135136 Covers 25/2/02 21:36 Page 2 A N N U A L R E P O R T S & F I N A N C I A L S T A T E M E N T S 2 0 0 1 For the Reed Elsevier Combined Businesses, Reed International P.L.C. and Elsevier NV Reed Elsevier T A E L S E V I E R S C I E N C E • S C I E N C E D I R E C T • C H E M W E B • B I O M E D N E T • M D L I N F O R M A T I O N S Y S T E M S • S C I R U S • E X C E R P T A • F • • • N R T R M M E D I C A • T H E L A N C E T • G R A Y ’ S A N A T O M Y • A C A D E M I C P R E S S • C H U R C H I L L L I V I N G S T O N E • M O S B Y • W B S A U N D E R S • C E L L • B R A I N R E S E A R C H • O N C O L O G Y T O D A Y • T E T R A H E D R O N L E T T E R S • V A S C U L A R S U R G E R Y • E N C Y C L O P E D I A O F G E N E T I C S • L E X I S N E X I S • B U T T E R W O R T H S T O L L E Y • M A T T H E W B E N D E R • S H E P A R D ’ S • M A R T I N D A L E H U B B E L L • LEXIS.COM • N E X I S . C O M • E D I T I O N S D U J U R I S C L A S S E U R • M A L A Y A N L A W J O U R N A L • D E P A L M A • C O N O S U R • N I M M E R O N C O P Y R I G H T • H A L S B U R Y ’ S L A W S • M O O R E ’ S F E D E R A L P R A C T I C E • H A R C O U R T S C H O O L P U B L I S H E R S • L E X P O L O N I C A • R I G B Y • H E I N E M A N N • G I N N • G R E E N W O O D • H O LT R I N E H A R T A N D W I N S T O N • S T E C K - V A U G H N • T H E P S Y C H O L O G I C A L C O R P O R A T I O N • W E C H S L E R T E S T • H I . C O M . A U • S T A N F O R D A C H I E V E M E N T T E S T • W E C H S L E R I N T E L L I G E N C E S E R I E S • H A R C O U R T E D U C A T I O N A L M E A S U R E M E N T • E L E C T R O N I C D E S I G N N E W S • V A R I E T Y • R E S T A U R A N T S & I N S T I T U T I O N S • C O M P U T E R W E E K L Y • C O M M U N I T Y C A R E • N E W S C I E N T I S T • F L I G H T I N T E R N A T I O N A L • E S T A T E S G A Z E T T E • C N I . C O M • R A T I . C O M ( )£ ( $ ) ( % ) ( )€ • • E L S E V I E R • B E L E G G E R S B E L A N G E N • B I Z Z • Z I B B . N L • T O E R I S T I E K • M I D E M • W O R L D T R A V E L M A R K E T • H O T E LY M P I A • M B A T I M A T • B O O K E X P O • S T R A T E G I E S • M I P C O M • D O C T O R • K E L L Y ’ S D I R E C T O R I E S • F A R M E R S ’ W E E K L Y • T O T A L J O B S . C O M I n d i s p e n s a b l e g l o b a l i n f o r m a t i o n SCIENCE & MEDICAL LEGAL EDUCATION BUSINESS 135136 Covers 25/2/02 21:36 Page 3 CONTENTS 01...FINANCIAL HIGHLIGHTS 02...REVIEW OF 2001 FINANCIAL PERFORMANCE 13...STRUCTURE AND CORPORATE GOVERNANCE 17...REMUNERATION REPORT REED ELSEVIER COMBINED FINANCIAL STATEMENTS 26...ACCOUNTING POLICIES 28...COMBINED FINANCIAL STATEMENTS 32...NOTES TO THE COMBINED FINANCIAL STATEMENTS 54...INDEPENDENT AUDITORS’ REPORT REED INTERNATIONAL P.L.C. ANNUAL REPORT AND FINANCIAL STATEMENTS 56...FINANCIAL HIGHLIGHTS 57...DIRECTORS’ REPORT 60...ACCOUNTING POLICIES 61...FINANCIAL STATEMENTS 64...NOTES TO THE FINANCIAL STATEMENTS 70...INDEPENDENT AUDITORS’ REPORT ELSEVIER NV ANNUAL REPORT AND FINANCIAL STATEMENTS 72...FIVE YEAR FINANCIAL SUMMARY 73...THE SUPERVISORY BOARD’S REPORT 73...THE EXECUTIVE BOARD’S REPORT 74...FINANCIAL STATEMENTS 77...ACCOUNTING POLICIES 78...NOTES TO THE FINANCIAL STATEMENTS 81...AUDITORS’ REPORT 81...OTHER INFORMATION ADDITIONAL INFORMATION FOR US INVESTORS 84...REED ELSEVIER COMBINED BUSINESSES 89...REED INTERNATIONAL P.L.C. 91...ELSEVIER NV 92...PRINCIPAL OPERATING LOCATIONS This document contains detailed Annual Report and Accounts information in respect of the Reed Elsevier combined businesses and the two parent companies, Reed International P.L.C. and Elsevier NV. This, together with the separate summary document Reed Elsevier Annual Review and Summary Financial Statements 2001, forms the Annual Reports and Financial Statements of Reed International P.L.C. and Elsevier NV for the year ended 31 December 2001 and the two documents should be read together. 135136 pp01_12 Reed 25/2/02 21:37 Page 01 REED ELSEVIER Financial highlights The financial highlights refer to ‘adjusted’ profit and cash flow figures. These figures are used by the Reed Elsevier businesses as additional performance measures and are stated before the amortisation of goodwill and intangible assets, exceptional items and related tax effects. Adjusted pre-tax profit is presented for total operations; other highlights relate to continuing operations, which exclude the consumer publishing businesses sold in the period to 1998. 01 135136 pp01_12 Reed 25/2/02 21:37 Page 02 REED ELSEVIER Review of 2001 financial performance REVIEW OF OPERATIONS Turnover Science & Medical Legal Education Business Total Adjusted operating profit Science & Medical Legal Education Business Total 2001 £m 1,024 1,330 579 1,627 4,560 344 267 132 247 990 2000 £m 693 1,201 202 1,672 3,768 252 237 40 264 793 2001 €m 1,649 2,141 932 2,620 7,342 554 430 212 398 1,594 2000 €m 1,137 1,970 331 2,742 6,180 413 389 66 433 1,301 % change at constant currencies 44% 7% 177% (5)% 18% 34% 9% 218% (8)% 22% Adjusted figures, which exclude the amortisation of goodwill and intangible assets and exceptional items, are presented as additional performance measures. This review provides a commentary on the operating and financial performance of the Reed REVIEW OF OPERATIONS The combined financial statements encompass the Unless otherwise indicated, all percentage movements in the following commentary refer to Elsevier combined businesses for the year ended businesses of Reed Elsevier plc and Elsevier Reed constant currency rates, using 2000 full year 31 December 2001. In addition, it describes Finance BV, together with their parent companies, average rates, and are stated before the other financial aspects of the combined Reed International and Elsevier (the “Reed Elsevier amortisation of goodwill and intangible assets and businesses including taxation and treasury combined businesses” or “Reed Elsevier”). exceptional items. management and accounting policies. The review Financial information is presented in both sterling also includes information on the financial and euros. performance and dividends of the parent companies and on the finance activities of the Elsevier Reed Finance BV group. FORWARD-LOOKING STATEMENTS The Reed Elsevier Annual Reports & Financial Statements 2001 contain forward-looking statements within the meaning of Section 27A of the US Securities Act 1933, as amended, and Section 21E of the Securities Exchange Act 1934, as amended. These statements are subject to a number of risks and uncertainties and actual results and events could differ materially from those currently being anticipated as reflected in such forward-looking statements. The terms ‘expect’, ‘should be’, ‘will be’, and similar expressions identify forward-looking statements. Factors which may cause future outcomes to differ from those foreseen in forward-looking statements include, but are not limited to, general economic conditions and business conditions in Reed Elsevier’s markets, customers’ acceptance of its products and services, the actions of competitors, changes in law and legal interpretation affecting Reed Elsevier’s intellectual property rights, and the impact of technological change. 02 135136 pp01_12 Reed 25/2/02 21:37 Page 03 REED ELSEVIER SCIENCE & MEDICAL Turnover Science & Technology Health Sciences Adjusted operating profit Operating margin 2001 £m 748 276 1,024 344 33.6% 2000 £m 592 101 693 252 36.4% 2001 €m 1,204 445 1,649 554 33.6% 2000 €m 971 166 1,137 413 36.4% % change at constant currencies 24% 165% 44% 34% (2.8)pts SCIENCE & MEDICAL offset by cost savings particularly in production extended regulatory review process prior to The Science & Medical business has had following prior year rationalisation. The overall acquisition and some momentum in the another very successful year. Elsevier Science margin, at 34%, decreased by 2.8 percentage business was lost. On a pro forma calendar year has extended its leading position, growing points due to the inclusion of the lower margin basis, the Harcourt STM business saw revenue revenue well ahead of the market and Harcourt STM business. delivering double digit profit growth. The key and operating profit growth of 3% and 5% respectively in 2001 over 2000. The strategies indicators on ScienceDirect usage, penetration The ScienceDirect service saw its penetration of and management organisation for the enlarged and customer retention, all show good the subscriber base increase to 66% by value, up Elsevier Science business – within two divisions, progress. The Harcourt Science, Technical and from 45% a year ago and 25% a year before that. Science & Technology and Health Sciences – Medical (STM) business acquired in July 2001 Usage continues to grow strongly with annual are now in place and substantial progress has is contributing well and the business page views doubled over the year to 220 million. been made in the integration of the businesses. integration is well advanced. The majority of the targeted annual cost savings New product development has focused on of $40 million will be realised in 2002, Revenue and operating profits increased by customised subject collections and superior principally in production, technology and back 44% and 34% respectively at constant navigation tools. Good progress was made in a office functions. This will fund the investments exchange rates, including the part year three year programme to make all our historical being made in new online medical information contribution of the Harcourt STM business. scientific research archive available online on products and in sales and marketing. Excluding this and other acquisitions and ScienceDirect, with modules released in three disposals, revenue and operating profit growth Chemistry disciplines. Also well received by The outlook for the Science & Medical business were 8% and 13% respectively. The good sales customers has been the Scirus scientific web is good. Revenue growth momentum in Science performance was driven by stronger subscription search engine, which enables retrieval in a & Technology is strong and in Health Sciences renewals and growing sales of online products. focused way of scientific material from over is building. The opportunities in the medical 70 million pages available on the web. field for electronically delivered information and Underlying operating margins improved by solutions are growing and considerable. 2 percentage points reflecting the strong The Harcourt STM business made a satisfactory We have the investment plans in place to revenue growth and increasing operating contribution in the part year under Reed Elsevier capture this and the increases in investment will efficiency. Additional investments in new ownership. As previously reported, the business be funded from operational efficiencies. product, sales and marketing were more than was affected by the uncertainties of the Another good year can be expected in 2002. 03 2000 1500 1000 500 0 135136 pp01_12 Reed 25/2/02 21:37 Page 04 REED ELSEVIER Review of 2001 financial performance LEGAL Turnover LexisNexis North America LexisNexis International Adjusted operating profit Operating margin 2001 £m 1,041 289 1,330 267 20.1% 2000 £m 947 254 1,201 237 19.7% 2001 €m 1,676 465 2,141 430 20.1% 2000 €m 1,553 417 1,970 389 19.7% % change at constant currencies 6% 10% 7% 9% 0.4 pts LEGAL CD-ROM sales as business migrates online. The Martindale Hubbell legal directories business The Legal business has had a year of significant This compares with online revenue growth of 5% had another good year with strong renewals and business turnaround. For the first time in a in 2000 and reflects the strong performance of significant revenue growth from sales of lawyer number of years, we are showing encouraging the new and upgraded products and the impact home pages to the small law market and listings growth in the US and, with margins also now of the expanded sales force and better marketing. on the lawyers.com website. improving, there has been a positive initial In US Corporate and Federal markets, revenues turnaround in the business. The acceleration in increased by 5% with the upgraded nexis.com LexisNexis International businesses outside the US revenue growth represents a very satisfactory service continuing to make good progress. reported revenues and operating profits up 10% payback from the step up in investment over the Weakness in second half transactional volumes and 3% respectively, or 5% and 2% excluding last two years in product, sales and marketing. driven by the economic downturn was more than acquisitions, with a solid sales performance offset by strong demand in government and coupled with further investment in online services. Revenues and operating profits increased by 7% academic markets. and 9% respectively at constant exchange rates, Good sales growth in Europe and Asia Pacific was in part held back by the weaker market conditions or 5% and 9% excluding acquisitions. Operating Usage of the LexisNexis online services continues in Argentina. Online sales continued to grow margins improved by 0.4 percentage points to grow strongly with the number of searches up rapidly in the UK and significant new online reflecting the stronger revenue growth and 30% in the year. On average, LexisNexis handled product was launched in France. increased operational efficiency, particularly in over 400,000 searches each working day in the US. LexisNexis North America saw underlying 2001. Migration from the older proprietary online The outlook for the Legal business is good. revenue growth of 5%, which we estimate to be system to the easier to use and more functional Our products are doing well in their markets slightly ahead of market growth, and compares web products continues with over 80% of all legal and a continued high level of investment is with 2% in 2000. Operating profits were up 15% searches now web based. In addition to the building on this success. Margins are expected to compared with a 24% decline in 2000. growing commercial preference reflected in our improve further as revenues grow and investment In US Legal Markets, online revenues grew again been reaffirmed by the most recent strongly by 10% in part offset by lower print and independent market research in US law schools. revenues, the success of our web products has levels stabilise. 04 135136 pp01_12 Reed 25/2/02 21:37 Page 05 REED ELSEVIER EDUCATION SEGMENT Turnover Harcourt Education and Testing Reed Educational & Professional Publishing Adjusted operating profit Operating margin EDUCATION The Education businesses have had a very good year. The Harcourt Education and Testing businesses acquired in July 2001 have made an excellent contribution and transformed the division into a leading publisher in the global English speaking schools market. The Harcourt K-12 (Kindergarten – 12th grade) business again outperformed the US schools market in 2001 and has exceeded our high expectations. The Reed Educational & Professional Publishing business also had a good year. Revenues and operating profits increased substantially including the part year contribution of the Harcourt businesses. Excluding this and other acquisitions, revenues and operating profit growth for the Reed Educational & Professional Publishing business was 8% and 10% respectively at constant exchange rates. On a pro forma calendar basis, the Harcourt Education and Testing businesses saw revenues up 12% and operating profits up 10% in 2001 despite weaker performances in Canada and Trade Books. The Harcourt US K-12 business had another strong year in 2001 with pro forma revenue growth of 11%, significantly ahead of the market and on top of a very successful year in 2000. It won the highest overall market share in 2001 state adoption revenues in both the elementary and secondary schools markets. Particular successes 2001 £m 376 203 579 132 2000 £m 202 202 40 2001 €m 605 327 932 212 2000 €m 331 331 66 22.8% 19.8% 22.8% 19.8% % change at constant currencies (1)% 177% 218% 3.0 pts in the elementary market were achieved in California maths and science, Florida social studies and Texas language arts. In the secondary market, the literature and language arts programmes, Elements of Literature and Elements of Language, were very successful, as was the science programme, particularly in California. Strong performances were also achieved in open states with the reading, science and maths programmes. Significant progress has also been made in the development of our e-learning strategy for the US market, focused around electronically delivered curriculum content, teacher professional development and classroom based testing. To accelerate the creation of our e-content, in October 2001 we entered into a co-development alliance with Riverdeep Inc, a leading electronic curriculum content developer. In September we acquired Classroom Connect, the leading online professional development company for the schools market. For e-testing, we are building on Harcourt’s substantial test creation expertise. The Harcourt Testing businesses saw pro forma revenue growth of 22% in 2001 with good growth boosted by significant one off incremental requirements on existing state testing contracts. The business moved into new and expanded facilities in the year, and scoring capacity is being added to position it well to capture the opportunities in the rapidly growing testing market. The Reed Educational & Professional Publishing business saw underlying revenue and operating profit growth of 8% and 10% respectively, with particularly strong performances from the Rigby US supplemental business and in UK secondary schools driven by strong publishing to meet changes in the curriculum. The global library business also performed well, particularly in the US. Rigby is now being integrated with the Harcourt Steck-Vaughn supplemental business to form one unified US supplemental unit. Reported revenues for Reed Educational & Professional Publishing were 1% down, after reflecting the transfer of the Butterworth- Heinemann academic book publishing activities to Science & Medical where the technical publishing programme has greater fit. The outlook for the Education business is good. The US schools education market is not expected in 2002 to repeat its most recent growth, largely as a result of the phasing of the state adoption cycle. We have however strong programmes for 2002 and fully expect to have a satisfactory year of growth outperforming a somewhat dull market. The integration of the US supplemental businesses and cost savings programmes across the Harcourt Education supply chain and infrastructure are expected to fund over $20 million of additional investment in e-learning strategies. 05 135136 pp01_12 Reed 25/2/02 21:37 Page 06 REED ELSEVIER Review of 2001 financial performance BUSINESS Turnover Cahners Business Information Reed Business Information Elsevier Business Information Reed Exhibition Companies Other Adjusted operating profit Operating margin 2001 £m 593 260 263 446 65 1,627 247 15.2% 2000 £m 665 270 278 358 101 1,672 264 15.8% 2001 €m 955 419 423 718 105 2,620 398 15.2% 2000 €m 1,090 443 456 587 166 2,742 433 15.8% % change at constant currencies (15)% (4)% (7)% 23% (5)% (8)% (0.6)pts BUSINESS and above the restructurings in 2000. Good growth was seen in Property, Social The Business division has had a very difficult Internet spend has been scaled back reflecting Services and Science titles and in online year with the progressive weakening of global the market circumstances. Total savings, on services, mitigating to some extent the revenue economic conditions exacerbated by the events of September 11 which particularly affected US markets. Whilst aggressive actions top of directly variable costs, amounted to approximately £45m/€72m in the year. Operating margins at 15% were only slightly decline in IT and other advertising markets. Overall market share was increased significantly. Underlying operating profits were 10% lower have been taken to reduce costs, the focus has lower than in the prior year reflecting the cost reflecting a combination of reduced revenues also been on improving yields and building savings made, with some margin dilution from and increased funding for successfully growing market share through strengthening sales and portfolio changes. online services, in particular totaljobs.com. marketing activities and improving product quality. The division significantly outperformed In the US, Cahners Business Information saw In Continental Europe, Elsevier Business the Business to Business market reflecting underlying revenues 13% lower, impacted by the Information saw underlying revenues up 4% this share growth, the sector and geographic slowdown in the US economy and the hiatus driven by growth in subscriptions/circulation spread of the business, and the market leading caused by the September 11 events, with ad particularly in Regulatory, Human Resources positions of our titles and exhibitions. pages in Manufacturing, Electronics and and Healthcare, whilst advertising was generally TV/Telecommunications most affected. Market weaker in the second half of the year reflecting Revenues and operating profits were down share gains were however made in many sectors the economic slowdown. Underlying operating 5% and 8% respectively on the prior year reflecting the investments made in product, sales profits were 16% lower as investment was made at constant exchange rates, or 3% and and marketing and the greater resilience of our in upgrading product, new online initiatives and 8% excluding acquisitions and disposals. market leading titles in a downturn. Underlying sales and marketing, as well as additional costs The revenue decline was driven by falls in operating margins were held, due to the cost associated with systems changes. advertising particularly in the US partly offset actions taken, despite the revenue drop. by good growth in the Exhibitions business. Reed Exhibition Companies performed strongly Cost actions were taken across the division with In the UK, Reed Business Information despite the tough economic environment. substantial additional headcount reductions over underlying revenues were 3% lower. Revenues and operating profits grew by 9% and 06 135136 pp01_12 Reed 25/2/02 21:37 Page 07 REED ELSEVIER 6% respectively excluding acquisitions and and businesses. These included the travel The outlook for the Business division in 2002 is disposals. This was driven by strong publishing businesses, OAG Worldwide and clearly challenging given the progressive slowdown performances in annual shows, particularly in Cahners Travel Group, the Bowker bibliographic in the global economic environment in 2001 and Europe at the international Midem shows and in business, Cahners’ automotive and metals uncertainties as to the timing and speed of a Asia Pacific, and some benefit from the phasing titles, RBI’s retail and hobby electronics titles, recovery. Whilst global advertising markets have of non annual shows. Revenues in the US were EBI’s consumer encyclopedia and certain been particularly affected by the slowdown, particularly impacted by the cancellation of a training businesses, and minor exhibitions. circulation revenues and the exhibitions business number of shows immediately following This substantially completes the disposal are proving more resilient. Revenues may be a September 11, although the profit impact was programme started in 2000 and, with the little lower in 2002, with the first half suffering mitigated by insurance recoveries. The Miller acquisitions also made, represents a major particularly in comparison against a strong first Freeman Europe shows, acquired in July 2000 reshaping of the Business division. We have half in 2001, however margins have largely been and not included in the underlying growth exited sectors which were non core, lower protected by the aggressive cost actions already figures, had an excellent year. growth or where we did not have leading taken. The outlook for the longer term is positive During the year a significant number of sustainable growth and quality. sharply focused business around attractive, higher disposals were made of non core titles, shows growth sectors. positions, to focus on sectors with more as economic conditions improve with a more REED ELSEVIER COMBINED BUSINESSES Reported figures Turnover Operating profit Profit before taxation Net borrowings Adjusted figures Operating profit Operating margin Profit before taxation Operating cash flow Operating cash flow conversion Interest cover (times) 2001 £m 4,560 391 275 3,229 990 22% 848 1,006 102% 7 2000 £m 3,768 210 192 433 793 21% 690 775 98% 8 2001 €m 7,342 630 442 5,296 1,594 22% 1,365 1,620 102% 7 Change at constant currencies % 18% 84% 44% 22% 1pt 20% 26% 2000 €m 6,180 344 315 697 1,301 21% 1,132 1,271 98% 8 Adjusted figures, which exclude the amortisation of goodwill and intangible asset and exceptional items, are presented as additional performance measures. REED ELSEVIER COMBINED BUSINESSES Profit & Loss The reported profit before tax for the Reed Elsevier combined businesses, including €7,342m, including the contribution from the Harcourt businesses acquired in July 2001. forma operating profit growth of 8%. Operating margins improved by 0.7 percentage points to Underlying revenue growth, excluding the impact 21.7% reflecting the pick up in revenue growth of acquisitions and disposals and currency across most businesses, coupled with the levelling exceptional items and the FRS10 amortisation translation effects, was 3%, or 6% before taking off of investment spend and the cost savings of goodwill and intangible assets, was £275m/€442m, which compares with a reported profit of £192m/€315m in 2000. The increase reflects higher underlying operating profits, partly offset by lower gains on disposals and by into account the decline in Business division programmes. Acquisitions and disposals were revenues driven by the global economic broadly neutral to the overall margin. downturn. The Harcourt businesses saw revenue growth of 8% on a pro forma calendar year basis. acquisitions after taking into account financing, goodwill and intangible asset amortisation, and Adjusted operating profits, excluding exceptional items and the amortisation of goodwill and The amortisation charge for intangible assets and goodwill amounted to £501m/€806m, up £33m/€38m, principally reflecting the mid year acquisition of the Harcourt businesses. exceptional integration and related costs. The reported attributable profit of £126m/€202m compares with £33m/€54m in 2000. intangible assets, were up 25% expressed in The goodwill and intangible assets of these sterling at £990m, and up 23% expressed in euros at €1,594m, including the part year contribution of Harcourt. Underlying operating profit growth was businesses are being amortised over periods up to 40 years. The useful lives of the goodwill and intangible assets relating to