable to the Company’s auditor for the audit of the Company’s annual accounts	0.1	0.1
Fees payable to the Company’s auditor for the audit of the Company’s subsidiaries	0.2	0.2
Total audit fees	0.3	0.3
Digital strategy review	-	0.3
Other services	0.1	0.1
Total non-audit fees	0.1	0.4
Total fees	0.4	0.7

In the current year the Group incurred £0.1m of non-audit fees with Deloitte relating to remuneration advice and other advisory services.

During the prior year the Group commissioned an extension of the digital strategy review of the books market to consider technology and market entry strategies. After careful consideration of proposals from a number of providers the Board appointed a Deloitte digital strategy team based on market understanding, service and price.

4. Non-recurring and other items

		2014	2013¹
£m			Restated
Integration costs		-	(1.1)
Network re-organisation costs	(a)	(3.0)	(3.3)
Acquisition and disposal costs	(b)	(0.9)	(3.7)
Release of property provisions	(c)	0.5	-
Impairment	(d)	(0.5)	-
Amortisation of acquired intangibles	(e)	(3.0)	(2.8)
Disposal of MMC	(f)	-	0.1
Total before, finance costs and taxation		(6.9)	(10.8)
Finance costs		-	(0.2)
Total before taxation		(6.9)	(11.0)
Income tax expense		1.0	1.3
Total after taxation		(5.9)	(9.7)

Note:
1. Restatement in respect of retirement benefit obligations, see Note 34.

The Group incurred a total of £5.9m (2013: £9.7m) in non-recurring and other costs, after tax. This comprises:

(a) Network reorganisation costs

Network reorganisation costs of £3.0m have been incurred across the Group. The largest elements of which relate to the network restructuring programme within Connect News and Media. In addition cost reduction actions taken within Connect Books resulted in a cost of £0.5m. The largest cost category was redundancy costs of £1.6m.

(b) Acquisition and disposal costs

Acquisition and disposal costs of £0.9m relate primarily to reviewing and targeting future acquisitions, together with the final apportionment of deferred consideration from the acquisition of The Consortium in April 2012 and costs associated with the acquisition of Martin Lavell in September 2013.

In the prior year acquisition costs of £3.7m have been incurred including the Consortium acquisition deferred consideration of £3.2m which has been recognised in the Income Statement, the costs having been spread over the earn out periods at the expected payout levels given the business’ strong profit performance. Acquisition and new venture set up costs in respect of Erasmus, selected contracts from Blackwell Books Limited and Bertrams direct to consumer proposition were £0.5m.

During the year the Group has released £0.5m relating to the historical property reversionary lease provisions following the settlement of two historical claims.

(d) Impairment

During the year we have reviewed the carrying value of acquired intangibles from the acquisition of Blackwell customer relationships in the Books division and as a result of lower than anticipated sales conversion we have written off £0.5m.

(e) Amortisation of acquired intangibles

Amortisation of acquired intangibles of £3.0m has been incurred relating to acquisitions amortised over their expected economic lives for which there is no ongoing cash impact. This leaves a further £15.2m net book value to be amortised over future years. During the year the estimated useful economic lives of Customer Relationships and Trade Names have been reviewed and have been reduced from a maximum of 10 years to a maximum of 7.5 years. As a result an incremental amortisation charge of £0.6m has been incurred in the year.

(f) Disposal of MMC

On 1 May 2013, the Group disposed of 100% of the share capital in Dawson Marketing Services Limited and its trading subsidiary Marketlink Marketing Communications Limited (“MMC”) for £0.3m. Due to the nature and size of the business disposed investment, it has not been separately disclosed as a discontinued operation as defined by IFRS5 - Non Current Assets Held for Sale and Discontinued Operations.

MMC contributed £3.9m to revenue and £0.1m to the Group’s operating profit in 2013.

274

275

5. Staff costs and employees

(a) Staff costs

The aggregate remuneration of employees (including executive directors) was:

£m	Note	2014	2013 Restated
Wages and salaries		82.5	81.2
Social security		6.6	6.5
Pension costs	6	2.8	3.1
Share based payments	31	1.5	1.9
Total		93.4	92.7

Pension costs shown above exclude charges and credits for pension scheme financing and actuarial gains and losses arising on the pension scheme.

For comparability, prior year has been restated to exclude costs of £10.9m for individuals not directly under contracts of service.

(b) Employee numbers

The average total monthly number of employees (including executive directors) was:

Number	2014	2013
Operations	3,446	4,036
Support functions	932	758
Total	4,378	4,794

6. Retirement benefit obligation

Defined benefit pension schemes

The Group operates three defined benefit schemes, of which the WH Smith Pension Trust (the "Pension Trust") represents over 96% of the total obligation at 31 August 2014. As part of the acquisition of the Consortium, the Group acquired the assets and liabilities in respect of two other defined benefit schemes (the "Consortium CARE" and "Platinum" schemes).

The Group's defined benefit pension plans are final salary pension plans, which provide benefits to members in the form of a guaranteed level of pension payable for life. The level of benefits provided depends on members' length of service and their salary in the final years leading up to retirement. Benefits are paid to members from trustee-administered funds, the trustees are responsible for ensuring that the plan is sufficiently funded to meet current and future benefit payments. If investment experience is worse than expected, the Group's obligations are increased.

The trustees must agree a funding plan with the sponsoring company such that any funding shortfall is expected to be met by additional contributions and investment performance. In order to assess the level of contributions required, triennial valuations are carried out with plan's obligations measured using prudent assumptions (relative to those used to measure accounting liabilities). The trustees' other duties include managing the investment of plan assets, administration of plan benefits and exercising of discretionary powers.

The amounts recognised in the balance sheet are as follows:

£m	WH Smith			WH Smith
	Pension	Consortium	2014	Pension	Consortium	2013
Present value of defined benefit obligation	(431.6)	(18.4)	(0.6)	(450.6)	(402.1)	(16.8)	(0.3)	(419.2)
Fair value of assets	507.3	14.4	0.9	522.6	455.3	13.8	0.5	469.6
Net surplus	75.7	(4.0)	0.3	72.0	53.2	(3.0)	0.2	50.4
Amounts not recognised due to asset limit	(75.7)	-	-	(75.7)	(53.2)	-	-	(53.2)
	-	(4.0)	0.3	(3.7)	-	(3.0)	0.2	(2.8)
Additional liability recognised due to minimum funding requirements	(17.3)	-	-	(17.3)	(20.3)	-	-	(20.3)
Pension liability	(17.3)	(4.0)	-	(21.3)	(20.3)	(3.0)	-	(23.3)
Pension asset	-	-	0.3	0.3	-	-	0.2	0.2

The primary defined benefit pension scheme (the Smiths News Section of the WH Smith Pension Trust) has an IAS 19 surplus of £75.7m at 31 August 2014 (2013 £53.2m surplus) which the Group does not recognise in the accounts as the investment policy being used means that the amount available on a reduction of future contributions is expected to be £nil (2013: £nil). The valuation of the defined benefit schemes for the IAS 19 disclosures have been carried out by independent qualified actuaries based on updating the most recent funding valuations of the respective schemes, adjusted as appropriate for membership experience and changes in the actuarial assumptions.

The actuarial valuation for funding purposes produces a scheme deficit due to different assumptions and calculation methodologies used compared to those under IAS 19, most notably the use of a discount rate that reflects the actual investment strategy, rather than corporate bond yields as required under IAS 19.

In the prior year the triennial actuarial valuation of the Smiths News section of the WH Smith Pension Trust, effective 31 March 2012 was agreed at a liability of £33.0m. The deficit in the scheme was £23.0m when last estimated at 19 June 2013, reduced from £50.0m at the last valuation date of March 2009. The next valuation date for the scheme will be 31 March 2015.

Future cash contributions by the Group to address this reduced deficit will be £4.1m per annum through to March 2019. The Group recognises the present value of these agreed contributions as a pension liability of £17.3m (FY2013 £20.3m).

IAS 19 (Revised) has been adopted in the year ended 31 August 2014. This required a change in accounting policy to reflect pension interest in the income statement calculated on the net balance sheet position at the beginning of the period. The resulting non-cash pension charge for the period ended 31 August 2014 was £0.9m. The prior period for the year ended 31 August 2013 was restated as described in Note 34.

Other defined benefit schemes

For the Consortium CARE and Platinum schemes, the Group contributed £0.4m in 2014. The next funding valuation of the Consortium CARE scheme was due on 31 December 2013 and has not yet been finalised. The results of the Platinum scheme's 31 December 2012 funding valuation are not yet finalised.

Across all three of the Groups' schemes the expected level of contributions for FY2015 is £4.9m.

The weighted average duration of the schemes is 18 years for the Pension Trust, 21 years for the Consortium Care scheme and 31 years for the Platinum scheme.

