As filed with the Securities and Exchange Commission on March 27, 1998
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(MarkOne)
[ ] (REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) or (g) OF THE
SECURITIES EXCHANGE ACT OF 1934
or
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the fiscal year ended December 31, 1997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-3334
<TABLE>
<CAPTION>
<S> <C>
REED INTERNATIONAL P.L.C. ELSEVIER NV
(Exact name of Registrant as specified in its charter) (Exact name of Registrant as specified in its charter)
England The Netherlands
(Jurisdiction of incorporation or organisation) (Jurisdiction of incorporation or organisation)
25 Victoria Street Van de Sande Bakhuyzenstraat 4
London SW1H 0EX 1061 AG Amsterdam
England The Netherlands
(Address of principal executive offices) (Address of principal executive offices)
</TABLE>
Securities registered or to be registered pursuant to section 12(b) of the Act
Title of each class
Reed International P.L.C.: Name of exchange on which registered
American Depositary Shares (each
representing four Reed International
P.L.C. Ordinary Shares) New York Stock Exchange
Ordinary Shares of 12.5p each
(the "Reed International Ordinary
Shares") New York Stock Exchange*
Elsevier NV:
American Depositary Shares
(each representing two Elsevier
NV Ordinary Shares) New York Stock Exchange
Ordinary Shares of Dfl0.10 each
(the "Elsevier Ordinary Shares") New York Stock Exchange*
- - - ----------
* Listed, not for trading, but only in connection with the listing of the
applicable Registrant's American Depository Shares issued in respect
thereof.
Securities registered or to be registered pursuant to Section 12(g) of the
Act: None
----------
Securities for which there is a reporting obligation pursuant to Section
15(d) of the Act: None
----------
Indicate the number of outstanding shares of each of the issuers' classes
of capital or common stock as of December 31, 1997:
Number of
Title of each class Outstanding shares
- - - ------------------- ------------------
Reed International P.L.C.:
Preference shares (cumulative) of (pound)1.00 each
Redeemable at par at the option of the company
3.15% ....................................................... 1,500,000
3.85% ....................................................... 1,200,000
Non-redeemable
3.50% ....................................................... 317,766
4.90% ....................................................... 1,050,587
Ordinary Shares of 12.5p each
(previously 25p) ............................................ 1,140,399,121
Elsevier NV:
Ordinary shares of Dfl 0.10 each ................................ 666,713,891
R-shares of Dfl 1.00 each (held indirectly by Reed
International P.L.C.) ....................................... 4,049,951
----------
Indicate by check mark whether the registrants (1) have filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) have been subject to such
filing requirements for the past 90 days:
Yes [X] No []
Indicate by check mark which financial statement item the registrants have
elected to follow:
Item 17 [] Item 18 [X]
================================================================================
<PAGE>
TABLE OF CONTENTS
Page
----
GENERAL INFORMATION ........................................................ 1
FORWARD LOOKING STATEMENTS ................................................. 2
PART I
ITEM 1: DESCRIPTION OF BUSINESS ...................................... 3
ITEM 2: DESCRIPTION OF PROPERTY ...................................... 18
ITEM 3: LEGAL PROCEEDINGS ............................................ 18
ITEM 4: CONTROL OF REGISTRANTS ....................................... 19
REED INTERNATIONAL ......................................... 19
ELSEVIER ................................................... 19
REED ELSEVIER .............................................. 19
ITEM 5: NATURE OF TRADING MARKET ..................................... 21
REED INTERNATIONAL ......................................... 21
ELSEVIER ................................................... 22
ITEM 6: EXCHANGE CONTROLS AND OTHER LIMITATIONS
AFFECTING SECURITY HOLDERS ................................. 23
REED INTERNATIONAL ......................................... 23
ELSEVIER ................................................... 23
ITEM 7: TAXATION ..................................................... 24
REED INTERNATIONAL ......................................... 24
ELSEVIER ................................................... 27
ITEM 8: SELECTED FINANCIAL DATA ...................................... 30
REED ELSEVIER .............................................. 30
REED INTERNATIONAL ......................................... 32
ELSEVIER ................................................... 33
ITEM 9: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS ........................ 36
REED ELSEVIER .............................................. 36
REED INTERNATIONAL ......................................... 46
ELSEVIER ................................................... 47
ITEM 9A: QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK .......................................... 48
REED ELSEVIER .............................................. 48
ITEM 10: DIRECTORS AND OFFICERS OF REGISTRANTS ........................ 50
REED ELSEVIER .............................................. 50
REED INTERNATIONAL ......................................... 50
ELSEVIER ................................................... 50
<PAGE>
ITEM 11: COMPENSATION OF DIRECTORS AND OFFICERS ....................... 53
ITEM 12: OPTIONS TO PURCHASE SECURITIES FROM
REGISTRANTS OR SUBSIDIARIES ................................ 56
REED INTERNATIONAL ......................................... 56
ELSEVIER ................................................... 58
REED ELSEVIER .............................................. 59
ITEM 13: INTERESTS OF MANAGEMENT IN CERTAIN TRANSACTIONS .............. 62
REED INTERNATIONAL ......................................... 62
ELSEVIER ................................................... 62
PART II
ITEM 14: DESCRIPTION OF SECURITIES TO BE REGISTERED ................... 62
REED INTERNATIONAL ......................................... 62
ELSEVIER ................................................... 62
PART III
ITEM 15: DEFAULTS UPON SENIOR SECURITIES .............................. 62
REED INTERNATIONAL ......................................... 62
ELSEVIER ................................................... 62
ITEM 16: CHANGES IN SECURITIES AND CHANGES IN
SECURITY FOR REGISTERED SECURITIES ......................... 62
REED INTERNATIONAL ......................................... 62
ELSEVIER ................................................... 62
PART IV
ITEM 17: FINANCIAL STATEMENTS* ........................................ 62
ITEM 18: FINANCIAL STATEMENTS ......................................... 62
ITEM 19: FINANCIAL STATEMENTS AND EXHIBITS ............................ F-1
* The registrants have responded to Item 18 in lieu of responding to this
Item.
<PAGE>
GENERAL INFORMATION
Reed Elsevier was formed by the merger (the "Merger") on January 1, 1993
of the businesses of Reed International P.L.C. ("Reed International") and
Elsevier NV ("Elsevier"). On that date, substantially all of the operating
interests of both Reed International and Elsevier were merged into a single
operating group under Reed Elsevier plc, a public limited company incorporated
in England, and many of the treasuryorelated activities of both Reed
International and Elsevier were combined under Elsevier Reed Finance BV, a
private limited company organized under the laws of the Netherlands. Since the
Merger, the operating businesses of Reed Elsevier have been managed on a unified
basis. See "Description of Business". Reed Elsevier is not a legal entity but is
the collective reference to the separate legal entities of Reed International,
Elsevier, Reed Elsevier plc and Elsevier Reed Finance BV and their respective
subsidiaries. The businesses of all of the entities comprising Reed Elsevier are
collectively referred to herein as the "combined businesses". A diagram
presenting a simplified view of the structure of Reed Elsevier is included under
"Description of Business o Introduction".
Reed International and Elsevier have entered into equalization
arrangements which are intended to ensure that ordinary shareholders in Reed
International and Elsevier enjoy substantially equivalent dividend and capital
rights in the net income and net assets of the combined businesses.
The financial statements of the Reed Elsevier combined businesses (the
"Combined Financial Statements") appearing in this Annual Report are presented
in pounds sterling and incorporate the consolidated financial statements of Reed
International and the financial statements of Elsevier. In addition, as separate
legal entities, Reed International and Elsevier prepare separate financial
statements which reflect their respective shares in the combined businesses. In
such separate financial statements, Reed International and Elsevier account for
their respective shares in the combined businesses on an equity basis.
The audited Combined Financial Statements of Reed Elsevier for the three
years ended December 31, 1997 have been prepared in accordance with accounting
policies that are in compliance with both U.K. and Dutch generally accepted
accounting principles ("U.K. and Dutch GAAP"). These accounting principles
differ, in some respects, from those generally accepted in the United States
("U.S. GAAP"). These differences are set out in note 29 to the audited Combined
Financial Statements included in this Annual Report.
The audited consolidated financial statements of Reed International for
the three years ended December 31, 1997 have been prepared in accordance with
accounting policies that are in compliance with U.K. generally accepted
accounting principles ("U.K. GAAP"). These accounting principles differ, in some
respects, from U.S. GAAP. These differences are set out in note 17 to the
audited consolidated financial statements of Reed International included in this
Annual Report.
The audited financial statements of Elsevier for the three years ended
December 31, 1997 have been prepared in accordance with accounting policies that
are in compliance with Dutch generally accepted accounting principles ("Dutch
GAAP"). These accounting principles differ, in some respects, from U.S. GAAP.
These differences are set out in note 13 to the audited financial statements of
Elsevier included in this Annual Report.
The Reed Elsevier Combined Financial Statements and the Reed International
consolidated financial statements are published in pounds sterling. In this
Annual Report, references to "U.S. dollars" or "$" are to United States dollars
and references to "pounds sterling", "sterling", "pence", "(pound)", or "p" are
to U.K. currency. Solely for convenience, this Annual Report contains
translations of certain amounts of currencies other than pounds sterling into
pounds sterling amounts. Unless otherwise indicated or except as otherwise
provided below, translations of amounts of currencies other than pounds sterling
into pounds sterling amounts have been made at the rate used in the preparation
of the Reed Elsevier Combined Financial Statements or the Reed International
consolidated financial statements. These translations should not be construed as
representations that the pounds sterling amounts actually represent such
non-pounds sterling amounts or could be converted into non-pounds sterling
amounts at the rate indicated.
In addition, solely for convenience, this Annual Report contains
translations of certain pounds sterling amounts into U.S. dollars under "Nature
of Trading Market o Reed International" and "Selected Financial Data o Reed
Elsevier" and "Selected Financial Data o Reed International" at specified rates.
These translations of certain pounds sterling amounts into U.S. dollars should
not be construed as representations that the pounds sterling amounts actually
represent such U.S. dollar amounts or could be converted into U.S. dollars at
the rate indicated. Unless otherwise indicated, these translations of pounds
sterling into U.S. dollars have been made at the noon buying rate (the "Noon
Buying Rate") in New York City for cable transfers in pounds sterling as
certified for customs purposes by the Federal Reserve Bank of New York on the
dates specified herein. For information concerning recent Noon Buying Rates for
pounds sterling expressed in U.S. dollars, see "Selected Financial Data o
Exchange Rates".
The Elsevier financial statements are published in Dutch guilders. In this
Annual Report, references to "Dutch guilders", "guilders" or "Dfl" are to Dutch
currency. Solely for convenience, this Annual Report contains translations of
certain guilder amounts into U.S. dollars under "Nature of Trading Market o
Elsevier" and "Selected Financial Data o Elsevier" at specified rates. These
translations of certain guilder amounts into U.S. dollars should not be
construed as representations that the guilder amounts actually represent such
U.S. dollar amounts or could be converted into U.S. dollars at the rate
indicated. Unless otherwise indicated, these translations of guilders into U.S.
dollars have been made at the Noon Buying Rate for Dutch guilders
1
<PAGE>
on the dates specified herein. For information concerning recent Noon Buying
Rates for Dutch guilders expressed in U.S. dollars, see "Selected Financial Data
- - - -- Exchange Rates".
Except where the context otherwise requires, references to "Elsevier"
herein are to Elsevier NV, references to "Reed International" herein are to Reed
International P.L.C. and references to "Reed Elsevier" herein are to,
collectively, Reed International, Elsevier, Reed Elsevier plc, Elsevier Reed
Finance BV and their respective subsidiaries. References to the "Registrants"
herein are to Reed International and Elsevier collectively in their capacities
as registrants and references to "Registrant" herein are to Reed International
or Elsevier, as the case may be, in its individual capacity as a registrant.
FORWARD LOOKING STATEMENTS
This Annual Report contains forward-looking statements within the meaning
of Section 21E of the Securities Exchange Act, as amended. These statements are
subject to a number of risks and uncertainties and actual results and events
could differ materially from those currently 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 and progress of Reed Elsevier's Year 2000
compliance program.
2
<PAGE>
PART I
ITEM 1: DESCRIPTION OF BUSINESS
Introduction
Reed Elsevier is one of the world's leading publishers and information
providers based on net sales. Its activities include scientific, professional
and business publishing. Its principal operations are in North America and
Europe. For the year ended December 31, 1997, Reed Elsevier had total net sales
of approximately (pound)3.4 billion and an average of approximately 27,600
employees. In 1997, North America represented Reed Elsevier's largest single
geographic market, based on net sales by destination, contributing 47% of Reed
Elsevier's total net sales.
Reed Elsevier came into existence on January 1, 1993 when Reed
International and Elsevier contributed their businesses to two jointly owned
companies, Reed Elsevier plc and Elsevier Reed Finance BV. Reed Elsevier plc,
which owns all the publishing and information businesses, is incorporated in
England, and Elsevier Reed Finance BV, which owns the financing and treasury
companies, is incorporated in the Netherlands. Reed International and Elsevier
have retained their separate legal and national identities and are publicly-held
companies with separate stock exchange listings in London, Amsterdam and New
York.
Under the equalization arrangements agreed at the time of the Merger
ordinary shareholders in Reed International and Elsevier enjoy substantially
equivalent dividend and capital rights with respect to their ordinary shares in
the net income and net assets of Reed Elsevier. The differences between a Reed
International Ordinary Share and an Elsevier Ordinary Share are that a Reed
International Ordinary Share provides an interest in a U.K. based legal entity,
pays dividends in U.K. currency and is subject to U.K. tax law with respect to
dividends and capital rights in respect of those shares, whereas an Elsevier
Ordinary Share provides an interest in a Dutch legal entity, pays dividends in
Dutch currency and is subject to Dutch tax law with respect to dividends and
capital rights in respect of those shares. The equalization arrangements are
such that, with respect to dividend and capital rights, one Elsevier Ordinary
Share is, in broad terms, intended to confer equivalent economic interests to
1.538 of a Reed International Ordinary Share, after giving effect to the
adjustments described below. Under the equalization arrangements, the Boards of
both Reed International and Elsevier have agreed, except in exceptional
circumstances, to recommend equivalent gross dividends (i.e., including, with
respect to the dividend on Reed International Ordinary Shares, the associated
U.K. tax credit currently 20%, reducing to 10% on April 6, 1999) based on the
equalization ratio. The equalization ratio is subject to change to reflect share
subdivisions and similar events which may affect the number of outstanding
ordinary shares of either Reed International or Elsevier. The equalization ratio
determined at the time of the Merger was such that, with respect to dividend and
capital rights, one Elsevier Ordinary Share was, in broad terms, intended to
confer equivalent economic interests to 7.69 Reed International Ordinary Shares.
This ratio has been adjusted to reflect a ten for one share subdivision in
respect of the Elsevier Ordinary Shares, which became effective on October 5,
1994 and a two for one share subdivision in respect of the Reed International
Ordinary Shares, which became effective on May 2, 1997. There is no effect on
the proportionate interests in Reed Elsevier of the Reed International and
Elsevier shareholders as a result of these subdivisions.
Reed International and Elsevier each hold a 50% interest in Reed Elsevier
plc. Until November 3, 1994, Reed International and Elsevier each held a 50%
interest in Elsevier Reed Finance BV. On that date Elsevier subscribed for
additional shares in Elsevier Reed Finance BV raising its interest to 54%. The
capital injection did not change the equalization ratio referred to above. This
capital injection by Elsevier into Elsevier Reed Finance BV was made to satisfy
the funding needs of Elsevier Reed Finance BV. Reed International did not
participate in this funding and, as a result, Elsevier now holds 54% of the
shares in Elsevier Reed Finance BV and Reed International holds 46% of the
shares. The funds contributed by Elsevier in the capital injection remain part
of the net assets of the Reed Elsevier combined businesses and so there is no
resulting change in the sharing of earnings or net assets between Reed
International and Elsevier shareholders. In addition to its interest in Reed
Elsevier plc and Elsevier Reed Finance BV, Reed International also holds a 5.8%
indirect interest in Elsevier. This equity interest reflects the higher market
capitalization of Reed International, relative to Elsevier, in the period
immediately preceding the Merger and has been taken into account in the
equalization arrangements described above. As a result of this interest in
Elsevier, Reed International shareholders have a 52.9% interest in the net
income of Reed Elsevier and Elsevier shareholders, excluding Reed International,
have a 47.1% interest.
3
<PAGE>
The following diagram presents a simplified view of the structure of Reed
Elsevier.
[GRAPHIC OMITTED]
The principal assets of Reed International comprise its 50% interest in
Reed Elsevier plc, its 46% interest in Elsevier Reed Finance BV, its 5.8%
indirect interest in Elsevier and certain amounts receivable from subsidiaries
of Reed Elsevier plc. The principal assets of Elsevier comprise its 50% interest
in Reed Elsevier plc, its 54% interest in Elsevier Reed Finance BV and certain
amounts receivable from subsidiaries of Reed Elsevier plc and Elsevier Reed
Finance BV. Elsevier also owns shares, carrying special dividend rights, in
certain of the Dutch subsidiaries of Reed Elsevier plc. These shares enable
Elsevier to receive dividends from companies within its tax jurisdiction,
thereby mitigating potential tax costs for Reed Elsevier.
History and Development of Reed International Prior to the Merger
Reed International was founded in 1903, although certain of its
publications originated in the 19th century. Reed International was originally a
paper manufacturing company which grew through the acquisition of a number of
different manufacturing businesses. In 1970, Reed International diversified into
publishing with the acquisition of International Publishing Corporation Limited,
which had interests in consumer, business to business, legal and newspaper
publishing. Notwithstanding this acquisition, the publishing and information
businesses represented a relatively small part of Reed International's total
activities at such time. Their importance grew through the early 1980's, and in
1986 the Board of Reed International decided to concentrate on publishing and
information businesses. As part of this strategy, in July 1987 Reed
International sold its paint and home improvement business for approximately
(pound)278 million. In the following year, Reed International sold its paper,
packaging and office supplies businesses (which comprised Reed Manufacturing
Group) and the businesses within its North American Paper Group for an aggregate
consideration of approximately (pound)890 million. The proceeds received from
these divestments were used, in part, to finance a number of investments in the
publishing field, including the acquisition of Octopus Publishing Group plc, a
U.K. based book publisher, in August 1987 for approximately (pound)528 million
(of which (pound)344 million was in the form of Reed International Ordinary
Shares); Independent Television Publications Limited, the publisher of TV Times,
a leading U.K. television listings magazine, in June 1989 for approximately
(pound)127 million; Travel Information Group, a U.S. based publisher of business
information for the hotel and travel industry, in June 1989 for approximately
$825 million ((pound)535 million); and Martindale-Hubbell Inc., the publisher of
the leading U.S. reference guide for the legal profession, in January 1990 for
approximately $304 million ((pound)189 million). Reed International's strategic
focus within the publishing and information businesses was directed primarily
towards higher margin, subscription-based businesses in English language
markets. Total Reed International acquisition expenditure for the five years
ended December 31, 1992 was in excess of (pound)1.5 billion.
History and Development of Elsevier Prior to the Merger
Elsevier was formed in 1880 when a number of established Dutch publishers
and booksellers pooled their interests. Initially, Elsevier's activities
comprised small scale publishing for the general trade market. After World War
II, however, Elsevier broadened the scope of its operations, diversifying into
consumer magazines and business publications and achieving considerable growth
as a publisher of English language scientific journals. Elsevier acquired
Excerpta Medica and North Holland in the early 1970's, thereby substantially
increasing the size of its interests in scientific and medical publishing. In
1979, Elsevier merged with Nederlands Dagbladunie NV, adding major interests in
Dutch national newspapers and commercial printing to its activities. Since the
late 1980's, Elsevier's strategy has been directed primarily towards expansion
in publishing and information in English language information markets. This
strategy resulted in the disposal of Elsevier's commercial printing and consumer
book publishing operations and in the acquisition in the United States of a
number of publishing houses active in the fields of professional and business to
business publishing.
4
<PAGE>
Elsevier's largest acquisition in the five years prior to the Merger was
its acquisition of Pergamon Press, a U.K. based publisher of scientific
journals, in May 1991, for approximately (pound)406 million. Other significant
acquisitions in the five years ended December 31, 1992 included the acquisition
of Springhouse Corporation Inc. in September 1988 and Real Estate Data
Inc./Damar Corporation in December 1988. Elsevier's total acquisition
expenditure in the five years ended December 31, 1992 was approximately Dfl 2.3
billion ((pound)700 million).
Strategy
The principal objective of the Merger was to achieve enhanced long term
growth through the integration of complementary businesses with similar
strategies. Management believes that the combined businesses possess greater
financial and management strength than would have been the case for Reed
International and Elsevier individually. This greater financial and management
strength, together with stronger representation in global markets, both in terms
of geographical coverage and product range, better positions Reed Elsevier to
identify and exploit opportunities for the continued development of new products
and penetration into new markets.
Reed Elsevier's principal objective is to produce sustainable and
above-average earnings growth over the longer term through a strategy of
focusing on leading positions in the growing markets for professional,
scientific and business information worldwide.
In pursuit of this strategy, Reed Elsevier has made strategic acquisitions
in scientific, professional and business to business markets and other less
significant acquisitions to enhance existing activities. Since the Merger, the
principal acquisitions have been Editions du Juris-Classeur, formerly Editions
Techniques, a prominent French legal publisher, which was acquired in July 1993
for approximately FF650 million ((pound)76 million), Official Airline Guides, an
independent U.S. provider of travel information and services, which was acquired
in September 1993 for approximately $415 million ((pound)277 million),
LEXIS-NEXIS, formerly known as Mead Data Central, a provider of full-text online
information services in the legal, news and business areas, which was acquired
in December 1994 for approximately $1.5 billion ((pound)1.0 billion), Tolley
Publishing Company, a legal and tax publisher in the United Kingdom, which was
acquired in August 1996 for (pound)101 million, MDL Information Systems Inc., a
U.S. publicly traded company specialising in software systems and information
databases for the scientific research and development industry, which was
acquired in April 1997, for $320 million ((pound)195 million) and Chilton
Business Group, a U.S. business information publisher, which was acquired in
September 1997, for $447 million ((pound)273 million). In November 1996, Reed
Elsevier also formed a joint venture with Times Mirror Company to own and
operate Shepard's, the U.S. legal citation business. In addition, Reed Elsevier
has made more than 100 other smaller acquisitions since the merger and total
acquisition expenditure in the five years ended December 31, 1997 was
approximately (pound)2.5 billion. As part of Reed Elsevier's major portfolio
refocus on professional and business markets, at the end of 1995, the newspaper
businesses in the United Kingdom and The Netherlands and the consumer magazine
businesses in the United States and The Netherlands were divested in five
separate transactions yielding gross proceeds of (pound)751 million. In 1995, it
was announced that, as part of this major divestment program, Reed Elsevier
intended to dispose of its consumer book publishing business, Reed Books. In
1997, Reed Elsevier disposed of the Adult Trade and Tigerprint divisions of Reed
Books. It remains Reed Elsevier's intention to dispose of the remainder of Reed
Books. In January 1998 Reed Elsevier completed the last major step in its
withdrawal from consumer publishing markets with the divestment of its consumer
magazines business in the United Kingdom.
It was announced on March 9, 1998 that the proposed merger with Wolters
Kluwer had been abandoned. The merger proposal announced last October was
expected to provide attractive strategic and other benefits to each of the
parties. The Boards of Reed International and Elsevier had to conclude, however,
that the revisions to the merger terms that Wolters Kluwer sought - reflecting
in the main their concerns about the impact of regulatory approvals - meant that
the merger could no longer be seen to be in the best interests of shareholders.
Reed Elsevier's strategic direction remains clear and unaffected by this
development.
Development and improvement of Reed Elsevier's portfolio and the product
portfolios within each business will continue to be a priority. This is expected
to be achieved through acquisitions to support growing businesses, through
divestiture and by investment in the development of the product offering to meet
evolving customer needs. The organizational structure and competencies of Reed
Elsevier are also being adapted and developed to meet the challenges of
providing information in electronic as well as hard copy formats. This has
included restructuring of business and reference information activities in the
United States, the United Kingdom and continental Europe, and greater investment
in technology resources, both systems and people.
Reed Elsevier
Reed Elsevier is one of the world's largest publishing and information
businesses based on net sales. Its activities include scientific, professional
and business publishing. Net sales are derived principally from subscriptions,
advertising sales, circulation and copy sales and exhibition fees. In 1997, 32%
of Reed Elsevier's net sales from continuing businesses was derived from
subscriptions, 24% from advertising sales, 24% from circulation and copy sales,
9% from exhibitions and 11% from other sources. Subscription sales are defined
as net sales derived from the periodic distribution or update of a product which
is usually prepaid, while circulation and copy sales include all other net sales
from the distribution of a product, usually on cash or credit terms. Both
subscription and circulation and copy sales include the electronic distribution
of products and subscription and transactional sales of online services.
Approximately one fifth of Reed Elsevier's net sales from continuing businesses
are derived from electronic information products.
5
<PAGE>
The following table shows net sales of Reed Elsevier among its business
segments and on the basis of geographic origin and markets and operating income
before exceptional items of Reed Elsevier among its business segments and on the
basis of its geographic origin, in each of the three years ended December 31,
1997:
<TABLE>
<CAPTION>
Operating Income Before Exceptional
Net Sales Items (1)
-------------------------------------- -------------------------------------
1995 1996 1997 1995 1996 1997
------------ ----------- ---------- ---------- ----------- -----------
(pound) (pound) (pound) (pound) (pound) (pound)
million % million % million % million % million % million %
------- --- ------- --- ------- --- ------- --- ------- --- ------- ---
Business Segment (2)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Scientific .............. 532 15 553 16 571 17 211 26 231 27 230 26
Professional ............ 914 25 1,037 31 1,076 32 223 27 268 31 296 34
Business ................ 1,278 35 1,307 39 1,340 39 266 32 288 34 286 32
Consumer ................ 81 2 78 2 75 2 2 -- 5 1 7 1
----- --- ----- --- ----- --- ---- --- ----- --- ---- ---
Continuing Operations ... 2,805 77 2,975 88 3,062 90 702 85 792 93 819 93
Discontinued
Operations(3) ......... 844 23 406 12 355 10 126 15 64 7 66 7
----- --- ----- --- ----- --- ---- --- ----- --- ---- ---
Total ................... 3,649 100 3,381 100 3,417 100 828 100 856 100 885 100
===== === ===== === ===== === ==== === ===== === ==== ===
Geographic Origin (4)
North America ........... 1,376 38 1,438 42 1,512 44 313 38 358 42 394 45
United Kingdom .......... 668 18 732 22 763 22 176 21 203 24 213 24
The Netherlands ......... 362 10 369 11 369 11 119 15 128 15 123 14
Rest of Europe .......... 267 7 279 8 263 8 67 8 74 9 69 8
Asia/Pacific ............ 132 4 157 5 155 5 27 3 29 3 20 2
----- --- ----- --- ----- --- ---- --- ----- --- ---- ---
Continuing Operations ... 2,805 77 2,975 88 3,062 90 702 85 792 93 819 93
Discontinued
Operations(3) ......... 844 23 406 12 355 10 126 15 64 7 66 7
----- --- ----- --- ----- --- ---- --- ----- --- ---- ---
Total ................... 3,649 100 3,381 100 3,417 100 828 100 856 100 885 100
===== === ===== === ===== === ==== === ===== === ==== ===
Net Sales
-------------------------------------
Geographic Market (4)
North America ........... 1,470 40 1,535 45 1,594 47
United Kingdom .......... 419 12 459 14 468 14
The Netherlands ......... 187 5 193 6 210 6
Rest of Europe .......... 402 11 430 13 414 12
Asia/Pacific ............ 327 9 358 10 376 11
----- --- ----- --- ----- ---
Continuing Operations ... 2,805 77 2,975 88 3,062 90
Discontinued
Operations(3) ......... 844 23 406 12 355 10
----- --- ----- --- ----- ---
Total 3,649 100 3,381 100 3,417 100
===== === ===== === ===== ===
</TABLE>
(1) Exceptional items are significant items within Reed Elsevier's ordinary
activities which under U.K. and Dutch GAAP are required to be disclosed
separately due to their nature, size or infrequency. Exceptional items
before tax totalled(pound)477 million (loss) in the year ended December 31,
1997,(pound)1 million (profit) in the year ended December 31, 1996,
and(pound)13 million (profit) in the year ended December 31, 1995. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations o Reed Elsevier" and note 5 to the audited Combined Financial
Statements for a further description of these items.
(2) During 1997 Reed Elsevier's business publishing activities were reorganized
into three geographically focused business groups, Cahners Business
Information, Reed Business Information and Elsevier Business Information,
serving North America, the United Kingdom and Continental Europe
respectively. As a result certain operations have been transferred between
the reporting segments. On the sale of IPC Magazines in January 1998 the
New Scientist title was retained and has been recategorized above in the
Business segment. Comparative figures have been restated accordingly.
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(3) Discontinued operations, are presented in accordance with U.K. and Dutch
GAAP, relate wholly to the Consumer segment and comprise the consumer
publishing businesses divested in 1995, IPC Magazines, excluding New
Scientist, and certain operations of Reed Books, which have been divested
by the date of approval of this Annual Report.
(4) The analysis by geographic origin attributes net sales and operating income
before exceptional items to the territory where the product originates. The
analysis by geographic market attributes net sales on the basis of the
destination market.
Reed Elsevier's businesses compete for circulation and marketing
expenditures in the scientific, professional and business information markets.
The bases of competition include, for readers and users of the information, the
quality and variety of the editorial content, the quality of the software to
access the information, the timeliness and the price of the products and, for
advertisers, the quality and the size of the audiences targeted.
Each operating business of Reed Elsevier plc is managed by a chief
executive who is or reports to an executive director of Reed Elsevier plc.
Individual business units comprise corporate entities or divisions of corporate
entities located in the countries in which subsidiaries of Reed Elsevier plc
operate.
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The following structure chart shows the main business units by reference
to business segment and geographical location.
<TABLE>
<CAPTION>
Geographic Location
Business Segment North America(1) United Kingdom The Netherlands Rest of Europe
- - - ---------------- ---------------- -------------- --------------- --------------
<S> <C> <C> <C> <C>
Scientific Elsevier Science Elsevier Science Elsevier Science Elsevier Science, Republic of
F-D-C Reports The Lancet Excerpta Medica Ireland
Excerpta Medica Communications Elsevier Science, Switzerland
Communications Editions Scientifiques et
Springhouse Corporation Medicales Elsevier, France
MDL Information Systems Inc.
Professional LEXIS-NEXIS Butterworths Elsevier Editions du Juris-Classeur,
LEXIS Law Publishing Tolley Opleidingen France
Shepard's (50%) Heinemann Educational Litec, France
Butterworths, Canada Ginn Dott. A. Guiffre Editore,
Martindale-Hubbell Butterworth-Heinemann Italy (40%)
Congressional Information Stampfli Verlag, Switzerland
Services (40%)
Greenwood-Heinemann Rigby
Business Reed Exhibition Companies Reed Exhibition Companies Misset(3) Reed Midem Organisation,
Cahners Publishing Reed Business Information(2) Bonaventura(3) France
Company Reed Travel Group(7) Colofon(3) OIP, France
Chilton Business Group(4) REZsolutions, Inc (includes Messe Salzburg, Austria
R.R. Bowker(4) Utell International)(67%) Pan European Publishing
Reed Travel Group Company, Belgium(3)
Grupo Arte y Cemento,
Spain(3)
Reed Elsevier Deutschland(3),
Germany
Groupe Strategies, France(3)
Editions Prat, France(3)
Consumer-- IPC Magazines(5)
discontinued Book Club Associates (50%)(6)
and continuing Reed Books(6)
operations
</TABLE>
Business Segment Asia/Pacific
- - - ---------------- ------------
Scientific Elsevier Science, Japan
Excerpta Medica
Communications, Japan
Professional Butterworths, Australia
Butterworths, South East
Asia
Butterworths, South
Africa (50.1%)
Rigby Heinemann, Australia
Business Reed Exhibitions, Japan
Reed Exhibitions, Singapore
Reed Exhibitions, Australia
Reed Business Publishing,
Australia(2)
Reed Travel Group
Singapore
Consumer-- Reed Books, Australia(6)
discontinued
and continuing
operations
(1) U.S. unless otherwise stated
(2) Reed Business Information was formed by combining Reed Business Publishing,
Reed Information Services and Bowker Saur
(3) These businesses form Elsevier Business Information
(4) Effective September 1997 these businesses form Cahners Business Information
(prior to February 1, 1998 known as Reed Elsevier Business Information)
(5) In January 1998, Reed Elsevier divested IPC Magazines
(6) Reed Elsevier intends to dispose of the remaining Consumer book publishing
businesses, including its 50% interest in Book Club Associates
(7) Effective January 1998 Reed Travel Group's Hotel Directories and Travel
Business Magazines groups form part of Cahners Business Information, as
Cahners Travel and its Airline Group has been renamed OAG Worldwide and
forms part of Reed Business Information.
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Reed Elsevier plc
Scientific
The Scientific segment of Reed Elsevier comprises worldwide scientific and
medical publishing businesses. For the years ended December 31, 1997 December
31, 1996 and December 31, 1995, the Scientific segment achieved net sales of
(pound)571 million, (pound)553 million and (pound)532 million, respectively, and
operating income before exceptional items of (pound)230 million, (pound)231
million and (pound)211 million, respectively. The Scientific segment represented
approximately 17% of Reed Elsevier's total net sales and 26% of Reed Elsevier's
total operating income before exceptional items for the year ended December 31,
1997.
Scientific
Within the Scientific segment, Elsevier Science contributed approximately
83% of the total net sales in the year ended 31 December, 1997.
Elsevier Science. Elsevier Science is the world's leading international
publisher of scientific information, with headquarters in the Netherlands and
operations located around the globe. Through a number of imprints including
Elsevier, Pergamon, Excerpta Medica and North-Holland, Elsevier Science supplies
journals, books and CD-ROMs to research libraries and professional markets
serving an increasingly wide range of research fields. Elsevier Science
publishes approximately 1,200 journals, sold through subscriptions, with the
physical, life, and social sciences being the principal areas covered. Other
publishing programs include econometrics, statistics, geology, computer
sciences, management, and psychology. Among Elsevier Science's most widely known
and largest print journals are Biochimica et Biophysica Acta, Brain Research,
Neuroscience and Biology of the Cell in the biosciences; Annals of Thoracic
Surgery in the medical sciences; Tetrahedron and Journal of Chromatography in
chemistry; Physics Letters and Solid State Communications in physics and
materials science; Journal of Financial Economics in economics; and Artificial
Intelligence in the computer sciences field. Elsevier Science also publishes
secondary material in the form of bibliographic data and abstracts, and tertiary
layers of information in the form of review and reference works. In addition the
company publishes conference proceedings, letters, journals for rapid
communications, handbooks, bulletins, magazines, dictionaries, newsletters, and
sponsored publications.
Elsevier Science offers a number of sophisticated secondary databases,
available either on-line or on CD-ROM. These include EMBASE, covering
pharmaceutical and biomedical sciences, Geobase, focusing on geoscience and
related areas, and the newly launched biological science database Elsevier
BIOBASE. Elsevier Science also maintains such highly specialized databases as
World Textiles and FLUIDEX. All five of these databases are available in one
source, the OPSBANK database.
A number of CD-ROM products were launched during 1997, including the first
edition of Elsevier Dictionaries on CD- ROM and Elsevier's Encyclopedia of
Neuroscience, the first hybrid CD-ROM/World Wide Web multimedia product of its
kind to be launched. More than 20 of Elsevier Science's journals are published
on the World Wide Web. Amongst those launched in 1997 are Intelligent Data
Analysis, covering new developments in computer science, Mutation Research
Genomics, a new section of the journal Mutation Research, and Artificial
Intelligence, with an on-line pre-print server.
Acquisitions were made of several high quality journals which complement
the existing portfolio in selected fields, including Journal of Supercritical
Fluids and Journal of the American College of Surgeons. Elsevier Science also
acquired several tertiary journals from the Current Science Group. During the
year, Elsevier Science initiated work on several new journals, including Journal
of Financial Markets (FINMAR), covering scientific models related to securities
trading and pricing, which is to be launched in 1998.
During 1997, Elsevier Science made progress in implementing its electronic
online publishing strategy. This included changes to the operational structure
of the business which was reorganized from one focused on geographically based
operating companies to an international structure to facilitate marketing and
service to Elsevier Science's worldwide customer base and provide greater
economies of scale.
The customer base of the Elsevier Electronic Subscriptions (EES) service,
which offers libraries complete electronic editions of any Elsevier Science
journal, was expanded during 1997 to include corporate and semi-governmental
subscribers, in addition to the academic market. Several important EES contracts
were signed during the year in Europe, Asia, Australasia and North America,
amounting to 50 sites providing access to up to 1.3 million scientists. In
addition, during 1997 Elsevier Science launched Science Channel, a customized
interaction service on the World Wide Web to deliver news and indices of
Elsevier Science journals. Elsevier Science also acquired the remaining shares
in ADONIS, a collaboration of publishers that develops and markets CD-ROM based
document delivery and electronic journal subscription services.
ScienceDirect is the major new online scientific information service
designed to offer libraries and their end-users desktop access to the full text
of remotely stored journals published by Elsevier Science. In 1997 the early
release phase was successfully completed and the service will be launched on a
commercial basis in early 1998. It will be a comprehensive database of
scientific, medical and technical literature written and peer-reviewed by
experts in their field. ScienceDirect's features include a powerful search
engine, full text display of journal articles, an integrated abstract and
indexing layer and advanced graphics capabilities. ScienceDirect's product
offerings will range from services tailored to academic, corporate and
government libraries to other services customized and packaged to address the
information needs of individuals in specific scientific communities. It is
expected that the full text of journals from other participating publishers will
also be available.
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<PAGE>
Elsevier Science is also evolving, from a pure content provider to a
service provider, which integrates the existing product offering with
information management tools and services. This facilitates the retrieval and
use of a broad range of information sources and products on an integrated basis.
As part of this strategy, Elsevier Science acquired in April 1997 for $320
million the U.S. public company MDL Information Systems Inc. ("MDL"), a leading
provider of scientific information management systems in the life science and
chemical industries.
The acquisition later in 1997 BioMedNet and ChemWeb from the Current
Science Group offers the opportunity to link the expertise and knowledge of
Elsevier Science with the technology and skills of a specialist provider of web
based community services aimed at individual scientists. Elsevier Science
further expanded its position in the chemical sector through the acquisition in
January 1998 of the rights to the pre-eminent Beilstein online database and the
associated "CrossFire" user interface. This will provide access to approximately
eight million chemical structures with linked descriptions of the properties,
reactions, preparations, citations and other relevant data. The acquisition of
Engineering Information Inc. in February 1998 adds to Elsevier Science's
offerings in engineering and applied physical sciences.
The scientific publishing business is highly cash generative as journal
subscriptions are paid annually in advance. In the year ended December 31, 1997,
subscriptions accounted for approximately 86% of Elsevier Science's net sales,
circulation and copy sales for 3% of net sales and other sources for 11% of net
sales. In the year ended December 31, 1997, approximately 40% of Elsevier
Science's net sales was derived from North America, 36% from Europe, 11% from
Japan and the remaining 13% from the rest of the world. In addition to existing
markets, management believes that opportunities exist for further growth from
sales to emerging markets, such as South-East Asia, South America, India and
Eastern Europe.
Much of the pre-press production of the scientific businesses is
undertaken in-house. The efficient electronic production system, CAP (Computer
Aided Production), is used to deliver the full text of journal articles in
whatever format the customer requires: online, on CD-ROM, or in print. In 1997
this was improved further by integrating production facilities and focusing on
outsourcing. Electronic files of all journals are fed from CAP into the
Electronic Warehouse, which in turn makes content available as required for
delivery to customers. Printing is primarily sourced through a variety of
unaffiliated printers located in cost effective printing centers, mainly in
Europe. The distribution of scientific journals is to a large extent handled
through independent subscription agents. Reed Elsevier is the world's leading
publisher of English language scientific information, based on the number of
journals published. Competition with Reed Elsevier's scientific businesses is
generally on a title by title basis. Leading competing titles are normally
published by learned societies such as the American Chemical Society, the
Institute of Electrical and Electronics Engineers and the American Institute of
Physics in the United States and the Royal Society of Chemistry in the United
Kingdom. In addition, a number of organizations now offer scientific information
through electronic networks.
Medical
The medical businesses within the Scientific segment comprise Excerpta
Medica Communications, Springhouse Corporation, Editions Scientifiques et
Medicales Elsevier and The Lancet, and together these businesses contributed
approximately 17% of the Scientific segment's net sales in the year ended
December 31, 1997.
Excerpta Medica Communications. Excerpta Medica Communications ("EMC")
provides customized information to healthcare professionals, medical societies
and pharmaceutical companies worldwide. Consistent with the global structure of
their main clients, EMC fulfils the needs of pharmaceutical companies'
international and domestic marketing operations through their own offices in the
Netherlands, Germany, Italy, France, Spain, the United Kingdom, the United
States, Japan, Hong Kong and Australia. Activities include educational and
promotional scientific information delivered via medical symposia, traditional
print media, audio-visual and computer-based programs. In the year ended
December 31, 1997, approximately 91% of EMC's net sales were derived from
sponsored projects, 7% from subscriptions and 2% from other sources. In the same
period, approximately 41% of net sales came from North America, 35% from Europe
and 24% from the rest of the world.
Springhouse Corporation. Springhouse Corporation ("Springhouse") publishes
nursing reference products and additional materials for nursing students and
instructors in the United States. Notable titles include the highly respected
and widely used drug reference for nurses, Nursing Drug Handbook, and the
Nursing97 magazine. In recent years the corporation has been extending its reach
into other segments beyond hospital staff nurses, with publications such as
Nursing Management, which focuses on nursing administrators and managers. In the
year ended December 31, 1997, Springhouse's circulation and copy sales accounted
for approximately 41% of total net sales, with a further 28% from advertising,
26% from subscriptions and 5% from other sources.
Editions Scientifiques et Medicales Elsevier. Editions Scientifiques et
Medicales Elsevier ("ESME") based in Paris, publishes 80 titles in the fields of
medicine, biotechnology and clinical chemistry, including the renowned
Encyclopedie Medico-Chirurgicale ("EMC"). In 1997 ESME made several
acquisitions, amongst which were Comptes Rendus de l'Academie des Sciences, the
proceedings of the French Academy of Science, serving its 3,000 institutions and
Labo France SA, publisher of a leading scientific journal for clinical chemists
and the directory of reference in the same market. In addition, ESME acquired
the list of journals in the exact sciences published under the Gauthier Villars
imprint. Electronic initiatives include a range of CD-ROMs on surgical
techniques and, in radiology, a range of atlases. In the year ended December 31,
1997, ESME's circulation and copy sales accounted for approximately 58% of total
net sales, with a further 6% from advertising, 28% from subscriptions and 8%
from other sources.
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The Lancet. The Lancet is one of the world's most respected general
medical journals, covering all aspects of human health. During 1997, the
editorial content continued to be strengthened in the clinical area and new
subject areas were added. The news section was also relaunched, and the content
diversified to include the medical humanities. In the year ended December 31,
1997, subscriptions accounted for 82% of total net sales and advertising for
18%.
The medical businesses operate throughout the world and their products are
varied, but where possible paper and printing services are purchased on a
co-ordinated basis with other Reed Elsevier businesses. Distribution is
primarily accomplished through various postal and shipping companies. The
medical publishing market is highly fragmented and no individual companies
compete on a similar scale on an international level. There is regional
competition from a number of publishers and service providers in the United
States, such as the Thomson Corporation, American Medical Association,
Massachusetts Medical Society (New England Journal of Medicine), Medi Media,
Adis Press and Lippincott-Raven (Wolters Kluwer), Avantstar, IMS (Cognizant) and
Mosby (Times Mirror).
Professional
The businesses which comprise the Professional segment serve, through a
variety of publishing formats, the legal, tax, reference and educational markets
around the world. For the years ended December 31, 1997, December 31, 1996 and
December 31, 1995, the Professional segment achieved net sales of (pound)1,076
million, (pound)1,037 million and (pound)914 million, respectively, and
operating income before exceptional items of (pound)296 million, (pound)268
million and (pound)223 million, respectively. The Professional segment
represented approximately 32% of Reed Elsevier's total net sales and 34% of Reed
Elsevier's total operating income before exceptional items for the year ended
December 31, 1997.
Legal
The Reed Elsevier Legal Division comprises the Butterworths group of
companies, Editions du Juris-Classeur, 40% interests in Giuffre in Italy and in
Stampfli Verlag in Switzerland and a Polish joint venture, Wydawnictwa Prawnicze
PWN. In the year ended December 31, 1997 the legal businesses contributed 20% of
the total net sales of the Professional segment.
Butterworths. Butterworths operates in the legal markets in the U.K.,
Australia, New Zealand, South Africa, South-East Asia and the Republic of
Ireland. It is also well established in Canada. Butterworths provides legal, tax
and regulatory materials in loose-leaf, book and CD-ROM formats. Among its most
widely known publications in the U.K. are Halsbury's Laws of England, The
Encyclopedia of Forms and Precedents, Simon's Taxes and Butterworth's Company
Law Service. Much of its information is now available through the LEXIS on-line
service, and through a paid-for service on the Internet. Tolley Publishing
Limited, acquired in August 1996, is the market leader in "first point of
reference" tax publishing, through its single volume guides, and it complements
Butterworths' position in publishing for practitioners at the specialist end of
the legal and tax markets in the U.K. Tolley also produces several CD-ROM
products for tax and business markets. During the course of the year,
Butterworths acquired a number of journals in the U.K. including the Police
Journal, Litigation, and Justice of the Peace, founded in 1837 and the world's
oldest established legal journal. The acquisition also included the Justice of
the Peace Reports and the Family Court Reporter. Developments in electronic
publishing included the upgrade of the Butterworths website to incorporate a
paid-for law reporting service, and the launch of Butterworths Family and Child
Law Library CD-ROM.
Outside the U.K., Butterworths Australia launched a paid-for service on
the Internet, which won the Folio Infobase industry award for the 'Best Internet
Publishing Solution 1997'. Butterworths New Zealand was appointed official
electronic publisher of The New Zealand Law Reports, complementing the position
it already has in the hard copy field. It also launched an Internet service,
using the platform provided by Butterworths Australia. Butterworths South Africa
considerably expanded its electronic product range during the year. In June
1997, 49.99% of Butterworths South Africa was sold to Kagiso Trust Investment
Company (Pty) Ltd. In South-East Asia, sales of Halsbury's Laws of Hong Kong
increased strongly during the year, and a new five-year contract for publication
of the Singapore Law Reports in both hard copy and electronic formats was signed
with the Singapore Academy of Law. Butterworths Canada introduced two new
newsletter services and continued to invest in its extensive database of
Canadian materials for LEXIS. Butterworths established a presence in India
during the year and began to publish a list of textbooks acquired from N.M.