previously acquired Turnover increased by 21% expressed in sterling to £4,560m, and by 19% expressed in euros to 5%, or 10% excluding the Business division. science and medical publishing businesses have Additionally the Harcourt businesses saw pro been reassessed and extended to conform with 07 135136 pp01_12 Reed 25/2/02 21:37 Page 08 REED ELSEVIER Review of 2001 financial performance those of the Harcourt assets with which they are being integrated. This has had the effect of reducing the annual amortisation charge by £20m/€32m. Exceptional items showed a pre-tax charge of £72m/€117m, comprising £63m/€102m of Harcourt and other acquisition integration and related costs, and £35m/€56m in respect of restructuring actions taken particularly in the Business division in response to the global economic downturn, less £26m/€41m gain on sale of businesses. After a tax credit of £81m/€130m arising on restructuring and disposals, exceptional items showed a post-tax gain of £9m/€13m. This compares with a net post-tax charge on exceptional items in 2000 of £10m/€16m. Net interest expense, at £142m/€229m, was £39m/€60m higher than in the previous year principally due to the financing of the Harcourt Cash flows, acquisitions, disposals and debt Reed Elsevier generates significant cash flows as its principal businesses do not require major fixed or working capital investments. Capital expenditure principally relates to computer equipment and investment in systems infrastructure to support electronic publishing activities. Total capital expenditure in the year amounted to £178m/€287m, up £34m/€51m from the prior year level reflecting greater spending on IT systems and the inclusion of the Harcourt businesses. Depreciation in the year was £132m/€213m. Working capital requirements are negative overall, due to the substantial proportion of revenues received through subscription and similar advanced receipts. Adjusted operating cash flow, before exceptional items, was £1,006m/€1,620m representing a conversion rate of operating profit into cash flow businesses amounted £3,065m/€4,934m, including debt on completion of £1,040m/€1,674m. An amount of £3,097m/€4,986m was capitalised as goodwill and intangible assets. The 2001 acquisitions contributed £149m/€240m to adjusted operating profit in the year and added £286m/€460m to operating cash flow. Net borrowings at 31 December 2001 were £3,229m/€5,296m, an increase of £2,796m/€4,599m on the prior year end, which principally reflects the spend on acquisitions, less free cash flow. Gross borrowings at 31 December 2001 amounted to £3,664m/€6,009m, denominated mostly in US dollars, and were partly offset by cash balances totalling £435m/€713m invested in short term deposits and marketable securities. Approximately 93% of cash balances of 102%, up 4 percentage points on 2000. were held in sterling, euros and US dollars. acquisition, less the benefit of the share placing The conversion rate is flattered by the seasonality A total of 78% of Reed Elsevier’s gross in December 2000. Net interest cover was of the Harcourt operating cash flows which favour 7 times. the second half. Excluding that effect, the conversion rate was approximately 85% reflecting borrowings were at fixed rates, including £1,528m/€2,506m of floating rate debt fixed through the use of interest rate swaps. Adjusted profit before tax at £848m/€1,365m was up 23% expressed in sterling, 21% expressed in euros, or 20% at constant exchange rates. Approximately 9% of this growth at constant rates arises from the financial benefits of the share proceeds received in December 2000 ahead of the Harcourt acquisition and 8% from the contribution post financing of the Harcourt acquisition. Dilution from disposals was 2% with a further 2% expected in 2002. The effective tax rate on adjusted earnings was slightly higher at 26.3% (2000 25.9%). The adjusted profit attributable to shareholders of £624m/€1,005m compared to £511m/€838m in 2000, 20% higher at constant exchange rates. higher capital spend in 2001 and movements in At 31 December 2001, the fixed rate debt had working capital. Free cash flow – after interest, taxation and dividends but before acquisition spend and exceptional receipts and payments – was £459m/€738m compared to £334m/€548m in 2000. Net exceptional cash inflows of £140m/€225m include £96m/€154m proceeds from sale of businesses and £141m/€227m of reduced tax payments less exceptional acquisition related costs and restructuring. a weighted average interest coupon of 6.8% and an average remaining life of 10.5 years. The net interest expense also reflects the interest yield differentials between short term investments and long term fixed rate borrowings. ACQUISITION OF HARCOURT On 12 July 2001, Reed Elsevier acquired the entire share capital of Harcourt General, Inc for US$4.45 billion (£3.2 billion/€5.2 billion) following a successful tender offer of US$59 per share of common stock or share equivalent. In 2001, acquisitions were made for a total consideration of £3,242m/€5,219m, of which the Harcourt STM and Education and Testing Certain businesses – the Harcourt Higher Education business and the Corporate & Professional Services businesses other than 08 135136 pp01_12 Reed 25/2/02 21:37 Page 09 REED ELSEVIER educational and clinical testing – were The Harcourt businesses acquired have Financial instruments are used to finance the immediately on-sold to The Thomson Corporation seasonality in sales, profits and cashflows, most Reed Elsevier business and to hedge for US$2.06 billion, on which taxes of particularly in the K-12 Schools business and to a transactions. Reed Elsevier’s businesses do not approximately US$0.5 billion were payable over lesser extent in Health Sciences, which favours enter into speculative transactions. The main 12 months. Harcourt General debt on completion the second half of the year. On a calendar basis, risks faced by Reed Elsevier are liquidity risk, was approximately US$1.5 billion. in 2001, approximately 55% of sales, 65% of interest rate risk and foreign currency risk. The operating profits and all of the operating cash Boards of the parent companies agree overall Reed Elsevier retained Harcourt’s Scientific, flow arose in the July to December period. policy guidelines for managing each of these risks Technical and Medical (STM) business and its K- and the Boards of Reed Elsevier plc and Elsevier 12 (Kindergarten – 12th grade) Schools Education The benefits of this second half phasing to Reed Finance SA agree policies (in conformity with and Testing businesses for an implied total value Elsevier’s reported 2001 figures was less marked parent company guidelines) for their respective of approximately US$4.5 billion, including the than this since July is by far the most significant business and treasury centres. These policies are assumption of certain corporate liabilities and month for sales and profit and the Harcourt summarised below and have not changed looking through seasonal cashflow variations. businesses are accounted for from 12 July. significantly since the beginning of 2001. The acquisition was financed initially from the A review of the goodwill and intangible assets of US$1.8 billion of cash proceeds of the joint the Harcourt businesses indicated that an Funding Reed Elsevier develops and maintains a range international share offering in December 2000, expected useful life of up to 40 years would be of borrowing facilities and debt programmes to the assumption of US$0.9 billion of Harcourt appropriate for these assets. Accordingly, the fund its requirements, at short notice and at General public debt, and from short term maximum estimated useful life under Reed competitive rates. The significance of Reed commercial paper borrowings. In July 2001, Elsevier’s accounting policy of amortising goodwill Elsevier plc’s US operations means that the US$1.5 billion of short term borrowings were and intangible assets has been increased from majority of debt is denominated in US dollars and refinanced through a multi-currency multi-tranche 20 years to 40 years. global bond offering, under which were issued US$550 million 5 year notes, €500 million 7 year notes swapped to US dollars, and US$550 million TREASURY POLICIES The Boards of Reed International and Elsevier Elsevier maintains a maturity profile to facilitate refinancing. Reed Elsevier’s policy is that no more is raised in the US debt markets. A mixture of short term and long term debt is utilised and Reed 10 year notes. Taking into account the funding have requested that Reed Elsevier plc and than US$1,000m of long term debt should mature mix and interest rate hedging undertaken on Elsevier Finance BV have due regard to the in any 12-month period. In addition, minimum signing of the definitive purchase agreement, the best interests of Reed International and proportions of net debt with maturities over three average annual funding cost is approximately Elsevier shareholders in the formulation of years and five years are specified, depending on 7.2% for the incremental debt. treasury policies. the level of the total borrowings. 09 135136 pp01_12 Reed 25/2/02 21:37 Page 10 REED ELSEVIER Review of 2001 financial performance During 2001, the debt maturity profile of Reed derivatives and over two thirds of fixed rate term local currencies of the 12 European countries now Elsevier was lengthened considerably following the debt having matured by 2009 and 2011 participating in European Economic and Monetary Harcourt acquisition, with the assumption of respectively. Union (“EMU”). The Netherlands is a participant; US$0.9 billion of Harcourt General public term the United Kingdom is not. debt and the US$1.5 billion global bond offering in At 31 December 2001, fixed rate term debt (not July. After taking account of the maturity of swapped back to floating rate) amounted to The implications for Reed Elsevier businesses have committed bank facilities that back short term US$1.9 billion and had a weighted average life been low relative to many other multinational borrowings, at 31 December 2001, all debt had a remaining of 19.7 years (31 December 2000 European companies. Principally this is because, maturity beyond one year, with 24% maturing in 13.4 years). Interest rate derivatives in place at with the significant exception of Elsevier Science, December of the second year, 14% in the third 31 December 2001 which fix or cap the interest which already publishes global prices, Reed year, 15% in the fourth and fifth years, 32% in five cost on an additional US$2.0 billion of variable rate Elsevier’s businesses price in the local currency of to ten years, and 15% beyond ten years. US dollar debt, have a weighted average maturity the country in which they operate and have limited Security of funding for the acquisition of Harcourt of 3 years. cross border trade. As a result, the most significant issue arising was the timing of euro based General was provided by a US$8.5 billion credit On launch of the US$1.5 billion multi currency marketing and invoicing and the transfer to euro facility arranged in October 2000 and syndicated global bond offering in July 2001, Reed Elsevier denominated business and financial systems. in December 2000. On completion in July 2001, managed its fixed to floating rate mix to comply In this respect, during 2001, Reed Elsevier this facility had been substantially reduced with policy limits by simultaneously swapping the businesses had put in place systems to following the successful renegotiation of fixed rate euro notes into variable rate dollars and accommodate the euro. US$1.0 billion of other committed facilities, receipt by swapping the five year fixed rate US dollar notes of the US$1.8 billion share placement proceeds, into variable rate dollars. In this way, Reed Elsevier assumption of the US$0.9 billion Harcourt General secured term funding whilst retaining its preferred public debt and receipt of the Thomson on-sale balance of fixed rate and variable rate debt. ELSEVIER REED FINANCE BV Structure Elsevier Reed Finance BV, the Dutch resident parent company of the Elsevier Reed Finance BV proceeds. Following the US$1.5 billion term debt issue later in July, the facility was cancelled down to its 31 December 2001 level of US$2.5 billion. Foreign currency exposure management Translation exposures arise on the earnings and group (“ERF”), is directly owned by Reed International and Elsevier. ERF provides treasury, net assets of business operations in countries other finance and insurance services to the Reed Elsevier At 31 December 2001, Reed Elsevier had access than those of the parent companies. These plc businesses through its subsidiaries in to US$3.5 billion of committed bank facilities exposures are hedged, to a significant extent, by a Switzerland: Elsevier Finance SA (“EFSA”), Elsevier which principally provide back up for short term policy of denominating borrowings in currencies Properties SA (“EPSA”) and Elsevier Risks SA debt but also security of funding for future where significant translation exposures exist, most (“ERSA”). These three Swiss companies are acquisition spend in the event that commercial notably US dollars. paper markets are not available. organised under one Swiss holding company, which is in turn owned by Elsevier Reed Finance BV. Currency exposures on transactions denominated Interest rate exposure management Reed Elsevier’s interest rate exposure management in a foreign currency are required to be hedged using forward contracts. In addition, recurring Activities EFSA, EPSA and ERSA each focus on their own policy is aimed at reducing the exposure of the transactions and future investment exposures may specific area of expertise. combined businesses to changes in interest rates. be hedged, within defined limits, in advance of The proportion of interest expense that is fixed on becoming contractual. The precise policy differs EFSA is the principal treasury centre for the net debt is determined by reference to the level of according to the commercial situation of the combined businesses. It is responsible for all net interest cover. Reed Elsevier uses fixed rate individual businesses. Expected future net cash aspects of treasury advice and support for Reed term debt, interest rate swaps, forward rate flows may be covered for sales expected for up to Elsevier plc’s businesses operating in Continental agreements and a range of interest rate options to the next 12 months (50 months for Elsevier Europe and certain other territories and undertakes manage the exposure. Interest rate derivatives are Science subscription businesses up to limits foreign exchange and derivatives dealing services used only to hedge an underlying risk and no net staggered by duration). Cover takes the form of for the whole of Reed Elsevier. EFSA also provides market positions are held. foreign exchange forward contracts. Reed Elsevier plc businesses with financing for At 31 December 2001, approximately 95% of At the year-end, the amount of outstanding foreign manages cash pools and investments. Reed Elsevier’s net debt is denominated in US dollars on which approximately 80% of forecast net interest expense absent acquisitions is capped for exchange cover in respect of future transactions was £0.5 billion/€0.8 billion. the next three years. This capped percentage reduces thereafter over time, with all interest rate European Economic and Monetary union On 1 January 2002, the euro fully replaced the EPSA is responsible for the exploitation of tangible and intangible property rights whilst ERSA is responsible for insurance activities relating to risk retention. acquisitions and product development and 10 135136 pp01_12 Reed 25/2/02 21:37 Page 11 REED ELSEVIER Major developments During the year, additional loans to Reed Elsevier plc businesses in the US of US$2.5 billion were debt outside of the Swiss domestic public market The average balance of cash under management, to diversify its sources of funding. on behalf of Reed Elsevier plc and its parent made, of which US$2.2 billion was to finance EFSA continued to advise Reed Elsevier plc the acquisition of Harcourt General, Inc. businesses on the treasury implications of the introduction of the euro and all euro transfer Additional loans to Reed Elsevier plc businesses in Europe of €0.1 billion were made. To fund this additional lending and to provide capacity to programmes progressed according to plan, with gross assets were held in US dollars, including no major issues arising following the conversion US$6.8 billion in loans to Reed Elsevier plc companies, was approximately US$1.1 billion. Liabilities and assets At the end of 2001, 91% (2000 87%) of ERF’s meet new lending requests, ERF raised in January 2002. EFSA also organised bank subsidiaries. The euro currency block US$1.3 billion by means of a rights issue to tenders in several European and Asian countries represented 9% of total assets (2000 12%). which both Reed International and Elsevier and implemented cash-pooling arrangements. subscribed and the funds were contributed to It also advised Reed Elsevier plc companies in Liabilities included US$1.2 billion in US dollars EFSA. A US$3 billion US commercial paper Europe on the establishment of collection and US$0.6 billion equivalent in euro currencies, programme had been established by EFSA in mechanisms for payments arising from internet borrowed under the US and euro commercial December 2000 in anticipation of the new loans. portal services. The volume of foreign exchange paper programmes, the Swiss domestic bond Following this increase in debt, EFSA is dealt by EFSA during 2001 amounted to and committed bank credit facilities. developing alternative routes for issuing term approximately US$0.8 billion equivalent. 11 135136 pp01_12 Reed 25/2/02 21:37 Page 12 REED ELSEVIER Review of 2001 financial performance PARENT COMPANIES Reported profit attributable Adjusted profit attributable Average exchange rate €:£ Reported earnings per share Adjusted earnings per share Dividend per share 2001 £m 61 330 1.61 4.8p 26.1p 10.5p Reed International 2000 £m 11 270 1.64 1.0p 23.3p 10.0p % change 22% 12% 5% 2001 €m 101 503 1.61 €0.13 €0.64 €0.30 Elsevier 2000 €m 27 419 1.64 €0.04 €0.59 €0.28 % change 20% 8% 7% 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. PARENT COMPANIES Profit and loss account Adjusted earnings per share for Reed International were 26.1p, up 12% on the previous year, and for Elsevier were €0.64, an increase of 8%. The difference in percentage change is entirely Dividends Dividends to Reed International and Elsevier Dividend cover for Reed International, using adjusted earnings, was 2.5 times. For Elsevier, the shareholders are equalised at the gross level, adjusted dividend cover was 2.1 times. Measured including the benefit of the UK attributable tax for the combined businesses, dividend cover was credit of 10% received by certain Reed 2.3 times compared with 2.1 times in 2000. International shareholders. The exchange rate attributable to the impact of currency movements used for each dividend calculation – as defined in on the translation of reported results. At constant the Reed Elsevier merger agreement – is the spot rates of exchange, the adjusted earnings per share euro/sterling exchange rate, averaged over a period of both companies would have shown an increase of five business days commencing with the tenth of 10% over the previous year. business day before the announcement of the 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 4.8p and €0.13, compared to 1.0p and €0.04 respectively in 2000. The Reed International and Elsevier annual reports and financial statements are presented on proposed dividend. The Board of Reed International has proposed a final dividend of 7.4p, giving a total dividend of 10.5p for the year, up 5% on 2000. The Boards of Elsevier, in accordance with the dividend equalisation arrangements, have proposed a final dividend of €0.21. This results in a total dividend of €0.30 for the year, 7% higher than in 2000. The difference in percentage growth is attributable pages 56 to 81. to currency movements. 12 135136 pp13-24 Reed 25/2/02 21:37 Page 13 REED ELSEVIER Structure and corporate governance STRUCTURE Corporate structure International and Elsevier at the time of the The Boards of Reed International and Elsevier merger, which determined the equalisation have implemented standards of corporate Reed Elsevier came into existence in January ratio whereby one Elsevier ordinary share is, in governance and disclosure policies applicable 1993, when Reed International and Elsevier broad terms, intended to confer equivalent to companies listed on the stock exchanges of contributed their businesses to two jointly economic interests to 1.538 Reed International the United Kingdom and the Netherlands. owned companies, Reed Elsevier plc, a UK ordinary shares. The equalisation ratio is The effect of this is that an obligation applying registered company which owns the publishing subject to change to reflect share splits and to one of Reed International or Elsevier will, and information businesses, and Elsevier Reed similar events that affect the number of where practicable and not in conflict, also be Finance BV, a Dutch registered company which outstanding ordinary shares of either Reed observed by the other. Reed International, owns the financing activities. Reed International International or Elsevier. which has its primary listing on the London and Elsevier have retained their separate legal Stock Exchange, has complied throughout the and national identities and are publicly held Under the equalisation arrangements, Reed period under review with the provisions of companies with separate stock exchange International shareholders have a 52.9% Section 1 of the Combined Code, other than in listings in Amsterdam, London and New York. economic interest in Reed Elsevier, and relation to the designation of a senior Elsevier shareholders (other than Reed independent non-executive director other than Proposed name changes International) have a 47.1% economic interest the Chairman. Although such a designation Following the harmonisation of the Boards of in Reed Elsevier. Holders of ordinary shares in had not been made at the commencement of Reed International, Elsevier and Reed Elsevier Reed International and Elsevier enjoy the period under review, the Board designated plc during 1999, and in recognition of the substantially equivalent dividend and capital Dr Stomberg as the senior independent benefits of this management structure and the rights with respect to their ordinary shares. non-executive director during the period. equivalence of economic interests, a proposal Elsevier, which has its primary listing on will be submitted to the forthcoming Annual The Boards of both Reed International and Euronext in Amsterdam, has complied General Meeting of Reed International to Elsevier have agreed, except in exceptional throughout the period under review with the change that company’s name to Reed Elsevier circumstances, to recommend equivalent listing rules of Euronext in Amsterdam, and PLC. Similarly, a proposal will be submitted to gross dividends (including, with respect to the best custom and practice appropriate to the forthcoming Annual General Meeting of dividend on Reed International ordinary internationally focused Dutch companies. Elsevier to change that company’s name to shares, the associated UK tax credit), based Reed Elsevier NV. The existing company that on the equalisation ratio. A Reed International The way in which the relevant principles owns the publishing and information ordinary share pays dividends in sterling and of corporate governance are applied and businesses, currently named Reed Elsevier is subject to UK tax law with respect to complied with within Reed International, plc, will, in turn, change its name to Reed dividend and capital rights. An Elsevier Elsevier, Reed Elsevier plc and Elsevier Elsevier Group plc. ordinary share pays dividends in euros and is Reed Finance BV is described below. subject to Dutch tax law with respect to The above changes will not affect the dividend and capital rights. Reed International and Elsevier participate in equalisation ratio or the economic interests that Reed International and Elsevier shareholders have in Reed Elsevier. CORPORATE GOVERNANCE and presentations on the Reed Elsevier Compliance with codes of best practice combined businesses are made after the The Boards of Reed International and Elsevier announcement of the interim and full year regular dialogue with institutional shareholders, Equalisation arrangements support the principles of corporate governance results. A trading update is provided at the Reed International and Elsevier each hold a set out in the Combined Code – the Principles respective Annual General Meetings of 50% interest in Reed Elsevier plc. Reed of Good Governance and Code of Best Reed International and Elsevier, and near the International holds a 39% interest in Elsevier Practice, issued by the UK Financial Services end of the financial year. The Annual General Reed Finance BV, with Elsevier holding a 61% Authority (“the Combined Code”), and Meetings provide an opportunity for the interest. Reed International additionally holds corporate governance best practice in the Boards of Reed International and Elsevier to an indirect equity interest in Elsevier, reflecting Netherlands such as the recommendations of communicate with individual shareholders. the arrangements entered into between Reed the Peters Committee. The Chairman, Chief Executive Officer, 13 135136 pp13-24 Reed 25/2/02 21:37 Page 14 REED ELSEVIER Structure and corporate governance Chairman of the Remuneration Committee All Reed International and Elsevier directors are directors: Morris Tabaksblat (Chairman), John and other directors are available to answer subject to retirement at least every three years, Brock, Roelof Nelissen, Steven Perrick, Lord questions from shareholders. The interim and are able then to make themselves available Sharman, Rolf Stomberg (senior independent and annual results announcements and for re-election by shareholders at their respective non-executive director) and David Webster. presentations, together with other important Annual General Meetings. At the Reed announcements concerning Reed Elsevier, are International Annual General Meeting to be held Elsevier made available on the Reed Elsevier website on 9 April 2002, Messrs Brock, Davis and (www.reedelsevier.com). Haank will retire by rotation. Lord Sharman, BOARDS The Boards of Reed International, Elsevier, Reed Elsevier plc and Elsevier Reed Finance having been appointed a director since the last Annual General Meeting, will also retire. At the Elsevier Annual General Meeting to be held on 10 April 2002, Messrs Brock, Davis and Haank BV each comprise a balance of executive and will retire by rotation. Being eligible, these non-executive directors who bring a wide range directors of Reed International and Elsevier will of skills and experience to the deliberations of offer themselves for re-election. David Webster, the Boards. Each of the Boards meet regularly. who has served on the Reed International Board Elsevier has a two-tier board structure comprising a Supervisory Board, all of whom are non-executives and an Executive Board. The members of the Supervisory Board are Morris Tabaksblat (Chairman), Dien de Boer- Kruyt, John Brock, Roelof Nelissen, Steven Perrick, Rolf Stomberg and David Webster. The Executive Board comprises Crispin Davis (Chief Executive Officer), Mark Armour (Chief Financial Officer), Gerard van de Aast, Derk since 1992, the Reed Elsevier plc Board since Haank and Andrew Prozes. The Boards of Reed International, Elsevier and Reed Elsevier plc are harmonised. Subject to approval by the respective shareholders, all the directors of Reed Elsevier plc are also directors of Reed International and of Elsevier. No individual may be appointed to the Boards of Reed International, Elsevier or Reed Elsevier plc unless recommended by the joint Nominations Committee, although the Reed International and Elsevier shareholders maintain their rights to appoint individuals to their respective Boards, in accordance with the provisions of the Articles of Association of those companies. Lord Sharman was appointed a non-executive director of Reed International and Reed Elsevier plc on 1 January 2002. A resolution will be proposed at the forthcoming Elsevier Annual General Meeting to appoint Lord Sharman as a member of the Elsevier Supervisory Board. 