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Royal Mail Holdings plc
Accounts
2002 - 2003
At WAKWOHL ZF mis
COMPANIES HOUSE 210603
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Royal Mail Holdings plc
Registereti(No. 4074919
Directors
Details of Directors are shown on pages 11 and 12.
Secretary
Jonathan Evans
Auditors
Emst & Young LLP
Registered Office
148 Old Street
London
EC1V9HQ
Royal Mail Holdings plc
Accounts
2002 - 2003
Contents
Chairman's Statement
Joint Deputy Chairman's and Chief Executives’ Statement
Financial Review
Royal Mail Holdings plc Board
Directors’ Report
Corporate Governanes
Intemal Controt
Report on Directors’ Remuneration
‘Statement of Directors’ responsibilities in respect of the accounts
Independent auditor's report to the members of Royal Mail Holdings plc
Accounting policies and general notes
Group profit and loss account
‘Group statement of total recognised gains and losses
Balance sheets
Group cash flow statement
Notes to the cash flow statement
Notes to the accounts
Five-year summary
Glossary of terms
Contacts
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Royal Mail Holdings plc
Chairman's Statement
‘Year one of our Renewal Plan has been a year of progress. A year where we have started to contro! our costs, reduce overheads and take the
first real steps towards creating a sustainable and thriving company,
At the end of year one of our three-year Renewal Pian, the Group has made a £611m pre-tax loss and a £197m loss from operations. This is an
improvement of £121m or 38% over our losses from operations in 2001-02,
Our people have worked hard to achieve this progress and it is to their credit that we can look to the future more positively today. We have a great
deal more to do and some significant risks to deal with before we can demonstrate that we have transformed our business into a profitable,
moder and competitive company.
‘A’Share in Success’ scheme was launched earlier this year, which will pay a dividend to all our eligible people if we hit the profit targets in the
third year of the Renewal Plan. I am pleased that this year’s results show that we are on target to reward our people for their hard work in turning
this business around.
‘We have appointed an experienced leadership team with Elmar Toime, the new Executive Deputy Chairman, Adam Crozier, Chief Executive of
Royal Mail Group plc, and David Mills, Chief Executive of Post Office Limited, together with six external appointments to the Board.
Customer service has improved throughout the year with an overall cumulative increase in our quality of service for First Class letters, however,
we missed hitting a number of our year end targets. Parcelforce Worldwide exceeded its target of 96% for PF 24 hour delivery, achieving 98%,
and Post Office Limited made great strides in improving queuing times over last year to exit at 94.3%. Improved colleague relations, leading to
fewer strikes with strike days down 90% year on year, have played an important part in getting this right, but we stil have further to go to achieve
our service targets across all our key products.
Our goals forthe organisation remain clear:
- Make our business a great place to work
- Improve customer service
-Retum to profitability
- Deliver positive cash flow
In order to achieve these goals we must deliver the critical strands of our Renewal Plan, which fundamentally restructures our operations in order
to make the Royal Mail Group a profitable and sustainable business.
Parcelforce Worldwide has led the way through working in partnership with its people to eliminate unprofitable products and inefficient aspects of
its operations. Progress has not been as rapid in the UK maits operations as we work through @ numberof issues, including taking stock of the
regulatory environment.
The radical surgery I talked about last year means we have cut management and administrative overheads right across the business. Overall
some 16,500 jobs have gone with around 5,500 people taking voluntary redundancy and 4,600 people not being replaced as they leave. Some
6,500 jobs have transferred to new companies under TUPE arrangements.
We have now secured a manageable package of price controls in consultation with Postcomm, our Regulator. These controls allow us to add 1p
to the cost of First and Second Class stamps - the first increase in First Class postage for three years. We sfill offer one of the lowest price yet
highest delivery specifications in Europe.
‘What we now need to resolve is a fair and reasonable price for competitors’ access to our delivery network. At present the Regulator’s proposals.
‘on competition and the price set for access to our network, which we believe are again out of step with the EU Postal Directive, could strip out
£tbn of revenue from Royal Mail over the forthcoming years and force the Company to sort and deliver letters for a prioe well below economic
costs. Itis vital that we charge a commercial price for our services if we are to protect a universal price and service for all customers.
A commercial loan package worth £1,044m has been agreed with Government. Securing this finance deal means we can concentrate on
delivering the savings identified in our Renewal Plan to take the Company back into profitability.
In addition, the Government has agreed financing support, using our €1.8bn investments for the Post Office network. This includes a £450m
three-year package of support fo ensure the continuation of uneconomic services via Post Offices in the rural communities.
‘The new pensions accounting standard (FRS 17) means we are reporting in the notes to the accounts a hypothetical deficit of £4.6bn on Royal
Mait’s pension fund, which had assets at the end of last year of £15.6bn. This accounting approach depends on the state of the stock market on
the day that the assets of the fund are valued, and the FRS 17 deficit reflects the low market conditions at the end of our financial year. The deficit
does not represent the Pension Plan valuation by an independent actuary, and a separate review of this on behalf of the Trustees is being carried
out as at 31 March 2003, We anficipate that we will no longer benefit from a pension surplus as we have for the past 13 years and we are likely to
make additional payments to the fund of some £100m per annum until the deficit is cleared, subject to agreement with the Trustees of an
approved funding plan, to ensure our people's existing contributions are safe.
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Royal Mail Holdings plc
Chairman's Statement (continued)
Although the pension provision is an additional cost, improvements in customer service, fewer strikes and a reat focus on making this a better
place to work will put us back on track. We are stil some way off reporting a profit but this year's results are a real step in the right direction.
The enormous goodwill we have in our people, our brands and our customers means we are within sight of regaining our profitability and our
aon as the best postal service in the world.
Allan Leighton
Chairman
28 May 2003
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Royal Mail Holdings plc
Joint Deputy Chairman’s and Chief Executives’ Statement
In the last year the business has managed to reduce its ongoing fosses through measures that have contained costs and reduced overheads. But
there is slippage on some of the key programmes in the Renewal Plan and this is where we must focus in the coming year.
Lord Sawyer's second review of industrial relations, published in March 2008, praised Royel Mail and the unions for their ongoing effort to stop
industrial action and iraprove relations. Since the launch of 17 local partnership boards, industrial action is at a ten-year low. Out of some 55
milion available working days for our people in the UK, 6,686 (0.01%) were lost to strike action in the last year.
There was nearly @ 2% cumulative rise in quality of service for First Clas letters, and customer confidence is building. We achieved good results
for Parcelforce Worldwide (98%), and Post Office Limited was up on last year, but we stil missed our target for First Class quality of service and
overall, only achieved 3 out of 15 year end headline service standards for mail, There is obviousty still room for improvement and our quality of
service plan is geared to achieve that in the coming year.
The timed, next day guaranteed delivery product, Special Delivery, has continued to outperform competitive offerings in terms of value-for-money
and is responsible for £239m (an underlying growth of 10% on previous year} or around 4% of revenue for Royal Mail.
We wanted fo move nationally toa single daily delivery early in 2003. Although we failed to meet that target, the common sense rationale is stil
compelling - as second deliveries account for 20% of costs but only 4% of volume, itis nota viable proposition. The 13 rial areas told us what
worked and what didn't, and we've made changes to the plan accordingly. Customer reactions to the changes and their wilingness to be flexible
in order to protect the Universal Service Obligation in the long-term are encouraging.
Despite some frustratingly stow progress, we are now pushing ahead, with real buy-in from our people. We are expecting to implement a union
agreement, which offers our people an increase in basic pay, a five-day working week and simplified bonus schemes based on the achievement
of agreed weekly targets.
98 offices have started planning for these changes and a futher roll-out will happen over the next year - but because of slippage inthe first year,
the pressure ison to deliver the predicted programme benefits
We've modemised key stages of the UK’s mail sortation, and not before time. To support improved and more efficient delivery systems, we are
introducing address interpretation electronic systems capable of reading poorly addressed mail, which will drive up quality by reducing sorting
errors. 63 out of 70 mail centres are connected and more than half of our automated mail passes through these systems currently.
‘We have also embarked on the wholesale rationalisation of our transport network. We are implementing plans to move standard tariff and bulk
mail around more efficiently by creating a single, integrated network based on a regional hub-and-spoke’ system. The number of distribution
centres has reduced to 13 from 16 and the successful absorption of work from Thames Valley distribution centre to Bristol proves the approach is
viable and delivers. in addition, a £40m hub at Daventry is expected to be finished in August 2003,
Our logistics business continues to offer a warehousing capablity to customers and relum logistics contracts such as those with Amazon.com
and Retum Logistics Limited (supplying Virgin, Waterstones and Safeway), support the growth in sales through the internet, mail order and home
shopping.
Parcelforce Worldwide has successfully undergone the most radical surgery across the Group in line with plans announced in March 2002. After
‘some ten years of losses, the business is on target to break even in 2004-05. The number of depots has been cut from 101 to 54, routes have
been completely reworked and new ways of combined working and a new system of owner-drivers have been introduced successfully.
Significantly for customers, Parcelforce Worldwide has identified and focused on the successful business of ‘time-guaranteed’, ‘next day’ and ‘two
day’ express deliveries, exiting loss-making non-guaranteed services and 350 unprofitable contracts.
Our European parcels business, General Logistics Systems (GLS), has continued to grow its volumes and revenues. As a result of the economic
downtum across Europe, the rate of growth has been slower than expected. Consequently GLS has tightened further its control on operating
expenses and, coupled with margin improvement, has increased its operating earnings before interest and tax. The focus is on continued
integration of the individual parcel companies - building upon the recent re-branding exercise, which brought the companies under a common
brand, and the cross-border IT project, which increases the information available to customers and the efficiency of the cross-border product
stream,
An unprecedented restructuring and modemisation programme is underway for our Post Office network. As outlined in our network plan, agreed
with Government last autumn, new products and funding packages are now in place and the rate of unplanned closures has slowed from 262 in
2001-02 to 239 this year.
However, the Post Office network continues to make a loss and comprehensive reinvention is needed to manage a rapidly changing environment.
In March 2003, we launched the Post Office card account. This card is used to access benefits payments and we can now undertake basic bank
account transactions for the major banks together with current account transactions for selected institutions. The introduction of new and
enhanced services such as currency exchange, travel insurance and access to funds through the high street banks’ basic bank accounts alt
ensure that the network remains relevant to the business of everyday life.
Parliamentary and EU approval for a funding package of £210m to support the urban network has enabled our Network Reinvention programme
to push ahead. This involves the planned closure of some 3,000 urban Post Offices over the next three years and incorporates compensation
payments to subpostmasters. In a preference exercise 3,700 subpostmasters expressed an interest in this scheme. The package also includes
£30m for investment in branches that want to expand or improve.
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Royal Mail Holdings plc
Joint Deputy Chairman’s and Chief Executives’ Statement (continued)
We are determined to keep a Post Office branch in urban areas within a mile of 95% of our customers. ‘Urban deprived’ branches (totalling 2,800
in England) will also be able to apply for an improvement grant from a £15m fund, which forms part of the Government's plan to regenerate
impoverished communities. In November 2002, Post Office branches in Wales received a total fund of £2.5m and the Scottish Executive
announced a £2m fund for branches in deprived areas in December 2002.
The Government's £450m funding package over three years will help continue aocess to over-the-counter services in rural areas and prevent
avoidable closures.
One of the key activities over the year has been our absolute focus on our core businesses. We have successfully outsourced some 5,000 jobs
from our faclties management services, saving some £30m per annum over the seven-year contract, and a further 200 employee health services
jobs and switched 1,300 jobs to Capita, who now collect TV licence fees, Our 1,7364strong Business Systems uni will be outsourced from early
June as part of an agreed deal that will deliver savings of some £60m per annum over the ten-year life ofthe contract.
We have simplified our UK organisational structure - stripping out layers of management and administrative roles. Our aim is to reduce these jobs
by 25% and we are well on our way towards that goal
‘We also changed the corporate name to Royal Mail in order to focus on our key UK brands: Royal Mail, Parcelforce Worldwide and Post Office™.
There is a great deal to do in year two of our Renewal Plan and it will be even more challenging than the year we've just seen. We now have the
leadership team in place to drive change through the business and the Renewal Plan is just the beginning. Our foe On range prota and
sustainable business for the future means we will deliver for our customers fe ‘our people.
Eimar Toime ~ a ” ‘Davig Mins:
Executive Deputy Chairman Chief Executive i ll
Royal Mail Holdings ple Royal Mail Group ple Post Office Limited
28 May 2003 28 May 2003, 28 May 2003,
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Royal Mail Holdings plc
Financial Review
The Royal Mail Group (the Group) comprises Royal Mail Holdings plc (the Company) - which is wholly-owned by HM Government - and its
subsidiary and associated undertakings and joint ventures. The Company is incorporated under the Companies Act {the Act), and the accounts
are produced in accordance with this Act and applicable UK aooounting standards.
‘On 4 November 2002, the Company changed its name from Consignia Holdings pic to Royal Mail Holdings plc.
The accounts are drawn up for the 52-week period ended on 30 March 2003 (2002 53 weeks).
Going concern
‘Since the uncertainty over going concern reported in last year’s accounts, considerable progress has been made in our financing discussions with
Government. We have now concluded a £1,044m commercial loan facility, which is designed to enable Royal Mail to fund itself through to cash
flow self-sufficiency. The Directors are, therefore, now satisfied that Royal Mail will continue as a going concern,
We have agreed with Government that the total operational financing needs of Post Office Limited of £0.7bn over the next five years will be
provided out of the Group's existing current asset investments that have been set aside to back the Mails Reserve. In addition, a further £1.2bn
Joan facitity to fund the working capital needs of the Post Office network has been agreed in principle with Government, with the detailed terms
close to completion.
‘As such, the Directors consider it appropriate to prepare the Group statements on a going concem basis.
Group results
“The Group's full year loss from its operations of £197m (2002 £318m) before exceptional items - equivalent to £0.8m every trading day -is a
significant improvement on last year's £1.2m loss per trading day. The difference between the Group operating profit/(loss) and the loss from
operations, both before exceptional items, is explained below:
2003 2002
Group operating profitloss) before exceptional items 19 7)
‘Add back pensions benefit derived in accordance with SSAP 24 (248) (250)
(227) (17)
Share of profitloss) in associates and joint ventures (including non-exceptional impairment of goodwill 30 (1)
Loss from operations (197) (318)
‘The £227m loss, analysed by business segments on page 33 of the accounts, is attributed to @ mails and parcels profit of 12m, Past Office
services loss of £209m and other businesses losses of £30m.
The loss before taxation was £611m (2002 £1,124m). This loss reflects net interest receivable of £35m (2002 £56m) and exceptional items of
£695m (2002 £1,112m). The loss for the year of £559m (2002 £940m) was after a net tax credit of £52m (2002 £179m) and a small amount of
equity minority interest.
External tumover at £8,209m (excluding £79m tumover from joint ventures) was £104m lower than last year. 2001-02 was, however, a 53-week
‘accounting period against §2 in the curent year. After adjusting ast year's tumover to a 62-wek basis, the 2002-03 tumover represents an
increase of £50m (0.6%), driven by growth in the mails and paroels segment (£140m) offset by dectines in Post Office Limited (36m) and other
businesses (£54m).
‘The Group net assets at the 30 March 2003 stood at £2,088m, a reduction of £517m from the closing position last year. The principal movement
arose from the sale of current asset investments of £550m to sustain the Post Office network, to fund the Renewal Programme and to make the
pension prepayment. As with last year, the Group's cash position was helped by the pension holiday of £126m (2002 £ 36m). The holiday relates
to the surplus built up in the pension scheme over the past 20 years because of the high equity bias of the fund during a sustained period of bull
market retums.
The segmental analysis in note 1 to the Group accounts analyses the operating loss in accordance with SSAP 25 - Segmental Reporting. We
have set out below an altemative analysis that recognises the pensions benefit does not arise from current trading and to reflect the substantial
amount of trading between operational units and other support functions (intemal trading). The analysis below also takes into account the impact
of internal interest charged to businesses for their use of centrally managed funding resources. Cash flows include both movements in physical
cash and working capital movements funded through intercompany balances.
Mails and parcels
Mails and parcels consist of our traditional businesses of UK and international mails {including overseas mails businesses set up or acquired),
Parcefforce, Logistics Solutions and our European parcels businesses - GLS. Together, these businesses reported total extemal revenue of
£7,351m, an increase of £m over 2002, and losses from operations of £120m (2002 £241m).
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Royal Mail Holdings pic
Financial Review (continued)
UK mails
UK mails' external revenue increased by £256m to £5,548m. The increase was attributable to a switch of £269m income from Parcelforce for the
‘Special Detivery product, the Universal Service Obligation parcels and Mail Order retums, offset principally by loss of revenue due to the 53rd
week, to give an underlying growth of £56m in core letter products - represented by a 1.1% growh in pillar box and collection postings and a
41.2% growth in commercial and bulk-posted letters. These low levels of growth continue to reflect a slowdown in the national economy that has
particularly impacted the advertising and publishing markets.