Tripathi Ltd. Preparatory work was carried out for the forthcoming publication
of Halsbury's Laws of India.
In the year ended December 31, 1997, approximately 89% of Butterworths'
net sales was derived from hard copy sales, with 11% attributable to electronic
products although significant investment in and growth from electronic
publishing are expected over the next few years. In the same period,
approximately 56% of net sales came from the United Kingdom, 16% from Australia,
5% from Canada and the balance from the rest of the world. The principal U.K.
competitor in the legal field is Sweet & Maxwell (Thomson Corporation), with
Commerce Clearing House (Wolters Kluwer) competing against its tax publications.
Editions du Juris-Classeur. Editions du Juris-Classeur ("EJC") is a French
publisher of legal materials in loose-leaf form for lawyers and notaries. The
Juris-Classeur collection comprises some 400 regularly updated volumes covering
66 topics. Its 20 journals, including the leading weekly La Semaine Juridique,
also cover all the important areas of French legal practice. EJC's on-line
service, Juris-Data, includes exclusive coverage of the Cour d'Appel. EJC owns
Litec, which publishes looseleaf collections of legal codes for local government
in France and also soft bound editions for both practitioners and students.
During 1997, EJC strengthened its electronic product offering with the
acquisitions of Infolib and Legisoft. Infolib specialises in legal software and
Legisoft markets information and software enabling lawyers to search an
extensive database of codes and cases, and to draft deeds using ready-made
forms. The company also acquired La Documentation Organique (LaDO), a loose-leaf
encyclopaedia for tax
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specialists. In the year ended December 31, 1997, subscriptions comprised
approximately 73% of EJC's net sales, while circulation and copy sales comprised
approximately 12% of net sales, with 15% from other sources. EJC's major
competitors are Dalloz (CEP) and Lamy (Wolters Kluwer).
Giuffre. Giuffre, in which Reed Elsevier has a 40% interest, publishes
reference materials in both hard copy and, increasingly, CD-ROM formats for the
Italian legal market. It also has a journals programme and is a major Italian
academic legal publisher. A number of important new commentaries were published
and two new journals were launched: Il Controllo Legale dei Conti and
Responsibilita, Comunicazione, Impresa.
Stampfli Verlag. Stampfli Verlag is a Swiss legal and tax publisher in
which Reed Elsevier acquired a 40% interest in January 1997.
Wydawnictwa Prawnicze PWN. Wydawnictwa Prawnicze PWN, a joint venture
company which was established at the end of 1994 with PWN, Poland's leading
academic publisher, launched a new loose-leaf service for accountants. It also
acquired Lex Media, a small CD-ROM publisher based in Krakow and a 51% share in
Wydawnictwa Prawnicze ("WP"). WP specialises in publishing text books for legal
practitioners and for court officials.
LEXIS-NEXIS
In the year ended December 31, 1997, LEXIS-NEXIS contributed approximately
61% of the total net sales of the Professional segment.
LEXIS-NEXIS provides legal and professional information in North America
and internationally. Its largest business is the LEXIS-NEXIS online information
service, which has more than 1.25 million subscribers. Recent acquisitions,
including a 50% interest in Shepard's in November 1996 and more than fifty legal
titles from the Thomson Corporation in early 1997, have expanded LEXIS-NEXIS's
print and CD-ROM publishing businesses. Martindale-Hubbell, the biographical
directory publisher for the U.S. and international legal profession, brought
under LEXIS-NEXIS in 1997, is an important part of LEXIS-NEXIS's integrated
product offering to the U.S. legal market.
The LEXIS-NEXIS online service contains archives of legal information,
comprising case law, statutes and secondary legal information from around the
world, together with coverage of some 13,800 news and business publications,
wire services and broadcast transcripts. In addition, the online service
provides access to the largest collection of public records in the United
States, including regulations and public records, the full text and images of
over five million patents filed with the U.S. Patent Office since 1975, and a
comprehensive database of trademark applications and registrations. In total the
LEXIS-NEXIS data warehouse contains over 1.3 billion documents.
The service is marketed in the United States through market facing
divisions, namely Legal Information Services, which covers the legal and
accountancy markets, Business Information Services, which sells to corporations
and other business users, and National Information Services, which focuses on
local, state and federal government channels. In March 1998, Business
Information Services and National Information Services were combined to form one
operational unit, NEXIS. The new unit also includes Congressional Information
Services, the publisher of U.S. government reference products for the academic,
law and business market, and LEXIS Document Services, which provides document
filing and retrieval services. The NEXIS division is responsible for developing,
marketing and selling business and public records information to major
corporations and the U.S. government. Restructuring carried out in late 1997
transferred the majority of the information technology, data development and
marketing resources from central functions to these online business units. This
initiative increases the market focus of the support functions and thereby
improves both their effectiveness and the time to market of new products and
services.
The content library offered by LEXIS-NEXIS was further developed during
1997, through licensing of key tax and business law data from CCH, a subsidiary
of Wolters Kluwer. Other key sources added to the online service include WEFA
market research data, FIND/SVP MarketLooks market and industry briefing reports
and several key medical publications. In addition, Bloomberg News and Daily
Market Summaries, previously delivered exclusively via Bloomberg terminals, were
made available to LEXIS-NEXIS subscribers.
LEXIS-NEXIS Office 97 was introduced during the year and is the first
32-bit interface to the online service. This offers compatibility with Windows
95 and Windows NT, easy navigation of search results and a library of predefined
search templates designed to automate popular searches. During 1997 work was
undertaken to establish the infrastructure to allow for large scale Internet
access to the LEXIS-NEXIS database. LEXIS-NEXIS Xchange, a web based service,
was launched towards the end of the year and provides legal professionals with a
personalised web location through which they are able to obtain legal and
general news, to communicate with other professionals and to gain access to the
LEXIS-NEXIS database. As part of a strategic relationship between Reed Elsevier
and Microsoft, LEXIS-NEXIS is working on initiatives, based on Microsoft's MCIS
platform, to develop new products and enhance existing ones.
LEXIS-NEXIS is making a significant investment in upgrading all of its
systems to be Year 2000 compliant. The core online system has already been
successfully tested in a post Year 2000 environment and work continues to
remediate and test other system components to ensure full Year 2000 compliance.
LEXIS-NEXIS Europe was created at the beginning of 1997, bringing a new
focus on building LEXIS-NEXIS branded business in Europe. Emphasis on content
acquisition, product development and customer service is already helping to grow
the
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business. A German language version of Company Quick-Check was released during
the year and European versions of LEXIS- NEXIS Xchange are in production.
In 1997 LEXIS-NEXIS developed its print and CD-ROM legal publishing
businesses. In April 1997, LEXIS-NEXIS acquired over fifty legal titles from the
Thomson Corporation and integrated these with its existing legal publisher, the
Michie Company, to form LEXIS Law Publishing. This company publishes U.S. State
Code products, publishing in print and CD- ROM formats, and has a nationwide
presence with over 200 national and Federal titles, including the U.S. Code
Service.
Shepard's. Shepard's, the publisher of legal citations, is jointly owned
by Reed Elsevier and The Times Mirror Company.
Martindale-Hubbell. Martindale-Hubbell, the leading biographical publisher
for the U.S. legal profession, publishes the Martindale-Hubell Law Directory, a
source of information on attorneys, including biographical details and
professional ratings, and law firms worldwide. In 1997, Martindale-Hubbell
signed strategic alliances with the American Bar Association and the National
Law Journal to provide Internet lawyer directory services on their web sites.
LEXIS-NEXIS also operates Reed Technology and Information Services, which
holds the contract with the U.S. Federal Government to convert all U.S. patent
information into digital format, and Marquis Who's Who and National Register
Publishing, niche directory publishers.
In the year ended December 31, 1997, approximately 49% of LEXIS-NEXIS' net
sales came from subscription sales, including on-line services, 24% from
transactional sales of on-line services, 10 % from advertising (including
directory listings), 6% from circulation and copy sales and the remaining 11%
from other sources. In the same period approximately 98% of net sales came from
North America and 2% from the rest of the world. The principal competitor to
LEXIS-NEXIS Legal Information Services is the West Group of the Thomson
Corporation (Westlaw). The principal competitors to LEXIS-NEXIS Business
Information Services are Reuters, Dialog Corporation and Dow Jones News
Retrieval. There is no publication regarded as equivalent to the
Martindale-Hubbell Law Directory on a national level in the United States,
although there are a number of less comprehensive directories.
Educational
The educational businesses within the Professional segment are made up of
Reed Educational and Professional Publishing and Elsevier Opleidingen. These
businesses contributed approximately 19% of the total net sales of the
Professional segment in the year ended December 31, 1997.
Reed Educational & Professional Publishing. Reed Educational &
Professional Publishing ("REPP") serves the primary and secondary U.K. schools
market, as well as the international professional and academic sectors.
REPP operates through seven main businesses: Heinemann Educational, Ginn
and Butterworth-Heinemann, based in the United Kingdom; Rigby and
Greenwood-Heinemann based in the United States; Rigby Heinemann based in
Australia; and Heinemann in South Africa. REPP is the leading publisher for the
U.K. primary and secondary schools markets, based on net sales, under the
Heinemann and Ginn imprints. Butterworth-Heinemann is an international publisher
of professional information and learning materials for higher education and
professional markets, with its principal operations in the United Kingdom, the
United States, Australia and Singapore. During 1997, Heinemann English Language
Teaching, which publishes material for those learning English as a second
language, was sold following a strategic review of the business.
In the United States, Rigby publishes elementary school literacy materials
and Greenwood-Heinemann publishes monograph and reference lists and professional
resources for teachers. The Australian business, Rigby Heinemann, is the leading
publisher of primary and secondary school books. In South Africa, REPP took full
ownership in 1997 of Heinemann (South Africa) Pty, previously a joint venture
with CNA Gallo.
In the year ended December 31, 1997, approximately 33% of REPP's net sales
derived from the United Kingdom, 38% from North America, 9% from continental
Europe, 9% from Australia and the remaining 11% from the rest of the world.
Printing and binding are performed by unaffiliated printers, both in the country
of origin and in cost effective printing centers around the world. Warehouse and
distribution facilities are handled by unaffiliated distribution agents, except
that REPP has its own warehouse and distribution facilities in the United
States. REPP's major U.K. competitors are Longman (Pearson), Nelson (Thomson
Corporation), Oxford University Press and Cambridge University Press. In the
United States, principal competitors include Wright Group and Scholastic
Corporation. No single publisher is dominant in any of the markets in which
Greenwood-Heinemann is active. However, all university presses are considered to
be competitors in the academic market. In Australia, principal competitors
include Longman Cheshire (Pearson), Ashton Scholastic and Macmillan.
Elsevier Opleidingen. Elsevier Opleidingen provides tailor-made,
vocational training, seminars and courses for industry and governmental
authorities in both the Netherlands and Belgium. In the year ended December 31,
1997, approximately 90% of net sales were from the Netherlands.
Business
The Business segment is comprised of travel and exhibition companies
operating worldwide, and business magazine publishing companies operating
principally in the United States, Europe and Australia. For the years ended
December 31, 1997,
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December 31, 1996 and December 31, 1995, the Business segment achieved net sales
of (pound)1,340 million, (pound)1,307 million and (pound)1,278 million,
respectively, and operating income before exceptional items of (pound)286
million, (pound)288 million and (pound)266 million, respectively. The Business
segment represented approximately 39% of Reed Elsevier's total net sales and 32%
of Reed Elsevier's total operating income before exceptional items for the year
ended December 31, 1997.
Exhibitions
The exhibitions business contributed approximately 19% of the net sales of
the Business segment in the year ended December 31, 1997.
Reed Exhibition Companies ("REC") is an international event organiser,
with 335 events in 25 countries, attracting over 112,000 exhibitors and 7.5
million visitors annually. REC's events are concentrated in a number of industry
sectors of which the most important are: engineering; building and construction;
manufacturing; aerospace; information technology and communications;
electronics; hotel and food service; travel; entertainment and retail.
Many of REC's events are industry leaders, including National Hardware
Show, ShowBiz Expo, National Manufacturing Week and Canadian Machine Tool Show
in North America; Pakex, World Travel Market and London Book Fair in the U.K.;
MIDEM, MIPTV, MIPIM, Salon Nautique and FIAC in France; Computer Faire in South
Africa; AIMEX and Sydney International Catering Fair in Australia; International
Jewellery Tokyo in Japan; Asian Aerospace and Thai Metalex in South-East Asia;
and the Nepcon and Travel series of international events.
Throughout the year REC built the business through acquisitions, new
launches and cooperation agreements in new markets. REC's North American
operations were expanded with the acquisition of Professional Exhibition
Management Company (PEMCO), as part of the acquisition of the Chilton Business
Group, which enhanced REC's strength in the manufacturing and jewellery sectors.
In Australia, the purchase of Practical Marketing Group Ltd (PMG) brought five
new events in information technology, electronics and marketing. REC's position
in the international travel industry was reinforced by the acquisition of EIBTM,
the European incentive travel and meetings show. A separate international travel
show division has been created to promote the highly successful Travel Market
brand. In the entertainment market FunExpo, the Las Vegas family entertainment
show, and Satis, the French audio-visual event were acquired. In the IT field,
REC won the contract to manage Apple Expo on behalf of Apple Computer France. In
1997, 35 new events were launched and leading brands were successfully expanded
internationally. These included the launch of MIDEM Latin America in Miami,
paving the way for future development of the MIDEM brands in Latin America. New
events in China included Amusement Park China and Airport China, which
complements the biennial Asian Aerospace in Singapore. Following joint venture
initiatives in the Brazilian market, REC has now incorporated its own businesses
and opened offices in Rio de Janeiro and Sao Paulo. As part of an ongoing
portfolio review certain U.S. computer shows were sold at the end of 1997.
Over 85% of REC's net sales is derived from licences of exhibition
participation rights, with the balance attributable to conference fees,
advertising in exhibition guides, sponsorship fees and admission charges. The
exhibition market is highly cash generative as exhibitors pay fees up to one
year or more in advance while most of the costs, such as facility rental and
attendee promotion, are paid shortly prior to or after the event is staged. With
few exceptions no capital is employed in exhibition halls, the majority of which
are leased on a short term basis. In the year ended December 31, 1997,
approximately 42% of REC's net sales came from North America, 29% from
continental Europe, 12% from the United Kingdom and the remaining 17% from the
rest of the world. As some events are held other than annually, net sales in any
single year may be affected by the cycle of non-annual exhibitions, although
across REC as a whole the impact is not significant.
The exhibition industry has historically been extremely fragmented. The
acquisition of Blenheim Group by United News & Media in 1996 created a
significant global competitor. The main competitors in domestic markets are
industry focused trade associations and convention center and exhibition hall
owners, the latter being particularly strong in continental Europe.
Business Magazines
The magazine businesses within the Business segment are made up of Cahners
Business Information, Reed Business Information and Elsevier Business
Information. Together these businesses contributed approximately 63% of the net
sales of the Business segment in the year ended December 31, 1997. In the United
States business to business magazines are primarily distributed on a "controlled
circulation" basis, whereby the product is delivered without charge to qualified
buyers within a targeted industry group based upon circulation lists developed
and maintained by the publisher. In the United Kingdom business magazines are
distributed both on a "controlled circulation" basis and a paid circulation
basis, but in both cases are dependent on advertising for a significant
proportion of their revenues. As net sales are mainly derived from advertising
these businesses are sensitive to economic conditions and advertiser expenditure
in those countries. In the Netherlands, however, a higher proportion of
publications is sold by subscription, thus such publications are generally more
stable through economic cycles.
Cahners Business Information. Cahners Publishing Company the business to
business publisher in the United States, has been combined with Chilton Business
Group ("Chilton"), acquired in September 1997 from ABC Capital Cities for $447
million, to form Cahners Business Information ("Cahners"). The merged companies
publish over 110 trade magazines organised in fifteen market-focused groups. In
key sectors such as manufacturing and entertainment, the Chilton and Cahners
portfolios are complementary and Chilton adds new titles in the automotive and
materials sectors. Other sectors served include electronics, building and
construction, food service, publishing and retail. Among the best known titles
are Variety, Multichannel News,
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Publishers Weekly, EDN, American Metal Market, Interior Design and Automotive
Industries. Also within Cahners is R.R. Bowker, the U.S. bibliographical
publisher. Cahners also publishes product tabloids which provide information
primarily on new products to managers and professionals in the industrial,
processing, medical, scientific and high technology fields. Cahners operates
primarily in the United States, with major publishing centers in Boston, New
York, Chicago, Los Angeles, Radnor, and Denver. Increasingly however, its
operations are expanding beyond U.S. borders, reflecting both the growing
importance of U.S. exports and the increasing internationalization of the
industries served.
During 1997 increased investment has been made by Cahners in the
editorial, production and sales infrastructure. This investment has been focused
on technology and enhanced business systems. In addition to Chilton, other 1997
acquisitions included Asian Hotelier in the food service group and Asia Image in
the entertainment group. Launches also strengthened market-facing groups, with
Global Design News, Supply Chain Management and Medical Design Technology in the
manufacturing sector, Television Europe in the entertainment field and
Professional Remodeler in the growing construction market. As part of an ongoing
portfolio review following the acquisition of Chilton, certain computer titles
were sold at the end of 1997.
Development continued in 1997 on Manufacturing Marketplace, a web-based
electronic community for professionals in the manufacturing sector. The
experience gained in launching this site has been applied to other web
initiatives, such as the Variety website launched in late 1997 as the first step
in the development of an electronic community for the entertainment industry,
Entertainment Marketplace.
Cahners leverages its knowledge of the business sectors it serves and the
extensive databases of business names and reader-related demographics it has
collated through a broad range of products and services. These include direct
mail, product news tabloids, newspapers, newsletters and custom published
supplements, as well as the feature publications which continue to serve as the
core of the portfolio.
In the year ended December 31, 1997, approximately 77% of Cahners' total
net sales came from advertising, 14% from subscriptions and circulation sales
and the balance from other sources. Cahners operates circulation management and
fulfilment facilities in Colorado and the Caribbean island of St Kitts which
identify, qualify and maintain subscriber lists for substantially all of its
titles. These lists enable the company to serve its advertisers by creating
highly targeted readerships for its magazines. Much of the editorial pre-press
production is performed in-house. Paper and printing services are purchased on a
co-ordinated basis with other Reed Elsevier businesses in the United States.
Distribution of magazines is primarily through the U.S. postal service,
supplemented by news-stand sales through unaffiliated wholesalers.
Reed Elsevier's U.S. business to business titles compete on an individual
basis with the publications of a number of publishers, including CMP
Publications in its electronics markets and Avantstar, BPI/VNU, Primedia (K-III)
the Penton division of Pittway Corporation, Hanley Wood, Miller Freeman (United
News and Media) and McGraw-Hill in other markets. No one competitor matches Reed
Elsevier's breadth of titles in the U.S. business to business magazine market.
Reed Business Information. Reed Business Information ("RBI"), the business
to business information publisher, has a portfolio of around 100 magazines,
market access products and on-line services. Its business magazines include
Computer Weekly, Farmers Weekly, Estates Gazette, Flight International, Caterer
& Hotelkeeper, Commercial Motor, European Chemical News and Community Care. It
also publishes such directories as Kelly's, Kompass and The Bankers' Almanac, as
well as the Reedbase database of over a million companies worldwide, and
includes Mardev the international list broking company and ICIS-LOR, the
chemical and commodities pricing service.
The magazine portfolio was strengthened during 1997 through brand
development into areas such as conferences, special supplements and award
events. RBI is also developing online services in key markets, building on the
strong brands it publishes in hard-copy format. Following the launch of Estates
Gazette Interactive and @ Computer Weekly in 1996, RBI introduced in 1997 two
other high value-added subscription-based services - Air Transport Intelligence
(ATI) and Chemical News & Information (CNI) - which are accessed through the
World Wide Web. Subscription-driven on-line launches are also planned in early
1998 for the information technology and social services markets.
During the year British Exports Initiative, a website aimed at
international buyers of British goods was launched. Further new websites were
Farmers Weekly Interactive, an on-line news and information service for the
agricultural market, Freelance Informer and Motor Trader providing information
on the information technology contract market and the motor trade industry
respectively. Kelly's Directory, which launched the sales program for its
bicentenary edition, was strengthened by new CD and Internet versions of the
product. RBI is also involved in the development of the Kompass Global website
which will enable buyers and sellers worldwide to access standardized
product-linked information.
Other initiatives included the launches of Corporate Networks, a monthly
magazine for senior U.K. management in the information technology industry, the
Recruitment Yearbook & Directory, and the Reed Retail Industry Awards. The
acquisition of Truck and Truck & Driver, strengthened the road transport
portfolio, whilst the international news weekly New Scientist was transferred to
RBI from IPC Magazines. In Australia, RBI acquired Infolink, a group of
building, architecture and hospitality publications and took over responsibility
for the bibliographical publisher, D.W. Thorpe, as part of a strategy to bring
Reed Elsevier's bibliographical publications under the control of business
publishing companies.
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In the year ended December 31, 1997, approximately 67% of RBI's net sales
came from the United Kingdom, 8% from continental Europe, 10% from Australia and
15% from the rest of the world. In the same year, approximately 64% of net sales
was derived from advertising, 12% from subscription sales, 11% from circulations
sales and the remaining 13% from other sources. RBI performs full computerized
editorial make-up in-house for all of its titles. Paper and printing services
are purchased from unaffiliated third parties, primarily on a co-ordinated basis
with other Reed Elsevier businesses in the United Kingdom. RBI's distribution is
generally through public postal systems, with news-stand distribution for some
titles through Reed Elsevier and outside wholesalers. RBI competes directly with
EMAP Business Communications and Miller Freeman (United News & Media) in a
number of sectors in the United Kingdom, and also with many smaller companies on
an individual title by title basis.
Elsevier Business Information. Elsevier Business Information ("EBI")
comprises the business publishing operations in continental Europe. EBI is
active in the Netherlands, Belgium, Spain, Germany and France.
EBI in the Netherlands was formed by bringing together the former
operating companies, Bonaventura and Misset, together with Colofon, a medium
sized Dutch business publisher, acquired in 1997. The integration of these three
operations was completed in the course of 1997. The individual business units
are now organised in market facing groups. With its portfolio of more than 160
titles, EBI covers all the major sectors of the Dutch economy.
Its titles are predominantly subscription-based and revenue is principally
divided between subscriptions and advertising. Most titles are published in the
Dutch language. Through trade journals, product news tabloids, directories,
documentary systems and newspapers, EBI covers such fields as agriculture,
catering, construction, engineering, food, fashion, horticulture,
transportation, tourism and travel. In addition to Colofon, Van der Wolk, a
publisher of loose leaf products for business entrepreneurs was acquired in
1997. The joint venture Multicount Elsevier Kennisbank provides an online
information service for financial and tax professionals. Agreement was reached
on the acquisition of all Multicount's activities, which will further strengthen
EBI's position in this sector.
In the year ended December 31, 1997, approximately 44% of EBI's net sales
in the Netherlands was derived from advertising, 36% from magazine subscriptions
and 15% from magazine circulation and copy sales and the remaining 5% from other
sources including sales of software. Printing and production is contracted out
to third parties and distribution is through the Dutch postal system and
wholesalers owned by VNU. EBI competes with a number of companies on a title by
title basis in individual market sectors, the largest competitor being VNU. In
the agricultural sector, the main competition is from Oogst (association
journal) and, in the engineering and industrial sector, competition comes from
VNU and Wolters Kluwer.
Pan European Publishing Company (PEPCO), based in Belgium, publishes 10
English language product news tabloids for the international market. This
business provides specialized information on new products in the international
electronic, laboratory, biotechnical and industrial markets. PEPCO launched 2
new publications for the telecommunication components industry. In the year
ended December 31, 1997, approximately 82% of net sales was derived from
advertising sales, with the balance mainly from subscription sales. Grupo Arte y
Cemento in Spain provides the same service to the Spanish market and enhanced
its position in 1997 through the acquisition of Construdatos, which specializes
in market information on new building projects.
Other constituents of EBI are Reed Elsevier Deutschland, which includes
Artzliche Praxis, a prominent medical journal; K.G. Saur, a leading publisher
for the library information market; and Groupe Strategies, which publishes the
journal Strategies and other information materials for the French advertising
and communications industry. Towards the end of 1997, EBI acquired Editions
Prat, a publisher of mainly loose-leaf information aimed at the fiscal, legal
and administration fields.
Travel
The businesses operating in the travel market comprise Reed Travel Group
and a 67% non-controlling interest in REZsolutions Inc., which was formed in
November 1997 by merging Utell International, owned by Reed Elsevier, with
Anasazi Inc. These businesses contributed approximately 18% of the net sales of
the business segment in the year ended December 31, 1997.
Reed Travel Group. Reed Travel Group ("RTG") is an independent provider of
travel information, products and services. Its principal print and electronic
products include North American Pocket Flight Guide, OAG FlightDisk, OAG World
Airways Guide and Hotel & Travel Index and a range of periodicals such as Travel
Weekly, TravelAge, Frequent Flyer, and Meetings & Conventions.
In September 1997, Reed Elsevier announced the discovery of irregularities
in circulation claims in respect of certain publications of RTG and a
compensation program for the advertisers affected. The compensation program,
which was approved by the Reed Elsevier plc Audit Committee, started to be
implemented in mid-December 1997. It has been positively received by
advertisers. A wide ranging and comprehensive investigation into the surrounding
circumstances has been conducted by the Reed Elsevier plc Audit Committee, with
assistance from leading independent firms of lawyers, accountants and
circulation auditors. This investigation is now complete. The Audit Committee
has made recommendations to the Reed Elsevier plc Board which address the issues
raised by the irregularities, both for the RTG business and, more widely, for
Reed Elsevier. These recommendations, which are now being implemented, include
improved risk management processes and the expansion of internal audit
activities.
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The Audit Committee will continue to monitor the implementation of the
recommendations arising from its review and the compensation program, for which
full provision has been made in the 1997 financial statements.
RTG was restructured in January 1998. The Hotel Directories group and the
Travel Business Magazines group are now managed as part of Cahners Business
Information as Cahners Travel. The Airline Group, renamed OAG Worldwide, is
being integrated with Reed Business Information. The travel operations are
expected to benefit from the publishing and marketing expertise, established
infrastructure and experience in developing both hard copy and electronic
products of Reed Elsevier's mainstream business publishing activities.
The hard copy products within Reed Travel Group's portfolio continued to
come under pressure in 1997. The electronic products growth was unable to make
up the shortfall from hard copy revenues. Several infrastructure and development
projects were undertaken during the year to strengthen the database management
and publishing capabilities.
In the year ended December 31, 1997, approximately 33% of RTG's net sales
were derived from circulation and copy sales, 15% from transfer connection
listing fees charged to airlines, 43% from advertising and hotel directory
listing fees and 9% from other sources. While the distribution of products and
services has global reach, net sales are derived principally from North American
and European based activities. In the same period, approximately 63% of RTG's
net sales were derived from North America, 8% from the United Kingdom, 14% from
Continental Europe and 15% from the rest of the world.
RTG faces little direct competition to its hard copy directory products
other than from individual airlines. There is increasingly significant
competition, however, from the computer reservation systems of the major airline
consortia, such as Sabre, Galileo, Worldspan and Amadeus, and from international
hotel groups, such as Hilton International and Hyatt.
Utell International. ("Utell") the world's largest hotel marketing, sales
and reservations company, was merged in December 1997 with Anasazi Inc., a
leading supplier of technology and marketing services to the hospitality
industry. The new company, called REZsolutions Inc., is jointly owned by Reed
Elsevier and the shareholders of Anasazi Inc.. Reed Elsevier will equity account
for its 67% interest in the merged business.
In the year ended December 31, 1997, approximately 54% of Utell's net
sales came from hotel commissions, 22% from hotel representation charges, 12%
from settlement services and 12% from other sources. In the same period,
approximately 48% of Utell's net sales were derived from continental Europe, 27%
from North America, 12% from the United Kingdom and the remaining 13% from the
rest of the world. Utell's main competitors include international branded hotel
chains.
Consumer-Continuing and Discontinued Operations
During 1997, Reed Elsevier has continued its disposal of consumer
publishing businesses as part of its strategy of increasing its focus on high
value-added areas of "must-have" information and significantly reducing its
exposure to the consumer markets. Those businesses sold by the date of approval
of this Annual Report are categorized, under U.K. and Dutch GAAP, as
Discontinued Operations and comprise the consumer publishing businesses divested
in 1995, IPC Magazines, excluding New Scientist, and certain operations of Reed
Books. The remaining businesses of Reed Books, the disposals of which are in
progress, are categorized, under U.K. and Dutch GAAP, as Continuing Operations.
For the years ended December 31, 1997, December 31, 1996 and December 31, 1995,
the Discontinued Operations achieved net sales of (pound)355 million, (pound)406
million and (pound)844 million, respectively. The Discontinued Operations
represented approximately 10% of Reed Elsevier's total net sales for the year
ended December 31, 1997. For the years ended December 31, 1997, December 31,
1996 and December 31, 1995 the Continuing Operations achieved net sales of
(pound)75 million, (pound)78 million and (pound)81 million, respectively. The
Continuing Operations represented approximately 2% of Reed Elsevier's total net
sales for the year ended December, 31 1997.
Reed Books. Reed Books is a consumer book publisher, based in the U.K. The
Adult Trade division which publishes a broad range of fiction for adults under
imprints which include William Heinemann, Mandarin, Methuen, Minerva, Secker &
Warburg and Sinclair Stevenson, was sold to Random House as of March 1997.
Tigerprint, a leading supplier of greetings cards and stationery to Marks &
Spencer plc was sold to its management as of August 1997. Reed Children's Books
is the publisher of well-known character titles such as Winnie the Pooh and
Thomas the Tank Engine. The principal imprints of the Illustrated and Reference
divisions include Conran Octopus, Hamlyn and Mitchell Beazley. In the year ended
December 31, 1997, approximately 89% of Reed Books' total net sales was derived
from the sale of books and 11% from other sources. Reed Elsevier expects the
remaining books businesses to be sold in 1998.
IPC Magazines. IPC Magazines is a publisher of consumer magazines in the
U.K.. It operates in a wide range of market sectors from television listings to
music, women's interest to soccer and country pursuits to yachting. IPC's titles
include TV Times and What's on TV, Woman's Own, Country Life and Horse & Hound,
as well as Marie Claire which is published as a joint venture with Marie Claire
Album SA, a French magazine publisher. In the year ended December 31, 1997,
circulation and copy sales accounted for approximately 58% of IPC's total net
sales, with 34% from advertising, 4% from subscriptions and 4% from other
sources. IPC magazines was sold, in January 1998, to an institutional buy-out
organised by Cinven for (pound)860 million.
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Associates
Reed Elsevier's principal associates are Shepard's in the United States,
Giuffre in Italy and Book Club Associates ("BCA") in the United Kingdom. During
1997, Reed Elsevier acquired 40% of Stampfli Verlag, a leading Swiss legal
publisher and contributed the Utell hotel reservation business in return for a
67% non controlling interest in REZsolutions Inc., a joint venture between Utell
and Anasazi Inc, which will be equity accounted.
In November 1996, Reed Elsevier formed a 50/50 joint venture with Times
Mirror Company, to own and operate Shepard's, the premier U.S. legal citation
business.
In January 1994, Reed Elsevier acquired its 40% interest in the Italian
legal publisher Giuffre from the majority shareholders, the Giuffre family.
Giuffre, which has its principal offices in Milan and Rome, is a leading legal
publisher for the university and professional markets in Italy.
In October 1988, Reed International acquired a 50% partnership interest in
BCA, the largest book club in the United Kingdom. The other 50% partner is
Bertelsmann AG. Reed Elsevier has announced its intention to sell its interest
in this business as part of the program to divest the consumer book publishing
businesses.
Elsevier Reed Finance BV
Elsevier Reed Finance BV and its subsidiaries are collectively referred to
as Elsevier Reed Finance ("ERF"). Through its operations in the Netherlands,
Luxembourg, Switzerland, Ireland and Guernsey (Channel Islands), ERF provides
treasury, insurance and cash management services to Reed Elsevier plc and its
two parent companies. Elsevier Reed Finance BV's primary financing subsidiary is
Elsevier SA, which is incorporated and based in Switzerland. Elsevier SA
co-ordinates all treasury activities within ERF and advises the other ERF
companies on treasury matters.
The principal activities of ERF, which are conducted on open market terms,
include providing a centralized currency dealing service and cross-border
settlement systems for operating companies which are subsidiaries of Reed
Elsevier plc; owning and managing a portfolio of intangible assets comprised of
trademarks, copyrights and other publishing rights licensed by certain companies
which are subsidiaries of Reed Elsevier plc; arranging financing in a full range
of currencies and maturities for companies which are subsidiaries of Reed
Elsevier plc; managing its cash resources and, through Elsevier SA, managing
centralized cash pooling systems as agent for certain subsidiaries of Reed
Elsevier plc and apportioning interest to participating companies across the
pooled balances. ERF's primary sources of income are interest earned on the loan
portfolio and on bank deposits and other investments, and royalties from
publishing rights and other intangible assets owned and managed by it.
Reed Elsevier's treasury policies support the objectives of maximizing
returns on assets and minimizing interest costs while at the same time
controlling risk and prohibiting speculative activities. Treasury policies
define the acceptable risk parameters and, in general, require interest and
currency exposures to be hedged within narrow limits such that returns are not
increased, nor costs reduced, by putting the principal values of assets or
liabilities at risk nor by taking financial positions that are unrelated to
underlying exposures. The use of financial instruments to hedge interest and
currency exposures is governed by treasury policies which define not only the
acceptable instruments but also the conditions under which they may be utilized.
In order to reduce counterparty risk, the main cash management arrangements with
Reed Elsevier plc subsidiaries were transferred onto a fiduciary basis during
1997.
Employees
Reed Elsevier's average number of employees in the year ended December 31,
1997 was 27,600, including 2,100 in Discontinued Operations. In the Continuing
Operations, approximately 5,800 were located in the United Kingdom, 12,200 in
North America, 2,900 in the Netherlands and 4,600 in the rest of the world. The
average number of employees in the Continuing Operations in the year ended
December 31, 1997 was 3,200 in Scientific, 10,100 in Professional, 11,600 in
Business, and 600 in Consumer.
Labor Relations
Reed Elsevier's human resources objective is to create a framework of
human resource policies and a climate of employee relations that enables it to
achieve its overall objectives of superior business performance. Reed Elsevier
operates in a wide range of different national and business cultures and
considers that the local management are best placed to translate this philosophy
into specific policies and action plans taking into account their local history,
culture, legal and political situation. In the Netherlands, for instance, high
business performance is combined with collective representation of trade unions,
whereas in the United States and United Kingdom there is limited trade union
representation and businesses generally manage their communications and employee
relations by dealing directly with individuals and groups of employees.
Management believes that the relationship between Reed Elsevier and its
employees is positive and it is not aware of any significant employee disputes.
ITEM 2: DESCRIPTION OF PROPERTY
Neither Reed Elsevier nor any of the combined businesses owns any physical
property which Reed Elsevier considers material to the business of Reed Elsevier
or the combined businesses taken as a whole. None of the real property owned or
leased by Reed Elsevier or any of the combined businesses is presently subject
to liabilities relating to environmental regulations which Reed Elsevier
considers material to the business of Reed Elsevier or the combined businesses
taken as a whole.
ITEM 3: LEGAL PROCEEDINGS
The Reed Elsevier combined businesses are party to various legal
proceedings, the ultimate resolution of which is not expected to have a material
adverse effect on the financial position of the combined businesses or the
results of their operations.
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ITEM 4: CONTROL OF REGISTRANTS
REED INTERNATIONAL
As of March 11, 1998, Reed International is aware of the following
interests of 3% or more in the issued Reed International Ordinary Shares:
Number of Reed
International
Ordinary Shares Percent of
Identity of Person or Group(1) Owned Class
- - - ----------------------------- --------------- ----------
Prudential Corporation ......................... 78,497,236 6.88
Lord Hamlyn .................................... 50,302,816 4.41
Officers and Directors (including Lord Hamlyn) . 50,595,617 4.44
- - - ----------
(1) Under U.K. Law, subject to certain limited exceptions, persons or groups
owning or controlling 3% or more of the Issued Reed International Ordinary
Shares are required to notify Reed International of the level of their
holdings.
As far as Reed International is aware, other than as disclosed herein, it
is neither directly or indirectly owned or controlled by one or more
corporations or by any government.
Reed International is not aware of any arrangements the operation of which
may at a subsequent date result in a change in control of Reed International.
ELSEVIER
As of March 11, 1998, Elsevier is aware of the following interests of 5%
or more in the issued Elsevier Ordinary Shares:
Number of
Elsevier Ordinary Percent of
Identity of Person or Group(2) Shares Owned(1) Class
- - - ----------------------------- ----------------- ----------
Internationale Nederlander Nerzekeringen NV .... 49,336,800 7.40%
Officers and Directors (3) ..................... 204,740 --
- - - ----------
(1) The Elsevier Ordinary shares may be issued in registered or bearer form.
(2) Under Dutch law, individuals or corporate bodies acquiring shares which
result in such individual or corporate bodies holding more than 5% of the
issued share capital of Elsevier are required to notify Elsevier thereof.
(3) No individual member of the Supervisory Board or the Executive Board of
Elsevier or executive officer of Elsevier has notified Elsevier that they
hold more than 5% of the issued share capital of Elsevier pursuant to the
Dutch law described in the immediately preceding footnote.
As far as Elsevier is aware, other than as disclosed herein, it is neither
directly nor indirectly owned or controlled by one or more corporations or by
any government.
Elsevier is not aware of any arrangements the operation of which may at a
subsequent date result in a change in control of Elsevier.
REED ELSEVIER
The Boards of Directors of Reed International and Elsevier each manage
their respective shareholdings in Reed Elsevier plc and Elsevier Reed Finance
BV. For information with respect to the Boards of Directors of Reed
International and Elsevier, see "Directors and Officers of Registrants".
Pursuant to the Reed Elsevier plc Articles of Association, the maximum number of
directors of the company is 20. Reed International and Elsevier are each
entitled to appoint ten directors. Decisions of the Board of Directors of Reed
Elsevier plc require a two-thirds majority and the quorum required for meetings
of the Board of Reed Elsevier plc is at least one director appointed by Reed
International and one director appointed by Elsevier.
The Board of Directors of Reed Elsevier plc has delegated day-to-day
management responsibility for the operating businesses to the Reed Elsevier plc
Executive Committee (the "REEC"), which committee collectively constitutes the
function of Chief Executive of Reed Elsevier plc. The REEC comprises two
directors of Reed Elsevier plc appointed by Reed International and two directors
of Reed Elsevier plc appointed by Elsevier. Appointments to the REEC require the
approval of both Reed
19
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International and Elsevier (which neither party is entitled to withhold or delay
unreasonably). The quorum for meetings of the REEC is two directors, one of whom
has been appointed by Elsevier and the other by Reed International. The REEC
meets regularly, usually in London or Amsterdam.
The REEC as of March 11, 1998, comprised Herman Bruggink and Nigel
Stapleton as Co-Chairmen, Paul Vlek and John Mellon.
The Supervisory Board of Elsevier Reed Finance BV as of March 11, 1998,
comprised Pierre Vinken (Chairman), Nigel Stapleton and Paul Vlek and the
Executive Board consists of Cornelis Alberti as Managing Director. The minimum
number of members of the Supervisory Board of Elsevier Reed Finance BV is two,
of which at least one is appointed by Elsevier and one by Reed International.
The quorum for meetings of the Supervisory Board is one Reed International
appointee and one Elsevier appointee, and resolutions at such meeting require to
be passed by unanimous vote. The Management Board of Elsevier Reed Finance BV
constitutes at least one member proposed by Elsevier together with any further
appointees as Reed International and Elsevier shall determine. The Articles of
Association of Elsevier Reed Finance BV contain provisions requiring the
Executive Board to obtain the approval of the Supervisory Board for certain
specified activities.
For a complete description of the board membership positions and executive
officer positions within Reed International, Elsevier, Reed Elsevier plc and
Elsevier Reed Finance BV held by the members of the Board of Directors of Reed
Elsevier plc, the members of the REEC and the members of the Board of Directors
of Elsevier Reed Finance BV, see "Directors and Officers of Registrants".
The Articles of Association of Reed Elsevier plc contain certain
restrictions on the transfer of shares in Reed Elsevier plc. In addition,
pursuant to arrangements established at the time of the Merger, neither Reed
International nor Elsevier may without the prior approval of the other acquire
or dispose of any interest in the share capital of the other or otherwise take
any action to acquire the other (the "standstill obligations"). The Panel on
Takeovers and Mergers in the United Kingdom (the "Panel") has stated that in the
event of a change of statutory control of either Reed International or Elsevier,
the person or persons acquiring such control will be required to make an offer
to acquire the share capital of Reed Elsevier plc (but not Elsevier Reed Finance
BV) held by the other, in accordance with the requirements of the City Code on
Takeovers and Mergers in the United Kingdom. This requirement would not apply if
the person acquiring statutory control of either Reed International or Elsevier
made an offer for the other on terms which are considered by the Panel to be
appropriate.
Pursuant to arrangements established at the time of the Merger, if any
person (together with persons acting in concert with him) acquires shares, or
control of the voting rights attaching to shares, carrying more than 50% of the
votes ordinarily exercisable at a general meeting of Reed International or
Elsevier and has not made a comparable takeover offer for the other party, the
other party may by notice suspend or modify the operation of certain provisions
of the Merger arrangements, such as (i) the right of the party in which control
has been acquired (the "acquired party") to appoint or remove directors of Reed
International, Elsevier and Reed Elsevier plc and (ii) the standstill
obligations in relation to the acquired party. Such a notice will cease to apply
if the person acquiring control makes a comparable offer for all the equity
securities of the other within a specified period or if the person (and persons
acting in concert with him) ceases to have control of the other.
20
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ITEM 5: NATURE OF TRADING MARKET
REED INTERNATIONAL
The Reed International Ordinary Shares are listed on the London Stock
Exchange, the New York Stock Exchange and the Amsterdam Stock Exchange. The
London Stock Exchange is the principal trading market for the Reed International
Ordinary Shares. Trading on the New York Stock Exchange is in the form of
American Depositary Shares ("ADSs"), evidenced by American Depositary Receipts
("ADRs") issued by Citibank NA, as depositary. Each ADS represents four Reed
International Ordinary Shares. At December 31, 1997, there were 71 persons with
registered addresses in the United States who were record owners of Reed
International Ordinary Shares (excluding shares held in ADR form) and the
portion of Reed International Ordinary Shares held by them constituted less than
0.03% of all Reed International Ordinary Shares. At December 31, 1997 there were
46 registered holders of ADRs and 10,926,832 Reed International Ordinary Shares
represented by ADRs, constituting approximately 0.95% of all Reed International
Ordinary Shares.
The table below sets forth, for the calendar quarters indicated, the high
and low closing middle market quotations for the Reed International Ordinary
Shares on the London Stock Exchange as reported in the Daily Official List of
the London Stock Exchange.
Calendar Periods Pence per Ordinary Share
- - - ---------------- ------------------------
High Low
---- ---
1996 First Quarter ............................. 554 491
Second Quarter ............................ 605 534
Third Quarter ............................. 594 533
Fourth Quarter ............................ 601 517
1997 First Quarter ............................. 596 507
Second Quarter ............................ 628 541
Third Quarter ............................. 630 507
Fourth Quarter ............................ 648 521
1998 First Quarter (through March 11, 1998) .... 715 598
- - - ----------
(1) The Pence per Ordinary Share information for all calendar periods,
reflects the two for one share subdivision in respect of the Reed
International Ordinary Shares, which became effective on May 2, 1997.
On March 11,1998 the closing middle market quotation of the Reed
International Ordinary Shares on the London Stock Exchange, as derived from the
Daily Official List of the London Stock Exchange, was 617 pence per Reed
International Ordinary Share.
The following table sets forth, for the calendar quarter indicate, the
high and low last reported sales prices in U.S. dollars for the Reed
International American Depositary Shares on the New York Stock Exchange, as
derived from the New York Stock Exchange Composite Tape, and reported by
Datastream International Ltd:
Calendar Periods U.S. dollars per ADS
- - - ---------------- ---------------------
High Low
------ -------
1996 First Quarter ............................. 34.75 30.00
Second Quarter ............................ 36.25 33.50
Third Quarter ............................. 37.38 33.25
Fourth Quarter ............................ 39.25 35.00
1997 First Quarter ............................. 38.75 33.50
Second Quarter ............................ 41.38 36.00
Third Quarter ............................. 42.63 33.88
Fourth Quarter ............................ 42.87 34.13
1998 First Quarter (through March 11, 1998) .... 48.25 40.13
On March 11, 1998 the closing last reported sales price of the Reed
International American Depositary Shares on the New York Stock Exchange, as
derived from the new York Stock Exchange Composite Tape, and reported by
Datastream International Ltd., was 40.75 dollars per ADS.
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<PAGE>
ELSEVIER
The Elsevier Ordinary Shares are quoted on the stock exchanges of
Amsterdam, New York, London, and on the EBS stock exchange in Switzerland. The
Amsterdam Stock Exchange is the principal trading market for the Elsevier
Ordinary Shares. Trading on the New York Stock Exchange is in the form of
American Depositary Shares ("ADSs"), evidenced by American Depositary Receipts
("ADRs") issued by Citibank NA, as depositary. Each ADS represents two Elsevier
Ordinary Shares. Elsevier Ordinary Shares may be issued in registered or bearer
form. At December 31, 1997, there were 294 persons with registered addresses in
the United States who were record owners of Elsevier Ordinary Shares (excluding
shares held in ADR form) and the portion of Elsevier Ordinary Shares held by
them constituted approximately 9.0% of all Elsevier Ordinary Shares. At December
31, 1997 there were 36 registered holders of ADRs and 11,474,980 Elsevier
Ordinary Shares represented by ADRs, constituting approximately 1.7% of all
Elsevier Ordinary Shares.
The table below sets forth, for the calendar quarters indicated, the high
and low closing middle market quotations for the Elsevier Ordinary Shares on the
Amsterdam Stock Exchange as reported in the Officiele Prijscourant of the
Amsterdam Stock Exchange.
Calendar Periods Dfl per Ordinary Share
- - - ---------------- ----------------------
High Low
------ ------
1996 First Quarter ............................. 25.30 21.30
Second Quarter ............................ 27.70 25.30
Third Quarter ............................. 28.30 24.60
Fourth Quarter ............................ 29.00 26.80
1997 First Quarter ............................. 32.50 27.20
Second Quarter ............................ 33.70 29.30
Third Quarter ............................. 38.60 28.30
Fourth Quarter ............................ 34.10 28.20
1998 First Quarter (through March 11, 1998) .... 38.70 33.00
On March 11, 1998 the closing middle market quotation of the Elsevier
Ordinary Shares on the Amsterdam Stock Exchange, as derived from the Officiele
Prijscourant of the Amsterdam Stock Exchange, was 32.5 pence per Elsevier
Ordinary Share.
