-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MsW2erNR7wZBoerALDxGBK+6GePUuALGUy9fGE5qpfo9QSV5kGrpPuk3xo+kAtyM piOzo0dzW17sfePv5IlJZQ== 0000950117-01-000501.txt : 20010314 0000950117-01-000501.hdr.sgml : 20010314 ACCESSION NUMBER: 0000950117-01-000501 CONFORMED SUBMISSION TYPE: 20-F PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010313 FILER: COMPANY DATA: COMPANY CONFORMED NAME: REED INTERNATIONAL PLC CENTRAL INDEX KEY: 0000929869 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS PUBLISHING [2741] IRS NUMBER: 000000000 STATE OF INCORPORATION: X0 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 20-F SEC ACT: SEC FILE NUMBER: 001-13334 FILM NUMBER: 1567559 BUSINESS ADDRESS: STREET 1: 25 VICTORIA ST STREET 2: LONDON ENGLAND CITY: SWIHOEX STATE: X0 ZIP: 00000 BUSINESS PHONE: 011442072275660 MAIL ADDRESS: STREET 1: 25 VICTORIA ST STREET 2: LONDON ENGLAND CITY: SWIHOEX STATE: X0 ZIP: 00000 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ELSEVIER NV / CENTRAL INDEX KEY: 0000929872 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS PUBLISHING [2741] IRS NUMBER: 000000000 STATE OF INCORPORATION: P7 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 20-F SEC ACT: SEC FILE NUMBER: 001-13688 FILM NUMBER: 1567560 BUSINESS ADDRESS: STREET 1: VAN DE SANDE BAKHUYZENSTRAAT 4 STREET 2: 1061 AG ANSTERDAM CITY: THE NETHERLANDS STATE: P7 ZIP: 00000 BUSINESS PHONE: 011442072275660 MAIL ADDRESS: STREET 1: VAN DE SANDE BAKHUYZENSTRAAT 4 STREET 2: 1061 AG ANSTERDAM CITY: THE NETHERLANDS STATE: P7 ZIP: 00000 FORMER COMPANY: FORMER CONFORMED NAME: ELSEVIER NV / DATE OF NAME CHANGE: 19940922 20-F 1 0001.txt REED ELSEVIER 20-F As filed with the Securities and Exchange Commission on 13 March 2001 ------------------------------------------- ------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------------------------------- (Mark One) & REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) or 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934 or 6 ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended 31 December 2000 or & TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number: 1-3334 ELSEVIERENVATIONAL P.L.C. (Exact name of Registrant as specified in its charter) ThelNetherlands (Jurisdiction of incorporation or organisation) VanVdetSandeSBakhuyzenstraat 4 1061oAGSAmsterdam ThelNetherlands (Address of principal executive offices) Securities registered or to be registered pursuant to section 12(b) of the Act:
Title of each class Name of exchange on which registered Reed International P.L.C.: American Depositary Shares (each represe nting four Reed International P.L.C. ordinary shares) New York Stock Exchange Ordinary shares of 12.5p each (the "Reed International ordinary shares ") New York Stock Exchange* Elsevier NV: American Depositary Shares (each representing two Elsevier NV ordinary shares) New York Stock Exchange Ordinary shares of 'E'0.06 each (the "Elsevier ordinary shares ") New York Stock Exchange*
------------------- * Listed, not for trading, but only in connection with the listing of the applicable Registrant's American Depositary Shares issued in respect thereof. Securities registered or to be registered pursuant to Section 12(g) of the Act: None ------------------------------------------- Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None ------------------------------------------- Indicate the number of outstanding shares of each of the issuers' classes of capital or common stock as of 31 December 2000:
Title of each class Number of outstanding shares Reed International P.L.C.: Ordinary shares of 12.5p each . . . . . . . . . . . . . . . . . . . . . . 1,262,450,655 Elsevier NV: Ordinary shares of 'E'0.06 each . . . . . . . . . . . . . . . . . . . . . 735,717,794 R-shares of 'E'0.6 each (held by a subsidia ry of Reed International P.L.C.) 4,049,951
------------------------------------------- Indicate by check mark whether the registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) have been subject to such filing requirements for the past 90 days: Yes 6 No & Indicate by check mark which financial statement item the registrants have elected to follow: Item 17 & Item 18 6 ------------------------------------------- ------------------------------------------- TABLE OF CONTENTS Page ------------------------------------------- GENERAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS . . . . . . . . . . . . 2 PART I IIDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS . . . . . . . . . . . . . . N/A OFFERTSTATISTICS AND EXPECTED TIMETABLE. . . . . . . . . . . . . . . . . . . . . . . . . . N/A ITEM 3: KEY INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . 3 Selected financial data . . . . . . . . . . . . . . . . . . . 3 Risk factors. . . . . . . . . . . . . . . . . . . . . . . . . 9 INFORMATION ON REED ELSEVIER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Structure . . . . . . . . . . . . . . . . . . . . . . . . . . 11 History and development . . . . . . . . . . . . . . . . . . . 12 Business description and organisation . . . . . . . . . . . . 12 Strategy. . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Property, plants & equipment. . . . . . . . . . . . . . . . . 27 OPERATING AND FINANCIAL REVIEW AND PROSPECTS . . . . . . . . . . . . . . . . . . . . 28 Operating results --- Reed Elsevier . . . . . . . . . . . . . 28 Liquidity and capital resources --- Reed Elsevier . . . . . . 36 Operating results --- Reed International and Elsevier . . . . 36 Trend information . . . . . . . . . . . . . . . . . . . . . . 37 DIRECTORS,6SENIOR MANAGEMENT AND EMPLOYEES . . . . . . . . . . . . . . . . . . . . . . . . . 38 Directors and senior management . . . . . . . . . . . . . . . 38 Compensation. . . . . . . . . . . . . . . . . . . . . . . . . 40 Board practices . . . . . . . . . . . . . . . . . . . . . . . 45 Employees . . . . . . . . . . . . . . . . . . . . . . . . . . 46 Share ownership . . . . . . . . . . . . . . . . . . . . . . . 47 ITEM 7:MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS. . . . . . . . . . 54 Major shareholders. . . . . . . . . . . . . . . . . . . . . . 54 Related party transactions. . . . . . . . . . . . . . . . . . 54 ITEFINANCIAL INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 THEEOFFER AND LISTING. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 Trading markets . . . . . . . . . . . . . . . . . . . . . . . 56 ITEM 10: ADDITIONAL INFORMATION . . . . . . . . . . . . . . . . . 58 Memorandum and articles of association --- Reed International 58 Memorandum and articles of association --- Elsevier . . . . . 60 Material contracts. . . . . . . . . . . . . . . . . . . . . . 63 Exchange controls . . . . . . . . . . . . . . . . . . . . . . 63 Taxation. . . . . . . . . . . . . . . . . . . . . . . . . . . 64 Documents on display. . . . . . . . . . . . . . . . . . . . . 65 - -1 Page ------------------------------------------- ITEM 11: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK . . . . . . . . . . . . . . . . . . . . . . . . . . 66 ITEM 12: DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES Reed International. . . . . . . . . . . . . . . . . . . . . . N/A Elsevier. . . . . . . . . . . . . . . . . . . . . . . . . . . N/A Reed Elsevier . . . . . . . . . . . . . . . . . . . . . . . . N/A PART II ITEM 13: DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES Reed International. . . . . . . . . . . . . . . . . . . . . . N/A Elsevier. . . . . . . . . . . . . . . . . . . . . . . . . . . N/A ITEM 14: MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS Reed International. . . . . . . . . . . . . . . . . . . . . . N/A Elsevier. . . . . . . . . . . . . . . . . . . . . . . . . . . N/A ITEM 15: [Reserved] ITEM 16: [Reserved] PART III ITEM 17: FINANCIAL STATEMENTS * . . . . . . . . . . . . . . . . . 68 ITEM 18: FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . 68 ITEM 19: EXHIBITS . . . . . . . . . . . . . . . . . . . . . . . F-1 * The registrants have responded to Item 18 in lieu of responding to this Item. 0 GENERAL Reed Elsevier came into existence on 1 January 1993 when Reed International P.L.C. and Elsevier NV contributed their businesses to two jointly owned companies, Reed Elsevier plc and Elsevier Reed Finance BV. Reed International P.L.C. and Elsevier NV have retained their separate legal and national identities. Reed Elsevier is not a legal entity but a collective reference to the separate legal entities of Reed International P.L.C., Elsevier NV, Reed Elsevier plc and Elsevier Reed Finance BV and their respective subsidiaries, associates and joint ventures. The businesses of all of the entities comprising Reed Elsevier are collectively referred to in this annual report as "Reed Elsevier", and the financial statements of the combined businesses are referred to as the "combined financial statements". In this annual report, references to "we", "our", or "us" are to all of the entities comprising Reed Elsevier. References to "Reed International" and "Elsevier" are to Reed International P.L.C. and Elsevier NV, respectively. In this annual report references to U.S. Dollars or $ are to U.S. currency; references to pounds sterling, sterling, 'L', pence or p are to U.K. currency. Since 4 January 1999, the prices of all shares listed on the Euronext Amsterdam N.V. Exchange, including Elsevier's, have been quoted in euro rather than Dutch guilders. Elsevier has adopted the euro as its primary currency for the presentation of financial information and the declaration of dividends. References to euro and 'E' are to the currency of the European Economic and Monetary Union. For a discussion of the effects of the introduction of the euro on Reed Elsevier's combined results of operations and combined financial position, see "Operating and Financial Review and Prospects". The rates used in the preparation of the financial statements for the 2000 financial year were $1.51 per 'L'1.00 and $0.921 per 'E'1.00 for profit and loss account items (the average prevailing exchange rate during the year) and $1.49 per 'L'1.00 and $0.925 per 'E'1.00 for balance sheet items (the rate prevailing at 31 December 2000). 'E' amounts for periods prior to the 1999 financial year have been stated using the relevant Dutch guilder amounts, translated at the Official Conversion Rate of Dfl2.20371 per 'E'1.00 which was fixed at 1 January 1999. For a discussion of the effects of currency fluctuations on Reed Elsevier's combined results of operations and combined financial position, see "Operating and Financial Review and Prospects". Noon Buying Rates are not used in the preparation of the financial statements included in this annual report except where indicated for certain convenience translations. At 31 December 2000, the Noon Buying Rates were $1.4955 per 'L'1.00 and $0.9388 per 'E'1.00; at 20 February 2001 the Noon Buying Rates were $1.4436 per 'L'1.00 and $0.9096 per 'E'1.00. Harcourt Information In this annual report references to "Harcourt" are to Harcourt General, Inc.. We have re cently entered into arrangements to acquire the Scientific, Technical and Medical business and the U.S. Schools Education and Testing businesses of Harcourt. Subject to regulatory approvals we intend to acquire the businesses through a cash tender offer commenced on 9 November 2000 for the entire share capital of Harcourt and will subsequently on-sell Harcourt's other business to The Thomson Corporation. Harcourt files reports with the United States Securities and Exchange Commission pursuant to the requirements of the United States Securities Exchange Act of 1934, as amended. Harcourt is not affiliated with us and we were not involved in the preparation of such information. Accordingly, we cannot be sure that the information relating to Harcourt contained or incorporated by reference in this annual report is accurate or complete. You may read and copy any reports, statements or other information that Harcourt files with the Commission at the Commission's public reference room located at 450 Fifth Street, NW, Washington, DC 20549. 1 SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS This document contains or incorporates by reference a number of forward- looking statements within the meaning of Section 27A of the United States Securities Act of 1933, as amended, and Section 21E of the United States Securities Exchange Act 1934, as amended, relating to us and Harcourt with respect to: . financial condition; . results of operations; . business plans; . competitive positions; . the features and functions of and markets for the products and services we and Harcourt offer; . our business plans and strategies; . using client bases and cost savings following the acquisition of the Harcourt businesses; and . the consummation and advantages of the acquisition of the Harcourt businesses. We consider any statements that are not historical facts to be "forward- looking statements". These statements are based on the current expectations of the management of our businesses and are subject to risks and uncertainties and actual results. These differences could be material; therefore, you should evaluate forward-looking statements in light of various important factors, including those set forth or incorporated by reference in this annual report. Important factors that could cause actual results to differ materially from estimates or forecasts contained in the forward-looking statements include, among others: . general economic and business conditions; . exchange rate fluctuations; . the impact of technological change, including the impact of electronic or other distribution formats, on our businesses; . competitive factors in the industries in which we operate; . customer acceptance of our products and services; . changes in law and legal interpretation affecting our intellectual property rights and how business is done through the Internet; . legislative, fiscal and regulatory developments and political risks; . requirements or actions of anti-trust authorities; . changes in the seasonal and cyclical nature of the markets for our products and services; . changes in public funding and spending by academic institutions; . our ability to integrate our operations and the acquired businesses of Harcourt; . the effect on our business of the failure to realise synergies or other anticipated benefits of the acquisition of the Harcourt businesses; . liabilities within Harcourt of which we are not aware; and . other risks referenced from time to time in the filings of Reed International and Elsevier with the Securities and Exchange Commission. The terms "estimate", "project", "plan", "intend", "expect", "believe", "should" and similar expressions identify forward-looking statements. These forward-looking statements are found at various places throughout this annual report and the other documents incorporated by reference listed under "Documents on display". You should not place undue reliance on these forward-looking statements, which speak only as of the date of this annual report. We undertake no obligation to publicly update or release any revisions to these forward-looking statements to reflect events or circumstances after the date of this annual report or to reflect the occurrence of unanticipated events. 2 PART I ITEM 3: KEY INFORMATION SELECTED FINANCIAL DATA REED ELSEVIER The selected combined financial data for Reed Elsevier should be read in conjunction with, and is qualified by, the combined financial statements included in this annual report. In addition, as separate legal entities, Reed International and Elsevier prepare separate financial statements which reflect their respective shareholders' economic interest in Reed Elsevier accounted for on an equity basis. All of the selected financial data for Reed Elsevier set out below has been extracted or derived from the combined financial statements which have been audited by Deloitte & Touche, London and Deloitte & Touche, Amsterdam. Combined Profit and Loss Account Data
Year ended 31 December(1) --------------------------------------------------- 1996 1997 1998 1999 2000 2000(2) -------- -------- -------- ---------------- ------- (in millions) Amounts in accordance with U.K. and Dutch GAAP: Turnover Continuing operations . . . . . . . . . . . . . . . . 'L'2,897 'L'2,987 'L'3,163 'L'3,390'L'3,768 $5,635 Discontinued operations(3) . . . . . . . . . . . . . . 484 430 28 --- --- --- -------- -------- -------- ---------------- ------- 3,381 3,417 3,191 3,390 3,768 5,635 ======== ======== ======== ================ ======= Adjusted operating profit (including joint ventures)(4) Continuing operations . . . . . . . . . . . . . . . . 787 812 813 792 793 1,186 Discontinued operations(3) . . . . . . . . . . . . . . 69 73 --- --- --- --- Amortisation of goodwill and intangible assets (including joint ventures) . . . . . . . . . . . . . . (250) (289) (332) (373) (468) (700) Exceptional items charged to operating income(5). . . . --- (502) (79) (239) (115) (172) -------- -------- -------- ---------------- ------- Operating profit (including joint ventures) . . . . . . 606 94 402 180 210 314 Non operating exceptional items(5). . . . . . . . . . . 24 54 682 7 85 127 -------- -------- -------- ---------------- ------- Profit before interest and taxes. . . . . . . . . . . . 630 148 1,084 187 295 441 Net interest expense. . . . . . . . . . . . . . . . . . (51) (62) (40) (82) (103) (154) -------- -------- -------- ---------------- ------- Profit before taxes and minority interests. . . . . . . 579 86 1,044 105 192 287 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . (212) (99) (271) (167) (159) (238) Minority interests. . . . . . . . . . . . . . . . . . . (1) (1) (1) (1) --- --- -------- -------- -------- ---------------- ------- Profit/(loss) attributable. . . . . . . . . . . . . . . 366 (14) 772 (63) 33 49 ======== ======== ======== ================ ======= Adjusted amounts(4) Adjusted operating profit . . . . . . . . . . . . . . 856 885 813 792 793 1,186 Adjusted profit before tax . . . . . . . . . . . . . . 805 823 773 710 690 1,032 Adjusted attributable profit . . . . . . . . . . . . . 603 608 571 527 511 764 Amounts in accordance with U.S. GAAP: Continuing operations Operating income . . . . . . . . . . . . . . . . . . . 711 107 13 109 236 353 Net income/(loss) from continuing operations . . . . . 450 3 (122) (73) 60 90 Discontinued operations Net income from trading operations . . . . . . . . . . 43 40 (1) --- --- --- Gain on sales net of provisions . . . . . . . . . . . --- --- 521 --- --- --- -------- -------- -------- ---------------- ------- Net income from discontinued operations . . . . . . . . 43 40 520 --- --- --- ======== ======== ======== ================ ======= Net income/(loss) . . . . . . . . . . . . . . . . . . . 493 43 398 (73) 60 90 ======== ======== ======== ================ =======
3 Combined Balance Sheet Data
As at 31 December(1) --------------------------------------------------- 1996 1997 1998 1999 2000 2000(2) -------- -------- -------- ---------------- ------- (in millions) Amounts in accordance with U.K. and Dutch GAAP: Total assets . . . . . . . . . . . . . . . 'L'5,176 'L'5,211 'L'5,760 'L'5,272'L'7,428 $11,109 Long term obligations less current portion (717) (689) (520) (377) (623) (932) Net borrowings . . . . . . . . . . . . . . (196) (630) (962) (1,066) (433) (648) Combined shareholders' funds(6). . . . . . 2,063 1,692 2,130 1,855 3,041 4,548 Amounts in accordance with U.S. GAAP: Total assets . . . . . . . . . . . . . . . 6,107 6,139 6,443 5,896 8,115 12,136 Long term obligations less current portion (993) (1,291) (1,122) (772) (1,724) (2,578) Combined shareholders' funds(6). . . . . . 3,075 2,774 2,833 2,423 3,707 5,544
------------------- (1) The combined financial statements are prepared in accordance with accounting policies that are in conformity with U.K. and Dutch GAAP, which differ in certain significant respects from U.S. GAAP. The principal differences between U.K. and Dutch GAAP and U.S. GAAP which are relevant to Reed Elsevier are set out in note 30 to the combined financial statements. (2) Noon buying rates as at 31 December 2000 have been used to provide a convenience translation into U.S. dollars. (3) Discontinued operations are presented in accordance with U.K. and Dutch GAAP, and comprise IPC Magazines and the consumer book publishing operations which were the final elements of the consumer segment sold in 1998. (4) U.K. and Dutch GAAP allow the presentation of alternative earnings measures. Adjusted figures, which exclude the amortisation of goodwill and intangible assets, exceptional items and related tax effects, are presented as additional performance measures. U.S. GAAP does not permit the presentation of alternative earnings measures. (5) Exceptional items are significant items within Reed Elsevier's ordinary activities which, under U.K. and Dutch GAAP, need to be disclosed separately by virtue of their size or incidence. The items do not qualify as extraordinary under U.S. GAAP a nd are considered a part of operating results. Exceptional items charged to operating profit, under U.K. and Dutch GAAP, are: (i) in 2000 'L'77 million in respect of reorganisation costs; and 'L'38 million in respect of acquisition related costs; (ii) in 1999 'L'161 million in respect of reorganisation costs; and 'L'78 million in respect of Year 2000 compliance and acquisition related costs; (iii) in 1998 'L'79 million in respect of Year 2000 compliance and acquisition related costs; and (iv) in 1997 'L'230 million in respect of the cost of programmes to recompense advertisers in relation to irregularities in circulation claims for certain Reed Travel Group publications together with related expenses and reorganisation costs; 'L'250 million in respect of a non-cash write-down of intangible assets related to Reed Travel Group; and 'L'22 million in respect of Year 2000 compliance and acquisition related costs. Non operating exceptional items arise primarily from the net profit on disposal of Springhouse, KG Saur and REZsolutions in 2000, of IPC Magazines in 1998 and, in other years, from the disposal of other businesses and surplus property interests. For further details see note 8 to the combined financial statements. (6) On 5 December 2000, following a joint international offering, Reed International issued 113,700,000 new 12.5p ordinary shares at 625p each and Elsevier issued 66,255,000 new 'E'0.06 ordinary shares at 'E'14.50 each. The purpose of the offering was to finance the proposed acquisition by Reed Elsevier of the Scientific, Technical and Medical business and the U.S. Schools Education and Testing businesses of Harcourt. 4 REED INTERNATIONAL The selected financial data for Reed International should be read in conjunction with, and is qualified by, the consolidated financial statements of Reed International included in this annual report. The results and financial position of Reed International reflect the 52.9% economic interest of Reed International's shareholders in Reed Elsevier, after taking account of results arising in Reed International and its subsidiaries. These interests have been accounted for on a gross equity basis. All of the selected consolidated financial data for Reed International set out below has been extracted or derived from the financial statements of Reed International, which have been audited by Deloitte & Touche, London.
Year ended 31 December(1) ----------------------------------------- 1996 1997 1998 1999 2000 2000(2) ------ ------ ------ ------------ ------- (in millions, except per share amounts) Amounts in accordance with U.K. GAAP: Share of adjusted profit before tax(3). . . . . . . . . . . . 'L'426 'L'435 'L'409 'L'376'L'365 $546 Share of amortisation . . . . . . . . . . . . . . . . . . . . (132) (153) (176) (197) (248) (371) Share of exceptional items before tax(4). . . . . . . . . . . 13 (237) 319 (122) (15) (22) Elsevier's share of U.K. tax credit on distributed earnings . . . . . . . . . . . . . . . . . . . . . . . . . . (18) (20) (12) (6) (6) (9) ------ ------ ------ ------------ ------- Profit on ordinary activities before tax. . . . . . . . . . . 289 25 540 51 96 144 ------ ------ ------ ------------ ------- Tax on profit on ordinary activities. . . . . . . . . . . . . (113) (52) (144) (90) (85) (127) ------ ------ ------ ------------ ------- Profit/(loss) attributable to ordinary shareholders . . . . . 176 (27) 396 (39) 11 17 ====== ====== ====== ============ ======= Basic earnings/(loss) per Reed International ordinary share . . . . . . . . . . . . . . . . . . . . . . . 15.5p (2.4p) 34.7p (3.4p) 1.0p 0.01 Diluted earnings/(loss) per Reed International ordinary share . . . . . . . . . . . . . . . . . . . . . . . 15.4p (2.4p) 34.6p (3.4p) 1.0p 0.01 Gross dividends per Reed International ordinary share(5). . . 17.0p 18.25p 17.3p 11.1p 11.1p 0.17 Total assets. . . . . . . . . . . . . . . . . . . . . . . . . 1,247 1,056 1,292 1,090 1,745 2,610 Long term obligations . . . . . . . . . . . . . . . . . . . . (36) (36) (36) (36) (36) (54) Shareholders' funds(6). . . . . . . . . . . . . . . . . . . . 1,091 895 1,127 981 1,609 2,406 Adjusted Amounts:(3) Adjusted profit before tax. . . . . . . . . . . . . . . . . . 426 435 409 376 365 546 Adjusted profit attributable to ordinary shareholders . . . . 319 322 302 279 270 404 Adjusted earnings per Reed International ordinary share . . . 28.1p 28.3p 26.4p 24.4p 23.3p 0.35 Amounts in accordance with U.S. GAAP: Net income/(loss) . . . . . . . . . . . . . . . . . . . . . . 244 4 191 (47) 27 40 Basic earnings/(loss) per Reed International ordinary share . . . . . . . . . . . . . . . . . . . . . . . 21.4p 0.4p 16.7p (4.1p) 2.3p 0.03 Diluted earnings/(loss) per Reed International ordinary share 21.4p 0.4p 16.7p (4.1p) 2.3p 0.03 Total assets. . . . . . . . . . . . . . . . . . . . . . . . . 1,673 1,511 1,544 1,328 2,009 3,004 Long term obligations . . . . . . . . . . . . . . . . . . . . (36) (36) (36) (36) (36) (54) Shareholders' funds(6). . . . . . . . . . . . . . . . . . . . 1,627 1,467 1,499 1,282 1,961 2,933
------------------- (1) The consolidated financial statements of Reed International are prepared in accordance with accounting policies that are in conformity with U.K. GAAP, which differs in certain significant respects from U.S. GAAP. The principal differences between U.K. GAAP and U.S. GAAP which are relevant to Reed International are set out in note 23 to the Reed International financial statements. (2) Noon buying rates as at 31 December 2000 have been used to provide a convenience translation into U.S. dollars. (3) U.K. GAAP allows the presentation of alternative earnings measures. Share of adjusted profit before tax is presented as an additional performance measure and is shown before share of amortisation of goodwill and intangible assets and share of exceptional items. U.S. GAAP does not permit the presentation of alternative earnings measures. (4) Share of exceptional items before tax includes Reed International's share of Reed Elsevier's exceptional items: (i) in 2000 exceptional charges principally relate to the costs of a major programme of reorganisation across Reed Elsevier businesses, commenced in 1999. Basic earnings per Reed International ordinary share include 3.5p (loss) in respect of these items. Exceptional gains, amounting to 3.9p per Reed International ordinary share, arose in 2000 in respect of the disposal of Springhouse, KG Saur and REZsolutions; (ii) in 1999 exceptional items principally relate to the costs of a major programme of reorganisation across Reed Elsevier businesses. Costs include employee severance, surplus leasehold property obligations and fixed asset write-offs. Basic earnings per Reed International ordinary share include 7.3p (loss) in respect of these items; (iii) in 1998 exceptional items principally relate to the gain on disposal of IPC Magazines. Basic earnings per Reed International ordinary share under, respectively, U.S. GAAP and U.K. GAAP includes 24.1p and 27.4p in respect of this item. In addition, under U.S. GAAP, Reed Elsevier's goodwill and intangible asset lives were re-evaluated and are amortised over shorter periods resulting, from 1998, in a significantly higher amortisation charge; see Note 30 to the combined financial statements. Basic 5 earnings per Reed International ordinary share includes 12.3p (loss) under U.S. GAAP in respect of the non recurring element of the incremental charge arising from this re-evaluation; and (iv) in 1997 exceptional items principally relate to the cost of programmes to recompense advertisers in relation to irregularities in circulation claims for certain Reed Travel Group publications together with related expenses and reorganisation costs together with the non-cash write down of Reed Travel Group intangible assets. Basic earnings per Reed International ordinary share under, respectively, U.S. GAAP and U.K. GAAP includes 21.6p (loss) and 18.3p (loss) in respect of these items. (5) The amount of gross dividends per Reed International ordinary share shown includes the U.K. tax credit available to certain Reed International shareholders, including beneficial owners of Reed International ADSs who are residents of the U.S. for the purposes of the U.K. Tax Treaty but do not include any deduction on account of U.K. withholding taxes, currently at the rate of 15% of the sum of the dividend and the related tax credit in most cases; see "Item 10: Additional Information -- Taxation ". (6) On 5 December 2000, Reed International issued 113,700,000 new 12.5p ordinary shares at 625p each following a joint international offering by Reed International and Elsevier. The purpose of the offering was to finance the proposed acquisition by Reed Elsevier of the Scientific, Technical and Medical business and the U.S. Schools Education and Testing businesses of Harcourt. The nominal value of the shares issued was 'L'14.2 million and the net proceeds were 'L'694 million. ELSEVIER The selected financial data for Elsevier should be read in conjunction with, and is qualified by, the financial statements of Elsevier included in this annual report. The results and financial position of Elsevier reflect the 50% economic interest of Elsevier's shareholders in Reed Elsevier. These interests are accounted for on an equity basis. All of the selected financial data for Elsevier set out below has been extracted or derived from the financial statements of Elsevier, which have been audited by Deloitte & Touche, Amsterdam.