1993 and the Elsevier Board since 1999, will also retire by rotation at the conclusion of the 2002 Annual General Meetings and will not be seeking re-election. The Boards of Reed International and Elsevier comprise a majority of independent non- executive directors, none of whom is involved in any business relationship with Reed Elsevier, with the exception of Steven Perrick, who is a partner in Freshfields Bruckhaus Deringer, an international firm of advisers who provide legal advice to Reed Elsevier. As a general rule, non-executive directors of Reed International and members of the Elsevier Supervisory Board serve on the respective Board for a maximum period of ten years. The non-executive directors meet on an annual basis to review the performance of individual directors and the functioning and constitution of the Boards as a whole. On appointment, directors receive training Reed International appropriate to their level of previous experience. All directors have access to the services of the Company Secretaries and may take independent The Reed International Board consists of executive directors: Crispin Davis (Chief Executive Officer), Mark Armour (Chief Reed Elsevier plc The Reed Elsevier plc Board consists of five executive directors and seven non-executive directors. Biographical information in respect of the members of the Board appears on page 31 of the Annual Review and Summary Financial Statements. Biographical information in respect of Dien de Boer-Kruyt, the member of the Elsevier Supervisory Board who does not serve on the Reed International and Reed Elsevier plc Boards, appears on page 41 of the Annual Review and Summary Financial Statements. Elsevier Reed Finance BV The Supervisory Board of Elsevier Reed Finance BV comprises Roelof Nelissen (Chairman), Mark Armour, Dien de Boer-Kruyt and Steven Perrick, with the Management Board consisting of Cornelis Alberti, Willem Boellaard and Jacques Billy. Appointments to the Supervisory and Management Boards are made by the shareholders, in accordance with the company’s Articles of Association. COMMITTEES Audit Committees Reed International, Elsevier and Reed Elsevier professional advice in the furtherance of their Financial Officer), Gerard van de Aast, Derk plc have established Audit Committees duties, at the company’s expense. Haank and Andrew Prozes, and non-executive which comprise only non-executive directors, 14 135136 pp13-24 Reed 25/2/02 21:37 Page 15 REED ELSEVIER the majority of whom are independent. Remuneration Committee Reed Elsevier plc and Elsevier Reed Finance The committees, which meet regularly, are Reed Elsevier plc has established a BV. They approve the strategies and annual chaired by David Webster, the other members Remuneration Committee which comprises budgets of each company, and receive regular being Steven Perrick and Roelof Nelissen. only independent non-executive directors. reports on their operations, including their Lord Sharman also became a member of the The committee, which meets regularly, is treasury and risk management activities. Reed International and Reed Elsevier plc chaired by Rolf Stomberg, the other members The Boards of Reed International and Elsevier committees, following his appointment as a being John Brock and Roelof Nelissen. have each adopted a schedule of matters director of those companies in January 2002. The committee is responsible for which are required to be brought to the The committees are responsible for reviewing recommending to the Board the remuneration respective Board for decision. Major matters relating to the financial affairs of the in all its forms of executive directors of Reed transactions proposed by the Boards of Reed companies, internal control policies and the Elsevier plc, and provides advice to the Chief Elsevier plc or Elsevier Reed Finance BV internal and external audit programmes. This Executive Officer on the remuneration of require the approval of the Boards of both includes, for example, reviewing accounting executives at a senior level below the Board. Reed International and Elsevier. policies, compliance with accounting standards and other statutory requirements, The fees of non-executive directors are The Reed International and Elsevier Audit and matters relating to risk management determined by each of the Boards as a whole. Committees meet on a regular basis to review and the effectiveness of internal controls. the systems of internal control of Reed Elsevier The committees also consider the appointment A report prepared by the Remuneration plc and Elsevier Reed Finance BV. and fees of external auditors, including the Committee, and approved by the Boards of nature and extent of non-audit services Reed International, Elsevier and Reed Operating companies provided by the auditors. The Director of Elsevier plc, appears on pages 17 to 23. This The Board of Reed Elsevier plc is responsible Internal Audit and senior representatives of the report also serves as disclosure of the for the system of internal control of the Reed external auditors of the respective companies directors’ remuneration and interests in Elsevier publishing and information attend meetings of the committees. shares of the two parent companies, Reed businesses, while the Boards of Elsevier Reed International and Elsevier. Finance BV are responsible for the system of Nominations Committee internal control in respect of the finance Reed International and Elsevier have Strategy Committee group activities. The Boards of Reed Elsevier established a joint Nominations Committee Reed Elsevier plc has established a Strategy plc and Elsevier Reed Finance BV are also which is chaired by Morris Tabaksblat, the Committee which is chaired by Morris responsible for reviewing the effectiveness of other members being Crispin Davis, Tabaksblat, the other members being Crispin their system of internal control. The objective Steven Perrick and Rolf Stomberg. The Davis, John Brock and David Webster. of these systems is to manage, rather than committee meets regularly and its terms of The committee meets regularly and its terms eliminate, the risk of failure to achieve reference include assessing the performance of reference include reviewing the major business objectives. Accordingly, they can of the directors, assuring Board succession features of the strategy proposed by the Chief only provide reasonable, but not absolute, and making recommendations to the Boards Executive Officer, and subsequently assurance against material misstatement of Reed International, Elsevier and Reed recommending the proposed strategy to the or loss. Elsevier plc concerning the appointment or Board. The committee is also responsible for reappointment of directors to, and the reviewing any acquisition or investment, which In accordance with the guidance published by retirement of directors from, those Boards. would have major strategic or structural the Internal Control Working Party of the implications for Reed Elsevier plc. Institute of Chartered Accountants in England In conjunction with the Chairman of the Reed Elsevier plc Remuneration Committee and INTERNAL CONTROL external consultants, the committee is also Parent companies & Wales (the Turnbull Report), the Boards of Reed Elsevier plc and Elsevier Reed Finance BV have implemented an ongoing process for responsible for developing proposals for the The Boards of Reed International and Elsevier identifying, evaluating and managing the remuneration and fees for new directors. exercise independent supervisory roles over significant risks faced by their respective the activities and systems of internal control of businesses. This process has been in place 15 135136 pp13-24 Reed 25/2/02 21:37 Page 16 REED ELSEVIER Structure and corporate governance throughout the year ended 31 December 2001 and external auditors on internal control RESPONSIBILITIES IN RESPECT OF THE and up to the date of the approvals of the matters. In addition, each Business Group is FINANCIAL STATEMENTS Annual Reports and Financial Statements. required, at the end of the financial year, to The directors of Reed International, Elsevier, review the effectiveness of its internal controls Reed Elsevier plc and Elsevier Reed Finance Reed Elsevier plc and report its findings on a detailed basis BV are required to prepare financial Reed Elsevier plc has an established to the management of Reed Elsevier plc. statements as at the end of each financial framework of procedures and internal controls, These reports are summarised and, as part of period, which give a true and fair view of the which is set out in a group Policies and the annual review of effectiveness, submitted state of affairs, and of the profit or loss, of the Procedures Manual, and with which the to the Audit Committee of Reed Elsevier plc. respective companies and their subsidiaries, management of each business is required to The Chairman of the Audit Committee reports joint ventures and associates. They are comply. Group businesses are required to to the Board on any significant internal control responsible for maintaining proper accounting maintain systems of internal control, which are matters arising. appropriate to the nature and scale of their activities and address all significant operational Elsevier Reed Finance BV records, for safeguarding assets, and for taking reasonable steps to prevent and detect fraud and other irregularities. The directors are also and financial risks that they face. The Board Elsevier Reed Finance BV has established responsible for selecting suitable accounting of Reed Elsevier plc has adopted a schedule of policy guidelines, which are applied for policies and applying them on a consistent matters that are required to be brought to it all Elsevier Reed Finance BV companies. basis, making judgements and estimates that for decision. The Boards of Elsevier Reed Finance BV have are prudent and reasonable. adopted schedules of matters that are required Each business group has identified and to be brought to them for decision. Procedures Applicable accounting standards have been evaluated its major risks, the controls in place are in place for monitoring the activities of the followed and the Reed Elsevier combined to manage those risks and the level of residual finance group, including a comprehensive financial statements, which are the risk accepted. Risk management and control treasury reporting system. The major risks responsibility of the directors of Reed procedures have been further embedded into affecting the finance group have been International and Elsevier, are prepared using the operations of the business, including identified and evaluated and are subject to accounting policies which comply with both the monitoring of progress in areas of regular review. The internal control system of UK and Dutch Generally Accepted Accounting improvement which came to management and Elsevier Reed Finance BV is reviewed each Principles. Board attention. The major risks identified year by its external auditors. The controls in include business continuity, protection of IT place to manage these risks and the level GOING CONCERN systems and data, challenges to intellectual of residual risk accepted are monitored by The directors of Reed International and property rights, management of strategic and the Boards. operational change, evaluation and integration of acquisitions, and recruitment and retention Annual review Elsevier, having made appropriate enquiries, consider that adequate resources exist for the combined businesses to continue in of personnel. As part of the year end procedures, the operational existence for the foreseeable future Boards of Reed International, Elsevier, Reed and that, therefore, it is appropriate to adopt The major strategic risks facing the Reed Elsevier plc and Elsevier Reed Finance BV the going concern basis in preparing the Elsevier plc businesses are considered by the have reviewed the effectiveness of the systems financial statements. Strategy Committee. Litigation and other legal of internal control during the last financial year. and regulatory matters are managed by legal directors in Europe and the United States. The Reed Elsevier plc Audit Committee receives regular reports on the management of material risks and reviews these reports with executive management. The Audit Committee also receives regular reports from both internal 16 135136 pp13-24 Reed 25/2/02 21:37 Page 17 REED ELSEVIER Remuneration report 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 the remuneration (in all its forms), and the terms of the service contracts and all other 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. 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 with the aid of external professional advice. The non-executive directors’ remuneration consists only of fees. COMPLIANCE WITH THE BEST PRACTICE PROVISIONS In designing its performance-related remuneration policy, the Remuneration Committee has complied with Schedule A of the Combined Code – the Principles of Good Governance and Code of Best Practice, issued by the UK Financial Services Authority (“the Combined Code”). In relation to disclosure of directors’ remuneration, Reed International, a UK company listed on the London Stock Exchange, has complied with Schedule B of the Combined Code. REMUNERATION POLICY In determining its policy on senior executive remuneration, including the directors, the committee's principal objective is to attract, retain and motivate people of the highest calibre and experience needed to shape and 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 director’s 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 60% of basic salary. The maximum potential bonus payable to a US 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 between 10 and 20 times salary was made during 2000. 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 that is pensionable is base salary. 17 135136 pp13-24 Reed 25/2/02 21:37 Page 18 REED ELSEVIER Remuneration report 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, which is subject to English law, provides for a notice period of twenty-four months. (ii) C H L Davis was appointed a director in September 1999. His service contract, which is subject to English law, 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 in 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 the company, eighteen months’ 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 the company, twelve months’ base salary would be payable. (v) G J A van de Aast was appointed a director in December 2000 and his service contract, which is subject to English law, provides for a notice period of twelve months. The notice periods in respect of individual directors have been reviewed by the Remuneration Committee. The committee believes that as a general rule for future contracts, the notice period should be 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 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 a 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 committee believes that the Reed Elsevier plc group can benefit 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) were as follows: a) Aggregate emoluments £000 €000 Salaries and fees Benefits Annual performance-related bonuses Pension contributions Pension to former director One-off bonuses Compensation and payments in respect of a former director Total b) Individual emoluments of executive directors £ 2001 2,790 75 1,056 218 241 – – 4,380 2000 2,068 66 835 786 230 461 581(i) 5,027 € 2001 4,492 121 1,700 351 388 – – 7,052 2000 3,391 108 1,368 1,289 377 757 953(i) 8,243 Salary Benefits Bonus Total 2000 Salary Benefits Bonus Total 2000 M H Armour C H L Davis D J Haank A Prozes (from 7.8.2000) G J A van de Aast (from 6.12.2000) Salary, benefits and bonus of a former director 598,423 570,543 415,002 20,123 163,298 810,000 20,324 315,333 1,145,657 1,102,547 345,145 333,749 10,790 143,023 908,547(ii) 8,731 380,278 555,555 28,364 54,178 325,000 15,108 487,562 944,564 394,286 668,153 1,304,100 537,336 894,444 523,250 32,398 32,722 17,373 14,057 24,324 262,910 963,461 935,690 507,686 1,844,508 1,808,177 230,267 784,976 566,037 612,248 1,520,749 1,490,016(ii) 87,227 634,801 46,516 135,772(i) 3,570,492 3,090,918 222,665(i) 5,748,495 5,069,101 (i) Details of salary, benefits, bonus and compensation payments to a former director were set out in the 2000 Remuneration Report. (ii) Includes a one – off bonus of £461,391 (€756,681) as compensation for loss of bonus from his previous employment. Taking into account gains of £253,777 (€408,581) on the exercise of share options, A Prozes was the highest paid director in 2001. 18 135136 pp13-24 Reed 25/2/02 21:37 Page 19 REED ELSEVIER c) 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 1/30th 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. 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 7 years’ service. This pension has no associated contingent benefits for a spouse or dependents, 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 dependents’ pension on death. The increase in the transfer value of the directors’ pension, after deduction of contributions, is shown below: £ € Increase in accrued annual pension during the period Total accrued annual pension as at 31.12.2001 16,497 39,920 43,469 – 10,794 95,650 89,111 119,331 – 11,753 Transfer value increase after deduction of directors’ contributions 176,325 549,662 358,574 – 101,756 Increase in accrued annual pension during the period Total accrued annual pension as at 31.12.2001 26,560 64,271 69,985 – 17,378 153,996 143,469 192,123 – 18,922 Transfer value increase after deduction of directors’ contributions 283,883 884,956 577,304 – 163,827 M H Armour C H L Davis D J Haank A Prozes G J A van de Aast 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. d) Individual emoluments of non-executive directors J F Brock R J Nelissen S Perrick R W H Stomberg M Tabaksblat D G C Webster £ € 2001 2000 2001 2000 35,404 35,404 35,404 35,404 34,220 34,304 34,304 34,220 57,000 57,000 57,000 57,000 56,120 56,258 56,258 56,120 173,913 168,202 280,000 275,851 35,404 34,220 57,000 56,120 350,933 339,470 565,000 556,727 G J de Boer-Kruyt, a member of the Supervisory Board of Elsevier, received emoluments of £13,354 (€21,500) during the year (2000 £9,832, €16,125). 19 135136 pp13-24 Reed 25/2/02 21:37 Page 20 REED ELSEVIER Remuneration report SHARE OPTIONS Executive directors have been granted options over Reed International and Elsevier shares. Options over shares in Reed International and Elsevier have been granted under the Reed Elsevier plc Executive Share Option Scheme, in which executive directors and other senior executives participate. The scheme grants options at the market price at the time of grant, which are normally exercisable between three and ten years from the date of grant. Since 1999 all executive share options have been granted subject to the performance condition that the compound growth in the average of the Reed International and Elsevier adjusted EPS (i.e. before exceptional items, amortisation of goodwill and intangible assets and UK tax credit equalisation) in the three years immediately preceding vesting must exceed the compound growth in the average of the UK and Dutch retail price indices by a minimum of 6%. Grants have also been made over shares in Reed International under the Reed Elsevier plc UK SAYE Scheme, in which all eligible UK employees are invited to participate. The SAYE Scheme grants options at a maximum discount of 20% to the market price at the time of grant, and are normally exercisable after the expiry of three or five years from the date of grant. The terms of the Reed Elsevier plc schemes have been approved by the shareholders of Reed International. Under arrangements for Dutch based executives, options to subscribe for Reed International and Elsevier shares have been granted to members of the Elsevier Executive Board and to other senior executives. Prior to 1999 options were granted at the market price at the time of the grant and were exercisable for a period up to five years from the date of grant. Following the introduction of new tax laws in the Netherlands, the committee decided that Dutch based directors and senior executives granted options during 1999 could elect to take either a five year option at an option price representing a premium of 26% to the market price, or a ten year option at market price, or a combination of both. No grants under such arrangements have been made since 1999 and all executive share options are now awarded through the Reed Elsevier plc Executive Share Option Scheme. LONGER TERM INCENTIVES Options over shares in Reed International and Elsevier have been granted 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 to be made to executive directors and a limited number of key executives, over Reed International and Elsevier ordinary shares. Grants have been made to 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 grant to any one individual ranged from 10 to a maximum 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 11⁄2 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 €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. The second performance condition requires participants to achieve individual business unit targets over the three financial years 2000-2002. If the performance targets are not achieved, the entire option will lapse. 20 135136 pp13-24 Reed 25/2/02 21:37 Page 21 REED ELSEVIER Details of options held by directors in the ordinary shares of Reed International and Elsevier as at 31 December 2001, and movements during the period are shown below: Over shares in Reed International M H Armour – Executive Scheme – LTIP – SAYE Scheme Total C H L Davis – Executive Scheme – Nil cost options – LTIP – SAYE Scheme Granted during the year 62,974 62,974 122,914 1 January 2001 59,600 30,000 52,000 66,900 33,600 88,202 882,016 3,924 1,216,242 160,599 80,300 80,300 171,821 535,332 1,718,213 5,019 Total 2,751,584 122,914 D J Haank – Executive Scheme – LTIP Total A Prozes – Executive Scheme – LTIP – Nil cost options 18,498 18,497 51,368 513,680 602,043 188,281 941,406 60,507 51,110 51,110 83,785 Total 1,190,194 83,785 G J A van de Aast – Executive Scheme 50,940 – LTIP Total 509,404 560,344 49,317 49,317 (i) Retained an interest in all of the shares Option price 400.75p 585.25p 565.75p 523.00p 537.50p 436.50p 659.00p 436.50p 430.00p 467.00p 467.00p 467.00p 436.50p 659.00p Nil 436.50p 336.20p 677.25p 537.50p 436.50p 659.00p 436.50p 566.00p 659.00p 566.00p Nil 638.00p 659.00p 638.00p Exercised during the year Market price at exercise date 31 December 2001 59,600 30,000 52,000 66,900 33,600 88,202 62,974 882,016 3,924 1,279,216 Exercisable 2002-2005 2002-2006 2002-2007 2002-2008 2002-2009 2003-2010 2004-2011 2005 2004 160,599 2002-2009 80,300 80,300 171,821 122,914 535,332 1,718,213 5,019 2,874,498 18,498 18,497 51,368 51,110 513,680 653,153 2003-2009 2004-2009 2003-2010 2004-2011 2002 2005 2005 2002-2004 2002-2009 2003-2010 2004-2011 2005 188,281 2003-2010 83,785 941,406 40,338 1,253,810 2004-2011 2005 2002-2003 50,940 2003-2010 49,317 509,404 609,661 2004-2011 2005 20,169(i) 20,169 636.50 The middle market price of a Reed International ordinary share during the year was in the range 492p to 700p and at 31 December 2001 was 570p. 21 135136 pp13-24 Reed 25/2/02 21:37 Page 22 REED ELSEVIER Remuneration report Over shares in Elsevier M H Armour – Executive Scheme – LTIP Total C H L Davis – Executive Scheme – LTIP – Nil cost options Total D J Haank – Executive Scheme – LTIP – Convertible Debentures Total A Prozes – Executive Scheme – LTIP – Nil cost options Total 1 January 2001 20,244 61,726 617,256 699,226 95,774 47,888 47,888 120,245 1,202,446 319,250 1,833,491 35,000 30,000 30,000 10,926 10,925 35,949 359,485 6,540 518,825 131,062 655,310 42,120 828,492 G J A van de Aast – Executive Scheme 35,866 Total – LTIP 358,658 394,524 (i) Retained an interest in 8,000 shares (ii) Average price Granted during the year 44,882 44,882 87,601 87,601 36,426 36,426 59,714 59,714 35,148 35,148 Option price €13.55 €10.73 €14.75 €10.73 €12.00 €12.00 €12.00 €10.73 €14.75 €10.73 Nil €11.93 €14.11 €15.25 €17.07 €13.55 €10.73 €14.75 €10.73 €16.71(ii) €13.60 €14.75 €13.60 Nil €14.87 €14.75 €14.87 Exercised during the year Market price at exercise date 31 December 2001 20,244 61,726 44,882 617,256 744,108 95,774 47,888 47,888 120,245 87,601 1,202,446 319,250 1,921,092 30,000 30,000 10,926 10,925 35,949 36,426 359,485 3,920(iii) 517,631 131,062 59,714 655,310 28,080 874,166 35,000(i) €15.35 35,000 14,040(iv) 14,040 €14.38 Exercisable 2002-2009 2003-2010 2004-2011 2005 2002-2009 2003-2009 2004-2009 2003-2010 2004-2011 2005 2002 2002 2002-2003 2002-2004 2002-2009 2003-2010 2004-2011 2005 2002 2003-2010 2004-2011 2005 2002-2003 35,866 2003-2010 35,148 358,658 429,672 2004-2011 2005 (iii) 2,620 options, at an average option price of €15.56, lapsed unexercised during the year (iv) Retained an interest in all of the shares The market price of an Elsevier ordinary share during the year was in the range €10.92 to €15.64 and at 31 December 2001 was €13.28. The aggregate notional pre-tax gain made by the directors on the exercise of Reed International and Elsevier share options during the year was £328,125 (€528,280). There have been no changes in the options held by directors over Reed International and Elsevier ordinary shares since 31 December 2001. 