As filed with the Securities and Exchange Commission on March 25, 1999
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------
[ ] (REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) or 12(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, 1998
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)
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*
</TABLE>
- ------------
* Listed, not for trading, but only in connection with the listing of the
applicable Registrant's American Depositary Shares issued in respect
thereof.
Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
----------
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act: None
----------
Indicate the number of outstanding shares of each of the issuers' classes of
capital or common stock as of December 31, 1998:
Title of each class Number of outstanding shares
Reed International P.L.C.:
Preference Shares (cumulative) of L1.00 each
Redeemable at par at the option of Reed International
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)............ 1,144,498,877
Elsevier NV:
Ordinary Shares of Dfl0.10 each................................. 667,303,771
R-shares of Dfl1.00 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
----
DEFINITIONS ............................................................... 1
FORWARD-LOOKING STATEMENTS ................................................ 1
PART I
ITEM 1: DESCRIPTION OF BUSINESS ..................................... 2
ITEM 2: DESCRIPTION OF PROPERTY ..................................... 17
ITEM 3: LEGAL PROCEEDINGS ........................................... 17
ITEM 4: CONTROL OF REGISTRANTS ...................................... 18
Reed International .......................................... 18
Elsevier .................................................... 18
Reed Elsevier ............................................... 18
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 .................................................... 34
ITEM 9: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONS AND RESULTS OF OPERATIONS ........................ 37
Reed Elsevier ............................................... 37
Reed International .......................................... 48
Elsevier .................................................... 49
ITEM 9A: QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK ........................................... 50
Reed Elsevier ............................................... 50
ITEM 10: DIRECTORS AND OFFICERS OF REGISTRANTS ....................... 52
Reed Elsevier ............................................... 52
Reed International .......................................... 52
Elsevier .................................................... 53
i
<PAGE>
Page
----
ITEM 11: COMPENSATION OF DIRECTORS AND OFFICERS ...................... 56
ITEM 12: OPTIONS TO PURCHASE SECURITIES FROM
REGISTRANTS OR SUBSIDIARIES ................................. 60
Reed International .......................................... 60
Elsevier .................................................... 62
Reed Elsevier ............................................... 63
ITEM 13: INTERESTS OF MANAGEMENT IN CERTAIN TRANSACTIONS ............. 66
Reed International .......................................... 66
Elsevier .................................................... 66
PART II
ITEM 14: DESCRIPTION OF SECURITIES TO BE REGISTERED .................. 66
Reed International .......................................... 66
Elsevier .................................................... 66
PART III
ITEM 15: DEFAULTS UPON SENIOR SECURITIES ............................. 66
Reed International .......................................... 66
Elsevier .................................................... 66
ITEM 16: CHANGES IN SECURITIES AND CHANGES IN SECURITY
FOR REGISTERED SECURITIES ................................... 66
Reed International .......................................... 66
Elsevier .................................................... 66
PART IV
ITEM 17: FINANCIAL STATEMENTS* ....................................... 66
ITEM 18: FINANCIAL STATEMENTS ........................................ 66
ITEM 19: FINANCIAL STATEMENTS AND EXHIBITS ........................... F-1
* The registrants have responded to Item 18 in lieu of responding to this
Item.
ii
<PAGE>
DEFINITIONS
The following definitions apply throughout this Annual Report unless the
context otherwise requires:
"Reed Reed International P.L.C.
International"
"Elsevier" Elsevier NV
"Merger" The merger on January 1, 1993 of the businesses of Reed
International and Elsevier; see "Description of the Business
Introduction".
"Reed Elsevier" The collective reference to the separate legal entities of
Reed International, Elsevier, Reed Elsevier plc, Elsevier
Reed Finance BV and their respective subsidiaries.
"Combined The collective reference to the businesses of all the
Businesses" entities comprising Reed Elsevier.
"Combined The financial statements of the Combined Businesses.
Financial
Statements"
"U.K. GAAP" Generally accepted accounting principles in the United
Kingdom.
"Dutch GAAP" Generally accepted accounting principles in The Netherlands.
"U.K. and Accounting policies that comply with both U.K. and Dutch
Dutch GAAP" generally accepted accounting principles.
"U.S. GAAP" Generally accepted accounting principles in the United
States.
"Noon Buying The noon buying rate in New York City for cable transfers
Rate" for a specified territory as certified for customs purposes
by the Federal Reserve Bank of New York.
In this Annual Report references to "U.S. Dollars" or "$" are to U.S.
currency, references to "pounds sterling", "sterling", "L", "pence" or "p" are
to U.K. currency and references to "Dutch guilders", "guilders" or "Dfl" are to
Dutch currency. The rates used in the preparation of the Combined Financial
Statements for the fiscal year ended December 31, 1998 were $1.66 per L1.00 and
$0.51 per Dfl1.00 for income statement items (the average prevailing exchange
rate during the year) and $1.66 per L1.00 and $0.53 per Dfl1.00 for balance
sheet items (the rate prevailing at December 31, 1998). 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 Conditions and Results of Operations --- Reed Elsevier".
Noon Buying Rates are not used in the preparation of the Combined Financial
Statements included in this Annual Report except where indicated for certain
convenience translations. At December 31, 1998, the Noon Buying Rates were $1.66
per L1.00 and $0.53 per Dfl1.00; at March 10, 1999 the Noon Buying Rates were
$1.63 per L1.00 and $0.50 per Dfl1.00.
Since January 4, 1999, the prices of all shares listed on the Amsterdam
Stock Exchange, including Elsevier, have been quoted in euros rather than Dutch
guilders. For the 1999 financial year Elsevier will continue to maintain the
Dutch guilder as its primary currency for the presentation of financial
information and the declaration of dividends. For the convenience of the reader
supplementary financial information in euros is presented for Elsevier. This
information has been translated into euros at the Official Conversion Rate of
Dfl2.20371 per k1.00. References to "euros" and "k" are to the currency of the
European Economic and Monetary Union. For a discussion of the effects of the
introduction of the euro on Reed Elsevier's combined results of operations and
combined financial position, see "Management's Discussion and Analysis of
Financial Conditions and Results of Operations --- Reed Elsevier".
FORWARD-LOOKING STATEMENTS
This Annual Report contains forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Such statements are based on the
beliefs of the management of the Combined Businesses as well as assumptions made
by, and information currently available to, the management of the Combined
Businesses. These forward-looking 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 or contribute to different
future outcomes from those foreseen in forward-looking statements include, but
are not limited to, those discussed in Item 1, "Description of Business", Item
9, "Management's Discussion and Analysis of Financial Conditions and Results of
Operations" and Item 9A, "Quantitative and Qualitative Disclosures about Market
Risk", as well as general economic and business conditions in Reed Elsevier's
markets, customers' acceptance of its products and services, the actions of
competitors, technological change, and the impact on Reed Elsevier of internal
and external Year 2000 issues and risks.
1
<PAGE>
PART I
ITEM 1: DESCRIPTION OF BUSINESS
Introduction and Structure
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, 1998, Reed Elsevier had total net sales
of approximately L3.2 billion and an average of approximately 26,100 employees.
In 1998, North America represented Reed Elsevier's largest single geographic
market, based on net sales by destination, contributing 54% 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 finance activities, 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.
Reed International and Elsevier each holds a 50% interest in Reed Elsevier
plc. Reed International holds a 46% interest in Elsevier Reed Finance BV, with
Elsevier holding a 54% interest. Reed International additionally holds a 5.8%
indirect economic interest in Elsevier, as shown in the structure diagram. This
equity interest reflects the higher market capitalisation of Reed International,
relative to Elsevier, in the period immediately preceding the Merger. It has
been taken into account in determining the equalization ratio whereby one
Elsevier Ordinary Share is intended to confer equivalent economic interests to
1.538 Reed International Ordinary Shares. The equalization ratio is subject to
change to reflect share splits and similar events that affect the number of
outstanding ordinary shares of either Reed International or Elsevier.
Under the equalization arrangements, Reed International shareholders have a
52.9% economic interest in the net income of Reed Elsevier and Elsevier
shareholders (other than Reed International) have a 47.1% economic interest in
the net income of Reed Elsevier. Holders of ordinary shares in Reed
International and Elsevier enjoy substantially equivalent dividend and capital
rights with respect to their ordinary shares.
The boards of both Reed International and Elsevier have agreed, except in
exceptional circumstances, to recommend equivalent gross dividends (including,
with respect to the dividend on Reed International Ordinary Shares, the
associated U.K. tax credit currently 20%, reducing to 10% on April 6, 1999 and
applicable for the 1998 final dividend), based on the equalization ratio. A Reed
International Ordinary Share pays dividends in U.K. currency and is subject to
UK tax law with respect to dividend and capital rights. An Elsevier Ordinary
Share pays dividends in Dutch currency and is subject to Dutch tax law with
respect to dividend and capital rights.
The following diagram presents a simplified view of the structure of Reed
Elsevier.
REED INTERNATIONAL ELSEVIER SHAREHOLDERS
- ------------------ ---------------------
REED INTERNATIONAL P.L.C. 5.8% ELSEVIER NV
- ------------------------- -----------
50% 50% 46% 54%
REED ELSEVIER plc ELSEVIER REED FINANCE BV
(PUBLISHING AND (FINANCE ACTIVITIES)
INFORMATION BUSINESSES) ------------------------
- -----------------------
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
2
<PAGE>
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. It diversified into publishing in 1970 which
developed into a significant business by 1986, at which time the Board of Reed
International decided to concentrate on publishing and information businesses.
Over the period up to the Merger, Reed International disposed of its
manufacturing businesses and made a number of significant acquisitions of
publishing and information businesses. Reed International's strategic focus
within the publishing and information businesses was directed primarily towards
higher margin, subscription-based businesses in English language markets. Total
Reed International acquisition expenditure for the five years ended December 31,
1992 was in excess of L1.5 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, Elsevier broadened the scope of its operations, diversifying into consumer
magazines, newspapers, business publications and commercial printing and
achieving considerable growth as a publisher of English language scientific
journals. Since the late 1980's, Elsevier's strategy has been directed primarily
towards expansion in publishing and information in English language information
markets. This strategy resulted in the disposal of Elsevier's commercial
printing and consumer book publishing operations and in the acquisition in the
United States of a number of publishing houses active in the fields of
scientific, professional and business to business publishing. Elsevier's total
acquisition expenditure for the five years ended December 31, 1992 was
approximately Dfl2.3 billion (L700 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 and delivering valuable
information through innovative products and services whether in print or
electronic form.
In pursuit of this strategy, Reed Elsevier has made strategic acquisitions
in scientific, professional and business to business markets and other smaller
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 (L76 million); Official Airline Guides, an
independent U.S. provider of travel information and services, which was acquired
in September 1993 for approximately $415 million (L277 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 (L1.0 billion); Tolley Publishing Company, a
legal and tax publisher in the United Kingdom, which was acquired in August 1996
for L101 million; MDL Information Systems Inc., a U.S. company specialising in
software systems and information databases for the scientific research and
development industry, which was acquired in April 1997 for $320 million (L195
million), and Chilton Business Group, a U.S. business information publisher,
which was acquired in September 1997 for $447 million (L273 million). In
November 1996, Reed Elsevier formed a joint venture with Times Mirror Company to
own and operate Shepard's, the premier US legal citation business. In August
1998, Reed Elsevier acquired Matthew Bender, a leading US publisher of secondary
legal content and the remaining 50% of Shepard's from Times Mirror for $1.65
billion (L1.0 billion). In addition, Reed Elsevier has made a significant number
of smaller acquisitions since the merger and total acquisition expenditure in
the six years ended December 31, 1998 was approximately L3.7 billion.
As part of Reed Elsevier's major portfolio refocus on scientific,
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 L751 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, the sale of which was
completed in 1998. In 1998, Reed Elsevier also completed the last major step in
its withdrawal from consumer publishing markets with the divestment of IPC
Magazines in the United Kingdom, yielding gross proceeds of L878 million.
In October 1997 Reed Elsevier announced a proposed merger of its businesses
with those of the Dutch publisher Wolters Kluwer NV. On March 9, 1998 it was
announced that the proposed merger with Wolters Kluwer had been abandoned. The
proposed merger was expected to provide attractive strategic and other benefits
to each of the parties. The Boards of Reed
3
<PAGE>
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.
Development of Reed Elsevier's portfolio and the product portfolios within
each business will continue to be a priority. This is expected to be achieved by
investment in the development of product offerings to meet evolving customer
needs and through acquisitions to support growing businesses. 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.
Reed Elsevier
Reed Elsevier is one of the world's largest publishers and information
providers based on net sales. Its activities include scientific, professional
and business publishing. Net sales are derived principally from subscriptions,
advertizing sales, circulation and copy sales and exhibition fees. In 1998, 36%
of Reed Elsevier's net sales from continuing businesses was derived from
subscriptions, 25% from advertizing sales, 20% from circulation and copy sales,
9% from exhibition fees and 10% 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.
The following table shows net sales of Reed Elsevier by business segment
and on the basis of geographic origin and markets and adjusted operating income
of Reed Elsevier, which is stated before exceptional items and the amortization
of goodwill and intangible assets, by business segment and on the basis of its
geographic origin, in each of the three years ended December 31, 1998:
<TABLE>
<CAPTION>
Net Sales Adjusted Operating Income(1)(2)
---------------------------------------------- ---------------------------------------------
1996 1997 1998 1996 1997 1998
-------------- -------------- -------------- ------------ ------------- -------------
L L L L L L
million % million % million % million % million % million %
Business Segment
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Scientific ......................... 553 16 571 17 622 20 231 27 230 26 223 27
Professional ....................... 1,037 31 1,076 31 1,154 36 268 31 296 34 330 41
Business ........................... 1,307 39 1,340 39 1,387 43 288 34 286 32 260 32
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Continuing Operations .............. 2,897 86 2,987 87 3,163 99 787 92 812 92 813 100
Discontinued Operations(3) ......... 484 14 430 13 28 1 69 8 73 8 --
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total .............................. 3,381 100 3,417 100 3,191 100 856 100 885 100 813 100
===== ===== ===== ===== ===== ===== ===== ===== ===== ===== ===== =====
Geographic Origin(4)
North America ...................... 1,438 43 1,512 44 1,663 52 358 42 394 45 390 48
United Kingdom ..................... 654 19 694 20 692 22 199 23 207 23 204 25
The Netherlands .................... 369 11 369 11 383 12 128 15 123 14 128 16
Rest of Europe ..................... 279 8 263 8 293 9 74 9 69 8 76 9
Asia/Pacific ....................... 157 5 149 4 132 4 28 3 19 2 15 2
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Continuing Operations .............. 2,897 86 2,987 87 3,163 99 787 92 812 92 813 100
Discontinued Operations(3) ......... 484 14 430 13 28 1 69 8 73 8 --
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total .............................. 3,381 100 3,417 100 3,191 100 856 100 885 100 813 100
===== ===== ===== ===== ===== ===== ===== ===== ===== ===== ===== =====
Geographic Market(4)
North America ...................... 1,523 45 1,582 46 1,726 54
United Kingdom ..................... 423 13 432 13 483 15
The Netherlands .................... 192 6 208 6 222 7
Rest of Europe ..................... 414 12 401 12 407 13
Asia/Pacific ....................... 345 10 364 10 325 10
----- ----- ----- ----- ----- -----
Continuing Operations .............. 2,897 86 2,987 87 3,163 99
Discontinued Operations(3) ......... 484 14 430 13 28 1
----- ----- ----- ----- ----- -----
Total .............................. 3,381 100 3,417 100 3,191 100
===== ===== ===== ===== ===== =====
</TABLE>
- -----------
(1) Adjusted operating income is shown after share of profit in joint ventures
and before exceptional items and the amortization of goodwill and
intangible assets.
(2) Exceptional items are significant items within Reed Elsevier's ordinary
activities which, under U.K. and Dutch GAAP, are required to be disclosed
separately due to their size or incidence. Exceptional items before tax
totalled L603 million (profit) in the year ended December 31, 1998, L448
million (loss) in the year ended December 31, 1997, and L24 million
(profit) in the year ended December 31, 1996. See "Management's Discussion
and Analysis of Financial Conditions and Results of Operations --- Reed
Elsevier" and note 5 to the audited Combined Financial Statements for a
further description of these items.
4
<PAGE>
(3) Discontinued operations, are presented in accordance with U.K. and Dutch
GAAP, and comprise IPC Magazines and the consumer book publishing
operations which were the final elements of the Consumer segment sold in
the year.
(4) The analysis by geographic origin attributes net sales and adjusted
operating income 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
advertizers, 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.
The following structure chart shows the main business units by reference to
business segment and geographical location.
<TABLE>
<CAPTION>
Business Segment Geographic Location
North America(1) United Kingdom The Netherlands Rest of Europe Asia/Pacific
---------------- -------------- --------------- -------------- ------------
<S> <C> <C> <C> <C> <C>
Scientific Elsevier Science Elsevier Science Elsevier Science Elsevier Science, Elsevier Science,
Excerpta Medica The Lancet Excerpta Medica Republic of Ireland Japan
Communications Communications Elsevier Science, Excerpta Medica
Springhouse Switzerland Communications,
Corporation Editions Scientifiques Japan
MDL Information et Medicales
Systems, Inc. Elsevier, France
Beilstein, Germany
Professional LEXIS-NEXIS Butterworths Elsevier Opleidingen Editions du Juris-- Butterworths, Australia
LEXIS Law Publishing Tolley Publishing Classeur, France Butterworths, South
Matthew Bender Heinemann Verlag Orac, Austria East Asia
Shepard's Ginn Dott. A. Giuffre Editore, Butterworths,
Martindale-Hubbell Butterworth- Italy (40%) South Africa (50.01%)
Congressional Heinemann Stampfli Verlag, Rigby Heinemann,
Information Switzerland (40%) Australia
Services Wydawnictwa Depalma, Argentina
Butterworths, Canada Prawnicze PWN, Abeledo Perrot,
Rigby Poland (50%) Argentina (66%)
Greenwood-Heinemann
Business Reed Exhibition Reed Exhibition Elsevier Business Reed Midem Reed Exhibitions,
Companies(3) Companies(3) Information(2) Organisation, Japan(3)
Cahners Business Reed Business France(3) Reed Exhibitions,
Information Information OIP, France(3) Singapore(3)
OAG Worldwide(4) OAG Worldwide(4) Messe Salzburg, Reed Exhibitions,
Cahners Travel Group(4) Austria(3) Australia(3)
REZsolutions, Inc. Pan European Reed Business
(67%) Publishing Company, Information,
Belgium(2) Australia
Elsevier Informacion OAG Worldwide,
Profesional, Spain(2) Singapore(4)
Reed Elsevier
Deutschland,(2)
Germany
Editions Prat, France(2)
Groupe Strategies,
France(2)
</TABLE>
- ------------
(1) U.S. unless otherwise stated
(2) These businesses form part of Elsevier Business Information
(3) These businesses form part of Reed Exhibition Companies
(4) Effective January 1998 the activities of Reed Travel Group were
restructured. The Hotel Directories and Travel Business Magazines divisions
became part of Cahners Business Information, as Cahners Travel Group and
its Airline Guides division was renamed OAG Worldwide and became part of
Reed Business Information.
5
<PAGE>
REED ELSEVIER PLC
Scientific
% change %change
1997 1998 at actual at constant
L million L million rates rates(1)
Net sales --------- --------- ----- --------
Elsevier Science.......... 465 513 +10% +12%
Medical Business.......... 106 109 +3% +5%
---- ---- -------- ----
571 622 +9% +11%
==== ==== ======== ====
Adjusted operating income.. 230 223 -3% -1%
==== ==== ========
Operating margin........... 40.3% 35.9% -4.4 pts
==== ==== ========
- -----------
(1) Represents percentage change over 1997 at constant rates of exchange, which
have been calculated using the average exchange rates for 1997.
The Scientific segment of Reed Elsevier comprises worldwide scientific and
medical publishing and communications businesses. For the years ended December
31, 1998, December 31, 1997 and December 31, 1996, the Scientific segment
achieved net sales of L622 million, L571 million and L553 million, respectively,
and adjusted operating income of L223 million, L230 million and L231 million,
respectively. The Scientific segment represented approximately 20% of Reed
Elsevier's total net sales and 27% of Reed Elsevier's total adjusted operating
income for the year ended December 31, 1998.
Scientific
Within the Scientific segment, Elsevier Science's scientific information
businesses contributed approximately 82% of the total net sales in the year
ended 31 December, 1998.
Elsevier Science. Elsevier Science is the 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
scientific information through journals, books, CD-ROMs and online to research
libraries, scientists and professional markets serving an increasingly wide
range of research fields. Elsevier Science is integral to the scientific
community through the publication of more than 1,200 subscription based journals
with more than 150,000 new research articles published each year, focused on the
life sciences, chemistry and physical sciences. These peer-reviewed publications
are an essential conduit for the dissemination of research findings. 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 life sciences; Annals of Thoracic
Surgery in the medical sciences; Tetrahedron and Journal of Chromatography in
chemistry; Physics Letters and Solid State Communications in the physical
sciences; Journal of Financial Economics in economics; and Artificial
Intelligence in the computer sciences field. Elsevier Science also publishes
secondary material in the form of supporting bibliographic data, indexes and
abstracts, and tertiary layers of information in the form of review and
reference works, including the Trends series and Encylopaedia of Neuroscience.
In addition the company publishes conference proceedings, letters, journals for
rapid communications, handbooks, bulletins, magazines, dictionaries,
newsletters, and sponsored publications.
Elsevier Science offers a number of sophisticated secondary databases,
available electronically online or on CD-ROM. These include: EMBASE, covering
pharmaceutical and biomedical sciences; Compendex, covering all the engineering
disciplines; Geobase, focusing on geoscience and related areas; Beilstein
Database, acquired in 1998, providing online access to approximately eight
million chemical structures with linked descriptions of the properties,
reactions, preparations, citations and other relevant data; and Elsevier
BIOBASE, a biological science database. Elsevier Science also maintains such
highly specialized databases as World Textiles and FLUIDEX. All of these
databases are available in one source, the OPSBANK database.
During 1998 several new titles were launched reflecting the continuing
trend of increased scientific specialization. These include: Materials Science
in semiconductor processing; Physica E, dealing with the physics of nano
structures; Ocean Modelling, covering developments in ocean and atmospheric data
management; Journal of Financial Markets, focusing on modelling techniques in
securities pricing and trading; Integrative Medicine, reviewing developments in
the integration of conventional and alternative medicine; and Environmental
Science and Policy.
Elsevier Science has added to this organic development of new journals by
selective acquisitions. These included MAGMA, the journal of the European
Society for Magnetic Resonance in Medicine and Biology, and the American Journal
of Ophthalmology, a respected journal in its field. Elsevier Science
strengthened its services in the growing area of the `soft' sciences, comprising
social sciences, business and economics, by acquiring JAI Press/Ablex
publishing.
ScienceDirect, the web-based scientific database, was commercially launched
in 1998. This was the culmination of a major investment program over the last
two years and sets a new standard in the electronic distribution of scientific
content. It is a comprehensive database of scientific, medical and technical
literature written and peer-reviewed by experts in their field. The system uses
the sophisticated LEXIS-NEXIS search engine to provide comprehensive access to
substantially all the Elsevier
6
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Science archive of the last three years. The system is based on the delivery of
remotely stored information through web-based user interfaces. Other features
include full text display of journal articles, an integrated abstract and
indexing layer and advanced graphics capabilities. ScienceDirect's product
offerings range from services tailored to academic, corporate and government
libraries to customized and packaged services to address the information needs
of individuals in specific scientific communities. At the end of 1998,
ScienceDirect contained almost 400,000 articles covering 3 years of research
published in over 1,000 journals. Electronic distribution provides immense
benefits in terms of flexibility and efficiency. It allows research scientists
and librarians to access the full text of a wide range of articles, to search on
a specific criteria and to move seamlessly between one article and another
through hypertext linking. Electronic distribution also provides far greater
opportunities to enhance the journal content through the provision of additional
linked services. Elsevier Science believes that its content and lead in
investing in electronic distribution systems positions it at the center of the
migration to electronic delivery.
The ability to expand the range and quality of the services offered in an
electronic environment was demonstrated through the integration of BioMedNet,
ChemWeb, Engineering Village and the Beilstein Database within Elsevier Science.
The Beilstein Database is being linked with online versions of the journals and
the management tools in high speed drug research of MDL Information Systems.
Elsevier Science is now able to offer specialist information online, in
addition to the core research journals, to research scientists in each of its
key disciplines of life sciences, chemistry and physical sciences. These
services include topical news and discussion groups specific to these
disciplines, and can be directly linked to Elsevier Science journal articles or
database information, together with more general scientific information.
Developments in new products and services have been accompanied by
substantial investment in operating systems. This will ensure that Elsevier
Science is able to support all its journals and services in hard copy and
electronic formats. The investment has been focused on the expansion of sales
and marketing activities to coincide with the commercial launch of ScienceDirect
and other electronic services, as well as in the editorial and production areas.
The scientific publishing business is highly cash generative as journal
subscriptions are usually paid annually in advance. In the year ended December
31, 1998, subscriptions accounted for approximately 83% of Elsevier Science's
net sales, circulation and copy sales for 4% of net sales and other sources for
13% of net sales. In the year ended December 31, 1998, approximately 40% of
Elsevier Science's net sales was derived from North America, 36% from Europe,
and the remaining 24% from Asia/Pacific.
Much of the pre-press production of the scientific businesses is undertaken
in-house. An efficient electronic production system, CAP (Computer Aided
Production), is used to deliver the full text of journal articles in whichever
format the customer requires: online, on CD-ROM, or in print. Electronic files
of all journals are fed from CAP into the Electronic Warehouse, which in turn
stores content and makes it available as required for delivery to customers.
Printing is primarily sourced through a variety of unaffiliated printers located
in cost effective printing centres, mainly in Europe. The distribution of
scientific journals is to a large extent handled through independent
subscription agents. Elsevier Science is the world's leading publisher of
English language scientific information, based on the number of journals
published. Competition with Elsevier Science is generally on a title by title
basis. Leading competing titles are normally published by learned societies such
as the American Chemical Society, the Institute of Electrical and Electronics
Engineers and the American Institute of Physics in the United States and the
Royal Society of Chemistry in the United Kingdom. In addition, a number of
organizations now offer scientific information through electronic networks.
Medical
Elsevier Science also operates a worldwide network of medical publishing
and communications businesses. 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 18% of the Scientific segment's net sales
in the year ended December 31, 1998.
Excerpta Medica Communications. Excerpta Medica Communications ("EMC")
publishes 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 U.K., the United States, Japan,
Hong Kong and Australia. Activities include educational and promotional
scientific information delivered via medical symposia, traditional print media,
audio-visual and computer-based programs. EMC expanded during 1998 with the
acquisition in the U.S. of HealthIQ, which administers drug reimbursement
schemes for pharmaceutical companies, and the launch in Europe of EMCALL, an
electronic service linking leading medical experts with drug companies. In the
year ended December 31, 1998, approximately 92% of EMC's net sales were derived
from sponsored projects, 7% from subscriptions and 1% from other sources. In the
same period, approximately 27% of net sales came from North America, 58% from
Europe and 15% from Asia/Pacific.
Springhouse Corporation. Springhouse Corporation ("Springhouse") publishes
nursing reference products and additional materials for nursing students and
instructors in the United States. Notable titles include Nursing Drug Handbook,
the respected and widely used drug reference for nurses, and the Nursing
magazine. The acquisition of Nursing Management Congress provided an expansion
opportunity in the nursing management market. In the year ended December 31,
1998, Springhouse's circulation and
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copy sales accounted for approximately 40% of total net sales, with a further
25% from advertizing, 27% from subscriptions and 8% from other sources.
Editions Scientifiques et Medicales Elsevier. Editions Scientifiques et
Medicales Elsevier ("ESME") based in Paris, publishes 79 medical, biotechnology
and clinical chemistry titles, including the renowned Encyclopedie Medico
Chirurgicale. In 1998, ESME launched new encyclopaedias, including Akos, which
provides continuing education for general medical practitioners. The
acquisitions of Gauthier-Villars and Labo France were integrated and
substantially enhanced ESME's services in mathematics and material sciences, and
medical biology. In the year ended December 31, 1998, ESME's circulation and
copy sales accounted for approximately 57% of total net sales, with a further 6%
from advertizing, 28% from subscriptions and 9% from other sources.
The Lancet. The Lancet is one of the world's most respected medical
journals, covering all aspects of human health and is sold through subscription
in over 75 countries. During 1998, the news section was relaunched, and the
content diversified to include the medical humanities, including discussion of
current medical issues such as the scope of a potential epidemic of variant CJD
and the ethical basis of the cloning of animals. In the year ended December 31,
1998, subscriptions accounted for 81% of total net sales, advertizing for 18%
and 1% from other sources.
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 company
competes 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), Advanstar, IMS (Cognizant) and
Mosby (Harcourt Brace).
Professional
% change %change
1997 1998 at actual at constant
L million L million rates rates(1)
Net sales --------- --------- ----- --------
Lexis-Nexis............... 661 741 +12% +13%
Reed Elsevier Legal
Division................. 206 207 -- +6%
Education and Tuition..... 209 206 -1% +2%
----- ---- -------- ----
1,076 1,154 +7% +10%
===== ==== ======== ====
Adjusted operating income.. 296 330 +11% +14%
===== ==== ========
Operating margin........... 27.5% 28.6% +1.1 pts
===== ==== ========
- -----------
(1) Represents percentage change over 1997 at constant rates of exchange, which
have been calculated using the average exchange rates for 1997.
The businesses which comprise the Professional segment serve, through a
variety of publishing formats, the legal, tax, business reference and
educational markets around the world. For the years ended December 31, 1998,
December 31, 1997 and December 31, 1996, the Professional segment achieved net
sales of L1,154 million, L1,076 million and L1,037 million, respectively, and
adjusted operating income of L330 million, L296 million and L268 million,
respectively. The Professional segment represented approximately 36% of Reed
Elsevier's total net sales and 41% of Reed Elsevier's total adjusted operating
income for the year ended December 31, 1998.
LEXIS-NEXIS
In the year ended December 31, 1998, LEXIS-NEXIS contributed approximately
64% of the total net sales of the Professional segment.
LEXIS-NEXIS is a leading provider of legal and professional information to
the legal, corporate and government markets in North America and, to a lesser
extent, internationally. The LEXIS-NEXIS group comprises the LEXIS-NEXIS online
service, LEXIS-NEXIS Europe, LEXIS Law Publishing, Matthew Bender, Shepard's,
Martindale-Hubbell, Congressional Information Service, LEXIS Document Services,
Marquis Who's Who, National Register Publishing and Reed Technology &
Information Services. Following rapid growth since its acquisition at the end of
1994, 1998 has been a year of investment for the next phase of development for
LEXIS-NEXIS. There has been significant success in strengthening the content and
editorial base, and in developing and launching new products and services.
Expansion in the US legal information market has been a crucial element of
Reed Elsevier's strategy since the acquisition of LEXIS-NEXIS. The $1.65 billion
acquisition in August 1998 of Matthew Bender and the remaining 50% interest in
Shepard's secured a leading publisher of analytical legal information and full
ownership of the pre-eminent U.S. legal citation business. Management believes
that these acquisitions provide an outstanding platform from which to take
advantage of the opportunities available in the growing U.S. legal market. This
market is undergoing an important change and lawyers
8
<PAGE>
increasingly look for the integration of primary law, case law, analytical
commentary and citation services. The key requirement is that such products
should allow seamless searching on specific criteria across all the information
sources. LEXIS-NEXIS now owns all the elements of content, editorial skills and
electronic delivery to develop and market such products. The integration of
Matthew Bender and Shepard's within LEXIS-NEXIS is progressing well. The
management of these operations has been combined with those of LEXIS Law
Publishing. Support functions, such as warehousing, production, sales and
finance are being brought together and dedicated teams are developing integrated
products across the LEXIS-NEXIS portfolio.
The LEXIS-NEXIS online service, which contributes approximately half of the
net sales of the LEXIS-NEXIS, provides toits customers --- who include lawyers,
accountants, financial analysts, journalists, government officials and
information specialists --- one of the largest databases in the world, with over
10 terabytes of information, providing access to more than 24,000 legal,
business, news and public records sources. The LEXIS-NEXIS data warehouse
contains more than 2.6 billion documents for customers to search, and an average
search takes less than six seconds. Traditionally customers have dialed-up the
service directly using proprietary desktop software interfaces. Since late 1997,
customers have been able to use standard Web browsers to access the service via
the Internet or LEXIS-NEXIS' global Extranet, and customers are increasingly
using the service through their Intranets.
The LEXIS-NEXIS online service is managed through two divisions, LEXIS
Online and NEXIS Online. Centralized technical, financial, facilities and
customer service functions support these divisions.
LEXIS Online, is responsible for developing, marketing and selling
information services to lawyers, accountants and the courts, and also manages
legal content acquisition and enhancements. During the year, LEXIS Online made
significant performance and functionality improvements to the LEXIS-NEXIS
Xchange web browser product, released commercially in December 1997. This
product provides, through an intuitive interface, access to the full search
functions of the LEXIS-NEXIS database and additional services. These include the
Daily Opinion Service, providing cite lists for all Federal and State appellate
and high courts, with links to the full text of opinions. New search features,
to improve productivity have also been released, including Core Terms,
highlighting major legal terms within a case or opinion so as to provide a quick
guide to its relevance.
NEXIS Online introduced LEXIS-NEXIS Universe, a new web browser product for
the business market. This is a highly flexible service, providing current
awareness features that can be tailored to specific criteria, together with
comprehensive search capabilities. It is based on plain language search criteria
entered into standard Windows based formats. LEXIS-NEXIS Universe has been well
received by subscribers. LEXIS-NEXIS Political Universe, one of the recently
launched family of Universe products, provides legislative, regulatory and news
content through a web interface. It also offers the ability to create customised
reports on bills, votes, members of Congress or candidates.
LEXIS-NEXIS has supplemented these technological developments with the
addition of new content and services. Major content licensing deals included
further content from CCH Tax Reports, BNA Mergers & Acquisitions Law Reports and
Dun & Bradstreet Business Reports.
LEXIS-NEXIS Europe. LEXIS-NEXIS Europe, formed in January 1997, offers a
wide range of LEXIS-NEXIS online information products in its European markets
and has developed a tailored European browser product, with German and French
language options, for release in 1999.
LEXIS Law Publishing. LEXIS Law Publishing ("LLP") has been a leading force
in U.S. legal publishing since the early 1800's. First known as The Michie
Company, LLP now offers more than 1,100 practice titles in 35 states and
territories. The company provides a wide range of publications on litigation,
torts, business and international law. In addition, LLP is the official
publisher of the United States Code Service and United States Supreme Court
Reports, Lawyers' Edition.
Matthew Bender. Matthew Bender, a leading US publisher of legal analysis
and case law, was acquired in August 1998. During its more than 100 year
history, Matthew Bender has achieved a unique status as a speciality publisher
in diverse areas of the law through a combination of in-house editorial talent
and publishing ties with some of the foremost experts in the legal profession.
Some of its most successful publications include California Forms of Pleading
and Practice, Collier on Bankruptcy, Immigration Law and Procedure, Moore's
Federal Practice, Nimmer on Copyright and Rabkin & Johnson's Current Legal
Forms.
Shepard's. Shepard's is the premier U.S. legal citation service which
contains more than 146 million citations derived from 7 million cases over 125
years. It provides a comprehensive mix of Federal and State jurisdictional and
topical citator services delivered in print, CD-ROM and online. "Shepardizing"
is a key process for all US lawyers and involves checking the continuing
authority of a case or statutory reference in the light of subsequent legal
changes. Reed Elsevier originally acquired a 50% interest in Shepard's in 1996
and purchased the remaining 50% from Times Mirror in August 1998.