The following table sets forth, for the calendar quarter indicate, the
high and low last reported sales prices in U.S. dollars for the Elsevier
American Depositary Shares on the New York Stock Exchange, as derived from the
New York Stock Exchange Composite Tape, and reported by Datastream International
Ltd:
Calendar Periods U.S. dollars per ADS
- - - ---------------- --------------------
High Low
----- ------
1996 First Quarter ............................. 30.88 27.00
Second Quarter ............................ 33.00 29.88
Third Quarter ............................. 33.13 29.75
Fourth Quarter ............................ 34.75 30.88
1997 First Quarter ............................. 33.38 29.50
Second Quarter ............................ 35.63 30.50
Third Quarter ............................. 37.25 28.81
Fourth Quarter ............................ 33.63 28.63
1998 First Quarter (through March 11, 1998) .... 38.25 32.13
On March 11, 1998 the closing last reported sales price of the Elsevier
American Depositary Shares on the New York Stock Exchange, as derived from the
New York Stock Exchange Composite Tape, and reported by Datastream International
Ltd., was 32.69 dollars per ADS.
22
<PAGE>
ITEM 6: EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS
REED INTERNATIONAL
There are currently no U.K. decrees or regulations restricting the import
or export of capital or affecting the remittance of dividends or other payments
to holders of Reed International Ordinary Shares who are non-residents of the
United Kingdom.
There are no limitations relating only to non-residents of the United
Kingdom under U.K. law or Reed International's Memorandum and Articles of
Association on the right to be a holder of, and to vote in respect of, Reed
International Ordinary Shares.
ELSEVIER
There are currently no Dutch decrees or regulations restricting the import
or export of capital or affecting the remittance of dividends or other payments
to holders of Elsevier Ordinary Shares who are non-residents of the Netherlands.
There are no limitations relating only to non-residents of the Netherlands
under Dutch law or Elsevier's Articles of Association on the right to be a
holder of, and to vote in respect of, Elsevier Ordinary Shares.
23
<PAGE>
ITEM 7: TAXATION
REED INTERNATIONAL
The following is a summary of all material United States federal and U.K.
tax consequences of the acquisition, ownership and disposition of Reed
International ADSs. The discussion is applicable to U.S. Holders (as defined
below) (i) who are residents of the United States for purposes of the United
States/United Kingdom Double Taxation Convention (the "U.K. Tax Treaty") and
(ii) whose ADSs are not, for purposes of the U.K. Tax Treaty, effectively
connected with a permanent establishment in the United Kingdom.
This discussion is intended only as a descriptive summary and does not
purport to be a complete analysis or listing of all possible tax considerations.
The discussion deals only with Reed International ADSs held as capital assets
and does not address any special tax consequences that may be applicable to U.S.
Holders that are subject to special treatment under the U.K. Tax Treaty or the
United States Internal Revenue Code of 1986, as amended (the "Code"), such as
dealers in securities, financial institutions, life insurance companies,
corporations which alone, or together with one or more associated companies,
control (directly or indirectly) 10% or more of the voting power of Reed
International, persons holding Reed International ADSs as part of a hedging or
conversion transaction or a straddle or persons whose functional currency is not
the United States dollar.
The statements regarding U.S. and U.K. tax laws (including the U.K. Tax
Treaty) set forth below are based (i) on those laws as in force and as applied
in practice on the date of this Annual Report and are subject to changes to
those laws and/or changes in practice subsequent to the date of this Annual
Report that may affect the tax consequences described herein (some of which may
have retroactive effect), and (ii) in part on representations of the Depositary
and assume that each obligation in the Reed International Deposit Agreement (as
defined below) and any related agreement will be performed in accordance with
its terms. This summary is not exhaustive of all possible tax considerations and
prospective purchasers are advised to satisfy themselves as to the overall tax
consequences, including specifically the consequences under U.S. state and local
and other laws, of the acquisition, ownership and disposition of Reed
International ADSs by consulting their own tax advisers.
As used herein, a "U.S. Holder" of a Reed International ADS means a holder
that is a citizen or resident of the United States, a corporation, partnership
or other entity created or organized in or under the laws of the United States
or any political subdivision thereof, or an estate or trust the income of which
is subject to United States federal income taxation regardless of its source.
This summary does not address the tax consequences for a U.S. Holder who
is resident (or in the case of an individual, resident or ordinarily resident)
in the United Kingdom.
In general, for U.S. federal income tax purposes, U.S. Holders of Reed
International ADSs will be treated as the owners of the underlying Reed
International Ordinary Shares that are represented by such ADSs. Deposits or
withdrawals of Reed International Ordinary Shares by U.S. Holders for Reed
International ADSs generally will not be subject to U.S. federal income tax.
Taxation of Dividends
Under existing U.K. law, Reed International will generally be required,
when paying a dividend on the Reed International Ordinary Shares, to account to
the U.K. Inland Revenue for U.K. advance corporation tax ("ACT"). The rate of
ACT at present is equal to one quarter of the amount of dividend payment, or 20%
of the sum of the dividend paid plus the related ACT amount. An amount
equivalent to the ACT accounted for by Reed International with respect to a
dividend is allowed, under current U.K. law, as a credit against the U.K. tax
liability of persons other than corporate bodies, who receive (or are treated as
receiving) the dividend and who are resident in the United Kingdom for U.K. tax
purposes. But no such credit is given in respect of any dividend which Reed
International elects to treat as a foreign income dividend under provisions
introduced by the United Kingdom Finance Act of 1994. The following summary
assumes that Reed International does not make such an election.
An Eligible U.S. Holder (as defined below) will be entitled under the U.K.
Tax Treaty to receive, in respect of a dividend, a payment (a "Treaty Payment")
equal to the amount of the tax credit to which an individual resident in the
United Kingdom for U.K. tax purposes would have been entitled had such
individual received the dividend (the "Tax Credit Amount") reduced by an amount
equal to 15% of the sum of the dividend and Tax Credit Amount (the "15% U.K.
withholding tax"). For example, at the current rate of ACT of one quarter of the
amount of a dividend, an Eligible U.S. Holder that receives from Reed
International a dividend payment of 80p is entitled to a Treaty Payment of 5p
(i.e., the Tax Credit Amount of 20p reduced by 15% of the sum of the dividend
and the Tax Credit Amount, or 15p), resulting in a total cash receipt (before
applicable U.S. taxes) of 85p.
Under the provisions of the Finance (No. 2) Act 1997 and as announced in
the pre-Budget report published in December 1997 and confirmed in the March 1998
Budget Statement, changes are to be made to the taxation of dividends paid on or
after April 6, 1999. From that date, Reed International will no longer be
required to account to the U.K. Inland Revenue for ACT when paying a dividend on
the Reed International Ordinary Shares, and an individual resident in the United
Kingdom for U.K. tax purposes who received such a dividend will be entitled to a
tax credit equal to only one-ninth of the dividend. The right of U.S. holders to
claim payment of any part of that tax credit will depend on the terms of the
U.K. Tax Treaty at that date; however, U.S. Holders should note that the
reduction in the rate of the tax credit available to U.K. resident individuals
from April 6, 1999 is likely to mean that U.S. Holders currently entitled to
claim payment of the Tax Credit Amount will cease to be able to obtain payment
of that amount.
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<PAGE>
For the purposes of this Annual Report, the term "Eligible U.S. Holder"
means a U.S. Holder that is a beneficial owner of the dividend paid with respect
to its Reed International ADSs and that satisfies all of the following
conditions: the U.S. Holder (i) is an individual or a corporation resident in
the United States for purposes of the U.K. Tax Treaty (and, in the case of a
corporation, not also resident in the United Kingdom for U.K. tax purposes),
(ii) is not a corporation which, alone or together with one or more associated
corporations, controls, directly or indirectly, 10% or more of the voting stock
of Reed International, (iii) is a holder whose holding of ADSs is not
effectively connected with a permanent establishment in the United Kingdom
through which such U.S. Holder carries on business or with a fixed base in the
United Kingdom from which such U.S. Holder performs independent personal
services, (iv) under certain circumstances, is not a company 25% or more of the
capital of which is owned, directly or indirectly, by persons that are not
individuals resident in, and are not nationals of, the United States, (v) under
certain circumstances, is not exempt from federal income tax on dividend income
in the United States and (vi) under certain circumstances, does not own 10% or
more of the Reed International Ordinary Shares.
A U.S. Holder that is a partnership, trust or estate may be entitled under
the U.K. Tax Treaty to receive a Treaty Payment in respect of a dividend paid by
Reed International, but only to the extent that dividend income derived by such
U.S. Holder is taxable in the United States as the income of a U.S. resident in
the hands of such U.S. Holder or of its partners or beneficiaries, as the case
may be.
Arrangements (the "H Arrangements") have been made with the U.K. Inland
Revenue for Treaty Payments relating to dividends paid by Reed International in
respect of Reed International Ordinary Shares represented by Reed International
ADSs evidenced by ADRs to be paid to certain Eligible U.S. Holders at the same
time as, and together with, such dividends as long as (i) the registered holder
completes the declaration on the reverse of the dividend check confirming the
Eligible U.S. Holder's entitlement to the associated Tax Credit Amount and
presents the check for payment within three months from the date of issue of the
check, or (ii) in the case of ADRs held through a Depositary Trust Company
("DTC") participant, a declaration as to the condition entitling the Eligible
U.S. Holder to the associated Treaty Payment is completed by the DTC participant
which holds the ADRs on behalf of the Eligible U.S. Holder. These arrangements
generally apply to Eligible U.S. Holders other than (i) estates or trusts, any
of the beneficiaries of which are not U.S. residents, (ii) investment or holding
companies, 25% or more of the capital of which is owned, directly or indirectly,
by persons who are not individuals resident in and are not nationals of the
United States, (iii) persons exempt from U.S. federal income tax with respect to
dividends paid on the Reed International Ordinary Shares (other than certain
pension funds) and (iv) persons owning 10% or more of the Reed International
Ordinary Shares.
A U.S. Holder that is entitled to and wishes to receive payment of the
Treaty Payment but that does not satisfy the requirements to benefit from the H
Arrangements described in the preceding paragraph, must make a separate claim
for payment in the manner and at the times prescribed in U.S. Revenue Procedure
80-18, 1980-1 C.B. 623, U.S. Revenue Procedure 90-61, 1990-2 C.B. 657 and U.S.
Revenue Procedure 81-58, 1981-2 C.B. 678. Claims for such payment must be made
within six years of the end of the U.K. year of assessment (generally April 5 in
each year) in which the related dividend was paid. The first claim by an
Eligible U.S. Holder for a payment under these procedures is made by sending the
appropriate U.K. form in duplicate to the Director of the Internal Revenue
Service ("I.R.S.") Center with which such Eligible U.S. Holder's last U.S.
federal income tax return was filed. Forms may be obtained from the Internal
Revenue Service, Assistant Commissioner (International), 950 L'Enfant Plaza
South, S.W., Washington, D.C. 20024. Because a claim may not be considered made
until the U.K. Inland Revenue receives the appropriate form from the I.R.S.,
forms should be sent to the I.R.S. well before the end of the applicable
limitation period. Any refund claim after the first claim by an Eligible U.S.
Holder for payment under these procedures should be filed directly with the U.K.
Inland Revenue, Financial Intermediaries and Claims Office, Fitzroy House, PO
Box 46, Nottingham NG2 1BD, England.
Distributions made in respect of the Reed International Ordinary Shares
(including the related Tax Credit Amount) will constitute dividends for U.S.
federal income tax purposes to the extent paid out of current or accumulated
earnings and profits of Reed International, as determined under U.S. federal
income tax principles. The amount of dividend income for a U.S. Holder will be
the dollar value of the dividend payment, on the date of receipt by the
Depositary, regardless of whether the dividend is converted into dollars.
Foreign currency exchange gain or loss, if any, realized on a sale or other
disposition of pounds, will be ordinary income or loss to the U.S. Holder.
Dividends paid by Reed International will not be eligible for the dividends
received deduction allowed to corporations under the Code.
Subject to certain limitations, the 15% U.K. withholding tax may be
claimed as a credit against the U.S. federal income tax liability of the
Eligible U.S. Holder. The overall limitation on foreign taxes eligible for
credit is calculated separately with respect to specific classes, or "baskets"
of income. For this purpose, dividends distributed by Reed International will be
treated as income from sources outside the United States and generally will
constitute "passive income" or, in the case of certain U.S. Holders, "financial
services income". Foreign tax credits allowable with respect to each income
basket cannot exceed the U.S. federal income tax otherwise payable with respect
to such income.
Under section 812 of the United Kingdom Income and Corporation Taxes Act
1988, the United Kingdom Treasury has power to deny payment of Tax Credit
Amounts under the United Kingdom's income tax conventions to certain
corporations if they or an associated company (as defined in the said section
812) has a qualifying presence in a state in the United States which operates a
unitary system of corporate taxation. These provisions come into force only if
the United Kingdom Treasury so determines by statutory instrument. No such
instrument is currently in force.
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<PAGE>
Taxation of Capital Gains
A U.S. Holder that is not resident (and, in addition, in the case of an
individual, not ordinarily resident) in the United Kingdom for U.K. tax purposes
will not generally be liable for U.K. taxation on capital gains realized on the
disposal of such holder's Reed International ADSs unless at the time of the
disposal such U.S. Holder carries on a trade, profession or vocation in the
United Kingdom through a branch or agency and such Reed International ADSs are
or have been used, held or acquired for the purposes of such trade (or
profession or vocation), branch or agency.
A U.S. Holder will, upon the sale or exchange of a Reed International ADS,
generally recognize gain or loss for U.S. federal income tax purposes in an
amount equal to the difference between the dollar amount realized for the Reed
International ADS and the U.S. Holders's tax basis in the ADS. Such gain or loss
will be capital gain or loss and will be long term capital gain or loss if the
Reed International ADS has been held for more than one year on the date of the
sale or exchange. The tax rate applicable to such long-term capital gain will be
determined based on the number of months held. Any gain recognized by a U.S.
Holder will generally be treated as U.S. source income.
Although capital gains of corporations currently are taxed at the same
rates as ordinary income, the distinction between capital gain and ordinary
income or loss is relevant for purposes of, among other things, limitations on
the deductibility of capital losses. Individuals and certain other non-corporate
taxpayers are taxed at a lower rate on net long-term capital gains than on items
of ordinary income. A U.S. Holder who is liable for both U.K. and U.S. tax on a
gain on the disposal of a Reed International ADS will generally be entitled,
subject to certain limitations, to credit the U.K. tax against its U.S. federal
income tax liability in respect of such gain.
Information Reporting and Backup Withholding
In general, information reporting requirements will apply to dividends
paid in respect of the Reed International ADSs or the proceeds received on the
sale, exchange, or redemption of the Reed International ADS within the United
States by non-corporate U.S. Holders, and a 31% backup withholding may apply to
such amounts if the U.S. Holder fails to provide an accurate taxpayer
identification number or to report interest and dividends required to be shown
on its federal income tax returns. The amount of any backup withholding from a
payment to a U.S. Holder will be allowed as a credit against the U.S. Holder's
U.S. federal income tax liability.
Estate and Gift Tax
Reed International ADSs evidenced by ADRs held by an individual U.S.
Holder whose domicile is determined to be the United States for purposes of the
U.K. Estate Tax Treaty between the United States and the United Kingdom (the
"U.K. Estate Tax Treaty") and who is not a national of the United Kingdom will
not be subject to U.K. inheritance tax on such individual's death or on a
lifetime transfer of the ADSs except in certain cases where the ADSs (i) are
part of the business property of a U.K. permanent establishment of an
enterprise, (ii) pertain to a U.K. fixed base of an individual used for the
performance of independent personal services, or (iii) are comprised in a
settlement (unless at the time of the settlement the settlor was domiciled in
the United States and was not a national of the United Kingdom). The U.K. Estate
Tax Treaty generally provides a credit against U.S. federal estate or gift tax
liability for the amount of any U.K. inheritance tax paid in the United Kingdom
in a case where the ADSs are subject to both U.K. inheritance tax and to U.S.
federal estate or gift tax.
U.K. Stamp Duty and Stamp Duty Reserve Tax
U.K. Stamp Duty and U.K. Stamp Duty Reserve Tax ("SDRT") at the
then-applicable rate arises upon the transfer or issue to the Custodian of Reed
International Ordinary Shares in exchange for Reed International ADSs evidenced
by ADRs. For this purpose, the rate of Stamp Duty is (pound)1.50 per (pound)100
(or part thereof) and the current rate of SDRT is 1.5% applied, in each case, to
the amount or value of the consideration or, in some circumstances, to the value
of the Ordinary Shares. The Stamp Duty or SDRT will be payable by the
Depositary. In accordance with the terms of the Deposit Agreement, holders of
ADRs must pay an amount in respect of such duty or tax to the Deposit Agreement,
holders of ADRs must pay an amount in respect of such duty or tax to the
Depositary except in connection with the initial issuance and deposit of the
Reed International Ordinary Shares.
Provided that the instrument of transfer is not executed in the United
Kingdom and remains at all subsequent times outside the United Kingdom, no U.K.
Stamp Duty will be payable on the acquisition or transfer of Reed International
ADRs. Neither will an agreement to transfer Reed International ADRs give rise to
a liability to SDRT.
A transfer of Reed International Ordinary Shares by the Depositary or its
nominee to the relative ADR holder where there is no transfer of beneficial
ownership will give rise to U.K. Stamp Duty at the rate of 50 pence per
transfer.
Purchases of Reed International Ordinary Shares, as opposed to ADSs, may
give rise to a charge to U.K. Stamp Duty or SDRT at the rate of 50 pence per
(pound)100 or part thereof (Stamp Duty) or 0.5% (SDRT) of the price payable for
the Reed International Ordinary Shares at the time of the transfer or agreement
to transfer. SDRT is generally the liability of the purchaser and U.K. Stamp
Duty is also usually paid by it. Where such Reed International Ordinary Shares
are later transferred to the Custodian, further U.K. Stamp Duty or SDRT will
normally be payable as described above.
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ELSEVIER
The following is a summary of all material United States federal and Dutch
tax consequences of the acquisition, ownership and disposition of Elsevier ADSs.
The discussion is applicable to U.S. Holders (as defined below) (i) who are
residents of the United States for purposes of the United States/Netherlands
Double Taxation Convention of December 18, 1992 (the "Dutch Tax Treaty of 1992")
and (ii) whose ADSs are not, for purposes of the Dutch Tax Treaty of 1992,
effectively connected with a permanent establishment and/or permanent
representative in the Netherlands.
The statements regarding U.S. and Dutch tax laws (including the Dutch Tax
Treaty of 1992) set forth below are based (i) on those laws as in force and as
applied in practice on the date of this Annual Report and are subject to changes
to those laws and/or changes in practice subsequent to the date of this Annual
Report that may affect the tax consequences described herein (some of which may
have retroactive effect), and (ii) in part on representations of the Depositary
and assume that each obligation in the Elsevier Deposit Agreement (as defined
below) and any related agreement will be performed in accordance with its terms.
This summary is not exhaustive of all possible tax considerations and
prospective purchasers are advised to satisfy themselves as to the overall tax
consequences, including specifically the applicability of the Dutch Tax Treaty
of 1992 to U.S. Holders of Elsevier ADSs and the consequences under U.S. state
and local and other laws, of the acquisition, ownership and disposition of
Elsevier ADSs by consulting their own tax advisers. As used herein, a "U.S.
Holder" of an Elsevier ADS means a holder that is a citizen or resident of the
United States, a corporation, partnership or other entity created or organized
in or under the laws of the United States or any political subdivision thereof,
or an estate or trust the income of which is subject to U.S.
federal income taxation regardless of its source.
United States Tax Consequences
This discussion is intended only as a descriptive summary and does not
purport to be a complete analysis or listing of all possible U.S. tax
considerations. The discussion deals only with Elsevier ADSs held as capital
assets and does not address any special tax consequences that may be applicable
to U.S. Holders that are subject to special treatment under the Code, such as
dealers in securities, financial institutions, life insurance companies, persons
holding Elsevier ADSs as part of a hedging or conversion transaction or a
straddle or persons whose functional currency is not the U.S. dollar.
In general, for United States federal income tax purposes, U.S. Holders of
Elsevier ADSs will be treated as the owners of the underlying Elsevier Ordinary
Shares that are represented by such Elsevier ADSs.
Deposits or withdrawals of Elsevier Ordinary Shares by U.S. Holders for
Elsevier ADSs generally will not be subject to U.S. federal income tax.
Taxation of Dividends
The gross amount of dividends paid to U.S. Holders of Elsevier ADSs
(including amounts withheld to reflect Dutch withholding taxes) will be treated
as dividend income to such U.S. Holders, to the extent paid out of current or
accumulated earnings and profits, as determined under U.S. federal income tax
principles. Such income will be includable in the gross income of a U.S. Holder
as ordinary income on the day received by the Depositary. Such dividends will
not be eligible for the dividends received deduction allowed to corporations
under the Code.
The amount of any dividend paid in Dutch guilders will equal the U.S.
dollar value of the Dutch guilders received calculated by reference to the
exchange rate in effect on the date the dividend is received by the Depositary,
regardless of whether the Dutch guilders are converted into U.S. dollars. If the
dividend is not converted into U.S. dollars on the date of receipt, a U.S.
Holder will have a basis in the Dutch guilders equal to the U.S. dollar value on
the date of receipt. Any gain or loss realized on a subsequent conversion or
other disposition of the Dutch guilders will be treated as ordinary income or
loss.
Generally the maximum rate of withholding tax on dividends paid to a U.S.
Holder pursuant to the Dutch Tax Treaty of 1992 is 15% Subject to certain
conditions and limitations, Dutch withholding taxes will be treated as foreign
taxes eligible for credit against a U.S. Holder's U.S. federal income tax
liability. The overall limitation on foreign taxes eligible for credit is
calculated separately with respect to specific classes or "baskets" of income.
For this purpose, dividends paid by Elsevier will be treated as income from
sources outside of the United States and generally will constitute "passive
income" or, in the case of certain U.S. Holders, "financial services income".
Foreign tax credits allowable with respect to each income basket, cannot exceed
the U.S. federal income tax otherwise payable with respect to such income.
To the extent that the amount of any distribution exceeds Elsevier's
current and accumulated earnings and profits for a taxable year, the
distribution will first be treated as a tax-free return of capital, causing a
reduction in the adjusted basis of the Elsevier ADSs (thereby increasing the
amount of gain, or decreasing the amount of loss, to be recognized by the
<PAGE>
investor on a subsequent disposition of the Elsevier ADSs), and the balance in
excess of adjusted basis will be taxed as capital gain recognized on a sale or
exchange.
27
<PAGE>
Taxation of Capital Gains
For U.S. federal income tax purposes, a U.S. Holder will recognize taxable
gain or loss on any sale or exchange of an Elsevier ADS in an amount equal to
the difference between the amount realized for the Elsevier ADS and the U.S.
Holder's basis in the Elsevier ADS. Such gain or loss will be capital gain or
loss and will be long-term capital gain or loss if the Elsevier ADS has been
held for more than one year on the date of the sale or exchange. Any gain
recognized by a U.S. Holder will generally be treated as U.S. source income.
Although capital gains of corporations currently are taxed at the same
rates as ordinary income, the distinction between capital gain and ordinary
income or loss is relevant for purposes of, among other things, limitations on
the deductibility of capital losses. Individuals and certain other non-corporate
taxpayers are taxed at a lower rate on net long-term capital gains than on items
of ordinary income. The tax rate applicable to such net long term capital gains
will be determined based on the number of months held.
Information Reporting and Backup Withholding
In general, information reporting requirements will apply to dividends
paid in respect of the Elsevier ADSs or the proceeds received on the sale,
exchange, or redemption of the Elsevier ADSs within the United States by
non-corporate U.S. Holders, and a 31% backup withholding may apply to such
amounts if the U.S. Holder fails to provide an accurate taxpayer identification
number or to report interest and dividends required to be shown on its federal
income tax returns. The amount of any backup withholding from a payment to a
U.S. Holder will be allowed as a credit against the U.S. Holder's United States
federal income tax liability.
Dutch Tax Consequences
This discussion summarizes the principal Dutch tax consequences under
current law and practice to U.S. Holders, as interpreted under officially
published case law. This summary generally does not address the tax consequences
to a U.S. Holder that is resident (or, in the case of an individual, ordinarily
resident) in the Netherlands for Dutch tax purposes.
Taxation of Dividends
Dividends, distributed by Elsevier are, pursuant to Dutch national law,
subject to 25% dividend withholding tax. Dividends include dividends in cash or
in kind, constructive dividends and liquidation proceeds in excess of recognized
(for Dutch tax purposes) paid-in capital. Distribution of stock dividends is
subject to dividend withholding tax unless distributed out of recognized (for
Dutch tax purposes) paid-in share premium.
Under the application of the Dutch Tax Treaty of 1992, dividends paid by
Elsevier to a beneficial owner resident in the United States are generally
eligible for a reduction in the rate of withholding to 15% of the gross amount
of the dividends.
In case the beneficial owner is a company which holds directly at least
10% of the voting power of Elsevier, the rate of withholding will be further
reduced to 5% of the gross amount of the dividends.
Elsevier is not a "beleggingsinstelling" in the sense of Article 28 of the
Netherlands Corporation Tax Act (Wet op de vennootschapsbelasting 1969). (A
"beleggingsinstelling" is a specific investment fund referred to in Article 28
of the Netherlands Corporate Income Tax Act, the sole purpose of which is to
invest funds and to distribute its revenues to its shareholders within eight
months after the end of its fiscal year. Under a number of conditions, the
beleggingsinstelling is not subject to Dutch corporate income tax.)
The term "dividends" as used in this convention means income from shares
or other rights participating in profits, as well as income from other corporate
rights which is subjected to the same taxation treatment as income from shares
by the laws of the Netherlands. For the purposes of this paragraph, the term
"dividends" also includes, in the case of the Netherlands, income from profit
sharing bonds ("winstdelende obligaties").
A beneficial owner of dividends, who holds depositary rights evidencing
beneficial ownership of the shares in lieu of the shares themselves in Elsevier
may claim the benefits of the Dutch Tax Treaty of 1992.
The above provisions shall not apply if the beneficial owner of the
dividends, being a resident of the United States, carries on business in the
Netherlands, through a permanent establishment situated therein, or performs
independent personal services from a fixed base situated therein, and the
holding in respect of which the dividends are paid forms part of the business
property of such permanent establishment or pertains to such fixed base.
A trust, company or other organization that is a resident of the United
States and that is operated exclusively for religious, charitable, scientific,
educational, or public purposes shall be exempt from Dutch withholding tax if
and to the extent that: (a) such trust, company or other organization is exempt
from tax in the United States, and: (b) such trust, company or other
organization would be exempt from tax in the Netherlands in respect of such
items of income if it were organized, and carried on all its activities, in the
Netherlands, unless the income is derived from carrying on a trade or business
or from a related person other than a person referred to above.
28
<PAGE>
Dividend income derived by a trust, company or other organization
constituted and operated exclusively to administer or provide benefits under one
or more funds or plans established to provide pension, retirement or other
employee benefits shall in principle be exempt from Dutch withholding tax if it
is a resident of the United States and its income is generally exempt from tax,
unless the income is derived from carrying on a trade or business or from a
related person other than a person referred to above. However, if the ownership
of the dividend is separated from the ownership of the ADS, the exemption from
Dutch withholding tax may be challenged.
Taxation of Capital Gains
Gains derived by a resident of the United States from the disposition of
Elsevier ADSs generally will not be taxable in the Netherlands. If, however, the
ADSs would form part of the business property of a permanent establishment which
an enterprise of the United States has in the Netherlands or of personal
property pertaining to a fixed base, available to a resident of the United
States, in the Netherlands for the purpose of performing independent personal
services, such gains, including those from the alienation of such permanent
establishment (alone or with the whole enterprise) or of such fixed base, may be
taxed in the Netherlands.
The provision of the above paragraphs shall not affect the right of the
Netherlands to levy according to its own law a tax on gains from the alienation
of Elsevier ADSs derived by an individual who is a resident of the United States
and who: (a) has, at any time during the five year period preceding the
alienation, been a resident of the Netherlands, and (b) at the time of the
alienation owns, either alone or together with related individuals, at least 25%
of any class of shares in Elsevier. For the purposes of this paragraph, the term
"related individuals" means the alienator's spouse and their relatives by blood
or marriage in the direct line (ancestors and lineal descendants). In case the
individuals would not be married, the term "related individuals" means the
alienator, his/her partner and their relatives by blood or marriage in the
direct line.
A resident of the United States may be subject to Dutch personal income
tax on (part of) the gains derived from the alienation of Elsevier ADSs if (a)
the resident has moved his residence from the Netherlands to the United States
at any time during the ten year period preceding the alienation of the ADSs and
(b) at the time of emigration owned, either alone or together with related
individuals, at least 5% of any class of shares in Elsevier. For the purposes of
this paragraph, the term "related individuals" means the alienator's spouse and
their relatives by blood or marriage in the direct line (ancestors and lineal
descendants). In case the resident would not be married, the term "related
individuals" means the alienator, his/her partner and their relatives by blood
or marriage in the direct line.
Estate and Gift Tax
A gift or inheritance of Elsevier ADSs from a U.S. Holder of ADSs will not
be subject to Dutch gift and inheritance tax, provided that: (a) the holder does
not carry on a business in the Netherlands through a permanent establishment or
a permanent representative to which or to whom the ADSs are attributable; (b)
the holder has not been a resident of the Netherlands at any time during the ten
years preceding the time of the gift or death, or, in the event he or she has
been a resident of the Netherlands in that period, the holder is not a Dutch
citizen at the time of the gift or death; and (c) for purposes of the tax on
gifts, the holder has not been a resident of the Netherlands at any time during
the twelve months preceding the time of the gift.
29
<PAGE>
ITEM 8: SELECTED FINANCIAL DATA
REED ELSEVIER
The selected combined financial data for Reed Elsevier should be read in
conjunction with, and is qualified by, the Combined Financial Statements and
notes thereto of Reed Elsevier included in this Annual Report. The Combined
Financial Statements, which are presented in pounds sterling, encompass the
businesses of Reed Elsevier plc and Elsevier Reed Finance BV and their
respective subsidiaries and associates, together with their parent companies,
Reed International and Elsevier. In addition, as separate legal entities, Reed
International and Elsevier prepare separate financial statements which reflect
their respective shares in such combined businesses. In such separate financial
statements Reed International and Elsevier account for their respective shares
in the combined businesses on an equity basis.
The selected combined financial data for Reed Elsevier for the five years
ended December 31, 1997 has been extracted or derived from the Combined
Financial Statements for Reed Elsevier which have been audited for the years
ended December 31, 1997, 1996, 1995 and 1994 by Deloitte & Touche, London and
Deloitte & Touche, Amsterdam and by Price Waterhouse, London and Coopers &
Lybrand, Amsterdam for the year ended December 31, 1993.
Combined Income Statement Data
<TABLE>
<CAPTION>
Year ended December 31,(1)
----------------------------------------------------
1993 1994 1995 1996 1997 1997(2)
------ ------ ------ ------ ------ -------
(in millions)
<S> <C> <C> <C> <C> <C> <C>
Amounts in accordance with U.K.
and Dutch GAAP(3):
Total activities (unless
otherwise stated)
Net sales(4) (pound) (pound) (pound) (pound) (pound) (pound)
Continuing operations ........... 2,066 2,243 2,805 2,975 3,062 $5,022
Discontinued operations ......... 730 792 844 406 355 582
----- ------ ------ ------ ------ ------
Total Activities ..................... 2,796 3,035 3,649 3,381 3,417 5,604
----- ------ ------ ------ ------ ------
Operating income before non-operating
exceptional items(4)
Continuing operations ........... 469 550 702 792 819 1,343
Exceptional items charged to
operating profit ................ -- -- -- -- (502) (823)
Discontinued operations ......... 89 113 126 64 66 108
----- ------ ------ ------ ------ ------
Total Activities ...................... 558 663 828 856 383 628
----- ------ ------ ------ ------ ------
Non-operating exceptional items(5) .... 16 14 13 1 25 41
Operating income after exceptional
items .............................. 574 677 841 857 408 669
Net interest expense ................. (40) (57) (105) (51) (62) (102)
Income before taxes and minority
interest ........................... 534 620 736 806 346 567
Net income(6) ........................ 396 468 554 604 207 339
Approximate amounts in accordance
with U.S. GAAP:
Continuing operations(4)
Operating income ................ 395 460 542 711 107 175
Net income ...................... 239 273 270 450 3 5
Discontinued operations(4)
Net income from trading
operations .................... 55 69 70 43 40 66
Gain on sales net of provisions . -- -- 353 -- -- --
----- ------ ------ ------ ------ ------
Net income from discontinued
operations ......................... 55 69 423 43 40 63
----- ------ ------ ------ ------ ------
</TABLE>
30
<PAGE>
Combined Balance Sheet Data
<TABLE>
<CAPTION>
Year ended December 31,(1)
----------------------------------------------------
1993 1994 1995 1996 1997 1997(2)
------ ------ ------ ------ ------ -------
(in millions)
<S> <C> <C> <C> <C> <C> <C>
Amounts in accordance with U.K.
and Dutch GAAP: (pound) (pound) (pound) (pound) (pound) (pound)
Total assets ......................... 4,200 4,653 5,499 5,147 5,003 $8,205
Long term obligations less current
portion(7) ......................... (579) (749) (930) (717) (689) (1,130)
Net borrowings(8) .................... (575) (1,295) (680) (196) (630) (1,033)
Combined shareholders' equity ........ 1,714 1,419 2,075 2,071 1,494 2,450
Approximate amounts in accordance
with U.S. GAAP:
Total assets ......................... 4,902 5,749 6,483 6,107 6,139 10,068
Long term obligations less current
portion(7) ......................... (874) (1,130) (1,256) (993) (1,291) (2,117)
Combined shareholders' equity ........ 2,420 2,529 3,084 3,075 2,774 4,549
</TABLE>
- - - ----------
(1) The Combined Financial Statements are prepared in accordance with
accounting policies that are in conformity with U.K. and Dutch GAAP, which
differs in certain significant respects from U.S. GAAP. The differences
between U.K. and Dutch GAAP and U.S. GAAP which are relevant to the
combined businesses are set out in note 29 to the audited Combined
Financial Statements.
(2) For the convenience of the reader, pounds sterling and pence amounts for
the fiscal year ended December 31, 1997 have been translated into U.S.
dollars using the Noon Buying Rate on December 31, 1997 of $1.64
per(pound)1.00. Noon Buying Rates are not used in the preparation of the
Combined Financial Statements included in this Annual Report. The rates
used in the preparation of the Combined Financial Statements for the fiscal
year ended December 31, 1997 were $1.64 per(pound)1.00 for income statement
items (the average prevailing exchange rate during the year) and $1.66
per(pound)1.00 for balance sheet items (the rate prevailing at December 31,
1997). For a discussion of the effects of currency fluctuations on Reed
Elsevier's combined results of operations and combined financial position,
see "Management's Discussion and Analysis of Financial Condition and
Results of Operations o Reed Elsevier".
(3) In accordance with the U.K. accounting standard on Fair Values in
Acquisition Accounting, FRS7, reorganization costs in respect of
acquisitions are charged to the income statement; prior to 1995 these costs
were included in goodwill.
(4) Under U.K. and Dutch GAAP, discontinued operations only comprise those
businesses where sales transactions or closures have been completed. Under
U.S. GAAP all businesses are treated as discontinued operations once the
formal commitment to sell or close is made. Under U.S. GAAP net income from
discontinued operations includes net income from the trading activities of
discontinued operations and the gain or loss on sale of discontinued
operations. Under U.K. and Dutch GAAP operating results from discontinued
operations are included within operating income and the gain or loss on
sale is included as an exceptional item. Under U.K. and Dutch GAAP,
discontinued operations relate wholly to the Consumer segment and comprise
the consumer publishing businesses divested in 1995, IPC Magazines,
excluding New Scientist, and certain operations of Reed Books which have
been divested by the date of approval of this Annual Report. Under U.S.
GAAP, the consumer publishing businesses divested in 1995, IPC Magazines,
excluding New Scientist, and all the remaining consumer book publishing
businesses are treated as discontinued operations following the commitment
to divest these operations.
(5) Exceptional items are significant items within Reed Elsevier's ordinary
activities which under U.K. and Dutch GAAP need to be disclosed separately
by virtue of their size or incidence. Operating profit in 1997 is stated
after charging exceptional items of(pound)502 million. This amount
comprises(pound)230 million in respect of the estimated cost of programs to
recompense advertisers in relation to irregularities in circulation claims
for certain Reed Travel Group publications together with related expenses
and reorganization costs,(pound)250 million in respect of a non-cash
write-down of intangible assets related to Reed Travel Group and(pound)22
million in respect of other items. Exceptional items credited below
operating profit arise primarily from the net profit on disposal of certain
business. For further details see note 5 to the audited Combined Financial
Statements.
(6) The SSAP 24 credit in respect of the main U.K. pension scheme included in
operating income is (pound)1 million in the 1997 fiscal year, (1996
(pound)7 million; 1995 (pound)6 million; 1994 (pound)9 million; 1993
(pound)9 million); see note 26 to the audited Combined Financial
Statements. The SSAP 24 credit comprises a regular cost offset by
amortization of the net actuarial surplus calculated in accordance with the
provisions of the U.K. accounting standard on Accounting for Pension Costs,
SSAP 24.
(7) Long term obligations comprise long term borrowings and capital lease
obligations which become due after more than one year. Reed Elsevier has
revolving credit facilities expiring in over one year with a number of
banks which are available to support commercial paper and other short term
borrowings. Under U.S. GAAP the borrowings backed by these credit
facilities, which amount to (pound)602 million at December 31, 1997 (1996
(pound)276 million; 1995 (pound)326 million; 1994 (pound)381 million; 1993
(pound)295 million), are included as long term obligations.
(8) Net borrowings comprise total borrowings less cash and short term
investments.
31
<PAGE>
REED INTERNATIONAL
The selected consolidated financial data for Reed International should be
read in conjunction with, and is qualified by, the consolidated financial
statements of Reed International and notes thereto included in this Annual
Report. The results and financial position of Reed International reflect its
52.9% economic interest in the Reed Elsevier Combined Businesses, which takes
into account its 5.8% indirect interest in Elsevier, accounted for on an equity
basis.
All of the selected consolidated financial data for Reed International set
forth below has been extracted or derived from the financial statements of Reed
International, which have been audited for the years ended December 31,
1997,1996, 1995 and 1994 by Deloitte & Touche, London and by Price Waterhouse,
London for the year ended December 31, 1993.
<TABLE>
<CAPTION>
Year ended December 31,(1)
----------------------------------------------------
1993 1994 1995 1996 1997 1997(2)
------ ------ ------ ------ ------ -------
(in millions, except per share amounts)(3)
<S> <C> <C> <C> <C> <C> <C>
Amounts in accordance
with U.K. GAAP:
Income from interests in
associated undertakings
Share of profits before (pound) (pound) (pound) (pound) (pound) (pound)
exceptional items .............. 242 265 364 405 413 $ 677
Share of exceptional items ....... 8 7 7 -- (251) (412)
----- ------ ------ ------ ------ ------
Total ................................ 250 272 371 405 162 265
----- ------ ------ ------ ------ ------
Net income(6)(7) ..................... 197 233 277 302 90 148
Basic earnings per Reed International
Ordinary Share(3)(4) ............... 17.6p 20.75p 24.6p 26.6p 7.9p 0.13
Gross dividends per Reed International
Ordinary Share(3)(5) ............... 11.7p 13.45p 15.3p 17.0p 18.25p 0.30
Total assets ......................... 1,019 875 1,240 1,251 951 1,560
Shareholders' equity ................. 907 751 1,098 1,096 790 1,296
Approximate amounts in
accordance U.S. GAAP:
Net income(6)(7) ..................... 152 168 352 244 4 7
Basic earnings per Reed International
Ordinary Share(3)(4)(6)(7) ......... 13.5p 14.9p 30.9p 21.4p -- --
Total assets ......................... 1,321 1,379 1,677 1,673 1,511 2,478
Shareholders' equity ................. 1,280 1,338 1,631 1,627 1,467 2,406
</TABLE>
- - - ----------
(1) The consolidated financial statements of Reed International are prepared in
conformity with accounting policies that are in compliance with U.K. GAAP,
which differs in certain significant respects from U.S. GAAP. The
differences between U.K. GAAP and U.S. GAAP which are relevant to Reed
International are set out in note 17 to the audited financial statements of
Reed International.
(2) For the convenience of the reader, pounds sterling and pence amounts for
the fiscal year ended December 31, 1997 have been translated into U.S.
dollars using the Noon Buying Rate on December 31, 1997 of $1.64
per(pound)1.00. Noon Buying Rates are not used by Reed International in the
preparation of its consolidated financial statements included in this
Annual Report. The rates used in the preparation of the Reed International
consolidated financial statements for the fiscal year ended December 31,
1997 were $1.64 per(pound)1.00 for income statement items (the average
prevailing exchange rate during the year) and $1.66 per(pound)1.00 for
balance sheet items (the rate prevailing at December 31, 1997).
(3) Earnings per Reed International Ordinary Share and gross dividends per Reed
International Ordinary Share for all periods prior to 1997 have been
restated to give effect to the two for one share subdivision in respect of
Reed International Ordinary Shares, which became effective on May 2, 1997.
(4) Under U.K. and U.S. GAAP the calculation of basic earnings per share is
based only on common stock in issue. Diluted earnings per Reed
International Ordinary Share amounts, taking account of the effects of
additional common shares that would be outstanding if dilutive potential
shares had been issued, have not been disclosed because they are not
materially different from the respective basic earnings per Reed
International Ordinary Share amounts under either U.K. or U.S. GAAP.
(5) The amount of gross dividends per Reed International Ordinary Share shown
includes the U.K. tax credit available to certain beneficial owners of Reed
International ADSs who are residents of the United States for the purposes
of the U.K. Tax Treaty but do not include any deduction on account of U.K.
withholding taxes, currently at the rate of 15% of the sum of the dividend
and the related tax credit in most cases.
(6) The net income in 1995 includes Reed International's share of the Reed
Elsevier Combined Businesses' net gain on sale of certain consumer
publishing businesses. Under U.S. GAAP, Reed International's share of the
net post tax gain was (pound)187 million whereas under U.K. and Dutch GAAP,
its share was a net post tax gain of (pound)1 million, reflecting the
differing accounting treatment of intangible assets and goodwill. Basic
earnings per Reed International Ordinary Share under U.S. GAAP includes
16.4p in respect of such gain on sale.
(7) The net income in 1997 includes Reed International's share of the Reed
Elsevier Combined Businesses exceptional items, the most significant of
which relate to the Reed Travel Group provision for customer compensation
and related expenses and reorganization costs and the non-cash writedown of
Reed Travel Group and intangible assets. Basic earnings per Reed
International Ordinary Share includes 18.3p (loss) and 21.6p (loss) under,
respectively, U.K. and Dutch GAAP and U.S. GAAP in respect of these items;
the loss under U.S. GAAP reflects the differing accounting treatment under
U.S. GAAP of intangible assets and goodwill.
32
<PAGE>
ELSEVIER
The selected financial data for Elsevier should be read in conjunction
with, and is qualified by, the financial statements of Elsevier and notes
thereto included in this Annual Report. The results and financial position of
Elsevier reflect its 50% interest in the Reed Elsevier Combined Businesses,
accounted for on an equity basis.
All of the selected financial data for Elsevier set forth below has been
extracted or derived from the financial statements of Elsevier, which have been
audited for the years ended December 31, 1997, 1996, 1995 and 1994 by Deloitte &
Touche, Amsterdam and by Coopers & Lybrand, Amsterdam for year ended December
31, 1993.
<TABLE>
<CAPTION>
Year ended December 31,(1)
----------------------------------------------------
1993 1994 1995 1996 1997 1997(2)
------ ------ ------ ------ ------ -------
(in millions, except per share amounts)(3)
<S> <C> <C> <C> <C> <C> <C>
Amounts in accordance
with Dutch GAAP:
Share in attributable profits
after tax of affiliates
Share of profits before
exceptional items ............. Dfl 506 Dfl 606 Dfl 682 Dfl 781 Dfl 966 $ 473
Share of exceptional items ......... 22 22 3 1 (640) (314)
----- ------ ------ ------ ------ ------
Total ............................... 528 628 685 782 326 159
----- ------ ------ ------ ------ ------
Net income(5)(6) .................... 552 650 701 794 330 162
Basic earnings per Elsevier
Ordinary Share(3)(4) .............. 0.80 0.93 1.00 1.13 0.47 0.23
Gross dividends per Elsevier
Ordinary Share(3)(4) .............. 0.52 0.55 0.59 0.76 0.95 0.46
Total assets ........................ 2,793 2,264 2,943 3,554 3,053 1,496
Long term borrowings, less current
portion ........................... (12) (15) (19) (21) (24) (12)
Shareholders' equity ................ 2,460 1,922 2,563 3,065 2,495 1,222
Approximate amounts in accordance
with U.S. GAAP:
Net income(5)(6) .................... 420 511 914 692 128 63
Basic earnings per Elsevier
Ordinary Share(3)(4)(5)(6) ........ 0.60 0.73 1.30 0.98 0.18 0.09
Total assets ........................ 3,575 3,525 3,917 4,667 4,751 2,328
Long term borrowings, less current
portion ........................... (12) (15) (19) (21) (24) (12)
Shareholders' equity ................ 3,473 3,427 3,809 4,551 4,633 2,270
</TABLE>
- - - ----------
(1) The financial statements of Elsevier are prepared in accordance with
accounting policies that are in conformity with Dutch GAAP, which differs
in certain significant respects from U.S. GAAP. The differences between
Dutch GAAP and U.S. GAAP which are relevant to Elsevier are set out in note
13 to the audited financial statements of Elsevier.
(2) For the convenience of the reader, Dutch guilder amounts for the fiscal
year ended December 31, 1997 have been translated into U.S. dollars using
the Noon Buying Rate on December 31, 1997 of U.S. $0.49 per Dfl 1.00. Noon
Buying Rates are not used by Elsevier in the preparation of its financial
statements included in this Annual Report. The rates used in the
preparation of Elsevier financial statements for the fiscal year ended
December 31, 1997 were $0.51 per Dfl 1.00 for income statement items (the
average prevailing exchange rate during the year) and $0.50 per Dfl 1.00
for balance sheet items (the rate prevailing at December 31, 1997).
(3) Earnings per Elsevier Ordinary Share and dividends per Elsevier Ordinary
Share for all periods presented have been restated to give effect to the
ten for one share subdivision in respect of Elsevier Ordinary Shares, which
became effective on October 5, 1994.