22 135136 pp13-24 Reed 25/2/02 21:37 Page 23 REED ELSEVIER INTERESTS IN SHARES The interests of the directors in the issued share capital of Reed International and Elsevier at the beginning and end of the year are shown below: Reed International ordinary shares Elsevier ordinary shares M H Armour J F Brock C H L Davis D J Haank R J Nelissen S Perrick A Prozes R W H Stomberg M Tabaksblat G J A van de Aast D G C Webster 1 January 2001 2,500 3,000 44,778 – – – – – – – 31 December 2001 2,500 3,000 74,071 – – – 43,329 – – – 5,000 5,000 1 January 2001 2,500 – 31,099 10,880 5,000 – – – 8,000 – – 31 December 2001 2,500 – 51,953 28,880 5,000 972 30,360 – 8,000 7,500 – 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 a beneficiary under the EBT, each executive director is deemed to be interested in all the shares held by the EBT which, at 31 December 2001, amounted to 2,416,207 Reed International ordinary shares and 1,412,194 Elsevier ordinary shares. There have been no changes in the interests of the directors in the share capital of Reed International or Elsevier since 31 December 2001. On behalf of the Board of Reed Elsevier plc Rolf Stomberg Chairman of the Remuneration Committee 23 135136 pp13-24 Reed 25/2/02 21:37 Page 24 135136 pp25-54 Reed 25/2/02 21:38 Page 25 REED ELSEVIER Combined financial statements REED ELSEVIER COMBINED FINANCIAL STATEMENTS 26...ACCOUNTING POLICIES 28...COMBINED PROFIT AND LOSS ACCOUNT 29...COMBINED CASH FLOW STATEMENT 30...COMBINED BALANCE SHEET 31...COMBINED STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES 31...COMBINED SHAREHOLDERS’ FUNDS RECONCILIATION 32...NOTES TO THE COMBINED FINANCIAL STATEMENTS 54...INDEPENDENT AUDITORS’ REPORT 135136 pp25-54 Reed 25/2/02 21:38 Page 26 REED ELSEVIER Combined financial statements ACCOUNTING POLICIES 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 financial statements form part of the statutory information to be provided by Elsevier, but are not for a legal entity and do not include all the information required to be disclosed by a company in its financial statements under the UK Companies Act 1985 or Dutch Civil Code. Additional information is given in the annual reports and financial statements of the parent companies set out on pages 56 to 81. A list of principal businesses is set out on page 92. 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 tangible fixed assets, but before exceptional payments and proceeds. Two new UK financial reporting standards have been adopted in the 2001 financial statements: FRS17: Retirement Benefits and FRS19: Deferred Tax. FRS17 requires additional disclosures until full implementation is mandatory in 2003. Although not mandatory for Reed Elsevier until 2002, 26 FRS19 has been adopted early and balance sheet presentation has been restated accordingly. 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 both pounds sterling and euros. 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 on 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. The principal exchange rates used are set out in note 27. 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. Acquired goodwill and intangible assets are capitalised and amortised systematically over their estimated useful lives up to a maximum period of 40 years, subject to impairment review. For financial years prior to the year ended 31 December 2001, a maximum period of 20 years was applied. In view of the longevity of the intangible assets and goodwill relating to the Harcourt publishing businesses acquired in the year, the maximum period has been extended to 40 years and has been applied in respect of these assets. The useful lives of the intangible assets and goodwill relating to previously acquired businesses have been re-assessed and those relating to science and medical publishing have been extended to conform with those of the Harcourt assets with which they are being integrated, with the effect of reducing annual amortisation by £20m/€32m. The longevity of these assets is evidenced by their long established and well regarded brands and imprints, and their characteristically stable market positions. 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, equipment and computer systems are 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. 135136 pp25-54 Reed 25/2/02 21:38 Page 27 period of online display; exhibitions – on exhibition date; educational testing contracts – on delivery milestones. 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 application infrastructure and product delivery platforms is capitalised as a tangible fixed asset and written off over the 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. REED ELSEVIER ACCOUNTING POLICIES (continued) Inventories and pre-publication costs Inventories and pre-publication costs are stated at the lower of cost, including appropriate attributable overheads, and estimated net realisable value. Pre-publication costs, representing costs incurred in the origination of content prior to publication, are expensed systematically over the economic lives of the related products, generally up to five years. 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 less anticipated returns on transactions completed by performance, excluding customer sales taxes and sales between the combined businesses. Sales are recognised for the various revenue sources as follows: subscriptions – over the period of the subscription; circulation – on despatch; advertising – on publication or 27 135136 pp25-54 Reed 25/2/02 21:38 Page 28 REED ELSEVIER Combined financial statements COMBINED PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31 DECEMBER 2001 Turnover Including share of turnover of joint ventures Less: share of turnover of joint ventures Continuing operations before acquisitions Acquisitions Cost of sales Gross profit Operating expenses Before amortisation and exceptional items Amortisation of goodwill and intangible assets Exceptional items Operating profit (before joint ventures) Continuing operations before acquisitions Acquisitions Share of operating profit of joint ventures Operating profit including joint ventures Non operating exceptional items Net profit on sale of businesses Profit on ordinary activities before interest Net interest expense Profit on ordinary activities before taxation Tax on profit on ordinary activities Profit on ordinary activities after taxation Minority interests Profit attributable to parent companies’ shareholders Equity dividends paid and proposed Retained loss taken to combined reserves ADJUSTED FIGURES Adjusted operating profit Adjusted profit before tax Adjusted profit attributable to parent companies’ shareholders Note 2001 £m 2000 £m 2001 €m 4,627 (67) 4,560 3,902 658 (1,611) 2,949 (2,570) (1,974) (498) (98) 379 331 48 12 391 26 417 (142) 275 (148) 127 (1) 126 (269) (143) 2001 £m 990 848 624 3,836 (68) 3,768 3,768 – (1,332) 2,436 (2,239) (1,659) (465) (115) 197 197 – 13 210 85 295 (103) 192 (159) 33 – 33 (245) (212) 2000 £m 793 690 511 7,449 (107) 7,342 6,283 1,059 (2,594) 4,748 (4,138) (3,178) (802) (158) 610 533 77 20 630 41 671 (229) 442 (238) 204 (2) 202 (432) (230) 2001 €m 1,594 1,365 1,005 1 2 2 6 1,5 6 7 8 26 9 Note 1,10 10 10 2000 €m 6,291 (111) 6,180 6,180 – (2,185) 3,995 (3,672) (2,721) (762) (189) 323 323 – 21 344 140 484 (169) 315 (261) 54 – 54 (402) (348) 2000 €m 1,301 1,132 838 Adjusted figures, which exclude the amortisation of goodwill and intangible assets, exceptional items and related tax effects, are presented as additional performance measures. 28 135136 pp25-54 Reed 25/2/02 21:38 Page 29 REED ELSEVIER COMBINED CASH FLOW STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2001 Net cash inflow from operating activities before exceptional items Payments relating to exceptional items charged to operating profit Net cash inflow from operating activities Note 11 6 2001 £m 1,163 (97) 1,066 2000 £m 907 (94) 813 2001 €m 1,873 (156) 1,717 Dividends received from joint ventures 15 12 6 19 2000 €m 1,487 (154) 1,333 10 33 (204) (171) (231) 51 (180) (231) (87) 5 (313) Interest and similar income received Interest and similar charges paid Returns on investments and servicing of finance Taxation before exceptional items Exceptional items Taxation Purchase of tangible fixed assets Purchase of fixed asset investments Proceeds from sale of tangible fixed assets Capital expenditure and financial investment Acquisitions Exceptional net proceeds from sale of businesses Acquisitions and disposals 113 (227) (114) (178) 141 (37) (175) (59) 6 (228) 11 6,11 (2,236) 96 (2,140) 20 (124) (104) (141) 31 (110) (141) (53) 3 (191) (861) 153 (708) 181 (365) (184) (287) 227 (60) (282) (95) 10 (367) (3,599) 154 (3,445) (1,412) 251 (1,161) Equity dividends paid to shareholders of the parent companies (255) (196) (411) (321) Cash outflow before changes in short term investments and financing Decrease/(increase) in short term investments Financing Increase in cash 11 11 11 (1,696) 1,169 537 10 (490) (1,137) 1,634 7 (2,731) 1,882 865 16 (803) (1,865) 2,679 11 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. ADJUSTED FIGURES Adjusted operating cash flow Adjusted operating cash flow conversion Note 10 2001 £m 1,006 102% 2000 £m 775 98% 2001 €m 1,620 102% 2000 €m 1,271 98% 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 tangible 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. 29 135136 pp25-54 Reed 25/2/02 21:38 Page 30 REED ELSEVIER Combined financial statements COMBINED BALANCE SHEET AS AT 31 DECEMBER 2001 Fixed assets Goodwill and intangible assets Tangible fixed assets Investments Investments in joint ventures: Share of gross assets Share of gross liabilities Share of net assets Other investments Current assets Inventories and pre-publication costs Debtors – amounts falling due within one year Debtors – amounts falling due after more than one year Cash and short term investments Creditors: amounts falling due within one year Net current liabilities Total assets less current liabilities Creditors: amounts falling due after more than one year Provisions for liabilities and charges Minority interests Net assets Capital and reserves Combined share capitals Combined share premium accounts Combined reserves Combined shareholders’ funds Note 13 14 15 16 17 18 19 20 21 24 26 2001 £m 6,723 489 241 121 (55) 66 175 2000 £m 4,127 416 153 137 (65) 72 81 2001 €m 11,026 802 395 198 (90) 108 287 2000 €m 6,644 670 247 221 (105) 116 131 7,453 4,696 12,223 7,561 488 999 463 435 2,385 (4,134) (1,749) 5,704 (2,502) (280) (5) 2,917 184 1,629 1,104 2,917 114 860 206 1,594 2,774 (3,379) (605) 4,091 (873) (170) (7) 3,041 185 1,621 1,235 3,041 801 1,638 759 713 3,911 (6,780) (2,869) 9,354 (4,103) (459) (8) 4,784 302 2,672 1,810 4,784 184 1,385 331 2,566 4,466 (5,441) (975) 6,586 (1,406) (273) (11) 4,896 298 2,610 1,988 4,896 Approved by the Boards of Reed International P.L.C. and Elsevier NV, 20 February 2002. 30 135136 pp25-54 Reed 25/2/02 21:38 Page 31 REED ELSEVIER COMBINED STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES FOR THE YEAR ENDED 31 DECEMBER 2001 Profit attributable to parent companies’ shareholders Exchange translation differences Total recognised gains and losses for the year COMBINED SHAREHOLDERS’ FUNDS RECONCILIATION FOR THE YEAR ENDED 31 DECEMBER 2001 Profit attributable to parent companies’ shareholders Equity dividends paid and proposed Issue of ordinary shares, net of expenses Exchange translation differences Net (decrease)/increase in combined shareholders’ funds Combined shareholders’ funds at 1 January Combined shareholders’ funds at 31 December 2001 £m 126 (3) 123 2000 £m 33 113 146 2001 €m 202 83 285 2000 €m 54 150 204 2001 £m 126 (269) 22 (3) (124) 3,041 2,917 2000 £m 33 (245) 1,285 113 1,186 1,855 3,041 2001 €m 202 (432) 35 83 (112) 4,896 4,784 2000 €m 54 (402) 2,107 150 1,909 2,987 4,896 31 135136 pp25-54 Reed 25/2/02 21:38 Page 32 REED ELSEVIER Combined financial statements Notes to the combined financial statements Included above in respect of the Harcourt acquired businesses: 1 SEGMENT ANALYSIS Business segment Science & Medical Legal Education Business Total Science & Medical Education Geographical origin North America United Kingdom The Netherlands Rest of Europe Rest of World Total Business segment Science & Medical Legal Education Business Total Science & Medical Education Geographical origin North America United Kingdom The Netherlands Rest of Europe Rest of World Total Turnover Operating profit 2001 £m 2000 £m 2001 £m 2000 £m Adjusted operating profit Capital employed 2001 £m 2000 £m 1,024 1,330 579 1,627 4,560 242 376 693 1,201 202 1,672 3,768 – – 2,695 2,098 795 416 445 209 734 399 356 181 4,560 3,768 1,649 2,141 932 2,620 7,342 390 605 4,339 1,280 670 716 337 1,137 1,970 331 2,742 6,180 – – 3,441 1,204 654 584 297 210 59 95 27 391 29 61 47 154 129 51 10 391 140 (8) 19 59 210 – – (89) 109 127 57 6 210 338 95 153 44 630 47 98 76 248 208 82 16 630 230 (13) 31 96 344 – – (146) 179 208 93 10 344 Turnover Operating profit 2001 €m 2000 €m 2001 €m 2000 €m 2000 £m 252 237 40 264 793 1,506 2,512 1,921 1,075 7,014 – – 1,245 1,760 286 2,443 144 1,205 4,078 – – 335 191 136 102 29 793 6,021 3,128 553 (53) 460 33 476 (62) 506 30 7,014 4,078 Adjusted operating profit 2001 €m 554 430 212 398 2000 €m 413 389 66 433 Capital employed 2001 €m 2000 €m 2,470 4,120 3,150 1,763 – – 2,042 2,886 460 3,933 232 1,941 6,566 – – 1,594 1,301 11,503 549 313 223 167 49 9,874 5,036 907 (87) 754 55 766 (100) 815 49 2001 £m 344 267 132 247 990 56 88 482 207 163 108 30 990 90 142 776 333 262 174 49 7,342 6,180 1,594 1,301 11,503 6,566 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. The Harcourt acquired businesses contributed £565m/€910m of turnover, £95m/€153m of operating profit and £136m/€219m of adjusted operating profit originating in North America. Turnover is analysed before the £67m/€107m (2000 £68m/€111m) share of joint ventures’ turnover, of which £17m/€27m (2000 £21m/€34m) relates to the Legal segment, principally to Giuffrè, and £50m/€80m (2000 £47m/€77m) relates to the Business segment, principally to exhibition joint ventures. Share of operating profit in joint ventures of £12m/€20m (2000 £13m/€21m) comprises £3m/€5m (2000 £4m/€6m) relating to the Legal segment and £9m/€15m (2000 £9m/€15m) relating to the Business segment. 32 Included above in respect of the Harcourt acquired businesses: 135136 pp25-54 Reed 25/2/02 21:38 Page 33 REED ELSEVIER 1 SEGMENT ANALYSIS (continued) Analysis of turnover by geographical market North America United Kingdom The Netherlands Rest of Europe Rest of World Total 2001 £m 2,765 557 224 587 427 4,560 2000 £m 2,152 521 234 478 383 3,768 The Harcourt acquired businesses contributed £535m/€861m of turnover by geographical market in North America. Reconciliation of capital employed to combined shareholders’ funds Capital employed Taxation Dividends and net interest Net borrowings Minority interests Combined shareholders’ funds Business segment Science & Medical Legal Education Business Total Included above in respect of the Harcourt acquired businesses: Science & Medical Education Business segment Science & Medical Legal Education Business Total Included above in respect of the Harcourt acquired businesses: Science & Medical Education 2001 £m 7,014 (634) (229) (3,229) (5) 2,917 2000 £m 4,078 (427) (170) (433) (7) 3,041 Depreciation Amortisation 2001 £m 23 62 7 40 132 2 4 2000 £m 17 60 3 38 118 – – 2001 £m 106 191 35 169 501 14 21 2000 £m 98 168 14 188 468 – – Depreciation Amortisation 2001 €m 37 100 11 65 213 3 6 2000 €m 28 98 5 63 194 – – 2001 €m 171 308 56 272 807 23 34 2000 €m 161 276 23 308 768 – – 2001 €m 4,452 897 361 945 687 7,342 2001 €m 11,503 (1,041) (374) (5,296) (8) 4,784 2000 €m 3,529 855 384 784 628 6,180 2000 €m 6,566 (688) (274) (697) (11) 4,896 Capital expenditure 2000 2001 £m £m 35 89 14 40 178 2 10 26 72 3 43 144 – – Capital expenditure 2000 2001 €m €m 56 143 23 65 287 3 16 43 118 5 70 236 – – 33 135136 pp25-54 Reed 25/2/02 21:38 Page 34 REED ELSEVIER Combined financial statements Notes to the combined financial statements 2 COST OF SALES AND OPERATING EXPENSES Before amortisation and exceptional items £m Amortisation of goodwill and intangible assets £m Exceptional items £m Cost of sales Continuing operations Acquisitions Total Distribution and selling costs Continuing operations Acquisitions Administrative expenses Continuing operations Acquisitions Operating expenses Continuing operations Acquisitions Total 1,361 250 1,611 902 126 1,028 813 133 946 1,715 259 1,974 – – – – – – 436 62 498 436 62 498 – – – – – – 59 39 98 59 39 98 Before amortisation and exceptional items €m Amortisation of goodwill and intangible assets €m Exceptional items €m Cost of sales Continuing operations Acquisitions Total Distribution and selling costs Continuing operations Acquisitions Administrative expenses Continuing operations Acquisitions Operating expenses Continuing operations Acquisitions Total 2,191 403 2,594 1,453 202 1,655 1,309 214 1,523 2,762 416 3,178 – – – – – – 702 100 802 702 100 802 – – – – – – 95 63 158 95 63 158 34 2001 Total £m 1,361 250 1,611 902 126 1,028 1,308 234 1,542 2,210 360 2,570 2001 Total €m 2,191 403 2,594 1,453 202 1,655 2,106 377 2,483 3,559 579 4,138 Before amortisation and exceptional items £m Amortisation of goodwill and intangible assets £m Exceptional items £m 1,332 – 1,332 884 – 884 775 – 775 1,659 – 1,659 – – – – – – 465 – 465 465 – 465 – – – – – – 115 – 115 115 – 115 Before amortisation and exceptional items €m Amortisation of goodwill and intangible assets €m Exceptional items €m 2,185 – 2,185 1,450 – 1,450 1,271 – 1,271 2,721 – 2,721 – – – – – – 762 – 762 762 – 762 – – – – – – 189 – 189 189 – 189 2000 Total £m 1,332 – 1,332 884 – 884 1,355 – 1,355 2,239 – 2,239 2000 Total €m 2,185 – 2,185 1,450 – 1,450 2,222 – 2,222 3,672 – 3,672 135136 pp25-54 Reed 25/2/02 21:38 Page 35 REED ELSEVIER 3 PERSONNEL NUMBER OF PEOPLE EMPLOYED Business segment Science & Medical Legal Education Business Total Included above in respect of the Harcourt acquired businesses: Science & Medical Education Geographical location North America United Kingdom The Netherlands Rest of Europe Rest of World Total 4 PENSION SCHEMES At 31 December 2001 Average during the year 2000 2001 6,200 13,300 5,600 11,900 37,000 2,000 4,100 5,200 12,700 3,400 13,300 34,600 1,000 1,900 3,700 11,200 1,500 12,500 28,900 – – 21,400 18,900 14,800 6,200 2,900 3,800 2,700 6,100 3,000 3,700 2,900 5,700 3,000 3,000 2,400 37,000 34,600 28,900 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 2001. The principal valuation assumptions for the main UK scheme were: Actuarial method Annual rate of return on investments Annual increase in total pensionable remuneration Annual increase in present and future pensions in payment Projected unit method 6.60% 5.00% 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 3%. The actuarial values placed on scheme assets were sufficient to cover 121% and 114% 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 £1,723m/€2,826m, and £266m/€437m 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 these other 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 £39m/€63m (2000 £35m/€57m), including a net £nil/€nil (2000 £1m/€2m) SSAP24 credit related to the main UK scheme. The net SSAP24 credit on the main UK scheme comprises a regular cost of £24m/€39m (2000 £23m/€38m), offset by amortisation of the net actuarial surplus of £24m/€39m (2000 £24m/€40m). Pension contributions made in the year amounted to £39m/€63m (2000 £36m/€59m). A prepayment of £128m/€210m (2000 £128m/€206m) 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. 35 135136 pp25-54 Reed 25/2/02 21:38 Page 36 REED ELSEVIER Combined financial statements Notes to the combined financial statements 4 PENSION SCHEMES (continued) Pension costs are accounted for in accordance with the UK accounting standard, SSAP24. A new UK financial reporting standard, FRS17: Retirement Benefits, will, with effect from the 2003 financial year, introduce new accounting policies in respect of pension arrangements. FRS17 also requires additional information to be disclosed in the intervening period on pension assets and liabilities (with effect from the 2001 financial year), as set out below, and pension expense (with effect from the 2002 financial year) based on methodologies set out in the standard which are different from those used by the scheme actuaries in determining funding arrangements. The assumed rates of return on scheme assets, the market value of those assets and the present value of the scheme liabilities at 31 December 2001 based on the methodologies and presentation prescribed by FRS17 were as follows: Equities Bonds Other Total fair value of assets Present value of scheme liabilities Surplus Related deferred tax Net pension asset Main UK Scheme Aggregate of Schemes Assumed rate of return on assets % 7.20% 5.00% 4.00% £m 991 502 73 1,566 (1,316) 250 (75) 175 €m 1,625 823 120 2,568 (2,158) 410 (123) 287 Assumed rate of return on assets % 7.70% 5.50% 4.00% £m 1,267 721 81 2,069 (1,872) 197 (57) 140 €m 2,078 1,182 133 3,393 (3,070) 323 (93) 230 The net pension asset is stated after deducting liabilities in respect of unfunded schemes. The principal assumptions made in valuing pension scheme liabilities for the purposes of FRS17 are: Inflation Rate of increase in salaries Rate of increase in pensions in payment Discount rate Main UK Aggregate of Scheme 2.50% 4.50% 2.50% 5.50% Schemes 2.50% 4.40% 2.50% 5.90% The combined profit and loss reserves as at 31 December 2001 of £1,104m/€1,810m would have been £1,154m/€1,892m had the accounting requirements of FRS17 applied in the 2001 financial year. 5 OPERATING PROFIT Operating profit is stated after the following: Hire of plant and machinery Other operating lease rentals Depreciation (including £4m/€6m (2000 £4m/€7m) in respect of assets held under finance leases) Amortisation of goodwill and intangible assets Amortisation of goodwill and intangible assets in joint ventures Total amortisation Staff costs Wages and salaries Social security costs Pensions Total staff costs Auditors’ remuneration For audit services For non audit services Note 4 2001 £m 7 87 132 498 3 501 1,207 119 39 1,365 2.5 3.4 2000 £m 12 71 118 465 3 468 979 100 35 1,114 1.9 2.6 2001 €m 11 140 213 802 4 806 1,943 192 63 2,198 4.0 5.5 2000 €m 20 116 194 762 6 768 1,606 164 57 1,827 3.1 4.3 Included in auditors’ remuneration for non audit services is £1.0m/€1.6m (2000 £1.5m/€2.5m) paid to Deloitte & Touche and its associates in the UK. Non audit fees paid to Deloitte & Touche principally relate to accounting services and tax advice in connection with Harcourt and other acquisitions and disposals. Information on directors’ remuneration, share options, longer term incentive plans, pension contributions and entitlements is set out in the Reed Elsevier plc Remuneration Report on pages 17 to 23 and forms part of these financial statements. 36 135136 pp25-54 Reed 25/2/02 21:38 Page 37 REED ELSEVIER 6 EXCEPTIONAL ITEMS Reorganisation costs Acquisition related costs Charged to operating profit Net profit on sale of businesses Exceptional charge before tax Net tax credit Total exceptional credit/(charge) Note (i) (ii) (iii) (iv) 2001 £m (35) (63) (98) 26 (72) 81 9 2000 £m (77) (38) (115) 85 (30) 20 (10) 2001 €m (56) (102) (158) 41 (117) 130 13 2000 €m (126) (63) (189) 140 (49) 33 (16) (i) Reorganisation costs relate to headcount reduction, principally in the Business division, and comprise employee severance. Reorganisation costs in 2000 related to the major programme of reorganisation commenced in 1999. (ii) Acquisition related costs include employee severance and property rationalisation costs arising on the integration of Harcourt and other recent acquisitions, and £9m/€14m of exceptional costs relating to the financing of the tender offer. (iii) The net profit on sale of businesses relates primarily to the disposals of OAG Worldwide, Cahners Travel Group, Bowker and certain training businesses in the Netherlands. (iv) The net tax credit includes taxes recoverable in respect of disposals and prior period reorganisation costs. Cash flows in respect of exceptional items were as follows: Reorganisation costs Acquisition related costs Other Exceptional operating cash outflow Net proceeds from sale of businesses Exceptional cash (outflow)/inflow before tax Exceptional tax cash inflow Total exceptional cash inflow 2001 £m (41) (51) (5) (97) 96 (1) 141 140 2000 £m (76) (9) (9) (94) 153 59 31 90 Cash flows in respect of acquisition related costs in 2000 are stated net of proceeds of £26m/€43m from a property disposal. 7 NET INTEREST EXPENSE Interest receivable and similar income Interest payable and similar charges Promissory notes and bank loans Other loans Other interest and similar charges Total Interest cover (times) 2001 £m 107 (102) (90) (57) (142) 7 2000 £m 26 (83) (45) (1) (103) 8 2001 €m (66) (82) (8) (156) 154 (2) 227 225 2001 €m 172 (164) (145) (92) (229) 7 Interest receivable and payable include offsetting exceptional amounts of £48m/€77m principally arising on interest rate and currency hedging arrangements in respect of the Harcourt transaction. Interest cover is calculated as the number of times adjusted operating profit is greater than the net interest expense. 2000 €m (125) (15) (14) (154) 251 97 51 148 2000 €m 43 (136) (74) (2) (169) 8 37 135136 pp25-54 Reed 25/2/02 21:38 Page 38 REED ELSEVIER Combined financial statements Notes to the combined financial statements 8 TAX ON PROFIT ON ORDINARY ACTIVITIES Current tax United Kingdom The Netherlands Rest of World Total current tax Deferred tax Origination and reversal of timing differences Changes in recoverable amounts of deferred tax assets Sub-total Share of tax attributable to joint ventures Total 2001 £m 62 79 81 222 25 (104) 143 5 148 2000 £m 60 54 46 160 (5) – 155 4 159 2001 €m 100 127 130 357 40 (167) 230 8 238 2000 €m 98 89 75 262 (8) – 254 7 261 The current tax charge for the year is high as a proportion of profit before tax principally due to non tax-deductible amortisation. A reconciliation of the notional current tax charge based on average standard rates of tax (weighted in proportion to accounting profits) to the actual current tax charge is set out below: Profit on ordinary activities before tax Tax at average standard rates Net impact of amortisation of goodwill and intangible assets Permanent differences and other items Reversal of timing differences Current tax charge 9 EQUITY DIVIDENDS PAID AND PROPOSED Reed International Elsevier Total 2001 £m 275 62 119 66 (25) 222 2001 £m 132 137 269 2000 £m 192 49 102 4 5 160 2000 £m 123 122 245 2001 €m 442 100 192 106 (41) 357 2001 €m 211 221 432 2000 €m 315 80 167 7 8 262 2000 €m 202 200 402 Dividends comprise the total dividend for Reed International of 10.5p (2000 10.0p) per ordinary share and the total dividend for Elsevier of €0.30 (2000 €0.28) per ordinary share. 