Martindale-Hubbell. Martindale-Hubbell is the publisher of the leading
biographical guides to the legal profession in North America and
internationally. Its flagship product, the Martindale-Hubbell Law Directory,
includes more than 900,000 US lawyer and law firm listings. There are also
special Canadian and International editions. Its market coverage was extended
with the launch of the lawyers.com website. This site connects small law offices
with prospective clients. The Martindale-Hubbell Law Directory is available
through: hardbound print, CD-ROM and online.
Other companies in the LEXIS-NEXIS group include: Congressional Information
Service --- a commercial publisher of U.S. government reference systems for
information users in academia, public libraries and legal and business
enterprises; LEXIS Document Services --- a provider of comprehensive searching
and filing services to U.S. law firms and asset-based lenders;
9
<PAGE>
Marquis Who's Who --- a U.S publisher of biographical information; National
Register Publishing --- a U.S. publisher of directories serving the advertizing,
financial, real estate, and general reference markets; and Reed Technology &
Information Services ("RTIS") --- a provider of content management and
information delivery systems. During 1998, RTIS was awarded a 5 year extension
to its contract with the U.S. Government Patent and Trademark Office for patent
management.
In the year ended December 31, 1998, approximately 60% of LEXIS-NEXIS' net
sales came from subscription sales, including online services, 16% from
transactional sales of online services, 9% from advertizing (including directory
listings), 6% from circulation and copy sales and the remaining 9% from other
sources. In the same period approximately 97% of net sales came from North
America and 3% from the rest of the world.
In the U.S. legal information and services markets, LEXIS-NEXIS' principal
competitor is the Thomson Corporation (notably the West Group). The principal
competitors in the business information market include Dialog Corporation and
Dow Jones.
Reed Elsevier Legal Division
The Reed Elsevier Legal Division comprises the Butterworths group of
companies, Tolley Publishing in the U.K, Editions du Juris-Classeur in France,
Verlag Orac in Austria, 40% interests in Giuffre in Italy and in Stampfli Verlag
in Switzerland, Wydawnictwa Prawnicze PWN, a Polish joint venture, HVG-Orac a
joint venture in Hungary, Orac Publishers in the Czech Republic and, in
Argentina, Depalma and a 66% interest in Abeledo Perrot. In the year ended
December 31, 1998 the legal businesses contributed 18% 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, India, Canada and the
Republic of Ireland. Butterworths provides legal, tax and regulatory materials
in loose-leaf, book, CD-ROM and online formats.
Among its most widely known publications in the U.K. are Halsbury's Laws of
England, The Encyclopaedia of Forms and Precedents, Simon's Taxes and
Butterworth's Company Law Service. An increasing amount of its information is
now available online, through the web-based Butterworths Direct service,
launched in the first half of 1998, and through the LEXIS online service.
Butterworths Direct is the most comprehensive online legal information service
in the U.K., and comprises four services: News Direct, a free general law
service; Law Direct, a subscription based current awareness service; All England
Direct, comprising a 24-hour case reporting service, and the entire All England
Law Reports; and Halsbury's Law Direct, comprising the complete text of the 56
volume set of the latest edition fully updated. The online system allows lawyers
to search on defined criteria across all the online sources. A key feature is
the option to search using plain language search. Butterworths Direct
demonstrates the power to expand the range and quality of services offered in an
electronic environment. It provides the platform for the eventual migration of
the entire Butterworths product range to both hard copy and electronic delivery.
It is positioned as the first online point of reference for English Law. Tolley
Publishing, acquired in August 1996, is a market leader in "first point of
reference" tax publishing, through its single volume guides and its loose leaf
service. Tolley Publishing complements Butterworths' position in publishing for
practitioners at the specialist end of the legal and tax markets in the U.K.
Tolley Publishing also produces several CD-ROM and online products for tax,
regulatory and business markets.
Outside the U.K., Butterworth companies also have leading positions in
legal, tax and regulatory information publishing in their markets. During 1998,
Butterworths Australia further developed their position in the legal publishing
market through their web-based services and through the acquisition of an
electronic case citator, CaseBase. Butterworths New Zealand was appointed
official electronic publisher of The New Zealand Law Reports in 1997 and have
been appointed official publishers of the Ombudsman Compendium of Case Notes in
1998. Butterworths South Africa secured more than 1,000 paying customers to
their paid-for internet services during the year and established a new "Law for
Business" division, and in September 1998, acquired the third largest publisher
of legislative materials in the country, Lex Patria. The company has a strong
list of specialised and regional statute-based services, which are published in
loose-leaf and CD-ROM formats. In South-East Asia, the company announced plans
to introduce major new editions of Halsbury's Laws of Malaysia and Halsbury's
Laws of Singapore, and were appointed publishers of the Hong Kong Lawyer, the
official journal of the Law Society of Hong Kong, which is a bilingual English
and Chinese journal. Butterworths Canada made arrangements with a number of
third parties, including Canada Law Book Ltd., Maritime Law Book, Inc. and the
Supreme Court of Canada, to add their content to the Canadian legal database of
LEXIS-NEXIS. Progress was also made in licensing Canadian news and business
content for the NEXIS online service. Butterworths India was established in 1997
and in that year acquired the publishing assets of N.M. Tripathi Ltd. In 1998
several new editions of leading Tripathi titles were published, including the
renowned Mulla's Hindu Law and Modi's Medical Jurisprudence.
In the year ended December 31, 1998, approximately 91% of Butterworths' net
sales were derived from hard copy sales, with 9% attributable to electronic
products. Significant investment in and growth from electronic publishing is
expected over the next few years. In the same period, approximately 61% of net
sales came from the U.K., 15% from Australia, 6% 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 online
service, Juris-Data, contains the largest case law database in France, including
exclusive coverage of the Cour d'Appel
10
<PAGE>
(French Court of Appeal). EJC also includes the Infolib, Legisoft and La
Documentation Organique ("LaDo") businesses. Infolib specialises in legal
software and other materials for notaries. Legisoft markets information and
software for lawyers, enabling them to search an extensive database of codes and
cases and to draft deeds using ready-made forms. LaDo publishes an encyclopaedia
for tax specialists, which is available in both loose-leaf and CD-ROM formats.
In the year ended December 31, 1998, subscriptions comprised approximately 77%
of EJC's net sales, while circulation and copy sales comprised approximately 18%
of net sales, with 5% from other sources. EJC's major competitors are Dalloz
(CEP) and Lamy (Wolters Kluwer).
Verlag Orac. Verlag Orac, the leading tax publisher and a leading law
publisher in Austria, was acquired in November 1998. It publishes a
comprehensive range of tax materials, including the fortnightly Austrian Tax
Newspaper and the monthly Journal of Accountancy. Verlag Orac also has equity
holdings in law publishing houses in Hungary, HVG-Orac (50%) and the Czech
Republic, Orac Publishers.
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 program and is a major Italian
academic legal publisher. In 1998 it launched two new journals, Europa e diritto
privato and Il lavoro nella publica amministrazione.
Stampfli Verlag. Stampfli Verlag is a Swiss legal and tax publisher in
which Reed Elsevier has a 40% interest.
Wydawnictwa Prawnicze PWN. Wydawnictwa Prawnicze PWN ("WP-PWN") is a joint
venture company which was established in 1994 with PWN, Poland's leading
academic publisher.
Abeledo Perrot. In January 1999, Reed Elsevier acquired a 66% interest in
Abeledo Perrot, one of the leading legal publishers in Argentina, which
publishes for legal practitioners and for the academic and student markets.
Depalma. Depalma, an Argentine publishing house which has a leading list of
legal text books for both practitioner and student markets, was acquired by Reed
Elsevier in February 1999.
Educational and Tuition
The educational and tuition businesses within the Professional segment are
made up of Reed Educational & Professional Publishing and Elsevier Opleidingen.
These businesses contributed approximately 18% of the total net sales of the
Professional segment in the year ended December 31, 1998.
Reed Educational & Professional Publishing. Reed Educational & Professional
Publishing ("REPP") serves the educational markets of the U.K., U.S., Australia,
New Zealand and South Africa, as well as the international professional and
academic sectors.
REPP operates through eight main businesses: U.K. Schools comprising
Heinemann, Rigby-Heinemann and Ginn, Global Library and Butterworth-Heinemann
based in the U.K.; Rigby and Greenwood-Heinemann based in the U.S.A.;
Rigby-Heinemann based in Australia; Heinemann in South Africa; and Reed
Educational in New Zealand. U.K. Schools is a publisher for the UK primary and
secondary markets under the imprints. Global Library publishes reference
material for school libraries and has operational units in the U.K., U.S.A. and
Australia. Butterworth-Heinemann is an international publisher of professional
information and learning materials for higher education and professional
markets. It has publishing units in the U.K., U.S.A. and Australia. In the
U.S.A., Rigby publishes supplemental materials for elementary school literacy
development. Greenwood-Heinemann publishes monograph and reference lists and
professional resources for teachers. The Australian business, Rigby Heinemann,
is a leading publisher of primary and secondary school books in Australia. In
South Africa, Heinemann is a leading publisher of school texts and in New
Zealand, Rigby Educational publishes text-books for the local market.
The launch of the U.K. Government's National Literacy Strategy provided
Ginn and Heinemann with the opportunity to introduce several new products on a
short timetable to support this initiative. This was paralleled in the U.S.A.,
where Rigby developed products to meet the "back to basics" approach to the
teaching of reading and consolidated its position as a major provider of
literacy products for elementary school children. Greenwood-Heinemann also
launched Word Matters, a companion volume for teachers to its highly acclaimed
title Guided Reading on the teaching of phonics. Butterworth-Heinemann continued
its success in previous years by winning two major awards for its publications.
In the year ended December 31, 1998, approximately 39% of REPP's net sales
derived from the United Kingdom, 42% from North America, 1% from continental
Europe, 7% from Australia and the remaining 11% from the rest of the world.
Printing and binding are performed by unaffiliated printers and in cost
effective printing centers both in the country of origin and around the world.
REPP has its own warehouse and distribution facilities in its principal
territories. REPP's major U.K. competitors are Longman (Pearson), Nelson
(Thomson Corporation), Oxford University Press, Stanley Thomes (Wolters Kluwer)
and Cambridge University Press. In the United States, principal competitors
include Wright Group (Tribune), SRA/Open Court (McGraw Hill) and MCP (Pearson).
University presses are considered to be competitors in the academic market. In
Australia, principal commercial competitors include Nelson, Macmillan, AWL and
Jacaranda.
Elsevier Opleidingen. Elsevier Opleidingen provides tailor made vocational
training, seminars for industry and government services in the Netherlands and
Belgium. The business expanded the range of its products and services as
organisations placed increasing emphasis on structural change and development of
their human resources. Major new tuition services included the formation of a
separate division, Elsevier Resultaat Consultants, providing advice to
organisations on the implementation of change; a series of measurement and
control courses for technicians and engineers, using the latest laboratory
techniques; and a
11
<PAGE>
course aimed at improving team management. In the year ended December 31, 1998,
approximately 85% of net sales were from the Netherlands.
Business
% change %change
1997 1998 at actual at constant
L million L million rates rates(1)
Net sales --------- --------- ----- --------
Cahners Business Information.. 397 455 +15% +16%
Reed Business Information..... 264 275 +4% +6%
Elsevier Business Information. 177 210 +19% +22%
Cahners Travel Group.......... 85 76 -11% -10%
OAG Worldwide................. 99 90 -9% -7%
Reed Exhibition Companies..... 257 274 +7% +9%
Other/Utell (1997)............ 61 7
----- ----- -------- ----
1,340 1,387 +4% +5%
===== ===== ======== ====
Adjusted operating income...... 286 260 -9% -8%
===== ===== ======== ====
Operating margin............... 21.3% 18.7% -2.6 pts
===== ===== ========
- ------------
(1) Represents percentage change over 1997 at constant rates of exchange, which
have been calculated using the average exchange rates for 1997.
The Business segment is comprised of business magazine publishing companies
operating principally in the U.S.A., the U.K., Europe and Australia and travel
and exhibition companies operating worldwide. For the years ended December 31,
1998, December 31, 1997 and December 31, 1996, the Business segment achieved net
sales of L1,387 million, L1,340 million and L1,307 million, respectively, and
adjusted operating income of L260 million, L286 million and L288 million,
respectively. The Business segment represented approximately 43% of Reed
Elsevier's total net sales and 32% of Reed Elsevier's total adjusted operating
income for the year ended December 31, 1998.
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 80% of the net
sales of the Business segment in the year ended December 31, 1998. The former
Reed Travel Group was restructured in January 1998. The Hotel Directories and
the Travel Business Magazines groups form part of Cahners Business Information
as Cahners Travel Group. The Airline Group has been renamed OAG Worldwide and
forms part of Reed Business Information. In the U.S.A. business to business
magazines are primarily distributed on a "controlled circulation" basis, whereby
the product is delivered without charge to qualified buyers within a targeted
industry group based upon circulation lists developed and maintained by the
publisher. In the U.K. business magazines are distributed both on a "controlled
circulation" basis and a "paid circulation" basis, but in both cases are
dependent on advertizing for a significant proportion of their revenues. As net
sales are mainly derived from advertizing these businesses are sensitive to
economic conditions and advertizer expenditure in those countries. In the
Netherlands, however, a higher proportion of publications is sold by
subscription, thus such publications are generally more resilient through
economic cycles.
Cahners Business Information. Cahners Publishing Company, the business to
business publisher in the United States, has been combined with Chilton Business
Group ("Chilton"), acquired in September 1997, to form Cahners Business
Information ("Cahners"). Integration of Chilton with Cahners' existing title
portfolio was substantially completed during the year with the market benefits
of the combined portfolios already felt. Cahners now publishes over 130 trade
magazines organized in eighteen market-focused groups. The key sectors served
include communications, entertainment, travel, electronics, building and
construction, manufacturing, automotive, materials, publishing and retail home
furnishings. Among the best known titles are Variety, Broadcasting & Cable,
Multichannel News, Publishers Weekly, EDN, American Metal Market, Pollution
Engineering, Design News and Automotive Industries. Cahners includes R.R.
Bowker, the U.S. bibliographical publisher of Books in Print, Ulrich's
Periodicals and Literary Market Place. 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, Philadelphia, and
Denver. Readership of its publications is expanding beyond U.S. borders,
reflecting both the growing importance of U.S. exports and the increasing
internationalization of the industries served.
Cahners has concentrated on an active program of re-positioning and
extending existing titles. For instance, the launch of Home Accents Today and
Kids Today, extended Cahners' presence in the Retail Furnishing sector through
the established titles, Furniture Today and Home Textiles Today. New titles have
also been launched in key industry sectors such as Supply Chain Management
Review for logistics managers, Professional Remodeler for the construction
industry, and Grid covering interior design, architecture and real estate in New
York.
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This organic development has been supplemented by selective acquisitions.
These have included in the retail sector, Gifts & Decorative Accessories, the
magazine for general gift stores; Playthings, a leading publication for
retailers in the toys and games market; and A.F.Lewis, the publisher of the
leading directory and database in the graphic communications sector.
Cahners also developed its leading titles through electronic delivery.
Manufacturing Marketplace, launched in 1997, progressed well and attracted over
1,000 advertizers. The website has now more than 150,000 registered users and
400,000 unregistered users. The editorial and technology skills gained from
Manufacturing Marketplace have been applied to the development of Variety.com,
for the entertainment sector, Buildingteam.com for the construction sector and
Supplychainlink.com aimed at procurement specialists and purchasing officers.
Buildingteam.com has been established around Cahners' 13 construction titles and
has been developed in conjunction with a specialist construction insurer and a
database supplier. It provides a comprehensive information service covering
cost, product, standards and regulatory information and industry news.
Supplychainlink.com provides access to purchasing information, using content
from nine specialist magazines published by Cahners. It is orientated to the
delivery of news and provides access to other sites on the web dealing with this
industry sector.
A new management team was established at Cahners Travel Group which
reorganized the business, including the appointment of experienced publishers to
manage the periodicals and directories. Among the best known titles are the
Hotel & Travel Index and a range of periodicals such as Travel Weekly, Travel
Age and Meetings & Conventions. There has also been a thorough review of the
customers and markets addressed by the products and the hotel directories have
been changed to a controlled circulation basis. Investment has also been made in
sales, marketing and customer support as well as production and operations. The
recompense program to advertizers has neared completion.
The directories remain the most effective way for advertizers to reach
travel agents and Travel Weekly is the leading U.S. industry magazine. Cahners
Travel Group is now in a position to capitalise on these strengths. It has
already joined forces with Microsoft Expedia.com, the leading online travel
service, to deliver the internet's most comprehensive hotel information
database.
Cahners leverages its knowledge of the business sectors it serves and the
extensive databases of business names and reader related demographics it has
collated through a broad range of products and services. These include websites,
direct mail, product news tabloids, newspapers, newsletters and custom published
supplements, as well as the feature publications which continue to serve as the
core of the portfolio.
In the year ended December 31, 1998, approximately 81% of Cahners' total
net sales came from advertizing, 12% from subscriptions and circulation sales
and 7% from other sources. Cahners operates circulation management and
fulfilment facilities in Colorado and the Caribbean island of St Kitts which
identify, qualify and maintain subscriber lists for substantially all of its
titles. These lists enable Cahners to serve its advertizers by creating highly
targeted readerships for its magazines. Much of the editorial pre-press
production is performed in-house. Paper and printing services are purchased on a
co-ordinated basis with other Reed Elsevier businesses in the U.S.A.
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 Advanstar, BPI/VNU, Primedia
(K-III), Penton Media, Hanley Wood, Miller Freeman (United News & 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 U.K.
based business to business information publisher, has a portfolio of around 100
business magazines, market access products and online services. RBI publishes
over 60 primary business magazine brands in some 30 market facing sectors. Its
business magazines include Computer Weekly, Farmers Weekly, Estates Gazette,
Flight International, New Scientist, Caterer & Hotelkeeper, Commercial Motor and
Community Care. Its major directories are Kelly's, Kompass and The Bankers'
Almanac, and it also has online services which include Estates Gazette
Interactive, @Computer Weekly, Air Transport Intelligence and ICIS-LOR.
RBI strengthened its portfolio through new launches, acquisitions and brand
development into such areas as conferences, recruitment fairs and awards events.
In parallel RBI extended the development of electronic services. Estates Gazette
Interactive built on its initial success and now has more than 3,000 paying
subscribers with over 100 new companies subscribing each month during 1998. The
service was expanded with the addition of credit checking, environmental
surveys, demographic and economic data. The site won two important industry
awards in the U.K. for the best business website. Air Transport Intelligence
also achieved a strong market presence with multi-user subscription agreements
with many of the world's major airlines and aerospace manufacturers. RBI won the
New Media Publisher of the Year Award from the Periodical Publisher's
Association, in recognition of its innovative strategy in electronic publishing.
In the important information technology sector, there were two new launches
of recruitment products addressed to younger information technology
professionals Computer Weekly Xtra and Coolwebjobs.com. They extended RBI's
market presence around its core title, Computer Weekly. This organic development
was supplemented with the acquisition of the computing titles of Dennis
Publishing. In the social care sector, Community Care, the leading magazine for
professionals in this area was redesigned and was accompanied by the highly
successful Community Care Live, a two day conference which attracted more than
80 speakers.
OAG Worldwide was formed as a stand-alone division following the
reorganisation of the Reed Travel Group. Its main competence is in the gathering
and distribution of airline scheduling information. The new management team has
concentrated the
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business on the provision and development of independent databases of airline
schedules and related travel information. There has been increased focus on the
publishing development of content. OAG Worldwide has launched its travel
information service onto corporate intranets and has achieved growing
penetration of the corporate market. It has also invested in its hard copy
portfolio of easy to use guides for business travellers. OAG Max, a
sophisticated air transport analysis tool, was launched on CD-ROM. The
recompense program to advertizers has neared completion.
In the year ended December 31, 1998, approximately 62% of RBI's net sales
came from the U.K., 10% from continental Europe, 6% from Australia and 22% from
Asia/Pacific excluding Australia. In the same year, approximately 49% of net
sales was derived from advertizing, 10% from subscription sales, 22% from
circulation sales and the remaining 19% 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 U.K. RBI's
distribution is generally through public postal systems, with news-stand
distribution for some titles through outside wholesalers. RBI competes directly
with EMAP Business Communications and Miller Freeman (United News & Media) in a
number of sectors in the U.K., and also with many smaller companies on an
individual title by title basis.
Elsevier Business Information. Elsevier Business Information ("EBI")
comprises the business publishing operations in continental Europe and operates
in the Netherlands, Belgium, Spain, Germany and France.
EBI in the Netherlands, is organised in market facing groups focused on 13
market segments. It publishes over 160 titles and is the leading business
magazine and information publisher. Its principal titles include Elsevier, the
major current affairs weekly, Beleggers Belangen and FEM in business and
management, Boerderij and Buiten in agriculture.
Its titles are predominantly subscription-based and revenue is principally
divided between subscriptions and advertizing. Most titles are published in the
Dutch language. Through trade journals, product news tabloids, directories,
documentary systems, databases and newspapers, EBI serves markets which include
agriculture, catering, construction, engineering, food, fashion, horticulture,
transportation, tourism and travel. During 1998, EBI extended its existing
strong market presence with the launch of a number of new publications to
address specialist markets. This included the expansion of FEM, one of the
leading management titles in the Netherlands. Buiten (Outdoors) was launched in
the agricultural market and covers a wide range of countryside issues. The
portfolio in the food sector was expanded with the launch of Elsevier Food
International.
This development of traditional hard copy titles was accompanied by the
expansion of EBI's electronic publishing strategy. New products were launched
based on the existing core titles. Beleggers Belangen, addressing the investment
community, launched a website providing information and analysis on companies
listed on the Amsterdam Stock Exchange. EBI's position in this market was
enhanced by the acquisition of the outstanding interest in the joint venture
Multicount Elsevier Kennisbank, an online information service for financial and
tax professionals.
In the year ended December 31, 1998, approximately 40% of EBI's net sales
was derived from advertizing, 36% from magazine subscriptions and 19% 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 mainly through the Dutch postal system. EBI competes
with a number of companies on a title by title basis in individual market
sectors, the largest competitors being Wolters Kluwer and VNU. In the
agricultural sector, the main competition is from Oogst (association journal)
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. During 1998, PEPCO
launched a number of websites, providing online links between readers and
advertizers. In the year ended December 31, 1998, approximately 75% of net sales
was derived from advertizing sales. The Spanish operations, Grupo Arte y
Cemento, a publisher of product news tabloids, and Construdatos, which publishes
market information on new building projects, were combined to form Elsevier
Informacion Profesional, which launched a series of publications around the
established titles.
Other constituents of EBI are Editions Prat, a publisher of mainly
loose-leaf information aimed at the fiscal, legal and administration sectors in
France; Reed Elsevier Deutschland, which includes rtzliche Praxis, a prominent
German language medical journal; K.G. Saur, a leading publisher for the German
library information market; Groupe Strategies, which publishes the journal
Strategies and other information materials for the French advertizing and
communications industry.
Exhibitions
The exhibitions business contributed approximately 20% of the net sales of
the Business segment in the year ended December 31, 1998.
Reed Exhibition Companies ("REC") is an international event organizer, with
334 events in 24 countries, attracting over 100,000 exhibitors and 5.5 million
buyers annually. REC's events are concentrated in a number of industry sectors
of which the most important are: marketing and business services; publishing;
IT/Communications; manufacturing; aerospace; leisure; electronics; hospitality;
travel; entertainment; and retail.
Many of REC's events are industry leaders, including National Hardware
Show, National Manufacturing Week, JCK International Jewellery Shows,
Professional Golfers Association (PGA) Merchandise Show, PGA International Golf
Show and
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<PAGE>
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.
REC launched 26 new shows in 1998, reflecting an increasing demand for well
organized and focused industry shows which provide an efficient marketing tool
for customers. This extended successful brands into new geographic markets. For
example, REC added Asia International Book Fair to its portfolio of Book Fairs
in France, America and Japan. The jewellery portfolio was strengthened by the
launch of International Jewellery Kobe, a sister event to International
Jewellery Tokyo. These initiatives formed part of REC's strategy to build on the
international scope and scale of its activities while maintaining the individual
nature of events in different geographic markets.
The strength of the brands within REC's portfolio was demonstrated by the
successful Asian Aerospace event. This achieved attendance figures in line with
historic trends despite the significantly more difficult economic conditions in
South East Asia.
Organic development of the portfolio was enhanced through acquisitions. The
most significant events acquired were the two golf equipment shows purchased
from the Professional Golfers Association of America. These events, together
with the acquisitions of the Cannes Boat Show and the International Golf Travel
Show, added to REC's growing sports/leisure and travel portfolios.
REC is also investing in electronic services such as online registration
and appointment setting systems, and extending existing services through such
means as virtual markets. For example, MIP Interactive is an online platform for
TV and film professionals offering year-round access to new business
opportunities between annual MIP TV events. In addition, REC has undertaken a
major investment program in supporting infrastructure including the development
of a powerful new sales and marketing system.
Over 80% of REC's net sales is derived from licences of exhibition
participation rights, with the balance attributable to conference fees,
advertizing in exhibition guides, sponsorship fees and admission charges. With
few exceptions no capital is employed in exhibition halls, the majority of which
are leased on a short term basis. In the year ended December 31, 1998,
approximately 44% of REC's net sales came from North America, 27% from
continental Europe, 16% from the U.K. and the remaining 13% from Asia/Pacific.
As some events are held other than annually, net sales in any single year may be
affected by the cycle of non-annual exhibitions.
The exhibition industry has historically been extremely fragmented. Within
domestic markets, competition comes primarily from industry focused trade
associations and convention center and exhibition hall owners. The main global
competitor is United News & Media, although a number of hall owners are
increasingly seeking international presence.
Consumer-Discontinued Operations
During 1998, Reed Elsevier completed the disposal of its consumer
publishing businesses as part of its strategy of increasing its focus on high
value-added areas of "must-have" information. The consumer publishing businesses
are categorized, under U.K. and Dutch GAAP and U.S. GAAP, as Discontinued
Operations and comprise IPC Magazines and the remaining consumer book publishing
operations which were the final elements of the Consumer segment sold in the
year. For the years ended December 31, 1998, December 31, 1997 and December 31,
1996, the Discontinued Operations achieved net sales of L28 million, L430
million and L484 million, respectively. The Discontinued Operations represented
approximately 1% of Reed Elsevier's total net sales for the year ended December
31, 1998.
Joint Ventures
Reed Elsevier's principal joint ventures are Giuffre in Italy and
REZsolutions, Inc.
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.
During 1997, Reed Elsevier contributed the Utell hotel reservations
business in return for a 67% non controlling interest in REZsolutions, Inc, a
joint venture between Utell and Anasazi Inc., which provides technology,
marketing and reservations services to the hospitality industry.
Elsevier Reed Finance BV
Elsevier Reed Finance BV, the Dutch resident parent company of the Elsevier
Reed Finance group ("ERF"), is directly owned by Reed International P.L.C and
Elsevier NV. ERF provides treasury, finance and insurance services to the Reed
Elsevier plc businesses principally through its subsidiaries in Switzerland. In
the course of 1998, different activities carried out within Elsevier SA (the
principal subsidiary within ERF) were reorganized under several distinct legal
entities. As a result, Elsevier SA became a pure holding company, renamed
Elsevier Swiss Holdings SA, with three subsidiaries: Elsevier Finance SA
15
<PAGE>
("EFSA"), Elsevier Properties SA ("EPSA") and Elsevier Risks SA ("ERSA"). In
addition, Elsevier SA put its Irish subsidiary into liquidation and closed its
Luxembourg branch.
EFSA has become the principal treasury center for the Combined Businesses
and provides, inter alia, financing, management of cash pools and investments,
foreign exchange dealing services, and the operation of cross border settlements
systems. In anticipation of the introduction of the euro on January1, 1999,
EFSA's services were extended such that it is now responsible for all aspects of
treasury advice and support for Reed Elsevier plc's businesses operating in
continental Europe and certain other territories. EPSA is responsible for
exploitation of tangible and intangible property rights. During 1998, Reed
Publishing Nederland BV ("RPN"), an ERF subsidiary, contracted out the
management of its intangible property rights to EPSA such that all intangible
properties rights are now managed in one center of expertise. To reflect this
concentration, the shareholding in RPN was transferred to EPSA. ERSA is
responsible for insurance activities relating to risk retention.
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.
Employees
Reed Elsevier's average number of employees in the year ended December 31,
1998 was 26,100, including 200 in Discontinued Operations. In the Continuing
Operations, approximately 5,400 were located in the U.K., 13,600 in North
America, 2,800 in the Netherlands, 2,200 in the rest of Europe and 1,900 in
Asia/Pacific. The average number of employees in the business segments of
Continuing Operations in the year ended December 31, 1998 was 3,500 in
Scientific, 11,100 in Professional and 11,300 in Business.
Labor Relations
The board of Reed Elsevier plc is fully committed to the concept of
employee involvement and participation, and encourages each of its businesses to
formulate its own tailor-made approach with the co-operation of employees. The
group is an equal opportunity employer, and recruits and promotes employees on
the basis of suitability for the job. Appropriate training and development
opportunities are available to all employees. During 1998 the board formulated
and agreed Codes of Conduct applicable to employees within the Reed Elsevier plc
group, which have been adopted throughout its businesses.
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ITEM 2: DESCRIPTION OF PROPERTY
The Combined Businesses do not own any physical property which is
considered material to the Combined Businesses taken as a whole. None of the
real property owned or leased by the Combined Businesses is presently subject to
liabilities relating to environmental regulations which is considered material
to the Combined Businesses taken as a whole.
ITEM 3: LEGAL PROCEEDINGS
The Combined Businesses are party to various legal proceedings, the
ultimate resolutions of which are 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 March9, 1999, Reed International is aware of the following
disclosable interests in the issued Reed International Ordinary Shares:
Number of Reed
International
Ordinary Shares %
Identity of Person or Group(1) Owned of Class
- ------------------------------ ---------------- --------
Prudential Corporation ..................... 79,917,105 6.98
Lord Hamlyn ................................ 43,302,816 3.78
Directors and Officers ..................... 287,732 0.02
- -----------
(1) Under U.K. Law, subject to certain limited exceptions, persons or groups
owning or controlling 3% or more of the issued Reed International Ordinary
Shares are required to notify Reed International of the level of their
holdings.
As far as Reed International is aware, except as disclosed herein, it is
neither directly or indirectly owned 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 March9, 1999, Elsevier is aware of the following disclosable
interests in the issued Elsevier Ordinary Shares, in addition to the 4,049,951
R-shares in Elsevier held wholly by Reed International and representing a 5.8%
equity interest in the total share capital of Elsevier:
Number of Elsevier
Ordinary Shares %
Identity of Person or Group(2) Owned(1) of Class
- ------------------------------ ------------------ --------
Internationale Nederlander Verzekeringen NV ...... 52,450,342 7.86
Directors and Officers(3) ........................ 46,440 --
- ------------
(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, except as disclosed herein, it is neither
directly nor indirectly owned or controlled by one or more corporations or by
any government.
Elsevier is not aware of any arrangements the operation of which may at a
subsequent date result in a change in control of Elsevier.
REED ELSEVIER
The Boards of Directors of Reed International and Elsevier manage their
respective shareholdings in Reed Elsevier plc and Elsevier Reed Finance BV.
Under the Reed Elsevier plc Articles of Association, the maximum number of
directors of the Company is 20. Reed International and Elsevier are each
currently entitled to appoint ten directors. Decisions of the Board of Directors
of Reed Elsevier plc currently require a two-thirds majority, and the quorum
required for meetings of the Board of Reed Elsevier plc is currently at least
one director appointed by Reed International and one director appointed by
Elsevier.
On August 6, 1998, Reed International and Elsevier announced that they had
decided to move to a unitary management structure of a single non-executive
Chairman and sole Chief Executive Officer and, so far as practicable, identical
boards. This is a logical evolution of the management structure in place since
the merger of Reed International's and Elsevier's businesses in 1993, under
which the day to day management of the jointly owned businesses of Reed Elsevier
plc have been under the control of a four person Executive Committee of the
Board of Reed Elsevier plc. It is proposed that in April 1999 Morris Tabaksblat
will become non-executive Chairman of both Reed International and Elsevier and
in June 1999 he will also become non-executive Chairman of
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Reed Elsevier plc. The intention to recruit a new Chief Executive Officer of
Reed Elsevier plc, who will also be Chief Executive Officer of Reed
International and Elsevier, was also announced on August 6, 1998, and is now at
an advanced stage. For additional information concerning other changes to the
Board membership within Reed International, Elsevier and Reed Elsevier plc
arising from the proposed introduction of a unitary management structure see
"Directors and Officers of the Registrants".
The following information applies as at March 9, 1999 and will be subject
to change in April 1999 (see "Proposed Unitary Management Structure" below).
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 collectively functions as the Chief
Executive of Reed Elsevier plc. Appointments to the REEC require the approval of
both Reed 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 currently comprises the Co-Chief Executives, Herman Bruggink and
Nigel Stapleton, and John Mellon.
The Supervisory Board of Elsevier Reed Finance BV currently comprises
Pierre Vinken (Chairman), Mark Armour, Herman Spruijt and Steven Perrick, and
the Management Board consists of Cornelis Alberti and Willem Boellaard as
Managing Directors. 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 meetings 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.
The Articles of Association of Reed Elsevier plc contain certain
restrictions on the transfer of shares in Reed Elsevier plc. In addition,
pursuant to arrangements established at the time of the Merger, neither Reed
International nor Elsevier may acquire or dispose of any interest in the share
capital of the other or otherwise take any action to acquire the other without
the prior approval of the other (the "Standstill Obligations"). The Panel on
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.
Arrangements established at the time of the Merger provide that, if any
person (together with persons acting in concert with him) acquires shares, or
control of the voting rights attaching to shares, carrying more than 50% of the
votes ordinarily exercisable at a general meeting of Reed International or
Elsevier and has not made a comparable 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.
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, together with proposed changes thereto, see "Directors
and Officers of Registrants".
Proposed Unitary Management Structure
Reed International, Elsevier and Reed Elsevier plc propose to adopt a
unitary management structure with a non-executive Chairman and a Chief Executive
Officer who are common to all three companies. This is seen as a logical
evolution of the structure that has been in place since the Merger, under which
the Reed Elsevier plc group been managed by an Executive Committee of the Reed
Elsevier plc board. The boards of all three companies will, so far as
practicable, be harmonized with effect from the Annual General Meetings in April
1999, subject to endorsement of the proposals at those meetings, and there will
be a majority of non-executive directors on each board. Each director appointed
to the Reed International and Elsevier boards will retire by rotation from both
boards at the same time every three years.
Reed International and Elsevier will establish a Nominations Committee for
all new appointments to each of the boards of Reed International, Elsevier and
Reed Elsevier plc. The committee will initially comprise the Chairman, the Chief
Executive Officer and one non-executive director from each of Reed International
and Elsevier. The Audit Committees and the Remuneration Committees of each
company will comprise three non-executive directors.
To give effect to the intended unitary management structure, certain other
changes are proposed to the existing contractual arrangements between Reed
International and Elsevier and to the Articles of Association of Reed
International, Elsevier and Reed Elsevier plc.