Total costs including net internal trading grew by £116m to £5,482m. The cost of inflation, the annual pay award and one-off costs of mails
automation programmes were largely offset by efficiency improvements and a robust management of all discretionary spend.
Overall, the maifs business turned a loss from operations last year, before exceptional items, of £74m to a profit of £66m, This result includes new
profits for the UK mails division from the transferred products amounting to some £75m. Losses after exceptional items but before tax were
£269m and the cash inflow was £74m.
International mails
International mails’ extemal income fell by 9% to £687m. This decline was partly the effect of the 53rd week (£14m) but largely due to
‘management action to exit from loss-making product areas and the impact of electronic substitution. Tota! external costs at £343m reduced by
£74m - an 18% saving over the prior year. These savings were due to the exit from loss-making products and lower handling costs both in the UK
and overseas. The net effect of these operational changes were offset by higher internal trading costs, resulting in an unchanged loss at £18m
before exceptional items and tax, and a loss of £44m after exceptional items but before tax. The cash outflow from the international mails
operations was £45m, driven by a combination of losses and the timing of settlements with other postal administrations.
Parcelforce
In March 2002, the Board announced a far-reaching tumaround plan for its UK parcels business. This involved the closure of the operational
network that provided the Standard product (/.e. non ‘time-guaranteed’, non ‘next day’ or ‘two day’ express deliveries) and a full withdrawal from
the product (and its declining market), the introduction of more owner-drivers to the collection and delivery fleet, and the termination of some 350
large customer contracts that were judged to provide inadequate yield. Accountability for the Special Delivery product, the Universal Service
Obligation parcels and Mail Order retums was also switched to UK mails. The actions taken so far have included the closure of five sort centres,
the reduction of some 50% of operational jobs, the closure of 50 depots and the reduction of average daily traffic volumes from some 400,000 to I
170,000. The consequence of this was a reduction in UK parcels’ external income by £178m to £296m (a 38% decline). At the same time, the
restructuring of its network caused operating costs to fall by £85m fo £483m (a decline of 15%). Overall, the losses from operations increased
from £94m to £187m. This reflected the immediate impact of the income withdrawal versus the slower pace to drive down the cost base as we
worked through the network closure programme, which is fundamentally complete. The business cash outflow was £211m.
Logistics Solutions
Logistics Solutions manages a network of warehouses and 1,900 vehicles to provide a distribution service for both extemal customers and other
internal operating businesses.
AAs a consequence of the restructuring of Parcelforce, the transfer of accountabity for high volume parcels customers, previously with Logistics
Solutions, moved back to Parcelforce, As a result, Logistics Solutions’ extemal income fel by £194m to £34m. The repositioning of the high
volume parcels customers had the effect of increasing Logistics Solutions’ intemal trading receipts by £207m to £332m. The external operating
costs for the overall service fell by £15m to £353m due to a number of local eficiency measures. The net impact was to tum last years overall
loss before exceptional costs of £15m to a profit of 13m. Exceptional costs were £46m, bringing total losses before tax to £33m. Cash inflow for
the business was £42m,
General Logistics Systems
GLS, our European parcels operation, grew its external income by £186m to £786m during the year. This increase was driven by a combination
of the full year effects of acquisitions (£90m), currency translations (£71m) and underlying growth £25m (4%). Profit before interest and tax was
£14m, a significant improvement on last year’s £14m loss, The earings before interest, tax, depreciation and amortisation was £39m, an €18m
improvement over the previous year.
Post Office Limited
Post Office Limited is responsible for 17,239 retail outlets of which 18,521 are independently owned. This year saw the delivery of many key
milestones designed to stem the network's high levels of losses, The Horizon contract was re-negotiated and wil result in considerable savings;
36,000 people were trained to deliver the banking transactions; a sales and marketing function was set up; 12 financial institutions signed up for
banking access with the system going ive at all outlets on schedule; 13 cash centres and depots were closed and all funding was agreed with
Government.
Total income decreased by £104m (8%) to £1,186m, of which intemal income from servicing the mails and parcels businesses accounted for
£50 ofthis decline. External income was £899m, a dectine of £54m (6%). Ths is a combination of a small growth in our underlying business of
£20m that was more than offset by @ reduced contribution from Government for developing banking capabilties and piloting the Your Guide
initiative. Overall costs, including internal trading costs from other parts of the Group, reduced by £73m (5%) to £1,380m.
Losses before exceptional items amounted to £194m -£31m (19%) higher than last year - which includes a net investment of about £50m in the
banking programme, The loss after exceptional ters was £363m and the cash outflow for the year was £286,
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Financial Review (continued)
The universal banking system has now gone live with the first Post Office card accounts and Basic Bank accounts being opened - itis too early to
say what the level of take-up of either product will be, This service will allow people receiving benefits, currently over 15 million people, to make
cash withdrawals at Post Offices.
The difficult financial position of Post Office Limited (including the replacement of the substantial Department for Work and Pensions revenue
stream) continues to be addressed in three ways, Firstly, we are rationalising the urban network, secondly, we are implementing our strategic
review, which is addressing the economic viability, social obligations and the commercial opportunities of the network, and thirdly, we are
reducing our overhead costs.
Other Group activities
Other Group activities comprise the treasury management of cash and market investments, the Group Centre and other support services to the
main trading businesses. Profit from operations forthe year, prior to the pensions benefit was £117m, £31m better than last year. The profit
mainly consists of internal interest charges made to operating and support units of £176m {2002 £214m), offset by lower net losses on support
services’ activities of £59m (2002 £126m), mainly arising from lower estate management costs and development spend.
Exceptional items
The Group results include net exceptional costs of £695m (2002 £1,142m), all of which resulted from a series of initiatives announced in the
Renewal Programme to remove £1.4bn from our annual gross cost base.
Provisions of £449m were made in the year for redundancy, covering the changes in sorting and delivery of mail of £230m, the review of the Post
Office Limited structure of £73m and the restructuring of distribution transport operations of £22m, The provisions relate to our people working
directly in the businesses implementing change. in addition, provisions of £124m were made covering our people working in support functions
and minor restructuring projects. The provisions above are inclusive of the necessary top-up to the Royal Mail Pension Plan of £200m,
Impairment write-downs of £97m and non-redundancy-related provisions of £151m were made, of which £25m relates to costs associated with
changes to our transport network, and £126m in respect of vacant property costs and other costs associated with the Renewals Programme.
We have impaired our investment in associates by £24m, principally Spring £19m, reflecting our view of economic prospects within the relevant
markets.
The accounts also include net profits on disposal of fixed assets of £24m (2002 £24m) and £2m profit on sale of part of one of our subsidiary
undertakings, Romec Limited, to our joint venture partner, Haden Building Management Limited.
Taxation
The accounts include a £4m current tax credit (2002 a charge of £3m) and a deferred tax credit of £48m {2002 £182m) for the year.
The tax credit for 2003 represents an effective tax rate of 9% on a loss before tax, compared to a 16% credit for 2002, The credit mainly arises
from relief on restructuring costs, which gives rise to losses that have in part been offset against deferred tax liabiliies and surrendered to
associates and joint ventures.
Treasury
The Group operates a central treasury function that manages some £1,251m of investments and £550m of borrowings in accordance with
investment restrictions set by Government, and acts as internal banker for the Group. The Group finances its operations largely through retained
profits and borrowings.
Group Treasury derives its authority from the Royal Mail Hollings plc Board and provides regular monitoring reports for their review. The treasury
function only has the authority to undertake financial transactions relating to the management of underlying business risks, All strategies are risk
averse and the treasury policy has remained unchanged during the period.
During the third quarter of this financial year, the Group entered into financing arrangements with the DTI to secure a package for the restructuring
of the Mails Business, The Royal Mail Credit Agreement provides for a maximum facility of £1,044m, made up of fixed and floating tranches
repayable between March 2007 (£200m) and March 2009 (£844m).
‘A framework agreement has been signed between Post Office Limited, Royal Mail and the Secretary of State dealing with Mails' past surpluses
and funding for the Mails Business restructuring. Under the framework agreement Royal Mail will provide funding to Post Office Limited out of
certain accumulated reserves. Finance in the form of loans from the Secretary of State for Trade and Industry is to be provided for cash and near
cash items in the Post Office Limited network, in transit and in cash centres, including peak funding requirements to a maximum of £1,200m. This
finance is intended to replace the pre-funding provided by the Department for Work and Pensions (DWP) for benefit payments prior to the
introduction of Automatic Credit Transfer (ACT) for claimant payments, Although details have yet to be agreed, it is thought that the finance will be
made up of a core facility of bonds together with a flexible loan facility.
The Group's main financial risks are interest rate and foreign currency tisk. The Group mitigates interest rate risk through a portfolio approach to
investment. Short-term portfolios are driven by liquidity requirements and medium-term portfolios driven by investment decisions. The Group's
principal sterling financial instruments are deposits, gilts and short and long-term borrowings.
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Royal Mail Holdings pic
Financial Review (continued)
Foreign currency balances held to operate the Bureau de Change service are hedged by Group Treasury using a combination of forward and spot
contracts. Where possible, internal netting of exposures takes place.
‘The Group is exposed to transaction risk from its obligation to pay overseas postal administrations for the delivery of UK-originating mail. This
exposure is. denominated it in Special Drawing Rights (SDRs) - a basket currency of US Dollars, euros, Japanese Yen and Sterling. This risk is
minimised by using forward foreign currency contracts, options and foreign cusrency deposits. The Group has a policy of matching receipts and
payments for it iual currencies. A maximum of 80% of the exposure to pay overseas administrations is hedged. This programme utilises
forward contracts, options, and foreign currency deposits. Treasury operate a rolling 18-month programme, which is subsequently reviewed on a
quarterly basis.
All other significant current liabilities are hedged when they become contractual.
The Group is exposed to foreign currency translation risk on the net assets of all overseas subsidiaries.
‘The Group's fuel risk management strategy aims to reduce uncertainty created by movements in the oil market. The strategy operates within the
parameters set by the Board. The fuel procurement programme allows for the use of over-the-counter derivative products to manage both the
‘commodity and foreign exchange elements of the exposure.
Counterparty risk is managed by limiting aggregate exposure fo any individual counterparty. These exposures are reviewed regularly and
adjusted as appropriate.
Debt
Consolidated debt at 30 March 2003 was £637m, a year-on-year reduction of £68m, principally reflecting the easly repayment of a loan.
Interest receivable
The Group's net interest receivable was £35m. This comprised £69m of interest received on average investments of £1 .6bn at a rate of 4.3%,
less £34m interest payable on average borrowings of £580m at a rate of 5.8%.
Last year net interest receivable was £56m, comprising £90m received on average investments of £1.9bn at a rate of 4.7%, less £34m interest
payable on average borrowings of £590m at a rate of 5.8%.
Pensions
The overall Group result includes a £246m (2002 £250m) benefit derived in accordance with SSAP 24, and this amount can be analysed into its
three key components. The accounting charges are based on assumptions on a ‘best estimate’ basis, which reflects the difference between
‘experienced’ performance over the prudent actuarial assumption assumed in the funding rate. This has resulted in a lower regular accounting
cost amounting to £48m of the benefit. The surplus in the Royal Mail Pension Plan (RMPP) allows a further reduction in cost - evaluated by the
Plan actuary using their ‘best estimate’ assumptions - providing £153m benefit, with the interest on the long-term pension debtor of £45m making
up the final element of the benefit.
The new accounting standard FRS 17 - Retirement Benefits, introduces radical changes to accounting for pensions and similar benefits. Royat
Mail is complying with the transitional arrangements as modified by the Accounting Standards Board in November 2002. The balance sheet and
profit and loss aspects are disclosed in note 21 to the Group accounts. These disclosures will be continued for the next two years, with 2005-06
being the frst year in which all pension costs and related information will be reported in accordance with FRS 17.
The FRS 17 requirements mean we are reporting, within the notes to the accounts, a hypothetical deficit of £4.6bn on the RMP fund. This deficit
represents the difference between the market value ofthe Plan’s assets and the assessed value of the Plan's lables atthe balance sheet date
of 30 March 2003. An FRS 17 deficiency of some 28% of fund assets is a similar size to those currently experienced by other large pension
schemes, However, as the RMPP is the Sth largest UK occupational pension scheme, the monetary value appears disproportionaely lage. Asset
values reflect the low stock market valuations atthe end of our financial year, falling to £12. 1bn (from £15.6bn at March 2002) mirroring falls inthe
FTSE 100 from 5272 to 3708 over the same period, At 5272, last year's acoounts reported an FRS 17 surplus of £272m. Liabilities are assessed
using AA bond rates, and as these rates have also fallen, the present value of liabilities has increased to £16.7bn (£15.3bn in 2002).
This FRS 17 assessment of our Pension Pian produces a hypothetical snapshot of its finances at a single point in the life of a pension fund
(typically 50 years and beyond). By using a snapshot approach, the asset valuation is highly sensitive to timing effects. Recent short-term
fluctuations in stock market valuations would have changes this position by several £100m if taken only two or three days apart. To further
illustrate this point, the recovery in the FTSE equity values between the balance sheet date and 28 April 2003 would have reduced the declared
deficit by over £600m. It is therefore important to separate this FRS 17 snapshot from the long-term Pension Plan valuation by an independent
actuary under the Scheme rules, and a separate review of this on behalf of the Trustees is being carried out as at 31 March 2003. Although the
result of the actuary's work is likely to produce a substantially lower disclosed deficit when results are available in the autumn, we are not
‘complacent. The sustained lower stock market valuations will undoubtedly mean that we no longer anticipate benefits from a pension surplus that
we have enjoyed for the past 13 years. We have also made allowances in our stretegic plans for additional pension payments until the deficit is
cleared. This is likely to generate changes to our pensions costs in 2003-04, remove the reduction due to surplus benefits (shown as £153m in.
note 21 to the Group accounts) and require annual deficiency payments in the order of some £100m unti the deficit is cleared. This amount is
subject to agreement with the Trustees of an approved funding plan.
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Royal Mail Holdings plc
Financial Review (continued)
Regulation
The Postal Services Commission (Postcomm) was created as the independent Regulator for the UK postal industry in 2000, Subsequently, Royal
Mail was granted its first licence, which required it to provide a universal postal service at affordable prices. Currently, several other companies
have also been granted licences.
During the year, Royal Mail accepted Postcomm's proposals for a second price contol over a three-year period starting 1 April 2003. This allows
Royal Mail to increase its prices by approximately 3% immediately, followed by a conventional RPI-1% approach in the second and third years.
Although Royal Mail finally accepted these proposals, it has been highly critical of the process, which took almost a year to complete,
Royal Mail has very recently received the results of Postcomm’s determination on access, which it believes could significantly damage the fabric
of the business and its ability to provide the universal service, Royal Mall is not against access as long as the price imposed by Postcomm does
not undermine the uniform tariff and allows it to make a commercial retum. However, Postcomm's proposals to introduce competition, including
access to our network, could eventually reduce revenues by over £1bn, and the Group continues to rigorously defend this position with
Postcomm.
Postcomm have published their draft work programme for 2003, which includes work on Royal Mail's cost structure, regulatory accounts and
fundamentally, the definition and development ofthe universal service,
Major project investment
We continue the drive to modernise our infrastructure. During the year, the Group invested £297m (of which £104m was capital expenditure)
‘through our key strategic programmes. This included £133m to upgrade the mails and parcels infrastructure and services, £87m to develop the
Universal Banking capability, £35m to provide a high quality enterprise-wide IT environment and £42m on a range of other key initiatives.
Future prospects
The performance for 2002-03 at a loss from operations of £197m was significantly better than our target and keeps us in line fo achieve our
Renewal Plan objective for 2004-05.
Continued progress through 2003-04 and 2004-05 does critically depend on reaping the benefits of the strategic programmes that we have
embarked upon. Thus, the introduction of new business models and service pattems in UK mails and parcels, capitalising on the new
international mails faciity at Langley with its latest technology, new business opportunities for the Post Office network, urban Post Office closures
and successful outsourcing of non-core activities will continue to be key in driving the business back to profitability and positive cash flows. At the
same time, we have to mitigate the financial consequences of delays fo postal tariff increases, higher National Insurance costs and increases to
‘our pension contributions.
We plan to maintain a reasonable investment in our infrastructure through a £253m capital expenditure programme next year.
Our move to a single delivery at a consistent time six days a week with other efficiency measures across the Group will result in a further 17,000
jobs becoming redundant over the next three years. (This is over and above the 13,000 disclosed in last year's accounts but inline with our
original announcement of 30,000).
The Board are encouraged by this year’s results and remain committed to the remaining two years ofthe three-year Renewal Programme. We
expect to continue to reduce trading losses and move back into profit next year.