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 dividends is, therefore, similar to or lower than that of Elsevier. 38 135136 pp25-54 Reed 25/2/02 21:38 Page 39 REED ELSEVIER 10 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: Operating profit including joint ventures Adjustments: Amortisation of goodwill and intangible assets Reorganisation costs Acquisition related costs Adjusted operating profit Profit before tax Adjustments: Amortisation of goodwill and intangible assets Reorganisation costs Acquisition related costs Net profit on sale of businesses Adjusted profit before tax Profit attributable to parent companies’ shareholders Adjustments: Amortisation of goodwill and intangible assets Reorganisation costs Acquisition related costs Net profit on sale of businesses Adjusted profit attributable to parent companies’ shareholders Net cash inflow from operating activities Dividends received from joint ventures Purchase of tangible fixed assets Proceeds from sale of tangible fixed assets Payments in relation to exceptional items charged to operating profit Adjusted operating cash flow 2001 £m 391 501 35 63 990 275 501 35 63 (26) 848 126 507 3 33 (45) 624 1,066 12 (175) 6 97 1,006 2000 £m 210 468 77 38 793 192 468 77 38 (85) 690 33 468 53 33 (76) 511 813 6 (141) 3 94 775 2001 €m 630 806 56 102 2000 €m 344 768 126 63 1,594 1,301 442 806 56 102 (41) 1,365 202 816 5 54 (72) 1,005 315 768 126 63 (140) 1,132 54 768 86 55 (125) 838 1,717 1,333 19 (282) 10 156 10 (231) 5 154 1,620 1,271 39 135136 pp25-54 Reed 25/2/02 21:38 Page 40 REED ELSEVIER Combined financial statements Notes to the combined financial statements 11 CASH FLOW STATEMENT Reconciliation of operating profit to net cash inflow from operating activities Operating profit (before joint ventures) Exceptional charges to operating profit Operating profit before exceptional items Amortisation of goodwill and intangible assets Depreciation Net SSAP24 pension credit Total non cash items Increase in inventories and pre-publication costs Decrease/(increase) in debtors (Decrease)/increase in creditors Movement in working capital Net cash inflow from operating activities before exceptional items Payments relating to exceptional items charged to operating profit Net cash inflow from operating activities Acquisitions Purchase of businesses Net proceeds from on-sale of Harcourt Higher Education and Corporate & Professional Services businesses Payment of Harcourt change of control and other non operating liabilities assumed Deferred consideration of prior year acquisitions Total Note 6 4 6 Note 12 12 2001 £m 379 98 477 498 132 – 630 (48) 156 (52) 56 1,163 (97) 1,066 2001 £m (3,222) 1,185 (156) (43) (2,236) 2000 £m 197 115 312 465 118 (1) 582 (3) (110) 126 13 907 (94) 813 2000 £m (848) – – (13) (861) 2001 €m 610 158 768 802 213 – 1,015 (77) 251 (84) 90 1,873 (156) 1,717 2000 €m 323 189 512 762 194 (2) 954 (5) (181) 207 21 1,487 (154) 1,333 2001 €m 2000 €m (5,187) (1,391) 1,908 (251) (69) (3,599) – – (21) (1,412) The Harcourt businesses, acquired on 12 July 2001 (see note 12), contributed £283m/€456m to net cash inflow from operating activities and paid £12m/€19m in respect of capital expenditure for the part year under Reed Elsevier ownership. Other acquisitions contributed £3m/€5m to net cash inflow from operating activities. Exceptional sale of businesses Goodwill and intangible assets Net tangible assets Net profit on sale Consideration in respect of sale of businesses, net of expenses Net amounts receivable Net cash inflow 2001 £m 61 15 76 26 102 (6) 96 2000 £m 35 44 79 85 164 (11) 153 2001 €m 98 24 122 41 163 (9) 154 2000 €m 57 73 130 140 270 (19) 251 40 135136 pp25-54 Reed 25/2/02 21:38 Page 41 REED ELSEVIER 11 CASH FLOW STATEMENT (continued) Financing Net movement in promissory notes and bank loans Repayment of other loans Issuance of other loans Repayment of finance leases Issue of ordinary shares Total 2001 £m (454) (84) 1,069 (5) 526 11 537 2000 £m 304 (155) 202 (4) 347 1,287 1,634 2001 €m (731) (135) 1,721 (8) 847 18 865 2000 €m 499 (254) 331 (7) 569 2,110 2,679 The issuance of other loans relates primarily to global notes issued by a wholly owned US subsidiary of Reed Elsevier plc, comprising US$550m 6.125% notes due in 2006, €500m 5.750% notes due in 2008, and US$550m 6.750% notes due in 2011. The issuance of other loans in 2000 related to a US$300m Swiss Domestic Bond. The repayment of other loans relates primarily to the repurchase of Public Notes with a nominal value of US$97m. The repayment of other loans in 2000 related primarily to US$100m of Private Placements and US$150m of Medium Term Notes which matured in the year. Reconciliation of net borrowings Net borrowings at 1 January Increase in cash (Decrease)/increase in short term investments Increase in borrowings Change in net borrowings resulting from cash flows Borrowings in acquired businesses Inception of finance leases Exchange translation differences Net borrowings at 31 December Net borrowings at 1 January Increase in cash (Decrease)/increase in short term investments Increase in borrowings Change in net borrowings resulting from cash flows Borrowings in acquired businesses Inception of finance leases Exchange translation differences Net borrowings at 31 December Cash £m 85 10 – – 10 – – 1 96 Cash €m 137 16 – – 16 – – 4 Short term investments £m 1,509 – (1,169) – (1,169) – – (1) 339 Short term investments €m 2,429 – (1,882) – (1,882) – – 9 Borrowings £m (2,027) – – (526) (526) (1,042) (3) (66) 2001 £m (433) 10 (1,169) (526) (1,685) (1,042) (3) (66) (3,664) (3,229) Borrowings €m (3,263) – – (847) (847) (1,677) (5) (217) 2001 €m (697) 16 (1,882) (847) (2,713) (1,677) (5) (204) 157 556 (6,009) (5,296) 2000 £m (1,066) 7 1,137 (347) 797 (48) (3) (113) (433) 2000 €m (1,717) 11 1,865 (569) 1,307 (79) (5) (203) (697) Net borrowings comprise cash and short term investments, loan capital, finance leases, promissory notes and bank and other loans, and are analysed further in notes 19 to 22. The borrowings in acquired businesses principally comprise the public term debt with a nominal value totalling US$842m and other borrowings assumed of Harcourt General, Inc. Of the Harcourt General, Inc public term debt at acquisition, US$150m matured within one year, US$192m between five and ten years and US$500m after more than ten years, with coupon rates of between 6.5% and 8.875%. 41 135136 pp25-54 Reed 25/2/02 21:38 Page 42 REED ELSEVIER Combined financial statements Notes to the combined financial statements ACQUISITIONS 12 During the year a number of acquisitions were made for a total consideration amounting to £3,242m/€5,219m, after taking account of borrowings of £1,042m/€1,677m and net cash acquired of £4m/€6m. On 12 July 2001, Reed Elsevier plc acquired, through a US subsidiary, Reed Elsevier Inc., the whole of the common stock and Series A cumulative convertible stock of Harcourt General, Inc for US$4.45 billion. On 13 July 2001, Reed Elsevier Inc. sold the Harcourt Higher Education business and the Corporate & Professional Services businesses (other than educational and clinical testing) to The Thomson Corporation for US$2.06 billion before estimated tax payable of US$0.5 billion. Following the on-sale, Reed Elsevier Inc. has acquired Harcourt’s Science, Technical & Medical (STM) business and its Schools Education and Testing businesses. A summary of the estimated fair value of the consideration paid for Harcourt General, Inc and the assets and liabilities acquired is set out below. Goodwill Intangible fixed assets Tangible fixed assets Investments Business held for resale Current assets Current liabilities Borrowings Current and deferred tax Other net liabilities Net assets acquired Consideration Less: amounts deferred from prior year Net cash flow Goodwill Intangible fixed assets Tangible fixed assets Investments Business held for resale Current assets Current liabilities Borrowings Current and deferred tax Other net liabilities Net assets acquired Consideration Less: amounts deferred from prior year Net cash flow Book value Fair value on acquisition adjustments £m 493 25 54 70 523 702 (311) (1,005) 18 (269) 300 £m 758 1,633 – – 536 (56) – (35) (33) (19) 2,784 Book value Fair value on acquisition €m 794 40 87 113 842 1,130 (501) (1,618) 29 (433) 483 adjustments €m 1,220 2,629 – – 863 (90) – (56) (53) (31) 4,482 Notes (i) (ii) (iii) (iv) (v) (vi) (vii) (viii) Notes (i) (ii) (iii) (iv) (v) (vi) (vii) (viii) Fair value £m 1,251 1,658 54 70 1,059 646 (311) (1,040) (15) (288) 3,084 3,084 (20) 3,064 Fair value €m 2,014 2,669 87 113 1,705 1,040 (501) (1,674) (24) (464) 4,965 4,965 (32) 4,933 The fair value of goodwill reflects the excess of the consideration paid over the fair value of the net tangible and intangible assets acquired. The fair value of intangible assets acquired is based on a valuation exercise carried out by independent qualified valuers. (i) (ii) (iii) The businesses held for resale relate to those on-sold to The Thomson Corporation and are stated at the estimated net realisable proceeds after taxes payable and separation and other expenses. (iv) The fair value adjustment to current assets relates to a conforming of accounting practices across the businesses, principally with respect to the level of internal labour deferred in pre-publication costs. The Harcourt General, Inc publicly traded debt has been restated at market based value on acquisition. (v) (vi) The fair value adjustment for current and deferred tax balances relates to the recognition of deferred tax assets at amounts considered recoverable in the short term. (vii) The other net liabilities on acquisition include £103m/€166m in respect of change of control arrangements and transaction costs incurred by Harcourt General, Inc and £124m/€200m in respect of General Cinema lease obligations and other non operating liabilities assumed. (viii) Consideration is stated after £26m/€42m of acquisition costs. The fair values included above represent estimates following a preliminary valuation exercise. Final values will be incorporated into the 2002 financial statements. 42 135136 pp25-54 Reed 25/2/02 21:38 Page 43 REED ELSEVIER 12 ACQUISITIONS (continued) Proforma turnover and adjusted operating profit for the Harcourt STM and Education and Testing businesses for the two years ended 31 December 2001, which have been prepared on the basis of Reed Elsevier’s accounting policies and as if the acquisition of Harcourt had taken place on 1 January 2000, are set out below. Turnover STM Education and Testing Adjusted operating profit STM Education and Testing 2001 £m 481 769 1,250 107 153 260 2000 £m 451 656 1,107 103 129 232 2001 €m 774 1,238 2,012 172 246 418 2000 €m 740 1,076 1,816 169 212 381 From the beginning of the Harcourt General, Inc financial year, 1 November 2000, to 12 July 2001, the Harcourt STM business and Education and Testing businesses together reported, on the basis of Harcourt’s US GAAP accounting policies, turnover of £746m/€1,209m and operating profit of £41m/€66m. For the previous Harcourt General financial year ended 31 October 2000, the businesses reported under US GAAP operating profit of £182m/€295m. The fair values of the consideration paid for other acquisitions in the year, the most significant of which were Courtlink and Classroom Connect, and the assets and liabilities acquired, which are provisional pending the completion of fair value assessments in 2002, are summarised below: Goodwill Intangible fixed assets Tangible fixed assets Current assets Current liabilities Borrowings Net assets acquired Consideration (after taking account of £4m net cash acquired) Less: transferred from investments Less: deferred to future years Net cash flow Goodwill Intangible fixed assets Tangible fixed assets Current assets Current liabilities Borrowings Net assets acquired Consideration (after taking account of €6m net cash acquired) Less: transferred from investments Less: deferred to future years Net cash flow Book value on acquisition £m – – 8 10 (27) (2) (11) Fair value adjustments £m 177 11 (2) – – – 186 Book value on acquisition €m – – 13 16 (44) (3) (18) Fair value adjustments €m 285 18 (3) – – – 300 Fair value £m 177 11 6 10 (27) (2) 175 175 (13) (4) 158 Fair value €m 285 18 10 16 (44) (3) 282 282 (21) (7) 254 43 135136 pp25-54 Reed 25/2/02 21:38 Page 44 REED ELSEVIER Combined financial statements Notes to the combined financial statements 13 GOODWILL AND INTANGIBLE ASSETS Cost At 1 January 2001 Acquisitions Sale of businesses Exchange translation differences At 31 December 2001 Accumulated amortisation At 1 January 2001 Sale of businesses Charge for the year Exchange translation differences At 31 December 2001 Net book amount At 1 January 2001 At 31 December 2001 14 TANGIBLE FIXED ASSETS Cost At 1 January 2001 Acquisitions Capital expenditure Disposals Exchange translation differences At 31 December 2001 Accumulated depreciation At 1 January 2001 Acquisitions Disposals Charge for the year Exchange translation differences At 31 December 2001 Net book amount At 1 January 2001 At 31 December 2001 Goodwill £m 3,730 1,428 (384) 61 4,835 1,478 (355) 332 23 1,478 Intangible assets £m 3,508 1,669 (654) 50 4,573 1,633 (622) 166 30 1,207 Total £m Goodwill €m 7,238 3,097 (1,038) 111 9,408 3,111 (977) 498 53 2,685 6,005 2,299 (618) 243 7,929 2,380 (572) 535 81 2,424 Intangible assets €m 5,648 2,687 (1,053) 218 7,500 2,629 (1,001) 267 84 1,979 Total €m 11,653 4,986 (1,671) 461 15,429 5,009 (1,573) 802 165 4,403 2,252 3,357 1,875 3,366 4,127 6,723 3,625 5,505 3,019 5,521 6,644 11,026 Land and buildings £m Plant, equipment and computer systems £m 168 50 10 (17) 2 213 56 22 (11) 7 1 75 112 138 826 115 168 (149) 9 969 522 83 (119) 125 7 618 304 351 Total £m 994 165 178 (166) 11 1,182 578 105 (130) 132 8 693 416 489 Land and buildings €m Plant, equipment and computer systems €m Total €m 270 81 16 (27) 9 349 90 35 (18) 11 5 123 180 226 1,330 1,600 185 271 (240) 43 266 287 (267) 52 1,589 1,938 840 134 (191) 202 28 930 169 (209) 213 33 1,013 1,136 490 576 670 802 At 31 December 2001 and 2000, all assets were included at cost. No depreciation was provided on freehold land. The net book amount of tangible fixed assets includes £16m/€26m (2000 £17m/€27m) in respect of assets held under finance leases. 44 135136 pp25-54 Reed 25/2/02 21:38 Page 45 REED ELSEVIER 15 FIXED ASSET INVESTMENTS At 1 January 2001 Share of attributable profit Amortisation of goodwill and intangible assets Dividends received from joint ventures Acquisitions Additions Transfers/disposals Provided Exchange translation differences At 31 December 2001 Investments in joint ventures £m Other investments £m 72 10 (3) (12) – – – – (1) 66 81 – – – 70 59 (23) (13) 1 175 Total £m 153 10 (3) (12) 70 59 (23) (13) – 241 Investments in joint ventures €m 116 16 (4) (19) – – – – (1) 108 Other investments €m 131 – – – 113 95 (37) (21) 6 287 Total €m 247 16 (4) (19) 113 95 (37) (21) 5 395 The principal joint venture at 31 December 2001 is Giuffrè (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 £37m/€61m and £24m/€39m respectively (2000 £37m/€60m and £27m/€43m). At 31 December 2001, the Reed Elsevier plc Employee Benefit Trust (“EBT”) held 2,416,207 (2000 590,257) Reed International ordinary shares and 1,412,194 (2000 320,000) Elsevier ordinary shares at a book amount of £18m/€30m. The aggregate market value at 31 December 2001 was £25m/€41m (2000 £7m/€12m). 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. Details of the share option schemes are set out in the Reed Elsevier plc Remuneration Report on pages 17 to 23. 16 INVENTORIES AND PRE-PUBLICATION COSTS Raw materials Pre-publication costs Finished goods Total 17 DEBTORS – AMOUNTS FALLING DUE WITHIN ONE YEAR Trade debtors Amounts owed by joint ventures Other debtors Prepayments and accrued income Total 18 DEBTORS – AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR Trade debtors Pension prepayment Prepayments, accrued income and other debtors Deferred taxation assets Total Note 4 24 2001 £m 43 258 187 488 2001 £m 760 2 98 139 999 2001 £m 5 128 86 244 463 2000 £m 17 40 57 114 2000 £m 652 3 89 116 860 2000 £m 1 128 35 42 206 2001 €m 71 423 307 801 2001 €m 1,246 3 161 228 2000 €m 27 64 93 184 2000 €m 1,050 5 143 187 1,638 1,385 2001 €m 8 210 141 400 759 2000 €m 2 206 56 67 331 A new financial reporting standard, FRS19: Deferred tax, has been adopted during the year. Under the previously applicable accounting standard, certain deferred taxation assets could be set off against deferred taxation liabilities. Under FRS19 these balances are required to be shown as debtors falling due after more than one year. Comparatives have been restated accordingly. 45 135136 pp25-54 Reed 25/2/02 21:38 Page 46 REED ELSEVIER Combined financial statements Notes to the combined financial statements 19 CASH AND SHORT TERM INVESTMENTS Cash at bank and in hand Short term investments Total 2001 £m 96 339 435 2000 £m 85 1,509 1,594 2001 €m 157 556 713 2000 €m 137 2,429 2,566 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. 20 CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR Note 23 Borrowings Promissory notes and bank loans Other loans Obligations under finance leases Trade creditors Other creditors Taxation Proposed dividends Accruals and deferred income Total 21 CREDITORS: AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR Note 23 Borrowings Loans repayable: Within one to two years Within two to five years After five years Obligations under finance leases Other creditors Taxation Accruals and deferred income Total 22 FINANCIAL INSTRUMENTS 2001 £m 1,443 108 5 1,556 246 330 429 190 1,383 4,134 2001 £m 91 506 1,500 11 2,108 21 331 42 2,502 2000 £m 1,395 4 5 1,404 245 213 193 177 1,147 3,379 2000 £m 4 205 402 12 623 27 197 26 873 2001 €m 2,367 177 8 2,552 403 541 704 312 2,268 6,780 2000 €m 2,246 6 8 2,260 394 343 311 285 1,848 5,441 2001 €m 2000 €m 149 830 2,460 18 3,457 34 543 69 6 330 648 19 1,003 43 317 43 4,103 1,406 Details of the objectives, policies and strategies pursued by Reed Elsevier in relation to financial instruments are set out in the Review of 2001 Financial Performance on pages 2 to 12. For the purpose of the disclosures which follow in this note, short term debtors and creditors have been excluded, as permitted under FRS13. 46 135136 pp25-54 Reed 25/2/02 21:38 Page 47 REED ELSEVIER 22 FINANCIAL INSTRUMENTS (continued) Currency and interest rate profile of financial liabilities The currency and interest rate profile of the aggregate financial liabilities of £3,848m/€6,310m (2000 £2,147m/€3,457m), after taking account of interest rate and cross currency interest rate swaps, is set out below: 2001 US dollar Sterling Euro Other currencies Total 2000 US dollar Sterling Euro Other currencies Total Floating rate financial liabilities £m Fixed rate financial liabilities £m Floating rate financial liabilities €m Fixed rate financial liabilities €m Fixed rate financial liabilities Weighted average interest rate Weighted average duration (years) 629 22 268 88 1,007 2,703 – 138 – 2,841 1,032 36 440 143 1,651 4,433 – 226 – 4,659 6.8% – 5.6% – 6.8% 10.7 – 5.2 – 10.5 Floating rate financial liabilities £m Fixed rate financial liabilities £m Floating rate financial liabilities €m Fixed rate financial liabilities €m Fixed rate financial liabilities Weighted average interest rate Weighted average duration (years) 890 43 223 65 1,221 779 – 141 6 926 1,433 69 359 105 1,966 1,254 – 227 10 1,491 6.8% – 5.6% 5.9% 6.6% 8.0 – 6.0 0.7 7.7 Included within fixed rate financial liabilities as at 31 December 2001 are £105m/€172m (2000 £nil/€nil) of US dollar term debt and £397m/€651m of interest rate swaps denominated principally in US dollars that mature within one year (2000 £73m/€118m denominated principally in US dollars). Currency and interest rate profile of financial assets The currency and interest rate profile of the aggregate financial assets of £616m/€1,010m (2000 £1,694m/€2,727m), after taking account of interest rate swaps, is set out below: 2001 US dollar Sterling Euro Other currencies Total 2000 US dollar Sterling Euro Other currencies Total Floating rate financial assets £m Non interest bearing financial assets £m Floating rate financial assets €m Non interest bearing financial assets €m 87 74 244 30 435 147 24 6 4 181 143 121 400 49 713 241 39 10 7 297 Floating rate financial assets £m Non interest bearing financial assets £m Floating rate financial assets €m Non interest bearing financial assets €m 103 622 834 35 1,594 67 16 1 3 87 166 1,001 1,343 56 2,566 107 26 2 5 140 47 At 31 December 2001, there were fixed rate financial assets of £nil/€nil (2000 £13m/€21m denominated in US dollars). 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 £175m/€287m (2000 £81m/€130m) of investments denominated principally in sterling and US dollars which have no maturity date. 135136 pp25-54 Reed 25/2/02 21:38 Page 48 REED ELSEVIER Combined financial statements Notes to the combined financial statements 22 FINANCIAL INSTRUMENTS (continued) At 31 December 2001, agreements totalling £357m/€585m (2000 £1,767m/€2,845m) were in place to enter into interest rate swaps and interest rate floors at future dates. Of these, individual agreements totalling £207m/€339m (2000 £946m/€1,523m) were to fix the interest expense on US dollar borrowings commencing in 2002 for periods of between five and six years, at a weighted average interest rate of 6.28% (2000 interest rate options totalling £671m/€1,080m). Interest rate floors with principal amounts totalling £150m/€246m and starting in 2002 protect the interest income on sterling short term investments for periods of up to a year, at a minimum rate of 4.85% (2000 interest rate swaps totalling £150m/€242m). At 31 December 2001, forward rate agreements totalling £276m/€453m (2000 £885m/€1,425m) were in place. All of these agreements (2000 £537m/€865m) were to fix the interest expense on short term US dollar borrowings commencing in 2002 for periods of six months, at a weighted average interest rate of 2.82%. Maturity profile of financial liabilities The maturity profile of financial liabilities at 31 December comprised: Repayable: Within one year Within one to two years Within two to five years After five years Total 2001 £m 1,598 149 557 1,544 3,848 2000 £m 1,426 54 237 430 2,147 2001 €m 2,621 244 914 2,531 6,310 2000 €m 2,296 87 382 692 3,457 Financial liabilities repayable within one year include US commercial paper and euro commercial paper. Short term borrowings are supported by committed facilities and by centrally managed cash and short term investments. As at 31 December 2001, a total of £2,413m/€3,957m (2000 £4,497m/€7,240m) of committed facilities were available, of which £418m/€686m was drawn and is included in financial liabilities repayable within one year. Of the total committed facilities, £248m/€407m (2000 £2,389m/€3,846m) matures within one year, £1,724m/€2,827m (2000 £nil/€nil) within one to two years, and £441m/€723m (2000 £2,108m/€3,394m) within two to three years. Included within the 2000 amount is £3,154m/€5,078m of committed facilities arranged in anticipation of the Harcourt acquisition. Secured borrowings under finance leases were £16m/€26m (2000 £17m/€27m). 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. 48 135136 pp25-54 Reed 25/2/02 21:38 Page 49 REED ELSEVIER 22 FINANCIAL INSTRUMENTS (continued) Fair values of financial assets and liabilities The notional amount, book value and fair value of financial instruments are as follows: 2001 2000 Notional amount £m Book value £m Fair value £m Notional amount £m Book value £m Fair value £m Primary financial instruments held or issued to finance operations Investments Cash Short term investments Other financial assets Short term borrowings and current portion of long term borrowings Long term borrowings Other financial liabilities Provisions Derivative financial instruments held to manage interest rate and currency exposure Interest rate swaps Interest rate options Interest rate floors Forward rate agreements Forward foreign exchange contracts Foreign exchange options Total financial instruments 1,233 690 275 276 917 – 3,391 3,391 175 96 339 6 (1,556) (2,108) (22) (162) 175 96 338 6 (1,555) (2,104) (22) (162) (3,232) (3,228) (9) (4) – – – – (13) (43) (48) 1 – (2) – (92) (3,245) (3,320) 81 85 1,509 19 (1,404) (623) (34) (86) (453) (1) – – – – – (1) (454) 1,612 671 – 885 1,776 50 4,994 4,994 81 85 1,512 19 (1,398) (614) (34) (86) (435) (49) (17) – (1) (38) (1) (106) (541) 49 135136 pp25-54 Reed 25/2/02 21:38 Page 50 REED ELSEVIER Combined financial statements Notes to the combined financial statements 22 FINANCIAL INSTRUMENTS (continued) Primary financial instruments held or issued to finance operations Investments Cash Short term investments Other financial assets Short term borrowings and current portion of long term borrowings Long term borrowings Other financial liabilities Provisions Derivative financial instruments held to manage interest rate and currency exposure Interest rate swaps Interest rate options Interest rate floors Forward rate agreements Forward foreign exchange contracts Forward foreign exchange options Total financial instruments Notional amount €m 2001 Book value Fair value €m €m Notional amount €m 2000 Book value Fair value €m €m 287 157 556 10 (2,552) (3,457) (36) (265) 287 157 554 10 (2,550) (3,451) (36) (265) (5,300) (5,294) (15) (7) – – – – (71) (79) 2 – (3) – (22) (5,322) (151) (5,445) 2,022 1,132 451 453 1,503 – 5,561 5,561 130 137 2,429 31 (2,260) (1,003) (55) (139) (730) (2) – – – – – (2) (732) 130 137 2,434 31 (2,251) (987) (55) (139) (700) (79) (27) – (2) (61) (2) (171) (871) 2,595 1,080 – 1,425 2,859 81 8,040 8,040 The amounts shown as the book value of derivative financial instruments represent accruals or deferred income arising from these financial 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 2001 and 2000. The fair values of all other items have been calculated by discounting expected future cash flows at market rates. 