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The following is a summary of the key changes which will be made to the
management structure in due course and which are to be reflected in the changes
to the existing contractual arrangements.
o Elsevier will cease to be a `struktuur regime' company under the laws
of the Netherlands, which means that the rights to appoint and dismiss
directors will no longer vest in the Supervisory Board but in the
general meeting of the Elsevier shareholders;
o appointments to the Boards of Reed International, Elsevier and Reed
Elsevier plc will be made from candidates proposed by the Nominations
Committee. Reed International and Elsevier will no longer have
separate appointment rights to the Board of Reed Elsevier plc or each
other's Board;
o persons nominated by the Nominations Committee will be required to be
approved:
--by the Reed Elsevier plc Board, prior to appointment to the Reed
Elsevier plc Board;
--by the Reed International Board, prior to appointment to the Reed
International Board and by Reed International shareholders at the next
general meeting following that appointment; and
--by the Elsevier Combined Board prior to appointment to the Elsevier
Executive or Supervisory Board by Elsevier shareholders.
However, none of the Reed International, Elsevier or Reed Elsevier plc
Boards will be able to appoint, or recommend the appointment of, a
person who is not first nominated by the Nominations Committee;
o Reed International shareholders will retain their rights under Reed
International's Articles of Association to appoint directors to the
Reed International Board by ordinary resolution. Elsevier shareholders
may appoint a director to the Elsevier Boards by ordinary resolution
if that person has been proposed by the Elsevier Combined Board and,
if the person has not, by an ordinary resolution of shareholders
representing at least 50% of the Elsevier issued share capital or a
resolution passed 66% of those present and voting (subject to certain
procedural requirements);
o as at present, Reed International and Elsevier shareholders will also
be able to remove a director from their respective boards by ordinary
resolution. However, under the unitary management structure, such a
removal will have a greater impact as the removed director will be
required to resign or be removed from the Boards of, respectively,
Elsevier or Reed International and Reed Elsevier plc as well (except
in circumstances where there has been a change of control of Reed and
not Elsevier, vice versa (see below)). The same will apply to a
director removed from the Board of Reed Elsevier plc;
o in the event of a change of control of one parent company and o not
the other (where there has been no comparable offer for the other),
the parent company which has not suffered the change in control will
effectively have the sole right to remove and appoint directors of
Reed Elsevier plc. Also, a director removed from the board of a parent
company which has suffered a change in control will not have to resign
from the board of the other parent company or Reed Elsevier plc;
o each director on the Reed International and Elsevier Boards will
retire by rotation from both boards at the same time and at least
every three years;
o under the new arrangements, the Boards of each of Reed International,
Elsevier and Reed Elsevier plc must have no less than three and no
more than five executive directors and, in the case of Reed Elsevier
plc and Reed International, six, and in the case of Elsevier, no less
than six and no more than eight, non-executive directors (who will be
members of Elsevier's Supervisory Board);
o day to day management responsibility for the operating businesses of
the Reed Elsevier plc group will be delegated to the Chief Executive
Officer or an appropriate committee following the dissolution of the
REEC;
o decisions of the Board of Reed Elsevier plc will require a simple
majority; and
o Reed International and Elsevier will implement standards of corporate
governance and disclosure policies, applicable to companies in the
United Kingdom and the Netherlands. The effect of this commitment is
that an obligation applying to one of Reed International or Elsevier
will, where not in conflict, be observed by the other, where
practicable.
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 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, 1998, there were 24 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
0.01% of all Reed International Ordinary Shares. At December 31, 1998, there
were 49 registered holders of ADRs representing 28,913,488 Reed International
Ordinary Shares, constituting approximately 2.53% 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 derived from the Daily Official List of
the London Stock Exchange.
Pence per Ordinary Share(1)
---------------------------
Calendar Periods High Low
- ---------------- ---- ---
1997
First Quarter ............................... 596 507
Second Quarter .............................. 628 541
Third Quarter ............................... 630 507
Fourth Quarter .............................. 648 521
1998
First Quarter ............................... 716 578
Second Quarter .............................. 635 519
Third Quarter ............................... 641 434
Fourth Quarter .............................. 517 428
1999
First Quarter (through March 10, 1999) ...... 630 470
- -------------
(1) The Pence per Ordinary Share information for all calendar periods, reflects
the two for one share split in respect of the Reed International Ordinary
Shares, which became effective on May 2, 1997.
On March 10, 1999, 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 565 pence per Reed
International Ordinary Share.
The following table sets forth, for the calendar quarter indicated, 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:
U.S. dollars per ADS
--------------------
Calendar Periods High Low
- ---------------- ---- ---
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 ................................ 48.25 39.75
Second Quarter ............................... 43.00 35.63
Third Quarter ................................ 42.38 29.63
Fourth Quarter ............................... 34.75 28.50
1999
First Quarter (through March 10, 1999) ....... 39.63 31.50
On March 10, 1999, 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 36.50 U.S. dollars per ADS.
21
<PAGE>
ELSEVIER
The Elsevier Ordinary Shares are quoted on the Amsterdam Stock Exchange,
the New York Stock Exchange, the London Stock Exchange, 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, 1998, there were 277 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 6.96% of all Elsevier
Ordinary Shares. At December 31, 1998 there were 54 registered holders of ADRs
representing 3,713,314 Elsevier Ordinary Shares constituting approximately 0.56%
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 derived from the Officiele Prijscourant of the
Amsterdam Stock Exchange. From January 4, 1999, all market quotations on the
Amsterdam Stock Exchange have been presented in euros. Quotations prior to
January 4, 1999, have, for the convenience of the reader, been translated into
euros at the Official Conversion Rate of Dfl2.20371 per k1.00.
Euros per Ordinary Share
------------------------
Calendar Periods High Low
- ---------------- ---- ---
1997
First Quarter ...................................... 14.75 12.34
Second Quarter ..................................... 15.29 13.30
Third Quarter ...................................... 17.52 12.84
Fourth Quarter ..................................... 15.47 12.80
1998
First Quarter ...................................... 17.74 14.88
Second Quarter ..................................... 15.97 13.39
Third Quarter ...................................... 15.66 11.07
Fourth Quarter ..................................... 15.52 10.48
1999
First Quarter (through March 10, 1999) ............. 15.25 11.85
On March 10, 1999, 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 k13.85 per Elsevier Ordinary
Share.
The following table sets forth, for the calendar quarter indicated, 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:
U.S. dollars per ADS
--------------------
Calendar Periods High Low
- ---------------- ---- ---
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 ...................................... 38.25 32.13
Second Quarter ..................................... 34.13 29.00
Third Quarter ...................................... 34.06 24.81
Fourth Quarter ..................................... 29.50 24.75
1999
First Quarter (through March 10, 1999) ............. 33.63 27.63
On March 10, 1999, 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 30.13 U.S. 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, 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, 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 U.S. 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 enity 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 (applicable until April 5, 1999), 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 generally 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 as in effect on the date of this Annual Report to receive from the
U.K. Inland Revenue, in respect of a cash 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 applicable until April 5, 1999, an Eligible U.S. Holder
that receives from Reed International a cash dividend payment of 80p is
currently entitled to a Treaty Payment of 5p (i.e., the Tax Credit Amount of 20p
reduced by 15% of the cash sum of the dividend and the Tax Credit Amount, or
15p), resulting in a total cash receipt (before applicable U.S. taxes) of 85p.
The requirement to account for ACT is to be abolished for 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 receives 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 effective at the date the dividend is paid; 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
24
<PAGE>
is likely to mean that U.S. Holders currently entitled to claim payment of the
Tax Credit Amount on dividends paid before April 6, 1999 may not be entitled to
obtain payment of that amount in respect of dividends paid on or after April 6,
1999.
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 cash dividend
paid by Reed International applicable until April 5, 1999, 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.
A U.S. Holder that is entitled to and wishes to receive payment of the
Treaty Payment in respect of a dividend paid before April 6, 1999, 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. As 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 any 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.
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 ordinarily 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. Capital gains of individuals derived with respect to capital
assets held for more than one year are eligible for reduced rates of taxation.
The deductibility of
25
<PAGE>
capital losses is subject to limitations. Any gain or loss recognized by a U.S.
Holder will generally be treated as U.S. source gain or loss.
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.
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 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 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 a re 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") is payable 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
current rate of Stamp Duty is L1.50 per L100 (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 D epositary. In accordance with
the terms of the Deposit Agreement, holders of ADRs must pay an amount in
respect of such stamp duty or SDRT 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 subsequent transfer of Reed
International ADRs. Agreement to transfer Reed International ADRs will not give
rise to a liability to SDRT.
A transfer of Reed International Ordinary Shares by the Depositary 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
L100 or part thereof (Stamp Duty) or 0.5% (SDRT) of the price payable for the
Reed International Oridinary 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 the purchaser. 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.
26
<PAGE>
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.
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
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.
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. Capital gains
of individuals derived with respect to capital assets held for more than one
year are eligible for reduced rates of taxation. The deductibility of capital
losses is subject to limitations. Any gain or loss recognized by a U.S. Holder
will generally be treated as U.S. source gain or loss.
27
<PAGE>
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.
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.
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
28
<PAGE>
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 provisions of the Dutch Tax Treaty of 1992 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 the Dutch
Tax Treaty of 1992, the term "related individuals" means the alienator's spouse
and his relatives by blood or marriage in the direct line (ancestors and lineal
descendants) and his relatives (by whole or half blood or by marriage) in the
second degree in the collateral line (siblings of their spouses). 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 individual s" 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, Gift and Transfer (recht van overgang) Tax
A gift or inheritance of Elsevier ADSs from a U.S. Holder of ADSs will not
be subject to Dutch inheritance, gift and transfer (recht van overgang) 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
included in this Annual Report. In addition, as separate legal entities, Reed
International and Elsevier prepare separate financial statements which reflect
their respective shares in the Combined Businesses accounted for on an equity
basis.
The selected financial data for Reed Elsevier for the five years ended
December 31, 1998 has been extracted or derived from the Combined Financial
Statements which have been audited by Deloitte & Touche, London and Deloitte &
Touche, Amsterdam.
Combined Income Statement Data
<TABLE>
<CAPTION>
Year ended December 31,(1)(3)
--------------------------------------------------------------
1994 1995 1996 1997 1998 1998(2)
(restated) (restated) (restated) (restated)
-------- -------- -------- -------- -------- --------
(in millions)
Amounts in accordance with U.K. and Dutch GAAP:
Net sales(4)
<S> <C> <C> <C> <C> <C> <C>
Continuing operations.......................... L2,164 L2,724 L2,897 L2,987 L3,163 $5,251
Discontinued operations........................ 871 925 484 430 28 46
------ ------ ------ ------ ------ ------
Total Activities................................. 3,035 3,649 3,381 3,417 3,191 5,297
------ ------ ------ ------ ------ ------
Operating income (including joint ventures)
before exceptional items and amortization(4)(7)
Continuing operations.......................... 539 700 787 812 813 1,350
Discontinued operations........................ 124 128 69 73 --- ---
Amortization of goodwill and intangible assets(3)
(including joint ventures)...................... (223) (255) (250) (289) (332) (551)
Exceptional items charged to operating
income(5)(6).................................... --- --- --- (502) (79) (131)
------ ------ ------ ------ ------ ------
Operating income (including joint ventures)...... 440 573 606 94 402 668
Non-operating exceptional items(5)............... 14 403 24 54 682 1,132
------ ------ ------ ------ ------ ------
Income before interest and taxes................. 454 976 630 148 1,084 1,800
Net interest expense............................. (57) (105) (51) (62) (40) (67)
------ ------ ------ ------ ------ ------
Income before taxes and minority interests....... 397 871 579 86 1,044 1,733
Taxes on income.................................. (178) (185) (212) (99) (271) (449)
Minority interests............................... (1) (1) (1) (1) (1) (2)
------ ------ ------ ------ ------ ------
Net income....................................... 218 685 366 (14) 772 1,282
====== ====== ====== ====== ====== ======
Approximate amounts in accordance with U.S. GAAP:
Continuing operations(4)
Operating income............................... 460 542 711 107 13 22
Net income..................................... 273 270 450 3 (122) (203)
------ ------ ------ ------ ------ ------
Discontinued operations(4)
Net income from trading operations............. 69 70 43 40 (1) (2)
Gain on sales net of provisions................ --- 353 --- --- 521 865
------ ------ ------ ------ ------ ------
Net income from discontinued operations.......... 69 423 43 40 520 863
====== ====== ====== ====== ====== ======
</TABLE>
30
<PAGE>
Combined Balance Sheet Data
<TABLE>
<CAPTION>
Year ended December 31,(1)(3)
--------------------------------------------------------------
1994 1995 1996 1997 1998 1998(2)
(restated) (restated) (restated) (restated)
-------- -------- -------- -------- -------- --------
(in millions)
Amounts in accordance with U.K. and Dutch GAAP:
<S> <C> <C> <C> <C> <C> <C>
Total assets..................................... L4,960 L5,573 L5,176 L5,211 L5,760 $9,561
Long term obligations less current portion(8) (749) (930) (717) (689) (520) (863)
Net borrowings(9)................................ (1,295) (680) (196) (630) (962) (1,597)
Combined shareholders' equity.................... 1,700 2,139 2,063 1,692 2,130 3,536
Approximate amounts in accordance with U.S. GAAP:
Total assets..................................... 5,749 6,483 6,107 6,139 6,443 10,695
Long term obligations less current portion(8).... (1,130) (1,256) (993) (1,291) (1,122) (1,863)
Combined shareholders' equity.................... 2,529 3,084 3,075 2,774 2,833 4,703
</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 DutchGAAP and U.S. GAAP which are relevant to the Combined
Businesses are set out in note 28 to the audited Combined Financial
Statements.
(2) For the convenience of the reader, pounds sterling amounts for the fiscal
year ended December 31, 1998 have been translated into U.S. dollars using
the Noon Buying Rate on December 31, 1998 of $1.66 per L1.00.
(3) Amounts presented for the financial years 1994, 1995, 1996 and 1997, have
been restated on introduction of new U.K. accounting standards, which are
first applicable for the 1998 financial year, to include retrospective
capitalization and amortization of acquired goodwill and intangible assets
(FRS10) and additional information in respect of joint ventures (FRS 9).
For further details see note 1 to the Combined Financial Statements.
(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 and
under U.S. GAAP, discontinued operations comprise those consumer publishing
businesses divested in 1995, IPC Magazines divested in 1998 and the
consumer book publishing operations, the divestment of which was completed
during 1998.
(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. Exceptional items charged
to operating income, under U.K. and Dutch GAAP, in 1998 total L79 million
in respect of Year 2000 compliance and acquisition related integration.
Operating income in 1997 is stated after charging exceptional items of L502
million. This amount comprises L230 million in respect of the estimated
cost of programs to recompense advertizers in relation to irregularities in
circulation claims for certain Reed Travel Group publications together with
related expenses and reorganization costs; L250 million in respect of a
non-cash write-down of intangible assets related to Reed Travel Group; and
L22 million in respect of Year 2000 compliance and acquisition related
integration. Non-operating exceptional items arise primarily from the net
profit on disposal of IPC Magazines in 1998 and, in prior years, disposal
of other businesses including the other consumer publishing businesses
divested. For further details see note 5 to the audited Combined Financial
Statements.
(6) In accordance with the U.K. accounting standard FRS7: Fair Values in
Acquisition Accounting, reorganization costs in respect of acquisitions are
charged to the income statement, and categorized as exceptional items;
prior to 1995 these costs were included in goodwill.
(7) The SSAP 24 credit in respect of the main U.K. pension scheme included in
operating income is L4 million in the 1998 fiscal year, (1997 L1 million;
1996 L7 million; 1995 L6 million; 1994 L9 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 SSAP 24:
Accounting for Pension Costs.
(8) 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 L602 million at December 31, 1998 (1997 L602
million; 1996 L276 million; 1995 L326 million; 1994 L381 million), are
included as long term obligations.
(9) Net borrowings comprise total borrowings less cash and short term
investments.
31
<PAGE>
REED INTERNATIONAL
The selected financial data for Reed International should be read in
conjunction with, and is qualified by, the consolidated financial statements of
Reed International included in this Annual Report. The results and financial
position of Reed International reflect its 52.9% economic interest in the
Combined Businesses, which takes into account its 5.8% indirect interest in
Elsevier, accounted for on a gross 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 by Deloitte & Touche, London.
<TABLE>
<CAPTION>
Year ended December 31,(1)(3)(4)
--------------------------------------------------------------
1994 1995 1996 1997 1998 1998(2)
(restated) (restated) (restated) (restated)
-------- -------- -------- -------- -------- --------
(in millions, except per share amounts)
Amounts in accordance with U.K. GAAP:
<S> <C> <C> <C> <C> <C> <C>
Share of net income from joint ventures(5)
Share of income before taxes, exceptional
items and amortization....................... L321 L382 L426 L435 L409 $679
Share of amortization of goodwill and
intangible assets before tax................. (118) (134) (132) (153) (176) (292)
Share of exceptional items before tax.......... 7 213 13 (237) 319 529
Taxation....................................... (95) (99) (113) (52) (144) (239)
------ ------ ------ ------ ------ ------
115 362 194 (7) 408 677
Tax credit equalization(5)....................... (14) (16) (18) (20) (12) (20)
------ ------ ------ ------ ------ ------
Net income....................................... 101 346 176 (27) 396 657
------ ------ ------ ------ ------ ------
Basic earnings per Reed International
Ordinary Share(6)(7)(9)........................ 9.0p 30.7p 15.5p (2.4p) 34.7p 0.58
Fully diluted earnings per Reed International
Ordinary Share(6)(7)........................... 8.9p 30.5p 15.4p (2.4p) 34.6p 0.57
Gross dividends per Reed International
Ordinary Share(6)(8)........................... 13.45p 15.3p 17.0p 18.25p 17.3p 0.29
Total assets..................................... 1,024 1,274 1,247 1,056 1,292 2,145
Long term obligations............................ 36 36 36 36 36 60
Shareholders' equity(10)......................... 899 1,132 1,091 895 1,127 1,871
Approximate amounts in accordance U.S. GAAP:
Net income....................................... 168 352 244 4 191 317
Basic earnings per Reed International
Ordinary Share(6)(7)(9)........................ 14.9p 30.9p 21.4p 0.4p 16.7p 0.28
Fully diluted earnings per Reed International
Ordinary Share(6)(7)........................... 14.7p 30.7p 21.4p 0.4p 16.7p 0.28
Total assets..................................... 1,379 1,677 1,673 1,511 1,544 2,563
Long term obligations............................ 36 36 36 36 36 60
Shareholders' equity(10)......................... 1,338 1,631 1,627 1,467 1,499 2,488
</TABLE>
- -------------
(1) The consolidated financial statements of Reed International are prepared in
accordance with accounting policies that are in conformity with U.K. GAAP,
which differs in certain significant respects from U.S. GAAP. The
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, 1998 have been translated into U.S.
dollars using the Noon Buying Rate on December 31, 1998 of $1.66 per L1.00.
(3) Under the new UK accounting standard FRS 9: Associates and Joint Ventures,
which is first applicable for the 1998 financial year, Reed International's
interest in the Combined Businesses, previously treated as an associate,
now falls to be treated as an interest in joint ventures. Reported net
assets and net income are unaffected.
(4) Under the new UK accounting standard FRS 10: Goodwill and Intangible
Assets, which is first applicable for the 1998 financial year, the results
of the Reed Elsevier combined businesses for the financial years 1994,
1995, 1996 and 1997 have been restated to include retrospective
capitalization and amortization of acquired goodwill and intangible assets.
The amounts presented for Reed International have been restated
accordingly.
32
<PAGE>
(5) The share of net income from joint ventures is based on the 52.9% economic
interest that Reed International shareholders have in the net income of the
Combined Businesses. The statutory net income of Reed International
includes the impact of sharing the U.K. tax credit on dividend
distributions with Elsevier NV as a reduction in reported net income.
(6) Earnings per Reed International Ordinary Share and gross dividends per Reed
International Ordinary Share for all relevant periods have been restated to
give effect to the two for one share split in respect of Reed International
Ordinary Shares, which became effective on May 2, 1997.
(7) In accordance with the new U.K. financial reporting standard FRS14:
Earnings per Share, which is first applicable in the 1998 financial year
both basic earnings per share and fully diluted earnings per share are
presented. Under U.K. and U.S.GAAP, the calculation of basic earnings per
share is based only on common stock in issue. Fully diluted earnings per
share amounts take account of the effects of additional common stock that
would be in issue if outstanding dilutive potential shares had been
exercised.
(8) The amount of gross dividends per Reed International Ordinary Share shown
includes the U.K. tax credit (currently 20%; reducing to 10% after April 6,
1999 and applicable to the 1998 final dividend) available to certain Reed
International shareholders, including beneficial owners of Reed
International ADSs who are residents of the U.S.A. for the purposes of the
U.K. Tax Treaty but do not include any deduction on account of U.K.
withholding taxes, currently at the rate of 15% of the sum of the dividend
and the related tax credit in most cases; see "Taxation --- Reed
International --- Taxation of dividends".
(9) Net income includes Reed International's share of the Combined Businesses'
exceptional items, which in 1995 related to the net gain on sale of certain
consumer publishing businesses. Basic earnings per Reed International
Ordinary Share under, respectively, U.S. GAAP and U.K. GAAP includes 16.4p
and 18.8p in respect of such gain on sale.
In 1997 exceptional items principally relate to the Reed Travel Group
provision for customer compensation and related expenses and reorganization
costs together with the non-cash writedown of Reed Travel Group intangible
assets. Basic earnings per Reed International Ordinary Share under,
respectively, U.S. GAAP and U.K. GAAP includes 21.6p (loss) and 18.3p
(loss) in respect of these items.
In 1998 exceptional items principally relate to the gain on disposal of IPC
Magazines. Basic earnings per Reed International Ordinary Share under,
respectively, U.S. GAAP and U.K. GAAP includes 24.1p and 27.4p in respect
of this item. In addition, under U.S.GAAP, the Combined Businesses'
goodwill and intangible asset lives have been re-evaluated and are now
being amortized over shorter periods resulting, in 1998, in a significantly
higher periodic amortization charge; see Note28 to the Combined Financial
Statements. Basic earnings per Reed International Ordinary Share includes
12.3p (loss) under U.S. GAAP in respect of the non recurring element of the
incremental charge arising from this re-evaluation.
(10) Shareholders' equity for all years includes L4million of non-equity
preference shares, which are redeemable at the option of Reed
International.
33
<PAGE>
ELSEVIER
The selected financial data for Elsevier should be read in conjunction
with, and is qualified by, the financial statements of Elsevier included in this
Annual Report. The results and financial position of Elsevier reflect its 50%
interest in the 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 by Deloitte & Touche, Amsterdam.
<TABLE>
<CAPTION>
Year ended December 31,(1)(3)(4)
--------------------------------------------------------------
1994 1995 1996 1997 1998 1998(2)
(restated) (restated) (restated) (restated)
-------- -------- -------- -------- -------- --------
(in millions, except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
Share in net income of affiliates(4)
Shares of income before taxes, exceptional
item and amortization........................ Dfl841 Dfl914 Dfl1,057 Dfl1,313 Dfl1,268 $672
Share of amortization of goodwill and
intangible assets before tax................. (310) (323) (329) (461) (545) (289)
Share of exceptional items before tax.......... 19 510 32 (716) 989 524
Taxation....................................... (247) (234) (279) (158) (446) (236)
------ ------ ------ ------ ------- ------
Net income....................................... 303 867 481 (22) 1,266 671
------ ------ ------ ------ ------ ------
Basic earnings per Elsevier
Ordinary Share(5)(6)(7)........................ 0.43 1.24 0.68 (0.03) 1.79 0.95
Gross dividends per Elsevier
Ordinary Share(5).............................. 0.55 0.59 0.76 0.95 0.87 0.46
Total assets..................................... 2,645 3,022 3,542 3,384 3,826 2,028
Long term borrowings, less current portion....... (15) (19) (21) (24) (25) (13)
Shareholders' equity............................. 2,304 2,642 3,053 2,826 3,333 1,766
Approximate amounts in accordance with U.S. GAAP:
Net income....................................... 511 914 692 128 719 381
Basic earnings per Elsevier
Ordinary Share(5)(6)(7)........................ 0.73 1.30 0.98 0.18 1.02 0.54
Total assets..................................... 3,525 3,917 4,667 4,751 4,533 2,402
Long term borrowings, less current portion....... (15) (19) (21) (24) (25) (13)
Shareholders' equity............................. 3,427 3,809 4,551 4,633 4,434 2,350
</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, 1998 have been translated into U.S. dollars using
the Noon Buying Rate on December 31, 1998 of U.S. $0.53 per Dfl1.00.
(3) Under the new UK accounting standard FRS 10: Goodwill and Intangible
Assets, which is first applicable for the 1998 financial year, the results
of the Reed Elsevier combined businesses for the financial years 1994,
1995, 1996 and 1997 have been restated to include retrospective
capitalization and amortization of acquired goodwill and intangible assets.
The amounts presented for Elsevier have been restated accordingly.
(4) The share in net income of affiliates is based upon the 50% share of the
net income of the Combined Businesses attributable to Elsevier
shareholders.
(5) Basic earnings per Elsevier Ordinary Share and gross dividends per Elsevier
Ordinary Share for all relevant periods have been restated to give effect
to the ten for one share split in respect of Elsevier Ordinary Shares,
which became effective on October 5, 1994.
(6) 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 stock
that would be in issue if outstanding dilutive potential shares had been
exercised, 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.
34
<PAGE>
(7) Net income includes Elsevier's share of the Reed Elsevier combined
businesses' exceptional items, which in 1995 related to the net gain on
sale of certain consumer publishing businesses. Basic earnings per Elsevier
Ordinary Share under, respectively, U.S. GAAP and Dutch GAAP includes
Dfl0.63 and Dfl0.73 in respect of such gain on sale.
In 1997 exceptional items principally relate to the Reed Travel Group
provision for customer compensation and related expenses and reorganization
costs together with the non-cash writedown of Reed Travel Group intangible
assets. Basic earnings per Elsevier Ordinary Share under, respectively,
U.S. GAAP and Dutch GAAP includes Dfl1.05 (loss) and Dfl0.89 (loss) in
respect of these items.
In 1998 exceptional items principally relate to the gain on disposal of IPC
Magazines. Basic earnings per Elsevier Ordinary Share under, respectively,
U.S. GAAP and Dutch GAAP includes Dfl1.21and Dfl1.37 in respect of this
item. In addition, under U.S. GAAP, the Combined Businesses' goodwill and
intangible asset lives have been re-evaluated and are now being amortized
over shorter periods resulting, in 1998, in a significantly higher periodic
amortization charge; see Note 28 to the Combined Financial Statements.
Basic earnings per Elsevier Ordinary Share included Dfl0.62 (loss) under
U.S. GAAP in respect of the non recurring element of the incremental charge
arising from this re-evaulation.
Exchange Rates
The following table illustrates, for the periods and dates indicated,
certain information for pounds sterling expressed in U.S. dollars per L1.00.
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 Results of
Operations --- Reed Elsevier".
U.S. dollars per L1.00
Period
-------------------------------------
Year ended December 31, End Average(1) High Low
- ----------------------- ------ --------- ------ -----
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 ........................... 1.66 1.66 1.71 1.61
1999 (through March 10, 1999)... 1.63 1.64 1.66 1.60
- -------------
(1) The average of the Noon Buying Rates on the last day of each month during
the relevant period.
The following table illustrates, for the periods and dates indicated,
certain information concerning the Noon Buying Rate for 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 Dfl1.00
Period
-------------------------------------
Year ended December 31, End Average(1) High Low
- ----------------------- ------ --------- ------ -----
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 ........................... 0.53 0.50 0.55 0.48
1999 (through March 10, 1999)... 0.50 0.51 0.54 0.49
- -------------
(1) The average of the Noon Buying Rates on the last day of each month during
the relevant period.
35
<PAGE>
Dividends
The following table illustrates, 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 split 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,
--------------------------------------
1994 1995 1996 1997 1998
------ ------ ------ ------ ------
Interim -- pence ...................... 3.35 3.75 4.125 4.4 4.6
Interim -- $ .......................... 0.05 0.06 0.06 0.07 0.08
Final (1997 Second interim) -- pence .. 7.40 8.50 9.475 10.2 10.4
Final (1997 Second interim) -- $ ...... 0.12 0.13 0.15 0.17 0.17(1)
The following table illustrates, for the periods indicated, a summary of
the dividends paid per Elsevier Ordinary Share. Dividends per Elsevier Ordinary
Share have been calculated to give effect to the ten for one share split 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.
Year ended December 31,
--------------------------------------
1994 1995 1996 1997 1998
------ ------ ------ ------ ------
Interim -- Dfl ........................ 0.18 0.18 0.20 0.29 0.29
Interim -- $ .......................... 0.10 0.11 0.12 0.15 0.16
Final (1997 Second interim) -- Dfl .... 0.37 0.41 0.56 0.66 0.58
Final (1997 Second interim) -- $ ...... 0.23 0.24 0.29 0.33 0.29(1)
- -------------
(1) The final dividend for the year ended December 31, 1998 is payable on May
21, 1999 (May 28, 1999 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 10, 1999.
36
<PAGE>
ITEM 9: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS
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 certain significant respects from U.S. GAAP as set out in note 28 to
the audited Combined Financial Statements. The following combined financial
information of Reed Elsevier should be read in conjunction with, and is
qualified by reference to the audited Combined Financial Statements. 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, 1998, subscriptions comprised 36% of net sales of the
continuing businesses, circulation and copy sales comprised 20%, advertising
sales comprised 25%, exhibition fees comprised 9% and the other net sales
comprised 10%. 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, 1998, these
geographic markets accounted for 77% of total net sales from continuing
operations. The largest geographic market is North America, where the proportion
of net sales from continuing operations over these periods has grown from 52% in
the year ended December 31, 1996 to 55% in the year ended December 31, 1998. The
increase in the relative importance of the North American market to Reed
Elsevier largely reflects the impact of acquisitions. The most recent
acquisition with significant sales in North America was Matthew Bender and the
remaining 50% interest in Shepard's in August 1998. Net sales to the United
Kingdom have remained relatively steady at 15% of net sales from continuing
operations in each of the years ended December 31, 1998, December 31, 1997 and
December 31, 1996, while net sales from continuing operations to the Netherlands
have remained at 7%. Net sales to the rest of continental Europe from the
continuing operations accounted for 13%, 13% and 14% in the three years ended
December31, 1998, 1997 and 1996 respectively. The other geographic market
comprises Asia/Pacific which accounted for 10%, 12% and 12% of net sales from
the continuing operations in the three years ended December 31, 1998, 1997 and
1996 respectively.
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
31,1998, December 31, 1997 and December 31, 1996, labor costs represented 42%,
41% and 40%, respectively, of Reed Elsevier's total costs of the continuing
operations and paper and printing costs represented 10%, 9% and 11%,
respectively, of total costs of the continuing operations.
Reed Elsevier's businesses perform according to a seasonal pattern, with
adjusted operating income, defined as operating income before exceptional items
and the amortization of goodwill and intangible assets, 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 and acquisitions. The seasonality will therefore vary
from year to year. In the three years ended December 31, 1998, December 31, 1997
and December 31, 1996, adjusted operating income was slightly higher in the
first half of the year, being 53%, 51% and 52% respectively of the adjusted
operating income for each full year, after adjusting for acquisitions and
development activities.
Reed Elsevier's operating income during each of the three years ended
December 31, 1998 included net pension credits of L4million in 1998, L1 million
in 1997 and L7 million in 1996, 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 Combined Financial Statements for further details and
note 28 for the difference between accounting for pension costs under the rules
set out in SSAP 24 and under U.S. GAAP.
In order to provide a meaningful measure of underlying performance,
"adjusted" figures are presented which exclude all exceptional items and the
amortization of goodwill and intangible assets and the related tax benefits.
Following the introduction of FRS 10 in the 1998 financial year, acquired
goodwill and intangible assets are now capitalized and systematically amortized
over a maximum period of 20 years, with retrospective application. A
reconciliation of reported figures to the adjusted figures for each of the three
years in the period ended December 31, 1998, is set out in note 6 to the audited
Combined Financial Statements included in this Annual Report. As discussed in
note 28 to the audited Combined Financial Statements, U.S. GAAP does not permit
the presentation of other income measures.
37
<PAGE>
Year 2000 Compliance Program
The Reed Elsevier Year 2000 compliance program was formally established in
1997 to address the internal and external risks to Reed Elsevier's business
operations arising from the millennium date change. These risks arise where
automated systems, including information technology systems and other equipment
using embedded microprocessors, have been programmed to recognize calendar years
using two rather than four digits. Such equipment with date-sensitive software
may not be able to recognize the two digit date, "00", as the year 2000. This
could result in a system failure or miscalculations causing disruptions of
operations or financial processes, such as equipment failures or a temporary
inability to process various business transactions. If systems do not correctly
recognize and process date information beyond the year 1999, there could be a
material adverse impact on the Combined Businesses' operations.
The program, which has the highest priority, is being implemented in each
of the Reed Elsevier businesses by dedicated project teams and co-ordinated
across the Reed Elsevier plc businesses by the Reed Elsevier Technology Group,
which reports to the Co-Chief Executive of Reed Elsevier plc. Regular reports on
the program are submitted to the Reed Elsevier plc Board.
Project Status
The compliance program consists of five phases, namely; project initiation,
inventory, analysis and prioritization, remediation and testing, and compliance
maintenance. To date, in all material respects, Reed Elsevier business units
have completed at least the first three phases of the program and are well into
the fourth phase, remediation and testing. A number have reached the fifth
phase, compliance maintenance. In addition, Reed Elsevier business units are
developing contingency plans in the event that there should be an unforeseen
failure in their own systems or in the systems of third parties with whom they
interact. These activities are intended to encompass all major categories of
information technology systems, including databases and online systems, together
with non-IT systems encompassing financial, editorial, subscription and
distribution activities and each business units' physical facilities.
Work carried out during 1998 led to the identification of some further
issues, expanding the scope of the program and necessitating rescheduling of
completion timetables and revision to cost estimates compared to those
previously forecast. Reed Elsevier's current objective is to complete
remediation of all of its business critical systems by mid-1999, with continued
testing through to the end of 1999. Achievement of this objective may be
restricted to the extent that the Year 2000 conformity of third party software
or products supplied or licensed to Reed Elsevier is delayed or not achieved.
Based on our progress to date, Reed Elsevier expects to complete its Year 2000
program on a timely basis and is committed to taking all reasonable and
practicable steps to ensuring that its businesses do not suffer any material
disruption as a result of the millennium date change . Reed Elsevier is in the
process of assessing the Year 2000 readiness of its key customers, suppliers,
subcontractors and business partners.
Costs
Compliance costs in 1998 amounted to L53 million (1997 : L11 million).
Further costs of L40 million are forecast in 1999, resulting in total estimated
costs in the order of L100 million prior to the Year 2000, compared to L75
million previously forecast. These costs represent incremental spending,
including redeployed resources, over normal operations. The total cost estimate
does not include potential costs related to any customer or other claims should
systems fail. In some instances, the installation schedule of new software and
hardware in the normal course of business is being accelerated to also afford a
solution to Year 2000 capability issues. Such costs, in the order of L20
million, are capitalized and amortized in accordance with Reed Elsevier's
accounting policies. The total costs estimate is based on the current assessment
of the projects and is subject to change as the projects progress.
Risks
The Year 2000 presents a number of risks and uncertainties that could have
a material adverse impact on Reed Elsevier, including, amongst others, failures
of telephone and mail systems and other public utilities, failures within
government agencies and financial and banking systems around the world and the
nature of government responses to Year 2000 issues. In particular, failure of
Reed Elsevier's customers, suppliers, subcontractors and business partners to
address adequately their Year 2000 readiness could adversely affect Reed
Elsevier's business.
