</rev>
As filed with the Securities and Exchange Commission on 13 March 2001
-------------------------------------------
-------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------------------------
(Mark One)
& REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) or 12(g) OF THE
SECURITIES EXCHANGE ACT OF 1934
or
6 ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended 31 December 2000
or
& TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 1-3334
ELSEVIERENVATIONAL P.L.C.
(Exact name of Registrant as specified in its charter)
ThelNetherlands
(Jurisdiction of incorporation or organisation)
VanVdetSandeSBakhuyzenstraat 4
1061oAGSAmsterdam
ThelNetherlands
(Address of principal executive offices)
Securities registered or to be registered pursuant to section 12(b) of the Act:
Title of each class Name of exchange on which registered
Reed International P.L.C.:
American Depositary Shares (each represe nting four Reed
International P.L.C. ordinary shares) New York Stock Exchange
Ordinary shares of 12.5p each
(the "Reed International ordinary shares ") New York Stock Exchange*
Elsevier NV:
American Depositary Shares
(each representing two Elsevier NV ordinary shares) New York Stock Exchange
Ordinary shares of 'E'0.06 each
(the "Elsevier ordinary shares ") New York Stock Exchange*
-------------------
* Listed, not for trading, but only in connection with the listing of the
applicable Registrant's American Depositary Shares issued in respect
thereof.
Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
-------------------------------------------
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act: None
-------------------------------------------
Indicate the number of outstanding shares of each of the issuers' classes of
capital or common stock as of 31 December 2000:
Title of each class Number of outstanding shares
Reed International P.L.C.:
Ordinary shares of 12.5p each . . . . . . . . . . . . . . . . . . . . . . 1,262,450,655
Elsevier NV:
Ordinary shares of 'E'0.06 each . . . . . . . . . . . . . . . . . . . . . 735,717,794
R-shares of 'E'0.6 each (held by a subsidia ry of Reed International P.L.C.) 4,049,951
-------------------------------------------
Indicate by check mark whether the registrants (1) have filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) have been subject to such
filing requirements for the past 90 days:
Yes 6 No &
Indicate by check mark which financial statement item the registrants have
elected to follow:
Item 17 & Item 18 6
-------------------------------------------
-------------------------------------------
</rev>
TABLE OF CONTENTS
Page
-------------------------------------------
GENERAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS . . . . . . . . . . . . 2
PART I
IIDENTITY OF
DIRECTORS, SENIOR MANAGEMENT AND ADVISERS . . . . . . . . . . . . . . N/A
OFFERTSTATISTICS
AND EXPECTED TIMETABLE. . . . . . . . . . . . . . . . . . . . . . . . . . N/A
ITEM 3: KEY
INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . 3
Selected financial data . . . . . . . . . . . . . . . . . . . 3
Risk factors. . . . . . . . . . . . . . . . . . . . . . . . . 9
INFORMATION ON
REED ELSEVIER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Structure . . . . . . . . . . . . . . . . . . . . . . . . . . 11
History and development . . . . . . . . . . . . . . . . . . . 12
Business description and organisation . . . . . . . . . . . . 12
Strategy. . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Property, plants & equipment. . . . . . . . . . . . . . . . . 27
OPERATING AND
FINANCIAL REVIEW AND PROSPECTS . . . . . . . . . . . . . . . . . . . . 28
Operating results --- Reed Elsevier . . . . . . . . . . . . . 28
Liquidity and capital resources --- Reed Elsevier . . . . . . 36
Operating results --- Reed International and Elsevier . . . . 36
Trend information . . . . . . . . . . . . . . . . . . . . . . 37
DIRECTORS,6SENIOR
MANAGEMENT AND EMPLOYEES . . . . . . . . . . . . . . . . . . . . . . . . . 38
Directors and senior management . . . . . . . . . . . . . . . 38
Compensation. . . . . . . . . . . . . . . . . . . . . . . . . 40
Board practices . . . . . . . . . . . . . . . . . . . . . . . 45
Employees . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Share ownership . . . . . . . . . . . . . . . . . . . . . . . 47
ITEM 7:MAJOR
SHAREHOLDERS AND RELATED PARTY TRANSACTIONS. . . . . . . . . . 54
Major shareholders. . . . . . . . . . . . . . . . . . . . . . 54
Related party transactions. . . . . . . . . . . . . . . . . . 54
ITEFINANCIAL
INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
THEEOFFER AND
LISTING. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
Trading markets . . . . . . . . . . . . . . . . . . . . . . . 56
ITEM 10: ADDITIONAL INFORMATION . . . . . . . . . . . . . . . . . 58
Memorandum and articles of association --- Reed International 58
Memorandum and articles of association --- Elsevier . . . . . 60
Material contracts. . . . . . . . . . . . . . . . . . . . . . 63
Exchange controls . . . . . . . . . . . . . . . . . . . . . . 63
Taxation. . . . . . . . . . . . . . . . . . . . . . . . . . . 64
Documents on display. . . . . . . . . . . . . . . . . . . . . 65
</rev>
- -1
Page
-------------------------------------------
ITEM 11: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK . . . . . . . . . . . . . . . . . . . . . . . . . . 66
ITEM 12: DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Reed International. . . . . . . . . . . . . . . . . . . . . . N/A
Elsevier. . . . . . . . . . . . . . . . . . . . . . . . . . . N/A
Reed Elsevier . . . . . . . . . . . . . . . . . . . . . . . . N/A
PART II
ITEM 13: DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
Reed International. . . . . . . . . . . . . . . . . . . . . . N/A
Elsevier. . . . . . . . . . . . . . . . . . . . . . . . . . . N/A
ITEM 14: MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND
USE OF PROCEEDS
Reed International. . . . . . . . . . . . . . . . . . . . . . N/A
Elsevier. . . . . . . . . . . . . . . . . . . . . . . . . . . N/A
ITEM 15: [Reserved]
ITEM 16: [Reserved]
PART III
ITEM 17: FINANCIAL STATEMENTS * . . . . . . . . . . . . . . . . . 68
ITEM 18: FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . 68
ITEM 19: EXHIBITS . . . . . . . . . . . . . . . . . . . . . . . F-1
* The registrants have responded to Item 18 in lieu of responding to this
Item.
0
GENERAL
Reed Elsevier came into existence on 1 January 1993 when Reed International
P.L.C. and Elsevier NV contributed their businesses to two jointly owned
companies, Reed Elsevier plc and Elsevier Reed Finance BV. Reed International
P.L.C. and Elsevier NV have retained their separate legal and national
identities. Reed Elsevier is not a legal entity but a collective reference to
the separate legal entities of Reed International P.L.C., Elsevier NV, Reed
Elsevier plc and Elsevier Reed Finance BV and their respective subsidiaries,
associates and joint ventures. The businesses of all of the entities comprising
Reed Elsevier are collectively referred to in this annual report as "Reed
Elsevier", and the financial statements of the combined businesses are referred
to as the "combined financial statements". In this annual report, references to
"we", "our", or "us" are to all of the entities comprising Reed Elsevier.
References to "Reed International" and "Elsevier" are to Reed International
P.L.C. and Elsevier NV, respectively.
In this annual report references to U.S. Dollars or $ are to U.S. currency;
references to pounds sterling, sterling, 'L', pence or p are to U.K. currency.
Since 4 January 1999, the prices of all shares listed on the Euronext Amsterdam
N.V. Exchange, including Elsevier's, have been quoted in euro rather than Dutch
guilders. Elsevier has adopted the euro as its primary currency for the
presentation of financial information and the declaration of dividends.
References to euro and 'E' are to the currency of the European Economic and
Monetary Union. For a discussion of the effects of the introduction of the euro
on Reed Elsevier's combined results of operations and combined financial
position, see "Operating and Financial Review and Prospects".
The rates used in the preparation of the financial statements for the 2000
financial year were $1.51 per 'L'1.00 and $0.921 per 'E'1.00 for profit and loss
account items (the average prevailing exchange rate during the year) and $1.49
per 'L'1.00 and $0.925 per 'E'1.00 for balance sheet items (the rate prevailing
at 31 December 2000). 'E' amounts for periods prior to the 1999 financial year
have been stated using the relevant Dutch guilder amounts, translated at the
Official Conversion Rate of Dfl2.20371 per 'E'1.00 which was fixed at 1 January
1999. For a discussion of the effects of currency fluctuations on Reed
Elsevier's combined results of operations and combined financial position, see
"Operating and Financial Review and Prospects".
Noon Buying Rates are not used in the preparation of the financial statements
included in this annual report except where indicated for certain convenience
translations. At 31 December 2000, the Noon Buying Rates were $1.4955 per
'L'1.00 and $0.9388 per 'E'1.00; at 20 February 2001 the Noon Buying Rates were
$1.4436 per 'L'1.00 and $0.9096 per 'E'1.00.
Harcourt Information
In this annual report references to "Harcourt" are to Harcourt General, Inc..
We have re cently entered into arrangements to acquire the Scientific,
Technical and Medical business and the U.S. Schools Education and Testing
businesses of Harcourt. Subject to regulatory approvals we intend to acquire the
businesses through a cash tender offer commenced on 9 November 2000 for the
entire share capital of Harcourt and will subsequently on-sell Harcourt's other
business to The Thomson Corporation.
Harcourt files reports with the United States Securities and Exchange
Commission pursuant to the requirements of the United States Securities Exchange
Act of 1934, as amended. Harcourt is not affiliated with us and we were not
involved in the preparation of such information. Accordingly, we cannot be sure
that the information relating to Harcourt contained or incorporated by reference
in this annual report is accurate or complete. You may read and copy any
reports, statements or other information that Harcourt files with the Commission
at the Commission's public reference room located at 450 Fifth Street, NW,
Washington, DC 20549.
1
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This document contains or incorporates by reference a number of forward-
looking statements within the meaning of Section 27A of the United States
Securities Act of 1933, as amended, and Section 21E of the United States
Securities Exchange Act 1934, as amended, relating to us and Harcourt with
respect to:
. financial condition;
. results of operations;
. business plans;
. competitive positions;
. the features and functions of and markets for the products and services
we and Harcourt offer;
. our business plans and strategies;
. using client bases and cost savings following the acquisition of the
Harcourt businesses; and
. the consummation and advantages of the acquisition of the Harcourt
businesses.
We consider any statements that are not historical facts to be "forward-
looking statements". These statements are based on the current expectations of
the management of our businesses and are subject to risks and uncertainties and
actual results. These differences could be material; therefore, you should
evaluate forward-looking statements in light of various important factors,
including those set forth or incorporated by reference in this annual report.
Important factors that could cause actual results to differ materially from
estimates or forecasts contained in the forward-looking statements include,
among others:
. general economic and business conditions;
. exchange rate fluctuations;
. the impact of technological change, including the impact of electronic or
other distribution formats, on our businesses;
. competitive factors in the industries in which we operate;
. customer acceptance of our products and services;
. changes in law and legal interpretation affecting our intellectual
property rights and how business is done through the Internet;
. legislative, fiscal and regulatory developments and political risks;
. requirements or actions of anti-trust authorities;
. changes in the seasonal and cyclical nature of the markets for our
products and services;
. changes in public funding and spending by academic institutions;
. our ability to integrate our operations and the acquired businesses of
Harcourt;
. the effect on our business of the failure to realise synergies or other
anticipated benefits of the acquisition of the Harcourt businesses;
. liabilities within Harcourt of which we are not aware; and
. other risks referenced from time to time in the filings of Reed
International and Elsevier with the Securities and Exchange Commission.
The terms "estimate", "project", "plan", "intend", "expect", "believe",
"should" and similar expressions identify forward-looking statements. These
forward-looking statements are found at various places throughout this annual
report and the other documents incorporated by reference listed under "Documents
on display".
You should not place undue reliance on these forward-looking statements, which
speak only as of the date of this annual report. We undertake no obligation to
publicly update or release any revisions to these forward-looking statements to
reflect events or circumstances after the date of this annual report or to
reflect the occurrence of unanticipated events.
2
PART I
ITEM 3: KEY INFORMATION
SELECTED FINANCIAL DATA
REED ELSEVIER
The selected combined financial data for Reed Elsevier should be read in
conjunction with, and is qualified by, the combined financial statements
included in this annual report. In addition, as separate legal entities, Reed
International and Elsevier prepare separate financial statements which reflect
their respective shareholders' economic interest in Reed Elsevier accounted for
on an equity basis.
All of the selected financial data for Reed Elsevier set out below has been
extracted or derived from the combined financial statements which have been
audited by Deloitte & Touche, London and Deloitte & Touche, Amsterdam.
Combined Profit and Loss Account Data
Year ended 31 December(1)
---------------------------------------------------
1996 1997 1998 1999 2000 2000(2)
-------- -------- -------- ---------------- -------
(in millions)
Amounts in accordance with U.K. and Dutch GAAP:
Turnover
Continuing operations . . . . . . . . . . . . . . . . 'L'2,897 'L'2,987 'L'3,163 'L'3,390'L'3,768 $5,635
Discontinued operations(3) . . . . . . . . . . . . . . 484 430 28 --- --- ---
-------- -------- -------- ---------------- -------
3,381 3,417 3,191 3,390 3,768 5,635
======== ======== ======== ================ =======
Adjusted operating profit (including joint ventures)(4)
Continuing operations . . . . . . . . . . . . . . . . 787 812 813 792 793 1,186
Discontinued operations(3) . . . . . . . . . . . . . . 69 73 --- --- --- ---
Amortisation of goodwill and intangible assets
(including joint ventures) . . . . . . . . . . . . . . (250) (289) (332) (373) (468) (700)
Exceptional items charged to operating income(5). . . . --- (502) (79) (239) (115) (172)
-------- -------- -------- ---------------- -------
Operating profit (including joint ventures) . . . . . . 606 94 402 180 210 314
Non operating exceptional items(5). . . . . . . . . . . 24 54 682 7 85 127
-------- -------- -------- ---------------- -------
Profit before interest and taxes. . . . . . . . . . . . 630 148 1,084 187 295 441
Net interest expense. . . . . . . . . . . . . . . . . . (51) (62) (40) (82) (103) (154)
-------- -------- -------- ---------------- -------
Profit before taxes and minority interests. . . . . . . 579 86 1,044 105 192 287
Taxes . . . . . . . . . . . . . . . . . . . . . . . . . (212) (99) (271) (167) (159) (238)
Minority interests. . . . . . . . . . . . . . . . . . . (1) (1) (1) (1) --- ---
-------- -------- -------- ---------------- -------
Profit/(loss) attributable. . . . . . . . . . . . . . . 366 (14) 772 (63) 33 49
======== ======== ======== ================ =======
Adjusted amounts(4)
Adjusted operating profit . . . . . . . . . . . . . . 856 885 813 792 793 1,186
Adjusted profit before tax . . . . . . . . . . . . . . 805 823 773 710 690 1,032
Adjusted attributable profit . . . . . . . . . . . . . 603 608 571 527 511 764
Amounts in accordance with U.S. GAAP:
Continuing operations
Operating income . . . . . . . . . . . . . . . . . . . 711 107 13 109 236 353
Net income/(loss) from continuing operations . . . . . 450 3 (122) (73) 60 90
Discontinued operations
Net income from trading operations . . . . . . . . . . 43 40 (1) --- --- ---
Gain on sales net of provisions . . . . . . . . . . . --- --- 521 --- --- ---
-------- -------- -------- ---------------- -------
Net income from discontinued operations . . . . . . . . 43 40 520 --- --- ---
======== ======== ======== ================ =======
Net income/(loss) . . . . . . . . . . . . . . . . . . . 493 43 398 (73) 60 90
======== ======== ======== ================ =======
3
Combined Balance Sheet Data
As at 31 December(1)
---------------------------------------------------
1996 1997 1998 1999 2000 2000(2)
-------- -------- -------- ---------------- -------
(in millions)
Amounts in accordance with U.K. and Dutch GAAP:
Total assets . . . . . . . . . . . . . . . 'L'5,176 'L'5,211 'L'5,760 'L'5,272'L'7,428 $11,109
Long term obligations less current portion (717) (689) (520) (377) (623) (932)
Net borrowings . . . . . . . . . . . . . . (196) (630) (962) (1,066) (433) (648)
Combined shareholders' funds(6). . . . . . 2,063 1,692 2,130 1,855 3,041 4,548
Amounts in accordance with U.S. GAAP:
Total assets . . . . . . . . . . . . . . . 6,107 6,139 6,443 5,896 8,115 12,136
Long term obligations less current portion (993) (1,291) (1,122) (772) (1,724) (2,578)
Combined shareholders' funds(6). . . . . . 3,075 2,774 2,833 2,423 3,707 5,544
-------------------
(1) The combined financial statements are prepared in accordance with
accounting policies that are in conformity with U.K. and Dutch GAAP,
which differ in certain significant respects from U.S. GAAP. The
principal differences between U.K. and Dutch GAAP and U.S. GAAP which are
relevant to Reed Elsevier are set out in note 30 to the combined
financial statements.
(2) Noon buying rates as at 31 December 2000 have been used to provide a
convenience translation into U.S. dollars.
(3) Discontinued operations are presented in accordance with U.K. and Dutch
GAAP, and comprise IPC Magazines and the consumer book publishing
operations which were the final elements of the consumer segment sold in
1998.
(4) U.K. and Dutch GAAP allow the presentation of alternative earnings
measures. Adjusted figures, which exclude the amortisation of goodwill
and intangible assets, exceptional items and related tax effects, are
presented as additional performance measures. U.S. GAAP does not permit
the presentation of alternative earnings measures.
(5) Exceptional items are significant items within Reed Elsevier's ordinary
activities which, under U.K. and Dutch GAAP, need to be disclosed
separately by virtue of their size or incidence. The items do not qualify
as extraordinary under U.S. GAAP a nd are considered a part of operating
results. Exceptional items charged to operating profit, under U.K. and
Dutch GAAP, are:
(i) in 2000 'L'77 million in respect of reorganisation costs; and
'L'38 million in respect of acquisition related costs;
(ii) in 1999 'L'161 million in respect of reorganisation costs; and 'L'78
million in respect of Year 2000 compliance and acquisition related
costs;
(iii) in 1998 'L'79 million in respect of Year 2000 compliance and
acquisition related costs; and
(iv) in 1997 'L'230 million in respect of the cost of programmes to
recompense advertisers in relation to irregularities in circulation
claims for certain Reed Travel Group publications together with
related expenses and reorganisation costs; 'L'250 million in respect
of a non-cash write-down of intangible assets related to Reed Travel
Group; and 'L'22 million in respect of Year 2000 compliance and
acquisition related costs.
Non operating exceptional items arise primarily from the net profit on
disposal of Springhouse, KG Saur and REZsolutions in 2000, of IPC
Magazines in 1998 and, in other years, from the disposal of other
businesses and surplus property interests.
For further details see note 8 to the combined financial statements.
(6) On 5 December 2000, following a joint international offering, Reed
International issued 113,700,000 new 12.5p ordinary shares at 625p each
and Elsevier issued 66,255,000 new 'E'0.06 ordinary shares at 'E'14.50
each. The purpose of the offering was to finance the proposed acquisition
by Reed Elsevier of the Scientific, Technical and Medical business and the
U.S. Schools Education and Testing businesses of Harcourt.
4
REED INTERNATIONAL
The selected financial data for Reed International should be read in
conjunction with, and is qualified by, the consolidated financial statements of
Reed International included in this annual report. The results and financial
position of Reed International reflect the 52.9% economic interest of Reed
International's shareholders in Reed Elsevier, after taking account of results
arising in Reed International and its subsidiaries. These interests have been
accounted for on a gross equity basis.
All of the selected consolidated financial data for Reed International set out
below has been extracted or derived from the financial statements of Reed
International, which have been audited by Deloitte & Touche, London.
Year ended 31 December(1)
-----------------------------------------
1996 1997 1998 1999 2000 2000(2)
------ ------ ------ ------------ -------
(in millions, except per share amounts)
Amounts in accordance with U.K. GAAP:
Share of adjusted profit before tax(3). . . . . . . . . . . . 'L'426 'L'435 'L'409 'L'376'L'365 $546
Share of amortisation . . . . . . . . . . . . . . . . . . . . (132) (153) (176) (197) (248) (371)
Share of exceptional items before tax(4). . . . . . . . . . . 13 (237) 319 (122) (15) (22)
Elsevier's share of U.K. tax credit on distributed
earnings . . . . . . . . . . . . . . . . . . . . . . . . . . (18) (20) (12) (6) (6) (9)
------ ------ ------ ------------ -------
Profit on ordinary activities before tax. . . . . . . . . . . 289 25 540 51 96 144
------ ------ ------ ------------ -------
Tax on profit on ordinary activities. . . . . . . . . . . . . (113) (52) (144) (90) (85) (127)
------ ------ ------ ------------ -------
Profit/(loss) attributable to ordinary shareholders . . . . . 176 (27) 396 (39) 11 17
====== ====== ====== ============ =======
Basic earnings/(loss) per Reed International
ordinary share . . . . . . . . . . . . . . . . . . . . . . . 15.5p (2.4p) 34.7p (3.4p) 1.0p 0.01
Diluted earnings/(loss) per Reed International
ordinary share . . . . . . . . . . . . . . . . . . . . . . . 15.4p (2.4p) 34.6p (3.4p) 1.0p 0.01
Gross dividends per Reed International ordinary share(5). . . 17.0p 18.25p 17.3p 11.1p 11.1p 0.17
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . 1,247 1,056 1,292 1,090 1,745 2,610
Long term obligations . . . . . . . . . . . . . . . . . . . . (36) (36) (36) (36) (36) (54)
Shareholders' funds(6). . . . . . . . . . . . . . . . . . . . 1,091 895 1,127 981 1,609 2,406
Adjusted Amounts:(3)
Adjusted profit before tax. . . . . . . . . . . . . . . . . . 426 435 409 376 365 546
Adjusted profit attributable to ordinary shareholders . . . . 319 322 302 279 270 404
Adjusted earnings per Reed International ordinary share . . . 28.1p 28.3p 26.4p 24.4p 23.3p 0.35
Amounts in accordance with U.S. GAAP:
Net income/(loss) . . . . . . . . . . . . . . . . . . . . . . 244 4 191 (47) 27 40
Basic earnings/(loss) per Reed International
ordinary share . . . . . . . . . . . . . . . . . . . . . . . 21.4p 0.4p 16.7p (4.1p) 2.3p 0.03
Diluted earnings/(loss) per Reed International ordinary share 21.4p 0.4p 16.7p (4.1p) 2.3p 0.03
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . 1,673 1,511 1,544 1,328 2,009 3,004
Long term obligations . . . . . . . . . . . . . . . . . . . . (36) (36) (36) (36) (36) (54)
Shareholders' funds(6). . . . . . . . . . . . . . . . . . . . 1,627 1,467 1,499 1,282 1,961 2,933
-------------------
(1) The consolidated financial statements of Reed International are prepared
in accordance with accounting policies that are in conformity with U.K.
GAAP, which differs in certain significant respects from U.S. GAAP. The
principal differences between U.K. GAAP and U.S. GAAP which are relevant
to Reed International are set out in note 23 to the Reed International
financial statements.
(2) Noon buying rates as at 31 December 2000 have been used to provide a
convenience translation into U.S. dollars.
(3) U.K. GAAP allows the presentation of alternative earnings measures. Share
of adjusted profit before tax is presented as an additional performance
measure and is shown before share of amortisation of goodwill and
intangible assets and share of exceptional items. U.S. GAAP does not
permit the presentation of alternative earnings measures.
(4) Share of exceptional items before tax includes Reed International's share
of Reed Elsevier's exceptional items:
(i) in 2000 exceptional charges principally relate to the costs of a
major programme of reorganisation across Reed Elsevier businesses,
commenced in 1999. Basic earnings per Reed International ordinary
share include 3.5p (loss) in respect of these items. Exceptional
gains, amounting to 3.9p per Reed International ordinary share,
arose in 2000 in respect of the disposal of Springhouse, KG Saur and
REZsolutions;
(ii) in 1999 exceptional items principally relate to the costs of a major
programme of reorganisation across Reed Elsevier businesses. Costs
include employee severance, surplus leasehold property obligations
and fixed asset write-offs. Basic earnings per Reed International
ordinary share include 7.3p (loss) in respect of these items;
(iii) in 1998 exceptional items principally relate to the gain on
disposal of IPC Magazines. Basic earnings per Reed International
ordinary share under, respectively, U.S. GAAP and U.K. GAAP
includes 24.1p and 27.4p in respect of this item. In addition,
under U.S. GAAP, Reed Elsevier's goodwill and intangible asset
lives were re-evaluated and are amortised over shorter periods
resulting, from 1998, in a significantly higher amortisation
charge; see Note 30 to the combined financial statements. Basic
5
earnings per Reed International ordinary share includes 12.3p (loss) under U.S.
GAAP in respect of the non recurring element of the incremental charge arising
from this re-evaluation; and
(iv) in 1997 exceptional items principally relate to the cost of
programmes to recompense advertisers in relation to irregularities
in circulation claims for certain Reed Travel Group publications
together with related expenses and reorganisation costs together
with the non-cash write down of Reed Travel Group intangible assets.
Basic earnings per Reed International ordinary share under,
respectively, U.S. GAAP and U.K. GAAP includes 21.6p (loss) and
18.3p (loss) in respect of these items.
(5) The amount of gross dividends per Reed International ordinary share shown
includes the U.K. tax credit available to certain Reed International
shareholders, including beneficial owners of Reed International ADSs who
are residents of the U.S. for the purposes of the U.K. Tax Treaty but do
not include any deduction on account of U.K. withholding taxes, currently
at the rate of 15% of the sum of the dividend and the related tax credit
in most cases; see "Item 10: Additional Information -- Taxation ".
(6) On 5 December 2000, Reed International issued 113,700,000 new 12.5p
ordinary shares at 625p each following a joint international offering by
Reed International and Elsevier. The purpose of the offering was to
finance the proposed acquisition by Reed Elsevier of the Scientific,
Technical and Medical business and the U.S. Schools Education and Testing
businesses of Harcourt. The nominal value of the shares issued was 'L'14.2
million and the net proceeds were 'L'694 million.
ELSEVIER
The selected financial data for Elsevier should be read in conjunction with,
and is qualified by, the financial statements of Elsevier included in this
annual report. The results and financial position of Elsevier reflect the 50%
economic interest of Elsevier's shareholders in Reed Elsevier. These interests
are accounted for on an equity basis.
All of the selected financial data for Elsevier set out below has been
extracted or derived from the financial statements of Elsevier, which have been
audited by Deloitte & Touche, Amsterdam.
Year ended 31 December(1)
-----------------------------------------
1996 1997 1998 1999 2000 2000(2)
------ ------ ------ ------------ -------
(in millions, except per share amounts)
Amounts in accordance with Dutch GAAP:
Share of adjusted profit before tax(3). . . . . . . 'E'480 'E'595 'E'575 'E'540'E'566 $531
Share of amortisation . . . . . . . . . . . . . . . (149) (209) (247) (284) (384) (361)
Share of exceptional items before tax(4). . . . . . 14 (324) 449 (176) (25) (23)
Taxation. . . . . . . . . . . . . . . . . . . . . . (127) (72) (203) (128) (130) (122)
------ ------ ------ ------------ -------
Profit/(loss) attributable to ordinary shareholders 218 (10) 574 (48) 27 25
====== ====== ====== ============ =======
Basic earnings/(loss) per Elsevier ordinary share . 0.31 (0.01) 0.81 (0.07) 0.04 0.04
Diluted earnings/(loss) per Elsevier ordinary share 0.31 (0.01) 0.81 (0.07) 0.03 0.03
Gross dividends per Elsevier ordinary share . . . . 0.34 0.43 0.39 0.27 0.28 0.26
Total assets. . . . . . . . . . . . . . . . . . . . 1,607 1,535 1,736 1,639 2,650 2,488
Long term borrowings, less current portion. . . . . (10) (11) (11) (8) (6) (6)
Shareholders' funds(5). . . . . . . . . . . . . . . 1,385 1,282 1,512 1,493 2,448 2,298
Adjusted Amounts:(3)
Adjusted profit before tax. . . . . . . . . . . . . 480 595 575 540 566 531
Adjusted profit attributable. . . . . . . . . . . . 360 440 425 401 419 393
Adjusted earnings per Elsevier ordinary share . . . 0.51 0.62 0.60 0.57 0.59 0.55
Amounts in accordance with U.S. GAAP:
Net income/(loss) . . . . . . . . . . . . . . . . . 314 58 326 (46) 58 54
Basic earnings/(loss) per Elsevier ordinary share . 0.44 0.08 0.46 (0.06) 0.08 0.08
Diluted earnings/(loss) per Elsevier ordinary share 0.44 0.08 0.46 (0.06) 0.08 0.08
Total assets. . . . . . . . . . . . . . . . . . . . 2,118 2,156 2,057 1,997 3,046 2,859
Long term borrowings, less current portion. . . . . (10) (11) (11) (8) (6) (6)
Shareholders' funds(5). . . . . . . . . . . . . . . 2,065 2,102 2,012 1,951 2,984 2,801
-------------------
(1) The financial statements of Elsevier are prepared in accordance with
accounting policies that are in conformity with Dutch GAAP, which differs
in certain significant respects from U.S. GAAP. The principal differences
between Dutch GAAP and U.S. GAAP which are relevant to Elsevier are set
out in note 15 to the Elsevier financial statements.
(2) Noon buying rates as at 31 December 2000 have been used to provide a
convenience translation into U.S. dollars.
(3) Dutch GAAP allows the presentation of alternative earnings measures. Share
of adjusted profit before tax is presented as an additional performance
measure and is shown before share of amortisation of goodwill and
intangible assets and share of exceptional items. U.S. GAAP does not
permit the presentation of alternative earnings measures.
(4) Share of exceptional items before tax includes Elsevier's share of Reed
Elsevier's exceptional items:
(i) in 2000 exceptional charges principally relate to the costs of a
major programme of reorganisation across Reed Elsevier businesses,
commenced in 1999. Basic earnings per Elsevier ordinary share
include 'E'0.09 (loss) in respect of these items. Exceptional gains,
amounting to 'E'0.10 per Elsevier ordinary share, arose in 2000 in
respect of the disposal of Springhouse, KG Saur and REZsolutions;
6
(ii) in 1999 exceptional items principally relate to the costs of a major
programme of reorganisation across Reed Elsevier businesses,
commenced in 1999. Costs include employee severance, surplus
leasehold property obligations and fixed asset write-offs. Basic
earnings per Elsevier ordinary share include 'E'0.18 (loss) in
respect of these items;
(iii) in 1998 exceptional items principally relate to the gain on disposal
of IPC Magazines. Basic earnings per Elsevier ordinary share under,
respectively, Dutch GAAP and U.S. GAAP includes 'E'0.55 and 'E'0.62
in respect of this item. In addition, under U.S. GAAP, Reed
Elsevier's goodwill and intangible asset lives were re-evaluated and
are amortised over shorter periods resulting, from 1998, in a
significantly higher amortisation charge; see Note 30 to the
combined financial statements. Basic earnings per Elsevier ordinary
share includes 'E'0.28 (loss) under U.S. GAAP in respect of the non
recurring element of the incremental charge arising from this
re-evaluation; and
(iv) in 1997 exceptional items principally relate to the cost of
programmes to recompense advertisers in relation to irregularities
in circulation claims for certain Reed Travel Group publications
together with related expenses and reorganisation costs together
with the non-cash write down of Reed Travel Group intangible assets.
Basic earnings per Elsevier ordinary share under, respectively, U.S.
GAAP and Dutch GAAP includes 'E'0.48 (loss) and 'E'0.40 (loss) in
respect of these items.
(5) On 5 December 2000, the company issued 66,255,000 new ordinary shares at
'E'14.50 each following a joint international offering by Reed
International and Elsevier. The purpose of the offering was to finance the
proposed acquisition by Reed Elsevier of the Scientific, Technical and
Medical business and the U.S. Schools Education and Testing businesses of
Harcourt. The nominal value of the shares issued was 'E'4.0 million and
the net proceeds were 'E'933 million.
EXCHANGE RATES
For a discussion of the impact of currency fluctuations on Reed Elsevier's
combined results of operations and combined financial position, see "Item 5:
Operating and Financial Review and Prospects -- Reed Elsevier". The exchange
rate on 20 February 2001 was 'L'1.00 = $1.4436 and 'E'1.00 = $0.9096.
The following table illustrates, for the periods and dates indicated, certain
information for pounds sterling expressed in U.S. dollars per 'L'1.00. Noon
Buying Rates have not been used in the preparation of the Reed Elsevier combined
financial statements or the Reed International financial statements.
U.S. dollars per 'L'1.00
Period
---------------------------
Year ended 31 December End Average(1) High Low
--------------------------------------- ---- ---------- ---- ----
1996 . . . . . . . . . . . . . . . . . . 1.71 1.56 1.71 1.49
1997 . . . . . . . . . . . . . . . . . . 1.64 1.64 1.70 1.58
1998 . . . . . . . . . . . . . . . . . . 1.66 1.66 1.71 1.61
1999 . . . . . . . . . . . . . . . . . . 1.62 1.62 1.68 1.55
2000 . . . . . . . . . . . . . . . . . . 1.49 1.52 1.65 1.40
Month High Low
--------------------------------------- ---- ----
February 2001 (through 20 February 2001) 1.48 1.44
January 2001 . . . . . . . . . . . . . . 1.50 1.46
December 2000. . . . . . . . . . . . . . 1.49 1.44
November 2000. . . . . . . . . . . . . . 1.45 1.40
October 2000 . . . . . . . . . . . . . . 1.48 1.43
September 2000 . . . . . . . . . . . . . 1.48 1.40
August 2000. . . . . . . . . . . . . . . 1.50 1.45
-------------------
(1) The average of the Noon Buying Rates on the last day of each month during
the relevant period.
The following table illustrates, for the periods and dates indicated, certain
information concerning the Noon Buying Rate for the euro expressed in U.S.
dollars per 'E'1.00. Noon Buying Rates have not been used in the preparation of
the Elsevier financial statements.
U.S. dollars per 'E'1.00(1)
Period
---------------------------
Year ended 31 December End Average(2) High Low
--------------------- ---- ---------- ---- ----
1996 . . . . . . . . . 1.28 1.30 1.37 1.26
1997 . . . . . . . . . 1.08 1.12 1.28 1.03
1998 . . . . . . . . . 1.17 1.10 1.21 1.06
1999 . . . . . . . . . 1.01 1.07 1.18 1.00
2000 . . . . . . . . . 0.94 0.92 1.03 0.83
7
U.S. dollars per 'E'1.00(1)
Period
-------------------
Month High Low
--------------------------------------- ---- ----
February 2001 (through 20 February 2001) 0.94 0.91
January 2001 . . . . . . . . . . . . . . 0.95 0.92
December 2000. . . . . . . . . . . . . . 0.94 0.87
November 2000. . . . . . . . . . . . . . 0.87 0.84
October 2000 . . . . . . . . . . . . . . 0.88 0.83
September 2000 . . . . . . . . . . . . . 0.90 0.85
August 2000. . . . . . . . . . . . . . . 0.92 0.88
-------------------
(1) 'E' rates for periods prior to the 1999 financial year have been stated
using the relevant Dutch guilder rates, translated at the Official
Conversion Rate of Dfl2.20371 per 'E'1.00, which was fixed as at 1 January
1999.
(2) The average of the Noon Buying Rates on the last day of each month during
the relevant period.
8
RISK FACTORS
The key risks relating to our business and to the acquisition of Harcourt are
included below. Additional risks not presently known to us or that we currently
deem immaterial may also impair our business.
Risks relating to our business
Our intellectual property rights may not be adequately protected under current
laws in some jurisdictions, which may adversely affect our results and our
ability to grow.
Our products are largely comprised of intellectual property content delivered
through a variety of media, including journals, books, CD-Rom and the Internet.
We rely on trademark, copyright and other intellectual property laws to
establish and protect our proprietary rights in these products. However, we
cannot assure you that our proprietary rights will not be challenged, limited,
invalidated or circumvented. Despite trademark and copyright protection, third
parties may be able to copy, infringe or otherwise profit from our proprietary
rights without our authorisation. These unauthorised activities may be more
easily facilitated by the Internet.
In addition, the lack of Internet-specific legislation relating to trademark
and copyright protection creates an additional challenge for us in protecting
our proprietary rights to content delivered through the Internet and electronic
platforms.
We operate in a highly competitive environment that is subject to rapid change
and we must continue to invest and adapt to remain competitive.
Our scientific, business to business, legal and education businesses operate in
highly competitive markets. These markets continue to change in response to
technological innovations and other factors. We cannot predict with certainty
the changes that may occur and affect the competitiveness of our businesses. In
particular, the means of delivering our products, and the products themselves,
may be subject to rapid technological change. Although we have undertaken
several initiatives to adapt to and benefit from these changes, we cannot
predict whether technological innovations will, in the future, make some of our
products wholly or partially obsolete. We may be required to invest significant
resources to further adapt to the changing market and competitive environment.
We cannot assure you whether, or when, our substantial investment in our
Internet initiatives will produce returns.
We are investing significant amounts to develop and promote our Internet
initiatives and electronic platforms. The provision of products and services
through these media is very competitive and we may experience difficulties
developing this aspect of our businesses due to a variety of factors, many of
which are beyond our control. These factors may include:
. the ability of our Internet initiatives and electronic platforms to be
accepted by our customers;
. competition from comparable and new technologies; and
. the public's acceptance and continued use of the Internet and electronic
media.
In addition, as a consequence of our Internet and other technological
initiatives, we are becoming more dependent on the performance of the Internet
and our systems.
We cannot assure you that there will be continued demand for our products and
services.
Our businesses are dependent on the continued acceptance by our customers of
our products and services and of the prices which we charge. Although we take
significant care to ensure that we fully understand the needs of our customers,
we cannot predict whether there will be changes in the market in the future
which will affect the acceptability of products, services and prices to our
customers.
Changes in government spending and spending by academic institutions may
adversely affect our education and scientific businesses.
Our education business receives substantial public funds for its products and
services. Our scientific business supplies scientific information principally to
academic institutions. Any decrease or elimination of government funding or a
decrease in academic funding could negatively impact our businesses.
We may be unable to implement and execute our strategic plans if we cannot
maintain high quality management.
The implementation and execution of our strategic plans depend on the
availability of high quality management resources across all our businesses. We
cannot predict that in the future such resources will be available although we
place significant emphasis on the development of management talent and
succession planning.
We are dependent on advertising for a significant portion of our revenue.
Approximately 24% of our revenue is derived from advertising. Traditionally,
spending by companies on advertising and other marketing activities has been
cyclical with companies spending significantly less on advertising in times of
economic slowdown or recession.
9
Fluctuations in exchange rates may affect our reported results.
Our financial statements are expressed in pounds sterling and euros and are,
therefore, subject to movements in exchange rates on the translation of the
financial information of businesses whose operational currencies are other than
our reporting currencies. The United States is our most important market outside
the United Kingdom and the Euro Zone, and, accordingly, significant fluctuations
in U.S. dollar/sterling and U.S. dollar/euro exchange rates could significantly
affect our reported results from year to year. In addition, in some of our
businesses we incur costs in currencies other than those in which revenues are
earned. The relative movements between the exchange rates in the currencies in
which costs are incurred and the currencies in which revenues are earned can
significantly affect the profits of those businesses.
Risks relating to the acquisition of Harcourt
The on-sale of the remaining businesses may not be completed.
The on-sale to The Thomson Corporation and realisation of after tax proceeds of
approximately $1.6 billion ('L'1.1 billion) will not take place until the merger
is completed. Although we do not expect that, following the merger, there will
be any significant delays in completing the on-sale, we cannot be sure that
delays will not occur. If such delays were to occur, or in the unlikely event
that the on-sale is not completed, we would consider other means for reducing
our post-acquisition borrowings and dealing with the unsold businesses.
We may be required to divest businesses and assets or enter into behavioural
undertakings.
We have agreed with Harcourt that if any regulatory objections to our
acquisition of Harcourt and our on-sale to The Thomson Corporation are made that
could reasonably be expected to prohibit or materially impair or delay those
transactions beyond 24 July 2001, we will use our reasonable best efforts to
sell, hold separate or otherwise dispose of assets or conduct our business in a
manner that will resolve such objections unless such action would reasonably be
expected to be materially adverse to our business, financial condition, assets
or results of operations or to Harcourt's business, financial condition, assets
or results of operations. As a result of this obligation, we may be required to
divest significant assets or businesses that we would otherwise choose to
retain, or to enter into behavioural undertakings that we might otherwise choose
not to enter.
Integrating our operations and the acquired businesses of Harcourt may prove to
be disruptive and could result in the combined businesses failing to meet our
expectations.
We are acquiring, and retaining, the Scientific, Technical and Medical business
and the U.S. Schools Education and Testing businesses of Harcourt with the
expectation that the acquisition will result in accelerated revenue and profit
growth. We cannot be sure that Reed Elsevier will realise these anticipated
benefits in full or at all. Achieving the expected benefits and synergies of the
acquisition will depend, in part, upon whether the operations and the personnel
of Harcourt can be integrated in an efficient and effective manner with ours.
The process of integrating two formerly separately-operated businesses may be
disruptive to both businesses, may take longer than we anticipate and may cause
an interruption of our business. The performance of the combined businesses may
not meet our expectations if integration is not successful or if the process is
prolonged.
There may be contingent and other liabilities within Harcourt of which we are
not aware.
We intend to acquire the Harcourt businesses by means of a tender offer
followed by the merger of one of our wholly-owned subsidiaries into Harcourt,
pursuant to which Harcourt will become wholly-owned by us. As a result, we will
indirectly acquire all of Harcourt's known and unknown liabilities, regardless
of whether they are directly associated with the businesses that we intend to
retain.
We do not control Harcourt, and, although Harcourt has provided us with limited
access to its books and records, we cannot be sure that such access was
sufficient to enable us to evaluate all of Harcourt's liabilities and the risks
associated with its businesses. Harcourt could have liabilities or its business
could be subject to risks of which we are currently unaware that could have a
material adverse effect on our business, financial position and results of
operations.
10
ITEM 4: INFORMATION ON REED ELSEVIER
STRUCTURE
Reed Elsevier came into existence on 1 January 1993 when Reed International and
Elsevier contributed their businesses to two jointly owned companies, Reed
Elsevier plc, a U.K. registered company which owns all the publishing and
information businesses, and Elsevier Reed Finance BV, a Dutch registered company
which owns the financing activities. Reed International and Elsevier have
retained their separate legal and national identities and are publicly held
companies with separate stock exchange listings in London, Amsterdam and New
York.
Reed International and Elsevier each holds a 50% interest in Reed Elsevier plc.
Reed International holds a 39% interest in Elsevier Reed Finance BV, with
Elsevier holding a 61% interest. Reed International additionally holds an
indirect equity interest in Elsevier, reflecting the arrangements entered into
between Reed International and Elsevier at the time of the merger, which
determined the equalisation ratio whereby one Elsevier ordinary share is, in
broad terms, intended to confer equivalent economic interests to 1.538 Reed
International ordinary shares. The equalisation ratio is subject to change to
reflect share splits and similar events that affect the number of outstanding
ordinary shares of either Reed International or Elsevier.
Under the equalisation arrangements Reed International shareholders have a
52.9% economic interest in Reed Elsevier and Elsevier shareholders (other than
Reed International) have a 47.1% economic interest in Reed Elsevier. Holders of
ordinary shares in Reed International and Elsevier enjoy substantially
equivalent dividend and capital rights with respect to their ordinary shares.
The boards of both Reed International and Elsevier have agreed, except in
exceptional circumstances, to recommend equivalent gross dividends (including,
with respect to the dividend on Reed International ordinary shares, the
associated U.K. tax credit), based on the equalisation ratio. A Reed
International ordinary share pays dividends in sterling and is subject to U.K.
tax law with respect to dividend and capital rights. An Elsevier ordinary share
pays dividends in euros and is subject to Dutch tax law with respect to dividend
and capital rights.
The principal assets of Reed International comprise its 50% interest in Reed
Elsevier plc, its 39% interest in Elsevier Reed Finance BV, its indirect equity
interest in Elsevier and certain amounts receivable from subsidiaries of Reed
Elsevier plc. The principal assets of Elsevier comprise its 50% interest in Reed
Elsevier plc, its 61% interest in Elsevier Reed Finance BV and certain amounts
receivable from subsidiaries of Reed Elsevier plc and Elsevier Reed Finance BV.
Elsevier also owns shares, carrying special dividend rights, in certain of the
Dutch subsidiaries of Reed Elsevier plc. These shares enable Elsevier to receive
dividends from companies within its tax jurisdiction, thereby mitigating Reed
Elsevier's potential tax costs.
11
HISTORY AND DEVELOPMENT
Reed International prior to the merger
Reed International was founded in 1903, although certain of its publications
originated in the 19th century. Reed International was originally a paper
manufacturing company. It diversified into publishing in 1970 developing its
publishing holdings into a significant business by 1986, at which time the Board
of Reed International decided to concentrate on publishing and information
businesses. Over the period up to the merger, Reed International disposed of its
manufacturing businesses and made a number of significant acquisitions of
publishing and information businesses. Reed International's strategic focus
within the publishing and information businesses was directed primarily towards
higher margin, subscription-based businesses in English language markets.
Elsevier prior to the merger
Elsevier was formed in 1880 when a number of established Dutch publishers and
booksellers pooled their interests. Initially, Elsevier's activities comprised
small scale publishing for the general trade market. After World War II,
Elsevier broadened the scope of its operations, diversifying into consumer
magazines, newspapers, business publications and commercial printing and
achieving considerable growth as a publisher of English language scientific
journals. Since the late 1980's, Elsevier's strategy has been directed primarily
towards expansion in publishing and information in English language information
markets. This strategy resulted in the disposal of Elsevier's commercial
printing and consumer book publishing operations and in the acquisition of a
number of publishing houses active in the fields of scientific, professional and
business to business publishing.
Material Acquisitions and Disposals
Reed Elsevier has made strategic acquisitions in the scientific, legal and
business markets to enhance existing activities. Total acquisition expenditure
in the three years ended 31 December 2000 was approximately 'L'2.3 billion. The
principal acquisitions have been:
. Matthew Bender, a leading U.S. pub lisher of legal analysis and case law
and the remaining 50% equity in Shepard's from Times Mirror, in August
1998 for $1.65 billion ('L'1 billion);
. CMD Group, a leading international supplier of information to the
construction industry, in May 2000 for $300 million ('L'199 million); and
. Miller Freeman Europe, Europe's leading trade exhibition organiser, in
July 2000 for 'L'360 million.
In addition, Reed Elsevier has made a significant number of smaller
acquisitions.
In 1995 Reed Elsevier initiated a major divestment programme to withdraw from
consumer publishing markets. In 1998 Reed Elsevier completed the sale of its
consumer book publishing operations. The last major step in its withdrawal from
consumer publishing markets was the divestment, also in 1998, of IPC Magazines
in the United Kingdom, yielding gross proceeds of 'L'878 million.
Acquisition of Harcourt STM and Education Businesses
The pending acquisition of Harcourt's STM business and its U.S. Schools
Education and Testing businesses will represent a major step forward in our
strategy. The acquisition, when completed, will give Reed Elsevier a leading
position across the scientific, technical and medical spectrum, and a strong
position in the fast growing U.S. Schools education market.
The transaction, which is subject to regulatory approvals, will be effected by
the purchase of the whole of Harcourt and the on-sale to The Thomson Corporation
of the Higher Education business and certain Corporate and Professional Services
businesses that we do not wish to retain. The total cost of the transaction,
after taking into account the on-sale and debt assumed and other liabilities,
will be approximately $4.5 billion.
To finance the acquisition, in December 2000, Reed International and Elsevier
raised 'L'1,263 million through the issue of new shares representing an
additional 9.9% of their respective ordinary share capitals. The remainder of
the transaction cost will be funded from available debt facilities.
A more detailed description of the Harcourt STM and US Schools Education and
Testing businesses is included in, respectively, "Science & Medical" and
"Education". Harcourt revenues and operating profits have been adjusted from
reported figures to reflect proposed segmental reporting by Reed Elsevier.
Principal Executive Offices
The principal executive offices of Reed International are located at 25
Victoria Street, London SW1H 0EX, England. Tel: +44 20 7222 8420. The principal
executive offices of Elsevier are located at Van de Sande Bakhuyzenstraat 4,
1061 AG Amsterdam, The Netherlands. Tel: +31 20 515 9341. The principal
executive office located in the United States is at 125 Park Avenue, 23rd
Floor, New York, New York, 10017. Tel +1 212 309 5498. Our internet address is
www.reed elsevier.com.
BUSINESS DESCRIPTION AND ORGANISATION
We are one of the world's leading publishers and information providers. Our
activities include scientific, legal, education and business publishing. Our
principal operations are in North America and Europe. For the year ended 31
December 2000, we had total turnover of approximately 'L'3.8 billion and an
average of approximately 28,900 employees. In 2000, North America
12
represented our largest single geographic market, based on turnover by
destination, contributing 57% of Reed Elsevier's total turnover.
Turnover is derived principally from subscriptions, advertising sales,
circulation and copy sales and exhibition fees. In 2000, 39% of Reed Elsevier's
turnover was derived from subscriptions; 24% from advertising sales; 17% from
circulation and copy sales; 10% from exhibition fees; and 10% from other
sources.
Subscription sales are defined as turnover derived from the periodic
distribution or update of a product which is often prepaid, while circulation
and copy sales include all other turnover from the distribution of a product,
usually on cash or credit terms. The level of publishing-related advertising
sales has historically been tied closely to the economic cycle with changes in
the profit performance of advertisers, business confidence and other economic
factors having a high correlation with changes in the size of the market.
Subscription sales and circulation and copy sales have tended to be more stable
than advertising sales through economic cycles.
Both subscription and circulation and copy sales include the electronic
distribution of products and subscription and transactional sales of online
services. Approximately 25% of Reed Elsevier's turnover is derived from
electronic information products, and approximately 12% is Internet sourced.
The following table shows the turnover of Reed Elsevier by business segment and
on the basis of geographic origin and markets and adjusted operating profit of
Reed Elsevier, which is stated before the amortisation of goodwill and
intangible assets and exceptional items, by business segment and on the basis of
its geographic origin, in each of the three years ended 31 December 2000:
Turnover Adjusted Operating Profit(1)(2)
------------------------------------------------------- ------------------------------------------------
1998 1999 2000 1998 1999 2000
----------------- ----------------- ----------------- ---------------- ---------------- ------------
('L' million) % ('L' million) % ('L' million) % ('L'
million) % ('L' million) % ('L' million)
Business Segment(3)
Science & Medical. . . . . 622 19 652 19 693 19 223 27 231 29 252
Legal. . . . . . . . . . . 948 30 1,087 32 1,201 32 291 36 282 36 237
Education. . . . . . . . . 159 5 181 5 202 5 31 4 34 4 40
Business . . . . . . . . . 1,434 45 1,470 44 1,672 44 268 33 245 31 264
------------ ---- ------------ ---- ------------ ---- ------------ --- ------------ --- ------------
Continuing operations. . . 3,163 99 3,390 100 3,768 100 813 100 792 100 793
Discontinued operations(4) 28 1 --- --- --- --- --- --- --- --- ---
------------ ---- ------------ ---- ------------ ---- ------------ --- ------------ --- ------------
Total. . . . . . . . . . . 3,191 100 3,390 100 3,768 100 813 100 792 100 793
============ ==== ============ ==== ============ ==== ============ === ============ === ============
Geographic Origin(5)
North America. . . . . . . 1,663 52 1,836 54 2,098 56 390 48 359 45 335
United Kingdom . . . . . . 692 22 698 21 734 19 204 25 191 24 191
The Netherlands. . . . . . 383 12 391 11 399 11 128 16 135 17 136
Rest of Europe . . . . . . 293 9 307 9 356 9 76 9 87 11 102
Rest of World. . . . . . . 132 4 158 5 181 5 15 2 20 3 29
------------ ---- ------------ ---- ------------ ---- ------------ --- ------------ --- ------------
Continuing operations. . . 3,163 99 3,390 100 3,768 100 813 100 792 100 793
Discontinued operations(4) 28 1 --- --- --- --- --- --- --- --- ---
------------ ---- ------------ ---- ------------ ---- ------------ --- ------------ --- ------------
Total. . . . . . . . . . . 3,191 100 3,390 100 3,768 100 813 100 792 100 793
============ ==== ============ ==== ============ ==== ============ === ============ === ============
Geographic Market(5)
North America. . . . . . . 1,726 54 1,906 56 2,152 57
United Kingdom . . . . . . 483 15 484 14 521 14
The Netherlands. . . . . . 222 7 237 7 234 6
Rest of Europe . . . . . . 407 13 418 13 478 13
Rest of World. . . . . . . 325 10 345 10 383 10
------------ ---- ------------ ---- ------------ ----
Continuing operations. . . 3,163 99 3,390 100 3,768 100
Discontinued operations(4) 28 1 --- --- --- ---
------------ ---- ------------ ---- ------------ ----
Total. . . . . . . . . . . 3,191 100 3,390 100 3,768 100
============ ==== ============ ==== ============ ====
Adjusted Operating Profit(1)(2)
------------------------------
------------------------------
%
Business Segment(3)
Science & Medical. . . . . 32
Legal. . . . . . . . . . . 30
Education. . . . . . . . . 5
Business . . . . . . . . . 33
------------------------------
Continuing operations. . . 100
Discontinued operations(4) ---
------------------------------
Total. . . . . . . . . . . 100
==============================
Geographic Origin(5)
North America. . . . . . . 42
United Kingdom . . . . . . 24
The Netherlands. . . . . . 17
Rest of Europe . . . . . . 13
Rest of World. . . . . . . 4
------------------------------
Continuing operations. . . 100
Discontinued operations(4) ---
------------------------------
Total. . . . . . . . . . . 100
==============================
Geographic Market(5)
North America. . . . . . .