Group Finance Director
28 May 2003
10
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Royal Mail Holdings pic
Royal Mail Holdings plc Board
Non Executive Directors
ALLAN LEIGHTON (CHAIRMAN)
‘Allan (50) joined the organisation in April 2001 and became chaltman of the Company in March 2002. He began his career with Mars
Confectionery and moved to Pedigree Petfoods as sales director. In 1992 he became group marketing director of Asda Stores Limited, and chief
executive in 1996, becoming president and CEO of Wal-Mart Europe when Wal-Mart bought Asda in 1999. He left in 2000 and is currently
chairman of Bhs Limited, Wilson Connolly ple, Cannons Group Limited and lastminute.com, non executive director of Dyson Limited, BSkyB and
George Weston Limited, and deputy chairman of Leeds United plc,
DAVID FISH
David (54) joined the Board on 1 January 2003. He was a member of the Mars Inc Operating Board from 1994 to 2001, and joint president of
Masterfoods Europe. He has also been president of Snackfoods Europe, and held European vice-president positions in marketing and personnel.
He is also a non executive director of Christian Salvesen. David is chairman of the Remuneration Committee, and a member of the Nomination
Committee.
RICHARD HANDOVER,
Richard (57) is group chief executive of WH Smith ple, He is also chairman of the Adult Learning Inspectorate and Business in the Community
Education Leadership, and is a non executive director of Nationwide Building Society. Richard was appointed to the Board on 1 January 2003. He
is chairman of the Nomination Committee, and a member of the Remuneration Committee.
MIKE HODGKINSON
Mike (59) has been chief executive of BAA plc since 1999, and retires in June 2003. He is also board member and chairman of the Finance
Committee of Transport for London, and a non executive director of FKI pic. Mike was appointed to the Board on 1 January 2003. He is the senior
independent director, and a member of the Remuneration Committee, From 1 May 2003, he is also chairman of Post Office Limited,
JOHN NEILL CBE
John (55) has been group chief executive and deputy chairman of the Unipart Group of companies since 1987. He is a director of the Court of the
Bank of England, and a non executive director of Charter plc. He is also vice-president of the Society of Motor Manufacturers and Traders, and a
director of the SMMT Forum. John was appointed to the Board on 1 January 2003, and is a member of the Audit and Risk Committee.
ROSEMARY THORNE
Rosemary (51) is group finance director of Bradford & Bingley plc. She joined the Board in October 1998 and Is chairman of the Audit and Risk
Committee and a member of the Remuneration Committee. She is a member of the Financial Reporting Council, Financial Reporting Review
Panel and The Hundred Group's main and technical committees.
ROBERT WIGLEY
Bob (42) joined the Board on 1 April 2003, and is a member of the Audit and Risk Committee. He is chairman of Merrill Lynch's European
Investment Banking Business, and a trustee ofthe children's mobility charity, Whizz-Kidz.
Executive Directors
ELMAR TOIME (EXECUTIVE DEPUTY CHAIRMAN)
Elmar (56) joined the Company on 1 March 2003, having been chief executive of New Zealand Post since 1993. Prior to that he had held senlor
appointments in New Zealand Post in business planning, marketing and retail operations. In 2002 he established Kiwibank a new, full-service
tetail bank, as a wholly-owned subsidiary of New Zealand Post. Elmar remains a non executive director of Sky City Entertainment Group in New
Zealand, He is also a member of the Board of Post Office Limited.
MARISA CASSONI (GROUP FINANCE DIRECTOR)
Marisa (51) joined the organisation in February 2001 from Britannic Assurance plo, where she was group finance director from 1998. Previous to
that she was Group finance director of the Prudential’s UK Division from 1994. She became a non executive director of Severn Trent pic in
September 2001
JERRY COPE (MANAGING DIRECTOR UK, ROYAL MALL)
Jerry (51) joined the organisation in 1973 and has held senior positions in personnel and industial relations, line management and strategic and
commercial planning, He was appointed to the Board in 1996 as group managing director Strategy and Business Development. He became group
managing director of Mail Services in September 2001. He is a shareholder-nominated director of Camelot and chairman of the governors of
Kingston University.
‘ADAM CROZIER (CHIEF EXECUTIVE ROYAL MAIL GROUP PLC)
‘Adam (39) joined the company on 1 February 2003, having previously been chief executive ofthe Football Association since 2000. Before then
he had held a number of senior roles at Saatchi and Saatchi Advertising, including that of joint chief executive from 1995.
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Royal Mail Holdings plc
Royal Mail Holdings plc Board (continued)
TONY MeCARTHY (GROUP DIRECTOR PEOPLE AND ORGANISATIONAL DEVELOPMENT)
Tony (47) joined the company on 6 January 2003, having previously been group human resources director of BAE Systems, where he had
worked in a variety of HR roles since 1978.
DAV MILLS {CHIEF EXECUTIVE POST OFFICE LIMITED)
David (59) joined the organisation as an executive director and chief executive of Post Ofice Limited on 15 April 2002, He began his career with
Midland Bank (now HSBC Bank plc) in 1962, and in December 1999 was appointed general manager, Personal Banking and was the chair of
First Direct. David has held a number of senior extemal positions and directorships including chairman APACS Cash Services Group and of
Mondex International Limited, director of British Interactive Broadcasting Limited, and of Personal Investment Authority Limited.
During the year the following Directors left the Company:
John Roberts CBE was an Executive Director until 31 December 2002.
John Lloyd was a Non Executive Director until 25 March 2003.
Miles Templeman was a Non Executive Director until 25 March 2003.
12
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Royal Mail Holdings plc
Directors’ Report
The Directors present the Group accounts for Royal Mail Holdings plc (the Company). These accounts relate to the 62 weeks ended 30 March
2003 (2002 53 weeks).
Principal activities
The Group continues to provide a nationwide and international distribution service, principally of mails and parcels, The Group also provides
access to a wide range of financial and retail services through its network of Post Office branches across the United Kingdom (UK).
Change of name
On 4 November 2002, the Company changed its name from Consignia Holdings ptc to Royal Mail Holdings ple.
Review of the business and future developments
A review of the Group's business and future developments is presented in the Chairman's Statement, Joint Deputy Chairman's and Chief
Executives’ Statement and the Financial Review.
Results and dividends
The loss on ordinary activities before taxation amounted to £611m (2002 £1,124m). After taxation and minority interest, the loss was £559m
(2002 £940m). The Directors do not recommend a dividend {2002 nil dividend).
The Govemment confirmed in July 2002 thatthe funds set aside forthe payment of past dividends should now be considered a part of past
‘surpluses. Past surpluses of the Group are to form a part of the amounts transferred to the Mails Reserve in accordance with the section 72 order
issued by the Secretary of State for Trade and Industry.
Political and charitable contributions
During the year the Group made charitable contributions of £0.3m {2002 £0.4m). No political contributions were made.
‘Supplier payment policy
The policy of the Company and its principal operating subsidiaries is to use their purchasing power fairly. Payment terms are agreed in advance
for all major contracts. For lower value transactions, standard payment terms apply. The poticy is to make payments within 45 days of receiving a
valid invoice, The Company and its principal operating subsidiaries in the UK have sought to comply with the TI's Better Payment Practice
Code. Copies of this can be obtained from the DTI. This code replaced the CBI prompt payment code. As the Company is a non-operating
‘company, the creditor days are zero. The creditor days of the operating subsidiaries can be found in their accounts.
Land and buildings
In the opinion of the Directors, the aggregate market value of the Group's land and buildings exceeds the net book value, based upon a historic
cost accounting policy, of £1,201m by a considerable margin.
Post balance sheet events
Details of the post balance sheet events are included in note 26 to the accounts.
Directors and their interests
The Directors of the Company and details of changes during the year are given or. pages 11 and 12. The Chairman is appointed by the Secretary
of State, all other Directors are appointed by the Company with the Secretary of State's consent.
HM Government is the Company’s sole shareholder and aocordingly, the Directors have no interest inthe shares ofthe Company.
People
The Royal Mail Group employs more than 200,000 people making it one of the largest employers in the UK. The vast majority of our people are
engaged in providing services directly to customers through the collection and delivery of mail and parcels to the provision of services through the
network of Post Office branches.
‘Over the past few years the Royal Mail Group has suffered from a troubled commercial, employee retations and industrial relations environment,
which has resulted in low levels of morale, trust and involvement. However, opinion surveys of our people indicate a strong underlying
‘commitment to the business and its long-term success, which provides a strong foundation to build on.
The goals to renew the Group through a transformational change in the way all our people are engaged and involved in the business and are
aligned and equipped to meet business goals. The objective is fo make the Royal Mail Group a ‘great place to work’, which will drive better
service fo our customers and result in greater commercial success. In order to achieve this, focus will be on improving the quality of leadership
within the organisation, professionalising key roles and achieving greater involvement of our people in decision making and influencing the
business. Underpinning all ofthis is a need for dignity at work where everybody feels valued, is treated fairly and equally with everyone playing a
full partin helping the business to achieve its goats
Over the past year we have started to lay the foundations for this change. Weekly face-to-face sessions are taking place between groups of our
people and their team leaders to discuss ways in which the team can become more effective in meeting is objectives and how it can improve the
working environment - supported by local budgets which the teams control, The surveys of our people have been revamped to ensure that local
and national issues are identified and discussed within the teams and that all ofthe issues reised have clear action plans to address them.
Bullying and harassment in the workplace is being tackled with the objective of completely driving out this unacceptable behaviour from the
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Royal Mail Holdings plc
Directors’ Report (continued)
organisation through the provision of a confidential counselling helpline and independent investigators who will follow up. There has also been
significant suocess in reducing strike action over the past 12 months folowing the review conducted by Lord Sawyer and his team, Substantial
progress towards these recommendations have been made and management continue to work with the unions and Lord Sawyer to ensure that
this suocess can be built upon, The Board remain fly committed to implementing the recommendations made by the team,
The Group's policy is to give full consideration to applications for employment from disabled persons. Our people who become disabled whilst
employed receive full support through the provision of training and special equipment to facilitate continued employment where practicable. The
Group provides training, career development and promotion to our disabled people wherever appropriate,
‘An Equal Opportunities policy is maintained in all respects including disabilty, age, religion, colour, sex, nationality, ethnic origin, sexual
orientation, race, creed and marital status.
Going concern
After consideration of cash flow projections for the Group, the Directors consider that it is appropriate to prepare the financial statements on a
going concem basis.
Auditors
Arresolution to reappoint Ernst & Young LLP as auditors will be put to the Annual General Meeting.
By order ofthe Board
Jonathan Evans
Seoretary
London
28 May 2003
14
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Royal Mail Holdings plc
Corporate Governance
Statement by the Directors on compliance with the Combined Code on Corporate Governance
The Group is committed to high standards of corporate governance. This statement describes how the principles of corporate governance are
applied by the Group and its compliance with the Combined Code (the Code).
The Group has been in full compliance with the provisions of the Code throughout the year and up to the date of approval of these accounts, in so
fat as they are appropriate to a public company with a single shareholder. The only exception was that a Senior Independent Director was not
appointed until 4 March 2003. The Secretary of State also approves the remuneration of both executive and non executive Directors, including all
incentive plans.
The Board and its committees
Details of the Board and committees are set out below.
The Board
The Board is responsible for setting the objectives and strategy of the Group and for monitoring performance. The Board usually meets monthly,
and has defined those matters that are reserved exclusively for its consideration, The Board currently comprises a non executive Chairman, six
executive Directors and six non executive Directors (including Bob Wigley who joined on 1 April 2003). There is also an additional non executive
Director vacancy, which the Company is seeking to fill. Executive Directors have rolling 12-month contracts and non executive Directors are
generally appointed for a three-year term.
There is an agreed division of responsibiities between the Chairman, the Executive Deputy Chairman and the Chief Executive roles. All non
executive Directors are considered independent.
Directors may take independent professional advice in the furtherance oftheir duties, atthe Group's expense. All Directors have access to the
advice and services of the Company Secretary.
The following committees deal with specific aspects ofthe Group's management.
Audit and Risk Committee
The Audit and Risk Committee consists of non executive Directors, The Committee has been chaired throughout the year by Rosemary Thome,
with Miles Templeman and Allan Leighton as the other members. Miles Templeman stood down from the Committee on 4 March 2003 and was
replaced by John Neil, Allan Leighton was replaced by Bob Wigley on 1 April 2003.
The Audit and Risk Committee provides a forum for reporting by both internal and external auditors and is responsible for a wide range of matters
including:
monitoring the corporate risk exposure of the business and the effectiveness of internal controls;
- reviewing the half year and annual accounts before their submission to the Board;
~ advising the Board on the appointment of external auditors and on their remuneration both for audit and non-audit work;
- discussing the nature, scope and outcomes of the audit with external and internal auditors;
- agreement of the annual internal audit plan; and
- keeping under review the independence and objectivity of the external and internal auditors.
Management Board
The Executive Deputy Chairman, Elmar Toime, chairs the Management Board, which comprises all executive Directors of Royal Mail Holdings
plc and Royal Mail Group plc, and certain other senior executives of the Group. The Management Board develops the Group's strategy, annual
operating plans and budgets for Board approval, and monitors their deployment. It reviews operational activities, sets policies where these are not
reserved to the Board.
The Management Board comprises:
Elmar Toime, Executive Deputy Chairman Adam Crozier, Chief Executive of Royal Mail Group plc
Paul Bateson, Managing Director Logistics David Burden, Chief Information Officer
Marisa Cassoni, Group Finance Director Jerry Cope, Managing Director UK, Royal Mail
Vanessa Leeson, Managing Director Parcelforce Worldwide Tony McCarthy, Group Director People and Organisational Development
David Mills, Chief Executive of Post Office Limited Paul Rich, Deputy Managing Director and Marketing Director UK, Royal Mail
Alan Williams, Corporate Affairs Director Kevin Williams, Managing Director International
Pensions Committee
The Pensions Committee is chaired by Marisa Cassoni, The Committee is responsible for reviewing funding, benefits, scheme structure and
strategic developments impacting on the Group's occupational pension schemes. The Committee represents the Group in discussions with the
Trustees of the Group's occupational pension schemes. Other members of the Committee are the Company Secretary, Jonathan Evans and the
Group Director People and Organisational Development, Tony McCarthy.
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Royal Mail Holdings plc
Corporate Governance (continued)
Remuneration Committee
The Remuneration Committee develops the Company's policy on executive Directors’ remuneration for approval by the Board and the Secretary
of State, The Committee consists of non executive Directors. Membership until 3 March 2003 was Miles Templeman (Chairman), Rosemary
Thome, John Lloyd and Allan Leighton. From 4 March 2003 the membership has been David Fish (Chairman), Rosemary Thome, Richard
Handover and Mike Hodgkinson.
Nomination Committee
The Nomination Committee has the overall role of leading the process both for appointments to the Board of the Company, and for appointments
to subsidiary boards, Some appointments are subject to the consent of the Secretary of State. The Committee consists of non executive Directors
and its membership is Richard Handover (Chairman), Allan Leighton and David Fish.
Internal Control
‘The Board is responsible for the system of internal control and risk management as well as the timely review of its effectiveness. The system is
designed to manage rather than eliminate the risk of failure to achieve business objectives and can only provide reasonable but not absolute
assuranoe against material misstatement or loss.
There is an ongoing process for identifying, evaluating and managing the significant risks faced by the Group in accordance with the quidance
detailed by the Tumbull Committee as part of the Code. The Board regularly reviews this process, The process has been in place forthe full year
and up to the date of approval of these accounts.
The Board has reviewed the effectiveness of the system of risk management and intemal control. The key elements include a review of internal
audit reports, regular confirmations from local management and communications from the Chairman of the Audit and Risk Committee on the
‘outcome of Audit and Risk Committee meetings,
The key processes of internal control and risk management include the following:
Management structure
The business units have authority to manage within the mits set by the Board and within the scope of reserved powers. The Code of Business
Standards sets the principles of professionalism and integrity for our people.
Identification and evaluation of business risks
‘A process of risk and intemal control self-assessment encompasses all areas of the Group. The process defines significant risks and the controls
in place to manage them and requires each business unit Managing Director to undertake a formal assessment of the effectiveness of the risk
management and control processes. This information is communicated to the Board. The Internal Audit and Risk Management function regularly
reviews the Group's risks for coverage, relevance and effective management. The function also undertakes regular reviews of the most significant
areas of risk and ensures that key controls remain in place and are effective and reports its findings to the Audit and Risk Committee.
Information and financial reporting system
The Group's planning, financial and reporting procedures include annual budgets, which are reviewed and approved by the Board. Performance
is monitored regularly by reference to key performance indicators, updated forecasts and information on the key risk areas.
Audit and Risk Committee
The Audit and Risk Commitee reports to the Board and meets as a minimum on a quarterly basis to monitor and review the effectiveness of the
risk management and control environment.