The principal long-term assumptions used to calculate scheme liabilities on all Group schemes are:

% p.a.	2014	2013
Discount rate	3.85	4.45
Inflation assumptions – CPI	2.25	2.45
Inflation assumptions – RPI	3.25	3.45

A summary of the movements in the net balance sheet asset/(liability) and amounts recognised in the Group Income Statement and Other Comprehensive Income are as follows:

	Fair value of scheme assets	Defined benefit obligation	Impact of IFRIC 14 on defined benefit pension schemes	Net asset/ (liability) on balance sheet
£m
At 31 August 2012	433.1	(395.3)	(73.8)	(36.0)
Current service cost	-	(0.4)	-	(0.4)
Net interest cost – Restated¹	17.6	(16.1)	(3.1)	(1.6)
Total amount recognised in income statement – Restated¹	17.6	(16.5)	(3.1)	(2.0)
Actual less expected return on scheme assets	27.9	-	-	27.9
Actuarial losses arising from experience	-	(1.4)	-	(1.4)
Actuarial loss arising from changes in financial assumptions	-	(21.6)	-	(21.6)
Actuarial loss arising from changes in demographic assumptions	-	(0.4)	-	(0.4)
Change in surplus not recognised – Restated¹	-	-	3.4	3.4
Amount recognised in other comprehensive income	27.9	(23.4)	3.4	7.9
Employer contributions	7.0	-	-	7.0
Benefit payments	(16.0)	16.0	-	-
Amounts included in cash flow statement	(9.0)	16.0	-	7.0
At 31 August 2013	469.6	(419.2)	(73.5)	(23.1)
Current service cost	(1.3)	1.2	-	(0.1)
Net interest cost	20.6	(18.2)	(3.3)	(0.9)
Total amount recognised in income statement	19.3	(17.0)	(3.3)	(1.0)
Actual less expected return on scheme assets	44.6	-	-	44.6
Actuarial losses arising from experience	-	0.8	-	0.8
Actuarial loss arising from changes in financial assumptions	-	(33.3)	-	(33.3)
Actuarial loss arising from changes in demographic assumptions	-	2.6	-	2.6
Change in surplus not recognised	-	-	(16.2)	(16.2)
Amount recognised in other comprehensive income	44.6	(29.9)	(16.2)	(1.5)
Employer contributions	4.6	-	-	4.6
Benefit payments	(15.4)	15.4	-	-
Amounts included in cash flow statement	(10.8)	15.4	-	4.6
At 31 August 2014	522.7	(450.7)	(93.0)	(21.0)
Included within Non-current assets				0.3
Included within Current liabilities				(4.1)
Included within Non-current liabilities				(17.2)

Note:
1 Restatement in respect of retirement benefit obligations, see Note 34.

The charge for the current service cost is included within administrative expenses. 'Net interest costs' are calculated by applying a discount rate to the net defined benefit asset or liability scheme assets and are included within finance income and expense.

An analysis of the assets at the balance sheet date is detailed below:

£m		2014	2013
Swap financing portfolio1	Unquoted	477.0	439.1
Interest rate and inflation swaps	Unquoted	6.2	(11.8)
Loan fund2	Unquoted	24.2	-
Equity call options3	Unquoted	-	27.9
Equities (CARE)	Unquoted	10.4	10.2
Bonds (CARE, Platinum)	Unquoted	4.7	4.2
Cash (CARE)		0.2	-
		522.7	469.6

Notes:

Investments with the aim of generating a return above LIBOR to finance the interest and inflation swaps in the Pension Trust. At 31 August 2014 this comprised £270m in asset and total return swap contracts and £180m in a fund comprising a range of assets from government bonds to hedge funds that targets a return above LIBOR.
The loan fund looks to generate a return over a portfolio of loans.
The equity option portfolio as at 31 August 2013 represented a notional upside exposure to equities of around £140m.

The assets held in the swap financing portfolio provide a swap-based hedge against the change in value of a proportion of the Trust's liabilities for changes in long-term interest rates and inflation expectations.

The actual return on scheme assets during 2014 was a gain of £65.2m (2013: a gain of £45.5m).

The value of the assets held by the trust in Connect Group PLC issued financial instruments is nil (2013: nil).

Sensitivity of results to changes in the main assumptions:

Assumption	Change in assumption	Impact on IAS 19 liabilities
Discount rate	Decrease by 0.5% p.a.	Increase by £41m
Rate of inflation	Increase by 0.5% p.a.	Increase by £36m
Life expectancy	Increase by 1 year	Increase by £16m

The sensitivity analysis for each significant actuarial assumption has been determined based on reasonably possible changes to the assumptions at the end of the reporting period. It is based on a change in the key assumption while holding all other assumptions constant. The effect of a change in more than one assumption will be different to the sum of the individual changes. When calculating the sensitivities, the same methodology used to calculate the liability recognised in the balance sheet has been applied. The methodology and types of assumptions used in preparing the sensitivity analysis is consistent with the previous period.

The history of experience adjustments is as follows:

£m	2014	2013	2012	2011	2010
Present value of defined benefit obligation	(450.7)	(419.2)	(395.3)	(348.3)	(367.4)
Fair value of assets	522.7	469.6	433.1	375.1	408.6
Impact of IFRIC 14 on defined benefit pension schemes	(93.0)	(73.5)	(73.8)	(63.1)	(41.2)
Net deficit in the schemes	(21.0)	(23.1)	(36.0)	(36.3)	-
Experience adjustments on scheme liabilities	0.8	(1.4)	(1.0)	(4.1)	(1.4)
Experience adjustments on scheme assets	44.6	27.9	34.0	(45.8)	39.1

The cumulative amount of actuarial gains and losses recognised in the statement of comprehensive income since the adoption of IFRS is a loss of £21.4m (2013: a loss of £36.2m restated).

The group’s defined benefit pension plans have a number of areas of risk, the most significant of which and they ways in which the Group has sought to manage them are set out below:

Risk	Description
Changes in bond yields	Falling bond yields tend to increase the funding and accounting liabilities.
	The assets held in the swap financing portfolio of the Trust provide a swap-based hedge against the change in value of a proportion of the Trust’s liabilities for changes in long-term interest rates and inflation expectations, reducing the exposure to changes in bond yields.
	The Care and Platinum schemes both hold investments in corporate and government bonds which offer a degree of matching, i.e. the movement in assets arising from changes in bond yields partially matches the movement in the funding or accounting liabilities. In this way, the exposure to movements in bond yields is reduced.
Inflation risk	The plans’ benefit obligations are linked to inflation and higher inflation will lead to higher liabilities (although in most cases caps on the level of inflationary increases are in place to protect the plan against extreme inflation).
	The assets held in the swap financing portfolio of the Trust provide a swap-based hedge against the change in value of a proportion of the Trust’s liabilities for changes in long-term interest rates and inflation expectations, reducing the exposure to inflation.
	For the Care and Platinum schemes the majority of the assets are either unaffected by inflation (fixed interest bonds) or loosely correlated with inflation (equities), meaning that an increase in inflation will also increase the deficit.
Life expectancy	The majority of the plans’ obligations are to provide a pension for the life of the member, so increases in life expectancy will result in an increase in the plans’ liabilities.

Defined contribution schemes

The Group operates a number of defined contribution schemes. For the year ended 31 August 2014, company contributions totalled £2.8m (2013: £3.1m) which is included in the Income Statement.

A defined contribution plan is a pension plan under which the group pays contributions to an independently administered fund – such contributions are based upon a fixed percentage of employees’ pay. The group has no legal or constructive obligations to pay further contributions to the fund once the contributions have been paid. Members’ benefits are determined by the amount of contributions paid by the Company and the member, together with investment returns earned on the contributions arising from the performance of each individual’s chosen investments and the type of pension the member chooses to buy at retirement. As a result, actuarial risk (that benefits will be lower than expected) and investment risk (that assets invested in will not perform in line with expectations) fall on the employee.

279

Investment revenue and finance costs

£m	Note	2014	2013 Restated^{1}
Net change in fair value of derivative assets		0.4	0.3
Investment revenue		0.4	0.3
Interest on bank overdrafts and loans		(4.7)	(4.7)
Net interest expense on defined benefit obligation	6	(0.9)	(1.6)
Interest payable on finance leases		(0.2)	(0.2)
Unwinding of discount on provisions – trading		(0.1)	(0.3)
Underlying finance costs		(5.9)	(6.8)
Underlying net finance costs		(5.5)	(6.5)
Unwinding of discount on provisions – non-recurring		–	(0.2)
Net finance costs		(5.5)	(6.7)

Note:
1 Restatement in respect of retirement benefit obligations, see Note 34.

Income tax expense

£m	2014			2013
	Underlying	Non-Recurring and other items	Total	Restated^{1} Underlying	Non-recurring and other items	Total
Current tax	12.3	(1.0)	11.3	15.1	(1.3)	13.8
Adjustment in respect of prior year UK corporation tax	(2.4)	–	(2.4)	(2.6)	–	(2.6)
Total current tax charge	9.9	(1.0)	8.9	12.5	(1.3)	11.2
Deferred tax – current year	(0.4)	–	(0.4)	(0.7)	–	(0.7)
Deferred tax – prior year	(0.2)	–	(0.2)	(0.3)	–	(0.3)
Total tax on profit	9.3	(1.0)	8.3	11.5	(1.3)	10.2
Effective tax rate	18.7%		19.4%	23.0%		26.2%

The effective underlying income tax rate for the year was 18.7% (2013: 23.0%). After adjusting for the impact of non-recurring and other items of £1.0m (2013: £1.3m), the effective statutory income tax rate was 19.4% (2013: 26.2%).