United Kingdom . . . . . .
The Netherlands. . . . . .
Rest of Europe . . . . . .
Rest of World. . . . . . .
Continuing operations. . .
Discontinued operations(4)
Total. . . . . . . . . . .
<-------------------
(1) Adjusted operating profit is shown before the amortisation of goodwill and
intangible assets and exceptional items. Reed Elsevier businesses focus on
adjusted profits as an additional performance measure; see note 1 to the
combined financial statements.
(2) Exceptional items are significant items within Reed Elsevier's ordinary
activities which, under U.K. and Dutch GAAP, are required to be disclosed
separately due to their size or incidence. Net exceptional items charged
to operating profit totalled 'L'115 million (loss) in the year ended 31
December 2000, 'L'239 million (loss) in the year ended 31 December 1999,
and 'L'79 million (loss) in the year ended 31 December 1998. See "Item 5
Operating and Financial Review and Prospects --- Reed Elsevier" and note 8
to the combined financial statements for a further description of these
items.
13
(3) The Education business, previously reported within the Legal segment, has
been presented separately for the first time in 2000 in anticipation of
the acquisition of Harcourt. Comparatives have been restated accordingly.
The Scientific segment has been renamed Science & Medical to reflect
business strategy.
(4) Discontinued operations, are presented in accordance with U.K. and Dutch
GAAP, and comprise IPC Magazines and the consumer book publishing
operations which were the final elements of the Consumer segment sold in
1998.
(5) The analysis by geographic origin attributes turnover and adjusted
operating profit to the territory where the product originates. The
analysis by geographic market attributes turnover on the basis of the
destination market.
Reed Elsevier's businesses compete for circulation and marketing expenditures
in scientific and medical, legal, education and business markets. The bases of
competition include, for readers and users of the information, the quality and
variety of the editorial content, the quality of the software to derive added
value from the information, the timeliness and the price of the products and,
for advertisers, the quality and the size of the audiences targeted.
14
The following table shows the main business units by reference to business
segment and geographical location.
Business Segment Geographical Location
--------------------------------------------------------------------------------------------------
North America(1) United Kingdom The Netherlands
------------------------------- -------------------------------- -------------------------------
Science & Medical Elsevier Science Elsevier Science Elsevier Science
Excerpta Medica Communications The Lancet Excerpta Medica Communications
MDL Information Systems
Cell Press
Endeavor
Legal LEXIS-NEXIS U.S. Butterworths Tolley Publishing(3)
North American Legal Markets(2)LEXIS-NEXIS Europe(3)
Corporate and Federal Markets
Martindale Hubbell
Education Rigby Heinemann
Greenwood-Heinemann Ginn
Butterworth-Heinemann
Business Cahners Business Information Reed Business Information Elsevier Business Information(5)
CMD Group Reed Exhibition Companies(4)
Cahners Travel Group(6) OAG Worldwide(6)
ICIS-LOR
Schnell Publishing Company
Reed Exhibition Companies(4)
OAG Worldwide(6)
Business Segment Geographical Location
--------------------------------------------------------------------
Rest of Europe Rest of World
----------------------------------- -------------------------------
Science & Medical Elsevier Science,Republic of Ireland Elsevier Science, Japan
Elsevier Science, Switzerland Excerpta Medica Communications,
Editions Scientifiques et Medicales Japan
Elsevier, France
Beilstein, Germany
Legal Editions du Juris-Classeur, Butterworths, Australia(3)
France(3) Butterworths, South East Asia(3)
Verlag Orac, Austria(3) Butterworths, South Africa
Dott. A. Giuffre(3) Editore, Italy (50.01%)(3)
(40%) LEXIS-NEXIS International
StImpfli Verlag,(3) Switzerland Latin America, Argentina
(40%) & Chile(3)
Wydawnictwa(3) Prawnicze PWN,
Poland (50%)
Education Rigby-Heinemann, Australia
Business Elsevier Business Information, Reed Business Information,
Belgium(5) Australia
Elsevier Informacion Profesional, Reed Exhibitions, Japan(4)
Spain(5) Reed Exhibitions, Singapore(4)
Reed Elsevier Deutschland, Reed Exhibitions, Australia(4)
Germany(5)
Editions Prat, France(5)
Groupe Strategies, France(5)
Miller Freeman Europe(4)
Reed Midem Organisation,France(4)
-------------------
(1) U.S. unless otherwise stated.
(2) This business includes Michie, Matthew Bender and Shepard's.
(3) These businesses form part of LEXIS-NEXIS International.
(4) These businesses form part of Reed Exhibition Companies.
(5) These businesses form part of Elsevier Business Information.
(6) In 2000, Reed Elsevier announced that it planned to divest a number of
businesses, including OAG Worldwide and Cahners Travel Group.
(7) All businesses are 100% owned unless otherwise stated.
SCIENCE & MEDICAL
1998 1999 % change 2000 % change
------------ ------------ ------------------- ------------ -------------------
('L' million) ('L' million) at constant rates(1) ('L' million) at constant rates(2)
Turnover
Elsevier Science . . . . . 513 534 +5% 592 +12%
Medical Businesses . . . . 109 118 +6% 101 --15%
------------ ------------ ------------------- ------------ -------------------
622 652 +5% 693 +7%
============ ============ =================== ============ ===================
Adjusted operating profit(3) 223 231 +5% 252 +12%
============ ============ =================== ============ ===================
Operating margin . . . . . . 35.9% 35.4% --0.5pts 36.4% +1.0pts
============ ============ =================== ============ ===================
<-------------------
(1) Represents percentage change over 1998 at constant rates of exchange,
which have been calculated using the average exchange rates for the 1998
financial year; see page 29 for percentage changes at actual rates of
exchange.
(2) Represents percentage change over 1999 at constant rates of exchange,
which have been calculated using the average exchange rates for the 1999
financial year; see page 29 for percentage changes at actual rates of
exchange.
(3) U.K. and Dutch GAAP allow the presentation of alternative earnings
measures. Adjusted operating profit is presented as an additional
performance measure and is shown before amortisation of goodwill and
intangible assets and exceptional items. U.S. GAAP does not permit the
presentation of alternative earnings measures.
The Science & Medical (formerly Scientific) segment of Reed Elsevier comprises
worldwide scientific and medical publishing and communications businesses.
The Science & Medical strategy is to extend its leading global position in
providing high quality scientific, technical and medical information solutions
to research scientists and information professionals. The prime driver of growth
will be the Science Direct family of Internet products, where electronic access,
inter-linked content and search capacity offer added value to users.
Elsevier Science
Elsevier Science is a leading international publisher of scientific information
with headquarters in The Netherlands and operations located around the globe.
Within the Science & Medical segment, Elsevier Science's scientific information
businesses contributed approximately 85% of the total turnover in 2000. Through
a number of imprints including Elsevier, Pergamon, Excerpta Medica and North
Holland, Elsevier Science supplies scientific information through journals,
books, CD-ROMs and online to research libraries, scientists and professional
markets serving an increasingly wide range of research fields. Elsevier Science
is integral to the scientific community through the publication of more than
1,200 subscription based journals with more than 150,000 new research articles
published each year, focused on the life sciences, chemistry and physical
sciences. These peer-reviewed publications are an essential conduit for the
dissemination of authoritative research findings. Other publishing programmes
include econometrics, statistics, geology, computer sciences, management and
psychology.
During 2000 we signed some 300 ScienceDirect online contracts, including
consortia deals in Germany, The Netherlands, New Jersey, China and Brazil.
Approximately 45% of journal subscriptions by value now include ScienceDirect,
and usage has grown from 5 million page views per month at the beginning of 2000
to 15 million in January 2001.
ScienceDirect now holds approximately 1.2 million research articles and is by
far the most comprehensive source of full text scientific research in the world.
More research is added daily from our 1,200 scientific journals, and we have
recently announced our intention to incorporate all articles that were published
before 1995 into the ScienceDirect electronic offering. This substantial
undertaking will take approximately five years to complete. The ScienceDirect
content will be further enhanced by the inclusion of major reference works; the
first major reference work on ScienceDirect was Comprehensive Clinical
Psychology.
Our focus has also been on expanding the ScienceDirect product line with
subject specific products, such as PhysicsDirect, PharmaDirect,
EngineeringDirect, Embase.com and BioMedNet reviews. For each of the some 20
subject areas, specific homepages have also been created. PhysicsDirect provides
access to some 50 physics journals, as well as the Inspec and Compendex
databases, with subject specific navigational tools. Embase.com combines the
leading Embase and Medline database into one searchable thesaurus, with full
text links to some 1,400 journals. BioMedNet reviews is a subscription based web
service providing access to the Elsevier Science biomedical review journals.
The Chemistry Preprint Server was launched in August. This new service for the
chemistry community provides rapid communication and is a freely available and
permanent web archive for unpublished research articles in the field of
chemistry. In the pharmaceutical area, we have added to the scope of our service
through the acquisition of the Afferent advanced drug screening software.
In parallel with customisation, we have worked to improve the functionality and
ease of use of ScienceDirect, for instance, by giving individual users
personalisation through e-mail alerts, customised searches and the tracking of
search histories. In order to link ScienceDirect with peer reviewed content and
web information, a scientific Internet web browser, Scirus.com, was launched.
Scirus.com allows for simultaneous searches through more than 50 million web
pages as well as the
16
ScienceDirect content. The acquisition of Endeavor, the leading provider of
digital library systems, is expected to enable our customers to integrate our
electronic offerings into solutions which address the requirements of their
institutions.
The migration from print to electronic services, backed by a doubling of the
sales force and customer service, is broadening access to our information.
Through the consortium deals and our individual sales efforts, we are now able
to reach usage groups not traditionally part of our customer base; for example
smaller academic institutions.
Among Elsevier Science's most widely known and largest journals are Cell, Brain
Research, Neuroscience and Biochimica et Biophysica Acta in the life sciences;
the Journal of the American College of Cardiologists and Annals of Thoracic
Surgery in the medical sciences; Tetrahedron and Journal of Chromatography in
chemistry; Physics Letters and Solid State Communications in the physical
sciences; Journal of Financial Economics in economics; and Artificial
Intelligence in the computer sciences field. Elsevier Science also publishes
secondary material in the form of supporting bibliographic data, indexes and
abstracts, and tertiary layers of information in the form of review and
reference works, including the Trends and Current Opinion series and
Encyclopaedia of Neuroscience. In addition the company publishes conference
proceedings, letters, journals for rapid communications, handbooks, bulletins,
magazines, dictionaries, newsletters, and sponsored publications.
Elsevier Science offers a number of secondary databases, available
electronically online or on CD-ROM. These include: EMBASE, covering
pharmaceutical and biomedical sciences; Compendex, covering all the engineering
disciplines; Geobase, focusing on geoscience and related areas; Beilstein
Database, providing online access to approximately eight million chemical
structures with linked descriptions of the properties, reactions, preparations,
citations and links to the pharmaceutical research tools of MDL Information
Systems; and Elsevier BIOBASE, a biological science database. Elsevier Science
also maintains such highly specialized databases as World Textiles and FLUIDEX.
In the scientific publishing business journal subscriptions are usually paid
annually in advance. In 2000, subscriptions accounted for approximately 76% of
Elsevier Science's turnover, circulation and copy sales for 9% of turnover and
other sources for 15% of turnover. In 2000, approximately 43% of Elsevier
Science's turnover was derived from North America, 33% from Europe, and the
remaining 24% from Rest of World.
Much of the pre-press production of the scientific businesses is undertaken
in-house. An electronic production system, Computer Aided Production ("CAP") is
used to deliver the full text of journal articles in whichever format the
customer requires: online, on CD-ROM, or in print. Electronic files of all
journals are fed from CAP into the Electronic Warehouse, which in turn stores
content and makes it available as required for delivery to customers. Printing
is primarily sourced through a variety of unaffiliated printers located in cost
effective printing centres, mainly in Europe. As part of our ongoing efforts to
upgrade our systems infrastructure, we are rolling out an electronic workflow
programme from author submission and peer review to pre-press and the Electronic
Warehouse. The distribution of hard copy scientific journals is to a large
extent handled through independent subscription agents. Electronic delivery is
directly fulfilled principally through ScienceDirect.
Competition with Elsevier Science is generally on a title by title basis.
Leading competing titles are normally published by learned societies such as the
American Chemical Society, the Institute of Electrical and Electronics Engineers
and the American Institute of Physics in the United States and the Royal Society
of Chemistry in the United Kingdom.
Medical Businesses
The Science & Medical segment also operates a worldwide network of medical
publishing and communications businesses. The medical businesses within the
Science & Medical segment comprise Excerpta Medica Communications, Editions
Scientifiques et Medicales Elsevier and The Lancet, and together these
businesses contributed approximately 15% of the Science & Medical segment's
turnover in 2000. In June 2000, we sold the Springhouse business, focused on the
nursing community, for $105 million.
Excerpta Medica Communications ("EMC") publishes customised information to
healthcare professionals, medical societies and pharmaceutical companies
worldwide. Consistent with the global structure of its main clients, EMC fulfils
the needs of pharmaceutical companies' international and domestic marketing
operations through its offices in The Netherlands, Germany, Italy, France,
Spain, the United States, Japan, Hong Kong and Australia. Activities include
educational and promotional scientific information delivered via medical
symposia, traditional print media, audio-visual and computer-based programs. EMC
works closely with pharmaceutical companies to provide worldwide marketing
platforms for new drugs. In 2000, approximately 89% of EMC's turnover was
derived from sponsored projects and 11% from subscriptions. In the same period,
approximately 37% of turnover came from North America, 30% from Europe and 33%
from Rest of World.
Editions Scientifiques et Medicales Elsevier ("ESME") based in Paris, publishes
a range of medical, biotechnology and clinical chemistry titles, including the
renowned Encyclopedie Medico Chirurgicale. In 2000, ESME launched Spanish and
English language treatises of Encyclopedie Medico Chirurgicale. In 2000, ESME's
circulation and copy sales accounted for approximately 52% of total turnover,
with a further 8% from advertising, 29% from subscriptions and 11% from other
sources.
The Lancet is one of the world's most respected medical journals, covering all
aspects of human health and is sold through subscription in over 75 countries.
The Lancet celebrated its 175th year of publication with the launch of The
Lancet Oncology, the first of a series of journals with review information on
specific diseases. In 2000, subscriptions accounted for 86% of total turnover,
advertising for 14%.
The medical publishing field is highly fragmented. There is regional
competition from a number of publishers and service providers in the United
States, such as The Thomson Corporation, American Medical Association,
Massachusetts Medical
17
Society (New England Journal of Medicine), Medi Media, Adis Press and
Lippincott-Raven (Wolters Kluwer), Advanstar and IMS (Cognizant).
Harcourt Scientific Technical and Medical Businesses
On 27 October 2000 Reed Elsevier announced agreements had been reached to
acquire Harcourt's Scientific Technical and Medical business and U.S. Schools
Education and Testing businesses in a $4.5 billion transaction, subject to
regulatory reviews which are currently in progress.
The Harcourt Scientific Technical and Medical ("STM") businesses are expected
to bring high quality scientific and technical journals and a leading global
position in medical publishing. The combined business will be positioned across
the entire scientific, technical and medical spectrum, and will offer a range of
Internet information services.
Harcourt STM has two principal businesses, Academic Press and Harcourt Health
Sciences:
--- Academic Press publishes 174 peer-reviewed journals, with particular focus
on life, physical, social and computer sciences. Academic Press also
publishes reference works and databases. The IDEAL system provides
Academic Press content online and holds over 95,000 scientific research
articles.
--- Harcourt Health Sciences is a leader in healthcare and medical publishing
measured by revenues. Through a range of imprints, including Mosby,
Churchill Livingstone, Harcourt and WB Saunders, Harcourt Health Sciences
publishes some 8,500 clinical reference works and 250 journals and
handbook series, covering the full spectrum of primary medical research,
clinical practice and allied healthcare. Through MD Consult, Harcourt
Health Sciences provides proprietary and licensed clinical information to
physicians and other healthcare professionals.
Total revenue for these Harcourt STM businesses for the year to 31 October 2000
were $688 million.
Following the closing of the acquisition, two separate divisions will be
created within the Science & Medical segment, Science and Medical, and the
immediate priorities will be:
--- to integrate the Elsevier Science and Academic Press businesses;
--- to use the combined science content and navigation tools to develop new,
customised online information services;
--- to integrate the worldwide medical businesses; and
--- to reorganise medical publishing around key clinical disciplines and
expand the availability of online information services and solutions.
In Science, the combination of the brands and content of Academic Press and
Elsevier Science is expected to create a business with a breadth and depth of
scientific information across the major scientific disciplines. The
ScienceDirect online platform is scalable and the service will be extended
across the Academic Press content.
In Medical, the acquisition of Harcourt Health Sciences will represent an
opportunity in a complementary area for Science & Medical. Science & Medical's
clinical medicine journals, medical databases and the medical communications
businesses fit well with Harcourt Health Sciences. The Harcourt Health Sciences
prestigious reference works and handbook series across clinical disciplines is
expected to provide opportunities for the development of navigational tools for
online information services. MD Consult is an entry point into online services
for practising clinicians and is expected to be leveraged through the
application of Science & Medical's online publishing skills and increased
investment to create additional Internet services.
LEGAL
1998 1999 % change 2000 % change
------------ ------------ ------------------- ------------ -------------------
('L' million) ('L' million) at constant rates(1) ('L' million) at constant rates(2)
Turnover
LEXIS-NEXIS U.S. . . . . . 741 854 +13% 947 +4%
LEXIS-NEXIS International 207 233 +13% 254 +11%
------------ ------------ ------------------- ------------ -------------------
948 1,087 +13% 1,201 +5%
============ ============ =================== ============ ===================
Adjusted operating profit(3) 291 282 --5% 237 --19%
============ ============ =================== ============ ===================
Operating margin . . . . . . 30.7% 25.9% --4.8pts 19.7% --6.2pts
============ ============ =================== ============ ===================
-------------------
(1) Represents percentage change over 1998 at constant rates of exchange,
which have been calculated using the average exchange rates for the 1998
financial year; see page 29 for percentage changes at actual rates of
exchange.
(2) Represents percentage change over 1999 at constant rates of exchange,
which have been calculated using the average exchange rates for the 1999
financial year; see page 29 for percentage changes at actual rates of
exchange.
(3) U.K. and Dutch GAAP allow the presentation of alternative earnings
measures. Adjusted operating profit is presented as an additional
performance measure and is shown before amortisation of goodwill and
intangible assets and exceptional items. U.S. GAAP does not permit the
presentation of alternative earnings measures.
18
The Legal segment of Reed Elsevier serves important legal, tax, business and
reference markets around the world. The Education business, previously reported
within the Legal segment, has been presented separately for the first time in
2000 in anticipation of the acquisition of Harcourt. Comparatives have been
restated accordingly.
The Legal strategy is to serve as an indispensable partner to legal and other
professionals, on a global basis, through the provision of preferred information
and solutions.
In 2000, we launched new and upgraded Internet products and services including
the core research services of lexis.com and nexis.com for the North American
Legal Markets division and the Corporate and Federal Markets division. We have
expanded our sales and marketing activities, and have been building our global
capability and presence through acquisition and alliance.
In recognition that our markets and customers are increasingly becoming global,
we are developing a global product and technology platform to serve as an
underpinning to link individual country offerings, and to enable Reed Elsevier
legal content to be delivered to our customers around the globe. We also made
the important decision in 2000 to adopt LEXIS-NEXIS as our global brand. This
will be implemented progressively across our international markets in 2001.
Acquisitions were made in 2000 in the U.S., the U.K., Asia and Latin America to
extend our global capability. LEXIS-NEXIS International added Eclipse, a leading
publisher in U.K. employment law and related fields which is an important
growing area of law. In the Corporate and Federal Markets division, we acquired
the RiskWise group of companies which provides online identity verification and
fraud-risk solutions for the e-commerce industry and complements our existing
public record business.
LEXIS-NEXIS U.S.
LEXIS-NEXIS U.S. is a leading provider of information to the legal, corporate
and government markets in hard copy, online and CD-ROM formats. It operates
principally in the U.S.. LEXIS-NEXIS U.S. is organised into three business
units: North American Legal Markets, Corporate and Federal Markets and
Martindale Hubbell. In 2000, LEXIS-NEXIS U.S. contributed approximately 79% of
the total turnover of the Legal segment.
The North American Legal Markets division is responsible for developing,
marketing and selling legal information products in electronic and hard copy
formats to legal firms and practitioners. In 2000, LEXIS-NEXIS U.S. continued
its investment in new products and services, in sales and marketing, and in
support activities, to better meet the changing needs and expectations of legal
and other professionals and to improve its competitive position.
In the North American Legal Markets division, we met our goal in 2000 of
introducing a competitive Internet-based service mid year with the enhanced
lexis.com, and we continue to add content and functionality to improve and
differentiate our service. Content licences were secured through long term
agreements with CCH and Tax Analysts, both leading publishers of tax material.
Case law summaries have now been added to the LEXIS-NEXIS federal and state case
law collection. These summaries cover cases since 1995 and we are working to
include earlier years, having started with those cases most often accessed.
Navigation and printing functions have been improved for easier usability and
report products introduced to help customers analyse their research results more
efficiently.
The most recent independent market research shows lexis.com to have parity
preference amongst law students, an improvement from a year ago and representing
an important milestone.
Customisation has been a feature of 2000 both in product and in marketing and
sales programmes. During the year we launched a range of tools under the LEXIS-
NEXIS Customized e-Solutions brand, including: an enterprise-wide portal powered
by Plumtree Software and developed exclusively for law firms' knowledge
management needs; Custom Web Pages for easy access to specific forms and sources
on lexis.com; Intranet Solutions for firms in the initial stages of creating an
Intranet; and Practice Pages designed under the guidance of Matthew Bender
authors and editors for a customised approach to specific areas of practice. To
meet the needs of U.S. attorneys in small firms and single-lawyer practices, the
lexisONE.com service was launched with free and fee-based research and legal
forms, as well as resources to help attorneys manage firm business, client
relationships and their careers.
Matthew Bender, a leading U.S. publisher of legal analysis and case law, offers
more than 500 publications in print and electronic formats --- sold to
subscribers in more than 160 countries. Its publications include California
Forms of Pleading and Practice, Collier on Bankruptcy, Immigration Law and
Procedure, Moore's Federal Practice, Nimmer on Copyright and Rabkin & Johnson's
Current Legal Forms.
Michie offers more than 700 practice-enhancing titles, 400 Custom Legal
Publications and the Annotated Codes of 35 states and territories. In addition,
Michie is the official publisher of the United States Code Service and United
States Supreme Court Reports, Lawyers' Edition. Law school professors and
students have long relied on the Michie Contemporary Legal Education Series to
provide course materials, prepared by leading legal scholars.
Shepard's is the premier U.S. legal citation service, providing a comprehensive
mix of Federal and State jurisdictional and topical citator services delivered
online or in print or CD-ROM formats. "Shepardizing" is a key process for all
U.S. lawyers and involves checking the continuing authority of a case or
statutory reference in the light of subsequent legal changes.
The Corporate and Federal Markets divi sion is responsible for developing,
marketing and selling the Lexis-Nexis online service to corporations, businesses
and local, state and federal government agencies, and also manages news,
business, financial and public records content acquisition and enhancements. In
the Corporate and Federal Markets division, we launched the new flagship
product, nexis.com, in September 2000. This represents a major upgrade of our
online research service, adding much
19
improved navigation, personalisation and search capabilities to our information
databases. As in the North American Legal Markets division, we are building
customised solutions with our customers that are both industry and function
specific, such as insurance, media, sales support, mergers and acquisitions and
business intelligence, that integrate searching across a customer's Intranet,
Lexis-Nexis and other information sources, including the web. We have made
alliances with major systems suppliers, such as Siebel and Verity, who have
embedded nexis.com in their products.
Martindale-Hubbell is a publisher of biographical guides to the legal
profession in North America and internationally. Its flagship product, the
Martindale-Hubbell Law Directory, includes more than 900,000 U.S. lawyer and law
firm listings. There are also special Canadian and International editions and an
online directory of professional legal staff. The Martindale-Hubbell Law
Directory is available through hardbound print, CD-ROM and online. Martindale-
Hubbell also offers the Internet-based lawyers.com service to small law offices
to connect them with prospective clients. The service, which is free to users,
provides profiles of some 420,000 attorneys and firms world-wide.
Other businesses within LEXIS-NEXIS U.S. include: LEXIS Document Services, a
provider of comprehensive searching and filing services to U.S. law firms and
asset-based lenders which provides service for 4,300 jurisdictions throughout
the U.S. and Canada; Marquis Who's Who, a U.S. publisher of biographical
information; National Register Publishing, a U.S. publisher of directories
serving the advertising, financial, real estate, and general reference markets;
and Reed Technology & Information Services ( "RTIS "), a provider of content
management and information delivery systems.
LEXIS-NEXIS Europe offers a wide range of LEXIS-NEXIS online information
products in its European markets, including local-language Internet browser
products in Germany and France. In January 2000, the business was expanded
through the acquisition of FT Profile and a long term licence agreement for
Financial Times content. From January 2001 LEXIS-NEXIS Europe will form part of
LEXIS-NEXIS International.
In 2000, approximately 66% of LEXIS-NEXIS U.S.'s turnover came from
subscription sales, including online services, 10% from transactional sales of
online services, 9% from advertising (including directory listings), 5% from
circulation and copy sales and the remaining 10% from other sources. In the same
period approximately 96% of turnover came from North America and 4% from the
rest of the world.
In the U.S. legal information and services markets, LEXIS-NEXIS U.S.'s
principal competitor is West (The Thomson Corporation). The principal
competitors in the business information market include Dialog (The Thomson
Corporation) and Factiva (Dow Jones and Reuters).
LEXIS-NEXIS International
LEXIS-NEXIS International comprises the Butterworths group of companies,
Editions du Juris-Classeur in France, Verlag Orac in Austria, Orac Publishers in
the Czech Republic, 40% interests in Giuffre(C) in Italy and in Staempfli Verlag
in Switzerland, 50% interests in Wydawnictwa Prawnicze PWN, a Polish joint
venture, HVG-Orac, a joint venture in Hungary, and legal publishers in Latin
America. In 2000 LEXIS-NEXIS International contributed 21% of the total turnover
of the Legal segment.
Butterworths operates in the U.K. (Butterworths Tolley Publishing), Australia,
New Zealand, South Africa, South East Asia, India, Canada and the Republic of
Ireland. Butterworths provides legal, tax and regulatory materials in loose-
leaf, book, CD-ROM and online formats.
Butterworths Tolley Publishing's most widely known publications are Halsbury's
Laws of England, The Encyclopaedia of Forms and Precedents, Simon's Taxes and
Butterworth's Company Law Service. An increasing amount of its information is
now available online, through the web-based Butterworths Lexis Direct service.
The integration of Butterworths Direct and LEXIS has provided access, via a
single subscription, to a wide range of U.K., Commonwealth and U.S. legal
materials. Butterworths Lexis Direct is a leader in electronic legal publishing
both in terms of content and functionality and comprises several services: Law
Direct, a subscription based current awareness service; All England Direct,
comprising a 24-hour case reporting service, and the entire All England Law
Reports; and Halsbury's Law Direct, comprising the complete text of the 56
volume set of the latest edition fully updated. During 2000, customised services
were added in specialist fields, such as Human Rights Direct and EU Direct, and,
in partnership with a leading legal training firm, CPD Direct was launched,
providing online training and professional development as an online service.
Butterworths Tolley Publishing is a market leader in "first point of reference"
tax publishing, through its single volume guides and its loose leaf service, and
complements Butterworths' position in publishing for practitioners at the
specialist end of the legal and tax markets in the U.K.. Butterworths Tolley
Publishing also produces several CD-ROM and online products for tax, regulatory
and business markets. The expansion into regulatory publishing continued with
the acquisition in January 2000 of Eclipse, a publisher of U.K. employment law
and related material.
In 2000, approximately 87% of Butterworths' turnover was derived from hard copy
sales, with 13% attributable to electronic products. In the same period,
approximately 60% of turnover came from the U.K., 13% from Australia, 6% from
Canada and the balance from the rest of the world. Printing is primarily sourced
through a variety of unaffiliated printers located in cost-effective printing
centres. Warehousing and distribution are largely outsourced. The principal U.K.
competitor in the legal field is Sweet & Maxwell (The Thomson Corporation), with
Commerce Clearing House (Wolters Kluwer) competing against its tax publications.
Editions du Juris-Classeur ( "EJC ") is a French publisher of legal materials
in loose-leaf form, CD-ROM and online for lawyers and notaries. The Juris-
Classeur collection comprises some 400 regularly updated volumes covering 66
topics. Its
20
20 journals, including the leading weekly La Semaine Juridique, also cover all
the important areas of French legal practice. In 2000 the French case law
database, Juris-Data, was launched as an online service. EJC has its own
printing and warehousing facilities. In 2000, subscriptions comprised
approximately 75% of EJC's turnover, while circulation and copy sales comprised
approximately 20% of turnover, with 5% from other sources. EJC's major
competitors are Dalloz (Havas Vivendi) and Lamy (Wolters Kluwer).
Verlag Orac, the leading tax publisher and a leading law publisher in Austria,
publishes a comprehensive range of tax materials, including the fortnightly
Austrian Tax Newspaper and the monthly Journal of Accountancy. Verlag Orac also
has an equity holding in a Hungarian law publisher HVG-Orac (50%) and now has
full ownership of Orac Publishers in the Czech Republic.
Giuffre, in which Reed Elsevier has a 40% interest, publishes reference
materials in both hard copy and, increasingly, CD-ROM formats for the Italian
legal market. It also has a journals programme.
StImpfli Verlag is a Swiss legal and tax publisher in which Reed Elsevier has a
40% interest.
Wydawnictwa Prawnicze PWN is a joint venture company which was established in
1994 with PWN, Poland's leading academic publisher in which Reed Elsevier has a
50% interest.
LEXIS-NEXIS International's Latin American businesses comprise legal publishers
in Argentina (Abeledo Perrot, Depalma and Jurisprudencia) and in Chile
(Publitecsa and Conusur). Publitecsa and Conusur were both acquired in 2000.
They serve a range of markets including legal practitioners and academic and
student markets.
EDUCATION
1998 1999 % change 2000 % change
------------ ------------ ------------------- ------------ -------------------
('L' million) ('L' million) at constant rates(1) ('L' million) at constant rates(2)
Turnover
Reed Educational & Professional
Publishing. . . . . . . . . . 159 181 +12% 202 +9%
============ ============ =================== ============ ===================
Adjusted operating profit(3). . 31 34 +8% 40 +15%
============ ============ =================== ============ ===================
Operating margin. . . . . . . . 19.5% 18.8% --0.7pts 19.8% +1.0pts
============ ============ =================== ============ ===================
-------------------
(1) Represents percentage change over 1998 at constant rates of exchange,
which have been calculated using the average exchange rates for the 1998
financial year; see page 29 for percentage changes at actual rates of
exchange.
(2) Represents percentage change over 1999 at constant rates of exchange,
which have been calculated using the average exchange rates for the 1999
financial year; see page 29 for percentage changes at actual rates of
exchange.
(3) U.K. and Dutch GAAP allow the presentation of alternative earnings
measures. Adjusted operating profit is presented as an additional
performance measure and is shown before amortisation of goodwill and
intangible assets and exceptional items. U.S. GAAP does not permit the
presentation of alternative earnings measures.
The Education business is now reported separately from the Legal segment in
anticipation of the acquisition of Harcourt. Reed Educational & Professional
Publishing ("REPP") serves the educational markets of the U.K., the U.S.,
Australia, New Zealand and South Africa, as well as the international
professional and academic sectors.
REPP aims to be the number one choice for the provision of materials to
teachers and of professional and academic knowledge and instruction in targeted
market segments. Four key elements underpin achievement of this aim: expansion
in the supplemental segment of the U.S. schools market; continued consolidation
in the U.K. schools market; development of electronic resources; and expansion
of electronic access.
Reed Educational & Professional Publishing
REPP operates through eight main businesses: U.K. Schools comprising the
Heinemann, Rigby and Ginn imprints; Global Library and Butterworth-Heinemann
based in the U.K.; Rigby and Greenwood-Heinemann based in the United States;
Rigby-Heinemann based in Australia; Heinemann in South Africa; and Reed
Publishing in New Zealand. U.K. Schools is a publisher for the U.K. primary and
secondary markets. Global Library publishes reference material for school
libraries and has operational units in the U.K., United States and Australia.
Butterworth-Heinemann is an international publisher of professional information
and learning materials for higher education and professional markets. It has
publishing units in the U.K., United States and Australia. In the United States,
Rigby publishes supplemental materials for elementary school literacy
development. Greenwood-Heinemann publishes monograph and reference lists and
teachers' professional resources. The Australian business, Rigby Heinemann, is a
publisher of primary and secondary school books in Australia. In South Africa,
Heinemann is a publisher of school texts and in New Zealand, Reed Publishing
publishes text-books for the local market. 2000 also saw expansion of the
e-learning unit and the development of a number of electronic products such as
the Heinemann Explore reference product.
In 2000, approximately 51% of REPP's turnover was derived from North America,
31% from the U.K., 7% from Australia and the remaining 11% from the rest of the
world. Printing and binding are performed by unaffiliated printers and in cost
effective printing centres both in the country of origin and around the world.
REPP has its own warehouse and distribution
21
facilities in its principal territories. REPP's major U.K. competitors are
Longman (Pearson), Oxford University Press, Stanley Thornes (Wolters Kluwer) and
Cambridge University Press. In the United States, principal competitors include
Wright Group (Tribune), SRA/ Open Court (McGraw Hill) and MCP (Pearson).
University presses are considered to be competitors in the academic market. In
Australia, principal commercial competitors include Nelson, Macmillan, AWL and
Jacaranda.
Harcourt Education and Testing Businesses
On 27 October 2000 Reed Elsevier announced agreements had been reached to
acquire Harcourt's Scientific, Technical and Medical business and U.S. Schools
Education and Testing businesses in a $4.5 billion transaction, subject to
regulatory reviews which are currently in progress.
Harcourt is a leader in U.S. educational publishing and assessment markets,
providing print and multi-media teaching materials and tests.
--- Harcourt School Publishers is a leading U.S. elementary (K-6) publisher
with particular strength in the four major subject areas of science,
reading, math and social studies. The business has been successful in
state adoptions, particularly in the three largest adoption states of
Texas, Florida and California. In 2000, Harcourt's new reading programme
was adopted for use in Texas and its science programme was adopted for use
in Texas, Florida, California, North Carolina and West Virginia.
--- Holt, Rinehart and Winston is a major U.S. secondary (grade 6-12)
publisher with a leading position in literature and language arts, the
largest middle and secondary school discipline. It also has a strong and
growing position in science and is developing new math and social studies
programmes.
--- Steck-Vaughn is a publisher of U.S. K-12, adult education and public
supplemental educational materials. The business is complementary to Reed
Elsevier's Rigby business.
--- Harcourt Trade is a small niche U .S. publishing business including the
Harvest imprint.
In the Testing area, Harcourt has two principal businesses, Harcourt
Educational Measurement and The Psychological Corporation, which provide testing
and performance measurement services for educational and clinical use.
--- Harcourt Educational Measurement provides a range of achievement, aptitude
and guidance educational testing services for measuring K-12 student
progress. Harcourt Educational Measurement develops and administers
accountability tests for students in all 50 U.S. states and is the
exclusive contractor in 20 states, including California and Florida.
--- The Psychological Corporation provides practising and research
psychologists with psychological, speech and occupational therapy
assessment tests for many aspects of human behaviour, intelligence and
development.
Total revenue for these Harcourt Education and Testing businesses for the year
to 31 October 2000 were $990 million.
The Education strategy focuses on growing share through innovation and
excellence in publishing development.
The immediate priorities after closing the acquisition will be:
--- to maintain the current momentum in winning U.S. state adoptions, and to
follow this success through in open states;
--- to integrate the Steck-Vaughn and Rigby supplemental businesses and to
expand the publishing programmes;
--- to step up investment in new programmes in secondary education,
particularly math;
--- to expand the scope and penetration of the testing business through
Internet-based delivery and services; and
--- to step up investment in the online publishing unit to develop new
interactive learning programmes.
The primary objectives of accelerated investment in e-learning will be in the
migration of key course content, the development of supporting interactive
instructional material, the development of teacher and ancillary material, and
the strengthening of online library reference materials.
22
BUSINESS
1998 1999 % change 2000 % change
------------ ------------ ------------------- ------------ -------------------
('L' million) ('L' million) at constant rates(1) ('L' million) at constant rates(2)
Turnover
Cahners Business Information 531 542 --1% 665 +15%
Reed Business Information . . 248 243 --2% 270 +11%
Elsevier Business Information 257 270 +7% 278 +11%
Reed Exhibition Companies . . 274 301 +8% 358 +18%
OAG Worldwide . . . . . . . . 90 85 --6% 72 --19%
Other . . . . . . . . . . . . 34 29 29
------------ ------------ ------------------- ------------ -------------------
1,434 1,470 +2% 1,672 +12%
============ ============ =================== ============ ===================
Adjusted operating profit(3) . 268 245 --9% 264 +7%
============ ============ =================== ============ ===================
Operating margin . . . . . . . 18.7% 16.7% --2.0pts 15.8% --0.9pts
============ ============ =================== ============ ===================
-------------------
(1) Represents percentage change over 1998 at constant rates of exchange,
which have been calculated using the average exchange rates for the 1998
financial year; see page 29 for percentage changes at actual rates of
exchange.
(2) Represents percentage change over 1999 at constant rates of exchange,
which have been calculated using the average exchange rates for the 1999
financial year; see page 29 for percentage changes at actual rates of
exchange.
(3) U.K. and Dutch GAAP allow the presentation of alternative earnings
measures. Adjusted operating profit is presented as an additional
performance measure and is shown before amortisation of goodwill and
intangible assets and exceptional items. U.S. GAAP does not permit the
presentation of alternative earnings measures.
The Business segment is comprised of business magazine and information
companies operating principally in the U.S., the U.K., Europe and a worldwide
exhibitions business.
The Business strategy is to be the first choice of business professionals for
information and decision support, marketing services and e-commerce
connectivity. Reed Elsevier believes strong brands and market positions in key
sectors, built on high quality and online decision support information and
premium exhibition services, will attract audiences and deliver more effective
buyer-seller connections.
During 2000 the businesses have been brought together in one global division
and the portfolio refocused on fewer, faster growing sectors through a programme
of acquisitions and disposals. We have launched Internet portals in key sectors,
as well as new print magazines and exhibitions. The principal acquisitions were
CMD Group, e:Logic and Miller Freeman Europe. We have also been selling non-core
assets including the K G Saur reference business in Germany, a number of the
tuition businesses in The Netherlands and Belgium, and a range of titles in the
US and Europe that did not fit our chosen sectors.
The sale of our travel publishing businesses, OAG Worldwide and Cahners Travel
Group, is well advanced and the Bowker bibliographic business is also to be
sold. These disposals have a dilutive impact on earnings but leave the Business
segment more focused.
Business Magazines and Information
The business magazine and information businesses within the Business segment
are made up of Cahners Business Information, Reed Business Information and
Elsevier Business Information. Together these businesses contributed
approximately 73% of the turnover of the Business segment in 2000. In the U.S.
business to business magazines are primarily distributed on a "controlled
circulation" basis, whereby the product is delivered without charge to qualified
buyers within a targeted industry group based upon circulation lists developed
and maintained by the publisher. In the U.K. business magazines are distributed
both on a "controlled circulation" basis and a "paid circulation" basis, but in
both cases are dependent on advertising for a significant proportion of their
revenues. As turnover is mainly derived from advertising, these businesses are
sensitive to economic conditions and advertiser expenditure in those countries.
In The Netherlands, however, a higher proportion of publications is sold by
subscription, thus such publications are generally more resilient through
economic cycles.
Cahners Business Information ("Cahners") is a leading publisher of business
information in the United States, with over 100 trade magazines and some 120 web
sites. Following the changes in portfolio, Cahners Business Information has been
reorganised into three market sector-focused divisions; Manufacturing and
Electronics, Construction and Retail, and Media to support its transformation
from a broad-based publisher of business-to-business magazines to a market
sector focused, media-neutral provider of critical information and marketing
solutions to business professionals. Throughout the year Cahners has launched
vertical portals in a number of key sectors, including e-insite in Electronics,
manufacturing.net in Manufacturing, and variety.com, tvinsite.com and
wirelessweek.com in respectively the entertainment, television and
telecommunication areas within Media. Over 20 portals have now been launched,
using the e:Logic platform, in target sectors. In Construction, major
development work has followed the CMD Group acquisition to leverage its content
into a vertical portal to address the construction industry supply chain. Within
the Manufacturing sector we are migrating the joint venture with i2 into a more
23
straightforward licensing arrangement and have refocused the web service on the
design, automation and supply chain/logistics segments of Manufacturing.
Launches have not been confined to Internet services. Cahners launched three
new magazines --- eV, focused on entertainment and the digital economy;
Broadband Week, which informs on broadband networks, applications and content,
and CommVerge, which addresses the converging space of communications, computers
and consumer electronics.
In May, Cahners made the $300 million acquisition of CMD Group, an
international supplier of information to the construction industry. CMD Group
provides construction project information, both nationally and regionally in the
U.S., as well as directories of building products and services and construction
cost data.
In June, Cahners acquired e:Logic, a growing application service provider of
web development, design and delivery systems to media and Internet companies for
$73 million. e:Logic provides Cahners with content management technology and is
supporting our strategy of building leading Internet portals.
Cahners Travel Group, the travel publishing division, has been offered for
sale.
Among the best known Cahners titles are Variety, Broadcasting & Cable,
Multichannel News, Publishers Weekly, EDN, Design News and Interior Design.
Cahners also publishes product tabloids which provide information primarily on
new products to managers and professionals in the industrial, processing,
medical, scientific and high technology fields. Cahners operates primarily in
the United States, with major publishing centres in New York, Boston, Chicago,
Los Angeles, Denver and Greensboro. Readership of its publications is expanding
beyond U.S. borders, reflecting both the potential of U.S. exports and the
increasing internationalisation of the industries served.
Cahners leverages its knowledge of the business sectors it serves and the
extensive databases of business names and reader related demographics it has
collated through a broad range of products and services. These include websites,
direct mail, product news tabloids, newspapers, newsletters and custom published
supplements, as well as the feature publications which continue to serve as the
core of the portfolio.
In 2000, approximately 74% of Cahners' total turnover came from advertising,
15% from subscriptions and circulation sales and 11% from other sources. Cahners
operates circulation management and fulfilment facilities in Colorado and the
Caribbean island of St Kitts which identify, qualify and maintain subscriber
lists for substantially all of its titles. These lists enable Cahners to serve
its advertisers by creating highly targeted readerships for its magazines. Much
of the editorial pre-press production is performed in- house. Paper and printing
services are purchased on a co-ordinated basis with other Reed Elsevier
businesses in the U.S.. Distribution of magazines is primarily through the U.S.
postal service, supplemented by news-stand sales through unaffiliated
wholesalers.
Reed Elsevier's U.S. business to business titles compete on an individual basis
with the publications of a number of publishers, including CMP Media (United
Business Media) in its electronics sectors and Advanstar, BPI/VNU, Primedia,
Penton Media, Hanley Wood and McGraw-Hill in other sectors.
Reed Business Information ("RBI"), the U.K. based business magazine and
directory publisher, has a portfolio of around 100 business magazines,
directories, market access products and online services. RBI publishes over 50
primary business magazine brands in some 20 market facing sectors. Its business
magazines include Computer Weekly, Farmers Weekly, Estates Gazette, Flight
International, New Scientist, Caterer & Hotelkeeper, Doctor, Commercial Motor
and Community Care. Its major directories are Kelly's, Kompass and The Bankers'
Almanac, and it also has online services which include Estates Gazette
Interactive, Air Transport Intelligence, Planet Science, ICIS-LOR and
totaljobs.com.
In the U.K., RBI continued to increase investment in totaljobs.com, the online
recruitment service, which has a leading position in the U.K. with approximately
50,000 jobs carried. Other initiatives include the 75/25 computerweekly.com
joint venture with InterX to combine RBI's brands, content and publishing
expertise with InterX's technical and product data services. RBI launched
E.Business Review and increased the frequency of Personnel Today.
In 2000, approximately 81% of RBI's turnover came from the U.K., 8% from
continental Europe, 7% from North America and 4% from the rest of the world. In
the same year, approximately 66% of turnover was derived from advertising, 14%
from subscription sales, 10% from circulation sales and the remaining 10% from
other sources. RBI performs full computerised editorial make-up in-house for all
of its titles. Paper and printing services are purchased from unaffiliated third
parties, primarily on a co-ordinated basis with other Reed Elsevier businesses
in the U.K.. RBI's distribution is generally through public postal systems, with
news-stand distribution for some titles through outside wholesalers. RBI
competes directly with EMAP Business Communications and United Business Media in
a number of sectors in the U.K., and also with many smaller companies on an
individual title by title basis.
Elsevier Business Information ("EBI") comprises the business and reference
publishing operations in continental Europe, which operates in The Netherlands,
Belgium, Spain, Germany, France and Italy.
EBI in The Netherlands, is focused on 13 market segments. It publishes over 160
titles and is the leading business magazine and information publisher. Its
principal titles include Elsevier, the major current affairs weekly, Beleggers
Belangen and FEM in business and management, Boerderij and Buiten in
agriculture. Its titles are predominantly subscription-based and revenue is
principally divided between subscriptions and advertising. Most titles are
published in the Dutch language. Through trade journals, product news tabloids,
directories, documentary systems, databases, newspapers, and websites, EBI
serves markets which include agriculture, catering, construction, engineering,
food, fashion, horticulture, transportation, tourism and travel.
24
EBI's zibb.nl was launched in 2000 as a general business information portal in
The Netherlands.
The portfolio was extended by the acquisition in July 2000 of the Stammer
business in Italy, as part of the Miller Freeman Europe transaction, and by
other acquisitions in France, Spain and Germany. Disposal of the K G Saur
reference business has been completed and a number of the non core Tuition
businesses have been, or are in the process of being, sold.
In 2000, approximately 36% of EBI's turnover was derived from advertising, 29%
from magazine subscriptions, 16% from training, 10% from magazine circulation
and copy sales, and the remaining 9% from other sources including sales of
software. Printing and production is contracted out to third parties and
distribution is mainly through the Dutch postal system. EBI competes with a
number of companies on a title by title basis in individual market sectors, the
largest competitors being Wolters Kluwer and VNU. In the agricultural sector,
the main competition is from Oogst (association journal).
EBI Belgium, publishes 10 English language product news tabloids for the
international market. This business provides specialised information on new
products in the international electronic, laboratory, biotechnical and
industrial markets. The Spanish operations, Elsevier Informacion Profesional,
comprise Grupo Arte y Cemento, a publisher of product news tabloids,
Construdatos, which publishes market information on new building projects and
Inese (acquired in 2000).
Other constituents of EBI are Editions Prat, a publisher of mainly loose-leaf
information aimed at the fiscal, legal and administration sectors in France;
Groupe Strategies, which publishes the journal Strategies and other information
materials for the French advertising and communications industry; Reed Elsevier
Deutschland, which includes Artzliche Praxis, a prominent German language
medical journal and Institut Verlag, a supplier of information for the
construction industry.
Exhibitions
The exhibitions business contributed approximately 21% of the turnover of the
Business segment in 2000, and is the world's largest exhibitions business, with
a leading position in the U.S., Asia and each major European economy.
Reed Exhibition Companies ("REC") is an international event organizer, with 450
events in 28 countries, attracting over 100,000 exhibitors and 5.5 million
buyers annually. REC's events are concentrated in a number of industry sectors
of which the most important are: marketing and business services; publishing;
IT/communications; manufacturing; aerospace; leisure; electronics; hospitality;
travel; entertainment; and retail.
Many of REC's events are industry leaders, including National Hardware Show,
National Manufacturing Week, JCK International Jewellery Shows, Professional
Golfers Association (PGA) Merchandise Show, PGA International Golf Show and
Canadian Machine Tool Show in North America; Pakex, World Travel Market and
London Book Fair in the U.K.; MIDEM, MIPTV, MIPIM, Salon Nautique and FIAC in
France; Computer Faire in South Africa; AIMEX in Australia and Australian Gift
Fairs; International Jewellery Tokyo in Japan; Asian Aerospace and Thai Metalex
in South-East Asia; and the Nepcon and Travel series of international events.
REC launched over 35 new shows in 2000, and a significant increase in
investment in show related websites, of which there are now over 250. These will
provide more accessible and focused pre and post event services, including
contact broking, to exhibitors and attendees.
In July 2000 Reed Elsevier acquired Miller Freeman Europe, a leading trade
exhibition organiser in Europe with operations in France, Spain, Italy, Germany
and Scandinavia, for 'L'360 million. The portfolio has over 100 shows and 66
related websites and includes prestigious international and national domestic
events across a number of sectors, including building and construction, retail,
food and hospitality, and environmental services.
Acquisitions have also been made in the U.S. food sector and alliances formed
with major exhibition halls in Berlin and Vienna.
Over 80% of REC's turnover is derived from exhibition participation fees, with
the balance attributable to conference fees, advertising in exhibition guides,
sponsorship fees and admission charges. With few exceptions no capital is
employed in exhibition halls, the majority of which are leased on a short term
basis. In 2000 approximately 42% of REC's turnover came from North America, 34%
from continental Europe, 10% from the U.K. and the remaining 14% from Rest of
World. As some events are held other than annually, turnover in any single year
may be affected by the cycle of non-annual exhibitions.
The exhibition industry has historically been extremely fragmented. Within
domestic markets, competition comes primarily from industry focused trade
associations and convention center and exhibition hall owners. The main U.S.
competitor is Miller Freeman, Inc. (VNU), although a number of hall owners are
increasingly seeking international presence.
OAG Worldwide
Continued progress was made in the development of its electronic products with
the launch of OAG.com and OAGMobile. The sale of OAG Worldwide is well advanced.
ELSEVIER REED FINANCE BV
Elsevier Reed Finance BV ("ERF"), the Dutch resident parent company of the ERF
group, is directly owned by Reed International and Elsevier. ERF provides
treasury, finance and insurance services to the Reed Elsevier plc businesses
through its subsidiaries in Switzerland: Elsevier Finance SA ("EFSA"), Elsevier
Properties SA ("EPSA") and Elsevier Risks SA ("ERSA"). These three Swiss
companies are organised under one Swiss holding company, which is in turn owned
by ERF.
EFSA, EPSA and ERSA each focus on their own specific area of expertise. EFSA is
the principal treasury centre for Reed Elsevier. It is responsible for all
aspects of treasury advice and support for Reed Elsevier plc's businesses
operating in continental
25
Europe and certain other territories and undertakes foreign exchange and
derivatives dealing services for the whole of Reed Elsevier. EFSA also provides
Reed Elsevier plc businesses with financing for acquisitions and product
development and manages cash pools and investments. EPSA is responsible for the
exploitation of tangible and intangible property rights whilst ERSA is
responsible for insurance activities relating to risk retention.