Year ended 31 December(1) ----------------------------------------- 1996 1997 1998 1999 2000 2000(2) ------ ------ ------ ------------ ------- (in millions, except per share amounts) Amounts in accordance with Dutch GAAP: Share of adjusted profit before tax(3). . . . . . . 'E'480 'E'595 'E'575 'E'540'E'566 $531 Share of amortisation . . . . . . . . . . . . . . . (149) (209) (247) (284) (384) (361) Share of exceptional items before tax(4). . . . . . 14 (324) 449 (176) (25) (23) Taxation. . . . . . . . . . . . . . . . . . . . . . (127) (72) (203) (128) (130) (122) ------ ------ ------ ------------ ------- Profit/(loss) attributable to ordinary shareholders 218 (10) 574 (48) 27 25 ====== ====== ====== ============ ======= Basic earnings/(loss) per Elsevier ordinary share . 0.31 (0.01) 0.81 (0.07) 0.04 0.04 Diluted earnings/(loss) per Elsevier ordinary share 0.31 (0.01) 0.81 (0.07) 0.03 0.03 Gross dividends per Elsevier ordinary share . . . . 0.34 0.43 0.39 0.27 0.28 0.26 Total assets. . . . . . . . . . . . . . . . . . . . 1,607 1,535 1,736 1,639 2,650 2,488 Long term borrowings, less current portion. . . . . (10) (11) (11) (8) (6) (6) Shareholders' funds(5). . . . . . . . . . . . . . . 1,385 1,282 1,512 1,493 2,448 2,298 Adjusted Amounts:(3) Adjusted profit before tax. . . . . . . . . . . . . 480 595 575 540 566 531 Adjusted profit attributable. . . . . . . . . . . . 360 440 425 401 419 393 Adjusted earnings per Elsevier ordinary share . . . 0.51 0.62 0.60 0.57 0.59 0.55 Amounts in accordance with U.S. GAAP: Net income/(loss) . . . . . . . . . . . . . . . . . 314 58 326 (46) 58 54 Basic earnings/(loss) per Elsevier ordinary share . 0.44 0.08 0.46 (0.06) 0.08 0.08 Diluted earnings/(loss) per Elsevier ordinary share 0.44 0.08 0.46 (0.06) 0.08 0.08 Total assets. . . . . . . . . . . . . . . . . . . . 2,118 2,156 2,057 1,997 3,046 2,859 Long term borrowings, less current portion. . . . . (10) (11) (11) (8) (6) (6) Shareholders' funds(5). . . . . . . . . . . . . . . 2,065 2,102 2,012 1,951 2,984 2,801
------------------- (1) The financial statements of Elsevier are prepared in accordance with accounting policies that are in conformity with Dutch GAAP, which differs in certain significant respects from U.S. GAAP. The principal differences between Dutch GAAP and U.S. GAAP which are relevant to Elsevier are set out in note 15 to the Elsevier financial statements. (2) Noon buying rates as at 31 December 2000 have been used to provide a convenience translation into U.S. dollars. (3) Dutch GAAP allows the presentation of alternative earnings measures. Share of adjusted profit before tax is presented as an additional performance measure and is shown before share of amortisation of goodwill and intangible assets and share of exceptional items. U.S. GAAP does not permit the presentation of alternative earnings measures. (4) Share of exceptional items before tax includes Elsevier's share of Reed Elsevier's exceptional items: (i) in 2000 exceptional charges principally relate to the costs of a major programme of reorganisation across Reed Elsevier businesses, commenced in 1999. Basic earnings per Elsevier ordinary share include 'E'0.09 (loss) in respect of these items. Exceptional gains, amounting to 'E'0.10 per Elsevier ordinary share, arose in 2000 in respect of the disposal of Springhouse, KG Saur and REZsolutions; 6 (ii) in 1999 exceptional items principally relate to the costs of a major programme of reorganisation across Reed Elsevier businesses, commenced in 1999. Costs include employee severance, surplus leasehold property obligations and fixed asset write-offs. Basic earnings per Elsevier ordinary share include 'E'0.18 (loss) in respect of these items; (iii) in 1998 exceptional items principally relate to the gain on disposal of IPC Magazines. Basic earnings per Elsevier ordinary share under, respectively, Dutch GAAP and U.S. GAAP includes 'E'0.55 and 'E'0.62 in respect of this item. In addition, under U.S. GAAP, Reed Elsevier's goodwill and intangible asset lives were re-evaluated and are amortised over shorter periods resulting, from 1998, in a significantly higher amortisation charge; see Note 30 to the combined financial statements. Basic earnings per Elsevier ordinary share includes 'E'0.28 (loss) under U.S. GAAP in respect of the non recurring element of the incremental charge arising from this re-evaluation; and (iv) in 1997 exceptional items principally relate to the cost of programmes to recompense advertisers in relation to irregularities in circulation claims for certain Reed Travel Group publications together with related expenses and reorganisation costs together with the non-cash write down of Reed Travel Group intangible assets. Basic earnings per Elsevier ordinary share under, respectively, U.S. GAAP and Dutch GAAP includes 'E'0.48 (loss) and 'E'0.40 (loss) in respect of these items. (5) On 5 December 2000, the company issued 66,255,000 new ordinary shares at 'E'14.50 each following a joint international offering by Reed International and Elsevier. The purpose of the offering was to finance the proposed acquisition by Reed Elsevier of the Scientific, Technical and Medical business and the U.S. Schools Education and Testing businesses of Harcourt. The nominal value of the shares issued was 'E'4.0 million and the net proceeds were 'E'933 million. EXCHANGE RATES For a discussion of the impact of currency fluctuations on Reed Elsevier's combined results of operations and combined financial position, see "Item 5: Operating and Financial Review and Prospects -- Reed Elsevier". The exchange rate on 20 February 2001 was 'L'1.00 = $1.4436 and 'E'1.00 = $0.9096. The following table illustrates, for the periods and dates indicated, certain information for pounds sterling expressed in U.S. dollars per 'L'1.00. Noon Buying Rates have not been used in the preparation of the Reed Elsevier combined financial statements or the Reed International financial statements. U.S. dollars per 'L'1.00
Period --------------------------- Year ended 31 December End Average(1) High Low --------------------------------------- ---- ---------- ---- ---- 1996 . . . . . . . . . . . . . . . . . . 1.71 1.56 1.71 1.49 1997 . . . . . . . . . . . . . . . . . . 1.64 1.64 1.70 1.58 1998 . . . . . . . . . . . . . . . . . . 1.66 1.66 1.71 1.61 1999 . . . . . . . . . . . . . . . . . . 1.62 1.62 1.68 1.55 2000 . . . . . . . . . . . . . . . . . . 1.49 1.52 1.65 1.40 Month High Low --------------------------------------- ---- ---- February 2001 (through 20 February 2001) 1.48 1.44 January 2001 . . . . . . . . . . . . . . 1.50 1.46 December 2000. . . . . . . . . . . . . . 1.49 1.44 November 2000. . . . . . . . . . . . . . 1.45 1.40 October 2000 . . . . . . . . . . . . . . 1.48 1.43 September 2000 . . . . . . . . . . . . . 1.48 1.40 August 2000. . . . . . . . . . . . . . . 1.50 1.45
------------------- (1) The average of the Noon Buying Rates on the last day of each month during the relevant period. The following table illustrates, for the periods and dates indicated, certain information concerning the Noon Buying Rate for the euro expressed in U.S. dollars per 'E'1.00. Noon Buying Rates have not been used in the preparation of the Elsevier financial statements. U.S. dollars per 'E'1.00(1)
Period --------------------------- Year ended 31 December End Average(2) High Low --------------------- ---- ---------- ---- ---- 1996 . . . . . . . . . 1.28 1.30 1.37 1.26 1997 . . . . . . . . . 1.08 1.12 1.28 1.03 1998 . . . . . . . . . 1.17 1.10 1.21 1.06 1999 . . . . . . . . . 1.01 1.07 1.18 1.00 2000 . . . . . . . . . 0.94 0.92 1.03 0.83
7 U.S. dollars per 'E'1.00(1)
Period ------------------- Month High Low --------------------------------------- ---- ---- February 2001 (through 20 February 2001) 0.94 0.91 January 2001 . . . . . . . . . . . . . . 0.95 0.92 December 2000. . . . . . . . . . . . . . 0.94 0.87 November 2000. . . . . . . . . . . . . . 0.87 0.84 October 2000 . . . . . . . . . . . . . . 0.88 0.83 September 2000 . . . . . . . . . . . . . 0.90 0.85 August 2000. . . . . . . . . . . . . . . 0.92 0.88
------------------- (1) 'E' rates for periods prior to the 1999 financial year have been stated using the relevant Dutch guilder rates, translated at the Official Conversion Rate of Dfl2.20371 per 'E'1.00, which was fixed as at 1 January 1999. (2) The average of the Noon Buying Rates on the last day of each month during the relevant period. 8 RISK FACTORS The key risks relating to our business and to the acquisition of Harcourt are included below. Additional risks not presently known to us or that we currently deem immaterial may also impair our business. Risks relating to our business Our intellectual property rights may not be adequately protected under current laws in some jurisdictions, which may adversely affect our results and our ability to grow. Our products are largely comprised of intellectual property content delivered through a variety of media, including journals, books, CD-Rom and the Internet. We rely on trademark, copyright and other intellectual property laws to establish and protect our proprietary rights in these products. However, we cannot assure you that our proprietary rights will not be challenged, limited, invalidated or circumvented. Despite trademark and copyright protection, third parties may be able to copy, infringe or otherwise profit from our proprietary rights without our authorisation. These unauthorised activities may be more easily facilitated by the Internet. In addition, the lack of Internet-specific legislation relating to trademark and copyright protection creates an additional challenge for us in protecting our proprietary rights to content delivered through the Internet and electronic platforms. We operate in a highly competitive environment that is subject to rapid change and we must continue to invest and adapt to remain competitive. Our scientific, business to business, legal and education businesses operate in highly competitive markets. These markets continue to change in response to technological innovations and other factors. We cannot predict with certainty the changes that may occur and affect the competitiveness of our businesses. In particular, the means of delivering our products, and the products themselves, may be subject to rapid technological change. Although we have undertaken several initiatives to adapt to and benefit from these changes, we cannot predict whether technological innovations will, in the future, make some of our products wholly or partially obsolete. We may be required to invest significant resources to further adapt to the changing market and competitive environment. We cannot assure you whether, or when, our substantial investment in our Internet initiatives will produce returns. We are investing significant amounts to develop and promote our Internet initiatives and electronic platforms. The provision of products and services through these media is very competitive and we may experience difficulties developing this aspect of our businesses due to a variety of factors, many of which are beyond our control. These factors may include: . the ability of our Internet initiatives and electronic platforms to be accepted by our customers; . competition from comparable and new technologies; and . the public's acceptance and continued use of the Internet and electronic media. In addition, as a consequence of our Internet and other technological initiatives, we are becoming more dependent on the performance of the Internet and our systems. We cannot assure you that there will be continued demand for our products and services. Our businesses are dependent on the continued acceptance by our customers of our products and services and of the prices which we charge. Although we take significant care to ensure that we fully understand the needs of our customers, we cannot predict whether there will be changes in the market in the future which will affect the acceptability of products, services and prices to our customers. Changes in government spending and spending by academic institutions may adversely affect our education and scientific businesses. Our education business receives substantial public funds for its products and services. Our scientific business supplies scientific information principally to academic institutions. Any decrease or elimination of government funding or a decrease in academic funding could negatively impact our businesses. We may be unable to implement and execute our strategic plans if we cannot maintain high quality management. The implementation and execution of our strategic plans depend on the availability of high quality management resources across all our businesses. We cannot predict that in the future such resources will be available although we place significant emphasis on the development of management talent and succession planning. We are dependent on advertising for a significant portion of our revenue. Approximately 24% of our revenue is derived from advertising. Traditionally, spending by companies on advertising and other marketing activities has been cyclical with companies spending significantly less on advertising in times of economic slowdown or recession. 9 Fluctuations in exchange rates may affect our reported results. Our financial statements are expressed in pounds sterling and euros and are, therefore, subject to movements in exchange rates on the translation of the financial information of businesses whose operational currencies are other than our reporting currencies. The United States is our most important market outside the United Kingdom and the Euro Zone, and, accordingly, significant fluctuations in U.S. dollar/sterling and U.S. dollar/euro exchange rates could significantly affect our reported results from year to year. In addition, in some of our businesses we incur costs in currencies other than those in which revenues are earned. The relative movements between the exchange rates in the currencies in which costs are incurred and the currencies in which revenues are earned can significantly affect the profits of those businesses. Risks relating to the acquisition of Harcourt The on-sale of the remaining businesses may not be completed. The on-sale to The Thomson Corporation and realisation of after tax proceeds of approximately $1.6 billion ('L'1.1 billion) will not take place until the merger is completed. Although we do not expect that, following the merger, there will be any significant delays in completing the on-sale, we cannot be sure that delays will not occur. If such delays were to occur, or in the unlikely event that the on-sale is not completed, we would consider other means for reducing our post-acquisition borrowings and dealing with the unsold businesses. We may be required to divest businesses and assets or enter into behavioural undertakings. We have agreed with Harcourt that if any regulatory objections to our acquisition of Harcourt and our on-sale to The Thomson Corporation are made that could reasonably be expected to prohibit or materially impair or delay those transactions beyond 24 July 2001, we will use our reasonable best efforts to sell, hold separate or otherwise dispose of assets or conduct our business in a manner that will resolve such objections unless such action would reasonably be expected to be materially adverse to our business, financial condition, assets or results of operations or to Harcourt's business, financial condition, assets or results of operations. As a result of this obligation, we may be required to divest significant assets or businesses that we would otherwise choose to retain, or to enter into behavioural undertakings that we might otherwise choose not to enter. Integrating our operations and the acquired businesses of Harcourt may prove to be disruptive and could result in the combined businesses failing to meet our expectations. We are acquiring, and retaining, the Scientific, Technical and Medical business and the U.S. Schools Education and Testing businesses of Harcourt with the expectation that the acquisition will result in accelerated revenue and profit growth. We cannot be sure that Reed Elsevier will realise these anticipated benefits in full or at all. Achieving the expected benefits and synergies of the acquisition will depend, in part, upon whether the operations and the personnel of Harcourt can be integrated in an efficient and effective manner with ours. The process of integrating two formerly separately-operated businesses may be disruptive to both businesses, may take longer than we anticipate and may cause an interruption of our business. The performance of the combined businesses may not meet our expectations if integration is not successful or if the process is prolonged. There may be contingent and other liabilities within Harcourt of which we are not aware. We intend to acquire the Harcourt businesses by means of a tender offer followed by the merger of one of our wholly-owned subsidiaries into Harcourt, pursuant to which Harcourt will become wholly-owned by us. As a result, we will indirectly acquire all of Harcourt's known and unknown liabilities, regardless of whether they are directly associated with the businesses that we intend to retain. We do not control Harcourt, and, although Harcourt has provided us with limited access to its books and records, we cannot be sure that such access was sufficient to enable us to evaluate all of Harcourt's liabilities and the risks associated with its businesses. Harcourt could have liabilities or its business could be subject to risks of which we are currently unaware that could have a material adverse effect on our business, financial position and results of operations. 10 ITEM 4: INFORMATION ON REED ELSEVIER STRUCTURE Reed Elsevier came into existence on 1 January 1993 when Reed International and Elsevier contributed their businesses to two jointly owned companies, Reed Elsevier plc, a U.K. registered company which owns all the publishing and information businesses, and Elsevier Reed Finance BV, a Dutch registered company which owns the financing activities. Reed International and Elsevier have retained their separate legal and national identities and are publicly held companies with separate stock exchange listings in London, Amsterdam and New York. Reed International and Elsevier each holds a 50% interest in Reed Elsevier plc. Reed International holds a 39% interest in Elsevier Reed Finance BV, with Elsevier holding a 61% interest. Reed International additionally holds an indirect equity interest in Elsevier, reflecting the arrangements entered into between Reed International and Elsevier at the time of the merger, which determined the equalisation ratio whereby one Elsevier ordinary share is, in broad terms, intended to confer equivalent economic interests to 1.538 Reed International ordinary shares. The equalisation ratio is subject to change to reflect share splits and similar events that affect the number of outstanding ordinary shares of either Reed International or Elsevier. Under the equalisation arrangements Reed International shareholders have a 52.9% economic interest in Reed Elsevier and Elsevier shareholders (other than Reed International) have a 47.1% economic interest in Reed Elsevier. Holders of ordinary shares in Reed International and Elsevier enjoy substantially equivalent dividend and capital rights with respect to their ordinary shares. The boards of both Reed International and Elsevier have agreed, except in exceptional circumstances, to recommend equivalent gross dividends (including, with respect to the dividend on Reed International ordinary shares, the associated U.K. tax credit), based on the equalisation ratio. A Reed International ordinary share pays dividends in sterling and is subject to U.K. tax law with respect to dividend and capital rights. An Elsevier ordinary share pays dividends in euros and is subject to Dutch tax law with respect to dividend and capital rights. The principal assets of Reed International comprise its 50% interest in Reed Elsevier plc, its 39% interest in Elsevier Reed Finance BV, its indirect equity interest in Elsevier and certain amounts receivable from subsidiaries of Reed Elsevier plc. The principal assets of Elsevier comprise its 50% interest in Reed Elsevier plc, its 61% interest in Elsevier Reed Finance BV and certain amounts receivable from subsidiaries of Reed Elsevier plc and Elsevier Reed Finance BV. Elsevier also owns shares, carrying special dividend rights, in certain of the Dutch subsidiaries of Reed Elsevier plc. These shares enable Elsevier to receive dividends from companies within its tax jurisdiction, thereby mitigating Reed Elsevier's potential tax costs. 11 HISTORY AND DEVELOPMENT Reed International prior to the merger Reed International was founded in 1903, although certain of its publications originated in the 19th century. Reed International was originally a paper manufacturing company. It diversified into publishing in 1970 developing its publishing holdings into a significant business by 1986, at which time the Board of Reed International decided to concentrate on publishing and information businesses. Over the period up to the merger, Reed International disposed of its manufacturing businesses and made a number of significant acquisitions of publishing and information businesses. Reed International's strategic focus within the publishing and information businesses was directed primarily towards higher margin, subscription-based businesses in English language markets. Elsevier prior to the merger Elsevier was formed in 1880 when a number of established Dutch publishers and booksellers pooled their interests. Initially, Elsevier's activities comprised small scale publishing for the general trade market. After World War II, Elsevier broadened the scope of its operations, diversifying into consumer magazines, newspapers, business publications and commercial printing and achieving considerable growth as a publisher of English language scientific journals. Since the late 1980's, Elsevier's strategy has been directed primarily towards expansion in publishing and information in English language information markets. This strategy resulted in the disposal of Elsevier's commercial printing and consumer book publishing operations and in the acquisition of a number of publishing houses active in the fields of scientific, professional and business to business publishing. Material Acquisitions and Disposals Reed Elsevier has made strategic acquisitions in the scientific, legal and business markets to enhance existing activities. Total acquisition expenditure in the three years ended 31 December 2000 was approximately 'L'2.3 billion. The principal acquisitions have been: . Matthew Bender, a leading U.S. pub lisher of legal analysis and case law and the remaining 50% equity in Shepard's from Times Mirror, in August 1998 for $1.65 billion ('L'1 billion); . CMD Group, a leading international supplier of information to the construction industry, in May 2000 for $300 million ('L'199 million); and . Miller Freeman Europe, Europe's leading trade exhibition organiser, in July 2000 for 'L'360 million. In addition, Reed Elsevier has made a significant number of smaller acquisitions. In 1995 Reed Elsevier initiated a major divestment programme to withdraw from consumer publishing markets. In 1998 Reed Elsevier completed the sale of its consumer book publishing operations. The last major step in its withdrawal from consumer publishing markets was the divestment, also in 1998, of IPC Magazines in the United Kingdom, yielding gross proceeds of 'L'878 million. Acquisition of Harcourt STM and Education Businesses The pending acquisition of Harcourt's STM business and its U.S. Schools Education and Testing businesses will represent a major step forward in our strategy. The acquisition, when completed, will give Reed Elsevier a leading position across the scientific, technical and medical spectrum, and a strong position in the fast growing U.S. Schools education market. The transaction, which is subject to regulatory approvals, will be effected by the purchase of the whole of Harcourt and the on-sale to The Thomson Corporation of the Higher Education business and certain Corporate and Professional Services businesses that we do not wish to retain. The total cost of the transaction, after taking into account the on-sale and debt assumed and other liabilities, will be approximately $4.5 billion. To finance the acquisition, in December 2000, Reed International and Elsevier raised 'L'1,263 million through the issue of new shares representing an additional 9.9% of their respective ordinary share capitals. The remainder of the transaction cost will be funded from available debt facilities. A more detailed description of the Harcourt STM and US Schools Education and Testing businesses is included in, respectively, "Science & Medical" and "Education". Harcourt revenues and operating profits have been adjusted from reported figures to reflect proposed segmental reporting by Reed Elsevier. Principal Executive Offices The principal executive offices of Reed International are located at 25 Victoria Street, London SW1H 0EX, England. Tel: +44 20 7222 8420. The principal executive offices of Elsevier are located at Van de Sande Bakhuyzenstraat 4, 1061 AG Amsterdam, The Netherlands. Tel: +31 20 515 9341. The principal executive office located in the United States is at 125 Park Avenue, 23rd Floor, New York, New York, 10017. Tel +1 212 309 5498. Our internet address is www.reed elsevier.com. BUSINESS DESCRIPTION AND ORGANISATION We are one of the world's leading publishers and information providers. Our activities include scientific, legal, education and business publishing. Our principal operations are in North America and Europe. For the year ended 31 December 2000, we had total turnover of approximately 'L'3.8 billion and an average of approximately 28,900 employees. In 2000, North America 12 represented our largest single geographic market, based on turnover by destination, contributing 57% of Reed Elsevier's total turnover. Turnover is derived principally from subscriptions, advertising sales, circulation and copy sales and exhibition fees. In 2000, 39% of Reed Elsevier's turnover was derived from subscriptions; 24% from advertising sales; 17% from circulation and copy sales; 10% from exhibition fees; and 10% from other sources. Subscription sales are defined as turnover derived from the periodic distribution or update of a product which is often prepaid, while circulation and copy sales include all other turnover from the distribution of a product, usually on cash or credit terms. The level of publishing-related advertising sales has historically been tied closely to the economic cycle with changes in the profit performance of advertisers, business confidence and other economic factors having a high correlation with changes in the size of the market. Subscription sales and circulation and copy sales have tended to be more stable than advertising sales through economic cycles. Both subscription and circulation and copy sales include the electronic distribution of products and subscription and transactional sales of online services. Approximately 25% of Reed Elsevier's turnover is derived from electronic information products, and approximately 12% is Internet sourced. The following table shows the turnover of Reed Elsevier by business segment and on the basis of geographic origin and markets and adjusted operating profit of Reed Elsevier, which is stated before the amortisation of goodwill and intangible assets and exceptional items, by business segment and on the basis of its geographic origin, in each of the three years ended 31 December 2000:
Turnover Adjusted Operating Profit(1)(2) ------------------------------------------------------- ------------------------------------------------ 1998 1999 2000 1998 1999 2000 ----------------- ----------------- ----------------- ---------------- ---------------- ------------ ('L' million) % ('L' million) % ('L' million) % ('L' million) % ('L' million) % ('L' million) Business Segment(3) Science & Medical. . . . . 622 19 652 19 693 19 223 27 231 29 252 Legal. . . . . . . . . . . 948 30 1,087 32 1,201 32 291 36 282 36 237 Education. . . . . . . . . 159 5 181 5 202 5 31 4 34 4 40 Business . . . . . . . . . 1,434 45 1,470 44 1,672 44 268 33 245 31 264 ------------ ---- ------------ ---- ------------ ---- ------------ --- ------------ --- ------------ Continuing operations. . . 3,163 99 3,390 100 3,768 100 813 100 792 100 793 Discontinued operations(4) 28 1 --- --- --- --- --- --- --- --- --- ------------ ---- ------------ ---- ------------ ---- ------------ --- ------------ --- ------------ Total. . . . . . . . . . . 3,191 100 3,390 100 3,768 100 813 100 792 100 793 ============ ==== ============ ==== ============ ==== ============ === ============ === ============ Geographic Origin(5) North America. . . . . . . 1,663 52 1,836 54 2,098 56 390 48 359 45 335 United Kingdom . . . . . . 692 22 698 21 734 19 204 25 191 24 191 The Netherlands. . . . . . 383 12 391 11 399 11 128 16 135 17 136 Rest of Europe . . . . . . 293 9 307 9 356 9 76 9 87 11 102 Rest of World. . . . . . . 132 4 158 5 181 5 15 2 20 3 29 ------------ ---- ------------ ---- ------------ ---- ------------ --- ------------ --- ------------ Continuing operations. . . 3,163 99 3,390 100 3,768 100 813 100 792 100 793 Discontinued operations(4) 28 1 --- --- --- --- --- --- --- --- --- ------------ ---- ------------ ---- ------------ ---- ------------ --- ------------ --- ------------ Total. . . . . . . . . . . 3,191 100 3,390 100 3,768 100 813 100 792 100 793 ============ ==== ============ ==== ============ ==== ============ === ============ === ============ Geographic Market(5) North America. . . . . . . 1,726 54 1,906 56 2,152 57 United Kingdom . . . . . . 483 15 484 14 521 14 The Netherlands. . . . . . 222 7 237 7 234 6 Rest of Europe . . . . . . 407 13 418 13 478 13 Rest of World. . . . . . . 325 10 345 10 383 10 ------------ ---- ------------ ---- ------------ ---- Continuing operations. . . 3,163 99 3,390 100 3,768 100 Discontinued operations(4) 28 1 --- --- --- --- ------------ ---- ------------ ---- ------------ ---- Total. . . . . . . . . . . 3,191 100 3,390 100 3,768 100 ============ ==== ============ ==== ============ ==== Adjusted Operating Profit(1)(2) ------------------------------ ------------------------------ % Business Segment(3) Science & Medical. . . . . 32 Legal. . . . . . . . . . . 30 Education. . . . . . . . . 5 Business . . . . . . . . . 33 ------------------------------ Continuing operations. . . 100 Discontinued operations(4) --- ------------------------------ Total. . . . . . . . . . . 100 ============================== Geographic Origin(5) North America. . . . . . . 42 United Kingdom . . . . . . 24 The Netherlands. . . . . . 17 Rest of Europe . . . . . . 13 Rest of World. . . . . . . 4 ------------------------------ Continuing operations. . . 100 Discontinued operations(4) --- ------------------------------ Total. . . . . . . . . . . 100 ============================== Geographic Market(5) North America. . . . . . . United Kingdom . . . . . . The Netherlands. . . . . . Rest of Europe . . . . . . Rest of World. . . . . . . Continuing operations. . . Discontinued operations(4) Total. . . . . . . . . . . <------------------- (1) Adjusted operating profit is shown before the amortisation of goodwill and intangible assets and exceptional items. Reed Elsevier businesses focus on adjusted profits as an additional performance measure; see note 1 to the combined financial statements. (2) Exceptional items are significant items within Reed Elsevier's ordinary activities which, under U.K. and Dutch GAAP, are required to be disclosed separately due to their size or incidence. Net exceptional items charged to operating profit totalled 'L'115 million (loss) in the year ended 31 December 2000, 'L'239 million (loss) in the year ended 31 December 1999, and 'L'79 million (loss) in the year ended 31 December 1998. See "Item 5 Operating and Financial Review and Prospects --- Reed Elsevier" and note 8 to the combined financial statements for a further description of these items. 13 (3) The Education business, previously reported within the Legal segment, has been presented separately for the first time in 2000 in anticipation of the acquisition of Harcourt. Comparatives have been restated accordingly. The Scientific segment has been renamed Science & Medical to reflect business strategy. (4) Discontinued operations, are presented in accordance with U.K. and Dutch GAAP, and comprise IPC Magazines and the consumer book publishing operations which were the final elements of the Consumer segment sold in 1998. (5) The analysis by geographic origin attributes turnover and adjusted operating profit to the territory where the product originates. The analysis by geographic market attributes turnover on the basis of the destination market. Reed Elsevier's businesses compete for circulation and marketing expenditures in scientific and medical, legal, education and business markets. The bases of competition include, for readers and users of the information, the quality and variety of the editorial content, the quality of the software to derive added value from the information, the timeliness and the price of the products and, for advertisers, the quality and the size of the audiences targeted. 14 The following table shows the main business units by reference to business segment and geographical location.
Business Segment Geographical Location -------------------------------------------------------------------------------------------------- North America(1) United Kingdom The Netherlands ------------------------------- -------------------------------- ------------------------------- Science & Medical Elsevier Science Elsevier Science Elsevier Science Excerpta Medica Communications The Lancet Excerpta Medica Communications MDL Information Systems Cell Press Endeavor Legal LEXIS-NEXIS U.S. Butterworths Tolley Publishing(3) North American Legal Markets(2)LEXIS-NEXIS Europe(3) Corporate and Federal Markets Martindale Hubbell Education Rigby Heinemann Greenwood-Heinemann Ginn Butterworth-Heinemann Business Cahners Business Information Reed Business Information Elsevier Business Information(5) CMD Group Reed Exhibition Companies(4) Cahners Travel Group(6) OAG Worldwide(6) ICIS-LOR Schnell Publishing Company Reed Exhibition Companies(4) OAG Worldwide(6) Business Segment Geographical Location -------------------------------------------------------------------- Rest of Europe Rest of World ----------------------------------- ------------------------------- Science & Medical Elsevier Science,Republic of Ireland Elsevier Science, Japan Elsevier Science, Switzerland Excerpta Medica Communications, Editions Scientifiques et Medicales Japan Elsevier, France Beilstein, Germany Legal Editions du Juris-Classeur, Butterworths, Australia(3) France(3) Butterworths, South East Asia(3) Verlag Orac, Austria(3) Butterworths, South Africa Dott. A. Giuffre(3) Editore, Italy (50.01%)(3) (40%) LEXIS-NEXIS International StImpfli Verlag,(3) Switzerland Latin America, Argentina (40%) & Chile(3) Wydawnictwa(3) Prawnicze PWN, Poland (50%) Education Rigby-Heinemann, Australia Business Elsevier Business Information, Reed Business Information, Belgium(5) Australia Elsevier Informacion Profesional, Reed Exhibitions, Japan(4) Spain(5) Reed Exhibitions, Singapore(4) Reed Elsevier Deutschland, Reed Exhibitions, Australia(4) Germany(5) Editions Prat, France(5) Groupe Strategies, France(5) Miller Freeman Europe(4) Reed Midem Organisation,France(4)
------------------- (1) U.S. unless otherwise stated. (2) This business includes Michie, Matthew Bender and Shepard's. (3) These businesses form part of LEXIS-NEXIS International. (4) These businesses form part of Reed Exhibition Companies. (5) These businesses form part of Elsevier Business Information. (6) In 2000, Reed Elsevier announced that it planned to divest a number of businesses, including OAG Worldwide and Cahners Travel Group. (7) All businesses are 100% owned unless otherwise stated. SCIENCE & MEDICAL
1998 1999 % change 2000 % change ------------ ------------ ------------------- ------------ ------------------- ('L' million) ('L' million) at constant rates(1) ('L' million) at constant rates(2) Turnover Elsevier Science . . . . . 513 534 +5% 592 +12% Medical Businesses . . . . 109 118 +6% 101 --15% ------------ ------------ ------------------- ------------ ------------------- 622 652 +5% 693 +7% ============ ============ =================== ============ =================== Adjusted operating profit(3) 223 231 +5% 252 +12% ============ ============ =================== ============ =================== Operating margin . . . . . . 35.9% 35.4% --0.5pts 36.4% +1.0pts ============ ============ =================== ============ =================== <------------------- (1) Represents percentage change over 1998 at constant rates of exchange, which have been calculated using the average exchange rates for the 1998 financial year; see page 29 for percentage changes at actual rates of exchange. (2) Represents percentage change over 1999 at constant rates of exchange, which have been calculated using the average exchange rates for the 1999 financial year; see page 29 for percentage changes at actual rates of exchange. (3) U.K. and Dutch GAAP allow the presentation of alternative earnings measures. Adjusted operating profit is presented as an additional performance measure and is shown before amortisation of goodwill and intangible assets and exceptional items. U.S. GAAP does not permit the presentation of alternative earnings measures. The Science & Medical (formerly Scientific) segment of Reed Elsevier comprises worldwide scientific and medical publishing and communications businesses. The Science & Medical strategy is to extend its leading global position in providing high quality scientific, technical and medical information solutions to research scientists and information professionals. The prime driver of growth will be the Science Direct family of Internet products, where electronic access, inter-linked content and search capacity offer added value to users. Elsevier Science Elsevier Science is a leading international publisher of scientific information with headquarters in The Netherlands and operations located around the globe. Within the Science & Medical segment, Elsevier Science's scientific information businesses contributed approximately 85% of the total turnover in 2000. Through a number of imprints including Elsevier, Pergamon, Excerpta Medica and North Holland, Elsevier Science supplies scientific information through journals, books, CD-ROMs and online to research libraries, scientists and professional markets serving an increasingly wide range of research fields. Elsevier Science is integral to the scientific community through the publication of more than 1,200 subscription based journals with more than 150,000 new research articles published each year, focused on the life sciences, chemistry and physical sciences. These peer-reviewed publications are an essential conduit for the dissemination of authoritative research findings. Other publishing programmes include econometrics, statistics, geology, computer sciences, management and psychology. During 2000 we signed some 300 ScienceDirect online contracts, including consortia deals in Germany, The Netherlands, New Jersey, China and Brazil. Approximately 45% of journal subscriptions by value now include ScienceDirect, and usage has grown from 5 million page views per month at the beginning of 2000 to 15 million in January 2001. ScienceDirect now holds approximately 1.2 million research articles and is by far the most comprehensive source of full text scientific research in the world. More research is added daily from our 1,200 scientific journals, and we have recently announced our intention to incorporate all articles that were published before 1995 into the ScienceDirect electronic offering. This substantial undertaking will take approximately five years to complete. The ScienceDirect content will be further enhanced by the inclusion of major reference works; the first major reference work on ScienceDirect was Comprehensive Clinical Psychology. Our focus has also been on expanding the ScienceDirect product line with subject specific products, such as PhysicsDirect, PharmaDirect, EngineeringDirect, Embase.com and BioMedNet reviews. For each of the some 20 subject areas, specific homepages have also been created. PhysicsDirect provides access to some 50 physics journals, as well as the Inspec and Compendex databases, with subject specific navigational tools. Embase.com combines the leading Embase and Medline database into one searchable thesaurus, with full text links to some 1,400 journals. BioMedNet reviews is a subscription based web service providing access to the Elsevier Science biomedical review journals. The Chemistry Preprint Server was launched in August. This new service for the chemistry community provides rapid communication and is a freely available and permanent web archive for unpublished research articles in the field of chemistry. In the pharmaceutical area, we have added to the scope of our service through the acquisition of the Afferent advanced drug screening software. In parallel with customisation, we have worked to improve the functionality and ease of use of ScienceDirect, for instance, by giving individual users personalisation through e-mail alerts, customised searches and the tracking of search histories. In order to link ScienceDirect with peer reviewed content and web information, a scientific Internet web browser, Scirus.com, was launched. Scirus.com allows for simultaneous searches through more than 50 million web pages as well as the 16 ScienceDirect content. The acquisition of Endeavor, the leading provider of digital library systems, is expected to enable our customers to integrate our electronic offerings into solutions which address the requirements of their institutions. The migration from print to electronic services, backed by a doubling of the sales force and customer service, is broadening access to our information. Through the consortium deals and our individual sales efforts, we are now able to reach usage groups not traditionally part of our customer base; for example smaller academic institutions. Among Elsevier Science's most widely known and largest journals are Cell, Brain Research, Neuroscience and Biochimica et Biophysica Acta in the life sciences; the Journal of the American College of Cardiologists and Annals of Thoracic Surgery in the medical sciences; Tetrahedron and Journal of Chromatography in chemistry; Physics Letters and Solid State Communications in the physical sciences; Journal of Financial Economics in economics; and Artificial Intelligence in the computer sciences field. Elsevier Science also publishes secondary material in the form of supporting bibliographic data, indexes and abstracts, and tertiary layers of information in the form of review and reference works, including the Trends and Current Opinion series and Encyclopaedia of Neuroscience. In addition the company publishes conference proceedings, letters, journals for rapid communications, handbooks, bulletins, magazines, dictionaries, newsletters, and sponsored publications. Elsevier Science offers a number of secondary databases, available electronically online or on CD-ROM. These include: EMBASE, covering pharmaceutical and biomedical sciences; Compendex, covering all the engineering disciplines; Geobase, focusing on geoscience and related areas; Beilstein Database, providing online access to approximately eight million chemical structures with linked descriptions of the properties, reactions, preparations, citations and links to the pharmaceutical research tools of MDL Information Systems; and Elsevier BIOBASE, a biological science database. Elsevier Science also maintains such highly specialized databases as World Textiles and FLUIDEX. In the scientific publishing business journal subscriptions are usually paid annually in advance. In 2000, subscriptions accounted for approximately 76% of Elsevier Science's turnover, circulation and copy sales for 9% of turnover and other sources for 15% of turnover. In 2000, approximately 43% of Elsevier Science's turnover was derived from North America, 33% from Europe, and the remaining 24% from Rest of World. Much of the pre-press production of the scientific businesses is undertaken in-house. An electronic production system, Computer Aided Production ("CAP") is used to deliver the full text of journal articles in whichever format the customer requires: online, on CD-ROM, or in print. Electronic files of all journals are fed from CAP into the Electronic Warehouse, which in turn stores content and makes it available as required for delivery to customers. Printing is primarily sourced through a variety of unaffiliated printers located in cost effective printing centres, mainly in Europe. As part of our ongoing efforts to upgrade our systems infrastructure, we are rolling out an electronic workflow programme from author submission and peer review to pre-press and the Electronic Warehouse. The distribution of hard copy scientific journals is to a large extent handled through independent subscription agents. Electronic delivery is directly fulfilled principally through ScienceDirect. Competition with Elsevier Science is generally on a title by title basis. Leading competing titles are normally published by learned societies such as the American Chemical Society, the Institute of Electrical and Electronics Engineers and the American Institute of Physics in the United States and the Royal Society of Chemistry in the United Kingdom. Medical Businesses The Science & Medical segment also operates a worldwide network of medical publishing and communications businesses. The medical businesses within the Science & Medical segment comprise Excerpta Medica Communications, Editions Scientifiques et Medicales Elsevier and The Lancet, and together these businesses contributed approximately 15% of the Science & Medical segment's turnover in 2000. In June 2000, we sold the Springhouse business, focused on the nursing community, for $105 million. Excerpta Medica Communications ("EMC") publishes customised information to healthcare professionals, medical societies and pharmaceutical companies worldwide. Consistent with the global structure of its main clients, EMC fulfils the needs of pharmaceutical companies' international and domestic marketing operations through its offices in The Netherlands, Germany, Italy, France, Spain, the United States, Japan, Hong Kong and Australia. Activities include educational and promotional scientific information delivered via medical symposia, traditional print media, audio-visual and computer-based programs. EMC works closely with pharmaceutical companies to provide worldwide marketing platforms for new drugs. In 2000, approximately 89% of EMC's turnover was derived from sponsored projects and 11% from subscriptions. In the same period, approximately 37% of turnover came from North America, 30% from Europe and 33% from Rest of World. Editions Scientifiques et Medicales Elsevier ("ESME") based in Paris, publishes a range of medical, biotechnology and clinical chemistry titles, including the renowned Encyclopedie Medico Chirurgicale. In 2000, ESME launched Spanish and English language treatises of Encyclopedie Medico Chirurgicale. In 2000, ESME's circulation and copy sales accounted for approximately 52% of total turnover, with a further 8% from advertising, 29% from subscriptions and 11% from other sources. The Lancet is one of the world's most respected medical journals, covering all aspects of human health and is sold through subscription in over 75 countries. The Lancet celebrated its 175th year of publication with the launch of The Lancet Oncology, the first of a series of journals with review information on specific diseases. In 2000, subscriptions accounted for 86% of total turnover, advertising for 14%. The medical publishing field is highly fragmented. There is regional competition from a number of publishers and service providers in the United States, such as The Thomson Corporation, American Medical Association, Massachusetts Medical 17 Society (New England Journal of Medicine), Medi Media, Adis Press and Lippincott-Raven (Wolters Kluwer), Advanstar and IMS (Cognizant). Harcourt Scientific Technical and Medical Businesses On 27 October 2000 Reed Elsevier announced agreements had been reached to acquire Harcourt's Scientific Technical and Medical business and U.S. Schools Education and Testing businesses in a $4.5 billion transaction, subject to regulatory reviews which are currently in progress. The Harcourt Scientific Technical and Medical ("STM") businesses are expected to bring high quality scientific and technical journals and a leading global position in medical publishing. The combined business will be positioned across the entire scientific, technical and medical spectrum, and will offer a range of Internet information services. Harcourt STM has two principal businesses, Academic Press and Harcourt Health Sciences: --- Academic Press publishes 174 peer-reviewed journals, with particular focus on life, physical, social and computer sciences. Academic Press also publishes reference works and databases. The IDEAL system provides Academic Press content online and holds over 95,000 scientific research articles. --- Harcourt Health Sciences is a leader in healthcare and medical publishing measured by revenues. Through a range of imprints, including Mosby, Churchill Livingstone, Harcourt and WB Saunders, Harcourt Health Sciences publishes some 8,500 clinical reference works and 250 journals and handbook series, covering the full spectrum of primary medical research, clinical practice and allied healthcare. Through MD Consult, Harcourt Health Sciences provides proprietary and licensed clinical information to physicians and other healthcare professionals. Total revenue for these Harcourt STM businesses for the year to 31 October 2000 were $688 million. Following the closing of the acquisition, two separate divisions will be created within the Science & Medical segment, Science and Medical, and the immediate priorities will be: --- to integrate the Elsevier Science and Academic Press businesses; --- to use the combined science content and navigation tools to develop new, customised online information services; --- to integrate the worldwide medical businesses; and --- to reorganise medical publishing around key clinical disciplines and expand the availability of online information services and solutions. In Science, the combination of the brands and content of Academic Press and Elsevier Science is expected to create a business with a breadth and depth of scientific information across the major scientific disciplines. The ScienceDirect online platform is scalable and the service will be extended across the Academic Press content. In Medical, the acquisition of Harcourt Health Sciences will represent an opportunity in a complementary area for Science & Medical. Science & Medical's clinical medicine journals, medical databases and the medical communications businesses fit well with Harcourt Health Sciences. The Harcourt Health Sciences prestigious reference works and handbook series across clinical disciplines is expected to provide opportunities for the development of navigational tools for online information services. MD Consult is an entry point into online services for practising clinicians and is expected to be leveraged through the application of Science & Medical's online publishing skills and increased investment to create additional Internet services. LEGAL
1998 1999 % change 2000 % change ------------ ------------ ------------------- ------------ ------------------- ('L' million) ('L' million) at constant rates(1) ('L' million) at constant rates(2) Turnover LEXIS-NEXIS U.S. . . . . . 741 854 +13% 947 +4% LEXIS-NEXIS International 207 233 +13% 254 +11% ------------ ------------ ------------------- ------------ ------------------- 948 1,087 +13% 1,201 +5% ============ ============ =================== ============ =================== Adjusted operating profit(3) 291 282 --5% 237 --19% ============ ============ =================== ============ =================== Operating margin . . . . . . 30.7% 25.9% --4.8pts 19.7% --6.2pts ============ ============ =================== ============ ===================