The failure to correct a material Year 2000 problem could result in an
interruption in, or failure of, certain normal business activities or
operations. Such failures could materially and adversely affect Reed Elsevier's
results of operations, liquidity and financial condition. Due to the general
uncertainty inherent in the Year 2000 problem, resulting in part from the Year
2000 readiness of third party suppliers and customers, Reed Elsevier is unable
to determine at this time whether the consequences of Year 2000 failures will
have a material impact on Reed Elsevier's results of operations, liquidity or
financial condition. The Year 2000 program is planned to reduce significantly
Reed Elsevier's level of uncertainty about the Year 2000 problem and, in
particular, about the Year 2000 compliance and readiness of its own systems and
those of its major suppliers and customers. Reed Elsevier believes that, with
the implementation of new business systems and completion of the project as
scheduled, the possibility of significant interruptions or normal operations
should be reduced.
In addition, Reed Elsevier is aware of the possibility of claims against it
and other entities for damages arising from products and services that were not
Year 2000 compliant. As a result of its efforts, Reed Elsevier believes that, in
all material respects, any such Year 2000 claims against it would be without
merit.
38
<PAGE>
Contingency Plans
Reed Elsevier business units are developing contingency plans in the event
that there should be an unforeseen failure in their own systems or in the
systems of third parties with whom they operate. Contingency plans are expected
to be in place by mid-1999 and will be tested during the second half of 1999.
These activities are intended to encompass all major categories of IT systems,
including databases and online systems, in use by the combined businesses and
extend to its editorial processes, subscription and distribution systems and its
physical facilities. As part of its contingency planning efforts, Reed Elsevier
intends to identify alternate suppliers, subcontractors and business partners or
other business strategies where necessary if significant exposures are
identified.
Users of the Annual Report are cautioned that forward-looking statements
contained in this description of the Year 2000 compliance program should be read
in conjunction with the disclosures under the heading "Forward-Looking
Statements" on page 1.
European Economic and Monetary Union
On January 1, 1999, the euro was introduced as the de facto currency of the
11 European countries participating in European Economic and Monetary Union
(EMU). The Netherlands is a participant in EMU; the United Kingdom is not.
In 2002, the Dutch guilder, like the currencies of other participants, will
be fully replaced by the euro once euro-denominated notes and coins are
substituted. In the interim, the euro and the participating currencies coexist
and are inextricably linked by fixed conversion rates.
The implications for Reed Elsevier businesses are initially low relative to
many other multinational European companies. Principally this is because, with
the significant exception of Elsevier Science, which already publishes global
prices, Reed Elsevier's businesses have limited cross border trade. The most
significant issue, therefore, is the timing of euro based marketing and
invoicing and the transfer to euro dominated business and financial systems. In
this respect, Reed Elsevier businesses have developed plans in 1998 to
accommodate the euro. These take account of the pace of customer readiness, and
a systems conversion schedule which is integrated with the overall systems
upgrade and Year 2000 compliance programs.
The impact on net income of moving to a euro currency environment is not
expected to be significant.
While Reed Elsevier will continue to evaluate the impact of the euro
introduction over time, based on currently available information, management
does not believe that the introduction of the euro will have a material adverse
impact on the financial condition or overall trends in results of operations.
External factors present a number of other risks and uncertainties and it
remains uncertain whether or to what extent Reed Elsevier may be affected.
Effect of Currency Translation
The Combined Financial Statements are expressed in pounds sterling and are
therefore subject to the impact of movements in exchange rates on the
translation of the financial information of individual businesses whose
operational currencies are other than sterling. The principal exposures are the
U.S. dollar and the Dutch guilder, both of which generally reflect Reed
Elsevier's business exposure to the U.S.A. and the Netherlands, its most
important markets outside the U.K. 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 regional 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, 1998, 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. Euro
Sterling Dollars zone Other Total
30% 42% 24% 4% 100%
======== ======= ==== ===== =====
Currency translation differences reduced Reed Elsevier's net sales by L62
million and adjusted operating income by L14million in the year ended December
31, 1998 compared to the year ended December 31, 1997.
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
39
<PAGE>
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. When opportunities for such
matching of exposures internally do not exist, exposures may instead be hedged
externally with third parties. For further details see note 19 to the audited
Combined Financial Statements.
Individual businesses report their treasury activities periodically to the
regional centralized treasury departments. The centralized treasury activities
are reported quarterly to committees of the Boards of Reed International and
Elsevier. The individual businesses and the regional centralized treasury
departments are subject to periodic reviews to ensure adherence to hedging
policies and completeness and accuracy of reporting.
The following table shows net sales and adjusted operating income of Reed
Elsevier among its business segments, in each of the three years ended December
31, 1998, together with the percentage change in 1997 and 1998 at both actual
and constant exchange rates:
<TABLE>
<CAPTION>
Net Sales
Year ended December 31,
----------------------------------------------------------------------------
1996 1997 % change 1998 % change
-------------- -------------- --------------- ------------- ---------------
Actual Constant Actual Constant
rates rates(1) rates rates(2)
------ -------- ------ --------
Business Segment L million % L million % L million %
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Scientific................... 553 16 571 17 3 15 622 20 9 11
Professional................. 1,037 31 1,076 31 4 10 1,154 36 7 10
Business..................... 1,307 39 1,340 39 3 10 1,387 43 4 5
----- ---- ----- ---- ----- ----
Continuing Operations........ 2,897 86 2,987 87 3 11 3,163 99 6 8
Discontinued Operations(3)... 484 14 430 13 28 1
----- ---- ----- ---- ----- ----
Total........................ 3,381 100 3,417 100 1 8 3,191 100 (7) (5)
===== ==== ===== ==== ===== ====
Adjusted Operating Income(4)
Year ended December 31,
----------------------------------------------------------------------------
1996 1997 % change 1998 % change
-------------- -------------- --------------- ------------- ---------------
Actual Constant Actual Constant
rates rates(1) rates rates(2)
------ -------- ------ --------
Business Segment L million % L million % L million %
Scientific................... 231 27 230 26 -- 11 223 27 (3) (1)
Professional................. 268 31 296 34 10 17 330 41 11 14
Business..................... 288 34 286 32 (1) 7 260 32 (9) (8)
----- ---- ----- ---- ----- ----
Continuing Operations........ 787 92 812 92 3 11 813 100 -- 2
Discontinued Operations(3)... 69 8 73 8 -- --
----- ---- ----- ---- ----- ----
Total........................ 856 100 885 100 3 11 813 100 (8) (7)
===== ==== ===== ==== ===== ====
</TABLE>
- ------------
(1) Represents percentage change over 1996 at constant rates of exchange, which
have been calculated using the average exchange rates for 1996.
(2) Represents percentage change over 1997 at constant rates of exchange, which
have been calculated using the average exchange rates for 1997.
(3) Discontinued operations, are presented in accordance with U.K. and Dutch
GAAP, and comprise IPC Magazines and the consumer book publishing
operations which were the final elements of the Consumer segment sold in
the year.
(4) Adjusted operating income is shown after share of profit in joint ventures
and before exceptional items and the amortization of goodwill and
intangible assets.
(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 size or incidence. Exceptional items before tax
totalled L603 million (profit) in the year ended December 31, 1998, L448
million (loss) in the year ended December 31, 1997 and L24million (profit)
in the year ended December 31, 1996. See note 5 to the audited Combined
Financial Statements for a further description of these items.
40
<PAGE>
Results of Operations for the Year Ended December 31, 1998
Compared to the Year Ended December 31, 1997
General. As a result of the divestment in 1998 of the remaining consumer
publishing businesses, total net sales of ReedElsevier fell by 7% to L3,191
million in 1998, compared to L3,417 million in 1997. Excluding the consumer
publishing divestments, net sales of the continuing businesses increased by 6%
in 1998 to L3,163 million. Currency translation differences had an adverse
impact in 1998, reducing net sales from the continuing businesses by L62
million. At constant rates of exchange, net sales of the continuing businesses
increased by 8% in 1998. Net sales of businesses acquired by Reed Elsevier
during 1998, the most significant of which were Matthew Bender, the remaining
50% interest in Shepard's, Beilstein and Engineering Information, contributed
L108 million to the increase and the full year effect of acquisitions made
during 1997 contributed a further L123 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 and the deconsolidation of
Utell following its merger in December 1997 with Anasazi, Inc. to form
REZsolutions, Inc. in which Reed Elsevier equity accounts for its 67% interest
in the merged business. The net effect of acquisitions and disposals in 1997 and
1998 and the deconsolidation of Utell was to increase net sales by L116 million
for the continuing business. Excluding these factors, and before taking into
account an 8% decline is net sales of the Travel publishing businesses, the
percentage increase in net sales from the continuing businesses at constant
exchange rates was 5%.
In 1998, 25% of the continuing businesses' net sales were derived from
advertising and advertising sales increased by 7% in 1998 over 1997 to L789
million. Subscription sales for the continuing businesses increased by 16% to
L1,138 million in 1998, as compared with L977 million in 1997, and accounted for
36% of net sales for continuing businesses for 1998 compared to 33% for the
continuing businesses in 1997. The increase in the relative importance of
subscription sales to Reed Elsevier largely reflects the acquisition of
subscription based businesses and the migration during the year of customers at
LEXIS-NEXIS from transactional to subscription accounts. As a result of this and
the impact of disposals, net sales from circulation and copy sales for the
continuing businesses were L630 million in 1998 as compared with L666 million in
1997. Circulation and copy sales represented 20% of net sales from continuing
businesses in 1998, compared to 22% in 1997. The most significant component of
the balance was exhibitions which accounted for 9% of net sales for continuing
businesses in 1998 and 1997, generating net sales of L278 million in 1998
compared with L261 million in 1997.
Adjusted operating income fell by 8% to L813 million in 1998, compared to
L885 million in 1997. Excluding the consumer publishing divestments, adjusted
operating income was flat compared to 1997. The incremental contribution from
1997 and 1998 acquisitions, net of disposals, was L26 million, whereas currency
translation reduced adjusted operating income in 1998 by L14million for the full
year against 1997. The adjusted operating income from the Travel publishing
businesses declined by L34 million as a result of an 8% revenue decline and
investment in operations to position these businesses for future growth.
Excluding these items, adjusted operating income from the continuing businesses
grew by 3%. Operating margin before exceptional items and amortization of
goodwill and intangible assets in 1998 fell by 0.4 percentage points over 1997
to 25.5%. For the continuing businesses, operating margin before exceptional
items and amortization of goodwill and intangible assets fell by 1.5 percentage
points over 1997 to 25.7%, due principally to the decline in adjusted operating
income at the Travel publishing businesses.
Expenditure on major development projects in the continuing businesses,
principally in respect of new electronic products and services and related
operating systems, increased by approximately L15 million to L80 million in
1998, of which L20 million was capitalized. These amounts do not include the
significant ongoing product renewal and expansion of sales and marketing,
editorial and production activities across the businesses.
The results for 1998 included net exceptional gains of L603 million,
comprising the net profit on the sale of IPC Magazines (L692 million),
acquisition related restructuring costs (L26 million), 1998 costs of the Year
2000 compliance program (L53 million) and costs incurred in respect of the
abandoned merger with Wolters Kluwer (L10 million). L70 million has been
provided in respect of taxation. The results for 1997 included net exceptional
charges of L448 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 (L230 million), the non-cash write down of intangible asset
values in respect of the Reed Travel Group (L250 million), acquisition related
restructuring costs (L11 million), 1997 costs of the Year 2000 compliance
program (L11 million), net profit on the sale of certain non-core businesses
(L57 million) and costs incurred in respect of the abandoned merger with Wolters
Kluwer (L3 million). The net tax credit thereon amounted to L115 million.
Further details are set out in note 5 to the audited Combined Financial
Statements.
The results for 1998 also included amortization of goodwill and intangible
assets of L332 million, following the introduction of FRS 10 during the 1998
financial year. With retrospective application, the results for 1997 have been
re-stated to include amortization of goodwill and intangible assets of L289
million and to increase the exceptional profit on the sale of businesses by
L29 million accordingly.
Operating income was L1,084 million in 1998, compared to L148 million in
1997, an increase of L936 million reflecting the net movement on exceptional
items and amortization of goodwill and intangible assets. Net interest expense
fell to L40 million in 1998, compared to L62 million in 1997. This reflected the
impact of a strong free cash flow and net exceptional receipts from disposals at
the beginning of the year, offset in part by acquisition spending during the
second half of 1998 and exceptional item payments. Net interest cover, the
number of times that adjusted operating income before interest covers net
interest expense, was 20 times in 1998, which compared to 14 times in 1997.
Income before taxes and minority interests was L1,044 million in 1998 as
compared with L86 million in 1997. On an adjusted basis, excluding the effect of
exceptional items and amortization of goodwill and intangible assets, income
before taxes and
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minority interests was L773 million in 1998, compared to L823 million in 1997, a
reduction of L50 million or 6%. The adjusted figures exclude the net exceptional
pre-tax items of, in 1998, L603 million (profit) and, in 1997, L448 million
(loss), and the amortization of goodwill and intangible assets of, in 1998, L332
million and, in 1997, L289 million. Compared with 1997, on translation of
earnings, the strengthening of sterling reduced adjusted income before taxes and
minority interests by L14 million. At constant exchange rates adjusted income
before taxes and minority interests was L787 million in 1998, a reduction of L36
million or 4%.
The adjusted net income before tax, at reported rates reduced 1% in the
first half of 1998, when compared with the corresponding prior year period, and
11% in the second half. The first half comparison benefited from more favourable
economic and market conditions than in the second half and from phasing,
particularly in relation to exhibition cycling and the timing of investments in
the cost base. First half comparisons in 1999 are expected to be, therefore,
adversely affected with some corresponding benefit in the second half.
The effective tax rate on adjusted operating income for Reed Elsevier
remained at 26.0% in 1998. 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.
Net income of Reed Elsevier for 1998 was L772 million, compared to a net
loss of L14 million in 1997. Adjusted net income, excluding exceptional items
and amortization of goodwill and intangible assets and related tax effects, was
L571 million in 1998, compared to L608 million in 1997, which represents a
decrease of L37 million or 6%. At constant exchange rates the reduction in
adjusted net income was 5%.
Scientific. Net sales for the Scientific segment were L622 million in 1998,
an increase of L51 million or 9% compared to 1997. Currency translation
differences reduced net sales by L11 million, giving an increase in net sales
over 1997 for the Scientific segment of 11% at constant exchange rates. Net
sales from acquisitions made during 1998, principally the Beilstein Database and
Engineering Information Inc., contributed L21 million to the net sales increase
at constant exchange rates. Excluding 1998 acquisitions and the full year effect
of several acquisitions in 1997, of which MDL Information Systems was the most
significant, the increase in net sales over 1997 was 5% at constant rates of
exchange.
Adjusted operating income for the Scientific segment declined by L7 million
to L223 million in 1998. Excluding currency translation differences, which
reduced operating income by L4 million, the reduction in operating income over
1997 for the Scientific segment was 1%.
Net sales for scientific publishing increased by 12% at constant rates of
exchange in 1998; excluding acquisitions, the increase was 6%. Adjusted
operating income for scientific publishing was slightly lower at constant
exchange rates in 1998, driven by a lower rate of underlying revenue growth than
in the prior year as a result of lower journal subscriptions from Asia, due to
the economic crisis in the region, together with continued investment in both
existing and acquired businesses. This included the expansion of the sales and
marketing activities to support the launch of electronic publishing initiatives,
notably ScienceDirect, as well as the cost of the related production systems.
The recently acquired electronic publishing businesses continued their
development activities by expanding their online services and libraries for
specific scientific communities.
The medical publishing and communications businesses in 1998 reported net
sales growth of 5% at constant rates of exchange but no increase in underlying
adjusted net income. Good growth in France and in U.S. sponsored communications
was offset by a more difficult market for the nursing titles. Reported adjusted
net income was down on 1997 due to relocations and other one-off costs in the
Netherlands.
Professional. Net sales for the Professional segment were L1,154 million in
1998, an increase of L78 million or 7% compared to 1997. Currency translation
differences reduced net sales by L26 million. At constant rates of exchange the
increase in net sales over 1997 for the Professional segment was 10%. Net sales
from acquisitions made during 1998, principally Matthew Bender, a leading
publisher of analytical legal information in the United States, and the
remaining 50% interest in Shepard's, the leading U.S.legal citation service,
contributed L68 million to the net sales increase at constant rates. Excluding
1998 acquisitions, the full year effect of several acquisitions in 1997
(principally in the U.S. and French legal markets) and the impact of the
disposal of Heinemann English Language Teaching at the end of 1997, the increase
in net sales was 4% at constant exchange rates.
Adjusted operating income for the Professional segment increased by L34
million or 11% to L330 million in 1998, compared to L296 million in 1997.
Excluding currency translation differences, which reduced operating income by L6
million, the increase in adjusted operating income over 1997 for the
Professional segment was 14%.
Net sales and adjusted operating income at LEXIS-NEXIS grew by 13% and 15%
respectively at constant exchange rates in 1998. The acquisition of Matthew
Bender and the remaining 50% of Shepard's, acquired in August 1998, added
L60 million to net sales and L22 million to adjusted operating income. Excluding
these and other acquisitions, the increase in net sales and adjusted operating
income was 3% and 5% respectively. Strong revenue growth was reported from LEXIS
Law Publishing, National Register Publishing, Marquis and LEXIS Document
Services. This was partly offset by a lower rate of growth in the online
business, due to stronger competition in both the U.S. legal and business
information markets, the development and launch of new web-based products,
investment in sales and marketing and in the operational infrastructure of the
business, as well as phasing at Martindale-Hubbell.
In the Reed Elsevier Legal Division, the increase in adjusted operating
income in 1998 was 8% at constant rates of exchange, on net sales up 6% at
constant rates of exchange to L207 million, driven by strong performances in the
U.K., France and Australia. In the U.K., growth in net sales was modest,
reflecting some pressure on subscription renewals. Adjusted operating income
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benefited from the absence of 1997's one-off costs, partly offset by the
development and launch costs of the Butterworths Direct online service.
The Reed Educational & Professional Publishing businesses reported a 5%
decrease in net sales at constant exchange rates, reflecting the disposal of the
Heinemann English Language Teaching business at the end of 1997, and an increase
in adjusted operating income of 25% at constant rates of exchange. Excluding
acquisitions and disposals, the increases were 8% and 25% respectively. Growth
in the U.K. schools business was driven by the additional government funding for
literacy materials and the removal of one off costs incurred in 1997 in respect
of the transfer to third party distribution arrangements. Rigby and Greenwood
Heinemann in the United States increased adjusted net income through new
publishing programs and sales initiatives. The tuition activities in the
Netherlands increased net sales and adjusted operating income, excluding
acquisitions, by 9% and 11% respectively at constant rates of exchange in 1998,
with buoyant demand for training courses and in-company projects.
Business. Net sales for the Business segment were L1,387 million in 1998,
an increase of L47 million or 4% compared to 1997. Currency translation
differences reduced net sales by L25 million. At constant exchange rates, the
increase in net sales over 1997 for the Business segment was 5%. Net sales from
acquisitions made during 1998, principally two golf equipment and accessories
shows acquired from the Professional Golfers Association of America ("PGA") and
several computing titles purchased from Dennis Publishing in the United Kingdom,
contributed L19 million to the net sales increase at constant exchange rates.
The contribution from 1998 acquisitions and the full year effect of several
acquisitions in 1997, the most significant of which were the Chilton Business
Group and Editions Prat, was offset in part by the impact of a number of
non-core disposals, in particular the U.S. computer titles and trade shows sold
at the end of 1997, and the deconsolidation of Utell.
Adjusted operating income for the Business segment declined by L26 million
to L260 million in 1998, compared to L286 million in 1997. Excluding currency
translation differences, which reduced adjusted operating income by L4 million,
thereduction in operating income over 1997 for the Business segment was 8%.
In U.S. business magazine publishing, Cahners Business Information,
excluding Cahners Travel Group, increased its net sales and adjusted operating
income by 16% and 10% respectively in 1998 at constant exchange rates. On a
comparable basis, taking into account the Chilton titles on a pro forma basis
for 1997, net sales grew by 6% driven by growth in sectors such as Broadcasting,
Communications, Printing & Packaging and Manufacturing. Net sales growth slowed
in the second half of 1998 in some other markets, such as Building &
Construction, Electronics and the Bowker directories. Excluding acquisitions and
disposals, adjusted operating income was flat due to the investments made in the
editorial, production and sales infrastructures. For Cahners Travel Group, which
consists of the hotel directories and travel periodicals of the former Reed
Travel Group, net sales declined by 10%, partly due to moving the hotel
directories to a controlled calculation basis, whilst adjusted operating income
declined by 68% at constant exchange rates in 1998 as investment was made in the
operational cost base. The recompense program, provided for in 1997, for
advertizers affected by the circulation irregularities in the hotel directories
is near completion.
In U.K. business magazine publishing, Reed Business Information, excluding
OAG Worldwide, increased its net sales and adjusted operating income by 6% in
1998 at constant exchange rates. This reflected strong advertising growth across
the U.K. portfolio (particularly in recruitment advertising which accounted for
L59 million of net sales), including the Aerospace, Social Services, Catering
and Property titles, although some slowing was seen in the second half of the
year due to an overall weakening of U.K. economic conditions. For OAG Worldwide,
which consists of the airline guides of the former Reed Travel Group, net sales
and adjusted operating income declined by 7% and 58% respectively at constant
exchange rates in 1998. Hard copy circulation sales and marketing connection
listing fees were lower and further investment was made in the operational cost
base to address the decline in net sales. The recompense program, provided for
in 1997, for advertizers affected by the circulation irregularities in the
airline guides is near completion.
In continental European business magazine publishing, Elsevier Business
Information increased its net sales and adjusted operating income by 22% and 31%
respectively in 1998 at constant exchange rates, including the acquisition of
Editions Prat in1997 and several smaller acquisitions in both 1998 and 1997.
Excluding acquisitions, growth in net sales and adjusted operating income was 9%
and 15% at constant rates of exchange respectively, despite increased investment
in new products and infrastructure, reflecting particularly good growth in the
Netherlands and improved profitability in France and Germany.
Exhibitions reported a 9% increase in net sales and an 8% increase in
adjusted operating income in 1998 at constant exchange rates, driven by growth
from annual shows in North America and Europe and a favorable impact of cycling,
including the biennial Asian Aerospace show. The Asian economic crisis resulted
in lower net sales and adjusted operating income in that region as shows were
either reduced in size or cancelled. Demand from Asia in shows in Europe and
North America was also affected. The additional contribution to adjusted net
income from several acquisitions in 1998, and 1998 including the PGA golf
equipment and accessories shows in the United States, more than offset by the
loss of net sales and operating income from the disposal of the U.S. computer
shows at the end of 1997.
Consumer-Discontinued operations. Net sales for the discontinued operations
were L28 million in 1998, a reduction from L430 million in 1997, reflecting the
disposal of IPC Magazines at the start of 1998 and of the remaining consumer
book publishing activities.
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Results of Operations for the Year Ended December 31, 1997 (re-stated)
Compared to the Year Ended December 31, 1996 (re-stated)
General. Total net sales increased by 1% to L3,417 million in 1997,
compared to L3,381 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 L230 million. At constant exchange
rates, 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 L160 million to the increase and the full year effect of
acquisitions made during 1996 contributed a further L27 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, 25% of the continuing businesses' net sales were derived from
advertising, the same percentage as in 1996, and advertising sales increased by
4% in 1997 over 1996 to L737 million. Net sales from circulation and copy sales
for the continuing businesses were L666 million in 1997 as compared with L654
million in 1996, an increase of 2%. Circulation and copy sales represented 22%
of net sales from continuing businesses in 1997, compared to 23% in 1996.
Subscription sales for the continuing businesses increased by 4% to L977 million
in 1997, as compared with L943 million in 1996, and accounted for 33% 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 L261 million in 1997 compared with L247 million in 1996.
Adjusted operating income increased by 3% to L885 million in 1997, compared
to L856 million in 1996. Excluding the consumer publishing divestments, adjusted
operating income 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 L66 million for the full year against 1996. At constant exchange rates,
adjusted operating income for the continuing businesses increased by 11% in
1997. Adjusted operating income of businesses acquired during 1997 contributed
L34 million at constant rates of exchange to the increase. Operating margin
before exceptional items and amortization of goodwill and intangible assets in
1997 increased by 0.6 percentage points over 1996 to 25.9%. For the continuing
businesses, operating margin before exceptional items and amortization of
goodwill and intangible assets was 27.1%, unchanged compared to 1996.
The results for 1997 included net exceptional charges of L448 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 (L230
million), the non-cash write down of intangible asset values in respect of the
Reed Travel Group (L250 million), acquisition related restructuring costs (L11
million), 1997 costs of the Year 2000 compliance program (L11 million), net
profit on the sale of certain businesses (L57 million) and costs incurred in
respect of the abandoned merger with Wolters Kluwer (L3 million). The net tax
credit thereon amounted to L115 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 L24 million, comprising the net
exceptional profit arising from the sale of certain businesses and the disposal
of surplus property interests. The net tax credit thereon amounted to L1
million.
The results for 1997 and 1996 also include amortization of goodwill and
intangible assets of L289 million and L250 million respectively, following the
introduction of FRS 10 during the 1998 fiscal year, with retrospective
application; the exceptional profit on disposal of businesses has been increased
in 1997 and 1996 respectively by L29 million and L23 million accordingly.
Operating income was L148 million in 1997, compared to L630 million in
1996, a reduction of L482 million reflecting the inclusion of the exceptional
items and amortization of goodwill and intangible assets. Net interest expense
increased to L62 million in 1997, compared to L51 million in 1996. This
reflected the impact of acquisition spending during 1997 offset in part by a
strong free cash flow and net exceptional receipts of L54 million. The net
interest expense also reflected the interest yield differentials between short
term cash investments and long term fixed rate borrowings. Net interest cover,
the number of times that adjusted operating income before interest covers net
interest expense, was 14 times in 1997, which compared to 17 times in 1996.
Income before taxes and minority interests was L86 million in 1997 as
compared with L579 million in 1996. On an adjusted basis, excluding the effect
of exceptional items and amortization of goodwill and intangible assets, income
before taxes and minority interests was L823 million in 1997, compared to L805
million in 1996, an increase of L18 million or 2%. The adjusted figures exclude
the net exceptional pre-tax charges of, in 1997, L448 million (loss), and in
1996, L24 million (profit), and the amortization of goodwill and intangible
assets of, in 1997, L289 million and, in 1996, L250 million. Compared with 1997,
on translation of earnings, the significant strengthening of sterling reduced
adjusted income before taxes and minority interests by L66 million. At constant
exchange rates, adjusted income before taxes and minority interests was L886
million in 1997, an increase of L81 million or 10%.
The effective tax rate on adjusted operating income for Reed Elsevier in
1997 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.
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Net loss of Reed Elsevier for 1997 was L14 million, compared to a net
income of L366 million in 1996, a reduction of L380 million. Adjusted net income
excluding exceptional items and amortization of goodwill and intangible assets
was L608 million in 1997, compared to L603 million in 1996, which represents an
increase of L5 million or 1%. At constant exchange rates the increase in
adjusted net income was 9%.
Scientific. Net sales for the Scientific segment were L571 million in 1997,
an increase of L18 million or 3% compared to 1996. Currency translation
differences reduced net sales by L63 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, contributed L40 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.
Adjusted operating income for the Scientific segment declined by L1 million
to L230 million in 1997. Excluding currency translation differences, which
reduced operating income by L27 million, the increase in operating income over
1996 for the Scientific segment was 11%.
Adjusted operating income for Elsevier Science's 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.
Adjusted operating income 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 L1,076 million in
1997, an increase of L39 million or 4% compared to 1996. Currency translation
differences reduced net sales by L65 million. At constant exchange rates 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 L28 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.
Adjusted operating income for the Professional segment increased by L28
million or 10% to L296 million in 1997, compared to L268 million in 1996.
Excluding currency translation differences, which reduced operating income by
L17 million, the increase in adjusted operating income over 1996 for the
Professional segment was 17%. Excluding acquisitions, the increase in adjusted
operating income was 8% at constant exchange rates.
Adjusted operating income 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 legal titles
acquired from the Thomson Corporation. Excluding acquisitions, the increase in
adjusted operating income 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.
In the Reed Elsevier Legal Division, the increase in adjusted operating
income 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 adjusted operating income was 13% at
constant exchange rates.
Reed Educational & Professional Publishing reported a 5% decline in its
adjusted operating income 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 adjusted operating income
by 45% at constant exchange rates.
Business. Net sales for the Business segment were L1,340 million in 1997,
an increase of L33 million or 3% compared to 1996. Currency translation
differences reduced net sales by L102 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 L92 million to
the net sales increase at constant exchange rates. Excluding acquisitions and
the impact of a number of non-core disposals, the increase in net sales was 5%
at constant exchange rates.
Adjusted operating income for the Business segment declined by L2 million
to L286 million in 1997, compared to L288 million in 1996. Excluding currency
translation differences, which reduced adjusted operating income by L21 million,
the increase in adjusted operating income 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, adjusted operating income increased by 11% at constant exchange rates.
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Exhibitions reported a 12% increase in adjusted operating income 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.
In U.S. business magazine publishing, Cahners Business Information
increased its adjusted operating income 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 adjusted operating income by 17% in 1997 at constant exchange rates.
Excluding the impact of several minor acquisitions and non-core disposals,
adjusted operating income 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 adjusted operating income 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 adjusted operating income 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, adjusted operating income for 1997
fell by 19% at constant exchange rates. 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 L230million, less tax relief of approximately L87
million, was made in respect of this and related expenses and reorganization
costs. Taking into account the prospective trading performance of the RTG
businesses, a non-cash write down of the related intangible asset values
totalling L250 million was also made in 1997. The provision and 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-Discontinued operations. Net sales for the discontinued operations
were L430 million in 1997, a reduction of L54million compared to 1996,
reflecting the timing of disposals of consumer book publishing activities during
1997. Currency translation differences reduced net sales by L2 million. Adjusted
operating income for the discontinued operations increased by L4 million to L73
million in 1997, compared to L69 million in 1996. The increase in adjusted
operating income reflects growth from IPC Magazines, which was sold in January
1998, less the contribution lost from disposals during 1997 of consumer book
publishing activities. Currency translation differences had no material impact
on adjusted operating income. 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.
Liquidity and Capital Resources
Reed Elsevier's businesses require relatively low levels of investment in
both working capital and tangible fixed assets. Thenet 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, 1998, 1997 and 1996
amounted to L937 million, L956 million and L928 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 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 L343
million at December 31, 1998 and L141 million at December 31, 1997. Expenditure
on tangible fixed assets amounted to L151 million, L121million and L115 million
in the years ended December 31, 1998, 1997 and 1996, respectively.
During 1998, Reed Elsevier paid a total of L1,232 million for acquisitions,
including L14 million deferred payments in respect of acquisitions made in prior
years. The largest acquisition in 1998 was of Matthew Bender and the remaining
50% interest in Shepard's, for $1.65 billion (L1.0 billion). All payments were
financed by net cash inflow from operating activities, available cash resources
and borrowings. Exceptional net inflows of L647 million were received in 1998,
comprising the net proceeds from the disposal of the remaining consumer
publishing businesses, offset by amounts paid in respect of acquisition
integration costs, Year 2000 compliance, the Reed Travel Group recompense plans
and the abandoned merger with Wolters Kluwer.
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During 1997, Reed Elsevier paid a total of L726 million for acquisitions,
including L7 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 (L195 million) and Chilton Business Group for
$447 million (L273 million). All payments were financed by net cash inflow from
operating activities, available cash resources and commercial paper borrowings.
Exceptional net inflows of L54 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 abandoned merger with Wolters Kluwer.
At December 31, 1998, Reed Elsevier had short term investments and cash of
L708 million. At such date, Reed Elsevier also had short term borrowings of
L1,150 million and long term borrowings of L520 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, Dutch guilders and French francs and the long term borrowings were
denominated mainly 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
L7 million of loan stock were redeemed.
Short term borrowings consist principally of $649 million (L391 million) of
short term notes issued under Reed Elsevier Inc.'s U.S. commercial paper
program, and $870 million (L524 million) of short term notes issued under the
Eurocommercial paper programs of ERF subsidiaries, Elsevier Finance SA and
Elsevier Properties SA, all of which are supported by committed credit
facilities and centrally managed cash and short term investments. The balance of
short term borrowings consists of bank borrowings and other loan stock. As of
December 31, 1998, Reed Elsevier had available a committed multicurrency
facility of $1 billion (L602 million) with a remaining maturity in excess of 4
years, of which L44 million was utilized.
At December 31, 1998, 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 (L121 million) Eurobonds maturing in
1999, $20 million (L12 million) of privately placed notes issued under Reed
Elsevier Inc.'s U.S. medium term note program maturing in 1999, $100 million
(L60 million) privately placed notes maturing in 2000, $125 million (L76
million) privately placed notes maturing in 2003 and $150 million (L90 million)
privately placed notes maturing in 2023. At December 31, 1998, Reed Elsevier
plc's subsidiary, Reed Elsevier Capital Inc., had outstanding $150 million (L90
million) of public notes maturing in 2000, $150 million (L90 million) of public
notes maturing in 2005 and $150 million (L90 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, 1998,
Reed Elsevier plc's subsidiary, Reed (Nederland) NV, had outstanding Dfl125
million (L42 million) privately placed bonds maturing in 1999, of which Dfl60
million is swapped into $35.8 million (L22 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,
1998, the weighted average maturity of Reed Elsevier plc's long term gross debt
was 9 years.
47
<PAGE>
REED INTERNATIONAL
The following discussion is based on the audited consolidated financial
statements of Reed International for the years ended December 31, 1998, December
31, 1997, and December 31, 1996. The consolidated financial statements have been
prepared in accordance with U.K. GAAP, which differs in certain significant
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 L396 million for the year ended
December 31, 1998, compared to L27million (loss) for the year ended December 31,
1997 and L176 million for the year ended December 31, 1996. This represents an
increase over the prior year of L423 million (1997: L203 million decrease). The
increase principally reflects Reed International's share of the Combined
Businesses' exceptional items. Basic earnings per Reed International Ordinary
Share for the years ended December 31,1998, 1997 and 1996 were 34.7 pence, 2.4
pence (loss) and 15.5 pence, respectively. The financial statements of Reed
International reflect Reed International's status 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 gross 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
Conditions and Results of Operations --- Reed Elsevier".
The net income for Reed International for the years ended December 31,
1998, 1997 and 1996 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. Under arrangements established 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 and applicable for the 1998
final dividend) 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
1998, 1997 and 1996 fiscal years this amounted to L12 million, L20 million and
L18 million respectively.
In the 1998 financial year, the new U.K. accounting standard FRS10:
Goodwill and Intangible Assets was introduced under which Reed Elsevier
capitalizes acquired goodwill and intangible assets and amortizes them over a
maximum period of 20 years, with retrospective application. Prior year figures
have been restated accordingly. Reed International's share of the amortization
after related tax effects in the years December 31, 1998, 1997, and 1996 was
L176 million, L153 million and L139 million respectively.
Reed International's shareholders' equity at December 31, 1998 and December
31, 1997 was L1,127 million and L895 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 increase in shareholders' equity at December 31,1998 principally
reflects Reed International's share in the combined businesses' retained profit,
after dividends paid and payable.