50 135136 pp25-54 Reed 25/2/02 21:38 Page 51 REED ELSEVIER 22 FINANCIAL INSTRUMENTS (continued) Hedges The unrecognised and deferred gains and losses on financial instruments used for hedging purposes as at 31 December 2001, and before taking into account gains and losses arising in the year and included in the profit and loss account, are derived as follows: On hedges at 1 January 2001 Arising in previous years included in 2001 profit and loss account Arising in previous years not included in 2001 profit and loss account Arising in 2001 not included in 2001 profit and loss account On hedges at 31 December 2001 Of which: Expected to be included in 2002 profit and loss account Expected to be included in 2003 profit and loss account or later On hedges at 1 January 2001 Arising in previous years included in 2001 profit and loss account Arising in previous years not included in 2001 profit and loss account Arising in 2001 not included in 2001 profit and loss account On hedges at 31 December 2001 Of which: Expected to be included in 2002 profit and loss account Expected to be included in 2003 profit and loss account or later 23 OBLIGATIONS UNDER LEASES Future finance lease obligations are: Repayable: Within one year Within one to two years Within two to five years After five years Less: interest charges allocated to future periods Total Obligations falling due within one year Obligations falling due after more than one year Total Annual commitments under operating leases are: On leases expiring: Within one year Within two to five years After five years Total Unrecognised Deferred Gains £m 2 (2) – 3 3 2 1 Losses £m (108) 93 (15) (67) (82) (6) (76) Gains £m Losses £m 17 – 17 11 28 15 13 (24) 4 (20) (2) (22) (14) (8) Unrecognised Deferred Gains €m 3 (3) – 5 5 3 2 Losses €m (174) 151 (23) (111) (134) (10) (124) Gains €m Losses €m 27 – 27 19 46 25 21 (39) 7 (32) (4) (36) (23) (13) Note 2001 £m 2000 £m 2001 €m 2000 €m 20 21 7 3 2 9 (5) 16 5 11 16 2001 £m 19 41 63 123 6 4 1 11 (5) 17 5 12 17 2000 £m 4 31 38 73 11 5 3 15 (8) 26 8 18 26 2001 €m 31 67 104 202 10 6 2 18 (9) 27 8 19 27 2000 €m 6 50 62 118 51 Of the above annual commitments, £119m/€195m relates to land and buildings (2000 £71m/€115m) and £4m/€7m to other leases (2000 £2m/€3m). 135136 pp25-54 Reed 25/2/02 21:38 Page 52 REED ELSEVIER Combined financial statements Notes to the combined financial statements 24 PROVISIONS FOR LIABILITIES AND CHARGES At 1 January 2001 Acquisitions Transfers Provided Utilised Exchange translation differences At 31 December 2001 At 1 January 2001 Acquisitions Transfers Provided Utilised Exchange translation differences At 31 December 2001 Surplus property £m 84 – – – (10) 2 76 Surplus property €m 135 – – – (16) 6 125 Deferred taxation liabilities £m Lease guarantees £m 79 14 (6) 29 (1) 3 118 Deferred taxation liabilities €m 127 23 (10) 47 (2) 9 194 – 104 – – (18) – 86 Lease guarantees €m – 167 – – (29) 2 140 Other £m 7 – (4) – (3) – – Other €m 11 – (6) – (5) – – Total £m 170 118 (10) 29 (32) 5 280 Total €m 273 190 (16) 47 (52) 17 459 A new financial reporting standard, FRS19: Deferred tax, has been adopted during the year. Under the previously applicable accounting standard, certain deferred taxation assets could be set off against deferred taxation liabilities. Under FRS19 these balances are required to be shown as debtors falling due after more than one year. Comparatives have been restated accordingly. 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. The provision for lease guarantees represents amounts provided in respect of guarantees given by Harcourt General, Inc in favour of a former subsidiary, GC Companies, Inc. for certain property leases for various periods up to 2016. The net provision for deferred taxation comprises: Note 18 8 Deferred taxation liabilities Excess of tax allowances over related amortisation Pension prepayment Short term timing differences Deferred taxation assets Excess of amortisation over related tax allowances Short term timing differences Tax losses carried forward Total Net provision at 1 January Acquisitions Transfers Deferred tax credit in profit and loss account Exchange translation differences Net provision at 31 December 52 2001 £m 41 38 39 118 (6) (201) (37) (244) (126) 37 8 (96) (79) 4 (126) 2000 £m – 37 42 79 (8) (34) – (42) 37 36 (2) 7 (5) 1 37 2001 €m 67 62 65 194 (10) (330) (60) (400) (206) 60 13 (155) (127) 3 (206) 2000 €m – 60 67 127 (13) (54) – (67) 60 58 (3) 11 (8) 2 60 135136 pp25-54 Reed 25/2/02 21:38 Page 53 REED ELSEVIER CONTINGENT LIABILITIES 25 There are contingent liabilities amounting to £7m/€11m (2000 £10m/€16m) in respect of borrowings of former subsidiaries and £143m/€235m in respect of lease guarantees, in excess of provided amounts, given by Harcourt General, Inc in favour of GC Companies, Inc. (see note 24). 26 COMBINED SHAREHOLDERS’ FUNDS At 1 January 2001 Profit attributable to parent companies’ shareholders Equity dividends paid and proposed Issue of ordinary shares, net of expenses Exchange translation differences At 31 December 2001 At 1 January 2001 Profit attributable to parent companies’ shareholders Equity dividends paid and proposed Issue of ordinary shares, net of expenses Exchange translation differences At 31 December 2001 Combined share capitals £m 185 – – – (1) 184 Combined share capitals €m 298 – – – 4 Combined share premium accounts £m 1,621 – – 22 (14) Combined reserves £m 1,235 126 (269) – 12 Total £m 3,041 126 (269) 22 (3) 1,629 1,104 2,917 Combined share premium accounts €m 2,610 – – 35 27 Combined reserves €m 1,988 202 (432) – 52 Total €m 4,896 202 (432) 35 83 302 2,672 1,810 4,784 Combined share capital excludes the shares of Elsevier held by Reed International. Combined reserves include a £4m/€7m (2000 £4m/€6m) capital redemption reserve following the redemption of non equity shares in Reed International in 1999. 27 EXCHANGE RATES The following exchange rates have been applied in preparing the combined financial statements: Euro to sterling US dollars to sterling Euro to US dollars US dollars to euro Profit and loss Balance sheet 2001 1.61 1.44 1.12 0.89 2000 1.64 1.51 1.09 0.92 2001 1.64 1.45 1.13 0.88 2000 1.61 1.49 1.08 0.93 53 135136 pp25-54 Reed 25/2/02 21:38 Page 54 REED ELSEVIER Combined financial statements INDEPENDENT AUDITORS’ REPORT To the shareholders of Reed International P.L.C. and Elsevier NV We have audited the combined financial statements of Reed International P.L.C., Elsevier NV, Reed Elsevier plc, Elsevier Reed Finance BV and their respective subsidiaries, associates and joint ventures (together “the combined businesses”) for the year ended 31 December 2001 which comprise the profit and loss account, the balance sheet, the cash flow statement, the statement of total recognised gains and losses, the shareholders’ funds reconciliation and the related notes 1 to 27. These financial statements have been prepared under the accounting policies set out therein. Respective responsibilities of directors and auditors As described in the statement of directors’ responsibilities, the directors of Reed International P.L.C. and Elsevier NV are responsible for the preparation of the combined financial statements in accordance with applicable United Kingdom and Dutch accounting standards. Our responsibilities, as independent auditors of the combined financial statements, are set out in auditing standards generally accepted in the United Kingdom and the Netherlands and by our respective professions’ ethical guidance. We report to you our opinion as to whether the combined financial statements give a true and fair view. We read the other information contained in the Annual Report and Financial Statements, as described in the contents section, and consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the combined financial statements. We are not required to consider whether the boards’ statements on internal control cover all risks and controls, or form an opinion on the effectiveness of the combined businesses’ corporate governance procedures or their risk and control procedures. Basis of audit opinion We conducted our audit in accordance with auditing standards generally accepted in the United Kingdom and the Netherlands. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in financial statements. It also includes an assessment of the significant estimates and judgements made by the directors in the preparation of financial statements, and of whether the accounting policies are appropriate to the circumstances, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the combined financial statements are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the combined financial statements. Opinion In our opinion the combined financial statements give a true and fair view of the state of affairs of the combined businesses as at 31 December 2001, and of their profits for the year then ended. Deloitte & Touche Chartered Accountants and Registered Auditors London 20 February 2002 Deloitte & Touche Accountants Amsterdam 20 February 2002 54 135136 pp55-70 Reed 25/2/02 21:38 Page 55 REED ELSEVIER Reed International P.L.C. REED INTERNATIONAL P.L.C. ANNUAL REPORT AND FINANCIAL STATEMENTS 56...FINANCIAL HIGHLIGHTS 57...DIRECTORS’ REPORT 60...ACCOUNTING POLICIES 61...FINANCIAL STATEMENTS 64...NOTES TO THE FINANCIAL STATEMENTS 70...INDEPENDENT AUDITORS’ REPORT 135136 pp55-70 Reed 25/2/02 21:38 Page 56 REED ELSEVIER REED ELSEVIER Reed International P.L.C. FINANCIAL HIGHLIGHTS FOR THE YEARS ENDED 31 DECEMBER PROFIT AND LOSS ACCOUNT Adjusted profit before tax Adjusted profit attributable to shareholders Profit before tax Profit/(loss) attributable to shareholders PER SHARE INFORMATION Adjusted earnings per ordinary share Net dividend per ordinary share Dividend cover Earnings/(loss) per ordinary share Ordinary share prices – high – low Market capitalisation (£m) 1997 £m 435 322 45 (7) 28.3p 14.60p 1.8 (0.6)p 648p 507p 6,956 1998 £m 409 302 552 408 26.4p 15.00p 1.7 35.7p 716p 428p 5,379 1999 £m 376 279 57 (33) 24.4p 10.00p 2.4 (2.9)p 630p 344p 5,310 2000 £m 365 270 102 17 23.3p 10.00p 2.1 1.5p 700p 391p 2001 £m 449 330 146 67 26.1p 10.50p 2.5 5.3p 700p 493p 8,837 7,210 (i) All amounts presented are based on the 52.9% share of Reed Elsevier combined profits attributable to the Reed International shareholders (see note 9 to the financial statements). The statutory profit for Reed International includes the impact of sharing the UK tax credit with Elsevier as a reduction in reported profits. On this basis, the consolidated profit before tax, attributable profit and basic earnings per share for the year ended 31 December 2001 are £140m, £61m and 4.8p respectively. (ii) Adjusted figures are shown before amortisation of goodwill and intangible assets, exceptional items and equalisation adjustments. The Reed Elsevier businesses focus on adjusted profit and cash flow as additional performance measures. (iii) The figures for the year ended 31 December 1997 have been restated to include retrospective amortisation of goodwill and intangible assets on the introduction of FRS10: Goodwill and Intangible Assets in 1998. (iv) Dividend cover is calculated as the number of times adjusted profit attributable to shareholders, after taking account of the sharing of the UK tax credit with Elsevier, covers the annual dividend. (v) Share prices quoted are the closing mid-price. Market capitalisation is at the year end date. 56 135136 pp55-70 Reed 25/2/02 21:38 Page 57 REED ELSEVIER DIRECTORS’ REPORT The directors present their report, together with the financial statements of the company, for the year ended 31 December 2001. As a consequence of the merger of the company’s businesses with those of Elsevier, described on page 13, the shareholders of Reed International and Elsevier can be regarded as having the interests of a single economic group. The Reed Elsevier combined financial statements represent the combined interests of both sets of shareholders and encompass the businesses of Reed Elsevier plc, Elsevier Reed Finance BV and their respective subsidiaries, associates and joint ventures, together with the parent companies, Reed International and Elsevier (“the combined businesses”). This directors’ report and the financial statements of the company should be read in conjunction with the combined financial statements and other reports set out on pages 2 to 54, as well as the Report of the Chairman and the Chief Executive Officer in the Annual Review and Summary Financial Statements. Principal activities The company is a holding company and its principal investments are its direct 50% shareholding in Reed Elsevier plc and its 39% shareholding in Elsevier Reed Finance BV, which are engaged in publishing and information activities and financing activities, respectively. The remaining shareholdings in these two companies are held by Elsevier. Reed International also has an indirect equity interest in Elsevier. Reed International and Elsevier have retained their separate legal identities and are publicly held companies with separate stock exchange listings in Amsterdam, London and New York. Proposed name change Following the harmonisation of the Boards of Reed International, Elsevier and Reed Elsevier plc during 1999, it is now felt that a common corporate name for the three companies would reflect the benefits of this management structure and the equivalence of economic interests. Accordingly, a resolution will be submitted to the 2002 Annual General Meeting to change Reed International’s name to Reed Elsevier PLC. A proposal will also be submitted to the Annual General Meeting of Elsevier NV to change that company’s name to Reed Elsevier NV. Upon the above name changes becoming effective, the company that owns the publishing and information businesses, currently named Reed Elsevier plc, will change its name to Reed Elsevier Group plc. Financial statement presentation The consolidated financial statements of Reed International include the 52.9% economic interest that shareholders have under the equalisation arrangements in the Reed Elsevier combined businesses, accounted for on a gross equity basis. Under the terms of the merger agreement, 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. Because of the tax credit, Reed International normally requires less cash to fund its net dividend than Elsevier does to fund its gross dividend. An adjustment is, therefore, required in the statutory profit and loss account of Reed International to share this tax benefit between the two sets of shareholders in accordance with the equalisation agreement. The equalisation adjustment arises on dividends paid by Reed International to its shareholders and it reduces the statutory attributable earnings of the company by 47.1% of the total amount of the tax credit, which in 2001 was £6m (2000 £6m). In addition to the reported figures, adjusted profit figures are presented as additional performance measures. These exclude the tax credit equalisation adjustment, the amortisation of goodwill and intangible assets and exceptional items and provide a basis for performance comparison that is not dependent on the choice of adoption method of FRS10 on accounting for goodwill and intangible assets. Profit and loss account The company’s share of the operating profits of Reed Elsevier plc was £202m, up from £106m in 2000, reflecting strong performances in the Science & Medical, Legal and Education divisions, partly offset by the impact of the global economic downturn on the Business division. The company’s share of the charge for amortisation of goodwill and intangible assets was £265m, up £17m from 2000, reflecting acquisitions made in the year, particularly the acquisition in July of the STM and Education and Testing businesses of Harcourt General, Inc. The company’s share of operating exceptional items was £52m (2000 £60m), principally comprising its share of Harcourt integration costs and employee severance costs incurred in response to of the economic downturn. The share of operating exceptional items in 2000 comprised reorganisation costs of £40m and acquisition related costs of £20m. The profit for the year also included the share of profits on sale of businesses of £14m. The reported attributable profit for Reed International was £61m (2000 £11m). The adjusted profit attributable to shareholders – before exceptional items and the amortisation of goodwill and intangible assets – was £330m (2000 £270m). 57 135136 pp55-70 Reed 25/2/02 21:38 Page 58 REED ELSEVIER REED ELSEVIER Reed International P.L.C. DIRECTORS’ REPORT (continued) Adjusted earnings per share increased by 12% to 26.1p (2000 23.3p). Including the effect of the tax credit equalisation as well as the amortisation of goodwill and intangible assets and exceptional items, the basic earnings per share was 4.8p (2000 1.0p). Balance sheet The balance sheet of Reed International reflects the shareholders’ 52.9% economic interest in net assets of Reed Elsevier, which at 31 December 2001 amounted to £1,543m (2000 £1,609m). The £66m decrease in net assets principally reflects Reed International’s share in the attributable profits of Reed Elsevier plc and Elsevier Reed Finance BV, less dividends paid and payable. Dividends The Board is recommending a final dividend of 7.4p per ordinary share to be paid on 13 May 2002 to shareholders on the Register on 12 April 2002 which, when added to the interim dividend already paid on 10 September 2001 amounting to 3.1p per ordinary share, makes the total dividend for the year 10.5p (2000 10.0p). The total dividend on the ordinary shares for the financial year will amount to £132m (2000 £123m), leaving a retained loss of £71m (2000 £112m). Directors The following served as directors during the year: M Tabaksblat (Chairman) C H L Davis (Chief Executive Officer) M H Armour (Chief Financial Officer) G J A van de Aast J F Brock D J Haank R J Nelissen S Perrick A Prozes RW H Stomberg (Senior independent non-executive director) D G C Webster Lord Sharman of Redlynch was appointed a non-executive director on 1 January 2002. In accordance with the company’s Articles of Association, he will retire at the forthcoming Annual General Meeting and, being eligible, will offer himself for re-election. Brief biographical details of the directors at the date of this Report are given on page 31 of the Annual Review and Summary Financial Statements. Messrs Brock, Davis, Haank and Webster will retire by rotation at the forthcoming Annual General Meeting. Being eligible, Messrs Brock, Davis and Haank, will each offer themselves for re-election. Mr Webster, having served on the Board since 1992, will not be seeking re-election. The notice period applicable to the service contracts of Messrs Davis and Haank is set out in the Reed Elsevier plc Remuneration Report on page 18. Mr Brock and Lord Sharman do not have a service contract with the company or Reed Elsevier plc. Details of directors’ remuneration and their interests in the share capital of the company are provided in the Reed Elsevier plc Remuneration Report on pages 17 to 23. Share capital During the period 2,426,463 ordinary shares in the company were issued in connection with the following share option schemes: 621,699 under a UK SAYE share option scheme at prices between 320p and 500p per share. 1,804,764 under Executive share option schemes at prices between 208.75p and 611p per share. 58 135136 pp55-70 Reed 25/2/02 21:38 Page 59 REED ELSEVIER DIRECTORS’ REPORT (continued) At 19 February 2002, the company had received notification of the following substantial interests in the company’s issued ordinary share capital: T Rowe Price Prudential plc Oechsle 52,034,364 shares 49,903,031 shares 42,907,149 shares 4.11% 3.94% 3.39% At the 2001 Annual General Meeting a resolution was passed to extend the authority given to the company to purchase up to 10% of its ordinary shares by market purchase. At 31 December 2001, this authority remained unutilised. A resolution to further extend the authority is to be put to the 2002 Annual General Meeting. Charitable and political donations Reed Elsevier companies made donations during the year for charitable purposes amounting to £927,000 of which £36,000 was in the United Kingdom. There were no donations for political purposes. Statement of directors’ responsibilities The directors are required by English company law to prepare financial statements for each financial period, which give a true and fair view of the state of affairs of the company and the group, and of the profit or loss for that period. In preparing those financial statements, the directors ensure that suitable accounting policies, consistently applied and supported by reasonable and prudent judgements and estimates, have been used, and accounting standards have been followed. The directors are responsible for keeping proper accounting records, which disclose with reasonable accuracy at any time the financial position of the company and enable them to ensure that the financial statements comply with the law. The directors have general responsibility for taking reasonable steps to safeguard the assets of the group and to prevent and detect fraud and other irregularities. Corporate governance The company has complied throughout the period under review with the provisions of Section 1 of the Combined Code – the Principles of Good Governance and Code of Best Practice, issued by the UK Financial Services Authority (“the Combined Code”), other than in relation to the designation of a senior independent non-executive director other than the Chairman. Although such a designation had not been made at the commencement of the period under review, the Board designated Dr Stomberg as the senior independent non-executive director during the period. Details of how the provisions of the Combined Code have been applied and the directors’ statement on internal control are set out in the Structure and Corporate Governance report on pages 13 to 16. Going concern After making enquiries, the directors have a reasonable expectation that the group has adequate resources to continue in operational existence for the foreseeable future and that, therefore, it is appropriate to adopt the going concern basis in preparing these financial statements. Payments to suppliers Reed Elsevier companies agree terms and conditions for business transactions with suppliers and payment is made on these terms. The average time taken to pay suppliers was between 30 and 45 days. Auditors Resolutions for the reappointment of Deloitte & Touche as auditors of the company and authorising the directors to fix their remuneration will be submitted to the forthcoming Annual General Meeting. By order of the Board Stephen J Cowden Secretary 20 February 2002 Registered Office: 25 Victoria Street London SW1H 0EX 59 135136 pp55-70 Reed 25/2/02 21:38 Page 60 REED ELSEVIER REED ELSEVIER Reed International P.L.C. ACCOUNTING POLICIES Basis of preparation These statutory financial statements report the profit and loss account, cash flow and financial position of Reed International, and have been prepared in accordance with UK generally accepted accounting principles. A new accounting standard, FRS19: Deferred Tax has been adopted in the year and balance sheet presentation has been restated accordingly. Unless otherwise indicated, all amounts shown in the financial statements are in millions of pounds. The financial statements have been prepared under the historical cost convention in accordance with applicable accounting standards. The basis of the merger of the businesses of Reed International and Elsevier is set out on page 13. As permitted by section 230 of the Companies Act 1985, the company has not presented its own profit and loss account. 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 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. The accounting policies adopted in the preparation of the combined financial statements are set out on pages 26 and 27. Basis of valuation of assets and liabilities Reed International’s 52.9% economic interest in the net assets of the 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 subsidiaries. Joint ventures are accounted for using the gross equity method. In the parent company accounts, investments are stated at cost, less provision, if appropriate, for any impairment in value. 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 considered recoverable in the short term. Deferred taxation balances are not discounted. 60 135136 pp55-70 Reed 25/2/02 21:38 Page 61 REED ELSEVIER CONSOLIDATED PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31 DECEMBER 2001 Turnover Including share of turnover of joint ventures Less: share of turnover of joint ventures Administrative expenses Operating loss (before joint ventures) Share of operating profit of joint ventures Before amortisation and exceptional items Amortisation of goodwill and intangible assets Exceptional items Operating profit including joint ventures Share of non operating exceptional items of joint ventures Net interest income/(expense) Group Share of net interest of joint ventures Profit on ordinary activities before taxation Tax on profit on ordinary activities UK corporation tax Share of tax of joint ventures Profit attributable to ordinary shareholders Equity dividends paid and proposed Retained loss taken to reserves ADJUSTED FIGURES Profit before tax Profit attributable to ordinary shareholders Note 2001 £m 2000 £m 2,412 (2,412) – (1) (1) 519 (265) (52) 202 201 14 14 12 (87) (75) 140 (79) (3) (76) 61 (132) (71) 2001 £m 449 330 3 1 1 6 7 8 Note 9 9 1,994 (1,994) – (1) (1) 414 (248) (60) 106 105 45 45 5 (59) (54) 96 (85) (2) (83) 11 (123) (112) 2000 £m 365 270 2000 pence 1.0 1.0 1.5 23.3 61 Adjusted figures, which exclude the amortisation of goodwill and intangible assets, exceptional items and related tax effects, are presented as additional performance measures. EARNINGS PER ORDINARY SHARE (EPS) Basic EPS Diluted EPS EPS based on 52.9% economic interest in the Reed Elsevier combined businesses Adjusted EPS The above amounts derive from continuing activities. Note 10 10 10 10 2001 pence 4.8 4.8 5.3 26.1 135136 pp55-70 Reed 25/2/02 21:38 Page 62 REED ELSEVIER REED ELSEVIER Reed International P.L.C. CONSOLIDATED CASH FLOW STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2001 Net cash outflow from operating activities Dividends received from Reed Elsevier plc Interest received Returns on investments and servicing of finance Taxation Fixed asset investments Acquisitions and disposals Equity dividends paid Cash (outflow)/inflow before changes in short term investments and financing Decrease/(increase) in short term investments Issue of ordinary shares Increase in net funding balances to Reed Elsevier plc group Financing Change in net cash Note 11 11 11 11 2001 £m (3) 127 13 13 (3) (406) (406) (126) (398) 431 10 (43) (33) – 2000 £m (1) 97 4 4 (1) – – (98) 1 (431) 709 (279) 430 – 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. CONSOLIDATED STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES FOR THE YEAR ENDED 31 DECEMBER 2001 Profit attributable to ordinary shareholders Exchange translation differences Total recognised gains and losses for the year Recognised gains and losses include gains of £65m (2000 £75m) in respect of joint ventures. 