During 2000, additional loans to Reed Elsevier plc businesses in the U.S. of
$461 million were made, of which $200 million was to finance the acquisition of
the CMD Group. Additional loans to Reed Elsevier plc businesses in Europe of
'E'425 million were made, of which 'E'413 million was to finance the purchase of
the Miller Freeman Europe businesses. To fund this additional lending and to
provide capacity to meet new lending requests, ERF raised $495 million by means
of a rights issue to which Elsevier subscribed and the funds were contributed to
EFSA. Furthermore, EFSA issued a 7-year bond in the Swiss domestic market, for
$300 million equivalent. Additionally, EFSA put in place a $3.0 billion U.S.
Commercial Paper programme in December, in anticipation of financing related to
the Harcourt acquisition.
EFSA continued to advise Reed Elsevier plc businesses on the treasury
implications of the introduction of the euro and all euro transfer programmes
are progressing according to plan. EFSA also organised bank tenders in several
European countries, and implemented a number of cash-pooling arrangements within
Europe. The volume of foreign exchange dealt by EFSA during 2000 amounted to
approximately $3.8 billion equivalent. The average balance of cash under
management, on behalf of Reed Elsevier plc companies, was approximately $0.5
billion.
At the end of 2000, 87% (1999 93%) of ERF's gross assets were held in U.S.
dollars, including U.S.$4.3 billion in loans to Reed Elsevier plc subsidiaries.
The euro currency block represented 12% of total assets (1999 5%).
Liabilities included $822 million in U.S. dollars and $423 million equivalent
in euro currencies, borrowed under the euro commercial paper programme and the
Swiss domestic bond.
STRATEGY
In February 2000 we announced the Reed Elsevier strategy for growth, which was
built around the following key foundations:
1. Significant upgrade of management and organisation effectiveness;
2. Major upgrade of products, using Internet technology, to deliver superior
services to customers;
3. More effective marketing and sales programmes
4. Significant increase in investment -- largely against Internet -- to
drive revenue growth
5. Aggressive cost saving programmes
6. Geographical expansion
7. Continue to target acquisitions/alliances to accelerate achievement of
strategic goals
Throughout 2000 we have been executing this strategy and can report that we
have achieved virtually all of our objectives to date.
Significant upgrade of management and organisation effectiveness
We have made strong new appointments to senior management positions. These
include the Global CEOs for Science & Medical, Legal and Business; new CEOs for
Cahners and the LEXIS-NEXIS operating businesses; a new Group Technology
Officer, HR Director and General Counsel. Internet activities have been
separately organised within each business with clear leadership and
accountabilities. The head office has been reduced. Executive management
development programmes and new incentive structures have been introduced.
Major upgrade of products, using Internet technology, to deliver superior
services to customers
New and upgraded products have been developed and launched, based on in-depth
customer research. We have focused on providing higher value added content and
services, Internet delivered, with greater ease of use and functionality, and
increasing customisation.
We have built, launched and expanded Internet portals around core Business
sectors internationally. Five major portals have been launched in the U.S. in
the electronics, manufacturing and media sectors and 15 more using the e:Logic
platform. The new and upgraded Internet portals in Europe are performing
satisfactorily in their target markets.
More effective marketing and sales programmes
We have expanded customer research across the business. Marketing programmes
have been redeveloped. Sales forces have been significantly increased, most
particularly in Science & Medical and Legal.
Significant increase in investment -- largely against Internet -- to drive
revenue growth
The investment programme for 2000 has been aimed at upgrading our products and
our marketing and sales activities. The investment programme was budgeted at
'L'260 million, and actual spend in 2000 was 'L'10 million higher.
Aggressive cost saving programmes
Cost savings of 'L'143 million have been achieved in 2000, 'L'13 million ahead
of plan. These have been derived principally from non-revenue generating areas,
e.g. production, infrastructure and support staff.
26
Geographical expansion
We have extended our position globally through acquisition and launch. In
Science & Medical, ScienceDirect is now a fully global product. Within Legal,
businesses have been acquired in the U.S., the U.K., Asia and Latin America. In
Business, acquisitions have been made to fill out our presence in the Chemicals
and Construction sectors. Exhibitions businesses have been acquired in
continental Europe.
Continue to target acquisitions/alliances to accelerate achievement of
strategic goals
In 2000 we completed over 50 acquisitions, totalling 'L'952 million including
CMD Group (construction information), e:Logic (application service provider),
Miller Freeman Europe (exhibitions) and legal publishing businesses
internationally. Non core business have been, or are in the process of being,
disposed. Alliances have been formed to develop the scope and penetration of our
Internet services. Reed Elsevier Ventures was launched above under 2000 to
participate in emerging businesses.
A more detailed review of progress by business is included above under
"Business Description and Organisation".
PROPERTY, PLANTS AND EQUIPMENT
Reed Elsevier does not own any physical property which is considered material
to Reed Elsevier taken as a whole. None of the real property owned or leased by
Reed Elsevier is presently subject to liabilities relating to environmental
tions which is considered material to Reed Elsevier taken as a whole.
27
ITEM 5: OPERATING AND FINANCIAL REVIEW AND PROSPECTS
OPERATING RESULTS --- REED ELSEVIER
The following discussion is based on the combined financial statements which
have been prepared in accordance with U.K. and Dutch GAAP which differ in
certain significant respects from U.S. GAAP as set out in note 30 to the
combined financial statements.
The following discussion should be read in conjunction with, and is qualified
by reference to, the combined financial statements. Unless otherwise stated,
identified amounts relate to the total results of Reed Elsevier, including the
results of discontinued operations.
Reed Elsevier derives its turnover principally from subscription sales,
circulation and copy sales, advertising sales and exhibition fees.
Turnover by source for continuing operations
Year ended 31 December
1998 1999 2000
'L' million % 'L' million % 'L' million %
---------- --- ---------- --- ---------- ---
Subscriptions. . . 1,138 36 1,305 39 1,457 39
Circulation & copy 630 20 620 18 627 17
Advertising. . . . 789 25 821 24 923 24
Exhibition fees. . 278 9 307 9 363 10
Other. . . . . . . 328 10 337 10 398 10
---------- --- ---------- --- ---------- ---
Total. . . . . . . 3,163 100 3,390 100 3,768 100
========== === ========== === ========== ===
The relative movement in subscription sales largely reflects the acquisition of
subscription based businesses, customer migration from transactional to
subscription accounts and the relative impact of currency translation. As a
result of this and the impact of disposals, turnover from circulation and copy
sales has declined as a proportion of total turnover.
Reed Elsevier's principal geographic markets are North America, the United
Kingdom and Europe (including The Netherlands).
Turnover by geographic market for continuing operations
Year ended 31 December
1998 1999 2000
'L' million % 'L' million % 'L' million %
---------- --- ---------- --- ---------- ---
North America . 1,726 55 1,906 56 2,152 57
United Kingdom 483 15 484 14 521 14
The Netherlands 222 7 237 7 234 6
Rest of Europe 407 13 418 13 478 13
Rest of World . 325 10 345 10 383 10
---------- --- ---------- --- ---------- ---
Total . . . . . 3,163 100 3,390 100 3,768 100
========== === ========== === ========== ===
The increase in the relative importance of the North American market to Reed
Elsevier largely reflects the impact of acquisitions. Acquisitions with
significant sales in North America were CMD Group, acquired in May 2000, and
Matthew Bender and the remaining 50% interest in Shepard's, both of which were
acquired in August 1998. The relative movement in the Netherlands and Rest of
Europe markets reflects the relative impact of currency translation and
disposals.
The cost profile of individual businesses within Reed Elsevier varies widely
and costs are controlled on an individual business unit basis. The most
significant cost item for Reed Elsevier as a whole is labour costs, which
includes all employment costs of employees as well as of temporary or contracted
staff. Labour costs represented 42%, 44% and 42% of Reed Elsevier's total costs,
before amortisation of goodwill and intangible assets and exceptional items, of
the continuing operations in 2000, 1999 and 1998, respectively.
Acquired goodwill and intangible assets are capitalised and systematically
amortised over a maximum period of 20 years.
28
The following table shows turnover and adjusted operating profit for each of
Reed Elsevier's business segments, in each of the three years ended 31 December
2000, together with the percentage change in 2000 and 1999 at both actual and
constant exchange rates:
Turnover
Year ended 31 December
-------------------------------------------------------------------------
1998 1999 % change 2000 % change
-------------- -------------- -------------- ----------------------------
Actual Constant ActualConstant
rates rates(2) ratesrates(1)
---------- --- ---------- --------- -------- ---------- -----------------
'L' million % 'L' million % % % 'L' million % % %
Business Segment(3)
Science & Medical. . . . . 622 19 652 19 5 5 693 19 6 7
Legal. . . . . . . . . . . 948 30 1,087 32 15 13 1,201 32 10 5
Education. . . . . . . . . 159 5 181 5 14 12 202 5 12 9
Business . . . . . . . . . 1,434 45 1,470 44 3 2 1,672 44 14 12
---------- --- ---------- --------- -------- ---------- -----------------
Continuing operations. . . 3,163 99 3,390 100 7 6 3,768 100 11 9
Discontinued operations(4) 28 1 --- --- --- ---
---------- --- ---------- --------- -------- ---------- -----------------
Total. . . . . . . . . . . 3,191 100 3,390 100 6 5 3,768 100 11 9
========== === ========== ========= ======== ========== =================
Adjusted Operating Profit(5)(6)
Year ended 31 December
-------------------------------------------------------------------------
1998 1999 % change 2000 % change
-------------- -------------- -------------- ----------------------------
Actual Constant ActualConstant
rates rates(2) ratesrates(1)
---------- --- ---------- --------- -------- ---------- -----------------
'L' million % 'L' million % % % 'L' million % % %
Business Segment(3)
Science & Medical. . . . . 223 27 231 29 4 5 252 32 9 12
Legal. . . . . . . . . . . 291 36 282 36 (3) (5) 237 30 (16) (19)
Education. . . . . . . . . 31 4 34 4 10 8 40 5 18 15
Business . . . . . . . . . 268 33 245 31 (9) (9) 264 33 8 7
---------- --- ---------- --------- -------- ---------- -----------------
Continuing operations. . . 813 100 792 100 (3) (3) 793 100 (1) (1)
Discontinued operations(4) --- --- --- --- --- ---
---------- --- ---------- --------- -------- ---------- -----------------
Total. . . . . . . . . . . 813 100 792 100 (3) (3) 793 100 (1) (1)
========== === ========== ========= ======== ========== =================
-------------------
(1) Represents percentage change over 1999 at constant rates of exchange,
which have been calculated using the average exchange rates for the 1999
financial year.
(2) Represents percentage change over 1998 at constant rates of exchange,
which have been calculated using the average exchange rates for the 1998
financial year.
(3) The Education business, previously reported within the Legal segment, has
been presented separately for the first time in 2000. Comparatives have
been restated accordingly. The Scientific segment has been renamed Science
& Medical to reflect business strategy.
(4) Discontinued operations, are presented in accordance with U.K. and Dutch
GAAP, and comprise IPC Magazines and the consumer book publishing
operations, which were the final elements of the Consumer segment, sold in
1998.
(5) Adjusted operating profit is shown before the amortisation of goodwill and
intangible assets and exceptional items. Reed Elsevier businesses focus on
adjusted profit as an additional performance measure; see note 1 to the
combined financial statements.
(6) Exceptional items are significant items within Reed Elsevier's ordinary
activities which, under U.K. and Dutch GAAP, are required to be disclosed
separately due to their size or incidence. Net exceptional items charged
to operating profit totalled 'L'115 million (loss) in the year ended 31
December 2000, 'L'239 million (loss) in the year ended 31 December 1999
and 'L'79 million (loss) in the year ended 31 December 1998. See note 8 to
the combined financial statements for a further description of these
items.
29
Results of Operations for the Year Ended 31 December 2000 Compared to the Year
Ended 31 December 1999
General. The reported profit before tax for the Reed Elsevier combined
businesses, including exceptional items and the amortisation of goodwill and
intangible assets, was 'L'192 million, which compares with a reported profit of
'L'105 million in 1999. The increase includes the favourable movement in
exceptional items with lower reorganisation costs and the gain on disposals of
businesses. The reported attributable profit of 'L'33 million compares with a
reported attributable loss of 'L'63 million in 1999.
Turnover increased by 11% to 'L'3,768 million. Excluding acquisitions and
disposals and currency translation, underlying revenue growth was 5%. The second
half continued the improving trend seen in the first, benefiting from the
positive impact of investments in our products and our sales and marketing
activities.
Excluding exceptional items and the amortisation of goodwill and intangible
assets, adjusted operating profits were flat at 'L'793 million. Operating
margins at 21.0% were 2.4 percentage points below the prior year principally
reflecting major investments in our products and our sales and marketing
activities offset by cost reductions achieved in production, distribution and
support areas. Excluding acquisitions and disposals and currency translation
effects costs increased by 6%.
The amortisation charge for goodwill and intangible assets amounted to 'L'468
million, up 'L'95 million reflecting acquisitions made in 1999 and 2000, and
currency translation effects.
Exceptional items showed a pre-tax charge of 'L'30 million, comprising 'L'38
million on acquisition related costs, 'L'77 million in respect of the major
restructuring programme initiated in 1999, less 'L'85 million profit on sale of
businesses. This compares with a net charge on exceptional items in 1999 of
'L'232 million, of which 'L'161 million related to restructuring. Restructuring
charges include costs in relation to employee severance, surplus leasehold
property obligations and fixed asset write offs.
Net interest expense, at 'L'103 million, was 'L'21 million higher than in the
previous year principally due to the financing of acquisitions completed in 2000
and currency translation. Net interest cover was 8 times adjusted operating
profit.
Adjusted profit before tax, which excludes the amortisation of goodwill and
intangible assets and exceptional items, at 'L'690 million, was 3% lower than in
previous years expressed in sterling, or 3% lower at constant exchange rates.
The total tax charge for the year was high as a proportion of profit before tax
principally due to non-tax deductible amortisation and the non-recognition of
potential deferred tax assets. The effective tax rate on adjusted earnings was
slightly higher at 25.9% (1999 25.6%). The adjusted profit attributable to
shareholders of 'L'511 million compared to 'L'527 million in 1999, 3% lower at
constant exchange rates.
In 2000 the U.S. GAAP net profit was 'L'60 million, compared with a net loss of
'L'73 million in 1999, a movement of 'L'133 million. The movement reflects the
factors discussed above, together with year on year changes in the adjustments
required to reflect differences between U.K. and Dutch GAAP and U.S. GAAP. The
most significant differences relate to the capitalisation and amortisation of
goodwill and other intangibles, and deferred taxes; see note 30 to the combined
financial statements.
In the following commentary unless otherwise indicated, all percentage
movements refer to constant currency rates, using 1999 full year average rates,
and are stated before amortisation of goodwill and intangibles and exceptional
items. Percentage movements at actual exchange rates are shown in the table on
page 29. In anticipation of the acquisition of Harcourt General's STM and
Education and Testing businesses, the Reed Educational & Professional Publishing
business, formerly reported within the Legal segment, is now reported separately
as an Education segment, and comparatives have been restated accordingly. The
Scientific segment has been renamed Science & Medical.
Science & Medical
Turnover and adjusted operating profit in the Science & Medical business
increased by 7% and 12% respectively at constant rates of exchange, or 8% and
12% excluding acquisitions and disposals. The sales growth was driven by the
stronger subscription renewals in the year and the increasing contribution from
Internet services. The previously adverse subscriber attrition trends were
reversed. Operating margins were slightly higher reflecting the strong revenue
growth, with the significant increase in investment, in new product and sales
and marketing initiatives, offset by cost savings in production, distribution
and back office functions. In addition to the positive impact on subscription
renewals, the Internet services contributed an additional 2 percentage points to
sales growth. The new policy on pricing introduced for the 2000 subscription
year, moderating increases and the impact of currencies so as to give more
predictable journal pricing for customers, also contributed to the stronger
renewals and helped accelerate the migration from print to electronic products.
The medical publishing and communications business in 2000 reported turnover
lower by 15% due to the disposal of Springhouse in June 2000. Underlying sales
were marginally ahead and adjusted operating profits up 22% following
reorganisation of the sponsored communications business and after the weak
performance in France in 1999.
Operating profit in the Science & Medical business increased by 'L'29 million
to 'L'140 million in 2000. This reflected growth in adjusted operating profit
and a lower level of exceptional items charged to operating profit offset by
higher amortisation of goodwill and intangible assets.
30
Legal
Turnover in the Legal business increased by 5%, or 3% excluding acquisitions,
and adjusted operating profit was down 19%. This reflects the significant step
up in investment, particularly at LEXIS-NEXIS U.S., to deliver upgraded products
and services, and sales and marketing programmes. The investment was partly
funded by the major cost savings programme. Operating margins were
correspondingly lower, by 6.2 percentage points at 19.7%, from which they are
expected to recover as the investment pays off. At LEXIS-NEXIS U.S., turnover
excluding acquisitions was up 2% while adjusted operating profits were 24% lower
reflecting the significant step up in investment.
In the North American Legal Markets division, online revenues grew 5% with the
second half growth showing a continuing improvement over the first. This was
partly offset by lower print and CD-ROM sales as business migrates online.
Online usage is growing in the online business as customers migrate to the
upgraded functionalities and services of the lexis.com platform which now
accounts for more than 65% of searches. The Martindale-Hubbell legal directory
business had another successful year.
In the Corporate and Federal Markets division, NEXIS online revenues grew by
4%, a major turnaround from the 4% decline seen the previous year, with a
particularly strong second half. The launch of the significantly upgraded
flagship product, nexis.com, has been exceptionally well received in the market
and is driving new sales and expansion of existing customer accounts.
Across LEXIS-NEXIS U.S. the major re-engineering programme has continued to
deliver substantial cost savings, in excess of $90 million, with almost every
area re-engineered, including production, IT, administration and other support
services.
LEXIS-NEXIS International businesses outside the U.S. (formerly the Reed
Elsevier Legal Division) reported turnover and adjusted operating profit up 11%
and 2% respectively, or 5% and 1% excluding acquisitions, reflecting solid sales
performance and a significant increase in new product and marketing investment.
Operating profit in the Legal business decreased by 'L'65 million to an
operating loss of 'L'8 million in 2000. This reflected the decline in adjusted
operating profit together with an increase in the amortisation of goodwill and
intangibles reflecting acquisitions made during 2000 and currency translation
effects. Exceptional items charged to operating profit were 'L'77 million
compared to 'L'89 million in 1999.
Education
Reed Educational & Professional Publishing saw revenues and adjusted operating
profit increase by 9% and 15% respectively. Rigby, the U.S. supplementary
business, had a particularly good year with revenues 37% ahead driven by market
share gains and a very successful launch of the new Rigby literacy programme. In
U.K. Schools, sales in the Primary market were lower than the prior year which
benefited from exceptional, ring fenced government funding for literacy
materials. In Secondary, however, sales were up 23% on strong new publishing
programmes addressing curriculum changes. The Australian schools business also
performed well.
Operating profit in the Education business was 'L'19 million, against 'L'20
million in 1999; higher adjusted operating profit being offset by higher
exceptional items charged to operating profit.
Business
Turnover and adjusted operating profit in the Business segment increased by 12%
and 7% respectively at constant rates of exchange. Excluding acquisitions and
disposals, the figures were 4% and 3% respectively. Turnover growth was held
back by the unfavourable cycling of non-annual exhibitions and lower revenues in
the travel businesses being sold. Operating margins at 15.8% were 0.9 percentage
points lower reflecting the significant increase in investment, although this is
substantially funded by the cost saving programme.
Cahners Business Information turnover and adjusted operating profits were up 5%
and 30% respectively before the impact of acquisitions. The Electronics, Supply
Chain, Retail and Entertainment sectors performed particularly well, with
Manufacturing flat and Cahners Travel Group lower. New product launches in both
print and Internet services added 2% to revenue growth. Operating margins
improved, despite a significant increase in new product investment, reflecting
the major restructuring programme in the second half of 1999.
At Reed Business Information, turnover increased by 11%, or 7% excluding
acquisitions, with stronger growth and market share gains in display and
recruitment advertising in U.K. magazines and in Internet revenues. The
Computer, Personnel, Aerospace and Science sectors performed particularly well.
Underlying operating profits were 1% lower, reflecting the major increase in
investment, particularly totaljobs.com, the online recruitment service.
At Elsevier Business Information, turnover and adjusted operating profits were
up 11% and 5% respectively, or 7% and 10% excluding acquisitions. Strong
performances were seen across the businesses in The Netherlands, Belgium, Spain
and France. In The Netherlands, the Business and Management, Personnel,
Healthcare and Retail sectors were particularly strong and buoyant advertising
demand was captured with the launch of supplements.
Turnover at Reed Exhibition Companies increased by 18% and adjusted operating
profit by 19%. Excluding acquisitions, revenue grew by 1% and adjusted
operating profit declined by 8% as several major non-annual shows in the U.K.
and U.S. did
31
not take place in 2000. The decline in adjusted operating profit also reflects
the significant new show launch programme, with over 35 new shows launched, and
a significant step up in investment in show related websites, of which there are
now over 250.
At OAG Worldwide, turnover declined by 19% due to portfolio rationalisation in
anticipation of its impending sale and lower sales of the print product.
Investment has been significantly increased in new web products and the OAG.com
and OAGMobile services were launched in the second half. The sale of the
business is well advanced.
Operating profit in the Business segment increased by 'L'67 million to 'L'59
million in 2000. The increase in amortisation charges, relating to acquisitions
made in 2000 and 1999 were more than offset by higher adjusted operating profits
and lower exceptional charges to operating profit.
Results of Operations for the Year Ended 31 December 1999 Compared to the Year
Ended 31 December 1998
General. The reported profit before tax for the Reed Elsevier combined
businesses, including exceptional items and the amortisation of goodwill and
intangible assets, was 'L'105 million, which compares with a reported profit of
'L'1,044 million in 1998. The decline reflects the net 'L'835 million adverse
movement in exceptional items, higher amortisation charges arising from
acquisitions and a weaker trading performance. The reported attributable loss of
'L'63 million compares with a reported attributable profit of 'L'772 million in
1998.
Turnover increased by 6% to 'L'3,390 million. Underlying revenue growth
excluding the impact of acquisitions and disposals and currency translation
effects, was 3%.
Excluding exceptional items and the amortisation of goodwill and intangible
assets, adjusted operating profits were down 3% to 'L'792 million. Operating
margins at 23.4% were 2.1 percentage points below the prior year. Excluding
acquisitions and disposals and currency translation effects, revenue growth was
3% whilst costs increased by 5%, principally reflecting investment in people,
products and sales and marketing.
The amortisation charge for goodwill and intangible assets amounted to 'L'373
million, up 'L'41 million reflecting acquisitions made in 1998 and 1999.
Exceptional items showed a pre tax charge of 'L'232 million, being 'L'161
million in respect of the major restructuring projects across the operating
businesses, 'L'50 million in respect of the Year 2000 compliance programme,
'L'28 million on acquisition related costs, and 'L'7 million profit on sale of
fixed asset investments. This compares with a net gain on exceptional items in
1998 of 'L'603 million which included a 'L'692 million profit on the sale of IPC
Magazines and other businesses.
Net interest expense at 'L'82 million, was 'L'42 million higher than the
previous year due to the financing of the Matthew Bender and Shepard's
acquisitions completed in the second half of 1998. Net interest cover was 10
times adjusted operating profit.
Adjusted profit before tax, which excludes the amortisation of goodwill and
intangible assets and exceptional items, at 'L'710 million, was 8% lower than in
1998.
The total tax charge for the year was high as a proportion of profit before tax
principally due to the non-tax deductible amortisation, the non-recognition of
potential deferred tax assets and taxes arising on restructuring related
business consolidation. The effective tax rate on adjusted earnings was slightly
lower at 25.6% (1998 26%).
The adjusted profit attributable to shareholders of 'L'527 million compared to
'L'571 million in 1998, a decline of 8% at constant exchange rates.
In 1999 the U.S. GAAP net loss was 'L'73 million, compared with net loss of
'L'398 million in 1998, a reduction of 'L'471 million. This reduction reflects
the factors discussed above together with the increased amortisation charge
following the re-evaluation under U.S. GAAP of the useful lives of goodwill and
intangible assets in 1998, together with other year on year changes in
adjustments to reflect differences between U.K. and Dutch GAAP and U.S. GAAP.
The most significant differences relate to the capitalisation and amortisation
of goodwill and other intangible assets, and deferred taxes; see note 30 to the
combined financial statements.
In the following commentary unless otherwise indicated, all percentage
movements refer to constant currency rates, using 1998 full year average rates,
and are stated before amortisation of goodwill and intangibles and exceptional
items. Percentage movements at actual exchange rates are shown in the table on
page 29.
Science & Medical. Turnover and adjusted operating profits in the Science &
Medical segment both increased by 5% at constant rates of exchange, or 2%
excluding acquisitions. Operating margins were slightly lower at 35.4%. Sales
growth at Elsevier Science of 5%, which included 3% benefit from acquisitions,
was adversely affected by the impact on subscription renewals of currency
movements on library budgets, particularly in Japan and continental Europe.
Operating profits excluding acquisitions increased by 4%.
Progress was made during the year in the roll-out of ScienceDirect, the web-
based scientific information service, with approximately 25% of journal
subscription revenues now covering both print journals and the ScienceDirect
service.
32
The medical publishing and communications businesses in 1999 reported turnover
growth of 6% at constant rates of exchange due to acquisitions. Excluding
acquisitions, turnover and adjusted operating profit fell by 1% and 12%
respectively, due to some weakness in the sponsored communications business and
in France.
Operating profit in the Science & Medical segment fell by 'L'15 million to
'L'111 million. Increases in adjusted operating profits were offset by 'L'29
million of exceptional items charged to operating profit.
Legal. Turnover in the Legal segment increased by 13% whilst adjusted operating
profits declined by 5% at constant rates of exchange. Excluding the effect of
acquisitions, principally Matthew Bender and the remaining 50% of Shepard's
acquired in August 1998, turnover increased by 3% while adjusted operating
profits declined by 14%. This result reflected the combination of low revenue
growth at LEXIS-NEXIS U.S. and continued investment spend, resulting in
operating margins 4.8 percentage points lower at 25.9% for the segment.
At LEXIS-NEXIS U.S., turnover increased by 13% whereas adjusted operating
profits were down 8% as significant additional investment was made in new
product development and in sales and marketing. Excluding acquisitions, turnover
was up 2% and adjusted operating profits down 18%. The North American Legal
Markets division had flat revenues with a good performance in the large law firm
market offset by weaker revenues in other markets. The print/CD-ROM legal
publishing business saw some loss of revenues, principally at Shepard's, due to
heavy promotion of a competing product and discounting of Shepard's by a
competitor as its licence to the Shepard's content expired. The Martindale-
Hubbell legal directory business had an excellent year with revenues 12% ahead.
In the Corporate and Federal Markets division, NEXIS revenues fell by 4%,
reflecting pricing pressures across the industry.
LEXIS-NEXIS International, comprising Reed Elsevier's legal businesses outside
the United States, saw turnover and adjusted operating profits up 13% and 7%,
respectively, including the benefit of small acquisitions in Austria, Argentina,
Australia and South Africa. Excluding these, adjusted operating profit growth
was 5% on sales up 7%, led by strong performances in the U.K., France and South
East Asia.
Operating profit in the Legal segment decreased by 'L'98 million to 'L'57
million, reflecting increased amortisation due to the impact of acquisitions in
1999 and 1998, and increased exceptional items charged to operating profit
principally attributable to reorganisation costs.
Education. Turnover in the Education segment increased by 12% and adjusted
operating profit by 8% at constant exchange rates. Operating margins fell 0.7%
to 18.8%. The U.K. and U.S. Schools businesses both increased turnover by 15%,
driven by additional government funding for literacy materials and by increased
market share. Costs increased faster than turnover as investment was made in new
publishing programmes to capture demand. The Butterworth-Heinemann businesses
reported a strong front-list in scientific, technical and medical markets.
Operating profit increased by 'L'6 million to 'L'20 million. This movement was
primarily attributable to the increase in adjusted operating profit.
Business. Turnover in the Business segment increased by 2% whilst adjusted
operating profit decreased by 9%, reflecting low underlying revenue growth,
particularly at Cahners, whilst costs rose. Excluding acquisitions, turnover was
up 1% and operating profits 11% lower. Operating margins at 16.7% were 2.0
percentage points lower than the prior year.
Cahners Business Information's turnover was flat in 1999, before a 1% reduction
due to the net effect of disposals less acquisitions. Adjusted operating profit
at constant rates of exchange declined by 40% due to a 5% increase in costs,
largely reflecting the full year effect of prior year investments made in the
organisation, which had anticipated much stronger revenue growth. Growth in the
Entertainment & Media, Building & Construction and Retail sectors was offset by
revenue declines in Manufacturing, Electronics and Travel. Although the slowdown
in turnover growth began in the second half of 1998, the degree to which this
persisted into 1999 was unexpected. A major restructuring of the business took
place in the second half of 1999 to realign the cost base.
At Reed Business Information turnover and adjusted operating profit declined by
2% and 6%, respectively, at constant exchange rates. Weakness in advertising
demand, particularly in high margin recruitment advertising, in the first half
was recovered in the second half as the U.K. economy strengthened with the
exception of the important Computer sector which saw strong competition both in
print and online. Online services established around the core titles continued
to develop in 1999 with growth in subscriptions and advertising support. The
Healthcare, Property and Social Services sectors performed well.
Elsevier Business Information (excluding Elsevier Tuition activities) saw
underlying turnover and adjusted operating profit growth of 3% and 6%
respectively in 1999 at constant exchange rates, before several small
acquisitions in both 1999 and 1998, as advertising demand in Continental Europe
picked up during the year. In The Netherlands, turnover growth was driven by the
journal Elsevier and titles in the Human Resources, General Management and
Construction sectors, whilst improvements in profitability were reported in
Spain and France. The tuition activities in The Netherlands increased turnover
and adjusted operating profit by 8% at constant rates of exchange in 1999,
driven by growth from in-company and open training. During 1999 management and
development responsibility for this business was moved to Elsevier Business
Information to provide combined product focus on targeted customer groups.
Turnover at Reed Exhibitions companies was ahead by 8% whilst adjusted
operating profit rose by 11% at constant exchange rates, driven by growth in the
annual trade shows, particularly in North America, and the contribution of the
PGA
33
golf equipment and accessories shows acquired in 1998. 30 new shows were
launched in the year in North America, Europe and Asia, adding over 3 percentage
points to the growth in turnover. The impact of show cycling, i.e., of non-
annual shows, and acquisitions was broadly neutral in 1999.
At OAG Worldwide, adjusted operating profit increased by 18% in 1999 at
constant exchange rates, on turnover down 6%. During 1999 good progress was made
in stabilising the business with certain activities terminated to increase
profitability, and plans developed to capitalise on the growing demand for
electronic products using OAG Worldwide data. Growth in electronic turnover was
offset by the continued shift of customers from print to online services. In
February 2000 the decision to divest OAG Worldwide was announced.
Operating profit in the Business segment fell by 'L'116 million to an operating
loss of 'L'8 million. This movement reflected the decline in adjusted operating
profit together with exceptional charges to operating profit. Exceptional
charges were principally attributable to restructuring costs.
Effect of Currency Translation
The combined financial statements are expressed in pounds sterling and are
therefore subject to the impact of movements in exchange rates on the
translation of the financial information of individual businesses whose
operational currencies are other than sterling. The principal exposures are the
U.S. dollar and the euro, both of which generally reflect Reed Elsevier's
business exposure to the United States and the Euro Zone, its most important
markets outside the United Kingdom.
The currency profile of Reed Elsevier's adjusted profit before tax for 2000,
taking account of the currencies of the interest on its borrowings and cash over
that period, is set forth below:
Adjusted profit before tax in each currency as a percentage of total adjusted
profit before tax
U.S. Pounds
Dollars Sterling Euro Other Total
33% 29% 31% 7% 100%
========= ======== ==== ===== =====
Currency translation differences increased Reed Elsevier's turnover by 'L'86
million and decreased adjusted profit before tax by 'L'1 million in 2000
compared to 1999.
To help protect Reed International's and Elsevier's shareholders' funds from
the effect of currency movements, Reed Elsevier will, if deemed appropriate,
hedge the foreign exchange translation exposure by borrowing in those currencies
where significant translation exposure exists or by selling forward surplus cash
flow into one of the shareholders' currencies. Hedging of foreign exchange
translation exposure is undertaken only by the regional centralised treasury
departments and under policies agreed by the Boards of Reed International and
Elsevier. Borrowing in the operational currency of individual businesses
provides a structural hedge for the assets in those markets and for the income
realised from those assets. The currencies of Reed Elsevier's borrowings,
therefore, reflect two key objectives, namely to minimise funding costs and to
hedge currencies where it has significant business exposure.
Individual businesses within Reed Elsevier plc and ERF are subject to foreign
exchange transaction exposures caused by the effect of exchange rate movements
on their turnover and operating costs, to the extent that such turnover and
costs are not denominated in their operating currencies. Individual businesses
are encouraged to hedge their exposures internally at market rates with the
centralised treasury department within ERF. To minimise hedging costs, these
exposures are matched whenever possible with offsetting exposures existing in
other individual businesses. When opportunities for such matching of exposures
internally do not exist, exposures may instead be hedged externally with third
parties. Hedging of foreign exchange transaction exposure is the only hedging
activity undertaken by the individual businesses. For further details see note
24 to the combined financial statements.
The Harcourt acquisition and equity and debt financing
On 27 October 2000, Reed Elsevier entered into a definitive agreement with
Harcourt to make a tender offer of $59 per share of common stock, or share
equivalent, for the entire issued share capital of Harcourt. The offer values
the company at $4.45 billion ('L'3.10 billion/'E'5.37 billion at exchange rates
then prevailing). Reed Elsevier plc also entered into a definitive agreement
with The Thomson Corporation (Thomson) to on-sell, for pre-tax proceeds of $2.06
billion, the Harcourt Higher Education business and the Corporate and
Professional Services businesses other than educational and clinical testing.
Following completion of the offer and the on-sale of businesses, Reed Elsevier
will have acquired Harcourt's Scientific, Technical and Medical (STM) business
and its K-12 (kindergarten to grade 12) Schools Education and Testing businesses
for an implied value of approximately $4.5 billion, taking into account
corporate net debt, taxes payable on the on-sale proceeds and the assumption of
corporate and other liabilities. In the year to 31 October 2000, these
businesses had sales of $1.7 billion; (STM $688 million, 1999 $633 million;
Education and Testing $990 million, 1999 $787 million); adjusted operating
profits (pre-amortisation of goodwill and intangible assets) of $371 million
(STM $161 million, 1999 $138 million; Education and Testing $210 million, 1999
$159 million) and net assets of $1.1 billion (including $0.7 billion of goodwill
and intangible assets) before corporate net debt of $1.2 billion.
34
The acquisition and the on-sale to Thomson is subject to regulatory approvals,
which may require some divestment of assets or other behavioural undertakings.
In order to fund the acquisition a placing of new shares in Reed International
and Elsevier was undertaken jointly in November 2000 and new debt facilities
obtained. The placing of new ordinary shares in the parent companies was
executed through an accelerated bookbuild process completed on 29 November 2000.
The net proceeds of the placing totalled 'L'1.3 billion through the issue of
113.7 million ordinary shares in Reed International at 625 pence per share and
66.26 million ordinary shares in Elsevier at 'E'14.50 per share, including the
exercise of over-allotment options by the joint bookrunners. The majority of the
proceeds have been hedged into U.S. dollars.
This amount represented 9.9% of the ordinary share capitals of both parent
companies. It is intended that Reed International should subscribe for
additional R-shares in Elsevier, which represent the cross-shareholding of Reed
International in Elsevier, so as to maintain Reed International's indirect
equity interest at 5.8% on a fully diluted basis. This will reflect the
respective economic interests of the shareholders of Reed International and
Elsevier in the combined businesses represented by the equalisation
arrangements. The equalisation ratio is unaffected.
The initial acquisition funding will be provided by cash and short term
borrowings or commercial paper programmes or draw down against committed credit
facilities, and potentially by leaving in place up to $850 million of Harcourt
public debt securities. The facilities include $6.5 billion of new bank
facilities put in place in November 2000. The on-sale agreement between Reed
Elsevier and Thomson has conditions which in effect mirror the terms of the
merger agreement between Reed Elsevier and Harcourt, and the on-sale should
therefore be completed at the time of the Harcourt acquisition or shortly
thereafter dependent on the tender offer process. It is intended that the
majority of the short term borrowings should be refinanced through the issuance
of term debt securities.
The blended financing rate on the debt component of the funding, inclusive of
the Harcourt public debt which may remain outstanding, and the cost of long term
debt including interest rate hedging undertaken, is expected to be approximately
7.2%.
Proforma combined net borrowings of the Reed Elsevier businesses (as at 31
December 2000) and Harcourt (as at 31 October 2000), taking into account the
acquisition financing and the on-sale of businesses to Thomson, would be
approximately 'L'3.2 billion.
European Economic and Monetary Union
On 1 January 1999, the euro was introduced as the de facto currency of the 12
European countries now participating in European Economic and Monetary Union
(EMU). The Netherlands is a participant in EMU; the United Kingdom is not.
In 2002, the Dutch guilder, like the currencies of other participants, will be
fully replaced by the euro once euro- denominated notes and coins are
substituted. In the interim, the euro and the participating currencies coexist
and are inextricably linked by fixed conversion rates.
The implications for Reed Elsevier businesses have been initially low relative
to many other multinational European companies. Principally this is because,
with the significant exception of Elsevier Science, which already publishes
global prices, Reed Elsevier's businesses have limited cross border trade. The
most significant issue, therefore, is the timing of euro based marketing and
invoicing and the transfer to euro denominated business and financial systems.
In this respect, Reed Elsevier businesses have put in place systems to
accommodate the euro.
The profit and loss expense of moving to a euro currency environment has not
been significant and is not expected to be significant in the future. While Reed
Elsevier is continuing to evaluate the impact of the euro introduction over
time, based on currently available information, management does not believe that
the introduction of the euro will have a material adverse impact on the
financial condition or overall trends in results of operations.
Recently Issued Accounting Pronouncements
SFAS 133: Accounting for Derivative Instruments and Hedging Activities, was
issued in June 1998 and, as amended by SFAS 138, is effective for the financial
year beginning 1 January 2001. The standard requires all derivative instruments
to be valued at fair value in the balance sheet. Changes in fair value are
accounted for through the profit and loss account or comprehensive income
statement depending on a derivative's designation and its effectiveness as a
hedging instrument. On implementation, a cumulative transition adjustment of
'L'1 million (loss) to the 2000 U.S. GAAP net income and 'L'86 million (loss) in
other comprehensive income will be made. Under U.K. and Dutch GAAP derivative
instruments are recorded at appropriate historic cost amounts, with fair values
shown as a disclosure item.
FRS 17, Retirement Benefits, was issued by the U.K. Accounting Standards Board
in November 2000. As under SFAS 87, plan assets and liabilities are determined
by, respectively, market-related values at the date of the financial statements
and by discounting plan obligations using a market derived discount factor.
Under FRS 17 actuarial gains and losses are recognised in full in the balance
sheet with movements recognised in the statement of total recognised gains and
losses. This will differ from current U.S. GAAP which does not require the full
recognition of actuarial gains and losses, and also requires the amortisation of
actuarial gains and losses to be recognised in the profit and loss account. The
standard is required to be fully implemented in
35
the 2003 financial year with disclosures of the impact required from 2001. The
impact of adapting the standard cannot be reasonably estimated at this time.
FRS 19, Deferred Tax, was issued by the U.K. Accounting Standards Board in
December 2000. FRS 19 requires deferred tax to be provided in full, except on
timing differences arising where non-monetary assets are revalued and where
there is no commitment to sell the asset and on the retained earnings of
subsidiaries, joint ventures or associates where there is no commitment to remit
such earnings. FRS 19 is required to be implemented in the 2002 financial year.
The standard is not expected to have a material impact on implementation.
LIQUIDITY AND CAPITAL RESOURCES --- REED ELSEVIER
Reed Elsevier businesses focus on adjusted operating cash flow as the key cash
flow measure. Reed Elsevier's adjusted operating cash flow before exceptional
items in 2000, 1999 and 1998 amounted to, respectively, 'L'775 million, 'L'780
million and 'L'808 million. In each of these years the adjusted operating cash
flow conversion was, respectively, 98%, 98% and 99%. Adjusted operating cash
flow is measured after dividends from joint ventures, tangible fixed asset spend
and proceeds from the sale of fixed assets, but before exceptional payments and
proceeds.
Reed Elsevier generates significant cash flows as its principal businesses do
not require major fixed or working capital investments. Working capital
requirements are negative overall, due to the substantial proportion of revenues
received through subscription and similar advanced receipts, principally for
scientific journals and exhibition fees. Trading working capital amounted to
'L'479 million net liabilities at 31 December 2000 and 'L'394 million net
liabilities at 31 December 1999. Subscriptions and other revenues in advance
represented 'L'679 million and 'L'583 million, respectively, of these totals.
Capital expenditure principally relates to computer equipment and, increasingly,
investment in systems infrastructure to support electronic publishing
activities. Total capital expenditures amounted to 'L'141 million, 'L'137
million and 'L'151 million in 2000, 1999 and 1998, respectively.
During 2000, Reed Elsevier paid a total of 'L'952 million for acquisitions and
fixed asset investments, including net debt assumed of 'L'48 million and 'L'13
million deferred payments in respect of acquisitions made in prior years. All
payments were financed by net cash inflow from operating activities, available
cash resources and commercial paper borrowings. Exceptional net inflows of 'L'90
million were received in 2000, comprising proceeds from sale of fixed asset
investments and property disposals less amounts paid in respect of
reorganisation costs and acquisition related costs.
During 1999, Reed Elsevier paid a total of 'L'166 million for acquisitions and
fixed asset investments including net 'L'5 million deferred payments in respect
of acquisitions made in prior years. All payments were financed by net cash
inflow from operating activities, available cash resources and commercial paper
borrowings. Exceptional net outflows of 'L'61 million were paid in 1999,
comprising amounts paid in respect of reorganisation costs, acquisition related
costs, Year 2000 compliance and the Reed Travel Group recompense plans less
exceptional tax repayments.
Net borrowings at 31 December 2000 were 'L'433 million, a reduction of 'L'633
million compared to 31 December 1999, principally reflecting the proceeds from
the joint international share offering by Reed International and Elsevier in
December 2000, together with the free cash flow and exceptional receipts, less
spend on acquisitions.
Gross borrowings at 31 December 2000 amounted to 'L'2,027 million, denominated
mostly in U.S. dollars and partly offset by cash balances of 'L'1,594 million
invested in short term deposits and marketable securities. Approximately 98% of
cash balances were held in sterling, euros and U.S. dollars. A total of 46% of
Reed Elsevier's gross borrowings were at fixed rates, including 'L'516 million
of floating rate debt fixed through the use of interest rate swaps. At 31
December 2000, the fixed rate debt had a weighted average coupon of 6.6% and an
average remaining life of 7.7 years. The net interest expense also reflects the
interest yield differentials between short term cash investments and long term
fixed rate borrowings.
The financing of the proposed Harcourt acquisition is discussed above under
"Operating Results --- Reed Elsevier --- The Harcourt acquisition and equity and
debt financing".
OPERATING RESULTS --- REED INTERNATIONAL AND ELSEVIER
The following discussion is based on the financial statements of Reed
International and Elsevier for the three years ended 31 December 2000. The
results of Reed International reflect its shareholders' 52.9% economic interest
in the Reed Elsevier combined businesses. The results of Elsevier reflect its
shareholders' 50% economic interest in the Reed Elsevier combined businesses.
The respective economic interests of the Reed International and Elsevier
shareholders take account of Reed International's interest in Elsevier. Both
parent companies equity account for their respective shares in the Reed Elsevier
combined businesses. The financial statements have been prepared in accordance
with, respectively, U.K. and Dutch GAAP, which differ in certain significant
respects from U.S. GAAP as set out in note 23 to the Reed International
financial statements and note 15 to the Elsevier financial statements.
36
Results of Operations for the Year Ended 31 December 2000 Compared to the Year
Ended 31 December 1999
Adjusted earnings per share for Reed International were 23.3p, a decline of 5%
compared to the previous year. Adjusted earnings per share for Elsevier were
'E'0.59, an increase of 4%. The difference in percentage change is entirely
attributable to the impact of the strengthening, on average, of sterling against
the euro in 2000. At constant rates of exchange, the adjusted earnings per share
of both companies would have shown a decline of 5% over the previous year.
After their share of the exceptional items and the charge in respect of
goodwill and intangible assets amortisation, the reported earnings per share of
Reed International after tax credit equalisation and Elsevier were 1.0p and
'E'0.04, compared to a loss per share in 1999 of 3.4p and 'E'0.07, respectively.
Dividends to Reed International and Elsevier shareholders are equalised at the
gross level, including the benefit of the U.K. attributable tax credit of 10%
(20% prior to April 1999) received by certain Reed International shareholders.
The exchange rate used for each dividend calculation --- as defined in the Reed
Elsevier merger agreement --- is the spot euro/sterling exchange rate, averaged
over a period of five business days commencing with the tenth business day
before the announcement of the proposed dividend.
As announced in 2000, the 2000 interim dividend was reduced by one-third and
the proposed final dividend adjusted upwards correspondingly to restore normal
proportions between the interim and final dividends following the dividend
reduction in 1999.
The board of Reed International has proposed a final dividend of 6.9p, giving a
total dividend of 10.0p for the year, the same as for 1999. The boards of
Elsevier, in accordance with the dividend equalisation arrangements, have
proposed a final dividend of 'E'0.19. This results in a total dividend of
'E'0.28 for the year, 4% higher than in 1999. The difference in percentage
growth is attributable to currency movements.
Dividend cover for Reed International, using adjusted earnings, was 2.1 times.
For Elsevier, the adjusted dividend cover was 2.1 times. Measured for the
combined businesses, dividend cover was 2.1 times compared with 1999 at 2.3
times.
Results of Operations for the Year Ended 31 December 1999 Compared to the Year
Ended 31 December 1998
Adjusted earnings per share for Reed International were 24.4p, a decline of 8%
compared to the previous year. Adjusted earnings per share for Elsevier were
'E'0.57, a decline of 5%. The difference in the percentage change is entirely
attributable to the impact of the strengthening of sterling against the euro in
1999. At constant rates of exchange, the adjusted earnings per share of both
companies would have shown a decline of 8% over the previous year.
After their share of the exceptional items and the charge in respect of
goodwill and intangible assets amortisation, the reported loss per share of Reed
International after tax credit equalisation and Elsevier were 3.4p and 'E'0.07,
compared to earnings per share in 1998 of 34.7p and 'E'0.81 respectively.
Dividends to Reed International and Elsevier shareholders are equalised at the
gross level, including the benefit of the U.K. attributable tax credit of 10%
(20% prior to April 1999) received by certain Reed International shareholders.
The exchange rate used for each dividend calculation --- as defined in the Reed
Elsevier merger agreement --- is the spot euro/sterling exchange rate, averaged
over a period of 5 business days commencing with the tenth business day before
the announcement of the proposed dividend.
The board of Reed International proposed a final dividend of 5.4p, giving a
total dividend of 10.0p for the year, 33% lower than in 1998. The boards of
Elsevier, in accordance with the dividend equalisation arrangements, proposed a
final dividend of 'E'0.15 (Dfl 0.33), reflecting a guilder/sterling exchange
rate of Dfl 3.58 to 'L'1. This resulted in a total dividend of 0.27 (Dfl 0.59)
for the year, 31% lower than in 1998. The difference in percentage reductions
was attributable to currency movements and the change in the level of U.K. tax
credit effective April 1999.
Dividend cover for Reed International, using adjusted earnings, was 2.4 times.
For Elsevier , the adjusted dividend cover was 2.2 times. Measured for the
combined businesses, dividend cover was 2.3 times compared with 1998 at 1.6
times.
The reduction of approximately one-third in the equalised Reed International
and Elsevier dividends from the 1998 level reflects the adjustment to dividend
policy in support of the new Reed Elsevier strategy for investment-led growth.
TREND INFORMATION
Trends, uncertainties and events which could have a material impact on Reed
Elsevier's turnover, operating profit and liquidity and capital resources are
discussed above in Item 5 "Operating and Financial Review and Prospects" under
"Operating Results --- Reed Elsevier"; "Liquidity and capital resources --- Reed
Elsevier", "Operating Results --- Reed International and Elsevier" and in "Item
4: Information on Reed Elsevier".
37
ITEM 6: DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
DIRECTORS AND SENIOR MANAGEMENT
The directors and executive officers of each of Reed International, Elsevier,
Reed Elsevier plc and Elsevier Reed Finance BV at 20 February 2001 were:
Elsevier Reed
Name (Age) Reed International Elsevier Reed Elsevier plc Finance BV
---------------------- ----------------- ------------------ ----------------- ----------------
Cornelis Alberti (64) Managing Director
Mark Armour (46) Chief Financial Member of the Chief Financial Member of the
Officer Executive Board Officer Supervisory Board
and Chief Financial
Officer
Willem Boellaard (70) Managing Director
John Brock (52) Non-executive Member of the Non-executive
Director Supervisory Board Director(2)(4)
Crispin Davis (51) Chief Executive Member of the Chief Executive
Officer(3) Executive Board Officer(4)
and Chief Executive
Officer(3)
Dien de Boer-Kruyt (56) Member of the Member of the
Supervisory Board Supervisory Board
Derk Haank (47) Executive Director Member of the Executive Director
Executive Board
Otto ter Haar (71) Member of the Member of the
Supervisory Board Supervisory Board
Roelof Nelissen (69) Non-executive Member of the Non-executive Chairman of the
Director(1) Supervisory Director(1)(2) Supervisory Board
Board(1)
Steven Perrick (52) Non-executive Member of the Non-executive
Director(1)(3) Supervisory Director(1)
Board(1)(3)
Andrew Prozes (55) Executive Director Executive Director
Dr. Rolf Stomberg (60) Non-executive Member of the Non-executive
Director(3) Supervisory Director(2)
Board(3)
Morris Tabaksblat (63) Non-executive Chairman of the Non-executive
Chairman(3) Supervisory Chairman(4)
Board(3)
Gerard van de Aast (43) Executive Director Executive Director
David Webster (56) Non-executive Member of the Non-executive
Director(1) Supervisory Director(1)(4)
Board(1)
Stephen Cowden (48) Company Secretary General Counsel/
Company Secretary
Erik Ekker (52) Company Secretary Legal Director
(Continental
Europe)
(1) Member of the Audit Committees of the Boards of Reed International,
Elsevier and Reed Elsevier plc.
(2) Member of the Remuneration Committee of the Board of Reed Elsevier plc.
(3) Member of the joint Nominations Committee of the Boards of Reed
International and Elsevier.
(4) Member of the Strategy Committee of the Board of Reed Elsevier plc.
A person described as a non-executive Director of Reed International or Reed
Elsevier plc or a member of the Supervisory Board of Elsevier is a director not
employed by such company in an executive capacity.
Mr Alberti has been Managing Director of Elsevier Reed Finance BV since the
merger. He was an executive Director of Reed Elsevier plc from the merger until
December 1996. He joined Elsevier in 1978 and was a member of the Executive
Board of Elsevier from 1984 until 1999.
38
Mr Armour was appointed Finance Director of Reed International and Chief
Financial Officer of Reed Elsevier plc in July 1996, having been Deputy Chief
Financial Officer of Reed Elsevier plc since February 1995. He was appointed
Chief Financial Officer of Elsevier in April 1999. He became a member of the
Supervisory Board of Elsevier Reed Finance BV in December 1998. He was
previously a partner in Price Waterhouse.
Mr Boellaard was appointed a Managing Director of Elsevier Reed Finance BV in
December 1998. He joined Reed International in 1990.
Mr Brock was appointed a non-executive director of Reed Elsevier plc and Reed
International and a member of the Supervisory Board of Elsevier in April 1999.
He is a director of Cadbury Schweppes plc and Managing Director of its Beverages
Stream.
Mr Davis became Chief Executive Officer of Reed Elsevier plc, Reed
International and Elsevier in September 1999. He was previously Chief Executive
Officer of Aegis Group plc from 1994 to 1999.
Mrs de Boer-Kruyt became a member of the Supervisory Board of Elsevier in April
2000. She was appointed a member of the Supervisory Board of Elsevier Reed
Finance BV in July 2000. She is a non-executive director of Sara Lee/DE,
Hollandske Beton Group and Internatio Mueller.