The tax rates used in the 2014 and 2013 reconciliations of the tax charge are the main rates of UK corporation tax, those being 22.2% (2013: 23.6%).

Reconciliation of the tax charge

£m	2014	2013 Restated^{1}
Profit before tax	43.1	38.9
Tax on profit at the standard rate of UK corporation tax 22.2% (2013: 23.6%)	9.5	9.2
Permanent differences	1.3	2.9
Share schemes	(0.2)	(0.4)
Adjustment in respect of prior year UK corporation tax	(2.6)	(2.9)
Impact of overseas tax rates	0.3	1.4
Total tax charge	8.3	10.2
Tax charges to other comprehensive income and directly in equity
£m	2014	2013
Current tax relating to the defined benefit pension scheme	0.7	0.6
Current tax relating to share based payments	0.5	–
Deferred tax relating to derivative financial instruments	(0.1)	(0.3)
Deferred tax relating to share based payments	0.5	0.5
Deferred tax relating to retirement benefit obligations	(0.6)	(3.3)
Tax charges to other comprehensive income	1.0	(2.5)

Note:
1 Restatement in respect of retirement benefit obligations, see Note 34.

Dividends

Amounts paid & proposed as distributions to equity shareholders in the years:

	2014 Per share	2013 Per share	2014 £m	2013 £m
Paid & proposed dividends for the year
Interim dividend – paid	3.1p	3.0p	5.8	5.5
Final dividend – proposed	6.6p	6.3p	12.3	11.6
	9.7p	9.3p	18.1	17.1
Recognised dividends for the year
Final dividend – prior year	6.3p	5.8p	11.9	10.5
Interim dividend – current year	3.1p	3.0p	5.8	5.5
	9.4p	8.8p	17.7	16.0

The proposed final dividend for the year ended 31 August 2014 of 6.6p is subject to approval by shareholders at the Annual General Meeting on 4 February 2015 and in line with IAS10 – “Events after the reporting period”, this dividend has not been included as a liability in these accounts. The proposed dividend, if approved, will be paid on 6 February 2015 to shareholders on the register at close of business on 9 January 2015.

10. Earnings per share

	2014			2013
	£m Earnings	Weighted average number of shares million	Pence per share	£m Earnings	Restated1 Weighted average number of shares million	Pence per share
Weighted average number of shares in issue		187.7			183.9
Shares held by the ESOP (weighted)		(1.4)			(1.7)
Basic earnings per share (EPS)
Underlying earnings attributable to ordinary shareholders	40.5	186.3	21.7p	38.4	182.2	21.1p
Non-recurring & other items	(5.9)			(9.7)
Earnings attributable to ordinary shareholders	34.6	186.3	18.6p	28.7	182.2	15.7p
Diluted earnings per share (EPS)
Effect of dilutive share options		6.3			11.7
Diluted underlying EPS	40.5	192.6	21.0p	38.4	193.9	19.8p
Diluted EPS	34.6	192.6	18.0p	28.7	193.9	14.8p

1 Restatement in respect of retirement benefit obligations, see Note 34.

The acquisition of Hedgelane Limited in April 2012 included £4.0 million of deferred share capital payable contingent on profit targets and the continued employment of the former owners of Hedgelane Limited. In January 2014, 4.5 million shares were allotted in satisfaction of the deferred share capital. The weighted effect of this has been included in diluted EPS.

11. Intangible assets

11a Intangible assets

Note:

£m	Acquired Intangibles				Internally generated development costs	Computer software costs	Total
	Goodwill	Customer relationships	Trade name	Software
Cost:
At 1 September 2013	44.2	21.7	3.0	0.7	5.6	25.3	100.5
Additions	-	0.3	-	-	1.6	1.9	3.8
Disposals	-	-	-	-	(1.2)	(20.4)	(21.6)

£m	Goodwill	Acquired Intangibles			Internally generated development costs	Computer software costs	Total
		Customer relationships	Trade name	Software
At 31 August 2014	44.2	22.0	3.0	0.7	6.0	6.8	82.7
Accumulated amortisation:
At 1 September 2013	-	5.6	0.9	0.5	3.5	21.8	32.3
Amortisation charge	-	2.4	0.5	0.1	1.6	1.2	5.8
Impairment	-	0.5	-	-	-	-	0.5
Disposal	-	-	-	-	(1.2)	(20.4)	(21.6)
At 31 August 2014	-	8.5	1.4	0.6	3.9	2.6	17.0
Net book value at 31 August 2014	44.2	13.5	1.6	0.1	2.1	4.2	65.7
Cost:
At 1 September 2012	43.1	19.7	2.9	0.7	3.9	24.9	95.2
Additions	0.3	-	-	-	1.7	1.2	3.2
Acquisition of subsidiaries	0.8	2.3	0.1	-	-	-	3.2
Disposals	-	(0.3)	-	-	-	(0.8)	(1.1)
At 31 August 2013	44.2	21.7	3.0	0.7	5.6	25.3	100.5
Accumulated amortisation:
At 1 September 2012	-	3.4	0.6	0.3	2.3	21.5	28.1
Amortisation charge	-	2.3	0.3	0.2	1.2	1.0	5.0
Disposal	-	(0.1)	-	-	-	(0.7)	(0.8)
At 31 August 2013	-	5.6	0.9	0.5	3.5	21.8	32.3
Net book value at 31 August 2013	44.2	16.1	2.1	0.2	2.1	3.5	68.2

In the year the Group acquired the trade and assets of Martin Lavell giving rise to the recognition of an intangible asset of £0.3m for customer relationships.

In the prior year the £2.3m of additions to customer relationships is primarily £2.0m in relation to the acquisition of certain European and African academic library services customer relationships from Blackwell UK Limited on 20 May 2013 by Dawson Books Limited, a 100% owned subsidiary of the Group. The remaining £0.3m related to the Erasmus acquisition.

11b. Goodwill and intangibles by segment and CGU

Goodwill of £4.1m and acquired intangibles totalling £5.1m arose from the acquisition of the business and assets of Bertrams on 20 March 2009 have been allocated to the Connect Books combined cash generating unit (CGU).

The acquisition of Dawson Holdings PLC on 23 August 2011, resulted in goodwill of £18.1m and acquired intangibles of £7.8m. These have been allocated to the two remaining individual CGU's identified at the time of the acquisition; Dawson Books and Media Direct.

On the acquisition of Hedgelane Limited on 24 April 2012, the Group recognised goodwill of £20.9m and acquired intangibles of £10.4m which have been allocated to the Education and Care CGU.

The acquisition of 100% of the issued share capital of Houtschild Internationale Boekhandel B.V. on 13 June 2012 produced a further £0.3m of goodwill.

The acquisition of Erasmus on 17 January 2013 generated £0.8m of goodwill and £0.3m of acquired intangible assets.

283

The acquisition of certain Blackwell contracts on 16 April 2013 generated £2.0m of acquired intangibles.

The acquisition of trade and assets of Martin Lavell acquired on 1 September 2013 generated acquired intangibles of £0.3m.

During the year the original useful economic lives of customer relationship and trade names were reviewed and reduced from 10 years to a maximum of 7.5 years based upon managements revised assessment of future contractual renewal rates. The impact in the current year was an additional amortisation charge of £0.6m.

Goodwill is not amortised, but tested annually for impairment or more frequently if there are indications that goodwill might be impaired with the recoverable amount being determined from value in use calculations. The recoverable amounts of the combined cash generating units are determined from the value in use calculations. The Group prepares cash flow forecasts derived from the most recent budgets and forecasts for the following 3 years as approved by the Board and extrapolates these cash flows on an estimated growth rate of 1% into perpetuity. The rate used to discount the forecast cash flows range from 13.5% to 13.9%, being the Group's risk adjusted pre-tax WACC, specific for each cash generating unit. Pre-tax discount rates are derived from the Group's post-tax WACC of 9% risk adjusted by 2%. The calculation of value in use is most sensitive to the discount rate and growth rates used. In analysing the sensitivity of key assumptions, management consider that potential changes in certain assumptions could cause the carrying value to fall below recoverable amount for Connect Books. Using the key assumptions stated above the value in use exceeded the carrying amount by £16.1m. An impairment would be recognised if the discount rate was 1.9% higher or if forecast cash flows were more than 34% lower.

Management believes that no other reasonable potential change in any of the above key assumptions would cause the carrying value to exceed its recoverable amount.

£m	Goodwill		On acquisition	Acquired Intangibles		On acquisition	Total		On acquisition
	2014	2013		2014	2013		2014	2013
Connect Books	17.6	17.6	17.6	5.6	7.6	12.7	23.2	25.2	30.3
Connect Media	5.7	5.7	5.7	1.6	1.8	2.6	7.3	7.5	8.3
Connect News	-	-	-	0.2	-	0.3	0.2	-	0.3
Connect Education and Care	20.9	20.9	20.9	7.8	9.0	10.4	28.7	29.9	31.3
	44.2	44.2	44.2	15.2	18.4	26.0	59.4	62.6	70.2

The individual material intangible assets relate to the customer relationships acquired with Dawson Holdings PLC and Hedgelane Ltd. The carrying value of these assets at 31 August 2014 is £4.6m and £7.0m respectively with a remaining amortisation period of 4 and 5 years respectively.