(4) Under Dutch and U.S. GAAP the calculation of basic earnings per share is
based only on common stock in issue. Diluted earnings per Elsevier Ordinary
Share amounts, taking account of the effects of additional common shares
that would be outstanding if dilutive potential shares had been issued,
have not been disclosed because they are not materially different from the
respective basic earnings per Elsevier Ordinary Share amounts under either
Dutch or U.S. GAAP.
(5) The net income in 1995 includes Elsevier's share of the Reed Elsevier
combined businesses' net gain on sale of certain consumer publishing
businesses. Under U.S. GAAP, Elsevier's share of the net post tax gain was
Dfl 443 million whereas under U.K. and Dutch GAAP, its share was a net post
tax gain of Dfl 3 million, reflecting the differing accounting treatment of
intangible assets and goodwill. Basic earnings per Elsevier Ordinary Share
under U.S. GAAP includes Dfl 0.63 in respect of such gain on sale.
(6) The net income in 1997 includes Elsevier's share of the Reed Elsevier
Combined Businesses exceptional items, the most significant of which relate
to the Reed Travel Group provision for customer compensation and related
expenses and reorganization costs and the non-cash writedown of Reed Travel
Group intangible assets. Basic earnings per Elsevier Ordinary Share
includes Dfl 0.89 (loss) and Dfl 1.05 (loss) under, respectively, U.K. and
Dutch GAAP and U.S. GAAP in respect of these items; the loss under U.S.
GAAP reflects the differing accounting treatment under U.S. GAAP of
intangible assets and goodwill.
33
<PAGE>
Exchange Rates
The following table sets forth, for the periods and dates indicated,
certain information for pounds sterling expressed in U.S. dollars per
(pound)1.00. Noon Buying Rates have not been used in the preparation of the Reed
Elsevier Combined Financial Statements or the Reed International financial
statements. For a discussion of the impact of currency fluctuations on Reed
Elsevier's combined results of operations and combined financial position, see
"Management's Discussion and Analysis of Financial Condition and Result of
Operations o Reed Elsevier".
U.S. dollar per (pound)1.00
Period
----------------------------------------
Year ended December 31, End Average(1) High Low
- - - ---------------------- ----- --------- ---- ----
1993 .......................... 1.48 1.50 1.59 1.42
1994 .......................... 1.56 1.53 1.64 1.46
1995 .......................... 1.55 1.60 1.67 1.55
1996 .......................... 1.71 1.56 1.71 1.49
1997 .......................... 1.64 1.64 1.70 1.58
1998 (through March 11, 1998) . 1.67 1.64 1.67 1.61
(1) The average of the Noon Buying Rates on the last day of each month during
the relevant period.
The following table sets forth, for the periods and dates indicated,
certain information concerning the Noon Buying Rate for Dutch guilders expressed
in U.S. dollars per Dutch guilder. Noon Buying Rates have not been used by
Elsevier in the preparation of its financial statements included in this Annual
Report.
U.S. dollars per Dfl 1.00
Period
-----------------------------------------
Year ended December 31, End Average(1) High Low
- - - ---------------------- ----- --------- ---- -----
1993 .......................... 0.51 0.54 0.57 0.51
1994 .......................... 0.58 0.55 0.60 0.51
1995 .......................... 0.62 0.62 0.66 0.57
1996 .......................... 0.58 0.59 0.62 0.57
1997 .......................... 0.49 0.51 0.58 0.47
1998 (through March 11, 1998) . 0.49 0.49 0.50 0.48
(1) The average of the Noon Buying Rates on the last day of each month during
the relevant period.
Dividends
The following table sets forth, for the periods indicated, a summary of
the dividends paid per Reed International Ordinary Share. Dividends per Reed
International Ordinary Share have been calculated to give effect to the two for
one share subdivision in respect of Reed International Ordinary Shares which
became effective on May 2, 1997. For the convenience of the reader the pence
amounts have been translated at the Noon Buying Rate prevailing at each payment
date.
Year ended December 31,
-----------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ------ -----
Interim-pence ....................... 3.00 3.35 3.75 4.125 4.4
Interim -$ .......................... 0.04 0.05 0.06 0.06 0.07
Final (1997 Second interim)-pence ... 6.37 7.40 8.50 9.475 10.2
Final (1997 Second interim)-$ ....... 0.09 0.12 0.13 0.15 0.17(1)
The following table sets forth, for the periods indicated, a summary of
the dividends paid per Elsevier Ordinary Share. Dividends per Elsevier Ordinary
Share amounts for all periods have been calculated to give effect to the ten for
one share subdivision in respect of Elsevier Ordinary Shares, which became
effective on October 5, 1994. For the convenience of the reader the Dutch
guilder amounts have been translated at the Noon Buying Rate prevailing at each
payment date.
34
<PAGE>
Year ended December 31,
----------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
Interim-Dfl ......................... 0.17 0.18 0.18 0.20 0.29
Interim-$ ........................... 0.09 0.10 0.11 0.12 0.15
Final (1997 Second interim)-Dfl ..... 0.35 0.37 0.41 0.56 0.66
Final (1997 Second interim)-$ ....... 0.18 0.23 0.24 0.29 0.32(1)
(1) The second interim dividend for the year ended December 31, 1997 is
payable on May 1, 1998 (May 8, 1998 to holders of Reed International and
Elsevier ADSs). The rate prevailing at the payment date has yet to be
determined; the rate used is the Noon Buying Rate on March 11, 1998.
35
<PAGE>
ITEM 9: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
REED ELSEVIER
The following discussion is based on the combined financial information
which has been prepared in accordance with U.K. and Dutch GAAP, and which
differs in some respects from U.S. GAAP. These differences are set out in note
29 to the audited Combined Financial Statements included in this Annual Report.
The following combined financial information of Reed Elsevier should be read in
conjunction with, and is qualified by reference to the audited combined
financial information of Reed Elsevier for the years ended December 31, 1997,
December 31, 1996 and December 31, 1995 set forth in the Combined Financial
Statements included in this Annual Report. Unless otherwise stated, identified
amounts relate to the total results of the Reed Elsevier combined businesses,
including the results of discontinued operations.
General
Reed Elsevier derives its net sales principally from subscription sales,
circulation and copy sales, advertising sales and exhibition fees. In the year
ended December 31, 1997, subscriptions comprised 32% of net sales of the
continuing businesses, circulation and copy sales comprised 24%, advertising
sales comprised 24%, exhibitions comprised 9% and the other net sales comprised
11%. Subscription sales are defined as net sales derived from the periodic
distribution or update of a product which is usually prepaid, while circulation
and copy sales include all other net sales from the distribution of a product,
usually on cash or credit terms. The level of publishing-related advertising
sales has historically been tied closely to the economic cycle with changes in
the profit performance of advertisers, business confidence and other economic
factors having a high correlation with changes in the size of the market.
Subscription sales and circulation and copy sales have tended to be more stable
than advertising sales through economic cycles.
Reed Elsevier's principal geographic markets are North America, the United
Kingdom and the Netherlands. In the year ended December 31, 1997, these
geographic markets accounted for 74% of total net sales from continuing
operations. Net sales from continuing operations to each of the geographic
markets have remained relatively steady in each of the years ended December 31,
1997, December 31, 1996 and December 31, 1995. The largest geographic market is
North America, where the proportion of net sales from continuing operations over
these periods has remained at 52%. Net sales to the United Kingdom accounted for
15% of net sales from continuing operations, with net sales from continuing
operations to the Netherlands at 7%. The other geographic markets comprise the
rest of continental Europe, accounting for 14% of net sales from continuing
operations in each of the years ended December 31, 1997, December 31, 1996 and
December 31, 1995, and Asia/Pacific, which accounted for the remaining 12% of
net sales from continuing operations.
The cost profile of individual businesses within Reed Elsevier varies
widely and costs are controlled on an individual business unit basis. The two
most significant cost items for Reed Elsevier as a whole are labor costs and
paper and printing costs. Labor costs include all employment costs of employees
as well as of temporary or contracted staff. In the years ended December 31,
1997, December 31, 1996 and December 31, 1995, labor costs represented 38%, 36%
and 35%, respectively, of Reed Elsevier's total costs and paper and printing
costs represented 14%, 15% and 16%, respectively, of total costs.
Reed Elsevier's businesses perform according to a seasonal pattern, with
operating income before exceptional items being slightly higher in the first
half of the year, principally reflecting exhibition and business magazine
publishing schedules, before taking into account the timing of development
activities. The seasonality will therefore vary from year to year. In the three
years ended December 31, 1997, December 31, 1996 and December 31, 1995,
operating income before exceptional items was slightly higher in the first half
of the year, being 51%, 52% and 51% respectively of the operating income before
exceptional items for each full year, after adjusting for acquisitions.
Reed Elsevier's operating income during each of the three years ended
December 31, 1997 included net pension credits of (pound)1 million in 1997,
(pound)7 million in 1996 and (pound)6 million in 1995, arising almost entirely
from an actuarial surplus in its main U.K. pension plan. These net credits were
calculated in accordance with U.K. accounting standard SSAP 24, which governs
the amortization of such actuarial surpluses. The pension credit is allocated to
the continuing operations segments of Reed Elsevier in proportion to the
pensionable remuneration of the U.K. pension plan participants each segment
employs. See note 26 to the audited Reed Elsevier Combined Financial Statements
for further details and note 29 for the difference between accounting for
pension costs under the rules set out in SSAP 24 and under U.S. GAAP.
In previous years, "headline" figures have been presented which were
calculated in accordance with the recommendations of the Institute for
Investment Management and Research which excluded certain abnormal non trading
items. In order to provide a more meaningful measure of underlying performance,
"adjusted" figures are now presented which exclude all exceptional items. There
is no difference between the headline and adjusted bases in the comparative
period. A reconciliation of figures reported under FRS 3 to the adjusted figures
for each of the three years in the period ended December 31, 1997, is set out in
note 6 to the audited Reed Elsevier Combined Financial Statements included in
this Annual Report. As discussed in note 29 to the audited Reed Elsevier
Combined Financial Statements, U.S. GAAP does not permit the presentation of
other income measures.
36
<PAGE>
Year 2000 Compliance Program
Reed Elsevier has placed the highest priority on its Year 2000 compliance
program. This is designed to ensure that its computer operations, business
processes and products are compliant in good time for the millennium date
change. It also addresses the interaction of the business with the systems of
suppliers and customers. The scope of the program has been agreed with all the
business units, each of which has already identified the issues associated with
Year 2000 compliance, including the software and systems that will need to be
upgraded or replaced. Each business unit has established a project team to
undertake the remediation work and the Reed Elsevier Technology Group, reporting
to the Reed Elsevier Executive Committee, is co-ordinating the process at a
group level.
Reed Elsevier expects to complete the major part of its Year 2000
remediation work by the end of 1998. This will provide reasonable time in which
to test and stabilise the upgraded computers and systems. In order to ensure
that the programme remains on schedule, progress is closely monitored by the
Reed Elsevier Executive Committee.
The total costs of the compliance programme prior to the Year 2000 are
estimated to be in the order of (pound)75 million. Costs incurred in 1997
amounted to (pound)11 million. The compliance costs are expensed as incurred and
identified separately as an exceptional item. New systems and software will be
capitalized and amortized in accordance with Reed Elsevier's accounting
policies. These figures are based on the current status of the program and may
be subject to change.
Effect of Currency Translation
The Combined Financial Statements are herein expressed in pounds sterling
and are therefore subject to the impact of movements in exchange rates on the
translation of the financial information of individual businesses whose
operational currencies are other than sterling. The principal exposures are the
U.S. dollar and the Dutch guilder, both of which generally reflect Reed
Elsevier's business exposure to the United States and the Netherlands, its most
important markets outside the United Kingdom. To help protect Reed
International's and Elsevier's shareholders' equity from the effect of currency
movements, Reed Elsevier will, if deemed appropriate, hedge the foreign exchange
translation exposure by borrowing in those currencies where significant
translation exposure exists or by selling forward surplus cash flow into one of
the shareholders' currencies. Hedging of foreign exchange translation exposure
is undertaken only by the centralized treasury departments and under policies
agreed by the Audit Committees of Reed International and Elsevier. Borrowing in
the operational currency of individual businesses provides a structural hedge
for the assets in those markets and for the income realized from those assets.
The currencies of Reed Elsevier's borrowings, therefore, reflect two key
objectives, namely to minimize funding costs and to hedge currencies where it
has significant business exposure.
The currency profile of Reed Elsevier's adjusted income before taxes and
minority interests for the year ended December 31, 1997, taking account of the
currencies of the interest on its borrowings and cash over that period, is set
forth below:
Adjusted income before taxes and minority interests in each currency as a
percentage of total adjusted income before taxes and minority interests
Pounds U.S. Dutch
Sterling Dollars Guilders Other Total
-------- ------- -------- ----- -----
35% 38% 16% 11% 100%
======== ======= ======== ===== =====
Currency translation differences reduced Reed Elsevier's net sales by
(pound)232 million and operating income before exceptional items by (pound)66
million in the year ended December 31, 1997 compared to the year ended December
31, 1996.
Individual businesses within Reed Elsevier plc and ERF are subject to
foreign exchange transaction exposures caused by the effect of exchange rate
movements on their net sales and operating costs, to the extent that such net
sales and costs are not denominated in their operating currencies. These
businesses typically hedge their foreign exchange transaction exposures in order
to minimize any currency mismatch between net sales and costs. Hedging of
foreign exchange transaction exposure is the only hedging activity undertaken by
the individual businesses and may be executed internally or externally.
Individual businesses are encouraged to hedge their exposures internally at
market rates with the centralized treasury department within ERF. To minimize
hedging costs, these exposures are matched whenever possible with offsetting
exposures existing in other individual businesses. For example, a substantial
portion of Elsevier Science's subscription sales are denominated in U.S.
dollars. At the time its annual subscription prices are set, substantially all
of its U.S. dollar receipts are sold forward to ERF, fixing the value of the
U.S. dollar-denominated revenues into guilders or sterling, the two principal
operating currencies of Elsevier Science. The U.S. dollar receipts are then
resold on market terms to other individual businesses within Reed Elsevier,
requiring U.S. dollars to hedge their own exposures. When opportunities for such
matching of exposures internally do not exist, exposures may instead be hedged
externally with third parties. See note 19 to the audited Combined Financial
Statements.
Individual businesses report their treasury activities periodically to the
centralized treasury departments. The centralized treasury departments report
their activities quarterly to committees of the Boards of Reed International and
Elsevier. Both the
37
<PAGE>
individual businesses and the centralized treasury departments are subject to
periodic reviews by internal and external auditors to confirm adherence to
hedging policies and completeness and accuracy of reporting.
<TABLE>
<CAPTION>
Net Sales
Year Ended December 31,
-----------------------------------------------------------------------
1995 1996 1997
---------- ---------- % change ---------- % change
(pound) (pound) Actual Constant (pound) Actual Constant
million % million % rates rates(1) million % rates rates(2)
------- -- ------- -- ------ -------- ------- -- ------ --------
Business Segment(3)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Scientific ............... 532 15 553 16 4 6 571 17 3 15
Professional ............. 914 25 1,037 31 13 13 1,076 32 4 10
Business ................. 1,278 35 1,307 39 2 2 1,340 39 3 10
Consumer ................. 81 2 78 2 75 2
------ --- ------ --- ------ ------- ------- --- ------ ---
Continuing Operations .... 2,805 77 2,975 88 6 6 3,062 90 3 11
Discontinued Operations(4) 844 23 406 12 355 10
------ --- ------ --- ------ ------- ------- --- ------ ---
Total .................... 3,649 100 3,381 100 (7) (7) 3,417 100 1 8
====== === ====== === ====== ======= ======= === ====== ===
</TABLE>
<TABLE>
<CAPTION>
Operating Income Before Exceptional Items(5)
Year Ended December 31,
-----------------------------------------------------------------------
1995 1996 1997
---------- ---------- % change ---------- % change
(pound) (pound) Actual Constant (pound) Actual Constant
million % million % rates rates(1) million % rates rates(2)
------- -- ------- -- ------ -------- ------- -- ------ --------
Business Segment(3)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Scientific ............... 211 26 231 27 9 11 230 26 -- 11
Professional ............. 223 27 268 31 20 19 296 34 10 17
Business ................. 266 32 288 34 8 8 286 32 (1) 7
Consumer ................. 2 -- 5 1 7 1
---- --- ---- --- ------ ----- ---- --- ----- ----
Continuing Operations .... 702 85 792 93 13 13 819 93 3 12
Discontinued Operations(4) 126 15 64 7 66 7
---- --- ---- --- ------ ----- ---- --- ----- ----
Total .................... 828 100 856 100 3 4 885 100 3 11
==== === ==== === ====== ===== ==== === ===== ====
</TABLE>
(1) Represents percentage change over 1995 at constant rates of exchange,
which have been calculated using the average exchange rates for 1995.
(2) Represents percentage change over 1996 at constant rates of exchange,
which have been calculated using the average exchange rates for 1996.
(3) During 1997 Reed Elsevier's business to business publishing activities
were reorganized into three geographically focused groups, Cahners
Business Information, Reed Business Information and Elsevier Business
Information, serving North America, the United Kingdom and Continental
Europe respectively. As a result certain operations have been transferred
between the reporting segments. On the sale of IPC Magazines in January
1998 the New Scientist title was retained and has been recategorized in
the Business segment. Comparative figures have been restated accordingly.
(4) Discontinued operations, under U.K. and Dutch GAAP, relate wholly to the
Consumer segment and comprise the consumer publishing businesses divested
in 1995, IPC Magazines, excluding New Scientist, and certain operations of
Reed Books, which have been divested by the date of approval of this
Annual Report.
(5) Exceptional items are significant items within Reed Elsevier's ordinary
activities which under U.K. and Dutch GAAP are required to be disclosed
separately due to their nature, size or infrequency. Exceptional items
before tax totalled (pound)477 million (loss) in the year ended December
31, 1997, (pound)1 million (profit) in the year ended December 31, 1996
and (pound)13 million (profit) in the year ended December 31, 1995. See
note 5 to the audited Combined Financial Statements for a further
description of these items.
38
<PAGE>
Results of Operations for the Year Ended December 31, 1997
Compared to the Year Ended December 31, 1996
General. Total net sales increased by 1% to (pound)3,417 million in 1997,
compared to (pound)3,381 million in 1996. Excluding the consumer publishing
divestments, net sales of the continuing businesses increased by 3% in 1997.
Currency translation differences had a material impact in 1997, reducing net
sales from the continuing businesses by (pound)230 million. At constant rates of
exchange, net sales of the continuing businesses increased by 11% in 1997. Net
sales of businesses acquired by Reed Elsevier during 1997, the most significant
of which were MDL Information Systems Inc. and Chilton Business Group,
contributed (pound)160 million to the increase and the full year effect of
acquisitions made during 1996 contributed a further (pound)27 million at
constant exchange rates. The impact of acquisitions in both years was offset in
part by a reduction in net sales as a result of certain minor non-core
disposals. Excluding these factors, the percentage increase in net sales from
the continuing businesses at constant exchange rates was 6%.
In 1997, 24% of the continuing businesses' net sales was derived from
advertising, the same percentage as in 1996, although in absolute terms
advertising sales increased by 4% in 1997 over 1996 to (pound)737 million. Net
sales from circulation and copy sales for the continuing businesses were
(pound)741 million in 1997 as compared with (pound)732 million in 1996.
Circulation and copy sales represented 24% of net sales from continuing
businesses in 1997, as in 1996. Subscription sales for the continuing businesses
increased by 4% to (pound)977 million in 1997, as compared with (pound)943
million in 1996, and accounted for 32% of net sales for continuing businesses
for 1997 and for 1996. The most significant component of the balance was
exhibitions which accounted for 9% of net sales for continuing businesses in
1997, compared with 8% in 1996. Exhibitions generated net sales of (pound)261
million in 1997 compared with (pound)247 million in 1996.
Total operating income before exceptional items increased by 3% to
(pound)885 million in 1997, compared to (pound)856 million in 1996. Excluding
the consumer publishing divestments, operating income before exceptional items
also increased by 3%. Significant strengthening of sterling against Reed
Elsevier's other principal operating currencies, including in particular the
U.S. dollar and Dutch guilder, reduced operating income in 1997 by (pound)66
million for the full year against 1996. At constant rates of exchange, operating
income before exceptional items for the continuing businesses increased by 12%
in 1997. Operating income of businesses acquired during 1997 contributed
(pound)34 million at constant rates of exchange to the increase.
Operating margin before exceptional items in 1997 increased by 0.6
percentage points over 1996 to 25.9%. For the continuing businesses, operating
margin before exceptional items was 26.7%, an increase of 0.1 percentage points
over 1996.
The results for 1997 included net exceptional charges of (pound)477
million, comprising the estimated cost of the program to recompense advertisers
in relation to irregularities in circulation claims for certain Reed Travel
Group publications together with related expenses and reorganization costs
((pound)230 million), the non-cash write down of intangible asset values in
respect of the Reed Travel Group ((pound)250 million), acquisition related
restructuring costs ((pound)11 million), 1997 costs of the Year 2000 compliance
program ((pound)11 million), net profit on the sale of certain businesses
((pound)28 million) and costs incurred in respect of the proposed merger, now
abandoned, with Wolters Kluwer ((pound)3 million). The net tax credit thereon
amounted to (pound)76 million. Further details are set out in note 5 to the
audited Combined Financial Statements included in this Annual Report. The
results for 1996 included exceptional items of (pound)1 million, comprising the
net exceptional profit arising from the disposal of surplus property interests,
on which no tax was payable.
Operating income was (pound)408 million in 1997, compared to (pound)857
million in 1996, a reduction of (pound)449 million reflecting the inclusion of
the exceptional items. Net interest expense increased to (pound)62 million in
1997, compared to (pound)51 million in 1996. This reflected the impact of an
increased level of acquisition spending during 1997 compared to 1996 in part
offset by a strong free cash flow and net exceptional receipts of (pound)54
million. The net interest expense also reflects the interest yield differentials
between short term cash investments and long term fixed rate borrowings. Net
interest cover, the number of times that operating profit before interest and
exceptional items covers net interest expense, was 14 times in 1997, which
compared to 17 times in 1996.
Income before taxes and minority interests was (pound)346 million in 1997
as compared with (pound)806 million in 1996. On an adjusted basis, excluding the
effect of exceptional items, income before taxes and minority interests was
(pound)823 million in 1997, compared to (pound)805 million in 1996, an increase
of (pound)18 million or 2%. The exclusions from FRS 3 profit to calculate the
adjusted figures were the net exceptional pre-tax charges of, in 1997,
(pound)477 million (loss) and in 1996, (pound)1 million (profit). The
significant strengthening of sterling reduced adjusted income before taxes and
minority interests by (pound)66 million. At constant exchange rates adjusted
income before taxes and minority interests was (pound)886 million in 1997, an
increase of (pound)81 million or 10%.
The effective tax charge for Reed Elsevier in 1997 was 39.9% compared to
24.9% in 1996, reflecting the impact of the exceptional items in 1997. Excluding
exceptional items the underlying rate was 26.0% compared to 25.0% in 1996. This
rate is lower than the standard rates in Reed Elsevier's major operating
territories due mainly to the tax amortization of acquired intangible assets
(predominantly in the United States) and beneficial features of the Reed
Elsevier legal structure. The increase of 1.0 percentage points in the
underlying tax rate largely reflects the impact of incremental earnings taxed at
the standard rates.
Net income of Reed Elsevier for 1997 was (pound)207 million, compared to
(pound)604 million in 1996, a reduction of (pound)397 million. Adjusted net
income excluding exceptional items was (pound)608 million in 1997, compared to
(pound)603 million in 1996, which represents an increase of (pound)5 million or
1%. At constant exchange rates the increase in adjusted net income was 9%.
Scientific. Net sales for the Scientific segment were (pound)571 million
in 1997, an increase of (pound)18 million or 3% compared to 1996. Currency
translation differences reduced net sales by (pound)63 million, giving an
increase in net sales over 1996 for the Scientific segment of 15% at constant
exchange rates. Net sales from acquisitions made during 1997, principally MDL
Information Systems Inc. ("MDL"), a provider of scientific information
management systems in the life science and chemical industries,
39
<PAGE>
contributed (pound)40 million to the net sales increase at constant exchange
rates. Excluding 1997 acquisitions and the disposal of several medical titles in
1996, the increase in net sales over 1996 was 8% at constant rates of exchange.
Operating income before exceptional items for the Scientific segment
declined by (pound)1 million to (pound)230 million in 1997. Excluding currency
translation differences, which reduced operating income by (pound)27 million,
the increase in operating income over 1996 for the Scientific segment was 11%.
Operating income before exceptional items for scientific publishing
increased by 12% at constant exchange rates in 1997, driven by strong journal
sales, with subscription renewals remaining over 95%, and the acquisition of
MDL. Excluding the impact of acquiring the lower margin MDL business operating
margin was maintained, whilst further investment was made in pursuing Elsevier
Science's electronic strategy, with an increased level of product innovation,
further development of electronic distribution channels and increased investment
in the operational infrastructure to support these initiatives.
Operating income before exceptional items for medical publishing grew by
9% in 1997 at constant rates of exchange, with particularly good contributions
from Excerpta Medica and The Lancet. Acquisitions made by Editions Scientifiques
et Medicales Elsevier and of Bugamor, a medical communications business based in
the Netherlands, contributed to this result.
Professional. Net sales for the Professional segment were (pound)1,076
million in 1997, an increase of (pound)39 million or 4% compared to 1996.
Currency translation differences reduced net sales by (pound)65 million. At
constant rates of exchange the increase in net sales over 1996 for the
Professional segment was 10%. Net sales from acquisitions made during 1997,
principally the legal titles acquired from the Thomson Corporation, contributed
(pound)28 million to the net sales increase at constant rates. Excluding 1997
acquisitions and the full year effect of the Tolley acquisition in 1996, the
increase in net sales was 7% at constant exchange rates.
Operating income before exceptional items for the Professional segment
increased by (pound)28 million or 10% to (pound)296 million in 1997, compared to
(pound)268 million in 1996. Excluding currency translation differences, which
reduced operating income by (pound)17 million, the increase in operating income
before exceptional items over 1996 for the Professional segment was 17%.
Excluding acquisitions, the increase in operating income before exceptional
items was 8% at constant exchange rates.
In legal publishing, the increase in operating income before exceptional
items in 1997 was 20% at constant rates of exchange, driven by a strong
performance by the U.K. business, the full year effect of the Tolley acquisition
and the impact of acquisitions made by Editions du Juris-Classeur in France.
Excluding acquisitions, the increase in operating income before exceptional
items was 13% at constant exchange rates.
Operating income before exceptional items at LEXIS-NEXIS grew by 19% at
constant exchange rates in 1997, including the full year effect of the 1996
investment in the Shepard's joint venture and the acquisition in 1997 of a
number of titles acquired from the Thomson Corporation. Excluding acquisitions,
the increase in operating income before exceptional items was 7% driven by
strong revenue growth and efficiency improvements at Martindale-Hubbell, LEXIS
Law Publishing and in the online business, offset in part by an increased level
of product and infrastructure investment, data development and customer service
improvements.
Reed Educational & Professional Publishing reported a 5% decline in its
operating income before exceptional items in 1997 at constant exchange rates,
with strong revenue driven growth from the core businesses of Heinemann
Educational, Ginn and Rigby U.S. offset by one-off costs and weak market
conditions that impacted Butterworth-Heinemann and Heinemann English Language
Teaching, which was sold in December 1997. The educational activities in the
Netherlands performed well in 1997 in favorable market conditions and increased
its operating income before exceptional items by 45% at constant exchange rates.
Business. Net sales for the Business segment were (pound)1,340 million in
1997, an increase of (pound)33 million or 3% compared to 1996. Currency
translation differences reduced net sales by (pound)102 million, resulting in an
increase in net sales over 1996 for the Business segment of 10% at constant
exchange rates. Net sales from acquisitions made during 1997, principally the
Chilton Business Group in the United States and Colofon in the Netherlands,
contributed (pound)92 million to the net sales increase at constant rates.
Excluding acquisitions and the impact of a number of non-core disposals, the
increase in net sales was 5% at constant exchange rates.
Operating income before exceptional items for the Business segment
declined by (pound)2 million to (pound)286 million in 1997, compared to
(pound)288 million in 1996. Excluding currency translation differences, which
reduced operating income before exceptional items by (pound)21 million, the
increase in operating income before exceptional items over 1996 for the Business
segment was 7%. Before acquisitions, the impact of a number of non-core
disposals and the continued decline in travel publishing sales and further
investment in that business, operating income before exceptional items increased
by 11% at constant exchange rates.
Exhibitions reported a 12% increase in operating income before exceptional
items in 1997 at constant exchange rates, driven by strong growth from annual
shows in North America, the United Kingdom and Japan. The impact of several
major non-annual shows not reporting in 1997 was offset by good growth from new
launches and acquisitions in the travel and entertainment markets.
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In U.S. business magazine publishing, Cahners Business Information
increased its operating income before exceptional items by 14% in 1997 at
constant exchange rates, including a first time contribution from Chilton. The
impact of strong underlying revenue growth, particularly in the Entertainment
and Electronic markets, lower paper prices and control of overhead costs was
constrained by weakness in the Food Services & Processing and Publishing markets
and further investment in print and electronic products, and in editorial,
production and sales infrastructures.
In U.K. business magazine publishing, Reed Business Information increased
its operating income before exceptional items by 17% in 1997 at constant
exchange rates. Excluding the impact of several minor acquisitions and non-core
disposals, operating income before exceptional items increased by 10%,
reflecting strong advertising revenue growth across its leading titles.
Recruitment advertising, in particular, remained buoyant in favorable market
conditions. This was achieved whilst higher levels of investment were made in
new electronic services.
In continental Europe business magazine publishing, Elsevier Business
Information increased its operating income before exceptional items by 43% in
1997 at constant exchange rates, driven by the acquisition of Colofon at the
start of 1997 and several minor acquisitions during the second half of the year.
Excluding acquisitions, growth in operating income before exceptional items
remained strong at 13%, reflecting good revenue growth in the Netherlands,
further efficiency improvements and the continued control of overhead costs.
In travel publishing, excluding Utell, operating income for 1997 fell by
19% at constant exchange rates before exceptional items. This reflected a
continued decline of hard copy revenue, with growth in electronic product sales
unable to make up the shortfall, in addition to an increased level of investment
in the business. During 1997, Reed Travel Group ("RTG") announced a recompense
plan for advertisers affected by irregularities in circulation claims in certain
of its publications. A provision of (pound)230 million, less tax relief of
approximately (pound)87 million, in respect of this and related expenses and
reorganization costs has been made. Taking into account the prospective trading
performance of the RTG businesses, a non-cash write down of the related
intangible asset values totalling (pound)250 million was also made in 1997. The
provision and the write down were shown as exceptional items charged to
operating income. In December 1997, Utell, the hotel reservation business,
merged with Anasazi Inc., a leading supplier of technology and marketing
services to the hospitality industry, to form REZsolutions Inc. in which Reed
Elsevier has a 67% non controlling interest.
Consumer--Continuing operations. Net sales for the continuing Consumer
segment were (pound)75 million in 1997, a reduction of (pound)3 million compared
to 1996. Operating income before exceptional items for the continuing Consumer
segment increased by (pound)2 million to (pound)7 million in 1997, compared to
(pound)5 million in 1996. Currency translation differences had no material
impact on net sales or operating income before exceptional items.
Consumer--Discontinued operations. Net sales for the discontinued
operations were (pound)355 million in 1997, a reduction of (pound)51 million
compared to 1996, reflecting the timing of disposals of activities within Reed
Books during 1997. Currency translation differences reduced net sales by
(pound)2 million. Operating income before exceptional items for the discontinued
operations increased by (pound)2 million to (pound)66 million in 1997, compared
to (pound)64 million in 1996. The increase in operating income before
exceptional items reflects growth from IPC Magazines, which was sold in January
1998, less the contribution lost from disposals during 1997 at Reed Books.
Currency translation differences had no material impact on operating income
before exceptional items. In consumer magazine publishing, IPC Magazines
increased its operating income before exceptional items by 10% in 1997 at
constant exchange rates, driven by a combination of growth in revenue and tight
control of costs.
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Results of Operations for the Year Ended December 31, 1996
Compared to the Year Ended December 31, 1995
General. As a result of the divestment in 1995 of the majority of consumer
publishing businesses, total net sales fell by 7% to (pound)3,381 million in
1996, compared to (pound)3,649 million in 1995. Excluding the consumer
publishing divestments, net sales of the continuing businesses increased by 6%
in 1996. Net sales of businesses acquired by Reed Elsevier during 1996
contributed (pound)18 million to the increase and the full year effect of
acquisitions made during 1995 contributed a further (pound)17 million. The
impact of acquisitions in both years was offset by a reduction in net sales as a
result of certain minor non-core disposals. Currency translation differences had
no material impact on total net sales.
In 1996, 24% of the continuing businesses' net sales was derived from
advertising, compared to 25% in 1995 for the continuing businesses, although in
absolute terms advertising sales increased by 2% in 1996 over 1995 to (pound)707
million. Net sales from circulation and copy sales were (pound)732 million in
1996 as compared with (pound)648 million for the continuing businesses in 1995.
Circulation and copy sales represented 24% of net sales from continuing
businesses in 1996. Subscription sales increased by 6% to (pound)943 million in
1996, as compared with (pound)893 million for the continuing businesses in 1995,
and accounted for 32% of the continuing businesses' net sales for the year. The
most significant component of the balance was exhibitions which accounted for 8%
of total net sales in 1996. Exhibitions generated net sales of (pound)247
million in 1996 compared with (pound)245 million in 1995.
Total operating income before exceptional items increased by 3% to
(pound)856 million in 1996, compared to (pound)828 million in 1995. Excluding
the consumer publishing divestments, operating income before exceptional items
of the continuing businesses increased by 13% in 1996. Operating income of
businesses acquired and interests acquired in associated undertakings during
1996 contributed (pound)3 million to the increase, which, together with the full
year effect of acquisitions made during 1995, was offset by a reduction in
operating income as a result of currency translation differences and certain
minor non-core disposals. Significant strengthening of sterling against the U.S.
dollar and Dutch guilder in the second half of 1996 reversed currency
translation gains reported in the first half and reduced operating income by
(pound)3 million for the full year against 1995.
Operating margin in 1996 increased by 2.6 percentage points over 1995 to
25.3%, partly due to the disposal of the lower margin consumer businesses. For
the continuing operations, operating margin improved by 1.6 percentage points.
The results for 1996 included exceptional items of (pound)1 million,
comprising the net exceptional profit arising from the disposal of surplus
property interests, on which no tax is payable. The results for 1995 included
exceptional items of (pound)13 million, comprising the profit and loss on the
completed sales of the consumer publishing businesses of (pound)381 million
(before taxation of (pound)11 million) and provision for losses on the intended
sale of businesses of (pound)368 million.
Operating income was (pound)857 million in 1996, compared to (pound)841
million in 1995, an increase of (pound)16 million or 2%. Net interest expense
reduced to (pound)51 million in 1996, compared to (pound)105 million in 1995.
This reflected a strong free cash flow, the receipt of exceptional divestment
proceeds from consumer publishing businesses sold in 1995 and realisation in
1996 of other non-core businesses and surplus properties.
Income before taxes and minority interests was, therefore, (pound)806
million in 1996 as compared with (pound)736 million in 1995, a 10% increase.
However, part of this increase was due to exceptional items, and, on an adjusted
basis, income before taxes and minority interests was (pound)805 million in
1996, compared to (pound)723 million in 1995, an increase of (pound)82 million
or 11%. The exclusions from FRS 3 profit to calculate the adjusted figures were,
in 1996, the net exceptional profit arising from the divestment of surplus
properties, and, in 1995, the net profit on the completed sales of the consumer
publishing businesses and provisions for losses on the intended sale of the
consumer books publishing business and other non-core businesses.
The effective tax charge for Reed Elsevier in 1996 was 24.9%, compared to
24.6% in 1995. Excluding Elsevier's entitlement to a tax credit, under the U.K.
imputation system, from a dividend paid to it by Reed Elsevier plc and the
exceptional items in both years, the underlying tax rate for 1996 was 25.3%
compared to 24.2% in 1995. This rate is lower than the standard rates in Reed
Elsevier's major operating territories due mainly to the tax amortization of
acquired intangible assets (predominantly in the United States) and beneficial
features of the Reed Elsevier legal structure. The increase of 1.1 percentage
points in the underlying tax rate largely reflects the impact of incremental
earnings being taxed at the standard rates of taxation in Reed Elsevier's
operating territories.
Net income of Reed Elsevier for 1996 was (pound)604 million, compared to
(pound)554 million in 1995, an increase of (pound)50 million or 9%. Adjusted net
income was (pound)603 million in 1996, compared to (pound)552 million in 1995,
which represents an increase of (pound)51 million or 9%.
Scientific. Net sales for the Scientific segment were (pound)553 million
in 1996, an increase of (pound)21 million or 4% compared to 1995. Currency
translation differences reduced net sales by (pound)9 million. At constant rates
of exchange, an increase in net sales of 8% from scientific publishing was
partially offset by a reduction in net sales from medical publishing, primarily
due to the disposal of certain non-core medical titles. Excluding these
disposals, net sales in 1996 increased by (pound)35 million or 7% over 1995 at
constant rates of exchange.
Operating income for the Scientific segment increased by 9% to (pound)231
million in 1996, compared to (pound)211 million in 1995. Excluding currency
translation differences, which reduced operating income by (pound)5 million, and
the medical title disposals, the increase in operating income was 11%.
Operating income for scientific publishing grew by 12% at constant rates
of exchange. Journal subscription net sales remained strong, with subscription
renewal rates remaining over 95%, while the take up of electronic products,
although still modest, was encouraging. Operating margins continued to improve,
driven by control of costs and further operational
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<PAGE>
efficiencies, despite further investment in the operational infrastructure as
Elsevier Science develops its electronic publishing activities.
Operating income for medical publishing grew by 26% at constant rates of
exchange, in large part reflecting the management action taken over the past two
years to refocus the business on its strong market niches. This included the
disposal of 13 non-core journals in the United States. Excerpta Medica reported
particularly good growth in the United States and the United Kingdom, while
Editions Scientifiques et Medicales Elsevier in France benefited from the 1995
restructuring of its sales force and several new launches.
Professional. Net sales for the Professional segment were (pound)1,037
million in 1996, an increase of (pound)123 million or 13% compared to 1995. Net
sales from acquisitions made during 1996, principally Tolley, the U.K. legal and
tax publisher, contributed (pound)12 million to the net sales increase, while
currency translation differences added a further (pound)8 million. Excluding
both these factors, the full year effect of acquisitions in 1995 and disposals
in 1995, the increase in net sales was 10%. From January 1, 1997, the
Professional segment excludes the bibliographic businesses which were
transferred to the Business segment. The remaining Reed Reference businesses,
primarily Martindale-Hubbell, were integrated into LEXIS-NEXIS. Numbers have
been restated to reflect these movements.
Operating income for the Professional segment increased by 20% in 1996 to
(pound)268 million, compared to (pound)223 million in 1995. Currency translation
differences increased operating income by (pound)2 million. Acquisitions in the
Professional segment in 1996 contributed a further (pound)2 million to the
increase in operating income, including one months contribution from Shepard's,
a joint venture with The Times Mirror Company. The net gain in 1996 from
currency translation differences and acquisitions was matched by disposal gains
in 1995.
In legal publishing, the increase in operating income was 17% at constant
rates of exchange, with net sales driving growth across all markets, reflecting
the continued success of recent product launches, strong margin growth from
Editions du Juris-Classeur and further improvement in profitability at Giuffre.
Excluding the acquisition during 1996 of Tolley, the full year effect of 1995
acquisitions, including the outstanding interest in the French legal publisher
Litec, and the profit from the disposal of the Australian Tax List in 1995, the
increase in net income was 19%.
Operating income at LEXIS-NEXIS increased by 25% at constant rates of
exchange in 1996, driven by strong growth in net sales across all markets, from
both new and existing customers. Net sales increased by 10% at constant rates of
exchange, with the online business market in particular, maintaining its rapid
growth. Operating margin improved further, reflecting continued improvements to
the cost structure and the benefits of further integration of activities. The
acquisition, at the end of November 1996, of a 50% interest in Shepard's, made a
small contribution to the increase in net income.
At Reed Educational and Professional Publishing, operating income was up
by 11% at constant rates of exchange in 1996. Despite flat market conditions in
the United Kingdom, both Heinemann and Ginn reported growth at Primary level
through their strong positions in the core curriculum areas. Heinemann also
reported strong growth at Secondary level through new publishing for the
National Curriculum. The tuition activities in the Netherlands and Belgium
increased operating income by 14% at constant rates of exchange, helped by
improving market conditions.
Business. Net sales for the Business segment were (pound)1,307 million in
1996, an increase of (pound)29 million or 2% compared to 1995. The contribution
to net sales from several minor acquisitions made during 1996 and the full year
effect of acquisitions made during 1995 was offset by the impact of a number of
non-core disposals, principally First Marketing Company in the United States.
Currency translation differences had no material impact on net sales. From
January 1, 1997, the Business segment includes bibliographic businesses which
were formerly part of Reed Reference Publishing. Numbers have been restated to
reflect the transfer.
Operating income for the Business segment increased by 8% to (pound)288
million in 1996, compared to (pound)266 million in 1995. Strong growth from the
magazine publishing businesses and exhibitions was partially offset by a
continued decline in hard copy travel publishing sales. The reduction in
operating income from non-core disposals was matched by gains from a number of
minor acquisitions and non-recurring restructuring costs in travel publishing.
Currency translation differences had no material impact on operating income.
Exhibitions reported a 14% growth in operating income at constant rates of
exchange in 1996, driven by strong underlying results in Europe and North
America and the favorable impact of cycling in Asia Pacific. Strong growth from
the MIDEM international events in France continued, but there was some weakness
in the domestic shows in France and Belgium. Due to the timing of the
acquisition in 1995 of the Australian exhibition operations of the Thomson
Corporation and of the 1996 additions, acquisitions had no material impact on
net income.
In U.S. business magazine publishing, Cahners Business Information
increased operating income by 12% in 1996 at constant exchange rates, despite
increased investment in online initiatives. The Entertainment, Electronics and
Printing & Packaging groups performed particularly strongly, as did Books,
whilst all groups benefited from reorganization of the organizational structure
to focus on end markets.
In U.K. business magazine publishing, operating income at Reed Business
Publishing and Reed Information Services, which have now merged to form Reed
Business Information, increased by 24%, driven by strong growth in advertising
sales, most notably in recruitment. The benefit from several minor acquisitions
was offset by the impact of non-core disposals.
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In continental Europe business magazine publishing, operating income for
Elsevier Business Information, encompassing Misset and Bonaventura's businesses
publications, increased by 15% in 1996, reflecting improved market conditions
and recent product launches.
RTG's operating income for 1996 fell by 9%, excluding the effect of
disposals and 1995 restructuring costs, reflecting the shift in marketing
budgets of airlines and hoteliers away from traditional agency and corporate
distribution channels to `direct to customers' channels. Underlying net sales
were down 1%, with good growth from Utell and electronic products at Reed Travel
Publishing, unable to compensate for the continued decline in hard copy and
transfer connection sales.
Consumer-Continuing Operations. Net sales for the continuing Consumer
segment were (pound)78 million in 1996, compared to (pound)81 million 1995. Net
sales were down 4%, as the Reed Books publishing program was refocussed.
Operating income for the continuing Consumer segment increased by (pound)3
million to (pound)5 million in 1996. Good growth from Reed Books, albeit from a
very low 1995 base, was partially offset by a lower contribution from Book Club
Associates, which suffered from intensified competition in its markets. Currency
translation differences had no material impact on net sales or operating income.
Consumer-Discontinued Operations. Net sales for the discontinued
operations were (pound)406 million in 1996, compared to (pound)844 million in
1995, reflecting the impact of the consumer divestments in 1995. In consumer
magazine publishing, IPC Magazines reported a 2% increase in net sales in 1996.
Advertising sales increased by 6% with a greater improvement in the second half
of the year, whilst circulation sales were generally flat. Currency translation
differences reduced net sales by (pound)2 million. Operating income for the
discontinued operations was (pound)64 million in 1996, compared to (pound)126
million in 1995. At IPC Magazines, operating income increased by 12% in 1996
driven by improving advertising conditions and the impact of a number of minor
acquisitions and profits on disposal of titles.
Liquidity and Capital Resources
Reed Elsevier's businesses require relatively low levels of investment in
both working capital and tangible fixed assets. The net cash inflow from
operating activities is normally more than adequate to cover Reed Elsevier's
requirements to finance working capital and investments in tangible fixed
assets. Reed Elsevier's combined net cash inflow from operating activities
before exceptional items in the years ended December 31, 1997, 1996 and 1995
amounted to (pound)947 million, (pound)939 million and (pound)942 million,
respectively. In each of these years, net cash inflow from operating activities
before exceptional items for Reed Elsevier exceeded operating income before
exceptional items. Net cash inflow from operating activities before exceptional
items is stated after working capital movements and adjusting for non-cash
items, but excludes payments to acquire tangible fixed assets, the proceeds from
sales of investments and tangible and intangible fixed assets, non-operating
exceptional items and payments against acquisition provisions.
The receipt in advance of substantial subscription payments for scientific
journals and exhibition fees results in financing which exceeds the requirements
for Reed Elsevier's other businesses. The excess of financing amounted to
(pound)141 million at December 31, 1997 and (pound)182 million at December 31,
1996. Expenditure on tangible fixed assets amounted to (pound)121 million,
(pound)115 million and (pound)124 million in the years ended December 31, 1997,
1996 and 1995, respectively.
During 1997, Reed Elsevier paid a total of (pound)726 million for
acquisitions, including (pound)7 million deferred payments in respect of
acquisitions made in prior years. The largest acquisitions in 1997 were the
purchase of MDL Information Systems Inc., for $320 million ((pound)195 million)
and Chilton Business Group for $447 million ((pound)273 million). All payments
were financed by net cash inflow from operating activities, available cash
resources and commercial paper borrowings. Exceptional net inflows of (pound)54
million were received in 1997, comprising the net proceeds from the disposal of
businesses offset by amounts paid in respect of acquisition integration costs,
Year 2000 compliance, the Reed Travel Group recompense plans and the proposed
merger, now abandoned, with Wolters Kluwer.
During 1996, Reed Elsevier paid a total of (pound)316 million for
acquisitions, including (pound)8 million deferred payments in respect of
acquisitions made in prior years. The largest acquisitions in 1996 were the
purchase of a 50% interest in Shepard's, a U.S. publisher of legal citations,
and Tolley, a U.K. legal and tax publisher. All payments were financed by net
cash inflow from operating activities, available cash resources and commercial
paper borrowings. Exceptional proceeds of (pound)335 million, after costs and
other expenses, were received in 1996 relating to the final tranche of proceeds
from the divestment in 1995 of the consumer publishing businesses. In addition
during 1996 exceptional net proceeds of (pound)59 million and (pound)62 million
were received from the sales of other non-core businesses and surplus property
interests respectively.