In respect of the financial years 1998, 1997 and 1996, Reed International
declared a total dividend, net of the associated U.K. tax credit, of 15.0 pence
(including the 10.4 pence final dividend to be proposed at the 1999 Annual
General Meeting in April), 14.6 pence and 13.6 pence, respectively, per Reed
International Ordinary Share. The equivalent gross dividends, including the
associated U.K. tax credit, were 17.3 pence, 18.25 pence and 17.0 pence for the
years ended December 31, 1998, 1997 and 1996, respectively.
48
<PAGE>
ELSEVIER
The following discussion is based on the audited financial statements of
Elsevier for the years ended December 31, 1998, December 31, 1997 and December
31, 1996. The financial statements have been prepared in accordance with Dutch
GAAP, which differs in certain significant 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 Dfl1,266 million for the year ended December
31, 1998 compared to Dfl22 million (loss) for the year ended December 31, 1997
and Dfl481 million for the year ended December 31, 1996. This represents an
increase over the prior year of Dfl1,288 million (1997: Dfl503 million
decrease). The increase principally reflects Elsevier's share of the combined
businesses' exceptional items. Earnings per Elsevier Ordinary Share for the
years ended December 31, 1998, 1997 and 1996 were Dfl1.79, Dfl0.03 (loss) and
Dfl0.68 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
1998 of Dfl3.28 per L1.00 (1997: Dfl3.19 per L1.00; 1996: Dfl2.63 per L1.00).
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 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 Conditions and Results of
Operations --- Reed Elsevier".
In the 1998 financial year, the new U.K. accounting standard FRS10:
Goodwill and Intangible Assets was introduced under which Reed Elsevier
capitalizes acquired goodwill and intangible assets and amortizes them over a
maximum period of 20 years, with retrospective application. Prior year figures
have been restated accordingly. Elsevier's share of the amortization after
related tax effects in the years ended December 31, 1998, 1997, and 1996 was
Dfl544 million, Dfl463 million and Dfl345 million respectively.
Elsevier's shareholders' equity at December 31, 1998 and December 31, 1997
was Dfl3,333 million and Dfl2,826 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 end exchange
rates. These rates were Dfl3.13 per L1.00 at December 31, 1998 (1997: Dfl3.34
per L1.00). The increase in shareholders' equity at December 31, 1998 reflects
Elsevier's share of the combined businesses' retained profit, after dividends
paid and payable, partially offset by adverse exchange translation differences.
In respect of the financial years 1998, 1997 and 1996, Elsevier declared
dividends payable per Elsevier Ordinary Share of Dfl0.87, Dfl0.95 and Dfl0.76.
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 1998 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 Dfl3.31 per L1.00 in respect of the
interim dividend and Dfl3.24 per L1.00 in respect of the final dividend, being
the average exchange rates over the period of five business days commencing with
the tenth business day prior to the respective announcements.
49
<PAGE>
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 with
Reed Elsevier's sterling 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 sterling 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 use of an "off the shelf" software model which utilizes
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.
50
<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, 1998, with all other variables held constant.
<TABLE>
<CAPTION>
Market Value Change
Favourable /(Unfavourable)
-------------------------------------
Financial Instrument Fair
Value
December 31, +100 basis -100 basis
1998 points points
-------------------------------------
(in L millions)
<S> <C> <C> <C>
Long term debt (including current portion) .............. (742) +34 (39)
Interest rate swaps ..................................... (12) +11 (12)
Forward rate agreements ................................. 2 (2) +2
------------ -----------
+43 (49)
============ ===========
</TABLE>
A 100 basis point change in interest rates would not result in a material
change on the fair value of other financial instruments such as cash, short term
investments, bank loans, commercial paper borrowings or currency swaps.
The substantial majority of borrowings are either fixed rate or have been
fixed through the use of interest rate swaps. In addition, a significant
proportion of cash and short term investments is hedged throughout 1999. A 100
basis point reduction in interest rates would result in a decrease in net
interest expense of L1 million, based on the composition of financial
instruments including cash , short term investments, bank loans and commercial
paper borrowings at December 31, 1998. A 100 basis points rise in interest rates
would increase net interest expense by L1 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 December
31, 1998, 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.
<TABLE>
<CAPTION>
Market Value Change
Favourable /(Unfavourable)
-------------------------------------
Fair Value
December 31,
Financial Instrument 1998 +10% -10%
-------------------------------------
(in L millions)
<S> <C> <C> <C>
Long term debt (including current portion) ................. (742) (82) +67
Short term debt ............................................ (968) (105) +91
Cash and short term investments ............................ 708 +27 (22)
Interest rate swaps ........................................ (12) (1) +1
Forward foreign currency contracts ......................... 2 (13) +11
------------ -----------
(174) +148
============ ===========
</TABLE>
A 10% change in foreign currency exchange rates would not have a material
change on the fair value of other financial instruments such as forward rate
agreements and currency swaps.
51
<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 Boards of
Elsevier Reed Finance BV, see "Control of Registrants -- Reed Elsevier". The
REEC appoints senior management of Reed Elsevier plc.
On August 6, 1998 the boards of Reed International and Elsevier decided to
move to a unitary management structure of a single non-executive Chairman and
sole Chief Executive Officer and, so far as practicable, identical boards. This
is a logical evolution of the management structure in place since the Merger,
under which the day to day management of the Combined Businesses has been under
the control of the REEC.
Morris Tabaksblat, who is currently the Chairman and Chief Executive
Officer of Unilever NV, Vice-Chairman of Unilever PLC and Vice-Chairman of the
European Round Table of Industrialists, joined the Elsevier Supervisory Board in
April 1998 and the Board of Reed Elsevier plc in June 1998. It is proposed that,
with effect from the end of the Annual General Meetings of Reed International
and Elsevier in April 1999, Mr Tabaksblat will become non-executive Chairman of
both Reed International and of Elsevier and, following his retirement as
Chairman and Chief Executive Officer of Unilever NV and as Vice-Chairman of
Unilever PLC in May 1999, will also become non-executive Chairman of Reed
Elsevier plc in June 1999.
The intention to recruit a new Chief Executive Officer was also announced
on August 6, 1998, and is now at an advanced stage.
It is intended that, as part of the process of harmonizing the three
boards, Mark Armour will be appointed to the Executive Board of Elsevier. He is
already Finance Director of Reed International and Chief Financial Officer of
Reed Elsevier plc, and will serve after April 1999 as Chief Financial Officer of
all three companies.
It is also proposed that in April 1999 Steven Perrick and Loek van
Vollenhoven will be appointed as non-executive directors of Reed International,
Rolf Stomberg and David Webster will be appointed as members of the Elsevier
Supervisory Board and John Brock will be appointed a non-executive director of
Reed International and Reed Elsevier plc, on the retirement of Richard Bodman,
and a member of the Elsevier Supervisory Board. Mr Brock, who is aged 50, is a
main board director of Cadbury Schweppes plc. In April 1999 Roelof Nelissen will
replace Pierre Vinken as Chairman of the Supervisory Board of Elsevier Reed
Finance BV, and Loek van Vollenhoven has been nominated to replace Herman
Spruijt as a member of the Supervisory Board of Elsevier Reed Finance BV.
Following the appointments and retirements described in this section, which
are subject to the passing of the relevant resolutions at the Annual General
Meetings, the non-executive directors of Reed Elsevier plc, Reed International
and Elsevier will be the same people, being Messrs Tabaksblat, Brock, Perrick,
Stomberg, van Vollenhoven and Webster, except only that Elsevier will have two
additional Supervisory Board members, Jules van Dijck and Roelof Nelissen.
REED INTERNATIONAL
The following information applies as at March 9, 1999 and the arrangements
regarding the appointment of directors will change, subject to shareholders'
approval, following the Annual General Meeting in April 1999 (see Item 4
"Control of Registrants").
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. The Articles of Association
provide that there cannot be less than five nor more than 20 members of the
Board of Directors of Reed International. The Board of Directors of Reed
International manages Reed International's shareholdings in Reed Elsevier plc,
Elsevier Reed Finance BV and Reed Holding BV, through which it holds a 5.8%
interest in Elsevier NV.
Under arrangements established 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.
Reed International and Elsevier have agreed that their 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.
52
<PAGE>
ELSEVIER
The following information applies as at March 9, 1999. The arrangements
regarding the appointment of directors and the powers of the Supervisory Board
will change, subject to shareholders' approval, following the Annual General
Meeting in April 1999 (see item 4 "Control of Registrants").
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.
Under arrangements established 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).
DIRECTORS AND OFFICERS
The directors and executive officers of each of Reed International,
Elsevier, Reed Elsevier plc and Elsevier Reed Finance BV at March 9, 1999 were:
<TABLE>
<CAPTION>
Name (Age) Reed International Elsevier Reed Elsevier plc Elsevier Reed
- ---------- ------------------ -------- ----------------- -------------
<S> <C> <C> <C> <C>
Finance BV
Herman Bruggink (52) Chairman of the Co-Chief Executive,
Executive Board Co-Chairman of the REEC
Nigel Stapleton (52) Chairman Co-Chief Executive,
Co-Chairman of the REEC
John Mellon (58) Executive Director Executive Director,
Member of the REEC
Cornelis Alberti (62) Member of the
Executive Board Managing Director
Mark Armour (44) Finance Director Chief Financial Officer Member of the
Supervisory Board
Richard Bodman (60) Non-executive Director(1) Non-executive Director(3)
Willem Boellaard (68) Managing Director
Neville Cusworth (60) Member of the Executive Director
Executive Board
Otto ter Haar (69) Member of the
Supervisory Board
Sir Christopher Lewinton Non-executive Director(1) Non-executive Director(3)
(67)
Roelof Nelissen (67) Member of the
Supervisory Board
Steven Perrick (50) Member of the Non-executive Director(3) Member of the
Supervisory Board(2) Supervisory Board
Herman Spruijt (49) Member of the Executive Director Member of the
Executive Board Supervisory Board
Dr. Rolf Stomberg (58) Non-executive Director(1) Non-executive Director(3)
Morris Tabaksblat (61) Member of the Non-executive Director(3)
Supervisory Board(2)
Onno Laman Trip (52) Executive Director
Jules Van Dijck (62) Member of the
Supervisory Board
Loek van Vollenhoven (68) Deputy Chairman of the Non-executive Director(3)
Supervisory Board(2)
Pierre Vinken (71) Chairman of the Non-executive Director(3) Chairman of the
Supervisory Board(2) Supervisory Board
David Webster (54) Non-executive Director(1) Non-executive Chairman(3)
Erik Ekker (50) Company Secretary Legal Director
(Continental Europe)
Mark Radcliffe (52) Company Secretary Company Secretary
</TABLE>
53
<PAGE>
- -------------
(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 and Chairman of the Executive Board of Elsevier in April
1995, having been an executive Director of Reed Elsevier plc and a member of the
Executive Board of Elsevier since the Merger. He ceased to be Co-Chairman of the
Board of Reed Elsevier plc upon becoming Co-Chief Executive in August 1998. 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. He ceased to be Co-Chairman of the Board
of Reed Elsevier plc upon becoming Co-Chief Executive in August 1998. 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 Merger. He was also a member of
the Supervisory Board of Elsevier Reed Finance BV from the Merger until December
1998. 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 will retire in April 1999. He has been a member of the REEC since
June 1994, having been an executive Director of Reed Elsevier plc since the
Merger. 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 Alberti will retire as a member of the Executive Board of Elsevier in
April 1999. He has been a member of the Executive Board of Elsevier since 1984
and Managing Director of Elsevier Reed Finance BV since the Merger. He was an
executive Director of Reed Elsevier plc from the Merger until December 1996. He
joined Elsevier in 1978.
Mr Armour was appointed Finance Director of Reed International and Chief
Financial Officer of Reed Elsevier plc in July 1996, having been Deputy Chief
Financial Officer of Reed Elsevier plc since February 1995. He became a member
of the Supervisory Board of Elsevier Reed Finance BV in December 1998.
Mr Bodman will retire in April 1999. He 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. He is also a Director of Tyco International
Inc., Internet Security Systems Group and Young & Rubicam Inc.
Mr Willem Boellaard was appointed a Managing Director of Elsevier Reed
Finance BV in December 1998. He joined Elsevier in 1990.
Mr Cusworth will retire in April 1999. He 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 ter Haar will retire in April 1999. He 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, having
joined Elsevier in 1959.
Sir Christopher Lewinton will retire in April 1999. He has been a
non-executive Director of Reed Elsevier plc since the Merger 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 Nelissen was a non-executive Director of Reed Elsevier plc since the
Merger until July 1998. He has been a member of the Supervisory Board of
Elsevier since 1990. Mr Nelissen is also a member of the Supervisory Board of
ABN AMRO Bank NV and Ahold NV.
Mr Perrick was appointed a member of the Supervisory Board of Elsevier in
April 1998, a non-executive director of Reed Elsevier plc in June 1998 and a
member of the Supervisory Board of Elsevier Reed Finance BV in July 1998. Mr
Perrick is also a partner in the law firm of De Brauw, Blackstone, Westbroek,
and Professor of Securities Law at Erasmus University.
Mr Spruijt became an executive Director of Reed Elsevier plc and a member
of the Executive Board of Elsevier in April 1995. He became a member of the
Supervisory Board of Elsevier Reed Finance BV in June 1998. He is Chairman of
Elsevier Science, having joined Elsevier in 1987.
Dr Stomberg was appointed a non-executive director of Reed International
and Reed Elsevier plc in January 1999. Dr Stomberg is also Chairman of John
Mowlem & Co plc and a member of the Boards of several European companies
including Scania AB and TNT Post Group NV.
Mr Tabaksblat was appointed a member of the Supervisory Board of Elsevier
in April 1998 and a non-executive director of Reed Elsevier plc in June 1998. Mr
Tabaksblat is also the Chairman and Chief Executive Officer of Unilever NV and
Vice- Chairman of Unilever PLC, from which he will retire in May 1999, and a
member of the Supervisory Boards of Aegon NV, TNT Post Group NV and VEBA AG.
54
<PAGE>
Mr Laman Trip became an executive Director and Director of Corporate Human
Resources of Reed Elsevier plc in September 1997.
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 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 Merger 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 Vinken, will retire in April 1999. He 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 Merger until April 1995. He has been
Chairman of the Supervisory Board of Elsevier Reed Finance BV since the Merger.
Mr Webster has been a non-executive Director of Reed Elsevier plc since the
Merger and a non-executive Director of Reed International since 1992. He became
non-executive Chairman of Reed Elsevier plc in August 1998. He is Chairman of
Safeway plc.
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.
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.
55
<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 in relation to succession to the board and the recruitment
of new directors, and the performance and development of senior management. The
Remuneration Committee also 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 Elsevier's Executive
Board in formulating its recommendations.
The Remuneration Committee comprises wholly of non-executive directors: R S
Bodman, Sir Christopher Lewinton (Chairman), P J Vinken, L van Vollenhoven and D
G C Webster, and since August 1998, S Perrick and M Tabaksblat, and since
February 1999, R Stomberg.
Compliance with best practice provisions
In designing its performance-related remuneration policy, the Remuneration
Committee has complied with Schedule A of the Combined Code, issued in June
1998, appended to the Listing Rules of the London Stock Exchange.
In relation to disclosure of directors' remuneration, Reed International, a
U.K. company listed on the London Stock Exchange, has complied with Schedule B
of the Combined Code, issued in June 1998, appended 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 meet the challenges faced by Reed Elsevier plc
group businesses both within its traditional businesses and in the
transition to electronic publishing media;
(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
realistic but stretching performance-related targets such as profit,
cash flow and gains in 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 1998 was 50%
of basic salary.
-- Share options, where the directors and other senior executives are
granted options annually 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 annually 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.
56
<PAGE>
Each of the executive directors has a service contract which is terminable
on no more than two years' notice. The Remuneration Committee continues to
believe, having regard to current practice within the market place, 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 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
Year ended December 31,
-------------------------
1998 1997
-------------------------
(in L thousands)
Salaries & fees ................................. 3,202 3,482
Benefits ........................................ 111 95
Annual performance-related bonuses .............. 278 747
Pension contributions ........................... 463 655
Pension to former director ...................... 209 211
Compensation in respect of former directors ..... 1,424 --
-------------------------
Total ........................................... 5,687 5,190
=========================
(b) Individual emoluments of executive directors
<TABLE>
<CAPTION>
Performance L Equivalent Total
Related ----------------------
Nationality Salary Benefits Bonus Total 1998 1997
-------------------------------------------------------------------------
(in Dfl) (in L)
<S> <C> <C> <C> <C> <C> <C>
H J Bruggink ...................... Dutch 1,511,514 43,279 75,576 1,630,369 497,064 466,583
O Laman Trip ...................... Dutch 621,000 28,454 31,050 680,504 207,470 76,623
(from September 15, 1997)
H P Spruijt ....................... Dutch 745,200 12,152 75,638 832,990 253,960 299,511
P C F M Vlek (until July 1, 1998) . Dutch 682,500 16,125 148,300 846,925 258,208 518,255
(in L) (in L)
M H Armour ........................ U.K. 350,000 19,547 17,500 387,047 387,047 416,327
G R N Cusworth .................... U.K. 223,560 22,373 22,580 268,513 268,513 285,074
J B Mellon ........................ U.K. 470,925 15,078 23,547 509,550 509,550 628,168
N J Stapleton ..................... U.K. 569,250 23,768 113,850 706,868 706,868 549,357
</TABLE>
Taking into account gains of L207,882 on the exercise of share options, N J
Stapleton was the highest paid director in 1998.
The aggregate notional pre-tax gains, based on the mid market share price
on the day of exercise, made by directors on the exercise of Reed International
and Elsevier share options during 1998, was L542,933.
Messrs Bruggink and Stapleton waived their entitlement to receive a bonus
in respect of 1997, amounting to Dfl505,298 and L182,169 respectively.
As announced on August 6, 1998, Reed International and Elsevier have
decided to move to a unitary management structure of a single non-executive
chairman and a sole Chief Executive Officer for Reed Elsevier plc. That decision
gave H J Bruggink and N J Stapleton the right to treat their employment with
Reed Elsevier plc as having been terminated immediately by the company. In order
to maintain continuity of senior management during the search for a single Chief
Executive Officer, and for a period after such appointment, the Board secured
the agreement of Messrs Bruggink and Stapleton to defer their right to leave the
company. This involves the following financial arrangements: A one-off bonus,
payable in May 1999, of Dfl500,000 to H J Bruggink and L140,000 to N J Stapleton
provided they have not voluntarily ceased to be employed prior to such date. In
N J Stapleton's case, because he has committed to stay at least until August 31,
1999 and, if necessary, until December 31, 1999, a credit of one year's service
for pension purposes and a guarantee that in 1999 his annual bonus entitlement
would not be less than 20% of salary has been agreed.
57
<PAGE>
(c) Payments to former directors
P C F M Vlek ceased to be a director on July 1, 1998 and, under the terms
of his service agreement, received a payment representing two years' salary and
bonus, and an amount equal to two years' employer's pension contributions, the
aggregate of which was Dfl4,671,700.
(d) Pensions
The Remuneration Committee reviews the pension arrangements for the
executive directors to ensure that the benefits provided are consistent with
those provided by other multinational companies in 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 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 in Total
accrued accrued Contributions Transfer value
annual annual paid by increase after
pension pension as at Transfer directors deduction of
during December 31, value during the directors'
Nationality the period 1998 increase period contributions L equivalent
-----------------------------------------------------------------------------------------------
(in Dfl) (in L)
<S> <C> <C> <C> <C> <C> <C>
H J Bruggink Dutch 55,703 622,567 470,000 59,000 411,000 125,305
O Laman Trip Dutch 17,000 84,145 181,000 24,000 157,000 47,865
H P Spruijt Dutch 26,076 289,086 198,000 29,000 169,000 51,524
P C F M Vlek
(until July 1, 1998) Dutch 42,469 690,295 220,000 25,000 195,000 59,451
(in L)
M H Armour U.K. 17,011 45,668 190,347 2,811 187,536 187,536
G R N Cusworth
(until October 14, U.K. 11,030 150,637 82,047 5,772 76,275 76,275
1998)
J B Mellon U.K. 28,331 308,004 268,875 15,222 253,653 253,653
N J Stapleton U.K. 34,833 232,148 397,400 18,418 378,982 378,982
</TABLE>
The transfer value increase in respect of individual directors represents a
liability in respect of directors' pension entitlement, and is not an amount
paid or payable to the director.
58
<PAGE>
(e) Individual emoluments of non-executive directors
Nationality 1998 1997
-------------------------------------
(in L thousand)
R J Nelissen (until July 1, 1998) .... Dutch 30,000 50,000
S Perrick (from July 1, 1998) ........ Dutch 26,666 --
M Tabaksblat (from July 1, 1998) ..... Dutch 26,666 --
P J Vinken ........................... Dutch 80,000 241,347(1)
L van Vollenhoven .................... Dutch 52,500 112,500(1)
R S Bodman ........................... U.S.A. 90,361 92,592
A A Greener .......................... U.K. 24,000 24,000
Lord Hamlyn (until April 29, 1998) ... U.K. 8,334 25,000
Sir Christopher Lewinton ............. U.K. 80,000 180,000(1)
D G C Webster ........................ U.K. 84,555 29,000(2)
- -------------
(1) Included in the emoluments in respect of the prior year are payments made
during 1998 to P J Vinken (L100,000), L van Vollenhoven (L60,000) and Sir
Christopher Lewinton (L100,000) in recognition of significant additional
duties carried out by the individual non-executive directors, prior to
January 1, 1998.
(2) An amount of L35,000 plus VAT was paid to Safeway plc, Mr. Webster's
employer, to compensate for time that he devoted to Reed Elsevier issues.
Fees payable to non-executive directors are determined by the Board. The
emoluments of D G C Webster include an additional fee payable to him to reflect
the significant additional duties he has undertaken during the year, including
those arising from his appointment as non-executive Chairman of Reed Elsevier
plc in August 1998.
Compensation of executive officers
The aggregate compensation paid to all executive officers (other than
directors) of Reed Elsevier plc (2 persons during the 1998 fiscal year) as a
group, for services in such capacities for the year ended December 31, 1998 was
L345,841 which included contributions made to the pension plans in respect of
such officers of Reed Elsevier plc of L4,638.
59
<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, 1998. 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 Option during the at exercise December 31, Exercisable
1998 the year price(p) year date 1998 between
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
M H Armour
--Executive Scheme 189,600 400.75 189,600 1999-2005
30,000 585.25 30,000 1999-2006
52,000 565.75 52,000 2000-2007
66,900 523.00 66,900 2001-2008
---------- --------- ------------
Total 271,600 66,900 338,500
---------- --------- ------------
GRN Cusworth
--Executive Scheme 34,000 585.25 34,000 1999-2006
--SAYE Scheme 1,076 320.60 1,076 2000
----------- ------------
Total 35,076 35,076
----------- ------------
J B Mellon
--Executive Scheme 106,800 400.75 106,800 513.50 --
67,400 585.25 67,400 1999-2006
80,400 565.75 80,400 2000-2007
--SAYE Scheme 2,102 328.20 2,102 1999
----------- ----------- ------------
Total 256,702 106,800 149,902
----------- ----------- ------------
N J Stapleton
--Executive Scheme 31,000 237.25 31,000 528.00 --
242,600 410.25 100,000 528.00 142,600 1999-2004
101,600 400.75 101,600 1999-2005
74,200 585.25 74,200 1999-2006
88,800 565.75 88,800 2000-2007
108,800 523.00 108,800 2001-2008
--SAYE Scheme 2,102 328.20 2,102 1999
1,076 320.60 1,076 2000
1,534 449.80 1,534 2002
--------------------- ----------- ------------
Total 542,912 108,800 131,000(1) 520,712
--------------------- ----------- ------------
</TABLE>
- -------------
Notes:
(1) Retained an interest in 14,000 Ordinary Shares
The middle market price of a Reed International ordinary share during the
year was in the range of 428.25p to 716.0p and at December 31, 1998 was 470.0p.
Between January 1, 1999 and March 9, 1999 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 Ordinary Shares of
Reed International 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) (i.e. before exceptional items, amortization of goodwill and intangible
assets and UK tax credit equalization) over a three-year period. The number of
shares over which options are granted and the EPS targets are approved by the
Reed Elsevier plc Remuneration Committee. The rate of increase in ordinary share
entitlements rises more steeply once the mid-point compound annual growth rate
(CAGR) target is achieved in recognition of exceptional performance.
60
<PAGE>
Except for sales to meet tax arising, participants are encouraged under the
Plan to retain their Ordinary Shares for at least three years from exercise of
their options.
For the 1996/98 Plan, the maximum number of options exercisable over Reed
International Ordinary Shares was 77,300. The terms of these options provided
that no options would be exercisable unless CAGR over the base EPS of 25.9p
(restated for the sub-division of Reed International Ordinary Shares in May
1997) exceeded 7% pa. Based on an EPS of 26.4p for the year ended December 31,
1998, CAGR for the performance period 1996/98 was less than 7% pa and,
accordingly, no entitlement arises under the 1996/98 Plan.
Options have also been granted in respect of the three year performance
periods 1997-99 and 1998-2000. The performance targets set by the Remuneration
Committee for these two performance periods are based on a base EPS of 28.1p and
28.3p 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 EPS/CAGR targets are achieved are:
<TABLE>
<CAPTION>
1997-99 Plan 1998-2000 Plan
--------------------------------- ------------------------
Ordinary Ordinary Ordinary Ordinary
shares if shares if shares if shares if
13.5% CAGR 20% CAGR 13.5% CAGR 20% CAGR
achieved achieved achieved achieved
(Target (Target (Target (Target
EPS 41.1p) EPS 48.5p) EPS 41.4p) EPS 48.9p)
--------------------------------- ------------------------
<S> <C> <C> <C> <C>
M H Armour ............. 8,528 21,320 10,680 26,700
J B Mellon ............. 13,152 32,880 -- --
N J Stapleton .......... 14,540 36,350 17,400 43,500
</TABLE>
Options under the 1997/99 Plan will only be exercisable if EPS for the year
ending December 31, 1999 is no less than 34.4p. For options under the 1998/2000
Plan to become exercisable, EPS for the year ending December 31, 2000 must be no
less than 34.7p. It is not yet possible to say whether for the 1997/99 or
1998/2000 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 1998.
Any ordinary shares required to fulfil entitlements under the Plan are
provided by the 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 which, at December 31, 1998, amounted to 121,374
Reed International Ordinary Shares.
In March 1999, further grants in respect of M H Armour and N J Stapleton
were recommended by the Reed Elsevier plc Remuneration Committee under the Plan
for 1999/2001. Based on a mid-market price of a Reed International Ordinary
Share as at February 28, 1999 (600.75p), maximum entitlements if 20% pa CAGR is
achieved during the performance period are MHArmour 24,070 and N J Stapleton
39,950.
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 and
the Reed International Overseas Executive Share Option Scheme, the "Reed
International Executive Schemes". The 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".
61
<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, 1998.
Granted Exercised
January 1, during the during the December 31,
1998 year year 1998
---- ---- ---- ----
H J Bruggink .............. 336,599 120,702 -- 457,301
O Laman Trip .............. -- 49,590 -- 49,590
H P Spruijt ............... 152,933 59,508 40,000 172,441
The middle market price of an Elsevier Ordinary Share during the year was
in the range of Dfl21.90 to Dfl39.30 and at December 31, 1998 was Dfl26.30.
At December 31, 1998 the total number of outstanding options held by
directors was 679,332 with an average option price of Dfl26.44 (compared with
686,444 options at an average option price of Dfl26.08 on January 1, 1998).
The disclosure in respect of options over Elsevier shares held by the Dutch
directors of Reed Elsevier plc reflects the requirements of the Amsterdam Stock
Exchange.
Subsequent to December 31, 1998, H J Bruggink exercised an option over
100,000 Elsevier Ordinary Shares.
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 9, 1999, such options were outstanding to purchase, between
that date and March 30, 2003, a total of 3,718,534 Elsevier Ordinary Shares at
prices ranging from Dfl17.00 to Dfl34.60 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 10, 1999 such convertible
debentures were outstanding or available for subscription which, if converted in
full, would result in the issue of a total of 1,201,380 Elsevier Ordinary
Shares.
62
<PAGE>
REED ELSEVIER
Share ownership and options
The interests of the directors of Reed Elsevier plc and their families in
the issued shares capital of Reed International and Elsevier at the beginning
and end of 1998 as shown below:
<TABLE>
<CAPTION>
Reed International P.L.C. Elsevier NV
Ordinary Shares Ordinary Shares
--------------- ---------------
January 1, December 31, January 1, December 31,
1998* 1998 1998* 1998
----- ---- ----- ----
<S> <C> <C> <C> <C>
M H Armour .................. -- -- -- --
R S Bodman .................. 1,400 1,400 900 900
H J Bruggink ................ 400 400 39,240 39,240
G R N Cusworth .............. 66,451 66,451 -- --
A A Greener ................. 25,214 25,379 -- --
O Laman Trip ................ -- -- -- --
Sir Christopher Lewinton .... 4,300 4,300 1,700 1,700
J B Mellon .................. 63,872 63,872 -- --
S Perrick ................... -- -- -- --
H P Spruijt ................. -- -- 300 300
N J Stapleton ............... 174,599 188,649 200 200
M Tabaksblat ................ -- -- -- --
P J Vinken .................. 22,442 22,442 59,100 --
L van Vollenhoven ........... -- -- 17,500 --
D G C Webster ............... 5,000 5,000 -- --
</TABLE>
- -------------
* On date of appointment if after January 1, 1998
Since December 31, 1998 PJ Vinken's interest in Reed International Ordinary
Shares reduced to nil. RWH Stomberg was appointed a director of Reed
International and Reed Elsevier plc on January 1, 1999. As at his date of
appointment he did not hold an interest in the Ordinary Shares of Reed
International or Elsevier.
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 9, 1999:
<TABLE>
<CAPTION>
Reed Reed International Elsevier
International Ordinary Shares Elsevier Ordinary Shares
Ordinary Subject to Ordinary Subject to
Shares Options Shares Options
----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Executive officers (other than
directors) as a group ............. 24,511 142,567 5,000 83,100
</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 2008. The options included in the above table
exercisable into Elsevier Ordinary Shares are exercisable at prices ranging from
Dfl22.30 to Dfl38.50 and between the date hereof and 2003.
Share option schemes
Following the Merger, Reed Elsevier plc introduced share option schemes
under which options over new issue and over existing Reed International Ordinary
Shares and/or Elsevier Ordinary Shares may be granted to employees of Reed
Elsevier plc and participating companies under its control. The share option
schemes are the Reed Elsevier plc SAYE Share Option Scheme (the "Reed Elsevier
plc SAYE Scheme") and the Reed Elsevier plc Executive U.K. and Overseas Share
Option Schemes (the "Reed Elsevier plc Executive Schemes" and, together with the
Reed Elsevier plc SAYE Scheme, the "Reed Elsevier plc Schemes"). The Reed
Elsevier plc Schemes have been approved by shareholders of Reed International
and information concerning the terms and conditions of the Schemes is set out
below.
63
<PAGE>
At March 9, 1999 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 13,897,242 shares, and the options for such
shares were exercisable at option prices ranging between 201p and 611p per share
and were exercisable between 1999 and 2008. At March 9, 1999 options over
1,132,360 Elsevier Ordinary Shares were outstanding at an option price of
Dfl34.60, under the Reed Elsevier plc schemes and were exercisable between 2001
and 2008.
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 L5 and the
permitted maximum (currently L250) 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 in employment on a predetermined date prior to the date of
invitation are entitled to participate in the Reed Elsevier plc SAYE Scheme. In
addition, the directors of Reed Elsevier plc may permit other employees of Reed
Elsevier plc and participating companies under its control to participate.
Invitations to apply for options may normally only be issued within 42 days
after the announcement of the combined results of Reed Elsevier for any period.
No options may be granted more than 10 years after the approval of the scheme.
Options under the Reed Elsevier plc SAYE Scheme may normally only be
exercised for a period of six months after the bonus date under the relevant
Savings Contract. However, options may be exercised earlier than the normal
exercise date in certain specified circumstances, including death, reaching age
60, or on ceasing employment on account of injury, disability, redundancy,
reaching contractual retirement age, or the sale of the business or subsidiary
for which the participant works, or provided the option has been held for at
least three years, on ceasing employment for any other reason. Exercise is
allowed in the event of an amalgamation, reconstruction or take-over of the
company whose shares are under option; alternatively, such options may, with the
agreement of an acquiring company or a company associated with it, be exchanged
for options over shares in the acquiring company or that associated company.
Options may also be exercised in the event of the voluntary winding-up of the
company whose shares are under option. In the event that options are exercised
before the bonus date, the participant may acquire only the number of shares
that can be purchased with the accumulated savings up to the date of exercise,
plus interest (if any).
Options under the Reed Elsevier plc SAYE Scheme are not transferable and
may be exercised only by the persons to whom they are granted or their personal
representatives.
In the event of any 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").
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
64
<PAGE>
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.
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. and Overseas 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 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.
65
<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 Not applicable.
ELSEVIER Not applicable.
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.
66
<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, 1998 ............. F-4
Combined Statements of Total Recognized Gains and Losses for the three years ........... F-4
ended December 31, 1998
Combined Balance Sheets at December 31, 1998 and December 31, 1997 ..................... F-5
Combined Statements of Cash Flows for the three years ended December 31, 1998 .......... F-6
Statements of Changes in Combined Shareholders' Equity for the three years ............ F-8
ended December 31, 1998
Notes to the Combined Financial Statements ............................................. F-9
Schedule II ............................................................................ F-39
Reed International P.L.C. Consolidated Financial Statements ............................. F-40
Report of Independent Accountants ...................................................... F-41
Consolidated Statements of Income for the three years ended December 31, 1998 ....... F-42
Consolidated Statements of Total Recognized Gains and Losses for the three ............. F-43
years ended December 31, 1998
Consolidated Balance Sheets at December 31, 1998 and December 31, 1997 ............. F-44
Consolidated Statements of Cash Flows for the three years ended December 31, 1998 ...... F-45
Statements of Changes in Consolidated Shareholders' Equity for the three ............... F-46
years ended December 31, 1998
Notes to the Consolidated Financial Statements ......................................... F-47
Elsevier NV Financial Statements ........................................................ F-56
Report of Independent Accountants ...................................................... F-57
Statements of Income for the three years ended December 31, 1998 ....................... F-58
Statements of Total Recognized Gains and Losses for the three years ended ............ F-58
December 31, 1998
Balance Sheets at December 31, 1998 and December 31, 1997 ............................. F-59
Statements of Cash Flows for the three years ended December 31, 1998 .............. F-60
Statements of Changes in Shareholders' Equity for the three years ended ............... F-61
December 31, 1998
Notes to the Financial Statements ...................................................... F-62
Proforma Statements of Income in euros for the three years ended December .............. F-68
31, 1998
Proforma Statements of Total Recognized Gains and Losses in euros for the .............. F-68
three years ended December 31, 1998
Proforma Balance Sheets in euros at December 31, 1998 and December 31, 1997 ........ F-69
Proforma Statements of Cash Flows in euros for the three years ended ................... F-70
December 31, 1998
</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, 1998 and 1997, 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, 1998, 1997 and 1996. Our audits
also included the financial statement schedules of December 31, 1998, 1997 and
1996 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, 1998 and 1997 and the results of their operations and
their cash flows for the three years ended December 31, 1998, 1997 and 1996 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 28). 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 10, 1999 March 10, 1999
F-3
<PAGE>
REED ELSEVIER
COMBINED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------
1996 1997 1998
Notes (restated)(restated)
----------------------------
(in L millions)
<S> <C> <C> <C>
Net sales
Including share of net sales in joint ventures 3,470 3,519 3,271
Less: share of net sales in joint ventures (89) (102) (80)
----------------------------
Net sales 3 3,381 3,417 3,191
----------------------------
Cost of sales (1,299) (1,282) (1,092)
----------------------------
Gross profit 2,082 2,135 2,099
Selling, general and administrative expenses before exceptional items (1,248) (1,277) (1,304)
----------------------------
Operating income before exceptional items and amortization 3 834 858 795
----------------------------
Exceptional items charged to operating income 5 -- (502) (79)
Amortization of goodwill and intangible assets (245) (278) (323)
----------------------------
Operating income before joint ventures 589 78 393
Share of operating income in joint ventures including share of 17 16 9
amortization
----------------------------
Operating income (including joint ventures) 606 94 402
Non-operating exceptional items 5 24 54 682
----------------------------
Income before interest and taxes 630 148 1,084
----------------------------
Interest income 58 38 64
Interest expense 8 (109) (100) (104)
----------------------------
Net interest expense (51) (62) (40)
----------------------------
Income before taxes and minority interests 579 86 1,044
Taxes on income 9 (212) (99) (271)
----------------------------
Income before minority interests 367 (13) 773
Minority interests and preference dividends (1) (1) (1)
----------------------------
Net income 366 (14) 772
============================
</TABLE>
The effect of discontinued operations is shown in note 3 and the effect of
acquisitions is shown in note 4. The restatement of prior year figures is
explained in note 1.