12. Acquisitions

The Group acquired the trade and assets from Martin Lavell Ltd on 1st September 2013, a significant distributor in the Business-to-Business sector of newspaper and magazine supplies in London, for a consideration of £0.3m. The acquisition gives rise to the recognition of £0.3m intangible asset for customer relationships and contributed a profit before tax of £0.3m in year.

13. Disposals

2014

There were no disposals in the period.

284

2013

On 30 April 2013, the Group disposed of 100% of the share capital in Dawson Marketing Services Limited and its trading subsidiary Marketlink Marketing Communications Limited (“MMC”) for £0.3m. Due to the nature and size of the business disposed investment, it has not been separately disclosed as a discontinued operation as defined by IFRS5 - Non Current Assets Held for Sale and Discontinued Operations.

MMC contributed £3.9m to revenue and £0.1m to the Group’s operating profit in 2013.

Property, plant and equipment

£m	Land & Buildings
	Freehold properties	Long term leasehold	Short term leasehold	Fixtures & fittings	Equipment & vehicles	Total
Cost:
At 1 September 2013	4.9	0.4	11.9	7.3	38.7	63.2
Additions	-	-	0.5	1.3	5.8	7.6
Disposals	-	-	(0.4)	(0.3)	(5.5)	(6.2)
At 31 August 2014	4.9	0.4	12.0	8.3	39.0	64.6
Accumulated depreciation:
At 1 September 2013	0.4	0.3	7.8	5.5	22.6	36.6
Depreciation charge	0.1	-	0.8	0.7	3.6	5.2
Disposals	-	-	(0.4)	(0.3)	(5.5)	(6.2)
At 31 August 2014	0.5	0.3	8.2	5.9	20.7	35.6
Net book value at 31 August 2014	4.4	0.1	3.8	2.4	18.3	29.0
Cost:
At 1 September 2012	4.9	0.4	12.4	11.1	29.5	58.3
Additions	-	-	0.7	0.6	6.2	7.5
Inter segment transfer	-	-	-	(4.1)	4.1	-
Disposals	-	-	(1.2)	(0.3)	(1.1)	(2.6)
At 31 August 2013	4.9	0.4	11.9	7.3	38.7	63.2
Accumulated depreciation:
At 1 September 2012	0.4	0.3	8.2	5.8	19.1	33.8
Depreciation charge	-	-	0.7	0.5	4.1	5.3
Inter segment transfer	-	-	-	(0.5)	0.5	-
Disposals	-	-	(1.1)	(0.3)	(1.1)	(2.5)
At 31 August 2013	0.4	0.3	7.8	5.5	22.6	36.6
Net book value at 31 August 2013	4.5	0.1	4.1	1.8	16.1	26.6

The Group leases plant and equipment under a number of finance lease arrangements and has the option to purchase the equipment at the end of each lease. The net book value of finance leases contained within these balances is £4.1m at 31 August 2014 (2013: £1.8m).

285

286

15. Interests in jointly controlled entities

The Group's share of the results, assets and liabilities of jointly controlled entities is as follows:

£m	2014	2013
Revenue	9.6	9.4
Profit after tax	0.3	0.2
Non-current assets	1.2	1.2
Current assets	2.6	2.2
Total assets	3.8	3.4
Current liabilities	(2.3)	(1.9)
Non-current liabilities	(0.1)	(0.3)
Total liabilities	(2.4)	(2.2)
Goodwill	2.9	2.9
Share of net assets	4.3	4.1

The jointly controlled entities of the Group are as follows:

FMD Limited	The Group has a 50% investment in FMD Limited, the holding company of Worldwide Magazine Distribution Limited, a company incorporated in England (2013: 50%). The latest statutory accounts of FMD Limited were drawn up to 30 April 2014.
Rascal Solutions Limited	The Group has a 50% interest in the ordinary shares of Rascal Solutions Limited, a company incorporated in England (2013: 50%). The latest statutory accounts of Rascal Solutions Limited were drawn up to 31 August 2013.
BlueBox Avionics Limited	The Group has a 50% interest in the ordinary shares of Bluebox Avionics Limited, a company incorporated in England (2013: 50%). The latest statutory accounts of Bluebox Avionics Limited were drawn up to 31 August 2013.

16. Inventories

£m	2014	2013
Goods held for resale	45.3	44.2

17. Trade and other receivables

£m	2014	2013
Trade receivables	107.9	107.6
Allowance for doubtful debts	(0.7)	(0.7)
	107.2	106.9
Other debtors	12.4	10.3
Prepayments and accrued income	8.5	9.9
Trade and other receivables	128.1	127.1

Trade receivables

Total trade receivables net of allowances for doubtful debts held by the Group at 31 August 2014 amounted to £107.2m (2013: £106.9m), comprising the amounts presented above.

The average credit period taken on sale of goods is 21 days (2013: 19 days). Trade receivables are generally non-interest bearing. The Group provides for receivables on an individual customer basis based on circumstances known at that time and the likelihood of recovery.

Included in the outstanding trade receivables balance are debtors with overdue amounts of £8.5m (2013: £9.5m) that the Group has not provided for as these amounts are still considered recoverable and fall outside our pre-determined provisioning policy.

Ageing of past due but not impaired receivables:

£m	2014	2013
30-60 days	5.3	6.0
61-90 days	1.4	1.1
91-120 days	0.6	0.9
Over 120 days	1.2	1.5
	8.5	9.5

Included within the 2014 number is an expected seasonal peak of £4.6m (2013: £4.6m) largely within the 30-60 day ageing relating to the Consortium business.

Of the trade receivables balance at the end of the year:

One customer (2013: one) had an individual balance that represented more than 10% of the total trade receivables balance. The total of these were £15.3m (2013: £29.0m); and
A further six customers (2013: three) had individual balances that represented more than 5% of the total trade receivables balance. The total of these was £42.2m (2013: £24.4m).

Movement in the allowance for doubtful debts:

£m	2014	2013
At 1 September	0.7	0.9
Impairment losses recognised	0.7	0.3
Amounts written off as uncollectible	(0.6)	(0.4)
Amounts recovered during the year	(0.1)	(0.1)
At 31 August	0.7	0.7

Ageing of past due and impaired trade receivables:

£m	2014	2013
30-60 days	-	-
61-90 days	0.1	0.1
91-120 days	0.1	0.1
Over 120 days	0.5	0.5
	0.7	0.7

The directors consider that the carrying amount of trade and other receivables approximates their fair value.

Other debtors and prepayments

The largest items included within this balance are £7.6m (2013: £4.9m) of publisher debtors and £4.0m (2013: £4.5m) of accrued revenue.

18. Trade and other payables

£m	2014	2013
Trade payables	156.1	147.2
Other tax and social security	3.1	3.5
Other creditors	11.9	15.7
Accruals and deferred income	21.2	22.3
	192.3	188.7

Trade and other payables principally comprise amounts outstanding for trade purchases and on-going costs. The average credit period taken for trade purchases is 30 days (2013: 26 days). No interest is charged on trade payables. The Directors consider that the carrying amount of trade and other payables approximates to their fair value.

19. Cash and borrowings

Cash and borrowings by currency (Sterling equivalent) are as follows:

£m	Sterling	Euro	US Dollar	Other	Total 2014	2013
Cash and cash equivalents	17.7	1.8	0.4	0.5	20.4	10.1
Term loan – disclosed within current liabilities	–	–	–	–	–	(3.0)
Term loan – disclosed within non-current liabilities	(48.4)	–	–	–	(48.4)	(34.0)
Revolving credit facility	(59.0)	(1.9)	–	–	(60.9)	(62.9)
Asset backed facility	–	–	–	–	–	(6.9)
Total borrowings	(107.4)	(1.9)	–	–	(109.3)	(106.8)
Net borrowings	(89.7)	(0.1)	0.4	0.5	(88.9)	(96.7)
Total borrowings
Amount due for settlement within 12 months	(59.0)	(1.9)	–	–	(60.9)	(72.8)
Amount due for settlement after 12 months	(48.4)	–	–	–	(48.4)	(34.0)
	(107.4)	(1.9)	–	–	(109.3)	(106.8)

Cash and cash equivalents comprise cash held by the Group and short-term bank deposits with an original maturity of three months or less. The carrying amount of these assets approximates their fair value.

Available Group bank facilities are outlined in Note 20. At 31 August 2014, the Group had £90.7m (2013: £70.2m) of undrawn committed borrowing facilities in respect of which all conditions precedents had been met. Interest payable under the current facility is calculated as the cost of one month LIBOR plus an interest margin of between 1.35% and 2.35% dependent on the net debt/ adjusted EBITDA covenant ratio.

20. Financial Instruments

Treasury policy

The Group operates a centralised treasury function to manage the Group's funding requirements and financial risks in line with the Board approved treasury policies and procedures and their delegated authorities. Treasury's role is to ensure that appropriate financing is available for running the businesses of the Group on a day to day basis, allowing for investments and acquisitions whilst minimising interest cost. No transactions of a speculative nature are undertaken. Dealings are restricted to those banks with suitable credit ratings and counterparty risk and credit exposure is monitored frequently.