At December 31, 1997, Reed Elsevier had short term investments and cash of
(pound)844 million. At such date, Reed Elsevier also had short term borrowings
of (pound)785 million and long term borrowings of (pound)689 million. The short
term investments and cash were held mainly in U.S. dollars, sterling and Dutch
guilders while the short term borrowings were denominated mainly in U.S. dollars
and sterling and the long term borrowings in U.S. dollars. The significant U.S.
dollar borrowings are consistent with Reed Elsevier's policy of borrowing in
those currencies where significant translation exposure exists and provide a
structural hedge for the income realized from the U.S. businesses. Significant
external borrowings by any of the entities within Reed Elsevier are generally
guaranteed jointly and severally by Reed International and Elsevier. During 1997
a maturing $150 million Eurobond, $80 million of maturing privately placed
medium term notes and (pound)7 million of loan stock were redeemed. During 1996,
no new long term borrowings were issued and a maturing $125 million Eurobond was
redeemed.
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Short term borrowings consist principally of $479 million ((pound)289
million) of short term notes issued under Reed Elsevier Inc.'s U.S. commercial
paper program, which is supported by committed credit facilities. A further
significant component as at December 31, 1997 was a short term bank loan of
(pound)255 million which was repaid during January 1998. The balance of short
term borrowings consists of short term notes issued under Elsevier SA's
Eurocommercial paper program, bank borrowings and other loan stock. As of
December 31, 1997, Reed Elsevier had available a committed multicurrency
facility of $1 billion ((pound)603 million) with a remaining maturity in excess
of 4 years, of which (pound)48 million was utilized.
At December 31, 1997, Reed Elsevier plc's subsidiary, Reed Elsevier Inc.,
had the following long term borrowings, jointly and severally guaranteed by Reed
International and Elsevier: $200 million ((pound)121 million) Eurobonds maturing
in 1999, $20 million ((pound)12 million) of privately placed notes issued under
Reed Elsevier Inc.'s U.S. medium term note program maturing in 1999, $100
million ((pound)60 million) privately placed notes maturing in 2000, $125
million ((pound)76 million) privately placed notes maturing in 2003 and $150
million ((pound)90 million) privately placed notes maturing in 2023. At December
31, 1997, Reed Elsevier plc's subsidiary, Reed Elsevier Capital Inc., had
outstanding $150 million ((pound)90 million) of public notes maturing in 2000,
$150 million ((pound)90 million) of public notes maturing in 2005 and $150
million ((pound)90 million) of public debentures maturing in 2025, all of which
debt is fully, unconditionally jointly and severally guaranteed by Reed
International and Elsevier. At December 31, 1997, Reed Elsevier plc's
subsidiary, Reed (Nederland) NV, had outstanding Dfl 125 million ((pound)37
million) privately placed bonds maturing in 1999, of which Dfl 60 million is
swapped into $35.8 million ((pound)22 million). These bonds are also jointly and
severally guaranteed by Reed International and Elsevier. The balance of long
term borrowings are finance leases and bank borrowings. At December 31, 1997,
the weighted average maturity of Reed Elsevier plc's long term gross debt was 10
years.
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REED INTERNATIONAL
The following discussion is based on the audited consolidated financial
statements of Reed International for the years ended December 31, 1997, December
31, 1996, and December 31, 1995. The consolidated financial statements have been
prepared in accordance with U.K. GAAP, which differs in some respects from U.S.
GAAP. The differences are set out in note 17 to the audited consolidated
financial statements of Reed International included in this Annual Report. Per
share amounts have been restated to take account of the two for one share
subdivision which became effective on May 2, 1997.
Net income for Reed International was (pound)90 million for the year ended
December 31, 1997, compared to (pound)302 million for the year ended December
31, 1996 and (pound)277 million for the year ended December 31, 1995. This
represents a decrease over the prior year of 70% (1996: 9% increase). The
decrease reflects Reed International's share of the combined businesses'
exceptional items and the impact of a stronger sterling on the translation of
the earnings of non U.K. Reed Elsevier businesses. Earnings per Reed
International Ordinary Share for the years ended December 31, 1997, 1996 and
1995 were 7.9 pence, 26.6 pence and 24.6 pence, respectively. The financial
statements of Reed International reflect Reed International's status since the
Merger as a holding company. Reed International's 50% direct interest in the
Reed Elsevier combined businesses and its 5.8% indirect interest in Elsevier are
accounted for on an equity basis. A full discussion of the operating results of
the Reed Elsevier combined businesses is set out under "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Reed Elsevier".
The net income for Reed International for the years ended December 31,
1997, 1996 and 1995 comprises 50% of the net income of the Reed Elsevier
combined businesses and 5.8% of Elsevier's net income less a dividend
equalization adjustment. Pursuant to arrangements established by Reed
International and Elsevier at the time of the Merger, dividends paid to Reed
International and Elsevier shareholders are equalized at the gross level,
inclusive of the benefits of the U.K. tax credit (currently 20%, reducing to 10%
on April 6, 1999) received by certain Reed International shareholders. An
adjustment is required in the statutory accounts of Reed International to
equalize the benefit of the tax credit between the two sets of shareholders of
Reed International and of Elsevier in accordance with the equalization
agreement. This equalization adjustment arises only on dividends paid by Reed
International to its shareholders and it reduces the statutory attributable
earnings of Reed International by 47.1% of the amount of the tax credit, in the
1997, 1996 and 1995 fiscal years this amounted to (pound)20 million, (pound)18
million and (pound)16 million respectively.
Reed International's shareholders' equity at December 31, 1997 and
December 31, 1996 was (pound)790 million and (pound)1,096 million, respectively.
These amounts represent Reed International's 50% share of shareholders' equity
of the Reed Elsevier combined businesses plus the 5.8% share of Elsevier's
shareholders' equity. The decrease in shareholders' equity at December 31, 1997
principally reflects Reed International's share in the combined businesses'
retained loss, after dividends paid and payable, together with its share of
goodwill written off on acquisitions.
In respect of 1997, 1996 and 1995, Reed International declared a total
dividend, net of the associated U.K. tax credit, of 14.6 pence, 13.6 pence and
12.25 pence, respectively, per Reed International Ordinary Share. The equivalent
gross dividends, including the associated U.K. tax credit, were 18.25 pence,
17.0 pence and 15.3 pence for the years ended December 31, 1997, 1996 and 1995,
respectively.
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ELSEVIER
The following discussion is based on the audited financial statements of
Elsevier for the years ended December 31, 1997, December 31, 1996 and December
31, 1995. The financial statements have been prepared in accordance with Dutch
GAAP, which differs in some respects from U.S. GAAP. The differences are set out
in note 13 to the audited financial statements of Elsevier included in this
Annual Report.
Net income for Elsevier was Dfl 330 million for the year ended December
31, 1997 compared to Dfl 794 million for the year ended December 31, 1996 and
Dfl 701 million for the year ended December 31, 1995. These amounts represent a
decrease over the prior year of 58% (1996: 13% increase). The decrease reflects
Elsevier's share of the combined businesses' exceptional items: partially offset
by the impact of a weaker guilder principally against sterling and the U.S.
dollar. Earnings per Elsevier Ordinary Share for the years ended December 31,
1997, 1996 and 1995 were Dfl 0.47, Dfl 1.13 and Dfl 1.00 respectively.
Net income represents Elsevier's 50% share in the net income of the Reed
Elsevier combined businesses, translated into guilders at the average rate for
1997 of Dfl 3.19 per (pound)1.00 (1996: Dfl 2.63 per (pound)1.00; 1995: Dfl 2.53
per (pound)1.00). These exchange rates are based on the average of the daily
closing rates throughout the year. The financial statements of Elsevier reflect
Elsevier's status since the merger as a holding company. Elsevier's 50% interest
in the Reed Elsevier combined business is accounted for on an equity basis. A
full discussion of the operating results of the Reed Elsevier combined
businesses is set out under "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Reed Elsevier".
Elsevier's shareholders' equity at December 31, 1997 and December 31, 1996
was Dfl 2,495 million and Dfl 3,065 million, respectively. These amounts
represent Elsevier's 50% share of the shareholders' equity of the Reed Elsevier
combined businesses, translated into guilders at the appropriate period and
exchange rates. These rates were Dfl 3.34 per (pound)1.00 at December 31, 1997
(1996: Dfl 2.96 per (pound)1.00) . The decrease in shareholders' equity at
December 31, 1996 principally reflects Elsevier's share of the combined
businesses' retained loss, after dividends paid and payable, together with its
share of goodwill written off on acquisitions partially offset by favorable
exchange translation differences.
In respect of 1997, 1996 and 1995, Elsevier declared dividends payable per
Elsevier Ordinary Share of Dfl 0.95, Dfl 0.76 and Dfl 0.59. Under the terms of
an agreement entered into at the time of the Merger, Reed International and
Elsevier both agreed to pay equivalent gross dividends, taking into account and
including, in the case of Reed International, the associated U.K. tax credit.
The 1997 dividend per Elsevier Ordinary Share was, therefore, equivalent to the
Reed International gross dividend on 1.538 of a Reed International Ordinary
Share translated at Dfl 3.38 per (pound)1.00, which was the average exchange
rate over the period of five business days commencing with the tenth business
day prior to the announcement of the first and second interim dividends in 1997.
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ITEM 9A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
REED ELSEVIER
Reed Elsevier's primary market risk exposures are to interest rate
fluctuations and to exchange rate movements. Net interest expense is exposed to
interest rate fluctuations on borrowings, cash and short term investments.
Upward fluctuations in interest rates increase the interest cost of floating
rate borrowings whereas downward fluctuations in interest rates decrease the
interest return on floating rate cash deposits and short term investments. Fixed
rate borrowings are protected against upward fluctuations in interest rates but
do not benefit from downward fluctuations. In addition, Reed Elsevier companies
engage in foreign currency denominated transactions and are subject to exchange
rate risk on such transactions.
Reed Elsevier seeks to limit these risks by means of financial
instruments, including interest rate swaps, forward rate agreements and forward
foreign exchange contracts. Reed Elsevier only enters into financial instruments
to hedge (or reduce) the underlying risks described above, and therefore has no
net market risk on financial instruments held at the end of the year. Reed
Elsevier does, however, have a credit risk from the potential non-performance by
the counterparties to these financial instruments, which are unsecured. The
amount of this credit risk is normally restricted to the amount of the hedge
gain and not the principal amount being hedged. This credit risk is controlled
by means of regular credit reviews of these counterparties and of the amounts
outstanding with each of them. Reed Elsevier does not anticipate non-performance
by the counterparties, which are principally licensed commercial banks and
investment banks with strong long term credit ratings.
Reed Elsevier enters into interest rate swaps and forward rate agreements
to hedge the effects of fluctuating interest rates on borrowings, cash and short
term investments. Interest rate swaps and forward rate agreements limit the
risks of fluctuating interest rates by allowing Reed Elsevier to fix the
interest rate on a notional principal amount equal to the principal amount of
the underlying floating rate cash, short term investments or borrowings being
hedged. Since Reed Elsevier has significant borrowings in U.S. dollars, the
substantial majority of the interest rate swaps on which fixed interest is paid
are denominated in U.S. dollars. To hedge the interest exposure associated
within Reed Elsevier's U.S. dollar and Dutch guilder assets, a significant
proportion of the interest rate swaps and forward rate agreements on which fixed
interest is received are denominated in U.S. dollars and Dutch guilders. Reed
Elsevier's policy is to fix the interest rates on its cash, short term
investments and borrowings when the combination of Reed Elsevier's funding
profile and interest exposures make such transactions appropriate.
Forward swaps and forward rate agreements are entered into to hedge
interest rate exposures known to arise at a future date. These exposures may
include new borrowings or cash deposits and short-term investments to be entered
into at a future date or future rollovers of existing borrowings or cash
deposits and short-term investments. Interest exposure arises on future new and
rollover borrowings, cash deposits and short-term investment because interest
rates can fluctuate between the time a decision is made to enter into such
transactions and the time those transactions are actually entered into. The
business purpose of forward swaps and forward rate agreements is to fix the
interest cost or interest return on future borrowings or cash investment at the
time it is known such a transaction will be entered into. The fixed interest
rate, the floating rate index (if applicable) and the time period covered by
forward swaps and forward rate agreements are known at the time the agreements
are entered into. The use of forward swaps and forward rate agreements is
limited to hedging activities; consequently no trading position results from
their use. The impact of forward swaps and forward rate agreements is the same
as interest rate swaps. Similarly, Reed Elsevier utilizes forward foreign
exchange contracts to hedge the effects of exchange rate movements on its
foreign currency net sales and operating costs. Financial instruments are
utilized to hedge (or reduce) the risks of interest rate or exchange rate
movements and are not entered into unless such risks exist. Financial
instruments utilized, while appropriate for hedging a particular kind of risk,
are not considered specialized or high-risk and are generally available from
numerous sources.
The following analysis sets out the sensitivity of the fair value of Reed
Elsevier's financial instruments to selected changes in interest rates and
exchange rates. The range of changes represents Reed Elsevier's view of the
changes that are reasonably possible over a one year period. Fair values
represent the present value of forecast future cash flows at the assumed market
rates.
The market values for interest rate and foreign currency risks are
calculated by the using of an "off the shelf" software model which utilises
standard pricing models to determine the present value of the instruments based
on the market conditions being variously interest rates and spot and forward
exchange rates, as of the valuation date.
Reed Elsevier's use of financial instruments and its accounting policies
for financial instruments are described more fully in Note 19 to the Reed
Elsevier combined financial statements.
48
<PAGE>
a) Interest Rate Risk:
The following sensitivity analysis assumes an immediate 100 basis point
change in interest rates for all currencies and maturities from their levels at
December 31, 1997, with all other variables held constant.
Market Value Change
Favourable / (Unfavourable)
---------------------------
+ 100 - 100
Fair Value basis basis
Financial Instrument Dec 31, 1997 points points
- - - -------------------- ------------ -------- -------
(in (pound) millions)
Long term debt (including
current portion) ............... (721) +36 (41)
Interest rate swaps ............ (1) +7 (7)
Currency swaps ................. (2) -- --
Forward rate agreements ........ -- -- --
--- ---
+43 (48)
=== ===
A 100 basis point change in interest rates would not have a material
change on the fair value of other financial instruments such as cash, short term
investments, bank loans or commercial paper borrowings.
The substantial majority of borrowings are either fixed rate or have been
fixed through the use of interest rate swaps. A significant proportion of cash
and short term investments is not hedged throughout 1998. Therefore a 100 basis
point reduction in interest rates would result in an increase in net interest
expense of (pound)3 million, based on the composition of financial instruments
including cash , short term investments, bank loans and commercial paper
borrowings at December 31, 1997. A rise in interest rates would reduce net
interest expense by (pound)3 million.
b) Foreign Currency Exchange Rate Risks
The following sensitivity analysis assumes an immediate 10% change in all
foreign currency exchange rates against sterling from their levels at 31
December 1997, with all other variables held constant. A +10% change indicates a
strengthening of the currency against sterling and a --10% change indicates a
weakening of the currency against sterling.
Market Value Change
Favourable / (Unfavourable)
Fair Value ---------------------------
Financial Instrument Dec 31, 1997 +10% -10%
- - - -------------------- ------------ ---- ----
(in (pound) millions)
Long term debt (including
current portion) ............... (721) (80) +65
Short term debt ................ (779) (53) +44
Cash and short term
investments .................... 844 +61 (50)
Currency swaps ................. (2) -- --
Forward foreign currency
contracts ...................... 2 (15) +13
----- ----
(87) +72
===== ====
A 10% change in foreign currency exchange rates would not have a material
change on the fair value of other financial instruments such as interest rate
swaps and forward rate agreements.
49
<PAGE>
ITEM 10: DIRECTORS AND OFFICERS OF REGISTRANTS
REED ELSEVIER
For information with respect to the Board of Directors of Reed Elsevier
plc, the Reed Elsevier plc Executive Committee ("REEC") and the Board of
Directors of Elsevier Reed Finance BV, see "Control of Registrants - Reed
Elsevier". The REEC appoints senior management of Reed Elsevier plc.
REED INTERNATIONAL
Under the Articles of Association of Reed International, at each Annual
General Meeting of shareholders all directors of Reed International appointed
since the preceding Annual General Meeting must retire from office, but such
directors may stand for re-election. In addition, one-third (or the nearest
number up to one-third) of the other directors of Reed International must retire
from office, but such directors may stand for re-election. The directors who
must retire from office at each Annual General Meeting in this way are those
directors who have been in office the longest, as measured from their election
or most recent re-election, as the case may be. There cannot be less than five
nor more than 20 members of the Board of Directors of Reed International
pursuant to the Articles of Association. The Board of Directors of Reed
International manages Reed International's shareholdings in Reed Elsevier plc
and Elsevier Reed Finance BV.
Pursuant to arrangements established by Reed International and Elsevier at
the time of the Merger, Elsevier is entitled from time to time to nominate up to
two individuals for appointment to the Board of Directors of Reed International.
The Board of Directors of Reed International is obliged, subject to any legal
constraints, to appoint the individuals so nominated and, unless Elsevier
requests otherwise, to propose their re-appointment when necessary at Annual
General Meetings of shareholders. The director of Reed International nominated
by Elsevier is currently Paul Vlek. Mr Vlek will not be seeking re-election
following the agreement by Reed International and Elsevier that this reciprocal
representation on the other company's board should not be exercised for the time
being. The Board of Directors of Reed International may not appoint other
directors, or propose a resolution for the appointment of a director, without
obtaining the prior approval of Elsevier (which it is not entitled to withhold
or delay unreasonably). Prior approval is not required in relation to the
proposal of a resolution to re-appoint a director retiring by rotation.
ELSEVIER
Elsevier has a two tier board structure with a Supervisory Board and an
Executive Board. There cannot be less than three members of the Supervisory
Board of Elsevier and not less than three members of the Executive Board of
Elsevier. The duties of the Supervisory Board are to supervise the policy of the
Executive Board and the general course of Elsevier's affairs. The powers of the
Supervisory Board include the appointment of the members of its Board and of the
Executive Board and the adoption of the annual accounts of Elsevier. In
addition, certain decisions of the Executive Board require the approval of the
Supervisory Board and certain other decisions require the approval of the
Combined Meeting (as defined below), as set forth in the Articles of Association
of Elsevier. The members of the Supervisory Board are appointed for a four year
period and can be re-elected. The Executive Board manages Elsevier's
shareholdings in Reed Elsevier plc and Elsevier Reed Finance BV. Its members are
appointed and can be suspended and dismissed by the Supervisory Board.
Pursuant to arrangements established by Reed International and Elsevier at
the time of the Merger, Reed International is entitled from time to time to
recommend up to two individuals for appointment as members of the Supervisory
Board of Elsevier. It has been agreed that the Supervisory Board, subject to any
legal constraints, appoint the individuals so recommended. Elsevier and Reed
International have agreed that their reciprocal representation on the other
company's board should not be exercised for the time being. Other appointments
to the Supervisory Board or the Executive Board of Elsevier cannot, unless
otherwise required by law, be made by the Supervisory Board without obtaining
the prior approval of Reed International (which Reed International is not
entitled to withhold or delay unreasonably).
50
<PAGE>
DIRECTORS AND OFFICERS
The directors and executive officers of each of Reed International,
Elsevier, Reed Elsevier plc and Elsevier Reed Finance BV at March 11, 1998 were:
<TABLE>
<CAPTION>
Elsevier Reed
Name (Age) Reed International Elsevier Reed Elsevier plc Finance BV
---------- ------------------ -------- ----------------- ----------
<S> <C> <C> <C> <C>
Herman Bruggink (51) Chairman of the Co-Chairman,
Executive Board Co-Chairman of
the REEC
Nigel Stapleton (51) Chairman Co-Chairman, Member of the
Co-Chairman of Supervisory
the REEC Board
John Mellon (57) Executive Director Executive Director,
Member of the REEC
Paul Vlek (53) Non-executive Deputy Chairman of Executive Director, Member of the
Director the Executive Board Member of the REEC Supervisory
Board
Mark Armour (43) Finance Director Chief Financial Officer
Neville Cusworth (59) Member of the Executive Director
Executive Board
Herman Spruijt (48) Member of the Executive Director
Executive Board
Onno Laman Trip (51) Executive Director
Richard Bodman (59) Non-executive Non-executive
Director(1) Director(3)
Anthony Greener (57) Non-executive Non-executive
Director(1) Director(3)
Lord Hamlyn (72) Non-executive Non-executive
Director(1) Director(3)
Sir Christopher Non-executive Non-executive
Lewinton (66) Director(1) Director(3)
Roelof Nelissen (66) Member of the Non-executive
Supervisory Director(3)
Board(2)
Pierre Vinken (70) Chairman of the Non-executive Chairman of the
Supervisory Director(3) Supervisory
Board(2) Board
Loek van Deputy Chairman of Non-executive
Vollenhoven (67) the Director(3)
Supervisory
Board(2)
David Webster (53) Non-executive Non-executive
Director(1) Director(3)
Cornelis Alberti (61) Member of the Managing
Executive Director
Board
Jules Van Dijck (61) Member of the
Supervisory
Board
Otto ter Haar (68) Member of the
Supervisory
Board
Mark Radcliffe (51) Company Secretary Company Secretary
Erik Ekker (49) Company Secretary Legal Director
(Continental Europe)
</TABLE>
(1) Member of both the Audit Committee and Remuneration Committee of the Board
of Directors of Reed International.
(2) Member of Elsevier Audit Committee.
(3) Member of both the Audit Committee and the Remuneration Committee of the
Board of Directors of Reed Elsevier plc.
A person described as a non-executive Director of either of Reed
International or Reed Elsevier plc is a director not employed by such company in
an executive capacity.
Mr Bruggink became Co-Chairman of the Board of Reed Elsevier plc,
Co-Chairman of the REEC, Chairman of the Executive Board of Elsevier since April
1995, having been an executive Director of Reed Elsevier plc since the formation
of Reed Elsevier in 1993 and a member of the Executive Board of Elsevier since
January 1993. Mr Bruggink was a non-executive Director of Reed International
from April 1995 to April 1997. He joined Elsevier in 1991.
Mr Stapleton became Co-Chairman of the Board of Reed Elsevier plc and
Co-Chairman of the REEC in July 1996. Prior to that he had been a member of the
REEC and an executive Director and Chief Financial Officer of Reed Elsevier plc
since the formation of Reed Elsevier in 1993. He has also been a member of the
Supervisory Board of Elsevier Reed Finance BV since 1993. Mr Stapleton became
Deputy Chairman of Reed International in June 1994 and Chairman of Reed
International in April 1997, having joined Reed International in 1986 as Finance
Director.
Mr Mellon has been a member of the REEC since June 1994, having been an
executive Director of Reed Elsevier plc since the formation of Reed Elsevier in
1993. He has been an executive Director of Reed International since January
1990. He was a member of the Supervisory Board of Elsevier from April 1995 to
December 1997. He joined Reed International in 1968.
Mr Vlek became Deputy Chairman of the Executive Board of Elsevier in April
1995 and a member of the REEC in November 1995, having been an executive
Director of Reed Elsevier plc since the formation of Reed Elsevier in 1993 and a
member of the Executive Board of Elsevier since 1991. He has been a member of
the Supervisory Board of Elsevier Reed Finance BV since July 1996. He is a
non-executive Director of Reed International, but will not be seeking
re-election at the Annual General Meeting in April 1998. He joined Elsevier in
1973.
51
<PAGE>
Mr Armour was appointed Finance Director of Reed International and Chief
Financial Officer of Reed Elsevier plc in July_1996, having been Deputy Chief
Financial Officer of Reed Elsevier plc since February 1995.
Mr Cusworth became an executive Director of Reed Elsevier plc and a member
of the Executive Board of Elsevier in April_1995. He is Chairman of the Reed
Elsevier Legal Division, having joined Reed International in 1967.
Mr Spruijt became an executive Director of Reed Elsevier plc and a member
of the Executive Board of Elsevier in April_1995. He is Chairman of Elsevier
Science, having joined Elsevier in 1987.
Mr Laman Trip became an executive Director and Director of Corporate Human
Resources of Reed Elsevier plc in September 1997.
Sir Christopher Lewinton has been a non-executive Director of Reed
Elsevier plc since the formation of Reed Elsevier in 1993 and a non-executive
Director of Reed International since 1990. He is Chairman of TI Group plc and a
member of the Supervisory Board of Mannesmann AG.
Mr Vinken has been Chairman of the Supervisory Board of Elsevier NV and a
non-executive Director of Reed Elsevier plc since April 1995, having been
Co-Chairman of the Board of Reed Elsevier plc and Co-Chairman of the REEC from
the formation of Reed Elsevier in 1993 until April 1995. He is Chairman of the
Supervisory Board of Elsevier Reed Finance BV.
Mr Bodman has been a non-executive Director of Reed International and Reed
Elsevier plc since May 1996. He is Managing General Partner of AT&T Ventures.
Mr Greener has been a non-executive Director of Reed Elsevier plc since
the formation of Reed Elsevier in 1993 and a non-_executive Director of Reed
International since 1990. He is Joint Chairman of Diageo plc.
Lord Hamlyn has been a non-executive Director of Reed Elsevier plc since
the formation of Reed Elsevier in 1993 and a non-executive Director of Reed
International since 1987. He was the founder of the Hamlyn Group and the Octopus
Publishing Group.
Mr Nelissen has been a non-executive Director of Reed Elsevier plc since
the formation of Reed Elsevier in 1993. He has been a member of the Supervisory
Board of Elsevier since 1990. Mr Nelissen is also a member of the Supervisory
Boards of ABN AMRO Bank NV and Ahold NV.
Mr van Vollenhoven has been a non-executive Director of Reed Elsevier plc
since November 1995, having been an executive Director of Reed Elsevier plc and
a member of the REEC since the formation of Reed Elsevier in 1993 until November
1995. Mr van Vollenhoven has been a member of the Supervisory Board of Elsevier
since November 1995. Mr van Vollenhoven is also a member of the Supervisory
Board of Heineken NV.
Mr Webster has been a non-executive Director of Reed Elsevier plc since
the formation of Reed Elsevier in 1993 and a non-executive Director of Reed
International since 1992. He is Chairman of Safeway plc.
Mr Alberti has been a member of the Executive Board of Elsevier since 1984
and Managing Director of Elsevier Reed Finance BV since the formation of Reed
Elsevier in 1993. He was an executive Director of Reed Elsevier plc from the
formation of Reed Elsevier in 1993 until December 1996. He joined Elsevier in
1978.
Mr van Dijck has been a member of the Supervisory Board of Elsevier since
1984. He is professor of Industrial and Organizational Sociology at the
University of Tilburg. Mr van Dijck is a member of the Supervisory Boards of ABN
AMRO Bank NV, Hoechst Holland NV and Dutch Philips Industries NV.
Mr ter Haar has been a member of the Supervisory Board of Elsevier since
1990. He was previously a member of the Executive Board of Elsevier, with
responsibility for Elsevier Science. He joined Elsevier in 1959.
Mr Radcliffe, an English barrister, has been Company Secretary and
Director of Corporate Services of Reed Elsevier plc and Company Secretary of
Reed International since 1995. He joined Reed International in 1986.
Mr Ekker, a Dutch lawyer, has been Legal Director (Continental Europe) of
Reed Elsevier plc since 1993. He has been Company Secretary of Elsevier since
1989. He joined Elsevier in 1977 as Legal Counsel.
52
<PAGE>
ITEM 11: COMPENSATION OF DIRECTORS AND OFFICERS
Constitution of the Remuneration Committee
The Board of Reed Elsevier plc established a Remuneration Committee in
January 1993. The Remuneration Committee is responsible for determining the
remuneration (in all its forms), the service contracts and all other terms and
conditions of employment of the executive directors, and also for considering
organizational issues and the performance and development of senior management.
The Remuneration Committee provides advice to the REEC on major policy issues
affecting the remuneration of executives at a senior level below the Board. The
Remuneration Committee draws on external professional advice as necessary and
also consults the Chairmen of Reed International and of the Executive Board of
Elsevier in formulating its recommendations.
The Remuneration Committee comprises all the non-executive directors whose
names are shown on page 51. They have no day to day involvement in the running
of the business.
Compliance with Best Practice Provisions
Reed International, a U.K. company listed on the London Stock Exchange,
has complied with Section A of the Best Practice Provisions annexed to the
Listing Rules of the London Stock Exchange.
In framing its remuneration policy, the Remuneration Committee has given
full consideration to Section B of the Best Practice Provisions annexed to the
Listing Rules of the London Stock Exchange.
Remuneration Policy
In determining its policy on executive directors' remuneration the
Remuneration Committee has regard to 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 works;
(ii) to ensure that it encourages enhanced performance by directors and
fairly recognizes the contribution of individual directors to the
attainment of the results of the Reed Elsevier plc group;
(iii)to encourage a team approach which will work towards achieving the
long term strategic objectives of the Reed Elsevier plc group;
(iv) to attract, retain and motivate people of the highest calibre and
experience needed to make the Reed Elsevier plc group successful;
(v) to link reward to individual directors' performance and company
performance so as to align the interests of the directors with the
shareholders of the parent companies.
The remuneration of executive directors consists of the following
elements:
- Base salary, which is set at the median of the market range 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
stretching performance-related targetsosuch as profit, cash flow and
gains in adjusted earnings per share (EPS) of Reed International and
Elsevier. Targets are set at the beginning of the year by the
Remuneration Committee. The maximum potential bonus for 1997 was 50%
of basic salary.
- Share options, where the directors and other senior executives, are
granted options over shares in either Reed International or Elsevier
at the market price at the date of grant. The Remuneration Committee
approves the grant of any option and, from 1996, the grant of options
has been subject to performance criteria set by the Remuneration
Committee.
- Longer-term incentives which comprise the grant of nil cost options to
acquire shares in Reed International where exercise is conditional
upon the attainment of long-term performance objectives set at the
date of grant by the Remuneration Committee.
- Post-retirement benefits, which comprise only pensions, where Reed
Elsevier plc group companies have different retirement schemes which
apply depending on local competitive market practice, length of
service and age of the director. The only element of remuneration
which is pensionable is base salary.
Each of the executive directors has a service contract which is terminable
on two years' notice (reduced in some instances from three years without
compensation on January 1, 1995). The Remuneration Committee believes that two
year notice periods are appropriate in view of the need to retain key executives
in what is an increasingly competitive and international market. The service
contracts for directors who were in office prior to January 1, 1996 provide for
liquidated damages in the event of early
53
<PAGE>
termination of their contract. The service contracts of directors appointed
since then do not include such a provision and a directors' duty of mitigation
will apply in relation to any payment of compensation on termination.
External Appointments
Executive directors may serve as non-executive directors on the boards of
non-associated companies and may retain remuneration arising from such
non-executive directorships. The Remuneration Committee believes that the Reed
Elsevier plc group benefits from the 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
December 31,
1997 1996
---------- ---------
(in (pound) thousands)
Salaries & fees .................................. 3,482 4,377
Benefits ......................................... 95 123
Annual performance related bonuses, .............. -- 1,576
Longer term incentives ........................... -- 551
Pension contributions ............................ 655 916
Pension to former director ....................... 211 111
Compensation in respect of former directors ...... -- 1,100
---------- ---------
Total ............................................ 4,443 8,754
========== =========
As the Remuneration Committee had decided to defer consideration of all
aspects of the directors' remuneration pending completion of the proposed merger
with Wolters Kluwer, no amounts have been included in respect of 1997 bonuses.
Following abandonment of the merger, the Committee has yet to meet to consider
the amounts of any bonuses that may be awarded in respect of 1997. Appropriate
disclosure will be made in the Interim Statement which will be published in
August 1998.
(b) Individual emoluments of executive directors
<TABLE>
<CAPTION>
(pound) Equivalent Total
------------------------
Nationality Salary Benefits Total 1997 1996
----------- ------ -------- ----- ---- ----
(in Dfl) (in (pound))
<S> <C> <C> <C> <C> <C> <C>
H J Bruggink ........................... Dutch 1,460,400 28,000 1,488,400 466,583 748,193
H P Spruijt ............................ Dutch 720,000 18,000 738,000 231,348 342,965
O Laman Trip (from September 15, 1997) . Dutch 175,000 8,300 183,300 57,461 --
P C F M Vlek ........................... Dutch 1,365,000 20,000 1,385,000 434,169 621,566
(in(pound)) (in(pound))
M H Armour (from July 1, 1996) ......... U.K. 295,000 19,257 314,257 314,257 197,362
G R N Cusworth ......................... U.K. 216,000 13,562 229,562 229,562 284,337
I A N Irvine (until June 30, 1997) ..... U.K. 262,500 250 262,750 262,750 752,339
J B Mellon ............................. U.K. 455,000 15,738 470,738 470,738 566,897
N J Stapleton .......................... U.K. 526,500 22,857 549,357 549,357 665,659
</TABLE>
Taking into account gains of (pound)294,538 on the exercise of share
options, J B Mellon was the highest paid director in 1997.
(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 each of its countries of
operation.
The policy for executive directors based in the U.K. is to provide pension
benefits at a normal retirement age of 60, equivalent to two thirds of basic
salary in the twelve months prior to retirement, provided they have completed 10
years' service with the Reed Elsevier plc group. For directors employed since
1987, full pension has to be accrued over 20 years. The way in which pension
benefits are provided will depend on when the individual director commenced
service, and can be either through the Reed Elsevier Pension Scheme (REPS) or
through Inland Revenue unapproved, unfunded arrangements, or a combination of
both. In 1989, the Inland Revenue introduced a cap on the amount of pension that
can be provided from an approved pension scheme. All
54
<PAGE>
U.K. based directors, with the exception of M H Armour, commenced service prior
to the introduction of the cap and so will receive all their pension benefits
from the REPS. M H Armour's pension benefits will be provided from a combination
of the REPS and the company's unapproved, unfunded pension arrangements.
Directors who are members of the Dutch pension scheme accrue a pension at
a normal retirement age of 60, according to length of service and their final
salary. Based on potential service to normal retirement age, the pension
entitlements of the directors are up to 70% of final annual salary.
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 a spouse's pension on death.
The increase in transfer value of the directors' pensions, after deduction
of contributions, is shown below:
<TABLE>
<CAPTION>
Increase Contributions
in accrued Total accrued paid by Transfer value
annual annual directors increase after
pension pension as at Transfer during deduction of
during the December 31, value the directors' (pound)
Nationality period 1997 increase period contributions equivalent
----------- ------ ---- -------- ------ ------------- ----------
(in Dfl) (in (pound))
<S> <C> <C> <C> <C> <C> <C> <C>
H J Bruggink ............. Dutch 59,213 566,864 514,000 58,000 456,000 142,947
H P Spruijt .............. Dutch 39,723 252,109 345,000 28,000 317,000 99,373
O Laman Trip ............. Dutch 4,518 4,518 55,000 5,485 49,515 15,522
P C F M Vlek ............. Dutch 53,458 653,862 445,000 48,000 397,000 124,451
(in (pound))
M H Armour ............... U.K. 12,703 28,657 128,919 3,342 125,577 125,577
G R N Cusworth ........... U.K. 15,528 139,606 155,967 8,511 147,456 147,456
J B Mellon ............... U.K. 44,526 279,672 516,997 18,071 498,926 498,926
N J Stapleton ............ U.K. 40,972 197,315 460,092 20,931 439,161 439,161
</TABLE>
(d) Individual emoluments of non-executive directors
Nationality 1997 1996
----------- ---- ----
(in (pound) thousand)
R J Nelissen ........................... Dutch 50,000 50,000
A Schuitemaker (to April 16, 1997) ..... Dutch 16,666 50,000
R van de Vijver (to August 3, 1997) .... Dutch 50,000 --
P J Vinken ............................. Dutch 141,347 80,000
L van Vollenhoven ...................... Dutch 52,500 52,500
R S Bodman (from May 8, 1996) .......... USA 92,592 64,935
A A Greener ............................ U.K. 24,000 24,000
Lord Hamlyn ............................ U.K. 25,000 25,000
Sir Christopher Lewinton ............... U.K. 80,000 80,000
D G C Webster .......................... U.K. 29,000 29,000
Compensation of executive officers
The aggregate compensation paid to all executive officers (other than
directors) of Reed Elsevier plc (2 persons during the 1997 fiscal year) as a
group, for services in such capacities for the year ended December 31, 1997 was
(pound)321,831 which included contributions made to the pension plans in respect
of such officers of Reed Elsevier plc of (pound)7,902.
55
<PAGE>
ITEM 12: OPTIONS TO PURCHASE SECURITIES FROM REGISTRANTS OR SUBSIDIARIES
REED INTERNATIONAL
Share Options
The following table sets forth the details of options held by directors
over Reed International Ordinary Shares as at December 31, 1997. Options are
granted under Executive Share Option Schemes or Save As You Earn (SAYE) schemes
which are described below:
<TABLE>
<CAPTION>
Market
Granted Exercised price (p)
January 1, during the Option during the at exercise December 31, Exercisable
1997 year price (p) year date 1997 between
---- ---- --------- ---- ---- ---- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
M H Armour -- Executive Scheme 189,600 400.75 189,600 1998-2005
30,000 585.25 30,000 1999-2006
52,000 565.75 52,000 2000-2007
------ ------ ------
Total 219,600 52,000 271,600
- - - ----- ------- ------ -------
GRN Cusworth -- Executive Scheme 49,200 410.25 49,200(1) 620.00 --
34,000 585.25 34,000 1999-2006
-- SAYE Scheme 3,752 199.80 3,752(2) 539.75 --
1,076 320.60 1,076 2000
----- ------ -----
Total 88,028 52,952 35,076
------ ------ ------
J B Mellon -- Executive Scheme 188,800 410.25 188,800 559.50 --
106,800 400.75 106,800 1998-2005
67,400 585.25 67,400 1999-2006
80,400 565.75 80,400 2000-2007
-- SAYE Scheme 3,752 199.80 3,752(2) 539.75 --
2,102 328.20 2,102 1999
----- ------ ----- -----
Total 368,854 80,400 192,552 256,702
------- ------ ------- -------
N J Stapleton -- Executive Scheme 31,000 237.25 31,000 1998-2001
242,600 410.25 242,600 1998-2004
101,600 400.75 101,600 1998-2005
74,200 585.25 74,200 1999-2006
88,800 565.75 88,800 2000-2007
-- SAYE Scheme 3,752 199.80 3,752(2) 546.25 --
2,102 328.20 2,102 1999
1,076 320.60 1,076 2000
1,534 449.80 1,534 2002
------ ----- ------ -----
Total 456,330 90,334 3,752 542,912
======= ====== ===== =======
</TABLE>
Notes:
1. Retained an interest in 16,805 ordinary shares
2. Retained an interest in all of the ordinary shares
The middle market price of a Reed International ordinary share during the
year was in the range of 507.0p to 647.5p and at December 31, 1997 was 610.0p.
Between January 1, 1998 and March 11, 1998 there were no changes to the
options held by directors.
Longer term incentives
Executive directors of Reed Elsevier plc who are executive directors of
Reed International have been granted nil cost options over Reed International
Ordinary Shares under a Longer Term Incentive Plan ("the Plan"). The Plan has
operated since 1991 and was designed with advice from independent remuneration
consultants. It is based on share rather than cash benefits to emphasize the
commonality of interest of the participants and the parent companies'
shareholders over the longer term.
Under the Plan, participants are granted annually nil cost options over
Reed International Ordinary Shares, which are exercisable only if Reed
International achieves significant growth in its adjusted earnings per share
(EPS) before exceptional items over a three year period. The number of shares
over which options are granted and the EPS targets are approved by the
56
<PAGE>
Remuneration Committee. In recognition of exceptional performance, the rate of
increase in ordinary share entitlements rises more steeply once the mid-point
compound annual growth rate (CAGR) target is achieved.
For the 1995-97 Plan, options were granted over 167,350 Reed International
Ordinary Shares. The terms of these options provided that no options would be
exercisable unless CAGR over the base EPS of 21.3p (restated for the
sub-division of Reed International Ordinary Shares in May 1997) exceeded 7% pa.
The maximum number of options become exercisable if CAGR of 20% pa is achieved.
Except for sales to meet tax arising, participants are required under the
Plan to retain their ordinary shares for at least three years from exercise of
their option.
Options have also been granted in respect of the three year performance
periods 1996-98 and 1997-99. The performance targets set by the Remuneration
Committee for these two performance periods are based on a base EPS of 25.85p
and 28.1p respectively. No options are exercisable unless CAGR exceeds the base
EPS by 7% pa, and the maximum number of options become exercisable if CAGR of
20% pa is achieved.
Entitlements if specific adjusted EPS CAGR targets are achieved are:
1996-98 Plan 1997-99 Plan
Ordinary Ordinary
shares shares
if Ordinary if Ordinary
13 1/2% shares if 13 1/2% shares if
CAGR 20% CAGR CAGR 20% CAGR
achieved achieved achieved achieved
-------- -------- -------- --------
M H Armour ........... -- -- 8,528 21,320
J B Mellon ........... 12,152 30,380 13,152 32,880
N J Stapleton ........ 13,384 33,460 14,540 36,350
It is not yet possible to say whether for the 1996-98 or 1997-99 period
options will be exercisable. No estimate of the value of this incentive for
those periods has therefore been included in the aggregate directors'
remuneration for 1997.
Any ordinary shares required to fulfil entitlements under the Plan are
provided by an employee share ownership plan (ESOP) from market purchases. As
beneficiaries under the ESOP, the above directors are deemed to be interested in
the shares held by the ESOP. At December 31, 1997, their deemed interest
amounted to 179,460 Reed International Ordinary Shares, although they have no
beneficial interest in 127,276 of those shares as they were purchased for the
Reed International Overseas SAYE Share Option Plan, in which the directors do
not participate.
Share Option Schemes
Reed International operates a number of share option schemes under which
options over new issue Reed International Ordinary Shares have been granted to
its executive directors, executive officers and eligible employees. The share
option schemes are the Reed International U.K. Executive Share Option Scheme
(the "Reed International U.K. Executive Scheme") the Reed International Overseas
Executive Share Option Scheme (the "Reed International Overseas Executive
Scheme") and the Reed International Save As You Earn Share Option Scheme (the
"Reed International SAYE Scheme" and, together with the Reed International U.K.
Executive Scheme and the Reed International Overseas Executive Scheme, the "Reed
International Schemes"). The Reed International Schemes were established in 1984
and options over new Reed International Ordinary Shares were granted thereunder
until 1993. No further options may be granted under these Schemes. The terms and
conditions of the Reed International Schemes are substantially similar to those
of the corresponding share option schemes of Reed Elsevier plc, which are
described below under "Reed Elsevier Share Option Schemes".
In addition to the share option schemes described above, Reed
International introduced in 1992 an Overseas SAYE Share Option Plan (the "Reed
International Overseas SAYE Plan") for certain of its operations outside the
United Kingdom and the United States. Entitlements arising under the plan are
satisfied by the Reed International Employee Share Ownership Plan (ESOP) from
market purchases of shares. At March 11, 1998 the total number of Reed
International Ordinary Shares subject to outstanding options under the Reed
International Overseas SAYE Plan amounted to 41,489 shares, and the options for
such shares were exercisable at option prices ranging between 227.0p and 238.3p
per share and were exercisable in 1998.
57
<PAGE>
ELSEVIER
Share Options
The following table sets forth details of Elsevier Ordinary Shares on
which options were held by the members of the Supervisory Board and the
Executive Board of Elsevier as at December 31, 1997.
Granted Exercised
January 1, during the during the December
1997 year year 31, 1997
---- ---- ---- --------
H J Bruggink .......... 233,290 103,309 -- 336,599
H P Spruijt ........... 132,000 50,933 30,000 152,933
P J Vinken ............ 50,000 -- 50,000 --
P C F M Vlek .......... 111,076 85,836 -- 196,912
The middle market price of an Elsevier Ordinary Share during the year was
in the range of Dfl 26.5 to Dfl 39.4 and at December 31, 1997 was Dfl 32.8.
Share Option Schemes
Under the Elsevier share option schemes, options to subscribe for Elsevier
shares have been granted each year to the members of the Executive Board and to
a small number of other senior executives of Elsevier. Such options give the
beneficiary the right, at any time during the five years following the date of
the grant, to purchase Elsevier Ordinary Shares at the market price at the time
of the grant. If such options are not exercised during the five years following
the date of the grant they will lapse. No other unissued capital of Elsevier is
under option or is agreed conditionally or unconditionally to be put under
option. At March 11, 1998 options were outstanding to purchase, between that
date and 2002, a total of 2,395,124 Elsevier Ordinary Shares at prices ranging
from Dfl 14.65 to Dfl 31.10 each.
In addition, Elsevier has arrangements in place, which are open to Dutch
employees of the businesses within Reed Elsevier after one year's service, under
which interest bearing debentures of Elsevier may be purchased for cash for
periods of five years, during which time they may be converted on a prescribed
basis into Elsevier Ordinary Shares. At March 11, 1998 such convertible
debentures were outstanding or available for subscription which, if converted in
full, would result in the issue of a total of 1,210,430 Elsevier Ordinary
Shares.
58
<PAGE>
REED ELSEVIER
Share ownership and options
The directors of Reed International and Elsevier who are also directors of
Reed Elsevier plc and their families, held shares in Reed International and
Elsevier at the beginning and end of 1997 as shown below:
<TABLE>
<CAPTION>
Reed International P.L.C. Elsevier NV
Ordinary Shares Ordinary Shares
----------------------------- ----------------------------
January 1, December 31, January 1, December 31,
1997* 1997 1997 1997
----- ---- ---- ----
<S> <C> <C> <C> <C>
M H Armour ............... -- -- -- --
R S Bodman ............... -- 1,400 -- 900
H J Bruggink ............. 400 400 29,240 39,240
G R N Cusworth ........... 46,746 67,303 -- --
A A Greener .............. 25,074 25,214 -- --
Lord Hamlyn .............. 44,152,816 44,152,816 -- --
** 6,150,000 ** 6,150,000 -- --
O Laman Trip ............. -- -- -- --
Sir Christopher Lewinton . 2,600 4,300 1,700 1,700
J B Mellon ............... 44,496 63,872 -- --
R J Nelissen ............. -- -- -- --
H P Spruijt .............. -- -- 300 300
N J Stapleton ............ 115,666 174,599 200 200
P J Vinken ............... 22,442 22,442 59,100 59,100
P C F M Vlek ............. -- -- 60,000 60,000
L van Vollenhoven ........ -- -- 17,500 17,500
D G C Webster ............ 5,000 5,000 -- --
</TABLE>
* On date of appointment if after January 1, 1997
** Indicates other than beneficial interest
Between January 1, 1998 and March 11, 1998 there were no changes in the
number of shares held by the directors.