COMBINED STATEMENTS OF TOTAL RECOGNIZED GAINS AND LOSSES
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------
1996 1997 1998
(restated)(restated)
----------------------------
(in L millions)
<S> <C> <C> <C>
Net income for the financial year 366 (14) 772
Exchange translation differences (129) (13) (3)
----------------------------
Total recognized gains and losses for the financial year 237 (27) 769
============================
</TABLE>
The historical cost profits and losses are not materially different from
the results disclosed above.
The accompanying notes on pages F-9 to F-38 are an
integral part of these combined financial statements.
F-4
<PAGE>
REED ELSEVIER
COMBINED BALANCE SHEETS
At December 31,
-------------------
Notes 1997 1998
(restated)
-------------------
(in L millions)
ASSETS
Current assets:
Cash 110 26
Investments 734 682
Trade receivables 11 520 504
Inventories 12 121 101
Prepaid expenses and other current assets 13 277 227
-------------------
Total current assets 1,762 1,540
Non current receivables 14 165 136
Investments held as fixed assets 15 264 87
Property, plant and equipment 16 348 399
Goodwill and intangible assets 17 2,672 3,598
-------------------
Total assets 5,211 5,760
===================
LIABILITIES AND COMBINED SHAREHOLDERS' EQUITY
Current liabilities:
Short term borrowings and current portion of
long term borrowings 18 785 1,150
Accounts payable and accrued liabilities 21 1,131 1,256
Income taxes payable 228 141
Dividends 251 244
-------------------
Total current liabilities 2,395 2,791
Long term borrowings, less current portion 18 689 520
Income taxes payable after more than one year 78 224
Other long term liabilities 71 53
Provisions for liabilities and charges 22 280 36
Minority interests 6 6
-------------------
Total liabilities 3,519 3,630
-------------------
Combined shareholders' equity:
Combined share capitals 23 167 168
Combined premiums in excess of par 328 353
Combined retained earnings 1,197 1,609
-------------------
Total combined shareholders' equity 1,692 2,130
-------------------
Total liabilities and combined shareholders' equity 5,211 5,760
===================
Commitments and contingent liabilities: See notes 24, 25 and 26.
The accompanying notes on pages F-9 to F-38 are an
integral part of these combined financial statements.
F-5
<PAGE>
REED ELSEVIER
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------
1996 1997 1998
Notes (restated)(restated)
----------------------------
(in L millions)
<S> <C> <C> <C>
Operating income before joint ventures 589 78 393
Exceptional charges to operating income -- 502 79
----------------------------
Operating income before exceptional items 589 580 472
----------------------------
Net SSAP 24 pension credit 26 (7) (1) (4)
Net profit on sale of fixed assets (2) -- --
Amortization of goodwill and intangible assets
(excluding joint ventures) 245 278 323
Depreciation charges 89 96 97
----------------------------
Total non-cash items 325 373 416
----------------------------
Decrease in inventories 8 5 --
Decrease/(increase) in trade receivables
and other assets 22 (25) 17
(Decrease)/increase in accounts payable, (16) 23 32
accrued expenses andprovisions
----------------------------
Movement in working capital 14 3 49
----------------------------
Net cash inflow from operating activities before exceptional items 928 956 937
Payments relating to exceptional items charged to operating income:
Reed Travel Group recompense program and restructuring -- (7) (183)
Year 2000 program and acquisition integration -- (19) (75)
----------------------------
Net cash inflow from operating activities 928 930 679
----------------------------
Dividends received from joint ventures 11 17 11
Interest received 48 46 61
Interest paid (109) (105) (106)
----------------------------
Returns on investments and servicing of finance (61) (59) (45)
----------------------------
Taxation (157) (180) (144)
Purchase of tangible fixed assets (115) (121) (151)
Proceeds from sale of fixed assets 17 10 11
Exceptional net proceeds/(payments) from disposals of fixed assets 62 (21) --
----------------------------
Capital expenditure (36) (132) (140)
----------------------------
Acquisitions 27 (316) (726) (1,232)
Payments against acquisition provisions (24) (5) (11)
Exceptional net proceeds from sales/closures of businesses 27 394 104 913
Merger expenses -- (3) (8)
----------------------------
Acquisitions and disposals 54 (630) (338)
----------------------------
Equity dividends paid to the shareholders of the parent companies (299) (336) (362)
----------------------------
Cash inflow/(outflow) before changes in current asset investments and 440 (390) (339)
financing
----------------------------
(Increase)/decrease in current asset investments 27 (428) 299 63
Financing 27 (10) 120 192
----------------------------
Increase/(decrease) in cash 27 2 29 (84)
============================
</TABLE>
The accompanying notes on pages F-9 to F-38 are an
integral part of these combined financial statements.
F-6
<PAGE>
REED ELSEVIER
COMBINED STATEMENTS OF CASH FLOW -- (continued)
In accordance with FRS9: Associates and Joint Ventures, which is first
applicable for the 1998 financial year, dividends received from joint ventures
which were previously included within net cash inflow from operating activities,
have been shown separately in the combined cash flow statement. Comparative
amounts have been restated accordingly.
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): Cash Flow Statements, as amended by FRS 9, differs in
certain respects from U.S. accounting standard, SFAS 95: Statement of Cash
Flows. The principal differences are explained in Note 28.
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-38 are an integral part of these
combined financial statements.
F-7
<PAGE>
REED ELSEVIER
STATEMENTS OF CHANGES IN COMBINED SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Combined Combined Combined Combined
share premiums in revaluation retained Combined
capitals excess of par reserves earnings total
-------- ------------- -------- -------- -----
(in L millions)
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995 as originally reported ............... 172 310 2 1,591 2,075
Prior year adjustment (adoption of FRS 10; see note 1) .......... -- -- -- 64 64
------ ------ ------ ------ ------
Balance at December 31, 1995 as restated .......................... 172 310 2 1,655 2,139
------ ------ ------ ------ ------
Net income as originally reported ............................... -- -- (2) 606 604
Prior year adjustment (adoption of FRS 10; see note 1) .......... -- -- -- (238) (238)
------ ------ ------ ------ ------
Net income, as restated ......................................... -- -- (2) 368 366
------ ------ ------ ------ ------
Ordinary dividends .............................................. -- -- -- (348) (348)
Exchange translation differences ................................ -- -- -- (103) (103)
Issue of Ordinary Shares on exercise of options ................. 1 34 -- -- 35
Adjustment on translation of Elsevier NV ........................ (4) (22) -- -- (26)
------ ------ ------ ------ ------
Balance at December 31, 1996 as restated .......................... 169 322 -- 1,572 2,063
------ ------ ------ ------ ------
Net income as originally reported ............................... -- -- -- 207 207
Prior year adjustment (adoption of FRS 10; see note 1) .......... -- -- -- (221) (221)
------ ------ ------ ------ ------
Net income, as restated ......................................... -- -- -- (14) (14)
------ ------ ------ ------ ------
Ordinary dividends .............................................. -- -- -- (365) (365)
Exhange transaction differences ................................. -- -- -- 4 4
Issue of Ordinary Shares on exercise of options ................. 1 20 -- -- 21
Adjustment on translation of Elsevier NV ........................ (3) (14) -- -- (17)
------ ------ ------ ------ ------
Balance at December 31, 1997 as restated .......................... 167 328 -- 1,197 1,692
------ ------ ------ ------ ------
Net income ...................................................... -- -- -- 772 772
Ordinary dividends .............................................. -- -- -- (349) (349)
Exhange transaction differences ................................. -- -- -- (11) (11)
Issue of Ordinary Shares on exercise of options ................. -- 18 -- -- 18
Adjustment on translation of Elsevier NV ........................ 1 7 -- -- 8
------ ------ ------ ------ ------
Balance at December 31, 1998 ...................................... 168 353 -- 1,609 2,130
====== ====== ====== ====== ======
</TABLE>
Combined share capitals includes non-equity shares of L4 million (1997 L4
million; 1996 L4 million). The accumulated exchange translation differences
included in combined retained earnings are L(182) million (1997 L(171) million;
1996 L(175) million).
Combined retained earnings include the share of the retained earnings of
joint ventures amounting to L36 million (1997 L60 million; 1996 L15 million).
The accompanying notes on pages F-9 to F-38 are an integral part of these
combined financial statements.
F-8
<PAGE>
REED ELSEVIER
NOTES TO THE COMBINED FINANCIAL STATEMENTS
1. Basis of preparation of financial statements
The equalization agreement between Reed International and Elsevier has the
effect that their shareholders can be regarded as having the interests of a
single economic group. The 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, associates
and joint ventures, together with the parent companies, Reed International and
Elsevier ("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 28.
Amounts are expressed in pounds sterling ("L"). 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 financial 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.
Prior year restatement on introduction of new accounting standards
The new U.K. financial reporting standards, FRS 9: Associates and Joint
Ventures and FRS 10: Goodwill and Intangible Assets, which are first applicable
in 1998, have been adopted in the preparation of the combined financial
statements. In adopting FRS 10, the accounting policy has been changed as
described below. In all other respects the combined financial statements have
been prepared on the basis of the accounting policies set out in the Reed
Elsevier Annual Review 1997.
Under FRS 10, Reed Elsevier capitalizes acquired goodwill and intangible
assets and amortizes them over a maximum period of 20 years, with retrospective
application. In prior years, acquired goodwill was written off direct to
reserves on acquisition whereas intangible assets were capitalized and not
amortized, subject to impairment review.
Prior year figures have been restated accordingly; combined net assets as
at January 1, 1998, 1997 and 1996 have been restated by L198 million
(capitalization of prior year goodwill less cumulative amortization of goodwill
and intangibles) L(8) million and L64 million respectively. Operating income for
the years ended December 31, 1997 and 1996 have been reduced for the non cash
amortization charge by L289 million and L250 million respectively. Attributable
profit has been reduced for the years ended December 31, 1997 and 1996 by L221
million and L238 million respectively, taking into account the resultant tax
timing differences and the restatement of exceptional items.
Under FRS9, interests previously treated as associates are now termed as
those in joint ventures and are accounted for under the gross equity method. Net
income and net assets are unaffected. The standard also introduces
presentational changes which have been made to the statements of income and cash
flows and to balance sheets. Prior year figures have been restated accordingly.
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
Investments which are held for the long term and where the Combined
Businesses exercise significant influence or joint control with other parties,
represent under FRS9 interests in associates or joint ventures and are accounted
for under the equity and gross equity methods respectively. All interests
previously recorded as associated undertakings fall to be treated as joint
ventures under FRS9. Prior year figures have been reclassified accordingly.
Reported net assets and net income are unaffected. 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.
F-9
<PAGE>
2. Accounting policies - (continued)
Goodwill and intangible fixed assets
On the acquisition of a subsidiary, associate, joint venture or business,
the purchase consideration is allocated between the underlying net tangible and
intangible assets on a fair value basis with any excess purchase consideration
representing goodwill. In accordance with the new financial reporting standard
FRS 10: Goodwill and Intangible Assets, acquired intangible assets and goodwill
are now capitalized and amortized systematically over their estimated useful
life, up to a maximum period of 20 years. In prior years goodwill was written
off directly to reserves on acquisition whereas intangible assets were
capitalized and not amortized, subject to impairment review. This new policy has
been applied retrospectively and prior year figures have been restated
accordingly.
Intangible assets comprise publishing rights and titles, databases,
exhibition rights and other intangible assets which are stated at fair value on
acquisition and are not subsequently revalued.
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.
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
Inventories 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, joint ventures or associates as there is no
present intention to distribute such retained earnings 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.
F-10
<PAGE>
3. Segment information
Details of business segments are provided in Item 1 "Description of
Business".
Discontinued operations, under U.K. and Dutch GAAP, comprise IPC Magazines
and the consumer book publishing operations, the divestment of which was
completed during the year.
<TABLE>
<CAPTION>
1996 1997 1998
(restated) (restated)
--------------------------------
(in L millions)
<S> <C> <C> <C>
By category of activity
Net sales
Scientific 553 571 622
Professional 1,037 1,076 1,154
Business 1,307 1,340 1,387
--------------------------------
Continuing operations 2,897 2,987 3,163
Discontinued operations 484 430 28
--------------------------------
3,381 3,417 3,191
================================
Adjusted operating income
Scientific 231 230 223
Professional 268 296 330
Business 288 286 260
--------------------------------
Continuing operations 787 812 813
Discontinued operations 69 73 --
--------------------------------
856 885 813
================================
Adjusted operating income is before exceptional items and amortization of
goodwill and intangibles and includes amounts in respect of joint ventures (L18
million, L27 million and L22 million for the years ended December 31, 1998, 1997
and 1996 respectively).
Depreciation
Scientific 9 11 18
Professional 44 47 50
Business 26 27 29
--------------------------------
Continuing operations 79 85 97
Discontinued operations 10 11 --
--------------------------------
89 96 97
================================
Amortization of goodwill and intangible assets (including joint
ventures)
Scientific 34 51 89
Professional 87 97 119
Business 114 126 123
--------------------------------
Continuing operations 235 274 331
Discontinued operations 15 15 1
--------------------------------
250 289 332
================================
Amortization of goodwill and intangible assets in respect of joint
ventures included above 5 11 9
================================
</TABLE>
F-11
<PAGE>
3. Segment information - (continued)
<TABLE>
<CAPTION>
1996 1997 1998
(restated) (restated)
---------------------------------
(in L millions)
<S> <C> <C>
Total assets
Scientific 794 803
Professional 1,910 2,901
Business 1,237 1,275
Corporate 963 777
----------------------
Continuing operations 4,904 5,756
Discontinued operations 307 4
----------------------
5,211 5,760
======================
The corporate segment comprises assets maintained for general purposes,
principally cash balances and current asset investments.
Capital expenditure
Scientific 19 24
Professional 51 76
Business 41 61
----------------------
Continuing operations 111 161
Discontinued operations 12 --
----------------------
123 161
======================
Capital employed
Scientific 378 338
Professional 1,637 2,539
Business 563 773
----------------------
Continuing operations 2,578 3,650
Discontinued operations 187 (16)
----------------------
2,765 3,634
======================
Reconciliation of capital employed to combined shareholders' equity
Capital employed 2,765 3,634
Taxation (187) (297)
Dividends and net interest (250) (239)
Net borrowings (630) (962)
Minority interests (6) (6)
----------------------
Combined shareholders' equity 1,692 2,130
======================
By geographic origin
Net sales
North America 1,438 1,512 1,663
U.K. 654 694 692
The Netherlands 369 369 383
Rest of Europe 279 263 293
Asia/Pacific 157 149 132
------------------------------
Continuing operations 2,897 2,987 3,163
Discontinued operations 484 430 28
------------------------------
3,381 3,417 3,191
==============================
</TABLE>
F-12
<PAGE>
3. Segment information - (continued)
<TABLE>
<CAPTION>
1996 1997 1998
(restated) (restated)
---------------------------------
(in L millions)
<S> <C> <C> <C>
Adjusted operating income
North America 358 394 390
U.K. 199 207 204
The Netherlands 128 123 128
Rest of Europe 74 69 76
Asia/Pacific 28 19 15
---------------------------------
Continuing operations 787 812 813
Discontinued operations 69 73 --
---------------------------------
856 885 813
=================================
Total assets
North America 2,597 3,581
U.K. 1,262 1,406
The Netherlands 330 314
Rest of Europe 613 362
Asia/Pacific 102 93
----------------------
Continuing operations 4,904 5,756
Discontinued operations 307 4
----------------------
5,211 5,760
======================
Capital employed
North America 1,788 2,906
U.K. 632 579
The Netherlands (29) (46)
Rest of Europe 146 173
Asia/Pacific 41 38
----------------------
Continuing operations 2,578 3,650
Discontinued operations 187 (16)
----------------------
2,765 3,634
======================
By geographic market
Net sales
North America 1,523 1,582 1,726
U.K. 423 432 483
The Netherlands 192 208 222
Rest of Europe 414 401 407
Asia/Pacific 345 364 325
---------------------------------
Continuing operations 2,897 2,987 3,163
Discontinued operations 484 430 28
---------------------------------
3,381 3,417 3,191
=================================
</TABLE>
F-13
<PAGE>
4. Significant acquisitions
During the three years ended December 31, 1998, Reed Elsevier spent L2,274
million (including deferred consideration) on the acquisition of publishing and
information businesses. In the year ended December 31, 1998, acquisitions were
made for a total of L1,219 million after taking account of L13 million of net
cash acquired. L2 million of the consideration has been deferred to future
years. In total, L1,232 million was paid during the year ended December 31,
1998, including L14 million paid in respect of acquisitions made in previous
years, and L1 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 L101 million. The fair value of the
net assets acquired, excluding goodwill, was L39 million.
In November, 1996 L157 million was invested in a joint venture with Times
Mirror Company to own and operate Shepard's, a U.S. legal citation business. The
fair value of net assets acquired, excluding goodwill, was L69 million.
In April , 1997 MDL Information Systems Inc, a provider of scientific
information management systems, was acquired for $320 million (L195 million).
The fair value of the net assets acquired, excluding goodwill, was L16 million.
In September, 1997 the Chilton Business Group, a business information
publisher, was purchased for $447 million (L273 million). The fair value of the
net assets acquired, after hindsight adjustments in 1998, excluding goodwill,
was L147 million.
In August, 1998 Matthew Bender, a publisher of legal analysis and case law,
and the remaining 50% equity in Shepard's, was purchased for $1.65 billion (L994
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.
The fair value adjustments for Matthew Bender and Shepard's are:
<TABLE>
<CAPTION>
Book value
on Fair value
acquisition adjustments Fair value
--------------------------------------
(in L millions)
<S> <C> <C> <C>
Goodwill 157 632 789
Intangible fixed assets 126 208 334
Tangible fixed assets 36 (13) 23
Current assets 53 (4) 49
Current liabilities (74) 1 (73)
Deferred tax 1 3 4
---------------------------------
Net assets acquired (including 100% of Shepard's) 299 827 1,126
======================
Less: transfer from investment in joint venture (50% of Shepard's) (132)
-------------
Consideration (after taking account of L3 million of net cash 994
acquired) =============
</TABLE>
Before exceptional acquisition related integration costs and the
amortization of goodwill and intangible assets, Matthew Bender and 50% of
Shepard's contributed L60 million to turnover, L22 million to adjusted operating
income and L27 million to net cash flow from operating activities for the 5
months under Reed Elsevier plc ownership. The historical results in U.S. dollars
for Matthew Bender and a 50% share in Shepard's in 1998 and 1997 whilst not
under Reed Elsevier ownership were:
7 months
Year ended ended
December 31, July 31,
1997 1998
---- ----
(in $ millions)
Net sales 227 126
Operating income (before exceptional items and amortization) 78 34
==================
F-14
<PAGE>
4. Significant acquisitions - (continued)
Other acquisitions
During the year a number of other acquisitions were made for a total
consideration amounting to L225 million, after taking account of L10 million of
net cash acquired. The most significant were the PGA Merchandise Show and PGA
International Golf Show, Engineering Information Inc., and Beilstein
Informationssysteme GmbH. L2 million of the consideration has been deferred to
future years.
The fair value adjustments for other acquisitions during the year ended
December 31, 1998 are:
Book value
on Fair value
acquisition adjustments Fair value
------------------------------------
(in L millions)
Goodwill -- 147 147
Intangible fixed assets -- 91 91
Tangible fixed assets 4 (2) 2
Current assets 11 (3) 8
Current liabilities (22) -- (22)
Deferred tax (1) -- (1)
----------------------------------
Net assets acquired (8) 233 225
==================================
Consideration (after taking account
of L10 million of net cash acquired) 225
==========
Before exceptional acquisition related integration costs and the
amortization of goodwill and intangible assets, the other businesses acquired in
1998 contributed L40 million to net sales, L9 million to operating income and
L14 million to net cash inflow from operating activities for the period under
Reed Elsevier plc ownership.
Finalisation of the fair value exercise and disposal of certain assets held
for resale in respect of acquisitions in previous years, resulted in an increase
in goodwill and intangible assets of L5 million.
5. Exceptional items
<TABLE>
<CAPTION>
1996 1997 1998
(restated)(restated)
--------------------------------
(in L millions)
<S> <C> <C> <C>
Reed Travel Group -- provision for customer recompense and related
expenses and reorganization -- (230) --
-- non-cash write down of intangible assets -- (250) --
Acquisition related integration costs -- (11) (26)
Year 2000 compliance costs -- (11) (53)
--------------------------------
Charged to operating income -- (502) (79)
--------------------------------
Continuing
-- Net profit on sale of businesses 23 57 --
-- Merger expenses -- (3) (10)
-- Net profit on disposal of fixed assets 1 -- --
Discontinued
--Net profit on sale of businesses -- -- 692
--------------------------------
Credited after operating income 24 54 682
--------------------------------
Total exceptional items credit/(charge) 24 (448) 603
================================
Net tax credit/(charge) 1 115 (70)
================================
</TABLE>
F-15
<PAGE>
5. Exceptional items - (continued)
Exceptional items in the three years ended December 31, 1998 relate to the
following:
(i) costs of L26 million (1997 L11 million; 1996 Lnil) relating to the
integration of acquisitions, principally the Chilton Business Group
and Matthew Bender;
(ii) expenditure of L53 million in 1998 (1997 L11 million; 1996 Lnil) in
connection with the Combined Businesses' Year 2000 compliance program;
(iii)in 1998 the net profit on sale of IPC Magazines divested in January
1998;
(iv) professional fees and other costs incurred in 1998 of L10 million
(1997 L3 million; 1996 Lnil) in respect of the abandoned merger of
Reed Elsevier and Wolters Kluwer;
(v) in 1997 a provision of L230 million, less tax relief of approximately
L87 million, in respect of the estimated cost of programs to
recompense advertizers affected by irregularities in circulation
claims for certain Reed Travel Group publications together with
related expenses and reorganization costs and a non-cash write down of
L250 million in intangible asset values;
(vi) in 1997 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;
(vii)in 1996 the net profit, on which no tax was payable, arising from the
divestments of surplus property interests and the net profit on the
sale of certain non core businesses; and
(viii)the disposal of the consumer book publishing operations, which
commenced in 1995 and was completed in 1998; after taking account of
provisions made in 1995 no further gain or loss was recognized in any
of the three years ended December 31, 1998.
The exceptional profit before tax on sale of businesses in 1997 and 1996
has been restated (increases of L29 million and L23 million respectively) to
reflect the cumulative goodwill and intangible asset amortization prior to sale
under FRS 10; see note 1.
Exceptional net inflows in 1998 totalled L647 million. This comprised
disposal proceeds, after reorganization and selling expenses, for IPC Magazines
(L826 million) and consumer books (L87 million) after net cash disposed of L42
million to fund taxation and working capital obligations; payments relating to
acquisition related integration costs (L22 million), Year 2000 costs (L53
million) and merger expenses (L8 million); and payments (L183 million) in
respect of Reed Travel Group customer recompense and reorganization, provided
for in 1997.
In 1997, exceptional net cash inflows totalled L54 million, after payments
of L21 million, for which appropriate provision had been made in 1996, in
relation to the disposal of surplus property interests.
In 1996, exceptional net cash inflows totalled L456 million, which included
net proceeds of L394 million in respect of disposals of consumer and other non
core businesses in 1995 and 1996. Net cash of L62 million was also generated
from the disposal of surplus property interests.
F-16
<PAGE>
6. Adjusted figures
In order to provide a more meaningful measure of underlying performance,
"adjusted" figures are presented which exclude all exceptional items and the
amortization of goodwill and intangible assets and related tax effects.
The adjustments in arriving at adjusted income are detailed below:
<TABLE>
<CAPTION>
1996 1997 1998
(restated) (restated)
--------------------------------
(in L millions)
<S> <C> <C> <C>
Income before tax 579 86 1,044
Adjustments:
Reed Travel Group
--provision for customer recompense and related expenses and
reorganization -- 230 --
--non-cash write down of intangible assets -- 250 --
Acquisition related integration costs -- 11 26
Year 2000 compliance costs -- 11 53
Net profit on sale of businesses (23) (57) (692)
Merger expenses -- 3 10
Net profit on disposal of fixed assets (1) -- --
Amortization of goodwill and intangible assets 250 289 332
--------------------------------
Adjusted income before tax 805 823 773
================================
Net income 366 (14) 772
Adjustments:
Reed Travel Group
--provision for customer recompense and related expenses and
reorganization -- 143 --
--non-cash write down of intangible assets -- 210 --
Acquisition related integration costs -- 7 16
Year 2000 compliance costs -- 7 33
Net profit on sale of businesses (24) (38) (592)
Net profit on disposal of fixed assets (1) -- --
Merger expenses -- 3 10
Amortization of goodwill and intangible assets 262 290 332
--------------------------------
Adjusted net income 603 608 571
================================
7. Operating income (including joint ventures)
1996 1997 1998
--------------------------------
(in L millions)
Operating income is arrived at after charging:
Operating lease rentals 69 61 60
Advertising and promotion 157 147 134
Royalties expense 112 124 128
8. Interest expense
1996 1997 1998
--------------------------------
(in L millions)
On loan capital (72) (59) (51)
On promissory notes, bank loans and overdrafts (36) (40) (52)
On capital leases (1) (1) (1)
--------------------------------
(109) (100) (104)
================================
</TABLE>
F-17
<PAGE>
9. Taxes on income
(a) Taxes on income charged to earnings were as follows:
<TABLE>
<CAPTION>
1996 1997 1998
(restated) (restated)
--------------------------------
(in L millions)
<S> <C> <C> <C>
U.K. taxation
Current 71 76 68
Deferred 3 (3) 1
Dutch taxation
Current 51 50 45
Deferred -- -- 4
Rest of world taxation
Current 70 70 5
Deferred -- 12 72
Share of tax attributable to joint ventures 6 9 6
--------------------------------
Total taxes on adjusted income before exceptional items and amortization
of goodwill and intangible assets 201 214 201
--------------------------------
Net deferred tax on amortization of goodwill and intangible assets 12 -- --
Exceptional items
Current -- 5 70
Deferred (1) (120) --
--------------------------------
212 99 271
================================
(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.
1996 1997 1998
(restated) (restated)
--------------------------------
(in L millions)
Income before taxes
United Kingdom 225 224 219
The Netherlands 159 150 149
Rest of world 421 449 405
Amortization of goodwill and intangible assets (250) (289) (332)
Exceptional items 24 (448) 603
--------------------------------
579 86 1,044
================================
Tax charged at local statutory rates 167 (11) 299
Net impact of amortization of goodwill and intangible assets 48 95 64
Tax credit on dividend from Reed Elsevier plc to Elsevier NV (3) (2) --
Permanent differences and other items -- 13 18
Exceptional items not taxed -- 4 (110)
--------------------------------
Actual tax charge 212 99 271
================================
</TABLE>
The total tax charge for the year has been reduced by L51 million (1997 L44
million; 1996 L42 million) in respect of allowances on publishing intangibles.
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-18
<PAGE>
9. Taxes on income - (continued)
(c) Deferred taxation
The closing balance is analyzed as follows:
<TABLE>
<CAPTION>
1997 1998
----------------------
(in L millions)
<S> <C> <C>
Deferred tax liabilities
Pension prepayment (39) (37)
Other timing differences (14) (4)
----------------------
(53) (41)
----------------------
Deferred tax assets
Excess of tax allowances over amortization 1 2
Acquisition and other provisions 129 38
----------------------
130 40
----------------------
Total assets/(liabilities) 77 (1)
======================
Deferred taxation is provided in full for timing differences using the
liability method.
No provision is made for the tax which would become payable on the
distribution of retained earnings by foreign subsidiaries, joint ventures or
associates as there is no present intention to distribute such retained earnings
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
1996 1997 1998
--------------------------------
(in L millions)
Reed International P.L.C. 156 167 172
Elsevier NV 192 198 177
--------------------------------
Combined 348 365 349
================================
Dividends comprise the total dividend for Reed International of 15.0 pence
per share (1997 14.6 pence per share; 1996 13.6 pence per share after adjusting
for the two for one share subdivision which became effective on May 2, 1997) and
the total dividend for Elsevier of Dfl0.87 per share (1997 Dfl0.95 per share;
1996 Dfl0.76 per share).
Dividends paid to Reed International and Elsevier shareholders are
equalized at the gross level inclusive of the U.K. tax credit (currently 20%,
reducing to 10% on April 6, 1999 and applicable for the 1998 final dividend)
received by certain Reed International shareholders. The cost of funding the
Reed International dividend is, therefore, lower than that of Elsevier.
11. Trade receivables
1997 1998
----------------------
(in L millions)
Trade accounts 559 549
Less provisions (39) (45)
----------------------
520 504
======================
</TABLE>
F-19
<PAGE>
12. Inventories
<TABLE>
<CAPTION>
1997 1998
-------------------------
(in L millions)
<S> <C> <C>
Raw materials 22 17
Work in progress 27 25
Finished goods 72 59
-------------------------
121 101
=========================
13. Prepaid expenses and other current assets
1997 1998
-------------------------
(in L millions)
Amounts owed by joint ventures 2 1
Deferred tax 57 --
Corporation tax recoverable -- 56
Advance corporation tax 42 13
Other receivables 61 48
Prepayments and accrued income 115 109
-------------------------
277 227
=========================
14. Non current receivables
1997 1998
-------------------------
(in L millions)
Trade receivables 7 10
Deferred tax 20 --
Pension prepayment 133 124
Prepayments, accrued income and other receivables 5 2
-------------------------
165 136
=========================
15. Investments held as fixed assets
1997 1998
(restated)
-------------------------
(in L millions)
Investments in joint ventures 249 75
Other investments 15 12
-------------------------
264 87
=========================
</TABLE>
Investments in joint ventures principally comprise Reed Elsevier's
interests in Giuffre (a 40% shareholding in an Italian legal publisher) and
REZsolutions Inc. (a 67% shareholding in a hotel reservation and marketing
business). Book Club Associates (a 50% investment in a U.K. partnership) was
sold during the year. On August 1, 1998, the 50% interest in Shepard's with a
net book value of L132 million, comprising L138 million of goodwill and
intangible assets less a L6 million share of net liabilities, was consolidated
on acquisition of the remaining 50% interest.
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.
F-20
<PAGE>
16. Property, plant and equipment
<TABLE>
<CAPTION>
Plant,
Equipment
Land and & Computer
Buildings Systems Total
-----------------------------------
(in L millions)
<S> <C> <C> <C>
Cost
At December 31, 1997 148 623 771
Additions 8 153 161
Acquisitions 14 11 25
Sale of businesses -- (66) (66)
Disposals (4) (48) (52)
Exchange differences -- 6 6
-----------------------------------
At December 31, 1998 166 679 845
===================================
Accumulated depreciation
At December 31, 1997 40 383 423
Charge for the year 5 92 97
Sale of businesses -- (36) (36)
Disposals (3) (38) (41)
Exchange differences -- 3 3
-----------------------------------
At December 31, 1998 42 404 446
===================================
Net book amounts
At December 31, 1998 124 275 399
===================================
At December 31, 1997 108 240 348
===================================
The cost of land and buildings comprises:
1997 1998
-------------------------
(in L millions)
Freehold property 127 133
Leasehold property, more than 50 years unexpired 18 18
Leasehold property, less than 50 years unexpired 3 15
-------------------------
148 166
=========================
</TABLE>
At December 31, 1998 and 1997, all assets were included at cost. No
depreciation has been provided on land (L13 million (1997 L10 million)). The net
book amount includes L15 million (1997 L9 million) in respect of assets held
under capital leases.
F-21
<PAGE>
17. Goodwill and intangible assets
<TABLE>
<CAPTION>
1997 1998
-------------------------
(in L millions)
<S> <C> <C>
At January 1 as originally reported 2,550 2,501
Prior year adjustment (adoption of FRS 10; see note 1) (30) 171
-------------------------
At January 1 as restated 2,520 2,672
-------------------------
Additions 705 1,228
Transfer (to)/from joint ventures (19) 138
Disposals (31) (132)
Exceptional write down of Reed Travel Group intangibles (250) --
Amortization (278) (323)
Exchange differences 25 15
-------------------------
At December 31 as restated 2,672 3,598
=========================
18. Borrowings
1997 1998
-------------------------
(in L millions)
Bank loans, overdrafts and commercial paper
Drawn under facilities expiring in year to December 31,
1998 320 --
1999 -- 53
2000 -- 1
Commercial paper 459 915
-------------------------
779 969
=========================
Year end
interest
Currency rates 1997 1998
------------------------------------------------
% (in L millions)
Other loans
Eurobond 1999 U.S. dollar 7.50 121 121
Medium term notes 1999 U.S. dollar 7.66-7.76 12 12
Private placement 1999 Guilders 9.70 41 42
Private placement 2000 U.S. dollar 9.71 60 60
Public notes 2000 U.S. dollar 6.63 90 90
Private placement 2003 U.S. dollar 8.50 76 76
Public notes 2005 U.S. dollar 7.00 90 90
Private placement 2023 U.S. dollar 6.63 90 90
Public debentures 2025 U.S. dollar 7.50 90 90
Finance leases Various Various 8 13
Miscellaneous Guilders Various 17 17
------------------------
695 701
========================
</TABLE>
F-22
<PAGE>
18. Borrowings - (continued)
<TABLE>
<CAPTION>
Bank loans,
overdrafts and
commercial Other
paper loans Total
----------------------------------------
(in L millions)
<S> <C> <C> <C>
Analysis by year of repayment
Within 1 year 968 182 1,150
----------------------------------------
Within 1 to 2 years 1 156 157
Within 2 to 3 years -- 4 4
Within 3 to 4 years -- 4 4
Within 4 to 5 years -- 76 76
Thereafter -- 279 279
----------------------------------------
1 519 520
----------------------------------------
Total 969 701 1,670
========================================
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
within 1 after 1
year year Total
------------------------------------
(in L millions)
Undrawn bank facilities at December 31, 1998
Overdraft 106 -- 106
Uncommitted lines of credit 257 -- 257
Undrawn committed facilities -- 558 558
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.
1997 1998
-------------------------
Short term loans, overdrafts and commercial paper
Weighted average interest rate during year 5.8% 5.2%
Year end weighted average interest rate 6.3% 5.2%
</TABLE>
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-23
<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 is 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 L2 million at December 31, 1998.