Mr Haank was appointed an executive director of Reed Elsevier plc and Reed
International in November 1999. He is Chief Executive Officer of Science &
Medical. He was Chief Executive Officer of Elsevier Business Information from
1996 to 1998. Mr Haank was appointed a member of the Executive Board of Elsevier
in April 2000.
Mr ter Haar has been a member of the Supervisory Board of Elsevier since 1990.
He was previously a member of the Executive Board of Elsevier, and was Chief
Executive Officer of Elsevier Science from 1977 to 1987. He was appointed a
member of the Supervisory Board of Elsevier Reed Finance BV in June 1999. He
will retire from the Boards of Elsevier and Elsevier Reed Finance BV at the
Elsevier Annual General Meeting in April 2001.
Mr Nelissen was appointed a non-executive Director of Reed International and
Reed Elsevier plc in April 1999, having previously been a non-executive Director
of Reed Elsevier plc since the merger until July 1998. He has been a member of
the Supervisory Board of Elsevier since 1990. Mr Nelissen is also a member of
the Supervisory Board of ABN AMRO Bank NV. He was formerly Chief Executive
Officer of ABN AMRO and Finance and Economics Minister of The Netherlands.
Mr Perrick was appointed a member of the Supervisory Board of Elsevier in April
1998, a non-executive director of Reed Elsevier plc in June 1998 and a
non-executive Director of Reed International in April 1999. He was a member of
the Supervisory Board of Elsevier Reed Finance BV from July 1998 until August
1999. Mr Perrick is a partner in the Amsterdam offices of the law firm
Freshfields Bruckhaus Deringer.
Mr Prozes became an executive director of Reed Elsevier plc and Reed
International in August 2000. A resolution will be proposed at the Elsevier
Annual General Meeting in April 2001 to appoint Mr Prozes a member of the
Executive Board of Elsevier. He is Chief Executive Officer of Legal. Prior to
joining Reed Elsevier, Mr Prozes was an Executive Vice President with the West
Group, a part of The Thomson Corporation, where he was also Chief Operating
Officer of West's on-line legal publishing business.
Dr Stomberg was appointed a non-executive director of Reed International and
Reed Elsevier plc in January 1999 and a member of the Supervisory Board of
Elsevier in April 1999. Dr Stomberg is also Chairman of John Mowlem & Co plc,
Management Consulting Group PLC and Unipoly SA, Luxembourg.
Mr Tabaksblat was appointed a member of the Supervisory Board of Elsevier in
April 1998 and a non-executive director of Reed Elsevier plc in June 1998. He
became a non-executive director and Chairman of Reed International in April
1999, when he was also appointed Chairman of the Supervisory Board of Elsevier
and Chairman of Reed Elsevier plc. Mr Tabaksblat is Chairman of the Supervisory
Board of Aegon NV, Vice Chairman of the Supervisory Board of TPG Group NV, a
member of the Supervisory Board of VEBA AG, and Chairman of the European Round
Table of Industrialists. He was Chairman and Chief Executive Officer of Unilever
NV from 1994 to 1999.
Mr van de Aast became an executive director of Reed Elsevier plc and Reed
International in December 2000. A resolution will be proposed at the Elsevier
Annual General Meeting in April 2001 to appoint Mr van de Aast a member of the
Executive Board of Elsevier. He is Chief Executive Officer of Business. Prior to
joining Reed Elsevier, Mr van de Aast was Vice President of Compaq's Europe,
Middle East and Africa business
Mr Webster has been a non-executive Director of Reed Elsevier plc since the
merger, a non-executive Director of Reed International since 1992 and a member
of the Supervisory Board of Elsevier since April 1999. He was non-executive
Chairman of Reed Elsevier plc from August 1998 until April 1999. He is Chairman
of Safeway plc.
Mr Cowden, an English lawyer, joined Reed Elsevier in December 2000 as General
Counsel, and was appointed Company Secretary of Reed Elsevier plc and Reed
International in February 2001. Prior to joining Reed Elsevier, Mr Cowden was
Group Company Secretary of GlaxoSmithKline.
Mr Ekker, a Dutch lawyer, has been Legal Director (Continental Europe) of Reed
Elsevier plc since 1993. He has been Company Secretary of Elsevier since 1989.
He joined Elsevier in 1977 as Legal Counsel.
39
COMPENSATION
Remuneration committee
This report has been prepared by the Remuneration Committee of Reed Elsevier
plc and approved by the boards of Reed International and Elsevier.
The Remuneration Committee is responsible for recommending to the board of Reed
Elsevier plc the remuneration (in all its forms), and the terms of the service
contracts and all the terms and conditions of employment of the executive
directors. The committee also provides advice to the Chief Executive Officer on
major policy issues affecting the remuneration of executives at a senior level
below the board of Reed Elsevier plc. The committee draws on external
professional advice as necessary in making its recommendations.
The Remuneration Committee, which is chaired by Dr. Rolf Stomberg, consists
wholly of independent non-executive directors: John Brock, Roelof Nelissen and
Rolf Stomberg.
Remuneration of non-executive directors
The remuneration of the non-executive directors is determined by the board of
Reed Elsevier plc with the aid of external professional advice.
The non-executive directors' remuneration consists only of fees.
Compliance with best practice provisions
In designing its performance-related remuneration policy, the Remuneration
Committee has complied with Schedule A of the Combined Code appended to the
Listing Rules of the U.K. Financial Services Authority.
In relation to disclosure of directors' remuneration, Reed International, a
U.K. company listed on the London Stock Exchange, has complied with Schedule B
of the Combined Code appended to the Listing Rules of the U.K. Financial
Services Authority.
Remuneration policy
In determining its policy on senior executives' remuneration i ncluding the
directors, the Remuneration Committee's principal objective is to attract,
retain and motivate people of the highest calibre and experience needed to
execute the strategy and deliver shareholder value in the context of an ever
more competitive and increasingly global employment market.
The Remuneration Committee also has regard to, and balances as far as is
practicable, the following objectives:
(i) to ensure that it maintains a competitive package of pay and benefits,
commensurate with comparable packages available within other multinational
companies operating in global markets and, where appropriate, reflecting
local practice operating within the country in which an individual
director is based;
(ii) to ensure that it encourages enhanced performance by directors and fairly
recognises the contribution of individual directors to the attainment of
the results of the Reed Elsevier plc group, whilst also encouraging a team
approach which will work towards achieving the long term strategic
objectives of the Reed Elsevier plc group;
(iii) to link reward to individual directors' performance and company
performance so as to align the interests of the directors with the
shareholders of the parent companies.
The remuneration of executive directors consists of the following elements:
--- Base salary, which is based on comparable positions in businesses of
similar size and complexity. Salaries are reviewed annually by the
Remuneration Committee.
--- A variable annual cash bonus, based on achievement of specific realistic
but stretching financial and individual performance-related targets.
Targets are set at the beginning of the year by the Remuneration
Committee. The maximum potential bonus for the European Directors is 50%
of basic salary. The maximum potential bonus payable to a U.S. based
director is 90% of basic salary.
--- Share options, where the directors and other senior executives are granted
options annually over shares in Reed International and Elsevier at the
market price at the date of grant. The Remuneration Committee approves the
grant of any option and sets performance conditions attaching to options.
--- A longer-term incentive arrangement ("LTIP") under which a one off grant
of options of 20 times salary has been made during the year. The LTIPs
were granted at market value at the date of grant, and are exercisable
after 5 years, subject to the achievement of highly demanding performance
conditions.
--- Post-retirement benefits, which comprise only pensions, where Reed
Elsevier plc group companies have different retirement schemes which apply
depending on local competitive market practice, length of service and age
of the director. The only element of remuneration which is pensionable is
base salary.
40
Service contracts
Each of the executive directors has a service contract, the notice periods of
which are described below:
(i) M H Armour was appointed a director in July 1996 and his service contract
provides for a notice period of twenty four months.
(ii) C H L Davis was appointed a director in September 1999. His service
contract provides for a notice period of twelve months. In the event of
loss of employment on a change of control before 1 September 2002, twelve
months' salary would be payable to C H L Davis in addition to any other
sums payable on termination.
(iii) D J Haank was appointed a director on 15 November 1999. His service
contract, which is subject to Dutch law, provides for six months' notice
and, in the event of termination without cause by Reed Elsevier plc,
salary and employer's pension contributions would be payable by way of
liquidated damages.
(iv) A Prozes was appointed a director in August 2000. His service contract,
which is subject to New York law, provides that in the event of
termination without cause by Reed Elsevier plc, prior to 6 July 2001,
twenty four months' base salary would be payable and, thereafter, twelve
months' base salary.
(v) G J A van de Aast was appointed a director in December 2000 and his
service contract provides for a notice period of twelve months.
The notice periods in respect of individual directors have been reviewed by the
Remuneration Committee. The Remuneration Committee believes that, as a general
rule for future contracts, the initial notice period should be up to twenty four
months, reducing to twelve months, and that the directors should, subject to
practice within the country in which the director is based, be required to
mitigate their damages in the event of termination. The Remuneration Committee
will, however, have regard to local market conditions so as to ensure that the
terms offered are appropriate to recruit and retain key executives operating in
global business.
The non-executive directors do not have service contracts.
External appointments
Executive directors may, subject to the approval of the Chairman and the Chief
Executive Officer, serve as non-executive directors on the boards of up to two
non-associated companies and may retain remuneration arising from such non-
executive directorships. The Remuneration Committee believes that the Reed
Elsevier plc group benefits from the broader experience gained by executive
directors in such appointments.
Emoluments of the directors
The emoluments of the directors of Reed Elsevier plc (including any entitlement
to fees or emoluments from either Reed International, Elsevier or Elsevier Reed
Finance BV) was as follows:
(a) Aggregate emoluments
Year ended 31 December
---------------------
2000 1999
---------- ----------
(in 'L' thousands)
Salaries and fees . . . . . . . . . . . . . . 2,068 2,505
Benefits. . . . . . . . . . . . . . . . . . . 66 108
Annual performance-related bonuses. . . . . . 835 412
Pension contributions . . . . . . . . . . . . 786 476
Pension to former director. . . . . . . . . . 230 214
One-off bonuses . . . . . . . . . . . . . . . 461 277
Compensation and payments to former directors 581 3,474
---------- ----------
Total . . . . . . . . . . . . . . . . . . . . 5,027 7,466
========== ==========
41
(b) Individual emoluments of executive directors
Salary Benefits Bonuses Total 1999
------- -------- ---------------- ---------
(in 'L')
M H Armour . . . . . . . . . . . . . . . . . . . . 385,002 18,841 166,700 570,543 390,503
C H L Davis
(from 1 September 1999) . . . . . . . . . . . . . 750,000 24,422 328,1251,102,547 534,158
D J Haank
(from 15 November 1999) . . . . . . . . . . . . . 235,191 8,047 101,907 345,145 33,836
O Laman Trip (until 30 June 2000). . . . . . . . . 87,632 11,335 36,805 135,772 206,116
A Prozes
(from 7 August 2000) . . . . . . . . . . . . . . 243,646 2,649 662,252 908,547 ---
G J A van de Aast
(from 6 December 2000) . . . . . . . . . . . . . 27,083 1,281 --- 28,364 ---
Salaries, benefits and bonuses of former directors 1,723,360
--------- ---------
3,090,918 2,887,973
========= =========
Taking into account gains of 'L'nil on the exercise of share options, C H L
Davis was the highest paid director in 2000.
O Laman Trip ceased to be a director on 30 June 2000 and, as compensation for
termination of his service agreement, received a payment representing two years'
salary and an amount equal to two years' employer's pension contributions plus
certain other benefits, the aggregate amount of which was 'L'581,342
('E'953,400).
(c) Recruitment of directors
A Prozes was appointed Chief Executive Officer of Reed Elsevier plc's global
Legal businesses in July 2000 and a Director of Reed International and Reed
Elsevier plc with effect from 7 August 2000. Mr Prozes's base salary is
US$800,000 per annum. In accordance with the terms of his service contract, Mr
Prozes received in respect of 2000, in addition to his performance related bonus
of 'L'200,861 ('E'329,412), a bonus of 'L'461,391 ('E'756,681) as compensation
for loss of bonus from his previous employment. Target bonus for 2001 will be
72% of base salary.
Options were granted to Mr Prozes in August 2000 under the Reed Elsevier plc
Executive Share Option Scheme over shares in Reed International and Elsevier
with an aggregate option price of four times base salary. Options over shares in
Reed International and Elsevier with an aggregate option price of twenty times
base salary were also granted under the terms of the Reed Elsevier plc Senior
Executive Long Term Incentive Scheme. Mr Prozes was also granted nil cost
options, as compensation for stock option gains forfeited upon leaving his
previous employment, over 60,507 ordinary shares in Reed International and
42,120 ordinary shares in Elsevier. The terms of such options provide that they
shall become exercisable over three years in equal tranches on each anniversary
of the commencement of employment, provided Mr Prozes has not voluntarily
terminated, or given notice to terminate, his employment prior to such date.
G J A van de Aast was appointed Chief Executive Officer of Reed Elsevier plc's
global Business to Business businesses in December 2000 and a Director of Reed
International and Reed Elsevier plc with effect from 6 December 2000. Mr van de
Aast's base salary is 'L'325,000 per annum. Target bonus for 2001 will be 40% of
base salary.
Options were granted to Mr van de Aast in December 2000, under the Reed
Elsevier plc Executive Share Option Scheme, over shares in Reed International
and Elsevier with an aggregate option price of two times base salary. Options
over shares in Reed International and Elsevier with an aggregate option price of
twenty times base salary were also granted under the terms of the Reed Elsevier
plc Senior Executive Long Term Incentive Scheme.
(d) Pensions
The Remuneration Committee reviews the pension arrangements for the executive
directors to ensure that the benefits provided are consistent with those
provided by other multinational companies in its principal countries of
operation.
The policy for executive directors based in the United Kingdom is to provide
pension benefits at a normal retirement age of 60, equivalent to two thirds of
base salary in the 12 months prior to retirement, provided they have completed
20 years' service with the Reed Elsevier plc group or at an accrual rate of 1/0
th of pensionable salary per annum if employment is for less than 20 years. The
target pension for C H L Davis at normal retirement age of 60 is 45% of base
salary in the 12 months prior to retirement. In 1989, the Inland Revenue
introduced a cap on the amount of pension that can be provided from an approved
pension scheme. M H Armour's, G J A van de Aast's and C H L Davis's pension
benefits will be provided from a combination of the Reed Elsevier Pension Scheme
and the company's unapproved, unfunded pension arrangements.
D J Haank is a member of the Dutch pension scheme, and his pension at normal
retirement age of 60 will be up to 70% of his final annual salary.
42
The target pension for A Prozes, a US based director, is US$265,000 per annum,
which becomes payable on retirement only if he completes a minimum of seven
years' service. This pension has no associated contingent benefits for a spouse
or dependants, and will be reduced in amount by the value of any other
retirement benefits payable by the company or any former employer, other than
those attributable to employee contributions.
The pension arrangements for all the directors include life assurance cover
whilst in employment, an entitlement to a pension in the event of ill health or
disability and, except in the case of A Prozes, a spouse's and/or dependants'
pension on death.
The increase in transfer value of the directors' pension, after deduction of
contributions, is shown below:
Transfer value
Increase in accrued Total accrued increase after
annual pension annual pension as at deduction of
during the period 31 December 2000* directors' contributions
------------------ ------------------- -----------------------
(in 'L')
M H Armour. . . . 15,611 75,901 249,530
C H L Davis . . . 35,906 47,162 665,827
D J Haank . . . . 9,247 75,814 39,567
O Laman Trip . . 7,172 37,054 107,358
A Prozes. . . . . --- --- ---
G J A van de Aast 920 920 13,075
-------------------
* Date of leaving service if prior to 31 December 2000.
The transfer value increase in respect of individual directors represents a
liability in respect of directors' pension entitlement, and is not an amount
paid or payable to the director.
43
(e) Individual emoluments of non-executive directors
2000 1999
------- -------
(in 'L')
J F Brock (from 15 April 1999) . . . . . 34,220 27,196
R J Nelissen (from 15 April 1999). . . . 34,304 30,197
S Perrick. . . . . . . . . . . . . . . . 34,304 43,530
R W H Stomberg . . . . . . . . . . . . . 34,220 35,260
M Tabaksblat . . . . . . . . . . . . . . 168,202 125,277
D G C Webster. . . . . . . . . . . . . . 34,220 70,260
Aggregate emoluments of former directors 83,556
-------------------
(1) M Tabaksblat was appointed Chairman of Reed Elsevier plc and Reed
International, and Chairman of the Supervisory Board of Elsevier in April
1999. Fees in respect of M Tabaksblat were paid to Unilever NV until May
1999, at which point he retired from Unilever.
(2) The emoluments of D G C Webster in 1999 include an additional fee payable
to him to reflect the significant additional duties he undertook during
that year including those arising from his appointment as non-executive
Chairman of Reed Elsevier plc during the period August 1998 to April 1999.
Compensation of executive officers
The aggregate compensation paid to all executive officers (other than
directors) of Reed Elsevier plc (2 persons during the 2000 financial year) as a
group, for services in such capacities for the year ended 31 December 2000 was
'L'538,000 which included contributions made to the pension plans in respect of
fficers of Reed Elsevier plc of 'L'nil.
44
BOARD PRACTICES
REED ELSEVIER
The Boards of Directors of Reed International and Elsevier manage their
respective shareholdings in Reed Elsevier plc and Elsevier Reed Finance BV.
During 1999 Reed International, Elsevier and Reed Elsevier plc introduced a
unitary management structure of a single non-executive Chairman, a sole Chief
Executive Officer and, so far as practicable, the same directors for all three
companies. This was a logical evolution of the management structure in place
since the merger, under which the day to day management of the jointly owned
businesses of Reed Elsevier plc had been under the control of an Executive
Committee of the Board of Reed Elsevier plc. For a complete description of the
Board membership positions and executive officer positions within Reed Elsevier
plc, see "Directors and Senior Management".
Under the governance arrangements approved by the shareholders of Reed
International and Elsevier in 1999, there shall be no less than three and no
more than five executive directors, and six non-executive directors. A person
may only be appointed or proposed or recommended for appointment to the board if
that person has been nominated for that appointment by the joint Nominations
Committee of Reed International and Elsevier. Persons nominated by the joint
Nominations Committee will be required to be approved by the Reed Elsevier plc
Board, prior to appointment to the Reed Elsevier plc Board.
Decisions of the Board of Directors of Reed Elsevier plc require a simple
majority, and the quorum required for meetings of the Board of Reed Elsevier plc
is any two directors.
The Reed Elsevier plc Board has established the following committees:
. Strategy --- comprising the Chairman, Chief Executive Officer and two
non-executive directors
. Audit --- comprising three non-executive directors
. Remuneration --- comprising three non-executive directors
Arrangements established at the time of the merger provide that, if any person
(together with persons acting in concert with him) acquires shares, or control
of the voting rights attaching to shares, carrying more than 50% of the votes
ordinarily exercisable at a general meeting of Reed International or Elsevier
and has not made a comparable take-over offer for the other party, the other
party may by notice suspend or modify the operation of certain provisions of the
merger arrangements, such as (i) the right of the party in which control has
been acquired (the "Acquired Party") to appoint or remove directors of Reed
International, Elsevier and Reed Elsevier plc and (ii) the Standstill
Obligations in relation to the Acquired Party. Such a notice will cease to apply
if the person acquiring control makes a comparable offer for all the equity
securities of the other within a specified period or if the person (and persons
acting in concert with him) ceases to have control of the other.
In the event of a change of control of one parent company and not the other
(where there has been no comparable offer for the other), the parent company
which has not suffered the change in control will effectively have the sole
right to remove and appoint directors of Reed Elsevier plc. Also, a director
removed from the board of a parent company which has suffered a change in
control will not have to resign from the board of the other parent company or
Reed Elsevier plc.
The Articles of Association of Reed Elsevier plc contain certain restrictions
on the transfer of shares in Reed Elsevier plc. In addition, pursuant to
arrangements established at the time of the merger, neither Reed International
nor Elsevier may acquire or dispose of any interest in the share capital of the
other or otherwise take any action to acquire the other without the prior
approval of the other (the "Standstill Obligations"). The Panel on Take-overs
and Mergers in the United Kingdom (the "Panel") has stated that in the event of
a change of statutory control of either Reed International or Elsevier, the
person or persons acquiring such control will be required to make an offer to
acquire the share capital of Reed Elsevier plc (but not Elsevier Reed Finance
BV) held by the other, in accordance with the requirements of the City Code on
Take-overs and Mergers in the United Kingdom. This requirement would not apply
if the person acquiring statutory control of either Reed International or
Elsevier made an offer for the other on terms which are considered by the Panel
to be appropriate.
The Supervisory Board of Elsevier Reed Finance BV comprises four members, and
the Management Board consists of two members. The minimum number of members of
the Supervisory Board of Elsevier Reed Finance BV is two, of which at least one
is nominated for appointment by Elsevier and one by Reed International. The
quorum for meetings of the Supervisory Board is one Reed International nominee
and one Elsevier nominee, and resolutions at such meetings require to be passed
by unanimous vote. The Management Board of Elsevier Reed Finance BV constitutes
at least one member nominated by Elsevier together with any further appointees
as Reed International and Elsevier shall determine. The Articles of Association
of Elsevier Reed Finance BV contain provisions requiring the Executive Board to
obtain the approval of the Supervisory Board for certain specified activities.
For a complete description of the Board membership positions within Elsevier
Reed Finance BV, see "Directors and Senior Management".
REED INTERNATIONAL
Under the governance arrangements approved by the shareholders of Reed
International and Elsevier, as part of the new unitary management structure
implemented during 1999, there shall be no less than three and no more than five
executive directors, and six non-executive directors. A person may only be
appointed or proposed or recommended for appointment to the board if that person
has been nominated for that appointment by the joint Nominations Committee of
Reed International and
45
Elsevier. Persons nominated by the joint Nominations Committee will be required
to be approved by the Reed International Board, prior to the appointment to the
Reed International Board.
Notwithstanding the provisions outlined above in relation to the appointment to
the board, Reed International shareholders retain their rights under Reed
International's Articles of Association to appoint directors to the Reed
International Board by ordinary resolution. Reed International shareholders may
also, by ordinary resolution, remove a director from the Board of Reed
International, and in such circumstances that director will also be required to
be removed or resign from the Boards of Elsevier and Reed Elsevier plc (except
in circumstances where there has been a change of control of Reed International
and not Elsevier).
Each director on the Reed International Board is required to retire by rotation
at least every three years.
The Reed International Board has established an Audit Committee, comprising
three non-executive directors. The joint Nominations Committee comprises the
Chairman, the Chief Executive Officer and one non-executive director from each
of Reed International and Elsevier.
ELSEVIER
Under the governance arrangements approved by the shareholders of Reed
International and Elsevier, as part of the new unitary management structure
implemented during 1999, there shall be no less than three and no more than five
members of the Executive Board, and no less than six and no more than eight
members of the Supervisory Board. A person may only be appointed or proposed or
recommended for appointment to the boards if that person has been nominated for
that appointment by the joint Nominations Committee of Reed International and
Elsevier. Persons nominated by the joint Nominations Committee will be required
to be approved by the Elsevier Combined Board prior to appointment to the
Elsevier Executive or Supervisory Board and by Elsevier shareholders.
Notwithstanding the provisions outlined above in relation to the appointment to
the Board, Elsevier shareholders retain their rights under Elsevier's Articles
of Association to appoint directors to the Elsevier Boards by ordinary
resolution if such appointment has been proposed by the Elsevier Combined Board
and, if such appointment has not, by an ordinary resolution of shareholders
requiring a majority of at least two-thirds of the votes cast if less than one
half of Elsevier's issued share capital is represented. Elsevier shareholders
may also, by ordinary resolution, remove a director from the Board of Elsevier,
and in such circumstances that director will also be required to be removed or
resign from the Boards of Reed International and Reed Elsevier plc (except in
circumstances where there has been a change of control of Elsevier and not Reed
International).
Each director on the Elsevier Executive and Supervisory Boards is required to
retire by rotation at least every three years.
The Elsevier Supervisory Board has established an Audit Committee, comprising
three members of the Elsevier Supervisory Board. The joint Nominations Committee
comprises the Chairman, the Chief Executive Officer and one non- executive
director from each of Reed International and Elsevier.
EMPLOYEES
Reed Elsevier's average number of employees in the year ended 31 December 2000
was 28,900. Approximately 5,700 were located in the U.K., 14,800 in North
America, 3,000 in the Netherlands, 3,000 in the rest of Europe and 2,400 in the
rest of World. The average number of employees in the business segments in the
year ended 31 December 2000 was 3,700 in Science & Medical, 11,200 in Legal,
1,500 in Education and 12,500 in Business.
The board of Reed Elsevier plc is fully committed to the concept of employee
involvement and participation, and encourages each of its businesses to
formulate its own tailor-made approach with the co-operation of employees. The
group is an equal opportunity employer, and recruits and promotes employees on
the basis of suitability for the job. Appropriate training and development
opportunities are available to all employees. Codes of Conduct applicable to
employees within the Reed Elsevier plc group have been adopted throughout its
sses.
46
SHARE OWNERSHIP
REED INTERNATIONAL
Share options
The following table sets forth the details of options held by directors over
Reed International ordinary shares as at 31 December 2000 under share option
schemes which are described below under "Reed Elsevier Share option schemes":
Granted
1 January during the 31 December
2000* year Option price 2000 Exercisable
-------- --------- ----------- ---------------------
(p)
M H Armour --- Executive Scheme 59,600 400.75 59,600 2001-2005
30,000 585.25 30,000 2001-2006
52,000 565.75 52,000 2001-2007
66,900 523.00 66,900 2001-2008
33,600 537.50 33,600 2002-2009
88,202 436.50 88,202 2003-2010
M H Armour --- LTIP 882,016 436.50 882,016 2005
M H Armour --- SAYE Scheme 3,924 430.00 3,924 2004
-------- --------- ----------
Total 246,024 970,218 1,216,242
======== ========= ==========
C H L Davis --- Executive Scheme 160,599 467.00 160,599 2002-2009
80,300 467.00 80,300 2003-2009
80,300 467.00 80,300 2004-2009
171,821 436.50 171,821 2003-2010
C H L Davis --- Nil cost options 535,332 Nil 535,332 2002
C H L Davis --- LTIP 1,718,213 436.50 1,718,213 2005
C H L Davis --- SAYE Scheme 5,019 336.20 5,019 2005
-------- --------- ----------
Total 856,531 1,895,053 2,751,584
======== ========= ==========
D J Haank --- Executive Scheme 18,498 677.25 18,498 2001-2004
18,497 537.50 18,497 2001-2009
51,368 436.50 51,368 2003-2010
D J Haank --- LTIP 513,680 436.50 513,680 2005
-------- --------- ----------
Total 36,995 565,048 602,043
======== ========= ==========
A Prozes --- Executive Scheme 188,281 566.00 188,281 2003-2010
A Prozes --- LTIP 941,406 566.00 941,406 2005
A Prozes --- Nil cost options 60,507 Nil 60,507 2001-2003
--------- ----------
Total 1,190,194 1,190,194
========= ==========
G J A van de Aast --- Executive Scheme 50,940 638.00 50,940 2003-2010
G J A van de Aast --- LTIP 509,404 638.00 509,404 2005
-------- ----------
Total 560,344 560,344
======== ==========
*On date of appointment if after 1 January 2000.
The middle market price of a Reed International ordinary share during the year
was in the range 390.75p to 700.00p and at 31 December 2000 was 700.00p.
Between 1 January 2001 and 20 February 2001, there were no changes to the
options held by directors.
Share option schemes
Prior to the merger, Reed International operated a number of share option
schemes under which options over new issue Reed International ordinary shares
were granted to its executive directors, executive officers and eligible
employees. The share option schemes which still have options capable of being
exercised are the Reed International U.K. Executive Share Option Scheme and the
Reed International Overseas Executive Share Option Scheme, (the "Reed
International Executive Schemes"). The Reed International Executive Schemes were
established in 1984. Options over new Reed International ordinary shares were
granted thereunder until 1993, and no further options may be granted under the
Reed International Executive Schemes. The terms and conditions of the Reed
International Executive Schemes are substantially similar to those of the
corresponding share
47
option schemes of Reed Elsevier plc, which are described below under "Reed
Elsevier plc Executive U.K. and Overseas Share Option Schemes.
A Longer Term Incentive Plan was operated until 1999. No entitlements arose in
respect of the 1998/2000 period. The Plan has been discontinued, and there are
no options outstanding under the Plan.
ELSEVIER
Share options
The following table sets forth the details of options held by directors over
Elsevier ordinary shares as at 31 December 2000 under share option schemes which
are described below under "Elsevier Share option schemes":
Market
Granted Exercised price at 31
1 January during the Option during theexercise December
2000* year price year date 2000 Exercisable
-------- --------- ------ ----------------- --------- -----------
('E') ('E')
M H Armour --- Executive Scheme 20,244 13.55 20,244 2002-2009
61,726 10.73 61,726 2003-2010
M H Armour --- LTIP 617,256 10.73 617,256 2005
-------- --------- ---------
Total 20,244 678,982 699,226
======== ========= =========
C H L Davis --- Executive Scheme 95,774 12.00 95,774 2002-2009
47,888 12.00 47,888 2003-2009
47,888 12.00 47,888 2004-2009
120,245 10.73 120,245 2003-2010
C H L Davis --- LTIP 1,202,446 10.73 1,202,446 2005
C H L Davis --- Nil cost options 319,250 Nil 319 250 2002
-------- --------- ---------
Total 510,800 1,322,691 1,833,491
======== ========= =========
D J Haank --- Executive Scheme 35,000 11.93 35,000 2001
30,000 14.11 30,000 2001-2002
30,000 15.25 30,000 2001-2003
10,926 17.07 10,926 2001-2004
10,925 13,55 10.925 2001-2009
35,949 10.73 35.949 2003-2010
D J Haank --- LTIP 359,485 10.73 359,485 2005
D J Haank --- Convertible Debentures 9,540 14.36(i) 3,000(ii15.66 6,540 2001-2002
-------- --------- --------- ---------
Total 126,391 395,434 3,000 518,825
======== ========= ========= =========
A Prozes --- Executive Scheme 131,062 13.60 131,062 2003-2010
A Prozes --- LTIP 655,310 13.60 655,310 2005
A Prozes --- Nil cost options 42,120 Nil 42,120 2001-2003
-------- --------- ---------
Total 828,492 828,492
======== ========= =========
G J A van de Aast --- Executive Scheme 35,866 14,87 35,866 2003-2010
G J A van de Aast --- LTIP 358,658 14.87 358,658 2005
-------- ---------
Total 394,524 394,524
======== =========
*On date of appointment if after 1 January 2000.
(i) Average price
(ii) Retained an interest in 3,000 shares
The market price of an Elsevier ordinary share during the year was in the range
'E'9.30 to 'E'16.07 and at 31 December 2000 was 'E'15.66.
Between 1 January 2001 and 20 February 2001, there were no changes to the
options held by directors.
Share option schemes
Under arrangements operated by Elsevier (the "Elsevier Executive Option
Arrangements"), options to subscribe for Elsevier ordinary shares were granted
each year until 1999 to the members of the Executive Board and to a small number
of other senior executives of Elsevier. Such options give the beneficiary the
right, at any time during periods of either five years or
48
ten years following the date of the grant, to purchase Elsevier ordinary shares.
Prior to 1999 all options granted under the Elsevier Executive Option
Arrangements could be exercised within a five year period from the date of
grant, and the options were granted at an exercise price equal to the market
price on the date of grant. During 1999, options were granted with an exercise
period of five years at an exercise price 26% above the market price at the date
of grant, or with an exercise period of 10 years at an exercise price equal to
the market price at the date of grant, or a combination of both.
In addition, Elsevier has arrangements in place (together with the Elsevier
Executive Option Arrangements the "Elsevier Share Option Arrangements"), which
are open to Dutch employees of the businesses within Reed Elsevier after one
year's service, under which interest bearing debentures of Elsevier may be
purchased for cash for periods of five years, during which time they may be
ted on a prescribed basis into Elsevier ordinary shares.
49
REED ELSEVIER
Share ownership and options
The interests of the directors of Reed Elsevier plc and their families in the
issued share capital of Reed International and Elsevier at the beginning and end
of 2000 are shown below:
Reed International Elsevier
ordinary shares ordinary shares
-------------------- --------------------
1 January 31 December 1 January 31 December
2000* 2000 2000* 2000
-------- ---------- -------- ----------
M H Armour 2,500 2,500 2,500 2,500
J F Brock 3,000 3,000 --- ---
G J A van de Aast --- --- --- ---
C H L Davis --- 44,778 --- 31,099
D J Haank --- --- 7,880 10,880
R J Nelissen --- --- --- 5,000
S Perrick --- --- --- ---
A Prozes --- --- --- ---
Dr R W H Stomberg --- --- --- ---
M Tabaksblat --- --- 8,000 8,000
---
D G C Webster 5,000 5,000 ---
*On date of appointment if after 1 January 2000.
There have been no changes in the interests of the directors in the share
capital of Reed International since 31 December 2000. Subsequent to 31 December
2000 S Perrick acquired 962 Elsevier shares.
Any ordinary shares required to fulfil entitlements under nil cost share option
grants are provided by the Employee Benefit Trust ("EBT") from market purchases.
As beneficiaries under the EBT, the directors are deemed to be interested in the
shares held by the EBT which, at 31 December 2000, amounted to 590,257 Reed
International ordinary shares and 320,000 Elsevier ordinary .
50
Shares and options held by executive officers
The following table indicates the total aggregate number of Reed International
ordinary shares and Elsevier ordinary shares beneficially owned and the total
aggregate number of Reed International ordinary shares and Elsevier ordinary
shares subject to options beneficially owned by each of the executive officers
(other than directors) of Reed Elsevier plc (2 people) as a group, as of 20
February 2001:
Reed
Reed International Elsevier
International ordinary Elsevier ordinary
ordinary shares subject ordinary shares subject
shares to options shares(1)(2to options
------------- ------------- -------- -------------
Executive officers (other than directors) as a group --- 229,971 5,000 199,049
(1)ABLThe Elsevier ordinary shares may be issued in registered or bearer form.
(2) No individual executive officer of Reed Elsevier plc has notified Elsevier
that he holds more than 5% of the issued share capital of Elsevier
pursuant to the Dutch law requirement described under "Control of
Registrants --- Elsevier".
The options included in the above table are exercisable into Reed International
ordinary shares at prices ranging from 424p to 700p per Share and between the
date hereof and 2010. The options included in the above table are exercisable
into Elsevier ordinary shares at prices ranging from 'E'10.45 to 'E'15.66 per
Share and between the date hereof and 2010.
Share option schemes
Following the merger, Reed Elsevier plc introduced share option schemes under
which options over new issue and over existing Reed International ordinary
shares and/or Elsevier ordinary shares may be granted to employees of Reed
Elsevier plc and participating companies under its control. The share option
schemes are the Reed Elsevier plc SAYE Share Option Scheme (the "Reed Elsevier
plc SAYE Scheme") and the Reed Elsevier plc Executive U.K. and Overseas Share
Option Schemes (the "Reed Elsevier plc Executive Schemes and, together with the
Reed Elsevier plc SAYE Scheme, the "Reed Elsevier plc Schemes"). The Reed
Elsevier plc Schemes have been approved by shareholders of Reed International
and information concerning the terms and conditions of the Schemes is set out
below.
During 1999 the directors introduced share option schemes (the "Reed Elsevier
plc Executive Share Option Schemes (No. 2)") under which options over only
existing Reed International ordinary shares and/or Elsevier ordinary shares may
be granted to employees. Apart from the fact that options over new issue shares
may not be issued under these schemes, the terms and conditions of these schemes
are identical to the Reed Elsevier plc Executive Schemes.
At 20 February 2001 the total number of Reed International ordinary shares
subject to outstanding options under the Reed International Schemes, the Reed
Elsevier plc Schemes and the Reed Elsevier plc Executive Share Option Schemes
(No. 2) amounted to 30,243,078 shares, and the options for such shares were
exercisable at option prices ranging between 208.75p to 700p per share and were
exercisable between 2001 and 2010. At 20 February 2001 the total number of
Elsevier ordinary shares subject to outstanding options under the Elsevier Share
Option Arrangements, the Reed Elsevier plc Schemes and the Reed Elsevier plc
Executive Share Option Schemes (No. 2) amounted to 15,440,684 shares, and the
options for such shares were exercisable at option prices ranging between
'E'10.45 to 'E'15.66 per share between 2001 and 2010.
During 2000, Reed Elsevier plc made grants under a Senior Executive Long Term
Incentive Scheme, following approval of the Scheme by the shareholders of Reed
International and Elsevier. At 20 February 2001 the total number of Reed
International ordinary shares and Elsevier ordinary shares subject to
outstanding options under the Reed Elsevier plc Senior Executive Long Term
Incentive Scheme were 14,370,866 and 10,059,317, respectively.
Also during 2000, the directors granted nil cost options over Restricted Shares
to a small number of senior executives. At 20 February 2001 the total number of
Reed International ordinary shares and Elsevier ordinary shares subject to
outstanding options under such arrangements were 65,739 and 45,762,
respectively.
Reed Elsevier plc SAYE Share Option Scheme
The Reed Elsevier plc SAYE Scheme provides for the grant of options over Reed
International ordinary shares and/or Elsevier ordinary shares to employees of
Reed Elsevier plc and participating companies under its control. Only options
over Reed International ordinary shares have been granted under the Reed
Elsevier plc SAYE Scheme to date. The price at which shares may be acquired
under the Reed Elsevier plc SAYE Scheme may not be less that the higher of (i)
80% of the closing middle market price for the relevant share on The London
Stock Exchange three days before invitations to apply for options are issued,
and (ii) if new shares are to be subscribed, their nominal value.
On joining the Reed Elsevier plc SAYE Scheme, a save as you earn contract (a
"Savings Contract") must be entered into with an appropriate savings body,
providing for contributions to be made to such savings body between 'L'5 and the
permitted maximum (currently 'L'250) per month for a period of three or five
years. A bonus is payable under the Savings Contract at the end of the savings
period. The amount of the monthly contributions may be reduced if applications
exceed the number of Reed International ordinary shares and/or Elsevier ordinary
shares available for the grant of options on that occasion.
51
The number of Reed International ordin ary shares and/or Elsevier ordinary
shares over which an option may be granted is limited to that number of shares
which may be acquired at the exercise price out of the repayment proceeds
(including any bonus) of the Savings Contract.
All U.K. employees of Reed Elsevier plc and participating companies under its
control in employment on a predetermined date prior to the date of invitation
are entitled to participate in the Reed Elsevier plc SAYE Scheme. In addition,
the directors of Reed Elsevier plc may permit other employees of Reed Elsevier
plc and participating companies under its control to participate.
Invitations to apply for options may normally only be issued within 42 days
after the announcement of the combined results of Reed Elsevier for any period.
No options may be granted more than 10 years after the approval of the scheme.
Options under the Reed Elsevier plc SAYE Scheme may normally only be exercised
for a period of six months after the bonus date under the relevant Savings
Contract. However, options may be exercised earlier than the normal exercise
date in certain specified circumstances, including death, reaching age 60, or on
ceasing employment on account of injury, disability, redundancy, reaching
contractual retirement age, or the sale of the business or subsidiary for which
the participant works, or provided the option has been held for at least three
years, on ceasing employment for any other reason. Exercise is allowed in the
event of an amalgamation, reconstruction or take-over of the company whose
shares are under option; alternatively, such options may, with the agreement of
an acquiring company or a company associated with it, be exchanged for options
over shares in the acquiring company or that associated company. Options may
also be exercised in the event of the voluntary winding-up of the company whose
shares are under option. In the event that options are exercised before the
bonus date, the participant may acquire only the number of shares that can be
purchased with the accumulated savings up to the date of exercise, plus interest
(if any).
Options under the Reed Elsevier plc SAYE Scheme are not transferable and may be
exercised only by the persons to whom they are granted or their personal
representatives.
In the event of any capitalisation or rights issue by Reed International or
Elsevier, or of any consolidation, subdivision or reduction of their share
capital, the number of shares subject to any relevant option and/or the exercise
price may be adjusted with the approval of the U.K. Inland Revenue, subject to
the independent auditors of Reed Elsevier plc confirming in writing that such
adjustment is, in their opinion, fair and reasonable.
No more than 168 million new Reed International ordinary shares, being
approximately 15% of Reed International's current issued share capital, may be
issued under the Reed Elsevier plc SAYE Scheme. No option may be granted under
the scheme if it would cause the number of Reed International ordinary shares
issued or issuable in any 10 year period under the scheme and any other share
option scheme adopted by Reed International or Reed Elsevier plc to exceed in
aggregate 10% of the issued share capital of Reed International from time to
time. The number of Elsevier ordinary shares which may be issued or issuable
under the Reed Elsevier plc SAYE scheme will be determined by the Combined
Meeting of Elsevier, but shall not exceed the percentage limits set out above in
relation to Reed International ordinary shares. Options may also be granted
under the Reed Elsevier plc SAYE Scheme over existing Reed International
ordinary shares or Elsevier ordinary shares.
Reed Elsevier plc Executive U.K. and Overseas Share Option Schemes
The Reed Elsevier plc Executive Schemes comprise (i) the Reed Elsevier plc
Executive U.K. Share Option Scheme (the "Reed Elsevier plc U.K. Executive
Scheme"), and (ii) the Reed Elsevier plc Executive Overseas Share Option Scheme
(the "Reed Elsevier plc Overseas Executive Scheme").
Reed Elsevier plc U.K. Executive Scheme: The Reed Elsevier plc U.K. Executive
Scheme provides for the grant of options over Reed International ordinary shares
and/or Elsevier ordinary shares to the U.K. Employees of Reed Elsevier plc and
participating companies under its control. All directors and employees of Reed
Elsevier plc and participating companies under its control who are contracted to
work for at least 25 hours per week are eligible to be nominated for
participation. The grant of options is administered by a committee of directors
of Reed Elsevier plc, a majority of the members of which are non- executive
directors. No payment is required for the grant of an option under the Reed
Elsevier plc U.K. Executive Scheme.
Options granted under the Reed Elsevier plc U.K. Executive Scheme may be
exercised within a period of 10 years and entitle the holder to acquire shares
at a price determined by the committee of directors of Reed Elsevier plc, which
may not be less than the higher of (i) in the case of Reed International
ordinary shares, the closing middle market price for the relevant share on The
London Stock Exchange at the date of grant, (ii) in the case of an Elsevier
ordinary share, the closing market price for the relevant share on Euronext,
Amsterdam at the date of grant and (iii) if new shares are to be subscribed,
their nominal value.
Employees may be granted options under the Reed Elsevier plc U.K. Executive
Scheme to replace those which have been exercised. In granting such replacement
options, the committee of directors of Reed Elsevier plc must satisfy itself
that the grant of such options is justified by the performance of Reed Elsevier
in the previous two to three years.
Options may normally only be granted under the Reed Elsevier plc U.K. Executive
Scheme within 42 days after the announcement of the combined results of Reed
Elsevier for any period. No option may be granted under the Reed Elsevier plc
U.K. Executive Scheme more than 10 years after the approval of the scheme.
52
Options granted under the Reed Elsevier plc U.K. Executive Scheme will normally
be exercisable only after the expiration of three years from the date of their
grant and by a person who remains a director or employee of Reed Elsevier plc
and participating companies under its control. Options granted from 1999 onwards
are subject to performance criteria. In order for an option to become
exercisable, the compound growth in the average of the Reed International and
Elsevier adjusted EPS (before amortisation of goodwill and intangible assets,
exceptional items and U.K. tax credit equalisation) in a consecutive three year
period after the grant is made, must exceed the compound growth in the average
of the U.K. and Dutch retail price index during the same period by a minimum of
6%. Early exercise of such options is permitted in substantially similar
circumstances to those set out in relation to the Reed Elsevier plc SAYE Scheme.
The committee of directors of Reed Elsevier plc has discretion to permit the
exercise of options by a participant in certain circumstances where it would not
otherwise be permitted.
Options granted under the Reed Elsevier plc U.K. Executive Scheme are not
transferable and may be exercised only by the persons to whom they are granted
or their personal representatives.
In the event of any capitalisation or rights issue by Reed International or
Elsevier, or of any consolidation, subdivision or reduction of their share
capital, the number of shares subject to any relevant option and/or the exercise
price may be adjusted with the approval of the U.K. Inland Revenue, subject to
the independent auditors of Reed Elsevier plc confirming in writing that such
adjustment is, in their opinion, fair and reasonable.
The limits described above on the number of Reed International ordinary shares
and Elsevier ordinary shares which may be issued under the Reed Elsevier plc
SAYE Scheme also apply to the Reed Elsevier plc U.K. and Overseas Executive
Scheme. In addition, no option may be granted under the scheme if it would cause
the number of Reed International Ordinary Shares issued or issuable in any 10
year period under the scheme or any other executive share option scheme adopted
by Reed International or Reed Elsevier plc to exceed in aggregate 5% of the
issued share capital of Reed International from time to time.
Equivalent limits to those above apply to the number of Elsevier ordinary
shares which may be issued or issuable under the scheme.
Options may also be granted under the Reed Elsevier plc U.K. Executive Scheme
over existing Reed International ordinary shares or Elsevier ordinary shares.
Reed Elsevier plc Overseas Executive Scheme: The Reed Elsevier plc Overseas
Executive Scheme provides for options to be granted to non-U.K. employees of
Reed Elsevier plc and participating companies under its control. The terms and
conditions of the Reed Elsevier plc Overseas Executive Scheme are substantially
similar to those of the Reed Elsevier plc U.K. Executive Scheme.
Reed Elsevier plc Senior Executive Long Term Incentive Scheme
Options over shares in Reed International and Elsevier have been granted during
the year under the Reed Elsevier plc Senior Executive Long Term Incentive Scheme
("LTIP"). Implementation of the LTIP was approved by shareholders of Reed
International and Elsevier at their respective Annual General Meetings in April
2000.
The terms of the LTIP permitted a one off grant of options over Reed
International and Elsevier ordinary shares, up to an aggregate value of 30 times
salary, to be made to executive directors and a limited number of key
executives. Grants have been made to existing management as well as individuals
recruited during the year, regarded as key executives responsible for reshaping
the business, executing the strategy for growth announced in February 2000 and
producing a sustainable improvement in shareholder value. All grants under the
LTIP were approved by the Remuneration Committee, and the maximum grant to any
one individual represented an aggregate value of 20 times salary.
Participants in the LTIP are required to build up a significant personal
shareholding in Reed International and/or Elsevier. At executive director level,
the requirement is that they should own shares equivalent to 1/2 times salary,
to be acquired over a reasonable period.
An option under the LTIP may only be exercised during the period 1 January 2005
and 31 December 2005, and then only if the performance targets have been
satisfied.
The first performance condition requires the achievement of 20% per annum total
shareholder return ("TSR") over three years from a base point of 436.5p per Reed
International share and 'E'10.73 for an Elsevier share, being the respective
share prices on 2 May 2000. In the event that the required TSR performance is
not achieved in the initial three year period, the TSR target will be extended
to a maximum of five years with a corresponding increase in the growth
requirement over such extended performance period.
Restricted share awards
The Remuneration Committee authorised during 2000 the granting of nil cost
options over restricted shares in Reed International and Elsevier to assist in
the recruitment and retention of senior executives. Options over restricted
shares will be met by the Employee Benefit Trust from market purchases.
53
ITEM 7: MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
MAJOR SHAREHOLDERS
REED INTERNATIONAL
As of 20 February 2001, Reed International is aware of the following
disclosable interests in the issued Reed International ordinary shares:
Number of Reed
International
ordinary shares
Identity of Person or Group(1) owned % of Class
----------------------------- -------------- ---------
Prudential Corporation . . . . 63,010,273 4.99
Lord Hamlyn. . . . . . . . . . 43,302,816 3.43
Directors and Officers . . . . 55,278 ---
-------------------
(1) Under U.K. Law, subject to certain limited exceptions, persons or groups
owning or controlling 3% or more of the issued Reed International Ordinary
Shares are required to notify Reed International of the level of their
holdings.
As far as Reed International is aware, except as disclosed herein, it is
neither directly or indirectly owned nor controlled by one or more corporations
or by any government.
There are 32,840 ordinary shareholders with registered addresses in the United
Kingdom, representing 99.8% of shares issued.
Reed International is not aware of any arrangements the operation of which may
at a subsequent date result in a change in control of Reed International. The
major shareholders of Reed International do not have different voting rights to
other ordinary shareholders.
ELSEVIER
As of 20 February 2001, Elsevier is aware of the following disclosable
interests in the issued Elsevier ordinary shares, in addition to the 4,049,951
R-shares in Elsevier held by a subsidiary of Reed International and representing
a 5.2% indirect equity interest in the total share capital of Elsevier:
Number of Elsevier
ordinary shares
Identity of Person or Group(1)(2) owned % of Class
-------------------------------- ----------------- ---------
ING Group . . . . . . . . . . . . 53,114,651 7.9
Directors and Officers(3) . . . . 58,441 ---
-------------------
(1) The Elsevier ordinary shares may be issued in registered or bearer form.
(2) Under Dutch law, individuals or corporate bodies acquiring shares which
result in such individual or corporate bodies holding more than 5% of the
issued share capital of Elsevier are required to notify Elsevier thereof.
(3) No individual member of the Superv isory Board or the Executive Board of
Elsevier or executive officer of Elsevier has notified Elsevier that they
hold more than 5% of the issued share capital of Elsevier pursuant to the
Dutch law described in the immediately preceding footnote.
As far as Elsevier is aware, except as disclosed herein, it is neither directly
nor indirectly owned or controlled by one or more corporations or by any
government.
Elsevier is not aware of any arrangements the operation of which may at a
subsequent date result in a change in control of Elsevier. The major
shareholders of Elsevier do not have different voting rights to other ordinary
shareholders.
RELATED PARTY TRANSACTIONS
REED INTERNATIONAL Not applicable.
ELSEVIER Not applicable.
54
ITEM 8: FINANCIAL INFORMATION
Financial Statements
See: Item 18. Financial Statements
Legal Proceedings
Reed Elsevier is party to various legal proceedings, the ultimate resolutions
of which are not expected to have a material adverse effect on the financial
position of Reed Elsevier or results of their operations.
Reed Elsevier Inc. ( "REI ") has been named as one of several defendants in an
action captioned Electronic Database Copyright Infringement Litigation, M.D.L.
Docket No. 1379, a federal multidistrict litigation which consolidates three
lawsuits alleging copyright infringement, filed against REI and others in
August and September, 2000, in federal district courts: The Authors Guild, Inc.
v. The Dialog Corporation et al., Laney et ano. v. Dow Jones & Company, Inc.,
et al., and Posner et al. v.. Gale Group Inc. These suits were brought by or on
behalf of freelance authors who allege that the defendants have infringed
plaintiffs' copyright by making plaintiffs' works available on databases
operated by the defendants. The plaintiffs are seeking to be certified as class
representatives of all similarly-situated freelance authors. On 27 February
2001, the Court ordered a stay of the proceeding pending disposition by The
United States Supreme Court of New York Times Company et al. v. Tasini et al.,
No. 00-201, in which REI is a defendant and which involves legal issues that,
if resolved by the Supreme Court in favour of REI would likely result in the
dismissal of the consolidated action as well. No proceedings relating to the
class certification motions, or other proceedings of substance, have yet
occurred. Plaintiffs in each action seek actual damages, statutory damages and
injunctive relief. The Laney plaintiff also seeks an accounting for profits
received. REI believes it has strong substantive defences to these actions and
will vigorously pursue them. It will also vigorously contest the motions for
class certification. REI has indemnity agreements from each of the content
providers that supplied articles to the relevant databases. REI could be
adversely affected in the event the plaintiffs are successful in their claims
and full recovery were not available under the indemnities.
55
ITEM 9: THE OFFER AND LISTING
TRADING MARKETS
REED INTERNATIONAL
The Reed International ordinary shares are listed on the London Stock Exchange,
the New York Stock Exchange and Euronext Amsterdam N.V. The London Stock
Exchange is the principal trading market for Reed International ordinary shares.
Trading on the New York Stock Exchange is in the form of American Depositary
Shares ("ADSs"), evidenced by American Depositary Receipts ("ADRs") issued by
Citibank NA, as depositary. Each ADS represents four Reed International ordinary
shares.