Shares and options held by executive officers
The following table indicates the total aggregate number of Reed
International Ordinary Shares and Elsevier Ordinary Shares beneficially owned
and the total aggregate number of Reed International Ordinary Shares and
Elsevier Ordinary Shares subject to options beneficially owned by each of the
executive officers (other than directors) of Reed Elsevier plc (2 people) as a
group, as of March 11, 1998:
<TABLE>
<CAPTION>
Reed
International Elsevier
Reed Ordinary Shares Elsevier Ordinary Shares
International Subject to Ordinary Shares Subject to
Ordinary Shares Options (1) (2) Options
--------------- ------- ------- -------
<S> <C> <C> <C> <C>
Executive officers (other than directors)
as a group .............................. 18,416 131,200 -- 50,000
</TABLE>
(1) The Elsevier Ordinary Shares may be issued in registered or bearer form
(2) No individual executive officer of Reed Elsevier plc has notified Elsevier
that it holds more than 5% of the issued share capital of Elsevier pursuant
to the Dutch law requirement described under "Control of Registrants -
Elsevier".
The options included in the above table exercisable into Reed
International Ordinary Shares are exercisable at prices ranging from 321.75p to
585.25p and between the date hereof and 2007. The options included in the above
table exercisable into Elsevier Ordinary Shares are exercisable at prices
ranging from Dfl 26.30 to Dfl 31.10 and between the date hereof and 2002.
Share option schemes
Following the Merger, Reed Elsevier plc introduced share option schemes
under which options over new issue Reed International Ordinary Shares and/or
Elsevier Ordinary Shares may be granted to employees of Reed Elsevier plc and
participating companies under its control. The share option schemes are the Reed
Elsevier plc SAYE Share Option Scheme (the "Reed Elsevier plc SAYE Scheme") and
the Reed Elsevier plc Executive U.K. and Overseas Share Option Schemes (the
"Reed Elsevier plc Executive Schemes" and, together with the Reed Elsevier plc
SAYE Scheme, the "Reed Elsevier plc Schemes"). The
59
<PAGE>
Reed Elsevier plc Schemes have been approved by shareholders of Reed
International and information concerning the terms and conditions of the Schemes
is set out below.
At March 11, 1998 the total number of Reed International Ordinary Shares
subject to outstanding options under the Reed International Schemes and the Reed
Elsevier plc Schemes amounted to 17,864,021 shares, and the options for such
shares were exercisable at option prices ranging between 188.75p and 585.25p per
share and were exercisable between 1998 and 2007. At March 11, 1998 no options
over Elsevier Ordinary Shares had been granted under the Reed Elsevier plc
schemes.
Reed Elsevier plc SAYE Share Option Scheme
The Reed Elsevier plc SAYE Scheme provides for the grant of options over
Reed International Ordinary Shares and/or Elsevier Ordinary Shares to employees
of Reed Elsevier plc and participating companies under its control. The price at
which shares may be acquired under the Reed Elsevier plc SAYE Scheme may not be
less that the higher of (i) 80% of the middle market quotation for the relevant
share on The London Stock Exchange three days before invitations to apply for
options are issued, and (ii) if new shares are to be subscribed, their nominal
value.
On joining the Reed Elsevier plc SAYE Scheme, a save as you earn contract
(a "Savings Contract") must be entered into with an appropriate savings body,
providing for contributions to be made to such savings body between (pound)5 and
the permitted maximum (currently (pound)250) per month for a period of three or
five years. A bonus is payable under the Savings Contract at the end of the
savings period. The amount of the monthly contributions may be reduced if
applications exceed the number of Reed International Ordinary Shares and/or
Elsevier Ordinary Shares available for the grant of options on that occasion.
The number of Reed International Ordinary Shares and/or Elsevier Ordinary
Shares over which an option may be granted is limited to that number of shares
which may be acquired at the exercise price out of the repayment proceeds
(including any bonus) of the Savings Contract.
All U.K. employees of Reed Elsevier plc and participating companies under
its control with at least a year's service are entitled to participate in the
Reed Elsevier plc SAYE Scheme. In addition, the directors of Reed Elsevier plc
may permit other employees of Reed Elsevier plc and participating companies
under its control to participate.
Invitations to apply for options may normally only be issued within 42
days after the announcement of the combined results of Reed Elsevier for any
period. No options may be granted more than 10 years after the approval of the
scheme.
Options under the Reed Elsevier plc SAYE Scheme may normally only be
exercised for a period of six months after the bonus date under the relevant
Savings Contract. However, options may be exercised earlier than the normal
exercise date in certain specified circumstances, including death, reaching age
60, or on ceasing employment on account of injury, disability, redundancy,
reaching contractual retirement age, or the sale of the business or subsidiary
for which the participant works, or provided the option has been held for at
least three years, on ceasing employment for any other reason. Exercise is
allowed in the event of an amalgamation, reconstruction or take-over of the
company whose shares are under option; alternatively, such options may, with the
agreement of an acquiring company or a company associated with it, be exchanged
for options over shares in the acquiring company or that associated company.
Options may also be exercised in the event of the voluntary winding-up of the
company whose shares are under option. In the event that options are exercised
before the bonus date, the participant may acquire only the number of shares
that can be purchased with the accumulated savings up to the date of exercise,
plus interest (if any).
Options under the Reed Elsevier plc SAYE Scheme are not transferable and
may be exercised only by the persons to whom they are granted or their personal
representatives.
In the event of any capitalization or rights issue by Reed International
or Elsevier, or of any consolidation, subdivision or reduction of their share
capital, the number of shares subject to any relevant option and/or the exercise
price may be adjusted with the approval of the U.K. Inland Revenue, subject to
the independent auditors of Reed Elsevier plc confirming in writing that such
adjustment is, in their opinion, fair and reasonable.
No more than 168 million new Reed International Ordinary Shares, being
approximately 15% of Reed International's current issued share capital, may be
issued under the Reed Elsevier plc SAYE Scheme. No option may be granted under
the scheme if it would cause the number of Reed International Ordinary Shares
issued or issuable in any 10 year period under the scheme and any other share
option scheme adopted by Reed International or Reed Elsevier plc to exceed in
aggregate 10% of the issued share capital of Reed International from time to
time. The number of Elsevier Ordinary Shares which may be issued or issuable
under the Reed Elsevier plc SAYE scheme will be determined by the Combined
Meeting of Elsevier, but shall not exceed the percentage limits set out above in
relation to Reed International Ordinary Shares. Options may also be granted
under the Reed Elsevier plc SAYE Scheme over existing Reed International
Ordinary Shares or Elsevier Ordinary Shares.
Reed Elsevier plc Executive U.K. and Overseas Share Option Schemes
The Reed Elsevier plc Executive Schemes comprise (i) the Reed Elsevier plc
Executive U.K. Share Option Scheme (the "Reed Elsevier plc U.K. Executive
Scheme"), and (ii) the Reed Elsevier plc Executive Overseas Share Option Scheme
(the "Reed Elsevier plc Overseas Executive Scheme").
60
<PAGE>
Reed Elsevier plc U.K. Executive Scheme The Reed Elsevier plc U.K.
Executive Scheme provides for the grant of options over Reed International
Ordinary Shares and/or Elsevier Ordinary Shares to the U.K. Employees of Reed
Elsevier plc and participating companies under its control. All directors and
employees of Reed Elsevier plc and participating companies under its control who
are contracted to work for at least 25 hours per week are eligible to be
nominated for participation. The grant of options is administered by a committee
of directors of Reed Elsevier plc, a majority of the members of which are
non-executive directors. No payment is required for the grant of an option under
the Reed Elsevier plc U.K. Executive Scheme.
Options granted under the Reed Elsevier plc U.K. Executive Scheme may be
exercised within a period of 10 years and entitle the holder to acquire shares
at a price determined by the committee of directors of Reed Elsevier plc, which
may not be less than the higher of (i) the middle market quotation for the
relevant shares on The London Stock Exchange at the date of grant, and (ii) if
new shares are to be subscribed, their nominal value.
Each person's participation in the Reed Elsevier plc U.K. Executive Scheme
will be limited so that the aggregate price payable on the exercise of all
options granted to such person under the scheme and any other executive share
option scheme administered by Reed International, Reed Elsevier plc or any
associated company of Reed Elsevier plc in any 10 year period (excluding options
which have been exercised) will not exceed four times his annual earnings.
Employees may be granted options under the Reed Elsevier plc U.K.
Executive Scheme to replace those which have been exercised. In granting such
replacement options, the committee of directors of Reed Elsevier plc must
satisfy itself that the grant of such options is justified by the performance of
Reed Elsevier in the previous two to three years.
Options may normally only be granted under the Reed Elsevier plc U.K.
Executive Scheme within 42 days after the announcement of the combined results
of Reed Elsevier for any period. No option may be granted under the Reed
Elsevier plc U.K. Executive Scheme more than 10 years after the approval of the
scheme.
Options granted under the Reed Elsevier plc U.K. Executive Scheme will
normally be exercisable only after the expiration of three years from the date
of their grant and by a person who remains a director or employee of Reed
Elsevier plc and participating companies under its control. Early exercise of
such options is permitted in substantially similar circumstances to those set
out in relation to the Reed Elsevier plc SAYE Scheme. The committee of directors
of Reed Elsevier plc has discretion to permit the exercise of options by a
participant in certain circumstances where it would not otherwise be permitted.
Options granted under the Reed Elsevier plc U.K. Executive Scheme are not
transferable and may be exercised only by the persons to whom they are granted
or their personal representatives.
In the event of any capitalization or rights issue by Reed International
or Elsevier, or of any consolidation, subdivision or reduction of their share
capital, the number of shares subject to any relevant option and/or the exercise
price may be adjusted with the approval of the U.K. Inland Revenue, subject to
the independent auditors of Reed Elsevier plc confirming in writing that such
adjustment is, in their opinion, fair and reasonable.
The limits described above on the number of Reed International Ordinary
Shares and Elsevier Ordinary Shares which may be issued under the Reed Elsevier
plc SAYE Scheme also apply to the Reed Elsevier plc U.K. Executive Scheme. The
following additional limits apply to the Reed Elsevier U.K. Executive Scheme:
(i) no option may be granted under the scheme if it would cause the number of
Reed International Ordinary Shares issued or issuable in any 10 year period
under the scheme or any other executive share option scheme adopted by Reed
International or Reed Elsevier plc to exceed in aggregate 5% of the issued
share capital of Reed International from time to time; and
(ii) in the four year period commencing on the date of adoption of the scheme,
not more than 2.5% of the issued share capital of Reed International from
time to time may be issued or issuable under the scheme.
Equivalent limits to those in (i) and (ii) above apply to the number of
Elsevier Ordinary Shares which may be issued or issuable under the scheme.
Options may also be granted under the Reed Elsevier plc U.K. Executive
Scheme over existing Reed International Ordinary Shares or Elsevier Ordinary
Shares.
Reed Elsevier plc Overseas Executive Scheme The Reed Elsevier plc Overseas
Executive Scheme provides for options to be granted to non-U.K. employees of
Reed Elsevier plc and participating companies under its control. The terms and
conditions of the Reed Elsevier plc Overseas Executive Scheme are substantially
similar to those of the Reed Elsevier plc U.K. Executive Scheme.
61
<PAGE>
ITEM 13: INTERESTS OF MANAGEMENT IN CERTAIN TRANSACTIONS
REED INTERNATIONAL Not applicable.
ELSEVIER Not applicable.
PART II
ITEM 14: DESCRIPTION OF SECURITIES TO BE REGISTERED
REED INTERNATIONAL Not applicable.
ELSEVIER Not applicable.
PART III
ITEM 15: DEFAULTS UPON SENIOR SECURITIES
REED INTERNATIONAL Not applicable.
ELSEVIER Not applicable.
ITEM 16: CHANGES IN SECURITIES AND CHANGES IN SECURITY FOR REGISTERED SECURITIES
REED INTERNATIONAL None.
ELSEVIER None.
PART IV
ITEM 17: FINANCIAL STATEMENTS
The Registrants have responded to Item 18 in lieu of responding to this
Item.
ITEM 18: FINANCIAL STATEMENTS
Reference is made to Item 19 for a list of all financial statements and
schedules filed as part of this Annual Report.
62
<PAGE>
ITEM 19: FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements filed as part of this Annual Report
The following financial statements and related schedules, together with
reports of independent accountants thereon, are filed as part of this Annual
Report:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Index to Financial Statements .............................................................................. F-1
Reed Elsevier Combined Financial Statements ................................................................ F-2
Report of Independent Accountants ........................................................................ F-3
Combined Statements of Income for the three years ended December 31, 1997 ................................ F-4
Combined Balance Sheets at December 31, 1997 and December 31, 1996 ....................................... F-5
Combined Statements of Cash Flows for the three years ended December 31, 1997 ............................ F-6
Statements of Changes in Combined Shareholders' Equity for the three years ended December 31, 1997 ....... F-8
Notes to the Combined Financial Statements ............................................................... F-9
Schedule II .............................................................................................. F-35
Reed International P.L.C. Consolidated Financial Statements ................................................ F-36
Report of Independent Accountants ........................................................................ F-37
Consolidated Statements of Income for the three years ended December 31, 1997 ............................ F-38
Consolidated Balance Sheets at December 31, 1997 and December 31, 1996 ................................... F-39
Consolidated Statements of Cash Flows for the three years ended December 31, 1997 ........................ F-40
Statements of Changes in Consolidated Shareholders' Equity for the three years ended December 31, 1997 ... F-41
Notes to the Consolidated Financial Statements ........................................................... F-42
Elsevier NV Financial Statements ........................................................................... F-50
Report of Independent Accountants ........................................................................ F-51
Statements of Income for the three years ended December 31, 1997 ......................................... F-52
Balance Sheets at December 31, 1997 and December 31, 1996 ................................................ F-53
Statements of Cash Flows for the three years ended December 31, 1997 ..................................... F-54
Statements of Changes in Shareholders' Equity for the three years ended December 31, 1997 ................ F-55
Notes to the Financial Statements ........................................................................ F-56
</TABLE>
(b) Exhibits filed as part of this Annual Report
The total amount of long-term debt securities of Reed Elsevier authorized
under any single instrument does not exceed 10% of the combined total assets of
Reed Elsevier. The Registrants hereby agree to furnish to the Commission, upon
its request, a copy of any instrument defining the rights of holders of
long-term debt of Reed Elsevier or any of the combined businesses for which
consolidated or unconsolidated financial statements are required to be filed.
F-1
<PAGE>
REED ELSEVIER
COMBINED FINANCIAL STATEMENTS
F-2
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Reed International P.L.C. and
to the Members of the Supervisory and Executive Boards and the Shareholders of
Elsevier NV
We have audited the accompanying combined balance sheets of Reed
International P.L.C., Elsevier NV, Reed Elsevier plc and Elsevier Reed Finance
BV and their respective subsidiaries (together "the combined businesses") as of
December 31, 1997 and 1996, and the related combined statements of income, total
recognized gains and losses, changes in combined shareholders' equity and cash
flows for the three years ended December 31, 1997, 1996 and 1995. Our audits
also included the financial statement schedules of December 31, 1997, 1996 and
1995 listed in the Index at Item 19. These combined financial statements and the
related financial statement schedules are the responsibility of the management
of Reed International P.L.C. and Elsevier NV. Our responsibility is to express
an opinion on these combined financial statements and the related financial
statement schedules based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United Kingdom, the Netherlands and the United States. Those
standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the aforementioned combined financial statements present
fairly, in all material respects, the financial position of the combined
businesses at December 31, 1997 and 1996 and the results of their operations and
their cash flows for the three years ended December 31, 1997, 1996 and 1995 in
conformity with accounting principles generally accepted in the United Kingdom
and the Netherlands (which differ in certain material respects from generally
accepted accounting principles in the United States - see note 29). Also, in our
opinion, the financial statement schedules when considered in relation to the
related combined financial statements taken as a whole, present fairly in all
material respects the information set forth therein.
DELOITTE & TOUCHE DELOITTE & TOUCHE
Chartered Accountants & Registered Auditors Registeraccountants
London, England Amsterdam, The Netherlands
March 11, 1998 March 11, 1998
F-3
<PAGE>
REED ELSEVIER COMBINED BUSINESSES
COMBINED STATEMENTS OF INCOME
Year ended December 31,
------------------------
Notes 1995 1996 1997
----- ------ ------ ------
(in (pound) millions)
Net sales ..................................... 3 3,649 3,381 3,417
Cost of sales ................................. (1,428) (1,299) (1,282)
------ ------ ------
Gross profit .................................. 2,221 2,082 2,135
Selling, general and administrative expenses
before exceptional items .................... (1,413) (1,248) (1,277)
Share of income of associated companies ....... 20 22 27
------ ------ ------
Operating income before exceptional items ..... 3 828 856 885
------ ------ ------
Exceptional items charged to operating income . 5 -- -- (502)
------ ------ ------
Operating income .............................. 828 856 383
------ ------ ------
Non-operating exceptional items ............... 5 13 1 25
------ ------ ------
Income before interest and taxes .............. 841 857 408
------ ------ ------
Interest income ............................... 21 58 38
Interest expense .............................. 8 (126) (109) (100)
------ ------ ------
Net interest expense .......................... (105) (51) (62)
------ ------ ------
Income before taxes and minority interests .... 736 806 346
Taxes on income ............................... 9 (181) (201) (138)
------ ------ ------
Income before minority interests .............. 555 605 208
Minority interests and preference dividends ... (1) (1) (1)
------ ------ ------
Net income .................................... 554 604 207
====== ====== ======
The effect of discontinued operations is shown in note 3 and the effect of
acquisitions is shown in note 4.
STATEMENTS OF TOTAL RECOGNIZED GAINS AND LOSSES
Year ended December 31,
-----------------------
1995 1996 1997
---- ---- ----
(in (pound) millions)
Net income for the financial year ...................... 554 604 207
Exchange translation differences ....................... 6 (126) (11)
---- ---- ----
Total recognized gains and losses for the financial year 560 478 196
==== ==== ====
The historical cost profits and losses are not materially different from
the results disclosed above.
The accompanying notes on pages F-9 to F-34 are
an integral part of these combined financial statements.
F-4
<PAGE>
REED ELSEVIER COMBINED BUSINESSES
COMBINED BALANCE SHEETS
At December 31,
------------------
Notes 1996 1997
----- ------ ------
(in (pound) millions)
ASSETS
Current Assets:
Cash ........................................ 85 110
Investments ................................. 1,056 734
Trade receivables ........................... 11 466 520
Inventories ................................. 12 139 121
Prepaid expenses and other current assets ... 13 201 277
----- -----
Total current assets .......................... 1,947 1,762
Non current receivables ....................... 14 147 165
Investments ................................... 15 180 227
Property, plant and equipment ................. 16 323 348
Intangible assets ............................. 17 2,550 2,501
----- -----
Total assets .................................. 5,147 5,003
===== =====
LIABILITIES AND COMBINED SHAREHOLDERS' EQUITY
Current liabilities:
Short term borrowings and current portion
of long term borrowings ................... 18 620 785
Accounts payable and accrued liabilities .... 21 1,054 1,131
Income taxes payable ........................ 237 228
Dividends ................................... 235 251
----- -----
Total current liabilities ..................... 2,146 2,395
Long term borrowings, less current portion .... 18 717 689
Income taxes payable after more than one year . 53 78
Other long term liabilities ................... 81 71
Provisions for liabilities and charges ........ 22 75 270
Minority interests ............................ 4 6
----- -----
Total liabilities ............................. 3,076 3,509
----- -----
Combined shareholders' equity:
Combined share capitals ..................... 23 169 167
Combined premiums in excess of par .......... 322 328
Combined retained earnings .................. 1,580 999
----- -----
Total combined shareholders' equity ........... 2,071 1,494
----- -----
Total liabilities and combined
shareholders' equity ........................ 5,147 5,003
===== =====
Commitments and contingent liabilities: See notes 24, 25 and 26.
The accompanying notes on pages F-9 to F-34 are
an integral part of these combined financial statements.
F-5
<PAGE>
REED ELSEVIER COMBINED BUSINESSES
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
Notes 1995 1996 1997
----- ---- ---- ----
(in (pound) millions)
<S> <C> <C> <C> <C>
Operating income before exceptional items ..................................... 828 856 885
Net SSAP 24 pension credit .................................................. 26 (6) (7) (1)
Net profit on sale of fixed assets .......................................... (4) (2) --
Depreciation charges ........................................................ 108 89 96
---- ---- ----
Total non-cash items .......................................................... 98 80 95
---- ---- ----
Income from interests in associated undertakings ............................ (20) (22) (27)
Dividends received from associated undertakings ............................. 14 11 17
---- ---- ----
(6) (11) (10)
---- ---- ----
(Increase)/decrease in inventories .......................................... (13) 8 5
(Increase)/decrease in trade receivables and other assets ................... (79) 22 (25)
Increase/(decrease) in accounts payable, accrued expenses and provisions .... 114 (16) 23
---- ---- ----
Movement in working capital ................................................... 22 14 3
---- ---- ----
Net cash inflow from operating activities before exceptional items ............ 942 939 973
Payments relating to exceptional items charged to operating income ............ -- -- (26)
---- ---- ----
Net cash inflow from operating activities ..................................... 942 939 947
---- ---- ----
Interest received ........................................................... 19 48 46
Interest paid ............................................................... (140) (109) (105)
---- ---- ----
Returns on investments and servicing of finance ............................... (121) (61) (59)
---- ---- ----
Taxation ...................................................................... (112) (157) (180)
---- ---- ----
Purchase of tangible fixed assets ........................................... (124) (115) (121)
Proceeds from sale of fixed assets .......................................... 17 17 10
Exceptional net proceeds/(payments) from disposals of fixed assets .......... -- 62 (21)
---- ---- ----
Capital expenditure ........................................................... (107) (36) (132)
---- ---- ----
Acquisitions ................................................................ 27 (74) (316) (726)
Payments against acquisition provisions ..................................... (53) (24) (5)
Exceptional net proceeds from sales/closures of businesses .................. 27 354 394 104
Merger expenses ............................................................. -- -- (3)
---- ---- ----
Acquisitions and disposals .................................................... 227 54 (630)
---- ---- ----
Equity dividends paid to the shareholders of the parent companies ............. (270) (299) (336)
---- ---- ----
Cash inflow/(outflow) before changes in current asset investments and financing 559 440 (390)
---- ---- ----
(Increase)/decrease in current asset investments .............................. 27 (577) (428) 299
Financing ..................................................................... 27 29 (10) 120
---- ---- ----
Increase in cash .............................................................. 27 11 2 29
==== ==== ====
</TABLE>
The accompanying notes on pages F-9 to F-34
are an integral part of these combined financial statements.
F-6
<PAGE>
Investments held as current assets 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.
FRS 1 (Revised 1996) differs in certain respects from U.S. accounting
standard, SFAS 95 "Statement of Cash Flows". The principal differences are
explained in Note 29.
Transactions undertaken to hedge another transaction are reported under the
same classification as the transaction that is subject to the hedge.
The accompanying notes on pages F-9 to F-34
are an integral part of these combined financial statements.
F-7
<PAGE>
REED ELSEVIER COMBINED BUSINESSES
STATEMENTS OF CHANGES IN COMBINED SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Combined Combined Combined
Combined premiums in revaluation retained Combined
share capitals excess of par reserves earnings total
-------------- --------------- ----------- -------- --------
(in (pound) millions)
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994 ............................. 169 268 2 980 1,419
Net income ............................................. -- -- -- 554 554
Ordinary dividends ..................................... -- -- -- (293) (293)
Exchange translation differences ....................... -- -- -- (6) (6)
Issue of ordinary shares on exercise of options ........ 1 32 -- -- 33
Goodwill written off on acquisitions ................... -- -- -- (21) (21)
Goodwill reinstated on sale of businesses .............. -- -- -- 96 96
Goodwill reinstated on prospective sale of businesses .. -- -- -- 281 281
Adjustment on translation of Elsevier NV ............... 2 10 -- -- 12
---- ---- ---- ----- -----
Balance at December 31, 1995 ............................. 172 310 2 1,591 2,075
Net income ............................................. -- -- (2) 606 604
Ordinary dividends ..................................... -- -- -- (348) (348)
Exchange translation differences ....................... -- -- -- (100) (100)
Issue of ordinary shares on exercise of options ........ 1 34 -- -- 35
Goodwill written off on acquisitions ................... -- -- -- (200) (200)
Goodwill reinstated on sale of businesses .............. -- -- -- 31 31
Adjustment on translation of Elsevier NV ............... (4) (22) -- -- (26)
---- ---- ---- ----- -----
Balance at December 31, 1996 ............................. 169 322 -- 1,580 2,071
Net income ............................................. -- -- -- 207 207
Ordinary dividends ..................................... -- -- -- (365) (365)
Exchange translation differences ....................... -- -- -- 6 6
Issue of ordinary shares on exercise of options ........ 1 20 -- -- 21
Goodwill written off on acquisitions ................... -- -- -- (451) (451)
Goodwill reinstated on sale of businesses .............. -- -- -- 22 22
Adjustment on translation of Elsevier NV ............... (3) (14) -- -- ( 17)
---- ---- ---- ----- -----
Balance at December 31, 1997 ............................. 167 328 -- 999 1,494
==== ==== ==== ===== =====
</TABLE>
Combined share capitals includes non-equity shares of (pound)4 million
(1996 (pound)4 million; 1995 (pound)4 million). The accumulated exchange
translation differences included in combined retained earnings are (pound)(154)
million (1996 (pound)(160) million; 1995 (pound)(60) million).
Combined retained earnings include the share of the retained earnings of
associated undertakings amounting to (pound)60 million (1996 (pound)15 million;
1995 (pound)14 million) including the undistributed reserves of Utell
contributed to the joint venture, REZsolutions Inc.. Goodwill reinstated on sale
of businesses includes (pound)7 million in respect of minor disposals.
The accumulated goodwill written off to combined retained earnings in
respect of acquisitions is (pound)2,065 million (1996 (pound)1,632 million; 1995
(pound)1,606 million).
The accompanying notes on pages F-9 to F-34
are an integral part of these combined financial statements.
F-8
<PAGE>
REED ELSEVIER COMBINED BUSINESSES
NOTES TO COMBINED FINANCIAL STATEMENTS
1. Basis of preparation of financial statements
The equalization agreement between Reed International P.L.C. and Elsevier
NV has the effect that their shareholders can be regarded as having the
interests of a single economic group. The principal financial statements are,
therefore, the combined Reed Elsevier accounts ("the combined financial
statements").
The combined financial statements encompass the businesses of Reed Elsevier
plc and Elsevier Reed Finance BV and their respective subsidiaries and
associates, together with the parent companies, Reed International P.L.C. and
Elsevier NV, ("the combined businesses" or "Reed Elsevier").
The combined financial statements adopt accounting policies that are in
conformity with accounting principles generally accepted in both the United
Kingdom and the Netherlands ("U.K. and Dutch GAAP") and are presented under the
historical cost convention as modified by the revaluation of land and buildings.
These principles differ in certain significant respects from accounting
principles generally accepted in the United States ("U.S. GAAP"); see note 29.
Amounts are expressed in pounds sterling ("(pound)"). In preparing these
financial statements, certain reclassifications and changes in presentation have
been made to the combined financial statements presented in the Reed Elsevier
Annual Review in order to conform more closely with accounting presentation and
disclosure requirements applicable in the United States.
The combined financial statements include those of all the combined
businesses made up to the end of the fiscal year. The results of businesses
acquired are included from the date of effective acquisition and businesses sold
are included up to the date of disposal.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent liabilities and assets at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
2. Accounting policies
The significant accounting policies adopted are as follows:
INVESTMENTS HELD AS FIXED ASSETS
Associated undertakings, where the combined businesses hold a long term
equity interest and where there is significant influence, are accounted for on
an equity basis. Other fixed asset investments are stated at cost, less
provision, if appropriate, for any diminution in value other than temporary.
FOREIGN EXCHANGE TRANSLATION
Balance sheet items are translated at year end exchange rates. Statement of
income items are translated at average exchange rates. The results of hedging
transactions for statement of income amounts in foreign currency are accounted
for in the statement of income for the relevant year. Exchange translation
differences on foreign equity investments and the related foreign currency net
borrowings and differences between balance sheet and average rates are taken to
retained earnings.
ACQUISITIONS
On the acquisition of a subsidiary, associate or business, the purchase
consideration is allocated between the underlying net tangible and intangible
assets on a fair value basis. Any excess cost or goodwill is written off against
retained earnings. On any subsequent disposal or closure the goodwill previously
written off is added back to retained earnings and is brought into the
calculation of profit and loss on disposal or closure.
INTANGIBLE FIXED ASSETS
Publishing rights and titles, databases, exhibition rights and other
intangible assets are stated at fair value on acquisition and are not
subsequently revalued. Having no finite economic life, no systematic
amortization is applied but provision is made for any permanent impairment in
value. Internally developed intangibles are not carried on the balance sheet.
Intangible assets are only recognized on more significant acquisitions.
NEW REPORTING STANDARD FRS10
On December 3, 1997, the U.K. Accounting Standards Board issued Financial
Reporting Standard 10 ("FRS10"), "Goodwill and Intangible Assets", which will be
applicable for the 1998 financial year. FRS 10 requires both goodwill and
intangible assets to be capitalized on acquisition and amortized over their
estimated useful lives, which are presumed to be no more than 20 years.
F-9
<PAGE>
2. Accounting policies -- (continued)
It is intended, on adoption of FRS10 in 1998, to capitalize all acquired
goodwill and intangible assets and amortize them over a maximum period of 20
years, with retrospective application. If this policy had been adopted in 1997,
net assets at December 31, 1997 would have been approximately (pound)280 million
higher and the non-cash amortization charges would have been approximately
(pound)260 million.
PROPERTY, PLANT AND EQUIPMENT AND DEPRECIATION
Property, plant and equipment are stated in the balance sheet at cost or
valuation less accumulated depreciation. No depreciation is provided on land.
Freehold buildings and long leases are depreciated over their estimated future
useful lives, as is plant and equipment which is depreciated on a straight line
basis at rates from 5% - 33%. Short leases are written off over the duration of
the lease. The increase over cost where property, plant and equipment are stated
at market or current valuations is taken directly to the revaluation reserve.
CAPITAL LEASES
Assets held under leases which confer rights and obligations similar to
those attaching to owned assets are capitalized as property, plant and equipment
and the corresponding liability to pay rentals is shown net of interest in the
accounts as obligations under capital leases. The capitalized 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 income statement on a straight
line basis over the periods of the leases.
INVENTORIES
Inventory and work in progress are stated at the lower of cost including
appropriate attributable overheads, on a first in first out basis, and estimated
net realizable value.
CURRENT ASSET INVESTMENTS
Investments held as current assets are stated at the lower of cost and
estimated net realizable value.
NET SALES
Net sales represent the invoiced value of sales on transactions completed
by delivery excluding customer sales taxes and sales between the combined
businesses.
DEVELOPMENT SPEND
Development spend incurred on the launch of new products or services is
expensed to the statement of income as incurred. The cost of developing software
for use internally may be capitalized and written off over its estimated future
life.
TAXATION
Deferred taxation is provided in full for timing differences using the
liability method. There is no material difference between this full provision
policy and the partial provision method required under U.K. GAAP. No provision
is made for tax which would become payable on the distribution of retained
earnings by foreign subsidiaries or associated companies or on the sale of
intangible assets at stated amounts as there is no present intention to
distribute such retained earnings or to sell intangible assets giving rise to a
charge. The potential deferred tax has not been quantified.
PENSIONS
The expected costs of pensions in respect of defined benefit pension
schemes are charged to the statement of income 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 income statement charge represents
contributions made.
3. Segment information
During 1997 Reed Elsevier's business publishing activities were reorganized
into three geographically focused business groups, Cahners Business Information,
Reed Business Information and Elsevier Business Information, serving North
America, the United Kingdom and Continental Europe respectively. As a result
certain operations have been transferred between the reporting segments. On the
sale of IPC Magazines in January 1998, the New Scientist title was retained and
has been recategorized in the Business segment. Comparative figures have been
restated accordingly.
Discontinued operations, under U.K. and Dutch GAAP, relate wholly to the
consumer segment and comprise the consumer publishing businesses divested in
1995, IPC Magazines, excluding New Scientist, and certain operations of Reed
Books, which have been divested by the date of approval of this Annual Report.
F-10
<PAGE>
3. Segment information -- (continued)
1995 1996 1997
---- ---- ----
(in (pound) millions)
By category of activity
Net sales
Scientific .................................. 532 553 571
Professional ................................ 914 1,037 1,076
Business .................................... 1,278 1,307 1,340
Consumer .................................... 81 78 75
----- ----- -----
Continuing operations ....................... 2,805 2,975 3,062
Discontinued operations ..................... 844 406 355
----- ----- -----
3,649 3,381 3,417
===== ===== =====
Operating income before exceptional items
Scientific .................................. 211 231 230
Professional ................................ 223 268 296
Business .................................... 266 288 286
Consumer .................................... 2 5 7
----- ----- -----
Continuing operations ....................... 702 792 819
Discontinued operations ..................... 126 64 66
----- ----- -----
828 856 885
===== ===== =====
Depreciation
Scientific .................................. 9 9 11
Professional ................................ 43 44 47
Business .................................... 27 26 27
Consumer .................................... 3 2 2
----- ----- -----
Continuing operations ....................... 82 81 87
Discontinued operations ..................... 26 8 9
----- ----- -----
108 89 96
===== ===== =====
Total assets
Scientific .................................. 701 763
Professional ................................ 1,417 1,520
Business .................................... 1,415 1,390
Consumer .................................... 249 169
Corporate ................................... 1,192 963
----- -----
Continuing operations ....................... 4,974 4,805
Discontinued operations ..................... 173 198
----- -----
5,147 5,003
===== =====
The corporate segment comprises assets maintained for general purposes,
principally cash balances.
Capital expenditure
Scientific .................................. 15 19
Professional ................................ 59 51
Business .................................... 36 41
Consumer .................................... 1 --
----- -----
Continuing operations ....................... 111 111
Discontinued operations ..................... 9 12
----- -----
120 123
===== =====
Capital employed
Scientific .................................. 336 347
Professional ................................ 1,153 1,247
Business .................................... 978 715
Consumer .................................... 117 113
----- -----
Continuing operations ....................... 2,584 2,422
Discontinued operations ..................... 157 145
----- -----
2,741 2,567
===== =====
F-11
<PAGE>
3. Segment information -- (continued)
1995 1996 1997
---- ---- ----
(in (pound) millions)
Reconciliation of capital employed to combined
shareholders' equity
Capital employed .............................. 2,741 2,567
Taxation .................................... (239) (187)
Dividends and net interest payable .......... (231) (250)
Net borrowings .............................. (196) (630)
Minority interests .......................... (4) (6)
----- -----
Combined shareholders' equity ................. 2,071 1,494
===== =====
By geographic origin
Net sales
North America ............................... 1,376 1,438 1,512
U.K. ........................................ 668 732 763
The Netherlands ............................. 362 369 369
Rest of Europe .............................. 267 279 263
Asia/Pacific 132 157 155
----- ----- -----
Continuing operations ....................... 2,805 2,975 3,062
Discontinued operations ..................... 844 406 355
----- ----- -----
3,649 3,381 3,417
===== ===== =====
Operating income before exceptional items
North America ............................... 313 358 394
U.K. ........................................ 176 203 213
The Netherlands ............................. 119 128 123
Rest of Europe .............................. 67 74 69
Asia/Pacific ................................ 27 29 20
----- ----- -----
Continuing operations ....................... 702 792 819
Discontinued operations ..................... 126 64 66
----- ----- -----
828 856 885
===== ===== =====
Total assets
North America ............................... 2,147 2,230
U.K. ........................................ 1,368 1,548
The Netherlands ............................. 185 295
Rest of Europe .............................. 1,146 610
Asia/Pacific ................................ 128 122
----- -----
Continuing operations ....................... 4,974 4,805
Discontinued operations ..................... 173 198
----- -----
5,147 5,003
===== =====
Capital employed
North America ............................... 1,652 1,520
U.K. ........................................ 905 771
The Netherlands ............................. (135) (65)
Rest of Europe .............................. 104 143
Asia/Pacific ................................ 58 53
----- -----
Continuing operations ....................... 2,584 2,422
Discontinued operations ..................... 157 145
----- -----
2,741 2,567
===== =====
By geographic market
Net sales
North America ............................... 1,470 1,535 1,594
U.K. ........................................ 419 459 468
The Netherlands ............................. 187 193 210
Rest of Europe .............................. 402 430 414
Asia/Pacific ................................ 327 358 376
----- ----- -----
Continuing operations ....................... 2,805 2,975 3,062
Discontinued operations ..................... 844 406 355
----- ----- -----
3,649 3,381 3,417
===== ===== =====
F-12
<PAGE>
4. Significant acquisitions
During the three years ended December 31, 1997, Reed Elsevier spent
(pound)1,099 million (including deferred consideration) on the acquisition of
publishing and information businesses. In the year ended December 31, 1997,
acquisitions were made for a total of (pound)725 million after taking account of
(pound)8 million of net cash acquired and (pound)3 million transferred from
associates. (pound)16 million of the consideration has been deferred to future
years. In total, (pound)726 million was paid during the year ended December 31,
1997, including (pound)7 million paid in respect of acquisitions made in
previous years, (pound)12 million for associated undertakings (of which
(pound)10 million represents a cash contribution to the joint venture,
REZsolutions Inc., on its formation) and (pound)1 million in respect of fixed
asset investments. The principal acquisitions are listed below.
In August, 1996 Tolley Publishing Company Limited, a supplier of tax, legal
and business information was acquired for (pound)101 million. The fair value of
the net assets acquired, excluding goodwill, was (pound)39 million.
In April , 1997 MDL Information Systems Inc, a provider of scientific
information management systems, was acquired for $320 million ((pound)195
million). The fair value of the net assets acquired, excluding goodwill, was
(pound)16 million.
In September, 1997 the Chilton Business Group, a business information
publisher, was purchased for $447 million ((pound)273 million). The fair value
of the net assets acquired, excluding goodwill, was (pound)151 million.
Acquisitions are accounted for under the purchase method. The net assets of
the businesses acquired are incorporated at their fair value to the combined
businesses. Fair value adjustments include the valuation of intangible assets on
major acquisitions and the fair value of tangible fixed assets and current
assets and liabilities in accordance with Reed Elsevier accounting policies.
Where the purchase price has exceeded the fair value of the net tangible and
intangible assets acquired, the excess is regarded as goodwill and has been
written off against retained earnings.
The fair value adjustments for acquisitions during the year ended December
31, 1997 are:
Book value on Fair value
acquisition adjustments Fair Value
------------- ----------- ----------
(in (pound) millions)
Fixed Assets
Intangible assets ...................... -- 254 254
Property, plant and equipment .......... 28 -- 28
Current assets ........................... 75 (5) 70
Current liabilities ...................... (72) (4) (76)
Loans .................................... (10) -- (10)
Deferred tax ............................. 2 6 8
---- ---- ----
Net assets acquired ...................... 23 251 274
==== ==== ----
Goodwill arising ......................... 451
----
Consideration (after taking account of
(pound)8 million of net cash acquired) . 725
====
Before taking account of exceptional acquisition related integration costs,
the businesses acquired in 1997 contributed (pound)144 million to net sales,
(pound)29 million to operating income and (pound)14 million to net cash inflow
from operating activities for the period under Reed Elsevier plc ownership.
5. Exceptional items
Exceptional items in 1997 comprise the following:
(i) A provision of (pound)230 million has been made, less tax relief of
approximately (pound)87 million, in respect of the estimated cost of
programmes to recompense advertisers affected by irregularities in
circulation claims for certain Reed Travel Group publications together
with related expenses and reorganization costs. Taking into account
the prospective trading performance of the Reed Travel Group
businesses, a non-cash write down of (pound)250 million has also been
made in intangible asset values;
(ii) Costs of (pound) 11 million incurred relating to the integration of
1997 acquisitions, principally the Chilton Business Group and the
titles acquired from the Thomson Corporation;
(iii) Expenditure in 1997 in connection with the combined businesses' Year
2000 compliance program;
(iv) The net profit on sale of certain businesses, principally the
Heinemann English Language Teaching business, a portfolio of certain
U.S. computer magazines and trade shows and the Belgian exhibitions
business. The sales or closure of certain Reed Books activities were
also completed during the year, which, after taking account of
provisions made in earlier years, resulted in no further gain or loss.
Exceptional cash proceeds, after expenses, of (pound)102 million were
generated from these disposals; and
F-13
<PAGE>
5. Exceptional items -- (continued)
(v) Professional fees and other costs incurred in 1997 in respect of the
proposed merger, now abandoned, of Reed Elsevier and Wolters Kluwer.
The net cash inflow in respect of the above items was (pound)73 million. In
addition (pound)21 million was paid, for which appropriate provision was made in
the prior year, in relation to the disposal of surplus property interests and
(pound)2 million was received in respect of prior year business disposals.
1995 1996 1997
---- ---- ----
(in (pound) millions)
Reed Travel Group
--provision for customer compensation and
related expenses and reorganization costs ... -- -- (230)
Reed Travel Group
--non-cash write down of intangible assets .... -- -- (250)
Acquisition related integration costs ........... -- -- (11)
Year 2000 compliance costs ...................... -- -- (11)
---- ---- ----
Charged to operating income ..................... -- -- (502)
---- ---- ----
Continuing
--Net profit on sale of businesses ............ -- -- 28
--Merger expenses ............................. -- -- (3)
--Net profit on disposal of fixed assets ...... -- 1 --
Discontinued
--Net profit/(loss) on sale of businesses ..... 381 (10) (20)
--(Creation)/utilization of provisions for
losses on sale of businesses including the
write-off of goodwill previously charged
direct to retained earnings ................. (368) 10 20
---- ---- ----
Credited after operating income ................. 13 1 25
---- ---- ----
Total exceptional items ......................... 13 1 (477)
==== ==== ====
Tax (net) ....................................... (11) -- 76
==== ==== ====
The exceptional items in 1996 comprised net profit, on which no tax was
payable, arising from the divestments of surplus property interests and the
utilisation of provisions for the sales or closure of Reed Books businesses.
These transactions generated exceptional cash proceeds, after expenses, of
(pound)62 million. In addition, net exceptional proceeds of (pound)335 million
were received in 1996 in respect of the sales in 1995 of consumer businesses,
and a further (pound)59 million on the sale of other non-core businesses.
The 1995 exceptional items were the net profit of (pound)381 million on the
completed sales of consumer publishing businesses and provisions of (pound)278
million and (pound)90 million for the loss, including the write-off of goodwill
previously charged direct to reserves, on the intended sale of the Reed Books
businesses and on other non-core businesses, respectively. Taxation of (pound)11
million was provided in respect of these transactions.
6. Adjusted figures
In previous years, "headline" figures have been presented which were
calculated in accordance with the recommendations of the Institute for
Investment Management and Research ("IIMR") which excluded certain abnormal non
trading items. In order to provide a more meaningful measure of underlying
performance, "adjusted" figures are now presented which exclude all exceptional
items. There is no difference between the headline and adjusted bases in the
comparative periods.
F-14
<PAGE>
6. Adjusted figures -- (continued)
The adjustments in arriving at adjusted profits are the exceptional items
and details are provided below:
1995 1996 1997
---- ---- ----
(in (pound) millions)
Income before tax ............................... 736 806 346
Adjustments:
Reed Travel Group
--provision for customer compensation and
related expenses and reorganization costs . -- -- 230
--non-cash write down of intangible assets .. -- -- 250
Acquisition related integration costs ......... -- -- 11
Year 2000 compliance costs .................... -- -- 11
Net profit on sale of businesses .............. (381) -- (28)
Provision for losses on sale of businesses .... 368 -- --
Merger expenses ............................... -- -- 3
Net profit on disposal of fixed assets ........ -- (1) --
---- ---- ----
Adjusted income before tax .................... 723 805 823
==== ==== ====
Net income ...................................... 554 604 207
Adjustments:
Reed Travel Group
--provision for customer compensation and
related expenses and reorganization costs . -- -- 143
--non-cash write down of intangible assets .. -- -- 250
Acquisition related integration costs ......... -- -- 7
Year 2000 compliance costs .................... -- -- 7
Net profit on sale of businesses .............. (370) -- (9)
Provision for losses on sale of businesses .... 368 -- --
Merger expenses ............................... -- -- 3
Net profit on disposal of fixed assets ........ -- (1) --
---- ---- ----
Adjusted net income ........................... 552 603 608
==== ==== ====
7. Operating income
1995 1996 1997
---- ---- ----
(in (pound) millions)
Operating income is arrived at after charging:
Operating lease rentals ....................... 82 69 61
Advertising and promotion ..................... 163 157 147
Royalties expense ............................. 99 112 124
8. Interest expense
1995 1996 1997
---- ---- ----
(in (pound) millions)
On loan capital ................................. (69) (72) (59)
On promissory notes, bank loans and overdrafts .. (53) (36) (40)
On capital leases ............................... (4) (1) (1)
---- ---- ----
(126) (109) (100)
==== ==== ====
F-15
<PAGE>
9. Taxes on income
(a) Taxes on income charged to earnings were as follows:
1995 1996 1997
---- ---- ----
(in (pound) millions)
U.K. taxation
Current ....................................... 62 71 76
Deferred ...................................... 6 3 (3)
Dutch taxation
Current ....................................... 52 51 50
Deferred ...................................... -- -- --
Rest of World taxation
Current ....................................... 36 70 70
Deferred ...................................... 8 -- 12
Share of tax attributable to associated
undertakings .................................. 6 6 9
Exceptional items
Current ....................................... 11 -- 4
Deferred ...................................... -- -- (80)
---- ---- ----
181 201 138
==== ==== ====
(b) The table below reconciles the local statutory tax rate to the
effective rate obtained by computing the tax charges as a percentage
of income before taxes.
1995 1996 1997
---- ---- ----
(in (pound) millions)
Income before taxes
United Kingdom ................................ 200 225 224
The Netherlands ............................... 177 159 150
Rest of World ................................. 346 421 449
Exceptional items ............................. 13 1 (477)
---- ---- ----
736 806 346
==== ==== ====
1995 1996 1997
---- ---- ----
(in (pound) millions)
Tax charged at local statutory rates ............ 226 246 80
Intangibles assets amortized .................... (49) (42) (44)
Tax credit on dividend from Reed Elsevier plc
to Elsevier NV ................................ (5) (3) (2)
Permanent differences ........................... 4 4 5
Other items ..................................... (1) (4) 8
Exceptional charges not tax relieved ............ 6 -- 91
---- ---- ----
Actual tax charge ............................... 181 201 138
==== ==== ====
Tax charged at local statutory rates is calculated by reference to the
appropriate statutory tax rate of each jurisdiction in which the combined
businesses operate.
F-16
<PAGE>
9. Taxes on income -- (continued)
(c) Deferred taxation
The closing balance is analyzed as follows:
1996 1997
---- ----
(in (pound) millions)
Deferred tax liabilities
Pension prepayment .................................... (42) (39)
Other timing differences .............................. (6) (14)
---- ----
(48) (53)
==== ====
Deferred tax assets
Excess of tax allowances over amortization ............ -- 1
Acquisition and other provisions ...................... 52 129
Other timing differences .............................. 1 --
---- ----
53 130
---- ----
Total assets ............................................ 5 77
==== ====
Deferred taxation is provided in full for timing differences using the
liability method.