Risk Management Committee
This is a sub-committee of the Audit and Risk Committee. It sets the framework for risk management within the Group and ensures integration
with strategic planning, It also facilitates regular reporting of Key risks, provides a forum for highlighting emerging risks and assesses the risks
identified and the actions to manage the risks to a desired level
16
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Royal Mail Holdings plc
Report on Directors’ Remuneration
‘The Board is responsible for the framework and costs of executive remuneration and the material terms of the service contracts offered to all
Directors, which require the consent of the Secretary of State. The Remuneration Committee's role is to develop the remuneration policy for
executive Directors and specifically, to recommend their salaries, benefits, including bonuses, pensions, and other terms and conditions of
employment. The Committee also recommends terms for their cessation of employment. No Director is involved in determining his or her own
remuneration.
The Remuneration Committee is made up wholly of non executive Directors as oulined above. Throughout the year, the Company has applied
the principles in Section 1 of the Combined Code on Corporate Governance (the Code) and has complied with the Code.
In the performance of its rote, the Committee has access to professional advisers within the Company. The Committee commissioned no direct
external advice during the period but sought via the Company advice from Hay Group on benchmark remuneration package comparators, Watson
Wyatt regarding pensions arrangements for certain executive Directors, and Emst & Young's Human Capital Division in regard fo the Long-Term
incentive Plan.
Policy on remuneration of Directors
The Company's policy on Directors’ remuneration is that the overall remuneration package should be sulficiently competitive to attract and retain
‘executives of the necessary quality in a complex business and a competitive international market place. The package consists of basic salary,
benefits, annual performance-related bonuses, pensions and a Long-Term Incentive Plan with a significant proportion being based on
performance and the achievement of demanding targets. Consideration is given to pay and employment policies elsewhere in the Group,
especially when determining annual salary increases.
The Remuneration Committee, having received consent from the Secretary of State, has now implemented its proposals to realign executive
Directors’ remuneration packages to support the Company's Renewal Plan, whilst ensuring the rewards are market-competitive. All executive
Directors are on service contracts which have been changed where necessary to reflect best commercial practice, and introduced in conjunction
with the new Long-Term Incentive Plan. The Company has supplemented the annual performance-related cash bonus with a transparent Long-
Term Incentive Plan based on three-year business renewal targets. The relative importance of the performance-related element of remuneration
thas been significantly increased, with Directors entitled to receive substantial performance-related payments, but only on achieving demanding
targets based on measures aligned to returns over the longer term.
The fees of the Chairman and the non executives are agreed with the Secretary of State, and are currently £20,000 per annum and £30,000 per
annum respectively, Additional fees are paid to the Chairs and members of committees.
Remuneration packages for executive Directors comprise the folowing elements:
Basic salary
Salaries are reviewed annually and appropri
Performance, increased individual responsi
increases are recommended where the Committee believes that it is necessary to reflect
ties and market levels,
Performance-related personal annual bonus
The Chairman and executive Directors may earn a performance-related bonus for achievement of financial and customer targets. These bonuses
are based on targets set each year in line with the Renewal Plan and agreed with the Shareholder, The maximum annual bonus for all executive
Directors, except the Executive Deputy Chairman and Chief Executive of Royal Mail Group plc, is 40% of basic pay. The Executive Deputy
Chairman and Chief Executive of Royal Mail Group ple can achieve a maximum of 75%; the non executive Chairman may eam an annual
performance-related bonus of £180,000. 80% of potential bonus earings relate to financial performance and 20% fo the achievement of
customer service targets. The Chief Executive of Post Office Limited can achieve a maximum of 40% of basic pay based upon achievement of
financial targets of Post Office Limited (80%), the Group's financial targets (16%) and customer service standards (4%).
Benefits
Benefits incorporate all benefits arising from their employment. In the main, these relate to the provision of company cars, death-in-service benefit
and health insurance plus the cash-equivalent of any benefits not taken.
Pensions
The Group has a lability o pay pensions in respect of Directors’ services and for some executive Directors makes contributions to pension
‘schemes for this purpose. The Company has set up a Funded Unapproved Retirement Benefit Scheme (FURBS). The FURBS will provide
benefits to Directors and employees whose contributions to the Company scheme are restricted by the Inland Revenue earnings cap.
Long-Term Incentive Pan
‘The Company recently introduced a Long-Term Incentive Plan for its most senior managers, which was approved by the Secretary of State for
application to the executive Directors. The objectives of the Long-Term Incentive Plan are to incentivise the delivery of the long-term business
goals of the Group and to reward success in achieving or exceeding these goals over a three-year period.
The Plan consists of Annual Performance Awards and Bonus Awards, both of which are made at the discretion of the Remuneration Committee.
Annual Performance Awards will be accrued on a sliding scale above a threshold level of financial performance of the Group, in line with the
Renewal Plan operating profit targets, and subject to satisfactory personal performance. The Renewal Plan operating profit targets have been
agreed with Government, our sole shareholder and are based on moving the Group from a foss from operations of £318m in 2001-02 to a profit,
before the cost of the ‘Share in Success’ scheme and Long-Term Incentive Plan awards, of £400m in 2004-05. Individual senior managers are
eligible for annual awards of up to 37.5% of their basic salary if the Group achieves 120% of the agreed target.
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Royal Mail Holdings pic
Report on Directors’ Remuneration (continued)
‘The award for on-target performance is 25% of basic salary and no award is made below 87.5% of the agreed target. The Bonus Award element
‘of the scheme allows the Remuneration Committee to award into the Plan up to 50% of their personal performance-related annual bonus, taking
into account individual preferences.
At the end of the three-year period, the value of these annual accrued awards together with any deferred bonus elements will be paid out in cash
and enhanced by up to 33% if the cumulative target over the 3 years is met. The maximum enhancement is 100% if the cumulative target over
the three years is exceeded by 178%.
The Remuneration Committee may, ifit is appropriate for the retention of key senior managers, permit a further period of deferral with
enhancement beyond the proposed three-year period.
All awards under the Long-Term Incentive Plan are subject to payments being made under the ‘Share in Success’ scheme to all our people. If no
payments are made to our people under the ‘Share in Success’ scheme, no Annual Performance Awards will be paid and there will be no
enhancement to Bonus Awards.
The ‘Share in Success’ scheme is designed to pay £800 to all our qualifying people for achieving on-target profits forthe financial year ending
‘arch 2005, and up to £1,200 per person if stretch targets are achieved.
Contracts of service
The rolling service contracts and letters of appointment of the Directors include the following terms:
Unexpired term
at 30 March 2003
Date of contract (months)
Chairman (Non Executive)
‘Allan Leighton (appointed Chairman 25 March 2002. Initially 725 March 2002 th
appointed non executive Director on 2 April 2001)
Executive Directors
Elmar Toime 4 March 2003 12
Marisa Cassoni 1 February 2001 12
Terry Cope 23 January 2003 2
Adam Crozier 1 February 2003 12
Tony McCarthy 6 January 2003 2
David Mills 15 April 2002 12
‘Non Executive Directors
David Fish 1 January 2003 33
Richard Handover 1 January 2003 33
Mike Hodgkinson {January 2003 33
John Neill 1 January 2003 33
Rosemary Thorne 26 March 2002 {initial appointment 6 October 12
1998 for 3 years plus one year extension)
Robert Wigley T April 2003 26
All executive Directors have a contracted 12-month notice period from the Company, the Director may give six-months notice. The standard
terms for compensation for loss of office is a maximum payment of 12-months basic salary. The Company is committed for the full three-year
term for non executive Directors, including the Chairman.
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Royal Mail Holdings plc
Report on Directors’ Remuneration (continued)
Audited information
Directors’ remuneration, excluding pensions, was as follows:
Tota excluding
Basic satay I Performance: Compensation
andteos I _ related bonus Benefits I torloss of ofce 2003 2002
€ € € G € £
CHAIRMAN (NON EXECUTIVE)
‘Allan Leighton
Neville Bain (retired 31 December 2001)
EXECUTIVE
Elmar Toime (appointed 1 March 2003)
Marisa Cassoni
Jeny Cope
‘Adam Crozier (appointed 1 February 2003)
Tony MoCanthy (appointed 6 January 2003)
David Mills (appointed 15 April 2002)
John Roberts (retired 31 December 2002)
NON EXECUTIVE I
David Fish (appointed i
1 January 2003) I
Richard Handover (appointed
4 January 2003)
Mike Hodgkinson (appointed
4 January 2003)
‘Mike Kinski (contract ended 12 February
2002)
‘John Lloyd (contract ended 4 March 2003)
John Neil (appointed
4 Janwary 2003)
Wiles Templeman (resigned 4 March 2003)
Rosemary Thome
Total 2003
Total 2002
No fees (2002 nil) were paid to third partes in respect of services provided by Directors.
The figures in the table represent emoluments eamed and receivable as Directors during the financial year, whenever paid. Such emoluments are
normally paid in the same financial year with the exception of the annual performance-related bonus, which is paid in the year following that in
which it is earned. Under the new Long-Term Incentive Plan, a proportion no greater than 50% of this bonus may be made as an award under the
Plan by the Remuneration Committee, taking into account executive Director preferences.
The above table includes any benefits or expenses paid to the Director on their recruitment. In this respect, Tony McCarthy received
compensation for costs incurred on departing his previous employer of £125,000.
John Roberts’ basic salary included six-months pay in lieu of notice amounting to £119,108.
Unaudited information
As required by the Shareholder, in determining the appropriate level of annual bonus for 2002-03, the Committee has taken into account the
performance of the Company against the year's financial and service targets, and the extent to which the Company is ontrack with its three-year
Renewal Plan,
The profit performance of the Company at operating level has exceeded the first-year Renewal Plan target by £120m (38%).
(On customer service, the Committee has taken into account performance against the licence targets agreed with Postcomm, both in terms of
achieved fevels and year-on-year improvement. Of the 15 targets applying to the mails businesses, only three were achieved in ful. However, 14
showed year-on-year cumulative improvements and the 15* matched last years level. In addition, the queuing performance target for Post Office
Limited showed sufficient improvement inthe final two months of the year to meet Postcomm’s criterion for this target to be dropped from the
licence.
In judging progress against the Renewal Plan, the Committee has looked at the status of the key Renewal Programmes. Some but not all are
behind schedule, however, the Company has secured additonal benefits in other areas to compensate. The Committee is satisfied that the
‘underlying and sustainable expenditure performance of the Company is in line with the requirements of the Renewal Plan going forward.
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Royal Mail Holdings plc
Report on Directors’ Remuneration (continued)
Audited information
Pensions
The Group normally offers its most senior people membership of the Royal Mail Senior Executive Pension Plan (RMSEPP). Details of RMSEPP
are set out in note 21 fo the accounts. The Plan is a funded, Inland Revenue-approved final salary occupational pension scheme. The scheme.
provides for a two-thirds final pensionable salary at normal retirement age, subject to the necessary pensionable service and Inland Revenue
earings cap, Pensions in payment are increased annually inline wth Retail Prices Index (RPI), subject in some cases to a cap. Pensions are
also payable to dependants on the death of the member and a lump sum is payable if death occurs in service.
For senior executives whose membership of the RMSEPP is restricted by the earnings cap, pension provision is made by a combination of the
Company scheme and an appropriate Funded Unapproved Retirement Benefits Scheme (FURBS) or equivalent. Gross employer contribution
rales range between 40% and 55% of base pay above the earnings cap. The Company has made provision for Elmar Toime, Adam Crozier and
Tony McCarthy at a rate of 40% pending final resolution of these new Directors’ pension arrangements. The total provision made for FURBS is
£167,740 {2002 £100,000). In addition, David Mills receives cash supplements of 24.2% for earings below the pensions cap, and 40% for
earnings above, giving a total of £80,754.
Disclosure of Directors’ pension transfer values is required under two separate requirements:
* Stock Exchange Listings Rules: the requirements are the same as that disclosed in last year's accounts and are designed
to place a value on the increase in Directors’ accrued benefits during the period. The transfer value is calculated on the
basis of actuarial advice in accordance with Actuarial Guidance Note GN11 and excludes Directors’ contributions.
‘* Directors’ Remuneration Report Regulations 2002: this is a new requirement and is designed to assess the change in
‘transfer values during the year, taking into account movement in investment market conditions. Falls in market values
may generate a negative movement in the transfer values.
The transfer values disclosed represent a potential lablty of the Company rather than any remuneration due fo the individual and cannot be
‘meaningfully aggregated with annual remuneration, as its not money the individual is entited to receive.
The pension entitlements (under Stock Exchange Listing Rules) of the Directors at the year end were:
Transter value* of I
Increase in accrued Increase before I
Increase In accrued I benefits during the inflation less
‘Accumulated accrued benefit I benefits during the period (net of Directors’
Age at 30 March 2003 period* inflation)* contributions
i -- ns
John Roberts
I Jerry Cope
Marisa Cassoni
Elmar Toime Hi
‘Adam Crozier Hl
Tony McCarthy Hl
David Mills H
* Excluding any increase arising from the transfer in of pension entitements accrued with previous employers.
20
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Royal Mail Holdings plc
Report on Directors’ Remuneration (continued)
The transfer value (in accordance with the Directors’ Remuneration Report Regulations 2002) of each Director's accrued benefits at the end of
the financial year is as follows:
T Movement in the
period, less
Plus transfers-in Directors’
I ‘Age I At31 March 2002 received Sub total I At30 March 2003 contributions
i £ £ £ £ E
John Roberts
Jerry Cope
Marisa Cassoni
Elmar Toime
‘Adam Crozier
Tony McCarthy
David Mills
John Roberts was an employee of Royal Mail forthe previous 35 years and, more recently, a member of the RMSEPP until his early retirement
on 31 December 2002, on a pension of £161,161 per annum. As at the end of the previous financial year, Johin Roberts had a deferred pension
entitlement of £149,869 per annum or an immediate pension entitlement of £127,197 per annum after allowing fr the early retirement reduction
factor. The increase in the accrued pension of £33,964 represents the increase (net of inflation) in his immediate pension entitlement, arising from
his departure. The effect of early retirement on the transfer value shown in the above table is £663,000. The balance of £1, 100,733 is attributable
to normal pension accruals and a favourable market movement at the ime of retirement.
During the year Marisa Cassoni brought a transfer payment of £916,751 into the RMSEPP. This provided additional accrued pension of £104,036
per annum. The effect ofthis additional pension has been to reduce Marisa Cassoni's future accrual rate within RMSEPP from 1/30th to 1/60th,
Tony McCarthy and David Mills are also on a 1/60th basis due to the effect of retained benefits from previous employers. All other executive
Directors are members of RMSEPP on a 1/30th basis.
By order of the Remuneration Committee
Jonathan Evans
Secretary
London
28 May 2003
21
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Royal Mail Holdings plc
Statement of Directors’ responsibilities in respect of the accounts
Company law requires the Directors to prepare accounts for each financial year which give a true and fair view of the state of afairs ofthe
Company and of the Group and of the profit or loss of the Group for that period.
In preparing those accounts Directors are required to:
~ select suitable accounting policies and apply them consistently,
— make judgements and estimates that are reasonable and praxlent; and
— state whether applicable accounting standards have been followed, subject to any material departures disclosed and explained in the accounts.
Directors are responsible for ensuring that proper accounting records are kept which disclose with reasonable accuracy, at any time, the financial
position of the Company and of the Group, and which enable them fo ensure that the accounts comply with the Companies Act 1985, Directors
are also responsible for ensuring that the assets of the Group are safeguarded and hence for taking reasonable steps for the prevention and
detection of fraud and other iregularities.
22
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Royal Mail Holdings plc
Independent auditor’s report to the members of Royal Mail Holdings pic
We have audited the Group's financial statements for the year ended 30 March 2003 which comprise the Group profit and loss acoount, the
Group and Company balance sheets, the Group cash flow statement and associated notes, the Group statement of total recognised gains and
losses, accounting policies and general notes and the related notes 1 to 28. These financial statements have been prepared on the basis of the
accounting policies set out therein. We have also aucited the information in the Directors’ Remuneration Report that is described as being
audited.
This report is made solely to the Company's members, as a body, in accordance with section 235 of the Companies Act 1985. 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.
Respective responsibilities of Directors and auditors
The Directors are responsible for preparing the accounts, including the financial statements which are required to be prepared in aocordance with
applicable United Kingdom law and accounting standards as set out in the statement of Directors’ responsibilities in respect of the acount.
Our responsibility is to audit the financial statements in accordance with relevant legal and regulatory requirements and, United Kingdom Auditing
Standards.
We report to you our opinion as to whether the financial statements give a true and fair view and whether the financial statements have been
properly prepared in accordance with the Companies Act 1985. We also report fo you if, in our opinion, the Directors’ Report is not consistent
with the financial statements, if the Company has not kept proper accounting records, if we have not received all the information and explanations
‘we require for our audit, or if information specified by law regarding Directors’ remuneration and transactions with the Group is not disclosed.
We read other information contained in the accounts and consider whether it is consistent with the audited financial statements. This other
information comprises the Directors’ Report, Financial Review, Directors’ Remuneration Report and Corporate Governance Statement. We
consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the financial
statements. Our responsibilities do not extend to any other information.