------------------- (1) Represents percentage change over 1998 at constant rates of exchange, which have been calculated using the average exchange rates for the 1998 financial year; see page 29 for percentage changes at actual rates of exchange. (2) Represents percentage change over 1999 at constant rates of exchange, which have been calculated using the average exchange rates for the 1999 financial year; see page 29 for percentage changes at actual rates of exchange. (3) U.K. and Dutch GAAP allow the presentation of alternative earnings measures. Adjusted operating profit is presented as an additional performance measure and is shown before amortisation of goodwill and intangible assets and exceptional items. U.S. GAAP does not permit the presentation of alternative earnings measures. 18 The Legal segment of Reed Elsevier serves important legal, tax, business and reference markets around the world. The Education business, previously reported within the Legal segment, has been presented separately for the first time in 2000 in anticipation of the acquisition of Harcourt. Comparatives have been restated accordingly. The Legal strategy is to serve as an indispensable partner to legal and other professionals, on a global basis, through the provision of preferred information and solutions. In 2000, we launched new and upgraded Internet products and services including the core research services of lexis.com and nexis.com for the North American Legal Markets division and the Corporate and Federal Markets division. We have expanded our sales and marketing activities, and have been building our global capability and presence through acquisition and alliance. In recognition that our markets and customers are increasingly becoming global, we are developing a global product and technology platform to serve as an underpinning to link individual country offerings, and to enable Reed Elsevier legal content to be delivered to our customers around the globe. We also made the important decision in 2000 to adopt LEXIS-NEXIS as our global brand. This will be implemented progressively across our international markets in 2001. Acquisitions were made in 2000 in the U.S., the U.K., Asia and Latin America to extend our global capability. LEXIS-NEXIS International added Eclipse, a leading publisher in U.K. employment law and related fields which is an important growing area of law. In the Corporate and Federal Markets division, we acquired the RiskWise group of companies which provides online identity verification and fraud-risk solutions for the e-commerce industry and complements our existing public record business. LEXIS-NEXIS U.S. LEXIS-NEXIS U.S. is a leading provider of information to the legal, corporate and government markets in hard copy, online and CD-ROM formats. It operates principally in the U.S.. LEXIS-NEXIS U.S. is organised into three business units: North American Legal Markets, Corporate and Federal Markets and Martindale Hubbell. In 2000, LEXIS-NEXIS U.S. contributed approximately 79% of the total turnover of the Legal segment. The North American Legal Markets division is responsible for developing, marketing and selling legal information products in electronic and hard copy formats to legal firms and practitioners. In 2000, LEXIS-NEXIS U.S. continued its investment in new products and services, in sales and marketing, and in support activities, to better meet the changing needs and expectations of legal and other professionals and to improve its competitive position. In the North American Legal Markets division, we met our goal in 2000 of introducing a competitive Internet-based service mid year with the enhanced lexis.com, and we continue to add content and functionality to improve and differentiate our service. Content licences were secured through long term agreements with CCH and Tax Analysts, both leading publishers of tax material. Case law summaries have now been added to the LEXIS-NEXIS federal and state case law collection. These summaries cover cases since 1995 and we are working to include earlier years, having started with those cases most often accessed. Navigation and printing functions have been improved for easier usability and report products introduced to help customers analyse their research results more efficiently. The most recent independent market research shows lexis.com to have parity preference amongst law students, an improvement from a year ago and representing an important milestone. Customisation has been a feature of 2000 both in product and in marketing and sales programmes. During the year we launched a range of tools under the LEXIS- NEXIS Customized e-Solutions brand, including: an enterprise-wide portal powered by Plumtree Software and developed exclusively for law firms' knowledge management needs; Custom Web Pages for easy access to specific forms and sources on lexis.com; Intranet Solutions for firms in the initial stages of creating an Intranet; and Practice Pages designed under the guidance of Matthew Bender authors and editors for a customised approach to specific areas of practice. To meet the needs of U.S. attorneys in small firms and single-lawyer practices, the lexisONE.com service was launched with free and fee-based research and legal forms, as well as resources to help attorneys manage firm business, client relationships and their careers. Matthew Bender, a leading U.S. publisher of legal analysis and case law, offers more than 500 publications in print and electronic formats --- sold to subscribers in more than 160 countries. Its publications include California Forms of Pleading and Practice, Collier on Bankruptcy, Immigration Law and Procedure, Moore's Federal Practice, Nimmer on Copyright and Rabkin & Johnson's Current Legal Forms. Michie offers more than 700 practice-enhancing titles, 400 Custom Legal Publications and the Annotated Codes of 35 states and territories. In addition, Michie is the official publisher of the United States Code Service and United States Supreme Court Reports, Lawyers' Edition. Law school professors and students have long relied on the Michie Contemporary Legal Education Series to provide course materials, prepared by leading legal scholars. Shepard's is the premier U.S. legal citation service, providing a comprehensive mix of Federal and State jurisdictional and topical citator services delivered online or in print or CD-ROM formats. "Shepardizing" is a key process for all U.S. lawyers and involves checking the continuing authority of a case or statutory reference in the light of subsequent legal changes. The Corporate and Federal Markets divi sion is responsible for developing, marketing and selling the Lexis-Nexis online service to corporations, businesses and local, state and federal government agencies, and also manages news, business, financial and public records content acquisition and enhancements. In the Corporate and Federal Markets division, we launched the new flagship product, nexis.com, in September 2000. This represents a major upgrade of our online research service, adding much 19 improved navigation, personalisation and search capabilities to our information databases. As in the North American Legal Markets division, we are building customised solutions with our customers that are both industry and function specific, such as insurance, media, sales support, mergers and acquisitions and business intelligence, that integrate searching across a customer's Intranet, Lexis-Nexis and other information sources, including the web. We have made alliances with major systems suppliers, such as Siebel and Verity, who have embedded nexis.com in their products. Martindale-Hubbell is a publisher of biographical guides to the legal profession in North America and internationally. Its flagship product, the Martindale-Hubbell Law Directory, includes more than 900,000 U.S. lawyer and law firm listings. There are also special Canadian and International editions and an online directory of professional legal staff. The Martindale-Hubbell Law Directory is available through hardbound print, CD-ROM and online. Martindale- Hubbell also offers the Internet-based lawyers.com service to small law offices to connect them with prospective clients. The service, which is free to users, provides profiles of some 420,000 attorneys and firms world-wide. Other businesses within LEXIS-NEXIS U.S. include: LEXIS Document Services, a provider of comprehensive searching and filing services to U.S. law firms and asset-based lenders which provides service for 4,300 jurisdictions throughout the U.S. and Canada; Marquis Who's Who, a U.S. publisher of biographical information; National Register Publishing, a U.S. publisher of directories serving the advertising, financial, real estate, and general reference markets; and Reed Technology & Information Services ( "RTIS "), a provider of content management and information delivery systems. LEXIS-NEXIS Europe offers a wide range of LEXIS-NEXIS online information products in its European markets, including local-language Internet browser products in Germany and France. In January 2000, the business was expanded through the acquisition of FT Profile and a long term licence agreement for Financial Times content. From January 2001 LEXIS-NEXIS Europe will form part of LEXIS-NEXIS International. In 2000, approximately 66% of LEXIS-NEXIS U.S.'s turnover came from subscription sales, including online services, 10% from transactional sales of online services, 9% from advertising (including directory listings), 5% from circulation and copy sales and the remaining 10% from other sources. In the same period approximately 96% of turnover came from North America and 4% from the rest of the world. In the U.S. legal information and services markets, LEXIS-NEXIS U.S.'s principal competitor is West (The Thomson Corporation). The principal competitors in the business information market include Dialog (The Thomson Corporation) and Factiva (Dow Jones and Reuters). LEXIS-NEXIS International LEXIS-NEXIS International comprises the Butterworths group of companies, Editions du Juris-Classeur in France, Verlag Orac in Austria, Orac Publishers in the Czech Republic, 40% interests in Giuffre(C) in Italy and in Staempfli Verlag in Switzerland, 50% interests in Wydawnictwa Prawnicze PWN, a Polish joint venture, HVG-Orac, a joint venture in Hungary, and legal publishers in Latin America. In 2000 LEXIS-NEXIS International contributed 21% of the total turnover of the Legal segment. Butterworths operates in the U.K. (Butterworths Tolley Publishing), Australia, New Zealand, South Africa, South East Asia, India, Canada and the Republic of Ireland. Butterworths provides legal, tax and regulatory materials in loose- leaf, book, CD-ROM and online formats. Butterworths Tolley Publishing's most widely known publications are Halsbury's Laws of England, The Encyclopaedia of Forms and Precedents, Simon's Taxes and Butterworth's Company Law Service. An increasing amount of its information is now available online, through the web-based Butterworths Lexis Direct service. The integration of Butterworths Direct and LEXIS has provided access, via a single subscription, to a wide range of U.K., Commonwealth and U.S. legal materials. Butterworths Lexis Direct is a leader in electronic legal publishing both in terms of content and functionality and comprises several services: Law Direct, a subscription based current awareness service; All England Direct, comprising a 24-hour case reporting service, and the entire All England Law Reports; and Halsbury's Law Direct, comprising the complete text of the 56 volume set of the latest edition fully updated. During 2000, customised services were added in specialist fields, such as Human Rights Direct and EU Direct, and, in partnership with a leading legal training firm, CPD Direct was launched, providing online training and professional development as an online service. Butterworths Tolley Publishing is a market leader in "first point of reference" tax publishing, through its single volume guides and its loose leaf service, and complements Butterworths' position in publishing for practitioners at the specialist end of the legal and tax markets in the U.K.. Butterworths Tolley Publishing also produces several CD-ROM and online products for tax, regulatory and business markets. The expansion into regulatory publishing continued with the acquisition in January 2000 of Eclipse, a publisher of U.K. employment law and related material. In 2000, approximately 87% of Butterworths' turnover was derived from hard copy sales, with 13% attributable to electronic products. In the same period, approximately 60% of turnover came from the U.K., 13% from Australia, 6% from Canada and the balance from the rest of the world. Printing is primarily sourced through a variety of unaffiliated printers located in cost-effective printing centres. Warehousing and distribution are largely outsourced. The principal U.K. competitor in the legal field is Sweet & Maxwell (The Thomson Corporation), with Commerce Clearing House (Wolters Kluwer) competing against its tax publications. Editions du Juris-Classeur ( "EJC ") is a French publisher of legal materials in loose-leaf form, CD-ROM and online for lawyers and notaries. The Juris- Classeur collection comprises some 400 regularly updated volumes covering 66 topics. Its 20 20 journals, including the leading weekly La Semaine Juridique, also cover all the important areas of French legal practice. In 2000 the French case law database, Juris-Data, was launched as an online service. EJC has its own printing and warehousing facilities. In 2000, subscriptions comprised approximately 75% of EJC's turnover, while circulation and copy sales comprised approximately 20% of turnover, with 5% from other sources. EJC's major competitors are Dalloz (Havas Vivendi) and Lamy (Wolters Kluwer). Verlag Orac, the leading tax publisher and a leading law publisher in Austria, publishes a comprehensive range of tax materials, including the fortnightly Austrian Tax Newspaper and the monthly Journal of Accountancy. Verlag Orac also has an equity holding in a Hungarian law publisher HVG-Orac (50%) and now has full ownership of Orac Publishers in the Czech Republic. Giuffre, in which Reed Elsevier has a 40% interest, publishes reference materials in both hard copy and, increasingly, CD-ROM formats for the Italian legal market. It also has a journals programme. StImpfli Verlag is a Swiss legal and tax publisher in which Reed Elsevier has a 40% interest. Wydawnictwa Prawnicze PWN is a joint venture company which was established in 1994 with PWN, Poland's leading academic publisher in which Reed Elsevier has a 50% interest. LEXIS-NEXIS International's Latin American businesses comprise legal publishers in Argentina (Abeledo Perrot, Depalma and Jurisprudencia) and in Chile (Publitecsa and Conusur). Publitecsa and Conusur were both acquired in 2000. They serve a range of markets including legal practitioners and academic and student markets. EDUCATION
1998 1999 % change 2000 % change ------------ ------------ ------------------- ------------ ------------------- ('L' million) ('L' million) at constant rates(1) ('L' million) at constant rates(2) Turnover Reed Educational & Professional Publishing. . . . . . . . . . 159 181 +12% 202 +9% ============ ============ =================== ============ =================== Adjusted operating profit(3). . 31 34 +8% 40 +15% ============ ============ =================== ============ =================== Operating margin. . . . . . . . 19.5% 18.8% --0.7pts 19.8% +1.0pts ============ ============ =================== ============ ===================
------------------- (1) Represents percentage change over 1998 at constant rates of exchange, which have been calculated using the average exchange rates for the 1998 financial year; see page 29 for percentage changes at actual rates of exchange. (2) Represents percentage change over 1999 at constant rates of exchange, which have been calculated using the average exchange rates for the 1999 financial year; see page 29 for percentage changes at actual rates of exchange. (3) U.K. and Dutch GAAP allow the presentation of alternative earnings measures. Adjusted operating profit is presented as an additional performance measure and is shown before amortisation of goodwill and intangible assets and exceptional items. U.S. GAAP does not permit the presentation of alternative earnings measures. The Education business is now reported separately from the Legal segment in anticipation of the acquisition of Harcourt. Reed Educational & Professional Publishing ("REPP") serves the educational markets of the U.K., the U.S., Australia, New Zealand and South Africa, as well as the international professional and academic sectors. REPP aims to be the number one choice for the provision of materials to teachers and of professional and academic knowledge and instruction in targeted market segments. Four key elements underpin achievement of this aim: expansion in the supplemental segment of the U.S. schools market; continued consolidation in the U.K. schools market; development of electronic resources; and expansion of electronic access. Reed Educational & Professional Publishing REPP operates through eight main businesses: U.K. Schools comprising the Heinemann, Rigby and Ginn imprints; Global Library and Butterworth-Heinemann based in the U.K.; Rigby and Greenwood-Heinemann based in the United States; Rigby-Heinemann based in Australia; Heinemann in South Africa; and Reed Publishing in New Zealand. U.K. Schools is a publisher for the U.K. primary and secondary markets. Global Library publishes reference material for school libraries and has operational units in the U.K., United States and Australia. Butterworth-Heinemann is an international publisher of professional information and learning materials for higher education and professional markets. It has publishing units in the U.K., United States and Australia. In the United States, Rigby publishes supplemental materials for elementary school literacy development. Greenwood-Heinemann publishes monograph and reference lists and teachers' professional resources. The Australian business, Rigby Heinemann, is a publisher of primary and secondary school books in Australia. In South Africa, Heinemann is a publisher of school texts and in New Zealand, Reed Publishing publishes text-books for the local market. 2000 also saw expansion of the e-learning unit and the development of a number of electronic products such as the Heinemann Explore reference product. In 2000, approximately 51% of REPP's turnover was derived from North America, 31% from the U.K., 7% from Australia and the remaining 11% from the rest of the world. Printing and binding are performed by unaffiliated printers and in cost effective printing centres both in the country of origin and around the world. REPP has its own warehouse and distribution 21 facilities in its principal territories. REPP's major U.K. competitors are Longman (Pearson), Oxford University Press, Stanley Thornes (Wolters Kluwer) and Cambridge University Press. In the United States, principal competitors include Wright Group (Tribune), SRA/ Open Court (McGraw Hill) and MCP (Pearson). University presses are considered to be competitors in the academic market. In Australia, principal commercial competitors include Nelson, Macmillan, AWL and Jacaranda. Harcourt Education and Testing Businesses On 27 October 2000 Reed Elsevier announced agreements had been reached to acquire Harcourt's Scientific, Technical and Medical business and U.S. Schools Education and Testing businesses in a $4.5 billion transaction, subject to regulatory reviews which are currently in progress. Harcourt is a leader in U.S. educational publishing and assessment markets, providing print and multi-media teaching materials and tests. --- Harcourt School Publishers is a leading U.S. elementary (K-6) publisher with particular strength in the four major subject areas of science, reading, math and social studies. The business has been successful in state adoptions, particularly in the three largest adoption states of Texas, Florida and California. In 2000, Harcourt's new reading programme was adopted for use in Texas and its science programme was adopted for use in Texas, Florida, California, North Carolina and West Virginia. --- Holt, Rinehart and Winston is a major U.S. secondary (grade 6-12) publisher with a leading position in literature and language arts, the largest middle and secondary school discipline. It also has a strong and growing position in science and is developing new math and social studies programmes. --- Steck-Vaughn is a publisher of U.S. K-12, adult education and public supplemental educational materials. The business is complementary to Reed Elsevier's Rigby business. --- Harcourt Trade is a small niche U .S. publishing business including the Harvest imprint. In the Testing area, Harcourt has two principal businesses, Harcourt Educational Measurement and The Psychological Corporation, which provide testing and performance measurement services for educational and clinical use. --- Harcourt Educational Measurement provides a range of achievement, aptitude and guidance educational testing services for measuring K-12 student progress. Harcourt Educational Measurement develops and administers accountability tests for students in all 50 U.S. states and is the exclusive contractor in 20 states, including California and Florida. --- The Psychological Corporation provides practising and research psychologists with psychological, speech and occupational therapy assessment tests for many aspects of human behaviour, intelligence and development. Total revenue for these Harcourt Education and Testing businesses for the year to 31 October 2000 were $990 million. The Education strategy focuses on growing share through innovation and excellence in publishing development. The immediate priorities after closing the acquisition will be: --- to maintain the current momentum in winning U.S. state adoptions, and to follow this success through in open states; --- to integrate the Steck-Vaughn and Rigby supplemental businesses and to expand the publishing programmes; --- to step up investment in new programmes in secondary education, particularly math; --- to expand the scope and penetration of the testing business through Internet-based delivery and services; and --- to step up investment in the online publishing unit to develop new interactive learning programmes. The primary objectives of accelerated investment in e-learning will be in the migration of key course content, the development of supporting interactive instructional material, the development of teacher and ancillary material, and the strengthening of online library reference materials. 22 BUSINESS
1998 1999 % change 2000 % change ------------ ------------ ------------------- ------------ ------------------- ('L' million) ('L' million) at constant rates(1) ('L' million) at constant rates(2) Turnover Cahners Business Information 531 542 --1% 665 +15% Reed Business Information . . 248 243 --2% 270 +11% Elsevier Business Information 257 270 +7% 278 +11% Reed Exhibition Companies . . 274 301 +8% 358 +18% OAG Worldwide . . . . . . . . 90 85 --6% 72 --19% Other . . . . . . . . . . . . 34 29 29 ------------ ------------ ------------------- ------------ ------------------- 1,434 1,470 +2% 1,672 +12% ============ ============ =================== ============ =================== Adjusted operating profit(3) . 268 245 --9% 264 +7% ============ ============ =================== ============ =================== Operating margin . . . . . . . 18.7% 16.7% --2.0pts 15.8% --0.9pts ============ ============ =================== ============ ===================
------------------- (1) Represents percentage change over 1998 at constant rates of exchange, which have been calculated using the average exchange rates for the 1998 financial year; see page 29 for percentage changes at actual rates of exchange. (2) Represents percentage change over 1999 at constant rates of exchange, which have been calculated using the average exchange rates for the 1999 financial year; see page 29 for percentage changes at actual rates of exchange. (3) U.K. and Dutch GAAP allow the presentation of alternative earnings measures. Adjusted operating profit is presented as an additional performance measure and is shown before amortisation of goodwill and intangible assets and exceptional items. U.S. GAAP does not permit the presentation of alternative earnings measures. The Business segment is comprised of business magazine and information companies operating principally in the U.S., the U.K., Europe and a worldwide exhibitions business. The Business strategy is to be the first choice of business professionals for information and decision support, marketing services and e-commerce connectivity. Reed Elsevier believes strong brands and market positions in key sectors, built on high quality and online decision support information and premium exhibition services, will attract audiences and deliver more effective buyer-seller connections. During 2000 the businesses have been brought together in one global division and the portfolio refocused on fewer, faster growing sectors through a programme of acquisitions and disposals. We have launched Internet portals in key sectors, as well as new print magazines and exhibitions. The principal acquisitions were CMD Group, e:Logic and Miller Freeman Europe. We have also been selling non-core assets including the K G Saur reference business in Germany, a number of the tuition businesses in The Netherlands and Belgium, and a range of titles in the US and Europe that did not fit our chosen sectors. The sale of our travel publishing businesses, OAG Worldwide and Cahners Travel Group, is well advanced and the Bowker bibliographic business is also to be sold. These disposals have a dilutive impact on earnings but leave the Business segment more focused. Business Magazines and Information The business magazine and information businesses within the Business segment are made up of Cahners Business Information, Reed Business Information and Elsevier Business Information. Together these businesses contributed approximately 73% of the turnover of the Business segment in 2000. In the U.S. business to business magazines are primarily distributed on a "controlled circulation" basis, whereby the product is delivered without charge to qualified buyers within a targeted industry group based upon circulation lists developed and maintained by the publisher. In the U.K. business magazines are distributed both on a "controlled circulation" basis and a "paid circulation" basis, but in both cases are dependent on advertising for a significant proportion of their revenues. As turnover is mainly derived from advertising, these businesses are sensitive to economic conditions and advertiser expenditure in those countries. In The Netherlands, however, a higher proportion of publications is sold by subscription, thus such publications are generally more resilient through economic cycles. Cahners Business Information ("Cahners") is a leading publisher of business information in the United States, with over 100 trade magazines and some 120 web sites. Following the changes in portfolio, Cahners Business Information has been reorganised into three market sector-focused divisions; Manufacturing and Electronics, Construction and Retail, and Media to support its transformation from a broad-based publisher of business-to-business magazines to a market sector focused, media-neutral provider of critical information and marketing solutions to business professionals. Throughout the year Cahners has launched vertical portals in a number of key sectors, including e-insite in Electronics, manufacturing.net in Manufacturing, and variety.com, tvinsite.com and wirelessweek.com in respectively the entertainment, television and telecommunication areas within Media. Over 20 portals have now been launched, using the e:Logic platform, in target sectors. In Construction, major development work has followed the CMD Group acquisition to leverage its content into a vertical portal to address the construction industry supply chain. Within the Manufacturing sector we are migrating the joint venture with i2 into a more 23 straightforward licensing arrangement and have refocused the web service on the design, automation and supply chain/logistics segments of Manufacturing. Launches have not been confined to Internet services. Cahners launched three new magazines --- eV, focused on entertainment and the digital economy; Broadband Week, which informs on broadband networks, applications and content, and CommVerge, which addresses the converging space of communications, computers and consumer electronics. In May, Cahners made the $300 million acquisition of CMD Group, an international supplier of information to the construction industry. CMD Group provides construction project information, both nationally and regionally in the U.S., as well as directories of building products and services and construction cost data. In June, Cahners acquired e:Logic, a growing application service provider of web development, design and delivery systems to media and Internet companies for $73 million. e:Logic provides Cahners with content management technology and is supporting our strategy of building leading Internet portals. Cahners Travel Group, the travel publishing division, has been offered for sale. Among the best known Cahners titles are Variety, Broadcasting & Cable, Multichannel News, Publishers Weekly, EDN, Design News and Interior Design. Cahners also publishes product tabloids which provide information primarily on new products to managers and professionals in the industrial, processing, medical, scientific and high technology fields. Cahners operates primarily in the United States, with major publishing centres in New York, Boston, Chicago, Los Angeles, Denver and Greensboro. Readership of its publications is expanding beyond U.S. borders, reflecting both the potential of U.S. exports and the increasing internationalisation of the industries served. Cahners leverages its knowledge of the business sectors it serves and the extensive databases of business names and reader related demographics it has collated through a broad range of products and services. These include websites, direct mail, product news tabloids, newspapers, newsletters and custom published supplements, as well as the feature publications which continue to serve as the core of the portfolio. In 2000, approximately 74% of Cahners' total turnover came from advertising, 15% from subscriptions and circulation sales and 11% from other sources. Cahners operates circulation management and fulfilment facilities in Colorado and the Caribbean island of St Kitts which identify, qualify and maintain subscriber lists for substantially all of its titles. These lists enable Cahners to serve its advertisers by creating highly targeted readerships for its magazines. Much of the editorial pre-press production is performed in- house. Paper and printing services are purchased on a co-ordinated basis with other Reed Elsevier businesses in the U.S.. Distribution of magazines is primarily through the U.S. postal service, supplemented by news-stand sales through unaffiliated wholesalers. Reed Elsevier's U.S. business to business titles compete on an individual basis with the publications of a number of publishers, including CMP Media (United Business Media) in its electronics sectors and Advanstar, BPI/VNU, Primedia, Penton Media, Hanley Wood and McGraw-Hill in other sectors. Reed Business Information ("RBI"), the U.K. based business magazine and directory publisher, has a portfolio of around 100 business magazines, directories, market access products and online services. RBI publishes over 50 primary business magazine brands in some 20 market facing sectors. Its business magazines include Computer Weekly, Farmers Weekly, Estates Gazette, Flight International, New Scientist, Caterer & Hotelkeeper, Doctor, Commercial Motor and Community Care. Its major directories are Kelly's, Kompass and The Bankers' Almanac, and it also has online services which include Estates Gazette Interactive, Air Transport Intelligence, Planet Science, ICIS-LOR and totaljobs.com. In the U.K., RBI continued to increase investment in totaljobs.com, the online recruitment service, which has a leading position in the U.K. with approximately 50,000 jobs carried. Other initiatives include the 75/25 computerweekly.com joint venture with InterX to combine RBI's brands, content and publishing expertise with InterX's technical and product data services. RBI launched E.Business Review and increased the frequency of Personnel Today. In 2000, approximately 81% of RBI's turnover came from the U.K., 8% from continental Europe, 7% from North America and 4% from the rest of the world. In the same year, approximately 66% of turnover was derived from advertising, 14% from subscription sales, 10% from circulation sales and the remaining 10% from other sources. RBI performs full computerised editorial make-up in-house for all of its titles. Paper and printing services are purchased from unaffiliated third parties, primarily on a co-ordinated basis with other Reed Elsevier businesses in the U.K.. RBI's distribution is generally through public postal systems, with news-stand distribution for some titles through outside wholesalers. RBI competes directly with EMAP Business Communications and United Business Media in a number of sectors in the U.K., and also with many smaller companies on an individual title by title basis. Elsevier Business Information ("EBI") comprises the business and reference publishing operations in continental Europe, which operates in The Netherlands, Belgium, Spain, Germany, France and Italy. EBI in The Netherlands, is focused on 13 market segments. It publishes over 160 titles and is the leading business magazine and information publisher. Its principal titles include Elsevier, the major current affairs weekly, Beleggers Belangen and FEM in business and management, Boerderij and Buiten in agriculture. Its titles are predominantly subscription-based and revenue is principally divided between subscriptions and advertising. Most titles are published in the Dutch language. Through trade journals, product news tabloids, directories, documentary systems, databases, newspapers, and websites, EBI serves markets which include agriculture, catering, construction, engineering, food, fashion, horticulture, transportation, tourism and travel. 24 EBI's zibb.nl was launched in 2000 as a general business information portal in The Netherlands. The portfolio was extended by the acquisition in July 2000 of the Stammer business in Italy, as part of the Miller Freeman Europe transaction, and by other acquisitions in France, Spain and Germany. Disposal of the K G Saur reference business has been completed and a number of the non core Tuition businesses have been, or are in the process of being, sold. In 2000, approximately 36% of EBI's turnover was derived from advertising, 29% from magazine subscriptions, 16% from training, 10% from magazine circulation and copy sales, and the remaining 9% from other sources including sales of software. Printing and production is contracted out to third parties and distribution is mainly through the Dutch postal system. EBI competes with a number of companies on a title by title basis in individual market sectors, the largest competitors being Wolters Kluwer and VNU. In the agricultural sector, the main competition is from Oogst (association journal). EBI Belgium, publishes 10 English language product news tabloids for the international market. This business provides specialised information on new products in the international electronic, laboratory, biotechnical and industrial markets. The Spanish operations, Elsevier Informacion Profesional, comprise Grupo Arte y Cemento, a publisher of product news tabloids, Construdatos, which publishes market information on new building projects and Inese (acquired in 2000). Other constituents of EBI are Editions Prat, a publisher of mainly loose-leaf information aimed at the fiscal, legal and administration sectors in France; Groupe Strategies, which publishes the journal Strategies and other information materials for the French advertising and communications industry; Reed Elsevier Deutschland, which includes Artzliche Praxis, a prominent German language medical journal and Institut Verlag, a supplier of information for the construction industry. Exhibitions The exhibitions business contributed approximately 21% of the turnover of the Business segment in 2000, and is the world's largest exhibitions business, with a leading position in the U.S., Asia and each major European economy. Reed Exhibition Companies ("REC") is an international event organizer, with 450 events in 28 countries, attracting over 100,000 exhibitors and 5.5 million buyers annually. REC's events are concentrated in a number of industry sectors of which the most important are: marketing and business services; publishing; IT/communications; manufacturing; aerospace; leisure; electronics; hospitality; travel; entertainment; and retail. Many of REC's events are industry leaders, including National Hardware Show, National Manufacturing Week, JCK International Jewellery Shows, Professional Golfers Association (PGA) Merchandise Show, PGA International Golf Show and Canadian Machine Tool Show in North America; Pakex, World Travel Market and London Book Fair in the U.K.; MIDEM, MIPTV, MIPIM, Salon Nautique and FIAC in France; Computer Faire in South Africa; AIMEX in Australia and Australian Gift Fairs; International Jewellery Tokyo in Japan; Asian Aerospace and Thai Metalex in South-East Asia; and the Nepcon and Travel series of international events. REC launched over 35 new shows in 2000, and a significant increase in investment in show related websites, of which there are now over 250. These will provide more accessible and focused pre and post event services, including contact broking, to exhibitors and attendees. In July 2000 Reed Elsevier acquired Miller Freeman Europe, a leading trade exhibition organiser in Europe with operations in France, Spain, Italy, Germany and Scandinavia, for 'L'360 million. The portfolio has over 100 shows and 66 related websites and includes prestigious international and national domestic events across a number of sectors, including building and construction, retail, food and hospitality, and environmental services. Acquisitions have also been made in the U.S. food sector and alliances formed with major exhibition halls in Berlin and Vienna. Over 80% of REC's turnover is derived from exhibition participation fees, with the balance attributable to conference fees, advertising in exhibition guides, sponsorship fees and admission charges. With few exceptions no capital is employed in exhibition halls, the majority of which are leased on a short term basis. In 2000 approximately 42% of REC's turnover came from North America, 34% from continental Europe, 10% from the U.K. and the remaining 14% from Rest of World. As some events are held other than annually, turnover in any single year may be affected by the cycle of non-annual exhibitions. The exhibition industry has historically been extremely fragmented. Within domestic markets, competition comes primarily from industry focused trade associations and convention center and exhibition hall owners. The main U.S. competitor is Miller Freeman, Inc. (VNU), although a number of hall owners are increasingly seeking international presence. OAG Worldwide Continued progress was made in the development of its electronic products with the launch of OAG.com and OAGMobile. The sale of OAG Worldwide is well advanced. ELSEVIER REED FINANCE BV Elsevier Reed Finance BV ("ERF"), the Dutch resident parent company of the ERF group, is directly owned by Reed International and Elsevier. ERF provides treasury, finance and insurance services to the Reed Elsevier plc businesses through its subsidiaries in Switzerland: Elsevier Finance SA ("EFSA"), Elsevier Properties SA ("EPSA") and Elsevier Risks SA ("ERSA"). These three Swiss companies are organised under one Swiss holding company, which is in turn owned by ERF. EFSA, EPSA and ERSA each focus on their own specific area of expertise. EFSA is the principal treasury centre for Reed Elsevier. It is responsible for all aspects of treasury advice and support for Reed Elsevier plc's businesses operating in continental 25 Europe and certain other territories and undertakes foreign exchange and derivatives dealing services for the whole of Reed Elsevier. EFSA also provides Reed Elsevier plc businesses with financing for acquisitions and product development and manages cash pools and investments. EPSA is responsible for the exploitation of tangible and intangible property rights whilst ERSA is responsible for insurance activities relating to risk retention. During 2000, additional loans to Reed Elsevier plc businesses in the U.S. of $461 million were made, of which $200 million was to finance the acquisition of the CMD Group. Additional loans to Reed Elsevier plc businesses in Europe of 'E'425 million were made, of which 'E'413 million was to finance the purchase of the Miller Freeman Europe businesses. To fund this additional lending and to provide capacity to meet new lending requests, ERF raised $495 million by means of a rights issue to which Elsevier subscribed and the funds were contributed to EFSA. Furthermore, EFSA issued a 7-year bond in the Swiss domestic market, for $300 million equivalent. Additionally, EFSA put in place a $3.0 billion U.S. Commercial Paper programme in December, in anticipation of financing related to the Harcourt acquisition. EFSA continued to advise Reed Elsevier plc businesses on the treasury implications of the introduction of the euro and all euro transfer programmes are progressing according to plan. EFSA also organised bank tenders in several European countries, and implemented a number of cash-pooling arrangements within Europe. The volume of foreign exchange dealt by EFSA during 2000 amounted to approximately $3.8 billion equivalent. The average balance of cash under management, on behalf of Reed Elsevier plc companies, was approximately $0.5 billion. At the end of 2000, 87% (1999 93%) of ERF's gross assets were held in U.S. dollars, including U.S.$4.3 billion in loans to Reed Elsevier plc subsidiaries. The euro currency block represented 12% of total assets (1999 5%). Liabilities included $822 million in U.S. dollars and $423 million equivalent in euro currencies, borrowed under the euro commercial paper programme and the Swiss domestic bond. STRATEGY In February 2000 we announced the Reed Elsevier strategy for growth, which was built around the following key foundations: 1. Significant upgrade of management and organisation effectiveness; 2. Major upgrade of products, using Internet technology, to deliver superior services to customers; 3. More effective marketing and sales programmes 4. Significant increase in investment -- largely against Internet -- to drive revenue growth 5. Aggressive cost saving programmes 6. Geographical expansion 7. Continue to target acquisitions/alliances to accelerate achievement of strategic goals Throughout 2000 we have been executing this strategy and can report that we have achieved virtually all of our objectives to date. Significant upgrade of management and organisation effectiveness We have made strong new appointments to senior management positions. These include the Global CEOs for Science & Medical, Legal and Business; new CEOs for Cahners and the LEXIS-NEXIS operating businesses; a new Group Technology Officer, HR Director and General Counsel. Internet activities have been separately organised within each business with clear leadership and accountabilities. The head office has been reduced. Executive management development programmes and new incentive structures have been introduced. Major upgrade of products, using Internet technology, to deliver superior services to customers New and upgraded products have been developed and launched, based on in-depth customer research. We have focused on providing higher value added content and services, Internet delivered, with greater ease of use and functionality, and increasing customisation. We have built, launched and expanded Internet portals around core Business sectors internationally. Five major portals have been launched in the U.S. in the electronics, manufacturing and media sectors and 15 more using the e:Logic platform. The new and upgraded Internet portals in Europe are performing satisfactorily in their target markets. More effective marketing and sales programmes We have expanded customer research across the business. Marketing programmes have been redeveloped. Sales forces have been significantly increased, most particularly in Science & Medical and Legal. Significant increase in investment -- largely against Internet -- to drive revenue growth The investment programme for 2000 has been aimed at upgrading our products and our marketing and sales activities. The investment programme was budgeted at 'L'260 million, and actual spend in 2000 was 'L'10 million higher. Aggressive cost saving programmes Cost savings of 'L'143 million have been achieved in 2000, 'L'13 million ahead of plan. These have been derived principally from non-revenue generating areas, e.g. production, infrastructure and support staff. 26 Geographical expansion We have extended our position globally through acquisition and launch. In Science & Medical, ScienceDirect is now a fully global product. Within Legal, businesses have been acquired in the U.S., the U.K., Asia and Latin America. In Business, acquisitions have been made to fill out our presence in the Chemicals and Construction sectors. Exhibitions businesses have been acquired in continental Europe. Continue to target acquisitions/alliances to accelerate achievement of strategic goals In 2000 we completed over 50 acquisitions, totalling 'L'952 million including CMD Group (construction information), e:Logic (application service provider), Miller Freeman Europe (exhibitions) and legal publishing businesses internationally. Non core business have been, or are in the process of being, disposed. Alliances have been formed to develop the scope and penetration of our Internet services. Reed Elsevier Ventures was launched above under 2000 to participate in emerging businesses. A more detailed review of progress by business is included above under "Business Description and Organisation". PROPERTY, PLANTS AND EQUIPMENT Reed Elsevier does not own any physical property which is considered material to Reed Elsevier taken as a whole. None of the real property owned or leased by Reed Elsevier is presently subject to liabilities relating to environmental tions which is considered material to Reed Elsevier taken as a whole. 27 ITEM 5: OPERATING AND FINANCIAL REVIEW AND PROSPECTS OPERATING RESULTS --- REED ELSEVIER The following discussion is based on the combined financial statements which have been prepared in accordance with U.K. and Dutch GAAP which differ in certain significant respects from U.S. GAAP as set out in note 30 to the combined financial statements. The following discussion should be read in conjunction with, and is qualified by reference to, the combined financial statements. Unless otherwise stated, identified amounts relate to the total results of Reed Elsevier, including the results of discontinued operations. Reed Elsevier derives its turnover principally from subscription sales, circulation and copy sales, advertising sales and exhibition fees. Turnover by source for continuing operations Year ended 31 December
1998 1999 2000 'L' million % 'L' million % 'L' million % ---------- --- ---------- --- ---------- --- Subscriptions. . . 1,138 36 1,305 39 1,457 39 Circulation & copy 630 20 620 18 627 17 Advertising. . . . 789 25 821 24 923 24 Exhibition fees. . 278 9 307 9 363 10 Other. . . . . . . 328 10 337 10 398 10 ---------- --- ---------- --- ---------- --- Total. . . . . . . 3,163 100 3,390 100 3,768 100 ========== === ========== === ========== ===
The relative movement in subscription sales largely reflects the acquisition of subscription based businesses, customer migration from transactional to subscription accounts and the relative impact of currency translation. As a result of this and the impact of disposals, turnover from circulation and copy sales has declined as a proportion of total turnover. Reed Elsevier's principal geographic markets are North America, the United Kingdom and Europe (including The Netherlands). Turnover by geographic market for continuing operations Year ended 31 December
1998 1999 2000 'L' million % 'L' million % 'L' million % ---------- --- ---------- --- ---------- --- North America . 1,726 55 1,906 56 2,152 57 United Kingdom 483 15 484 14 521 14 The Netherlands 222 7 237 7 234 6 Rest of Europe 407 13 418 13 478 13 Rest of World . 325 10 345 10 383 10 ---------- --- ---------- --- ---------- --- Total . . . . . 3,163 100 3,390 100 3,768 100 ========== === ========== === ========== ===
The increase in the relative importance of the North American market to Reed Elsevier largely reflects the impact of acquisitions. Acquisitions with significant sales in North America were CMD Group, acquired in May 2000, and Matthew Bender and the remaining 50% interest in Shepard's, both of which were acquired in August 1998. The relative movement in the Netherlands and Rest of Europe markets reflects the relative impact of currency translation and disposals. The cost profile of individual businesses within Reed Elsevier varies widely and costs are controlled on an individual business unit basis. The most significant cost item for Reed Elsevier as a whole is labour costs, which includes all employment costs of employees as well as of temporary or contracted staff. Labour costs represented 42%, 44% and 42% of Reed Elsevier's total costs, before amortisation of goodwill and intangible assets and exceptional items, of the continuing operations in 2000, 1999 and 1998, respectively. Acquired goodwill and intangible assets are capitalised and systematically amortised over a maximum period of 20 years. 28 The following table shows turnover and adjusted operating profit for each of Reed Elsevier's business segments, in each of the three years ended 31 December 2000, together with the percentage change in 2000 and 1999 at both actual and constant exchange rates:
Turnover Year ended 31 December ------------------------------------------------------------------------- 1998 1999 % change 2000 % change -------------- -------------- -------------- ---------------------------- Actual Constant ActualConstant rates rates(2) ratesrates(1) ---------- --- ---------- --------- -------- ---------- ----------------- 'L' million % 'L' million % % % 'L' million % % % Business Segment(3) Science & Medical. . . . . 622 19 652 19 5 5 693 19 6 7 Legal. . . . . . . . . . . 948 30 1,087 32 15 13 1,201 32 10 5 Education. . . . . . . . . 159 5 181 5 14 12 202 5 12 9 Business . . . . . . . . . 1,434 45 1,470 44 3 2 1,672 44 14 12 ---------- --- ---------- --------- -------- ---------- ----------------- Continuing operations. . . 3,163 99 3,390 100 7 6 3,768 100 11 9 Discontinued operations(4) 28 1 --- --- --- --- ---------- --- ---------- --------- -------- ---------- ----------------- Total. . . . . . . . . . . 3,191 100 3,390 100 6 5 3,768 100 11 9 ========== === ========== ========= ======== ========== =================
Adjusted Operating Profit(5)(6) Year ended 31 December ------------------------------------------------------------------------- 1998 1999 % change 2000 % change -------------- -------------- -------------- ---------------------------- Actual Constant ActualConstant rates rates(2) ratesrates(1) ---------- --- ---------- --------- -------- ---------- ----------------- 'L' million % 'L' million % % % 'L' million % % % Business Segment(3) Science & Medical. . . . . 223 27 231 29 4 5 252 32 9 12 Legal. . . . . . . . . . . 291 36 282 36 (3) (5) 237 30 (16) (19) Education. . . . . . . . . 31 4 34 4 10 8 40 5 18 15 Business . . . . . . . . . 268 33 245 31 (9) (9) 264 33 8 7 ---------- --- ---------- --------- -------- ---------- ----------------- Continuing operations. . . 813 100 792 100 (3) (3) 793 100 (1) (1) Discontinued operations(4) --- --- --- --- --- --- ---------- --- ---------- --------- -------- ---------- ----------------- Total. . . . . . . . . . . 813 100 792 100 (3) (3) 793 100 (1) (1) ========== === ========== ========= ======== ========== =================