The increase in the deferred tax asset in respect of acquisition and other
provisions is mainly attributable to the Reed Travel Group provision; see note
22.
No provision is made for the tax which would become payable on the
distribution of retained earnings by foreign subsidiaries or associated
companies or on the sale of intangible assets as there is no present intention
to distribute such retained earnings or to sell intangible assets giving rise to
a charge. The potential deferred tax has not been quantified as it is not
practicable to determine the liabilities.
10. Dividends--ordinary
1995 1996 1997
---- ---- ----
(in (pound) millions)
Reed International P.L.C.. ...................... 139 156 167
Elsevier NV ..................................... 154 192 198
---- ---- ----
Combined ........................................ 293 348 365
==== ==== ====
Dividends include the dividend in 1997 for Reed International P.L.C. of
14.6 pence per share (1996 13.6 pence per share; 1995 12.25 pence per share)
after adjusting for the two for one share subdivision which became effective on
May 2, 1997 and the dividend for Elsevier NV of Dfl 0.95 per share (1996 Dfl
0.76 per share; 1995 Dfl 0.59 per share).
Dividends paid to Reed International P.L.C. and Elsevier NV shareholders
are equalized at the gross level inclusive of the U.K. tax credit currently 20%,
reducing to 10% on April 6, 1999) received by certain Reed International P.L.C.
shareholders. The cost of funding the Reed International P.L.C. dividend is,
therefore, lower than that of Elsevier NV. The proposed dividends totalling
(pound)251 million as at December 31, 1997 were declared by the Boards of Reed
International P.L.C. and Elsevier NV as second interim dividends.
11. Trade receivables
1996 1997
---- ----
(in (pound) millions)
Trade accounts .......................................... 504 559
Less provisions ......................................... (38) (39)
---- ----
466 520
==== ====
F-17
<PAGE>
12. Inventories
1996 1997
---- ----
(in (pound) millions)
Raw materials ........................................... 26 22
Work in progress ........................................ 31 27
Finished goods .......................................... 82 72
---- ----
139 121
==== ====
13. Prepaid expenses and other current assets
1996 1997
---- ----
(in (pound) millions)
Amounts owed by associated undertakings ................. 2 2
Deferred tax ............................................ -- 57
Advance corporation tax ................................. 46 42
Other receivables ....................................... 57 61
Prepayments and accrued income .......................... 96 115
---- ----
201 277
==== ====
14. Non current receivables
1996 1997
---- ----
(in (pound) millions)
Trade receivables ....................................... 5 7
Deferred tax ............................................ 5 20
Pension prepayment ...................................... 132 133
Prepayments, accrued income and other receivables ....... 5 5
---- ----
147 165
==== ====
15. Investments held as fixed assets
1996 1997
---- ----
(in (pound) millions)
Investments in associated undertakings .................. 164 206
Loans to associated undertakings ........................ 2 2
Other investments ....................................... 14 19
---- ----
180 227
==== ====
Investments in associated undertakings principally comprise Reed Elsevier's
interests in Shepard's (a 50% partnership interest in a U.S. legal publisher),
Giuffre (a 40% shareholding in an Italian legal publisher), REZsolutions Inc. (a
67% shareholding in a hotel reservation and marketing business), and Book Club
Associates (a 50% investment in a U.K. partnership) which is intended to be sold
in due course.
REZsolutions Inc. is a joint venture company which was formed in late 1997,
and to which Reed Elsevier contributed the Utell hotel reservation business in
return for its 67% non-controlling interest. No gain or loss has been recognized
on this transaction.
Additions to other investments include (pound)5 million as part
consideration received in relation to minor business disposals in 1997.
F-18
<PAGE>
16. Property, plant and equipment
Plant,
Equipment
Land and & Computer
Buildings Systems Total
---------- --------- -----
(in (pound) millions)
Cost or valuation
At December 31, 1996 ........................... 135 614 749
Additions .................................... 5 118 123
Acquisitions ................................. 17 11 28
Sale of businesses ........................... (9) (8) (17)
Transfer to associated undertakings .......... -- (23) (23)
Disposals .................................... -- (83) (83)
Exchange differences ......................... -- (6) (6)
---- ---- ----
At December 31, 1997 ........................... 148 623 771
==== ==== ====
Accumulated depreciation
At December 31, 1996 ........................... 40 386 426
Charge for the year .......................... 4 92 96
Sale of businesses ........................... (4) (5) (9)
Transfer to associated undertakings .......... -- (13) (13)
Disposals .................................... -- (73) (73)
Exchange differences ......................... -- (4) (4)
---- ---- ----
At December 31, 1997 ........................... 40 383 423
==== ==== ====
Net book amounts
At December 31, 1997 ........................... 108 240 348
==== ==== ====
At December 31, 1996 ........................... 95 228 323
==== ==== ====
The cost or valuation of land and buildings comprises:
1996 1997
---- ----
(in (pound) millions)
Freehold property ....................................... 114 127
Leasehold property, more than 50 years unexpired ........ 18 18
Leasehold property, less than 50 years unexpired ........ 3 3
---- ----
135 148
==== ====
At December 31, 1997 and 1996, all assets were included at cost. No
depreciation has been provided on land ((pound)10 million (1996 (pound)5
million)).
The net book amount includes (pound)9 million (1996 (pound)11 million) in
respect of assets held under capital leases.
F-19
<PAGE>
17. Intangible assets
(in (pound) millions)
At December 31, 1995 ..................................... 2,708
Additions ................................................ 59
Disposals ................................................ (18)
Exchange differences ..................................... (199)
-----
At December 31, 1996 ..................................... 2,550
Additions (note 4) ....................................... 254
Transfer to associated undertakings ...................... (32)
Disposals ................................................ (48)
Exceptional write down of Reed Travel Group intangibles .. (250)
Exchange differences ..................................... 27
-----
At December 31, 1997 ..................................... 2,501
=====
18. Borrowings
1996 1997
---- ----
(in (pound) millions)
Bank loans, overdrafts and commercial paper
Drawn under facilities expiring in year to December 31,
1998 .................................................. -- 320
1999 .................................................. 19 --
2003 .................................................. 27 --
Commercial paper ........................................ 479 459
---- ----
525 779
==== ====
Year end
Currency interest rates 1996 1997
-------- -------------- ---- ----
% (in (pound) millions)
Other loans
Eurobond 1997 .............. U.S. dollar 9.63 88 --
Medium term notes 1997 ..... U.S. dollar 7.11-7.28 46 --
Eurobond 1999 .............. U.S. dollar 7.50 117 121
Medium term notes 1999 ..... U.S. dollar 7.66-7.76 11 12
Private placement 1999 ..... Guilders 9.70 42 41
Private placement 2000 ..... U.S. dollar 9.71 58 60
Public notes 2000 .......... U.S. dollar 6.63 88 90
Private placement 2003 ..... U.S. dollar 8.50 73 76
Loan Stock 1999/2004 ....... Sterling 9.00 5 --
Public notes 2005 .......... U.S. dollar 7.00 88 90
Loan Stock 2004/2009 ....... Sterling 4.50 2 --
Private placement 2023 ..... U.S. dollar 6.63 88 90
Public debentures 2025 ..... U.S. dollar 7.50 88 90
Finance leases ............. U.S. dollar Various 11 8
Miscellaneous .............. Guilders Various 7 17
---- ----
812 695
==== ====
F-20
<PAGE>
18. Borrowings -- (continued)
Bank loans,
overdrafts and
Analysis by year of repayment commercial paper Other Loans Total
---------------- ----------- -----
(in (pound) millions)
Within 1 year .......................... 779 6 785
---- ---- -----
Within 1 to 2 years .................... -- 180 180
Within 2 to 3 years .................... -- 156 156
Within 3 to 4 years .................... -- 5 5
Within 4 to 5 years .................... -- -- --
Thereafter ............................. -- 348 348
---- ---- -----
-- 689 689
---- ---- -----
Total .................................. 779 695 1,474
==== ==== =====
At December 31, 1996 bank loans and overdrafts of (pound)46 million were
classified as borrowings due after more than one year because they were
supported by facilities with the same bank that had a maturity of over one year;
there were no such borrowings classified as due after more than one year as at
December 31, 1997. The committed facility is subject to covenants which restrict
gross borrowings and secured borrowings by reference to Reed Elsevier's earnings
before interest, tax, depreciation and amortisation. There is also a covenant
restricting the ability to dispose of a substantial proportion of assets (except
for full consideration) if such disposal materially and adversely affects the
combined Reed Elsevier net assets or income.
Interest rates disclosed above are those on the underlying borrowings and
do not take account of net interest on interest rate swaps (see note 19).
Expiring Expiring
Undrawn bank facilities at December 31, 1997 within 1 year after 1 year Total
------------- ------------ -----
(in (pound) millions)
Overdraft ................................... 106 -- 106
Uncommitted lines of credit ................. 247 -- 247
Undrawn committed facilities ................ -- 555 555
Short term loans and overdrafts 1996 1997
---- ----
(in (pound) millions)
Weighted average interest rate during year .............. 5.8% 5.8%
Year end weighted average interest rate ................. 5.8% 6.3%
The weighted average interest rate for the year was computed by dividing
actual interest expense for the year by the average month-end amounts
outstanding for short term bank loans and commercial paper.
F-21
<PAGE>
19. Financial instruments
The use of financial instruments by Reed Elsevier is limited to hedging
activities and no trading positions result from their use; see Item 9A
Qualitative and Quantitative Disclosures about Market Risk. Consequently, the
impact of interest rate swaps and forward rate agreements is accrued as net
interest income or expense as realized over the life of the agreement. No
realized or unrealized gains or losses on such financial instruments are
recognized separately. Realized or unrealized gains and losses recognized on
forward foreign exchange contracts are offset by complementary realized or
unrealized gains or losses on the underlying transactions hedged through the use
of such contracts. The total net unrealized gain on open forward foreign
exchange contracts was (pound)2 million at December 31, 1997.
The estimated fair values of Reed Elsevier's financial instruments, both on
and off balance sheet, are as follows:
<TABLE>
<CAPTION>
Carrying Carrying
amount Fair Value amount Fair Value
December 31, December 31, December 31, December 31,
1996 1996 1997 1997
------------ ------------ ------------ ------------
(in (pound) millions)
<S> <C> <C> <C> <C>
Assets:
Cash .......................................... 85 85 110 110
Short term investments 1,056 1,056 734 734
Liabilities:
Bank loans, overdrafts and commercial paper ... (525) (525) (779) (779)
Other loans ................................... (812) (830) (695) (721)
Off balance sheet:
Interest rate swaps ........................... -- (2) -- (1)
Currency swaps ................................ -- 2 1 (2)
Forward rate agreements ....................... -- -- -- --
Forward foreign exchange contracts ............ -- 5 -- 2
</TABLE>
The amounts shown as carrying amounts in respect of off balance sheet
financial instruments represent accruals or deferred income arising from these
financial instruments. For certain instruments, including cash, short term
investments and short term debt, it has been assumed that the carrying amount
approximates fair value because of the short maturity of these instruments. The
fair value of long term debt has been based on current rates offered to Reed
Elsevier for debt of the same remaining maturities. The fair values for interest
rate swaps represent the replacement cost calculated using market rates of
interest as at December 31, 1997 and 1996.
The gross notional amounts of interest rate swaps are as follows:
<TABLE>
<CAPTION>
December 31, New Maturities/ Forward swaps December 31,
1996 Contracts terminations commencing 1997
------------ --------- ------------ ------------- ------------
(in (pound) millions; stated at exchange rates
prevailing at December 31, 1997)
<S> <C> <C> <C> <C> <C>
Interest rate swaps
U.S. dollar ..................... 500 -- (440) 181 241
Australian dollar ............... 10 14 (4) -- 20
Canadian dollar ................. 3 -- -- -- 3
French franc .................... -- 95 -- -- 95
Guilder ......................... 138 -- (45) -- 93
---- ---- ---- ---- ----
651 109 (489) 181 452
---- ---- ---- ---- ----
Forward swaps
U.S. dollar ..................... 181 -- -- (181) --
---- ---- ---- ---- ----
181 -- -- (181) --
---- ---- ---- ---- ----
Totals .......................... 832 109 (489) -- 452
==== ==== ==== ==== ====
</TABLE>
F-22
<PAGE>
19 Financial instruments - (continued)
The amounts of future maturities and outstanding notional principal of the
above interest rate swap agreements are as follows:
Maturities Outstanding
in year notional
ending principal at
December 31, December 31,
------------ ------------
(in (pound) millions)
1998........................... 157 295
1999........................... 79 216
2000........................... 111 105
2001........................... 60 45
Thereafter..................... 45 --
-----
452
=====
The weighted average interest rates on interest rate swap agreements in
existence at December 31, 1997 are shown below:
U.S.$ AUD Dfl CAD FFr
----- --- --- --- ---
Interest Rate Swaps
Pay Fixed .................... 6.74% 7.71% -- 8.24% 4.34%
Receive Floating ............. 5.73% 5.03% -- 3.80% 3.58%
Pay Floating ................. -- -- 3.61% -- --
Receive Fixed ................ -- -- 6.15% -- --
The fixed rates shown above as payable and receivable under interest rate
swaps are the weighted average fixed rates specified in the swap contracts. The
floating rates shown above as payable and receivable under interest rate swaps
are the weighted average floating rates in effect as of December 31, 1997. The
floating rate portions of the swaps are based on U.S. dollar commercial paper
rates or LIBOR, Australian dollar Bank Bill rates, Canadian dollar Banker's
Acceptance rates, Dutch guilder AIBOR or French franc PIBOR. The weighted
average floating rates shown above assume these floating interest rates will
remain constant throughout the remaining terms of the swap contracts. However,
changes in any of these floating interest rates would affect the weighted
average floating rates shown.
At December 31, 1997, Reed Elsevier had one swap contract with a notional
amount of CAD 8 million ((pound)3 million) that contained an embedded written
interest rate option at December 31, 1997. Under this contract, Reed Elsevier
pays a below-market fixed rate of interest and receives a floating rate of
interest (Canadian dollar Banker's Acceptance), as long as the floating rate of
interest remains at or below a predetermined rate. If the floating rate exceeds
the predetermined rate, Reed Elsevier pays a floating rate of interest and
receives a floating rate of interest. In such circumstances, the floating rate
of interest to be paid by the company is calculated as the floating interest
rate (Canadian dollar Banker's Acceptance) less a predetermined spread which is
contractually agreed with the counterparty. The spread represents the premium
income earned by Reed Elsevier for writing the embedded interest rate option.
At December 31, 1997, the gross notional amount of forward rate agreements
totalled (pound)120 million. Two agreements covered a three month period ending
in April, 1998. Both agreements are denominated in Dutch guilders (Dfl 400
million).
December 31, New December 31, Average rate
1996 contracts Maturities 1997 receivable
---- --------- ---------- ---- ----------
(In (pound) millions, stated at exchange rates prevailing at
December 31, 1997)
U.S. dollars.......... -- 120 (120) --
Guilders.............. 15 120 (15) 120 3.64%
Sterling.............. -- 100 (100) --
--- --- ----- ----
15 340 (235) 120
=== === ===== ====
F-23
<PAGE>
19 Financial instruments - (continued)
At December 31, 1997, the gross notional amount of forward foreign exchange
contracts totalled (pound)469 million (1996 (pound)475 million) as shown below:
December 31, 1996 December 31, 1997
------------------- ------------------
Currency Currency Currency Currency
sold bought sold bought
---- ------ ---- ------
(in (pound) millions)
U.S. dollars ................... 184 48 174 39
Guilders ....................... 27 79 31 12
Sterling ....................... 9 96 2 143
Other currencies ............... 15 17 26 42
--- --- --- ---
235 240 233 236
=== === === ===
All forward foreign exchange contracts mature within one year.
20 Obligations under capital leases
The future capital lease payments to which the combined businesses are
committed are:
1996 1997
---- ----
(in (pound) millions)
Repayable:
Within 1 year ...................................... 6 4
Between 1 and 2 years .............................. 3 3
Between 2 and 5 years .............................. 2 2
Over 5 years ....................................... 1 --
Less: interest charges allocated
to future period .................................. (1) (1)
--- ---
Total............................................... 11 8
=== ===
Obligations included in short term
borrowings and current portion of
long term borrowings............................... 6 4
--- ---
Obligations included in long term
borrowings, less current portion................... 5 4
=== ====
21 Accounts payable and accrued liabilities
1996 1997
---- ----
(in (pound) millions)
Accounts payable ................................... 200 187
Subscriptions received in advance .................. 388 418
Interest payable ................................... 7 2
Accrued salaries ................................... 42 48
Accruals ........................................... 224 246
Other creditors .................................... 193 230
----- -----
1,054 1,131
===== =====
F-24
<PAGE>
22 Provisions for liabilities and charges
<TABLE>
<CAPTION>
Losses on
sale of Pensions and Reed Travel
business Acquisitions severance pay Group Other Total
-------- ------------ ------------- ----- ----- -----
(in (pound) millions)
<S> <C> <C> <C> <C> <C> <C>
At December 31, 1996 ............ 42 20 8 -- 5 75
Provided ........................ -- -- 2 230 -- 232
Utilised ........................ (20) (6) (1) (7) -- (34)
Exchange differences ............ -- -- -- (3) -- (3)
---- ---- ---- ---- ---- ----
At December 31, 1997 ............ 22 14 9 220 5 270
==== ==== ==== ==== ==== ====
</TABLE>
The provision for Reed Travel Group of (pound)230 million is in respect of
the estimated cost of programs to recompense advertizers in relation to
irregularities in circulation claims, related expenses and reorganization costs.
23 Combined share capital
Issued and Issued and
Authorised Fully Paid Fully Paid
1997 1996 1997
---- ---- ----
(in (pound) millions)
Reed International P.L.C
Preference shares (cumulative) at
(pound)1.00 each
Redeemable at par at the option of
the company
3.15% (previously 4.5%) .................. 2 2 2
3.85% (previously 5.5%) .................. 1 1 1
Non-redeemable
3.50% (previously 5%) .................... -- -- --
4.90% (previously 7%) .................... 1 1 1
--- --- ---
Non equity shares ........................ 4 4 4
Ordinary shares of 12.5p each
(previously 25p) ........................ 143 142 143
Unclassified shares of 12.5p
each (previously 25p) ................... 41 -- --
--- --- ---
Total .................................... 188 146 147
=== === ===
Following the resolution at the Annual General Meeting in April 1997, Reed
International P.L.C. undertook a two for one subdivision of its ordinary shares
which became effective on May 2, 1997.
Issued and Issued and
Authorised Fully Paid Fully Paid
1997 1996 1997
---- ---- ----
(in Dfl millions)
Elsevier NV
Ordinary shares of Dfl 0.10 each .......... 210 67 67
=== === ===
The Reed International P.L.C. preference share capital of (pound)4 million
represents non-equity share capital and is the extent of the non-equity interest
in combined shareholders' equity.
Combined share capitals of(pound)167 million (1996(pound)169 million)
exclude the R-shares of Elsevier NV held by Reed International P.L.C.
Details of share option schemes separately operated by Reed International
P.L.C. and Elsevier NV are presented in the notes to their respective financial
statements.
F-25
<PAGE>
24 Leasing commitments
Minimum future rental commitments under non-cancellable operating leases at
December 31, 1997 were as follows:
Operating
leases
------
(in (pound)
millions)
1998 .............................................................. 63
1999 .............................................................. 48
2000 .............................................................. 47
2001 .............................................................. 45
2002 .............................................................. 42
2003 and thereafter ............................................... 224
---
469
===
The annual commitments under operating leases at December 31, 1997 are:
(in (pound)
millions)
Expiry of operating leases -- falling due within 1 year 8
-- falling due within 1 to 5 years 18
-- falling due after 5 years 37
-----
63
=====
25 Contingent liabilities
There are contingent liabilities amounting to (pound)33 million (1996
(pound)40 million) in respect of borrowings of former subsidiaries and (pound)8
million (1996 (pound)10 million) in respect of borrowings of associated
undertakings.
There are a number of outstanding legal claims against the combined
businesses but they are not considered to be material in the context of these
financial statements.
26 Pension schemes
A number of pension schemes are operated around the world. The major
schemes are of the defined benefit type with assets held in separate trustee
administered funds.
The main U.K. scheme, which covers the majority of U.K. employees, was
subject to a valuation by Watson Wyatt Partners, consultants, as at April 5,
1997. The scheme is valued formally every three years, the next valuation being
as at April 2000.
The principal 1997 valuation assumptions were:
Actuarial method : projected unit method
Annual rate of return on investments : 8%
Annual increase in total pensionable remuneration : 6%
Annual rate of return : 3.5%
Annual increase in present and future pensions
in payment : 4%
The actuarial value placed on the assets was sufficient to cover 123% of
the benefits that had accrued to members. The actuarial surplus is being spread
as a level amount over the average remaining service lives of current employees,
which has been assessed as eight years. The market value of the scheme's assets
at the date of valuation was (pound)1,293 million excluding assets held in
respect of members' additional voluntary contributions. This valuation takes
account of the measures announced by the U.K. government in its budget of July,
1997, which ended the rights of U.K. pension funds to receive tax credits on
U.K. dividends. On the recommendation of the actuaries, no company contributions
have been made to the scheme since April 1, 1989.
The main non U.K. schemes are in the United States and the Netherlands.
Assessments for accounting purposes have been carried out by external qualified
actuaries using prospective benefit methods with the objective that current and
future charges remain a stable percentage of pensionable payroll. The principal
actuarial assumptions adopted in the assessments of the major schemes assume
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.
Reed Elsevier companies have no significant health and medical plans
providing post-retirement benefits.
F-26
<PAGE>
26 Pension schemes - (continued)
The net pension charge was (pound)25 million (1996 (pound)17 million; 1995
(pound)22 million), including a net (pound)1 million (1996 (pound)7 million,
1995 (pound)6 million) SSAP 24 credit related to the main U.K. scheme. The net
SSAP 24 credit comprises a regular cost of (pound)19 million (1996 (pound)17
million, 1995 (pound)17 million), offset by amortization of the net actuarial
surplus of (pound)20 million (1996 (pound)24 million, 1995 (pound)23 million).
Pension contributions made in the year amounted to (pound)26 million (1996
(pound)24 million, 1995 (pound)28 million). A prepayment of (pound)133 million
(1996 (pound)132 million, 1995 (pound)125 million) is included in non current
receivables, representing the excess of the pension credit to profit since 1988
over the amounts funded to the main U.K. scheme.
27 Statements of Cash Flows
1995 1996 1997
---- ---- ----
(in (pound) millions)
Financing
Issue of ordinary shares ...................... 33 35 21
Issuance of long term borrowings .............. 284 -- 4
Repayment of long term borrowings ............. (2) (80) (151)
Redemption of minority interest
preference shares ........................... -- -- (3)
Redemption of finance leases .................. -- (8) (6)
Net movement in promissory notes
and bank loans .............................. (286) 43 255
---- ---- ----
29 (10) 120
==== ==== ====
The repayment of long term borrowings principally relates to a $150 million
Eurobond and $80 million of medium term notes which matured during the year. In
1996 a $125 million Eurobond was repaid on maturity.
Reconciliation of net debt
Current
asset
Cash Investments Borrowings Total
---- ----------- ---------- -------
(in (pound) millions)
At December 31, 1995 ............. 86 757 (1,523) (680)
------ ------ ------ ------
Cash flow ........................ 2 428 45 475
Inception of finance leases ...... -- -- (5) (5)
Exchange differences ............. (3) (129) 146 14
------ ------ ------ ------
At December 31, 1996 ............. 85 1,056 (1,337) (196)
------ ------ ------ ------
Cashflow ......................... 29 (299) (102) (372)
Inception of finance leases ...... -- -- (2) (2)
Loans in acquired businesses ..... -- -- (10) (10)
Exchange differences ............. (4) (23) (23) (50)
------ ------ ------ ------
At December 31, 1997 ............. 110 734 (1,474) (630)
====== ====== ====== ======
Borrowings comprise loan capital, finance leases, promissory notes and bank
loans and are further analyzed in note 18.
Discontinued operations contributed(pound)65 million (1996:(pound)78
million, 1995:(pound)94 million) to net cash inflow from operating activities.
1995 1996 1997
---- ---- ----
(in (pound) millions)
Acquisitions
Purchase of subsidiary undertakings
(including deferred consideration .......... (71) (155) (713)
from prior years)
Investment in associated undertakings ......... (2) (157) (12)
Purchase of fixed asset investments ........... (1) (4) (1)
---- ---- ----
Total ......................................... (74) (316) (726)
==== ==== ====
Of the (pound)12 million additions to associated undertakings, (pound)10
million represents a cash contribution to the joint venture REZsolutions Inc.,
on its formation.
F-27
<PAGE>
27 Statements of Cash Flows - (continued)
Additions to other investments include (pound)5 million as part
consideration received in relation to minor business disposals in 1997.
1995 1996 1997
---- ---- ----
(in (pound) millions)
Exceptional net proceeds from
sale/closure of business
Net assets divested ........................... 212 48 73
Goodwill reinstated on sales
of businesses ............................... 96 25 15
Provision made in 1995 for losses
on sales of businesses ...................... -- (10) (20)
Net profit .................................... 381 -- 28
---- ---- ----
Consideration in respect of sales
of businesses, net of expenses .............. 689 63 96
Consideration received in respect
of sale of businesses in prior years,
net of expenses ............................. -- 339 2
---- ---- ----
Net consideration from sales
of businesses ............................... 689 402 98
---- ---- ----
Net proceeds from closures of business ........ -- -- 8
---- ---- ----
Total ......................................... 689 402 106
==== ==== ====
Satisfied by:
Cash .......................................... 354 394 104
Investments ................................... -- 6 --
Amount receivable ............................. 369 2 2
Lease commitments accrued less costs
paid to date ................................ (34) -- --
---- ---- ----
Total ......................................... 689 402 106
==== ==== ====
28 Post Balance Sheet Events
(i) Sale of IPC Magazines
On January 5, 1998 Reed Elsevier announced the sale of IPC Magazines
(excluding New Scientist, which is being retained) to an institutional buy-out
organised by Cinven, for cash consideration of (pound)860 million. The sale will
result in an exceptional profit in excess of (pound)500 million and net proceeds
after appropriate tax provisions and selling costs of the order of (pound)750
million. In the year ended December 31, 1997, the business disposed of generated
sales and operating profit of (pound)342 million and (pound)69 million
respectively.
(ii) Proposed merger of Reed Elsevier and Wolters Kluwer
On March 9, 1998, Reed International P.L.C. and Elsevier NV announced that
the proposed merger with Wolters Kluwer nv, previously announced on October 13,
1997, had been abandoned. The Boards of Reed International P.L.C. and Elsevier
NV had concluded that the revisions to the merger terms which Wolters Kluwer nv
sought -- reflecting in the main their concerns about the impact of regulatory
approvals -- meant that the merger could no longer be seen to be in the best
interests of shareholders.
29 Summary of differences between U.K. and Dutch GAAP and U.S. GAAP
The combined financial statements are prepared in accordance with generally
accepted accounting principles in the United Kingdom and the Netherlands ("U.K.
and Dutch GAAP"), which differ in certain significant respects from generally
accepted accounting principles in the United States ("U.S. GAAP"). These
differences relate principally to the following items and the approximate effect
on net income and combined shareholders' equity is shown in the following
tables.
Discontinued operations and sale of businesses.
Discontinued operations, as separately categorized in the income statements
under U.K. and Dutch GAAP and U.S. GAAP, may relate only to significant business
segments. Under U.K. and Dutch GAAP, such businesses are separately segmented as
Discontinued only when sale transactions or closures have been completed. Under
U.S. GAAP, such businesses are segmented as Discontinued once formal commitment
to sale or closure is made.
Under U.S. GAAP net income from discontinued operations includes all
operating results of the discontinued operations and the gain or loss on sale.
Under U.K. and Dutch GAAP operating results from discontinued operations are
disclosed as a separate segment within trading profit and the gain or loss on
sale is disclosed as an exceptional item. Under U.K. and Dutch GAAP discontinued
operations relate wholly to the Consumer segment and comprise the consumer
publishing business divested
F-28
<PAGE>
29 Summary of differences between U.K. and Dutch GAAP and U.S. GAAP -
(continued)
in 1995, IPC Magazines, excluding New Scientist, and certain operations of Reed
Books, which have been divested by the date of approval of this Annual Report.
It is the intention to sell the remaining operations of Reed Books in due
course.
The adjustment in relation to the sale of businesses in 1995 reflects the
substantially lower goodwill and intangible asset values attributed to the
businesses concerned under U.S. GAAP due to amortization in prior periods.
Goodwill and other intangible assets
Under U.K. and Dutch GAAP, goodwill arising on business combinations
treated as acquisitions may be written off against retained earnings. Other
intangibles, principally publishing rights and titles, databases and exhibition
rights, are carried at fair value on acquisition with no systematic
amortization, as they have no finite economic life. The carrying value of these
intangible assets are evaluated periodically to determine whether there has been
a permanent loss in value, by reviewing current and estimated future earnings
and cash flows on an undiscounted basis.
Under U.S. GAAP, goodwill and other intangibles acquired prior to November
1, 1970, the effective date of APB Opinion 17, Intangible Assets, of (pound)35
million are not amortized as, in the opinion of management, these assets have no
evident limited life. The cost of intangible assets acquired after October 31,
1970 is required to be amortized over the period of their estimated useful
lives, to a maximum of 40 years.
The gross cost under U.S. GAAP, as at December 31, 1997, of goodwill is
(pound)1,994 million (1996 (pound)1,574 million) and of other intangibles
including those held in associated companies is (pound)3,014 million (1996
(pound)2,782 million). Accumulated amortization under U.S. GAAP, as at December
31, 1997, of goodwill is (pound)653 million (1996 (pound)305 million) and of
other intangibles including those held in associated companies is (pound)565
million (1996 (pound)415 million).
On December 3, 1997, the U.K. Accounting Standards Board issued Financial
Reporting Standard 10 ("FRS 10"), "Goodwill and Intangible Assets", which will
be applicable for the 1998 financial year. FRS 10 requires both goodwill and
intangible assets to be capitalized on acquisitions, and amortized over their
estimated useful lives, which are presumed to be no more than 20 years. It is
intended on adoption of FRS 10 in the 1998 combined financial statements, to
capitalize all acquired goodwill and intangible assets and to amortize them over
a maximum period of 20 years, with retrospective application. It is intended,
where appropriate, for the 1998 financial year, to conform the US GAAP
amortisation period with the maximum period to be adopted under U.K. and Dutch
GAAP in that year.
The increase in the adjustment for amortisation in 1997 reflects the
incremental non-cash write down of Reed Travel Group goodwill and intangibles
under U.S. GAAP.
Deferred taxation
Under Dutch GAAP, deferred taxation is provided in full. Under U.K. GAAP,
deferred taxation is only provided to the extent an asset or liability is
expected to crystallize.
In the combined financial statements deferred tax is provided in full
because there is no material difference between the application of the two
methods in the circumstances of Reed Elsevier. Under U.S. GAAP, deferred
taxation is provided on all temporary differences under the liability method,
subject to a valuation allowance where applicable in respect of deferred tax
assets, in accordance with SFAS 109, Accounting for Income Taxes. The principal
adjustment to apply U.S. GAAP is to provide deferred taxation on temporary
differences arising from the amortization under U.S. GAAP of goodwill and other
intangible assets.
Acquisition accounting
Prior to the introduction of U.K. Financial Reporting Standard 7 ("FRS7")
"Fair Values In Acquisition Accounting" which is effective in respect of 1995
and subsequent years, under U.K. and Dutch GAAP certain items, such as
integration costs incurred in the combined businesses' existing operations and
the costs of commitments and developments in progress, may have been provided as
part of the purchase accounting adjustments on acquisition. Under U.S. GAAP some
of these items are only expensed when the costs are incurred. Under FRS7,
provisions for restructuring and integration costs may no longer be provided as
part of purchase accounting.
Revaluation of land and buildings
Under U.K. and Dutch GAAP, land and buildings may be restated on the basis
of appraised values in financial statements presented in all other respects in
accordance with the historical cost convention. Such restatements are not
permitted under U.S. GAAP.
Pensions
The combined businesses account for pension costs under the rules set out
in SSAP 24. Its objectives and principles are broadly in line with those set out
in the U.S. accounting standard for pensions, SFAS 87, Employers' Accounting for
Pensions. However, SSAP 24 is less prescriptive in the application of the
actuarial method and assumptions to be applied in the calculation of pension
costs.
F-29
<PAGE>
29 Summary of differences between U.K. and Dutch GAAP and U.S. GAAP -
(continued)
Short term obligations expected to be refinanced
Under U.S. GAAP, where it is intended to refinance short term obligations
on a long term basis and this is supported by an ability to consummate the
refinancing, such short term obligations should be excluded from current
liabilities and shown as long term obligations. Under U.K. and Dutch GAAP, such
obligations can only be excluded from current liabilities where, additionally,
the debt and the facility are under a single agreement or course of dealing with
the same lender or group of lenders. Short term obligations totalling, as at
December 31, 1997, (pound)602 million (1996 (pound)276 million) would thus be
excluded from current liabilities under U.S. GAAP and shown as long term
obligations.
Sale and lease back transactions of real estate
U.S. GAAP prescribes certain requirements for income recognition on real
estate transactions relating to the consummation of a sale and the sellers'
continuing involvement in a property, which are not found in U.K. and Dutch
GAAP. This results in the profit from certain sale and lease back transactions
being deferred and recorded in different accounting periods under U.S. GAAP.
Ordinary dividends
Under U.K. and Dutch GAAP, dividends are provided for in the year in
respect of which they are proposed by the directors. Under U.S. 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 U.K. and Dutch GAAP are required to be disclosed
separately due to their size or infrequency.
Adjusted earnings
In note 6 an alternative "adjusted" earnings measure is presented as
permitted by U.K. and Dutch GAAP. U.S. GAAP does not permit the presentation of
other income measures.
Stock based compensation
SFAS 123 "Accounting for stock based compensation" is effective for fiscal
years beginning after December 15, 1995. The standard establishes a fair value
based method of accounting for stock based compensation plans and encourages the
recognition of the compensation cost on this basis in the income statement.
Where the cost is not recognized the proforma effect of the valuation method on
net income must be disclosed. Under U.K. and Dutch GAAP the compensation element
is not required to be recognized in net income.
The disclosure only provisions of SFAS 123 have been adopted. If
compensation costs based on fair value at the grant dates had been recognised in
the income statement net income would not have been materially affected.
Recently Issued Accounting Pronouncements
The effects on the Combined Businesses of recently issued accounting
pronouncements are summarised below.
SFAS 130 - "Reporting comprehensive income" was issued in June, 1997. This
standard establishes requirements for the reporting and display of comprehensive
income and its components (revenues, expenses, gains and losses) in a full set
of general purpose financial statements.
SFAS 131 - "Disclosures about segments of an enterprise and related
information" was issued in June, 1997. This standard specified revised
guidelines for determining and entity's operating segments and the type and
level of financial information to be disclosed. Implementation of this standard
will require segmental disclosure of additional financial information but it is
unlikely to have a significant impact on the measurement of revenues or
operating income before exceptional items as reported by existing segments.
SFAS 132 - "Employer's disclosures about pensions and other post retirement
benefits" was issued in February 1998. This standard standardizes disclosure
requirements for pensions and other post retirement benefits. The standard does
not change the measurement or recognition of these plans.
These standards are required to be adopted for U.S. GAAP reporting, for the
financial year ended December 31, 1998.
F-30
<PAGE>
29. Summary of differences between U.K. and Dutch GAAP and U.S. GAAP -
(continued)
Approximate effects on net income of differences between U.K.
and Dutch GAAP and U.S. GAAP:
Year ended December 31,
-----------------------------
1995 1996 1997
---- ---- ----
(in (pound) millions)
Net income under U.K. and
Dutch GAAP .................................. 554 604 207
U.S. GAAP adjustments:
Amortization of goodwill and
other intangibles .......................... (120) (107) (259)
Deferred taxation ........................... (31) (27) 71
Acqusition accounting ....................... (14) (9) (1)
Sale and lease back ......................... 1 14 1
Pension and other ........................... 2 18 24
Sale of businesses .......................... 301 -- --
---- ---- ----
Net income under U.S. GAAP .................... 693 493 43
==== ==== ====
Analyzed:
Continuing operations ....................... 270 450 3
Discountinued operations
--income from operations .................... 70 43 40
--gain on sale net of provisions ............ 353 -- --
---- ---- ----
693 493 43
==== ==== ====
Approximate effects on combined shareholders' equity of differences
between U.K. and Dutch GAAP and U.S. GAAP:
At December 31,
----------------------
1996 1997
---- ----
(in (pound) millions)
Combined shareholders' equity under
U.K. and Dutch GAAP ............................ 2,071 1,494
U.S. GAAP adjustments:
Goodwill and other intangibles ................. 952 1,124
Deferred taxation .............................. (191) (128)
Acquisition accounting ......................... 17 19
Pension and other .............................. (9) 14
Ordinary dividends ............................. 235 251
------ ------
Combined shareholders' equity under
U.S. GAAP ...................................... 3,075 2,774
====== ======
F-31
<PAGE>
29. Summary of differences between U.K. and Dutch GAAP and U.S. GAAP -
(continued)
Cash Flow Information
Cash flows under U.K. and Dutch GAAP in respect of taxation, returns on
investment and servicing of finance would be included within operating
activities under SFAS 95. Under SFAS 95 cash is aggregated for cash flow
statements with cash equivalents being short term investments with original
maturities of three months or less.
Under U.S. GAAP, the following amounts would be reported:
Year ended December 31,
---------------------------------
1995 1996 1997
---- ---- ----
(in (pound) millions)
Net cash provided by
operating activities ................... 709 721 708
Net cash provided/(used)
in investing activities ................ 120 18 (762)
Net cash (used) in financing
activities ............................. (260) (278) (244)
------ ------ ------
Net increase/(decrease) in
cash and cash equivalents .............. 569 461 (298)
====== ====== ======
Reconciliation of cash and
cash equivalents:
Cash under U.K. and Dutch GAAP .......... 86 85 110
Current asset investments with
original maturity within 3 months ...... 724 1,054 704
------ ------ ------
Cash and cash equivalents
under U.S. GAAP ........................ 810 1,139 814
====== ====== ======
Pensions
Reed Elsevier operates a number of pension schemes around the world. The
major schemes are of a defined benefit type with assets held in separate trustee
administered funds.
The most significant scheme is the main U.K. scheme which covers the
majority of U.K. employees. The main U.K. pension scheme is much more
significant than the other pension schemes of Reed Elsevier plc because it
includes substantial numbers of pensioners and deferred pensioners retained when
the manufacturing business of Reed International P.L.C. were divested in the
late 1980's.
The scheme is funded to cover future pension liabilities, including
expected future earnings and pension increases, in respect of service up to the
balance sheet date. The net pension costs/(credits) in respect of this scheme
calculated in accordance with SFAS 87 were as follows:
Year ended
December 31,
---------------------
1996 1997
---- ----
(in (pound) millions)
Service costs--benefits earned
during the year ................................. 20 20
Interest cost on projected
benefit obligations ............................. 78 78
Actual (return) on plan assets ................... (135) (223)
Net amortization and deferral
of current year asset gain ...................... 15 100
---- ----
Net periodic pension credits ..................... (22) (25)
==== ====
F-32
<PAGE>
29. Summary of differences between U.K. and Dutch GAAP and U.S. GAAP -
(continued)
The following table sets forth the funded status under SFAS 87 of the main
U.K. scheme:
At December 31,
---------------------
1996 1997
---- ----
(in (pound) millions)
Total accumulated and vested benefit obligation .......... 829 893
====== ======
Projected benefit obligation ............................. (897) (924)
Plan assets at fair value ................................ 1,278 1,462
------ ------
Plan assets in excess of projected benefit obligation .... 381 538
Unrecognized net gain .................................. (191) (329)
Unrecognized net transition (asset) .................... (73) (64)
Unrecognized prior service cost ........................ 18 4
------ ------
Prepaid pension cost ..................................... 135 159
====== ======
The principal assumptions used were:
1996 1997
---- ----
Discount rate .................................. 9% 8%
Salary increases ............................... 7% 6%
Investment return .............................. 9% 8%
Pension increases .............................. 5% 4%
Plan assets are invested primarily in equities, index-linked securities
and liquid assets.
The main U.S. pension schemes cover approximately 9,000 of the U.S.
employees. The benefits are based on years of service and the employees'
compensation. The funding policy is to contribute at least the minimum amount
required by law. The net pension costs/(credits) in respect of this scheme
calculated in accordance with SFAS 87 were as follows:
Year ended
December 31,
---------------------
1996 1997
---- ----
(in (pound) millions)
Service costs--benefits earned
during the year ................................. 10 9
Interest cost on projected
benefit obligations ............................. 10 10
Actual (return) on plan assets ................... (13) (24)
Net amortization and deferral
of current year asset gain ...................... 4 14
--- ---
Net periodic pension cost ........................ 11 9
=== ===
F-33
<PAGE>
29. Summary of differences between U.K. and Dutch GAAP and U.S. GAAP -
(continued)
The following table sets forth the funded status under SFAS 87 of the main
U.S. schemes:
At December 31,
--------------------
1996 1997
---- ----
(in (pound) millions)
Total accumulated and vested benefit obligation ....... 94 113
==== ====
Projected benefit obligation .......................... (120) (141)
Plan assets at fair value ............................. 115 143
---- ----
Projected benefit obligation in excess of plan assets . (5) 2
Unrecognized net transition liability ................ (12) (22)
Unrecognized prior service cost ...................... 1 1
---- ----
Accrued pension cost .................................. (16) (19)
==== ====
The principal assumptions used were:
1996 1997
---- ----
Discount rate.................................... 7.71% 7.50%
Salary increases................................. 3.0% to 8.0% 3.0% to 8.0%
Investment return................................ 9.50% 9.50%
Plan assets are invested primarily in listed stocks and U.S. bonds.
F-34
<PAGE>
REED ELSEVIER COMBINED BUSINESSES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Balance at
beginning Cost and Other Balance at
of year expenses movements Deductions end of year
------- -------- --------- ---------- -----------
(in (pound) millions)
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1995
Allowance for doubtful
receivables ...................... 38 8 (1) (5) 40
Year ended December 31, 1996
Allowance for doubtful
receviables ...................... 40 17 (9) (10) 38
Year ended December 31, 1997
Allowance for doubtful
receivables ...................... 38 19 (5) (13) 39
</TABLE>
F-35
<PAGE>
REED INTERNATIONAL P.L.C.
CONSOLIDATED FINANCIAL STATEMENTS
F-36
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Reed International P.L.C.
We have audited the accompanying consolidated balance sheets as of
December 31, 1997 and 1996, and the related consolidated statements of income,
total recognized gains and losses, changes in shareholders' equity and cash
flows for the three years ended December 31, 1997. These consolidated financial
statements are the responsibility of the company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United Kingdom and the United States. Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall presentation of the financial statements. We believe that
our audit provides a reasonable basis for our opinion.
In our opinion, the aforementioned consolidated financial statements
present fairly, in all material respects, the financial position of Reed
International P.L.C. and its subsidiaries at December 31, 1997 and 1996 and the
results of their operations and their cash flows for the three years ended
December 31, 1997 in conformity with accounting principles generally accepted in
the United Kingdom (which differ in certain material respects from generally
accepted accounting principles in the United States - see note 17).
DELOITTE & TOUCHE
Chartered Accountants & Registered Auditors
London, England
March 11, 1998
F-37
<PAGE>
REED INTERNATIONAL P.L.C. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Year ended December 31,
-------------------------------------
Notes 1995 1996 1997
(in (pound) millions except
per share amount)
Selling, general and
administrative expenses ........... (2) (1) (2)
Net interest income ................ 5 4 4 3
Income from interests in
associated undertakings ........... 3
- - - --Share of profits before
exceptional items ................. 364 405 413
- - - --Share of exceptional items ....... 7 -- (251)
---- ---- ----
Total .............................. 371 405 162
---- ---- ----
Income before taxes ................ 373 408 163
Taxes on income .................... 6 (96) (106) (73)
---- ---- ----
Income before preference
dividends ......................... 277 302 90
---- ---- ----
Preference dividends ............... -- -- --
---- ---- ----
Net income for the financial
year .............................. 277 302 90
==== ==== ====
Earnings per ordinary share
(pence) ........................... 7 24.6p 26.6p 7.9p
==== ==== ====
Selling, general and administrative expenses include (pound)529,000 (1996:
(pound)572,000, 1995: (pound)462,000) paid in the year to Reed Elsevier plc
under a contract for the services of the directors and administrative support
and exceptional costs of (pound)1,443,000 (1996 and 1995: (pound)nil) paid to
Reed Elsevier plc relating to the proposed merger of Reed International P.L.C.,
Elsevier NV and Wolters Kluwer nv which has now been abandoned.
STATEMENTS OF TOTAL RECOGNIZED GAINS AND LOSSES
Year ended December 31,
----------------------------
1995 1996 1997
---- ---- ----
(in (pound) millions)
Net income for the financial year ........... 277 302 90
Exchange translation differences ............ 3 (67) (6)
---- ---- ----
Total recognized gains and losses
for the financial year ..................... 280 235 84
==== ==== ====
The historical cost profits and losses are not materially different from
the results disclosed above.
The accompanying notes on pages F-42 to F-49 are an integral part of these
consolidated financial statements.
F-38
<PAGE>
REED INTERNATIONAL P.L.C. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
At December 31,
-------------------------------
Notes 1996 1997
(in (pound) millions)
Fixed assets:
Investments ............................ 9 1,052 740
Current assets:
Debtors ................................ 10 197 209
Short term investments ................. 2 2
----- ---
Current assets ........................... 199 211
Creditors: amounts falling
due within one year ..................... 11 (119) (125)
----- ----
Net current assets ....................... 80 86
----- ---
Total assets less current
liabilities ............................. 1,132 826
----- ---
Creditors: amounts falling
due after more than one year ............ 12 (36) (36)
----- ----
Net assets ............................... 1,096 790
===== ===
Capital and reserves:
Redeemable preference shares ........... 13 3 3
Non-redeemable preference
shares ............................... 13 1 1
Ordinary shares ........................ 13 142 143
Share premium account .................. 201 215
Profit and loss reserve ................ 749 428
----- ---
Shareholders' funds ...................... 1,096 790
===== ===
Contingent liabilities -- See note 14.
The accompanying notes on pages F-42 to F-49 are an integral part of these
consolidated financial statements.