The table below sets forth, for the calendar quarters indicated, the high and
low closing middle market quotations for the Reed International ordinary shares
on the London Stock Exchange as derived from the Daily Official List of the
London Stock Exchange and the high and low last reported sales prices in U.S.
dollars for the Reed International American Depositary Shares on the New York
Stock Exchange, as derived from the New York Stock Exchange Composite Tape, and
reported by Datastream International Ltd:
Pence per ordinary share U.S. dollars per ADS
----------------------- -------------------
Calendar Periods High Low High Low
--------------------------------------- ----------- ---------- --------- ---------
1996 . . . . . . . . . . . . . . . . . . 605 491 39.25 30.00
1997 . . . . . . . . . . . . . . . . . . 648 507 42.88 33.50
1998 . . . . . . . . . . . . . . . . . . 716 428 48.25 28.50
1999 . . . . . . . . . . . . . . . . . . 630 344 39.63 22.75
2000 . . . . . . . . . . . . . . . . . . 700 391 43.13 24.50
1999
First Quarter . . . . . . . . . . . . . 630 470 39.63 31.50
Second Quarter . . . . . . . . . . . . 590 423 37.63 27.06
Third Quarter . . . . . . . . . . . . . 495 366 31.69 24.13
Fourth Quarter . . . . . . . . . . . . 465 344 29.88 22.75
2000
First Quarter . . . . . . . . . . . . . 633 391 39.88 24.50
Second Quarter . . . . . . . . . . . . 575 426 35.00 25.06
Third Quarter . . . . . . . . . . . . . 617 510 36.31 31.25
Fourth Quarter . . . . . . . . . . . . 700 508 43.13 29.43
End of the Month
February 2001 (through 21 February 2001) 670 613 39.74 36.20
January 2001 . . . . . . . . . . . . . . 700 626 42.63 36.75
December 2000. . . . . . . . . . . . . . 700 638 43.13 37.69
November 2000. . . . . . . . . . . . . . 689 630 39.75 35.88
October 2000 . . . . . . . . . . . . . . 637 508 37.38 29.43
September 2000 . . . . . . . . . . . . . 617 537 36.25 32.44
August 2000. . . . . . . . . . . . . . . 597 520 36.31 31.88
56
ELSEVIER
The Elsevier ordinary shares are quoted on Euronext Amsterdam N.V., the New
York Stock Exchange and the London Stock Exchange. In addition Elsevier ordinary
shares are quoted on the EBS stock exchange in Switzerland and are also traded
on the Freiverkehrsmarkt in Frankfurt. Euronext Amsterdam N.V.is the principal
trading market for Elsevier ordinary shares. Trading on the New York Stock
Exchange is in the form of American Depositary Shares ("ADSs"), evidenced by
American Depositary Receipts ("ADRs") issued by Citibank NA, as depositary. Each
ADS represents two Elsevier ordinary shares.
The table below sets forth, for the calendar quarters indicated, the high and
low closing middle market quotations for the Elsevier Ordinary Shares on
Euronext Amsterdam N.V.as derived from the Officiele Prijscourant of Euronext
Amsterdam N.V and the high and low last reported sales prices in U.S. dollars
for the Elsevier American Depositary Shares on the New York Stock Exchange, as
derived from the New York Stock Exchange Composite Tape, and reported by
Datastream International Ltd: From 4 January 1999, all market quotations on the
Amsterdam Stock Exchange have been presented in euro. Quotations prior to 4
January 1999, have, for the convenience of the reader, been translated into euro
at the Official Conversion Rate of Dfl2.20371 per 'E'1.00.
'E' per ordinary share U.S. dollars per ADS
--------------------- -------------------
Calendar Periods High Low High Low
--------------------------------------- ---------- ---------- --------- ---------
1996 . . . . . . . . . . . . . . . . . . 13.57 9.71 34.75 26.63
1997 . . . . . . . . . . . . . . . . . . 17.52 12.34 37.25 28.63
1998 . . . . . . . . . . . . . . . . . . 17.74 10.48 38.25 24.75
1999 . . . . . . . . . . . . . . . . . . 15.25 8.95 33.63 18.63
2000 . . . . . . . . . . . . . . . . . . 16.07 9.30 29.94 18.00
1999 . . . . . . . . . . . . . . . . . .
First Quarter . . . . . . . . . . . . . 15.25 11.85 33.63 27.25
Second Quarter . . . . . . . . . . . . 14.25 11.25 31.00 23.38
Third Quarter . . . . . . . . . . . . . 12.65 9.65 26.38 20.63
Fourth Quarter . . . . . . . . . . . . 11.86 8.95 23.88 18.63
2000
First Quarter . . . . . . . . . . . . . 14.99 9.30 29.94 18.00
Second Quarter . . . . . . . . . . . . 12.69 9.90 24.69 18.19
Third Quarter . . . . . . . . . . . . . 14.19 11.75 25.75 21.75
Fourth Quarter . . . . . . . . . . . . 16.07 12.22 29.44 20.88
End of the Month
February 2001 (through 21 February 2001) 14.80 13.76 27.95 25.57
January 2001 . . . . . . . . . . . . . . 15.66 14.05 29.44 26.38
December 2000. . . . . . . . . . . . . . 15.98 14.71 29.44 26.13
November 2000. . . . . . . . . . . . . . 16.07 14.53 27.44 25.19
October 2000 . . . . . . . . . . . . . . 15.05 12.22 25.81 20.88
September 2000 . . . . . . . . . . . . . 14.19 12.70 25.63 22.50
August 2000. . . . . . . . . . . . . . . 14.08 11.81 25.75 21.75
57
ITEM 10: ADDITIONAL INFORMATION
MEMORANDUM AND ARTICLES OF ASSOCIATION
REED INTERNATIONAL
Set out below is information concerning Reed International's equity capital
structure and related summary information concerning provisions of Reed
International's memorandum and articles of association and applicable English
law. Since it is a summary, it does not contain all the information that may be
important to you, and the summary is qualified in its entirety by reference to
the Companies Act and the Reed International memorandum and articles of
association. For more complete information, you should read Reed International's
articles of association. A copy of Reed International's articles of association
has been filed as an exhibit to the annual report on Form 20-F -- see "Documents
on display".
Objects clause
Reed International is incorporated under the name "Reed International P.L.C."
and is registered in England and Wales with registered number 77536. Reed
International's memorandum of association provides that its objects include to
carry on business as a holding company, to carry on business of publishers,
producers, distributors, proprietors, wholesalers and retailers as well as carry
on any other business which Reed International may judge capable of enhancing
the value of its property or rights. The memorandum of association grants to
Reed International a range of corporate capabilities to effect these objects.
Directors
Interested Transaction. Under Reed International's articles of association, a
director may not vote in respect of any proposal in which he or she, or any
person connected with that director, has any material interest, except where
that interest exists because of an interest in shares, debentures or other
securities of, or otherwise in or through, Reed International. This is subject
to exceptions relating to proposals:
* indemnifying the director in respect of obligations incurred on behalf of
Reed International;
* indemnifying a third party in respect of obligations of Reed International
for which the director has assumed responsibility under an indemnity or
guarantee;
* relating to an offer of securities in which the director will be
interested as an underwriter;
* concerning another body corporate in which the director is beneficially
interested in less than 1% of the issued shares of any class of shares of
such a body corporate;
* relating to an employee benefit in which the director will share equally
with other employees; and
* relating to insurance that Reed International is empowered to purchase or
maintain for the benefit of its directors or for persons who include its
directors.
Qualification Shares. Directors are not required to hold any Reed
International shares by way of qualification.
Appointment and retirement of Directors. A director is not required to retire
upon attaining a particular age. At every annual general meeting of Reed
International one-third of the directors must retire from office, but if any
director has been in office for more than three years since his last
appointment, he shall retire and if there is only one director subject to
retirement by rotation, he shall retire. A director who retires at an annual
general meeting may be re-appointed. For more information, see Item 6:
Directors, Senior Management and Employees.
Borrowing Powers
The directors are empowered to exercise all the powers of Reed International to
borrow money, subject to the limitation that the aggregate amount of all moneys
borrowed by Reed International and its subsidiaries shall not exceed an amount
equal to the higher of five thousand million pounds; and two and a half times
Reed International's adjusted share capital and reserves, unless sanctioned by
an ordinary resolution of Reed International.
A resolution will be proposed at the forthcoming Annual General Meeting in
April 2001 to increase the limit to the higher of eight thousand million pounds;
and two and a half times Reed International's adjusted share capital and
reserves.
Share Capital
Reed International's authorised share capital is 'L'183,931,647. At 31 December
2000 it is comprised of 1,262,450,655 Reed International ordinary shares each
with a nominal value of 12.5 pence and 209,002,521 Reed International
unclassified shares each with a nominal value of 12.5 pence. As at 20 February
2001, 1,262,822,252 Reed International ordinary shares had been issued, all of
which are fully paid.
We may, subject to the Companies Act and shareholders pre-emption rights, allot
shares for cash. We may disapply the pre-emption rights by special resolution.
58
Description of Reed International Ordinary Shares
General. Reed International ordinary shares may be held in certificated or
uncertificated form.
Dividend Rights. Except in so far as the rights attached to any shares
otherwise provide, the holders of the Reed International ordinary shares are
entitled pro rata to the amounts paid up on such Reed International ordinary
shares to the profits of Reed International available for dividend and resolved
to be distributed. Reed International may, from time to time, by ordinary
resolution, declare a dividend to be paid to shareholders, according to their
rights and interests in the profits, and may fix the time for payment of such
dividend. No larger dividend may be declared than is recommended by the
directors, but Reed International may by ordinary resolution declare a smaller
dividend. If the directors think that the position of Reed International
justifies such payment, they may from time to time declare and pay interim
dividends of such amounts and on such dates as they think fit. The directors
also have the discretion to give shareholders the option to receive shares
instead of a cash dividend.
If a shareholder does not claim a dividend for 12 years, such shareholder
forfeits it and it reverts to Reed International. No dividend payable in respect
of a Reed International ordinary share will bear interest.
Liquidation Rights. Upon any liquidation or winding up of Reed International,
the surplus assets remaining after payment of all creditors shall be divided
among the shareholders in proportion to the capital paid up on their holdings of
Reed International ordinary shares.
Further Capital Calls. A holder of Reed International ordinary shares may be
required to make additional contributions of capital in respect of the Reed
International ordinary shares in the future, subject to the terms of allotment,
in respect of any moneys unpaid on their shares (whether in respect of nominal
value or premium) but not otherwise.
Notification of Interest in Reed International ordinary shares. Under Section
198 of the Companies Act, any person who acquires a material interest of 3% or
more, or any interest of 10% or more, in the Reed International ordinary shares
is obliged to notify Reed International in writing of the interest within two
business days following the day on which such interest was acquired.
In addition, under Section 212 of the Companies Act, Reed International may
give written notice to any person whom Reed International knows or has
reasonable cause to believe to be interested in Reed International shares
requesting information regarding such person's beneficial interest. If the
information is not provided or the directors believe the information provided is
false or misleading, Reed International may restrict certain of such person's
voting, dividend and transaction rights.
Voting Rights and General Meetings. Under English law, there are two types of
general meeting of shareholders, annual general meetings and extraordinary
general meetings. A public company must hold an annual general meeting at least
once in each year and not later than 15 months from the previous annual general
meeting. Annual general meetings normally deal with matters such as the election
of directors, appointment of statutory auditors, approval of the annual accounts
and the directors' report and the declaration of dividends. Any other general
meeting is known as an extraordinary general meeting.
At a general meeting, a simple majority of the votes cast is sufficient to pass
an ordinary resolution. A special resolution requires a majority of not less
than 75% of the shareholders voting, and being entitled to do so, at the meeting
in question. A small number of matters relating to variation of the rights
attaching to different classes of shares and proceedings in a winding-up require
the authority of an extraordinary resolution passed at a meeting of the relevant
class which requires the same majority as a special resolution.
Voting at any meeting of shareholders is by show of hands unless a poll,
meaning a vote by the number of shares held rather than by a show of hands, is
demanded. Subject to the restrictions referred to in the following paragraph, at
a meeting of shareholders every Reed International ordinary shareholder present
in person or, in the case of a corporation, by a duly authorised representative,
shall have one vote on a show of hands. On a poll every Reed international
ordinary shareholder present in person or by proxy or, in the case of a
corporation, by a duly authorised representative, shall have one vote for every
Reed International ordinary share held. A poll can be demanded by:
* the chairman of the meeting or any director present at the meeting;
* not less than five shareholders present at the meeting in person or by
proxy having the right to vote on the resolution;
* a shareholder or shareholders present at the meeting in person or by proxy
holding shares representing not less than 10% of the total voting rights
of all shareholders having the right to vote on the resolution; or
* a shareholder or shareholders present at the meeting in person or by proxy
holding shares conferring the right to vote on the resolution on which an
aggregate sum has been paid up equal to not less than 10% of the total sum
paid up on all the shares conferring that right.
59
A holder of shares shall not be entitled to be present, or to vote in respect
of any shares, at any general meeting of shareholders:
* if, in certain circumstances, Reed International has given notice to the
holder requesting details of the beneficial ownership of the shares
registered in the relevant holder's name and, inter alia, the required
details have not been supplied to Reed International within 28 days from
the date of any such notice; or
* if and for so long as the holder is in default in payment of any call or
other sum for the time being due and payable by him on such shares or any
interest or expenses (if any) payable in connection therewith.
There are no limitations imposed by English law or Reed International's
memorandum and articles of association on the right of non-residents or foreign
persons to hold or vote Reed International ordinary shares, other than the
limitations that would generally apply to all Reed International ordinary
shareholders.
Transfer of Shares. The instrument of transfer of a Reed International ordinary
share must be in writing and in the usual common form or in any other form which
the directors approve. An instrument of transfer must be executed by or on
behalf of the transferor and, unless the Reed International ordinary share is
fully paid, by or on behalf of the transferee. The directors may, in their
absolute discretion without giving any reason therefor, refuse to register the
transfer of a Reed International ordinary share which is not fully paid or on
which Reed International has a lien. The registration of transfers of Reed
International ordinary shares or of any class of shares may be suspended at such
times and for such periods as the directors may from time to time determine up
to a maximum of 30 days in any year.
Issue of Additional Shares. By virtue of Section 80 of the Companies Act, the
directors may not, subject to limited exceptions in respect of employee share
schemes, exercise any power to issue Reed International ordinary shares or grant
any rights to subscribe for or to convert other securities into Reed
international ordinary shares unless they have been authorised to do so by
shareholders in general meeting. Any such authority must state the maximum
amount of Reed International ordinary shares which may be issued under it and
the date on which it will expire, which must not be more than five years from
the date the resolution giving the authority is passed. Such authority is
usually renewed by Reed International yearly at the annual general meeting.
If Reed International ordinary shares are to be issued for cash, Section 89 of
the Companies Act requires, subject to limited exceptions in respect of employee
share schemes, that such Reed International ordinary shares first be offered to
existing shareholders in proportion to their respective shareholdings. However,
Section 95 of the Companies Act provides that in certain circumstances, the
directors of a company may, by special resolution of the company's shareholders
in general meeting, be given power to issue shares as if Section 89 of the
Companies Act did not apply.
Subject to applicable law, the directors of Reed International have the
discretion to:
* allot, grant options over or otherwise dispose of unissued ordinary shares
to such persons as they think fit; and
* issue with such rights and privileges and to such restrictions as they may
determine.
Purchase of own shares. Subject to the Companies Act, we may purchase any of
our own share of any class. Any contract that we enter for the purchase of our
own shares will be authorised by resolution, if required by the Companies Act,
and by an extraordinary resolution passed at a separate general meeting of each
class of holders (if any) entitled to convert their shares into equity share
capital.
Registrar and Transfer Agent. The registrar and transfer agent for the Reed
International ordinary shares is Computershare PLC, PO Box 82. The Pavilions,
Bridgwater Road, Bristol, BS99 7NH, England.
Preference Shares
Subject to the restrictions contained in Reed International's articles of
association, Reed International has the power to create and issue preference
shares. At the moment there are no such preference shares outstanding.
ELSEVIER
Set out below is certain information concerning Elsevier's exi sting equity
capital structure and related summary information concerning certain provisions
of Elsevier's articles of association and applicable Dutch law. Since it is a
summary, it does not contain all the information that may be important to you,
and the summary is qualified in its entirety by reference to Dutch law and the
articles of association of Elsevier. A copy of Elsevier's articles of
association has been filed as an exhibit to the annual report on Form 20-F --
see "Documents on Display".
Objects Clause
Elsevier is incorporated under the name "Elsevier NV". Elsevier's articles of
association provides that its objects are to participate in and to administer,
manage and finance companies, as well as to render services to enterprises, in
particular insofar as these enterprises are carried out by Reed Elsevier plc and
Elsevier Finance B.V. The memorandum of association grants to Elsevier a range
of corporate capabilities to effect these objects.
60
Directors
Appointment and Retirement of Directors. Directors are appointed by the
shareholder's body. A director is not required to retire upon attaining a
particular age. Directors retire periodically in accordance with a rotation plan
drawn up by the combined board. If any director has been in office for more than
three years since his last appointment, he shall retire at the next annual
general meeting. For more detailed information, see Item 6: Directors, Senior
Employees and Employees.
Share capital
Elsevier's authorised share capital is EUR 144,000,000. At 31 December 2000 it
is comprised of 2,100,000,000 Elsevier ordinary shares with a nominal value of
Euro 0.06 each, of which 735,717,794 were issued and outstanding, and 30,000,000
Elsevier R-Shares with a par value of Euro 0.60 each, of which 4,049,951 were
issued and outstanding. As at 20 February 2001, 736,048,806 Elsevier Ordinary
Shares and 4,049,951 Elsevier R-Shares had been issued, all of which are fully
paid.
The Elsevier R-Shares which are issued and outstanding were issued in
connection with the formation of Reed Elsevier on 1 January 1993 and are
indirectly held by Reed International. Each Elsevier R-Share is convertible at
the option of the holder into ten Elsevier ordinary shares. At each time one or
more of the Elsevier R-Shares are converted into Elsevier ordinary shares, the
number of Elsevier ordinary shares of the authorised capital shall be increased
by ten times the number of converted Elsevier R-Shares. At the same time, the
number of Elsevier R-Shares of the authorised capital will be decreased by the
number of shares converted.
Each holder of Ordinary Shares and each holder of R-Shares has pre-emptive
rights in proportion to the aggregate nominal value of the shares. Pre-emptive
rights may be restricted or excluded by a resolution of the shareholders' body.
Subject to renewal of the authority to allot shares at the forthcoming Annual
General Meeting, the boards of Elsevier intend to allot an additional 629,298
R-Shares to Reed Holding BV so as to maintain Reed International's 5.8% indirect
equity interest in Elsevier.
Description of Elsevier Ordinary Shares
Dividend Rights
Holders of Elsevier Ordinary and R-Shares are entitled to distribution of
profits only in so far as the equity of Elsevier exceeds the sum of the paid up
issued share capital and the statutory reserves.
Each year the combined board will determine the amount of Elsevier's profits to
be reserved. Elsevier will distribute the remaining profits to the holders of
the Elsevier ordinary shares and the Elsevier R-Shares in proportion to the
nominal amount of each share, except that the combined board may resolve to pay
a lower dividend on each Elsevier R-Share provided that the dividend out of
Elsevier's profits to be paid on each Elsevier R-Share shall be no less than 1%
of the nominal amount of each Elsevier R-Share. Elsevier may pay dividends after
approval of the annual accounts by the general meeting of shareholders from
which it appears that payment of the dividends is permitted.
At the proposal of the combined board, the general meeting of shareholders may
resolve to distribute dividends to holders of shares in the form of new shares.
The combined board may in the course of the financial year declare an interim
dividend provided that the equity of Elsevier exceeds the sum of the paid up
issued share capital and the statutory reserves. Also, the combined board may,
under certain conditions, resolve that payments to shareholders be made out of
one or more reserves provided that the amount to be paid on each Elsevier R-
Share shall in that case be no less than 1% of the nominal amount of each
Elsevier R-Share.
If a shareholder does not claim a dividend for five years, such shareholder
forfeits it and it reverts to Elsevier.
Liquidation Rights
Upon any liquidation or winding up of Elsevier, the surplus assets remaining
after payment of all creditors shall be divided among the holders of the
Elsevier ordinary shares and the Elsevier R-Shares in proportion to the nominal
amount of their shareholdings.
Notification of Interest in Elsevier Ordinary Shares
The Netherlands Control of Listed Companies Disclosure Act of 1996 (called the
"Wet melding zeggenschap in ter beurze genoteerde vennootschappen 1996"),
applies to any person who, as a result of an acquisition or disposal, holds 5%
or more of the percentage of voting rights or capital interest held in Elsevier.
Any such person must notify Elsevier as well as the Securities Board of The
Netherlands (called the "Stichting Toezicht Effectenverkeer") in writing
immediately after the acquisition or disposal of the triggering interest in the
shares.
After receipt of the notification, the information as notified, will be
published by the Securities Board within nine (9) days by means of an
advertisement in a newspaper or newspapers distributed in the member states of
the European Economic Area (including the EU) in which Elsevier is listed on a
stock exchange. If a person does not comply with these requirements, a civil
court can issued orders against that person.
61
Voting Rights and General Meetings
Before the end of June every year, Elsevier must hold an annual general meeting
at which matters such as the approval of the annual accounts and any proposed
appointment of supervisory board members are considered. The Elsevier executive
board or the supervisory board of Elsevier may convene shareholder meetings of
Elsevier in addition to the annual general meeting. Also, a meeting may be
convened if demanded by the shareholders of no less than 10% of the issued
capital by obtaining an order of the President of the competent District Court
in The Netherlands. General meetings of shareholders of Elsevier must be held in
Amsterdam or Rotterdam. Notice for general meetings must be given by the
supervisory board or the executive board of Elsevier not later than on the
fifteenth day prior to the day of the meeting.
The executive board or the supervisory board of Elsevier shall convene the
meetings of holders of Elsevier ordinary shares. Elsevier must give notice of
such meeting no later than on the fifteenth day before the day of the meeting.
Generally, the rights of holders of Elsevier ordinary shares may be modified by
amendment to the articles of association of Elsevier upon resolution of the
general meeting of shareholders, unless specifically provided otherwise under
Netherlands law or Elsevier's articles of association. Unless the combined board
proposes to amend Elsevier's articles of association, the resolution to amend
Elsevier's articles of association requires a majority of two-thirds of the
votes cast in a meeting in which at least half to the issued share capital is
represented.
Unless Netherlands law or the articles of association of Elsevier provide for a
greater majority, all resolutions will pass by an absolute majority of the votes
cast.
Each Elsevier ordinary share holder has the right to cast one vote per share at
a general meeting of shareholders. Each Elsevier R-Share holder has the right to
cast ten votes per share at a general meeting of shareholders. To be able to
exercise their rights at a general meeting, holders of registered shares must
give written notice of their intention to attend the meeting to the Elsevier
executive board. Such notice must be received no later than the seventh day
before the meeting. Holders of bearer shares must lodge their share certificates
at the place stated in the notice of the meeting, but no later than such date.
Each shareholder may appoint a proxy in writing.
Form and Transfer of Shares
Elsevier ordinary shares may be issued in registered or bearer form at the
election of the holder and Elsevier ordinary shares of one form may be exchanged
for Elsevier ordinary shares of the other form at the request of the holder.
Elsevier ordinary shares in bearer form will be available as CF- certificates
without separate dividend coupons, which will be held permanently in the custody
of a custodian appointed by the executive board of Elsevier. Share certificates
will not be made available for Elsevier's ordinary shares in registered form.
Bearer shares are transferred by surrendering the certificate unless the shares
have been deposited with the NECIGEF Central Clearing House Organisation in The
Netherlands (the "Necigef System"). In that case, Dutch rules governing the
transfer of shares by giro apply. Most of the Bearer Elsevier ordinary shares
are transferred through the Necigef System.
Any transfer of Elsevier ordinary shares in registered form requires a notarial
deed of transfer and, unless Elsevier itself is a party to the transfer, the
written acknowledgement by Elsevier of the transfer. The acknowledgement shall
be made in the instrument of transfer or by a dated statement on the instrument
of transfer or on a copy or extract thereof, mentioning the acknowledgement,
which must be signed as a true copy by a Dutch civil law notary or the
transferor.
Issue of Additional Shares
Additional shares may be issued by Elsevier upon resolution of a general
meeting of shareholders, or resolution of another designated body of Elsevier if
the general meeting has conferred this power on such other body. The appointment
of the combined board as the body to issue shares may be extended by the
articles of association of Elsevier or by a resolution of the general meeting of
shareholders each time for not more than five years.
A resolution of the general meeting of shareholders to issue shares or to
confer the power to issue shares on another designated body, can only be adopted
in relation to authorised but unissued shares, and can only be adopted at the
proposal of the combined board.
Elsevier is not entitled to subscribe for its own shares. Furthermore, shares
in the capital of Elsevier may not be subscribed for the account of a subsidiary
company.
Repurchase by Elsevier of Its Own Shares
Subject to certain restrictions under Netherlands law and Elsevier's articles
of association, Elsevier is entitled to repurchase up to a maximum of 10% of its
issued fully paid up shares outstanding. Such purchase may be made only upon
authorisation of the shareholders' meeting which authorisation is valid for a
maximum of eighteen months from the date of such authorisation and must include
the number of shares to be acquired, the way in which they may be acquired, and
the limits on the purchase price. Elsevier's right to repurchase the Elsevier
ordinary shares, and any restrictions on such right, are unaffected by whether
there is an arrearage in the payment of dividends.
62
MATERIAL CONTRACTS
This section provides a summary of all material contracts to which we are a
party and that have been entered into during the two immediately preceding
financial years. The full text of the agreements discussed below is available as
exhibits to our Registration Statement filed on Form F-3, Registration number
333-19226, filed with the SEC on 30 November 2000.
On 27 October 2000 Reed Elsevier Inc. and REH Mergersub Inc. entered into an
Agreement and Plan of Merger with Harcourt. Under the agreement, a cash tender
offer of $59 per share of common stock, or share equivalent, was made for the
entire issued share capital of Harcourt for a net cost of approximately $4.45
billion.
As a condition and inducement to entering into the Agreement and Plan of Merger
with Harcourt, Reed Elsevier Inc. and REH Mergersub Inc. and certain significant
stockholders of Harcourt, entered into a Stockholder Agreement, also dated 27
October 2000, in which stockholders agreed to tender their shares in the above
offer and to support the offer.
On 27 October 2000, Reed Elsevier Inc. entered into a Sale and Purchase
Agreement with The Thomson Corporation. The agreement was for the on-sale of
Harcourt's higher education business and its corporate and professional services
businesses other than its educational and clinical testing businesses. The
on-sale of these businesses was for pre-tax proceeds of approximately $2.06
billion. The on-sale to The Thomson Corporation is subject to regulatory
approvals, which may require some divestment of assets or other behavioural
undertakings.
EXCHANGE CONTROLS
There are currently no U.K. or Dutch decrees or regulations restricting the
import or export of capital or affecting the remittance of dividends or other
payments to holders of, respectively, Reed International ordinary shares who are
non-residents of the United Kingdom and Elsevier ordinary shares who are
non-residents of the Netherlands.
There are no limitations relating only to non-residents of the United Kingdom
under U.K. law or Reed International's Memorandum and Articles of Association or
on the right to be a holder of, and to vote, Reed International ordinary shares,
or to non-residents of the Netherlands under Dutch law or Elsevier's Articles of
Association on the right to be a holder of, and to vote, Elsevier ordinary
shares.
63
TAXATION
The following discussion is a summary under present law of the material U.K.
income, Dutch income and U.S. federal income tax considerations relevant to the
purchase, ownership and disposition of Reed International ordinary shares or
ADSs and Elsevier ordinary shares or ADSs. This discussion applies to you only
if you are a U.S. holder, you hold your ordinary shares or ADSs as capital
assets and you use the U.S. dollar as your functional currency. It does not
address the tax treatment of U.S. holders subject to special rules, such as
banks, dealers, insurance companies, tax-exempt entities, holders of 10% or more
of Reed International or Elsevier voting shares, persons holding ordinary shares
or ADSs as part of a hedging, straddle, conversion or constructive sale
transaction, persons that are resident or ordinarily resident in the United
Kingdom (or who have ceased to be resident since 17 March 1998) and persons that
are resident in The Netherlands. The summary also does not discuss the tax laws
of particular states or localities in the United States.
This summary does not consider your particular circumstances. It is not a
substitute for tax advice. We urge you to consult your own tax advisors about
the income tax consequences to you in light of your particular circumstances of
purchasing, holding and disposing of ordinary shares or ADSs.
As used in this discussion, "U.S. holder" means a beneficial owner of
ordinary shares or ADSs that is (i) a U.S. citizen or resident, (ii) a
corporation, partnership or other business entity created or organized under
the laws of the United States or any constituent jurisdiction, (iii) a trust
subject to the control of a U.S. person and the primary supervision of a U.S.
court or (iv) an estate the income of which is subject to U.S. federal income
taxation regardless of its source.
U.K. Taxation
Dividends
Under current U.K. taxation legislation, no tax is required to be withheld at
source from dividends paid on the Reed International ordinary shares or ADSs.
See "U.S. Federal Income Taxation---Dividends ".
Capital Gains
You will not be liable for U.K. taxation on capital gains realized on the
disposal of your Reed International ordinary shares or ADSs unless at the time
of the disposal you carry on a trade, profession or vocation in the United
Kingdom through a branch or agency and such ordinary shares or ADSs are or have
been used, held or acquired for the purposes of such trade, profession,
vocation, branch or agency.
U.K. Stamp Duty and Stamp Duty Reserve Tax
U.K. stamp duty reserve tax ("SDRT") or U.K. stamp duty is payable upon the
transfer or issue of Reed International ordinary shares to the Depositary in
exchange for Reed International ADSs evidenced by ADRs. For this purpose, the
current rate of stamp duty and SDRT is 1.5% applied, in each case, to the amount
or value of the consideration or, in some circumstances, to the value of the
ordinary shares.
Provided that the instrument of transfer is not executed in the United Kingdom
and remains outside the United Kingdom, no U.K. stamp duty will be payable on
the acquisition or subsequent transfer of Reed International ADRs. Agreement to
transfer Reed International ADRs will not give rise to a liability to SDRT.
A transfer of Reed International ordinary shares by the Depositary to an ADR
holder where there is no transfer of beneficial ownership will give rise to U.K.
stamp duty at the rate of 'L'5.00 per transfer.
Purchases of Reed International ordinary shares, as opposed to ADRs, will give
rise to U.K. stamp duty or SDRT at the time of transfer or agreement to
transfer, normally at the rate of 0.5% of the amount payable for the ordinary
shares. SDRT and U.K. stamp duty are usually paid by the purchaser. If the
ordinary shares are later transferred to the Depositary, additional U.K. stamp
duty or SDRT will normally be payable as described above.
Dutch Taxation
Withholding tax
Dividends distributed to you by Elsevier normally are subject to a withholding
tax imposed by The Netherlands at a rate of 25%. Under the U.S.-Netherlands
income tax treaty, the rate of Dutch withholding tax on dividends distributed to
you can be reduced from 25% to 15%. Dividends include, among other things, stock
dividends unless the dividend is distributed out of recognized paid-in share
premium for Dutch tax purposes.
You can claim the benefits of the reduced U.S.-Netherlands income tax treaty
withholding rate by submitting a Form IB 92 U.S.A. that includes an affidavit of
a financial institution (typically the entity that holds the Elsevier ordinary
shares or ADSs for you as custodian). If Elsevier receives the required
documentation before the relevant dividend payment date, it may apply the
reduced withholding rate at the source. If you fail to satisfy these
requirements, you can claim a refund of the excess amount withheld by filing
Form IB 92 U.S.A. with the Dutch tax authorities within 3 years after the
calendar year in which the withholding tax was levied and describing the
circumstances that prevented you from claiming withholding tax relief at the
source.
64
Taxation of dividends and capital gains
You will not be subject to any Dutch taxes on dividends distributed by Elsevier
(other than the withholding tax described above) or any capital gain realized on
the disposal of Elsevier ordinary shares or ADSs provided that (i) the Elsevier
ordinary shares or ADSs are not attributable to an enterprise or an interest in
an enterprise that you carry on, in whole or part through a permanent
establishment or a permanent representative in the Netherlands and (ii) you do
not have a substantial interest or a deemed substantial interest in Elsevier
(generally, 5% or more of either the total issued and outstanding capital or the
issued and outstanding capital of any class of shares) or, if you have such an
interest, it forms part of the assets of an enterprise.
U.S. Federal Income Taxation
Holders of the ADSs generally will be treated for U.S. federal income tax
purposes as owners of the ordinary shares represented by the ADSs.
Dividends
Dividends on Reed International ordinary shares or ADSs or Elsevier ordinary
shares or ADSs (including any Dutch tax withheld) will generally be included in
your gross income as ordinary income from foreign sources. The dollar amount
recognized on receiving a dividend in pounds sterling or euros will be based on
the exchange rate in effect on the date the depositary receives the dividend,
whether or not the payment is converted into U.S. dollars at that time. Any gain
or loss recognized on a subsequent conversion of pounds sterling or euros for a
different amount will be U.S. source ordinary income or loss. Dividends received
will not be eligible for the dividends-received deduction available to
corporations.
If you hold Reed International ordinary shares or ADSs and you are eligible
for benefits under the U.K.-U.S. income tax treaty, you may be entitled to a
foreign tax credit for U.K. withholding tax. The amount of the withholding tax
equals the tax credit payment that you are entitled to receive from the U.K.
Inland Revenue. At current rates, a dividend of 'L'90 entitles you to a payment
of 'L'10 offset by a U.K. withholding tax of 'L'10. Because the tax credit
payment and the withholding tax offset each other, the U.K. Inland Revenue
neither makes the payment nor collects the tax. The offsetting payments
nevertheless have U.S. tax significance. If you elect the benefits of the U.K.-
U.S. income tax treaty and you include the tax credit payment in your income,
you can claim a foreign tax credit for the U.K. withholding tax (subject to
otherwise applicable limitations on foreign tax credit claims). To make the
election, you must file a completed U.S. Internal Revenue Service ( "IRS ")
Form 8833 with your U.S. federal income tax return for the relevant year. A
U.S. partnership is entitled to benefits under the U.K.-U.S. income tax treaty
only with respect to income allocated to partners who are so entitled. The
U.K.-U.S. income tax treaty is being renegotiated, and a new or modified treaty
is likely to alter the treatment of dividends.
If you hold Elsevier ordinary shares or ADSs and are eligible to claim benefits
under the U.S.-Netherlands income tax treaty, you may claim a reduced rate of
Dutch dividend withholding tax equal to 15%. Subject to generally applicable
limitations, you can claim a deduction or a foreign tax credit only for Dutch
tax withheld at the rate provided under the U.S.-Netherlands income tax treaty.
Dispositions
You will recognize capital gain or loss on the sale or other disposition of
ordinary shares or ADSs in an amount equal to the difference between your basis
in the ordinary shares or ADSs and the amount realized. The gain or loss will be
capital gain or loss. It will be long-term capital gain or loss if you have held
the ordinary shares or ADSs for more than one year at the time of sale or other
disposition. Deductions for capital losses are subject to limitations.
If you receive pounds sterling or euros on the sale or other disposition of our
ordinary shares or ADSs, you will realize an amount equal to the U.S. dollar
value of the pounds sterling or euros on the date of sale or other disposition
(or in the case of cash basis and electing accrual basis taxpayers, the
settlement date). You will have a tax basis in the pounds sterling or the euros
you receive equal to the U.S. dollar amount received. Any gain or loss realized
by a U.S. holder on a subsequent conversion of pounds sterling or euros into
U.S. dollars will be U.S. source ordinary income or loss.
Information Reporting and Backup Withholding
Dividends from ordinary shares or ADSs and proceeds from the sale of the
ordinary shares or ADSs may be reported to the IRS, and a 31% backup withholding
tax may apply to such amounts unless the shareholder (i) is a corporation, (ii)
provides an accurate taxpayer identification number (in the case of a U.S.
holder) or a properly executed IRS Form W-8BEN (in the case of other
shareholders) or (iii) otherwise establishes a basis for exemption. The amount
of any backup withholding tax will be allowed as a credit against the holder's
U.S. federal income tax liability.
DOCUMENTS ON DISPLAY
It is possible to read and copy documents referred to in this annual report
that have been filed with the SEC at the SEC's public reference room located at
450 Fifth Street, NW, Washington, DC, 20549. Please call the SEC ast 1-800-SEC-
0330 for further information on the public reference rooms and their copy
charges.
65
ITEM 11: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Reed Elsevier's primary market risk exposures are to interest rate fluctuations
and to exchange rate movements. Net interest expense is exposed to interest rate
fluctuations on borrowings, cash and short term investments. Upward fluctuations
in interest rates increase the interest cost of floating rate borrowings whereas
downward fluctuations in interest rates decrease the interest return on floating
rate cash deposits and short term investments. Fixed rate borrowings are
protected against upward fluctuations in interest rates but do not benefit from
downward fluctuations. In addition, Reed Elsevier companies engage in foreign
currency denominated transactions and are subject to exchange rate risk on such
transactions.
Reed Elsevier seeks to limit these risks by means of financial instruments,
including interest rate swaps, interest rate options, forward rate agreements
and forward foreign exchange contracts. Reed Elsevier only enters into financial
instruments to hedge (or reduce) the underlying risks described above, and
therefore has no net market risk on financial instruments held at the end of the
year. Reed Elsevier does, however, have a credit risk from the potential
non-performance by the counterparties to these financial instruments, which are
unsecured. The amount of this credit risk is normally restricted to the amount
of the hedge gain and not the principal amount being hedged. This credit risk is
controlled by means of regular credit reviews of these counterparties and of the
amounts outstanding with each of them. Reed Elsevier does not expect
non-performance by the counterparties, which are principally licensed commercial
banks and investment banks with strong long term credit ratings.
Reed Elsevier enters into interest rate swaps and forward rate agreements to
hedge the effects of fluctuating interest rates on borrowings, cash and short
term investments. Interest rate swaps and forward rate agreements limit the
risks of fluctuating interest rates by allowing Reed Elsevier to fix the
interest rate on a notional principal amount equal to the principal amount of
the underlying floating rate cash, short term investments or borrowings being
hedged. Since Reed Elsevier has significant borrowings in U.S. dollars, the
substantial majority of the interest rate swaps on which fixed interest is paid
are denominated in U.S. dollars. Reed Elsevier's policy is to fix the interest
rates on its cash, short term investments and borrowings when the combination of
Reed Elsevier's funding profile and interest exposures make such transactions
appropriate.
Forward swaps and forward rate agreements are entered into to hedge interest
rate exposures known to arise at a future date. These exposures may include new
borrowings or cash deposits and short-term investments to be entered into at a
future date or future rollovers of existing borrowings or cash deposits and
short-term investments. Interest exposure arises on future new and rollover
borrowings, cash deposits and short-term investments because interest rates can
fluctuate between the time a decision is made to enter into such transactions
and the time those transactions are actually entered into. The business purpose
of forward swaps and forward rate agreements is to fix the interest cost on
future borrowings or interest return on cash investments at the time it is known
such a transaction will be entered into. The fixed interest rate, the floating
rate index (if applicable) and the time period covered by forward swaps and
forward rate agreements are known at the time the agreements are entered into.
The use of forward swaps and forward rate agreements is limited to hedging
activities; consequently no trading position results from their use. The impact
of forward swaps and forward rate agreements is the same as interest rate swaps.
Similarly, Reed Elsevier utilises forward foreign exchange contracts to hedge
the effects of exchange rate movements on its foreign currency turnover and
operating costs.
Interest rate options protect against fluctuating interest rates by enabling
Reed Elsevier to fix the interest rate on a notional principal amount of
borrowings or cash (in a similar manner to interest rate swaps and forward rate
agreements) whilst at the same time allowing Reed Elsevier to improve the fixed
rate if the market moves in a certain way. Reed Elsevier uses interest rate
options from time to time when it expects interest rates to move in its favour
but it is deemed imprudent to leave the interest rate risk completely unhedged.
In such cases, Reed Elsevier may use an option to lock in at certain rates
whilst at the same time maintaining some freedom to benefit if rates move as it
expects.
Financial instruments are utilised to hedge (or reduce) the risks of interest
rate or exchange rate movements and are not entered into unless such risks
exist. Financial instruments utilised, while appropriate for hedging a
particular kind of risk, are not considered specialised or high-risk and are
generally available from numerous sources.
The following analysis sets out the sensitivity of the fair value of Reed
Elsevier's financial instruments to selected changes in interest rates and
exchange rates. the range of changes represents Reed Elsevier's view of the
changes that are reasonably possible over a one year period. Fair values
represent the present value of forecast future cash flows at the assumed market
rates.
The market values for interest rate and foreign currency risks are calculated
by the use of an "off the shelf" software model which utilises standard pricing
models to determine the present value of the instruments based on the market
conditions being variously interest rates and spot and forward exchange rates,
as of the valuation date.
Reed Elsevier's use of financial instruments and its accounting policies for
financial instruments are described more fully in Note 2 and Note 24 to the
combined financial statements.
66
(a) Interest Rate Risk
The following sensitivity analysis assumes an immediate 100 basis point change
in interest rates for all currencies and maturities from their levels at 31
December 2000, with all other variables held constant.
Market Value Change
Favourable/(Unfavourable)
Fair Value
31 December +100 basis -100 basis
Financial Instrument 2000 points points
----------------------------------------- ---------- --------- ---------
(in 'L' millions)
Long term debt (including current portion) (623) 35 (40)
Short term debt. . . . . . . . . . . . . . (1,389) 1 (1)
Cash and short term investments. . . . . . 1,597 1 (1)
Interest rate swaps. . . . . . . . . . . . (49) 50 (54)
Interest rate options. . . . . . . . . . . (17) 22 (25)
Forward rate agreements. . . . . . . . . . (1) 2 (2)
<ATA100>basis point change in interest rates would not result in a material
change to the fair value of other financial instruments such as foreign exchange
options, cash, investments or other financial assets and liabilities.
The substantial majority of borrowings are either fixed rate or have been fixed
through the use of interest rate swaps. In addition, a significant proportion of
cash and short term investments is hedged throughout 2001. A 100 basis point
reduction in interest rates would result in a decrease in net interest expense
of 'L'5 million, based on the composition of financial instruments including
cash, short term investments, bank loans and commercial paper borrowings at 31
December 2000. A 100 basis points rise in interest rates would increase net
interest expense by 'L'5 million.
(b) Foreign Currency Exchange Rate Risks
The following sensitivity analysis assumes an immediate 10% change in all
foreign currency exchange rates against sterling from their levels at 31
December 2000, with all other variables held constant. A +10% change indicates a
strengthening of the currency against sterling and a --10% change indicates a
weakening of the currency against sterling.
Market Value Change
Favourable/(Unfavourable)
Fair Value
31 December
Financial Instrument 2000 +10% -10%
----------------------------------------- ----------- ---- ----
(in 'L' millions)
Long term debt (including current portion) (623) (72) 50
Short term debt. . . . . . . . . . . . . . (1,389) (141) 134
Cash and short term investments. . . . . . 1,597 115 (86)
Interest rate swaps. . . . . . . . . . . . (49) (2) 2
Interest rate options. . . . . . . . . . . (17) (6) 5
Forward foreign currency contracts . . . . (38) 1 (1)
Foreign exchange options . . . . . . . . . (1) --- 3
Other financial assets . . . . . . . . . . 100 8 (8)
Other financial liabilities. . . . . . . . (120) (11) 11
A 10% change in foreign currency exchange rates would not have a material
change to the fair value of other financial instruments such as forward rate
agreements.
67
PART III
ITEM 17: FINANCIAL STATEMENTS
The Registrants have responded to Item 18 in lieu of responding to this Item.
ITEM 18: FINANCIAL STATEMENTS
Reference is made to Item 19 for a list of all financial statements and
schedules filed as part of this annual report.
68
ITEM 19: FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements filed as part of this annual report
The following financial statements and related schedules, together with reports
of independent accountants thereon, are filed as part of this annual report:
Page
----
Index to Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1
Reed Elsevier Combined Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . . . F-2
Report of Independent Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-3
Combined Profit and Loss Account for the year ended 31 December 2000. . . . . . . . . . . . . . F-4
Combined Cash Flow Statement for the year ended 31 December 2000. . . . . . . . . . . . . . . . F-5
Combined Balance Sheet as at 31 December 2000 . . . . . . . . . . . . . . . . . . . . . . . . . F-6
Combined Statement of Total Recognised Gains and Losses for the year ended 31 December 2000 . . F-7
Combined Shareholders' Funds Reconciliation for the year ended 31 December 2000 . . . . . . . . F-7
Notes to the Combined Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . . . F-8
Schedule II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .F-39
Reed International P.L.C. Consolidated Financial Statements. . . . . . . . . . . . . . . . . . .F-40
Report of Independent Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .F-41
Consolidated Profit and Loss Account for the year ended 31 December 2000. . . . . . . . . . . .F-42
Consolidated Cash Flow Statement for the year ended 31 December 2000. . . . . . . . . . . . . .F-43
Consolidated Statement of Total Recognised Gains and Losses for the year ended 31 December 2000F-44
Reconciliation of Shareholders' Funds for the year ended 31 December 2000 . . . . . . . . . . .F-44
Consolidated Balance Sheet as at 31 December 2000 . . . . . . . . . . . . . . . . . . . . . . .F-45
Notes to the Consolidated Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . .F-46
Elsevier NV Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .F-57
Report of Independent Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .F-58
Profit and Loss Account for the year ended 31 December 2000 . . . . . . . . . . . . . . . . . .F-59
Cash Flow Statement for the year ended 31 December 2000 . . . . . . . . . . . . . . . . . . . .F-60
Balance Sheet as at 31 December 2000. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .F-61
Notes to the Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .F-62
Glossary of Terms. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .F-69
(b) Exhibits filed as part of this annual report
3.1 Memorandum and Articles of Association of Reed International P.L.C.
3.2 Memorandum and Articles of Association of Elsevier NV
3.3 Governing Agreement (as amended) between Reed International P.L.C. and
Elsevier NV
10.1
Agreement and Plan of Merger, date d 27 October 2000 among Reed Elsevier
Inc., REH Mergersub Inc. and Harcourt General, Inc. (incorporated by
reference in the Registration Statement on Form F-3 filed with the
Securities and Exchange Commission on 29 September 2000)
10.2
Stockholder Agreement, dated 27 October 2000 among REH Mergersub Inc.,
Reed Elsevier Inc. and Stockholder (incorporated by reference in the
Registration Statement on Form F-3 filed with the Securities and Exchange
Commission on 29 September 2000)
10Sale
and Purchase Agreement, dated 27 October 2000, between Reed Elsevier Inc. and
The Thomson Corporation (incorporated by reference in the Registration
Statement on Form F-3 filed with the Securities and Exchange Commission on 29
September 2000)
23.1
Independent Auditors' Consent -- Reed Elsevier Combined Financial
Statements
23.2
Independent Auditors' Consent -- Reed International P.L.C. Consolidated
Financial Statements
23.3
Independent Auditors' Consent -- Elsevier NV Financial Statements
The total amount of long term debt securities of Reed Elsevier authorised under
any single instrument does not exceed 10% of the combined total assets of Reed
Elsevier. The Registrants hereby agree to furnish to the Commission, upon its
request, a copy of any instrument defining the rights of holders of long term
debt of Reed Elsevier or any of the combined businesses for which consolidated
or unconsolidated financial statements are required to be filed.
69
REED ELSEVIER
COMBINED FINANCIAL STATEMENTS
70
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Reed International P.L.C. and to
the members of the Supervisory and Executive Boards and the Shareholders of
Elsevier NV.
We have audited the accompanying combined balance sheets of Reed International
P.L.C., Elsevier NV, Reed Elsevier plc and Elsevier Reed Finance BV and their
respective subsidiaries (together "the combined businesses") as of 31 December
2000 and 1999, and the related combined profit and loss accounts and statements
of total recognised gains and losses, changes in combined shareholders' funds
and cash flows for the three years ended 31 December 2000. Our audits also
included the financial statement schedule of 31 December 2000, 1999 and 1998
listed in the Index at Item 19. These combined financial statements and the
related financial statement schedule are the responsibility of the management of
Reed International P.L.C. and Elsevier NV. Our responsibility is to express an
opinion on these combined financial statements and the related financial
statement schedules based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United Kingdom, the Netherlands and the United States of
America. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such combined financial statements present fairly, in all
material respects, the financial position of the combined businesses at 31
December 2000 and 1999 and the results of their operations and their cash flows
for the three years ended 31 December 2000 in conformity with accounting
principles generally accepted in the United Kingdom and the Netherlands (which
differ in certain material respects from generally accepted accounting
principles in the United States of America --- see note 30). Also, in our
opinion, such financial statement schedule, when considered in relation to the
related combined financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
DELOITTE & TOUCHE DELOITTE & TOUCHE
Chartered Accountants & Registered Auditors Accountants
London, England Amsterdam, The Netherlands
21 February 2001 21 February 2001
71
REED ELSEVIER
COMBINED PROFIT AND LOSS ACCOUNT
FOR THE YEAR ENDED 31 DECEMBER 2000
2000 1999 1998
Note 'L'm 'L'm 'L'm
------ ------ ------
Turnover
Including share of turnover of joint ventures. . . . . . . . . . . . . . . 3,836 3,464 3,271
Less: share of turnover of joint ventures. . . . . . . . . . . . . . . . . (68) (74) (80)
------ ------ -3,191
3 3,768 3,390
Continuing operations before acquisitions . . . . . . . . . . . . . . . . 3,589 3,390 3,163
Acquisitions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 179 --- ---
---------------------
Continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . 3,768 3,390 3,163
Discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . --- --- 28
------ ------ ------
Cost of sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 (1,332) (1,185) (1,092)
------ ------ ------
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,436 2,205 (1,706)
Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 (2,239) (2,028)
Before amortisation and exceptional items . . . . . . . . . . . . . . . . (1,659) (1,420) (1,304)
Amortisation of goodwill and intangible assets. . . . . . . . . . . . . . (465) (369) (323)
Exceptional items . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 (115) (239) (79)
------ ------ ------
Operating profit (before joint ventures) . . . . . . . . . . . . . . . . . 197 177 393
Continuing operations before acquisitions . . . . . . . . . . . . . . . . 282 177 394
Acquisitions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (85) --- ---
---------------------
Continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . 197 177 394
Discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . --- --- (1)
Share of operating profit of joint ventures. . . . . . . . . . . . . . . . 13 3 9
------ ------ ------
Operating profit including joint ventures. . . . . . . . . . . . . . . . . 3, 7 210 180 402
Non operating exceptional items. . . . . . . . . . . . . . . . . . . . . . 8
Continuing --net profit on sale of fixed asset investments and businesses 85 7 ---
--merger expenses . . . . . . . . . . . . . . . . . . . . . . . . . --- --- (10)
Discontinued-- net profit on sale of businesses. . . . . . . . . . . . . . --- --- 692
------ ------ ------
Profit on ordinary activities before interest. . . . . . . . . . . . . . . 295 187 1,084
Net interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 (103) (82) (40)
------ ------ ------
Profit on ordinary activities before taxation. . . . . . . . . . . . . . . 192 105 1,044
Tax on profit on ordinary activities . . . . . . . . . . . . . . . . . . . 10 (159) (167) (271)
------ ------ ------
Profit/(loss) on ordinary activities after taxation. . . . . . . . . . . . 33 (62) 773
Minority interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . --- (1) (1)
------ ------ ------
Profit/(loss) attributable to parent companies' shareholders . . . . . . . 28 33 (63) 772
Ordinary dividends paid and proposed . . . . . . . . . . . . . . . . . . . 11 (245) (234) (349)
------ ------ ------
Retained (loss)/profit taken to combined reserves. . . . . . . . . . . . . (212) (297) 423
====== ====== ======
2000 1999 1998
Note 'L'm 'L'm 'L'm
------ ------ ------
Adjusted Figures
Adjusted operating profit . . . . . . . . . . . . . . . . . . . . . . . . 3, 12 793 792 813
Adjusted profit before tax. . . . . . . . . . . . . . . . . . . . . . . . 12 690 710 773
Adjusted profit attributable to parent companies' shareholders. . . . . . 12 511 527 571
====== ====== ======
Adjusted figures, which exclude the amortisation of goodwill and intangible
assets, exceptional items and related tax effects, are presented as additional
performance measures; see note 1.