2001 £m 61 (2) 59 2000 £m 11 60 71 RECONCILIATION OF SHAREHOLDERS’ FUNDS FOR THE YEAR ENDED 31 DECEMBER 2001 Profit attributable to ordinary shareholders Equity dividends paid and proposed Issue of ordinary shares, net of expenses Exchange translation differences Equalisation adjustments Net (decrease)/increase in shareholders’ funds Shareholders’ funds at 1 January Shareholders’ funds at 31 December 62 Consolidated Company 2001 £m 61 (132) 10 (2) (3) (66) 1,609 1,543 2000 £m 11 (123) 708 60 (28) 628 981 1,609 2001 £m 136 (132) 10 – – 14 1,735 1,749 2000 £m 95 (123) 708 – 4 684 1,051 1,735 135136 pp55-70 Reed 25/2/02 21:38 Page 63 REED ELSEVIER BALANCE SHEETS AS AT 31 DECEMBER 2001 Fixed assets Investment in joint ventures: Share of gross assets Share of gross liabilities Share of net assets Investments Current assets Debtors Short term investments Creditors: amounts falling due within one year Net current assets Total assets less current liabilities Creditors: amounts falling due after more than one year Net assets Capital and reserves Called up share capital Share premium account Capital redemption reserve Profit and loss reserve Shareholders’ funds Note 12 13 14 15 16 17 19 19 19 The financial statements were approved by the Board of Directors, 20 February 2002. M Tabaksblat Chairman M H Armour Chief Financial Officer Consolidated Company 2001 £m 2000 £m 2001 £m 2000 £m 5,241 (4,113) 1,128 – 1,128 555 – 555 (104) 451 1,579 (36) 1,543 158 936 4 445 1,543 3,556 (2,755) 801 – 801 513 431 944 (100) 844 1,645 (36) 1,609 158 926 4 521 1,609 – – – 1,411 1,411 555 – 555 (181) 374 1,785 (36) 1,749 158 936 4 651 1,749 – – – 1,005 1,005 513 431 944 (178) 766 1,771 (36) 1,735 158 926 4 647 1,735 63 135136 pp55-70 Reed 25/2/02 21:38 Page 64 REED ELSEVIER REED ELSEVIER Reed International P.L.C. Notes to the financial statements 1 INCOME FROM INTERESTS IN JOINT VENTURES Share of operating profit before amortisation and exceptional items (based on 52.9% economic interest in the Reed Elsevier combined businesses) Effect of tax credit equalisation on distributed earnings Items consolidated within Reed International group Share of non operating exceptional items Reed Elsevier combined results (52.9%) Items consolidated within Reed International group Note 2 2001 £m 524 (6) 1 519 14 – 14 2000 £m 419 (6) 1 414 45 – 45 Segmental analysis of the Reed Elsevier combined results is shown in the Reed Elsevier combined financial statements. 2 EFFECT OF TAX CREDIT EQUALISATION ON DISTRIBUTED EARNINGS The equalisation adjustment arises 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 60. 3 OPERATING LOSS The operating loss comprises administrative expenses and includes £278,000 (2000 £255,000) paid in the year to Reed Elsevier plc under a contract for the services of directors and administrative support. The company has no employees (2000 nil). 4 AUDITORS’ REMUNERATION Audit fees payable for the group were £23,000 (2000 £22,000). 5 DIRECTORS’ EMOLUMENTS Information on directors’ remuneration, share options, longer term incentive plans, pension contributions and entitlements is set out in the Reed Elsevier plc Remuneration Report on pages 17 to 23 and forms part of these financial statements. 6 NET INTEREST Interest receivable and similar income On short term investments On loans to Reed Elsevier plc group Net interest income 2001 £m 11 1 12 2000 £m 2 3 5 64 135136 pp55-70 Reed 25/2/02 21:38 Page 65 REED ELSEVIER 7 TAX ON PROFIT ON ORDINARY ACTIVITIES UK corporation tax Share of tax arising in joint ventures: Before amortisation and exceptional items On amortisation and exceptional items Total UK corporation tax has been provided at 30% (2000 30%). 2001 £m 3 116 (40) 79 2000 £m 2 94 (11) 85 The share of tax arising in joint ventures is high as a proportion of the share of profit before tax principally due to non tax-deductible amortisation. 8 DIVIDENDS Ordinary shares of 12.5 pence each Interim Final (2001 proposed) Total 9 ADJUSTED FIGURES 2001 pence 3.10 7.40 10.50 2000 pence 3.10 6.90 10.00 Profit before tax Effect of tax credit equalisation on distributed earnings Profit before tax based on 52.9% economic interest in the Reed Elsevier combined businesses Adjustments: Amortisation of goodwill and intangible assets Exceptional items Adjusted profit before tax Profit attributable to ordinary shareholders Effect of tax credit equalisation on distributed earnings Profit attributable to ordinary shareholders based on 52.9% economic interest in the Reed Elsevier combined businesses Adjustments: Amortisation of goodwill and intangible assets Exceptional items Adjusted profit attributable to ordinary shareholders Basic earnings per ordinary share Effect of tax credit equalisation on distributed earnings Earnings per share based on 52.9% economic interest in the Reed Elsevier combined businesses Adjustments: Amortisation of goodwill and intangible assets Exceptional items Adjusted earnings per ordinary share 2001 £m 38 94 132 2001 £m 140 6 146 265 38 449 61 6 67 268 (5) 330 2001 pence 4.8 0.5 5.3 21.2 (0.4) 26.1 2000 £m 35 88 123 2000 £m 96 6 102 248 15 365 11 6 17 248 5 270 2000 pence 1.0 0.5 1.5 21.4 0.4 23.3 65 135136 pp55-70 Reed 25/2/02 21:38 Page 66 REED ELSEVIER REED ELSEVIER Reed International P.L.C. Notes to the financial statements 10 EARNINGS PER ORDINARY SHARE (EPS) Basic EPS Diluted EPS EPS based on 52.9% economic interest in the Reed Elsevier combined businesses Adjusted EPS Basic EPS Diluted EPS EPS based on 52.9% economic interest in the Reed Elsevier combined businesses Adjusted EPS The diluted EPS figures are calculated after taking account of the effect of share options. 11 CASH FLOW STATEMENT Reconciliation of operating profit to net cash flow from operating activities Operating loss Net movement in debtors and creditors Net cash outflow from operating activities Reconciliation of net borrowings At 1 January 2001 Cash flow At 31 December 2001 Fixed asset investments 2001 Weighted average number of shares (millions) 1,262.6 1,273.3 1,262.6 1,262.6 2000 Weighted average number of shares (millions) 1,156.4 1,161.2 1,156.4 1,156.4 Earnings £m 61 61 67 330 Earnings £m 11 11 17 270 Note 9 9 2001 £m (1) (2) (3) Net funding balances to Reed Elsevier plc group £m 476 43 519 Short term investments £m 431 (431) – EPS pence 4.8 4.8 5.3 26.1 EPS pence 1.0 1.0 1.5 23.3 2000 £m (1) – (1) Total £m 907 (388) 519 On 12 April 2001, Reed Holding BV, a wholly owned subsidiary of Reed International, subscribed for 629,298 R-shares in Elsevier at a cost of £59m, so as to maintain Reed International’s 5.8% indirect equity interest in Elsevier. Reed Holding BV issued shares to Reed International for equivalent amount to fund the transaction. On 11 July 2001, Reed International took up its rights in a rights issue by Elsevier Reed Finance BV and subscribed for 32 R-shares in the company at a cost of £347m. 66 135136 pp55-70 Reed 25/2/02 21:38 Page 67 REED ELSEVIER 12 FIXED ASSET INVESTMENTS – CONSOLIDATED INVESTMENT IN JOINT VENTURES Share of operating profit Share of non operating exceptional items Share of net interest payable Share of profit before tax Share of taxation Share of profit after tax Dividends received Fixed asset investments (see note 11) Exchange translation differences Equalisation adjustments Net movement in the year At 1 January At 31 December The investment in joint ventures comprises the group’s share at the following amounts of: Fixed assets Current assets Creditors: amounts falling due within one year Creditors: amounts falling due after more than one year Provisions Minority interests Total 2001 £m 202 14 (87) 129 (76) 53 (127) 406 (2) (3) 327 801 1,128 2001 £m 3,943 1,298 (2,638) (1,324) (148) (3) 1,128 2000 £m 106 45 (59) 92 (83) 9 (97) – 60 (28) (56) 857 801 2000 £m 2,484 1,072 (2,200) (462) (90) (3) 801 Included within share of current assets and creditors are cash and short term investments of £230m (2000 £412m) and borrowings of £1,938m (2000 £1,072m) respectively. 13 FIXED ASSET INVESTMENTS – COMPANY At 1 January 2001 Additions (see note 11) At 31 December 2001 14 DEBTORS Amounts owed by Reed Elsevier plc group Other debtors Total Subsidiary undertakings £m 244 59 303 2000 £m 512 1 513 Consolidated 2001 £m 555 – 555 Joint ventures £m 761 347 1,108 Company 2001 £m 555 – 555 Total £m 1,005 406 1,411 2000 £m 512 1 513 Amounts falling due after more than one year are £40m (2000 £40m). These amounts are denominated in sterling and earn interest at a fixed rate of 9.8% (2000 9.8%) for a duration of six years (2000 seven years). At 31 December 2001 these amounts had a fair value of £49m (2000 £49m). 15 CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR Other creditors Proposed dividend Taxation Amounts owed to group undertakings Total Consolidated Company 2001 £m – 94 10 – 104 2000 £m 2 88 10 – 100 2001 £m – 94 10 77 181 2000 £m 2 88 10 78 178 67 135136 pp55-70 Reed 25/2/02 21:38 Page 68 REED ELSEVIER REED ELSEVIER Reed International P.L.C. Notes to the financial statements 16 CREDITORS: AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR Amounts owed to Reed Elsevier plc group Consolidated Company 2001 £m 36 2000 £m 36 2001 £m 36 2000 £m 36 These amounts are denominated in sterling and earn interest at a fixed rate of 10.5% (2000 10.5%) for a duration of four years (2000 five years). At 31 December 2001 these amounts had a fair value of £43m (2000 £43m). 17 CALLED UP SHARE CAPITAL Ordinary shares of 12.5p each Unclassified shares of 12.5p each Total Authorised No. of shares 1,264,877,118 206,576,058 Details of shares issued under share option schemes are set out in note 18. £m No. of shares 158 1,264,877,118 – 26 184 Issued and fully paid 2001 2000 £m No. of shares 158 1,262,450,655 – – 158 £m 158 –– 158 18 SHARE OPTION SCHEMES During the year a total of 2,426,463 ordinary shares in the company, having a nominal value of £0.3m, were allotted in connection with the exercise of share options. The consideration received by the company was £10.4m. Options were granted during the year under the Reed Elsevier plc Executive Share Option Scheme to subscribe for 9,488,809 ordinary shares, at prices between 519p and 693p per share. Options were also granted during the year under the Reed Elsevier plc SAYE Share Option Scheme to subscribe for 873,282 ordinary shares at a price of 500p per share. Options to subscribe for 2,407,771 ordinary shares in the company lapsed. Options outstanding at 31 December 2001 over the company’s ordinary share capital were: UK and overseas executive share option schemes Senior Executive Long Term Incentive Scheme UK SAYE share option scheme Number of ordinary shares 30,616,086 13,350,904 4,032,003 Range of subscription prices 321.75p – 700p 436.50p – 700p 336.20p – 500p Exercisable 2002–2011 2005 2002–2007 The above entitlements are expected, upon exercise, to be met principally by the issue of new ordinary shares. Excluded from the above are options which, upon exercise, will be met by the Reed Elsevier plc Employee Benefit Trust from shares purchased in the market. These comprise 580,902 nil cost options granted to certain directors and senior executives of Reed Elsevier plc, details of which are shown in the Reed Elsevier plc Remuneration Report on pages 17 to 23, and 2,352,974 options granted at subscription prices ranging between 424p and 677.25p. 19 RESERVES At 1 January 2001 Issue of ordinary shares, net of expenses Profit attributable to ordinary shareholders Equity dividends paid and proposed Exchange translation differences Equalisation adjustments At 31 December 2001 68 Share premium account £m 926 10 – – – – 936 Consolidated Capital redemption reserve £m 4 – – – – – 4 Profit and loss reserve £m 521 – 61 (132) (2) (3) 445 Total £m 1,451 10 61 (132) (2) (3) 1,385 135136 pp55-70 Reed 25/2/02 21:38 Page 69 REED ELSEVIER 19 RESERVES (continued) At 1 January 2001 Issue of ordinary shares, net of expenses Profit attributable to ordinary shareholders Equity dividends paid and proposed At 31 December 2001 Share premium account £m 926 10 – – 936 Company Capital redemption reserve £m 4 – – – 4 Profit and loss reserve £m 647 – 136 (132) 651 Total £m 1,577 10 136 (132) 1,591 Reed International’s share of the revenue reserves of the Reed Elsevier combined businesses is £582m (2000 £651m). CONTINGENT LIABILITIES 20 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: Guaranteed jointly and severally with Elsevier 2001 £m 3,086 2000 £m 1,827 Financial instruments disclosures in respect of the borrowings covered by the above guarantees are given in note 22 to the Reed Elsevier combined financial statements on pages 46 to 51. PRINCIPAL JOINT VENTURES 21 The principal joint ventures are: Reed Elsevier plc Incorporated and operating in Great Britain 25 Victoria Street, London SW1H 0EX Holding company for operating businesses involved in science & medical, legal, educational and business publishing Elsevier Reed Finance BV Incorporated in the Netherlands Sara Burgerhartstraat 25 1055 KV Amsterdam, The Netherlands £10,000 ordinary “R” shares £10,000 ordinary “E” shares £100,000 71/2% cumulative preference non voting shares Equivalent to a 50% equity interest 101 ordinary “R” shares 154 ordinary “E” shares Holding company for financing businesses Equivalent to a 39% equity interest The “E” shares in Reed Elsevier plc and Elsevier Reed Finance BV are owned by Elsevier. PRINCIPAL SUBSIDIARY UNDERTAKINGS 22 The principal subsidiary undertaking is: Reed Holding BV Incorporated in the Netherlands Sara Burgerhartstraat 25 1055 KV Amsterdam, The Netherlands Reed Holding BV owns 4,679,249 shares of a separate class in Elsevier, giving Reed International a 5.8% indirect equity interest in Elsevier. 41 ordinary shares % holding 100% – 100% 100% – % holding 100% 69 135136 pp55-70 Reed 25/2/02 21:38 Page 70 REED ELSEVIER REED ELSEVIER Reed International P.L.C. INDEPENDENT AUDITORS’ REPORT TO THE MEMBERS OF REED INTERNATIONAL P.L.C. We have audited the financial statements of Reed International P.L.C. (“the financial statements”) for the year ended 31 December 2001 which comprise the profit and loss account, the balance sheets, the cash flow statement, the statement of total recognised gains and losses, the reconciliation of shareholders’ funds and the related notes 1 to 22. These financial statements have been prepared under the accounting policies set out therein. Respective responsibilities of directors and auditors As described in the statement of directors’ responsibilities, the directors are responsible for the preparation of the financial statements in accordance with applicable United Kingdom law and accounting standards. Our responsibility is to audit the financial statements in accordance with relevant United Kingdom legal and regulatory requirements, auditing standards and the Listing Rules of the Financial Services Authority. We report to you our opinion as to whether the financial statements give a true and fair view and are properly prepared in accordance with the Companies Act 1985. We also report if, in our opinion, the directors’ report is not consistent with the financial statements, if the company has not kept proper accounting records, if we have not received all the information and explanations we require for our audit, or if information specified by law or the Listing Rules regarding directors’ remuneration and transactions with the company and other members of the group is not disclosed. We review whether the corporate governance statement reflects the company’s compliance with the seven provisions of the Combined Code specified for our review by the Listing Rules, and we report if it does not. We are not required to consider whether the board’s statements on internal control cover all risks and controls, or to form an opinion on the effectiveness of the group’s corporate governance procedures or its risk and control procedures. We read the directors’ report and the other information contained in the Annual Report for the above year as described in the contents section and consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the financial statements. Basis of audit opinion We conducted our audit in accordance with United Kingdom auditing standards issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements. It also includes an assessment of the significant estimates and judgements made by the directors in the preparation of the financial statements, and of whether the accounting policies are appropriate to the circumstances of the company and the group, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial statements. Opinion In our opinion the financial statements give a true and fair view of the state of affairs of the company and the group as at 31 December 2001 and the profit of the group for the year then ended and have been properly prepared in accordance with the Companies Act 1985. Deloitte & Touche Chartered Accountants and Registered Auditors London 20 February 2002 70 135136 pp71-82 Reed 25/2/02 21:39 Page 71 REED ELSEVIER Elsevier NV ELSEVIER NV ANNUAL REPORT AND FINANCIAL STATEMENTS 72...FIVE YEAR FINANCIAL SUMMARY 73...THE SUPERVISORY BOARD’S REPORT 73...THE EXECUTIVE BOARD’S REPORT 74...FINANCIAL STATEMENTS 77...ACCOUNTING POLICIES 78...NOTES TO THE FINANCIAL STATEMENTS 81...OTHER INFORMATION 135136 pp71-82 Reed 25/2/02 21:39 Page 72 REED ELSEVIER Elsevier NV FIVE YEAR FINANCIAL SUMMARY (in €m, unless otherwise indicated) PROFIT Adjusted profit attributable PER SHARE INFORMATION (in €) Adjusted EPS Cash dividend per ordinary share Pay-out Share price, high Share price, low Share price, closing OTHER DATA Average number of shares outstanding (in millions) Number of shares outstanding at year end (in millions) Market capitalisation Price/earnings ratio 1997 440 0.62 0.43 69% 17.88 12.03 14.88 707 707 10,526 24 1998 425 0.60 0.39 66% 17.83 9.94 11.93 708 708 8,447 20 1999 401 0.57 0.27 47% 15.25 8.95 11.86 708 709 8,409 21 2000 2001 419 503 0.59 0.28 47% 16.07 9.30 15.66 715 776 12,152 27 0.64 0.30 47% 15.66 10.92 13.28 780 784 10,412 21 (i) Financial information for 1997 and 1998 has been calculated on the basis of the official exchange rate of Dfl 2.20371 to one euro. Percentage changes and financial ratios have been calculated using historic guilder figures and may be affected by rounding. (ii) Adjusted profit attributable and adjusted EPS are before amortisation of goodwill and intangible assets, exceptional items and related tax effects. (iii) Per share information has been calculated using the average number of shares outstanding, taking into account that the R-shares can be converted into ten ordinary shares. (iv) Pay-out is the cash dividend as a percentage of adjusted EPS. (v) The closing price is the final quotation at year end on the Stockmarket of Euronext Amsterdam N.V. for ordinary shares. (vi) The price/earnings ratio is the closing share price divided by adjusted EPS. (vii) The number of shares outstanding at year end include the R-shares, assuming that they have been converted into ten ordinary shares. (viii) Market capitalisation is the number of shares outstanding at year end multiplied by the closing price. 72 135136 pp71-82 Reed 25/2/02 21:39 Page 73 REED ELSEVIER BOARDS Supervisory Board M Tabaksblat, Chairman GJ de Boer-Kruyt J F Brock R J Nelissen S Perrick R W H Stomberg D G C Webster Executive Board C H L Davis, Chairman M H Armour, Chief Financial Officer GJA van de Aast DJ Haank A Prozes THE SUPERVISORY BOARD’S REPORT As required by Article 33 of the Articles of Association, we herewith submit the Executive Board’s annual report and the financial statements for the financial year ended 31 December 2001 to the shareholders’ meeting for adoption. The financial statements have been examined by Deloitte & Touche Accountants, Amsterdam. We refer to the Report of the Chairman and the Chief Executive Officer and to the other reports contained within the Reed Elsevier Annual Review and Summary Financial Statements 2001 and the Reed Elsevier Annual Reports and Financial Statements 2001. These reports explain the business results of 2001, the financial state of the company at the end of 2001, and the key strategic issues. The equalisation agreement between Elsevier and Reed International has the effect that shareholders can be regarded as having the interests of a single economic group and provides that Elsevier shall declare dividends such that the dividend on one Elsevier ordinary share, which shall be payable in euros, will equal 1.538 times the cash dividend, including the related UK tax credit, paid on one Reed International ordinary share. In that context, the Combined Supervisory and Executive Board (“the Combined Board”) determines the amounts of the company’s profit to be distributed and retained. The ordinary shares and the R-shares are entitled to receive distribution in proportion to their nominal value. The Combined Board may resolve to pay less per R-share, but not less than 1% of the nominal value. Details of dividends are contained in the Review of 2001 Financial Performance on page 12. As explained on page 13, a proposal will be put to shareholders at the forthcoming Annual General Meeting to change the company’s name to Reed Elsevier NV. A proposal will be put to shareholders at the forthcoming Annual General Meeting to appoint Lord Sharman of Redlynch as a member of the Supervisory Board, to replace DGC Webster, who will not be seeking re-election. The Supervisory Board 20 February 2002 THE EXECUTIVE BOARD’S REPORT Registered office Sara Burgerhartstraat 25 1055 KV Amsterdam We refer to the Report of the Chairman and the Chief Executive Officer and to the other reports contained within the Reed Elsevier Annual Review and Summary Financial Statements 2001 and the Reed Elsevier Annual Reports and Financial Statements 2001. These reports explain the business results of 2001, the financial state of the company at the end of 2001, and the key strategic issues. The share of profits attributable to the shareholders of Elsevier was €101m (2000 €27m). Net assets at 31 December 2001, principally representing the investments in Reed Elsevier plc and Elsevier Reed Finance BV, were €2,392m (2000 €2,448m). The Executive Board 20 February 2002 Registered office Sara Burgerhartstraat 25 1055 KV Amsterdam 73 135136 pp71-82 Reed 25/2/02 21:39 Page 74 REED ELSEVIER Elsevier NV PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31 DECEMBER 2001 Turnover Including share of turnover of joint ventures Less: share of turnover of joint ventures Administrative expenses Operating loss (before joint ventures) Share of operating profit of joint ventures Before amortisation and exceptional items Amortisation of goodwill and intangible assets Exceptional items Operating profit including joint ventures Share of non operating exceptional items of joint ventures Net interest income/(expense) Group Share of net interest of joint ventures Profit on ordinary activities before taxation Tax on profit on ordinary activities Profit attributable to ordinary shareholders Equity dividends paid and proposed Retained loss taken to reserves ADJUSTED FIGURES Profit before tax Profit attributable to ordinary shareholders Note 1 2 Note 3 3 Adjusted figures, which exclude the amortisation of goodwill and intangible assets, exceptional items and related tax effects, are presented as additional performance measures. EARNINGS PER SHARE (EPS) Basic EPS Diluted EPS Adjusted EPS The above amounts derive from continuing activities. 74 Note 3 3 2001 € 0.13 0.13 0.64 2001 €m 3,671 (3,671) 2000 €m 3,091 (3,091) – (3) (3) 800 (403) (79) 318 315 20 20 63 (177) (114) 221 (120) 101 (221) (120) 2001 €m 683 503 – (3) (3) 654 (384) (95) 175 172 70 70 7 (92) (85) 157 (130) 27 (200) (173) 2000 €m 566 419 2000 € 0.04 0.03 0.59 135136 pp71-82 Reed 25/2/02 21:39 Page 75 REED ELSEVIER CASH FLOW STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2001 Net cash outflow from operating activities Dividends received from joint ventures Interest received Returns on investments and servicing of finance Taxation Investment in joint venture Acquisitions and disposals Equity dividends paid Cash outflow before changes in short term investments and financing Decrease/(increase) in short term investments Issue of shares, net of expenses Net repayment of debenture loans (Increase)/decrease in funding balances to joint ventures Financing Change in net cash Note 4 2001 €m (3) 100 62 62 17 (916) (916) 2000 €m (2) 623 4 4 4 (533) (533) (204) (160) (944) (64) 946 (952) 92 (1) (93) (2) – 956 (2) 62 1,016 – 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. RECONCILIATION OF SHAREHOLDERS’ FUNDS FOR THE YEAR ENDED 31 DECEMBER 2001 Profit attributable to ordinary shareholders Equity dividends paid and proposed Issue of shares, net of expenses Exchange translation differences Equalisation adjustments Net (decrease)/increase in shareholders’ funds Shareholders’ funds at 1 January Shareholders’ funds at 31 December 2001 €m 101 (221) 110 42 (88) (56) 2,448 2,392 2000 €m 27 (200) 947 75 106 955 1,493 2,448 75 135136 pp71-82 Reed 25/2/02 21:39 Page 76 REED ELSEVIER Elsevier NV BALANCE SHEET AS AT 31 DECEMBER 2001 Fixed assets Current assets Debtors Short term investments Creditors: amounts falling due within one year Net current (liabilities)/assets Total assets less current liabilities Creditors: amounts falling due after more than one year Provisions Net assets Share capital issued Paid-in surplus Legal reserves Other reserves Shareholders’ funds Note 4 5 6 7 8 9 2001 €m 2,506 94 25 119 (169) (50) 2,456 (5) (59) 2,392 47 1,438 387 520 2,392 2000 €m 1,674 5 971 976 (154) 822 2,496 (6) (42) 2,448 47 1,328 432 641 2,448 76 135136 pp71-82 Reed 25/2/02 21:39 Page 77 REED ELSEVIER ACCOUNTING POLICIES Basis of preparation These statutory financial statements report the profit and loss account, cash flow and financial position of Elsevier, and have been prepared in accordance with Dutch generally accepted accounting principles. Unless otherwise indicated, all amounts shown in the financial statements are in millions of euro. The financial statements have been prepared under the historical cost convention in accordance with applicable accounting standards. The basis of the merger of the businesses of Reed International and Elsevier is set out on page 13. As a consequence of the merger of the company’s businesses with those of Reed International, described on page 13, 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 on pages 26 to 53. 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 normally 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 on 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. Other accounting policies The accounting policies adopted in the preparation of the combined financial statements are set out on pages 26 and 27. 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. 77 135136 pp71-82 Reed 25/2/02 21:39 Page 78 REED ELSEVIER Elsevier NV Notes to the financial statements OPERATING LOSS 1 Operating loss is stated after the gross 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 €0.2m (2000 €0.2m) 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. 