Capital risk management

The Group manages its capital to ensure that entities in the Group will be able to continue as going concerns while maximising the return to stakeholders through the optimisation of the debt and equity balance. The capital structure of the Group consists of debt, which includes the borrowings, cash and cash equivalents as disclosed in Note 19 and equity attributable to equity holders of the parent, comprising issued capital, reserves and retained earnings as disclosed in the Group Statement of Changes in Equity.

288

289

Liquidity risk

The Group manages liquidity risk by maintaining adequate reserves and banking facilities and by monitoring forecast and actual cash flows. The facilities that the Group has at its disposal to further reduce liquidity risk are as follows:

As at 31 August 2014, the Group had £200m committed bank facilities in place (2013: £177m).

Bank facilities now comprise:

a £50m syndicated term loan with £5m repayable in February 2017, August 2017, February 2018 and August 2018 with the balance repayable in November 2018;
a £150m syndicated revolving credit facility which is expires in November 2018;

The facility described above is subject to the following covenants:

Leverage cover – the net debt: adjusted EBITDA ratio which must remain below 2.75x. At 31 August 2014 the ratio was 1.4x
Interest cover – the consolidated net interest: adjusted EBITDA ratio which must remain above 3.0x. As at 31 August 2014 the ratio was 11.8x
Fixed charge cover – the ratio of adjusted EBITDA to consolidated fixed charges is not less than 2.00 to 1. As at 31 August 2014 the ratio was 4.7x
Guarantor cover – The annual turnover, gross assets and pre-tax profits of the Guarantors contribute at any time 80 per cent or more of the annual consolidated turnover, gross assets and pre-tax profits of the Group for each of its financial years. The guarantors, which are all 100% owned or wholly owned subsidiaries of the Connect Group PLC, are Connect Group PLC, Dawson Holdings Limited, Hedgelane Limited, Smiths News Holdings Limited, Smiths News Investments Limited, Smiths News Trading Limited, Bertram Trading Limited, Connect2U Limited, The Consortium for Purchasing and Distribution Limited, Smiths News Instore Limited and Dawson Books Limited.

At 31 August 2014, the Group had available £90.7m (2013: £70.2m) of undrawn committed borrowing facilities. There were no breaches of loan agreements during either the current or prior years.

As the Group is cash generative its liquidity risk is considered low. The Group's cash generation allows it to meet all loan commitments as they fall due as well as sustain a negative working capital position.

The Group invests significant resources in the forecasting and management of its cash flows. This is critical given a routine cash cycle that results in significant predictable swings within each month of around £50m.

The following is an analysis of the undiscounted contractual cash flows payable under financial liabilities and derivatives. The undiscounted cash flows will differ from both the carrying value and fair value. Floating rate interest is estimated using the prevailing rate at the balance sheet date.

£m	Due within 1 Year	Due between 1 and 2 years	Due between 2 and 3 years	Greater than 3 years
At 31 August 2014
Non derivative financial liabilities
Bank and other borrowings	(62.0)	(1.1)	(10.9)	(41.1)
Finance leases	(0.9)	(1.1)	(1.2)	(1.2)
Derivative and other financial liabilities
Net settled derivative contracts – receipts	0.1	-	-	-
Net settled derivative contracts – payments	(0.3)	-	-	-
Derivative and other financial assets
Net settled derivative contracts – receipts	0.3	0.3	0.3	0.1
Total	(62.8)	(1.9)	(11.8)	(42.2)
At 31 August 2013
Non derivative financial liabilities
Bank and other borrowings	(72.8)	(34.0)	-	-
Finance leases	(1.0)	(0.8)	-	-
Derivative and other financial liabilities
Net settled derivative contracts – receipts	0.3	0.1	-	-
Net settled derivative contracts – payments	(1.3)	(0.3)	-	-
Derivative and other financial assets
Net settled derivative contracts – receipts	0.2	0.2	0.2	0.2
Total	(74.6)	(34.8)	0.2	0.2

Counterparty risk

Dealings are restricted to those banks with suitable credit ratings and counterparty risk and credit exposure is monitored.

Foreign currency risk

The Group does not hedge the translation effect of exchange rate movements on the Income Statement. The majority of the Group's transactions are however carried out in the functional currencies of its operations, and so transactional exposure is limited.
The majority of the Group's net assets are held in Sterling, with only £3.9m (2013: £3.1m) of net assets held in overseas currencies. Translation exposure arises on the re-translation of overseas subsidiaries profits and net assets into sterling for financial reporting purposes and is not seen as significant.
Note 19 denotes borrowings by currency.
There are no material currency exposures to disclose.

Interest rate risk

The Group regularly monitors its exposure to interest rate risk. The Group uses interest rate swaps to manage its exposure to interest rate movements on its bank borrowings. The Group avoids the use of derivatives or other financial instruments in circumstances when the outcome would effectively be largely dependent upon speculation on future rate movements. As at 31 August 2014, 100% of the Group's borrowings were at fixed rates achieved through hedging.

290

It is, and has been throughout the period of review, the Group's policy that no trading in derivative financial instruments shall be undertaken.

Hedge accounting

There are £60m of interest rate hedges in place until November 2014 and a further £60m in place until November 2017 contracted at an average effective rate of 3.5%.

Under interest rate swap contracts, the Group agrees to exchange the difference between fixed and floating rate interest amounts calculated on agreed notional principal amounts. Such contracts enable the Group to mitigate the cash flow exposures on the issued variable rate debt held. The fair value of interest rate swaps at the reporting date is based on the market values of equivalent instruments at the balance sheet date, and is disclosed below. The average interest rate is based on the outstanding balances at the end of the financial year.

The following table details the notional principal amounts and remaining terms of interest rate swap contracts outstanding as at the reporting date:

	Average contract fixed interest rate		Notional principal amount		Fair value
	2014	2013	2014	2013	2014	2013

Outstanding receive floating, pay fixed contracts
Less than 1 year	1.6%	1.6%	£60.0m	-	(£0.3m)	-
2 to 5 years	1.0%	1.0%	£60.0m	£120.0m	£0.9m	(£0.4m)

The interest rate swaps are settled on a monthly basis. The floating rate on the interest rate swaps is 1 month LIBOR. The Group settles the difference between fixed and floating interest rates on a net basis. All interest rate swap contracts exchanging floating rate interest amounts for fixed rate interest amounts are designated as cash flow hedges in order to reduce the Group's cash flow exposure resulting from variable interest rates on borrowings. The interest rate swaps and the interest payments on the loan occur simultaneously and the amount deferred in equity is recognised in the income statement over the period that the floating rate interest payments on debt impact the income statement.

All derivative financial instruments are classified as level 2 based upon the degree to which the fair value movements are observable. Level 2 fair value measurements are defined as those derived from inputs other than quoted prices that are observable for the asset or liability, either directly (prices from third parties) or indirectly (derived from third party prices).

	Current		Non-current
£m	2014	2013	2014	2013
Derivatives that are designated and effective as hedging instruments carried at fair value:
Interest rate swaps – Liabilities	-	(0.8)	-	-
	-	(0.8)	-	-
Interest rate swaps – Assets	-	-	0.6	0.4
	-	(0.8)	0.6	0.4

At 31 August 2014 it was determined that £50m of a £60m hedge put in place in September 2012 could not be designated within a hedge relationship as a result the movement of the fair value of this part of the hedge was recognised in the Income Statement, resulting in a £0.4m credit being recognised in finance costs with the remainder of the mark to market valuations being recognised in reserves.

291

292

Interest rate sensitivity analysis

The sensitivity analysis below has been determined based on the exposure to interest rates for both derivative and non-derivative instruments at the balance sheet date. For floating rate liabilities the analysis assumes the amount of liability outstanding at the balance sheet date was outstanding for the whole year.

If interest rates had been 0.5% higher/lower and all other variables were held constant, the Group's profit and equity for the year ended 31 August 2014 would decrease/increase by £0.1m (2013: £0.4m) due to the interest rate swaps that are used to mitigate this risk.

Credit risk

The Group considers its exposure to credit risk at 31 August 2014 to be as follows:

£m	2014	2013
Bank deposits	20.4	10.1
Trade receivables	107.9	106.9
	128.3	117.0

Further detail on the Group's policy relating to trade receivables can be found in Note 17 to the accounts.

21. Obligations under finance leases

£m	2014		2013
	Minimum lease payments	Present value of minimum lease payments	Minimum lease payments	Present value of minimum lease payments
Amount payable under finance leases:
Within one year	1.0	1.0	1.0	1.0
In the second to fifth years inclusive	3.4	3.1	0.9	0.8
Total	4.4	4.1	1.9	1.8
Less: future finance charges	(0.3)	-	(0.1)	-
Present value of lease obligations	4.1	4.1	1.8	1.8
Less: amount due for settlement within 12 months (shown under current liabilities)		(0.9)		(1.0)
Amount due for settlement after 12 months		3.2		0.8

Group policy is to acquire certain items of its fixtures and equipment under finance leases. The average lease term is 3.5 years. Interest rates are fixed at the contract date. All leases are on a fixed repayment basis and no arrangements have been entered into for contingent rental payments.