The accompanying notes on pages F-8 to F-38 are an
integral part of these combined financial statements
72
REED ELSEVIER
COMBINED CASH FLOW STATEMENT
FOR THE YEAR ENDED 31 DECEMBER 2000
2000 1999 1998
Note 'L'm 'L'm 'L'm
------ ---- ------
Net cash inflow from operating activities before exceptional items. . . . 13 907 898 937
Payments relating to exceptional items charged to operating profit. . . . 8 (94)(138) (258)
------ ---- ------
Net cash inflow from operating activities . . . . . . . . . . . . . . . . 813 760 679
------ ---- ------
Dividends received from joint ventures. . . . . . . . . . . . . . . . . . 17 6 4 11
------ ---- ------
Interest received . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 33 61
Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (124)(114) (106)
------ ---- ------
Returns on investments and servicing of finance . . . . . . . . . . . . . (104) (81) (45)
------ ---- ------
Taxation (including 'L'31m (1999 'L'74m; 1998 'L'nil) exceptional inflow) (110) (99) (144)
------ ---- ------
Purchase of tangible fixed assets . . . . . . . . . . . . . . . . . . . (141)(137) (151)
Proceeds from sale of tangible fixed assets . . . . . . . . . . . . . . 3 15 11
------ ---- ------
Capital expenditure . . . . . . . . . . . . . . . . . . . . . . . . . . . (138)(122) (140)
------ ---- ------
Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 (914)(167) (1,243)
Exceptional net proceeds from sale of fixed asset investments and
businesses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8, 13 153 3 913
Merger expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 --- --- (8)
------ ---- ------
Acquisitions and disposals. . . . . . . . . . . . . . . . . . . . . . . . (761)(164) (338)
------ ---- ------
Ordinary dividends paid to the shareholders of the parent companies . . . (196)(339) (362)
------ ---- ------
Cash outflow before changes in short term investments and financing . . . (490) (41) (339)
(Increase)/decrease in short term investments . . . . . . . . . . . . . . 13 (1,137) 297 63
Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 1,634 (197) 192
------ ---- ------
Increase/(decrease) in cash . . . . . . . . . . . . . . . . . . . . . . . 13 7 59 (84)
====== ==== ======
Short term investments include deposits of under one year if the maturity or
notice period exceeds 24 hours, commercial paper investments and interest
bearing securities that can be realised without significant loss at short
notice.
2000 1999 1998
Note 'L'm 'L'm 'L'm
---- ---- ----
Adjusted figures
Adjusted operating cash flow. . . . . . 12 775 780 808
Adjusted operating cash flow conversion 98% 98% 99%
==== ==== ====
Reed Elsevier businesses focus on adjusted operating cash flow as the key cash
flow measure. Adjusted operating cash flow is measured after dividends from
joint ventures, tangible fixed asset spend and proceeds from the sale of fixed
assets but before exceptional payments and proceeds. Adjusted operating cash
flow conversion expresses adjusted operating cash flow as a percentage of
adjusted operating profit; see note 1.
The accompanying notes on pages F-8 to F-38 are an
integral part of these combined financial statements
73
REED ELSEVIER
COMBINED BALANCE SHEET
AS AT 31 DECEMBER 2000
2000 1999
Note 'L'm 'L'm
------ ------
Fixed assets
Goodwill and intangible assets . . . . . . . . . . . . . 15 4,127 3,400
Tangible fixed assets. . . . . . . . . . . . . . . . . . 16 416 386
Investments. . . . . . . . . . . . . . . . . . . . . . . 17 153 119
Investments in joint ventures:
Share of gross assets . . . . . . . . . . . . . . . . 137 136
Share of gross liabilities. . . . . . . . . . . . . . (65) (47)
------ ------
Share of net assets . . . . . . . . . . . . . . . . . 72 89
Other investments . . . . . . . . . . . . . . . . . . . 81 30
------ ------
4,696 3,905
------ ------
Current assets
Stocks. . . . . . . . . . . . . . . . . . . . . . . . . 18 114 113
Debtors -- amounts falling due within one year. . . . . 19 860 666
Debtors -- amounts falling due after more than one year 20 164 148
Cash and short term investments . . . . . . . . . . . . 21 1,594 440
------ ------
2,732 1,367
Creditors: amounts falling due within one year . . . . . 22 (3,379) (2,676)
------ ------
Net current liabilities. . . . . . . . . . . . . . . . . (647) (1,309)
------ ------
Total assets less current liabilities. . . . . . . . . . 4,049 2,596
Creditors: amounts falling due after more than one year 23 (873) (620)
Provisions for liabilities and charges . . . . . . . . . 26 (128) (113)
Minority interests . . . . . . . . . . . . . . . . . . . (7) (8)
------ ------
Net assets . . . . . . . . . . . . . . . . . . . . . . . 3,041 1,855
====== ======
Capital and reserves
Combined share capitals. . . . . . . . . . . . . . . . . 185 168
Combined share premium accounts. . . . . . . . . . . . . 1,621 341
Combined reserves. . . . . . . . . . . . . . . . . . . . 1,235 1,346
------ ------
Combined shareholders' funds . . . . . . . . . . . . . . 28 3,041 1,855
====== ======
The accompanying notes on pages F-8 to F-38 are an
integral part of these combined financial statements
74
REED ELSEVIER
COMBINED STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES
FOR THE YEAR ENDED 31 DECEMBER 2000
2000 1999 1998
'L'm 'L'm 'L'm
---- ---- ----
Profit/(loss) attributable to parent companies' shareholders 33 (63) 772
Exchange translation differences . . . . . . . . . . . . . . 113 17 (3)
---- ---- ----
Total recognised gains and losses for the year . . . . . . . 146 (46) 769
==== ==== ====
COMBINED SHAREHOLDERS' FUNDS RECONCILIATION
FOR THE YEAR ENDED 31 DECEMBER 2000
2000 1999 1998
'L'm 'L'm 'L'm
----- ----- -----
Profit/(loss) attributable to parent companies' shareholders . . . . . 33 (63) 772
Ordinary dividends paid and proposed . . . . . . . . . . . . . . . . . (245) (234) (349)
Issue of ordinary shares, net of expenses and less capital redemptions 1,285 5 18
Exchange translation differences . . . . . . . . . . . . . . . . . . . 113 17 (3)
----- ----- -----
Net increase/(decrease) in combined shareholders' funds. . . . . . . . 1,186 (275) 438
Combined shareholders' funds at 1 January. . . . . . . . . . . . . . . 1,855 2,130 1,692
----- ----- -----
Combined shareholders' funds at 31 December. . . . . . . . . . . . . . 3,041 1,855 2,130
===== ===== =====
The accompanying notes on pages F-8 to F-38 are an
integral part of these combined financial statements
75
REED ELSEVIER
NOTES TO THE COMBINED FINANCIAL STATEMENTS
1. Basis of preparation
The equalisation agreement between Reed International and Elsevier has the
effect that their shareholders can be regarded as having the interests of a
single economic group. The Reed Elsevier combined financial statements ("the
combined financial statements") represent the combined interests of both sets of
shareholders and encompass the businesses of Reed Elsevier plc and Elsevier Reed
Finance BV and their respective subsidiaries, associates and joint ventures,
together with the parent companies, Reed International and Elsevier ("the
combined businesses").
These financial statements are presented under the historical cost convention
and in accordance with applicable UK and Dutch Generally Accepted Accounting
Principles ("GAAP"). These principles differ in certain significant respects
from accounting principles generally accepted in the United States of America
("US GAAP"); see note 30.
In addition to the figures required to be reported by accounting standards,
adjusted profit and operating cash flow figures have been presented as
additional performance measures. Adjusted profit is shown before the
amortisation of goodwill and intangible assets and exceptional items. Adjusted
operating cash flow is measured after dividends from joint ventures, tangible
fixed asset spend and proceeds from the sale of fixed assets, but before
exceptional payments and proceeds.
2. Accounting policies
The significant accounting policies adopted are as follows:
Investments
Fixed asset investments in joint ventures and associates are accounted for
under the gross equity and equity methods respectively. Other fixed asset
investments are stated at cost, less provision, if appropriate, for any
impairment in value. Short term investments are stated at the lower of cost and
net realisable value.
Foreign exchange translation
The combined financial statements are presented in pounds sterling.
Balance sheet items are translated at year end exchange rates and profit and
loss account items are translated at average exchange rates. Exchange
translation differences on foreign equity investments and the related foreign
currency net borrowings and differences between balance sheet and profit and
loss account rates are taken to reserves.
Transactions entered into in foreign currencies are recorded at the exchange
rates applicable at the time of the transaction. The results of hedging
transactions for profit and loss amounts in foreign currency are accounted for
in the profit and loss account to match the underlying transaction.
Goodwill and intangible assets
On the acquisition of a subsidiary, associate, joint venture or business, the
purchase consideration is allocated between the underlying net tangible and
intangible assets on a fair value basis, with any excess purchase consideration
representing goodwill.
In accordance with FRS10: Goodwill and Intangible Assets, acquired goodwill and
intangible assets are capitalised and amortised systematically over their
estimated useful lives up to a maximum period of 20 years, subject to impairment
review.
Intangible assets comprise publishing rights and titles, databases, exhibition
rights and other intangible assets, which are stated at fair value on
acquisition and are not subsequently revalued.
Tangible fixed assets
Tangible fixed assets are stated in the balance sheet at cost less accumulated
depreciation. No depreciation is provided on freehold land.
Freehold buildings and long leases are depreciated over their estimated useful
lives. Plant and equipment is depreciated on a straight line basis at rates from
5%--33%. Short leases are written off over the duration of the lease.
Finance leases
Assets held under leases which confer rights and obligations similar to those
attaching to owned assets are capitalised as tangible fixed assets and the
corresponding liability to pay rentals is shown net of interest in the accounts
as obligations under finance leases. The capitalised values of the assets are
written off on a straight line basis over the shorter of the periods of the
leases or the useful lives of the assets concerned. The interest element of the
lease payments is allocated so as to produce a constant periodic rate of charge.
Operating leases
Operating lease rentals are charged to the profit and loss account on a
straight line basis over the period of the leases.
76
2. Accounting policies -- (continued)
Stocks
Stocks and work in progress are stated at the lower of cost, including
appropriate attributable overheads, and estimated net realisable value.
Financial instruments
Payments and receipts on interest rate hedges are accounted for on an accruals
basis over the lives of the hedges and included respectively within interest
payable and interest receivable in the profit and loss account. Gains and losses
on foreign exchange hedges, other than in relation to net currency borrowings
hedging equity investments, are recognised in the profit and loss account on
maturity of the underlying transaction. Gains and losses on net currency
borrowings hedging equity investments are taken to reserves. Gains and losses
arising on hedging instruments that are closed out due to the cessation of the
underlying exposure are taken directly to the profit and loss account.
Currency swap agreements are valued at exchange rates ruling at the balance
sheet date with net gains and losses being included within short term
investments or borrowings. Interest payable and receivable arising from the swap
is accounted for on an accruals basis over the life of the swap.
Finance costs associated with debt issuances are charged to the profit and loss
account over the life of the related borrowings.
Turnover
Turnover represents the invoiced value of sales on transactions completed by
delivery, excluding customer sales taxes and sales between the combined
businesses.
Development spend
Development spend incurred on the launch of new products or services is
expensed to the profit and loss account as incurred. The cost of developing
software for use internally may be capitalised as a fixed asset and written off
over its estimated useful life.
Taxation
Deferred taxation is provided in full for timing differences using the
liability method. No provision is made for tax which would become payable on the
distribution of retained profits by foreign subsidiaries, associates or joint
ventures, unless there is an intention to distribute such retained earnings
giving rise to a charge. Deferred tax assets are only recognised to the extent
that they are considered recoverable in the short term. Deferred taxation
balances are not discounted.
Pensions
The expected costs of pensions in respect of defined benefit pension schemes
are charged to the profit and loss account so as to spread the cost over the
service lives of employees in the schemes. Actuarial surpluses and deficits are
allocated over the average expected remaining service lives of employees.
Pension costs are assessed in accordance with the advice of qualified actuaries.
For defined contribution schemes, the profit and loss account charge represents
contributions made.
Use of estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, the disclosure of
contingent liabilities and assets at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
77
3. Segment analysis
The Education business, previously reported within the Legal segment, has been
presented separately for the first time in 2000 in anticipation of the
acquisition of Harcourt. Comparatives have been restated accordingly. The
Scientific segment has been renamed Science & Medical to reflect business
strategy.
Adjusted operating profit is presented as an additional performance measure and
is shown after share of operating profit of joint ventures and before
amortisation of goodwill and intangible assets and exceptional items; see notes
1 and 12.
Turnover is analysed before the 'L'68m (1999 'L'74m; 1998 'L'80m) share of
joint ventures' turnover, of which 'L'21m (1999 'L'19m; 1998 'L'26m) relates to
the Legal segment, principally to Giuffree and, in 1998, Shephard's prior to the
acquisition of the remaining 50% interest on 1 August 1998. 'L'47m (1999 'L'55m;
1998 'L'54m) relates to the Business segment, principally to exhibition joint
ventures (1999 and 1998 principally to REZsolutions, Inc.).
Share of operating profit in joint ventures of 'L'13m (1999 'L'3m; 1998 'L'9m)
comprises 'L'4m (1999 'L'3m; 1998 'L'6m) relating to the Legal segment and 'L'9m
(1999 'L'nil; 1998 'L'3m) relating to the Business segment.
Analysis by business segment
2000 1999 1998
'L'm 'L'm 'L'm
--------- ----- -----
Turnover
Science & Medical . . . 693 652 622
Legal . . . . . . . . . 1,201 1,087 948
Education . . . . . . . 202 181 159
Business . . . . . . . . 1,672 1,470 1,434
--------- ----- -----
Continuing operations . 3,768 3,390 3,163
Discontinued operations --- --- 28
--------- ----- -----
Total . . . . . . . . . 3,768 3,390 3,191
========= ===== =====
Operating profit
Science & Medical . . . 140 111 126
Legal . . . . . . . . . (8) 57 155
Education . . . . . . . 19 20 14
Business . . . . . . . . 59 (8) 108
--------- ----- -----
Continuing operations . 210 180 403
Discontinued operations --- --- (1)
--------- ----- -----
Total . . . . . . . . . 210 180 402
========= ===== =====
Adjusted operating profit
Science & Medical . . . 252 231 223
Legal . . . . . . . . . 237 282 291
Education . . . . . . . 40 34 31
Business . . . . . . . . 264 245 268
--------- ----- -----
Total . . . . . . . . . 793 792 813
========= ===== =====
Depreciation
Science & Medical . . . 17 16 18
Legal . . . . . . . . . 60 63 47
Education . . . . . . . 3 3 2
Business . . . . . . . . 38 35 30
--------- ----- -----
Total . . . . . . . . . 118 117 97
========= ===== =====
78
3. Segment information -- (continued)
2000 1999 1998
'L'm 'L'm 'L'm
----- ----- -----
Amortisation of goodwill and intangible assets
Science & Medical . . . . . . . . . . . . . . 98 91 89
Legal . . . . . . . . . . . . . . . . . . . . 168 136 103
Education . . . . . . . . . . . . . . . . . . 14 15 16
Business . . . . . . . . . . . . . . . . . . 188 131 123
----- ----- -----
Continuing operations . . . . . . . . . . . . 468 373 331
Discontinued operations . . . . . . . . . . . --- --- 1
----- ----- -----
Total (including share of joint ventures) . . 468 373 332
===== ===== =====
2000 1999 1998
'L'm 'L'm 'L'm
----- ----- -----
Total assets
Science & Medical . . . . . . . . . . . . . . 769 776 803
Legal . . . . . . . . . . . . . . . . . . . . 2,888 2,637 2,699
Education . . . . . . . . . . . . . . . . . . 197 184 190
Business . . . . . . . . . . . . . . . . . . 1,980 1,235 1,287
----- ----- -----
Continuing operations . . . . . . . . . . . . 5,834 4,832 4,979
Discontinued operations . . . . . . . . . . . --- --- 4
----- ----- -----
Total . . . . . . . . . . . . . . . . . . . . 5,834 4,832 4,983
===== ===== =====
The analysis of total assets excludes corporate assets of 'L'1,594m (1999
'L'440m; 1998 'L'777m). Corporate assets are principally cash balances and short
term investments of which the principal amounts are 'L'64m in North America,
'L'641m in the United Kingdom, and 'L'748m in the Netherlands.
2000 1999 1998
'L'm 'L'm 'L'm
----- ------ -----
Capital expenditure
Science & Medical . . . . . . . . . . . . . . . . . . . . . . . . 26 20 24
Legal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72 75 72
Education . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 5 3
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 48 62
----- ------ -----
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 144 148 161
===== ====== =====
Capital employed
Science & Medical . . . . . . . . . . . . . . . . . . . . . . . . 286 315 338
Legal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,443 2,295 2,395
Education . . . . . . . . . . . . . . . . . . . . . . . . . . . . 144 137 149
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,205 668 768
----- ------ -----
Continuing operations . . . . . . . . . . . . . . . . . . . . . . 4,078 3,415 3,650
Discontinued operations . . . . . . . . . . . . . . . . . . . . . --- --- (16)
----- ------ -----
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,078 3,415 3,634
===== ====== =====
Reconciliation of capital employed to combined shareholders' funds
Capital employed . . . . . . . . . . . . . . . . . . . . . . . . 4,078 3,415 3,634
Taxation . . . . . . . . . . . . . . . . . . . . . . . . . . . . (427) (364) (297)
Dividends and net interest . . . . . . . . . . . . . . . . . . . (170) (122) (239)
Net borrowings . . . . . . . . . . . . . . . . . . . . . . . . . (433) (1,066) (962)
Minority interests . . . . . . . . . . . . . . . . . . . . . . . (7) (8) (6)
----- ------ -----
Combined shareholders' funds . . . . . . . . . . . . . . . . . . 3,041 1,855 2,130
===== ====== =====
79
3. Segment information -- (continued)
Analysis by geographical origin
2000 1999 1998
'L'm 'L'm 'L'm
----- ----- -----
Turnover
North America . . . . . 2,098 1,836 1,663
United Kingdom . . . . . 734 698 692
The Netherlands . . . . 399 391 383
Rest of Europe . . . . . 356 307 293
Rest of World . . . . . 181 158 132
----- ----- -----
Continuing operations . 3,768 3,390 3,163
Discontinued operations --- --- 28
----- ----- -----
Total . . . . . . . . . 3,768 3,390 3,191
===== ===== =====
Operating profit
North America . . . . . (89) (52) 98
United Kingdom . . . . . 109 86 139
The Netherlands . . . . 127 91 114
Rest of Europe . . . . . 57 51 47
Rest of World . . . . . 6 4 5
----- ----- -----
Continuing operations . 210 180 403
Discontinued operations --- --- (1)
----- ----- -----
Total . . . . . . . . . 210 180 402
===== ===== =====
Adjusted operating profit
North America . . . . . 335 359 390
United Kingdom . . . . . 191 191 204
The Netherlands . . . . 136 135 128
Rest of Europe . . . . . 102 87 76
Rest of World . . . . . 29 20 15
----- ----- -----
Total . . . . . . . . . 793 792 813
===== ===== =====
2000 1999 1998
'L'm 'L'm 'L'm
----- ----- -----
Total assets
North America . . . . . 4,040 3,501 3,581
United Kingdom . . . . . 1,510 1,020 1,406
The Netherlands . . . . 927 319 314
Rest of Europe . . . . . 820 324 362
Rest of World . . . . . 131 108 93
----- ----- -----
Continuing operations . 7,428 5,272 5,756
Discontinued operations --- --- 4
----- ----- -----
Total . . . . . . . . . 7,428 5,272 5,760
===== ===== =====
Capital employed
North America . . . . . 3,128 2,792 2,906
United Kingdom . . . . . 476 518 579
The Netherlands . . . . (62) (75) (46)
Rest of Europe . . . . . 506 147 173
Rest of World . . . . . 30 33 38
----- ----- -----
Continuing operations . 4,078 3.415 3,650
Discontinued operations --- --- (16)
----- ----- -----
Total . . . . . . . . . 4,078 3,415 3,634
===== ===== =====
80
3. Segment information -- (continued)
Analysis by geographical market
2000 1999 1998
'L'm 'L'm 'L'm
----- ----- -----
Turnover
North America . . . . . 2,152 1,906 1,726
United Kingdom. . . . . 521 484 483
The Netherlands . . . . 234 237 222
Rest of Europe. . . . . 478 418 407
Rest of World . . . . . 383 345 325
----- ----- -----
Continuing operations . 3,768 3,390 3,163
Discontinued operations --- --- 28
----- ----- -----
Total . . . . . . . . . 3,768 3,390 3,191
===== ===== =====
4.TABLCost of sales and operating expenses
2000
--------------------------------------------------
Before Amortisation
amortisation of goodwill
and exceptional and intangible Exceptional
items assets items Total
'L'm 'L'm 'L'm 'L'm
-------------- ------------- ----------- -----
Cost of sales
Continuing operations. . . . . 1,268 --- --- 1,268
Acquisitions . . . . . . . . . 64 --- --- 64
-------------- ------------- ----------- -----
Total. . . . . . . . . . . . . 1,332 --- --- 1,332
============== ============= =========== =====
Distribution and selling costs
Continuing operations. . . . . 844 --- --- 844
Acquisitions . . . . . . . . . 40 --- --- 40
-------------- ------------- ----------- -----
884 --- --- 884
-------------- ------------- ----------- -----
Administrative expenses
Continuing operations. . . . . 712 378 105 1,195
Acquisitions . . . . . . . . . 63 87 10 160
-------------- ------------- ----------- -----
775 465 115 1,355
-------------- ------------- ----------- -----
Operating expenses
Continuing operations. . . . . 1,556 378 105 2,039
Acquisitions . . . . . . . . . 103 87 10 200
-------------- ------------- ----------- -----
Total. . . . . . . . . . . . . 1,659 465 115 2,239
============== ============= =========== =====
81
4. Cost of sales and operating expenses -- (continued)
1999
--------------------------------------------------
Before Amortisation
amortisation of goodwill
and exceptional and intangible Exceptional
items assets items Total
'L'm 'L'm 'L'm 'L'm
-------------- ------------- ----------- -----
Cost of sales
Continuing operations. . . . . 1,185 --- --- 1,185
Acquisitions . . . . . . . . . --- --- --- ---
-------------- ------------- ----------- -----
Total. . . . . . . . . . . . . 1,185 --- --- 1,185
============== ============= =========== =====
Distribution and selling costs
Continuing operations. . . . . 759 --- --- 759
Acquisitions . . . . . . . . . --- --- --- ---
-------------- ------------- ----------- -----
759 --- --- 759
-------------- ------------- ----------- -----
Administrative expenses
Continuing operations. . . . . 661 369 239 1,269
Acquisitions . . . . . . . . . --- --- --- ---
-------------- ------------- ----------- -----
661 369 239 1,269
-------------- ------------- ----------- -----
Operating expenses
Continuing operations. . . . . 1,420 369 239 2,028
Acquisitions . . . . . . . . . --- --- --- ---
-------------- ------------- ----------- -----
Total. . . . . . . . . . . . . 1,420 369 239 2,028
============== ============= =========== =====
1998
--------------------------------------------------
Before Amortisation
amortisation of goodwill
and exceptional and intangible Exceptional
items assets items Total
'L'm 'L'm 'L'm 'L'm
-------------- ------------- ----------- -----
Cost of sales
Continuing operations. . . . . 1,071 --- --- 1,071
Acquisitions . . . . . . . . . --- --- --- ---
Discontinued operations. . . . 21 --- --- 21
-------------- ------------- ----------- -----
Total. . . . . . . . . . . . . 1,092 --- --- 1,092
============== ============= =========== =====
Distribution and selling costs
Continuing operations. . . . . 709 --- --- 709
Acquisitions . . . . . . . . . --- --- --- ---
Discontinued operations. . . . 5 --- --- 5
-------------- ------------- ----------- -----
714 --- --- 714
-------------- ------------- ----------- -----
Administrative expenses
Continuing operations. . . . . 588 322 79 989
Acquisitions . . . . . . . . . --- --- --- ---
Discontinued operations. . . . 2 1 --- 3
-------------- ------------- ----------- -----
590 323 79 992
-------------- ------------- ----------- -----
Operating expenses
Continuing operations. . . . . 1,297 322 79 1,698
Acquisitions . . . . . . . . . --- --- --- ---
Discontinued operations. . . . 7 1 --- 8
-------------- ------------- ----------- -----
Total. . . . . . . . . . . . . 1,304 323 79 1,706
============== ============= =========== =====
82
5. Personnel
Average number of people employed during the year:
2000 1999 1998
------ ------ ------
Business segment
Science & Medical . . . 3,700 3,600 3,500
Legal . . . . . . . . . 11,200 10,800 9,300
Education . . . . . . . 1,500 1,400 1,300
Business. . . . . . . . 12,500 11,900 11,800
------ ------ ------
Continuing operations . 28,900 27,700 25,900
Discontinued operations --- --- 200
------ ------ ------
Total . . . . . . . . . 28,900 27,700 26,100
====== ====== ======
Geographical location
North America . . . . . 14,800 14,800 13,600
United Kingdom. . . . . 5,700 5,500 5,400
The Netherlands . . . . 3,000 3,000 2,800
Rest of Europe. . . . . 3,000 2,300 2,200
Rest of World . . . . . 2,400 2,100 1,900
------ ------ ------
Continuing operations . 28,900 27,700 25,900
Discontinued operations --- --- 200
------ ------ ------
Total . . . . . . . . . 28,900 27,700 26,100
====== ====== ======
6. Pension schemes
A number of pension schemes are operated around the world. The major schemes
are of the defined benefit type with assets held in separate trustee
administered funds. The two largest schemes, which cover the majority of
employees, are in the UK and US. The main UK scheme was subject to a valuation
by Watson Wyatt Partners as at 5 April 2000. The main US scheme was subject to a
valuation by Towers Perrin as at 1 January 2000.
The principal valuation assumptions for the main UK scheme were:
Actuarial method. . . . . . . . . . . . . . . . . . . . .Projected unit method
Annual rate of return on investments. . . . . . . . . . . 6.60%
Annual increase in total pensionable remuneration . . . . 5.00%
Annual increase in present and future pensions in payment 3.00%
The principal valuation assumptions used for the US scheme were a rate of
return on investments of 8%, increase in pensionable remuneration of 4.5%, and
increase in present and future pensions in payment of 2%.
The actuarial values placed on scheme assets were sufficient to cover 121% and
117% of the benefits that had accrued to members of the main UK and US schemes,
respectively. Actuarial surpluses are spread as a level amount over the average
remaining service lives of current employees. The market values of the schemes'
assets at the valuation dates, excluding assets held in respect of members'
additional voluntary contributions, were 'L'1,723m and 'L'158m in respect of the
UK and US schemes, respectively.
Assessments for accounting purposes in respect of other schemes, including the
Netherlands scheme, have been carried out by external qualified actuaries using
prospective benefit methods with the objective that current and future charges
remain a stable percentage of pensionable payroll. The principal actuarial
assumptions adopted in the assessments of the major schemes are that, over the
long term, investment returns will marginally exceed the annual increase in
pensionable remuneration and in present and future pensions. The actuarial value
of assets of the schemes approximated to the aggregate benefits that had accrued
to members, after allowing for expected future increases in pensionable
remuneration and pensions in course of payment.
The net pension charge was 'L'35m (1999 'L'28m; 1998 'L'22m), including a net
'L'1m (1999 'L'3m; 1998 'L'4m) SSAP24 credit related to the main UK scheme. The
net SSAP24 credit on the main UK scheme comprises a regular cost of 'L'23m (1999
'L'16m; 1998 'L'15m), offset by amortisation of the net actuarial surplus of
'L'24m (1999 'L'19m; 1998 'L'19m). Pension contributions made in the year
amounted to 'L'36m (1999 'L'31m; 1998 'L'26m). A prepayment of 'L'128m (1999
'L'127m; 1998 'L'124m) is included in debtors falling due after more than one
year, representing the excess of the pension credit to the profit and loss
account since 1988 over the amounts funded to the main UK scheme.
83
7. Operating profit
Operating profit is stated after the following:
2000 1999 1998
'L'm 'L'm 'L'm
----- ---- ----
Hire of plant and machinery. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 12 10
Other operating lease rentals. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71 60 50
Depreciation (including 'L'4m (1999 'L'5m; 1998 'L'4m) in respect of assets held under finance leases) 118 117 97
Amortisation of goodwill and intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . 465 369 323
Amortisation of goodwill and intangible assets in joint ventures . . . . . . . . . . . . . . . . . . . 3 4 9
----- ---- ----
Total amortisation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . 468 373 332
===== ==== ====
Staff costs
Wages and salaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 979 859 748
Social security costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100 86 80
Pensions (see note 6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 28 22
----- ---- ----
Total staff costs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,114 973 850
===== ==== ====
Auditors' remuneration
For audit services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.9 1.6 1.5
For non audit services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.6 1.1 1.5
----- ---- ----
Included in auditors' remuneration for non audit services is 'L'1.5m (1999
'L'0.2m) paid to Deloitte & Touche and its associates in the UK.
Information on the remuneration and interest of directors is given in Item 6:
Directors, Senior Management and Employees.
8. Exceptional items
2000 1999 1998
'L'm 'L'm 'L'm
---- ---- ----
Reorganisation costs (i) (77) (161) ---
Acquisition related costs (ii) . . . . . . . . . . . . . . . . . (38) (28) (26)
Year 2000 compliance costs (iii) . . . . . . . . . . . . . . . . --- (50) (53)
---- ---- ----
Charged to operating profit. . . . . . . . . . . . . . . . . . . (115) (239) (79)
---- ---- ----
Merger expenses (iv) . . . . . . . . . . . . . . . . . . . . . . --- --- (10)
Net profit on sale of fixed asset investments and businesses (v) 85 7 692
---- ---- ----
Total exceptional items (charge)/credit. . . . . . . . . . . . . (30) (232) 603
==== ==== ====
Net tax credit/(charge) (vi) . . . . . . . . . . . . . . . . . . 20 15 (70)
==== ==== ====
(i) Reorganisation costs related to a major programme of reorganisation across
the Reed Elsevier businesses, commenced in 1999. Costs include employee
severance, surplus leasehold property obligations and fixed asset write
offs.
(ii) Acquisition related costs include 'L'27m in respect of the integration of
acquisitions, principally Miller Freeman Europe, CMD Group and Riskwise
International, together with 'L'11m of exceptional costs incurred in
respect of the tender offer for Harcourt (see note 29). In previous years,
costs related to the integration of acquisitions, principally Matthew
Bender (acquired 1998) and the Chilton Business Group (acquired 1997).
(iii) Expenditure in connection with the combined businesses' Year 2000
compliance programme.
(iv) Professional fees and other costs incurred in 1998 in respect of the
abandoned merger of Reed Elsevier and Wolters Kluwer.
(v) The net profit on sale of fixed asset investments and businesses related
primarily to Springhouse, KG Saur and REZsolutions, Inc. and in 1998
related to the divestment of IPC Magazines and the remaining consumer book
publishing operations.
(vi) The net tax credit in 1999 is stated after taxes arising on business
consolidation in the programme of reorganisation. Also in 1999, potential
deferred tax assets of 'L'32m in respect of the programme of
reorganisation were not recognised.
84
8. Exceptional items -- (continued)
Cash flows in respect of exceptional items were as follows:
2000 1999 1998
'L'm 'L'm 'L'm
---- ---- ----
Reorganisation costs . . . . . . . . . . . . . . . . . . . . . . (76) (39) ---
Acquisition related costs. . . . . . . . . . . . . . . . . . . . (9) (32) (22)
Year 2000 compliance costs . . . . . . . . . . . . . . . . . . . (2) (47) (53)
Reed Travel Group customer recompense (provided in 1997) . . . . (7) (20)(183)
---- ---- ----
Exceptional operating cash outflow . . . . . . . . . . . . . . . (94) (138)(258)
Net proceeds from sale of fixed asset investments and businesses 153 3 913
Merger expenses. . . . . . . . . . . . . . . . . . . . . . . . . --- --- (8)
---- ---- ----
Total exceptional cash inflow/(outflow). . . . . . . . . . . . . 59 (135) 647
==== ==== ====
Exceptional tax cash inflow. . . . . . . . . . . . . . . . . . . 31 74 ---
==== ==== ====
<CashLEflows in respect of acquisition related costs in 2000 are stated net of
proceeds of 'L'26m from a property disposal.
The exceptional tax cash inflow in 1999 includes 'L'58m of tax repayments.
9. Net interest expense
2000 1999 1998
'L'm 'L'm 'L'm
---- ---- ----
Interest receivable. . . . . . . 26 32 64
Interest payable
Other loans . . . . . . . . . . (45) (46) (51)
Promissory notes and bank loans (83) (67) (52)
Finance leases. . . . . . . . . (1) (1) (1)
---- ---- ----
Total. . . . . . . . . . . . . . (103) (82) (40)
==== ==== ====
Interest cover (times) . . . . . 8 10 20
==== ==== ====
Interest cover is calculated as the number of times adjusted operating profit
is greater than the net interest expense.
10. Tax on profit on ordinary activities
2000 1999 1998
'L'm 'L'm 'L'm
---- ---- ----
United Kingdom
Current . . . . . . . . . . . . . . . . . . . . . 62 65 68
Deferred . . . . . . . . . . . . . . . . . . . . . 4 (3) 1
The Netherlands
Current . . . . . . . . . . . . . . . . . . . . . 53 50 45
Deferred . . . . . . . . . . . . . . . . . . . . . --- --- 4
Rest of World
Current . . . . . . . . . . . . . . . . . . . . . 57 48 5
Deferred . . . . . . . . . . . . . . . . . . . . . (1) 19 72
---- ---- ----
Sub-total . . . . . . . . . . . . . . . . . . . . . 175 179 195
Share of tax attributable to joint ventures . . . . 4 3 6
---- ---- ----
Tax on ordinary activities before exceptional items 179 182 201
Net tax (credit)/charge on exceptional items
Current . . . . . . . . . . . . . . . . . . . . . (12) (9) 70
Deferred . . . . . . . . . . . . . . . . . . . . . (8) (6) ---
---- ---- ----
Total . . . . . . . . . . . . . . . . . . . . . . . 159 167 271
==== ==== ====
The total tax charge for 2000 and 1999 is high as a proportion of profit before
tax principally due to non-tax deductible amortisation and the non- recognition
of potential deferred tax assets.
The tax charge in 1998 was reduced by 'L'51m in respect of allowances on
publishing intangibles.
85
10. Tax on profit on ordinary activities -- (continued)
The table below reconciles the tax charged at local statutory rates to the
actual tax charge on profit on ordinary activities before taxation:
2000 1999 1998
'L'm 'L'm 'L'm
---- ---- -----
Profit before taxation
United Kingdom . . . . . . . . . . . . . . . . 207 212 219
The Netherlands. . . . . . . . . . . . . . . . 149 147 149
Rest of World. . . . . . . . . . . . . . . . . 334 351 405
Amortisation of goodwill and intangible assets (468) (373) (332)
Exceptional items. . . . . . . . . . . . . . . (30) (232) 603
---- ---- -----
Total . . . . . . . . . . . . . . . . . . . . . 192 105 1,044
==== ==== =====
>
2000 1999 1998
'L'm 'L'm 'L'm
---- ---- ----
Tax charged at local statutory rates . . . . . . . . . . . . 17 (6) 299
Net impact of amortisation of goodwill and intangible assets 100 72 64
Permanent differences and other items. . . . . . . . . . . . 55 38 18
Exceptional items not taxed. . . . . . . . . . . . . . . . . (13) 63 (110)
---- ---- ----
Actual tax charge. . . . . . . . . . . . . . . . . . . . . . 159 167 271
==== ==== ====
Tax charged at local statutory rates is calculated by reference to the
appropriate statutory tax rate of each jurisdiction in which Reed Elsevier
operates.
11. Ordinary dividends paid and proposed
2000 1999 1998
'L'm 'L'm 'L'm
---- ---- ----
Reed International 123 116 172
Elsevier . . . . . 122 118 177
---- ---- ----
Total. . . . . . . 245 234 349
==== ==== ====
Dividends comprise the total dividend for Reed International of 10.0p per
ordinary share (1999 10.0p; 1998 15.0p) and the total dividend for Elsevier of
'E'0.28 per ordinary share (1999 'E'0.27; 1998 'E'0.39).
Dividends paid to Reed International and Elsevier shareholders are equalised at
the gross level inclusive of the UK tax credit of 10% received by certain Reed
International shareholders. The cost of funding the Reed International dividend
is, therefore, similar to or lower than that of Elsevier.
86
12. Adjusted figures
Adjusted profit and cash flow figures are used by the Reed Elsevier businesses
as additional performance measures.
The adjusted figures are derived as follows:
2000 1999 1998
'L'm 'L'm 'L'm
---- ---- -----
Operating profit including joint ventures . . . . . . . . . . . . . . 210 180 402
Adjustments:
Amortisation of goodwill and intangible assets . . . . . . . . . . . 468 373 332
Reorganisation costs . . . . . . . . . . . . . . . . . . . . . . . . 77 161 ---
Acquisition related costs . . . . . . . . . . . . . . . . . . . . . 38 28 26
Year 2000 compliance costs . . . . . . . . . . . . . . . . . . . . . --- 50 53
---- ---- -----
Adjusted operating profit . . . . . . . . . . . . . . . . . . . . . . 793 792 813
==== ==== =====
Profit before tax . . . . . . . . . . . . . . . . . . . . . . . . . . 192 105 1,044
Adjustments:
Amortisation of goodwill and intangible assets . . . . . . . . . . . 468 373 332
Reorganisation costs . . . . . . . . . . . . . . . . . . . . . . . . 77 161 ---
Acquisition related costs . . . . . . . . . . . . . . . . . . . . . 38 28 26
Year 2000 compliance costs . . . . . . . . . . . . . . . . . . . . . --- 50 53
Merger expenses . . . . . . . . . . . . . . . . . . . . . . . . . . --- --- 10
Net profit on sale of fixed asset investments and businesses . . . . (85) (7) (692)
---- ---- -----
Adjusted profit before tax. . . . . . . . . . . . . . . . . . . . . . 690 710 773
==== ==== =====
Profit/(loss) attributable to parent companies' shareholders. . . . . 33 (63) 772
Adjustments:
Amortisation of goodwill and intangible assets . . . . . . . . . . . 468 373 332
Reorganisation costs . . . . . . . . . . . . . . . . . . . . . . . . 53 161 ---
Acquisition related costs . . . . . . . . . . . . . . . . . . . . . 33 22 16
Year 2000 compliance costs . . . . . . . . . . . . . . . . . . . . . --- 41 33
Merger expenses . . . . . . . . . . . . . . . . . . . . . . . . . . --- --- 10
Net profit on sale of fixed asset investments and businesses . . . . (76) (7) (592)
---- ---- -----
Adjusted profit attributable to parent companies' shareholders. . . . 511 527 571
==== ==== =====
Net cash inflow from operating activities . . . . . . . . . . . . . . 813 760 679
Dividends received from joint ventures. . . . . . . . . . . . . . . . 6 4 11
Purchase of tangible fixed assets . . . . . . . . . . . . . . . . . . (141) (137) (151)
Proceeds from sale of fixed assets. . . . . . . . . . . . . . . . . . 3 15 11
Payments in relation to exceptional items charged to operating profit 94 138 258
---- ---- -----
Adjusted operating cash flow. . . . . . . . . . . . . . . . . . . . . 775 780 808
==== ==== =====
87
13. Cash flow statement
2000 1999 1998
'L'm 'L'm 'L'm
---- ---- ----
Reconciliation of operating profit to net cash inflow from operating activities
Operating profit (before joint ventures). . . . . . . . . . . . . . . . . . . . 197 177 393
Exceptional charges to operating profit (see note 8). . . . . . . . . . . . . . 115 239 79
---- ---- ----
Operating profit before exceptional items . . . . . . . . . . . . . . . . . . . 312 416 472
---- ---- ----
Amortisation of goodwill and intangible assets. . . . . . . . . . . . . . . . . 465 369 323
Depreciation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 118 117 97
Net SSAP24 pension credit (see note 6). . . . . . . . . . . . . . . . . . . . . (1) (3) (4)
---- ---- ----
Total non cash items. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 582 483 416
---- ---- ----
Increase in stocks. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3) (9) o
(Increase)/decrease in debtors. . . . . . . . . . . . . . . . . . . . . . . . . (110) (8) 17
Increase in creditors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126 16 32
---- ---- ----
Movement in working capital . . . . . . . . . . . . . . . . . . . . . . . . . . 13 (1) 49
---- ---- ----
Net cash inflow from operating activities before exceptional items. . . . . . . 907 898 937
Payments relating to exceptional items charged to operating profit (see note 8) (94) (138)(258)
---- ---- ----
Net cash inflow from operating activities . . . . . . . . . . . . . . . . . . . 813 760 679
==== ==== ====
2000 1999 1998
'L'm 'L'm 'L'm
---- ---- ------
Acquisitions
Purchase of businesses and subsidiary undertakings (see note 14) (848) (120)(1,231)
Net payment of deferred consideration of prior year acquisitions (13) (5) ---
Payments against prior year acquisition provisions . . . . . . . --- (1) ---
Investment in joint ventures . . . . . . . . . . . . . . . . . . --- (19) ---
Purchase of fixed asset investments. . . . . . . . . . . . . . . (53) (22) (1)
---- ---- ------
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (914) (167)(1,232)
==== ==== ======
2000 1999 1998
'L'm 'L'm 'L'm
------- ------- -------
Exceptional sale of fixed asset investments and businesses
Goodwill and intangible assets. . . . . . . . . . . . . . . . . . . . . . . . . 35 6 132
Net tangible assets (excluding cash of 'L'nil (1999 'L'nil; 1998 'L'42m). . . . 44 --- 72
------- ------- -------
79 6 204
Net profit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85 7 692
------- ------- -------
Consideration in respect of sale of fixed asset investments and businesses, net
of expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 164 13 896
(Amounts paid)/deferred consideration received in respect of prior year disposals --- (8) 9
------- ------- -------
164 5 905
Amounts (receivable)/payable. . . . . . . . . . . . . . . . . . . . . . . . . . (11) (2) 8
------- ------- -------
Net cash inflow . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 153 3 913
======= ======= =======
2000 1999 1998
'L'm 'L'm 'L'm
------- ------- -------
Financing
Net movement in promissory notes and bank loans . . . . . . . . . . . . . . . . 304 (20) 181
Repayment of other loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . (155) (176) (3)
Issuance of other loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . 202 --- 2
Repayment of finance leases . . . . . . . . . . . . . . . . . . . . . . . . . . (4) (6) (6)
------- ------- -------
347 (202) 174
Issue of ordinary shares. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,287 9 18
Redemption of preference shares . . . . . . . . . . . . . . . . . . . . . . . . --- (4) ---
------- ------- -------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,634 (197) 192
======= ======= =======
The repayment of other loans relates primarily to US$100m of Private Placements
and US$150m of Medium Term Notes which matured in the year. The repayment of
other loans in 1999 related primarily to a US$200m Eurobond, Dfl125m Private
Placements and US$20m of Medium Term Notes which matured in the year. In 1998,
'L'3m of Dutch guilder convertible loan stock was repaid on maturity.
The issuance of other loans relates to a US$300m Swiss Domestic Bond.
88
13. Statements of cash flows -- (continued)
Short term
Cash investments Borrowings Total
'L'm 'L'm 'L'm 'L'm
---- ----------- ---------- ------
Reconciliation of net borrowings
Net borrowing at 31 December 1998. . . . . . . . . 26 682 (1,670) (962)
---- ----------- ---------- ------
Increase in cash . . . . . . . . . . . . . . . . . 59 --- --- 59
Decrease in short term investments . . . . . . . . --- (297) --- (297)
Decrease in borrowings . . . . . . . . . . . . . . --- --- 202 202
---- ----------- ---------- ------
Change in net borrowings resulting from cash flows 59 (297) 202 (36)
Inception of finance leases. . . . . . . . . . . . --- --- (11) (11)
Exchange translation differences . . . . . . . . . (6) (24) (27) (57)
---- ----------- ---------- ------
Net borrowings at 31 December 1999 . . . . . . . . 79 361 (1,506) (1,066)
---- ----------- ---------- ------
Increase in cash . . . . . . . . . . . . . . . . . 7 --- --- 7
Increase in short term investments . . . . . . . . --- 1,137 --- 1,137
Increase in borrowings . . . . . . . . . . . . . . --- --- (347) (347)
---- ----------- ---------- ------
Change in net borrowings resulting from cash flows 7 1,137 (347) 797
Loans in acquired businesses . . . . . . . . . . . --- --- (48) (48)
Inception of finance leases. . . . . . . . . . . . --- --- (3) (3)
Exchange translation differences . . . . . . . . . (1) 11 (123) (113)
---- ----------- ---------- ------
Net borrowings at 31 December 2000 . . . . . . . . 85 1,509 (2,027) (433)
==== =========== ========== ======
Net borrowings comprise cash and short term investments, loan capital, finance
leases, promissory notes and bank loans and are analysed further in notes 21 to
24 and 30.
14. Acquisitions
During the year a number of acquisitions were made for a total consideration
amounting to 'L'952m, after taking account of loans of 'L'48m and of net cash
acquired of 'L'6m. The most significant were Miller Freeman Europe, in July
2000, for a total consideration of 'L'360m and the CMD Group, in May 2000, for a
total consideration of 'L'199m, subject to additional deferred consideration in
2004 if performance targets are met.
The net assets of the businesses acquired are incorporated at their fair value
at the date of acquisition. Fair value adjustments include the valuation of
intangible assets and the restatement of tangible fixed assets and current
assets and liabilities in accordance with Reed Elsevier accounting policies.
Summaries of these adjustments, which are provisional pending the completion of
fair value assessments in 2001, and the consideration given are set out in the
table below:
Book value Fair value
on acquisition adjustments Fair value
'L'm 'L'm 'L'm
------------- ----------- ---------
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 152 528 680
Intangible fixed assets. . . . . . . . . . . . . . . . . . . . . . 9 309 318
Tangible fixed assets. . . . . . . . . . . . . . . . . . . . . . . 17 (3) 14
Investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 --- 13
Current assets . . . . . . . . . . . . . . . . . . . . . . . . . . 68 (5) 63
Current liabilities. . . . . . . . . . . . . . . . . . . . . . . . (125) (3) (128)
Loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (48) --- (48)
Current and deferred tax . . . . . . . . . . . . . . . . . . . . . (8) --- (8)
------------- ----------- ---------
Net assets acquired. . . . . . . . . . . . . . . . . . . . . . . . 78 826 904
============= =========== =========
Consideration (after taking account of 'L'6m of net cash acquired) 904
Less: deferred to future years . . . . . . . . . . . . . . . . . . (56)
---------
Net cash flow. . . . . . . . . . . . . . . . . . . . . . . . . . . 848
=========
Before the amortisation of goodwill an d intangible assets and exceptional
acquisition related costs, the businesses acquired in 2000 contributed 'L'179m
to turnover, 'L'12m to operating profit and 'L'33m to net cash inflow from
operating activities for the part year under Reed Elsevier ownership.
In the year ended 31 December 1999, acquisitions were made for a total of
'L'132m after taking account of 'L'4m of net cash acquired. 'L'12m of the
consideration was deferred to future years.
89
15. Goodwill and intangible assets
Intangible
Goodwill assets Total
'L'm 'L'm 'L'm
-------- ---------- -----
Cost
At 1 January 2000. . . . . . . . 2,899 3,081 5,980
Acquisitions . . . . . . . . . . 680 318 998
Sale of businesses . . . . . . . (42) (74) (116)
Exchange translation differences 193 183 376
-------- ---------- -----
At 31 December 2000. . . . . . . 3,730 3,508 7,238
======== ========== =====
Accumulated amortisation
At 1 January 2000. . . . . . . . 1,197 1,383 2,580
Sale of businesses . . . . . . . (39) (42) (81)
Charge for the year. . . . . . . 255 210 465
Exchange translation differences 65 82 147
-------- ---------- -----
At 31 December 2000. . . . . . . 1,478 1,633 3,111
======== ========== =====
Net book amount
At 1 January 2000. . . . . . . . 1,702 1,698 3,400
At 31 December 2000. . . . . . . 2,252 1,875 4,127
======== ========== =====
16. Tangible fixed assets
Plant,
equipment and
Land and computer
buildings systems Total
'L'm 'L'm 'L'm
--------- ------------ -----
Cost
At 1 January 2000. . . . . . . . 170 743 913
Acquisitions . . . . . . . . . . 4 20 24
Capital expenditure. . . . . . . 5 139 144
Disposals. . . . . . . . . . . . (21) (116) (137)
Exchange translation differences 10 40 50
--------- ------------ -----
At 31 December 2000. . . . . . . 168 826 994
========= ============ =====
Accumulated depreciation
At 1 January 2000. . . . . . . . 45 482 527
Acquisitions . . . . . . . . . . --- 10 10
Disposals. . . . . . . . . . . . --- (104) (104)
Charge for the year. . . . . . . 7 111 118
Exchange translation differences 4 23 27
--------- ------------ -----
At 31 December 2000. . . . . . . 56 522 578
========= ============ =====
Net book amount
At 1 January 2000. . . . . . . . 125 261 386
At 31 December 2000. . . . . . . 112 304 416
========= ============ =====
At 31 December 2000 and 1999, all assets were included at cost. No depreciation
was provided on freehold land. The net book amount of tangible fixed assets
includes 'L'17m (1999 'L'18m) in respect of assets held under finance leases.
90
17. Fixed asset investments
Investments
in joint Other
ventures investments Total
'L'm 'L'm 'L'm
----------- ----------- -----
At 1 January 2000. . . . . . . . . . . . . . . 89 30 119
Share of attributable profit . . . . . . . . . 12 --- 12
Amortisation of goodwill and intangible assets (3) --- (3)
Dividends received from joint ventures . . . . (6) --- (6)
Acquisitions . . . . . . . . . . . . . . . . . 12 1 13
Additions. . . . . . . . . . . . . . . . . . . --- 53 53
Disposals. . . . . . . . . . . . . . . . . . . (37) (5) (42)
Exchange translation differences . . . . . . . 5 2 7
----------- ----------- -----
At 31 December 2000. . . . . . . . . . . . . . 72 81 153
=========== =========== =====
The principal joint venture at 31 December 2000 is Giuffree (an Italian legal
publisher in which Reed Elsevier has a 40% shareholding).
The cost and net book amount of goodwill and intangible assets in joint
ventures were 'L'37m and 'L'27m respectively (1999 'L'74m and 'L'49m).
At 31 December 2000, the Reed Elsevier plc Employee Benefit Trust (EBT) held
590,257 (1999 618,790) Reed International ordinary shares and 320,000 (1999
320,000) Elsevier ordinary shares with an aggregate market value at that date of
'L'7.2m (1999 'L'5.1m). The EBT purchases Reed International and Elsevier shares
which, at the Trustee's discretion, can be used in respect of the exercise of
executive share options. Further details of these share option schemes is set
out in Item 12: Description of securities other than equity securities.
18. Stocks
2000 1999
'L'm 'L'm
---- ----
Raw materials. . 17 20
Work in progress 26 29
Finished goods . 71 64
---- ----
Total. . . . . . 114 113
==== ====
19. Debtors --- amounts falling due within one year
2000 1999
'L'm 'L'm
---- ----
Trade debtors. . . . . . . . . 652 530
Amounts owed by joint ventures 3 1
Other debtors. . . . . . . . . 89 42
Prepayments and accrued income 116 93
---- ----
Total. . . . . . . . . . . . . 860 666
==== ====
20. Debtors --- amounts falling due after more than one year
2000 1999
'L'm 'L'm
---- ----
Trade debtors . . . . . . . . . . . . . . . . 1 9
Pension prepayment (see note 6) . . . . . . . 128 127
Prepayments, accrued income and other debtors 35 12
---- ----
Total . . . . . . . . . . . . . . . . . . . . 164 148
==== ====
91
21. Cash and short term investments
2000 1999
'L'm 'L'm
----- ----
Cash at bank and in hand 85 79
Short term investments 1,509 361
----- ----
Total. . . . . . . . . . 1,594 440
===== ====
Short term investments include deposits of under one year if the maturity or
notice period exceeds 24 hours, commercial paper investments and interest
bearing securities that can be realised without significant loss at short
notice.