Basis of audit opinion
We conducted our audit in accordance with United Kingdom Auditing Standards issued by the Auditing Practices Board. An audit includes
examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements. It also includes an assessment of
the significant estimates and judgements made by the Directors in the preparation of the financial statements, and of whether the accounting
policies are appropriate to the Group's circumstances, consistently applied and adequately disclosed.
We planned and performed our audit 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 statements are free from material misstatement, whether caused by fraud
or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial
statements.
Opinion
In our opinion the financial statements give a true and fair view of the state of affairs of the Company and of the Group as at 30 March 2003 and
of the loss of the Group for the year then ended; and the financial statements have been properly prepared in accordance with the Companies Act
1985.
Emst & Young LLP
Registered Auditor
London
28 May 2003
23
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Royal Mail Holdings plc
Accounting policies and general notes
The following accounting policies and general notes apply throughout the Group:
‘A) Going concern
The Group's accounts for the year ended 31 March 2002 noted an uncertainty over how the Group's future cash requirements were to be
financed. The required financing was to cover it two principal businesses, Royal Mail Group covering mails and parcels and Post Office Limited
covering the Post Office network.
During the year, loan documentation was signed with Government giving Royal Mail Group plc access to £1,044m of financing on commercial
terms. Based upon current cashflow projections, the Directors believe that this is sufficient to meet the foreseeable funding needs of this
business. All relevant conditions precedent attaching to this financing, including a satisfactory outcome to Postcomm’s price contol proposals,
have been satisfied. The business is now able to draw down against this facility, as and when it Is required. For this reason, the Directors have
‘concluded that there Is no longer any uncertainty over the financing of this business.
In respect of Post Office Limited, agreement has been reached between Royal Mail Holdings plc and Government on how financial support wit be
provided to the company. Post Office Limited's current strategic plans indicate that funding of £0.7bn is required for operational needs and a
further £1.2bn working capital facility, The agreed funding package is made up as follows:
(2) the write-off of indebtedness of £464m owed to Royal Mail Group against a special Royal Mail Group reserve backed by the Group's past
surpluses;
(b) rural network payments of £150m per annum forthe next three years to support the maintenance ofthe rural network of Post Offices;
{o) further advances from the Royal Mail special reserve to meet Post Office Limited's projected net cash outflows until 2006-07.
A loan facility of up to £1.2bn will also be granted by Government to fund working capital needs, arising from the withdrawal by the Department for
Work and Pensions of advance funding for beneiit payments being made on its behalf over the Post Office network.
All of the above have been agreed and the £1.2bn loan facility is in the course of being documented,
‘After careful consideration of the Group's cash flow projections, the Directors have concluded that the Group will continue in operational existence
forthe foreseeable future.
B) Basis of preparation
The accounts on pages 24 to 55 have been prepared in accordance with applicable accounting standards under the histori cost
accounting convention and the requirements of the Companies Act 1985, except forthe issue described in accounting policy note (i) and
quantified in note 11.
Royal Mait Holdings ple (the Company) has not presented its own profit and loss account, as permitted by the Companies Act 1985 s230(3).
However, the results of the Company for the year are disclosed in note 28.
No new Financial Reporting Standards, which affect the presentation of these accounts, have been issued by the Accounting Standards Board.
C) Financial year
The financial year ends on the last Sunday in March and acoordingly, these accounts cover the S2-week period ended 30 March 2003 (2002 53
weeks).
D) Basis of consolidation
‘The accounts consolidate the accounts of Royal Mail Holdings plc and its subsidiary undertakings,
Entities, other than subsidiary undertakings, in which the Group has a participating interest and over whose operating and financial policies the
Group exercises a significant influence, are treated as associates or, where the Group exercises joint contol, joint ventures. In the consolidated
aecounts, associates are accounted for using the equity method and joint ventures are accounted for using the gross equity method.
‘The Group operates through business units that make use of each other's services in order fo take advantage of Group synergies, having regard
to the mutual dependencies that exist. The interbusiness charges recognise these dependencies. The Board's policy is to maintain controls to
ensure adherence to appropriate pricing principles.
E) Turnover
Tumover comprises revenue receivable directly from customers as adjusted for an assessment of prepaid stamps and meter sales still in the
hands of the public. Turnover excludes VAT,
Itis not considered that there is a material difference between turnover by origin and destination.
24
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Royal Mail Holdings plc
Accounting policies and general notes (continued)
F) Goodwill
Goodwill arising on acquisition, being the excess of the consideration over the fair value of the separately identifiable net assets acquired, is
capitalised and amortised on a straighttine basis over its estimated useful economic life of 20 years. Its reviewed for impairment at the end of
the first full financial year following acquisition and thereafter as appropriate.
G) Tangible fixed assets
(i) Tangible fixed assets are recognised at cost, including direcly attributable costs in bringing the asset into working condition for its intended
use
(i) Depreciation of tangible fixed assets is provided on a straightJine basis by reference to original cost, and to the remaining useful economic
lives of assets and their estimated residual values. The lives assigneed to major categories of tangible fixed assets are:
Property:
freehold buildings up to 60 years
leasehold land and buildings the shortest of the periad of the lease, 60
years or the estimated remaining useful life
Plant and machinery 3-15 years
Motor vehicles 1= 12years
Fixtures and equipment:
‘office machines 3-12 years
computers 2-7 years
other 4-15 years
(i) impairment reviews of fixed assets are performed annually for assets with an estimated remaining useful life in excess of 50 years, and
additionally where there is an indication of impairment as defined by FRS 11.
H) Leasing and hire purchase
Assets acquired under finance leases or hire purchase agreements are capitalised and treated as tangible fixed assets. Depreciation is provided
accordingly and the capital element of future rentals is included within creditors. Interest on such contracts is charged to the profit and loss
account over the period of the contract and represents a charge that relates to the proportion of the capital repayments outstanding. All other
leases are regarded as operating leases and rentals are charged on a straight-line basis over the lease term.
I) Investments
(i)In the Company's accounts, the investments in subsidiary undertakings, associates and joint ventures are stated at cost less provision for
impairment for acquired undertakings and at net asset value for internally formed companies.
(ii) Other fixed asset investments are stated at cost fess provision for impairment.
(ii) Government gil-edged securities, held as current assets, are stated at market value at the balance sheet date and the difference between
cost and market value is taken to the profit and loss account. This treatment is a departure from UK accounting rules, which stipulate that
unrealised profits be credited to a revaluation reserve. In the opinion ofthe Directors, the treatment adopted is necessary to present a true and fair
view. The accounting treatment adopted represents a fairer reflection of the investment return, All other current asset investments are treated
according to standard UK accounting rules.
J) Stocks
‘Stocks comprise unissued stores, such as uniforms, bicycles and stationery, and in the case of counter services also include retail stocks. Al!
stocks are carried at the lower of cost and net realisable value.
K) Deferred tax
Deferred tax is generally provided in full on timing differences at the balance sheet dale, at rates expected to apply when the tax liability (or asset)
crystallises based on substantially enacted tax rates and law. Timing differences arise from the inclusion of items of income and expenditure in
taxation computations in periods different fram those in which they are included in the accounts.
Deferred tax is not recognised in the following instances:
~ on gains on disposal of fixed assets where, on the basis of available evidence, itis more likely than not that the taxable gain will be rolled over
into replacement assets and charged to tax only when there is a commitment to dispose of those replacement assets;
- on unremitied earings of subsidiaries and associates where there is no commitment to remit those earnings; and
~ deferred tax assets are recognised only to the extent that the Directors consider that it is more likely than not that there will be suitable taxable
profits from which the future reversal of the underlying timing differences can be deducted.
Deferred tax assets and liabilities are not discounted.
25
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Royal Mail Holdings plc
Accounting policies and general notes (continued)
L) Pensions and other post-retirement benefits
Membership of occupational pension schemes (as detailed in note 21) is open to most permanent UK employees of the Group. All members of
defined benefit schemes are contracted out of the earnings-related part of the State pension scheme. Overseas subsidiaries make separate
arrangements for the provision of pensions and other post-retirement benefits,
The defined benefit schemes are financed on the basis that the combined current service contributions payable by the employees and employer
are sufficient to cover the cost of the benefits which are expected to acorue in the future to members. The charge to the profit and loss account is
calculated so as to spread variations from regular cost and to amortise the surplus or deficit over the expected remaining service lives of the
employees. The assets of the schemes are held in separate trustee administered funds.
Valuations of the defined benefit schemes are carried out by independent professionally qualified actuaries at intervals not normally exceeding
three years, as determined by the Trustees, The accounting charge for pensions refiects best estimate assumptions as required by SSAP 24,
whereas the funding arrangements use a more cautious assumption for investment retums to assess the cash position of the Royal Mail Pension
Plan (RMPP). This results in the cash payments being higher than the accounts charge for the RMPP. The difference is dealt with through the
long-term pensions debtor in the balance sheet.
M) Research and development
Expenditure on research and development is written off in the year in which itis incurred.
N) Foreign currencies
‘Transactions in foreign currencies are recorded at the rate ruling at the date of the transaction (or at the contracted rate if the transaction is
covered by a forward foreign currency contract). Monetary assets and liabilities denominated in foreign currencies are retranslated at the rate of
‘exchange ruling at the balance sheet date (or the appropriate forward contract rate). All differences are taken to the profit and loss account with
the exception of differences on foreign currency borrowings, which are used to finance or provide a hedge against foreign equity investments.
These are taken directly to reserves together with the exchange difference on the carrying amount of the related investments. Tax charges and
credits attributable to exchange differences on those borrowings are also dealt with in reserves. The accounts of overseas subsidiary
undertakings are translated at the rate of exchange ruling at the balance sheet date and the differences arising from the translation of opening net
investments are taken to reserves.
©) Derivative instruments
The Group uses forward foreign currency contracts to reduce exposure to foreign exchange rates. The Group's policy is that its derivative
instruments qualify for hedge accounting when the folowing criteria are met:
~ the instrument must be related to a foreign currency asset or liability that is probable and whose characteristics have been identifed;
= itrmust involve the same currency as the hedged item; and
—it must reduce the risk of foreign currency movements on the Group's operations.
The contracted rates are used to record the hedged item. As a result, gains and losses are offset against the foreign exchange gains or losses on
the related financial assets and liabilities. Where the instrument is used to hedge a committed or probable future transaction, gains or losses are
not recognised until the transaction occurs,
In addition, over-the-counter derivative products are used to manage both the commodity and foreign exchange risks associated with the fuel
procurement policy.
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Royal Mail Holdings plc
Group profit and loss account
S2 weeks ended 53 weeks ended
0 March 2003 31 March 2002
Before Exceptional Before Exceptional
exceptional items exceptional items
items (note 4) Total items (note 4) Total
Notes tm tm im fm £m fm
Tumover: Group and share of joint ventures?
tumover 8,378 . 8,378 8,408 . 6,408
Less: share of joint ventures’ turnover 9) : 9) : :
‘Turnover - continuing operations 8,299 . 8,299 8,408 . 8408
Ongcing ! 3209 : 3298 a3r7 : 8377
‘Acquisitions . . : 3a . 3
Turnover 1 8299 : 8299 8408 : 8.408
Staff costs 2 (4.622) (664) (6.195) (4.265) (13) (5378)
Depreciation and other arnounts writen of
tangible and intangible fixed assets:
Depreciation and amortisation 3 (233) ’ (233) (amt) - (271)
Impairment ae 7) en : (446) (46)
Other operating charges 4 8.415) (88) @BA5t) (3,339) (79) (3518)
Other operating inoome 4 : 3 18 9
Total net operating costs (6280) (67) @s77 (6.475) (1419) (9.594)
Group operating profil(oss) ~ continuing
‘operations
Ongoing 9 (7) (678) 7) (1119) (1,188)
Group operating profit{ loss) 3 19 637) 67) 7) (1119) (1,188)
Share of operating profit in joint ventres 8 : 18
‘Share of operating profit in associates 12 . 2 4 : 4
Impairment of goodwill in associates: 4 . (24) (24) 8) m (12)
Total operating profit/(loss): Group and share
of joint ventures and associates 4 (21) (672) (68) (1,126) (1,194)
Net profit on disposal of tangible fixed assets 4 - au 4 . 4 Py
Profiles) on cispasal of subsidiary underteking : 2 2 : (10) (10)
Profitiloss) on ordinary activities before
interest 8 (625) (648) (68) (1113) (1,180)
Net interest receivable 5 % : % 58 : %
Profititoss) on ordinary activities before
taxation a (695) i (12) (1112) (1,124)
Taxation 6 82 179
Loss on ordinary activites aftr taxation (658) (245)
Equity minority interests . 5
Loss transferred to reserves forthe financial
year 18 (659) (oo)
27
Royal Mail Holdings plc
Group statement of total recognised gains and losses
Loss for the financial year excluding share of profit in joint ventures and
associates
‘Share of joint ventures’ profit for the year
‘Share of associates’ profit for the year
Loss for the financial year
Exchange differences on translation of net assets and loans
Unrealised gain on joint venture/associate transaction
Total recognised losses for the financial year
52 weeks ended
30 March 2003
£m
(st?)
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53 weeks ended
34 March 2002
£m
(943)
3
(940)
(13)
15
(838)
There is no statement of historical cost profits and losses as the accounts are produced under the historic cost accounting convention.
28
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Balance sheets
Fixed assets
Intangible assets
“Tangible assets
Investments in joint ventures:
‘Share of gross assets
Share of gross libities
Investments in associates
Other investments
Current assets
Stocks
Debtors - receivable beyond one year
Deblors - receivable within one year
Investments
Cash at bank ard in hand
Creditors ~ amounts falling due within one year
Net current assets
Total assets less current tabilities
Creditors ~ amounts falling due after more than
‘one year
Provisions for liabilities and charges
Capital and reserves
Called up share capital
Profit and loss account
Mails Reserve
Dividend reserve
Other reserves
Total capital and reserves
‘Approved by the Board on 28 May 2003
Royal Mail Holdings pic
Notes
13
Group Company
AL AL At At
‘30 March 2003 31 March 2002 30 March 2003 31 March 2002
m £m fm fm
156 148 -
4,648 1,783
10
Cy
oH)
2 @
4 1 2,180 2725
1887 2,023 2.480 275
B 2 -
m2 549
1,298 882
1250 1800
1,060 1.054 =
4351 4327 >
2.566) (2340) :
1785 1987 i
3.672 4010 2,480 2725
(18) (655) -
(666) (750) a
2,088 2,605, 2,180 2705
8 246 2,480 2481
4,853
- 244 24
cu 8
2,088 2.606 2,480 23725
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Royal Mail Holdings plc
Group cash flow statement
Net cash flow from operating activities
Dividends from joint ventures and associates
Dividends from associates
Cash inflow from dividends from joint ventures and associates
Returns on investments and servicing of finance
Interest received
Interest paid
Net cash inflow from returns on investment and servicing of finance
Taxation
Corporation tax recovered
Cash inflow from taxation
Capital expenditure and financial investment
Purchase of tangible fixed assets
Purchase of fixed asset investments
Sale of tangible fixed assets
Sale of fixed asset investments
Net cash outflow from capital expenditure and financial investment
Acquisitions and disposals
Purchase of subsidiary undertakings
Purchase of interest in joint ventures and associates
Payment of deferred consideration in respect of prior years’ acquisitions
Disposal of subsidiary undertaking
Net cash outflow from acquisitions and disposals
Cash outflow before use of liquid resources and financing
Management of liquid resources
Net movement in current asset investments
Net cash inflow before financing
Financing
Repayment of hie purchase agreements
New long-term loans
Repayment of loans
Net cash outflow from financing
Increase in cash
30
‘S2weeksended —_-§3 weeks ended
30 March 2003 31 March 2002
£m £m
(@) (383) 12
7 1
7 1
69 11
(35) (32)
34 79
7 13
7 13
(221) (216)
- 6)
58 61
4 4
(159) (187)
(14)
. (25)
@ 9)
7 :
@ (48)
(486) (100)
@) 550 363
64 263
) G7 (63)
oy 53 t
o. ™ )
61) (9t)
3 172
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Royal Mail Holdings plc
Group cash flow statement (continued)
Reconciliation of net cash flow to movement in net funds.
S2weeks ended 53 weeks ended
30 March 2003 31 March 2002
Notes fm £m
Increase in cash 3 172
Repayment of hire purchase agreements (b) 37 83
New long-term loans (b) (83) (1)
Repayment of loans (b) 7 9
Cash flow from management of fiquid resources. (b) (550) (363)
Change in net funds resulting from cash flows (486) (100)
Exchange differences (b) 1 8)
Movement in net funds (485) (108)
Opening net funds (0) 2,158 2,266
Closing net funds (0) 1,673 158
BI
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Royal Mail Holdings pic
Notes to the cash flow statement
{a) Reconciliation of operating loss to net cash flow from operating activities
52 weeks ended 53 weeks ended
30 March 2003 31 March 2002
em £m
Group operating loss (678) (1,186)
Depreciation and amortisation 233 an
Impairment 7 446
(348) (489)
Change in operating assets and liabilities
Stocks 9 2
Debtors (673) (69)
Creditors 198 (100)
Counter services client balances 67 (4)
Provisions 264 652
Net cash (outflowV/inflow from operating activities (383) 2
Cash flows relating to operating exceptional items charged
in both current and prior years
The net cash outflows relating to the above were as follows:
2003 2002
Net cash outflow relating to: fm £m
Current year exceptional items 29 53
Prior year exceptional items 210 <
Total 239 53
The net cash outflow from operating activities includes cash outflows of £93m in respect of the restructuring of parcels services, £19m in relation
to the transport network restructuring programme and £127m for olher redundancies and other miscellaneous costs.