The fair value of the Group's lease obligations approximates to their carrying amount.

22. Other non-current liabilities

£m	2014	2013
Other creditors	1.4	1.6

The balance disclosed as other creditors within non-current liabilities relates to operating lease incentives which are being recognised over the lease term.

23. Deferred tax

Deferred tax assets and liabilities are attributable to the following:

£m	Accelerated tax depreciation	Other	Share based payments	Intangible assets	Retirement benefits	Total
At 1 September 2013	0.1	0.6	1.5	(3.5)	4.9	3.6
Charge to income	0.5	(0.4)	0.2	0.4	(0.1)	0.6
Charge to other comprehensive income	-	(0.1)	0.5	-	(0.6)	(0.2)
At 31 August 2014	0.6	0.1	2.2	(3.1)	4.2	4.0
Deferred tax assets	0.7	0.1	2.2	-	4.2	7.2
Deferred tax liabilities	(0.1)	-	-	(3.1)	-	(3.2)
At 1 September 2012	(0.2)	1.1	0.9	(4.1)	8.2	5.9
Charge to income	0.4	(0.2)	0.1	0.6	-	0.9
Charge to other comprehensive income	-	(0.3)	0.5	-	(3.3)	(3.1)
Acquisition/disposal of subsidiary	(0.1)	-	-	-	-	(0.1)
At 31 August 2013	0.1	0.6	1.5	(3.5)	4.9	3.6
Deferred tax assets	0.4	1.3	1.5	-	4.9	8.1
Deferred tax liabilities	(0.3)	(0.7)	-	(3.5)	-	(4.5)

The Company has capital losses carried forward of £23.9m (2013: £23.9m). Deferred tax assets have not been recognised in respect of the capital losses carried forward due to the uncertainty of their utilisation.

The Finance Act 2013, which provides for a reduction in the main rate of corporation tax from 21% to 20%, effective from 1 April 2015, was substantively enacted on 2 July 2013. This rate reduction has been reflected in the calculation of deferred tax at the balance sheet date.

24. Provisions

£m	Reorganisation provisions	Insurance provision	Deferred consideration	Property provisions	Total
Gross provision:
At 1 September 2013	1.4	1.4	1.9	6.4	11.1
Additions	0.7	0.2	0.2	1.3	2.4
Released	(0.1)	-	-	(1.5)	(1.6)
Utilised in year	(1.3)	(0.2)	(2.1)	(2.6)	(6.2)
At 31 August 2014	0.7	1.4	-	3.6	5.7
Discount:
At 1 September 2013	-	-	-	(0.8)	(0.8)
Additions	-	-	-	(0.1)	(0.1)
Released	-	-	-	0.4	0.4
Unwinding of discount utilisation	-	-	-	0.1	0.1
At 31 August 2014	-	-	-	(0.4)	(0.4)
Net book value at 31 August 2014	0.7	1.4	-	3.2	5.3

£m	Reorganisation provisions	Insurance provision	Deferred consideration	Property provisions	Total
Gross provision:
At 1 September 2012	0.3	1.3	2.1	10.8	14.5
Additions	1.4	0.5	1.8	0.6	4.3
Disposal	-	-	-	(0.9)	(0.9)
Utilised in year	(0.3)	(0.4)	(2.0)	(4.1)	(6.8)
At 31 August 2013	1.4	1.4	1.9	6.4	11.1
Discount:
At 1 September 2012	-	-	-	(2.0)	(2.0)
Additions	-	-	-	0.2	0.2
Unwinding of discount utilisation	-	-	-	1.0	1.0
At 31 August 2013	-	-	-	(0.8)	(0.8)
Net book value at 31 August 2013	1.4	1.4	1.9	5.6	10.3
£m				2014	2013
Included within current liabilities				3.4	7.5
Included within non-current liabilities				1.9	2.8
Total				5.3	10.3

Reorganisation provisions include amounts for programmes, primarily redundancy costs, that have been announced prior to the year end and are all expected to be utilised during the following financial year.

Insurance provisions represent the expected future costs of employer's liability, public liability and motor accident claims.

The property provision represents the estimated future cost of the Group's onerous and reversionary leases in non-trading properties based on known and estimated rental sub-leases. This provision has been discounted at a risk free rate and this discount will be unwound over the life of the leases. The provision is expected to be utilised over the period to 2019, when all of the leases provisions will have expired.

Deferred consideration relates to amounts provided in relation to the acquisition of Hedgelane Ltd on 23 April 2012, the cost was contingent upon future employment. The provision has been fully utilised in the year with the issue of 4,530,012 shares in January 2014.

25. Contingent liabilities and capital commitments

£m	2014	2013
Bank and other loans guaranteed	2.1	3.6

Other potential liabilities that could crystallise are in respect of previous assignments of leases where the liability could revert to the Group if the lessee defaulted. Pursuant to the terms of the Demerger Agreement, any such contingent liability in respect of assignment prior to demerger, which becomes an actual liability, will be apportioned between Connect Group PLC and WH Smith PLC in the ratio 35:65 (provided that the actual liability of Connect Group PLC in any 12 month period does not exceed £5m). The Company's share of these leases has an estimated future cumulative gross rental commitment at 31 August 2014 of £6.3m (2013: £8.4m). This excludes the reversionary lease provision included within property provisions in Note 24.

Contracts placed for future capital expenditure approved by the directors but not provided for amount to: £nil (2013: £nil).

26. Operating lease commitments

The group as lessee:

Minimum lease payments under non-cancellable operating leases are as follows:

£m	2014			2013
	Land & buildings	Equipment & vehicles	Total	Land & buildings	Equipment & vehicles	Total
Within one year	7.7	2.1	9.8	8.1	1.6	9.7
In the second to fifth years inclusive	25.6	1.5	27.1	26.2	1.6	27.8
In more than five years	24.3	-	24.3	26.7	-	26.7
	57.6	3.6	61.2	61.0	3.2	64.2

The Group leases various distribution properties and plant and equipment under non-cancellable operating lease agreements. The leases have varying terms, escalation clauses and renewal rights.

The group as lessor:

At the balance sheet date, the Group had contracted with tenants for the following future minimum lease payments:

£m	2014	2013
Within one year	0.1	-
In the second to fifth years inclusive	0.2	0.3
	0.3	0.3

Property rental income earned during the year was £0.1m (2013: £0.4m).

27. Net cash inflow from operating activities

£m	2014	2013
Operating profit	48.6	45.6
Acquisition costs	-	3.2
Share of profits of jointly controlled entities	(0.3)	-
Adjustment for pension funding	(4.6)	(6.5)
Depreciation of property, plant and equipment	5.2	5.3
Amortisation and impairment of intangible assets	6.3	5.0
Share based payments	1.1	1.9
(Increase)/decrease in inventories	(1.7)	0.4
Increase in receivables	(2.4)	(5.8)
Decrease in payables	7.3	1.5
Income tax paid	(9.8)	(10.5)
Decrease in provisions	(2.3)	(2.2)
Net cash inflow from operating activities	47.4	37.9

296

28. Share Capital

(a) Share capital

£m	2014	2013
Authorised:
300.0m ordinary shares of 5p each	15.0	15.0
Issued and fully paid:
189.3m ordinary shares of 5p each (2013: 184.3m)	9.5	9.2

(b) Movement in share capital

£m	Ordinary shares of 5p each
31 August 2013	9.2
Shares issued during the year	0.3
At 31 August 2014	9.5

The holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at the general meetings of the Company. The Company has one class of ordinary shares, which carry no right to fixed income.

During the year 4,959,905 (2013: 763,101) ordinary 5p shares were issued for a consideration of £4,373,469 (2013: £655,352), resulting in a share premium of £4,125,474 (2013: £617,197). Of these 4,530,012 relate to the deferred share capital payable to the former owners of Hedgelane Limited following its acquisition in April 2012, the remainder were issued to satisfy share scheme exercises.

The concept of authorised share capital was repealed by the Companies Act 2006 with effect from 1 October 2009, and on 15 January 2010, the Company passed a Special Resolution dis-applying the existing provisions of its Memorandum of Association from applying to its Articles of Association.

(c) Share premium

£m	2014	2013
Balance at 1 September	1.2	0.6
Premium arising on issue of equity shares	4.1	0.6
Balance at 31 August	5.3	1.2

29. Reserves

(a) Demerger reserve

£m	2014	2013
At 1 September	(280.1)	(280.1)
At 31 August	(280.1)	(280.1)

This relates to reserves created following the capital re-organisation undertaken as part of the demerger of WH Smith PLC in 2006. The balance represented the difference between the share capital and reserves of the Group restated on a pro-forma basis as at 31 August 2004 and the previously reported share capital.

(b) ESOP reserve

£m	2014	2013
Balance at 1 September	(1.5)	(1.7)
Acquired in the period	(6.3)	(3.0)
Disposed of on exercise of options	2.6	3.2
Balance at 31 August	(5.2)	(1.5)

The ESOP reserve represents the cost of shares in Connect Group PLC purchased in the market and held by the Smiths News Employee Benefit Trust to satisfy awards and options granted under the Group's Executive Share Schemes (see Note 31). The number of ordinary shares held by the Trust at 31 August 2014 was 2,203,191 (2013: 1,070,854).