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 December December December
31, 1997 31, 1997 31, 1998 31, 1998
------------------------------------------------
(in L millions)
<S> <C> <C> <C> <C>
Assets:
Cash 110 110 26 26
Short term investments 734 734 682 682
Liabilities:
Bank loans, overdrafts and commercial paper (779) (779) (969) (969)
Other loans (695) (721) (701) (741)
Off balance sheet:
Interest rate swaps -- (1) -- (12)
Currency swaps 1 (2) -- --
Forward rate agreements -- -- -- 2
Forward foreign exchange contracts -- 2 -- 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 and forward rate agreements represent the replacement cost calculated
using market rates of interest as at December 31, 1998 and 1997.
The gross notional amounts of interest rate swaps are as follows:
<TABLE>
<CAPTION>
December New Maturities/ December
31, 1997 Contracts terminations 31, 1998
------------------------------------------------
(in L millions; stated at exchange rates
prevailing at December 31, 1998)
Interest rate swaps
<S> <C> <C> <C> <C>
U.S. dollar 241 210 (90) 361
Australian dollar 19 -- (6) 13
Canadian dollar 3 -- -- 3
French franc 102 -- (8) 94
Guilder 99 -- (64) 35
---------------------------------------------
Totals 464 210 (168) 506
=============================================
</TABLE>
F-24
<PAGE>
19. Financial instruments - (continued)
The amounts of future maturities and outstanding notional principal of the
above interest rate swap agreements are as follows:
Outstanding
Maturities in notional
year ending principal at
December 31, December 31,
------------------------------
(in L millions)
1999 75 431
2000 115 316
2001 60 256
2002 226 30
Thereafter 30 --
-----------
506
===========
The weighted average interest rates on interest rate swap agreements in
existence at December 31, 1998 are shown below:
U.S.$ AUD Dfl CAD FFr
---------------------------------------------------------
Interest Rate Swaps
Pay Fixed 6.07% 7.05% -- 8.24% 4.40%
Receive Floating 4.99% 4.74% -- 5.36% 3.56%
Pay Floating -- -- 4.33% -- --
Receive Fixed -- -- 9.95% -- --
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, 1998. 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, 1998, Reed Elsevier had one swap contract with a notional
amount of CAD 8 million (L3 million) that contained an embedded written interest
rate option at December 31, 1998. 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 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, 1998, the gross notional amount of forward rate agreements
totalled L698 million. The individual agreements covered periods of between 91
days and seven months with periods ending on dates between May 28, 1999 and
April 25, 2000. The agreements are denominated in Dutch guilders (Dfl400
million) and sterling (L570 million); the agreements do not run concurrently and
therefore, the notional amounts at any one time are less than those indicated in
aggregate.
Average
December New December rate
31, 1997 contracts Maturities 31, 1998 receivable
------------------------------------------------------------
(in L millions, stated at exchange rates prevailing at
December 31, 1998)
Guilders 128 128 (128) 128 3.50%
Sterling -- 1,398 (828) 570 6.10%
------------------------------------------------
128 1,526 (956) 698
================================================
F-25
<PAGE>
19. Financial instruments -- (continued)
At December 31, 1998, the gross notional amount of forward foreign exchange
contracts totalled L898 million (1997: L469 million) as shown below:
1997 1998
------------------------------------------------
Currency Currency Currency Currency
sold bought sold bought
------------------------------------------------
(in L millions)
U.S. dollars 174 39 356 33
Guilders 31 12 43 224
Sterling 2 143 23 144
Other currencies 26 42 26 49
------------------------------------------------
233 236 448 450
================================================
Of the total gross amount, L871 million mature within one year and L27
million after one year.
20. Obligations under capital leases
The future capital lease payments to which the combined businesses are
committed are:
1997 1998
------------------------
(in L millions)
Repayable
Within 1 year 4 3
Between 1 and 2 years 3 3
Between 2 and 5 years 2 4
Over 5 years -- 9
Less: interest charges allocated to future period (1) (6)
------------------------
Total 8 13
========================
Obligations included in short term borrowings and
current portion of long term borrowings 4 3
------------------------
Obligations included in long term borrowings, less
current portion 4 10
------------------------
21. Accounts payable and accrued liabilities
1997 1998
-------------------------
(in L millions)
Accounts payable 187 148
Subscriptions received in advance 418 476
Interest payable 2 --
Accrued salaries 48 57
Accruals 369 425
Other creditors 107 150
-------------------------
1,131 1,256
=========================
F-26
<PAGE>
22. Provisions for liabilities and charges
<TABLE>
<CAPTION>
Losses Pensions
on sale and Reed
of severance Travel
business Acquisitions pay Group Other Total
-----------------------------------------------------------
(in L millions)
<S> <C> <C> <C> <C> <C> <C>
At December 31, 1997 as reported 22 14 9 220 5 270
Prior year adjustment (adoption of FRS 10; see
note 1) 10 -- -- -- -- 10
------------------------------------------------------------
At December 31, 1997 as restated 32 14 9 220 5 280
------------------------------------------------------------
Provided -- -- 1 -- -- 1
Utilized/transferred (32) (11) (10) (187) (5) (245)
------------------------------------------------------------
At December 31, 1998 -- 3 -- 33 -- 36
============================================================
</TABLE>
23. Combined share capitals
<TABLE>
<CAPTION>
Issued and Issued and
Authorised Fully Paid Fully Paid
------------------------------------
1998 1997 1998
------------------------------------
(in L millions)
<S> <C> <C> <C>
Reed International
Preference shares (cumulative) at L1.00 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) 143 143 143
Unclassified shares of 12.5p each (previously 25p) 41
------------------------------------
Total 188 147 147
====================================
</TABLE>
Following the resolution at the Annual General Meeting in April 1997, Reed
International undertook a two for one subdivision of its Ordinary Shares which
became effective on May 2, 1997.
A proposal will be put to shareholders at the Annual General Meeting in
April 1999 to repay and cancel the company's preference shares.
Issued and Issued and
Authorised Fully Paid Fully Paid
------------------------------------
1998 1997 1998
------------------------------------
(in Dfl millions)
Elsevier
Ordinary shares of Dfl0.10 each 210 67 67
====================================
The Reed International preference share capital of L4 million represents
non-equity share capital and is the extent of the non-equity interest in
combined shareholders' equity.
Combined share capitals of L168 million (1997 L167 million) exclude the
R-shares of Elsevier held indirectly by Reed International.
F-27
<PAGE>
Details of share option schemes separately operated by Reed International
and Elsevier are presented in the notes to their respective financial
statements.
24. Leasing commitments
The annual commitments under operating leases at December 31, 1998 are:
<TABLE>
<CAPTION>
Land and
Buildings Other
-------------------------
(in L millions)
<S> <C> <C>
Expiry of operating leases-- falling due within 1 year 4 1
Expiry of operating leases-- falling due within 2 to 5 years 18 3
Expiry of operating leases-- falling due after 5 years 30 --
-------------------------
52 4
=========================
</TABLE>
25. Contingent liabilities
There are contingent liabilities amounting to L32 million (1997 L33
million) in respect of borrowings of former subsidiaries and Lnil million (1997
L8 million) in respect of borrowings of joint ventures.
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:
<TABLE>
<CAPTION>
<S> <C> <C>
Actuarial method -- projected unit method
Annual rate of return on investments -- 8.0%
Annual increase in total pensionable remuneration -- 6.0%
Annual rate of return -- 3.5%
Annual increase in present and future pensions in payment -- 4.0%
</TABLE>
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 L1,293 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.
The net pension charge was L22 million (1997 L25 million; 1996 L17
million), including a net L4 million (1997 L1 million, 1996 L7 million) SSAP 24
credit related to the main U.K. scheme. The net SSAP 24 credit comprises a
regular cost of L15 million (1997 L19 million, 1996 L17 million), offset by
amortization of the net actuarial surplus of L19 million (1997 L20 million, 1996
L24 million). Pension contributions made in the year amounted to L26 million
(1997 L26 million, 1996 L24 million). The transfer of members from the main U.K.
scheme on divestment of IPC Magazines reduced the actuarial surplus and
prepayment by L13 million. A prepayment of L124 million (1997 L133 million, 1996
L132 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.
F-28
<PAGE>
27. Statements of cash flows
<TABLE>
<CAPTION>
1996 1997 1998
-----------------------------------
(in L millions)
<S> <C> <C> <C>
Financing
Issue of ordinary shares 35 21 18
Issuance of long term borrowings -- 4 2
Repayment of long term borrowings (80) (151) (3)
Redemption of minority interest preference shares -- (3) --
Redemption of capital leases (8) (6) (6)
Net movement in promissory notes and bank loans 43 255 181
-----------------------------------
(10) 120 192
===================================
</TABLE>
The repayment of long term borrowings relates to L3 million of Dutch
guilder loan stock which matured during the year. In 1997 a US$150 million
Eurobond and US$80 million of medium term notes were repaid on maturity. In 1996
a $125 million Eurobond was repaid on maturity.
Current
asset
Cash investments Borrowings Total
-------------------------------------------
Reconciliation of net debt (in L millions)
At December 31, 1996 85 1,056 (1,337) (196)
-------------------------------------------
Cashflow 29 (299) (102) (372)
Inception of capital leases -- -- (2) (2)
Loans in acquired businesses -- -- (10) (10)
Exchange translation differences (4) (23) (23) (50)
-------------------------------------------
At December 31, 1997 110 734 (1,474) (630)
-------------------------------------------
Cashflow (84) (63) (174) (321)
Inception of capital leases -- -- (10) (10)
Exchange translation differences -- 11 (12) (1)
-------------------------------------------
At December 31, 1998 26 682 (1,670) (962)
===========================================
Borrowings comprise loan capital, capital leases, promissory notes and bank
loans and are further analyzed in note 18.
Discontinued operations contributed Lnil (1997: L80 million, 1996: L93
million) to net cash inflow from operating activities.
1996 1997 1998
--------------------------------
Acquisitions (in L millions)
Purchase of subsidiary undertakings (including
deferred consideration from prior years) (155) (713) (1,231)
Investment in joint ventures (157) (12) --
Purchase of fixed asset investments (4) (1) (1)
--------------------------------
Total (316) (726) (1,232)
================================
In 1997, of the L12 million additions to joint ventures, L10 million
represents a cash contribution to the joint venture REZsolutions Inc., on its
formation.
F-29
<PAGE>
27. Statements of cash flows - (continued)
Exceptional net proceeds from sale/closure of businesses
<TABLE>
<CAPTION>
1996 1997 1998
(restated) (restated)
------------------------------------
(in L millions)
<S> <C> <C> <C>
Goodwill and intangible assets 9 49 132
Net tangible assets 31 -- 72
Provision made for losses on sale of businesses -- (10) --
Net profit 23 57 692
------------------------------------
Consideration in respect of sale of businesses, net of expenses 63 96 896
Deferred consideration, net of expenses paid, received in respect of
prior years' disposals 339 10 9
------------------------------------
402 106 905
Amounts payable/(receivable) (2) (2) 8
Satisfied by transfer of investments. (6) -- --
------------------------------------
Net cash inflow 394 104 913
====================================
</TABLE>
F-30
<PAGE>
28. Summary of differences between U.K. and Dutch GAAP and U.S. GAAP
The combined financial statements are prepared in accordance with U.K. and
Dutch GAAP, which differ in certain significant respects from 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.
Goodwill and other intangible assets
In prior years, under U.K. and Dutch GAAP, goodwill arising on business
combinations treated as acquisitions was written off against retained earnings.
Other intangibles, principally publishing rights and titles, databases and
exhibition rights, were carried at fair value on acquisition, subject to
impairment reviews but with no systematic amortization.
Under U.S. GAAP, goodwill and other intangible assets acquired after
October 31, 1970 are required to be amortized over the period of their estimated
useful lives, to a maximum of 40 years.
For the 1998 fiscal year, Reed Elsevier has adopted the new U.K. financial
reporting standard FRS10: Goodwill and Intangible Assets, and has accordingly
changed its accounting policy for goodwill and intangible assets; see note 1.
Under the new policy -- which has been applied retrospectively and under U.K.
and Dutch GAAP has resulted in a restatement of the financial position and
results of prior periods -- acquired goodwill and intangible assets are
capitalized and amortized through the income statement over their estimated
useful lives, up to a maximum of 20 years. In view of this and the consideration
given to the determination of appropriate prudent assets lives, the remaining
asset lives for U.S. GAAP purposes have been reviewed and determined
consistently with those adopted for the new U.K. and Dutch GAAP treatment.
This re-evaluation of asset lives under U.S. GAAP, which is effective from
January 1, 1998, has significantly increased the periodic amortization charge,
as the unamortized value of existing assets, which were previously being
amortized over periods up to 40 years, are now being amortized over shorter
periods. As a result of the restatement of the prior period U.K. and Dutch GAAP
financial position and results, the U.S. GAAP adjustments have been restated
accordingly.
In the year ended December 31, 1998, this has resulted in a non-recurring
amortization charge of L266 million attributable to goodwill and intangible
assets which have been fully written off in the year as a consequence of the
re-evaluation of asset lives.
The gross cost under U.S. GAAP, as at December 31, 1998, of goodwill is
L2,958 million (1997 L1,994 million) and of other intangibles including those
held in joint ventures is L3,161 million (1997 L3,014 million). Accumulated
amortization under U.S. GAAP, as at December 31, 1998, of goodwill is L877
million (1997 L565 million) and of other intangibles including those held in
joint ventures is L994 million (1997 L653 million).
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 using
the liability method. There is no material difference between this full
provision policy and the partial provision method required under U.K. GAAP.
Under U.S. GAAP, deferred taxation is provided on all temporary differences
under the liability method, subject to a valuation allowance on deferred tax
assets where applicable, in accordance with SFAS 109, Accounting for Income
Taxes. The principal adjustment to apply U.S. GAAP is to provide deferred
taxation on temporary differences arising from amortization as applied under
U.S. GAAP of goodwill and intangible assets.
Acquisition accounting
Prior to the introduction of U.K. financial reporting standard 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.
F-31
<PAGE>
28. Summary of differences between U.K. and Dutch GAAP and U.S. GAAP -
(continued)
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.
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, 1998, L602 million (1997 L602 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 incidence.
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 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
SFAS 133: Accounting for Derivative Instruments and Hedging Activities, was
issued in June 1998. The standard requires all derivative instruments to be
valued at fair value in the balance sheet and is effective for financial years
beginning after June 15, 1999. Changes in fair value are accounted for through
the income statement or comprehensive income statement depending on whether the
derivative is designated as a hedging instrument and, if appropriate, its
effectiveness as a hedging instrument. The impact of adopting the standard
cannot be reasonably estimated at this time. Under U.K. and Dutch GAAP the fair
value of derivative instruments is a disclosure item and is not accounted for in
the financial statements.
F-32
<PAGE>
28 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:
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------
1996 1997 1998
(restated) (restated)
------------------------------------
(in L millions)
<S> <C> <C> <C>
Net income under U.K. and Dutch GAAP as originally reported 604 207 772
Prior year adjustment (adoption of FRS 10; see note 1) (238) (221) --
------------------------------------
Net income under U.K. and Dutch GAAP as restated 366 (14) 772
------------------------------------
U.S. GAAP adjustments:
Amortization of goodwill and other intangibles 125 1 (477)
Deferred taxation (16) 32 77
Acquisition accounting (9) (1) (10)
Sale and lease back 14 1 6
Pensions 15 23 30
Other (2) 1 --
------------------------------------
Net income under U.S. GAAP 493 43 398
====================================
Analyzed:
Continuing operations 450 3 (122)
Discontinued operations
--income from operations 43 40 (1)
--gain on sales -- -- 521
------------------------------------
493 43 398
====================================
</TABLE>
Approximate effects on combined shareholders' equity of differences between U.K.
and Dutch GAAP and U.S. GAAP:
At December 31,
-------------------------
1997 1998
(restated)
-------------------------
(in L millions)
Combined shareholders' equity under U.K. and Dutch GAAP 1,494 2,130
as originally reported
Prior year adjustment (adoption of FRS 10; see note 1) 198 --
--------------------
Combined shareholders' equity under U.K. and Dutch GAAP 1,692 2,130
as restated
--------------------
U.S. GAAP adjustments:
Goodwill and other intangibles 925 637
Deferred taxation (127) (242)
Acquisition accounting 19 8
Pensions 26 57
Other (12) (1)
Ordinary dividends not declared in the period 251 244
--------------------
Combined shareholders' equity under U.S. GAAP 2,774 2,833
====================
F-33
<PAGE>
28. 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, dividends received from joint ventures and servicing of finance
would be included within operating activities under SFAS 95. Under SFAS 95 cash
is aggregated for cash flow statements with cash equivalents being short term
investments with original maturities of three months or less.
Under U.S. GAAP, the following amounts would be reported:
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------
1996 1997 1998
-----------------------------------
(in L millions)
<S> <C> <C> <C>
Net cash provided by operating activities (including
joint ventures) 721 708 501
Net cash provided/(used) in investing activities 18 (762) (478)
Net cash used in financing activities (278) (244) (428)
------------------------------------
Net increase/(decrease) in cash and cash equivalents 461 (298) (405)
====================================
Reconciliation of cash and cash equivalents:
Cash under U.K. and Dutch GAAP 85 110 26
Current asset investments with original maturity within
3 months 1,054 704 394
------------------------------------
Cash and cash equivalents under U.S. GAAP 1,139 814 420
====================================
</TABLE>
Comprehensive Income Information
SFAS 130: Reporting Comprehensive Income, requires that all items that are
required to be recognized as components of comprehensive income under U.S.
accounting standards are reported in a separate financial statement. There are
no material differences between total recognized gains and losses for the
financial year shown in the Statements of Total Recognized Gains and Losses,
presented under U.K. and Dutch GAAP, and U.S. GAAP comprehensive income.
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.
F-34
<PAGE>
28. Summary of differences between U.K. and Dutch GAAP and U.S. GAAP -
(continued)
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,
-------------------------
1997 1998
-------------------------
(in L millions)
Service costs-- benefits earned during the year 20 22
Interest cost on projected benefit obligations 78 68
Actual return on plan assets (105) (102)
Net amortization and deferral (18) (21)
-------------------------
Net periodic pension credits (25) (33)
=========================
The following table sets forth the funded status under SFAS 87 of the main
U.K. scheme:
At December 31,
-----------------------
1997 1998
-----------------------
(in L millions)
Projected benefit obligation (924) (1,205)
Plan assets at fair value 1,462 1,530
-----------------------
Plan assets in excess of projected benefit obligation 538 325
Unrecognized net gain (329) (120)
Unrecognized net transition asset (64) (51)
Unrecognized prior service cost 14 23
-----------------------
Prepaid pension cost 159 177
=======================
At December 31,
-------------------------
1997 1998
-------------------------
(in L millions)
Projected benefit obligation
Balance at January 1 897 924
Service cost 20 22
Interest cost 78 68
Prior service cost -- 20
Plan amendments -- --
Actuarial (loss)/gain (33) 288
Contributions 5 4
Disbursements (43) (46)
SFAS 88 events -- (75)
-------------------------
Balance at December 31 924 1,205
=========================
F-35
<PAGE>
28. Summary of differences between U.K. and Dutch GAAP and U.S. GAAP -
(continued)
At December 31,
-------------------------
1997 1998
-------------------------
(in L millions)
Fair value of assets
Balance at January 1 1,277 1,462
Actual return 223 221
Contributions 5 4
Disbursements (43) (46)
SFAS 88 events -- (111)
-------------------------
Balance at December 31 1,462 1,530
=========================
At December 31,
-------------------------
1997 1998
-------------------------
(in L millions)
Prepaid pension cost
Balance at January 1 134 159
Net Periodic Cost 25 33
SFAS 88 events -- (15)
-------------------------
Balance at December 31 159 177
=========================
The principal assumptions used were:
1997 1998
-------------------------
Discount rate 8% 7%
Salary increases 6% 5.5%
Investment return 8% 8%
Pension increases 4% 3.5%
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,
-------------------------
1997 1998
-------------------------
(in L millions)
Service costs--benefits earned during the year 9 13
Interest cost on projected benefit obligations 10 11
Actual return on plan assets (24) (17)
Net amortization and deferral 14 4
-------------------------
Net periodic pension cost 9 11
=========================
F-36
<PAGE>
28. 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,
-----------------------
1997 1998
-----------------------
(in L millions)
Projected benefit obligation (141) (167)
Plan assets at fair value 143 160
-----------------------
Projected benefit obligation in excess of plan assets 2 (7)
Unrecognized net transition liability (22) (20)
Unrecognized prior service cost 1 --
-----------------------
Accrued pension cost (19) (27)
=======================
At December 31,
------------------------
1997 1998
------------------------
(in L millions)
Projected benefit obligation
Balance at January 1 120 141
Service cost 9 13
Interest cost 10 11
Plan amendments -- (6)
Actuarial gain 8 15
Disbursements (6) (7)
------------------------
Balance at December 31 141 167
========================
At December 31,
------------------------
1997 1998
------------------------
(in L millions)
Fair value of assets
Balance at January 1 118 143
Actual return 24 17
Contributions 7 7
Disbursements (6) (7)
------------------------
Balance at December 31 143 160
========================
At December 31,
-----------------------
1997 1998
-----------------------
(in L millions)
Accrued pension cost
Balance at January 1 (17) (19)
Additional obligations -- (4)
Net Periodic Cost (9) (11)
Contributions 7 7
-----------------------
Balance at December 31 (19) (27)
=======================
F-37
<PAGE>
28. Summary of differences between U.K. and Dutch GAAP and U.S. GAAP -
(continued) The principal assumptions used were:
1997 1998
----------- --------------
Discount rate 7.50% 6.75%
Salary increases 4.0% to 5.0% 4.5% to 5.0%
Investment return 9.50% 9.50%
Plan assets are invested primarily in listed stocks and U.S. bonds.
F-38
<PAGE>
REED ELSEVIER
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Balance at
beginning of Cost and Other Balance at
year expenses movements Deductions end of year
--------------------------------------------------------------------
(in L millions)
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1996
Allowance for doubtful receivables 40 17 (9) (10) 38
Year ended December 31, 1997
Allowance for doubtful receivables 38 19 (5) (13) 39
Year ended December 31, 1998
Allowance for doubtful receivables 39 18 1 (13) 45
</TABLE>
F-39
<PAGE>
REED INTERNATIONAL P.L.C.
CONSOLIDATED FINANCIAL STATEMENTS
F-40
<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, 1998 and 1997, 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, 1998. 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, 1998 and 1997 and the
results of their operations and their cash flows for the three years ended
December 31, 1998 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 10, 1999
F-41
<PAGE>
REED INTERNATIONAL P.L.C.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------
Notes 1996 1997 1998
(restated) (restated)
------------------------------------
(in L millions except per share
amounts)
<S> <C> <C> <C> <C>
Net Sales
Share of joint ventures' net sales 1,789 1,808 1,688
Less: share of joint ventures' net sales (1,789) (1,808) (1,688)
------------------------------------
Group net sales -- -- --
------------------------------------
Selling, general and administrative expenses (1) (1) (1)
------------------------------------
Operating loss (1) (1) (1)
------------------------------------
Operating income from interests in joint ventures
Share of operating income before exceptional items and 3 436 449 419
amortization
Share of exceptional items -- (266) (42)
Share of amortization of goodwill and intangible assets 1 (132) (153) (176)
------------------------------------
Total 304 30 201
------------------------------------
Non-operating exceptional items -- (1) (5)
Share of non-operating exceptional items of joint ventures 3 13 30 366
------------------------------------
13 29 361
------------------------------------
Net interest income/(expense)
Group 5 4 3 5
Share of net interest payable in joint ventures (31) (36) (26)
------------------------------------
(27) (33) (21)
------------------------------------
Income before taxes 289 25 540
Taxes on income 6 (113) (52) (144)
------------------------------------
Income before preference dividends 176 (27) 396
------------------------------------
Preference dividends -- -- --
------------------------------------
Net income for the financial year 176 (27) 396
====================================
Earnings per ordinary share (pence) 7 15.5p (2.4)p 34.7p
====================================
Fully diluted earnings per ordinary share (pence) 7 15.4p (2.4)p 34.6p
====================================
</TABLE>
Selling, general and administrative expenses include L388,000 (1997:
L529,000, 1996: L572,000) paid in the year to Reed Elsevier plc under a contract
for the services of the directors and administrative support. Non-operating
exceptional costs of L4,986,000 (1997 : L1,443,000) were paid to Reed Elsevier
plc relating to the abandoned merger of Reed International P.L.C., Elsevier NV
and Wolters Kluwer nv businesses.
1996 and 1997 figures have been restated on the introduction of new U.K.
accounting standards to include retrospective amortization of goodwill and
intangible assets (FRS 10) and additional information in respect of joint
ventures (FRS 9). A more detailed description of the restatement is provided in
note 1.
The accompanying notes on pages F-47 to F-55 are an integral part of these
consolidated financial statements.
F-42
<PAGE>
REED INTERNATIONAL P.L.C.
CONSOLIDATED STATEMENTS OF TOTAL RECOGNIZED GAINS AND LOSSES
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------
1996 1997 1998
(restated) (restated)
------------------------------------
(in L millions)
<S> <C> <C> <C>
Net income for the financial year 176 (27) 396
Exchange translation differences (68) (6) (2)
------------------------------------
Total recognized gains and losses for the financial year 108 (33) 394
====================================
</TABLE>
The historical cost profits and losses are not materially different from
the results disclosed above.
The accompanying notes on pages F-47 to F-55 are an integral part of these
consolidated financial statements.
F-43
<PAGE>
REED INTERNATIONAL P.L.C.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
At December 31,
-------------------------
Notes 1997 1998
(restated)
-------------------------
(in L millions)
<S> <C> <C> <C>
Fixed assets Investments in joint ventures:
Share of gross assets 2,790 3,081
Share of gross liabilities (1,945) (2,015)
-------------------------
9 845 1,066
-------------------------
Current assets
Debtors 10 209 224
Short term investments 2 2
-------------------------
Current assets 211 226
Creditors: amounts falling due within one year 11 (125) (129)
-------------------------
Net current assets 86 97
-------------------------
Total assets less current liabilities 931 1,163
Creditors: amounts falling due after more than one year 12 (36) (36)
-------------------------
Net assets 895 1,127
=========================
Capital and reserves
Redeemable preference shares 13 3 3
Non-redeemable preference shares 13 1 1
Ordinary shares 13 143 143
Share premium account 215 229
Profit and loss reserve 533 751
-------------------------
Shareholders' funds 895 1,127
=========================
</TABLE>
Contingent liabilities -- See note 14.
The accompanying notes on pages F-47 to F-55 are an integral part of these
consolidated financial statements.
F-44
<PAGE>
REED INTERNATIONAL P.L.C.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31,
------------------------------------
Notes 1996 1997 1998
------------------------------------
(in L millions)
Operating loss (1) (1) (1)
Non-operating exceptional items -- (1) (5)
Net movement in debtors and creditors (1) -- 1
--------------------------
Net cash outflow from operating activities (2) (2) (5)
--------------------------
Dividends received from Reed Elsevier plc 135 158 171
Interest received 8 6 5
Interest paid (4) (4) --
--------------------------
Returns on investments and servicing of finance 4 2 5
Taxation (1) (1) (1)
Equity dividends paid (143) (158) (169)
--------------------------
Net cash (outflow)/inflow before financing (7) (1) 1
--------------------------
Issue of Ordinary Shares 15 15 14
Increase in net funding balances with
Reed Elsevier plc group (8) (14) (15)
--------------------------
Financing 7 1 (1)
--------------------------
Increase in cash 15 -- -- --
==========================
Operating loss is stated before Reed International P.L.C.'s share of income
from joint ventures.
The accompanying notes on pages F-47 to F-55 are an integral part of these
consolidated financial statements.
F-45
<PAGE>
REED INTERNATIONAL P.L.C.
STATEMENTS OF CHANGES IN CONSOLIDATED SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
12.5 Ordinary Shares
L Preference Shares (previously 25p)
--------------------------------------------- Share
Non- Share premium Profit and
Redeemable redeemable Number capital account loss reserve Total
L millions L millions 000 L millions L millions L millions L millions
---------- ---------- --- --------------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995, as
originally reported 3 1 1,130,470 141 187 766 1,098
Prior year adjustment (adoption of
FRS 10; see note 1) -- -- -- -- -- -- 34
--------------------------------------------------------------------------------
Balance at December 31, 1995,
as restated 3 1 1,130,470 141 187 800 1,132
--------------------------------------------------------------------------------
Net income, as originally reported -- -- -- -- -- 302 302
Prior year adjustment (adoption of
FRS 10; see note 1) -- -- -- -- -- (126) (126)
--------------------------------------------------------------------------------
Net income, as restated -- -- -- -- -- 176 176
--------------------------------------------------------------------------------
Ordinary dividends -- -- -- -- -- (156) (156)
Share of goodwill written off (net
of disposals) in joint ventures -- -- -- -- -- (90) (90)
Prior year adjustment (adoption of
FRS 10; see note 1) -- -- -- -- -- 90 90
Exchange translation differences
and other items -- -- -- -- -- (76) (76)
Issue of Ordinary Shares on
exercise of share options -- -- 5,584 1 14 -- 15
--------------------------------------------------------------------------------
Balance at December 31, 1996
as restated 3 1 1,136,054 142 201 744 1,091
--------------------------------------------------------------------------------
Net income, as originally reported -- -- -- -- -- 90 90
Prior year adjustment (adoption of
FRS 10; see note 1) -- -- -- -- -- (117) (117)
--------------------------------------------------------------------------------
Net income, as restated -- -- -- -- -- (27) (27)
--------------------------------------------------------------------------------
Ordinary dividends -- -- -- -- -- (167) (167)
Share of goodwill written off (net
of disposals) in joint ventures -- -- -- -- -- (227) (227)
Prior year adjustment (adoption of
FRS 10; see note 1) -- -- -- -- -- 227 227
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,
as restated 3 1 1,140,399 143 215 533 895
--------------------------------------------------------------------------------
Net income -- -- -- -- -- 396 396
Ordinary dividends -- -- -- -- -- (172) (172)
Exchange translation differences
and other items -- -- -- -- -- (6) (6)
Issue of Ordinary Shares on
exercise of share options -- -- 4,100 -- 14 -- 14
--------------------------------------------------------------------------------
Balance at December 31, 1998 3 1 1,144,499 143 229 751 1,127
================================================================================
</TABLE>
The accumulated exchange translation differences included in retained
earnings are L(88) million (December 31, 1997 L(86) million, December 31, 1996
L(80) million).
Reed International P.L.C.'s share of the revenue reserves as restated of
the combined businesses is L851 million (1997 L633 million; 1996 L832 million).
The accompanying notes on pages F-47 to F-55 are an integral part of these
consolidated financial statements.
F-46
<PAGE>
REED INTERNATIONAL P.L.C.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of financial statements
On January 1, 1993 Reed International and Elsevier contributed their
businesses to two companies, Reed Elsevier plc and Elsevier Reed Finance BV.
Reed Elsevier plc, which owns all the publishing and information businesses, is
incorporated in England and Elsevier Reed Finance BV, which owns the financing
and treasury companies, is incorporated in the Netherlands. Reed International
and Elsevier each hold a 50% interest in Reed Elsevier plc. Reed International
holds a 46% interest in Elsevier Reed Finance BV with Elsevier holding a 54%
interest. In addition, Reed International has a 5.8% interest in Elsevier
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 and Elsevier 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, Elsevier, Reed
Elsevier plc and Elsevier Reed Finance BV and their respective subsidiaries,
associates and joint ventures. These 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. As a result of the equalization arrangements, Reed
International shareholders have a 52.9% economic interest in the net income of
the Reed Elsevier combined businesses.
Prior year restatement on introduction of new accounting standards
The new U.K. financial reporting standards, FRS 9: Associates and Joint
Ventures and FRS 10: Goodwill and Intangible Assets, which are first applicable
in 1998 have been adopted in the preparation of the Reed Elsevier combined
financial statements. In adopting FRS 10, which relates to goodwill and
intangible assets, the accounting policy has been changed as described below. In
all other respects the Reed Elsevier combined financial statements have been
prepared on the basis of the accounting policies set out in the Reed Elsevier
Annual Review 1997. Under FRS 10, Reed Elsevier capitalizes all acquired
goodwill and intangible assets and amortizes them over a maximum period of 20
years, with retrospective application. In prior years, acquired goodwill was
written off direct to reserves on acquisition whereas intangible assets were
capitalized and not amortized, subject to impairment review. Prior year figures
have been restated in the Reed Elsevier combined financial statements and in
these financial statements, accordingly, net assets as at January 1, 1998 and
1997 have been restated by L105 million and L(5) million, respectively, (being
Reed International's share of capitalization of prior goodwill less cumulative
amortization of goodwill and intangibles) and the 1997 and 1996 net income has
been reduced by L117 million and L126 million, respectively, taking into account
the non-cash amortization charge, the consequent change in the exceptional
profit on the sale of businesses and the resultant tax timing differences.
Under FRS 9: Associates and Joint Ventures, Reed International's interest
in the Reed Elsevier combined businesses, previously recorded as associated
undertakings now fall under the category of joint venture interest. Reported net
income and net assets are unaffected. The standard also introduces
presentational changes which have been made to the income statements, statements
of cash flows and balance sheets. Prior year figures have been restated
accordingly.
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 ("L").
The consolidated financial statements include Reed International's 52.9%
economic interest in the Combined Businesses, accounted for on a gross equity
basis.
Determination of profit
The Reed International share of the Reed Elsevier combined results has been
calculated on the basis of the 52.9% economic interest of the Reed International
shareholders in the Reed Elsevier combined businesses after taking account of
results arising in Reed International and its subsidiary undertakings. Dividends
paid to Reed International and Elsevier shareholders are equalized at the gross
level inclusive of the benefits of the U.K. tax credit (currently 20%, reducing
to 10% on April 6, 1999 and applicable for the 1998 final dividend) received by
certain Reed International 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 to
its shareholders and reduces the net income of the company by 47.1% of the total
amount of the tax credit.
F-47
<PAGE>
2. Accounting policies - (continued)
Basis of valuation of assets and liabilities
Reed International's 52.9% economic interest in the net assets of the
combined businesses has been shown on the balance sheet as interests in joint
ventures, net of the assets and liabilities reported as part of Reed
International and its 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 's 52.9%
economic interest in the net assets of the combined businesses are taken
directly to retained earnings.
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 joint ventures and overseas subsidiaries.