------------------- (1) Represents percentage change over 1999 at constant rates of exchange, which have been calculated using the average exchange rates for the 1999 financial year. (2) Represents percentage change over 1998 at constant rates of exchange, which have been calculated using the average exchange rates for the 1998 financial year. (3) The Education business, previously reported within the Legal segment, has been presented separately for the first time in 2000. Comparatives have been restated accordingly. The Scientific segment has been renamed Science & Medical to reflect business strategy. (4) Discontinued operations, are presented in accordance with U.K. and Dutch GAAP, and comprise IPC Magazines and the consumer book publishing operations, which were the final elements of the Consumer segment, sold in 1998. (5) Adjusted operating profit is shown before the amortisation of goodwill and intangible assets and exceptional items. Reed Elsevier businesses focus on adjusted profit as an additional performance measure; see note 1 to the combined financial statements. (6) Exceptional items are significant items within Reed Elsevier's ordinary activities which, under U.K. and Dutch GAAP, are required to be disclosed separately due to their size or incidence. Net exceptional items charged to operating profit totalled 'L'115 million (loss) in the year ended 31 December 2000, 'L'239 million (loss) in the year ended 31 December 1999 and 'L'79 million (loss) in the year ended 31 December 1998. See note 8 to the combined financial statements for a further description of these items. 29 Results of Operations for the Year Ended 31 December 2000 Compared to the Year Ended 31 December 1999 General. The reported profit before tax for the Reed Elsevier combined businesses, including exceptional items and the amortisation of goodwill and intangible assets, was 'L'192 million, which compares with a reported profit of 'L'105 million in 1999. The increase includes the favourable movement in exceptional items with lower reorganisation costs and the gain on disposals of businesses. The reported attributable profit of 'L'33 million compares with a reported attributable loss of 'L'63 million in 1999. Turnover increased by 11% to 'L'3,768 million. Excluding acquisitions and disposals and currency translation, underlying revenue growth was 5%. The second half continued the improving trend seen in the first, benefiting from the positive impact of investments in our products and our sales and marketing activities. Excluding exceptional items and the amortisation of goodwill and intangible assets, adjusted operating profits were flat at 'L'793 million. Operating margins at 21.0% were 2.4 percentage points below the prior year principally reflecting major investments in our products and our sales and marketing activities offset by cost reductions achieved in production, distribution and support areas. Excluding acquisitions and disposals and currency translation effects costs increased by 6%. The amortisation charge for goodwill and intangible assets amounted to 'L'468 million, up 'L'95 million reflecting acquisitions made in 1999 and 2000, and currency translation effects. Exceptional items showed a pre-tax charge of 'L'30 million, comprising 'L'38 million on acquisition related costs, 'L'77 million in respect of the major restructuring programme initiated in 1999, less 'L'85 million profit on sale of businesses. This compares with a net charge on exceptional items in 1999 of 'L'232 million, of which 'L'161 million related to restructuring. Restructuring charges include costs in relation to employee severance, surplus leasehold property obligations and fixed asset write offs. Net interest expense, at 'L'103 million, was 'L'21 million higher than in the previous year principally due to the financing of acquisitions completed in 2000 and currency translation. Net interest cover was 8 times adjusted operating profit. Adjusted profit before tax, which excludes the amortisation of goodwill and intangible assets and exceptional items, at 'L'690 million, was 3% lower than in previous years expressed in sterling, or 3% lower at constant exchange rates. The total tax charge for the year was high as a proportion of profit before tax principally due to non-tax deductible amortisation and the non-recognition of potential deferred tax assets. The effective tax rate on adjusted earnings was slightly higher at 25.9% (1999 25.6%). The adjusted profit attributable to shareholders of 'L'511 million compared to 'L'527 million in 1999, 3% lower at constant exchange rates. In 2000 the U.S. GAAP net profit was 'L'60 million, compared with a net loss of 'L'73 million in 1999, a movement of 'L'133 million. The movement reflects the factors discussed above, together with year on year changes in the adjustments required to reflect differences between U.K. and Dutch GAAP and U.S. GAAP. The most significant differences relate to the capitalisation and amortisation of goodwill and other intangibles, and deferred taxes; see note 30 to the combined financial statements. In the following commentary unless otherwise indicated, all percentage movements refer to constant currency rates, using 1999 full year average rates, and are stated before amortisation of goodwill and intangibles and exceptional items. Percentage movements at actual exchange rates are shown in the table on page 29. In anticipation of the acquisition of Harcourt General's STM and Education and Testing businesses, the Reed Educational & Professional Publishing business, formerly reported within the Legal segment, is now reported separately as an Education segment, and comparatives have been restated accordingly. The Scientific segment has been renamed Science & Medical. Science & Medical Turnover and adjusted operating profit in the Science & Medical business increased by 7% and 12% respectively at constant rates of exchange, or 8% and 12% excluding acquisitions and disposals. The sales growth was driven by the stronger subscription renewals in the year and the increasing contribution from Internet services. The previously adverse subscriber attrition trends were reversed. Operating margins were slightly higher reflecting the strong revenue growth, with the significant increase in investment, in new product and sales and marketing initiatives, offset by cost savings in production, distribution and back office functions. In addition to the positive impact on subscription renewals, the Internet services contributed an additional 2 percentage points to sales growth. The new policy on pricing introduced for the 2000 subscription year, moderating increases and the impact of currencies so as to give more predictable journal pricing for customers, also contributed to the stronger renewals and helped accelerate the migration from print to electronic products. The medical publishing and communications business in 2000 reported turnover lower by 15% due to the disposal of Springhouse in June 2000. Underlying sales were marginally ahead and adjusted operating profits up 22% following reorganisation of the sponsored communications business and after the weak performance in France in 1999. Operating profit in the Science & Medical business increased by 'L'29 million to 'L'140 million in 2000. This reflected growth in adjusted operating profit and a lower level of exceptional items charged to operating profit offset by higher amortisation of goodwill and intangible assets. 30 Legal Turnover in the Legal business increased by 5%, or 3% excluding acquisitions, and adjusted operating profit was down 19%. This reflects the significant step up in investment, particularly at LEXIS-NEXIS U.S., to deliver upgraded products and services, and sales and marketing programmes. The investment was partly funded by the major cost savings programme. Operating margins were correspondingly lower, by 6.2 percentage points at 19.7%, from which they are expected to recover as the investment pays off. At LEXIS-NEXIS U.S., turnover excluding acquisitions was up 2% while adjusted operating profits were 24% lower reflecting the significant step up in investment. In the North American Legal Markets division, online revenues grew 5% with the second half growth showing a continuing improvement over the first. This was partly offset by lower print and CD-ROM sales as business migrates online. Online usage is growing in the online business as customers migrate to the upgraded functionalities and services of the lexis.com platform which now accounts for more than 65% of searches. The Martindale-Hubbell legal directory business had another successful year. In the Corporate and Federal Markets division, NEXIS online revenues grew by 4%, a major turnaround from the 4% decline seen the previous year, with a particularly strong second half. The launch of the significantly upgraded flagship product, nexis.com, has been exceptionally well received in the market and is driving new sales and expansion of existing customer accounts. Across LEXIS-NEXIS U.S. the major re-engineering programme has continued to deliver substantial cost savings, in excess of $90 million, with almost every area re-engineered, including production, IT, administration and other support services. LEXIS-NEXIS International businesses outside the U.S. (formerly the Reed Elsevier Legal Division) reported turnover and adjusted operating profit up 11% and 2% respectively, or 5% and 1% excluding acquisitions, reflecting solid sales performance and a significant increase in new product and marketing investment. Operating profit in the Legal business decreased by 'L'65 million to an operating loss of 'L'8 million in 2000. This reflected the decline in adjusted operating profit together with an increase in the amortisation of goodwill and intangibles reflecting acquisitions made during 2000 and currency translation effects. Exceptional items charged to operating profit were 'L'77 million compared to 'L'89 million in 1999. Education Reed Educational & Professional Publishing saw revenues and adjusted operating profit increase by 9% and 15% respectively. Rigby, the U.S. supplementary business, had a particularly good year with revenues 37% ahead driven by market share gains and a very successful launch of the new Rigby literacy programme. In U.K. Schools, sales in the Primary market were lower than the prior year which benefited from exceptional, ring fenced government funding for literacy materials. In Secondary, however, sales were up 23% on strong new publishing programmes addressing curriculum changes. The Australian schools business also performed well. Operating profit in the Education business was 'L'19 million, against 'L'20 million in 1999; higher adjusted operating profit being offset by higher exceptional items charged to operating profit. Business Turnover and adjusted operating profit in the Business segment increased by 12% and 7% respectively at constant rates of exchange. Excluding acquisitions and disposals, the figures were 4% and 3% respectively. Turnover growth was held back by the unfavourable cycling of non-annual exhibitions and lower revenues in the travel businesses being sold. Operating margins at 15.8% were 0.9 percentage points lower reflecting the significant increase in investment, although this is substantially funded by the cost saving programme. Cahners Business Information turnover and adjusted operating profits were up 5% and 30% respectively before the impact of acquisitions. The Electronics, Supply Chain, Retail and Entertainment sectors performed particularly well, with Manufacturing flat and Cahners Travel Group lower. New product launches in both print and Internet services added 2% to revenue growth. Operating margins improved, despite a significant increase in new product investment, reflecting the major restructuring programme in the second half of 1999. At Reed Business Information, turnover increased by 11%, or 7% excluding acquisitions, with stronger growth and market share gains in display and recruitment advertising in U.K. magazines and in Internet revenues. The Computer, Personnel, Aerospace and Science sectors performed particularly well. Underlying operating profits were 1% lower, reflecting the major increase in investment, particularly totaljobs.com, the online recruitment service. At Elsevier Business Information, turnover and adjusted operating profits were up 11% and 5% respectively, or 7% and 10% excluding acquisitions. Strong performances were seen across the businesses in The Netherlands, Belgium, Spain and France. In The Netherlands, the Business and Management, Personnel, Healthcare and Retail sectors were particularly strong and buoyant advertising demand was captured with the launch of supplements. Turnover at Reed Exhibition Companies increased by 18% and adjusted operating profit by 19%. Excluding acquisitions, revenue grew by 1% and adjusted operating profit declined by 8% as several major non-annual shows in the U.K. and U.S. did 31 not take place in 2000. The decline in adjusted operating profit also reflects the significant new show launch programme, with over 35 new shows launched, and a significant step up in investment in show related websites, of which there are now over 250. At OAG Worldwide, turnover declined by 19% due to portfolio rationalisation in anticipation of its impending sale and lower sales of the print product. Investment has been significantly increased in new web products and the OAG.com and OAGMobile services were launched in the second half. The sale of the business is well advanced. Operating profit in the Business segment increased by 'L'67 million to 'L'59 million in 2000. The increase in amortisation charges, relating to acquisitions made in 2000 and 1999 were more than offset by higher adjusted operating profits and lower exceptional charges to operating profit. Results of Operations for the Year Ended 31 December 1999 Compared to the Year Ended 31 December 1998 General. The reported profit before tax for the Reed Elsevier combined businesses, including exceptional items and the amortisation of goodwill and intangible assets, was 'L'105 million, which compares with a reported profit of 'L'1,044 million in 1998. The decline reflects the net 'L'835 million adverse movement in exceptional items, higher amortisation charges arising from acquisitions and a weaker trading performance. The reported attributable loss of 'L'63 million compares with a reported attributable profit of 'L'772 million in 1998. Turnover increased by 6% to 'L'3,390 million. Underlying revenue growth excluding the impact of acquisitions and disposals and currency translation effects, was 3%. Excluding exceptional items and the amortisation of goodwill and intangible assets, adjusted operating profits were down 3% to 'L'792 million. Operating margins at 23.4% were 2.1 percentage points below the prior year. Excluding acquisitions and disposals and currency translation effects, revenue growth was 3% whilst costs increased by 5%, principally reflecting investment in people, products and sales and marketing. The amortisation charge for goodwill and intangible assets amounted to 'L'373 million, up 'L'41 million reflecting acquisitions made in 1998 and 1999. Exceptional items showed a pre tax charge of 'L'232 million, being 'L'161 million in respect of the major restructuring projects across the operating businesses, 'L'50 million in respect of the Year 2000 compliance programme, 'L'28 million on acquisition related costs, and 'L'7 million profit on sale of fixed asset investments. This compares with a net gain on exceptional items in 1998 of 'L'603 million which included a 'L'692 million profit on the sale of IPC Magazines and other businesses. Net interest expense at 'L'82 million, was 'L'42 million higher than the previous year due to the financing of the Matthew Bender and Shepard's acquisitions completed in the second half of 1998. Net interest cover was 10 times adjusted operating profit. Adjusted profit before tax, which excludes the amortisation of goodwill and intangible assets and exceptional items, at 'L'710 million, was 8% lower than in 1998. The total tax charge for the year was high as a proportion of profit before tax principally due to the non-tax deductible amortisation, the non-recognition of potential deferred tax assets and taxes arising on restructuring related business consolidation. The effective tax rate on adjusted earnings was slightly lower at 25.6% (1998 26%). The adjusted profit attributable to shareholders of 'L'527 million compared to 'L'571 million in 1998, a decline of 8% at constant exchange rates. In 1999 the U.S. GAAP net loss was 'L'73 million, compared with net loss of 'L'398 million in 1998, a reduction of 'L'471 million. This reduction reflects the factors discussed above together with the increased amortisation charge following the re-evaluation under U.S. GAAP of the useful lives of goodwill and intangible assets in 1998, together with other year on year changes in adjustments to reflect differences between U.K. and Dutch GAAP and U.S. GAAP. The most significant differences relate to the capitalisation and amortisation of goodwill and other intangible assets, and deferred taxes; see note 30 to the combined financial statements. In the following commentary unless otherwise indicated, all percentage movements refer to constant currency rates, using 1998 full year average rates, and are stated before amortisation of goodwill and intangibles and exceptional items. Percentage movements at actual exchange rates are shown in the table on page 29. Science & Medical. Turnover and adjusted operating profits in the Science & Medical segment both increased by 5% at constant rates of exchange, or 2% excluding acquisitions. Operating margins were slightly lower at 35.4%. Sales growth at Elsevier Science of 5%, which included 3% benefit from acquisitions, was adversely affected by the impact on subscription renewals of currency movements on library budgets, particularly in Japan and continental Europe. Operating profits excluding acquisitions increased by 4%. Progress was made during the year in the roll-out of ScienceDirect, the web- based scientific information service, with approximately 25% of journal subscription revenues now covering both print journals and the ScienceDirect service. 32 The medical publishing and communications businesses in 1999 reported turnover growth of 6% at constant rates of exchange due to acquisitions. Excluding acquisitions, turnover and adjusted operating profit fell by 1% and 12% respectively, due to some weakness in the sponsored communications business and in France. Operating profit in the Science & Medical segment fell by 'L'15 million to 'L'111 million. Increases in adjusted operating profits were offset by 'L'29 million of exceptional items charged to operating profit. Legal. Turnover in the Legal segment increased by 13% whilst adjusted operating profits declined by 5% at constant rates of exchange. Excluding the effect of acquisitions, principally Matthew Bender and the remaining 50% of Shepard's acquired in August 1998, turnover increased by 3% while adjusted operating profits declined by 14%. This result reflected the combination of low revenue growth at LEXIS-NEXIS U.S. and continued investment spend, resulting in operating margins 4.8 percentage points lower at 25.9% for the segment. At LEXIS-NEXIS U.S., turnover increased by 13% whereas adjusted operating profits were down 8% as significant additional investment was made in new product development and in sales and marketing. Excluding acquisitions, turnover was up 2% and adjusted operating profits down 18%. The North American Legal Markets division had flat revenues with a good performance in the large law firm market offset by weaker revenues in other markets. The print/CD-ROM legal publishing business saw some loss of revenues, principally at Shepard's, due to heavy promotion of a competing product and discounting of Shepard's by a competitor as its licence to the Shepard's content expired. The Martindale- Hubbell legal directory business had an excellent year with revenues 12% ahead. In the Corporate and Federal Markets division, NEXIS revenues fell by 4%, reflecting pricing pressures across the industry. LEXIS-NEXIS International, comprising Reed Elsevier's legal businesses outside the United States, saw turnover and adjusted operating profits up 13% and 7%, respectively, including the benefit of small acquisitions in Austria, Argentina, Australia and South Africa. Excluding these, adjusted operating profit growth was 5% on sales up 7%, led by strong performances in the U.K., France and South East Asia. Operating profit in the Legal segment decreased by 'L'98 million to 'L'57 million, reflecting increased amortisation due to the impact of acquisitions in 1999 and 1998, and increased exceptional items charged to operating profit principally attributable to reorganisation costs. Education. Turnover in the Education segment increased by 12% and adjusted operating profit by 8% at constant exchange rates. Operating margins fell 0.7% to 18.8%. The U.K. and U.S. Schools businesses both increased turnover by 15%, driven by additional government funding for literacy materials and by increased market share. Costs increased faster than turnover as investment was made in new publishing programmes to capture demand. The Butterworth-Heinemann businesses reported a strong front-list in scientific, technical and medical markets. Operating profit increased by 'L'6 million to 'L'20 million. This movement was primarily attributable to the increase in adjusted operating profit. Business. Turnover in the Business segment increased by 2% whilst adjusted operating profit decreased by 9%, reflecting low underlying revenue growth, particularly at Cahners, whilst costs rose. Excluding acquisitions, turnover was up 1% and operating profits 11% lower. Operating margins at 16.7% were 2.0 percentage points lower than the prior year. Cahners Business Information's turnover was flat in 1999, before a 1% reduction due to the net effect of disposals less acquisitions. Adjusted operating profit at constant rates of exchange declined by 40% due to a 5% increase in costs, largely reflecting the full year effect of prior year investments made in the organisation, which had anticipated much stronger revenue growth. Growth in the Entertainment & Media, Building & Construction and Retail sectors was offset by revenue declines in Manufacturing, Electronics and Travel. Although the slowdown in turnover growth began in the second half of 1998, the degree to which this persisted into 1999 was unexpected. A major restructuring of the business took place in the second half of 1999 to realign the cost base. At Reed Business Information turnover and adjusted operating profit declined by 2% and 6%, respectively, at constant exchange rates. Weakness in advertising demand, particularly in high margin recruitment advertising, in the first half was recovered in the second half as the U.K. economy strengthened with the exception of the important Computer sector which saw strong competition both in print and online. Online services established around the core titles continued to develop in 1999 with growth in subscriptions and advertising support. The Healthcare, Property and Social Services sectors performed well. Elsevier Business Information (excluding Elsevier Tuition activities) saw underlying turnover and adjusted operating profit growth of 3% and 6% respectively in 1999 at constant exchange rates, before several small acquisitions in both 1999 and 1998, as advertising demand in Continental Europe picked up during the year. In The Netherlands, turnover growth was driven by the journal Elsevier and titles in the Human Resources, General Management and Construction sectors, whilst improvements in profitability were reported in Spain and France. The tuition activities in The Netherlands increased turnover and adjusted operating profit by 8% at constant rates of exchange in 1999, driven by growth from in-company and open training. During 1999 management and development responsibility for this business was moved to Elsevier Business Information to provide combined product focus on targeted customer groups. Turnover at Reed Exhibitions companies was ahead by 8% whilst adjusted operating profit rose by 11% at constant exchange rates, driven by growth in the annual trade shows, particularly in North America, and the contribution of the PGA 33 golf equipment and accessories shows acquired in 1998. 30 new shows were launched in the year in North America, Europe and Asia, adding over 3 percentage points to the growth in turnover. The impact of show cycling, i.e., of non- annual shows, and acquisitions was broadly neutral in 1999. At OAG Worldwide, adjusted operating profit increased by 18% in 1999 at constant exchange rates, on turnover down 6%. During 1999 good progress was made in stabilising the business with certain activities terminated to increase profitability, and plans developed to capitalise on the growing demand for electronic products using OAG Worldwide data. Growth in electronic turnover was offset by the continued shift of customers from print to online services. In February 2000 the decision to divest OAG Worldwide was announced. Operating profit in the Business segment fell by 'L'116 million to an operating loss of 'L'8 million. This movement reflected the decline in adjusted operating profit together with exceptional charges to operating profit. Exceptional charges were principally attributable to restructuring costs. Effect of Currency Translation The combined financial statements are expressed in pounds sterling and are therefore subject to the impact of movements in exchange rates on the translation of the financial information of individual businesses whose operational currencies are other than sterling. The principal exposures are the U.S. dollar and the euro, both of which generally reflect Reed Elsevier's business exposure to the United States and the Euro Zone, its most important markets outside the United Kingdom. The currency profile of Reed Elsevier's adjusted profit before tax for 2000, taking account of the currencies of the interest on its borrowings and cash over that period, is set forth below: Adjusted profit before tax in each currency as a percentage of total adjusted profit before tax
U.S. Pounds Dollars Sterling Euro Other Total 33% 29% 31% 7% 100% ========= ======== ==== ===== =====
Currency translation differences increased Reed Elsevier's turnover by 'L'86 million and decreased adjusted profit before tax by 'L'1 million in 2000 compared to 1999. To help protect Reed International's and Elsevier's shareholders' funds from the effect of currency movements, Reed Elsevier will, if deemed appropriate, hedge the foreign exchange translation exposure by borrowing in those currencies where significant translation exposure exists or by selling forward surplus cash flow into one of the shareholders' currencies. Hedging of foreign exchange translation exposure is undertaken only by the regional centralised treasury departments and under policies agreed by the Boards of Reed International and Elsevier. Borrowing in the operational currency of individual businesses provides a structural hedge for the assets in those markets and for the income realised from those assets. The currencies of Reed Elsevier's borrowings, therefore, reflect two key objectives, namely to minimise funding costs and to hedge currencies where it has significant business exposure. Individual businesses within Reed Elsevier plc and ERF are subject to foreign exchange transaction exposures caused by the effect of exchange rate movements on their turnover and operating costs, to the extent that such turnover and costs are not denominated in their operating currencies. Individual businesses are encouraged to hedge their exposures internally at market rates with the centralised treasury department within ERF. To minimise hedging costs, these exposures are matched whenever possible with offsetting exposures existing in other individual businesses. When opportunities for such matching of exposures internally do not exist, exposures may instead be hedged externally with third parties. Hedging of foreign exchange transaction exposure is the only hedging activity undertaken by the individual businesses. For further details see note 24 to the combined financial statements. The Harcourt acquisition and equity and debt financing On 27 October 2000, Reed Elsevier entered into a definitive agreement with Harcourt to make a tender offer of $59 per share of common stock, or share equivalent, for the entire issued share capital of Harcourt. The offer values the company at $4.45 billion ('L'3.10 billion/'E'5.37 billion at exchange rates then prevailing). Reed Elsevier plc also entered into a definitive agreement with The Thomson Corporation (Thomson) to on-sell, for pre-tax proceeds of $2.06 billion, the Harcourt Higher Education business and the Corporate and Professional Services businesses other than educational and clinical testing. Following completion of the offer and the on-sale of businesses, Reed Elsevier will have acquired Harcourt's Scientific, Technical and Medical (STM) business and its K-12 (kindergarten to grade 12) Schools Education and Testing businesses for an implied value of approximately $4.5 billion, taking into account corporate net debt, taxes payable on the on-sale proceeds and the assumption of corporate and other liabilities. In the year to 31 October 2000, these businesses had sales of $1.7 billion; (STM $688 million, 1999 $633 million; Education and Testing $990 million, 1999 $787 million); adjusted operating profits (pre-amortisation of goodwill and intangible assets) of $371 million (STM $161 million, 1999 $138 million; Education and Testing $210 million, 1999 $159 million) and net assets of $1.1 billion (including $0.7 billion of goodwill and intangible assets) before corporate net debt of $1.2 billion. 34 The acquisition and the on-sale to Thomson is subject to regulatory approvals, which may require some divestment of assets or other behavioural undertakings. In order to fund the acquisition a placing of new shares in Reed International and Elsevier was undertaken jointly in November 2000 and new debt facilities obtained. The placing of new ordinary shares in the parent companies was executed through an accelerated bookbuild process completed on 29 November 2000. The net proceeds of the placing totalled 'L'1.3 billion through the issue of 113.7 million ordinary shares in Reed International at 625 pence per share and 66.26 million ordinary shares in Elsevier at 'E'14.50 per share, including the exercise of over-allotment options by the joint bookrunners. The majority of the proceeds have been hedged into U.S. dollars. This amount represented 9.9% of the ordinary share capitals of both parent companies. It is intended that Reed International should subscribe for additional R-shares in Elsevier, which represent the cross-shareholding of Reed International in Elsevier, so as to maintain Reed International's indirect equity interest at 5.8% on a fully diluted basis. This will reflect the respective economic interests of the shareholders of Reed International and Elsevier in the combined businesses represented by the equalisation arrangements. The equalisation ratio is unaffected. The initial acquisition funding will be provided by cash and short term borrowings or commercial paper programmes or draw down against committed credit facilities, and potentially by leaving in place up to $850 million of Harcourt public debt securities. The facilities include $6.5 billion of new bank facilities put in place in November 2000. The on-sale agreement between Reed Elsevier and Thomson has conditions which in effect mirror the terms of the merger agreement between Reed Elsevier and Harcourt, and the on-sale should therefore be completed at the time of the Harcourt acquisition or shortly thereafter dependent on the tender offer process. It is intended that the majority of the short term borrowings should be refinanced through the issuance of term debt securities. The blended financing rate on the debt component of the funding, inclusive of the Harcourt public debt which may remain outstanding, and the cost of long term debt including interest rate hedging undertaken, is expected to be approximately 7.2%. Proforma combined net borrowings of the Reed Elsevier businesses (as at 31 December 2000) and Harcourt (as at 31 October 2000), taking into account the acquisition financing and the on-sale of businesses to Thomson, would be approximately 'L'3.2 billion. European Economic and Monetary Union On 1 January 1999, the euro was introduced as the de facto currency of the 12 European countries now participating in European Economic and Monetary Union (EMU). The Netherlands is a participant in EMU; the United Kingdom is not. In 2002, the Dutch guilder, like the currencies of other participants, will be fully replaced by the euro once euro- denominated notes and coins are substituted. In the interim, the euro and the participating currencies coexist and are inextricably linked by fixed conversion rates. The implications for Reed Elsevier businesses have been initially low relative to many other multinational European companies. Principally this is because, with the significant exception of Elsevier Science, which already publishes global prices, Reed Elsevier's businesses have limited cross border trade. The most significant issue, therefore, is the timing of euro based marketing and invoicing and the transfer to euro denominated business and financial systems. In this respect, Reed Elsevier businesses have put in place systems to accommodate the euro. The profit and loss expense of moving to a euro currency environment has not been significant and is not expected to be significant in the future. While Reed Elsevier is continuing to evaluate the impact of the euro introduction over time, based on currently available information, management does not believe that the introduction of the euro will have a material adverse impact on the financial condition or overall trends in results of operations. Recently Issued Accounting Pronouncements SFAS 133: Accounting for Derivative Instruments and Hedging Activities, was issued in June 1998 and, as amended by SFAS 138, is effective for the financial year beginning 1 January 2001. The standard requires all derivative instruments to be valued at fair value in the balance sheet. Changes in fair value are accounted for through the profit and loss account or comprehensive income statement depending on a derivative's designation and its effectiveness as a hedging instrument. On implementation, a cumulative transition adjustment of 'L'1 million (loss) to the 2000 U.S. GAAP net income and 'L'86 million (loss) in other comprehensive income will be made. Under U.K. and Dutch GAAP derivative instruments are recorded at appropriate historic cost amounts, with fair values shown as a disclosure item. FRS 17, Retirement Benefits, was issued by the U.K. Accounting Standards Board in November 2000. As under SFAS 87, plan assets and liabilities are determined by, respectively, market-related values at the date of the financial statements and by discounting plan obligations using a market derived discount factor. Under FRS 17 actuarial gains and losses are recognised in full in the balance sheet with movements recognised in the statement of total recognised gains and losses. This will differ from current U.S. GAAP which does not require the full recognition of actuarial gains and losses, and also requires the amortisation of actuarial gains and losses to be recognised in the profit and loss account. The standard is required to be fully implemented in 35 the 2003 financial year with disclosures of the impact required from 2001. The impact of adapting the standard cannot be reasonably estimated at this time. FRS 19, Deferred Tax, was issued by the U.K. Accounting Standards Board in December 2000. FRS 19 requires deferred tax to be provided in full, except on timing differences arising where non-monetary assets are revalued and where there is no commitment to sell the asset and on the retained earnings of subsidiaries, joint ventures or associates where there is no commitment to remit such earnings. FRS 19 is required to be implemented in the 2002 financial year. The standard is not expected to have a material impact on implementation. LIQUIDITY AND CAPITAL RESOURCES --- REED ELSEVIER Reed Elsevier businesses focus on adjusted operating cash flow as the key cash flow measure. Reed Elsevier's adjusted operating cash flow before exceptional items in 2000, 1999 and 1998 amounted to, respectively, 'L'775 million, 'L'780 million and 'L'808 million. In each of these years the adjusted operating cash flow conversion was, respectively, 98%, 98% and 99%. Adjusted operating cash flow is measured after dividends from joint ventures, tangible fixed asset spend and proceeds from the sale of fixed assets, but before exceptional payments and proceeds. Reed Elsevier generates significant cash flows as its principal businesses do not require major fixed or working capital investments. Working capital requirements are negative overall, due to the substantial proportion of revenues received through subscription and similar advanced receipts, principally for scientific journals and exhibition fees. Trading working capital amounted to 'L'479 million net liabilities at 31 December 2000 and 'L'394 million net liabilities at 31 December 1999. Subscriptions and other revenues in advance represented 'L'679 million and 'L'583 million, respectively, of these totals. Capital expenditure principally relates to computer equipment and, increasingly, investment in systems infrastructure to support electronic publishing activities. Total capital expenditures amounted to 'L'141 million, 'L'137 million and 'L'151 million in 2000, 1999 and 1998, respectively. During 2000, Reed Elsevier paid a total of 'L'952 million for acquisitions and fixed asset investments, including net debt assumed of 'L'48 million and 'L'13 million deferred payments in respect of acquisitions made in prior years. All payments were financed by net cash inflow from operating activities, available cash resources and commercial paper borrowings. Exceptional net inflows of 'L'90 million were received in 2000, comprising proceeds from sale of fixed asset investments and property disposals less amounts paid in respect of reorganisation costs and acquisition related costs. During 1999, Reed Elsevier paid a total of 'L'166 million for acquisitions and fixed asset investments including net 'L'5 million deferred payments in respect of acquisitions made in prior years. All payments were financed by net cash inflow from operating activities, available cash resources and commercial paper borrowings. Exceptional net outflows of 'L'61 million were paid in 1999, comprising amounts paid in respect of reorganisation costs, acquisition related costs, Year 2000 compliance and the Reed Travel Group recompense plans less exceptional tax repayments. Net borrowings at 31 December 2000 were 'L'433 million, a reduction of 'L'633 million compared to 31 December 1999, principally reflecting the proceeds from the joint international share offering by Reed International and Elsevier in December 2000, together with the free cash flow and exceptional receipts, less spend on acquisitions. Gross borrowings at 31 December 2000 amounted to 'L'2,027 million, denominated mostly in U.S. dollars and partly offset by cash balances of 'L'1,594 million invested in short term deposits and marketable securities. Approximately 98% of cash balances were held in sterling, euros and U.S. dollars. A total of 46% of Reed Elsevier's gross borrowings were at fixed rates, including 'L'516 million of floating rate debt fixed through the use of interest rate swaps. At 31 December 2000, the fixed rate debt had a weighted average coupon of 6.6% and an average remaining life of 7.7 years. The net interest expense also reflects the interest yield differentials between short term cash investments and long term fixed rate borrowings. The financing of the proposed Harcourt acquisition is discussed above under "Operating Results --- Reed Elsevier --- The Harcourt acquisition and equity and debt financing". OPERATING RESULTS --- REED INTERNATIONAL AND ELSEVIER The following discussion is based on the financial statements of Reed International and Elsevier for the three years ended 31 December 2000. The results of Reed International reflect its shareholders' 52.9% economic interest in the Reed Elsevier combined businesses. The results of Elsevier reflect its shareholders' 50% economic interest in the Reed Elsevier combined businesses. The respective economic interests of the Reed International and Elsevier shareholders take account of Reed International's interest in Elsevier. Both parent companies equity account for their respective shares in the Reed Elsevier combined businesses. The financial statements have been prepared in accordance with, respectively, U.K. and Dutch GAAP, which differ in certain significant respects from U.S. GAAP as set out in note 23 to the Reed International financial statements and note 15 to the Elsevier financial statements. 36 Results of Operations for the Year Ended 31 December 2000 Compared to the Year Ended 31 December 1999 Adjusted earnings per share for Reed International were 23.3p, a decline of 5% compared to the previous year. Adjusted earnings per share for Elsevier were 'E'0.59, an increase of 4%. The difference in percentage change is entirely attributable to the impact of the strengthening, on average, of sterling against the euro in 2000. At constant rates of exchange, the adjusted earnings per share of both companies would have shown a decline of 5% over the previous year. After their share of the exceptional items and the charge in respect of goodwill and intangible assets amortisation, the reported earnings per share of Reed International after tax credit equalisation and Elsevier were 1.0p and 'E'0.04, compared to a loss per share in 1999 of 3.4p and 'E'0.07, respectively. Dividends to Reed International and Elsevier shareholders are equalised at the gross level, including the benefit of the U.K. attributable tax credit of 10% (20% prior to April 1999) received by certain Reed International shareholders. The exchange rate used for each dividend calculation --- as defined in the Reed Elsevier merger agreement --- is the spot euro/sterling exchange rate, averaged over a period of five business days commencing with the tenth business day before the announcement of the proposed dividend. As announced in 2000, the 2000 interim dividend was reduced by one-third and the proposed final dividend adjusted upwards correspondingly to restore normal proportions between the interim and final dividends following the dividend reduction in 1999. The board of Reed International has proposed a final dividend of 6.9p, giving a total dividend of 10.0p for the year, the same as for 1999. The boards of Elsevier, in accordance with the dividend equalisation arrangements, have proposed a final dividend of 'E'0.19. This results in a total dividend of 'E'0.28 for the year, 4% higher than in 1999. The difference in percentage growth is attributable to currency movements. Dividend cover for Reed International, using adjusted earnings, was 2.1 times. For Elsevier, the adjusted dividend cover was 2.1 times. Measured for the combined businesses, dividend cover was 2.1 times compared with 1999 at 2.3 times. Results of Operations for the Year Ended 31 December 1999 Compared to the Year Ended 31 December 1998 Adjusted earnings per share for Reed International were 24.4p, a decline of 8% compared to the previous year. Adjusted earnings per share for Elsevier were 'E'0.57, a decline of 5%. The difference in the percentage change is entirely attributable to the impact of the strengthening of sterling against the euro in 1999. At constant rates of exchange, the adjusted earnings per share of both companies would have shown a decline of 8% over the previous year. After their share of the exceptional items and the charge in respect of goodwill and intangible assets amortisation, the reported loss per share of Reed International after tax credit equalisation and Elsevier were 3.4p and 'E'0.07, compared to earnings per share in 1998 of 34.7p and 'E'0.81 respectively. Dividends to Reed International and Elsevier shareholders are equalised at the gross level, including the benefit of the U.K. attributable tax credit of 10% (20% prior to April 1999) received by certain Reed International shareholders. The exchange rate used for each dividend calculation --- as defined in the Reed Elsevier merger agreement --- is the spot euro/sterling exchange rate, averaged over a period of 5 business days commencing with the tenth business day before the announcement of the proposed dividend. The board of Reed International proposed a final dividend of 5.4p, giving a total dividend of 10.0p for the year, 33% lower than in 1998. The boards of Elsevier, in accordance with the dividend equalisation arrangements, proposed a final dividend of 'E'0.15 (Dfl 0.33), reflecting a guilder/sterling exchange rate of Dfl 3.58 to 'L'1. This resulted in a total dividend of 0.27 (Dfl 0.59) for the year, 31% lower than in 1998. The difference in percentage reductions was attributable to currency movements and the change in the level of U.K. tax credit effective April 1999. Dividend cover for Reed International, using adjusted earnings, was 2.4 times. For Elsevier , the adjusted dividend cover was 2.2 times. Measured for the combined businesses, dividend cover was 2.3 times compared with 1998 at 1.6 times. The reduction of approximately one-third in the equalised Reed International and Elsevier dividends from the 1998 level reflects the adjustment to dividend policy in support of the new Reed Elsevier strategy for investment-led growth. TREND INFORMATION Trends, uncertainties and events which could have a material impact on Reed Elsevier's turnover, operating profit and liquidity and capital resources are discussed above in Item 5 "Operating and Financial Review and Prospects" under "Operating Results --- Reed Elsevier"; "Liquidity and capital resources --- Reed Elsevier", "Operating Results --- Reed International and Elsevier" and in "Item 4: Information on Reed Elsevier". 37 ITEM 6: DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES DIRECTORS AND SENIOR MANAGEMENT The directors and executive officers of each of Reed International, Elsevier, Reed Elsevier plc and Elsevier Reed Finance BV at 20 February 2001 were:
Elsevier Reed Name (Age) Reed International Elsevier Reed Elsevier plc Finance BV ---------------------- ----------------- ------------------ ----------------- ---------------- Cornelis Alberti (64) Managing Director Mark Armour (46) Chief Financial Member of the Chief Financial Member of the Officer Executive Board Officer Supervisory Board and Chief Financial Officer Willem Boellaard (70) Managing Director John Brock (52) Non-executive Member of the Non-executive Director Supervisory Board Director(2)(4) Crispin Davis (51) Chief Executive Member of the Chief Executive Officer(3) Executive Board Officer(4) and Chief Executive Officer(3) Dien de Boer-Kruyt (56) Member of the Member of the Supervisory Board Supervisory Board Derk Haank (47) Executive Director Member of the Executive Director Executive Board Otto ter Haar (71) Member of the Member of the Supervisory Board Supervisory Board Roelof Nelissen (69) Non-executive Member of the Non-executive Chairman of the Director(1) Supervisory Director(1)(2) Supervisory Board Board(1) Steven Perrick (52) Non-executive Member of the Non-executive Director(1)(3) Supervisory Director(1) Board(1)(3) Andrew Prozes (55) Executive Director Executive Director Dr. Rolf Stomberg (60) Non-executive Member of the Non-executive Director(3) Supervisory Director(2) Board(3) Morris Tabaksblat (63) Non-executive Chairman of the Non-executive Chairman(3) Supervisory Chairman(4) Board(3) Gerard van de Aast (43) Executive Director Executive Director David Webster (56) Non-executive Member of the Non-executive Director(1) Supervisory Director(1)(4) Board(1) Stephen Cowden (48) Company Secretary General Counsel/ Company Secretary Erik Ekker (52) Company Secretary Legal Director (Continental Europe)
(1) Member of the Audit Committees of the Boards of Reed International, Elsevier and Reed Elsevier plc. (2) Member of the Remuneration Committee of the Board of Reed Elsevier plc. (3) Member of the joint Nominations Committee of the Boards of Reed International and Elsevier. (4) Member of the Strategy Committee of the Board of Reed Elsevier plc. A person described as a non-executive Director of Reed International or Reed Elsevier plc or a member of the Supervisory Board of Elsevier is a director not employed by such company in an executive capacity. Mr Alberti has been Managing Director of Elsevier Reed Finance BV since the merger. He was an executive Director of Reed Elsevier plc from the merger until December 1996. He joined Elsevier in 1978 and was a member of the Executive Board of Elsevier from 1984 until 1999. 38 Mr Armour was appointed Finance Director of Reed International and Chief Financial Officer of Reed Elsevier plc in July 1996, having been Deputy Chief Financial Officer of Reed Elsevier plc since February 1995. He was appointed Chief Financial Officer of Elsevier in April 1999. He became a member of the Supervisory Board of Elsevier Reed Finance BV in December 1998. He was previously a partner in Price Waterhouse. Mr Boellaard was appointed a Managing Director of Elsevier Reed Finance BV in December 1998. He joined Reed International in 1990. Mr Brock was appointed a non-executive director of Reed Elsevier plc and Reed International and a member of the Supervisory Board of Elsevier in April 1999. He is a director of Cadbury Schweppes plc and Managing Director of its Beverages Stream. Mr Davis became Chief Executive Officer of Reed Elsevier plc, Reed International and Elsevier in September 1999. He was previously Chief Executive Officer of Aegis Group plc from 1994 to 1999. Mrs de Boer-Kruyt became a member of the Supervisory Board of Elsevier in April 2000. She was appointed a member of the Supervisory Board of Elsevier Reed Finance BV in July 2000. She is a non-executive director of Sara Lee/DE, Hollandske Beton Group and Internatio Mueller. Mr Haank was appointed an executive director of Reed Elsevier plc and Reed International in November 1999. He is Chief Executive Officer of Science & Medical. He was Chief Executive Officer of Elsevier Business Information from 1996 to 1998. Mr Haank was appointed a member of the Executive Board of Elsevier in April 2000. Mr ter Haar has been a member of the Supervisory Board of Elsevier since 1990. He was previously a member of the Executive Board of Elsevier, and was Chief Executive Officer of Elsevier Science from 1977 to 1987. He was appointed a member of the Supervisory Board of Elsevier Reed Finance BV in June 1999. He will retire from the Boards of Elsevier and Elsevier Reed Finance BV at the Elsevier Annual General Meeting in April 2001. Mr Nelissen was appointed a non-executive Director of Reed International and Reed Elsevier plc in April 1999, having previously been a non-executive Director of Reed Elsevier plc since the merger until July 1998. He has been a member of the Supervisory Board of Elsevier since 1990. Mr Nelissen is also a member of the Supervisory Board of ABN AMRO Bank NV. He was formerly Chief Executive Officer of ABN AMRO and Finance and Economics Minister of The Netherlands. Mr Perrick was appointed a member of the Supervisory Board of Elsevier in April 1998, a non-executive director of Reed Elsevier plc in June 1998 and a non-executive Director of Reed International in April 1999. He was a member of the Supervisory Board of Elsevier Reed Finance BV from July 1998 until August 1999. Mr Perrick is a partner in the Amsterdam offices of the law firm Freshfields Bruckhaus Deringer. Mr Prozes became an executive director of Reed Elsevier plc and Reed International in August 2000. A resolution will be proposed at the Elsevier Annual General Meeting in April 2001 to appoint Mr Prozes a member of the Executive Board of Elsevier. He is Chief Executive Officer of Legal. Prior to joining Reed Elsevier, Mr Prozes was an Executive Vice President with the West Group, a part of The Thomson Corporation, where he was also Chief Operating Officer of West's on-line legal publishing business. Dr Stomberg was appointed a non-executive director of Reed International and Reed Elsevier plc in January 1999 and a member of the Supervisory Board of Elsevier in April 1999. Dr Stomberg is also Chairman of John Mowlem & Co plc, Management Consulting Group PLC and Unipoly SA, Luxembourg. Mr Tabaksblat was appointed a member of the Supervisory Board of Elsevier in April 1998 and a non-executive director of Reed Elsevier plc in June 1998. He became a non-executive director and Chairman of Reed International in April 1999, when he was also appointed Chairman of the Supervisory Board of Elsevier and Chairman of Reed Elsevier plc. Mr Tabaksblat is Chairman of the Supervisory Board of Aegon NV, Vice Chairman of the Supervisory Board of TPG Group NV, a member of the Supervisory Board of VEBA AG, and Chairman of the European Round Table of Industrialists. He was Chairman and Chief Executive Officer of Unilever NV from 1994 to 1999. Mr van de Aast became an executive director of Reed Elsevier plc and Reed International in December 2000. A resolution will be proposed at the Elsevier Annual General Meeting in April 2001 to appoint Mr van de Aast a member of the Executive Board of Elsevier. He is Chief Executive Officer of Business. Prior to joining Reed Elsevier, Mr van de Aast was Vice President of Compaq's Europe, Middle East and Africa business Mr Webster has been a non-executive Director of Reed Elsevier plc since the merger, a non-executive Director of Reed International since 1992 and a member of the Supervisory Board of Elsevier since April 1999. He was non-executive Chairman of Reed Elsevier plc from August 1998 until April 1999. He is Chairman of Safeway plc. Mr Cowden, an English lawyer, joined Reed Elsevier in December 2000 as General Counsel, and was appointed Company Secretary of Reed Elsevier plc and Reed International in February 2001. Prior to joining Reed Elsevier, Mr Cowden was Group Company Secretary of GlaxoSmithKline. Mr Ekker, a Dutch lawyer, has been Legal Director (Continental Europe) of Reed Elsevier plc since 1993. He has been Company Secretary of Elsevier since 1989. He joined Elsevier in 1977 as Legal Counsel. 39 COMPENSATION Remuneration committee This report has been prepared by the Remuneration Committee of Reed Elsevier plc and approved by the boards of Reed International and Elsevier. The Remuneration Committee is responsible for recommending to the board of Reed Elsevier plc the remuneration (in all its forms), and the terms of the service contracts and all the terms and conditions of employment of the executive directors. The committee also provides advice to the Chief Executive Officer on major policy issues affecting the remuneration of executives at a senior level below the board of Reed Elsevier plc. The committee draws on external professional advice as necessary in making its recommendations. The Remuneration Committee, which is chaired by Dr. Rolf Stomberg, consists wholly of independent non-executive directors: John Brock, Roelof Nelissen and Rolf Stomberg. Remuneration of non-executive directors The remuneration of the non-executive directors is determined by the board of Reed Elsevier plc with the aid of external professional advice. The non-executive directors' remuneration consists only of fees. Compliance with best practice provisions In designing its performance-related remuneration policy, the Remuneration Committee has complied with Schedule A of the Combined Code appended to the Listing Rules of the U.K. Financial Services Authority. In relation to disclosure of directors' remuneration, Reed International, a U.K. company listed on the London Stock Exchange, has complied with Schedule B of the Combined Code appended to the Listing Rules of the U.K. Financial Services Authority. Remuneration policy In determining its policy on senior executives' remuneration i ncluding the directors, the Remuneration Committee's principal objective is to attract, retain and motivate people of the highest calibre and experience needed to execute the strategy and deliver shareholder value in the context of an ever more competitive and increasingly global employment market. The Remuneration Committee also has regard to, and balances as far as is practicable, the following objectives: (i) to ensure that it maintains a competitive package of pay and benefits, commensurate with comparable packages available within other multinational companies operating in global markets and, where appropriate, reflecting local practice operating within the country in which an individual director is based; (ii) to ensure that it encourages enhanced performance by directors and fairly recognises the contribution of individual directors to the attainment of the results of the Reed Elsevier plc group, whilst also encouraging a team approach which will work towards achieving the long term strategic objectives of the Reed Elsevier plc group; (iii) to link reward to individual directors' performance and company performance so as to align the interests of the directors with the shareholders of the parent companies. The remuneration of executive directors consists of the following elements: --- Base salary, which is based on comparable positions in businesses of similar size and complexity. Salaries are reviewed annually by the Remuneration Committee. --- A variable annual cash bonus, based on achievement of specific realistic but stretching financial and individual performance-related targets. Targets are set at the beginning of the year by the Remuneration Committee. The maximum potential bonus for the European Directors is 50% of basic salary. The maximum potential bonus payable to a U.S. based director is 90% of basic salary. --- Share options, where the directors and other senior executives are granted options annually over shares in Reed International and Elsevier at the market price at the date of grant. The Remuneration Committee approves the grant of any option and sets performance conditions attaching to options. --- A longer-term incentive arrangement ("LTIP") under which a one off grant of options of 20 times salary has been made during the year. The LTIPs were granted at market value at the date of grant, and are exercisable after 5 years, subject to the achievement of highly demanding performance conditions. --- Post-retirement benefits, which comprise only pensions, where Reed Elsevier plc group companies have different retirement schemes which apply depending on local competitive market practice, length of service and age of the director. The only element of remuneration which is pensionable is base salary. 40 Service contracts Each of the executive directors has a service contract, the notice periods of which are described below: (i) M H Armour was appointed a director in July 1996 and his service contract provides for a notice period of twenty four months. (ii) C H L Davis was appointed a director in September 1999. His service contract provides for a notice period of twelve months. In the event of loss of employment on a change of control before 1 September 2002, twelve months' salary would be payable to C H L Davis in addition to any other sums payable on termination. (iii) D J Haank was appointed a director on 15 November 1999. His service contract, which is subject to Dutch law, provides for six months' notice and, in the event of termination without cause by Reed Elsevier plc, salary and employer's pension contributions would be payable by way of liquidated damages. (iv) A Prozes was appointed a director in August 2000. His service contract, which is subject to New York law, provides that in the event of termination without cause by Reed Elsevier plc, prior to 6 July 2001, twenty four months' base salary would be payable and, thereafter, twelve months' base salary. (v) G J A van de Aast was appointed a director in December 2000 and his service contract provides for a notice period of twelve months. The notice periods in respect of individual directors have been reviewed by the Remuneration Committee. The Remuneration Committee believes that, as a general rule for future contracts, the initial notice period should be up to twenty four months, reducing to twelve months, and that the directors should, subject to practice within the country in which the director is based, be required to mitigate their damages in the event of termination. The Remuneration Committee will, however, have regard to local market conditions so as to ensure that the terms offered are appropriate to recruit and retain key executives operating in global business. The non-executive directors do not have service contracts. External appointments Executive directors may, subject to the approval of the Chairman and the Chief Executive Officer, serve as non-executive directors on the boards of up to two non-associated companies and may retain remuneration arising from such non- executive directorships. The Remuneration Committee believes that the Reed Elsevier plc group benefits from the broader experience gained by executive directors in such appointments. Emoluments of the directors The emoluments of the directors of Reed Elsevier plc (including any entitlement to fees or emoluments from either Reed International, Elsevier or Elsevier Reed Finance BV) was as follows: (a) Aggregate emoluments