£m	2014	2013
Balance at 1 September	(0.6)	(2.3)
Gain recognised on cash flow hedges (net of tax)	0.5	1.7
Exchange differences on translating net assets of foreign operations	(0.2)	–
Balance at 31 August	(0.3)	(0.6)

The hedging reserve represents the cumulative amount of gains and losses on hedging instruments deemed effective in cash flow hedges. The cumulative deferred gain or loss on the hedging instrument is recognised in the profit or loss only when the hedged transaction impacts the profit or loss.

Retained Earnings

	£m
Balance at 1 September 2012	196.7
Total comprehensive income for the year	33.9
Dividends paid	(16.0)
Employee share schemes	(0.2)
Credit for equity-settled share based payments	0.5
Balance at 31 August 2013	214.9
Total comprehensive income for the year	33.3
Dividends paid	(17.7)
Employee share schemes	(2.6)
Equity-settled share based payments, net of tax	0.6
Balance at 31 August 2014	228.5

Share-based payments

The Group recognised total expenses of £1.5m in 2014 (2013: £1.9m) related to equity-settled share-based payment transactions.

Average share price throughout the year was 191.5p (2013: 158.8p).

The Group operates the following share incentive schemes:

Sharesave Scheme

Under the terms of the Smiths News Sharesave Scheme, the Board may grant options to purchase ordinary shares in the Company to eligible employees who enter into an HM Revenue & Customs approved Save-As-You-Earn ("SAYE") savings contract for a term of three or five years. Options are granted at a 20% discount to the market price of the shares on the day preceding the date of offer and are normally exercisable for a period of six months after completion of the SAYE contract.

Executive Share Option Schemes (ESOS)

Under the terms of the Smiths News Executive Share Option Scheme, the Board may grant options to purchase ordinary shares in the Company to executives up to an annual limit of 200% of base salary. The exercise of options is conditional on the achievement of

297

a three year performance target, which is determined by the Remuneration Committee at the time of grant. Provided that the target is met, options are normally exercisable until the day preceding the 10th anniversary of the date of grant.

LTIP

Under the terms of the Connect Group LTIP, executive directors and key senior executives may be awarded each year conditional entitlements to ordinary shares in the Company (in the form of nil cost options) or, in order to retain flexibility and at the Company's discretion, a cash sum linked to the value of a notional award of shares up to a value of 200% of base salary. The vesting of awards is subject to the satisfaction of a three year performance condition, which is determined by the Remuneration Committee at the time of grant. Subject to the satisfaction of the performance condition, awards are normally exercisable until the 10th anniversary of the date of grant.

Deferred Bonus Plan (DBP)

Under the terms of the Connect Group Deferred Bonus Plan, executive directors and key senior executives may be granted each year share awards (in the form of nil cost options) dependent on the achievement of the Annual Bonus Plan and Economic Profit Plan performance targets. Awards are normally exercisable after two years subject to continued employment.

Details of the options/awards are as follows:

Number of options/awards	Sharesave		ESOS		LTIP		DBP
	No of shares	Weighted average exercise price	No of shares	Weighted average exercise price	No of shares	Weighted average exercise price	No of shares	Weighted average exercise price
At 31 Aug 2012	2,853,975	83.4p	6,612,582	91.5p	2,310,894	-	1,117,654	-
Granted	665,877	140.0p	1,032,399	152.9p	715,988	-	517,767	-
Exercised	(763,101)	85.9p	(2,821,302)	89.0p	(454,506)	-	(638,319)	-
Expired/Forfeited	(301,193)	82.8p	(235,511)	97.1p	(27,896)	-	-	-
At 31 Aug 2013	2,455,558	98.0p	4,588,168	106.5p	2,544,480	-	997,102	-
Granted	850,693	158.0p	895,607	210.3p	601,195	-	450,021	-
Exercised	(429,893)	86.9p	(503,897)	92.8p	(969,253)	-	(486,519)	-
Expired/Forfeited	(249,000)	101.4p	(255,367)	134.2p	(125,231)	-	(19,219)	-
At 31 Aug 2014	2,627,338	118.9p	4,724,511	126.1p	2,051,191	-	941,385	-
Exercisable at 31 Aug 2014	232,584	80.7p	1,652,486	92.7p	-	-	-	-
Exercisable at 31 Aug 2013	213,815	93.2p	604,592	94.3p	-	-	-	-

The weighted average remaining contractual life in years of options/awards is as follows:

	Sharesave	ESOS	LTIP	DBP
Outstanding at 31 August 2014	1.5	7.5	8.1	1.7
Outstanding at 31 August 2013	1.8	7.6	8.4	0.6

Details of the options/awards granted or commencing during the current and comparative year are as follows:

	Sharesave	ESOS	LTIP	DBP
During 2014:
Effective date of grant or commencement date	June 2014	Nov 2013	Nov 2013	Nov 2013
Average fair value at date of grant or scheme commencement – pence	42.5	28.6	188.2	188.2
During 2013:
Effective date of grant or commencement date	June 2013	Nov 2012	Nov 2012	Nov 2012
Average fair value at date of grant or scheme commencement – pence	38.6	19.5	156.6	156.6

The options outstanding at 31 August 2014 had exercise prices ranging from nil to 210.3p (2013: nil to 152.9p).

The weighted average share price on the date of exercise was 200p (2013: 161p).

The sharesave and ESOS options granted during each period have been valued using the Black-Scholes model, the LTIP and DBP schemes are valued by reference to the share price at the date of grant discounted by the estimated dividend yield per cent.

The inputs to the Black-Scholes model are as follows:

	Sharesave	ESOS	LTIP	DBP
2014 options/awards:
Share price at grant date – pence	197.5	210.3	210.3	210.3
Exercise price – pence	158.0	210.3	-	-
Expected volatility – per cent	32.0	31.0	-	-
Expected life – years	3.0	3.0	-	-
Risk free rate – per cent	1.96	1.61	-	-
Expected dividend yield – per cent	6.2	6.2	-	-
Weighted average fair value – pence	42.5	28.6	185.0	185.0
2013 options/awards:
Share price at grant date – pence	175.0	152.9	152.9	152.9
Exercise price – pence	140.0	152.9	-	-
Expected volatility – per cent	33.0	29.0	-	-
Expected life – years	3.0	3.0	-	-
Risk free rate – per cent	1.25	1.25	-	-
Expected dividend yield – per cent	5.5	5.5	5.5	5.5
Weighted average fair value – pence	38.6	19.5	136.7	136.7

32. Related party transactions

Transactions between businesses within this Group, which are related parties, have been eliminated on consolidation and are not disclosed in this note.

Transactions with the Group's pension schemes are disclosed in Note 6.

Trading transactions

	Sales to related parties		Amounts owed by related parties
£m	2014	2013	2014	2013
Jointly controlled entities	3.2	0.1	0.6	0.3

Sales to related parties are for management fees, payment is due on the last day of the month following the date of invoice.

Non-trading transactions

	Loans to related parties
£m	2014	2013
Jointly controlled entities	0.4	0.6

The loans to related parties have no set date for repayment and accrue interest at LIBOR + 2%.

Aggregate remuneration of key management personnel

The remuneration of the Directors and the executive management team, who are the key management personnel of the Group, is set out below in aggregate for each of the categories specified in IAS 24 “Related Party Disclosures.”

£m	2014	2013
Short-term employee benefits	3.0	3.0
Post-employment benefits	–	–
Share based payments	0.8	1.1
	3.8	4.1

Directors' transactions

There are no other transactions with Directors, other than those set out in Note 6.

33. Principal subsidiary undertakings and associated undertakings

Name	Country of incorporation/registration	Proportion of ownership interest
Bertram Trading Limited	England	100%
Bluebox Avionics Limited*	England	50%
Dawson Books Limited	England	100%
Dawson Espana Agienciede Ediciones SL	Spain	100%
Dawson France SAS	France	100%
Dawson Holdings Ltd	England	100%
Dawson Media Direct Limited	England	100%
DMD China Limited	Hong Kong	100%
DMD G.m.b.H.	Germany	100%
DMD Inc.	USA	100%
DMD NV	Belgium	99%
DMD SAS	France	100%
Phantom Media Limited	England	100%
Rascal Solutions Limited*	England	50%
Smiths News Holdings Limited	England	100%
Smiths News Trading Limited	England	100%
The Consortium for Purchasing and Distribution Ltd	England	100%
Hedgelane Limited	England	100%
Erasmus Antiquariaat en Boekhandel B.V.	Holland	100%
Houtschild Internationale Boekhandel B.V.	Holland	100%
Martin Lavell Ltd	England	100%
Magpie Investments Limited¹	England	51%
FMD Limited*	England	50%

¹ Magpie Investments Limited is treated as a subsidiary within the Group financial statements based upon the Group’s majority shareholding and the controlling interest on the Board.

Except as marked all of the above are subsidiaries of Connect Group PLC. Those marked with an asterisk are joint controlled entities, for details of which see Note 15 to the Group accounts.