F-48
<PAGE>
3. Income from interests in joint ventures
1996 1997 1998
(restated) (restated)
---------- --------- -------
(in L millions)
Share of operating income before
exceptional items and amortization
Reed Elsevier combined results (50%) .......... 428 443 407
Elsevier NV's result (5.8%) ................... 25 25 23
---- ---- ----
453 468 430
---- ---- ----
Effect of tax credit equalization
on distributed earnings (note 4) ............. (18) (20) (12)
Operating losses consolidated within
Reed International group ..................... 1 1 1
---- ---- ----
Share of operating income before
exceptional items and amortization ........... 436 449 419
---- ---- ----
Share of non operating exceptional
items of joint ventures
Based on Reed International's 52.9%
economic interest ............................ 13 29 361
Exceptional charges consolidated
within Reed International P.L.C
group ........................................ -- 1 5
---- ---- ----
Share of non operating exceptional items ...... 13 30 366
---- ---- ----
4. Effect of tax credit equalization on distributed earnings
The Reed International share of the Reed Elsevier combined results has been
calculated on the basis of the 52.9% economic interest of the Reed International
shareholders in the Combined Businesses. 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
and applicable for the 1998 final dividend) received by certain Reed
International 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 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/(expense)
1996 1997 1998
---- ---- ----
(in L millions)
Interest income
On loans to Reed Elsevier plc group ................ 7 7 9
Other interest receivable and similar income ........ 1 -- --
-- -- --
8 7 9
-- -- --
Interest expense
On loans from Reed Elsevier plc group ............... (4) (4) (4)
-- -- --
Net interest income ................................. 4 3 5
== == ==
F-49
<PAGE>
6. Taxes on income
Taxes on income charged to earnings were as follows:
1996 1997 1998
(restated) (restated)
---------- --------- -------
(in L millions)
U.K. Corporation Tax
Current ................................... -- 1 1
Share of tax attributable to joint
ventures
Before exceptional items .................. 113 112 106
On exceptional items ...................... -- (61) 37
---- ---- ----
113 52 144
==== ==== ====
7. Basic and fully diluted earnings per ordinary share
The basic earnings per ordinary share for each financial period is
calculated as follows:
Average
number of Basic
Earnings ordinary earnings per
(restated) shares in issue ordinary share
---------- ------------------------------
(in L millions) (in millions) (in pence)
Year ended December 31, 1998 .... 396 1,142.6 34.7p
Year ended December 31, 1997 .... (27) 1,138.9 (2.4)p
Year ended December 31, 1996 .... 176 1,134.4 15.5p
The fully diluted earnings per ordinary share for each financial period is
calculated as follows:
Average
number of Basic
Earnings ordinary earnings per
(restated) shares in issue ordinary share
---------- ------------------------------
(in L millions) (in millions) (in pence)
Year ended December 31, 1998 .... 396 1,144.6 34.6p
Year ended December 31, 1997 .... (27) 1,143.3 (2.4)p
Year ended December 31, 1996 .... 176 1,140.4 15.4p
Fully diluted earnings per ordinary share take account of the effects of
additional common shares that would be in issue if outstanding dilutive
potential shares had been exercised.
The 1996 basic and fully diluted earnings per ordinary share have been
restated to take into account the two for one share split of the Ordinary Shares
which became effective on May 2, 1997.
F-50
<PAGE>
8. Dividends paid and proposed
1996 1997 1998
---- ---- ----
(in L millions except per share amounts)
First interim ..................... 47 50 52
Final (1997 Second Interim) ....... 109 117 120
------ ------ ---
Total ............................. 156 167 172
====== ====== ===
Per 12.5p Ordinary Share
First interim ..................... 4.12p 4.40p 4.60p
Final (1997) Second interim) ...... 9.48p 10.20p 10.40p
------ ------- ------
Total ............................. 13.60p 14.60p 15.00p
====== ======= ======
Dividends in respect of preference shares of Reed International paid in
1998 amounted to L0.2 million (1997 L0.2 million, 1996 L0.2 million).
9. Fixed asset investments
Investment
in joint
ventures
---------
(in L millions)
At December 31, 1997, as originally reported ..................... 740
Prior year adjustment (adoption of FRS 10; see note 1) ........... 105
------
At December 31, 1997, as restated ................................ 845
------
Share of operating income before interest and tax in
joint ventures ................................................ 201
Share of non operating exceptional items ........................ 366
Share of net interest payable in joint ventures ................. (26)
Share of taxation arising in joint ventures ..................... (143)
Dividends received from joint ventures .......................... (171)
Exchange translation differences and other items ................ (6)
------
At December 31, 1998 ............................................. 1,066
======
The net investment in the joint ventures comprises the group's share of:
1997
(restated) 1998
---------- ----
(in L millions)
Fixed assets ....................................... 1,737 2,160
Current assets ..................................... 1,053 921
Creditors: amounts falling due within
one year ......................................... (1,351) (1,571)
Creditors: amounts falling due after
more than one year ............................... (443) (422)
Provisions ......................................... (148) (19)
Minority interests ................................. (3) (3)
------ ------
845 1,066
====== ======
The investment in joint ventures represents the 52.9% economic interest
that Reed International has in the Combined Businesses, less those assets and
liabilities that are separately consolidated in the Reed International group
accounts. Reed International's indirect 5.8% interest in Elsevier has been
reflected within the gross equity accounting for the joint ventures.
F-51
<PAGE>
10. Debtors
1997 1998
---- ----
(in L millions)
Amounts owed by Reed Elsevier plc group ................ 209 224
--- ---
209 224
=== ===
Amounts falling due after more than one year are L40 million (1997 L40
million).
11. Creditors: amounts falling due within one year
1997 1998
---- ----
(in L millions)
Proposed dividends ............................. 117 120
Taxation ....................................... 7 7
Other creditors ................................ 1 2
--- ---
125 129
=== ===
12. Creditors: amounts falling due after more than one year
1997 1998
---- ----
(in L millions)
Amounts owed to Reed Elsevier plc group .................. 36 36
== ==
13. Share capital
Issued and Issued and
Authorized Fully Paid Fully Paid
---------- ---------- ----------
(in L millions)
Preference shares (cumulative)
of L1.00 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) ...................... 143 143 143
Unclassified shares of 12.5p each
(previously 25p) ...................... 41 -- --
--- --- ---
Total .................................. 188 147 147
=== === ===
Details of shares issued under share option schemes are set out in note 16.
Following the resolution at the Annual General Meeting in April 1997, Reed
International undertook a two for one split of its Ordinary Shares which became
effective on May 2, 1997.
A proposal will be put to shareholders at the Annual General Meeting in
April 1999 to repay and cancel the company's preference shares.
F-52
<PAGE>
14. Contingent liabilities
There are contingent liabilities in respect of borrowings guaranteed by
Reed International:
1997 1998
---- ----
(in L millions)
Borrowings of Reed Elsevier plc group and
Elsevier Reed Finance BV group
Guaranteed jointly and severally with Elsevier ......... 1,168 1,616
Guaranteed solely by Reed International ................ 5 2
----- -----
1,173 1,618
===== =====
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
balances
with Reed
Current asset Elsevier plc
Cash investments group Total
---- ----------- ----- -----
(in L millions)
Reconciliation of net borrowings
At December 31, 1996 ............... -- 2 159 161
Cash flow .......................... -- -- 14 14
---- ---- --- ---
At December 31, 1997 ............... -- 2 173 175
Cash flow .......................... -- -- 15 15
---- ---- --- ---
At December 31, 1998 ............... -- 2 188 190
==== === === ===
16. Share option schemes
Reed Elsevier plc operates a savings related share option scheme which is
open to all U.K. employees of Reed Elsevier plc and participating companies
under its control who are in employment on a predetermined date prior to the
date of invitation. The following options have been granted over Reed
International Ordinary Shares, and may be exercised at the end of the savings
period at a price equivalent to not less than 80% of the market value of the
Reed International Ordinary Shares at the time of grant.
Transactions during the three financial periods ended December 31, 1998,
adjusted for the subdivision of Reed International Ordinary Shares, were:
Number of Exercise
Ordinary price
Shares (pence)
------ ---------
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
Granted ........................................ 881,830 499.2
Exercised ...................................... (2,032,556) 263-499.2
Lapsed ......................................... (1,339,934)
---------
Outstanding at December 31, 1998 ............... 3,946,823
=========
F-53
<PAGE>
Options outstanding at December 31, 1998 were exercisable by 2004.
Reed Elsevier plc operates an executive share option scheme and options are
granted to selected full time employees of Reed Elsevier plc. The options are
granted over Reed International Ordinary Shares, and are normally exercisable
after three years and may be exercised up to ten years from the date of grant at
a price equivalent to the market value of the Reed International Ordinary Shares
at the time of grant.
Transactions under the Reed Elsevier plc Executive Schemes and the Reed
International Executive Schemes during the three financial periods ended
December 31, 1998, adjusted for the subdivision of Reed International Ordinary
Shares, were:
Number of Exercise
Ordinary price
Shares (pence)
------ -------
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
Granted ...................................... 1,125,400 523-611
Exercised .................................... (2,067,200) 208.75-585.25
Lapsed ....................................... (829,200)
-----------
Outstanding at December 31, 1998 .............. 10,485,000
===========
Options outstanding at December 31, 1998 were exercisable by 2008.
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 accounts for its 52.9% economic interest in the Combined
Businesses, before the effect of tax credit equalization (see note 4), by the
gross equity method in conformity with U.K. GAAP which is similar to the equity
method used under U.S. GAAP. Using the equity method to present its net income
and shareholders' equity under U.S. GAAP Reed International 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 and, the effect on tax credit equalization
of recognizing dividends under U.S. GAAP, only if declared in the period, 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, and of deferred taxes. This had a particularly substantial
impact in 1998. In view of the consideration given to the determination of
appropriate prudent asset lives on adoption of FRS 10 under U.K. GAAP (see note
1), the remaining asset lives for U.S. GAAP purposes were reviewed and
determined consistently with those adopted for the new U.K. GAAP treatment. This
re-evaluation of asset lives under U.S. GAAP, which is effective from January 1,
1998, significantly increased the periodic amortization charge, as the
unamortized value of existing assets, which were previously amortized over
periods up to 40 years, are now being amortized over shorter periods. A more
complete explanation of the accounting policies used by the 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's ordinary
activities which under U.K. GAAP are required to be disclosed separately due to
their size or incidence.
F-54
<PAGE>
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; fully diluted earnings per Reed
International Ordinary Share amounts take account of the effects of additional
common stock that would be in issue if outstanding dilutive potential shares had
been exercised.
Approximate effects on net income of differences between U.K. and U.S. GAAP:
Year ended December 31,
---------------------------------
1996 1997 1998
(restated) (restated)
---------- --------- --------
(in L millions, except
per share amounts)
Net income under U.K. GAAP .................... 176 (27) 396
U.S. GAAP adjustments:
Impace of U.S.GAAP adjustments to combined
financial statements ........................ 68 31 (205)
----- ---- ----
Net income under U.S. GAAP .................... 244 4 191
===== ==== ====
Basic earnings per ordinary share under
U.S. GAAP (pence) ............................ 21.4p 0.4p 16.7p
===== ==== ====
Fully diluted earnings per ordinary share
under U.S. GAAP (pence) ...................... 21.4p 0.4p 16.7p
===== ==== ====
The basic and fully diluted 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 and fully diluted earnings per ordinary share under U.S. GAAP
include a 52.9% share of the following items, for 1998, 24.1p in respect of
profit on sale (under U.S. GAAP) of discontinued businesses and 12.3p (loss) in
respect of the non-recurring element of the incremental amortization of goodwill
and intangibles arising as a consequence of the re-evaluation of the Combined
Businesses' asset lives, 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,
--------------------
1997 1998
(restated)
---------- ----
(in L millions)
Shareholders' equity under U.K. GAAP ..................... 895 1,127
U.S. GAAP adjustments:
Impact of U.S. GAAP adjustments to combined
financial statements .................................. 455 252
Ordinary dividends not declared in the period .......... 117 120
----- -----
Shareholders' equity under U.S. GAAP ..................... 1,467 1,499
===== =====
F-55
<PAGE>
ELSEVIER NV
FINANCIAL STATEMENTS
F-56
<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, 1998 and
1997, 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, 1998. 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,
1998 and 1997 and the results of its operations and its cash flows for the three
years ended December 31, 1998 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 10, 1999
F-57
<PAGE>
ELSEVIER NV
STATEMENTS OF INCOME
Year ended December 31,
------------------------------
1996 1997 1998
Notes (restated) (restated)
----- ---------- ---------- ----
(in Dfl millions, except per
share amounts)
Wages and salaries ..................... (10) (12) (11)
Merger expenses (exceptional charges) .. -- (3) (12)
Other expenses net of recharges to
affiliates ............................ 3 7 8
------ ------ ------
Operating expenses ....................... (7) (8) (15)
------ ------ ------
Share in net income of affiliates
Share of net income excluding
exceptional items and amortization
of goodwill and intangible assets ...... 781 966 928
Share of exceptional items, net of tax .. 32 (531) 887
Share of amortization of goodwill and
intangible assets, net of tax .......... (344) (461) (545)
------ ------ ------
Total .................................... 469 (26) 1,270
Interest income ........................ 13 9 11
Interest expense ....................... (1) (2) (2)
------ ------ ------
Financial results ........................ 481 (19) 1,279
------ ------ ------
Income before tax ........................ 474 (27) 1,264
Tax ...................................... 7 5 2
------ ------ ------
Net income ............................... 481 (22) 1,266
------ ------ ------
Earnings per ordinary share (Dfl) ........ 3 0.68 (0.03) 1.79
====== ====== ======
STATEMENTS OF TOTAL RECOGNIZED GAINS AND LOSSES
Year ended December 31,
--------------------------------
1996 1997 1998
(restated) (restated)
---------- ---------- -----
(in Dfl millions)
Net income for the financial year ........ 481 (22) 1,266
Exchange translation differences ......... 337 341 (215)
------ ------ ------
Total recognized gains and losses
for the financial year .................. 818 319 1,051
====== ====== ======
1996 and 1997 figures have been restated on the introduction, and adoption
by the Combined Businesses, of new U.K. accounting standards. A more detailed
description of the restatement is provided in note 1.
The accompanying notes on pages F-62 to F-67 are an integral part of these
financial statements.
F-58
<PAGE>
ELSEVIER NV
BALANCE SHEETS
At December 31,
--------------------
1997 1998
Notes (restated)
----- ---------- ----
(in Dfl millions)
Financial fixed assets .................. 5 3,070 3,661
------ ------
Accounts receivable ................... 6 94 128
Cash and cash equivalents ............. 220 37
------ ------
Total current assets .................... 314 165
Total current liabilities ............... 7 (444) (390)
------ ------
Net working capital ..................... (130) (225)
------ ------
Long term liabilities ................... 8 (24) (25)
Provisions .............................. 9 (90) (78)
------ ------
Net assets .............................. 2,826 3,333
====== ======
Share capital issued .................. 10 71 71
Paid-in surplus ....................... 843 854
Legal reserve ......................... 1,726 2,092
Other reserves ........................ 186 316
------ ------
Shareholders' funds ..................... 2,826 3,333
====== ======
Contingent liabilities -- see note 11.
The accompanying notes on pages F-62 to F-67 are an integral part of these
financial statements.
F-59
<PAGE>
ELSEVIER NV
STATEMENTS OF CASH FLOWS
Year ended December 31,
---------------------------
1996 1997 1998
---- ---- ----
(in Dfl millions)
Cash from operations .......................... 18 (1) (18)
Dividends received ............................ 125 679 715
Dividend paid ................................. (405) (566) (634)
---- ---- ----
Cash (outflow)/surplus from operations ........ (262) 112 63
---- ---- ----
Received on newly issued shares ............... 55 21 11
Change in net funding balances
with affiliates .............................. 204 83 (33)
Changes to long term borrowings ............... 2 3 1
Capital contribution in affiliates ............ -- -- (225)
---- ---- ----
Financing ..................................... 261 107 (246)
---- ---- ----
Changes in cash and cash equivalents .......... (1) 219 (183)
==== ==== ====
Balance of cash and cash equivalents
at December 31 ............................... 1 220 37
==== ==== ====
The accompanying notes on pages F-62 to F-67 are an integral part of these
financial statements.
F-60
<PAGE>
ELSEVIER NV
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Dfl1.00 R-Shares Dfl0.10 Ordinary Shares
----------------- -----------------------------
Share Share Paid-in Legal Other
Number capital Number capital surplus reserve reserves Total
------ ------- ------ ------- ------- ------- -------- -----
Dfl 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, 1995
as originally reported ................. 4,050 4 661,773 66 768 1,220 505 2,563
Prior year adjustment
(adoption of FRS 10;
see note 1) ............................ -- -- -- -- -- 79 -- 79
------- ------- ------- ------- ------- ------- ------- -------
Balance at December 31, 1995
as restated ............................ 4,050 4 661,773 66 768 1,299 505 2,642
------- ------- ------- ------- ------- ------- ------- -------
Net income .............................. -- -- -- -- -- 782 12 794
Prior year adjustment
(adoption of FRS 10;
see note 1) ............................ -- -- -- -- -- (313) -- (313)
------- ------- ------- ------- ------- ------- ------- -------
Net income, as restated ................. -- -- -- -- -- 469 12 481
------- ------- ------- ------- ------- ------- ------- -------
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
acquisitions net of disposals .......... -- -- -- -- -- (222) -- (222)
Prior year adjustment
(adoption of FRS 10;
see note 1) ............................ -- -- -- -- -- 222 -- 222
------- ------- ------- ------- ------- ------- ------- -------
Balance at December 31, 1996
as restated ............................. 4,050 4 665,499 67 822 2,024 136 3,053
------- ------- ------- ------- ------- ------- ------- -------
Net income .............................. -- -- -- -- -- 326 4 330
Prior year adjustment
(adoption of FRS 10;
see note 1) ............................ -- -- -- -- -- (352) -- (352)
------- ------- ------- ------- ------- ------- ------- -------
Net income, as restated ................. -- -- -- -- -- (26) 4 (22)
------- ------- ------- ------- ------- ------- ------- -------
Ordinary dividends ...................... -- -- -- -- -- -- (633) (633)
Issue of shares ......................... -- -- 1,215 -- 21 -- -- 21
Share of affiliates' results:
Dividends ............................... -- -- -- -- -- (679) 679 --
Exchange translation
differences ............................ -- -- -- -- -- 341 -- 341
Equalization ............................ -- -- -- -- -- 66 -- 66
Goodwill written off on
acquisitions net of disposals .......... -- -- -- -- -- (684) -- (684)
Prior year adjustment
(adoption of FRS 10;
see note 1) ............................ -- -- -- -- -- 684 -- 684
------- ------- ------- ------- ------- ------- ------- -------
Balance at December 31, 1997
as restated ............................. 4,050 4 666,714 67 843 1,726 186 2,826
------- ------- ------- ------- ------- ------- ------- -------
Net income .............................. -- -- -- -- -- 1,270 (4) 1,266
Ordinary dividends ...................... -- -- -- -- -- -- (581) (581)
Issue of shares ......................... -- -- 590 -- 11 -- -- 11
Share of affiliates' results:
Dividends ............................... -- -- -- -- -- (715) 715 --
Exchange translation
differences ............................ -- -- -- -- -- (215) -- (215)
Equalization ............................ -- -- -- -- -- 26 -- 26
------- ------- ------- ------- ------- ------- ------- -------
Balance at December 31, 1998 ............ 4,050 4 667,304 67 854 2,092 316 3,333
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
The accumulated exchange translation differences included in retained
earnings is Dfl157 million (1997 Dfl372 million; 1996 Dfl31 million). At
December 31, 1998, 1997 and 1996 the legal reserve comprised Elsevier NV's share
of the post acquisition accumulated retained earnings of affiliates.
The accompanying notes on pages F-62 to F-67 are an integral part of these
financial statements.
F-61
<PAGE>
ELSEVIER NV
NOTES TO THE 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.
Prior year restatement on introduction of new accounting standards
The new U.K. financial reporting standards, FRS 9: Associates and Joint
Ventures and FRS 10: Goodwill and Intangible Assets, which are first applicable
in 1998 have been adopted in the preparation of the Reed Elsevier combined
financial statements. In adopting FRS 10, which relates to goodwill and
intangible assets, the accounting policy has been changed as described below. In
all other respects the Reed Elsevier combined financial statements have been
prepared on the basis of the accounting policies set out in the Reed Elsevier
Annual Review 1997. Under FRS 10, Reed Elsevier capitalizes all acquired
goodwill and intangible assets and amortizes them over a maximum period of 20
years, with retrospective application. In prior years, acquired goodwill was
written off direct to reserves on acquisition whereas intangible assets were
capitalized and not amortized, subject to impairment review. Prior year figures
have been restated in the Reed Elsevier combined financial statements and in
these financial statements accordingly. Elsevier's net assets as at January 1,
1998 and 1997 have been restated by Dfl331 million and Dfl(12) million,
respectively, (being Elsevier's share of capitalization of prior goodwill less
cumulative amortization of goodwill and intangible assets) and the 1997 and 1996
net income has been reduced by Dfl352 million and Dfl313 million, respectively,
for the non-cash amortization charge, the consequent change in the exceptional
profit on the sale of businesses and the resultant tax timing differences.
2. Accounting policies
The significant accounting policies adopted are as follows:
Basis of consolidation
The economic interests of Elsevier and Reed International 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. 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 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 and Elsevier. The arrangement provides for the distribution of
dividends and net assets in such a way that Elsevier'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.
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 1998, this rate was Dfl3.28 (1997:
3.19; 1996 : 2.63).
Tax is calculated on profit from Elsevier'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.
Basis 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 amounts expressed in foreign currencies are translated at the
exchange rates effective at the balance sheet date. Currency translation
differences arising from the conversion of investments in affiliates, expressed
in foreign currencies, are directly credited or charged to shareholders' equity.
F-62
<PAGE>
3. Basic earnings per ordinary share
Average number
Earings of Ordinary Basic earnings per
(restated) Shares in issue ordinary share
---------- --------------- --------------
(in Dfl
millions) (in millions) (in Dfl)
Year ended December 31, 1998 .. 1,266 667 1.79
Year ended December 31, 1997 .. (22) 666 (0.03)
Year ended December 31, 1996 .. 481 664 0.68
Of Elsevier's 50% share of the net income of the Combined Businesses, 47.1%
accrues to the holders of the Ordinary Shares and 2.9% to Reed International,
the holder of the R-shares. Consequently, the earnings per ordinary share
calculations are based on 47.1% of the net income of the Combined Businesses.
4. Proposal for allocation of income
1996 1997 1998
(restated) (restated)
---------- ---------- -----
(in Dfl millions)
Interim dividend Ordinary Shares ......... 133 193 194
Final dividend Ordinary Shares
(1997 Second Interim) ................... 373 440 387
Dividend R-shares (1998 Dfl40,500;
1997 Dfl40,500; 1996 Dfl40,500) ......... -- -- --
Retained (loss withdrawn from
reserves)/profit ........................ (25) (655) 685
------ ------ ------
481 (22) 1,266
====== ====== ======
The 1998 dividend will be paid in Dutch guilders. For the financial year
2000 it is intended to commence payments of dividends in euros.
The dividend paid by Elsevier equals the Reed International dividend plus
the U.K. tax credit (currently 20%, reducing to 10% on April 6, 1999 and
applicable for the 1998 final dividends). As a result Elsevier distributes a
higher proportion of the combined net income than Reed International. Reed
International's share in this difference in dividend is settled with Elsevier
and has been credited directly to retained earnings under equalization, because
this settlement maintains the contractually agreed balance between the
shareholders of Elsevier and Reed International.
Elsevier can pay a nominal dividend to Reed International on its R-shares
that is lower than the dividend on the Ordinary Shares. Reed International will
be compensated by direct dividend payments by Reed Elsevier plc. Equally,
Elsevier 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:
1997 1998
(restated)
---------- ----
(in Dfl millions)
U.K. tax credit ........................ 63 40
R-shares dividend ...................... (29) (31)
Proceeds of Ordinary Shares ............ 11 19
Exchange differences ................... 21 (2)
--- ---
66 26
=== ===
F-63
<PAGE>
5. Financial fixed assets
Investments
in
affiliates
----------
(in Dfl millions)
At December 31, 1997 as originally reported ................ 2,739
Prior year adjustment (adoption of FRS 10; see note 1) ..... 331
------
At December 31, 1997, as restated .......................... 3,070
------
Capital contribution in affiliates ......................... 225
Share in net income of affiliates .......................... 1,270
Dividends received ......................................... (715)
Exchange translation differences ........................... (215)
Equalization ............................................... 26
------
At December 31, 1998 ....................................... 3,661
======
The investments in affiliates at December 31, 1998 are:
Reed Elsevier plc, London (50%)
Elsevier Reed Finance BV, Amsterdam (54%)
In addition, Elsevier holds Dfl0.3 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 to receive dividends from companies within the same
tax jurisdiction.
In 1998 Elsevier made an extra capital contribution of Dfl225 million in
Reed Elsevier Overseas BV to finance the acquisitions of Matthew Bender and the
remaining 50% of Shephard's.
6. Accounts receivable
1997 1998
---- ----
(in Dfl millions)
Accounts receivable from affiliates .................. 87 120
Other receivables .................................... 7 8
--- ---
94 128
=== ===
The accounts receivable from affiliates bear interest.
7. Total current liabilities
1997 1998
---- ----
(in Dfl millions)
Trade liabilities .............................. 4 3
Proposed cash dividend ......................... 440 387
--- ---
444 390
=== ===
F-64
<PAGE>
8. Long term liabilities
Currency 1997 1998
-------- ---- ----
(in Dfl millions)
Other loans
Convertible debenture loans ............. Guilders 24 25
== ==
Convertible debenture loans consist of four convertible personnel debenture
loans with a weighted average interest rate of 6.2%. Depending on the conversion
terms, the surrender of Dfl1,000 at par qualifies for the acquisition of 40 to
60 Elsevier Ordinary Shares of Dfl0.10 par value.
9. Provisions
1997 1998
---- ----
(in Dfl millions)
Tax liabilities .................................... 81 76
Pensions and severance pay ......................... 9 2
-- --
90 78
== ==
10. Share capital
Issued and Issued and
Authorized fully paid fully paid
---------- ---------- ----------
1998 1997 1998
---- ---- ----
(in Dfl millions)
Ordinary Shares of Dfl0.10 each ........ 210 67 67
R-shares of Dfl1.00 each ............... 30 4 4
--- --- ---
Total .................................. 240 71 71
=== === ===
The authorized share capital as at December 31, 1998 consists of 2,100
million Ordinary Shares and 30 million registered R shares. Total issued
ordinary share capital at December 31, 1998 amounts to 667,303,771 shares of
Dfl0.10 par value. In total 4,049,951 R-shares of Dfl1.00 par value have been
issued. They are held by a subsidiary of Reed International. 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 may
pay a lower dividend on the R-shares (see note 4).
Since January 4, 1999 Elsevier Ordinary Shares have been quoted in euros on
the Amsterdam Stock Exchange. It is proposed to amend the Articles of
Association to change the par value of Ordinary Shares from Dfl0.10 to k0.06.
The nominal value of R- shares will be changed from Dfl1.00 to k0.6. The
equalization arrangements with Reed International will be unaffected.
These changes will give rise to an increase in the nominal issued shares
capital of approximately Dfl23 million, which differs from the result if the
fixed guilder/euro conversion rate had been applied. Elsevier has sufficient
tax-free share premium reserves to finance this increase. There are no
consequential costs to shareholders nor does it affect the equalization
arrangements with Reed Elsevier. It is also proposed to cancel K-share
certificates. Shareholders will be provided with the opportunity to exchange
their K-shares for CF-certificate shares free of charge during 1999.
At December 31, 1998 paid-in surplus included an amount of Dfl465 million
(1997: Dfl454 million) which is free of tax.
Details of shares issued under option schemes are set out in note 12.
11. Contingent liabilities
1997 1998
---- ----
(in Dfl millions)
There are contingent liabilities in respect of:
Borrowings of affiliates ................................. 3,901 5,058
===== =====
The guarantees are given jointly and severally with Reed International.
F-65
<PAGE>
12. Share option schemes
Reed Elsevier plc operates an Executive Share Option Scheme and options are
granted to selected fulltime employees of Reed Elsevier. Options granted over
Elsevier Ordinary Shares 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 Elsevier Ordinary Shares at the time of grant. The first
grant of options was during 1998.
Transactions during the year ended December 31, 1998 were:
Number of
Ordinary
Shares of Exercise
Dfl0.10 price
par value Dfl
--------- ---
Outstanding at December 31, 1997 ............... --
Granted ....................................... 1,158,230 34.60
Exercised ..................................... --
Lapsed ........................................ (25,870)
----------
Outstanding at December 31, 1998 ............... 1,132,360
==========
Options over Elsevier ordinary shares have also been granted to present and
former members of the Executive board of Elsevier, to certain former senior
executives of the Elsevier group and to senior executives of Reed Elsevier plc
under the Elsevier Share Option Scheme. The options are exercisable immediately
after granting during a period of 5 years, after which the options will lapse.
The strike price of the options is the market price of the Elsevier Ordinary
Shares at the time the option is granted.
Transactions during the three years ended December 31, 1998 were:
Number of
Ordinary
Shares of Exercise
DFl0.10 price
par value Dfl
--------- ---
Outstanding at December 31, 1995 ........... 4,957,000
Granted .................................... 825,866 26.30
Exercised .................................. (3,215,200) 14.65-26.30
-----------
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
Granted .................................... 727,050 27.55-34.60
Exercised .................................. (382,300) 14.65-31.10
-----------
Outstanding at December 31, 1998 ........... 2,739,874
===========
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 accounts for its 50% economic interest in the 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 reflects its 50% share of the effects of differences between U.K. and
Dutch GAAP and U.S. GAAP relating to the Combined Businesses and the effect on
tax credit equalization of recognizing dividends, under U.S. GAAP, only if
declared in the period, as a single reconciling item; 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, and of
deferred taxes. This had a particularly substantial impact in 1998. In view of
the consideration given to the determination of appropriate prudent asset lives
on adoption of FRS 10 under U.K. GAAP by the Combined Businesses (see note 1),
the remaining asset lives for U.S. GAAP purposes were reviewed and
F-66
<PAGE>
13. Summary of differences between Dutch GAAP and U.S. GAAP -- (continued)
determined consistently with those adopted for the new U.K. GAAP treatment. This
re-evaluation of asset lives under U.S. GAAP, which is effective from January 1,
1998, significantly increased the periodic amortization charge, as the
unamortized value of existing assets, which were previously amortized over
periods up to 40 years, are now being amortized over shorter periods. A more
complete explanation of the accounting policies used by the 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's ordinary activities
which under Dutch GAAP are required to be disclosed separately due to their size
or infrequency.
Earnings per share
Under Dutch GAAP, the calculation of basic earnings per share is based only
on common stock in issue. Under U.S. GAAP both basic and fully diluted are
required to be presented. Fully diluted earnings per ordinary share take account
of the effects of additional common stock that would be in issue if outstanding
dilutive potential shares had been exercised. These 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.
Approximate effects on net income of differences between Dutch GAAP and U.S.
GAAP:
Year ended December 31,
-------------------------------
1996 1997 1998
(restated) (restated)
---------- ---------- -----
(in Dfl millions except
per share amount)
Net income under Dutch GAAP .............. 481 (22) 1,266
U.S. GAAP adjustments
Impact of U.S. GAAP adjustments
to combined financial statements ......... 211 150 (547)
------ ------ ------
Net income under U.S. GAAP ............... 692 128 719
====== ====== ======
Basic earnings per ordinary share
under U.S. GAAP (Dfl) ................... 0.98 0.18 1.02
====== ====== ======
The basic earnings per ordinary share under U.S. GAAP includes a 50% share
of the following items, for 1998, Dfl1.21 in respect of profit on sale (under
U.S. GAAP) of discontinued businesses and Dfl0.62 (loss) in respect of the
non-recurring element of the incremental amortization of goodwill and
intangibles arising as a consequence of the re-evaluation of the Combined
Businesses' asset lives, and for 1997, Dfl1.05 (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,
---------------------
1997
(restated) 1998
(In Dfl millions)
Shareholders' equity under Dutch GAAP .......... 2,826 3,333
U.S. GAAP adjustments
U.S. GAAP adjustments to combined
financial statements ......................... 1,367 714
Ordinary dividends not declared
in the period ................................ 440 387
----- -----
Shareholders' equity under U.S. GAAP ........... 4,633 4,434
===== =====
F-67
<PAGE>
ELSEVIER NV
PRO FORMA STATEMENTS OF INCOME IN EUROS
(UNAUDITED)
Year ended December 31,
------------------------------
1996 1997 1998
(restated) (restated
---------- --------- -----
(in euro millions, except
per share amounts)(1)
Wages and salaries .............................. (4) (4) (5)
Merger expenses (exceptional charges) ........... -- (1) (6)
Other expenses net of recharges to affiliates ... 1 2 4
---- ---- ----
Operating expenses .............................. (3) (3) (7)
---- ---- ----
Share in net income of affiliates
Share of net income excluding exceptional
items and amortization of goodwill and
intangible assets ............................. 354 438 421
Share of exceptional items, net of tax ......... 14 (241) 402
Share of amortization of goodwill and
intangible assets, net of tax ................. (155) (209) (247)
---- ---- ----
Total ........................................... 213 (12) 576
Interest income ................................ 5 4 5
Interest expense ............................... -- (1) (1)
---- ---- ----
Financial results ............................... 218 (9) 580
---- ---- ----
Income before tax ............................... 215 (12) 573
Tax ............................................. 3 2 1
---- ---- ----
Net income ...................................... 218 (10) 574
==== ==== ====
Earnings per ordinary share (euro) .............. 0.31 (0.01) 0.81
==== ==== ====
STATEMENTS OF TOTAL RECOGNIZED GAINS AND LOSSES IN EUROS
(UNAUDITED)
Year ended December 31,
-------------------------------
1996 1997 1998
(restated) (restated
---------- --------- ----
(in euro millions)(1)
Net income for the financial year ........... 218 (10) 574
Exchange translation differences ............ 153 155 (98)
---- ---- ----
Total recognized gains and losses
for the financial year ..................... 371 145 476
==== ==== ====
- ------------
(1) The statements of income, prepared under Dutch GAAP, have been translated
into euros, at the Official Conversion Rate of Dfl2.20371 per k1.00, for
the convenience of the reader.
F-68
<PAGE>
ELSEVIER NV
PRO FORMA BALANCE SHEETS IN EUROS
(UNAUDITED)
At December 31,
--------------------------
1997 1998
(restated)
---------- -----
(in euro millions)(1)
Financial fixed assets ....................... 1,393 1,661
------ ------
Accounts receivable ......................... 42 58
Cash and cash equivalents ................... 100 17
------ ------
Total current assets ......................... 142 75
Total current liabilities .................... (201) (177)
------ ------
Net working capital .......................... (59) (102)
------ ------
Long term liabilities ........................ (11) (11)
Provisions ................................... (41) (36)
------ ------
Net assets ................................... 1,282 1,512
====== ======
Share capital isssued ....................... 32 32
Paid-in surplus ............................. 383 388
Legal reserve ............................... 783 949
Other reserves .............................. 84 143
------ ------
Shareholders' funds .......................... 1,282 1,512
====== ======
- -------------
(1) The balance sheets, prepared under Dutch GAAP, have been translated into
euros, at the Official Conversion Rate of Dfl2.20371 per k1.00, for the
convenience of the reader.
F-69
<PAGE>
ELSEVIER NV
PRO FORMA STATEMENTS OF CASH FLOWS IN EUROS
(UNAUDITED)
Year ended December 31,
---------------------------
1996 1997 1998
---- ---- ----
(in euro millions)(1)
Cash from operations .......................... 8 -- (8)
Dividends received ............................ 57 308 325
Dividend paid ................................. (184) (257) (288)
---- ---- ----
Cash (outflow)/surplus from
operations ................................... (119) 51 29
---- ---- ----
Received on newly issued shares ............... 25 10 5
Change in net funding balances
with affiliates .............................. 92 38 (15)
Changes to long term borrowings ............... 1 1 --
Capital contribution in affiliates ............ -- -- (102)
---- ---- ----
Financing ..................................... 118 49 (112)
---- ---- ----
Changes in cash and cash equivalents .......... (1) 100 (83)
==== ==== ====
Balance of cash and cash equivalents
at December 31 ............................... -- 100 17
==== ==== ====
- --------------
(1) The statements of cash flows, prepared under Dutch GAAP, have been
translated into euros, at the Official Conversion Rate of Dfl2.20371 per
k1.00, for the convenience of the reader.
F-70
<PAGE>
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 25, 1999.
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 25, 1999 Dated: March 25, 1999