Year ended 31 December --------------------- 2000 1999 ---------- ---------- (in 'L' thousands) Salaries and fees . . . . . . . . . . . . . . 2,068 2,505 Benefits. . . . . . . . . . . . . . . . . . . 66 108 Annual performance-related bonuses. . . . . . 835 412 Pension contributions . . . . . . . . . . . . 786 476 Pension to former director. . . . . . . . . . 230 214 One-off bonuses . . . . . . . . . . . . . . . 461 277 Compensation and payments to former directors 581 3,474 ---------- ---------- Total . . . . . . . . . . . . . . . . . . . . 5,027 7,466 ========== ==========
41 (b) Individual emoluments of executive directors
Salary Benefits Bonuses Total 1999 ------- -------- ---------------- --------- (in 'L') M H Armour . . . . . . . . . . . . . . . . . . . . 385,002 18,841 166,700 570,543 390,503 C H L Davis (from 1 September 1999) . . . . . . . . . . . . . 750,000 24,422 328,1251,102,547 534,158 D J Haank (from 15 November 1999) . . . . . . . . . . . . . 235,191 8,047 101,907 345,145 33,836 O Laman Trip (until 30 June 2000). . . . . . . . . 87,632 11,335 36,805 135,772 206,116 A Prozes (from 7 August 2000) . . . . . . . . . . . . . . 243,646 2,649 662,252 908,547 --- G J A van de Aast (from 6 December 2000) . . . . . . . . . . . . . 27,083 1,281 --- 28,364 --- Salaries, benefits and bonuses of former directors 1,723,360 --------- --------- 3,090,918 2,887,973 ========= =========
Taking into account gains of 'L'nil on the exercise of share options, C H L Davis was the highest paid director in 2000. O Laman Trip ceased to be a director on 30 June 2000 and, as compensation for termination of his service agreement, received a payment representing two years' salary and an amount equal to two years' employer's pension contributions plus certain other benefits, the aggregate amount of which was 'L'581,342 ('E'953,400). (c) Recruitment of directors A Prozes was appointed Chief Executive Officer of Reed Elsevier plc's global Legal businesses in July 2000 and a Director of Reed International and Reed Elsevier plc with effect from 7 August 2000. Mr Prozes's base salary is US$800,000 per annum. In accordance with the terms of his service contract, Mr Prozes received in respect of 2000, in addition to his performance related bonus of 'L'200,861 ('E'329,412), a bonus of 'L'461,391 ('E'756,681) as compensation for loss of bonus from his previous employment. Target bonus for 2001 will be 72% of base salary. Options were granted to Mr Prozes in August 2000 under the Reed Elsevier plc Executive Share Option Scheme over shares in Reed International and Elsevier with an aggregate option price of four times base salary. Options over shares in Reed International and Elsevier with an aggregate option price of twenty times base salary were also granted under the terms of the Reed Elsevier plc Senior Executive Long Term Incentive Scheme. Mr Prozes was also granted nil cost options, as compensation for stock option gains forfeited upon leaving his previous employment, over 60,507 ordinary shares in Reed International and 42,120 ordinary shares in Elsevier. The terms of such options provide that they shall become exercisable over three years in equal tranches on each anniversary of the commencement of employment, provided Mr Prozes has not voluntarily terminated, or given notice to terminate, his employment prior to such date. G J A van de Aast was appointed Chief Executive Officer of Reed Elsevier plc's global Business to Business businesses in December 2000 and a Director of Reed International and Reed Elsevier plc with effect from 6 December 2000. Mr van de Aast's base salary is 'L'325,000 per annum. Target bonus for 2001 will be 40% of base salary. Options were granted to Mr van de Aast in December 2000, under the Reed Elsevier plc Executive Share Option Scheme, over shares in Reed International and Elsevier with an aggregate option price of two times base salary. Options over shares in Reed International and Elsevier with an aggregate option price of twenty times base salary were also granted under the terms of the Reed Elsevier plc Senior Executive Long Term Incentive Scheme. (d) Pensions The Remuneration Committee reviews the pension arrangements for the executive directors to ensure that the benefits provided are consistent with those provided by other multinational companies in its principal countries of operation. The policy for executive directors based in the United Kingdom is to provide pension benefits at a normal retirement age of 60, equivalent to two thirds of base salary in the 12 months prior to retirement, provided they have completed 20 years' service with the Reed Elsevier plc group or at an accrual rate of 1/0 th of pensionable salary per annum if employment is for less than 20 years. The target pension for C H L Davis at normal retirement age of 60 is 45% of base salary in the 12 months prior to retirement. In 1989, the Inland Revenue introduced a cap on the amount of pension that can be provided from an approved pension scheme. M H Armour's, G J A van de Aast's and C H L Davis's pension benefits will be provided from a combination of the Reed Elsevier Pension Scheme and the company's unapproved, unfunded pension arrangements. D J Haank is a member of the Dutch pension scheme, and his pension at normal retirement age of 60 will be up to 70% of his final annual salary. 42 The target pension for A Prozes, a US based director, is US$265,000 per annum, which becomes payable on retirement only if he completes a minimum of seven years' service. This pension has no associated contingent benefits for a spouse or dependants, and will be reduced in amount by the value of any other retirement benefits payable by the company or any former employer, other than those attributable to employee contributions. The pension arrangements for all the directors include life assurance cover whilst in employment, an entitlement to a pension in the event of ill health or disability and, except in the case of A Prozes, a spouse's and/or dependants' pension on death. The increase in transfer value of the directors' pension, after deduction of contributions, is shown below:
Transfer value Increase in accrued Total accrued increase after annual pension annual pension as at deduction of during the period 31 December 2000* directors' contributions ------------------ ------------------- ----------------------- (in 'L') M H Armour. . . . 15,611 75,901 249,530 C H L Davis . . . 35,906 47,162 665,827 D J Haank . . . . 9,247 75,814 39,567 O Laman Trip . . 7,172 37,054 107,358 A Prozes. . . . . --- --- --- G J A van de Aast 920 920 13,075
------------------- * Date of leaving service if prior to 31 December 2000. The transfer value increase in respect of individual directors represents a liability in respect of directors' pension entitlement, and is not an amount paid or payable to the director. 43 (e) Individual emoluments of non-executive directors
2000 1999 ------- ------- (in 'L') J F Brock (from 15 April 1999) . . . . . 34,220 27,196 R J Nelissen (from 15 April 1999). . . . 34,304 30,197 S Perrick. . . . . . . . . . . . . . . . 34,304 43,530 R W H Stomberg . . . . . . . . . . . . . 34,220 35,260 M Tabaksblat . . . . . . . . . . . . . . 168,202 125,277 D G C Webster. . . . . . . . . . . . . . 34,220 70,260 Aggregate emoluments of former directors 83,556
------------------- (1) M Tabaksblat was appointed Chairman of Reed Elsevier plc and Reed International, and Chairman of the Supervisory Board of Elsevier in April 1999. Fees in respect of M Tabaksblat were paid to Unilever NV until May 1999, at which point he retired from Unilever. (2) The emoluments of D G C Webster in 1999 include an additional fee payable to him to reflect the significant additional duties he undertook during that year including those arising from his appointment as non-executive Chairman of Reed Elsevier plc during the period August 1998 to April 1999. Compensation of executive officers The aggregate compensation paid to all executive officers (other than directors) of Reed Elsevier plc (2 persons during the 2000 financial year) as a group, for services in such capacities for the year ended 31 December 2000 was 'L'538,000 which included contributions made to the pension plans in respect of fficers of Reed Elsevier plc of 'L'nil. 44 BOARD PRACTICES REED ELSEVIER The Boards of Directors of Reed International and Elsevier manage their respective shareholdings in Reed Elsevier plc and Elsevier Reed Finance BV. During 1999 Reed International, Elsevier and Reed Elsevier plc introduced a unitary management structure of a single non-executive Chairman, a sole Chief Executive Officer and, so far as practicable, the same directors for all three companies. This was a logical evolution of the management structure in place since the merger, under which the day to day management of the jointly owned businesses of Reed Elsevier plc had been under the control of an Executive Committee of the Board of Reed Elsevier plc. For a complete description of the Board membership positions and executive officer positions within Reed Elsevier plc, see "Directors and Senior Management". Under the governance arrangements approved by the shareholders of Reed International and Elsevier in 1999, there shall be no less than three and no more than five executive directors, and six non-executive directors. A person may only be appointed or proposed or recommended for appointment to the board if that person has been nominated for that appointment by the joint Nominations Committee of Reed International and Elsevier. Persons nominated by the joint Nominations Committee will be required to be approved by the Reed Elsevier plc Board, prior to appointment to the Reed Elsevier plc Board. Decisions of the Board of Directors of Reed Elsevier plc require a simple majority, and the quorum required for meetings of the Board of Reed Elsevier plc is any two directors. The Reed Elsevier plc Board has established the following committees: . Strategy --- comprising the Chairman, Chief Executive Officer and two non-executive directors . Audit --- comprising three non-executive directors . Remuneration --- comprising three non-executive directors Arrangements established at the time of the merger provide that, if any person (together with persons acting in concert with him) acquires shares, or control of the voting rights attaching to shares, carrying more than 50% of the votes ordinarily exercisable at a general meeting of Reed International or Elsevier and has not made a comparable take-over offer for the other party, the other party may by notice suspend or modify the operation of certain provisions of the merger arrangements, such as (i) the right of the party in which control has been acquired (the "Acquired Party") to appoint or remove directors of Reed International, Elsevier and Reed Elsevier plc and (ii) the Standstill Obligations in relation to the Acquired Party. Such a notice will cease to apply if the person acquiring control makes a comparable offer for all the equity securities of the other within a specified period or if the person (and persons acting in concert with him) ceases to have control of the other. In the event of a change of control of one parent company and not the other (where there has been no comparable offer for the other), the parent company which has not suffered the change in control will effectively have the sole right to remove and appoint directors of Reed Elsevier plc. Also, a director removed from the board of a parent company which has suffered a change in control will not have to resign from the board of the other parent company or Reed Elsevier plc. The Articles of Association of Reed Elsevier plc contain certain restrictions on the transfer of shares in Reed Elsevier plc. In addition, pursuant to arrangements established at the time of the merger, neither Reed International nor Elsevier may acquire or dispose of any interest in the share capital of the other or otherwise take any action to acquire the other without the prior approval of the other (the "Standstill Obligations"). The Panel on Take-overs and Mergers in the United Kingdom (the "Panel") has stated that in the event of a change of statutory control of either Reed International or Elsevier, the person or persons acquiring such control will be required to make an offer to acquire the share capital of Reed Elsevier plc (but not Elsevier Reed Finance BV) held by the other, in accordance with the requirements of the City Code on Take-overs and Mergers in the United Kingdom. This requirement would not apply if the person acquiring statutory control of either Reed International or Elsevier made an offer for the other on terms which are considered by the Panel to be appropriate. The Supervisory Board of Elsevier Reed Finance BV comprises four members, and the Management Board consists of two members. The minimum number of members of the Supervisory Board of Elsevier Reed Finance BV is two, of which at least one is nominated for appointment by Elsevier and one by Reed International. The quorum for meetings of the Supervisory Board is one Reed International nominee and one Elsevier nominee, and resolutions at such meetings require to be passed by unanimous vote. The Management Board of Elsevier Reed Finance BV constitutes at least one member nominated by Elsevier together with any further appointees as Reed International and Elsevier shall determine. The Articles of Association of Elsevier Reed Finance BV contain provisions requiring the Executive Board to obtain the approval of the Supervisory Board for certain specified activities. For a complete description of the Board membership positions within Elsevier Reed Finance BV, see "Directors and Senior Management". REED INTERNATIONAL Under the governance arrangements approved by the shareholders of Reed International and Elsevier, as part of the new unitary management structure implemented during 1999, there shall be no less than three and no more than five executive directors, and six non-executive directors. A person may only be appointed or proposed or recommended for appointment to the board if that person has been nominated for that appointment by the joint Nominations Committee of Reed International and 45 Elsevier. Persons nominated by the joint Nominations Committee will be required to be approved by the Reed International Board, prior to the appointment to the Reed International Board. Notwithstanding the provisions outlined above in relation to the appointment to the board, Reed International shareholders retain their rights under Reed International's Articles of Association to appoint directors to the Reed International Board by ordinary resolution. Reed International shareholders may also, by ordinary resolution, remove a director from the Board of Reed International, and in such circumstances that director will also be required to be removed or resign from the Boards of Elsevier and Reed Elsevier plc (except in circumstances where there has been a change of control of Reed International and not Elsevier). Each director on the Reed International Board is required to retire by rotation at least every three years. The Reed International Board has established an Audit Committee, comprising three non-executive directors. The joint Nominations Committee comprises the Chairman, the Chief Executive Officer and one non-executive director from each of Reed International and Elsevier. ELSEVIER Under the governance arrangements approved by the shareholders of Reed International and Elsevier, as part of the new unitary management structure implemented during 1999, there shall be no less than three and no more than five members of the Executive Board, and no less than six and no more than eight members of the Supervisory Board. A person may only be appointed or proposed or recommended for appointment to the boards if that person has been nominated for that appointment by the joint Nominations Committee of Reed International and Elsevier. Persons nominated by the joint Nominations Committee will be required to be approved by the Elsevier Combined Board prior to appointment to the Elsevier Executive or Supervisory Board and by Elsevier shareholders. Notwithstanding the provisions outlined above in relation to the appointment to the Board, Elsevier shareholders retain their rights under Elsevier's Articles of Association to appoint directors to the Elsevier Boards by ordinary resolution if such appointment has been proposed by the Elsevier Combined Board and, if such appointment has not, by an ordinary resolution of shareholders requiring a majority of at least two-thirds of the votes cast if less than one half of Elsevier's issued share capital is represented. Elsevier shareholders may also, by ordinary resolution, remove a director from the Board of Elsevier, and in such circumstances that director will also be required to be removed or resign from the Boards of Reed International and Reed Elsevier plc (except in circumstances where there has been a change of control of Elsevier and not Reed International). Each director on the Elsevier Executive and Supervisory Boards is required to retire by rotation at least every three years. The Elsevier Supervisory Board has established an Audit Committee, comprising three members of the Elsevier Supervisory Board. The joint Nominations Committee comprises the Chairman, the Chief Executive Officer and one non- executive director from each of Reed International and Elsevier. EMPLOYEES Reed Elsevier's average number of employees in the year ended 31 December 2000 was 28,900. Approximately 5,700 were located in the U.K., 14,800 in North America, 3,000 in the Netherlands, 3,000 in the rest of Europe and 2,400 in the rest of World. The average number of employees in the business segments in the year ended 31 December 2000 was 3,700 in Science & Medical, 11,200 in Legal, 1,500 in Education and 12,500 in Business. The board of Reed Elsevier plc is fully committed to the concept of employee involvement and participation, and encourages each of its businesses to formulate its own tailor-made approach with the co-operation of employees. The group is an equal opportunity employer, and recruits and promotes employees on the basis of suitability for the job. Appropriate training and development opportunities are available to all employees. Codes of Conduct applicable to employees within the Reed Elsevier plc group have been adopted throughout its sses. 46 SHARE OWNERSHIP REED INTERNATIONAL Share options The following table sets forth the details of options held by directors over Reed International ordinary shares as at 31 December 2000 under share option schemes which are described below under "Reed Elsevier Share option schemes":
Granted 1 January during the 31 December 2000* year Option price 2000 Exercisable -------- --------- ----------- --------------------- (p) M H Armour --- Executive Scheme 59,600 400.75 59,600 2001-2005 30,000 585.25 30,000 2001-2006 52,000 565.75 52,000 2001-2007 66,900 523.00 66,900 2001-2008 33,600 537.50 33,600 2002-2009 88,202 436.50 88,202 2003-2010 M H Armour --- LTIP 882,016 436.50 882,016 2005 M H Armour --- SAYE Scheme 3,924 430.00 3,924 2004 -------- --------- ---------- Total 246,024 970,218 1,216,242 ======== ========= ========== C H L Davis --- Executive Scheme 160,599 467.00 160,599 2002-2009 80,300 467.00 80,300 2003-2009 80,300 467.00 80,300 2004-2009 171,821 436.50 171,821 2003-2010 C H L Davis --- Nil cost options 535,332 Nil 535,332 2002 C H L Davis --- LTIP 1,718,213 436.50 1,718,213 2005 C H L Davis --- SAYE Scheme 5,019 336.20 5,019 2005 -------- --------- ---------- Total 856,531 1,895,053 2,751,584 ======== ========= ========== D J Haank --- Executive Scheme 18,498 677.25 18,498 2001-2004 18,497 537.50 18,497 2001-2009 51,368 436.50 51,368 2003-2010 D J Haank --- LTIP 513,680 436.50 513,680 2005 -------- --------- ---------- Total 36,995 565,048 602,043 ======== ========= ========== A Prozes --- Executive Scheme 188,281 566.00 188,281 2003-2010 A Prozes --- LTIP 941,406 566.00 941,406 2005 A Prozes --- Nil cost options 60,507 Nil 60,507 2001-2003 --------- ---------- Total 1,190,194 1,190,194 ========= ========== G J A van de Aast --- Executive Scheme 50,940 638.00 50,940 2003-2010 G J A van de Aast --- LTIP 509,404 638.00 509,404 2005 -------- ---------- Total 560,344 560,344 ======== ==========
*On date of appointment if after 1 January 2000. The middle market price of a Reed International ordinary share during the year was in the range 390.75p to 700.00p and at 31 December 2000 was 700.00p. Between 1 January 2001 and 20 February 2001, there were no changes to the options held by directors. Share option schemes Prior to the merger, Reed International operated a number of share option schemes under which options over new issue Reed International ordinary shares were granted to its executive directors, executive officers and eligible employees. The share option schemes which still have options capable of being exercised are the Reed International U.K. Executive Share Option Scheme and the Reed International Overseas Executive Share Option Scheme, (the "Reed International Executive Schemes"). The Reed International Executive Schemes were established in 1984. Options over new Reed International ordinary shares were granted thereunder until 1993, and no further options may be granted under the Reed International Executive Schemes. The terms and conditions of the Reed International Executive Schemes are substantially similar to those of the corresponding share 47 option schemes of Reed Elsevier plc, which are described below under "Reed Elsevier plc Executive U.K. and Overseas Share Option Schemes. A Longer Term Incentive Plan was operated until 1999. No entitlements arose in respect of the 1998/2000 period. The Plan has been discontinued, and there are no options outstanding under the Plan. ELSEVIER Share options The following table sets forth the details of options held by directors over Elsevier ordinary shares as at 31 December 2000 under share option schemes which are described below under "Elsevier Share option schemes":
Market Granted Exercised price at 31 1 January during the Option during theexercise December 2000* year price year date 2000 Exercisable -------- --------- ------ ----------------- --------- ----------- ('E') ('E') M H Armour --- Executive Scheme 20,244 13.55 20,244 2002-2009 61,726 10.73 61,726 2003-2010 M H Armour --- LTIP 617,256 10.73 617,256 2005 -------- --------- --------- Total 20,244 678,982 699,226 ======== ========= ========= C H L Davis --- Executive Scheme 95,774 12.00 95,774 2002-2009 47,888 12.00 47,888 2003-2009 47,888 12.00 47,888 2004-2009 120,245 10.73 120,245 2003-2010 C H L Davis --- LTIP 1,202,446 10.73 1,202,446 2005 C H L Davis --- Nil cost options 319,250 Nil 319 250 2002 -------- --------- --------- Total 510,800 1,322,691 1,833,491 ======== ========= ========= D J Haank --- Executive Scheme 35,000 11.93 35,000 2001 30,000 14.11 30,000 2001-2002 30,000 15.25 30,000 2001-2003 10,926 17.07 10,926 2001-2004 10,925 13,55 10.925 2001-2009 35,949 10.73 35.949 2003-2010 D J Haank --- LTIP 359,485 10.73 359,485 2005 D J Haank --- Convertible Debentures 9,540 14.36(i) 3,000(ii15.66 6,540 2001-2002 -------- --------- --------- --------- Total 126,391 395,434 3,000 518,825 ======== ========= ========= ========= A Prozes --- Executive Scheme 131,062 13.60 131,062 2003-2010 A Prozes --- LTIP 655,310 13.60 655,310 2005 A Prozes --- Nil cost options 42,120 Nil 42,120 2001-2003 -------- --------- --------- Total 828,492 828,492 ======== ========= ========= G J A van de Aast --- Executive Scheme 35,866 14,87 35,866 2003-2010 G J A van de Aast --- LTIP 358,658 14.87 358,658 2005 -------- --------- Total 394,524 394,524 ======== =========
*On date of appointment if after 1 January 2000. (i) Average price (ii) Retained an interest in 3,000 shares The market price of an Elsevier ordinary share during the year was in the range 'E'9.30 to 'E'16.07 and at 31 December 2000 was 'E'15.66. Between 1 January 2001 and 20 February 2001, there were no changes to the options held by directors. Share option schemes Under arrangements operated by Elsevier (the "Elsevier Executive Option Arrangements"), options to subscribe for Elsevier ordinary shares were granted each year until 1999 to the members of the Executive Board and to a small number of other senior executives of Elsevier. Such options give the beneficiary the right, at any time during periods of either five years or 48 ten years following the date of the grant, to purchase Elsevier ordinary shares. Prior to 1999 all options granted under the Elsevier Executive Option Arrangements could be exercised within a five year period from the date of grant, and the options were granted at an exercise price equal to the market price on the date of grant. During 1999, options were granted with an exercise period of five years at an exercise price 26% above the market price at the date of grant, or with an exercise period of 10 years at an exercise price equal to the market price at the date of grant, or a combination of both. In addition, Elsevier has arrangements in place (together with the Elsevier Executive Option Arrangements the "Elsevier Share Option Arrangements"), which are open to Dutch employees of the businesses within Reed Elsevier after one year's service, under which interest bearing debentures of Elsevier may be purchased for cash for periods of five years, during which time they may be ted on a prescribed basis into Elsevier ordinary shares. 49 REED ELSEVIER Share ownership and options The interests of the directors of Reed Elsevier plc and their families in the issued share capital of Reed International and Elsevier at the beginning and end of 2000 are shown below:
Reed International Elsevier ordinary shares ordinary shares -------------------- -------------------- 1 January 31 December 1 January 31 December 2000* 2000 2000* 2000 -------- ---------- -------- ---------- M H Armour 2,500 2,500 2,500 2,500 J F Brock 3,000 3,000 --- --- G J A van de Aast --- --- --- --- C H L Davis --- 44,778 --- 31,099 D J Haank --- --- 7,880 10,880 R J Nelissen --- --- --- 5,000 S Perrick --- --- --- --- A Prozes --- --- --- --- Dr R W H Stomberg --- --- --- --- M Tabaksblat --- --- 8,000 8,000 --- D G C Webster 5,000 5,000 ---
*On date of appointment if after 1 January 2000. There have been no changes in the interests of the directors in the share capital of Reed International since 31 December 2000. Subsequent to 31 December 2000 S Perrick acquired 962 Elsevier shares. Any ordinary shares required to fulfil entitlements under nil cost share option grants are provided by the Employee Benefit Trust ("EBT") from market purchases. As beneficiaries under the EBT, the directors are deemed to be interested in the shares held by the EBT which, at 31 December 2000, amounted to 590,257 Reed International ordinary shares and 320,000 Elsevier ordinary . 50 Shares and options held by executive officers The following table indicates the total aggregate number of Reed International ordinary shares and Elsevier ordinary shares beneficially owned and the total aggregate number of Reed International ordinary shares and Elsevier ordinary shares subject to options beneficially owned by each of the executive officers (other than directors) of Reed Elsevier plc (2 people) as a group, as of 20 February 2001:
Reed Reed International Elsevier International ordinary Elsevier ordinary ordinary shares subject ordinary shares subject shares to options shares(1)(2to options ------------- ------------- -------- ------------- Executive officers (other than directors) as a group --- 229,971 5,000 199,049 (1)ABLThe Elsevier ordinary shares may be issued in registered or bearer form. (2) No individual executive officer of Reed Elsevier plc has notified Elsevier that he holds more than 5% of the issued share capital of Elsevier pursuant to the Dutch law requirement described under "Control of Registrants --- Elsevier". The options included in the above table are exercisable into Reed International ordinary shares at prices ranging from 424p to 700p per Share and between the date hereof and 2010. The options included in the above table are exercisable into Elsevier ordinary shares at prices ranging from 'E'10.45 to 'E'15.66 per Share and between the date hereof and 2010. Share option schemes Following the merger, Reed Elsevier plc introduced share option schemes under which options over new issue and over existing Reed International ordinary shares and/or Elsevier ordinary shares may be granted to employees of Reed Elsevier plc and participating companies under its control. The share option schemes are the Reed Elsevier plc SAYE Share Option Scheme (the "Reed Elsevier plc SAYE Scheme") and the Reed Elsevier plc Executive U.K. and Overseas Share Option Schemes (the "Reed Elsevier plc Executive Schemes and, together with the Reed Elsevier plc SAYE Scheme, the "Reed Elsevier plc Schemes"). The Reed Elsevier plc Schemes have been approved by shareholders of Reed International and information concerning the terms and conditions of the Schemes is set out below. During 1999 the directors introduced share option schemes (the "Reed Elsevier plc Executive Share Option Schemes (No. 2)") under which options over only existing Reed International ordinary shares and/or Elsevier ordinary shares may be granted to employees. Apart from the fact that options over new issue shares may not be issued under these schemes, the terms and conditions of these schemes are identical to the Reed Elsevier plc Executive Schemes. At 20 February 2001 the total number of Reed International ordinary shares subject to outstanding options under the Reed International Schemes, the Reed Elsevier plc Schemes and the Reed Elsevier plc Executive Share Option Schemes (No. 2) amounted to 30,243,078 shares, and the options for such shares were exercisable at option prices ranging between 208.75p to 700p per share and were exercisable between 2001 and 2010. At 20 February 2001 the total number of Elsevier ordinary shares subject to outstanding options under the Elsevier Share Option Arrangements, the Reed Elsevier plc Schemes and the Reed Elsevier plc Executive Share Option Schemes (No. 2) amounted to 15,440,684 shares, and the options for such shares were exercisable at option prices ranging between 'E'10.45 to 'E'15.66 per share between 2001 and 2010. During 2000, Reed Elsevier plc made grants under a Senior Executive Long Term Incentive Scheme, following approval of the Scheme by the shareholders of Reed International and Elsevier. At 20 February 2001 the total number of Reed International ordinary shares and Elsevier ordinary shares subject to outstanding options under the Reed Elsevier plc Senior Executive Long Term Incentive Scheme were 14,370,866 and 10,059,317, respectively. Also during 2000, the directors granted nil cost options over Restricted Shares to a small number of senior executives. At 20 February 2001 the total number of Reed International ordinary shares and Elsevier ordinary shares subject to outstanding options under such arrangements were 65,739 and 45,762, respectively. Reed Elsevier plc SAYE Share Option Scheme The Reed Elsevier plc SAYE Scheme provides for the grant of options over Reed International ordinary shares and/or Elsevier ordinary shares to employees of Reed Elsevier plc and participating companies under its control. Only options over Reed International ordinary shares have been granted under the Reed Elsevier plc SAYE Scheme to date. The price at which shares may be acquired under the Reed Elsevier plc SAYE Scheme may not be less that the higher of (i) 80% of the closing middle market price for the relevant share on The London Stock Exchange three days before invitations to apply for options are issued, and (ii) if new shares are to be subscribed, their nominal value. On joining the Reed Elsevier plc SAYE Scheme, a save as you earn contract (a "Savings Contract") must be entered into with an appropriate savings body, providing for contributions to be made to such savings body between 'L'5 and the permitted maximum (currently 'L'250) per month for a period of three or five years. A bonus is payable under the Savings Contract at the end of the savings period. The amount of the monthly contributions may be reduced if applications exceed the number of Reed International ordinary shares and/or Elsevier ordinary shares available for the grant of options on that occasion. 51 The number of Reed International ordin ary shares and/or Elsevier ordinary shares over which an option may be granted is limited to that number of shares which may be acquired at the exercise price out of the repayment proceeds (including any bonus) of the Savings Contract. All U.K. employees of Reed Elsevier plc and participating companies under its control in employment on a predetermined date prior to the date of invitation are entitled to participate in the Reed Elsevier plc SAYE Scheme. In addition, the directors of Reed Elsevier plc may permit other employees of Reed Elsevier plc and participating companies under its control to participate. Invitations to apply for options may normally only be issued within 42 days after the announcement of the combined results of Reed Elsevier for any period. No options may be granted more than 10 years after the approval of the scheme. Options under the Reed Elsevier plc SAYE Scheme may normally only be exercised for a period of six months after the bonus date under the relevant Savings Contract. However, options may be exercised earlier than the normal exercise date in certain specified circumstances, including death, reaching age 60, or on ceasing employment on account of injury, disability, redundancy, reaching contractual retirement age, or the sale of the business or subsidiary for which the participant works, or provided the option has been held for at least three years, on ceasing employment for any other reason. Exercise is allowed in the event of an amalgamation, reconstruction or take-over of the company whose shares are under option; alternatively, such options may, with the agreement of an acquiring company or a company associated with it, be exchanged for options over shares in the acquiring company or that associated company. Options may also be exercised in the event of the voluntary winding-up of the company whose shares are under option. In the event that options are exercised before the bonus date, the participant may acquire only the number of shares that can be purchased with the accumulated savings up to the date of exercise, plus interest (if any). Options under the Reed Elsevier plc SAYE Scheme are not transferable and may be exercised only by the persons to whom they are granted or their personal representatives. In the event of any capitalisation or rights issue by Reed International or Elsevier, or of any consolidation, subdivision or reduction of their share capital, the number of shares subject to any relevant option and/or the exercise price may be adjusted with the approval of the U.K. Inland Revenue, subject to the independent auditors of Reed Elsevier plc confirming in writing that such adjustment is, in their opinion, fair and reasonable. No more than 168 million new Reed International ordinary shares, being approximately 15% of Reed International's current issued share capital, may be issued under the Reed Elsevier plc SAYE Scheme. No option may be granted under the scheme if it would cause the number of Reed International ordinary shares issued or issuable in any 10 year period under the scheme and any other share option scheme adopted by Reed International or Reed Elsevier plc to exceed in aggregate 10% of the issued share capital of Reed International from time to time. The number of Elsevier ordinary shares which may be issued or issuable under the Reed Elsevier plc SAYE scheme will be determined by the Combined Meeting of Elsevier, but shall not exceed the percentage limits set out above in relation to Reed International ordinary shares. Options may also be granted under the Reed Elsevier plc SAYE Scheme over existing Reed International ordinary shares or Elsevier ordinary shares. Reed Elsevier plc Executive U.K. and Overseas Share Option Schemes The Reed Elsevier plc Executive Schemes comprise (i) the Reed Elsevier plc Executive U.K. Share Option Scheme (the "Reed Elsevier plc U.K. Executive Scheme"), and (ii) the Reed Elsevier plc Executive Overseas Share Option Scheme (the "Reed Elsevier plc Overseas Executive Scheme"). Reed Elsevier plc U.K. Executive Scheme: The Reed Elsevier plc U.K. Executive Scheme provides for the grant of options over Reed International ordinary shares and/or Elsevier ordinary shares to the U.K. Employees of Reed Elsevier plc and participating companies under its control. All directors and employees of Reed Elsevier plc and participating companies under its control who are contracted to work for at least 25 hours per week are eligible to be nominated for participation. The grant of options is administered by a committee of directors of Reed Elsevier plc, a majority of the members of which are non- executive directors. No payment is required for the grant of an option under the Reed Elsevier plc U.K. Executive Scheme. Options granted under the Reed Elsevier plc U.K. Executive Scheme may be exercised within a period of 10 years and entitle the holder to acquire shares at a price determined by the committee of directors of Reed Elsevier plc, which may not be less than the higher of (i) in the case of Reed International ordinary shares, the closing middle market price for the relevant share on The London Stock Exchange at the date of grant, (ii) in the case of an Elsevier ordinary share, the closing market price for the relevant share on Euronext, Amsterdam at the date of grant and (iii) if new shares are to be subscribed, their nominal value. Employees may be granted options under the Reed Elsevier plc U.K. Executive Scheme to replace those which have been exercised. In granting such replacement options, the committee of directors of Reed Elsevier plc must satisfy itself that the grant of such options is justified by the performance of Reed Elsevier in the previous two to three years. Options may normally only be granted under the Reed Elsevier plc U.K. Executive Scheme within 42 days after the announcement of the combined results of Reed Elsevier for any period. No option may be granted under the Reed Elsevier plc U.K. Executive Scheme more than 10 years after the approval of the scheme. 52 Options granted under the Reed Elsevier plc U.K. Executive Scheme will normally be exercisable only after the expiration of three years from the date of their grant and by a person who remains a director or employee of Reed Elsevier plc and participating companies under its control. Options granted from 1999 onwards are subject to performance criteria. In order for an option to become exercisable, the compound growth in the average of the Reed International and Elsevier adjusted EPS (before amortisation of goodwill and intangible assets, exceptional items and U.K. tax credit equalisation) in a consecutive three year period after the grant is made, must exceed the compound growth in the average of the U.K. and Dutch retail price index during the same period by a minimum of 6%. Early exercise of such options is permitted in substantially similar circumstances to those set out in relation to the Reed Elsevier plc SAYE Scheme. The committee of directors of Reed Elsevier plc has discretion to permit the exercise of options by a participant in certain circumstances where it would not otherwise be permitted. Options granted under the Reed Elsevier plc U.K. Executive Scheme are not transferable and may be exercised only by the persons to whom they are granted or their personal representatives. In the event of any capitalisation or rights issue by Reed International or Elsevier, or of any consolidation, subdivision or reduction of their share capital, the number of shares subject to any relevant option and/or the exercise price may be adjusted with the approval of the U.K. Inland Revenue, subject to the independent auditors of Reed Elsevier plc confirming in writing that such adjustment is, in their opinion, fair and reasonable. The limits described above on the number of Reed International ordinary shares and Elsevier ordinary shares which may be issued under the Reed Elsevier plc SAYE Scheme also apply to the Reed Elsevier plc U.K. and Overseas Executive Scheme. In addition, no option may be granted under the scheme if it would cause the number of Reed International Ordinary Shares issued or issuable in any 10 year period under the scheme or any other executive share option scheme adopted by Reed International or Reed Elsevier plc to exceed in aggregate 5% of the issued share capital of Reed International from time to time. Equivalent limits to those above apply to the number of Elsevier ordinary shares which may be issued or issuable under the scheme. Options may also be granted under the Reed Elsevier plc U.K. Executive Scheme over existing Reed International ordinary shares or Elsevier ordinary shares. Reed Elsevier plc Overseas Executive Scheme: The Reed Elsevier plc Overseas Executive Scheme provides for options to be granted to non-U.K. employees of Reed Elsevier plc and participating companies under its control. The terms and conditions of the Reed Elsevier plc Overseas Executive Scheme are substantially similar to those of the Reed Elsevier plc U.K. Executive Scheme. Reed Elsevier plc Senior Executive Long Term Incentive Scheme Options over shares in Reed International and Elsevier have been granted during the year under the Reed Elsevier plc Senior Executive Long Term Incentive Scheme ("LTIP"). Implementation of the LTIP was approved by shareholders of Reed International and Elsevier at their respective Annual General Meetings in April 2000. The terms of the LTIP permitted a one off grant of options over Reed International and Elsevier ordinary shares, up to an aggregate value of 30 times salary, to be made to executive directors and a limited number of key executives. Grants have been made to existing management as well as individuals recruited during the year, regarded as key executives responsible for reshaping the business, executing the strategy for growth announced in February 2000 and producing a sustainable improvement in shareholder value. All grants under the LTIP were approved by the Remuneration Committee, and the maximum grant to any one individual represented an aggregate value of 20 times salary. Participants in the LTIP are required to build up a significant personal shareholding in Reed International and/or Elsevier. At executive director level, the requirement is that they should own shares equivalent to 1/2 times salary, to be acquired over a reasonable period. An option under the LTIP may only be exercised during the period 1 January 2005 and 31 December 2005, and then only if the performance targets have been satisfied. The first performance condition requires the achievement of 20% per annum total shareholder return ("TSR") over three years from a base point of 436.5p per Reed International share and 'E'10.73 for an Elsevier share, being the respective share prices on 2 May 2000. In the event that the required TSR performance is not achieved in the initial three year period, the TSR target will be extended to a maximum of five years with a corresponding increase in the growth requirement over such extended performance period. Restricted share awards The Remuneration Committee authorised during 2000 the granting of nil cost options over restricted shares in Reed International and Elsevier to assist in the recruitment and retention of senior executives. Options over restricted shares will be met by the Employee Benefit Trust from market purchases. 53 ITEM 7: MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS MAJOR SHAREHOLDERS REED INTERNATIONAL As of 20 February 2001, Reed International is aware of the following disclosable interests in the issued Reed International ordinary shares:
Number of Reed International ordinary shares Identity of Person or Group(1) owned % of Class ----------------------------- -------------- --------- Prudential Corporation . . . . 63,010,273 4.99 Lord Hamlyn. . . . . . . . . . 43,302,816 3.43 Directors and Officers . . . . 55,278 ---
------------------- (1) Under U.K. Law, subject to certain limited exceptions, persons or groups owning or controlling 3% or more of the issued Reed International Ordinary Shares are required to notify Reed International of the level of their holdings. As far as Reed International is aware, except as disclosed herein, it is neither directly or indirectly owned nor controlled by one or more corporations or by any government. There are 32,840 ordinary shareholders with registered addresses in the United Kingdom, representing 99.8% of shares issued. Reed International is not aware of any arrangements the operation of which may at a subsequent date result in a change in control of Reed International. The major shareholders of Reed International do not have different voting rights to other ordinary shareholders. ELSEVIER As of 20 February 2001, Elsevier is aware of the following disclosable interests in the issued Elsevier ordinary shares, in addition to the 4,049,951 R-shares in Elsevier held by a subsidiary of Reed International and representing a 5.2% indirect equity interest in the total share capital of Elsevier:
Number of Elsevier ordinary shares Identity of Person or Group(1)(2) owned % of Class -------------------------------- ----------------- --------- ING Group . . . . . . . . . . . . 53,114,651 7.9 Directors and Officers(3) . . . . 58,441 ---
------------------- (1) The Elsevier ordinary shares may be issued in registered or bearer form. (2) Under Dutch law, individuals or corporate bodies acquiring shares which result in such individual or corporate bodies holding more than 5% of the issued share capital of Elsevier are required to notify Elsevier thereof. (3) No individual member of the Superv isory Board or the Executive Board of Elsevier or executive officer of Elsevier has notified Elsevier that they hold more than 5% of the issued share capital of Elsevier pursuant to the Dutch law described in the immediately preceding footnote. As far as Elsevier is aware, except as disclosed herein, it is neither directly nor indirectly owned or controlled by one or more corporations or by any government. Elsevier is not aware of any arrangements the operation of which may at a subsequent date result in a change in control of Elsevier. The major shareholders of Elsevier do not have different voting rights to other ordinary shareholders. RELATED PARTY TRANSACTIONS
REED INTERNATIONAL Not applicable. ELSEVIER Not applicable.