(b) Analysis of net funds
At Exchange At
4 April 2002 Cash flows differences 30 March 2003
£m £m £m £m
Cash at bank and in hand 1,054 3 3 4,080
Debt due beyond one year (581) 67 (y (615)
Debt due within one year @) {43) (1) (53)
Hire purchase agreements due beyond one year (70) 35 - 35)
Hire purchase agreements due within one year (6) 2 - (34)
Current asset investments 1,800 (650) : 4,250
2,158 (486) 1 4,873
32
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Royal Mail Holdings pic
Notes to the accounts
4 Segmental information
‘2 wooks ended 30 March 2008, S53 weeks ended 31 Mach 2002
tm i
Analysis of tunover Tumover Tuner
Tol between External beeen Eternal
tumover —segents turnover ‘oua tumover segments turnover
By class of business
als and parcels 1384 43) 781 1387 an 7380
‘Counter senices 4186 co) 089 1280 en 953
(er businesses ast 102) e 22 con 105
Tota 4701 wo, 4299 3969 wt) 9408
By geographic area ot oigin
United Kingdom 7st 7782
Restot ne Works
(prcipaly Europe} ats 658
Tota 2299 2408
Analysis of (oss)profit before taxation
Betere Before
ey class ofbusiness I Operational Pensions Exceptional Exceptional tn Operafonal Pensions Excepforal Exceptions! tn
aetivty benefit items items Totat ‘actily benef items ems Tota
Mais and parcels 2 205 a 9) er (138) 205 er (1022) 955)
Counter services (208) a (3) (185) (7) (184 2 (144 4 (228)
Other businesses co) Ey cn) 8) 8) ) % ‘0 a) 1
Pensions benott 248 a) 280 (250)
Group eperatng
rot oss} ” 8 on) (678 7) on (1119) 41.186)
By geographic area of origin
Unites Kingdom 2 (680) 7) i) (258) 295)
Rest ofthe Word (inca Europe) 7 o © en ean)
Group operating oss 7) OT) Tie)
Share of peretng groftin joint ventures 1s *
‘Share of operating proftin assocites 2 : 2 4 4
Impairment of goodwiin associates 4) @ O) a i)
Proton Ssposato fed assets 4 Fy m a
Profijoss on Sposa of subsisiry 2 2 (10) (10)
Netinrestrecivable 8 % 6 8
Profitiloss) on ordinary ase betore
taxation 4 Coy sit) 412) ang (1129
Anaiysis of net assetsfiabilte) by cats of ‘AEB March at Mach
sins 7003 2002
én mn
Mais andparce’s 133 1225
Counter senices 4108) (286)
Other businesses ) 05)
Tas 3
Share of net assets fit vere 10
Share of net assets ofassocites e m0
Unatocated rat assets 393 1.821
Total ntassts 2088 Zits
Unallocated net assets principally include current asset investments, tax and borrowings. All net assets other than £300m (2002 £143m) were
located in the United Kingdom withthe balance principally in Europe.
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Royal Mail Holdings plc
2 Staff costs 2003 2002
im £m
Wages and salaries 4,628 4778
Social security costs 303 323
Pension costs {note 21) 265 a7
5196 5,378
A loan to one officer totalling £3,818 (2002- one officer: £5,516) was outstanding at the end of the year,
Staff costs include £564m (£364m wages and salaries and £200m pension costs), which is included in exceptional items (2002 £513m, £313m
and £200m respectively).
Average staff numbers, calculated on a full-time equivalent basis, including part-time employees were:
2002
as restated
Employees
181,264
14,564
17,139
8,843
221,810
2002
14,901
2002
£m
220
23
274
148
Ki)
259
446
2003
Employees
Mails and UK parcels 176,381
Counter services 13,893
Other 15,706
European parcels 9,587
Group total 215,567
2003
Subpostmasters at year end 14,567
Details of Directors’ remuneration and pension entitlements are included on pages 17 to 21.
3 Operating loss 2003
£m
Group operating loss is stated after
charging/(crediting):
Depreciation and amortisation:
Depreciation of owned assets 196
Depreciation of assets held under hire purchase
agreements 2
Amortisation of intangible assets 10
233
Impairment write-down:
‘Owned assets 90
Assets held under hire purchase agreements :
Intangible assets 7
7
‘Subpostmasters’ costs 575
Research and development expenditure 5
Operating lease charges:
Land and buildings 113
Vehicles and equipment. 89
Counter services net interest receivable (note 5) ©)
Expenditure reimbursed to:
Postoomm 6
Postwatch 10
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Royal Mail Holdings pic
3 Operating loss (continued)
2003 2002
Auditors’ remuneration: £000 2000
Audit services - current year 1,409 1,269
- prior year 409 :
Total audit services 1,518 1,269
Non-audit services - UK:
Due diligence and taxation services in respect
‘of acquisition and disposal activity 132 1,927
Regulatory, taxation, accounting and other
‘assurance services: 1,298 3,292
Other advisory services 515 1,007
Total non-audit services - UK 1,945 6,226
Overseas 438 1,679
Total non-audit services 2,383 7,905
35
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Royal Mail Holdings plc
4 Exceptional items 2003 2002
fm £m
Recognised in arriving at Group operating loss:
Recovery of losses arising from the supply of services
for television licensing : 19
Impairment write-downs @7) (446)
Provision for surplus properties (18) (10)
Provision for transport network restructuring a7 (156)
Provision for restructuring of parcel services 5 (298)
Provision for one detivery a day (245) .
Other redundancy provisions (250) (228)
Other (65) :
(697) (1.119)
Recognised below Group operating loss:
Impairment of goodwill in associates (24) 7)
Net profit on disposal of tangible fixed assets (no tax
‘or minority interest effect) a 4
Profit(lass) on disposal of subsidiary undertaking = 2 (10)
(695) (1.112)
Impairment reviews were carried out using an appropriate discount rate applicable to these specific types of assets of 8% and by reference to future
projections in accordance with long-term average growth rates. The impairment write-downs of £97m relate to tangible fixed assets in Post Ofice Limited
€88m) and UK parcels (£2m), and goodwillin UK and international mails subsidiaries of £7m. The £24m impairment of goodwill in associates mainly
Comprises Spring (219m).
Surplus property provisions arise from vacating administration and operational buildings as a result of the business restructuring initiatives.
‘Transport network restructuring relates to the initiative to streamne the transport network to a more integrated, road-based, regional hub-and-spoke!
system, which will reduce the total number of road journeys, The increase in the provision relates to further streamiining of the transport network, in
particular, the rationalisation of the air and rail networks,
Parcel services restructuring relates to the decision that Parcelforce Worldwide should concentrate solely on the growing market for time-guaranteed’,
‘next day’ and ‘two day’ express deliveries, both in the UK and overseas. The parcels business has transferred its universal parcels service to the UK
mails operation, which will use its existing network
The one delivery a day programme relates to the restructuring ofthe letter detivery service.
Other redundancy provisions relate to improvements inefficiency throughout the Group to support the initiative to reduce gross costs by £1.4bn per
annum. The increase in the provision relates to further efficiency reviews in the UK mails operations and counter services, and a major restructure of the
Group into six core business units - Counter Services, Letters, Parcelforce, Intemational Letters, Logistics and GLS, and a centval support unit.
“Other comprises provisions for the further rationalisation of support services, the incremental costs of running the redundancy programme and
miscellaneous write-offs and provisions,
36
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Royal Mail Holdings plc
5 Net interest receivable
2003 2002
gm £m
Interest payable:
= On bank loans and overdrafts 6) (4)
~ On other loans (29) (30)
(4) G4)
Interest receivable 69 90
35 56
In addition, counter services net interest receivable of £6m (2002 £1m) is included within other operating charges.
6 Taxation
(a) Tax on loss on ordinary activities
‘The tax (creditvcharge is made up as follows:
2003 2002
fm em
‘Current tax
‘Amount receivable for surrender of lasses to
associates and joint ventures in respect of
consortium retef (10) «
Tax overprovided in previous years. @ J
(7) -
Foreign tax 2 2
Group current tax (15) 2
‘Amount payable by joint ventures’ in respect of
consortium relief 5 -
‘Amount payable by associates’ in respect of
consortium relief 5 -
‘Share of associates’ current tax payable 4 4
Total current tax (note 6(b)) @ 3
Group deferred tax — origination and reversal
of timing differences (note 6{d)) (48) (182)
Tax on loss on ordinary activities (52 (179)
(0) Factors affecting current tax (creditVcharge
The tax assessed for the year differs from the standard rate of corporation tax in the UK of 30% (2002 30%). The differences are explained below:
2003 2002
£m £m
Loss on ordinary acthiies before tax (ett) 1,424)
Loss on ordinary activities muttptied by the standard rate of
‘corporation tax in the UK of 30% (2002 30%) (183) 337)
Deferred relief for asset depreciation and impairment 82 112
Accelerated relief for pension contrioutions* (180) Gt)
Provisions not deductible until incurred 88 101
Impairment and amortisation of goodwill 5 85
Losses and other reliefs not utlised 196 57
Other 48 16
Total current tax {note 6(a)) (4) 3
* Pensions contributions quality for tax relietin the year in which they are paid. Contributions paid in the year signiicarily exceeded pensions charges to
the profit and loss account.
37
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Royal Mail Holdings plc
6 Taxation (continued)
(©) Factors that may affect future tax charges
The Group has unrecognised deferred tax assets of £146m (2002 £57m) relating to tax losses in subsidiaries that are avallable to offset against future
taxable profits of those companies. The Group also has unrecognised deferred tax assets of 158m (2002 £126m) relating mainly to fixed asset ting
differences,
Deferred fax assets have not been recognised in respect of these items as they have arisen in companies which are loss-making and the losses, in
particular, may not be used to offset future taxable profits elsewhere in the Group. The unrecognised deferred tax assets will be recognised in future to
the extent that suitable taxable profits are expected to become availabe.
The Group has capital losses carried forward, the tax effect of which is approximately £12m (2002 £1 1m). These may be set-off in future against capital
gains. The Group has rolled over capital gains, the tax effect of which totals £75m (2002 £67m).Itis expected that gains on assets sold in the year will
‘de fully rolled over in due course.
(Gd) Deferred tax
‘The deferred tax included in the balance sheet is as follows:
2003 2002
m £m
Included in provisions for lables and charges (note 17) (10) (58)
Deferredi{accelerated) capita allowances rr) @
Pension contributions timing differences (338) (158)
Provisions 197 109
Losses 88 :
(10) (58)
‘AU April 2002 (68)
Deferred tax credit in Group proft and oss account
(note 6(@)) 48
At 30 March 2003 10)
T intangible fixed assets
Group inangie
Goodwill assets Total
cost tm om tm
At April 2002 442 7 459
Exchange movement 40 2 42
At 30 March 2003 482 19 504
AMORTISATION
At 1 April 2002 312 1 313
Exchange movement 6 2 5
Charge for the year 9 1 10
Impairment 7 - 7
‘At30 March 2003 343 2 345
NET BOOK AMOUNT
At30 March 2003 139 i7 156
At Apri 2002 430 6 146
Goodwill arising on acquisitions is being amortised evenly over its estimated useful economic life of 20 years.
38
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Royal Mail Holdings pic
8 Tangible fixed assets
Group Land and bulings
Plant and Fatures and
Freehold Long lease: ‘Short lease machinery Motor vehicles. ‘equipment Total
cost on fm fm fm im fn tm
At April 2002 1,589 205 366 624 342 862 4,008
Exchange movements 7 1 . 4 : 4 16
Reclassification (26) 4 2 Q) z 2 :
Additions B 5 59 70 8 36 203
Disposals (38) @) (25) (30) (104) (48) (248)
At 30 March 2003 4557 232 42 666 246 856 3979
‘ACCUMULATED DEPRECIATION
AL April 2002 648 114 174 306 197 786 2,225
Exchange movements . 1 . 2 - 3 6
Reclassification : : - (t) : 1
Charge for the year 82 7 32 57 8 7 223
Impairment 12 7 13 - 30 28 90
Disposals (25) (1) (24) (28) (89) (46) (213)
A130 March 2003 687 128 195 336 176 809 2,331
NET BOOK AMOUNT
At30 March 2003 870 104 2 30 70 at 41648
‘At April 2002 sat 41 192 318 145 76 4,783
‘The net book amounts held under hire purchase contracts amount to £110m (2002 £118m).
9 Fixed asset investments
Share profit
Group rainy ot
Att Apel Impairment ventures! AL30 March
02 Adéiione Disposats amerisaion associates 2005
tm tm tm tm fn fm
Share of net assets in associates 3 - (i) : 9 ro)
Good Ed : : 26) : 24
Net investment in associates 80 - () (26) 9 62
Share of net assets in joint ventures - 2 : . 8 10
Other investments 14 : Q) : : 11
94 2 (4) (26) 7 83
ther investments are Local Authority deposits that have a maturity date in exoess of 12 months at the date of purchase.
During the year, the Group sold 49% of its equity investment in Romec Limited, and 50% of is equity investment in First Rate Travel Services Holdings
Limited. Both companies are now accounted for as joint ventures, but there Is no goodwill associated with the investment in ether company. In addition,
the Group sold al of ts equity investment in Optecon, which was previously accounted for as an associate
Aso during the year, the Group disposed of most ofits equity investment in Cashtec and at the same time acquired a non-equity investment n the same
‘company, Cashtec is now accounted for as a trade investment, whereas it was previously accounted for as an associate Both the orginal associate and
the trade investment now held are recorded at zero value.
Further details of principal joint ventures and associates are given in note 27.
39
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Royal Mail Holdings plc
‘9 Fixed asset investments (continued)
Company 2003 2002
fm £m
At 1 Aprit 2002 2,725 .
Transfer from The Post Office Corporation * 3,784
Change in net asset value of subsidiary undertaking (545) (4,069)
At30 March 2003 2,180 2725
‘The fixed asset investment of the Company represents the net asset value of its investment in an intemally formed subsidiary undertaking, as stated in
accounting policy note I.
() Acquisitions in the prior year
No material adjustments have been made during the year to the provisional fair values of either the consideration relating to, or the net assets acquired
of, the subsidiary undertakings purchased in the year ended 31 March 2002
(i) Acquisitions during the year
‘There were no material acquisitions of subsidiary undertakings during the year.
Details of principal subsidiary undertakings can be found in note 27.
(ili) Disposals during the year
There were no material disposals of subsidiary undertakings during the year except forthe part-disposal of Romec Limited, which subsequently became
a joint venture. Further details can be found in the second paragraph below the table atthe beginning ofthis note,
10 Debtors.
2003 2002
£m &m
Receivable beyond one year:
Pension prepayment 707 531
Other debtors 5 18
2 549
2003 2002
£m £m
Receivable within one year:
Trade debtors 695, 700
Pension prepayment 400 .
‘Other prepayments and accrued income 204 182
4,296 882
‘The pension prepayment beyond one year relates to the cumulative excess of the amounts funded in the Group's defined benefit schemes over the
amounts charged to the consolidated profit and loss account. The amount within one year represents prepaid contributions for 2003-04.
40
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Royal Mail Holdings pic
44 Current asset investments
2003 2002
cn te
Government git-edged securities 253 358
Government short-term deposits (National Loans Fund) 913 41,172
Other deposits 84 270
1,250 1,800
In accordance with accounting policy note I(il), current asset investments are stated at market value. The difference between cost and market value
taken to the profit and loss account fr these investments was £1m (2002 £9m)..
The above investments include deposits of £549m, which are subject to a charge as security against the loans from the Department of Trade and
Industry. The balance of investments are restricted in their use to that permissible by the section 72 order, which created the Mails Reserve (note 18).
12 Creditors ~ amounts falling due within one year
2002
fm
g
36
987
970
220
6
1
104
7
2003
fm
Loans (note 14) 83
Obligations under hire purchase agreements (note 15) 34
Counter services client services balances 1,054
Trade creditors and accruals 1,028
Advance customer payments 253
Deferred consideration (note 16) :
Corporation tax 12
Other taxation and social security 112
Other creditors 2
2,566
2,340
‘The Group receives and disburses cash on behalf of Goverment agencies to customers (client services balances) through its counters network. The
level of such funds held can vary significantly at each balance sheet date.