22. Creditors: amounts falling due within one year
2000 1999
'L'm 'L'm
----- -----
Borrowings
Other loans. . . . . . . . . . . . . . . . . . 4 158
Promissory notes and bank loans. . . . . . . . 1,395 967
Obligations under finance leases (see note 25) 5 4
----- -----
1,404 1,129
Trade creditors . . . . . . . . . . . . . . . . 245 178
Other creditors . . . . . . . . . . . . . . . . 213 145
Taxation. . . . . . . . . . . . . . . . . . . . 193 120
Proposed dividends. . . . . . . . . . . . . . . 177 127
Accruals and deferred income. . . . . . . . . . 1,147 977
----- -----
Total . . . . . . . . . . . . . . . . . . . . . 3,379 2,676
===== =====
23. Creditors: amounts falling due after more than one year
2000 1999
'L'm 'L'm
---- ----
Borrowings Other loans repayable:
Within one to two years. . . . . . . . . . . . 4 3
Within two to five years . . . . . . . . . . . 205 81
After five years . . . . . . . . . . . . . . . 402 279
Obligations under finance leases (see note 25) 12 14
---- ----
623 377
Other creditors . . . . . . . . . . . . . . . . . 27 14
Taxation . . . . . . . . . . . . . . . . . . . . 197 208
Accruals and deferred income . . . . . . . . . . 26 21
---- ----
Total . . . . . . . . . . . . . . . . . . . . . . 873 620
==== ====
92
24. Financial instruments
Details of the objectives, policies and strategies pursued by Reed Elsevier in
relation to financial instruments are set out in Item 11: Quantitative and
Qualitative Disclosures about Market Risk.
For the purpose of the disclosures which follow in this note, short term
debtors and creditors have been excluded, as permitted under FRS13.
Currency and interest rate profile of financial liabilities
The currency and interest rate profile of the aggregate financial liabilities
of 'L'2,147m (1999 'L'1,595m), after taking account of interest rate and cross
currency interest rate swaps, is set out below:
Fixed rate financial liabilities
-------------------------------
Floating rate Fixed rate Weighted
financial financial Weighted average
liabilities liabilities average duration
'L'm 'L'm interest rate (years)
------------ ----------- ----------------- ------------
2000
US dollar. . . . 890 779 6.8% 8.0
Sterling . . . . 43 --- --- ---
Euro . . . . . . 223 141 5.6% 6.0
Other currencies 65 6 5.9% 0.7
------------ ----------- ----------------- ------------
Total. . . . . . 1,221 926 6.6% 7.7
============ =========== ================= ============
Fixed rate financial liabilities
-------------------------------
Floating rate Fixed rate Weighted
financial financial Weighted average
liabilities liabilities average duration
'L'm 'L'm interest rate (years)
------------ ----------- ----------------- ------------
1999
US dollar. . . . 500 888 6.9% 7.4
Sterling . . . . 1 --- --- ---
Euro . . . . . . 58 97 4.7% 1.7
Other currencies 31 20 6.7% 0.7
------------ ----------- ----------------- ------------
Total. . . . . . 590 1,005 6.7% 6.7
============ =========== ================= ============
Included within fixed rate financial liabilities as at 31 December 2000 are
'L'nil (1999 'L'154m) of US dollar term debt that matures within five months of
the year end and 'L'73m of interest rate swaps denominated principally in US
dollars that mature within twelve months of the year end (1999 'L'106m
denominated principally in euros and maturing within nine months).
93
24. Financial instruments -- (continued)
Currency and interest rate profile of financial assets
The currency and interest rate profile of the aggregate financial assets of
'L'1,694m (1999 'L'479m), after taking account of interest rate swaps, is set
out below:
2000 1999
-------------------------- --------------------------
Non interest Non interest
Floating rate bearing Floating rate bearing
financial financial financial financial
assets assets assets assets
'L'm 'L'm 'L'm 'L'm
------------ ----------- ------------ -----------
US dollar. . . . 103 67 67 24
Sterling . . . . 622 16 146 15
Euro . . . . . . 834 1 149 o
Other currencies 35 3 78 ---
------------ ----------- ------------ -----------
Total. . . . . . 1,594 87 440 39
============ =========== ============ ===========
At 31 December 2000, there were fixed rate financial assets of 'L'13m (1999
'L'nil) denominated in US dollars, with a weighted average interest rate of 8.0%
and a weighted average duration of 1.3 years.
Floating rate interest rates payable on US commercial paper are based on US
dollar commercial paper rates. Other financial assets and liabilities bear
interest by reference to LIBOR or other national LIBOR equivalent interest
rates.
Included within non interest bearing financial assets are 'L'81m (1999 'L'30m)
of investments denominated principally in sterling and US dollars which have no
maturity date.
Forward rate agreements are used principally to fix the interest expense on
short term borrowings.
At 31 December 2000, agreements totalling 'L'1,767m (1999 'L'387m) were in
place to enter into interest rate swaps and interest rate options at future
dates. Of these, individual agreements totalling 'L'946m (1999 'L'247m) were to
fix the interest expense on US dollar borrowings commencing in 2001 and 2002 for
periods of between two and ten years, at a weighed average interest rate of
6.8%. In addition, interest rate options totalling 'L'671m (1999 'L'nil) and
starting in 2001 were to fix the interest expense on US dollar borrowings for
periods of three to five years, at rates of between 5.7% and 6.7%. The other
agreements totalling 'L'150m (1999 'L'140m) were to fix the interest income on
sterling short term investments commencing in 2001 for a period of four months
at a weighted average interest rate of 7.2%.
Maturity profile of financial liabilities
The maturity profile of financial liabilities at 31 December comprised:
2000 1999
'L'm 'L'm
----- -----
Repayable:
Within one year. . . . . 1,426 1,131
Within one to two years 54 23
Within two to five years 237 112
After five years . . . . 430 329
----- -----
Total . . . . . . . . . . 2,147 1,595
===== =====
Financial liabilities repayable within one year include US commercial paper and
euro commercial paper. Short term borrowings are supported by available
committed facilities and by centrally managed cash and short term investments.
As at 31 December 2000, a total of 'L'4,497m (1999 'L'617m) of undrawn committed
facilities were available, of which 'L'2,389m (1999 'L'222m) matures within one
year and 'L'2,108m within two to three years (1999 'L'395m within two to five
years). Included within this amount is 'L'3,154m of committed facilities
arranged in anticipation of the Harcourt acquisition; see note 29. Secured
borrowings under finance leases were 'L'17m (1999 'L'18m).
Currency exposure
The business policy is to hedge all significant transaction exposures on
monetary assets and liabilities fully and consequently there are no material
currency exposures that would give rise to gains and losses in the profit and
loss account in the functional currencies of the operating units.
94
24. Financial instruments -- (continued)
Fair values of financial assets and liabilities
The notional amount, book value and fair value of financial instruments are as
follows:
2000 1999
--------------------------- ---------------------------
Notional Book Notional Book
amount value Fair value amount value Fair value
'L'm 'L'm 'L'm 'L'm 'L'm 'L'm
-------- ------ --------- -------- ------ ---------
Primary financial instruments held or issued to
finance operations
Investments . . . . . . . . . . . . . . . . . 81 81 30 30
Cash . . . . . . . . . . . . . . . . . . . . . 85 85 79 79
Short term investments . . . . . . . . . . . . 1,509 1,512 361 361
Other financial assets . . . . . . . . . . . . 19 19 9 9
Short term borrowings and current portion
of long term borrowings. . . . . . . . . . . (1,404) (1,398) (1,129) (1,123)
Long term borrowings . . . . . . . . . . . . . (623) (614) (377) (363)
Other financial liabilities . . . . . . . . . (34) (34) (23) (23)
Provisions . . . . . . . . . . . . . . . . . . (86) (86) (66) (66)
------ --------- ------ ---------
(453) (435) (1,116) (1,096)
------ --------- ------ ---------
Derivative financial instruments held to
manage interest rate and currency exposur e
Interest rate swaps . . . . . . . . . . . . . 1,612 (1) (49) 854 --- 14
Interest rate options . . . . . . . . . . . . 671 --- (17) --- --- ---
Forward rate agreements . . . . . . . . . . . 885 --- (1) 450 --- ---
Forward foreign exchange contracts . . . . . . 1,776 --- (38) 486 --- (7)
Foreign exchange options . . . . . . . . . . . 50 --- (1) --- --- ---
-------- ------ --------- -------- ------ ---------
4,994 (1) (106) 1,790 --- 7
-------- ------ --------- -------- ------ ---------
Total financial instruments . . . . . . . . . . 4,994 (454) (541) 1,790 (1,116) (1,089)
======== ====== ========= ======== ====== =========
The amounts shown as the book value in respect of derivative financial
instruments represent accruals or deferred income arising from these financial
instruments. For certain instruments, including cash and investments, it has
been assumed that the carrying amount approximates fair value because of the
short maturity of these instruments. The fair value of long term debt has been
based on current market rates offered to Reed Elsevier for debt of the same
remaining maturities. The fair values for interest rate swaps, interest rate
options and forward rate agreements represent the replacement cost calculated
using market rates of interest at 31 December 2000 and 1999. The fair values of
all other items have been calculated by discounting expected future cash flows
at market rates.
95
24. Financial instruments -- (continued)
Hedges
The unrecognised and deferred gains and losses on financial instruments used
for hedging purposes are as follows:
Unrecognised Deferred
------------ ------------
Gains Losses Gains Losses
'L'm 'L'm 'L'm 'L'm
----- ------ ----- ------
On hedges at 1 January 2000. . . . . . . . . . . . . . . . . . . . . . 22 (15) --- (18)
Arising in previous years included in 2000 profit and loss account . . (21) 15 --- 8
----- ------ ----- ------
Arising in previous years not included in 2000 profit and loss account 1 --- --- (10)
Arising in 2000 not included in 2000 profit and loss account . . . . . 1 (108) 17 (14)
----- ------ ----- ------
On hedges at 31 December 2000. . . . . . . . . . . . . . . . . . . . . 2 (108) 17 (24)
===== ====== ===== ======
Of which:
Expected to be included in 2001 profit and loss account . . . . . . . 1 (40) 6 (12)
Expected to be included in 2002 profit and loss account or
later . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 (68) 11 (12)
===== ====== ===== ======
25. Obligations under leases
Future finance lease obligations are:
2000 1999
'L'm 'L'm
---- ----
Repayable:
Within one year . . . . . . . . . . . . . . . . . . . . . . . 6 5
Within one to two years . . . . . . . . . . . . . . . . . . . 4 4
Within two to five years . . . . . . . . . . . . . . . . . . 1 4
After five years . . . . . . . . . . . . . . . . . . . . . . 11 10
Less: interest charges allocated to future periods . . . . . . (5) (5)
---- ----
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 18
==== ====
Obligations falling due within one year (see note 22). . . . . 5 4
Obligations falling due after more than one year (see note 23) 12 14
---- ----
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 18
==== ====
Annual commitments under operating leases are:
2000 1999
'L'm 'L'm
---- ----
On leases expiring:
Within one year. . . . . 4 4
Within two to five years 31 26
After five years . . . . 38 36
---- ----
Total . . . . . . . . . . 73 66
==== ====
Of the above annual commitments, 'L'71m relates to land and buildings (1999
'L'62m) and 'L'2m to other leases (1999 'L'4m).
96
26. Provisions for liabilities and charges
Surplus Deferred
property taxation Other Total
'L'm 'L'm 'L'm 'L'm
-------- -------- ----- -----
At 1 January 2000. . . . . . . . 64 36 13 113
Acquisitions . . . . . . . . . . --- (2) --- (2)
Transfers. . . . . . . . . . . . --- 7 --- 7
Provided . . . . . . . . . . . . 16 (5) 1 12
Utilised . . . . . . . . . . . . (1) --- (7) (8)
Exchange translation differences 5 1 --- 6
-------- -------- ----- -----
At 31 December 2000. . . . . . . 84 37 7 128
======== ======== ===== =====
The surplus property provision relates to lease obligations for various periods
up to 2012 and represents estimated sub-lease shortfalls in respect of
properties which have been, or are in the process of being, vacated.
Deferred taxation is analysed as follows:
2000 1999
'L'm 'L'm
---- ----
Deferred taxation liabilities
Pension prepayment . . . . . . . . . . . . . . . . 37 36
Revaluation gains. . . . . . . . . . . . . . . . . 42 33
---- ----
79 69
Deferred taxation assets
Excess of amortisation over related tax allowances (8) (9)
Acquisition and related provisions . . . . . . . . (34) (24)
---- ----
(42) (33)
---- ----
Total . . . . . . . . . . . . . . . . . . . . . . . 37 36
==== ====
27. Contingent liabilities
There are contingent liabilities amounting to 'L'10m (1999 'L'23m) in respect
of borrowings of former subsidiaries.
97
28. Combined shareholders' funds
Combined
Combined share
share premium Combined
capitals accounts reserves Total
'L'm 'L'm 'L'm 'L'm
-------- -------- -------- -----
At 31 December 1997. . . . . . . . . . . . . . . . . . . . . . . . . . 167 328 1,197 1,692
Profit attributable to parent companies' shareholders. . . . . . . . . --- --- 772 772
Ordinary dividends paid and proposed . . . . . . . . . . . . . . . . . --- --- (349) (349)
Issue of ordinary shares . . . . . . . . . . . . . . . . . . . . . . . --- 18 --- 18
Exchange translation differences . . . . . . . . . . . . . . . . . . . 1 7 (11) (3)
-------- -------- -------- -----
At 31 December 1998. . . . . . . . . . . . . . . . . . . . . . . . . . 168 353 1,609 2,130
Loss attributable to parent companies' shareholders. . . . . . . . . . --- --- (63) (63)
Ordinary dividends paid and proposed . . . . . . . . . . . . . . . . . --- --- (234) (234)
Issue of ordinary shares, less capital redemptions . . . . . . . . . . (4) 9 --- 5
Exchange translation differences . . . . . . . . . . . . . . . . . . . 4 (21) 34 17
-------- -------- -------- -----
At 31 December 1999. . . . . . . . . . . . . . . . . . . . . . . . . . 168 341 1,346 1,855
Profit attributable to parent companies' shareholders. . . . . . . . . --- --- 33 33
Ordinary dividends paid and proposed . . . . . . . . . . . . . . . . . --- --- (245) (245)
Issue of ordinary shares, net of expenses and less capital redemptions 17 1,268 --- 1,285
Exchange translation differences . . . . . . . . . . . . . . . . . . . --- 12 101 113
-------- -------- -------- -----
At 31 December 2000. . . . . . . . . . . . . . . . . . . . . . . . . . 185 1,621 1,235 3,041
======== ======== ======== =====
On 5 December 2000, following a joint international offering, Reed
International issued 113,700,000 new 12.5 pence ordinary shares at 625 pence
each and Elsevier issued 66,255,000 new 'E'0.06 ordinary shares at 'E'14.50
each. The purpose of the offering was to finance the proposed acquisition by
Reed Elsevier of the Scientific, Technical and Medical business and the Schools
Education and Testing businesses of Harcourt General, Inc. (see note 29).
Combined share capital excludes the shares of Elsevier held by Reed
International.
Combined reserves include a 'L'4m (1999 'L'4m; 1998 'L'nil) capital redemption
reserve following the redemption of non equity shares in Reed International in
1999.
29. Harcourt acquisition
On 8 November 2000, Reed Elsevier plc group launched, through a US subsidiary,
Reed Elsevier, Inc., a tender offer for the common stock and Series A cumulative
convertible stock of Harcourt General, Inc. ("Harcourt"). The offer was
unanimously recommended by the Harcourt board. The Smith family, which owns
approximately 28% of the common stock of Harcourt, have undertaken to tender all
their shares in the tender offer and to support the offer.
Reed Elsevier Inc. has also signed a definitive agreement with The Thomson
Corporation to on-sell the Harcourt Higher Education business and the Corporate
and Professional Services businesses, other than educational and clinical
testing.
Following completion of the offer and the on-sale of businesses, Reed Elsevier
plc will have acquired Harcourt's Scientific, Technical and Medical business and
its Schools Education and Testing businesses for a net cost of US$4.5 billion
after taking into account Harcourt's net debt, taxes payable on the on-sale
proceeds and the assumption of corporate and other liabilities. In the year to
31 October 2000, these businesses had sales of US$1.7 billion and net assets of
US$1.1 billion (including US$0.7 billion of goodwill and intangible assets)
before corporate net debt of US$1.2 billion.
The acquisition and the on-sale to Thomson are subject to regulatory approvals,
which may require some divestment of assets or other behavioural undertakings.
98
30. US accounting information
Summary of the principal differences between UK and Dutch GAAP and US GAAP
The combined financial statements are prepared in accordance with UK and Dutch
GAAP, which differ in certain significant respects from US GAAP. The principal
differences that affect net income and combined shareholders' funds are
explained below and their approximate effect is shown on F-33.
Discontinued operations and sale of businesses
Discontinued operations, as separately categorised in the profit and loss
account under UK and Dutch GAAP and US GAAP, may relate only to significant
business segments. Under UK and Dutch GAAP, such businesses are separately
segmented as discontinued only when sale transactions or closures have been
completed. Under US GAAP, such businesses are segmented as discontinued once
formal commitment to sale or closure is made.
Under US GAAP, net income from discontinued operations includes all operating
results of the discontinued operations and the gain or loss on sale. Under UK
and Dutch GAAP, operating results from discontinued activities are disclosed as
a separate element within operating profit and the gain or loss on sale is
disclosed as a non operating exceptional item.
Goodwill and other intangible assets
In the 1998 fiscal year, Reed Elsevier adopted the new UK financial reporting
standard FRS 10: Goodwill and Intangible Assets, and changed its accounting
policy for goodwill and intangible assets. Under the new policy, goodwill and
intangible assets are being amortised through the profit and loss account over
their estimated useful lives, up to a maximum of 20 years. In view of this and
the consideration given to the determination of appropriate prudent asset lives,
the remaining asset lives for US GAAP purposes were reviewed and determined
consistently with those adopted for the new UK and Dutch GAAP treatment.
This re-evaluation of asset lives under US GAAP, which was effective from 1
January 1998, significantly increased the periodic amortisation charge, as the
unamortised value of existing assets, which were previously being amortised over
periods up to 40 years, are now amortised over shorter periods.
The gross cost under US GAAP, as at 31 December 2000, of goodwill is 'L'3,757m
(1999 'L'3,042m; 1998 'L'2,958m) and of other intangible assets including those
held in joint ventures is 'L'3,900m (1999 'L'3,285m; 1998 'L'3,161m).
Accumulated amortisation under US GAAP, as at 31 December 2000, of goodwill is
'L'1,497m (1999 'L'1,180m; 1998 'L'877m) and of other intangible assets
including those held in joint ventures is 'L'1,433m (1999 'L'1,174m; 1998
'L'994m).
Deferred taxation
The combined businesses provide in full for timing differences using the
liability method. Under US GAAP, deferred taxation is provided on all temporary
differences under the liability method subject to a valuation allowance on
deferred tax assets where applicable, in accordance with SFAS 109, Accounting
for Income Taxes. The principal adjustments to apply US GAAP are to provide
deferred taxation on temporary differences arising on acquired intangible assets
for which amortisation is not deductible for tax purposes, from the amortisation
under US GAAP of goodwill and other intangible assets and the recognition of
deferred tax assets on timing differences where those assets are not considered
recoverable in the short term.
Acquisition accounting
Under UK and Dutch GAAP, severance and integration costs in relation to
acquisitions are only expensed as incurred. Due to their size and incidence,
under UK and Dutch GAAP, those costs are disclosed as exceptional items charged
to operating profit. Under US GAAP, certain integration costs may be provided as
part of purchase accounting adjustments on acquisition.
Pensions
The combined businesses account for pension costs under the rules set out in
SSAP24. Its objectives and principles are broadly in line with SFAS 87,
Employers' Accounting for Pensions. However, SSAP24 is less prescriptive in the
application of the actuarial methods and assumptions to be applied in the
calculation of pension costs.
Under US GAAP, plan assets are valued by reference to market-related values at
the date of the financial statements. Liabilities are assessed using the rate of
return obtainable on fixed or inflation-linked bonds. Under UK GAAP, pension
plan assets and liabilities are based on the results of the latest actuarial
valuation. Pension assets are valued at the discounted present value determined
by expected future income. Liabilities are assessed using the expected rate of
return on plan assets.
Short term obligations expected to be refinanced
Under US GAAP, where it is expected to refinance short term obligations on a
long term basis and this is supported by an ability to consummate the
refinancing, such short term obligations should be excluded from current
liabilities and shown as long term obligations. Under UK and Dutch GAAP, such
obligations can only be excluded from current liabilities where, additionally,
the debt and facility are under a single agreement or course of dealing with the
same lender or group of lenders. Short term obligations at 31 December 2000 of
'L'1,101m (1999 'L'395m; 1998 'L'602m) would thus be excluded from current
ities under US GAAP and shown as long term obligations.
99
30. US accounting information -- (continued)
Ordinary dividends
Under UK and Dutch GAAP, dividends are provided for in the year in respect of
which they are proposed by the directors. Under US GAAP, such dividends would
not be provided for until they are formally declared by the directors.
Exceptional items
Exceptional items are material items within the combined businesses' ordinary
activities which, under UK and Dutch GAAP, are required to be disclosed
separately due to their size or incidence. These items do not qualify as
extraordinary under US GAAP and are considered a part of operating results.
Adjusted earnings
In the combined financial statements adjusted profit and cash flow measures are
presented as permitted by UK and Dutch GAAP as an additional performance
measures. US GAAP does not permit the presentation of alternative earnings
measures. Accordingly, adjusted profit and adjusted cash flow are not regarded
as alternative performance measures under US GAAP.
Stock based compensation
SFAS 123: Accounting for Stock Based Compensation, establishes a fair value
based method of computing compensation cost. It encourages the application of
this method in the profit and loss account instead of intrinsic value based
methods. Where fair value based methods are not applied in the profit and loss
account, the proforma effect on net income is disclosed.
The disclosure only provisions of SFAS 123 have been adopted. If compensation
costs based on fair value at the grant date had been recognised in the profit
and loss account, net income under US GAAP would have been reduced by 'L'23m in
2000 (1999 'L'5m; 1998 'L'2m).
Recently issued accounting pronouncements
SFAS 133: Accounting for Derivative Instruments and Hedging Activities, was
issued in June 1998 and, as amended by SFAS 138, is effective for the financial
year beginning 1 January 2001. The standard requires all derivative instruments
to be valued at fair value on the balance sheet. Changes in fair value are
accounted for through the profit and loss account or comprehensive income
statement, depending on a derivative's designation and effectiveness as a
hedging instrument. On implementation, a cumulative transition adjustment of
'L'1m (loss) to the 2000 US GAAP net income and 'L'86m (loss) in other
comprehensive income will be made. Under UK and Dutch GAAP, derivative
instruments are recorded at appropriate historical cost amounts, with fair
values shown as a disclosure item.
FRS17: Retirement Benefits, was issued by the UK Accounting Standards Board in
November 2000. As under SFAS 87, plan assets and liabilities are determined by,
respectively, market-related values at the date of the financial statements and
by discounting plan obligations using a market derived discount factor. Under
FRS17, actuarial gains and losses are recognised in full in the balance sheet
with movements recognised in the statement of total recognised gains and losses.
This will differ from current US GAAP which does not require the full
recognition of actuarial gains and losses, and also requires the amortisation of
actuarial gains and losses to be recognised in the profit and loss account. The
standard is required to be fully implemented in the 2003 financial year, with
disclosures of the impact required in from 2001 years. The impact of adopting
the standard cannot be reasonably estimated at this time.
FRS19: Deferred Tax, was issued by the UK Accounting Standards Board in
December 2000. FRS19 requires deferred tax to be provided in full except on
timing differences arising where non-monetary assets are revalued and where
there is no commitment to sell the asset and on the retained earnings of
subsidiaries, joint ventures or associates where there is no commitment to remit
such earnings. FRS19 is required to be implemented in the 2002 financial
The standard is not expected to have a material impact on implementation.
100
30. US accounting information -- (continued)
Effects on net income of material differences between UK and Dutch GAAP and US
GAAP
2000 1999 1998
'L'm 'L'm 'L'm
---- ---- ----
Net income/(loss) under UK and Dutch GAAP . . . . . . 33 (63) 772
US GAAP adjustments:
Amortisation of goodwill and other intangible assets (78) (83) (477)
Deferred taxation. . . . . . . . . . . . . . . . . . 85 67 77
Pensions . . . . . . . . . . . . . . . . . . . . . . 22 6 30
Other items. . . . . . . . . . . . . . . . . . . . . (2) --- (4)
---- ---- ----
Net income/(loss) under US GAAP . . . . . . . . . . . 60 (73) 398
==== ==== ====
Analysed:
Continuing operations. . . . . . . . . . . . . . . . 60 (73) (122)
Discontinued operations
--- income from operations . . . . . . . . . . . . --- --- (1)
--- gain on sales. . . . . . . . . . . . . . . . . --- --- 521
---- ---- ----
Net income/(loss) under US GAAP . . . . . . . . . . . 60 (73) 398
==== ==== ====
Effects>on combined shareholders' funds of material differences between UK and
Dutch GAAP and US GAAP
2000 1999
'L'm 'L'm
----- -----
Combined shareholders' funds under UK and Dutch GAAP 3,041 1,855 US
GAAP adjustments:
Goodwill and other intangible assets . . . . . . . 604 553
Deferred taxation . . . . . . . . . . . . . . . . . (203) (180)
Pensions . . . . . . . . . . . . . . . . . . . . . 86 63
Other items . . . . . . . . . . . . . . . . . . . . 2 5
Ordinary dividends not declared in the period . . . 177 127
----- -----
Combined shareholders' funds under US GAAP . . . . . 3,707 2,423
===== =====
Additional information
Cash Flow Information
Cash flows under UK and Dutch GAAP in respect of taxation, returns on
investment, dividends received from joint ventures and servicing of finance
would be included within operating activities under SFAS 95. Under SFAS 95 cash
is aggregated for cash flow statements with cash equivalents, being short term
investments with original maturities of three months or less.
Under US GAAP, the following amounts would be reported:
2000 1999 1998
'L'm 'L'm 'L'm
----- ---- ----
Net cash provided by operating activities (including joint ventures) 605 584 501
Net cash used in investing activities. . . . . . . . . . . . . . . . (899) (286)(478)
Net cash provided/(used) in financing activities . . . . . . . . . . 1,531 (341)(428)
----- ---- ----
Net increase/(decrease) in cash and cash equivalents . . . . . . . . 1,237 (43)(405)
===== ==== ====
Reconciliation of cash and cash equivalents:
Cash under UK and Dutch GAAP . . . . . . . . . . . . . . . . . . . 85 79 26
Current asset investments with original maturity within 3 months . 1,509 268 394
----- ---- ----
Cash and cash equivalents under US GAAP. . . . . . . . . . . . . . . 1,594 347 420
===== ==== ====
101
30. US accounting information -- (continued)
Comprehensive Income Information
SFAS 130: Reporting Comprehensive Income, requires that all items that are
required to be recognised as components of comprehensive income under US
accounting standards are reported in a separate financial statement. Under US
GAAP, the comprehensive gain for the year ended 31 December 2000 would be
'L'182m (1999 'L'(46)m; 1998 'L'389m). Comprehensive income under US GAAP
comprises net income for the financial year, adjustments to the fair value of
marketable securities and exchange translation differences.
Under US GAAP, the following amounts would be reported:
2000 1999 1998
'L'm 'L'm 'L'm
---- ---- ----
Net income/(loss) under US GAAP . . . . . 60 (73) 398
Unrealised gains on marketable securities
--- arising in the year. . . . . . . . . --- 1 11
--- recognised in net income/(loss). . . --- (3) (7)
Exchange translation differences. . . . . 122 29 (13)
---- ---- ----
Comprehensive income/(loss) under US GAAP 182 (46) 389
==== ==== ====
Pensions-- UK Scheme
Reed Elsevier operates a number of pension schemes around the world. The major
schemes are of a defined benefit type with assets held in separate trustee
administered funds.
The most significant scheme is the main UK scheme which covers the majority of
UK employees. The main UK pension scheme is much more significant than the other
Reed Elsevier pension schemes because it includes substantial numbers of
pensioners and deferred pensioners retained when the manufacturing business of
Reed International were divested in the late 1980s.
The scheme is funded to cover future pension liabilities, including expected
future earnings and pension increases, in respect of service up to the balance
sheet date. The net pension costs/(credits) in respect of this scheme calculated
in accordance with SFAS 87 were as follows:
2000 1999 1998
'L'm 'L'm 'L'm
---- ---- ----
Service costs --- benefits earned during the year 36 34 22
Interest cost on projected benefit obligations . 67 66 68
Expected return on plan assets. . . . . . . . . . (103) (99)(102)
Net amortisation and deferral . . . . . . . . . . (15) (6) (21)
---- ---- ----
Net periodic pension credits. . . . . . . . . . . (15) (5) (33)
==== ==== ====
The following table sets forth the funded status under SFAS 87 of the main UK
scheme:
2000 1999 1998
'L'm 'L'm 'L'm
------ ------ ------
Projected benefit obligation . . . (1,259) (1,301) (1,205)
Plan assets at fair value. . . . . 1,747 1,776 1,530
------ ------ ------
Excess of plan assets. . . . . . . 488 475 325
Unrecognised net gain . . . . . . (272) (269) (120)
Unrecognised net transition asset (34) (43) (51)
Unrecognised prior service cost . 15 19 23
------ ------ ------
Prepaid pension cost . . . . . . . 197 182 177
====== ====== ======
102
30. US accounting information -- (continued)
2000 1999 1998
'L'm 'L'm 'L'm
----- ----- -----
Projected benefit obligation
Balance at 1 January. . . . . . . . . . . . . . . . . 1,301 1,205 924
Service cost . . . . . . . . . . . . . . . . . . . . 36 34 22
Interest cost. . . . . . . . . . . . . . . . . . . . 67 66 68
Prior service cost . . . . . . . . . . . . . . . . . 4 --- 20
Plan amendments. . . . . . . . . . . . . . . . . . . --- --- ---
Actuarial (gain)/loss. . . . . . . . . . . . . . . . (91) 55 288
Contributions. . . . . . . . . . . . . . . . . . . . --- 3 4
Disbursements. . . . . . . . . . . . . . . . . . . . (58) (62) (46)
Settlement and curtailment on disposal of businesses --- --- (75)
----- ----- -----
Balance at 31 December. . . . . . . . . . . . . . . . 1,259 1,301 1,205
===== ===== =====
2000 1999 1998
'L'm 'L'm 'L'm
----- ----- -----
Fair value of assets
Balance at 1 January. . . . . . . . . . . . . . . . . 1,776 1,530 1,462
Actual return. . . . . . . . . . . . . . . . . . . . 25 305 221
Contributions. . . . . . . . . . . . . . . . . . . . 4 3 4
Disbursements. . . . . . . . . . . . . . . . . . . . (58) (62) (46)
Settlement and curtailment on disposal of businesses --- --- (111)
----- ----- -----
Balance at 31 December. . . . . . . . . . . . . . . . 1,747 1,776 1,530
===== ===== =====
2000 1999 1998
'L'm 'L'm 'L'm
---- ---- ----
Prepaid pension cost
Balance at 1 January. . . . . . . . . . . . . . . . . 182 177 159
Net periodic credit. . . . . . . . . . . . . . . . . 15 5 33
Settlement and curtailment on disposal of businesses --- --- (15)
---- ---- ----
Balance at 31 December. . . . . . . . . . . . . . . . 197 182 177
==== ==== ====
The principal assumptions used were:
2000 1999 1998
'L'm 'L'm 'L'm
----- ----- -----
Discount rate . . 5.90% 5.25% 7.00%
Salary increases 4.70% 5.00% 5.50%
Investment return 6.20% 6.50% 8.00%
Pension increases 2.70% 3.00% 3.50%
Plan assets are invested primarily in equities, index-linked securities and
liquid assets.
Pensions-- US Schemes
The main US pension schemes cover approximately 14,000 of the US employees. The
benefits are based on years of service and the employees' compensation. The
funding policy is to contribute at least the minimum amount required by law. The
net pension costs/(credits) in respect of this scheme calculated in accordance
with SFAS 87 were as follows:
2000 1999 1998
'L'm 'L'm 'L'm
---- ---- ----
Service costs --- benefits earned during the year 18 18 13
Interest cost on projected benefit obligations . 15 12 11
Expected return on plan assets. . . . . . . . . . (16) (14) (17)
Net amortisation and deferral . . . . . . . . . . (1) --- 4
Recognised net actuarial loss . . . . . . . . . . (1) --- ---
---- ---- ----
Net periodic pension cost . . . . . . . . . . . . 15 16 11
==== ==== ====
103
30. US accounting information -- (continued)
The following table sets forth the funded status under SFAS 87 of the principal
US schemes including unfunded non-qualifying plans:
2000 1999 1998
'L'm 'L'm 'L'm
---- ---- ----
Projected benefit obligation . . (202) (159) (167)
Plan assets at fair value. . . . 184 175 160
---- ---- ----
(Deficit)/excess of plan assets (18) 16 (7)
Unrecognised net actuarial gain (20) (48) (20)
Unrecognised prior service cost (8) (9) ---
---- ---- ----
Accrued pension cost . . . . . . (46) (41) (27)
==== ==== ====
2000 1999 1998
'L'm 'L'm 'L'm
---- ---- ----
Projected benefit obligation
Balance at 1 January. . . . . . . 159 167 141
Service cost . . . . . . . . . . 18 18 13
Interest cost. . . . . . . . . . 15 12 11
Plan amendments. . . . . . . . . 1 --- (6)
Actuarial loss/(gain). . . . . . 13 (29) 15
Divestitures . . . . . . . . . . (7) --- ---
Disbursements. . . . . . . . . . (11) (9) (7)
Exchange translation adjustments 14 --- ---
---- ---- ----
Balance at 31 December. . . . . . 202 159 167
==== ==== ====
2000 1999 1998
'L'm 'L'm 'L'm
---- ---- ----
Fair value of assets
Balance at 1 January. . . . . . . 175 160 143
Actual return. . . . . . . . . . 1 20 17
Contributions. . . . . . . . . . 12 4 7
Divestitures . . . . . . . . . . (8) --- ---
Disbursements. . . . . . . . . . (11) (9) (7)
Exchange translation adjustments 15 --- ---
---- ---- ----
Balance at 31 December. . . . . . 184 175 160
==== ==== ====
2000 1999 1998
'L'm 'L'm 'L'm
---- ---- ----
Accrued pension cost
Balance at 1 January. . . . . . . (41) (27) (19)
Additional obligations . . . . . --- (2) (4)
Net periodic cost. . . . . . . . (15) (16) (11)
Contributions. . . . . . . . . . 12 4 7
Exchange translation adjustments (2) --- ---
---- ---- ----
Balance at 31 December. . . . . . (46) (41) (27)
==== ==== ====
The principal assumptions used were:
2000 1999 1998
'L'm 'L'm 'L'm
------------- ------------- -------------
Discount rate . . 7.50% 8.00% 6.75%
Salary increases 4.00% to 5.00% 4.50% to 5.00% 4.50% to 5.00%
Investment return 9.00% 9.25% 9.50%
Plan assets are invested primarily in listed stocks and US bonds.
104
30. US accounting information -- (continued)
Borrowings
2000 1999
'L'm 'L'm
----- ----
Bank loans, overdrafts and commercial paper Drawn under facilities
expiring in year to 31 December
2000 . . . . . . . . . . . . . . . . . . . . . . . . --- 65
2001 . . . . . . . . . . . . . . . . . . . . . . . . 165 ---
Commercial paper . . . . . . . . . . . . . . . . . . . 1,230 902
----- ----
Total. . . . . . . . . . . . . . . . . . . . . . . . . 1,395 967
===== ====
>
Year end
interest rates 2000 1999
Currency % 'L'm 'L'm
-------- ------------- ---- ----
Other loans and finance leases
Private placement 2000 . . . . US dollar 9.71 --- 62
Public notes 2000. . . . . . . US dollar 6.63 --- 93
Private placement 2003 . . . . US dollar 8.50 84 77
Public notes 2005. . . . . . . US dollar 7.00 101 93
Loans Notes 2005 . . . . . . . Sterling 6.05 20 ---
Swiss Domestic Bond 2007 . . . US dollar 7.05 201 ---
Private placement 2023 . . . . US dollar 6.63 101 93
Public debentures 2025 . . . . US dollar 7.50 101 93
Finance leases . . . . . . . . Various Various 17 18
Miscellaneous. . . . . . . . . Euro Various 7 10
---- ----
Total. . . . . . . . . . . . . 632 539
==== ====
Interest rates disclosed above are those on the underlying borrowings and do
not take account of net interest on interest rate swaps (see note 24).
Bank loans,
overdrafts and Other loans
commercial and finance
paper leases Total
'L'm 'L'm 'L'm
------------- ---------- -----
Analysis by year of repayment
Within 1 year . . . . . . . . 1,395 9 1,404
------------- ---------- -----
Within 1 to 2 years . . . . . --- 7 7
Within 2 to 3 years . . . . . --- 85 85
Within 3 to 4 years . . . . . --- --- ---
Within 4 to 5 years . . . . . --- 121 121
Thereafter. . . . . . . . . . --- 410 410
------------- ---------- -----
--- 623 623
------------- ---------- -----
Total . . . . . . . . . . . . 1,395 632 2,027
============= ========== =====
105
30. US accounting information -- (continued)
Expiring Expiring
within 1 year after 1 year Total
'L'm 'L'm 'L'm
------------ ----------- -----
Undrawn bank facilities at 31 December 2000
Overdraft . . . . . . . . . . . . . . . . . 73 --- 73
Uncommitted lines of credit . . . . . . . . 129 --- 129
Undrawn committed facilities. . . . . . . . 2,389 2,108 4,497
Of the 'L'2,108m undrawn committed facilities expiring after one year, 'L'158m
was utilised by way of letters of credit which support short term borrowings.
Of the undrawn credit facilities at 31 December 2000, 'L'3,154m relates to
facilities put in place in anticipation of the acquisition of Harcourt ('L'2,148
expires with one year, 'L'1,007m expires after one year).
The committed facilities are subject to covenants which restrict gross
borrowings and secured borrowings by reference to Reed Elsevier's combined
earnings before exceptional items, interest, tax, depreciation and amortisation.
There is also a covenant restricting the ability to dispose of a substantial
proportion of assets (except for full consideration) if such disposal materially
and adversely affects the Reed Elsevier's combined net assets or combined
attributable profit.
2000 1999
'L'm 'L'm
---- ----
Short term loans, overdrafts and commercial paper
Weighted average interest rate during year. . . . 6.1% 5.0%
Year end weighted average interest rate . . . . . 6.2% 5.7%
The weighted average interest rate for the year was computed by dividing actual
interest expense for the year by the average month-end amounts outstanding for
short term bank loans and commercial paper.
106
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
Balance Balance
at beginning Cost and Other at end
of year expenses movements Deductions of year
'L'm 'L'm 'L'm 'L'm 'L'm
----------- -------- --------- ---------- -------
Year ended 31 December 1998
Allowance for doubtful receivables 39 18 1 (13) 45
Year ended 31 December 1999
Allowance for doubtful receivables 45 14 --- (13) 46
Year ended 31 December 2000
Allowance for doubtful receivables 46 18 2 (19) 47
Year ended 31 December 1998
Provisions against stocks. . . . . 40 9 --- (10) 39
Year ended 31 December 1999
Provisions against stocks. . . . . 39 5 --- (2) 42
Year ended 31 December 2000
Provisions against stocks. . . . . 42 6 --- (5) 43
107
REED INTERNATIONAL P.L.C.
CONSOLIDATED FINANCIAL STATEMENTS
108
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Reed International P.L.C.
We have audited the accompanying consolidated balance sheets as of 31 December
2000 and 1999, and the related consolidated profit and loss accounts and
statements of total recognised gains and losses, changes in shareholders' funds
and cash flows for the three years ended 31 December 2000. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United Kingdom and the United States of America. Those standards
require that we plan and perform the audits to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall presentation of the financial statements. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Reed International P.L.C. and its
subsidiaries at 31 December 2000 and 1999 and the results of their operations
and their cash flows for the three years ended 31 December 2000 in conformity
with accounting principles generally accepted in the United Kingdom (which
differ in certain material respects from generally accepted accounting
principles in the United States of America --- see note 23).
DELOITTE & TOUCHE
Chartered Accountants & Registered Auditors
London, England
21 February 2001
109
REED INTERNATIONAL P.L.C.
CONSOLIDATED PROFIT AND LOSS ACCOUNT
FOR THE YEAR ENDED 31 DECEMBER 2000
2000 1999 1998
Note 'L'm 'L'm 'L'm
------ ------ ------
Turnover
Including share of turnover of joint ventures. . . . . . . 1,994 1,793 1,688
Less: share of turnover of joint ventures. . . . . . . . . (1,994)(1,793) (1,688)
------ ------ ------
--- --- ---
------ ------ ------
Administrative expenses. . . . . . . . . . . . . . . . . . (1) (1) (1)
------ ------ ------
Operating loss (before joint ventures) . . . . . . . . . . 5 (1) (1) (1)
------ ------ ------
Share of operating profit of joint ventures
Before amortisation and exceptional items . . . . . . . . 3 414 414 419
Amortisation of goodwill and intangible assets . . . . . (248) (197) (176)
Exceptional items . . . . . . . . . . . . . . . . . . . . (60) (126) (42)
------ ------ ------
106 91 201
------ ------ ------
Operating profit including joint ventures. . . . . . . . . 105 90 200
------ ------ ------
Non operating exceptional items. . . . . . . . . . . . . . 5 --- --- (5)
Share of non operating exceptional items of joint ventures 3 45 4 366
------ ------ ------
45 4 361
------ ------ ------
Net interest
Group . . . . . . . . . . . . . . . . . . . . . . . . . . 8 5 3 5
Share of net interest of joint ventures . . . . . . . . . (59) (46) (26)
------ ------ ------
(54) (43) (21)
------ ------ ------
Profit on ordinary activities before taxation. . . . . . . 96 51 (144)
Tax on profit on ordinary activities . . . . . . . . . . . 9 (85) (90)
UK corporation tax . . . . . . . . . . . . . . . . . . . (2) 5 (1)
Share of tax of joint ventures . . . . . . . . . . . . . (83) (95) (143)
------ ------ ------
Profit/(loss) attributable to ordinary shareholders . . . 11 (39) 396
Ordinary dividends paid and proposed . . . . . . . . . . . 10 (123) (116) (172)
------ ------ ------
Retained (loss)/profit taken to reserves . . . . . . . . . (112) (155) 224
====== ====== ======
Adjusted figures
Profit before tax . . . . . . . . . . . . . . . . . . . . 11 365 376 409
Profit attributable to ordinary shareholders . . . . . . 11 270 279 302
====== ====== ======
Adjusted figures, which exclude the amortisation of goodwill and intangible
assets, exceptional items and related tax effects, are presented as additional
performance measures.
2000 1999 1998
Note pence pence pence
----- ----- -----
Earnings per ordinary share (EPS)
Basic EPS . . . . . . . . . . . . . . . . . . . . . . . . 12 1.0 (3.4) 34.7
Diluted EPS . . . . . . . . . . . . . . . . . . . . . . . 12 1.0 (3.4) 34.6
EPS based on 52.9% economic interest in the Reed Elsevier
combined businesses . . . . . . . . . . . . . . . . . . 12 1.5 (2.9) 35.7
Adjusted EPS. . . . . . . . . . . . . . . . . . . . . . . 12 23.3 24.4 26.4
===== ===== =====
The above amounts derive from continuing activities.
The accompanying notes on pages F-46 to F-56 are an integral part of these
consolidated financial statements
110
REED INTERNATIONAL P.L.C.
CONSOLIDATED CASH FLOW STATEMENT
FOR THE YEAR ENDED 31 DECEMBER 2000
2000 1999 1998
Note 'L'm 'L'm 'L'm
---- ---- ----
Net cash outflow from operating activities . . . . . . . . . 13 (1) (2) (5)
Dividends received from Reed Elsevier plc. . . . . . . . . . 97 172 171
---- ---- ----
Interest received . . . . . . . . . . . . . . . . . . . . . 4 3 5
---- ---- ----
Returns on investments and servicing of finance. . . . . . . 4 3 5
---- ---- ----
Taxation . . . . . . . . . . . . . . . . . . . . . . . . . . (1) 7 (1)
---- ---- ----
Ordinary dividends paid. . . . . . . . . . . . . . . . . . . (98) (173)(169)
---- ---- ----
Cash inflow before changes in short term investments
and financing . . . . . . . . . . . . . . . . . . . . . . . 1 7 1
(Increase)/decrease in short term investments. . . . . . . . 13 (431) 2 ---
Issue of ordinary shares. . . . . . . . . . . . . . . . . . 709 --- 14
Increase in net funding balances to Reed Elsevier plc group 13 (279) (9) (15)
---- ---- ----
Financing. . . . . . . . . . . . . . . . . . . . . . . . . . 430 (9) (1)
---- ---- ----
Change in net cash . . . . . . . . . . . . . . . . . . . . . --- --- ---
==== ==== ====
The accompanying notes on pages F-46 to F-56 are an
integral part of these con- solidated financial
statements
111
REED INTERNATIONAL P.L.C.
CONSOLIDATED STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES
FOR THE YEAR ENDED 31 DECEMBER 2000
2000 1999 1998
'L'm 'L'm 'L'm
---- ---- ----
Profit/(loss) attributable to ordinary shareholders 11 (39) 396
Exchange translation differences. . . . . . . . . . 60 9 (2)
---- ---- ----
Total recognised gains and losses for the year. . . 71 (30) 394
==== ==== ====
Recognised gains and losses include gains of 'L'75m (1999 losses of 'L'37m,
1998 gains of 'L'396m) in respect of joint ventures.
RECONCILIATION OF SHAREHOLDERS' FUNDS
FOR THE YEAR ENDED 31 DECEMBER 2000
Consolidated
------------------
2000 1999 1998
'L'm 'L'm 'L'm
----- ----- -----
Profit/(loss) attributable to ordinary shareholders 11 (39) 396
Ordinary dividends paid and proposed. . . . . . . . (123) (116) (172)
Issue of ordinary shares, net of expenses . . . . . 708 4 14
Redemption of preference shares . . . . . . . . . . --- (4) ---
Exchange translation differences. . . . . . . . . . 60 --- ---
Equalisation adjustments. . . . . . . . . . . . . . (28) 9 (6)
----- ----- -----
Net increase/(decrease) in shareholders' funds. . . 628 (146) 232
Shareholders' funds at 1 January. . . . . . . . . . 981 1,127 895
----- ----- -----
Shareholders' funds at 31 December. . . . . . . . . 1,609 981 1,127
===== ===== =====
The accompanying notes on pages F-46 to F-56 are an
integral part of these con- solidated financial
statements
112
REED INTERNATIONAL P.L.C.
CONSOLIDATED BALANCE SHEET
AS AT 31 DECEMBER 2000
2000 1999
Note 'L'm 'L'm
------ ------
Fixed assets
Investment in joint ventures: 14
Share of gross assets . . . . . . . . . . . . . . . . 3,534 2,825
Share of gross liabilities . . . . . . . . . . . . . . (2,733)(1,968)
------ ------
Share of net assets . . . . . . . . . . . . . . . . . 801 857
------ ------
Current assets
Debtors . . . . . . . . . . . . . . . . . . . . . . . . 15 513 233
Short term investments. . . . . . . . . . . . . . . . . 431 ---
------ ------
944 233
Creditors: amounts falling due within one year. . . . . 16 (100) (73)
------ ------
Net current assets. . . . . . . . . . . . . . . . . . . 844 160
------ ------
Total assets less current liabilities . . . . . . . . . 1,645 1,017
Creditors: amounts falling due after more than one year 17 (36) (36)
------ ------
Net assets. . . . . . . . . . . . . . . . . . . . . . . 1,609 981
====== ======
Capital and reserves
Called up share capital . . . . . . . . . . . . . . . . 18 158 143
Share premium account . . . . . . . . . . . . . . . . . 20 926 233
Capital redemption reserve. . . . . . . . . . . . . . . 20 4 4
Profit and loss reserve . . . . . . . . . . . . . . . . 20 521 601
------ ------
Shareholders' funds . . . . . . . . . . . . . . . . . . 1,609 981
====== ======
The accompanying notes on pages F-46 to F-56 are an integral part of these con-
solidated financial statements
113
REED INTERNATIONAL P.L.C.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of financial statements
On 1 January 1993 Reed International and Elsevier contributed their businesses
to two companies, Reed Elsevier plc and Elsevier Reed Finance BV. Reed Elsevier
plc, which owns all the publishing and information businesses, is incorporated
in England and Elsevier Reed Finance BV, which owns the financing and treasury
companies, is incorporated in the Netherlands. Reed International and Elsevier
each hold a 50% interest in Reed Elsevier plc. Reed International holds a 39%
interest in Elsevier Reed Finance BV with Elsevier holding a 61% interest. Reed
International additionally holds an indirect equity interest in Elsevier,
reflecting the arrangements entered into between Reed International and Elsevier
at the time of the merger, which determined the equalisation ratio whereby one
Elsevier ordinary share is, in broad terms, intended to confer equivalent
economic interests to 1.538 Reed International ordinary shares.
Under the equalisation arrangements Reed International shareholders have a
52.9% economic interest in the Reed Elsevier combined businesses and Elsevier
shareholders (other than Reed International) have a 47.1% interest. Holders of
ordinary shares in Reed International and Elsevier enjoy substantially
equivalent dividend and capital rights with respect to their ordinary shares.
2. Accounting policies
Basis of preparation
The consolidated financial statements have been prepared under the historical
cost convention in accordance with UK GAAP. These principles differ in certain
significant respects from US GAAP; see note 23. Amounts in the financial
statements are stated in pounds sterling ("'L"').
The accounting policies adopted in the preparation of the combined financial
statements are set out in note 2 to the Reed Elsevier combined financial
statements.
Determination of profit
The Reed International share of the Reed Elsevier combined results has been
calculated on the basis of the 52.9% economic interest of the Reed International
shareholders in the Reed Elsevier combined businesses, after taking account of
results arising in Reed International and its subsidiary undertakings. Dividends
paid to Reed International and Elsevier shareholders are equalised at the gross
level inclusive of the UK tax credit received by certain Reed International
shareholders. In the financial statements, an adjustment is required to equalise
the benefit of the tax credit between the two sets of shareholders in accordance
with the equalisation agreement. This equalisation adjustment arises only on
dividends paid by Reed International to its shareholders and reduces the
attributable earnings of the company by 47.1% of the total amount of the tax
credit.
Basis of valuation of assets and liabilities
Reed International's 52.9% economic interest in the net assets of the Reed
Elsevier combined businesses has been shown on the balance sheet as interests in
joint ventures, net of the assets and liabilities reported as part of Reed
International and its subsidiary undertakings. Joint ventures are accounted for
using the gross equity method.
Translation of foreign currencies into sterling
Profit and loss items are translated at average exchange rates. In the
consolidated balance sheet, assets and liabilities are translated at rates
ruling at the balance sheet date or contracted rates where applicable. The gains
or losses relating to the retranslation of Reed International's 52.9% economic
interest in the net assets of the combined businesses are taken directly to
reserves.
Taxation
Deferred taxation is provided in full for timing differences using the
liability method. No provision is made for tax which might become payable on the
distribution of retained profits by foreign subsidiaries or joint ventures
unless there is an intention to distribute such retained earnings giving rise to
a charge. Deferred tax assets are only recognised to the extent that they are
recoverable in the short term. Deferred taxation balances are not discounted.
114
3. Income from interests in joint ventures
2000 1999 1998
'L'm 'L'm 'L'm
---- ---- ----
Share of operating profit before amortisation and exceptional items (based on
52.9% economic interest in the Reed Elsevi er combined businesses) . . . . . 419 419 430
Effect of tax credit equalisation on distributed earnings (see note 4). . . . (6) (6) (12)
Items consolidated within Reed International group. . . . . . . . . . . . . . 1 1 1
---- ---- ----
414 414 419
==== ==== ====
Share of non operating exceptional items
Reed Elsevier combined results (52.9%). . . . . . . . . . . . . . . . . . . . 45 4 361
Items consolidated within Reed International group (see note 5) . . . . . . . --- --- 5
---- ---- ----
45 4 366
==== ==== ====
Segmental analysis of the Reed Elsevier combined results is shown in the Reed
Elsevier combined financial statements.
4. Effect of tax credit equalisation on distributed earnings
The equalisation adjustment arises only on dividends paid by Reed International
to its shareholders and reduces the earnings of the company by 47.1% of the
total amount of the tax credit, as set out in the accounting policies on page
F-46.