54 ITEM 8: FINANCIAL INFORMATION Financial Statements See: Item 18. Financial Statements Legal Proceedings Reed Elsevier is party to various legal proceedings, the ultimate resolutions of which are not expected to have a material adverse effect on the financial position of Reed Elsevier or results of their operations. Reed Elsevier Inc. ( "REI ") has been named as one of several defendants in an action captioned Electronic Database Copyright Infringement Litigation, M.D.L. Docket No. 1379, a federal multidistrict litigation which consolidates three lawsuits alleging copyright infringement, filed against REI and others in August and September, 2000, in federal district courts: The Authors Guild, Inc. v. The Dialog Corporation et al., Laney et ano. v. Dow Jones & Company, Inc., et al., and Posner et al. v.. Gale Group Inc. These suits were brought by or on behalf of freelance authors who allege that the defendants have infringed plaintiffs' copyright by making plaintiffs' works available on databases operated by the defendants. The plaintiffs are seeking to be certified as class representatives of all similarly-situated freelance authors. On 27 February 2001, the Court ordered a stay of the proceeding pending disposition by The United States Supreme Court of New York Times Company et al. v. Tasini et al., No. 00-201, in which REI is a defendant and which involves legal issues that, if resolved by the Supreme Court in favour of REI would likely result in the dismissal of the consolidated action as well. No proceedings relating to the class certification motions, or other proceedings of substance, have yet occurred. Plaintiffs in each action seek actual damages, statutory damages and injunctive relief. The Laney plaintiff also seeks an accounting for profits received. REI believes it has strong substantive defences to these actions and will vigorously pursue them. It will also vigorously contest the motions for class certification. REI has indemnity agreements from each of the content providers that supplied articles to the relevant databases. REI could be adversely affected in the event the plaintiffs are successful in their claims and full recovery were not available under the indemnities. 55 ITEM 9: THE OFFER AND LISTING TRADING MARKETS REED INTERNATIONAL The Reed International ordinary shares are listed on the London Stock Exchange, the New York Stock Exchange and Euronext Amsterdam N.V. The London Stock Exchange is the principal trading market for Reed International ordinary shares. Trading on the New York Stock Exchange is in the form of American Depositary Shares ("ADSs"), evidenced by American Depositary Receipts ("ADRs") issued by Citibank NA, as depositary. Each ADS represents four Reed International ordinary shares. The table below sets forth, for the calendar quarters indicated, the high and low closing middle market quotations for the Reed International ordinary shares on the London Stock Exchange as derived from the Daily Official List of the London Stock Exchange and the high and low last reported sales prices in U.S. dollars for the Reed International American Depositary Shares on the New York Stock Exchange, as derived from the New York Stock Exchange Composite Tape, and reported by Datastream International Ltd:
Pence per ordinary share U.S. dollars per ADS ----------------------- ------------------- Calendar Periods High Low High Low --------------------------------------- ----------- ---------- --------- --------- 1996 . . . . . . . . . . . . . . . . . . 605 491 39.25 30.00 1997 . . . . . . . . . . . . . . . . . . 648 507 42.88 33.50 1998 . . . . . . . . . . . . . . . . . . 716 428 48.25 28.50 1999 . . . . . . . . . . . . . . . . . . 630 344 39.63 22.75 2000 . . . . . . . . . . . . . . . . . . 700 391 43.13 24.50 1999 First Quarter . . . . . . . . . . . . . 630 470 39.63 31.50 Second Quarter . . . . . . . . . . . . 590 423 37.63 27.06 Third Quarter . . . . . . . . . . . . . 495 366 31.69 24.13 Fourth Quarter . . . . . . . . . . . . 465 344 29.88 22.75 2000 First Quarter . . . . . . . . . . . . . 633 391 39.88 24.50 Second Quarter . . . . . . . . . . . . 575 426 35.00 25.06 Third Quarter . . . . . . . . . . . . . 617 510 36.31 31.25 Fourth Quarter . . . . . . . . . . . . 700 508 43.13 29.43 End of the Month February 2001 (through 21 February 2001) 670 613 39.74 36.20 January 2001 . . . . . . . . . . . . . . 700 626 42.63 36.75 December 2000. . . . . . . . . . . . . . 700 638 43.13 37.69 November 2000. . . . . . . . . . . . . . 689 630 39.75 35.88 October 2000 . . . . . . . . . . . . . . 637 508 37.38 29.43 September 2000 . . . . . . . . . . . . . 617 537 36.25 32.44 August 2000. . . . . . . . . . . . . . . 597 520 36.31 31.88
56 ELSEVIER The Elsevier ordinary shares are quoted on Euronext Amsterdam N.V., the New York Stock Exchange and the London Stock Exchange. In addition Elsevier ordinary shares are quoted on the EBS stock exchange in Switzerland and are also traded on the Freiverkehrsmarkt in Frankfurt. Euronext Amsterdam N.V.is the principal trading market for Elsevier ordinary shares. Trading on the New York Stock Exchange is in the form of American Depositary Shares ("ADSs"), evidenced by American Depositary Receipts ("ADRs") issued by Citibank NA, as depositary. Each ADS represents two Elsevier ordinary shares. The table below sets forth, for the calendar quarters indicated, the high and low closing middle market quotations for the Elsevier Ordinary Shares on Euronext Amsterdam N.V.as derived from the Officiele Prijscourant of Euronext Amsterdam N.V and the high and low last reported sales prices in U.S. dollars for the Elsevier American Depositary Shares on the New York Stock Exchange, as derived from the New York Stock Exchange Composite Tape, and reported by Datastream International Ltd: From 4 January 1999, all market quotations on the Amsterdam Stock Exchange have been presented in euro. Quotations prior to 4 January 1999, have, for the convenience of the reader, been translated into euro at the Official Conversion Rate of Dfl2.20371 per 'E'1.00.
'E' per ordinary share U.S. dollars per ADS --------------------- ------------------- Calendar Periods High Low High Low --------------------------------------- ---------- ---------- --------- --------- 1996 . . . . . . . . . . . . . . . . . . 13.57 9.71 34.75 26.63 1997 . . . . . . . . . . . . . . . . . . 17.52 12.34 37.25 28.63 1998 . . . . . . . . . . . . . . . . . . 17.74 10.48 38.25 24.75 1999 . . . . . . . . . . . . . . . . . . 15.25 8.95 33.63 18.63 2000 . . . . . . . . . . . . . . . . . . 16.07 9.30 29.94 18.00 1999 . . . . . . . . . . . . . . . . . . First Quarter . . . . . . . . . . . . . 15.25 11.85 33.63 27.25 Second Quarter . . . . . . . . . . . . 14.25 11.25 31.00 23.38 Third Quarter . . . . . . . . . . . . . 12.65 9.65 26.38 20.63 Fourth Quarter . . . . . . . . . . . . 11.86 8.95 23.88 18.63 2000 First Quarter . . . . . . . . . . . . . 14.99 9.30 29.94 18.00 Second Quarter . . . . . . . . . . . . 12.69 9.90 24.69 18.19 Third Quarter . . . . . . . . . . . . . 14.19 11.75 25.75 21.75 Fourth Quarter . . . . . . . . . . . . 16.07 12.22 29.44 20.88 End of the Month February 2001 (through 21 February 2001) 14.80 13.76 27.95 25.57 January 2001 . . . . . . . . . . . . . . 15.66 14.05 29.44 26.38 December 2000. . . . . . . . . . . . . . 15.98 14.71 29.44 26.13 November 2000. . . . . . . . . . . . . . 16.07 14.53 27.44 25.19 October 2000 . . . . . . . . . . . . . . 15.05 12.22 25.81 20.88 September 2000 . . . . . . . . . . . . . 14.19 12.70 25.63 22.50 August 2000. . . . . . . . . . . . . . . 14.08 11.81 25.75 21.75
57 ITEM 10: ADDITIONAL INFORMATION MEMORANDUM AND ARTICLES OF ASSOCIATION REED INTERNATIONAL Set out below is information concerning Reed International's equity capital structure and related summary information concerning provisions of Reed International's memorandum and articles of association and applicable English law. Since it is a summary, it does not contain all the information that may be important to you, and the summary is qualified in its entirety by reference to the Companies Act and the Reed International memorandum and articles of association. For more complete information, you should read Reed International's articles of association. A copy of Reed International's articles of association has been filed as an exhibit to the annual report on Form 20-F -- see "Documents on display". Objects clause Reed International is incorporated under the name "Reed International P.L.C." and is registered in England and Wales with registered number 77536. Reed International's memorandum of association provides that its objects include to carry on business as a holding company, to carry on business of publishers, producers, distributors, proprietors, wholesalers and retailers as well as carry on any other business which Reed International may judge capable of enhancing the value of its property or rights. The memorandum of association grants to Reed International a range of corporate capabilities to effect these objects. Directors Interested Transaction. Under Reed International's articles of association, a director may not vote in respect of any proposal in which he or she, or any person connected with that director, has any material interest, except where that interest exists because of an interest in shares, debentures or other securities of, or otherwise in or through, Reed International. This is subject to exceptions relating to proposals: * indemnifying the director in respect of obligations incurred on behalf of Reed International; * indemnifying a third party in respect of obligations of Reed International for which the director has assumed responsibility under an indemnity or guarantee; * relating to an offer of securities in which the director will be interested as an underwriter; * concerning another body corporate in which the director is beneficially interested in less than 1% of the issued shares of any class of shares of such a body corporate; * relating to an employee benefit in which the director will share equally with other employees; and * relating to insurance that Reed International is empowered to purchase or maintain for the benefit of its directors or for persons who include its directors. Qualification Shares. Directors are not required to hold any Reed International shares by way of qualification. Appointment and retirement of Directors. A director is not required to retire upon attaining a particular age. At every annual general meeting of Reed International one-third of the directors must retire from office, but if any director has been in office for more than three years since his last appointment, he shall retire and if there is only one director subject to retirement by rotation, he shall retire. A director who retires at an annual general meeting may be re-appointed. For more information, see Item 6: Directors, Senior Management and Employees. Borrowing Powers The directors are empowered to exercise all the powers of Reed International to borrow money, subject to the limitation that the aggregate amount of all moneys borrowed by Reed International and its subsidiaries shall not exceed an amount equal to the higher of five thousand million pounds; and two and a half times Reed International's adjusted share capital and reserves, unless sanctioned by an ordinary resolution of Reed International. A resolution will be proposed at the forthcoming Annual General Meeting in April 2001 to increase the limit to the higher of eight thousand million pounds; and two and a half times Reed International's adjusted share capital and reserves. Share Capital Reed International's authorised share capital is 'L'183,931,647. At 31 December 2000 it is comprised of 1,262,450,655 Reed International ordinary shares each with a nominal value of 12.5 pence and 209,002,521 Reed International unclassified shares each with a nominal value of 12.5 pence. As at 20 February 2001, 1,262,822,252 Reed International ordinary shares had been issued, all of which are fully paid. We may, subject to the Companies Act and shareholders pre-emption rights, allot shares for cash. We may disapply the pre-emption rights by special resolution. 58 Description of Reed International Ordinary Shares General. Reed International ordinary shares may be held in certificated or uncertificated form. Dividend Rights. Except in so far as the rights attached to any shares otherwise provide, the holders of the Reed International ordinary shares are entitled pro rata to the amounts paid up on such Reed International ordinary shares to the profits of Reed International available for dividend and resolved to be distributed. Reed International may, from time to time, by ordinary resolution, declare a dividend to be paid to shareholders, according to their rights and interests in the profits, and may fix the time for payment of such dividend. No larger dividend may be declared than is recommended by the directors, but Reed International may by ordinary resolution declare a smaller dividend. If the directors think that the position of Reed International justifies such payment, they may from time to time declare and pay interim dividends of such amounts and on such dates as they think fit. The directors also have the discretion to give shareholders the option to receive shares instead of a cash dividend. If a shareholder does not claim a dividend for 12 years, such shareholder forfeits it and it reverts to Reed International. No dividend payable in respect of a Reed International ordinary share will bear interest. Liquidation Rights. Upon any liquidation or winding up of Reed International, the surplus assets remaining after payment of all creditors shall be divided among the shareholders in proportion to the capital paid up on their holdings of Reed International ordinary shares. Further Capital Calls. A holder of Reed International ordinary shares may be required to make additional contributions of capital in respect of the Reed International ordinary shares in the future, subject to the terms of allotment, in respect of any moneys unpaid on their shares (whether in respect of nominal value or premium) but not otherwise. Notification of Interest in Reed International ordinary shares. Under Section 198 of the Companies Act, any person who acquires a material interest of 3% or more, or any interest of 10% or more, in the Reed International ordinary shares is obliged to notify Reed International in writing of the interest within two business days following the day on which such interest was acquired. In addition, under Section 212 of the Companies Act, Reed International may give written notice to any person whom Reed International knows or has reasonable cause to believe to be interested in Reed International shares requesting information regarding such person's beneficial interest. If the information is not provided or the directors believe the information provided is false or misleading, Reed International may restrict certain of such person's voting, dividend and transaction rights. Voting Rights and General Meetings. Under English law, there are two types of general meeting of shareholders, annual general meetings and extraordinary general meetings. A public company must hold an annual general meeting at least once in each year and not later than 15 months from the previous annual general meeting. Annual general meetings normally deal with matters such as the election of directors, appointment of statutory auditors, approval of the annual accounts and the directors' report and the declaration of dividends. Any other general meeting is known as an extraordinary general meeting. At a general meeting, a simple majority of the votes cast is sufficient to pass an ordinary resolution. A special resolution requires a majority of not less than 75% of the shareholders voting, and being entitled to do so, at the meeting in question. A small number of matters relating to variation of the rights attaching to different classes of shares and proceedings in a winding-up require the authority of an extraordinary resolution passed at a meeting of the relevant class which requires the same majority as a special resolution. Voting at any meeting of shareholders is by show of hands unless a poll, meaning a vote by the number of shares held rather than by a show of hands, is demanded. Subject to the restrictions referred to in the following paragraph, at a meeting of shareholders every Reed International ordinary shareholder present in person or, in the case of a corporation, by a duly authorised representative, shall have one vote on a show of hands. On a poll every Reed international ordinary shareholder present in person or by proxy or, in the case of a corporation, by a duly authorised representative, shall have one vote for every Reed International ordinary share held. A poll can be demanded by: * the chairman of the meeting or any director present at the meeting; * not less than five shareholders present at the meeting in person or by proxy having the right to vote on the resolution; * a shareholder or shareholders present at the meeting in person or by proxy holding shares representing not less than 10% of the total voting rights of all shareholders having the right to vote on the resolution; or * a shareholder or shareholders present at the meeting in person or by proxy holding shares conferring the right to vote on the resolution on which an aggregate sum has been paid up equal to not less than 10% of the total sum paid up on all the shares conferring that right. 59 A holder of shares shall not be entitled to be present, or to vote in respect of any shares, at any general meeting of shareholders: * if, in certain circumstances, Reed International has given notice to the holder requesting details of the beneficial ownership of the shares registered in the relevant holder's name and, inter alia, the required details have not been supplied to Reed International within 28 days from the date of any such notice; or * if and for so long as the holder is in default in payment of any call or other sum for the time being due and payable by him on such shares or any interest or expenses (if any) payable in connection therewith. There are no limitations imposed by English law or Reed International's memorandum and articles of association on the right of non-residents or foreign persons to hold or vote Reed International ordinary shares, other than the limitations that would generally apply to all Reed International ordinary shareholders. Transfer of Shares. The instrument of transfer of a Reed International ordinary share must be in writing and in the usual common form or in any other form which the directors approve. An instrument of transfer must be executed by or on behalf of the transferor and, unless the Reed International ordinary share is fully paid, by or on behalf of the transferee. The directors may, in their absolute discretion without giving any reason therefor, refuse to register the transfer of a Reed International ordinary share which is not fully paid or on which Reed International has a lien. The registration of transfers of Reed International ordinary shares or of any class of shares may be suspended at such times and for such periods as the directors may from time to time determine up to a maximum of 30 days in any year. Issue of Additional Shares. By virtue of Section 80 of the Companies Act, the directors may not, subject to limited exceptions in respect of employee share schemes, exercise any power to issue Reed International ordinary shares or grant any rights to subscribe for or to convert other securities into Reed international ordinary shares unless they have been authorised to do so by shareholders in general meeting. Any such authority must state the maximum amount of Reed International ordinary shares which may be issued under it and the date on which it will expire, which must not be more than five years from the date the resolution giving the authority is passed. Such authority is usually renewed by Reed International yearly at the annual general meeting. If Reed International ordinary shares are to be issued for cash, Section 89 of the Companies Act requires, subject to limited exceptions in respect of employee share schemes, that such Reed International ordinary shares first be offered to existing shareholders in proportion to their respective shareholdings. However, Section 95 of the Companies Act provides that in certain circumstances, the directors of a company may, by special resolution of the company's shareholders in general meeting, be given power to issue shares as if Section 89 of the Companies Act did not apply. Subject to applicable law, the directors of Reed International have the discretion to: * allot, grant options over or otherwise dispose of unissued ordinary shares to such persons as they think fit; and * issue with such rights and privileges and to such restrictions as they may determine. Purchase of own shares. Subject to the Companies Act, we may purchase any of our own share of any class. Any contract that we enter for the purchase of our own shares will be authorised by resolution, if required by the Companies Act, and by an extraordinary resolution passed at a separate general meeting of each class of holders (if any) entitled to convert their shares into equity share capital. Registrar and Transfer Agent. The registrar and transfer agent for the Reed International ordinary shares is Computershare PLC, PO Box 82. The Pavilions, Bridgwater Road, Bristol, BS99 7NH, England. Preference Shares Subject to the restrictions contained in Reed International's articles of association, Reed International has the power to create and issue preference shares. At the moment there are no such preference shares outstanding. ELSEVIER Set out below is certain information concerning Elsevier's exi sting equity capital structure and related summary information concerning certain provisions of Elsevier's articles of association and applicable Dutch law. Since it is a summary, it does not contain all the information that may be important to you, and the summary is qualified in its entirety by reference to Dutch law and the articles of association of Elsevier. A copy of Elsevier's articles of association has been filed as an exhibit to the annual report on Form 20-F -- see "Documents on Display". Objects Clause Elsevier is incorporated under the name "Elsevier NV". Elsevier's articles of association provides that its objects are to participate in and to administer, manage and finance companies, as well as to render services to enterprises, in particular insofar as these enterprises are carried out by Reed Elsevier plc and Elsevier Finance B.V. The memorandum of association grants to Elsevier a range of corporate capabilities to effect these objects. 60 Directors Appointment and Retirement of Directors. Directors are appointed by the shareholder's body. A director is not required to retire upon attaining a particular age. Directors retire periodically in accordance with a rotation plan drawn up by the combined board. If any director has been in office for more than three years since his last appointment, he shall retire at the next annual general meeting. For more detailed information, see Item 6: Directors, Senior Employees and Employees. Share capital Elsevier's authorised share capital is EUR 144,000,000. At 31 December 2000 it is comprised of 2,100,000,000 Elsevier ordinary shares with a nominal value of Euro 0.06 each, of which 735,717,794 were issued and outstanding, and 30,000,000 Elsevier R-Shares with a par value of Euro 0.60 each, of which 4,049,951 were issued and outstanding. As at 20 February 2001, 736,048,806 Elsevier Ordinary Shares and 4,049,951 Elsevier R-Shares had been issued, all of which are fully paid. The Elsevier R-Shares which are issued and outstanding were issued in connection with the formation of Reed Elsevier on 1 January 1993 and are indirectly held by Reed International. Each Elsevier R-Share is convertible at the option of the holder into ten Elsevier ordinary shares. At each time one or more of the Elsevier R-Shares are converted into Elsevier ordinary shares, the number of Elsevier ordinary shares of the authorised capital shall be increased by ten times the number of converted Elsevier R-Shares. At the same time, the number of Elsevier R-Shares of the authorised capital will be decreased by the number of shares converted. Each holder of Ordinary Shares and each holder of R-Shares has pre-emptive rights in proportion to the aggregate nominal value of the shares. Pre-emptive rights may be restricted or excluded by a resolution of the shareholders' body. Subject to renewal of the authority to allot shares at the forthcoming Annual General Meeting, the boards of Elsevier intend to allot an additional 629,298 R-Shares to Reed Holding BV so as to maintain Reed International's 5.8% indirect equity interest in Elsevier. Description of Elsevier Ordinary Shares Dividend Rights Holders of Elsevier Ordinary and R-Shares are entitled to distribution of profits only in so far as the equity of Elsevier exceeds the sum of the paid up issued share capital and the statutory reserves. Each year the combined board will determine the amount of Elsevier's profits to be reserved. Elsevier will distribute the remaining profits to the holders of the Elsevier ordinary shares and the Elsevier R-Shares in proportion to the nominal amount of each share, except that the combined board may resolve to pay a lower dividend on each Elsevier R-Share provided that the dividend out of Elsevier's profits to be paid on each Elsevier R-Share shall be no less than 1% of the nominal amount of each Elsevier R-Share. Elsevier may pay dividends after approval of the annual accounts by the general meeting of shareholders from which it appears that payment of the dividends is permitted. At the proposal of the combined board, the general meeting of shareholders may resolve to distribute dividends to holders of shares in the form of new shares. The combined board may in the course of the financial year declare an interim dividend provided that the equity of Elsevier exceeds the sum of the paid up issued share capital and the statutory reserves. Also, the combined board may, under certain conditions, resolve that payments to shareholders be made out of one or more reserves provided that the amount to be paid on each Elsevier R- Share shall in that case be no less than 1% of the nominal amount of each Elsevier R-Share. If a shareholder does not claim a dividend for five years, such shareholder forfeits it and it reverts to Elsevier. Liquidation Rights Upon any liquidation or winding up of Elsevier, the surplus assets remaining after payment of all creditors shall be divided among the holders of the Elsevier ordinary shares and the Elsevier R-Shares in proportion to the nominal amount of their shareholdings. Notification of Interest in Elsevier Ordinary Shares The Netherlands Control of Listed Companies Disclosure Act of 1996 (called the "Wet melding zeggenschap in ter beurze genoteerde vennootschappen 1996"), applies to any person who, as a result of an acquisition or disposal, holds 5% or more of the percentage of voting rights or capital interest held in Elsevier. Any such person must notify Elsevier as well as the Securities Board of The Netherlands (called the "Stichting Toezicht Effectenverkeer") in writing immediately after the acquisition or disposal of the triggering interest in the shares. After receipt of the notification, the information as notified, will be published by the Securities Board within nine (9) days by means of an advertisement in a newspaper or newspapers distributed in the member states of the European Economic Area (including the EU) in which Elsevier is listed on a stock exchange. If a person does not comply with these requirements, a civil court can issued orders against that person. 61 Voting Rights and General Meetings Before the end of June every year, Elsevier must hold an annual general meeting at which matters such as the approval of the annual accounts and any proposed appointment of supervisory board members are considered. The Elsevier executive board or the supervisory board of Elsevier may convene shareholder meetings of Elsevier in addition to the annual general meeting. Also, a meeting may be convened if demanded by the shareholders of no less than 10% of the issued capital by obtaining an order of the President of the competent District Court in The Netherlands. General meetings of shareholders of Elsevier must be held in Amsterdam or Rotterdam. Notice for general meetings must be given by the supervisory board or the executive board of Elsevier not later than on the fifteenth day prior to the day of the meeting. The executive board or the supervisory board of Elsevier shall convene the meetings of holders of Elsevier ordinary shares. Elsevier must give notice of such meeting no later than on the fifteenth day before the day of the meeting. Generally, the rights of holders of Elsevier ordinary shares may be modified by amendment to the articles of association of Elsevier upon resolution of the general meeting of shareholders, unless specifically provided otherwise under Netherlands law or Elsevier's articles of association. Unless the combined board proposes to amend Elsevier's articles of association, the resolution to amend Elsevier's articles of association requires a majority of two-thirds of the votes cast in a meeting in which at least half to the issued share capital is represented. Unless Netherlands law or the articles of association of Elsevier provide for a greater majority, all resolutions will pass by an absolute majority of the votes cast. Each Elsevier ordinary share holder has the right to cast one vote per share at a general meeting of shareholders. Each Elsevier R-Share holder has the right to cast ten votes per share at a general meeting of shareholders. To be able to exercise their rights at a general meeting, holders of registered shares must give written notice of their intention to attend the meeting to the Elsevier executive board. Such notice must be received no later than the seventh day before the meeting. Holders of bearer shares must lodge their share certificates at the place stated in the notice of the meeting, but no later than such date. Each shareholder may appoint a proxy in writing. Form and Transfer of Shares Elsevier ordinary shares may be issued in registered or bearer form at the election of the holder and Elsevier ordinary shares of one form may be exchanged for Elsevier ordinary shares of the other form at the request of the holder. Elsevier ordinary shares in bearer form will be available as CF- certificates without separate dividend coupons, which will be held permanently in the custody of a custodian appointed by the executive board of Elsevier. Share certificates will not be made available for Elsevier's ordinary shares in registered form. Bearer shares are transferred by surrendering the certificate unless the shares have been deposited with the NECIGEF Central Clearing House Organisation in The Netherlands (the "Necigef System"). In that case, Dutch rules governing the transfer of shares by giro apply. Most of the Bearer Elsevier ordinary shares are transferred through the Necigef System. Any transfer of Elsevier ordinary shares in registered form requires a notarial deed of transfer and, unless Elsevier itself is a party to the transfer, the written acknowledgement by Elsevier of the transfer. The acknowledgement shall be made in the instrument of transfer or by a dated statement on the instrument of transfer or on a copy or extract thereof, mentioning the acknowledgement, which must be signed as a true copy by a Dutch civil law notary or the transferor. Issue of Additional Shares Additional shares may be issued by Elsevier upon resolution of a general meeting of shareholders, or resolution of another designated body of Elsevier if the general meeting has conferred this power on such other body. The appointment of the combined board as the body to issue shares may be extended by the articles of association of Elsevier or by a resolution of the general meeting of shareholders each time for not more than five years. A resolution of the general meeting of shareholders to issue shares or to confer the power to issue shares on another designated body, can only be adopted in relation to authorised but unissued shares, and can only be adopted at the proposal of the combined board. Elsevier is not entitled to subscribe for its own shares. Furthermore, shares in the capital of Elsevier may not be subscribed for the account of a subsidiary company. Repurchase by Elsevier of Its Own Shares Subject to certain restrictions under Netherlands law and Elsevier's articles of association, Elsevier is entitled to repurchase up to a maximum of 10% of its issued fully paid up shares outstanding. Such purchase may be made only upon authorisation of the shareholders' meeting which authorisation is valid for a maximum of eighteen months from the date of such authorisation and must include the number of shares to be acquired, the way in which they may be acquired, and the limits on the purchase price. Elsevier's right to repurchase the Elsevier ordinary shares, and any restrictions on such right, are unaffected by whether there is an arrearage in the payment of dividends. 62 MATERIAL CONTRACTS This section provides a summary of all material contracts to which we are a party and that have been entered into during the two immediately preceding financial years. The full text of the agreements discussed below is available as exhibits to our Registration Statement filed on Form F-3, Registration number 333-19226, filed with the SEC on 30 November 2000. On 27 October 2000 Reed Elsevier Inc. and REH Mergersub Inc. entered into an Agreement and Plan of Merger with Harcourt. Under the agreement, a cash tender offer of $59 per share of common stock, or share equivalent, was made for the entire issued share capital of Harcourt for a net cost of approximately $4.45 billion. As a condition and inducement to entering into the Agreement and Plan of Merger with Harcourt, Reed Elsevier Inc. and REH Mergersub Inc. and certain significant stockholders of Harcourt, entered into a Stockholder Agreement, also dated 27 October 2000, in which stockholders agreed to tender their shares in the above offer and to support the offer. On 27 October 2000, Reed Elsevier Inc. entered into a Sale and Purchase Agreement with The Thomson Corporation. The agreement was for the on-sale of Harcourt's higher education business and its corporate and professional services businesses other than its educational and clinical testing businesses. The on-sale of these businesses was for pre-tax proceeds of approximately $2.06 billion. The on-sale to The Thomson Corporation is subject to regulatory approvals, which may require some divestment of assets or other behavioural undertakings. EXCHANGE CONTROLS There are currently no U.K. or Dutch decrees or regulations restricting the import or export of capital or affecting the remittance of dividends or other payments to holders of, respectively, Reed International ordinary shares who are non-residents of the United Kingdom and Elsevier ordinary shares who are non-residents of the Netherlands. There are no limitations relating only to non-residents of the United Kingdom under U.K. law or Reed International's Memorandum and Articles of Association or on the right to be a holder of, and to vote, Reed International ordinary shares, or to non-residents of the Netherlands under Dutch law or Elsevier's Articles of Association on the right to be a holder of, and to vote, Elsevier ordinary shares. 63 TAXATION The following discussion is a summary under present law of the material U.K. income, Dutch income and U.S. federal income tax considerations relevant to the purchase, ownership and disposition of Reed International ordinary shares or ADSs and Elsevier ordinary shares or ADSs. This discussion applies to you only if you are a U.S. holder, you hold your ordinary shares or ADSs as capital assets and you use the U.S. dollar as your functional currency. It does not address the tax treatment of U.S. holders subject to special rules, such as banks, dealers, insurance companies, tax-exempt entities, holders of 10% or more of Reed International or Elsevier voting shares, persons holding ordinary shares or ADSs as part of a hedging, straddle, conversion or constructive sale transaction, persons that are resident or ordinarily resident in the United Kingdom (or who have ceased to be resident since 17 March 1998) and persons that are resident in The Netherlands. The summary also does not discuss the tax laws of particular states or localities in the United States. This summary does not consider your particular circumstances. It is not a substitute for tax advice. We urge you to consult your own tax advisors about the income tax consequences to you in light of your particular circumstances of purchasing, holding and disposing of ordinary shares or ADSs. As used in this discussion, "U.S. holder" means a beneficial owner of ordinary shares or ADSs that is (i) a U.S. citizen or resident, (ii) a corporation, partnership or other business entity created or organized under the laws of the United States or any constituent jurisdiction, (iii) a trust subject to the control of a U.S. person and the primary supervision of a U.S. court or (iv) an estate the income of which is subject to U.S. federal income taxation regardless of its source. U.K. Taxation Dividends Under current U.K. taxation legislation, no tax is required to be withheld at source from dividends paid on the Reed International ordinary shares or ADSs. See "U.S. Federal Income Taxation---Dividends ". Capital Gains You will not be liable for U.K. taxation on capital gains realized on the disposal of your Reed International ordinary shares or ADSs unless at the time of the disposal you carry on a trade, profession or vocation in the United Kingdom through a branch or agency and such ordinary shares or ADSs are or have been used, held or acquired for the purposes of such trade, profession, vocation, branch or agency. U.K. Stamp Duty and Stamp Duty Reserve Tax U.K. stamp duty reserve tax ("SDRT") or U.K. stamp duty is payable upon the transfer or issue of Reed International ordinary shares to the Depositary in exchange for Reed International ADSs evidenced by ADRs. For this purpose, the current rate of stamp duty and SDRT is 1.5% applied, in each case, to the amount or value of the consideration or, in some circumstances, to the value of the ordinary shares. Provided that the instrument of transfer is not executed in the United Kingdom and remains outside the United Kingdom, no U.K. stamp duty will be payable on the acquisition or subsequent transfer of Reed International ADRs. Agreement to transfer Reed International ADRs will not give rise to a liability to SDRT. A transfer of Reed International ordinary shares by the Depositary to an ADR holder where there is no transfer of beneficial ownership will give rise to U.K. stamp duty at the rate of 'L'5.00 per transfer. Purchases of Reed International ordinary shares, as opposed to ADRs, will give rise to U.K. stamp duty or SDRT at the time of transfer or agreement to transfer, normally at the rate of 0.5% of the amount payable for the ordinary shares. SDRT and U.K. stamp duty are usually paid by the purchaser. If the ordinary shares are later transferred to the Depositary, additional U.K. stamp duty or SDRT will normally be payable as described above. Dutch Taxation Withholding tax Dividends distributed to you by Elsevier normally are subject to a withholding tax imposed by The Netherlands at a rate of 25%. Under the U.S.-Netherlands income tax treaty, the rate of Dutch withholding tax on dividends distributed to you can be reduced from 25% to 15%. Dividends include, among other things, stock dividends unless the dividend is distributed out of recognized paid-in share premium for Dutch tax purposes. You can claim the benefits of the reduced U.S.-Netherlands income tax treaty withholding rate by submitting a Form IB 92 U.S.A. that includes an affidavit of a financial institution (typically the entity that holds the Elsevier ordinary shares or ADSs for you as custodian). If Elsevier receives the required documentation before the relevant dividend payment date, it may apply the reduced withholding rate at the source. If you fail to satisfy these requirements, you can claim a refund of the excess amount withheld by filing Form IB 92 U.S.A. with the Dutch tax authorities within 3 years after the calendar year in which the withholding tax was levied and describing the circumstances that prevented you from claiming withholding tax relief at the source. 64 Taxation of dividends and capital gains You will not be subject to any Dutch taxes on dividends distributed by Elsevier (other than the withholding tax described above) or any capital gain realized on the disposal of Elsevier ordinary shares or ADSs provided that (i) the Elsevier ordinary shares or ADSs are not attributable to an enterprise or an interest in an enterprise that you carry on, in whole or part through a permanent establishment or a permanent representative in the Netherlands and (ii) you do not have a substantial interest or a deemed substantial interest in Elsevier (generally, 5% or more of either the total issued and outstanding capital or the issued and outstanding capital of any class of shares) or, if you have such an interest, it forms part of the assets of an enterprise. U.S. Federal Income Taxation Holders of the ADSs generally will be treated for U.S. federal income tax purposes as owners of the ordinary shares represented by the ADSs. Dividends Dividends on Reed International ordinary shares or ADSs or Elsevier ordinary shares or ADSs (including any Dutch tax withheld) will generally be included in your gross income as ordinary income from foreign sources. The dollar amount recognized on receiving a dividend in pounds sterling or euros will be based on the exchange rate in effect on the date the depositary receives the dividend, whether or not the payment is converted into U.S. dollars at that time. Any gain or loss recognized on a subsequent conversion of pounds sterling or euros for a different amount will be U.S. source ordinary income or loss. Dividends received will not be eligible for the dividends-received deduction available to corporations. If you hold Reed International ordinary shares or ADSs and you are eligible for benefits under the U.K.-U.S. income tax treaty, you may be entitled to a foreign tax credit for U.K. withholding tax. The amount of the withholding tax equals the tax credit payment that you are entitled to receive from the U.K. Inland Revenue. At current rates, a dividend of 'L'90 entitles you to a payment of 'L'10 offset by a U.K. withholding tax of 'L'10. Because the tax credit payment and the withholding tax offset each other, the U.K. Inland Revenue neither makes the payment nor collects the tax. The offsetting payments nevertheless have U.S. tax significance. If you elect the benefits of the U.K.- U.S. income tax treaty and you include the tax credit payment in your income, you can claim a foreign tax credit for the U.K. withholding tax (subject to otherwise applicable limitations on foreign tax credit claims). To make the election, you must file a completed U.S. Internal Revenue Service ( "IRS ") Form 8833 with your U.S. federal income tax return for the relevant year. A U.S. partnership is entitled to benefits under the U.K.-U.S. income tax treaty only with respect to income allocated to partners who are so entitled. The U.K.-U.S. income tax treaty is being renegotiated, and a new or modified treaty is likely to alter the treatment of dividends. If you hold Elsevier ordinary shares or ADSs and are eligible to claim benefits under the U.S.-Netherlands income tax treaty, you may claim a reduced rate of Dutch dividend withholding tax equal to 15%. Subject to generally applicable limitations, you can claim a deduction or a foreign tax credit only for Dutch tax withheld at the rate provided under the U.S.-Netherlands income tax treaty. Dispositions You will recognize capital gain or loss on the sale or other disposition of ordinary shares or ADSs in an amount equal to the difference between your basis in the ordinary shares or ADSs and the amount realized. The gain or loss will be capital gain or loss. It will be long-term capital gain or loss if you have held the ordinary shares or ADSs for more than one year at the time of sale or other disposition. Deductions for capital losses are subject to limitations. If you receive pounds sterling or euros on the sale or other disposition of our ordinary shares or ADSs, you will realize an amount equal to the U.S. dollar value of the pounds sterling or euros on the date of sale or other disposition (or in the case of cash basis and electing accrual basis taxpayers, the settlement date). You will have a tax basis in the pounds sterling or the euros you receive equal to the U.S. dollar amount received. Any gain or loss realized by a U.S. holder on a subsequent conversion of pounds sterling or euros into U.S. dollars will be U.S. source ordinary income or loss. Information Reporting and Backup Withholding Dividends from ordinary shares or ADSs and proceeds from the sale of the ordinary shares or ADSs may be reported to the IRS, and a 31% backup withholding tax may apply to such amounts unless the shareholder (i) is a corporation, (ii) provides an accurate taxpayer identification number (in the case of a U.S. holder) or a properly executed IRS Form W-8BEN (in the case of other shareholders) or (iii) otherwise establishes a basis for exemption. The amount of any backup withholding tax will be allowed as a credit against the holder's U.S. federal income tax liability. DOCUMENTS ON DISPLAY It is possible to read and copy documents referred to in this annual report that have been filed with the SEC at the SEC's public reference room located at 450 Fifth Street, NW, Washington, DC, 20549. Please call the SEC ast 1-800-SEC- 0330 for further information on the public reference rooms and their copy charges. 65 ITEM 11: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Reed Elsevier's primary market risk exposures are to interest rate fluctuations and to exchange rate movements. Net interest expense is exposed to interest rate fluctuations on borrowings, cash and short term investments. Upward fluctuations in interest rates increase the interest cost of floating rate borrowings whereas downward fluctuations in interest rates decrease the interest return on floating rate cash deposits and short term investments. Fixed rate borrowings are protected against upward fluctuations in interest rates but do not benefit from downward fluctuations. In addition, Reed Elsevier companies engage in foreign currency denominated transactions and are subject to exchange rate risk on such transactions. Reed Elsevier seeks to limit these risks by means of financial instruments, including interest rate swaps, interest rate options, forward rate agreements and forward foreign exchange contracts. Reed Elsevier only enters into financial instruments to hedge (or reduce) the underlying risks described above, and therefore has no net market risk on financial instruments held at the end of the year. Reed Elsevier does, however, have a credit risk from the potential non-performance by the counterparties to these financial instruments, which are unsecured. The amount of this credit risk is normally restricted to the amount of the hedge gain and not the principal amount being hedged. This credit risk is controlled by means of regular credit reviews of these counterparties and of the amounts outstanding with each of them. Reed Elsevier does not expect non-performance by the counterparties, which are principally licensed commercial banks and investment banks with strong long term credit ratings. Reed Elsevier enters into interest rate swaps and forward rate agreements to hedge the effects of fluctuating interest rates on borrowings, cash and short term investments. Interest rate swaps and forward rate agreements limit the risks of fluctuating interest rates by allowing Reed Elsevier to fix the interest rate on a notional principal amount equal to the principal amount of the underlying floating rate cash, short term investments or borrowings being hedged. Since Reed Elsevier has significant borrowings in U.S. dollars, the substantial majority of the interest rate swaps on which fixed interest is paid are denominated in U.S. dollars. Reed Elsevier's policy is to fix the interest rates on its cash, short term investments and borrowings when the combination of Reed Elsevier's funding profile and interest exposures make such transactions appropriate. Forward swaps and forward rate agreements are entered into to hedge interest rate exposures known to arise at a future date. These exposures may include new borrowings or cash deposits and short-term investments to be entered into at a future date or future rollovers of existing borrowings or cash deposits and short-term investments. Interest exposure arises on future new and rollover borrowings, cash deposits and short-term investments because interest rates can fluctuate between the time a decision is made to enter into such transactions and the time those transactions are actually entered into. The business purpose of forward swaps and forward rate agreements is to fix the interest cost on future borrowings or interest return on cash investments at the time it is known such a transaction will be entered into. The fixed interest rate, the floating rate index (if applicable) and the time period covered by forward swaps and forward rate agreements are known at the time the agreements are entered into. The use of forward swaps and forward rate agreements is limited to hedging activities; consequently no trading position results from their use. The impact of forward swaps and forward rate agreements is the same as interest rate swaps. Similarly, Reed Elsevier utilises forward foreign exchange contracts to hedge the effects of exchange rate movements on its foreign currency turnover and operating costs. Interest rate options protect against fluctuating interest rates by enabling Reed Elsevier to fix the interest rate on a notional principal amount of borrowings or cash (in a similar manner to interest rate swaps and forward rate agreements) whilst at the same time allowing Reed Elsevier to improve the fixed rate if the market moves in a certain way. Reed Elsevier uses interest rate options from time to time when it expects interest rates to move in its favour but it is deemed imprudent to leave the interest rate risk completely unhedged. In such cases, Reed Elsevier may use an option to lock in at certain rates whilst at the same time maintaining some freedom to benefit if rates move as it expects. Financial instruments are utilised to hedge (or reduce) the risks of interest rate or exchange rate movements and are not entered into unless such risks exist. Financial instruments utilised, while appropriate for hedging a particular kind of risk, are not considered specialised or high-risk and are generally available from numerous sources. The following analysis sets out the sensitivity of the fair value of Reed Elsevier's financial instruments to selected changes in interest rates and exchange rates. the range of changes represents Reed Elsevier's view of the changes that are reasonably possible over a one year period. Fair values represent the present value of forecast future cash flows at the assumed market rates. The market values for interest rate and foreign currency risks are calculated by the use of an "off the shelf" software model which utilises standard pricing models to determine the present value of the instruments based on the market conditions being variously interest rates and spot and forward exchange rates, as of the valuation date. Reed Elsevier's use of financial instruments and its accounting policies for financial instruments are described more fully in Note 2 and Note 24 to the combined financial statements. 66 (a) Interest Rate Risk The following sensitivity analysis assumes an immediate 100 basis point change in interest rates for all currencies and maturities from their levels at 31 December 2000, with all other variables held constant.