13 Creditors - amounts falling due after more than one year
2002
&m
581
70
655,
2002
2003
fm
Loans (note 14) 515
Obligations under hire purchase agreements (note 15) 35
Deferred consideration (note 16)
Pensions creditor 68
Other =
618
14 Loans
2003
im
‘Amounts fling due in:
One year or less 53
More than one year but not more than two years 1
More than two years but not more than five years 5
More than five years 509
568
BB ese
41
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Royal Mail Holdings plc
14 Loans (continued)
Analysis of loans
tat beret
principal range
secaty Fs 4
OT! Loans:
Loans repayable between March 2021
and September 2025 Assets 500 5.26 to 6.12
‘Short-term DTI loan Deposits 50 4.06
Miscellaneous long-term bank loans taken out by
overseas subsidiaries Land and buildings 18 2.13 to 7.35
568,
On 20 December 2002, the Group signed a credit facility from the Department of Trade and Industry for additional loans up to a maximum of £1,044m,
thereby giving a total credit facility of £1,544m. All loans under this facility are secured against cash deposits and a fixed and floating charge against
certain assets of the Group.
45 Obligations under hire purchase agreements
‘Amounts falling due in
One year or less
More than one year but not more than two years
More than two years but not more than five years
More than five years
‘Sub total beyond one year
Total
16 Deferred consideration
Amounts falling due in;
One year or less
‘More than one year but not more than two years
2003 2002
fm tm
34 36
32 4
1 Ki
2 4
35. 70
69 406
2003 2002
tn fm
6
: 3
8
42
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Royal Mail Holdings pic
17 Provisions for liabilities and charges:
cigs! ened
im ‘ im o
‘Surplus properties a a : 40
Restructuring of transport network 186 76 (23) 174
Restructuring of parcel services 27 - (5) (93) 199
‘One delivery a day - 245 : (11) 234
‘Other redundancy 206 250 - (193) 263
Other 12 45 5 (11) 46
Deferred tax (note 6) 58 : (48) : 10
750, 643 (82) (345) 966
The provisions comprise:-
() Surplus properties - where the Group holds surplus leasehold properties, provision is made for future rentals and other unavoidable property costs
up to the earler of the lease termination date and the Directors’ best estimate of the likely date of disposal. £17m of the provision is expected to be
utlised in 2003-04 and the majority ofthe balance over the following 6 years,
(ji) Restructuring of transport network - redundancy and other operating charges, £121m is expected to be utilised in 2003-04 and the remainder of
the balance in the following two years,
(ii) Restructuring of parcel services - redundancy costs and other operating charges. £120m is expected to be utlised in 2003-04 and the majority of
the balance in the following two years.
(iv) One delivery a day - redundancy costs and other operating charges. £86m is expected to be utilised in 2003-04 and the remainder of the batance in
2004-05.
(v) Other redundancy costs - itis expected that £218m wilt be incurred in 2003-04 and the balance inthe following two years.
(vi) Other provisions - further rationalisation of support services, the incremental cost of running the redundancy programme and miscellaneous write-
offs. £26m is expected to be utilised in 2003-04 and the majority of the balance in 2004-05,
18 Reserves
Seve dies 2003 ©2002
ecount Mas Dividend Other Total Total
om en mn fn on fm
At4 April 2002 2,346 : 24 15 2,605 3,543
Loss forthe financial year (559) : . z (559) (940)
‘Transfer of dividend reserve (see note below} 244 : (244) : :
Mails Reserve (see note below) (1,853) 1,853 = . .
Unrealised gain on associateljoint venture
transaction : : - 2 2 5
Exchange differences on retranslation of net
assets and loans of subsidiaries 40 - : : 40 (13)
At30 March 2003 218, 1,853 a 7 2,088, 2,605,
HM Government confirmed in July 2002 that the funds set aside for the possible payment of prior year dividends are now considered to be part of past
surpluses. Accordingly, the amounts in the dividend reserve have been transferred to the profit and loss reserve within Royal Mail Holdings ple. The past
surpluses of the Group are dealt with in accordance withthe restrictions applied to the Mails Reserve created under section 72 of the Postal Services Act
2000, as detaited below.
The Mails Reserve of £1,845m was created in Royal Mail Group pic on 3 February 2003, following directions issued by the Secretary of Stata for Trade
and Industry under section 72 of the Postal Services Act 2000. Interest subsequently eamed on the assets backing this reserve, amounting to £7m, was
transferred into the Mails Reserve at the year end date. The amounts allocated to the reserve in accordance with these directions are to be applied as if
they were profits available for distribution within the meaning of section 263() of the Companies Act 1985 (distributions to be made out of profits).
43
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18 Reserves (continued)
‘The purposes for which the Mails Reserve may be applied are also defined by these directions, which are principally the provision of financial assistance
40 Post Office Limited and security for loans for Royal Mail Group pe
Company Pt 2003 2002
‘eont ——_itend Teta Total
tm tm fn tn
At1 April 2002 2,481 244 2,725 3,784
Loss for the financial year (645) : (645) (1,059)
‘Transfer of dividend reserve 244 (284) . *
At30 March 2003 2,180 = 2,180, 2725
The Company is a non-rading company and the foss forthe financial year represents the net asset value adjustment arising as a result of accounting
policy note Ij). This states thatthe investments in intemally formed subsidiary undertakings are stated at net asset value, Accordingly, the Company's
loss forthe financial year is eliminated in the Group accounts and does not therefore form part ofthe Group results.
19 Share capital
‘Authorised 2003 2002
£ £
Ordinary shares of £1 each 100,000 100,000
Special Rights Redeemable Preference Share
(Special Share) of £1 each 4 1
100,001 400,001
Allotted and called up 2003 2002
e £
Ordinary shares of £1 each 50,000 50,000
Special Rights Redeemable Preference Share of £1 each 1 1
50,001 50,001
‘The Special Share can be redeemed at any time by its holder (the Special Shareholder). The Company cannot redeem the Special Share without the
prior consent of the Special Shareholder, No premium is payable on redemption.
‘Subject to, and in accordance with, the provisions of the Postal Services Act 2000, the Special Shareholder can at any time require the Directors to
declare and pay a dividend to the Special Shareholder or its nominee.
On distibution in a winding up of the Company, the Special Shareholder is entitled to repayment of the capital paid up on the Special Share in priority to
any repayment of capital to any other member.
The Special Share does not cary any rights to vote,
ln accordance with section 63(7) ofthe Postal Services Act 2000, for the purposes of the Companies Act 1986, the shares issued to the Secretary of
State shall be treated as if their norrinal value had been fully paid up.
44
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20 Derivatives and other financial instruments
Royal Mail Holdings plc
An explanation of the Group's treasury policy and controls is included in the Financial Review on pages 8 and 9. The role of financial instruments in
creating or changing the risks the Group faces in its activities is also explained in that section.
As permitted by FRS 13, short-term debtors, trade creditors, prepayments and accruals have been excluded from the disclosures.
(i) Financial liabilities — interest rate profile
The currency profile ofthe financial abilties ofthe Group was as follows:
2003 2002
onsntarest Noninst
Firedrate —Floatograte boming Total Fiedrae — Foaingrte veating Tota
tm tn tm tn m am tm m
Euro 12 6 . 8 20 70 4 94
Steriing 550 40 1,083 41,673 500 40 1,056 1,596
US Dollar : : 2 : 2 2
Total 562 46 1,083 4,691 522 410 1,060 1,692
The interest rate and maturity profiles of the financial liabilities were as follows:
2003
Fined rate Floating rate Koninteestbearing
Terage
time Average time to
Value terentrte Ve terentrate matty vave matty
fm * fm * Yours tm Days
Euro 2 5.50 6 euro LIBOR 50 . 7
plus 2
Sterling 550 5.67 18 40 One-week 10 69 497
money
market
oe: 7 x : : 4,014 Ondemand
Totat 562 46 4,083
2002
Fede Fat ate Noninarestbeang
Teane
fine Average bre Average
Vue Inerstrte tty Vee infeestote—matry Vaue tne tomatiy
tm % Years tm % Years itm Days
Euro 20 574 8.14 70 euroLIBOR 20 4 183
plus 0.25
Steriing 500 5.84 21.25 40 Oneweek 10 947 Ondemand
money
market
- - - : 2 106 726
- : : : 3 183
US Dollar 2 4.00 4.00 z : :
522 110 4,060
45
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20 Derivatives and other financial instruments (continued)
(li) Financial assets - interest rate profile
The currency profile of the financial assets of the Group was:
2003 2002
» t = o = o =
Euro 43 2 65 1 19 8 B
‘Sterling 41,261 . 986 2287 1814 3 1016 2,833
US Dollar - 7 7 4 - 2 6
Other : 2 2 = 1 1
Total 1,261 4B 1017 2,321 1,819 2 1,027 2,868
‘The interest rate and maturity profile of the financial assets were as follows:
2003
Value ‘interest rate ‘maturity Value lnterest rate. ‘maturity Value ‘to maturity.
Euro . . . 43 Bank rate 1 22 On
minus 1 demand
Sterling 1,261 3.59 82 . . 986 On
demand
US Dollar - . - . 7 On
demand
Other * : . - 2 On
demand
Total 1,261 43 1,017
2002
nr a swt ine
eee vt wn
im % Days im % Days fm Days:
Euro 1 3.08 8 19 euro On 8 On
overnight demand demand
Sterling 1,791 4.02 143 3 Bank On 1,016 On
base demand demand
minus 1
10 5.06 60
3 8.33 2
US Dollar 4 0.50 ‘On - - 2 On
demand demand
Other - . - . 2 4 On
demand
Total 1819 22 A027
The Sterling assets of the Group comprise gilts, deposits and cash.
‘Aone percentage point increase in interest rates throughout the period would have increased profit before tax by £7m.
46
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20 Derivatives and other financial instruments (continued)
(ii) Maturity profile of the Group's financial liabilities
‘The maturity profile of the Group's financial liabilities at 30 March 2003 Is set out betow:
2003 2002
- =
One year or less or on demand 4141 1,036
More than one year but not more than two years 3 38
‘More than two years but not more than five years 6 1
More than five years 54 507
1,691 1,692
(iv) Maturity profile of the Group’s undrawn committed borrowing facilities
The Group has various borrowing facilities avaitable to it. The undrawn committed facilities available at 30 March 2003 in respect of which all conditions
precedent had been met at that date are as follows:
2003 2002
tm en
Expiring in one year or less : -
Expiring in more than one year but not more than two years 500 2
Expiting in more than two years 494 :
994 :
The above faclities comprise a loan facility of £544m of which £50m had been utlised at 30 March 2003, These loans have been secured by charges on
‘cash deposits in favour of HM Treasury. The other £500m is a debt security facility which is secured by a fixed and floating charge on various assets of
the Group,
(v) Fair value of financial assets/(liabilities)
a) Primary financial instruments held or issued to finance the Group's operations
2003 2002
Book value Fair value Book value Fair valve
tm ‘fm ‘om m
Cash 4,060 4,060 11054 11054
‘Current asset investments 1,250 1,250 1,800 1,800
Fixed asset investments Ww 4 14 14
Long-term borrowings (615) (15) (680) (680)
Short-term borrowings (53) 63) : :
Deferred consideration . . (9) (9)
Hie purchase creditor (69) (69) (108) (106)
Client services balances (1,054) (1,054) (987) (987)
Fair values for borrowings and deposits have been calculated by discounting at an appropriate rate.
‘The camrying value of gilts is £263rn (2002 £371m), of which £253m (2002 £358m) is included in the current asset investment figures and £10m (2002
£13m) inthe fixed asset investment figures. The Group portfolio of gi holdings showed a lass of £m (2002 £9m loss) during the financial year when
revalued.
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20 Derivatives and other financial instruments (continued)
b) Derivative financial instruments held to manage currency and commodity price fluctuations
2003 2002
Market value Market value
em &m
Foreign currency transactions 185 188
Fuel derivatives 18 10
Atthe balance sheet date, the Group held contracts to purchase foreign currency for £ 186m (2002 £188m) and £17m (2002 £10m) fuel contracts. No
carrying amounts are shown as all these items are held off balance sheet. The difference between the contracted forward rate and mark to market rate
‘was £1m (2002 £0m) for currency contracts and £1.4m (2002 £0.3m) for fuel contracts.
(vi) Forward transactions
The Group had outstanding forward transactions to hedge foreign currencies and fuel purchases as follows:
In currency (millions) Sterling equivalents (millions)
2003 2002 2003
Maturing within one year
Euro 80 76 55 46
PY 4,784 2,545 9 14
uso 181 180 116 127
AUD 3 2 1 :
Maturing after one year
usp a 1 : 1
Euro 4 - 5 -
(vi) Gains and tosses on transactional exposures
‘The table below shows the Group's currency transactional exposures that glve rise to net currency gains and losses recognised inthe profit and loss
account. These liabilities arise from the net payments due to overseas postal administrations for delivery of mail, and are denominated in Special
Drawing Rights (SDRs). This isa basket currency comprising US Dollar, euro, Japanese Yen and Sterling. Such exposures comprise the monetary
liabilities of the Group that are not denominated in the functional currency of the operating unit involved.
‘A maximum of 80% of the exposure to pay overseas administrations is hedged, leaving 21 milion SDRs unhedged this year (2002 32 milion SDRs).
2003 2002
Net foreign currency liabilities (SDRm} 2a 32
Sterling equivalent value (&m) 19 28
‘A130 March 2003, the Group also held various open forward contracts that were taken out to hedge expected future foreign currency payments (as
shown in note (vi) above).
{Villy Gains and tosses on hedges
Foreign exchange exposures are hedged using currency deposits, currency borrowings, forward currency contracts and currency options
Gains and losses on these instruments are not recognised until the hedged exposure itself is recognised. Unrecognised gains and losses on these
instruments used for hedging are not material.
(ix) Borrowing facilities
The Group has committed borrowing facilities totaling £1,544m. Details of undrawn committed borrowing facilities are shown in note (iv) above,
48
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21 Pensions
The Group operates pension schemes as detailed below:
Name Former name Eighty Type
Royal Mail Pension Plan Consignia Pension Plan UK employees Defined benefit
(RMPP) (CPP)
Royal Mall Senior Executive Pension Consignia Senior Executive UK senior executives Defined benefit
Plan (RMSEPP) Pension Pian (CSEPP)
Royal Mail Retirement Savings Plan Consignia Retirement UK employees Defined contribution
(RMRSP) Savings Plan (CRSP)
Various other small-scale schemes Overseas subsidiary Definad contribution
operated by overseas subsidiaries employees
The RMPP consists of two sections, Section A&B and Section C that were created by the merger of two former schernes with effect from 1 Api! 2000,
The terms of the merger require separate consideration ofthe financial position of each section for upto six years after the date of the merger. The main
requirement is that a funding surplus in one section cannot be used to offset a funding deficiency inthe other. Thus, funding might sill be needed for
Section C even if Section A&B was experiencing a contribution holiday.
The pension charge was £264m for the defined benefit schemes, which includes £200m in respect of redundancy provisions and £m for defined
contribution schemes (2002£276m, £200m and £ 1m respectively). The overall Group resutt includes a £246m (2002 £250) benefit derived in
aocotdance with SSAP 24 on the basis set out below. The accounting charges are based on assumptions on a best estimate’ basis, which reflects the
difference between ‘experienced’ performance over the prudent actuarial assumption assumed in the funding rate, This has resulted in a lower regular
accounting cost amounting to £48m (2002 £53m) of the benefit. The surplus in the Royal Mail Pension Plan allows a further reduction in cost - evaluated
by the Scheme actuary using their best estimate’ assumptions ~ providing £153m benefit (2002 £164m). This surplus is being amortised over 12 years,
the average remaining sence lives of employees. The interest onthe long-term pension debtor of £4Sm (2002 £33m) makes up the final element of the
benefit.
Valuations of the defined benefit schemes are carried out at intervals not normally exceeding three years as determined by the trustees. The latest
actuarial assessments of the RMPP and the RMSEPP were carried out as at 31 March 2000 and 1 April 2001 respectively. These were performed using
an assumed rate of inflation of 3% for both schemes. Investment retums real were assumed to be 4.75% and 4.25% respectively. Pay increases real
were assumed to be 1.5% and 3% respectively and pensions, both in payment and deferred, were assumed to increase at 3% for both schemes. The
market value of assets at the latest actuarial assessments was £15,383m for the RMPP Section A&B (as at 31 March 2000), £2,434m for the RMPP
Section C (as at 31 March 2000) and £60m for the RMSEPP (as at 1 April 2001). The asset cover of the benefits accrued to members after allowing for
future increases in earnings was 115% for the RMPP Section A&B (as al 31 March 2000), 109% for the RMPP Section C (as at 31 March 2000) and
77% for the RMSEPP (as at 1 April 2001). The next full valuation of both the RMPP and the RMSEPP is being carried out as at 31 March 2003.
‘These accounts have been produced in accordance with the current accounting standard SSAP 24. The latest pensions accounting standard, FRS 17,
has been adopted by the Group in accordance with the transitional arrangements allowed by that standard. The amendment to FRS 17 announced by
‘the Accounting Standards Board in Novernber 2002 means that disclosures will be phased-in over the three years ending March 2003, March 2004 and
‘March 2005.