5. Operating loss
The operating loss comprises administrative expenses and includes 'L'255,000
(1999 'L'510,000; 1998 'L'388,000) paid in the year to Reed Elsevier plc under a
contract for the services of directors and administrative support. The company
has no employees (1999 nil; 1998 nil).
Exceptional costs of 'L'5m were paid to Reed Elsevier plc in 1998, in respect
of professional fees and other expenses relating to the abandoned merger of the
Reed International, Elsevier and Wolters Kluwer businesses.
6. Auditors' remuneration
Audit fees payable for the group were 'L'22,000 (1999 'L'21,000; 1998
'L'21,000). Non audit fees payable by the company to its auditors in connection
with the share offering were 'L'350,000 (1999 'L'nil; 1998 'L'164,000).
7. Directors' emoluments
Information on directors' remuneration, share options, longer term incentive
plans, pension contributions and entitlements is set out in Item 6: Directors,
Senior Management and Employees and forms part of these financial statements.
8. Net interest
2000 1999 1998
'L'm 'L'm 'L'm
---- ---- ----
Interest payable and similar charges
On loans from Reed Elsevier plc group --- (4) (4)
Interest receivable and similar income
On short term investments . . . . . . 2 --- ---
On loans to Reed Elsevier plc group . 3 7 9
---- ---- ----
Net interest income. . . . . . . . . . 5 3 5
==== ==== ====
115
9. Tax on profit on ordinary activities
2000 1999 1998
'L'm 'L'm 'L'm
---- ---- ----
UK corporation tax . . . . . . . . . . . . 2 (5) 1
Share of tax arising in joint ventures:
Before amortisation and exceptional items 94 103 106
On amortisation and exceptional items . . (11) (8) 37
---- ---- ----
Total. . . . . . . . . . . . . . . . . . . 85 90 144
==== ==== ====
UK corporation tax has been provided at 30.00% (1999 30.25%; 1998 31.0%).
The share of tax arising in joint ventures in 2000 and 1999 is high as a
proportion of the share of profit before tax principally due to non-tax
deductible amortisation and the non-recognition of potential deferred tax
assets.
10. Dividends
2000 1999 1998
'L'm 'L'm 'L'm
----- ----- -----
Interim. . . . . . . . . . . . . . 35 53 52
Final (2000 proposed). . . . . . . 88 63 120
----- ----- -----
Total. . . . . . . . . . . . . . . 123 116 172
===== ===== =====
2000 1999 1998
pence pence pence
----- ----- -----
Ordinary shares of 12.5 pence each
Interim . . . . . . . . . . . . . 3.10 4.60 4.60
Final (2000 proposed) . . . . . . 6.90 5.40 10.40
----- ----- -----
Total. . . . . . . . . . . . . . . 10.00 10.00 15.00
===== ===== =====
116
11. Adjusted figures
2000 1999 1998
'L'm 'L'm 'L'm
---- ---- ----
Profit before tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96 51 540
Effect of tax credit equalisation on distributed earnings . . . . . . . . . 6 6 12
---- ---- ----
Profit before tax based on 52.9% economic interest in the Reed Elsevier
combined businesses . . . . . . . . . . . . . . . . . . . . . . . . . . . 102 57 552
Adjustments:
Amortisation of goodwill and intangible assets . . . . . . . . . . . . . . 248 197 176
Exceptional items . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 122 (319)
---- ---- ----
Adjusted profit before tax. . . . . . . . . . . . . . . . . . . . . . . . . 365 376 409
==== ==== ====
Profit/(loss) attributable to ordinary shareholders . . . . . . . . . . . . 11 (39) 396
Effect of tax credit equalisation on distributed earnings . . . . . . . . . 6 6 12
---- ---- ----
Profit/(loss) attributable to ordinary shareholders based on 52.9% economic
interest in the Reed Elsevier combined bus inesses . . . . . . . . . . . . 17 (33) 408
Adjustments:
Amortisation of goodwill and intangible assets . . . . . . . . . . . . . . 248 197 176
Exceptional items . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 115 (282)
---- ---- ----
Adjusted profit attributable to ordinary shareholders . . . . . . . . . . . 270 279 302
==== ==== ====
2000 1999 1998
pence pence pence
----- ----- -----
Basic earnings/(loss) per ordinary share . . . . . . . . . . . . . . . 1.0 (3.4) 34.7
Effect of tax credit equalisation on distributed earnings. . . . . . . 0.5 0.5 1.0
----- ----- -----
Earnings/(loss) per share based on 52.9% economic interest in the Reed
Elsevier combined businesses . . . . . . . . . . . . . . . . . . . . 1.5 (2.9) 35.7
Adjustments:
Amortisation of goodwill and intangible assets . . . . . . . . . . . 21.4 17.2 15.4
Exceptional items . . . . . . . . . . . . . . . . . . . . . . . . . . 0.4 10.1 (24.7)
----- ----- -----
Adjusted earnings per ordinary share . . . . . . . . . . . . . . . . . 23.3 24.4 26.4
===== ===== =====
117
12. Earnings per ordinary share (EPS)
2000
------------------------------
Weighted
average number
Earnings of shares EPS
'L'm (millions) pence
-------- ------------- -----
Basic EPS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 1,156.4 1.0
Diluted EPS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 1,161.2 1.0
EPS based on 52.9% economic interest in the Reed Elsevier combined businesses 17 1,156.4 1.5
Adjusted EPS (see note 11). . . . . . . . . . . . . . . . . . . . . . . . . . 270 1,156.4 23.3
======== ============= =====
1999
------------------------------
Weighted
average number
Earnings of shares EPS
'L'm (millions) pence
-------- ------------- -----
Basic EPS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (39) 1,145.1 (3.4)
Diluted EPS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (39) 1,145.3 (3.4)
EPS based on 52.9% economic interest in the Reed Elsevier combined businesses (33) 1,145.1 (2.9)
Adjusted EPS (see note 11). . . . . . . . . . . . . . . . . . . . . . . . . . 279 1,145.1 24.4
======== ============= =====
1998
------------------------------
Weighted
average number
Earnings of shares EPS
'L'm (millions) pence
-------- ------------- -----
Basic EPS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 396 1,142.6 34.7
Diluted EPS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 396 1,144.6 34.6
EPS based on 52.9% economic interest in the Reed Elsevier combined businesses 408 1,142.6 35.7
Adjusted EPS (see note 11). . . . . . . . . . . . . . . . . . . . . . . . . . 302 1,142.6 26.4
======== ============= =====
The diluted EPS figures are calculated after taking account of the effect of
share options.
13. Cashflow statement
2000 1999 1998
Reconciliation of operating profit to net cash flow from operating activities 'L'm 'L'm 'L'm
---- ---- ----
Operating loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1) (1) (1)
Non operating exceptional items . . . . . . . . . . . . . . . . . . . . . . . --- --- (5)
Net movement in debtors and creditors . . . . . . . . . . . . . . . . . . . . --- (1) 1
---- ---- ----
Net cash outflow from operating activities. . . . . . . . . . . . . . . . . . (1) (2) (5)
==== ==== ====
Net funding
Short term balances to Reed
investments Elsevier plc group Total
'L'm 'L'm 'L'm
----------- ----------------- -----
Reconciliation of net borrowings
At 31 December 1997. . . . . . . 2 173 175
Cash flow. . . . . . . . . . . . o 15 15
----------- ----------------- -----
At 31 December 1998. . . . . . . 2 188 190
Cash flow. . . . . . . . . . . . (2) 9 7
----------- ----------------- -----
At 31 December 1999. . . . . . . o 197 197
Cash flow. . . . . . . . . . . . 431 279 710
----------- ----------------- -----
At 31 December 2000. . . . . . . 431 476 907
=========== ================= =====
118
14. Fixed asset investments
2000 1999
'L'm 'L'm
---- -----
Investment in joint ventures
Share of operating profit. . . . . . . . 106 91
Share of non operating exceptional items 45 4
Share of net interest payable. . . . . . (59) (46)
---- -----
Share of profit before tax . . . . . . . 92 49
Share of taxation. . . . . . . . . . . . (83) (95)
---- -----
Share of profit/(loss) after tax . . . . 9 (46)
Dividends received . . . . . . . . . . . (97) (172)
Exchange translation differences . . . . 60 9
Equalisation adjustments . . . . . . . . (28) ---
---- -----
Net movement in the year . . . . . . . . (56) (209)
At 1 January . . . . . . . . . . . . . . 857 1,066
---- -----
At 31 December . . . . . . . . . . . . . 801 857
==== =====
The investment in joint ventures comprises the group's share at the following
amounts of:
2000 1999
'L'm 'L'm
------ ------
Fixed assets. . . . . . . . . . . . . . . . . . . . . . 2,484 2,066
Current assets. . . . . . . . . . . . . . . . . . . . . 1,050 759
Creditors: amounts falling due within one year. . . . . (2,200) (1,576)
Creditors: amounts falling due after more than one year (462) (328)
Provisions. . . . . . . . . . . . . . . . . . . . . . . (68) (60)
Minority interests. . . . . . . . . . . . . . . . . . . (3) (4)
------ ------
Total . . . . . . . . . . . . . . . . . . . . . . . . . 801 857
====== ======
Included within share of current assets and creditors are cash and short term
investments of 'L'412m (1999 'L'233m) and borrowings of 'L'1,072m (1999 'L'797m)
respectively.
15. Debtors
Consolidated
------------
2000 1999
'L'm 'L'm
----- -----
Amounts owed by Reed Elsevier plc group 512 233
Other debtors . . . . . . . . . . . . . 1 ---
----- -----
Total . . . . . . . . . . . . . . . . . 513 233
===== =====
Amounts falling due after more than one year are 'L'40m (1999 'L'40m). These
amounts are denominated in sterling and earn interest at a fixed rate of 9.8%
(1999 9.8%) for a duration of seven years (1999 eight years). At 31 December
2000 these amounts had a fair value of 'L'49m (1999 'L'44m).
16. Creditors: amounts falling due within one year
Consolidated
------------
2000 1999
'L'm 'L'm
----- -----
Proposed dividend 88 63
Taxation. . . . . 10 9
Other creditors . 2 1
----- -----
Total . . . . . . 100 73
===== =====
119
17. Creditors: amounts falling due after more than one year
Consolidated
------------
2000 1999
'L'm 'L'm
----- -----
Amounts owed to Reed Elsevier plc group 36 36
===== =====
These amounts are denominated in sterling and earn interest at a fixed rate of
10.5% (1999 10.5%) for a duration of five years (1999 six years). At 31 December
2000 these amounts had a fair value of 'L'43m (1999 'L'44m).
18. Called up share capital
Authorised Issued and fully paid
---------- --------------------
2000 2000 1999
'L'm 'L'm 'L'm
---------- --------- ---------
Ordinary shares of 12.5p each . . 158 158 143
Unclassified shares of 12.5p each 26 --- ---
---------- --------- ---------
Total . . . . . . . . . . . . . . 184 158 143
========== ========= =========
On 5 December 2000, the company issued 113,700,000 new 12.5 pence ordinary
shares at 625 pence each following a joint international offering by Reed
International and Elsevier. The purpose of the offering was to finance the
proposed acquisition by Reed Elsevier of the Scientific, Technical and Medical
business and the Schools Education and Testing businesses of Harcourt General,
Inc. The nominal value of the shares issued by the company was 'L'14.2m and the
net proceeds were 'L'694m.
Details of shares issued under share option schemes are set out in note 19.
19. Share option schemes
Reed Elsevier plc operates a savings related share option scheme which is open
to all UK employees of Reed Elsevier plc and participating companies under its
control who are in employment on a predetermined date prior to the date of
invitation. The following options have been granted over Reed International
ordinary shares, and may be exercised at the end of the savings period at a
price equivalent to not less than 80% of the market value of the Reed
International ordinary shares at the time of grant.
Transactions during the three financial periods ended 31 December 2000 were:
Number of Exercise
ordinary price
shares (pence)
---------- -----------
Outstanding at 31 December 1997 6,437,483
Granted . . . . . . . . . . . 881,830 499.2
Exercised . . . . . . . . . . (2,032,556) 263.0-499.2
Lapsed . . . . . . . . . . . . (1,339,934)
----------
Outstanding at 31 December 1998 3,946,823
Granted . . . . . . . . . . . 1,251,005 430.0
Exercised . . . . . . . . . . (663,233) 263.0-499.2
Lapsed . . . . . . . . . . . . (755,857)
----------
Outstanding at 31 December 1999 3,778,738
Granted . . . . . . . . . . . 2,542,410 336.2
Exercised . . . . . . . . . . (824,500) 320.6-499.2
Lapsed . . . . . . . . . . . . (1,121,753)
----------
Outstanding at 31 December 2000 4,374,895
==========
The above options will, upon exercise, be met by the issue of new Reed
International ordinary shares. Options outstanding at 31 December 2000 were
exercisable by 2006. 79,506 options had vested at 31 December 2000.
120
Reed Elsevier plc operates an executive share option scheme and options are
granted to selected full time employees of Reed Elsevier. Options are granted
over Reed International ordinary shares, and are normally exercisable after
three years and may be exercised up to ten years from the date of grant at a
price equivalent to the market value of the Reed International ordinary shares
at the time of grant.
Transactions under the Reed Elsevier plc Executive Schemes and the Reed
International Executive Schemes during the three financial periods ended 31
December 2000 were:
Number of Exercise
ordinary price
shares (pence)
---------- -----------
Outstanding at 31 December 1997 12,256,000
Granted . . . . . . . . . . . 1,125,400 523.0-611.0
Exercised . . . . . . . . . . (2,067,200) 208.7-585.2
Lapsed . . . . . . . . . . . . (829,200)
----------
Outstanding at 31 December 1998 10,485,000
Granted . . . . . . . . . . . 14,522,906 424.0-537.5
Exercised . . . . . . . . . . (468,900) 201.0-410.2
Lapsed . . . . . . . . . . . . (798,033)
----------
Outstanding at 31 December 1999 23,740,973
Granted . . . . . . . . . . . 3,401,931 436.5-700.0
Exercised . . . . . . . . . . (2,295,145) 188.7-585.2
Lapsed . . . . . . . . . . . . (1,122,384)
----------
Outstanding at 31 December 2000 23,725,375
==========
<TheBabove outstanding options will, upon exercise, be met by the issue of new
Reed International ordinary shares. Options outstanding at 31 December 2000 were
exercisable by 2010. 5,970,798 options had vested at 31 December 2000.
During 2000 a total of 14,370,866 options were granted under the Reed Elsevier
plc Senior Executive Long Term Incentive Scheme at prices ranging between 436.5p
and 700p. Such options are exercisable from 1 January 2005 and the options will
be met by the issue of new Reed International ordinary shares.
Excluded from the above are options granted until 1999 under the Reed Elsevier
plc Executive Share Option Schemes (No. 2) which, upon exercise, will be met by
the Reed Elsevier Employee Benefit Trust (the "EBT") from shares purchased in
the market. At 31 December 2000 there were 2,514,405 such options outstanding at
exercise prices ranging between 424p and 677.25p. The EBT will also be used to
satisfy nil cost options granted to certain senior executives. At 31 December
2000 there were 601,071 such options outstanding.
121
20. Reserves
Consolidated
------------------------------------------
Share Capital
premium redemption Profit and loss
account reserve reserve Total
'L'm 'L'm 'L'm 'L'm
------- ---------- -------------- -----
At 1 January 1998. . . . . . . . . . . . . . 215 --- 533 748
Issue of ordinary shares, net of expenses. . 14 --- --- 14
Profit attributable to ordinary shareholders --- --- 396 396
Ordinary dividends paid and proposed . . . . --- --- (172) (172)
Exchange translation differences . . . . . . --- --- (6) (6)
------- ---------- -------------- -----
At 31 December 1998. . . . . . . . . . . . . 229 --- 751 980
Issue of ordinary shares, net of expenses. . 4 --- --- 4
Redemption of preference shares. . . . . . . --- 4 (4) ---
Loss attributable to ordinary shareholders . --- --- (39) (39)
Ordinary dividends paid and proposed . . . . --- --- (116) (116)
Exchange translation differences . . . . . . --- --- 9 9
------- ---------- -------------- -----
At 31 December 1999. . . . . . . . . . . . . 233 4 601 838
Issue of ordinary shares, net of expenses. . 693 --- --- 693
Profit attributable to ordinary shareholders --- --- 11 11
Ordinary dividends paid and proposed . . . . --- --- (123) (123)
Exchange translation differences . . . . . . --- --- 60 60
Equalisation adjustments . . . . . . . . . . --- --- (28) (28)
------- ---------- -------------- -----
At 31 December 2000. . . . . . . . . . . . . 926 4 521 1,451
======= ========== ============== =====
Equalisation adjustments relate to equity accounting effects in respect of the
proceeds of the joint international offering (see note 18).
Reed International's share of the revenue reserves of the Reed Elsevier
combined businesses is 'L'651m (1999 'L'710m).
21. Contingent liabilities
There are contingent liabilities in respect of borrowings of the Reed Elsevier
plc group and Elsevier Reed Finance BV group guaranteed by Reed International as
follows:
2000 1999
'L'm 'L'm
----- -----
Guaranteed jointly and severally with Elsevier 1,827 1,431
Guaranteed solely by Reed International. . . . --- 1
===== =====
Financial instruments disclosures in respect of the borrowings covered by the
above guarantees are given in note 24 to the Reed Elsevier combined financial
statements.
22. Capital commitments
Details of the capital commitments of the company's joint ventures are
disclosed in note 29 to the Reed Elsevier combined financial statements.
122
23. Summary of the principal differences between UK and US GAAP
The consolidated financial statements are prepared in accordance with UK GAAP,
which differ in certain significant respects from US GAAP. These differences
relate principally to the following items and the effect of material differences
on net income and shareholders' funds is shown in the following tables.
Impact of US GAAP adjustments to combined financial statements
Reed International accounts for its 52.9% economic interest in the Reed
Elsevier combined businesses, before the effect of tax credit equalisation (see
note 4), by the gross equity method in conformity with UK GAAP which is similar
to the equity method in US GAAP. Using the equity method to present its net
income and shareholders' funds under US GAAP, Reed International reflects its
52.9% share of the effects of differences between UK and US GAAP relating to the
combined businesses as a single reconciling item. The most significant
differences relate to the capitalisation and amortisation of goodwill and other
intangibles, and deferred taxes. A more complete explanation of the accounting
policies used by the Reed Elsevier combined businesses and the differences
between UK and US GAAP is given in note 30 to the Reed Elsevier combined
financial statements.
Ordinary dividends
Under UK GAAP, dividends are provided for in the year in respect of which they
are proposed by the directors. Under US GAAP, such dividends would not be
provided for until they are formally declared by the directors.
Exceptional items
Exceptional items are material items within Reed International's ordinary
activities which under UK GAAP are required to be disclosed separately due to
their size or incidence. These items do not qualify as extraordinary under US
GAAP and are considered a part of operating results.
Earnings per share
Under UK and US GAAP both basic and fully diluted earnings per share are
required to be presented. Diluted earnings per share take account of the effects
of additional ordinary shares that would be in issue if outstanding dilutive
potential shares had been exercised (see note 12).
Stock based compensation
SFAS 123: Accounting for Stock Based Compensation, establishes a fair value
based method of computing compensation cost. It encourages the application of
this method in the profit and loss account instead of intrinsic value based
methods. Where fair values are not applied, the proforma effect on net income
must be disclosed.
The disclosure only provisions of SFAS 123 have been adopted. If Reed
International's share of the combined businesses compensation costs based on
fair value at the grant dates had been recognised in the profit and loss
account, net income under US GAAP would have been reduced by 'L'12m in 2000
(1999 'L'2m). Proforma basic gain/(loss) per share, reflecting this cost, would
have been 1.2p (1999 (4.4)p).
The fair value of each option grant is estimated on the date of the grant using
the Black Scholes option pricing model with the following assumptions for
grants:
2000 1999
------------- -------------
Expected life (years) . 1-4 1-5
Expected dividend yield 1.90%-2.30% 3.00%-3.20%
Expected volatility . . 35.66%-44.11% 34.91%-39.67%
Risk-free interest rate 5.30%-5.50% 5.25%-5.75%
Effects on net income of material differences between UK GAAP and US GAAP
2000 1999 1998
'L'm 'L'm 'L'm
---- ---- ----
Net income/(loss) under UK GAAP. . . . . . . . . . . . . . . . . 11 (39) 396
Impact of US GAAP adjustments to combined financial statements . 16 (8)(205)
---- ---- ----
Net income/(loss) under US GAAP. . . . . . . . . . . . . . . . . 27 (47) 191
==== ==== ====
Basic earnings/(loss) per ordinary share under US GAAP (pence) . 2.3p (4.1)p6.7p
==== ==== ====
Diluted earnings/(loss) per ordinary share under US GAAP (pence) 2.3p (4.1)p6.7p
==== ==== ====
123
The basic and diluted (loss)/earnings per ordinary share under US GAAP includes
a 52.9% share of the following items:
(i) for 2000, 3.5p loss in respect of the costs of a major programme of
reorganisation across the Reed Elsevier businesses commenced in 1999 and
3.9p gain in respect of businesses disposed in 2000;
(ii) for 1999, 7.3p loss in respect of the costs of a major programme of
reorganisation across the Reed Elsevier businesses; and
(iii) for 1998, 24.1p in respect of profit on sale (under US GAAP) of
discontinued businesses and 12.3p loss in respect of the non-recurring
element of the incremental amortisation of goodwill and intangibles
arising as a consequence of the re-evaluation of the combined businesses'
asset lives.
Effects on shareholders' funds of material differences between UK and US GAAP
2000 1999
'L'm 'L'm
----- -----
Shareholders' funds under UK GAAP. . . . . . . . . . . . . . . 1,609 981
Impact of US GAAP adjustments to combined financial statements 264 238
Ordinary dividends not declared in the period. . . . . . . . . 88 63
----- -----
Shareholders' funds under US GAAP. . . . . . . . . . . . . . . 1,961 1,282
===== =====
Comprehensive Income Information
SFAS 130: Reporting Comprehensive Income, requires that all items that are
required to be recognised as components of comprehensive income under US GAAP
are reported in a separate financial statement. Under US GAAP comprehensive
income for 2000 would be 'L'74m (1999 'L'44m loss; 1998 'L'187m income). Under
US GAAP comprehensive income per share for 2000 would be 6.4p (1999 3.9p loss;
1998 16.3p income). Comprehensive income under US GAAP comprises net income for
the financial year, share of the comprehensive income items arising in the
combined businesses, equalisation and exchange translation differences.
124
ELSEVIER NV
FINANCIAL STATEMENTS
125
REPORT OF INDEPENDENT ACCOUNTANTS
To the members of the Supervisory and Executive Boards and the Shareholders of
Elsevier NV.
We have audited the accompanying balance sheets as of 31 December 2000 and
1999, and the related profit and loss accounts and statements of total
recognised gains and losses, changes in shareholders' funds and cash flows for
the three years ended 31 December 2000. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the Netherlands and the United States of America. Those standards
require that we plan and perform the audits to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall presentation of the financial statements. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Elsevier NV at 31 December 2000 and 1999 and
the results of its operations and its cash flows for the three years ended 31
December 2000 in conformity with accounting principles generally accepted in the
Netherlands (which differ in certain material respects from generally accepted
accounting principles in the United States of America --- see note 15).
DELOITTE & TOUCHE
Accountants
Amsterdam, The Netherlands
21 February 2001
126
ELSEVIER NV
PROFIT AND LOSS ACCOUNT
FOR THE YEAR ENDED 31 DECEMBER 2000
2000 1999 1998
Note 'E'm 'E'm 'E'm
------ ------ ------
Turnover
Including share of turnover of joint ventures. . . . . . . 3,091 2,577 2,375
Less: share of turnover of joint ventures. . . . . . . . . (3,091)(2,577) (2,375)
------ ------ ------
--- --- ---
Administrative expenses. . . . . . . . . . . . . . . . . . (3) (5) (7)
------ ------ ------
Operating loss (before joint ventures) . . . . . . . . . . 3 (3) (5) (7)
------ ------ ------
Share of operating profit of joint ventures
Before amortisation and exceptional items . . . . . . . . 654 608 612
Amortisation of goodwill and intangible assets . . . . . (384) (284) (247)
Exceptional items . . . . . . . . . . . . . . . . . . . . (95) (182) (59)
------ ------ ------
175 142 306
------ ------ ------
Operating profit including joint ventures. . . . . . . . . 172 137 299
------ ------ ------
Non operating exceptional items. . . . . . . . . . . . . . --- --- (8)
Share of non operating exceptional items of joint ventures 70 6 516
------ ------ ------
70 6 508
------ ------ ------
Net interest
Group . . . . . . . . . . . . . . . . . . . . . . . . . . 4 7 3 4
Share of net interest of joint ventures . . . . . . . . . (92) (66) (34)
------ ------ ------
(85) (63) (30)
------ ------ ------
Profit on ordinary activities before taxation. . . . . . . 157 80 777
Tax on profit on ordinary activities . . . . . . . . . . . (130) (128) (203)
------ ------ ------
Profit/(loss) attributable to ordinary shareholders . . . 27 (48) 574
Ordinary dividends paid and proposed . . . . . . . . . . . (200) (179) (263)
------ ------ ------
Retained (loss)/profit taken to reserves . . . . . . . . . (173) (227) 311
====== ====== ======
Adjusted figures
Profit before tax . . . . . . . . . . . . . . . . . . . . 5 566 540 575
Profit attributable to ordinary shareholders . . . . . . 5 419 401 425
====== ====== ======
Adjusted figures, which exclude the amortisation of goodwill and intangible
assets, exceptional items and related tax effects, are presented as additional
performance measures.
2000 1999 1998
Note 'E' 'E' 'E'
---- ----- ----
Earnings per share (EPS)
Basic EPS . . . . . . . 5 0.04 (0.07) 0.81
Diluted EPS . . . . . . 0.03 (0.07) 0.81
Adjusted EPS . . . . . 5 0.59 0.57 0.60
==== ===== ====
The above amounts derive from continuing activities.
2000 1999 1998
---- ---- ----
Weighted average number of shares (in millions)
Basic . . . . . . . . . . . . . . . . . . . . 715 708 708
Diluted . . . . . . . . . . . . . . . . . . . 716 709 709
==== ==== ====
The accompanying notes on pages F-62 to F-68 are an integral part of these
financial statements.
127
ELSEVIER NV
CASH FLOW STATEMENT
FOR THE YEAR ENDED 31 DECEMBER 2000
2000 1999 1998
'E'm 'E'm 'E'm
----- ---- ----
Net cash outflow from operating activities . . . . . . . . . . . . . . . . . (2) (5) (12)
Dividends received from joint ventures . . . . . . . . . . . . . . . . . . . 623 254 324
----- ---- ----
Interest received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 3 4
----- ---- ----
Returns on investments and servicing of finance. . . . . . . . . . . . . . . 4 3 4
----- ---- ----
Taxation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 --- ---
Investment in joint venture . . . . . . . . . . . . . . . . . . . . . . . . (533) --- ---
----- ---- ----
Acquisitions and disposals . . . . . . . . . . . . . . . . . . . . . . . . . (533) --- ---
----- ---- ----
Ordinary dividends paid. . . . . . . . . . . . . . . . . . . . . . . . . . . (160) (255)(288)
----- ---- ----
Cash (outflow)/inflow before changes in short term investments and financing (64) (3) 28
Increase in short term investments . . . . . . . . . . . . . . . . . . . . . (952) (2) ---
Issue of ordinary shares . . . . . . . . . . . . . . . . . . . . . . . . . 956 8 5
Net repayment of debenture loans . . . . . . . . . . . . . . . . . . . . . (2) --- ---
Increase/(decrease) in funding balances to joint ventures . . . . . . . . . 62 (3)(116)
----- ---- ----
Financing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,016 5 (111)
----- ---- ----
Change in net cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . --- --- (83)
===== ==== ====
The accompanying notes on pages F-62 to F-68 are an
integral part of these financial statements.
128
ELSEVIER NV
BALANCE SHEET
AS AT 31 DECEMBER 2000
2000 1999
Note 'E'm 'E'm
----- -----
Fixed assets. . . . . . . . . . . . . . . . . . . . . . 6 1,674 1,559
----- -----
Current assets
Debtors . . . . . . . . . . . . . . . . . . . . . . . . 7 5 61
Short term investments. . . . . . . . . . . . . . . . . 971 19
----- -----
976 80
Creditors: amounts falling due within one year. . . . . 8 (154) (102)
----- -----
Net current assets/(liabilities). . . . . . . . . . . . 822 (22)
----- -----
Total assets less current liabilities . . . . . . . . . 2,496 1,537
Creditors: amounts falling due after more than one year 9 (6) (8)
Provisions. . . . . . . . . . . . . . . . . . . . . . . 10 (42) (36)
----- -----
Net assets. . . . . . . . . . . . . . . . . . . . . . . 2,448 1,493
===== =====
Share capital issued. . . . . . . . . . . . . . . . . . 47 43
Paid-in surplus . . . . . . . . . . . . . . . . . . . . 1,328 385
Legal reserves. . . . . . . . . . . . . . . . . . . . . 432 847
Other reserves. . . . . . . . . . . . . . . . . . . . . 641 218
----- -----
Shareholders' funds . . . . . . . . . . . . . . . . . . 11 2,448 1,493
===== =====
The accompanying notes on pages F-62 to F-68 are an integral part of these
financial statements.
129
ELSEVIER NV
NOTES TO THE FINANCIAL STATEMENTS
1. Basis of financial statements
The accompanying financial statements have been prepared in conformity with
Dutch GAAP, which differ in certain significant respects from US GAAP; see note
15. Amounts in the financial statements are stated in euro ("'E"'). Certain
disclosures required to comply with Dutch statutory reporting requirements have
been omitted.
2. Accounting policies
The significant accounting policies adopted are as follows:
Basis of consolidation
As a consequence of the merger of the company's businesses with those of Reed
International, the shareholders of Elsevier and Reed International can be
regarded as having the interests of a single economic group, enjoying
substantially equivalent ordinary dividend and capital rights in the earnings
and net assets of the Reed Elsevier combined businesses.
Elsevier holds a majority interest in Elsevier Reed Finance BV (61%) and is
therefore required to prepare consolidated financial statements. However,
management believes that a better insight into the financial position and
results of Elsevier is provided by looking at the investment in the combined
businesses in aggregate, as presented in the Reed Elsevier combined financial
statements. Therefore, the Reed Elsevier combined financial statements form part
of the notes to Elsevier's statutory financial statements.
Elsevier's investments in the Reed Elsevier combined businesses are accounted
for using the gross equity method, as adjusted for the effects of the
equalisation arrangement between Reed International and Elsevier. The
arrangement lays down the distribution of dividends and net assets in such a way
that Elsevier's share in the profit and net assets of the Reed Elsevier combined
businesses equals 50%. All settlements accruing to shareholders from the
equalisation arrangement are taken directly to reserves.
Because the dividend paid to shareholders by Elsevier is equivalent to the Reed
International dividend plus the UK tax credit, Elsevier distributes a higher
proportion of the combined profit attributable than Reed International. Reed
International's share in this difference in dividend distributions is settled
with Elsevier and has been credited directly to reserves under equalisation.
Elsevier can pay a nominal dividend on its R-shares that is lower than the
dividend for the ordinary shares. Reed International will be compensated by
direct dividend payments by Reed Elsevier plc. Equally, Elsevier has the
possibility to receive dividends directly from Dutch affiliates. The settlements
flowing from these arrangements are also taken directly to reserves under
equalisation.
Basis of valuation of assets and liabilities
Goodwill and intangible assets are capitalised on acquisition and amortised
over a maximum period of 20 years.
Past service liabilities have been fully funded.
Other assets and liabilities are stated at face value.
Balance sheet amounts expressed in foreign currencies are translated at the
exchange rates effective at the balance sheet date. Currency translation
differences arising from the conversion of investments in joint ventures,
expressed in foreign currencies, are directly credited or charged to
shareholders' funds.
Tax is calculated on profit from Elsevier's own operations, taking into account
profit not subject to tax. The difference between the tax charge and tax payable
in the short term is included in the provision for deferred tax. This provision
is based upon relevant rates, taking into account tax deductible losses, which
can be compensated within the foreseeable future.
130
3. Operating loss
Operating loss is stated after the following:
2000 1999 1998
'E'm 'E'm 'E'm
---- ---- ----
Gross remuneration
Salaries. . . . . . . --- 5 4
Pension contributions --- --- 1
---- ---- ----
Total . . . . . . . . --- 5 5
==== ==== ====
<GrossE> remuneration represents the remuneration for present and former
directors of Elsevier in respect of services rendered to Elsevier and the
combined businesses. Fees for present and former members of the Supervisory
Board of Elsevier of 'E'0.2m (1999 'E'0.5m) are included in gross remuneration.
In so far as gross remuneration is related to services rendered to Reed Elsevier
plc and Elsevier Reed Finance BV, it is borne by these companies.
4. Net interest
2000 1999 1998
'E'm 'E'm 'E'm
---- ---- ----
Interest on receivables from joint ventures 2 2 3
Other net interest. . . . . . . . . . . . . 5 1 1
---- ---- ----
Net interest income . . . . . . . . . . . . 7 3 4
==== ==== ====
5. Adjusted figures
2000 1999 1998
'E'm 'E'm 'E'm
---- ---- ----
Profit before tax . . . . . . . . . . . . . . . . . . 157 80 777
Adjustments:
Amortisation of goodwill and intangible assets . . . 384 284 247
Exceptional items . . . . . . . . . . . . . . . . . 25 176 (449)
---- ---- ----
Adjusted profit before tax. . . . . . . . . . . . . . 566 540 575
==== ==== ====
Profit/(loss) attributable to ordinary shareholders . 27 (48) 574
Adjustments:
Amortisation of goodwill and intangible assets . . . 384 284 247
Exceptional items . . . . . . . . . . . . . . . . . 8 165 (396)
---- ---- ----
Adjusted profit attributable to ordinary shareholders 419 401 425
==== ==== ====
2000 1999 1998
'E' 'E' 'E'
---- ----- -----
Earnings/(loss) per ordinary share. . . . . . . 0.04 (0.07) 0.81
Adjustments:
Amortisation of goodwill and intangible assets 0.54 0.40 0.35
Exceptional items. . . . . . . . . . . . . . . 0.01 0.24 (0.56)
---- ----- -----
Adjusted earnings per ordinary share. . . . . . 0.59 0.57 0.60
==== ===== =====
131
6. Fixed assets
2000 1999
'E'm 'E'm
----- -----
Investment in joint ventures
At 1 January . . . . . . . . 1,559 1,661
Investment in joint venture 533 ---
Share in profits/(losses). . 24 (48)
Dividends received . . . . . (623) (254)
Currency translation . . . . 75 202
Equalisation (see note 11) . 106 (2)
----- -----
At 31 December . . . . . . . 1,674 1,559
===== =====
The investment in joint ventures comprises Elsevier's share at the following
amounts of:
2000 1999
'E'm 'E'm
------ ------
Fixed assets. . . . . . . . . . . . . . . . . . . . . . 3,781 3,144
Current assets. . . . . . . . . . . . . . . . . . . . . 1,229 1,021
Creditors: amounts falling due within one year. . . . . (2,572) (2,053)
Creditors: amounts falling due after more than one year (697) (491)
Provisions. . . . . . . . . . . . . . . . . . . . . . . (61) (55)
Minority interests. . . . . . . . . . . . . . . . . . . (6) (7)
------ ------
Total . . . . . . . . . . . . . . . . . . . . . . . . . 1,674 1,559
====== ======
The principal joint ventures are:
--- Reed Elsevier plc, London (50%)
--- Elsevier Reed Finance BV, Amsterdam (61%)
In addition, Elsevier holds Dfl 0.3m par value in shares with special dividend
rights in Reed Elsevier Overseas BV and Reed Elsevier Nederland BV, both with
registered offices in Amsterdam. These shares are included in the amount shown
under investment in joint ventures above. They enable Elsevier to receive
dividends from companies within the same tax jurisdiction.
7. Debtors
2000 1999
'E'm 'E'm
---- ----
Joint ventures. . . . . . --- 57
Other accounts receivable 5 4
---- ----
Total . . . . . . . . . . 5 61
==== ====
The accounts receivable from joint ventures bear interest.
8. Creditors: amounts falling due within one year
2000 1999
'E'm 'E'm
---- ----
Proposed dividend. . . . . . . . 140 100
Joint ventures . . . . . . . . . 5 ---
Accounts payable and other debts 9 2
---- ----
Total. . . . . . . . . . . . . . 154 102
==== ====
132
9. Creditors: amounts falling due after more than one year
2000 1999
'E'm 'E'm
---- ----
Debenture loans 6 8
==== ====
Debenture loans consist of four convertible personnel debenture loans with a
weighted average interest rate of 5.4%. Depending on the conversion terms, the
surrender of Dfl1,000 par value debenture loans qualifies for the acquisition of
40--60 Elsevier ordinary shares.
10. Provisions
2000 1999
'E'm 'E'm
---- ----
Deferred taxation 41 35
Pension . . . . . 1 1
---- ----
Total . . . . . . 42 36
==== ====
11. Shareholders' funds
Share
capital Paid-in Legal Other
issued surplus reserves reservesTotal
'E'm 'E'm 'E'm 'E'm 'E'm
------- ------- -------- -------------
Balance as at 31 December 1997 . . . . . . 32 383 783 841,282
Issue of ordinary shares, net of expenses --- 5 --- --- 5
Profit attributable. . . . . . . . . . . . --- --- 576 (2) 574
Ordinary dividends paid and proposed . . . --- --- --- (263)(263)
Dividends from joint ventures. . . . . . . --- --- (324) 324 ---
Currency translation . . . . . . . . . . . --- --- (98) --- (98)
Equalisation . . . . . . . . . . . . . . . --- --- 12 --- 12
------- ------- -------- -------------
Balance as at 31 December 1998 . . . . . . 32 388 949 1431,512
Redenomination of share capital into euros 11 (11) --- --- ---
Issue of ordinary shares, net of expenses --- 8 --- --- 8
Loss attributable. . . . . . . . . . . . . --- --- (48) --- (48)
Ordinary dividends paid and proposed . . . --- --- --- (179)(179)
Dividends from joint ventures. . . . . . . --- --- (254) 254 ---
Currency translation . . . . . . . . . . . --- --- 202 --- 202
Equalisation . . . . . . . . . . . . . . . --- --- (2) --- (2)
------- ------- -------- -------------
Balance as at 31 December 1999 . . . . . . 43 385 847 2181,493
Issue of ordinary shares, net of expenses 4 943 --- --- 947
Profit attributable. . . . . . . . . . . . --- --- 27 --- 27
Ordinary dividends paid and proposed . . . --- --- --- (200)(200)
Dividends from joint ventures. . . . . . . --- --- (623) 623 ---
Currency translation . . . . . . . . . . . --- --- 75 --- 75
Equalisation . . . . . . . . . . . . . . . --- --- 106 --- 106
------- ------- -------- -------------
Balance as at 31 December 2000 . . . . . . 47 1,328 432 6412,448
======= ======= ======== =============
On 5 December 2000, the company issued 66,255,000 new 'E'0.06 ordinary shares
at 'E'14.50 each following a joint international offering by Reed International
and Elsevier. The purpose of the offering was to finance the proposed
acquisition by Reed Elsevier of the Scientific, Technical and Medical business
and the Schools Education and Testing businesses of Harcourt General, Inc. The
nominal value of the shares issued by the company was 'E'4.0m and the net
proceeds were 'E'933m.
During 1999, the ordinary shares of Dfl 0.10 par value were redenominated as
ordinary shares of 'E'0.06 par value. This resulted in an increase in share
capital of 'E'11m which was transferred from the paid-in surplus account.
The authorised share capital consists of 2,100m ordinary shares and 30m
registered R-shares. As at 31 December 2000, the issued share capital consisted
of 735,717,794 (1999 668,251,106; 1998 667,303,771) ordinary shares of 'E'0.06
par value and 4,049,951 (1999 and 1998 4,049,951) R-shares of 'E'0.60 par value.
The R-shares are held by a subsidiary company of Reed International. The
R-shares are convertible at the election of the holder into ten ordinary shares
each. They have otherwise the same rights as the ordinary shares, except that
Elsevier may pay a lower dividend on the R-shares. Subject to renewal of the
authority to allot shares at the forthcoming Annual General Meeting, the boards
of Elsevier intend to allot an additional 629,298 R-shares to Reed Holding BV so
as to maintain Reed International's 5.8% indirect equity interest in Elsevier.
Within paid-in surplus, an amount of 'E'1,151m (1999 'E'208m: 1998 'E'211) is
free of tax.
Details of shares issued under share option schemes are set out in note 12.
133
12. Share option scheme
Reed Elsevier plc operates an Executive Share Option Scheme and options are
granted to selected full time employees of Reed Elsevier. Options granted over
Elsevier ordinary shares are normally exercisable after three years and may be
exercised up to 10 years from the date of grant at a price equivalent to the
market value of the Elsevier ordinary shares at the time of grant. The first
grant of options was during 1998.
Transactions during the three years ended 31 December 2000 were:
Number of
ordinary
shares of Exercise
'E'0.06 par price
value 'E'
---------- -----------
Outstanding at 31 December 1997 ---
Granted . . . . . . . . . . . 1,158,230 15.70
Exercised . . . . . . . . . . ---
Lapsed . . . . . . . . . . . . (25,870)
----------
Outstanding at 31 December 1998 1,132,360
Granted . . . . . . . . . . . 9,263,019 10.45-13.55
Exercised . . . . . . . . . . ---
Lapsed . . . . . . . . . . . . (152,312)
----------
Outstanding at 31 December 1999 10,243,067
Granted . . . . . . . . . . . 2,396,765 10.73-15.66
Exercised . . . . . . . . . . (301,498)10.45-15.70
Lapsed . . . . . . . . . . . . (548,789)
----------
Outstanding at 31 December 2000 11,789,545
==========
The above outstanding options will, upon exercise, be met by the issue of new
Elsevier ordinary shares. Options outstanding at 31 December 2000 were
exercisable by 2010. No options had vested at 31 December 2000.
During 2000 a total of 10,059,317 options were granted under the Reed Elsevier
plc Senior Executive Long Term Incentive Scheme at prices ranging between 10.73
and 15.66. Such options are exercisable from 1 January 2005 and the options will
be met by the issue of new Elsevier ordinary shares.
Options over Elsevier ordinary shares were granted until 1999 to senior
executives of Reed Elsevier plc under the Elsevier share option scheme. The
options are exercisable immediately after granting during a period of 5 to 10
years, after which the options will lapse. The strike price of the options is
the market price of the Elsevier ordinary shares at the time the option is
granted, except in the case of five year options granted during 1999, where the
strike price was 26% above the market price of an Elsevier ordinary share at the
time the option was granted.
Transactions during the three years ended 31 December 2000 were:
Number of
ordinary
shares of Exercise
'E'0.06 par price
value 'E'
---------- -----------
Outstanding at 31 December 1997 2,395,124
Granted . . . . . . . . . . . 727,050 12.50-15.70
Exercised . . . . . . . . . . (382,300) 6.65-14.11
----------
Outstanding at 31 December 1998 2,739,874
Granted . . . . . . . . . . . 233,285 13.55
Exercised . . . . . . . . . . (450,580) 6.65-14.11
----------
Outstanding at 31 December 1999 2,522,579
Granted . . . . . . . . . . . ---
Exercised . . . . . . . . . . (562,866)11.93-14.11
Lapsed . . . . . . . . . . . . (64,710)
----------
Outstanding at 31 December 2000 1,895,003
==========
134
The above options will, upon exercise, be met by the issue of new Elsevier
ordinary shares. Options outstanding at 31 December 2000 were exercisable by
2009. All options had vested at 31 December 2000.
Excluded from the above are options granted until 1999 under the Reed Elsevier
plc Executive Share Option Schemes (No. 2) which, upon exercise, will be met by
the Reed Elsevier Employee Benefit Trust (the "EBT") from shares purchased in
the market. At 31 December 2000 there were 1,429,428 such options outstanding at
exercise prices ranging between 10.45 and 15.7. The EBT will also be used to
satisfy nil cost options granted to certain senior executives. At 31 December
2000 there were 365,012 such options outstanding.
13. Contingent liabilities
There are contingent liabilities in respect of borrowings of the Reed Elsevier
plc group and Elsevier Reed Finance BV group guaranteed by Elsevier as follows:
2000 1999
'E'm 'E'm
----- -----
Guaranteed jointly and severally with Reed International 2,941 2,305
Guaranteed solely by Elsevier. . . . . . . . . . . . . . --- 1
===== =====
Financial instruments disclosures in respect of borrowings covered by the above
guarantees are given in note 24 to the Reed Elsevier combined financial
statements.
14. Proposal for allocation of profit
2000 1999 1998
'E'm 'E'm 'E'm
---- ---- ----
Interim dividend on ordinary shares 60 79 87
Final dividend on ordinary shares . 140 100 176
Dividend on R-shares. . . . . . . . --- --- ---
Retained (loss)/profit. . . . . . . (173)(227) 311
---- ---- ----
27 (48) 574
==== ==== ====
15. Summary of the principal differences between Dutch and US GAAP
The financial statements are prepared in accordance with Dutch GAAP, which
differ in certain significant respects from US GAAP. These differences relate
principally to the following items and the effect of material differences on net
income and shareholders' funds is shown in the following tables.
Impact of US GAAP adjustments to combined financial statements
Elsevier accounts for its 50% economic interest in the Reed Elsevier combined
businesses, before the effect of tax credit equalisation, by the equity method
in conformity with Dutch GAAP which is similar to the equity method in US GAAP.
Using the equity method to present its net income and shareholders' funds under
US GAAP, Elsevier reflects its 50% share of the effects of differences between
Dutch and US GAAP relating to the combined businesses as a single reconciling
item. The most significant differences relate to the capitalisation and
amortisation of goodwill and other intangibles, and deferred taxes. A more
complete explanation of the accounting policies used by the Reed Elsevier
combined businesses and the differences between Dutch and US GAAP is given in
note 30 to the Reed Elsevier combined financial statements.
Ordinary dividends
Under Dutch GAAP, dividends are provided for in the year in respect of which
they are proposed by the directors. Under US GAAP, such dividends would not be
provided for until they are formally declared by the directors.
Exceptional items
Exceptional items are material items within Elsevier's ordinary activities
which under Dutch GAAP are required to be disclosed separately due to their size
or incidence. These items do not qualify as extraordinary under US GAAP and are
considered a part of operating results.
Earnings per share
Under Dutch and US GAAP both basic and fully diluted earnings per share are
presented. Diluted earnings per share take account of the effects of additional
ordinary shares that would be in issue if outstanding dilutive potential shares
had been exercised (see note 3).
135
Stock based compensation
SFAS 123: Accounting for Stock Based Compensation, establishes a fair value
based method of computing compensation cost. It encourages the application of
this method in the profit and loss account instead of intrinsic value based
methods. Where fair values are not applied, the proforma effect on net income
must be disclosed.
The disclosure only provisions of SFAS 123 have been adopted. If Elsevier's
share of the combined businesses compensation costs based on fair value at the
grant date had been recognised in the profit and loss account, net income under
US GAAP would have been reduced by 'E'19m in 2000 (1999 'E'3m). Proforma basic
gain/(loss) per share, reflecting this cost, would have been 'E'0.05 (1999
('E'0.07)).
Effects on net income of material differences between Dutch and US GAAP
2000 1999 1998
'E'm 'E'm 'E'm
---- ----- ----
Net income/(loss) under Dutch GAAP . . . . . . . . . . . . . . 27 (48) 574
Impact of US GAAP adjustments to combined financial statements 31 2 (248)
---- ----- ----
Net income/(loss) under US GAAP. . . . . . . . . . . . . . . . 58 (46) 326
==== ===== ====
Basic earnings/(loss) per share under US GAAP ('E'). . . . . . 0.08 (0.06)0.46
==== ===== ====
Diluted earnings/(loss) per share under US GAAP ('E'). . . . . 0.08 (0.06)0.46
==== ===== ====
The basic and diluted (loss)/earnings per share under US GAAP includes a 50%
share of the following items:
(i) for 2000, 'E'0.09 loss in respect of the costs of a major programme of
reorganisation across the Reed Elsevier businesses commenced in 1999 and
0.10 gain in respect of businesses disposed in 2000;
(iifor
1999, 'E'0.18 loss in respect of the costs of a major programme of
reorganisation across the Reed Elsevier businesses; and
(iii) for 1998, 'E'0.55 in respect of profit on sale (under US GAAP) of
discontinued businesses and 'E'0.28 loss in respect of the non-recurring
element of the incremental amortisation of goodwill and intangibles
arising as a consequence of the re-evaluation of the combined
businesses' asset lives.
Effects on shareholders' funds of material differences between Dutch and US
GAAP
2000 1999
'E'm 'E'm
----- -----
Shareholders' funds under Dutch GAAP . . . . . . . . . . . . . 2,448 1,493
Impact of US GAAP adjustments to combined financial statements 396 358
Ordinary dividends not declared in the period. . . . . . . . . 140 100
----- -----
Shareholders' funds under US GAAP. . . . . . . . . . . . . . . 2,984 1,951
===== =====
Comprehensive Income Information
SFAS 130: Reporting Comprehensive Income, requires that all items that are
required to be recognised as components of comprehensive income under US GAAP
are reported in a separate financial statement. Under US GAAP comprehensive
income for 2000 would be 'E'238m (1999 'E'186m loss; 1998 'E'193m income). Under
US GAAP comprehensive income per share for 2000 would be 'E'0.33 (1999 'E'0.26
loss; 1998 'E'0.27 income). Comprehensive income under US GAAP comprises net
income for the financial year, share of the comprehensive income items arising
in the combined businesses, equalisation and exchange translation differences.
136
GLOSSARY OF TERMS
Terms used in Annual Report and Form 20-F US equivalent or brief description
Accruals Accrued expenses
Allotted Issued
Bank borrowings Payable to banks
Called up share capital Issued share capital
Capital allowances Tax term equivalent to US tax
depreciation allowances
Capital and reserves Shareholders' equity
Combined businesses Reed International P.L.C., Elsevier
NV, Reed Elsevier plc and
Elsevier Reed Finance BV and their
respective subsidiaries,
associates and joint ventures
Creditors Liabilities/payables
Current instalments of loans Long-term debt due within one year
Debtors Receivables and prepaid expenses
Finance lease Capital lease
Fixed asset investments Non-current investments
Freehold Ownership with absolute rights in
perpetuity
Interest receivable Interest income
Interest payable Interest expense
Loans Long-term debt
Prepayments Prepaid expenses
Profit Income
Profit and loss account Income statement/statement of
income
Reed Elsevier Reed International P.L.C., Elsevier
NV, Reed Elsevier plc and
Elsevier Reed Finance BV and their
respective subsidiaries,
associates and joint ventures
Short term investments Redeemable securities and short-
term deposits
Shareholders' funds Shareholders' equity
Share premium account Premiums paid in excess of par
value of ordinary shares
Stocks Inventories
Tangible fixed assets Property, plant and equipment
Turnover/revenues Sales
137
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, each of the Registrants certifies that it meets all of the requirements
for filing on Form 20-F and has duly caused this annual report to be signed on
its behalf by the undersigned, thereto duly authorised, on February 21, 2001.
REED INTERNATIONAL P.L.C. ELSEVIER NV
Registrant Registrant
By: C H L DAVIS By: C H L DAVIS
C H L Davis
Chief Executive Officer
C H L Davis
Member, Executive Board & Chief
Executive Officer
By: M H ARMOUR By: M H ARMOUR
M H Armour M H Armour
Chief Financial Officer Member, Executive Board & Chief
Financial Officer
Dated: February 21, 2001 Dated: February 21, 2001
138
LIST OF EXHIBITS
3.1 Memorandum and Articles of Association of Reed International P.L.C.
3.2 Memorandum and Articles of Association of Elsevier NV
3.3 Governing Agreement (as amended) between Reed International P.L.C. and
Elsevier NV
23.1
Independent Auditors' Consent --- Reed Elsevier combined financial
statements
23.2
Independent Auditors' Consent --- Reed International consolidated
financial statements
23.3
Independent Auditors' Consent --- Elsevier financial statements
139
STATEMENT OF DIFFERENCES
The British pound sterling sign shall be expressed ast . . . . . . . . . . 'L'
The Euro sign is expressed as . . . . . . . . . . . . . . . . . . . . . . 'E'
Characters normally expressed as subscript shall be preceded by . . . . . [u]