Market Value Change Favourable/(Unfavourable) Fair Value 31 December +100 basis -100 basis Financial Instrument 2000 points points ----------------------------------------- ---------- --------- --------- (in 'L' millions) Long term debt (including current portion) (623) 35 (40) Short term debt. . . . . . . . . . . . . . (1,389) 1 (1) Cash and short term investments. . . . . . 1,597 1 (1) Interest rate swaps. . . . . . . . . . . . (49) 50 (54) Interest rate options. . . . . . . . . . . (17) 22 (25) Forward rate agreements. . . . . . . . . . (1) 2 (2) basis point change in interest rates would not result in a material change to the fair value of other financial instruments such as foreign exchange options, cash, investments or other financial assets and liabilities. The substantial majority of borrowings are either fixed rate or have been fixed through the use of interest rate swaps. In addition, a significant proportion of cash and short term investments is hedged throughout 2001. A 100 basis point reduction in interest rates would result in a decrease in net interest expense of 'L'5 million, based on the composition of financial instruments including cash, short term investments, bank loans and commercial paper borrowings at 31 December 2000. A 100 basis points rise in interest rates would increase net interest expense by 'L'5 million. (b) Foreign Currency Exchange Rate Risks The following sensitivity analysis assumes an immediate 10% change in all foreign currency exchange rates against sterling from their levels at 31 December 2000, with all other variables held constant. A +10% change indicates a strengthening of the currency against sterling and a --10% change indicates a weakening of the currency against sterling.
Market Value Change Favourable/(Unfavourable) Fair Value 31 December Financial Instrument 2000 +10% -10% ----------------------------------------- ----------- ---- ---- (in 'L' millions) Long term debt (including current portion) (623) (72) 50 Short term debt. . . . . . . . . . . . . . (1,389) (141) 134 Cash and short term investments. . . . . . 1,597 115 (86) Interest rate swaps. . . . . . . . . . . . (49) (2) 2 Interest rate options. . . . . . . . . . . (17) (6) 5 Forward foreign currency contracts . . . . (38) 1 (1) Foreign exchange options . . . . . . . . . (1) --- 3 Other financial assets . . . . . . . . . . 100 8 (8) Other financial liabilities. . . . . . . . (120) (11) 11
A 10% change in foreign currency exchange rates would not have a material change to the fair value of other financial instruments such as forward rate agreements. 67 PART III ITEM 17: FINANCIAL STATEMENTS The Registrants have responded to Item 18 in lieu of responding to this Item. ITEM 18: FINANCIAL STATEMENTS Reference is made to Item 19 for a list of all financial statements and schedules filed as part of this annual report. 68 ITEM 19: FINANCIAL STATEMENTS AND EXHIBITS (a) Financial Statements filed as part of this annual report The following financial statements and related schedules, together with reports of independent accountants thereon, are filed as part of this annual report:
Page ---- Index to Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1 Reed Elsevier Combined Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . . . F-2 Report of Independent Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-3 Combined Profit and Loss Account for the year ended 31 December 2000. . . . . . . . . . . . . . F-4 Combined Cash Flow Statement for the year ended 31 December 2000. . . . . . . . . . . . . . . . F-5 Combined Balance Sheet as at 31 December 2000 . . . . . . . . . . . . . . . . . . . . . . . . . F-6 Combined Statement of Total Recognised Gains and Losses for the year ended 31 December 2000 . . F-7 Combined Shareholders' Funds Reconciliation for the year ended 31 December 2000 . . . . . . . . F-7 Notes to the Combined Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . . . F-8 Schedule II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .F-39 Reed International P.L.C. Consolidated Financial Statements. . . . . . . . . . . . . . . . . . .F-40 Report of Independent Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .F-41 Consolidated Profit and Loss Account for the year ended 31 December 2000. . . . . . . . . . . .F-42 Consolidated Cash Flow Statement for the year ended 31 December 2000. . . . . . . . . . . . . .F-43 Consolidated Statement of Total Recognised Gains and Losses for the year ended 31 December 2000F-44 Reconciliation of Shareholders' Funds for the year ended 31 December 2000 . . . . . . . . . . .F-44 Consolidated Balance Sheet as at 31 December 2000 . . . . . . . . . . . . . . . . . . . . . . .F-45 Notes to the Consolidated Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . .F-46 Elsevier NV Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .F-57 Report of Independent Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .F-58 Profit and Loss Account for the year ended 31 December 2000 . . . . . . . . . . . . . . . . . .F-59 Cash Flow Statement for the year ended 31 December 2000 . . . . . . . . . . . . . . . . . . . .F-60 Balance Sheet as at 31 December 2000. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .F-61 Notes to the Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .F-62 Glossary of Terms. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .F-69
(b) Exhibits filed as part of this annual report 3.1 Memorandum and Articles of Association of Reed International P.L.C. 3.2 Memorandum and Articles of Association of Elsevier NV 3.3 Governing Agreement (as amended) between Reed International P.L.C. and Elsevier NV 10.1 Agreement and Plan of Merger, date d 27 October 2000 among Reed Elsevier Inc., REH Mergersub Inc. and Harcourt General, Inc. (incorporated by reference in the Registration Statement on Form F-3 filed with the Securities and Exchange Commission on 29 September 2000) 10.2 Stockholder Agreement, dated 27 October 2000 among REH Mergersub Inc., Reed Elsevier Inc. and Stockholder (incorporated by reference in the Registration Statement on Form F-3 filed with the Securities and Exchange Commission on 29 September 2000) 10Sale and Purchase Agreement, dated 27 October 2000, between Reed Elsevier Inc. and The Thomson Corporation (incorporated by reference in the Registration Statement on Form F-3 filed with the Securities and Exchange Commission on 29 September 2000) 23.1 Independent Auditors' Consent -- Reed Elsevier Combined Financial Statements 23.2 Independent Auditors' Consent -- Reed International P.L.C. Consolidated Financial Statements 23.3 Independent Auditors' Consent -- Elsevier NV Financial Statements The total amount of long term debt securities of Reed Elsevier authorised under any single instrument does not exceed 10% of the combined total assets of Reed Elsevier. The Registrants hereby agree to furnish to the Commission, upon its request, a copy of any instrument defining the rights of holders of long term debt of Reed Elsevier or any of the combined businesses for which consolidated or unconsolidated financial statements are required to be filed. 69 REED ELSEVIER COMBINED FINANCIAL STATEMENTS 70 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of Reed International P.L.C. and to the members of the Supervisory and Executive Boards and the Shareholders of Elsevier NV. We have audited the accompanying combined balance sheets of Reed International P.L.C., Elsevier NV, Reed Elsevier plc and Elsevier Reed Finance BV and their respective subsidiaries (together "the combined businesses") as of 31 December 2000 and 1999, and the related combined profit and loss accounts and statements of total recognised gains and losses, changes in combined shareholders' funds and cash flows for the three years ended 31 December 2000. Our audits also included the financial statement schedule of 31 December 2000, 1999 and 1998 listed in the Index at Item 19. These combined financial statements and the related financial statement schedule are the responsibility of the management of Reed International P.L.C. and Elsevier NV. Our responsibility is to express an opinion on these combined financial statements and the related financial statement schedules based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United Kingdom, the Netherlands and the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such combined financial statements present fairly, in all material respects, the financial position of the combined businesses at 31 December 2000 and 1999 and the results of their operations and their cash flows for the three years ended 31 December 2000 in conformity with accounting principles generally accepted in the United Kingdom and the Netherlands (which differ in certain material respects from generally accepted accounting principles in the United States of America --- see note 30). Also, in our opinion, such financial statement schedule, when considered in relation to the related combined financial statements taken as a whole, presents fairly in all material respects the information set forth therein. DELOITTE & TOUCHE DELOITTE & TOUCHE Chartered Accountants & Registered Auditors Accountants London, England Amsterdam, The Netherlands 21 February 2001 21 February 2001 71 REED ELSEVIER COMBINED PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31 DECEMBER 2000
2000 1999 1998 Note 'L'm 'L'm 'L'm ------ ------ ------ Turnover Including share of turnover of joint ventures. . . . . . . . . . . . . . . 3,836 3,464 3,271 Less: share of turnover of joint ventures. . . . . . . . . . . . . . . . . (68) (74) (80) ------ ------ -3,191 3 3,768 3,390 Continuing operations before acquisitions . . . . . . . . . . . . . . . . 3,589 3,390 3,163 Acquisitions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 179 --- --- --------------------- Continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . 3,768 3,390 3,163 Discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . --- --- 28 ------ ------ ------ Cost of sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 (1,332) (1,185) (1,092) ------ ------ ------ Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,436 2,205 (1,706) Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 (2,239) (2,028) Before amortisation and exceptional items . . . . . . . . . . . . . . . . (1,659) (1,420) (1,304) Amortisation of goodwill and intangible assets. . . . . . . . . . . . . . (465) (369) (323) Exceptional items . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 (115) (239) (79) ------ ------ ------ Operating profit (before joint ventures) . . . . . . . . . . . . . . . . . 197 177 393 Continuing operations before acquisitions . . . . . . . . . . . . . . . . 282 177 394 Acquisitions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (85) --- --- --------------------- Continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . 197 177 394 Discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . --- --- (1) Share of operating profit of joint ventures. . . . . . . . . . . . . . . . 13 3 9 ------ ------ ------ Operating profit including joint ventures. . . . . . . . . . . . . . . . . 3, 7 210 180 402 Non operating exceptional items. . . . . . . . . . . . . . . . . . . . . . 8 Continuing --net profit on sale of fixed asset investments and businesses 85 7 --- --merger expenses . . . . . . . . . . . . . . . . . . . . . . . . . --- --- (10) Discontinued-- net profit on sale of businesses. . . . . . . . . . . . . . --- --- 692 ------ ------ ------ Profit on ordinary activities before interest. . . . . . . . . . . . . . . 295 187 1,084 Net interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 (103) (82) (40) ------ ------ ------ Profit on ordinary activities before taxation. . . . . . . . . . . . . . . 192 105 1,044 Tax on profit on ordinary activities . . . . . . . . . . . . . . . . . . . 10 (159) (167) (271) ------ ------ ------ Profit/(loss) on ordinary activities after taxation. . . . . . . . . . . . 33 (62) 773 Minority interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . --- (1) (1) ------ ------ ------ Profit/(loss) attributable to parent companies' shareholders . . . . . . . 28 33 (63) 772 Ordinary dividends paid and proposed . . . . . . . . . . . . . . . . . . . 11 (245) (234) (349) ------ ------ ------ Retained (loss)/profit taken to combined reserves. . . . . . . . . . . . . (212) (297) 423 ====== ====== ====== 2000 1999 1998 Note 'L'm 'L'm 'L'm ------ ------ ------ Adjusted Figures Adjusted operating profit . . . . . . . . . . . . . . . . . . . . . . . . 3, 12 793 792 813 Adjusted profit before tax. . . . . . . . . . . . . . . . . . . . . . . . 12 690 710 773 Adjusted profit attributable to parent companies' shareholders. . . . . . 12 511 527 571 ====== ====== ======
Adjusted figures, which exclude the amortisation of goodwill and intangible assets, exceptional items and related tax effects, are presented as additional performance measures; see note 1. The accompanying notes on pages F-8 to F-38 are an integral part of these combined financial statements 72 REED ELSEVIER COMBINED CASH FLOW STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2000
2000 1999 1998 Note 'L'm 'L'm 'L'm ------ ---- ------ Net cash inflow from operating activities before exceptional items. . . . 13 907 898 937 Payments relating to exceptional items charged to operating profit. . . . 8 (94)(138) (258) ------ ---- ------ Net cash inflow from operating activities . . . . . . . . . . . . . . . . 813 760 679 ------ ---- ------ Dividends received from joint ventures. . . . . . . . . . . . . . . . . . 17 6 4 11 ------ ---- ------ Interest received . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 33 61 Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (124)(114) (106) ------ ---- ------ Returns on investments and servicing of finance . . . . . . . . . . . . . (104) (81) (45) ------ ---- ------ Taxation (including 'L'31m (1999 'L'74m; 1998 'L'nil) exceptional inflow) (110) (99) (144) ------ ---- ------ Purchase of tangible fixed assets . . . . . . . . . . . . . . . . . . . (141)(137) (151) Proceeds from sale of tangible fixed assets . . . . . . . . . . . . . . 3 15 11 ------ ---- ------ Capital expenditure . . . . . . . . . . . . . . . . . . . . . . . . . . . (138)(122) (140) ------ ---- ------ Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 (914)(167) (1,243) Exceptional net proceeds from sale of fixed asset investments and businesses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8, 13 153 3 913 Merger expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 --- --- (8) ------ ---- ------ Acquisitions and disposals. . . . . . . . . . . . . . . . . . . . . . . . (761)(164) (338) ------ ---- ------ Ordinary dividends paid to the shareholders of the parent companies . . . (196)(339) (362) ------ ---- ------ Cash outflow before changes in short term investments and financing . . . (490) (41) (339) (Increase)/decrease in short term investments . . . . . . . . . . . . . . 13 (1,137) 297 63 Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 1,634 (197) 192 ------ ---- ------ Increase/(decrease) in cash . . . . . . . . . . . . . . . . . . . . . . . 13 7 59 (84) ====== ==== ======
Short term investments include deposits of under one year if the maturity or notice period exceeds 24 hours, commercial paper investments and interest bearing securities that can be realised without significant loss at short notice.
2000 1999 1998 Note 'L'm 'L'm 'L'm ---- ---- ---- Adjusted figures Adjusted operating cash flow. . . . . . 12 775 780 808 Adjusted operating cash flow conversion 98% 98% 99% ==== ==== ====
Reed Elsevier businesses focus on adjusted operating cash flow as the key cash flow measure. Adjusted operating cash flow is measured after dividends from joint ventures, tangible fixed asset spend and proceeds from the sale of fixed assets but before exceptional payments and proceeds. Adjusted operating cash flow conversion expresses adjusted operating cash flow as a percentage of adjusted operating profit; see note 1. The accompanying notes on pages F-8 to F-38 are an integral part of these combined financial statements 73 REED ELSEVIER COMBINED BALANCE SHEET AS AT 31 DECEMBER 2000
2000 1999 Note 'L'm 'L'm ------ ------ Fixed assets Goodwill and intangible assets . . . . . . . . . . . . . 15 4,127 3,400 Tangible fixed assets. . . . . . . . . . . . . . . . . . 16 416 386 Investments. . . . . . . . . . . . . . . . . . . . . . . 17 153 119 Investments in joint ventures: Share of gross assets . . . . . . . . . . . . . . . . 137 136 Share of gross liabilities. . . . . . . . . . . . . . (65) (47) ------ ------ Share of net assets . . . . . . . . . . . . . . . . . 72 89 Other investments . . . . . . . . . . . . . . . . . . . 81 30 ------ ------ 4,696 3,905 ------ ------ Current assets Stocks. . . . . . . . . . . . . . . . . . . . . . . . . 18 114 113 Debtors -- amounts falling due within one year. . . . . 19 860 666 Debtors -- amounts falling due after more than one year 20 164 148 Cash and short term investments . . . . . . . . . . . . 21 1,594 440 ------ ------ 2,732 1,367 Creditors: amounts falling due within one year . . . . . 22 (3,379) (2,676) ------ ------ Net current liabilities. . . . . . . . . . . . . . . . . (647) (1,309) ------ ------ Total assets less current liabilities. . . . . . . . . . 4,049 2,596 Creditors: amounts falling due after more than one year 23 (873) (620) Provisions for liabilities and charges . . . . . . . . . 26 (128) (113) Minority interests . . . . . . . . . . . . . . . . . . . (7) (8) ------ ------ Net assets . . . . . . . . . . . . . . . . . . . . . . . 3,041 1,855 ====== ====== Capital and reserves Combined share capitals. . . . . . . . . . . . . . . . . 185 168 Combined share premium accounts. . . . . . . . . . . . . 1,621 341 Combined reserves. . . . . . . . . . . . . . . . . . . . 1,235 1,346 ------ ------ Combined shareholders' funds . . . . . . . . . . . . . . 28 3,041 1,855 ====== ======
The accompanying notes on pages F-8 to F-38 are an integral part of these combined financial statements 74 REED ELSEVIER COMBINED STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES FOR THE YEAR ENDED 31 DECEMBER 2000
2000 1999 1998 'L'm 'L'm 'L'm ---- ---- ---- Profit/(loss) attributable to parent companies' shareholders 33 (63) 772 Exchange translation differences . . . . . . . . . . . . . . 113 17 (3) ---- ---- ---- Total recognised gains and losses for the year . . . . . . . 146 (46) 769 ==== ==== ====
COMBINED SHAREHOLDERS' FUNDS RECONCILIATION FOR THE YEAR ENDED 31 DECEMBER 2000
2000 1999 1998 'L'm 'L'm 'L'm ----- ----- ----- Profit/(loss) attributable to parent companies' shareholders . . . . . 33 (63) 772 Ordinary dividends paid and proposed . . . . . . . . . . . . . . . . . (245) (234) (349) Issue of ordinary shares, net of expenses and less capital redemptions 1,285 5 18 Exchange translation differences . . . . . . . . . . . . . . . . . . . 113 17 (3) ----- ----- ----- Net increase/(decrease) in combined shareholders' funds. . . . . . . . 1,186 (275) 438 Combined shareholders' funds at 1 January. . . . . . . . . . . . . . . 1,855 2,130 1,692 ----- ----- ----- Combined shareholders' funds at 31 December. . . . . . . . . . . . . . 3,041 1,855 2,130 ===== ===== =====
The accompanying notes on pages F-8 to F-38 are an integral part of these combined financial statements 75 REED ELSEVIER NOTES TO THE COMBINED FINANCIAL STATEMENTS 1. Basis of preparation The equalisation agreement between Reed International and Elsevier has the effect that their shareholders can be regarded as having the interests of a single economic group. The Reed Elsevier combined financial statements ("the combined financial statements") represent the combined interests of both sets of shareholders and encompass the businesses of Reed Elsevier plc and Elsevier Reed Finance BV and their respective subsidiaries, associates and joint ventures, together with the parent companies, Reed International and Elsevier ("the combined businesses"). These financial statements are presented under the historical cost convention and in accordance with applicable UK and Dutch Generally Accepted Accounting Principles ("GAAP"). These principles differ in certain significant respects from accounting principles generally accepted in the United States of America ("US GAAP"); see note 30. In addition to the figures required to be reported by accounting standards, adjusted profit and operating cash flow figures have been presented as additional performance measures. Adjusted profit is shown before the amortisation of goodwill and intangible assets and exceptional items. Adjusted operating cash flow is measured after dividends from joint ventures, tangible fixed asset spend and proceeds from the sale of fixed assets, but before exceptional payments and proceeds. 2. Accounting policies The significant accounting policies adopted are as follows: Investments Fixed asset investments in joint ventures and associates are accounted for under the gross equity and equity methods respectively. Other fixed asset investments are stated at cost, less provision, if appropriate, for any impairment in value. Short term investments are stated at the lower of cost and net realisable value. Foreign exchange translation The combined financial statements are presented in pounds sterling. Balance sheet items are translated at year end exchange rates and profit and loss account items are translated at average exchange rates. Exchange translation differences on foreign equity investments and the related foreign currency net borrowings and differences between balance sheet and profit and loss account rates are taken to reserves. Transactions entered into in foreign currencies are recorded at the exchange rates applicable at the time of the transaction. The results of hedging transactions for profit and loss amounts in foreign currency are accounted for in the profit and loss account to match the underlying transaction. Goodwill and intangible assets On the acquisition of a subsidiary, associate, joint venture or business, the purchase consideration is allocated between the underlying net tangible and intangible assets on a fair value basis, with any excess purchase consideration representing goodwill. In accordance with FRS10: Goodwill and Intangible Assets, acquired goodwill and intangible assets are capitalised and amortised systematically over their estimated useful lives up to a maximum period of 20 years, subject to impairment review. Intangible assets comprise publishing rights and titles, databases, exhibition rights and other intangible assets, which are stated at fair value on acquisition and are not subsequently revalued. Tangible fixed assets Tangible fixed assets are stated in the balance sheet at cost less accumulated depreciation. No depreciation is provided on freehold land. Freehold buildings and long leases are depreciated over their estimated useful lives. Plant and equipment is depreciated on a straight line basis at rates from 5%--33%. Short leases are written off over the duration of the lease. Finance leases Assets held under leases which confer rights and obligations similar to those attaching to owned assets are capitalised as tangible fixed assets and the corresponding liability to pay rentals is shown net of interest in the accounts as obligations under finance leases. The capitalised values of the assets are written off on a straight line basis over the shorter of the periods of the leases or the useful lives of the assets concerned. The interest element of the lease payments is allocated so as to produce a constant periodic rate of charge. Operating leases Operating lease rentals are charged to the profit and loss account on a straight line basis over the period of the leases. 76 2. Accounting policies -- (continued) Stocks Stocks and work in progress are stated at the lower of cost, including appropriate attributable overheads, and estimated net realisable value. Financial instruments Payments and receipts on interest rate hedges are accounted for on an accruals basis over the lives of the hedges and included respectively within interest payable and interest receivable in the profit and loss account. Gains and losses on foreign exchange hedges, other than in relation to net currency borrowings hedging equity investments, are recognised in the profit and loss account on maturity of the underlying transaction. Gains and losses on net currency borrowings hedging equity investments are taken to reserves. Gains and losses arising on hedging instruments that are closed out due to the cessation of the underlying exposure are taken directly to the profit and loss account. Currency swap agreements are valued at exchange rates ruling at the balance sheet date with net gains and losses being included within short term investments or borrowings. Interest payable and receivable arising from the swap is accounted for on an accruals basis over the life of the swap. Finance costs associated with debt issuances are charged to the profit and loss account over the life of the related borrowings. Turnover Turnover represents the invoiced value of sales on transactions completed by delivery, excluding customer sales taxes and sales between the combined businesses. Development spend Development spend incurred on the launch of new products or services is expensed to the profit and loss account as incurred. The cost of developing software for use internally may be capitalised as a fixed asset and written off over its estimated useful life. Taxation Deferred taxation is provided in full for timing differences using the liability method. No provision is made for tax which would become payable on the distribution of retained profits by foreign subsidiaries, associates or joint ventures, unless there is an intention to distribute such retained earnings giving rise to a charge. Deferred tax assets are only recognised to the extent that they are considered recoverable in the short term. Deferred taxation balances are not discounted. Pensions The expected costs of pensions in respect of defined benefit pension schemes are charged to the profit and loss account so as to spread the cost over the service lives of employees in the schemes. Actuarial surpluses and deficits are allocated over the average expected remaining service lives of employees. Pension costs are assessed in accordance with the advice of qualified actuaries. For defined contribution schemes, the profit and loss account charge represents contributions made. Use of estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent liabilities and assets at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 77 3. Segment analysis The Education business, previously reported within the Legal segment, has been presented separately for the first time in 2000 in anticipation of the acquisition of Harcourt. Comparatives have been restated accordingly. The Scientific segment has been renamed Science & Medical to reflect business strategy. Adjusted operating profit is presented as an additional performance measure and is shown after share of operating profit of joint ventures and before amortisation of goodwill and intangible assets and exceptional items; see notes 1 and 12. Turnover is analysed before the 'L'68m (1999 'L'74m; 1998 'L'80m) share of joint ventures' turnover, of which 'L'21m (1999 'L'19m; 1998 'L'26m) relates to the Legal segment, principally to Giuffree and, in 1998, Shephard's prior to the acquisition of the remaining 50% interest on 1 August 1998. 'L'47m (1999 'L'55m; 1998 'L'54m) relates to the Business segment, principally to exhibition joint ventures (1999 and 1998 principally to REZsolutions, Inc.). Share of operating profit in joint ventures of 'L'13m (1999 'L'3m; 1998 'L'9m) comprises 'L'4m (1999 'L'3m; 1998 'L'6m) relating to the Legal segment and 'L'9m (1999 'L'nil; 1998 'L'3m) relating to the Business segment. Analysis by business segment
2000 1999 1998 'L'm 'L'm 'L'm --------- ----- ----- Turnover Science & Medical . . . 693 652 622 Legal . . . . . . . . . 1,201 1,087 948 Education . . . . . . . 202 181 159 Business . . . . . . . . 1,672 1,470 1,434 --------- ----- ----- Continuing operations . 3,768 3,390 3,163 Discontinued operations --- --- 28 --------- ----- ----- Total . . . . . . . . . 3,768 3,390 3,191 ========= ===== ===== Operating profit Science & Medical . . . 140 111 126 Legal . . . . . . . . . (8) 57 155 Education . . . . . . . 19 20 14 Business . . . . . . . . 59 (8) 108 --------- ----- ----- Continuing operations . 210 180 403 Discontinued operations --- --- (1) --------- ----- ----- Total . . . . . . . . . 210 180 402 ========= ===== ===== Adjusted operating profit Science & Medical . . . 252 231 223 Legal . . . . . . . . . 237 282 291 Education . . . . . . . 40 34 31 Business . . . . . . . . 264 245 268 --------- ----- ----- Total . . . . . . . . . 793 792 813 ========= ===== ===== Depreciation Science & Medical . . . 17 16 18 Legal . . . . . . . . . 60 63 47 Education . . . . . . . 3 3 2 Business . . . . . . . . 38 35 30 --------- ----- ----- Total . . . . . . . . . 118 117 97 ========= ===== =====
78 3. Segment information -- (continued)
2000 1999 1998 'L'm 'L'm 'L'm ----- ----- ----- Amortisation of goodwill and intangible assets Science & Medical . . . . . . . . . . . . . . 98 91 89 Legal . . . . . . . . . . . . . . . . . . . . 168 136 103 Education . . . . . . . . . . . . . . . . . . 14 15 16 Business . . . . . . . . . . . . . . . . . . 188 131 123 ----- ----- ----- Continuing operations . . . . . . . . . . . . 468 373 331 Discontinued operations . . . . . . . . . . . --- --- 1 ----- ----- ----- Total (including share of joint ventures) . . 468 373 332 ===== ===== ===== 2000 1999 1998 'L'm 'L'm 'L'm ----- ----- ----- Total assets Science & Medical . . . . . . . . . . . . . . 769 776 803 Legal . . . . . . . . . . . . . . . . . . . . 2,888 2,637 2,699 Education . . . . . . . . . . . . . . . . . . 197 184 190 Business . . . . . . . . . . . . . . . . . . 1,980 1,235 1,287 ----- ----- ----- Continuing operations . . . . . . . . . . . . 5,834 4,832 4,979 Discontinued operations . . . . . . . . . . . --- --- 4 ----- ----- ----- Total . . . . . . . . . . . . . . . . . . . . 5,834 4,832 4,983 ===== ===== =====
The analysis of total assets excludes corporate assets of 'L'1,594m (1999 'L'440m; 1998 'L'777m). Corporate assets are principally cash balances and short term investments of which the principal amounts are 'L'64m in North America, 'L'641m in the United Kingdom, and 'L'748m in the Netherlands.