FRS 17 disclosures
Name of Plans: Royal Mail Pension Plan (RMPP)
Royal Mail Senior Executives Pension Plan (RMSEPP)
Nature of Plans: defined benefit
a) Assumptions
The major assumptions used by the actuary were:
‘At 30/03/2003 at 31/03/2002
% pa % pa
Rate of increase in salaries 3.55 3.80
Rate of increase in pensions 225 250
Discount rate 550 6.00
Inflation assumption 225 250
Expected average rate of retum on assets 7.90 770
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21 Pensions (continued)
'b) Plan assets and expected rates of return
The assets in the Plans and the expected rates of return were:
At 30 March 2003
Market value at 30 March 2003
RMPP RMSEPP
£m £m
Equities 9,650 56
Bonds 4,562 6
Property 4240
Other net assets 52) 25
Total market value of assets 12,100 87
Present value of Plan li (16,752) (119)
Deficit in scheme (4,852) 2)
Surplus restriction ee
Pension liability before deferred tax (4,852) @2)
Related deferred tax (\abiityasset* 5
Net pension liability (4,852) 32)
Long-term rate of retum
expected at 30 March 2003
pa
8.50
4.50
6.50
425
“No deferred tax is recognised in relation to the pension liabilities due to uncertainty regarding the existence of future tax liabilities against which
‘ax relief on pension costs might be offset.
At31 March 2002
Market value at 31 March 2002
RMPP RMSEPP
tm £m
Equities 12,607 63
Bonds 4,706 7
Property 4,194 -
Other assets 106 . 7
Total market value of assets 15,813 7
Present value of Plan liabilities 15,334 87)
Surplusi(defict) in scheme 282 (10)
Surplus restriction : 2
Pension asseti(labllty) before deferred tax 282 (10)
Related deferred tax (Kabilty)/asset (85) 3
Net pension asset/(liability) 197 (7)
50
Long-term rate of return
expected at 31 March 2002
wpa
8.20
530
670
450
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21 Pensions (continued)
c) Components of defined benefit costs
An analysis of the separate components of the cost that would be reflected in the performance statements is as follows:
RMPP- RMSEPP Total
£m ém ém
Analysis of amounts charged to operating profit:
‘Current service cost 362 os 386
Total charge to operating profit 382 4 386
Analysis of other amounts (credited)icharged to profit and loss account:
Gain on settlements (18) - (18)
Loss on curtailments* 106 14 119
Total net operating charge 469 18 487
“These costs have already been recognised in the Group primary statements on a
SSAP 24 basis.
Analysis of amount chargedi(credited) to other finance income:
Interest on pension Pian liabilities 905 5 910
Expected retum on pension Plan assets (1,185) 6) (1,191)
Net (credit}/charge to other finance income (280) (t} (281)
Total profit and loss charge before deduction for tax 189 7 206
Analysis of amounts recognised in statement of total recognised gains and losses
(STRGL):
Difference between actual and expected retum on Plan assets 4,342 2 4,370
Experience (gain}floss on Plan liabilities (22) 5 (17)
Loss on change in assumptions (financial and demographic) 672 4 676
Actuarial loss recognised in STRGL 4,992 7 5,029
d) Movement in surplusi(deficit)
Analysis of the movement in surplus/(deficit) in the Plans during the period:
2003
RMPP RMSEPP Total
£m £m ém
‘Surplus(deficit) in Plan at beginning of period 282 (10) 272
Company contributions paid 247 32 279
Current service cost (362) 4) (386)
Settlement gain 18 - 18
Curtailment loss (105) (14) (119)
Other finance income 280 1 281
Actuarial loss (4,992) (37) (5,029)
Deficit in Plan at end of period (4.852) (32) (4,684)
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24 Pensions (continued)
e) History of experience gains and losses
2003
RMPP RMSEPP Total
Loss between actual and expected return on Pian assets:
Amount (Em) 4,342 28 4,370
Percentage of Plan assets at end of period 35.9% 32.2% 35.9%
Experience (gainyloss on Plan liabilities:
Amount (£m) (22) 5 (17)
Percentage of Plan liabilities at end of period 0.1% 4.2% 0.1%
Total actuarial loss recognised in STRGL:
Amount (£m) 4,992 7 5,029
Percentage of Plan liabilities at end of period B8% 31.1% 29.8%
f) Balance sheet presentation
Net Assets At 30 March 2003 At 31 March 2002
£m £m
Net assets as stated in balance sheet 2,088 2,605
Pension prepayment recoverable beyond one year (SSAP 24) (707) (631)
Related deferred tax : 458,
Net assets excluding pension assetlliability 1,381 2,232
FRS 17 pension asset 197
FRS 17 pension liability (4,684) 7)
Net assets including pension assetiliability (3,303) 2,422
Reserves At30 March 2003 At31 March 2002
£m £m
Profit and loss reserve as stated in balance sheet 218 2,346
Pension prepayment recoverable beyond one year (SSAP 24) (707) (531)
Related deferred tax : 158
Profit and loss reserve excluding amounts relating to pension assetiliability (489) 1,973
FRS 17 pension asset - 197
FRS 17 pension liability (4,884) ()
Profit and loss reserve including amounts relating to pension asset/liability (5,173) 2,163
‘The long-term rates of future contributions expressed as a percentage of pay are 12.1% for the RMPP Section A&B, 11.1% for the RMPP Section C and
24.9% for the RMSEPP.
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22 Commitments:
(@ Capitat commitments
‘Capital commitments contracted for but not provided in the accounts amount to £138m {2002 £45m).
(li) Operating lease commitments
The Group Is committed to the following payments on operating leases during the next 12 months:
Vin nd ett
2003 2002 2003 2002
tn pa oe
For leases which expire:
Within one year 9 7 4 7
Between one and five years 26 2 56 62
Beyond five years 86 90 :
121 118 70 69
23 Contingent liabilities and guarantees
A subsidiary has guaranteed the performance of a third party in relation to lease payments payable over the 15-year term of a lease entered into on 21
December 2000, and has given certain tax indemnities to the US lessors. In the opinion of the Directors, no loss will result to the Group as a result of
these guarantees.
As required by the Notes Sorting Facility rules, notes in transit to cash handling centres and those processed ovemight, for which the Group has
received credit, are secured by gilts deposited with the Bank of England. On default, the estimated maximum liability would be £118m.
24 Borrowing limit
At30 March 2003, the Group borrowing limit under section 115(6){b) of the Postal Services Act 2000 was £5,000m (2002 £5,000m), subject to
Government agreement. The amount of outstanding borrowings at that date was £637m (2002 £705m}.
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25 Related party transactions
‘During the year the Group entered into transactions with other related parties. The transactions were in the ordinary course of business and included
administration and investment services recharged to the Group's pension scheme by Royal Mail Pensions Trustees Limited. The transactions entered
into and the balances outstanding at 30 March 2003 were as follows:
‘Amounts owed
‘om related party ‘Amounts
Purchases from {including owed torelated
‘alos to rolted party related party outstanding loans) party
en fm fm en fm tm fm tn
2003 = 2002-2003 2002-2003 «2002 2003-2002
Royal Mail Pension Plan 420 4a4 : + 187 197 : :
Quadrant Catering Limited 03 - 410 420 : - 08 10
Cashtec Limited 03 : : : - 24 : -
Postal Preference Services Limited 05 18 : - 06 04 : :
Media Marketing International Limited 03 - Ob - 04 - : -
Optecon Limited 18 (06 4008 + 06 + 02
Camelot ple 441 38 z : . ms : .
Szybka Paczka Spolka 2.0.0. : : : - 57 46 : :
G3 Worldwide Mail N.V 47 110 «901700 9K 15048 zs
First Rate Travel Services Holdings Limited Group 169 - : - 19 © . e
Romec Limited 4a - 973 - - - 29 -
National Design Consultancy : - 4d : : - 04 -
Companies listed above are joint ventures and associates of the Group with the exception of the Royal Mail Pension Plan. However, Cashtec Limited
and Opteoon Limited ceased to be associates during the year as explained in note 9,
Jerry Cope, a Director, is a shareholder-nominated Director of Camelot ple, with whom the Group has a commercial relationship for the sale of £770m
(2002 £810m) of lottery products per annum.
26 Post balance sheet events
On 6th May 2003 Royal Mail Group entered into an agreement with Computer Sciences Corporation (CSC) forthe outsourcing of ts IT operations. The
services will be provided by CSC as prime contractor and BT and Xansa (together called the Prism Aliance).
The transaction has been effected by way of a transfer of a wholly owned subsidiary, Royal Mail Business Systems Limited, to CSC. In addition, CSC
‘and Royal Mail Group have entered into a ten-year service agreement for the provision of IT services. CSC will manage the contract.
‘Some 1,735 people, mostly IT professionals currently employed by Royal Mail, will transfer in early June to CSC, Xansa and BT on existing terms and
conditions under TUPE regulations. Savings of approximately £60m per annum will be generated over the ten-year life of the contract.
‘On 19 May 2003, Postcomm published a draft determination of the terms on which it is proposed that UK Mail Ltd, a subsidiary of Business Post Group
pic, should have access to Royal Mail's postal facilities. Given the size and complexity of the proposals, the potential impact has stil to be quantified. The
proposals are not final and are subject to three-months public consultation.
‘On 27 May 2003, the European Commission announced that it has approved the measures proposed by the UK Government to fund, as detailed in note
A of accounting policies and general notes, the net public service cast of the network within Post Office Limited.
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27 Principal subsidiary undertakings, joint ventures and associates
County of incorporation Percentage holding % Principal activities
‘Subsidiary undertakings:
Royal Mail Group ple + UK 100 Distribution services
Post Office Limited UK 100 Counter services
Consignia (Customer Management) Limited > UK 100 ‘Customer management
Citipost Holdings Limited » UK 100 Mail services
General Logistics Systems Germany (formerly
German Parcels Beteiligungs GmbH ) Germany 100 Parcel services
Extand SA France 100 Parcel services
General Logistics Systems Denmark A/S (formerly
Pakke Trans A/S} Denmark 100 Parcel services
General Logistics Systems Netherlands B.V.
(formerly Nederlandse Pakket Dienst B.V.) Netherlands 100 Parcel services
Direzione Gruppo Executive S.p.A. Italy 100 Parcel services
savas
‘Camelot ple UK 20 Lottery operations
Quadrant Catering Limited « UK St Catering services
G3 Worldwide Mail N.V. (trade name ‘Spring’) Nethertands aS Mail services
oat eure
Romec Limited UK 51 Facilities management
First Rate Travel Services Holdings Limited UK 50 Foreign exchange
41. This investment is held by the Company. All other investments are held by subsidiaries,
2. Consignia (Customer Management) Limited ceased to trade with effect from 4 November 2002 after its business activities were sold to
Royal Mail Group ple.
3. The results for the year ended 30 March 2003 have been consolidated for all subsidiaries except Citipost Holdings Limited, whose results
for their year ended 31 December 2002 have been used. There were no material variations from their norma) trading activities between
1 January 2003 and 30 March 2003.
4. The Group holds 51% ofthe share capital of Quadrant Catering Limited. However, the voting rights attached to the various classes of
shares give the other investor operational control. Quadrant is therefore treated as an associate in the Group accounts.
A ullist of subsidiary undertakings and joint ventures and associates is available from the Company's registered office. All shareholdings are equity
shares.
28 Loss attributable to the members of the parent company
The loss dealt with in the accounts of the parent company was £545m (2002 £1,059m). The Company is a non-trading company and the loss for the
financial year represents the net asset vale adjustment arising as a result of accounting policy note I). This states that the invest mants in intemally
formed subsidiary undertakings are stated at net asset value. Accordingly, the Company's loss for the financial years eliminated in the Group accounts
and does not therefore form part of the Group results. Further details can be found in notes 9 and 18.
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Five-year summary
98 3600 00a enrentated 192 aan
Profit and loss account fn fm tn on fm
Tumover 7,010 7,522 3119 8,408 8,299
Total operating costs before exceptional items (6.616) (7,141) (8,097) (8,475) (8,280)
Exceptional items : (656) (67) (1.419) (637)
Group operating (oss)/prost 394 (275) (45) (1,188) (678)
‘Share of operating profit of joint ventures and
associates 3 4 : 4 30
{mpainnent of goodwill in associates : : : (12) 24)
Total operating (loss)proft 397 grt) (4s (4,194) (672)
Profiton sale of tangible fixed assets, a" " 2» a Py
Profi on disposatpart disposal of support service 2 : - :
Proftitoss) on disposal of subsidiary undertaking : : : (10) 2
(Loss\/proft before interest 460 (280) (25) (1,180) (646)
\Netinterest receivable 148 83 106 6 35
(Loss)/profit before tax 608 (171) 81 (1,124) (611)
Taxation (112) (96) (34) 179 52
(Loss}profit after tax 496 (267) a7 (945) (659)
Equity minority interests : 3 2 5 :
(Loss)profit for the financial year 498 (264) 49 (940) (659)
Transfer to dividend reserve 2 (151) (93) -
(Loss}proft retained 496 (415) (44) (940) (559)
Balance sheet 98-98 99-00 00-01 as restated 01-02 02.03
im im mn &m fm
Intangible assets 220 270 424 148 156
Tangible fixed assets 2510 2419 2,026 1,783 1,648
Fixed asset investments 2 6 Cy 4 83
Net current assets 1,708 1,723 2,008 1,987 1,785
Creditors beyond one year and provisions (160) (342) (977) (1,405) (1,584)
Total assets less lables 4,300 4,096 3,538 2,605 2,088
Revaluation reserve 225 289 . :
Profit and loss account 4075 3,659 3,298 22348 ne
Mails Reserve : : - - 1,853
Dividend reserve - 151 244 244
Other reserves - - : 18 7
Equity minority interests. = (3) 5) a
Capital and reserves 4,300 4,096 3.538 2,805, 2,088
Note
The restated figures for 2000-01 reftct tha impact ofthe implementation of FRS 19 Deferred Tax, and the change to the historic cost accounting convention.
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Glossary of terms
Accounting convention
The basis on which accounts are prepared.
‘Accounting Standards Board (ASB)
‘The Accounting Standards Board is responsible for producing accounting standards which are known as Financial Reporting Standards, The Company
is required to comply with Financial Reporting Standards when preparing accounts.
Capital expenditure
Expenditure on new, or additions to existing, fixed assets.
Cash
Cash in hand and deposits repayable on demand (within 24 hours or one working day} with any financial institution,
Client services balances.
Balances owed to or due from clients in respect of counter transactions carried out by Post Office Limited,
Counter services
‘The services provided to customers by the network of Post Office branches.
Creditors
The amount owed to others for pay, goods and services,
Currency options
An option to buy or sell foreign currency.
Current assets
Cash, or other assets readily convertible into cash.
Debtors
Mainly amounts owed by customers for services provided and pension prepayment,
Deferred taxation
The estimated future tax consequences of transactions and events recognised in the financial stalements ofthe current and previous periods.
FRS
A Financial Reporting Standard issued by the Accounting Standards Board.
Finance lease
A lease that transfers substantially all the risks and rewards of ownership of an asset to the lessee.
Goodwill
The excess of consideration over net assets acquired.
Group
Comprises Royal Mail Holdings ple and its subsidiary undertakings.
Hedge
The use of financial assets and financial abilities to manage risk.
Historic cost basis
The system of accounting where all current and capital expenditure is recorded at its cost at the time of purchase.
Interbusiness balances
Amounts owing between constituent businesses and subsidiary undertakings of the Group,
ICAEW
‘The Institute of Chartered Accountants in England and Wales.
Liquid funds (cash flow)
Current asset investments that are readily convertible into known amounts of cash at, or close to, their camying amount and can be disposed of without
curling business operations.
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Glossary of terms (continued)
NLF
National Loans Fund provides a source of funds for Government lending.
Operating lease
A lease other than finance lease.
Operating profit
Represents the profit (before interest and non-operating exceptional items) on ordinary activities withthe exception of counter services where interest
falls to be treated within operating activities.
Provisions
Amounts set aside to meet known liabilities likely to be incurred or certain to be incurred but where the amount is uncertain.
Reserves
The profit and loss account represents accumulated profits.
Shareholder
The Companys shareholder is HM Government.
Tangible fixed assets
Buildings, plant and vehicles purchased for use over a numberof year,
Total recognised gains and losses
Total ofall gains and losses — realised and unrealised - that are recognised in a period and are attributable to the shareholder.
Universal Service Obligation (USO)
The requirement to provide a universal postal service in the UK.
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Contacts
Royal Mail Holdings plc
Royal Mail Holdings plo
148 Old Street
LONDON
EC1V9HQ
020 7250 2888
Royal Mail
Business Sales Centre
08457 950950
Royal Mall
Customer Services
08457 740740
Parcelforce Worldwide
Customer Services
0800 224466
Post Office Helpline
08457 223344
Further information is available from
the Company's website
(www royalmail.com)
59