2 NET INTEREST Interest on receivables from joint ventures Other interest Net interest income 3 ADJUSTED FIGURES Profit before tax Adjustments: Amortisation of goodwill and intangible assets Exceptional items Adjusted profit before tax Profit attributable to ordinary shareholders Adjustments: Amortisation of goodwill and intangible assets Exceptional items Adjusted profit attributable to ordinary shareholders Earnings per ordinary share Adjustments: Amortisation of goodwill and intangible assets Exceptional items Adjusted earnings per ordinary share 4 FIXED ASSETS Investments in joint ventures At 1 January Investment in joint venture Share in profits Dividends received Currency translation Equalisation (see note 9) At 31 December 78 2001 €m 6 57 63 2001 €m 221 403 59 683 101 408 (6) 503 2001 € 0.13 0.52 (0.01) 0.64 2001 €m 1,674 916 62 (100) 42 (88) 2000 €m 2 5 7 2000 €m 157 384 25 566 27 384 8 419 2000 € 0.04 0.54 0.01 0.59 2000 €m 1,559 533 24 (623) 75 106 2,506 1,674 135136 pp71-82 Reed 25/2/02 21:39 Page 79 REED ELSEVIER 4 FIXED ASSETS (continued) The investment in joint ventures comprises the group’s share at the following amounts of: Fixed assets Current assets Creditors: amounts falling due within one year Creditors: amounts falling due after more than one year Provisions Minority interests Total The investments in joint ventures are: – Reed Elsevier plc, London (50%) – Elsevier Reed Finance BV, Amsterdam (61%) 2001 €m 6,112 1,837 (3,221) (2,047) (171) (4) 2,506 2000 €m 3,781 1,263 (2,572) (697) (95) (6) 1,674 In addition, Elsevier holds €0.14m 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 investments in joint ventures above. They enable Elsevier to receive dividends from companies within the same tax jurisdiction. On 11 July 2001, Elsevier took up its rights in a rights issue by Elsevier Reed Finance BV and subscribed for 51 E-shares in the company at a cost of €916m. 5 DEBTORS Joint ventures Other accounts receivable Total The accounts receivable from joint ventures bear interest. 6 CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR Proposed dividend Joint ventures Taxation Accounts payable and other debts Total 7 CREDITORS: AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR Debenture loans 2001 €m 88 6 94 2001 €m 157 – 11 1 169 2001 €m 5 2000 €m – 5 5 2000 €m 140 5 – 9 154 2000 €m 6 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 €227 par value debenture loans qualifies for the acquisition of 20-50 Elsevier ordinary shares. 79 135136 pp71-82 Reed 25/2/02 21:39 Page 80 REED ELSEVIER Elsevier NV Notes to the financial statements 8 PROVISIONS Deferred taxation Pension Total 9 SHAREHOLDERS’ FUNDS Balance as at 1 January 2000 Profit attributable to ordinary shareholders Equity dividends paid and proposed Issue of shares, net of expenses Dividends from joint ventures Exchange translation differences Equalisation adjustments Balance as at 1 January 2001 Profit attributable to ordinary shareholders Equity dividends paid and proposed Issue of shares, net of expenses Dividends from joint ventures Exchange translation differences Equalisation adjustments Balance as at 31 December 2001 Share capital issued €m 43 – – 4 – – – Paid-in surplus €m 385 – – 943 – – – 47 1,328 – – – – – – – – 110 – – – 47 1,438 2001 €m 58 1 59 Legal reserves €m Other reserves €m 847 27 – – (623) 75 106 432 101 – – (100) 42 (88) 387 218 – (200) – 623 – – 641 – (221) – 100 – – 2000 €m 41 1 42 Total €m 1,493 27 (200) 947 – 75 106 2,448 101 (221) 110 – 42 (88) 520 2,392 The authorised share capital consists of 2,100m ordinary shares and 30m registered R-shares. As at 31 December 2001, the issued share capital consisted of 736,575,369 (2000 735,717,794) ordinary shares of €0.06 par value and 4,679,249 (2000 4,049,951) R-shares of €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. On 12 April 2001, Elsevier issued 629,298 R-shares to Reed Holding BV, a wholly owned subsidiary of Reed International, for €91.3m before capital taxes, so as to maintain Reed International’s 5.8% indirect equity interest in Elsevier. Within paid-in surplus, an amount of €1,261m (2000 €1,151m) is free of tax. On 31 December 2001, there were options outstanding for the purchase of 28.4m (2000 24.3m) shares at an average price of €11.90 (2000 €11.78). The average term of these options is four years (2000 four years). 10 CONTINGENT LIABILITIES There are contingent liabilities in respect of borrowings of the Reed Elsevier plc group and the Elsevier Reed Finance BV group guaranteed by Elsevier as follows: Guaranteed jointly and severally with Reed International 2001 €m 5,061 2000 €m 2,941 Financial instruments disclosures in respect of the borrowings covered by the above guarantees are given in note 22 to the Reed Elsevier combined financial statements on pages 46 to 51. The financial statements were signed by the Boards of Directors, 20 February 2002. M Tabaksblat Chairman 80 M H Armour Chief Financial Officer 135136 pp71-82 Reed 25/2/02 21:39 Page 81 REED ELSEVIER Elsevier NV Other information AUDITORS’ REPORT TO THE MEMBERS OF ELSEVIER NV We have audited the 2001 financial statements of Elsevier NV, Amsterdam which comprise the profit and loss account, cash flow statement, reconciliation of shareholders’ funds, balance sheet and the related notes 1 to 10. These financial statements have been prepared under the accounting policies set out therein and include the Reed Elsevier combined financial statements for the year ended 31 December 2001 which comprise the profit and loss account, the balance sheet, the cash flow statement, the statement of total recognised gains and losses, the shareholders’ funds reconciliation and the related notes 1 to 27, having been prepared under the accounting policies set out therein, dated 20 February 2002. The financial statements are the responsibility of the company’s management. Our responsibility is to express an opinion on these financial statements based on our audit. Basis of audit opinion We conducted our audit in accordance with auditing standards generally accepted in the Netherlands. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit includes examination, on a test basis, of 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 financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. Opinion In our opinion, the financial statements of Elsevier NV, which include the Reed Elsevier combined financial statements, give a true and fair view of the financial position of Elsevier NV at 31 December 2001 and of the result and cash flow for the year then ended in accordance with accounting principles generally accepted in the Netherlands and comply with the legal requirements for financial statements as included in Part 9, Book 2 of the Netherlands Civil Code. Deloitte & Touche Accountants Amsterdam 20 February 2002 PROPOSAL FOR ALLOCATION OF PROFIT Interim dividend on ordinary shares Final dividend on ordinary shares Dividend on R-shares Retained loss 2001 €m 64 157 – (120) 101 2000 €m 60 140 – (173) 27 The Combined Supervisory and Executive Board determines the part of the profit to be retained. The profit to be distributed is paid on the ordinary shares and the R-shares in proportion to their nominal value. The Combined Board may resolve to pay less per R-share, but not less than 1% of the nominal value. The company is bound by the Governing Agreement with Reed International, which provides that Elsevier shall declare dividends such that the dividend on one Elsevier ordinary share, which shall be payable in euros, will equal 1.538 times the dividend, including the related UK tax credit, paid on one Reed International ordinary share. 81 135136 pp71-82 Reed 25/2/02 21:39 Page 82 135136 pp83-92 Reed 25/2/02 21:39 Page 83 REED ELSEVIER Additional information for US investors ADDITIONAL INFORMATION FOR US INVESTORS 84...REED ELSEVIER COMBINED BUSINESSES 89...REED INTERNATIONAL P.L.C. 91...ELSEVIER NV 135136 pp83-92 Reed 25/2/02 21:39 Page 84 REED ELSEVIER Additional information for US investors Reed Elsevier combined businesses SUMMARY FINANCIAL INFORMATION IN US DOLLARS Basis of preparation The summary financial information is a simple translation of the Reed Elsevier combined financial statements into US dollars at the stated rates of exchange. The financial information provided below is prepared under UK and Dutch GAAP as used in the preparation of the Reed Elsevier combined financial statements. It does not represent a restatement under US GAAP which would be different in some significant respects. Exchange rates for translation Sterling Profit and loss and cash flow Balance sheet Euro Profit and loss and cash flow Balance sheet Profit and loss account FOR THE YEAR ENDED 31 DECEMBER 2001 Net sales – continuing Adjusted operating profit Profit before tax Profit attributable Adjusted profit before tax Adjusted profit attributable Cash flow statement FOR THE YEAR ENDED 31 DECEMBER 2001 Net cash inflow from operating activities Dividends received from joint ventures Returns on investments and servicing of finance Taxation (including US$203m (2000 US$47m) exceptional net inflow) Capital expenditure and financial investment Acquisitions and disposals Equity dividends paid to the shareholders of the parent companies Cash outflow before changes in short term investments and financing Decrease/(increase) in short term investments Financing Increase in cash Adjusted operating cash flow Adjusted operating cash flow conversion 84 2001 US$ 1.44 1.45 0.894 0.884 2001 US$m 6,566 1,426 396 181 1,221 899 2001 US$m 1,535 17 (164) (53) (328) (3,082) (367) (2,442) 1,683 773 14 1,449 102% 2000 US$ 1.51 1.49 0.921 0.925 2000 US$m 5,690 1,197 290 50 1,042 772 2000 US$m 1,228 9 (157) (166) (288) (1,069) (297) (740) (1,717) 2,468 11 1,170 98% 135136 pp83-92 Reed 25/2/02 21:39 Page 85 REED ELSEVIER SUMMARY FINANCIAL INFORMATION IN US DOLLARS (continued) Balance sheet AS AT 31 DECEMBER 2001 Capital employed Goodwill and intangible assets Other fixed assets Trading working capital Other working capital Total Funded by: Combined shareholders’ funds Other net liabilities Net borrowings Total 2001 US$m 9,748 1,059 (347) (290) 10,170 4,230 1,258 4,682 10,170 2000 US$m 6,149 848 (714) (207) 6,076 4,531 900 645 6,076 85 135136 pp83-92 Reed 25/2/02 21:39 Page 86 REED ELSEVIER Additional information for US investors Reed Elsevier combined businesses 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 page 88. Goodwill and other intangible assets In 1998, Reed Elsevier adopted the new UK financial reporting standard FRS10: Goodwill and Intangible Assets, and accordingly changed its accounting policy for goodwill and intangible assets. Under this policy, for the fiscal years ended 31 December 1998 to 31 December 2000, and retrospectively for prior years, goodwill and intangible assets were 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 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 increased the periodic amortisation charge, as the unamortised value of existing assets, which were previously being amortised over periods up to 40 years, were amortised over shorter periods. As explained in the Accounting Policies, on pages 26 and 27, the maximum estimated useful life of goodwill and intangible assets has been reassessed as 40 years for the 2001 financial statements under UK and Dutch GAAP. Under the new US accounting standard SFAS 142: Goodwill and Other Intangible Assets, no amortisation has been charged on goodwill arising on the Harcourt acquisition and other acquisitions completed after 30 June 2001. Other goodwill and intangible assets are being amortised over periods up to 40 years, consistently with the periods adopted under UK and Dutch GAAP. The gross cost under US GAAP, as at 31 December 2001, of goodwill is £4,860m (2000 £3,757m) and of other intangible assets is £5,583m (2000 £3,900m). Accumulated amortisation under US GAAP, as at 31 December 2001, of goodwill is £1,414m (2000 £1,497m) and of other intangible assets is £1,131m (2000 £1,402m). 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 most significant adjustment to apply SFAS 109 arises on acquired intangible assets for which amortisation is not tax deductible. Under the timing difference approach applied under UK and Dutch GAAP, no such liability would be recognised. Pensions The combined businesses account for pension costs under the rules set out in SSAP24: Accounting for Pension Costs. 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 assets, liabilities and 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 and Dutch 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. Stock based compensation Under US GAAP, the combined businesses apply the accounting requirements of Accounting Principle Board Opinion No. 25: Accounting for Stock Issued to Employees (“APB 25”) and related interpretations in accounting for stock based compensation. Under APB 25 compensatory plans with performance criteria qualify as variable plans, for which total compensation cost must be recalculated each period based on the current share price. The total compensation cost is amortised over the vesting period. Under UK and Dutch GAAP, compensation cost is determined using the share price on the date of grant. Also under US GAAP, 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 but, where APB 25 is applied, the proforma effect on net income must be 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 £22m in 2001 (2000 £23m). Derivative instruments Under US GAAP, SFAS 133: Accounting for Derivative Instruments and Hedging Activities requires all derivative instruments to be carried 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 the derivative’s designation and effectiveness as a hedging instrument. Certain derivative instruments used by Reed Elsevier have not been designated as qualifying hedge instruments under SFAS 133 and, accordingly, a charge to net income is recorded under US GAAP for the changes in the fair value of those derivative instruments. Under UK and Dutch GAAP, derivative instruments intended as hedges are recorded at 86 135136 pp83-92 Reed 25/2/02 21:39 Page 87 REED ELSEVIER appropriate historical cost amounts, with fair values shown as a disclosure item. SFAS 133 was effective from 1 January 2001, resulting in a cumulative transition adjustment of £1m loss to US GAAP net income and £86m loss in other comprehensive income. Equity 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 measure. US GAAP does not permit the presentation of alternative earnings measures. Accordingly, adjusted profit is not regarded as an alternative performance measure under US GAAP. Acquisition accounting Under UK and Dutch GAAP, severance and integration costs in relation to acquisitions are expensed as incurred and, depending on their size and incidence, these costs may be 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. Employee Benefit Trust shares Under UK and Dutch GAAP, shares held by the Reed Elsevier Employee Benefit Trust (“EBT”) are classified as fixed asset investments. Under US GAAP, shares held by the EBT are treated as a reduction in shareholders’ funds. Available for sale investments Under UK and Dutch GAAP, investments in marketable securities are recorded at historical cost less provision for any impairment in value. Under US GAAP, investments classified as available for sale are reported at fair value, with unrealised gains or losses reported as a separate component of shareholders’ funds. Short term obligations expected to be refinanced Under US GAAP, where it is expected to refinace 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 2001 of £1,551m (2000 £1,101m) would thus be excluded from current liabilities under US GAAP and shown as long term obligations. Recently issued accounting pronouncements During 2001 the UK standard FRS17: Retirement Benefits was introduced. FRS17 requires additional disclosures until full implementation is mandatory in 2003. The additional disclosures for 2001 are given in note 4 to the financial statements. The net impact on the profit and loss account, were the accounting requirements of FRS17 to be applied for 2002, is not expected to be material and would not affect cash flow. FRS17 differs from US GAAP which does not require the immediate recognition of actuarial gains and losses, but instead allows the amortisation of actuarial gains and losses to be recognised in net income. SFAS 141: Business Combinations and SFAS 142: Goodwill and Other Intangible Assets were issued in June 2001. SFAS 141 eliminates the pooling-of-interests method and addresses the accounting for negative goodwill. It is effective for business combinations completed after 30 June 2001 and, subject to transitional provisions, retrospectively to prior business combinations. Adoption of the standard has had no material impact on the accounting for business combinations completed prior to 1 July 2001. SFAS 142 states that goodwill should not be amortised but should be tested for impairment at least annually at a reporting unit level. The statement is effective for financial years beginning after 15 December 2001, except for goodwill and intangible assets acquired after 30 June 2001, which should be accounted for in accordance with the provisions of SFAS 142. The goodwill and intangible assets arising on the Harcourt and other acquisitions completed after 30 June 2001 have been accounted for under US GAAP in accordance with the transitional provisions of SFAS 142. The impact of full adoption of the standard cannot be reasonably estimated at this time. 87 135136 pp83-92 Reed 25/2/02 21:39 Page 88 REED ELSEVIER Additional information for US investors Reed Elsevier combined businesses EFFECTS ON NET INCOME OF MATERIAL DIFFERENCES BETWEEN UK AND DUTCH GAAP AND US GAAP FOR THE YEAR ENDED 31 DECEMBER 2001 Net income under UK and Dutch GAAP US GAAP adjustments: Amortisation of goodwill and other intangible assets Deferred taxation Pensions Stock based compensation Derivative instruments Other items Net (loss)/income under US GAAP 2001 £m 126 (74) (43) 46 (15) (56) (4) (20) 2000 £m 33 (78) 85 22 – – (2) 60 2001 €m 202 (119) (69) 74 (24) (90) (6) (32) EFFECTS ON COMBINED SHAREHOLDERS’ FUNDS OF MATERIAL DIFFERENCES BETWEEN UK AND DUTCH GAAP AND US GAAP AS AT 31 DECEMBER 2001 Combined shareholders’ funds under UK and Dutch GAAP US GAAP adjustments: Goodwill and other intangible assets Deferred taxation Pensions Derivative instruments Unrealised gains on available for sale investments Equity dividends not declared in the period Other items 2001 £m 2,917 1,151 (860) 132 (79) 36 190 (20) 2000 £m 3,041 604 (203) 86 – 1 177 1 2001 €m 4,784 1,888 (1,410) 216 (130) 59 312 (33) Combined shareholders’ funds under US GAAP 3,467 3,707 5,686 2000 €m 54 (128) 139 36 – – (3) 98 2000 €m 4,896 973 (327) 138 – 2 285 1 5,968 88 135136 pp83-92 Reed 25/2/02 21:39 Page 89 REED ELSEVIER Additional information for US investors Reed International P.L.C. SUMMARY FINANCIAL INFORMATION IN US DOLLARS Basis of preparation The summary financial information is a simple translation of Reed International’s consolidated financial statements into US dollars at the stated rates of exchange. The financial information provided below is prepared under UK GAAP as used in the preparation of the Reed International consolidated financial statements. It does not represent a restatement under US GAAP which would be different in some significant respects. Consolidated profit and loss account FOR THE YEAR ENDED 31 DECEMBER 2001 Profit attributable to ordinary shareholders: statutory Profit attributable to 52.9% interest in Reed Elsevier combined businesses Adjusted profit attributable Amortisation of goodwill and intangible assets Exceptional items Data per American Depositary Share Earnings per American Depositary Share based on 52.9% interest in Reed Elsevier combined businesses Adjusted Basic Net dividend per American Depositary Share Balance sheet AS AT 31 DECEMBER 2001 Shareholders’ funds Exchange rates for translation of sterling Profit and loss Balance sheet 2001 US$m 88 475 (386) 7 96 2001 US$ $1.50 $0.31 $0.60 2001 US$m 2,237 2001 US$:£ 1.44 1.45 2000 US$m 17 408 (374) (8) 26 2000 US$ $1.41 $0.09 $0.60 2000 US$m 2,397 2000 US$:£ 1.51 1.49 Adjusted earnings per American Depositary Share is based on Reed International’s 52.9% share of the adjusted profit attributable of the Reed Elsevier combined businesses, which excludes amortisation of goodwill and intangible assets and exceptional items. Adjusted figures are described in note 9 to the Reed International consolidated financial statements. Reed International shares are quoted on the New York Stock Exchange and trading is in the form of American Depositary Shares (“ADSs”), evidenced by American Depositary Receipts (“ADRs”), representing four Reed International ordinary shares of 12.5p each. (CUSIP No. 758212872; trading symbol, RUK; Citibank is the ADS Depositary.) 89 135136 pp83-92 Reed 25/2/02 21:39 Page 90 REED ELSEVIER Additional information for US investors Reed International P.L.C. SUMMARY OF THE PRINCIPAL DIFFERENCES BETWEEN UK AND US GAAP Reed International accounts for its 52.9% economic interest in the Reed Elsevier combined businesses, before the effect of tax credit equalisation, 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, pensions 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 on pages 86 and 87. The Reed Elsevier Annual Report 2001 on Form 20-F provides further information for US investors. EFFECTS ON NET INCOME OF MATERIAL DIFFERENCES BETWEEN UK AND US GAAP FOR THE YEAR ENDED 31 DECEMBER 2001 Net income under UK GAAP Impact of US GAAP adjustments to combined financial statements Net (loss)/income under US GAAP (Loss)/earnings per ordinary share under US GAAP EFFECTS ON SHAREHOLDERS’ FUNDS OF MATERIAL DIFFERENCES BETWEEN UK AND US GAAP AS AT 31 DECEMBER 2001 Shareholders’ funds under UK GAAP Impact of US GAAP adjustments to combined financial statements Equity dividends not declared in the period Shareholders’ funds under US GAAP 2001 £m 61 (77) (16) (1.3)p 2001 £m 1,543 197 94 1,834 2000 £m 11 16 27 2.3p 2000 £m 1,609 264 88 1,961 90 135136 pp83-92 Reed 25/2/02 21:39 Page 91 REED ELSEVIER Additional information for US investors Elsevier NV SUMMARY FINANCIAL INFORMATION IN US DOLLARS Basis of preparation The summary financial information is a simple translation of Elsevier’s statutory financial statements into US dollars at the stated rates of exchange. The financial information provided below is prepared under Dutch GAAP as used in the preparation of the Elsevier statutory financial statements. It does not represent a restatement under US GAAP which would be different in some significant respects. Profit and loss account FOR THE YEAR ENDED 31 DECEMBER 2001 Adjusted profit attributable Data per American Depositary Share Earnings per American Depositary Share based on 50% interest in Reed Elsevier combined businesses Adjusted Basic Net dividend per American Depositary Share Balance sheet AS AT 31 DECEMBER 2001 Shareholders’ funds Exchange rates for translation of euros Profit and loss Balance sheet 2001 US$m 450 2001 US$ $1.14 $0.23 $0.54 2001 US$m 2,115 2001 €:US$ 1.118 1.131 2000 US$m 386 2000 US$ $1.09 $0.07 $0.52 2000 US$m 2,264 2000 €:US$ 1.086 1.081 Adjusted earnings per American Depositary Share is based on Elsevier’s 50% share of the adjusted profit attributable of the Reed Elsevier combined businesses, which excludes amortisation of goodwill and intangible assets and exceptional items. Adjusted figures are described in note 3 to the Elsevier statutory financial statements. Elsevier shares are quoted on the New York Stock Exchange and trading is in the form of American Depositary Shares (“ADSs”), evidenced by American Depositary Receipts (“ADRs”), representing two Elsevier ordinary shares of €0.06 each. (CUSIP No. 290259100; trading symbol, ENL; Citibank is the ADS Depositary.) SUMMARY OF THE PRINCIPAL DIFFERENCES BETWEEN DUTCH AND US GAAP 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, pensions 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 on pages 86 and 87. The Reed Elsevier Annual Report 2001 on Form 20-F provides further information for US investors. EFFECTS ON NET INCOME OF MATERIAL DIFFERENCES BETWEEN DUTCH AND US GAAP FOR THE YEAR ENDED 31 DECEMBER 2001 Net income under Dutch GAAP Impact of US GAAP adjustments to combined financial statements Net (loss)/income under US GAAP (Loss)/earnings per share under US GAAP EFFECTS ON SHAREHOLDERS’ FUNDS OF MATERIAL DIFFERENCES BETWEEN DUTCH AND US GAAP AS AT 31 DECEMBER 2001 Shareholders’ funds under Dutch GAAP Impact of US GAAP adjustments to combined financial statements Equity dividends not declared in the period Shareholders’ funds under US GAAP 2001 €m 101 (106) (5) €(0.01) 2001 €m 2,392 294 157 2,843 2000 €m 27 31 58 €0.08 2000 €m 2,448 396 140 2,984 91 135136 pp83-92 Reed 25/2/02 21:39 Page 92 REED ELSEVIER Principal operating locations Reed Elsevier plc 25 Victoria Street, London SW1H 0EX, UK Tel: +44 (0) 20 7222 8420 Fax: +44 (0) 20 7227 5799 Sara Burgerhartstraat 25 1055 KV Amsterdam Tel: +31 (0) 20 485 2434 Fax: +31 (0) 20 618 0325 125 Park Avenue, 23rd Floor New York, NY 10017, USA Tel: +1 212 309 5498 Fax: +1 212 309 5480 Elsevier Reed Finance BV Sara Burgerhartstraat 25 1055 KV Amsterdam Tel: +31 (0) 20 485 2434 Fax: +31 (0) 20 618 0325 Elsevier Science Sara Burgerhartstraat 25 1055 KV Amsterdam, The Netherlands www.elsevier.nl Elsevier Science The Boulevard, Langford Lane Kidlington, Oxford OX5 1GB, UK www.elsevier.co.uk Elsevier Science 655 Avenue of the Americas New York, NY10010, USA www.elsevier.com Elsevier Science Academic Press 525 B Street, Suite 1900 San Diego, CA 92101-4495, USA www.apnet.com Elsevier Science Health Sciences 11830 Westline Industrial Drive St. Louis, M063146, USA www.harcourthealth.com Elsevier Science WB Saunders Independence Square West Suite 300, The Curtis Centre Philadelphia, PA 19106-3399, USA www.harcourthealth.com 92 For further information or contact details, please consult our website: www.reedelsevier.com LexisNexis 9393 Springboro Pike Miamisburg, Ohio 45342, USA www.lexis-nexis.com LexisNexis Martindale Hubbell 121 Chanlon Road New Providence, N107974, USA www.martindale.com LexisNexis Butterworths Tolley Halsbury House, 35 Chancery Lane London WC2A 1EL, UK www.butterworths.co.uk Harcourt School Publishers 6277 Sea Harbor Drive Orlando FL 32819, USA www.harcourtschool.com Holt Rinehart and Winston 10801 N. MoPac Expressway Building 3, Austin, Texas 78759-5415, USA www.hrw.com Harcourt Educational Measurement The Psychological Corporation 19500 Bulverde Road San Antonio TX 78259, USA www.hemweb.com Harcourt Supplemental Publishers 1000 Hart Road Barrington Illinois 60010, USA www.steck-vaughn.com www.rigby.com Reed Educational & Professional Publishing Halley Court, Jordan Hill Oxford OX2 8EJ, UK www.repp.com Cahners Business Information 345 Hudson Street New York NY10014-4502, USA www.cahners.com Reed Business Information Quadrant House, The Quadrant Sutton, Surrey SM2 5AS, UK www.reedbusiness.com Elsevier Business Information Hanzestraat 1 7006 RH Doetinchem The Netherlands www.ebi.nl Reed Exhibition Companies Oriel House, 26 The Quadrant Richmond, Surrey TW9 1DL, UK www.reedexpo.com 135136 Covers 25/2/02 21:36 Page 4 D e s i g n : C o r p o r a t e E d g e w w w. c o r p o r a t e e d g e . c o m P r i n t : P i l l a n s & W i l s o n G r e e n a w a y. 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