A full list of subsidiary companies is available from the Company's registered office.

34. Restatement following the adoption of IAS 19 revised and disposal of MMC

The comparative period has also been restated to show the results of the MMC business, disposed of in April 2013, within non-recurring and other items, reducing underlying revenue by £3.9m and underlying operating profit by £0.1m for the year ended 31 August 2013.

The adoption of IAS 19 (revised) and the MMC restatement has had no impact on the balance sheet position of the Group as at 31 August 2013 and 31 August 2012 and no impact on the cash flows of the Group.

The impact on the comparative Group Income Statement and Statement of Change in Equity is set out below:

| Group Income Statement
£m | 12 months to Aug 2013 | | |
| --- | --- | --- | --- |
| | Reported | Adjustment | Restated |
| Disposal of MMC | | | |
| Underlying revenue | 1,810.8 | (3.9) | 1,806.9 |
| Operating profit – underlying | 56.5 | (0.1) | 56.4 |
| IAS 19 (Revised) | | | |
| Investment revenues | 1.8 | (1.5) | 0.3 |
| Finance costs | (5.3) | (1.5) | (6.8) |
| Profit before tax – underlying | 53.0 | (3.0) | 50.0 |
| Taxation | (12.1) | 0.6 | (11.5) |
| Profit for the period -underlying | 40.9 | (2.4) | 38.5 |
| Combined restatement | | | |
| Revenue | 1,810.8 | (3.9) | 1,806.9 |
| Operating profit – underlying | 56.5 | (0.1) | 56.4 |
| Profit before tax – underlying | 53.0 | (3.1) | 49.9 |
| Non-recurring and other items | (11.1) | 0.1 | (11.0) |
| Profit before tax – Statutory | 41.9 | (3.0) | 38.9 |
| Taxation – including non-recurring | (10.8) | 0.6 | (10.2) |
| Profit for the period – Statutory | 31.1 | (2.4) | 28.7 |
| Underlying EPS – basic | 22.4p | (1.3p) | 21.1p |
| Underlying EPS – diluted | 21.1p | (1.3p) | 19.8p |
| Statutory EPS – basic | 17.1p | (1.4p) | 15.7p |
| Statutory EPS – diluted | 16.0p | (1.2p) | 14.8p |

302

Group Statement of Changes in Equity

	12 months to 31 August 2013
£m	Previously reported	Impact of adopting IAS 19 (revised)	Restated
Impact of IFRIC14 on defined benefit schemes	0.3	3.1	3.4
Actuarial gain	4.5	(0.2)	4.3
Gain on cash flow hedges	1.7	–	1.7
Tax relating to components of other comprehensive income	(1.9)	(0.6)	(2.5)
Other comprehensive income	4.6	2.3	6.9
Profit after tax	31.1	(2.4)	28.7
Total comprehensive income	35.7	(0.1)	35.6

“哈，你是个小伙子，你是个小伙子，你是个小伙子，你是个小伙子，你是个小伙子，你是个小伙子，你是个小伙子，你是个小伙子，你是个小伙子，你是个小伙子，你是个小伙子，你是个小伙子，你是个小伙子，你是个小伙子，你是个小伙子，你是个小伙子，你是个小伙子，你是个小伙子，你是个小伙子，你是个小伙子，你是个小伙子，你是个小伙子，你是个小伙子，你是个小伙子，你是个小伙子，你是个小伙子，你是个小伙子，你是个小伙子，你是个小伙子，你是个小伙子，你是个小伙子，你是个小伙子，你是个小伙子，你是个小伙子，你是个小伙子，你是个小伙子，你是个小伙子，你是个小伙子，你是个小伙子，你是个小伙子，你是个小伙子，你是个小伙子，你是个小伙子，你是个小伙子，你是个小伙子，你是个小伙子，你是个小伙子，你是个小伙子，你是个小伙子，你是个小伙子，你是个小伙子，你是个小伙子，你是个小伙子，你是个小伙子，你是个小伙子，你是个小伙子，你是个小伙子，你是个小伙子，你是个小伙子，

sterling 164501

AI assistant

Smiths News PLC — Proxy Solicitation & Information Statement 2014

4854_rns_2014-11-13_2fcaeb7e-db4f-4370-b695-6bb0cd288b71.pdf

CONNECT GROUP PLC

PROPOSED ACQUISITION OF TUFFNELLS PARCELS EXPRESS

2 FOR 7 RIGHTS ISSUE OF 54,136,442 NEW ORDINARY SHARES AT 102 PENCE PER NEW ORDINARY SHARE

NOTICE OF GENERAL MEETING

NOTICE TO OVERSEAS SHAREHOLDERS

NOTICE TO NEW HAMPSHIRE RESIDENTS

NOTICE TO ALL INVESTORS

TABLE OF CONTENTS

Section B – Issuer

Tuffnells

Section B – Issuer

Unaudited Pro Forma statement of profit and loss

PART II

RISK FACTORS

1. RISKS RELATING TO THE BUSINESSES AND INDUSTRIES IN WHICH THE CONNECT GROUP AND TUFFNELLS OPERATES AND, FOLLOWING COMPLETION, THE ENLARGED GROUP WILL OPERATE

1.2 Parcel volumes in the UK may not grow as forecast and so adversely affect Tuffnells' growth prospects.

1.3 The Connect Group's customers and Tuffnells' customers may cease to continue trading with them or may reduce their level of demand for their products or services.

1.5 The Connect Group’s businesses could be adversely affected by the loss or termination of its key contracts.

1.6 The Connect Group may not be able to identify and successfully execute new growth strategies and attempts by the Connect Group to diversify through merger and acquisition activity, or through joint ventures or other collaborative activities, may be unsuccessful.

1.14 The Connect Group remains exposed to potential liabilities arising from its Demerger from WH Smith PLC.

1.21 Connect Group and Tuffnells, and following Completion the Enlarged Group, is subject to the risk of fraud.

2. RISKS RELATING TO THE ACQUISITION

2.1 The Acquisition may not proceed.

2.2 The Connect Group will not have full recourse to the Tuffnells Management Sellers under the Acquisition Agreement against all potential liabilities in Tuffnells, whether identified or unidentified.

2.3 Acquisition-related costs may exceed the Connect Group's expectations.

2.4 The Enlarged Group may not realise the anticipated benefits and synergies of the Acquisition.

2.5 The Enlarged Group may experience difficulties in incorporating Tuffnells into the Connect Group.

3.8 Admission of the New Ordinary Shares may not occur when expected.

3.9 The ability of Overseas Shareholders to bring actions or enforce judgments against the Enlarged Group or its directors or officers may be limited.

2. FORWARD LOOKING STATEMENTS

3. PRESENTATION OF FINANCIAL INFORMATION

3.1 General

3.2 Restated figures in the financial information for Connect

3.3 Tuffnells – Non-IFRS Financial Measures

3.4 Connect – Non-IFRS Financial Measures

4. MARKET SHARE DATA

5. DEFINITIONS

6. ROUNDING

7. CURRENCY

8. NO INCORPORATION OF WEBSITE INFORMATION

9. CONNECT GROUP'S DIVISIONS

PART V

RIGHTS ISSUE STATISTICS

PART VI

DIRECTORS, COMPANY SECRETARY, REGISTERED OFFICE AND ADVISERS

Directors

Company Secretary & General Counsel

Registered Office and Directors' Business Addresses

Joint Sponsor and Bookrunner

Financial Adviser to the Company

Joint Sponsor, Financial Adviser and Bookrunner

Financial Adviser to the Company in relation to the Rights Issue

Legal advisers to the Company as to English law and US law

Legal advisers to the Joint Sponsors and Bookrunners as to English law and US law

PART VII

CHAIRMAN'S LETTER

PROPOSED ACQUISITION OF TUFFNELLS AND UNDERWRITTEN RIGHTS ISSUE

1. INTRODUCTION

2. SUMMARY INFORMATION ON CONNECT

3. SUMMARY INFORMATION ON TUFFNELLS

4. BACKGROUND TO AND REASONS FOR THE ACQUISITION

4.2 A business with a strong track record, well positioned for further growth, and able to build upon its leading position in a market with sustainable growth characteristics and opportunities over time for organic growth across the Enlarged Group

4.3 The opportunity to achieve pre-tax cost synergies across the Enlarged Group of £2.0 million per annum within three years and to generate revenue synergies from shared infrastructure

4.4 Creating attractive financial returns for Connect Shareholders

5. KEY TERMS OF THE ACQUISITION

6. FINANCING THE ACQUISITION

7. FINANCIAL EFFECTS OF THE RIGHTS ISSUE AND THE ACQUISITION

8. KEY TERMS OF THE RIGHTS ISSUE

9. MANAGEMENT AND EMPLOYEES

10. DIVIDEND POLICY OF THE ENLARGED GROUP

11. CURRENT TRADING, TRENDS AND PROSPECTS

11.1 Connect

11.2 Tuffnells

12. OVERSEAS SHAREHOLDERS

13. TAXATION

14. SHARE SCHEMES

15. GENERAL MEETING

Smiths News PLC Proxy Solicitation & Information Statement 2014