F-39
<PAGE>
REED INTERNATIONAL P.L.C. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31,
-------------------------------------
Notes 1995 1996 1997
(in (pound) millions)
Operating loss ..................... (2) (1) (2)
Net movement in debtors
and creditors ..................... 3 (1) --
---- ---- ----
Net cash inflow/(outflow)
from operating activities ......... 1 (2) (2)
---- ---- ----
Dividends received from
Reed Elsevier plc ................ 126 135 158
Interest received ................. 8 8 6
Interest paid ..................... (4) (4) (4)
---- ---- ----
Returns on investments and
servicing of finance .............. 130 139 160
---- ---- ----
Taxation ........................... 4 (1) (1)
---- ---- ----
Financial investment
Repayment of loans by
Reed Elsvier plc group .......... 36 -- --
Equity dividends paid .............. (126) (143) (158)
---- ---- ----
Net cash inflow/(outflow)
before financing .................. 45 (7) (1)
---- ---- ----
Issue of ordinary shares .......... 11 15 15
Repayments of long term
borrowing ........................ (2) -- --
Increase in net funding
balances with Reed
Elsevier plc group ............... (54) (8) (14)
---- ---- ----
Financing .......................... (45) 7 1
---- ---- ----
Increase in cash ................... 15 -- -- --
==== ==== ====
Operating loss is stated before Reed International P.L.C.'s share of
income from associated undertakings.
The accompanying notes on pages F-42 to F-49 are an integral part of these
consolidated financial statements.
F-40
<PAGE>
REED INTERNATIONAL P.L.C. AND SUBSIDIARIES
STATEMENTS OF CHANGES IN CONSOLIDATED SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
12.5p Ordinary Shares
(pound)1 Preference Shares (previously 25p)
-------------------------- --------------------
Share
Non- Share Premium Profit and
Redeemable redeemable capital account loss reserve Total
(pound) (pound) Number (pound) (pound) (pound) (pound)
millions millions '000 millions millions millions millions
-------- -------- ---- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 ................. 3 1 1,125,172 141 176 430 751
--------- --------- --------- --------- --------- --------- ---------
Net income ................................... -- -- -- -- -- 277 277
Ordinary dividends ........................... -- -- -- -- -- (139) (139)
Share of goodwill written
off in Reed Elsevier
combines financial statements ............... -- -- -- -- -- (11) (11)
Share of goodwill reinstated
in Reed Elsevier combined
financial statements ........................ -- -- -- -- -- 199 199
Exchange translation differences
and other items ............................. -- -- -- -- -- 10 10
Issue of ordinary shares on
exercise of share options ................... -- -- 5,298 -- 11 -- 11
--------- --------- --------- --------- --------- --------- ---------
Balance at December 31, 1995 ................. 3 1 1,130,470 141 187 766 1,098
--------- --------- --------- --------- --------- --------- ---------
Net income ................................... -- -- -- -- -- 302 302
Ordinary dividends ........................... -- -- -- -- -- (156) (156)
Share of goodwill written off
in Reed Elsevier combined
financial statements ........................ -- -- -- -- -- (106) (106)
Share of goodwill reinstated in
Reed Elsevier combined
financial statements ........................ -- -- -- -- -- 16 16
Exchange translation differences
and other items ............................. -- -- -- -- -- (73) (73)
Issue of ordinary shares on
exercise of share options ................... -- -- 5,584 1 14 -- 15
--------- --------- --------- --------- --------- --------- ---------
Balance at December 31, 1996 ................. 3 1 1,136,054 142 201 749 1,096
--------- --------- --------- --------- --------- --------- ---------
Net income ................................... -- -- -- -- -- 90 90
Ordinary dividends ........................... -- -- -- -- -- (167) (167)
Share of goodwill written off
in Reed Elsevier combined
financial statements ........................ -- -- -- -- -- (239) (239)
Share of goodwill reinstated in
Reed Elsevier combined
financial statements ........................ -- -- -- -- -- 12 12
Exchange translation differences
and other items ............................. -- -- -- -- -- (17) (17)
Issue of ordinary shares on
exercise of share options ................... -- -- 4,345 1 14 -- 15
--------- --------- --------- --------- --------- --------- ---------
Balance at December 31, 1997 ................. 3 1 1,140,399 143 215 428 790
========= ========= ========= ========= ========= ========= =========
</TABLE>
The accumulated exchange translation differences included in retained
earnings are (pound)(85) million (December 31, 1996 (pound)(80) million,
December 31, 1995 (pound)(13) million).
Reed International P.L.C.'s share of the revenue reserves of the combined
businesses is (pound)528 million (1996 (pound)836 million; 1995 (pound)842
million). The share of accumulated goodwill in the Reed Elsevier combined
financial statements is (pound)1,092 million (1996 (pound)863 million; 1995
(pound)850 million).
The accompanying notes on pages F-42 to F-49 are an integral part of these
consolidated financial statements.
F-41
<PAGE>
REED INTERNATIONAL P.L.C. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1 Basis of financial statements
On January 1, 1993 Reed International P.L.C. and Elsevier NV contributed
their businesses to two companies, Reed Elsevier plc and Elsevier Reed Finance
BV. Reed Elsevier plc, which owns all the publishing and information businesses,
is incorporated in England and Elsevier Reed Finance BV, which owns the
financing and treasury companies, is incorporated in the Netherlands. Reed
International P.L.C. and Elsevier NV each hold a 50% interest in Reed Elsevier
plc. Reed International P.L.C. holds a 46% interest in Elsevier Reed Finance BV
with Elsevier NV holding a 54% interest. In addition, Reed International P.L.C.
has a 5.8% interest in Elsevier NV reflecting the relative market
capitalizations of the two companies on which the financial terms of the merger
of their businesses were based.
Under equalization arrangements entered into at the time of the merger,
ordinary shareholders of Reed International P.L.C. and Elsevier NV enjoy
substantially equivalent dividend and capital rights with respect to their
ordinary shares in the net income and net assets of the Reed Elsevier combined
businesses, comprising the separate legal entities of Reed International P.L.C.,
Elsevier NV, Reed Elsevier plc and Elsevier Reed Finance BV and their respective
subsidiaries and associates. These arrangements are such that, with respect to
dividend and capital rights, one Elsevier NV ordinary share is, in broad terms,
intended to confer equivalent economic interests to 1.538 of a Reed
International P.L.C. ordinary share. At the time of the Merger this ratio was
7.69 and this has been adjusted to reflect a ten for one share subdivision in
respect of Elsevier NV ordinary shares, which became effective on October 5,
1994 and a two for one share subdivision in respect of Reed International P.L.C.
ordinary shares which became effective on May 2, 1997. As a result of the
equalization arrangements, Reed International P.L.C. shareholders have a 52.9%
economic interest in the attributable profit of the Reed Elsevier combined
businesses.
2 Accounting policies
The significant accounting policies adopted are as follows:
Basis of Consolidation
The consolidated financial statements have been prepared under the
historical cost convention in accordance with applicable accounting principles
in the United Kingdom ("U.K. GAAP"). These principles differ in certain
significant respects from accounting principles generally accepted in the United
States ("U.S. GAAP"); see note 17. Amounts in the financial statements are
stated in pounds sterling ("(pound)").
The consolidated financial statements of Reed International P.L.C. include
its 52.9% economic interest that shareholders have under the equalization
arrangements in the Reed Elsevier combined businesses, accounted for on an
equity basis.
Determination of Profit
The Reed International P.L.C. share of the Reed Elsevier combined results
has been calculated on the basis of the 52.9% economic interest of the Reed
International P.L.C. shareholders in the Reed Elsevier combined businesses after
taking account of results arising in Reed International P.L.C. and its
subsidiary undertakings. Dividends paid to Reed International P.L.C. and
Elsevier NV shareholders are equalized at the gross level inclusive of the
benefits of the U.K. tax credit (currently 20%, reducing to 10% on April 6,
1999) received by certain Reed International P.L.C. shareholders. In these
financial statements, an adjustment is required to equalize the benefit of the
tax credit between the two sets of shareholders in accordance with the
equalization agreement. This equalization adjustment arises only on dividends
paid by Reed International P.L.C. to its shareholders and reduces the
attributable earnings of the company by 47.1% of the total amount of the tax
credit.
Basis of Valuation of Assets and Liabilities
Reed International P.L.C.'s 52.9% economic interest in the net assets of
the combined businesses has been shown on the balance sheet as interests in
associated undertakings net of the assets and liabilities reported as part of
Reed International P.L.C. and its subsidiary undertakings.
Translation of overseas currencies into sterling
Statement of income 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 re-translation of Reed International P.L.C.'s 52.9%
economic interest in the net assets of the combined businesses are taken
directly to retained earnings.
F-42
<PAGE>
Taxation
Deferred taxation is provided, using the liability method, to take account
of timing differences between the treatment of items for taxation and accounting
purposes where it is considered that a liability or asset will crystallise. No
provision is made for taxation which might arise in the event of a distribution
of retained earnings by overseas subsidiary and associated undertakings.
3 Income from interests in associated undertakings
1995 1996 1997
---- ---- ----
(in (pound) millions)
Share of profit before tax
and exceptional items
Reed Elsevier combined results (50%) .......... 368 403 412
Elsevier NV's results (5.8%) .................. 21 23 23
---- ---- ----
389 426 435
---- ---- ----
Effect of tax credit equalization on
distributed earnings (note 4) ................ (16) (18) (20)
Items consolidated within Reed
International P.L.C. group ................... (2) (3) (2)
---- ---- ----
Share of profits before exceptional
items ........................................ 371 405 413
---- ---- ----
Share of exceptional items
Based on Reed International's
P.L.C.'s 52.9% economic interest ............. -- -- (252)
Exceptional items consolidated
within Reed International
P.L.C. group ................................. -- -- 1
---- ---- ----
Share of exceptional items .................... -- -- (251)
---- ---- ----
Income from interests in
associated undertaking ....................... 371 405 162
==== ==== ====
4 Effect of tax credit equalization on distributed earnings
The Reed International P.L.C. share of the Reed Elsevier combined results
has been calculated on the basis of the 52.9% economic interest of the Reed
International P.L.C. shareholders in the combined businesses. Dividends paid to
Reed International P.L.C. and Elsevier NV shareholders are equalized at the
gross level inclusive of the benefits of the U.K. tax credit (currently 20%,
reducing to 10% on April 6, 1999) received by certain Reed International P.L.C.
shareholders. In these financial statements an adjustment is required to
equalize this benefit between the two sets of shareholders in accordance with
the equalization agreement. This equalization adjustment arises only on
dividends paid by Reed International P.L.C. to its shareholders and reduces the
attributable earnings of the company by 47.1% of the total amount of the tax
credit.
5 Net interest income
Year ended Year ended Year ended
December 31, December 31, December 31,
1995 1996 1997
---- ---- ----
(in (pound) millions)
Interest income
On loans to Reed Elsevier
plc group ......................... 7 7 7
Other interest receivable
and similar income ................ 1 1 --
-- -- --
8 8 7
-- -- --
Interest expense
On loans from Reed
Elsevier plc group ................ (4) (4) (4)
-- -- --
Net interest income ................. 4 4 3
== == ==
F-43
<PAGE>
6 Taxes on income
Taxes on income charged to earnings were as follows:
Year ended Year ended Year ended
December 31, December 31, December 31,
1995 1996 1997
---- ---- ----
(in (pound) millions)
U.K. Corporation Tax
Current ............................ 1 -- 1
Share of tax attributable to
associated undertakings
Before exceptional items ........... 89 106 112
On exceptional items ............... 6 -- (40)
---- ---- ----
96 106 73
==== ==== ====
The tax charge attributable to associated undertakings has been reduced in
respect of allowances on publishing intangibles ((pound)23 million (1996:
(pound)22 million, 1995: (pound)26 million)).
7 Earnings per ordinary share
The earnings per ordinary share for each financial period is calculated as
follows:
Average
number of Earnings per
ordinary ordinary
Earnings shares in issue share
-------- --------------- -----
(in (pound) (in millions) (in pence)
millions)
Year ended December 31, 1997 ........ 90 1,138.9 7.9
Year ended December 31, 1996 ........ 302 1,134.4 26.6
Year ended December 31, 1995 ........ 277 1,128.8 24.6
The 1995 and 1996 earnings per ordinary share have been restated to take
into account the two for one share subdivision of the ordinary shares which
became effective on May 2, 1997.
8 Dividends paid and proposed
Year ended Year ended Year ended
December 31, December 31, December 31,
1995 1996 1997
---- ---- ----
(in (pound) millions except per share
amounts)
First interim ..................... 43 47 50
Second interim (1996 and
1995: Final) ..................... 96 109 117
------ ------- ---
Total ............................. 139 156 167
====== ======= ===
Per 12.5p Ordinary Share
First iterim ..................... 3.75p 4.125p 4.40p
Second interim (1996 and
1995: Final) .................... 8.50p 9.475p 10.20p
------ ------- -----
Total ............................. 12.25p 13.600p 14.60p
====== ======= =====
Dividends in respect of preference shares of Reed International P.L.C.
paid in 1997 amounted to(pound)0.2 million (1996:(pound)0.2 million,
1995:(pound)0.2 million).
F-44
<PAGE>
9 Fixed asset investments
Investment in
associated
undertakings
------------
(in (pound)
millions)
At December 31, 1996 ............................................. 1,052
Share of profit of associated undertakings ....................... 162
Share of tax attributable to associated undertakings ............. (72)
Dividends received ............................................... (158)
Share of goodwill written off .................................... (239)
Share of goodwill reinstated ..................................... 12
Exchange translation differences and other items ................. (17)
------
At December 31, 1997 ............................................. 740
======
The investment in associated undertakings represents the 52.9% economic
interest that Reed International P.L.C. has in the Reed Elsevier combined
businesses, less those assets and liabilities that are separately consolidated
in the Reed International P.L.C. group accounts. Reed International P.L.C.'s
indirect 5.8% interest in Elsevier NV has been reflected within the equity
accounting for the associated undertakings.
10 Debtors
1996 1997
---- ----
(in (pound) millions)
Amounts owed by Reed Elsevier plc group ................ 195 209
Advance corporation tax receivable ..................... 2 --
--- ---
197 209
=== ===
Amounts falling due after more than one year are (pound)40 million (1996
(pound)40 million).
11 Creditors: Amounts falling due within one year
1996 1997
---- ----
(in (pound) millions)
Proposed dividend ............................ 109 117
Taxation ..................................... 9 7
Other creditors .............................. 1 1
--- ---
119 125
=== ===
12 Creditors: Amounts falling due after more than one year
1996 1997
---- ----
(in (pound) millions)
Amounts owed to Reed Elsevier plc group........ 36 36
===== =====
F-45
<PAGE>
13 Share capital
Issued and Issued and
Authorized Fully Paid Fully Paid
---------- ---------- ----------
1997 1996 1997
---- ---- ----
(in (pound) millions)
Preference shares (cumulative)
of (pound)1.00 each
Redeemable at par at the
option of the company
3.15% (previously 4.5%) .............. 2 2 2
3.85% (previously 5.5%) .............. 1 1 1
Non-redeemable
3.5% (previously 5%) ................. -- -- --
4.90% (previously 7%) ................ 1 1 1
--- --- ---
Non equity shares ........................ 4 4 4
Ordinary shares of 12.5p
each (previously 25p) ................... 143 142 143
Unclassified shares of
12.5p each (previously 25p) ............. 41 -- --
--- --- ---
Total .................................... 188 146 147
=== === ===
Details of shares issued under share option schemes are set out in note
15.
Following the resolution at the Annual General Meeting in April 1997, Reed
International P.L.C. undertook a two for one subdivision of its ordinary shares
which became effective on May 2, 1997.
14 Contingent liabilities
There are contingent liabilities in respect of borrowings guaranteed by
Reed International P.L.C.:
1996 1997
(in (pound) millions)
Borrowings of Reed Elsevier plc group
and Elsevier Reed Finance BV group
Guaranteed jointly and severally
with Elsvier NV ................................. 1,296 1,168
Guaranteed solely by Reed
International P.L.C ............................. 12 5
Borrowings of other companies ...................... 8 --
----- -----
1,316 1,173
===== =====
There are a number of outstanding legal claims against the combined
businesses but they are not considered to be material in the context of these
financial statements.
15 Statements of Cash Flows
Net funding
balance with
Reed
Current asset Elsevier
Cash Investments plc group Total
---- ----------- --------- -----
(in (pound) millions)
Reconciliation of net
borrowings
At December 31, 1995 ........ -- 2 151 153
Cash flow ................... -- -- 8 8
--- --- --- ---
At December 31, 1996 ........ -- 2 159 161
Cash flow ................... -- -- 14 14
--- --- --- ---
At December 31, 1997 ........ -- 2 173 175
--- --- --- ---
F-46
<PAGE>
16 Share option schemes
Reed Elsevier plc operates a savings related share option scheme which is
open to all U.K. employees who have at least one year's continuous service with
a Reed Elsevier company at the date on which the options are granted. The
following options have been granted over Reed International P.L.C. ordinary
shares, and may be exercised at the end of the savings period at a price
equivalent to not less than 80% of the market value of the ordinary shares at
the time of grant.
Transactions during the three financial periods ended December 31, 1997,
adjusted for the subdivision of Reed International Ordinary shares, were:
Number of Exercise share
ordinary shares price (pence)
--------------- -------------
Outstanding at December 31, 1994 ....... 8,645,602
Granted .............................. 1,941,400 320.6
Exercised ............................ (1,477,422) 141.4-328.2
Lapsed ............................... (625,886)
-----------
Outstanding at December 31, 1995 ....... 8,483,694
Granted .............................. 1,140,930 475.8
Exercised ............................ (2,006,618) 141.4-475.8
Lapsed ............................... (1,056,872)
-----------
Outstanding at December 31, 1996 ....... 6,561,134
Granted .............................. 1,541,679 449.8
Exercised ............................ (1,098,407) 199.8-475.8
Lapsed ............................... (566,923)
-----------
Outstanding at December 31, 1997 ....... 6,437,483
===========
Options outstanding at December 31, 1997 were exercisable by 2003.
Reed Elsevier plc operates an overseas savings related share option
scheme, the first grants for which were made in the period ended December 31,
1992. The scheme is open to all employees, who are not eligible for the U.K.
savings related scheme, who have been with Reed Elsevier for at least one year
and who work 20 or more hours per week. The options are granted over Reed
International P.L.C. ordinary shares, and may be exercised after five years at a
price equivalent to 80% of the market value of the ordinary shares at the time
of grant.
Transactions during the three financial periods ended December 31, 1997,
adjusted for the subdivision of Reed International Ordinary Shares, were:
Number of Exercise share
ordinary shares price (pence)
--------------- -------------
Outstanding at December 31, 1994 ...... 393,934
Granted ............................. --
Exercised ........................... (3,784) 203.6-233.8
Lapsed .............................. (42,044)
---------
Outstanding at December 31, 1995 ...... 348,106
Granted ............................. --
Exercised ........................... (26,144) 227.0-233.8
Lapsed .............................. (7,874)
---------
Outstanding at December 31, 1996 ...... 314,088
Granted ............................. --
Exercised ........................... (228,668) 227.0-233.8
Lapsed .............................. (24,746)
---------
Outstanding at December 31, 1997 ...... 60,674
=========
Options outstanding at December 31, 1997 were exercisable by 1998
F-47
<PAGE>
16 Share option schemes - (continued)
Reed Elsevier plc operates an executive share option scheme and options
are granted to selected full time employees of Reed Elsevier. The options are
granted over Reed International P.L.C. Ordinary Shares, and are normally
exercisable after three years and may be exercised up to ten years from the date
of grant at a price equivalent to the market value of the ordinary shares at the
time of grant.
Transactions during the three financial periods ended December 31, 1997,
adjusted for the subdivision of Reed International Ordinary Shares, were:
Number of Exercise share
ordinary shares price (pence)
--------------- -------------
Outstanding at December 31, 1994 ........... 12,847,400
Granted .................................. 4,651,200 400.75
Exercised ................................ (3,820,600) 188.75-410.25
Lapsed ................................... (408,200)
-----------
Outstanding at December 31, 1995 ........... 13,269,800
Granted .................................. 2,949,200 585.25
Exercised ................................ (3,577,400) 188.75-410.25
Lapsed ................................... (102,000)
-----------
Outstanding at December 31, 1996 ........... 12,539,600
Granted .................................. 3,140,000 565.75
Exercised ................................ (3,246,600) 188.75-585.25
Lapsed ................................... (177,000)
-----------
Outstanding at December 31, 1997 ........... 12,256,000
===========
Options outstanding at December 31, 1997 were exercisable by 2007.
17 Summary of differences between U.K. and U.S. GAAP
The consolidated financial statements are prepared in accordance with
generally accepted accounting principles in the United Kingdom ("U.K. GAAP"),
which differ in certain significant respects from generally accepted accounting
principles in the United States ("U.S. GAAP"). These differences relate
principally to the following items and the approximate effect on net income and
shareholders' equity is shown in the following tables.
Impact of U.S. GAAP adjustments to combined financial statements
Reed International P.L.C. accounts for its 52.9% economic interest in the
Reed Elsevier combined businesses, before the effect of tax credit equalization
(see note 4), by the equity method in conformity with both U.K. and U.S. GAAP.
Using the equity method to present its net income and shareholders' equity under
U.S. GAAP Reed International P.L.C. reflects its 52.9% share of the effects of
differences between U.K. and Dutch GAAP and U.S. GAAP relating to the combined
businesses as a single reconciling item. The most significant differences relate
to U.S. GAAP requirements in respect of the capitalization and amortization of
goodwill and other intangibles. This had a particularly substantial impact in
1995 on the calculation of the profit and loss on sale of businesses and, in
1997, on the non-cash writedown of Reed Travel Group goodwill and intangibles. A
more complete explanation of the accounting policies used by the Reed Elsevier
combined businesses and the differences between U.K. and Dutch GAAP and U.S.
GAAP is given in the combined financial statements.
Ordinary dividends
Under U.K. GAAP, dividends are provided for in the year in respect of
which they are proposed by the directors. Under U.S. GAAP, such dividends would
not be provided for until they are formally declared by the directors.
Exceptional items
Exceptional items are material items within Reed International P.L.C.'s
ordinary activities which under U.K. GAAP are required to be disclosed
separately due to their size or infrequency.
Earnings per share
Under U.K. and U.S. GAAP, the calculation of basic earnings per share is
based only on common stock in issue. Diluted earnings per Reed International
P.L.C. ordinary share amounts taking account of the effects of additional common
shares that would be outstanding if dilutive potential shares had been issued,
have not been disclosed because they are not materially different from the
respective basic earnings per Reed International ordinary share amounts under
either U.K. or U.S. GAAP.
F-48
<PAGE>
17 Summary of differences between U.K. and U.S. GAAP - (continued)
Impact of recently issued accounting standards
SFAS 130 --"Reporting comprehensive income" was issued in June 1997. This
standard establishes requirements for the reporting and display of comprehensive
income and its components (revenues, expenses, gains and losses) in a full set
of general purpose financial statements.
Approximate effects on net income of differences
between U.K. and U.S. GAAP:
Year ended December 31,
------------------------------------
1995 1996 1997
---- ---- ----
(in (pound) millions, except per share
amounts)
Net income under U.K. GAAP .............. 277 302 90
U.S. GAAP adjustments:
Impact of U.S. GAAP
adjustments to combined
financial statements ................. 75 (58) (86)
---- ---- ----
Net income under U.S. GAAP .............. 352 244 4
==== ==== ====
Basic earnings per ordinary share
under U.S. GAAP (pence).................. 30.9p 21.4p --
==== ==== ====
The basic earnings per ordinary shares under U.S. GAAP have been restated
to take into account the two for one share subdivision which become effective on
May 2, 1997.
The basic earnings per ordinary share under U.S. GAAP includes, for 1995,
32.9p in respect of profit on sale (under U.S. GAAP) of discontinued businesses,
and for 1997, 21.6p (loss) in respect of the Reed Travel Group provision for
customer compensation and related expenses and reorganization costs and the
non-cash writedown (under U.S. GAAP) of Reed Travel Group goodwill and
intangibles.
Approximate effects shareholders' equity of
differences between U.K. and U.S. GAAP:
At December 31,
----------------------
1996 1997
(in (pound) millions)
Shareholders' equity under U.K. GAAP ........... 1,096 790
U.S. GAAP adjustments:
Impact of U.S. GAAP
adjustments to combined financial
statements .................................. 422 560
Ordinary dividends ........................... 109 117
----- -----
Shareholders' equity under U.S. GAAP ........... 1,627 1,467
===== =====
18 Post balance sheet event
On March 9, 1998, Reed International P.L.C. and Elsevier NV announced that
the proposed merger with Wolters Kluwer nv, previously announced on October 13,
1997, had been abandoned. The Boards of Reed International P.L.C. and Elsevier
NV had concluded that the revisions to the merger terms which Wolters Kluwer nv
sought -- reflecting in the main their concerns about the impact of regulatory
approvals -- meant that the merger could no longer be seen to be in the best
interests of shareholders.
F-49
<PAGE>
ELSEVIER NV
FINANCIAL STATEMENTS
F-50
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the members of the Supervisory and Executive Boards and the Shareholders of
Elsevier NV
We have audited the accompanying balance sheets as of December 31, 1997
and 1996, and the related statements of income, total recognized gains and
losses, changes in shareholders' equity and cash flows for the three years ended
December 31, 1997. These financial statements are the responsibility of the
company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the Netherlands and the United States. Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall presentation of the financial statements. We believe that
our audit provides a reasonable basis for our opinion.
In our opinion, the aforementioned financial statements present fairly, in
all material respects, the financial position of Elsevier NV at December 31,
1997 and 1996 and the results of its operations and its cash flows for the three
years ended December 31, 1997 in conformity with accounting principles generally
accepted in the Netherlands (which differ in certain material respects from
generally accepted accounting principles in the United States - see note 13).
DELOITTE & TOUCHE
Registeraccountants
Amsterdam, The Netherlands
March 11, 1998
F-51
<PAGE>
ELSEVIER NV
STATEMENTS OF INCOME
Year ended December 31,
--------------------------
Notes 1995 1996 1997
(in Dfl millions, except per share
amounts)
Wages and salaries ................ (6) (5) (6)
Other ............................. (1) (2) (2)
---- ---- ----
Operating expenses .................. (7) (7) (8)
---- ---- ----
Share in attributable
profit after tax of affiliates
Shares of attributable profits
after tax excluding exceptional
items ............................. 682 781 966
Share of exceptonal items .......... 3 1 (640)
---- ---- ----
Total ............................... 685 782 326
---- ---- ----
Interest income ................... 13 13 9
Interest expense .................. (1) (1) (2)
---- ---- ----
Financial results ................... 697 794 333
---- ---- ----
Income before tax ................... 690 787 325
Tax ................................. 11 7 5
---- ---- ----
Net income .......................... 701 794 330
==== ==== ====
Earnings per ordinary share (Dfl) ... 3 1.00 1.13 0.47
==== ==== ====
STATEMENTS OF TOTAL RECOGNIZED GAINS AND LOSSES
Year ended December 31,
----------------------------
1995 1996 1997
---- ---- ----
(in Dfl millions)
Net income for the
financial year .............................. 701 794 330
Exchange translation
differences ................................. (179) 337 330
----- ----- -----
Total recognized gains
and losses for the financial year ........... 522 1,131 660
===== ===== =====
The accompanying notes on pages F-56 to F-61 are an integral part of
these financial statements.
F-52
<PAGE>
ELSEVIER NV
BALANCE SHEETS
At December 31,
------------------------------
Notes 1996 1997
----- ---- ----
(in Dfl millions)
Financial fixed assets .................. 5 3,380 2,739
------ ------
Accounts receivable ................... 6 173 94
Cash and cash equivalents ............. 1 220
------ ------
Total current assets .................... 174 314
Total current liabilities ............... 7 (381) (444)
------ ------
Net working capital ..................... (207) (130)
------ ------
Long term liabilities ................... 8 (21) (24)
Provisions .............................. 9 (87) (90)
------ ------
Net assets .............................. 3,065 2,495
====== ======
Share capital issued .................. 10 71 71
Paid-in surplus ....................... 822 843
Legal reserve ......................... 2,036 1,395
Other reserves ........................ 136 186
------ ------
Shareholders' funds ..................... 3,065 2,495
====== ======
The accompanying notes on pages F-56 to F-61 are an integral part of
these financial statements.
F-53
<PAGE>
ELSEVIER NV
STATEMENTS OF CASH FLOWS
Year ended December 31,
--------------------------------
1995 1996 1997
(in Dfl millions)
Net interest ............................ 12 12 7
Salary costs ............................ (6) (5) (6)
Other payables .......................... 1 (4) (5)
Tax paid ................................ 15 15 3
Dividends received ...................... 444 125 679
Dividend paid ........................... (362) (405) (566)
---- ---- ----
Cash surplus/(outflow)
from operations ........................ 104 (262) 112
---- ---- ----
Received on newly issued
shares ................................. 55 55 21
Change in net funding
balances with affiliates ............... (164) 204 83
Changes to long term
borrowings ............................. 4 2 3
---- ---- ----
Financing ............................... (105) 261 107
---- ---- ----
Changes in cash and
cash equivalents ....................... (1) (1) 219
==== ==== ====
Balance of cash and cash
equivalents at December 31, ............ 2 1 220
==== ==== ====
The accompanying notes on pages F-56 to F-61 are an integral part of
these financial statements.
F-54
<PAGE>
ELSEVIER NV
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
12.5p Ordinary Shares
(pound)1 Preference Shares (previously 25p)
-------------------------- --------------------
Share
Share capital Paid-in Legal Other
Capital issued surplus reserve reserves Total
Number Dfl Number Dfl Dfl Dfl Dfl Dfl
'000 million '000 million million million million million
-------- ------- -------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 ....... 4,050 4 657,428 66 713 704 435 1,922
Net income ........................ -- -- -- -- -- 685 16 701
Ordinary dividends ................ -- -- -- -- -- -- (390) (390)
Issue of shares ................... -- -- 4,345 -- 55 -- -- 55
Share of affiliates' results:
Dividends ......................... -- -- -- -- -- (444) 444 --
Exchange translation differences... -- -- -- -- -- (179) -- (179)
Equalization ...................... -- -- -- -- -- 4 -- 4
Goodwill written off on acqusitions -- -- -- -- -- 27 -- 27
Goodwill reinstated ............... -- -- -- -- -- 477 -- 477
-------- -------- --------- ------- --------- --------- -------- ------
Balance at December 31, 1995 ....... 4,050 4 661,773 66 768 1,220 505 2,563
Net income ........................ -- -- -- -- -- 782 12 794
Ordinary dividends ................ -- -- -- -- -- -- (506) (506)
Issue of shares ................... -- -- 3,726 1 54 -- -- 55
Share of affiliates' results:
Dividends ......................... -- -- -- -- -- (125) 125 --
Exchange translation differences... -- -- -- -- -- 337 -- 337
Equalization ...................... -- -- -- -- -- 44 -- 44
Goodwill written off on acqusitions -- -- -- -- -- (263) -- (263)
Goodwill reinstated ............... -- -- -- -- -- 41 -- 41
-------- -------- --------- ------- --------- --------- -------- ------
Balance at December 31, 1996 ....... 4,050 4 665,499 67 822 2,036 136 3,065
Net income ........................ -- -- -- -- -- 326 4 330
Ordinary dividends ................ -- -- -- -- -- -- (633) (633)
Issue of shares ................... -- -- 1,215 -- 21 -- -- 21
Share of affiliates' results:
Dividends ......................... -- -- -- -- -- (679) 679 --
Exchange translation differences... -- -- -- -- -- 330 -- 330
Equalization ...................... -- -- -- -- -- 66 -- 66
Goodwill written off on acqusitions -- -- -- -- -- (719) -- (719)
Goodwill reinstated ............... -- -- -- -- -- 35 -- 35
-------- -------- --------- ------- --------- --------- -------- ------
Balance at December 31, 1997 ....... 4,050 4 666,714 67 843 1,395 186 2,495
======== ======== ========= ======= ========= ========= ======== ======
</TABLE>
- - - ---------------
The accumulated exchange translation differences included in retained earnings
is Dfl 361 million (1996 Dfl 31 million; 1995 Dfl (306) million).
At December 31, 1997, 1996 and 1995 the legal reserve comprised Elsevier NV's
share of the post acquisition accumulated retained earnings of affiliates.
The accompanying notes on pages F-56 to F-61 are an integral part of these
financial statements.
F-55
<PAGE>
ELSEVIER NV
NOTES TO FINANCIAL STATEMENTS
1 Basis of financial statements
The accompanying financial statements have been prepared in conformity
with accounting principles generally accepted in the Netherlands ("Dutch GAAP"),
which differ in certain significant respects from accounting principles
generally accepted in the United States ("U.S. GAAP"); see note 13. Amounts in
the financial statements are stated in Dutch guilders ("Dfl"). Certain
disclosures required to comply with Dutch statutory reporting requirements have
been omitted.
2 Accounting policies
The significant accounting policies adopted are as follows:
Basis of consolidation
The economic interests of Elsevier NV and Reed International P.L.C.
shareholders in the combined businesses are governed by reference to the
equalization arrangement that was entered into by the two companies at the time
of the merger of their respective businesses. This arrangement was designed to
secure for both sets of shareholders substantially equivalent ordinary dividend
and capital rights in the earnings and net assets of the combined businesses.
Since November 1994 Elsevier NV, holds 54% of the shares in Elsevier Reed
Finance BV and is 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 statutory financial statements, and
with regard to the financial information contained in the combined financial
statements.
The investment in affiliates is valued using equity accounting as adjusted
for the effects of the existing equalization arrangement between Reed
International P.L.C. and Elsevier NV. The arrangement provides for the
distribution of dividends and net assets in such a way that Elsevier NV's share
in the profit and net assets of Reed Elsevier equals 50%. All settlements
accruing to shareholders from the equalization arrangements are taken direct to
retained earnings.
Insofar as affiliates charge or credit goodwill directly to their
shareholders' equity, one half of such goodwill will be charged or credited to
Elsevier NV's shareholders' equity. Goodwill is the difference between the
amount paid for the acquisition of, or investment in, outside enterprises and
business operations and the fair value of acquired net assets included in the
Reed Elsevier combined balance sheet. Insofar as affiliates show changes in
their shareholders' equity from applying fair value accounting, Elsevier NV will
include 50% of such changes in the legal reserve.
Basis of determination of income
Insofar as it is not evident from the above, the bases for the
determination of income are as follows:
Under the merger agreement, Elsevier is entitled to 50% of the Reed
Elsevier combined profit attributable to parent companies' shareholders. In
calculating the guilder equivalent of that share of profit, sterling's average
exchange rate for the year is applied. For 1997, this rate was Dfl 3.19 (1996 :
2.63).
Tax is calculated on profit from Elsevier NV's own operations, taking into
account profit not subject to tax and the net tax credit in connection with
dividends received from Reed Elsevier plc. The difference between tax charged
and tax payable in the short term is included in the provision for tax
liabilities. This provision is based upon relevant rates, taking into account
tax deductible losses which can be compensated within the foreseeable future.
Bases of valuation of assets and liabilities
In calculating past service liabilities, an interest rate of 6% has been
applied.
Other assets and liabilities are stated at face value.
Balance sheet accounts 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 affiliates, expressed
in foreign currencies, are directly credited or charged to shareholders' equity.
Change of accounting principles
For the 1998 financial year the Combined Businesses will be adopting the
new U.K. Financial Reporting Standard 10 "Goodwill and Intangible Assets". It is
intended to capitalize all acquired goodwill and intangible assets and to
amortise them over a maximum period of 20 years, with retrospective application.
F-56
<PAGE>
3 Earnings per ordinary share
Average number Earnings per
of ordinary ordinary
Earnings shares in issue share
-------- --------------- -----
(in Dfl millions) (in millions) (in Dfl)
Year ended December 31, 1997 .. 330 666 0.47
Year ended December 31, 1996 .. 794 663 1.13
Year ended December 31, 1995 .. 701 659 1.00
Of Elsevier NV's 50% share of the net income of the Reed Elsevier combined
businesses, 47.1% accrues to the holders of the ordinary shares and 2.9% to Reed
International P.L.C., the holder of the R-shares. Consequently, the earnings per
ordinary share calculations are based on 47.1% of the net income of the Reed
Elsevier combined businesses.
4 Proposal for allocation of income
1995 1996 1997
---- ---- ----
(in Dfl millions)
Interim dividend
ordinary shares .......................... 118 133 193
Second interim dividend
ordinary shares (1996
and 1995: Final) ......................... 272 373 440
Dividend R-shares (1997 Dfl
40,500; 1996 Dfl 40,500;
1995 Dfl 40,500) ......................... -- -- --
Retained profit/
(loss withdrawn from
reserves) ................................ 311 288 (303)
---- ---- ----
701 794 330
==== ==== ====
The dividend paid by Elsevier NV equals the Reed International P.L.C.
dividend plus the U.K. tax credit. As a result Elsevier NV distributes a higher
proportion of the combined profit attributable than Reed International P.L.C.
Reed International P.L.C.'s share in this difference in dividend is settled with
Elsevier NV and has been credited directly to retained earnings under
equalization, because this settlement maintains the contractually agreed balance
between the shareholders of Elsevier NV and Reed International P.L.C.
Elsevier NV can pay a nominal dividend to Reed International P.L.C. on its
R-shares that is lower than the dividend on the ordinary shares. Reed
International P.L.C. will be compensated by direct dividend payments by Reed
Elsevier plc. Equally, Elsevier NV is able to receive dividends direct from
Dutch affiliates. The settlements flowing from these arrangements are also taken
direct to retained earnings under equalization.
Changes resulting from equalization are as follows:
1996 1997
---- ----
(in Dfl millions)
U.K. tax credit .................................. 48 63
R-shares dividend ................................ (22) (29)
Proceeds of ordinary shares ...................... (9) 11
Exchange differences ............................. 27 21
--- ---
44 66
=== ===
F-57
<PAGE>
5 Fixed asset investments
Investments
in
affiliates
------------
(in Dfl millions)
At December 31, 1996 ............................... 3,380
Share of profits of affiliates .................... 326
Dividends received ................................ (679)
Net share of goodwill written off
by affiliates on acquisitions .................... (719)
Net share of goodwill written back
by affiliates of disposals ....................... 35
Exchange translation differences .................. 330
Equalization ...................................... 66
------
At December 31, 1997 ............................... 2,739
======
The investments in affiliates at December 31, 1997 are:
Reed Elsevier plc, London (50%)
Elsevier Reed Finance BV, Amsterdam (54%)
In addition, Elsevier NV holds Dfl 0.3 million par value in shares with
special dividend rights in Reed Elsevier Overseas BV and Reed Elsevier Nederland
BV. These shares are included in the amount shown under investment in affiliates
above. They enable Elsevier NV to receive dividends from companies within the
same tax jurisdiction.
6 Accounts receivable
1996 1997
---- ----
(in Dfl millions)
Accounts receivable from affiliates .................. 170 87
Other receivables .................................... 3 7
--- ---
173 94
=== ===
The accounts receivable from affiliates bear interest.
7 Total current liabilities
1996 1997
---- ----
(in Dfl millions)
Trade liabilities .................................... 6 4
Proposed cash dividend ............................... 373 440
Income tax less investment premiums .................. 2 --
--- ---
381 444
=== ===
8 Borrowings
Currency 1996 1997
-------- ---- ----
(in Dfl millions)
Other loans
Convertible debenture loans ............. Guilders 21 24
== ==
Convertible debenture loans consist of four convertible personnel
debenture loans with a weighted average interest rate of 6.3%. Depending on the
conversion terms, the surrender of Dfl 1,000 at par qualifies for the
acquisition of 40 to 60 Elsevier NV ordinary shares of Dfl 0.10 par value.
F-58
<PAGE>
9 Provisions for liabilities and charges
1996 1997
---- ----
(in Dfl millions)
Tax liabilities .................................... 82 81
Pensions and severance pay ......................... 5 9
-- --
87 90
== ==
10 Share capital
Issued and Issued and
Authorized fully paid fully paid
---------- ---------- ----------
1997 1996 1997
---- ---- ----
(in Dfl millions)
Ordinary share of Dfl 0.10 each ..... 210 67 67
R-shares of Dfl 1.00 each ........... 30 4 4
--- --- ---
Total ............................... 240 71 71
=== === ===
The authorized share capital as at December 31, 1997 consists of 2,100
million ordinary shares and 30 million registered R shares. Total issued
ordinary share capital at December 31, 1997 amounts to 666,713,891 shares of Dfl
0.10 par value. In total 4,049,951 R-shares of Dfl 1.00 par value have been
issued. They are held by a subsidiary of Reed International P.L.C. The R-shares
are convertible at the election of the holder into 10 ordinary shares each. They
have otherwise the same rights as the ordinary shares, except that Elsevier NV
may pay a lower dividend on the R-shares (see note 4).
At December 31, 1997 paid-in surplus included an amount of Dfl 454 million
(1996: Dfl 433 million) which is free of tax.
Details of shares issued under option schemes are set out in note 12.
11 Contingent liabilities
1996 1997
---- ----
(in Dfl millions)
There are contingent
liabilities in respect of:
Borrowings of affiliates ....................... 3,836 3,901
===== =====
The guarantees are given jointly and severally with Reed International
P.L.C.
F-59
<PAGE>
12 Share option schemes
Options for Elsevier NV ordinary shares of Dfl 0.10 par value have been
granted to present and former members of the Executive Board of Elsevier NV, to
certain former senior executives of the Elsevier NV group and to senior
executives of Reed Elsevier plc. The options are exercisable immediately after
granting during a period of 5 years, after which the options will lapse. The
strike price of the options is the market price of the ordinary shares at the
time the option is granted.
Transactions during the three years ended December 31, 1997 were:
Number of ordinary
shares of Strike price
Dfl 0.10 par value Dfl
------------------ ---
Outstanding at December 31, 1994 ........... 8,637,500
Granted .................................. --
Exercised ................................ (3,680,500) 14.65-17.00
-----------
Outstanding at December 31, 1995 ........... 4,957,000
Granted .................................. 825,866 26.30
Exercised ................................ (3,215,200) 14.65-29.60
-----------
Outstanding at December 31, 1996 ........... 2,567,666
-----------
Granted .................................. 684,078 31.10
Exercised ................................ (856,620) 14.65-31.10
-----------
Outstanding at December 31, 1997 ........... 2,395,124
===========
13 Summary of differences between Dutch GAAP and U.S. GAAP
The financial statements are prepared in accordance with generally
accepted accounting principles in the Netherlands ("Dutch GAAP"), which differ
in certain significant respects from generally accepted accounting principles in
the United States ("U.S. GAAP"). These differences relate principally to the
following items and the approximate effect on net income and shareholders'
equity is shown in the following tables.
Impact of U.S. GAAP adjustments to combined financial statements
Elsevier NV accounts for its 50% economic interest in the Reed Elsevier
combined businesses by the equity method in conformity with both Dutch GAAP and
U.S. GAAP. Using the equity method to present its net income and shareholders'
equity under U.S. GAAP Elsevier NV reflects its 50% share of the effects of
differences between U.K. and Dutch GAAP and U.S. GAAP relating to the combined
businesses as a single reconciling item, together with related effects arising
from the equalization of dividends at the gross level; see note 4. The most
significant differences relate to U.S. GAAP requirements in respect of the
capitalization and amortization of goodwill and other intangibles. This had a
particularly substantial impact in 1995 on the calculation of the profit and
loss on sale of businesses and, in 1997, on the non-cash writedown (under U.S.
GAAP) of Reed Travel Group goodwill and intangible. A more complete explanation
of the accounting policies used by the Reed Elsevier combined businesses and the
differences between U.K. and Dutch GAAP and U.S. GAAP is given in the combined
financial statements.
Ordinary dividends
Under Dutch GAAP, dividends are provided for in the year in respect of
which they are proposed by the directors. Under U.S. GAAP, such dividends would
not be provided for until they are formally declared by the directors.
Exceptional items
Exceptional items are material items within Elsevier NV's ordinary
activities which under Dutch GAAP are required to be disclosed separately due to
their size or infrequency.
Earnings per share
Under Dutch and U.S. GAAP, the calculation of basic earnings per share is
based only on common stock in issue. Diluted earnings per Elsevier Ordinary
Share amounts that would be outstanding if dilutive potential shares had been
issued, have not been disclosed because they are not materially different from
the respective basic earnings per Elsevier Ordinary Share amounts under either
Dutch or U.S. GAAP.
Impact of recently issued accounting standards
SFAS 130 -- "Reporting Comprehensive Income" -- was issued in June 1997.
This standard establishes requirements for the reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general purpose financial statements.
F-60
<PAGE>
13 Summary of differences between Dutch GAAP and U.S. GAAP -- (continued)
Approximate effects on net income of differences between Dutch GAAP and U.S.
GAAP:
Year ended December 31,
------------------------------------
1995 1996 1997
---- ---- ----
(in Dfl millions except per share
amount)
Net income under Dutch GAAP .............. 701 794 330
U.S. GAAP adjustments
Impace of U.S. GAAP adjustments
to combined financial statements ....... 213 (102) (202)
---- ---- ----
Net income under U.S. GAAP ............... 914 692 128
==== ==== ====
Basic earnings per ordinary
share under U.S. GAAP (Dfl) ............. 1.30 0.98 0.18
==== ==== ====
The basic earnings per ordinary share under U.S. GAAP includes, for 1995,
Dfl 0.63 in respect of profit on sale (under U.S. GAAP) of discontinued
businesses, and for 1997, Dfl 1.05 (loss) in respect of the Reed Travel Group
provision for customer compensation and related expenses and reorganization
costs and the non-cash writedown (under U.S. GAAP) of Reed Travel Group goodwill
and intangibles.
Approximate effects on shareholders' equity of differences between Dutch GAAP
and U.S. GAAP:
At December 31,
-----------------------
1996 1997
---- ----
(In Dfl millions)
Shareholders' equity under Dutch GAAP .............. 3,065 2,495
U.S. GAAP adjustments
U.S. GAAP adjustments to combined
financial statements ............................ 1,113 1,698
Ordinary dividends ............................... 373 440
----- -----
Shareholders' equity under U.S. GAAP ............... 4,551 4,633
===== =====
14 Post balance sheet event
On March 9, 1998, Reed International P.L.C. and Elsevier NV announced that
the proposed merger with Wolters Kluwer nv, previously announced on October 13,
1997, had been abandoned. The Boards of Reed International P.L.C. and Elsevier
NV had concluded that the revisions to the merger terms which Wolters Kluwer nv
had sought -- reflecting in the main their concerns about the impact of
regulatory approvals -- meant that the merger could no longer be seen to be in
the best interests of shareholders.
F-61
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, each of the Registrants certifies that it meets all of the requirements
for filing on Form 20-F and has duly caused this Annual Report to be signed on
its behalf by the undersigned, thereto duly authorized, in the case of Reed
International, in London, England and, in the case of Elsevier, in Amsterdam,
The Netherlands on March 27, 1998.
REED INTERNATIONAL P.L.C. ELSEVIER NV
Registrant Registrant
By: N. J. STAPLETON By: H. BRUGGINK
---------------------- ------------------------
Title: N.J. Stapleton Title: H. Bruggink
Chairman Chairman Executive Board
Dated: March 27, 1998 Dated: March 27, 1998
S-1