2000 1999 1998 'L'm 'L'm 'L'm ----- ------ ----- Capital expenditure Science & Medical . . . . . . . . . . . . . . . . . . . . . . . . 26 20 24 Legal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72 75 72 Education . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 5 3 Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 48 62 ----- ------ ----- Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 144 148 161 ===== ====== ===== Capital employed Science & Medical . . . . . . . . . . . . . . . . . . . . . . . . 286 315 338 Legal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,443 2,295 2,395 Education . . . . . . . . . . . . . . . . . . . . . . . . . . . . 144 137 149 Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,205 668 768 ----- ------ ----- Continuing operations . . . . . . . . . . . . . . . . . . . . . . 4,078 3,415 3,650 Discontinued operations . . . . . . . . . . . . . . . . . . . . . --- --- (16) ----- ------ ----- Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,078 3,415 3,634 ===== ====== ===== Reconciliation of capital employed to combined shareholders' funds Capital employed . . . . . . . . . . . . . . . . . . . . . . . . 4,078 3,415 3,634 Taxation . . . . . . . . . . . . . . . . . . . . . . . . . . . . (427) (364) (297) Dividends and net interest . . . . . . . . . . . . . . . . . . . (170) (122) (239) Net borrowings . . . . . . . . . . . . . . . . . . . . . . . . . (433) (1,066) (962) Minority interests . . . . . . . . . . . . . . . . . . . . . . . (7) (8) (6) ----- ------ ----- Combined shareholders' funds . . . . . . . . . . . . . . . . . . 3,041 1,855 2,130 ===== ====== =====
79 3. Segment information -- (continued) Analysis by geographical origin
2000 1999 1998 'L'm 'L'm 'L'm ----- ----- ----- Turnover North America . . . . . 2,098 1,836 1,663 United Kingdom . . . . . 734 698 692 The Netherlands . . . . 399 391 383 Rest of Europe . . . . . 356 307 293 Rest of World . . . . . 181 158 132 ----- ----- ----- Continuing operations . 3,768 3,390 3,163 Discontinued operations --- --- 28 ----- ----- ----- Total . . . . . . . . . 3,768 3,390 3,191 ===== ===== ===== Operating profit North America . . . . . (89) (52) 98 United Kingdom . . . . . 109 86 139 The Netherlands . . . . 127 91 114 Rest of Europe . . . . . 57 51 47 Rest of World . . . . . 6 4 5 ----- ----- ----- Continuing operations . 210 180 403 Discontinued operations --- --- (1) ----- ----- ----- Total . . . . . . . . . 210 180 402 ===== ===== ===== Adjusted operating profit North America . . . . . 335 359 390 United Kingdom . . . . . 191 191 204 The Netherlands . . . . 136 135 128 Rest of Europe . . . . . 102 87 76 Rest of World . . . . . 29 20 15 ----- ----- ----- Total . . . . . . . . . 793 792 813 ===== ===== ===== 2000 1999 1998 'L'm 'L'm 'L'm ----- ----- ----- Total assets North America . . . . . 4,040 3,501 3,581 United Kingdom . . . . . 1,510 1,020 1,406 The Netherlands . . . . 927 319 314 Rest of Europe . . . . . 820 324 362 Rest of World . . . . . 131 108 93 ----- ----- ----- Continuing operations . 7,428 5,272 5,756 Discontinued operations --- --- 4 ----- ----- ----- Total . . . . . . . . . 7,428 5,272 5,760 ===== ===== ===== Capital employed North America . . . . . 3,128 2,792 2,906 United Kingdom . . . . . 476 518 579 The Netherlands . . . . (62) (75) (46) Rest of Europe . . . . . 506 147 173 Rest of World . . . . . 30 33 38 ----- ----- ----- Continuing operations . 4,078 3.415 3,650 Discontinued operations --- --- (16) ----- ----- ----- Total . . . . . . . . . 4,078 3,415 3,634 ===== ===== =====
80 3. Segment information -- (continued) Analysis by geographical market
2000 1999 1998 'L'm 'L'm 'L'm ----- ----- ----- Turnover North America . . . . . 2,152 1,906 1,726 United Kingdom. . . . . 521 484 483 The Netherlands . . . . 234 237 222 Rest of Europe. . . . . 478 418 407 Rest of World . . . . . 383 345 325 ----- ----- ----- Continuing operations . 3,768 3,390 3,163 Discontinued operations --- --- 28 ----- ----- ----- Total . . . . . . . . . 3,768 3,390 3,191 ===== ===== ===== 4.TABLCost of sales and operating expenses
2000 -------------------------------------------------- Before Amortisation amortisation of goodwill and exceptional and intangible Exceptional items assets items Total 'L'm 'L'm 'L'm 'L'm -------------- ------------- ----------- ----- Cost of sales Continuing operations. . . . . 1,268 --- --- 1,268 Acquisitions . . . . . . . . . 64 --- --- 64 -------------- ------------- ----------- ----- Total. . . . . . . . . . . . . 1,332 --- --- 1,332 ============== ============= =========== ===== Distribution and selling costs Continuing operations. . . . . 844 --- --- 844 Acquisitions . . . . . . . . . 40 --- --- 40 -------------- ------------- ----------- ----- 884 --- --- 884 -------------- ------------- ----------- ----- Administrative expenses Continuing operations. . . . . 712 378 105 1,195 Acquisitions . . . . . . . . . 63 87 10 160 -------------- ------------- ----------- ----- 775 465 115 1,355 -------------- ------------- ----------- ----- Operating expenses Continuing operations. . . . . 1,556 378 105 2,039 Acquisitions . . . . . . . . . 103 87 10 200 -------------- ------------- ----------- ----- Total. . . . . . . . . . . . . 1,659 465 115 2,239 ============== ============= =========== =====
81 4. Cost of sales and operating expenses -- (continued)
1999 -------------------------------------------------- Before Amortisation amortisation of goodwill and exceptional and intangible Exceptional items assets items Total 'L'm 'L'm 'L'm 'L'm -------------- ------------- ----------- ----- Cost of sales Continuing operations. . . . . 1,185 --- --- 1,185 Acquisitions . . . . . . . . . --- --- --- --- -------------- ------------- ----------- ----- Total. . . . . . . . . . . . . 1,185 --- --- 1,185 ============== ============= =========== ===== Distribution and selling costs Continuing operations. . . . . 759 --- --- 759 Acquisitions . . . . . . . . . --- --- --- --- -------------- ------------- ----------- ----- 759 --- --- 759 -------------- ------------- ----------- ----- Administrative expenses Continuing operations. . . . . 661 369 239 1,269 Acquisitions . . . . . . . . . --- --- --- --- -------------- ------------- ----------- ----- 661 369 239 1,269 -------------- ------------- ----------- ----- Operating expenses Continuing operations. . . . . 1,420 369 239 2,028 Acquisitions . . . . . . . . . --- --- --- --- -------------- ------------- ----------- ----- Total. . . . . . . . . . . . . 1,420 369 239 2,028 ============== ============= =========== =====
1998 -------------------------------------------------- Before Amortisation amortisation of goodwill and exceptional and intangible Exceptional items assets items Total 'L'm 'L'm 'L'm 'L'm -------------- ------------- ----------- ----- Cost of sales Continuing operations. . . . . 1,071 --- --- 1,071 Acquisitions . . . . . . . . . --- --- --- --- Discontinued operations. . . . 21 --- --- 21 -------------- ------------- ----------- ----- Total. . . . . . . . . . . . . 1,092 --- --- 1,092 ============== ============= =========== ===== Distribution and selling costs Continuing operations. . . . . 709 --- --- 709 Acquisitions . . . . . . . . . --- --- --- --- Discontinued operations. . . . 5 --- --- 5 -------------- ------------- ----------- ----- 714 --- --- 714 -------------- ------------- ----------- ----- Administrative expenses Continuing operations. . . . . 588 322 79 989 Acquisitions . . . . . . . . . --- --- --- --- Discontinued operations. . . . 2 1 --- 3 -------------- ------------- ----------- ----- 590 323 79 992 -------------- ------------- ----------- ----- Operating expenses Continuing operations. . . . . 1,297 322 79 1,698 Acquisitions . . . . . . . . . --- --- --- --- Discontinued operations. . . . 7 1 --- 8 -------------- ------------- ----------- ----- Total. . . . . . . . . . . . . 1,304 323 79 1,706 ============== ============= =========== =====
82 5. Personnel Average number of people employed during the year:
2000 1999 1998 ------ ------ ------ Business segment Science & Medical . . . 3,700 3,600 3,500 Legal . . . . . . . . . 11,200 10,800 9,300 Education . . . . . . . 1,500 1,400 1,300 Business. . . . . . . . 12,500 11,900 11,800 ------ ------ ------ Continuing operations . 28,900 27,700 25,900 Discontinued operations --- --- 200 ------ ------ ------ Total . . . . . . . . . 28,900 27,700 26,100 ====== ====== ====== Geographical location North America . . . . . 14,800 14,800 13,600 United Kingdom. . . . . 5,700 5,500 5,400 The Netherlands . . . . 3,000 3,000 2,800 Rest of Europe. . . . . 3,000 2,300 2,200 Rest of World . . . . . 2,400 2,100 1,900 ------ ------ ------ Continuing operations . 28,900 27,700 25,900 Discontinued operations --- --- 200 ------ ------ ------ Total . . . . . . . . . 28,900 27,700 26,100 ====== ====== ======
6. Pension schemes A number of pension schemes are operated around the world. The major schemes are of the defined benefit type with assets held in separate trustee administered funds. The two largest schemes, which cover the majority of employees, are in the UK and US. The main UK scheme was subject to a valuation by Watson Wyatt Partners as at 5 April 2000. The main US scheme was subject to a valuation by Towers Perrin as at 1 January 2000. The principal valuation assumptions for the main UK scheme were:
Actuarial method. . . . . . . . . . . . . . . . . . . . .Projected unit method Annual rate of return on investments. . . . . . . . . . . 6.60% Annual increase in total pensionable remuneration . . . . 5.00% Annual increase in present and future pensions in payment 3.00%
The principal valuation assumptions used for the US scheme were a rate of return on investments of 8%, increase in pensionable remuneration of 4.5%, and increase in present and future pensions in payment of 2%. The actuarial values placed on scheme assets were sufficient to cover 121% and 117% of the benefits that had accrued to members of the main UK and US schemes, respectively. Actuarial surpluses are spread as a level amount over the average remaining service lives of current employees. The market values of the schemes' assets at the valuation dates, excluding assets held in respect of members' additional voluntary contributions, were 'L'1,723m and 'L'158m in respect of the UK and US schemes, respectively. Assessments for accounting purposes in respect of other schemes, including the Netherlands scheme, have been carried out by external qualified actuaries using prospective benefit methods with the objective that current and future charges remain a stable percentage of pensionable payroll. The principal actuarial assumptions adopted in the assessments of the major schemes are that, over the long term, investment returns will marginally exceed the annual increase in pensionable remuneration and in present and future pensions. The actuarial value of assets of the schemes approximated to the aggregate benefits that had accrued to members, after allowing for expected future increases in pensionable remuneration and pensions in course of payment. The net pension charge was 'L'35m (1999 'L'28m; 1998 'L'22m), including a net 'L'1m (1999 'L'3m; 1998 'L'4m) SSAP24 credit related to the main UK scheme. The net SSAP24 credit on the main UK scheme comprises a regular cost of 'L'23m (1999 'L'16m; 1998 'L'15m), offset by amortisation of the net actuarial surplus of 'L'24m (1999 'L'19m; 1998 'L'19m). Pension contributions made in the year amounted to 'L'36m (1999 'L'31m; 1998 'L'26m). A prepayment of 'L'128m (1999 'L'127m; 1998 'L'124m) is included in debtors falling due after more than one year, representing the excess of the pension credit to the profit and loss account since 1988 over the amounts funded to the main UK scheme. 83 7. Operating profit Operating profit is stated after the following:
2000 1999 1998 'L'm 'L'm 'L'm ----- ---- ---- Hire of plant and machinery. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 12 10 Other operating lease rentals. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71 60 50 Depreciation (including 'L'4m (1999 'L'5m; 1998 'L'4m) in respect of assets held under finance leases) 118 117 97 Amortisation of goodwill and intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . 465 369 323 Amortisation of goodwill and intangible assets in joint ventures . . . . . . . . . . . . . . . . . . . 3 4 9 ----- ---- ---- Total amortisation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 468 373 332 ===== ==== ==== Staff costs Wages and salaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 979 859 748 Social security costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100 86 80 Pensions (see note 6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 28 22 ----- ---- ---- Total staff costs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,114 973 850 ===== ==== ==== Auditors' remuneration For audit services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.9 1.6 1.5 For non audit services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.6 1.1 1.5 ----- ---- ----
Included in auditors' remuneration for non audit services is 'L'1.5m (1999 'L'0.2m) paid to Deloitte & Touche and its associates in the UK. Information on the remuneration and interest of directors is given in Item 6: Directors, Senior Management and Employees. 8. Exceptional items
2000 1999 1998 'L'm 'L'm 'L'm ---- ---- ---- Reorganisation costs (i) (77) (161) --- Acquisition related costs (ii) . . . . . . . . . . . . . . . . . (38) (28) (26) Year 2000 compliance costs (iii) . . . . . . . . . . . . . . . . --- (50) (53) ---- ---- ---- Charged to operating profit. . . . . . . . . . . . . . . . . . . (115) (239) (79) ---- ---- ---- Merger expenses (iv) . . . . . . . . . . . . . . . . . . . . . . --- --- (10) Net profit on sale of fixed asset investments and businesses (v) 85 7 692 ---- ---- ---- Total exceptional items (charge)/credit. . . . . . . . . . . . . (30) (232) 603 ==== ==== ==== Net tax credit/(charge) (vi) . . . . . . . . . . . . . . . . . . 20 15 (70) ==== ==== ====
(i) Reorganisation costs related to a major programme of reorganisation across the Reed Elsevier businesses, commenced in 1999. Costs include employee severance, surplus leasehold property obligations and fixed asset write offs. (ii) Acquisition related costs include 'L'27m in respect of the integration of acquisitions, principally Miller Freeman Europe, CMD Group and Riskwise International, together with 'L'11m of exceptional costs incurred in respect of the tender offer for Harcourt (see note 29). In previous years, costs related to the integration of acquisitions, principally Matthew Bender (acquired 1998) and the Chilton Business Group (acquired 1997). (iii) Expenditure in connection with the combined businesses' Year 2000 compliance programme. (iv) Professional fees and other costs incurred in 1998 in respect of the abandoned merger of Reed Elsevier and Wolters Kluwer. (v) The net profit on sale of fixed asset investments and businesses related primarily to Springhouse, KG Saur and REZsolutions, Inc. and in 1998 related to the divestment of IPC Magazines and the remaining consumer book publishing operations. (vi) The net tax credit in 1999 is stated after taxes arising on business consolidation in the programme of reorganisation. Also in 1999, potential deferred tax assets of 'L'32m in respect of the programme of reorganisation were not recognised. 84 8. Exceptional items -- (continued) Cash flows in respect of exceptional items were as follows:
2000 1999 1998 'L'm 'L'm 'L'm ---- ---- ---- Reorganisation costs . . . . . . . . . . . . . . . . . . . . . . (76) (39) --- Acquisition related costs. . . . . . . . . . . . . . . . . . . . (9) (32) (22) Year 2000 compliance costs . . . . . . . . . . . . . . . . . . . (2) (47) (53) Reed Travel Group customer recompense (provided in 1997) . . . . (7) (20)(183) ---- ---- ---- Exceptional operating cash outflow . . . . . . . . . . . . . . . (94) (138)(258) Net proceeds from sale of fixed asset investments and businesses 153 3 913 Merger expenses. . . . . . . . . . . . . . . . . . . . . . . . . --- --- (8) ---- ---- ---- Total exceptional cash inflow/(outflow). . . . . . . . . . . . . 59 (135) 647 ==== ==== ==== Exceptional tax cash inflow. . . . . . . . . . . . . . . . . . . 31 74 --- ==== ==== ====
2000 1999 1998 'L'm 'L'm 'L'm ---- ---- ---- Interest receivable. . . . . . . 26 32 64 Interest payable Other loans . . . . . . . . . . (45) (46) (51) Promissory notes and bank loans (83) (67) (52) Finance leases. . . . . . . . . (1) (1) (1) ---- ---- ---- Total. . . . . . . . . . . . . . (103) (82) (40) ==== ==== ==== Interest cover (times) . . . . . 8 10 20 ==== ==== ====
Interest cover is calculated as the number of times adjusted operating profit is greater than the net interest expense. 10. Tax on profit on ordinary activities
2000 1999 1998 'L'm 'L'm 'L'm ---- ---- ---- United Kingdom Current . . . . . . . . . . . . . . . . . . . . . 62 65 68 Deferred . . . . . . . . . . . . . . . . . . . . . 4 (3) 1 The Netherlands Current . . . . . . . . . . . . . . . . . . . . . 53 50 45 Deferred . . . . . . . . . . . . . . . . . . . . . --- --- 4 Rest of World Current . . . . . . . . . . . . . . . . . . . . . 57 48 5 Deferred . . . . . . . . . . . . . . . . . . . . . (1) 19 72 ---- ---- ---- Sub-total . . . . . . . . . . . . . . . . . . . . . 175 179 195 Share of tax attributable to joint ventures . . . . 4 3 6 ---- ---- ---- Tax on ordinary activities before exceptional items 179 182 201 Net tax (credit)/charge on exceptional items Current . . . . . . . . . . . . . . . . . . . . . (12) (9) 70 Deferred . . . . . . . . . . . . . . . . . . . . . (8) (6) --- ---- ---- ---- Total . . . . . . . . . . . . . . . . . . . . . . . 159 167 271 ==== ==== ====
The total tax charge for 2000 and 1999 is high as a proportion of profit before tax principally due to non-tax deductible amortisation and the non- recognition of potential deferred tax assets. The tax charge in 1998 was reduced by 'L'51m in respect of allowances on publishing intangibles. 85 10. Tax on profit on ordinary activities -- (continued) The table below reconciles the tax charged at local statutory rates to the actual tax charge on profit on ordinary activities before taxation:
2000 1999 1998 'L'm 'L'm 'L'm ---- ---- ----- Profit before taxation United Kingdom . . . . . . . . . . . . . . . . 207 212 219 The Netherlands. . . . . . . . . . . . . . . . 149 147 149 Rest of World. . . . . . . . . . . . . . . . . 334 351 405 Amortisation of goodwill and intangible assets (468) (373) (332) Exceptional items. . . . . . . . . . . . . . . (30) (232) 603 ---- ---- ----- Total . . . . . . . . . . . . . . . . . . . . . 192 105 1,044 ==== ==== =====
>
2000 1999 1998 'L'm 'L'm 'L'm ---- ---- ---- Tax charged at local statutory rates . . . . . . . . . . . . 17 (6) 299 Net impact of amortisation of goodwill and intangible assets 100 72 64 Permanent differences and other items. . . . . . . . . . . . 55 38 18 Exceptional items not taxed. . . . . . . . . . . . . . . . . (13) 63 (110) ---- ---- ---- Actual tax charge. . . . . . . . . . . . . . . . . . . . . . 159 167 271 ==== ==== ====
Tax charged at local statutory rates is calculated by reference to the appropriate statutory tax rate of each jurisdiction in which Reed Elsevier operates. 11. Ordinary dividends paid and proposed
2000 1999 1998 'L'm 'L'm 'L'm ---- ---- ---- Reed International 123 116 172 Elsevier . . . . . 122 118 177 ---- ---- ---- Total. . . . . . . 245 234 349 ==== ==== ====
Dividends comprise the total dividend for Reed International of 10.0p per ordinary share (1999 10.0p; 1998 15.0p) and the total dividend for Elsevier of 'E'0.28 per ordinary share (1999 'E'0.27; 1998 'E'0.39). Dividends paid to Reed International and Elsevier shareholders are equalised at the gross level inclusive of the UK tax credit of 10% received by certain Reed International shareholders. The cost of funding the Reed International dividend is, therefore, similar to or lower than that of Elsevier. 86 12. Adjusted figures Adjusted profit and cash flow figures are used by the Reed Elsevier businesses as additional performance measures. The adjusted figures are derived as follows:
2000 1999 1998 'L'm 'L'm 'L'm ---- ---- ----- Operating profit including joint ventures . . . . . . . . . . . . . . 210 180 402 Adjustments: Amortisation of goodwill and intangible assets . . . . . . . . . . . 468 373 332 Reorganisation costs . . . . . . . . . . . . . . . . . . . . . . . . 77 161 --- Acquisition related costs . . . . . . . . . . . . . . . . . . . . . 38 28 26 Year 2000 compliance costs . . . . . . . . . . . . . . . . . . . . . --- 50 53 ---- ---- ----- Adjusted operating profit . . . . . . . . . . . . . . . . . . . . . . 793 792 813 ==== ==== ===== Profit before tax . . . . . . . . . . . . . . . . . . . . . . . . . . 192 105 1,044 Adjustments: Amortisation of goodwill and intangible assets . . . . . . . . . . . 468 373 332 Reorganisation costs . . . . . . . . . . . . . . . . . . . . . . . . 77 161 --- Acquisition related costs . . . . . . . . . . . . . . . . . . . . . 38 28 26 Year 2000 compliance costs . . . . . . . . . . . . . . . . . . . . . --- 50 53 Merger expenses . . . . . . . . . . . . . . . . . . . . . . . . . . --- --- 10 Net profit on sale of fixed asset investments and businesses . . . . (85) (7) (692) ---- ---- ----- Adjusted profit before tax. . . . . . . . . . . . . . . . . . . . . . 690 710 773 ==== ==== ===== Profit/(loss) attributable to parent companies' shareholders. . . . . 33 (63) 772 Adjustments: Amortisation of goodwill and intangible assets . . . . . . . . . . . 468 373 332 Reorganisation costs . . . . . . . . . . . . . . . . . . . . . . . . 53 161 --- Acquisition related costs . . . . . . . . . . . . . . . . . . . . . 33 22 16 Year 2000 compliance costs . . . . . . . . . . . . . . . . . . . . . --- 41 33 Merger expenses . . . . . . . . . . . . . . . . . . . . . . . . . . --- --- 10 Net profit on sale of fixed asset investments and businesses . . . . (76) (7) (592) ---- ---- ----- Adjusted profit attributable to parent companies' shareholders. . . . 511 527 571 ==== ==== ===== Net cash inflow from operating activities . . . . . . . . . . . . . . 813 760 679 Dividends received from joint ventures. . . . . . . . . . . . . . . . 6 4 11 Purchase of tangible fixed assets . . . . . . . . . . . . . . . . . . (141) (137) (151) Proceeds from sale of fixed assets. . . . . . . . . . . . . . . . . . 3 15 11 Payments in relation to exceptional items charged to operating profit 94 138 258 ---- ---- ----- Adjusted operating cash flow. . . . . . . . . . . . . . . . . . . . . 775 780 808 ==== ==== =====
87 13. Cash flow statement
2000 1999 1998 'L'm 'L'm 'L'm ---- ---- ---- Reconciliation of operating profit to net cash inflow from operating activities Operating profit (before joint ventures). . . . . . . . . . . . . . . . . . . . 197 177 393 Exceptional charges to operating profit (see note 8). . . . . . . . . . . . . . 115 239 79 ---- ---- ---- Operating profit before exceptional items . . . . . . . . . . . . . . . . . . . 312 416 472 ---- ---- ---- Amortisation of goodwill and intangible assets. . . . . . . . . . . . . . . . . 465 369 323 Depreciation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 118 117 97 Net SSAP24 pension credit (see note 6). . . . . . . . . . . . . . . . . . . . . (1) (3) (4) ---- ---- ---- Total non cash items. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 582 483 416 ---- ---- ---- Increase in stocks. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3) (9) o (Increase)/decrease in debtors. . . . . . . . . . . . . . . . . . . . . . . . . (110) (8) 17 Increase in creditors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126 16 32 ---- ---- ---- Movement in working capital . . . . . . . . . . . . . . . . . . . . . . . . . . 13 (1) 49 ---- ---- ---- Net cash inflow from operating activities before exceptional items. . . . . . . 907 898 937 Payments relating to exceptional items charged to operating profit (see note 8) (94) (138)(258) ---- ---- ---- Net cash inflow from operating activities . . . . . . . . . . . . . . . . . . . 813 760 679 ==== ==== ====
2000 1999 1998 'L'm 'L'm 'L'm ---- ---- ------ Acquisitions Purchase of businesses and subsidiary undertakings (see note 14) (848) (120)(1,231) Net payment of deferred consideration of prior year acquisitions (13) (5) --- Payments against prior year acquisition provisions . . . . . . . --- (1) --- Investment in joint ventures . . . . . . . . . . . . . . . . . . --- (19) --- Purchase of fixed asset investments. . . . . . . . . . . . . . . (53) (22) (1) ---- ---- ------ Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (914) (167)(1,232) ==== ==== ======
2000 1999 1998 'L'm 'L'm 'L'm ------- ------- ------- Exceptional sale of fixed asset investments and businesses Goodwill and intangible assets. . . . . . . . . . . . . . . . . . . . . . . . . 35 6 132 Net tangible assets (excluding cash of 'L'nil (1999 'L'nil; 1998 'L'42m). . . . 44 --- 72 ------- ------- ------- 79 6 204 Net profit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85 7 692 ------- ------- ------- Consideration in respect of sale of fixed asset investments and businesses, net of expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 164 13 896 (Amounts paid)/deferred consideration received in respect of prior year disposals --- (8) 9 ------- ------- ------- 164 5 905 Amounts (receivable)/payable. . . . . . . . . . . . . . . . . . . . . . . . . . (11) (2) 8 ------- ------- ------- Net cash inflow . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 153 3 913 ======= ======= ======= 2000 1999 1998 'L'm 'L'm 'L'm ------- ------- ------- Financing Net movement in promissory notes and bank loans . . . . . . . . . . . . . . . . 304 (20) 181 Repayment of other loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . (155) (176) (3) Issuance of other loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . 202 --- 2 Repayment of finance leases . . . . . . . . . . . . . . . . . . . . . . . . . . (4) (6) (6) ------- ------- ------- 347 (202) 174 Issue of ordinary shares. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,287 9 18 Redemption of preference shares . . . . . . . . . . . . . . . . . . . . . . . . --- (4) --- ------- ------- ------- Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,634 (197) 192 ======= ======= =======
The repayment of other loans relates primarily to US$100m of Private Placements and US$150m of Medium Term Notes which matured in the year. The repayment of other loans in 1999 related primarily to a US$200m Eurobond, Dfl125m Private Placements and US$20m of Medium Term Notes which matured in the year. In 1998, 'L'3m of Dutch guilder convertible loan stock was repaid on maturity. The issuance of other loans relates to a US$300m Swiss Domestic Bond. 88 13. Statements of cash flows -- (continued)
Short term Cash investments Borrowings Total 'L'm 'L'm 'L'm 'L'm ---- ----------- ---------- ------ Reconciliation of net borrowings Net borrowing at 31 December 1998. . . . . . . . . 26 682 (1,670) (962) ---- ----------- ---------- ------ Increase in cash . . . . . . . . . . . . . . . . . 59 --- --- 59 Decrease in short term investments . . . . . . . . --- (297) --- (297) Decrease in borrowings . . . . . . . . . . . . . . --- --- 202 202 ---- ----------- ---------- ------ Change in net borrowings resulting from cash flows 59 (297) 202 (36) Inception of finance leases. . . . . . . . . . . . --- --- (11) (11) Exchange translation differences . . . . . . . . . (6) (24) (27) (57) ---- ----------- ---------- ------ Net borrowings at 31 December 1999 . . . . . . . . 79 361 (1,506) (1,066) ---- ----------- ---------- ------ Increase in cash . . . . . . . . . . . . . . . . . 7 --- --- 7 Increase in short term investments . . . . . . . . --- 1,137 --- 1,137 Increase in borrowings . . . . . . . . . . . . . . --- --- (347) (347) ---- ----------- ---------- ------ Change in net borrowings resulting from cash flows 7 1,137 (347) 797 Loans in acquired businesses . . . . . . . . . . . --- --- (48) (48) Inception of finance leases. . . . . . . . . . . . --- --- (3) (3) Exchange translation differences . . . . . . . . . (1) 11 (123) (113) ---- ----------- ---------- ------ Net borrowings at 31 December 2000 . . . . . . . . 85 1,509 (2,027) (433) ==== =========== ========== ======
Net borrowings comprise cash and short term investments, loan capital, finance leases, promissory notes and bank loans and are analysed further in notes 21 to 24 and 30. 14. Acquisitions During the year a number of acquisitions were made for a total consideration amounting to 'L'952m, after taking account of loans of 'L'48m and of net cash acquired of 'L'6m. The most significant were Miller Freeman Europe, in July 2000, for a total consideration of 'L'360m and the CMD Group, in May 2000, for a total consideration of 'L'199m, subject to additional deferred consideration in 2004 if performance targets are met. The net assets of the businesses acquired are incorporated at their fair value at the date of acquisition. Fair value adjustments include the valuation of intangible assets and the restatement of tangible fixed assets and current assets and liabilities in accordance with Reed Elsevier accounting policies. Summaries of these adjustments, which are provisional pending the completion of fair value assessments in 2001, and the consideration given are set out in the table below:
Book value Fair value on acquisition adjustments Fair value 'L'm 'L'm 'L'm ------------- ----------- --------- Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 152 528 680 Intangible fixed assets. . . . . . . . . . . . . . . . . . . . . . 9 309 318 Tangible fixed assets. . . . . . . . . . . . . . . . . . . . . . . 17 (3) 14 Investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 --- 13 Current assets . . . . . . . . . . . . . . . . . . . . . . . . . . 68 (5) 63 Current liabilities. . . . . . . . . . . . . . . . . . . . . . . . (125) (3) (128) Loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (48) --- (48) Current and deferred tax . . . . . . . . . . . . . . . . . . . . . (8) --- (8) ------------- ----------- --------- Net assets acquired. . . . . . . . . . . . . . . . . . . . . . . . 78 826 904 ============= =========== ========= Consideration (after taking account of 'L'6m of net cash acquired) 904 Less: deferred to future years . . . . . . . . . . . . . . . . . . (56) --------- Net cash flow. . . . . . . . . . . . . . . . . . . . . . . . . . . 848 =========
Before the amortisation of goodwill an d intangible assets and exceptional acquisition related costs, the businesses acquired in 2000 contributed 'L'179m to turnover, 'L'12m to operating profit and 'L'33m to net cash inflow from operating activities for the part year under Reed Elsevier ownership. In the year ended 31 December 1999, acquisitions were made for a total of 'L'132m after taking account of 'L'4m of net cash acquired. 'L'12m of the consideration was deferred to future years. 89 15. Goodwill and intangible assets
Intangible Goodwill assets Total 'L'm 'L'm 'L'm -------- ---------- ----- Cost At 1 January 2000. . . . . . . . 2,899 3,081 5,980 Acquisitions . . . . . . . . . . 680 318 998 Sale of businesses . . . . . . . (42) (74) (116) Exchange translation differences 193 183 376 -------- ---------- ----- At 31 December 2000. . . . . . . 3,730 3,508 7,238 ======== ========== ===== Accumulated amortisation At 1 January 2000. . . . . . . . 1,197 1,383 2,580 Sale of businesses . . . . . . . (39) (42) (81) Charge for the year. . . . . . . 255 210 465 Exchange translation differences 65 82 147 -------- ---------- ----- At 31 December 2000. . . . . . . 1,478 1,633 3,111 ======== ========== ===== Net book amount At 1 January 2000. . . . . . . . 1,702 1,698 3,400 At 31 December 2000. . . . . . . 2,252 1,875 4,127 ======== ========== =====
16. Tangible fixed assets
Plant, equipment and Land and computer buildings systems Total 'L'm 'L'm 'L'm --------- ------------ ----- Cost At 1 January 2000. . . . . . . . 170 743 913 Acquisitions . . . . . . . . . . 4 20 24 Capital expenditure. . . . . . . 5 139 144 Disposals. . . . . . . . . . . . (21) (116) (137) Exchange translation differences 10 40 50 --------- ------------ ----- At 31 December 2000. . . . . . . 168 826 994 ========= ============ ===== Accumulated depreciation At 1 January 2000. . . . . . . . 45 482 527 Acquisitions . . . . . . . . . . --- 10 10 Disposals. . . . . . . . . . . . --- (104) (104) Charge for the year. . . . . . . 7 111 118 Exchange translation differences 4 23 27 --------- ------------ ----- At 31 December 2000. . . . . . . 56 522 578 ========= ============ ===== Net book amount At 1 January 2000. . . . . . . . 125 261 386 At 31 December 2000. . . . . . . 112 304 416 ========= ============ =====
At 31 December 2000 and 1999, all assets were included at cost. No depreciation was provided on freehold land. The net book amount of tangible fixed assets includes 'L'17m (1999 'L'18m) in respect of assets held under finance leases. 90 17. Fixed asset investments
Investments in joint Other ventures investments Total 'L'm 'L'm 'L'm ----------- ----------- ----- At 1 January 2000. . . . . . . . . . . . . . . 89 30 119 Share of attributable profit . . . . . . . . . 12 --- 12 Amortisation of goodwill and intangible assets (3) --- (3) Dividends received from joint ventures . . . . (6) --- (6) Acquisitions . . . . . . . . . . . . . . . . . 12 1 13 Additions. . . . . . . . . . . . . . . . . . . --- 53 53 Disposals. . . . . . . . . . . . . . . . . . . (37) (5) (42) Exchange translation differences . . . . . . . 5 2 7 ----------- ----------- ----- At 31 December 2000. . . . . . . . . . . . . . 72 81 153 =========== =========== =====
The principal joint venture at 31 December 2000 is Giuffree (an Italian legal publisher in which Reed Elsevier has a 40% shareholding). The cost and net book amount of goodwill and intangible assets in joint ventures were 'L'37m and 'L'27m respectively (1999 'L'74m and 'L'49m). At 31 December 2000, the Reed Elsevier plc Employee Benefit Trust (EBT) held 590,257 (1999 618,790) Reed International ordinary shares and 320,000 (1999 320,000) Elsevier ordinary shares with an aggregate market value at that date of 'L'7.2m (1999 'L'5.1m). The EBT purchases Reed International and Elsevier shares which, at the Trustee's discretion, can be used in respect of the exercise of executive share options. Further details of these share option schemes is set out in Item 12: Description of securities other than equity securities. 18. Stocks
2000 1999 'L'm 'L'm ---- ---- Raw materials. . 17 20 Work in progress 26 29 Finished goods . 71 64 ---- ---- Total. . . . . . 114 113 ==== ====
19. Debtors --- amounts falling due within one year
2000 1999 'L'm 'L'm ---- ---- Trade debtors. . . . . . . . . 652 530 Amounts owed by joint ventures 3 1 Other debtors. . . . . . . . . 89 42 Prepayments and accrued income 116 93 ---- ---- Total. . . . . . . . . . . . . 860 666 ==== ====
20. Debtors --- amounts falling due after more than one year
2000 1999 'L'm 'L'm ---- ---- Trade debtors . . . . . . . . . . . . . . . . 1 9 Pension prepayment (see note 6) . . . . . . . 128 127 Prepayments, accrued income and other debtors 35 12 ---- ---- Total . . . . . . . . . . . . . . . . . . . . 164 148 ==== ====
91 21. Cash and short term investments
2000 1999 'L'm 'L'm ----- ---- Cash at bank and in hand 85 79 Short term investments 1,509 361 ----- ---- Total. . . . . . . . . . 1,594 440 ===== ====
Short term investments include deposits of under one year if the maturity or notice period exceeds 24 hours, commercial paper investments and interest bearing securities that can be realised without significant loss at short notice. 22. Creditors: amounts falling due within one year
2000 1999 'L'm 'L'm ----- ----- Borrowings Other loans. . . . . . . . . . . . . . . . . . 4 158 Promissory notes and bank loans. . . . . . . . 1,395 967 Obligations under finance leases (see note 25) 5 4 ----- ----- 1,404 1,129 Trade creditors . . . . . . . . . . . . . . . . 245 178 Other creditors . . . . . . . . . . . . . . . . 213 145 Taxation. . . . . . . . . . . . . . . . . . . . 193 120 Proposed dividends. . . . . . . . . . . . . . . 177 127 Accruals and deferred income. . . . . . . . . . 1,147 977 ----- ----- Total . . . . . . . . . . . . . . . . . . . . . 3,379 2,676 ===== =====
23. Creditors: amounts falling due after more than one year
2000 1999 'L'm 'L'm ---- ---- Borrowings Other loans repayable: Within one to two years. . . . . . . . . . . . 4 3 Within two to five years . . . . . . . . . . . 205 81 After five years . . . . . . . . . . . . . . . 402 279 Obligations under finance leases (see note 25) 12 14 ---- ---- 623 377 Other creditors . . . . . . . . . . . . . . . . . 27 14 Taxation . . . . . . . . . . . . . . . . . . . . 197 208 Accruals and deferred income . . . . . . . . . . 26 21 ---- ---- Total . . . . . . . . . . . . . . . . . . . . . . 873 620 ==== ====
92 24. Financial instruments Details of the objectives, policies and strategies pursued by Reed Elsevier in relation to financial instruments are set out in Item 11: Quantitative and Qualitative Disclosures about Market Risk. For the purpose of the disclosures which follow in this note, short term debtors and creditors have been excluded, as permitted under FRS13. Currency and interest rate profile of financial liabilities The currency and interest rate profile of the aggregate financial liabilities of 'L'2,147m (1999 'L'1,595m), after taking account of interest rate and cross currency interest rate swaps, is set out below:
Fixed rate financial liabilities ------------------------------- Floating rate Fixed rate Weighted financial financial Weighted average liabilities liabilities average duration 'L'm 'L'm interest rate (years) ------------ ----------- ----------------- ------------ 2000 US dollar. . . . 890 779 6.8% 8.0 Sterling . . . . 43 --- --- --- Euro . . . . . . 223 141 5.6% 6.0 Other currencies 65 6 5.9% 0.7 ------------ ----------- ----------------- ------------ Total. . . . . . 1,221 926 6.6% 7.7 ============ =========== ================= ============
Fixed rate financial liabilities ------------------------------- Floating rate Fixed rate Weighted financial financial Weighted average liabilities liabilities average duration 'L'm 'L'm interest rate (years) ------------ ----------- ----------------- ------------ 1999 US dollar. . . . 500 888 6.9% 7.4 Sterling . . . . 1 --- --- --- Euro . . . . . . 58 97 4.7% 1.7 Other currencies 31 20 6.7% 0.7 ------------ ----------- ----------------- ------------ Total. . . . . . 590 1,005 6.7% 6.7 ============ =========== ================= ============
Included within fixed rate financial liabilities as at 31 December 2000 are 'L'nil (1999 'L'154m) of US dollar term debt that matures within five months of the year end and 'L'73m of interest rate swaps denominated principally in US dollars that mature within twelve months of the year end (1999 'L'106m denominated principally in euros and maturing within nine months). 93 24. Financial instruments -- (continued) Currency and interest rate profile of financial assets The currency and interest rate profile of the aggregate financial assets of 'L'1,694m (1999 'L'479m), after taking account of interest rate swaps, is set out below:
2000 1999 -------------------------- -------------------------- Non interest Non interest Floating rate bearing Floating rate bearing financial financial financial financial assets assets assets assets 'L'm 'L'm 'L'm 'L'm ------------ ----------- ------------ ----------- US dollar. . . . 103 67 67 24 Sterling . . . . 622 16 146 15 Euro . . . . . . 834 1 149 o Other currencies 35 3 78 --- ------------ ----------- ------------ ----------- Total. . . . . . 1,594 87 440 39 ============ =========== ============ ===========
At 31 December 2000, there were fixed rate financial assets of 'L'13m (1999 'L'nil) denominated in US dollars, with a weighted average interest rate of 8.0% and a weighted average duration of 1.3 years. Floating rate interest rates payable on US commercial paper are based on US dollar commercial paper rates. Other financial assets and liabilities bear interest by reference to LIBOR or other national LIBOR equivalent interest rates. Included within non interest bearing financial assets are 'L'81m (1999 'L'30m) of investments denominated principally in sterling and US dollars which have no maturity date. Forward rate agreements are used principally to fix the interest expense on short term borrowings. At 31 December 2000, agreements totalling 'L'1,767m (1999 'L'387m) were in place to enter into interest rate swaps and interest rate options at future dates. Of these, individual agreements totalling 'L'946m (1999 'L'247m) were to fix the interest expense on US dollar borrowings commencing in 2001 and 2002 for periods of between two and ten years, at a weighed average interest rate of 6.8%. In addition, interest rate options totalling 'L'671m (1999 'L'nil) and starting in 2001 were to fix the interest expense on US dollar borrowings for periods of three to five years, at rates of between 5.7% and 6.7%. The other agreements totalling 'L'150m (1999 'L'140m) were to fix the interest income on sterling short term investments commencing in 2001 for a period of four months at a weighted average interest rate of 7.2%. Maturity profile of financial liabilities The maturity profile of financial liabilities at 31 December comprised:
2000 1999 'L'm 'L'm ----- ----- Repayable: Within one year. . . . . 1,426 1,131 Within one to two years 54 23 Within two to five years 237 112 After five years . . . . 430 329 ----- ----- Total . . . . . . . . . . 2,147 1,595 ===== =====
Financial liabilities repayable within one year include US commercial paper and euro commercial paper. Short term borrowings are supported by available committed facilities and by centrally managed cash and short term investments. As at 31 December 2000, a total of 'L'4,497m (1999 'L'617m) of undrawn committed facilities were available, of which 'L'2,389m (1999 'L'222m) matures within one year and 'L'2,108m within two to three years (1999 'L'395m within two to five years). Included within this amount is 'L'3,154m of committed facilities arranged in anticipation of the Harcourt acquisition; see note 29. Secured borrowings under finance leases were 'L'17m (1999 'L'18m). Currency exposure The business policy is to hedge all significant transaction exposures on monetary assets and liabilities fully and consequently there are no material currency exposures that would give rise to gains and losses in the profit and loss account in the functional currencies of the operating units. 94 24. Financial instruments -- (continued) Fair values of financial assets and liabilities The notional amount, book value and fair value of financial instruments are as follows:
2000 1999 --------------------------- --------------------------- Notional Book Notional Book amount value Fair value amount value Fair value 'L'm 'L'm 'L'm 'L'm 'L'm 'L'm -------- ------ --------- -------- ------ --------- Primary financial instruments held or issued to finance operations Investments . . . . . . . . . . . . . . . . . 81 81 30 30 Cash . . . . . . . . . . . . . . . . . . . . . 85 85 79 79 Short term investments . . . . . . . . . . . . 1,509 1,512 361 361 Other financial assets . . . . . . . . . . . . 19 19 9 9 Short term borrowings and current portion of long term borrowings. . . . . . . . . . . (1,404) (1,398) (1,129) (1,123) Long term borrowings . . . . . . . . . . . . . (623) (614) (377) (363) Other financial liabilities . . . . . . . . . (34) (34) (23) (23) Provisions . . . . . . . . . . . . . . . . . . (86) (86) (66) (66) ------ --------- ------ --------- (453) (435) (1,116) (1,096) ------ --------- ------ --------- Derivative financial instruments held to manage interest rate and currency exposur e Interest rate swaps . . . . . . . . . . . . . 1,612 (1) (49) 854 --- 14 Interest rate options . . . . . . . . . . . . 671 --- (17) --- --- --- Forward rate agreements . . . . . . . . . . . 885 --- (1) 450 --- --- Forward foreign exchange contracts . . . . . . 1,776 --- (38) 486 --- (7) Foreign exchange options . . . . . . . . . . . 50 --- (1) --- --- --- -------- ------ --------- -------- ------ --------- 4,994 (1) (106) 1,790 --- 7 -------- ------ --------- -------- ------ --------- Total financial instruments . . . . . . . . . . 4,994 (454) (541) 1,790 (1,116) (1,089) ======== ====== ========= ======== ====== =========
The amounts shown as the book value in respect of derivative financial instruments represent accruals or deferred income arising from these financial instruments. For certain instruments, including cash and investments, it has been assumed that the carrying amount approximates fair value because of the short maturity of these instruments. The fair value of long term debt has been based on current market rates offered to Reed Elsevier for debt of the same remaining maturities. The fair values for interest rate swaps, interest rate options and forward rate agreements represent the replacement cost calculated using market rates of interest at 31 December 2000 and 1999. The fair values of all other items have been calculated by discounting expected future cash flows at market rates. 95 24. Financial instruments -- (continued) Hedges The unrecognised and deferred gains and losses on financial instruments used for hedging purposes are as follows:
Unrecognised Deferred ------------ ------------ Gains Losses Gains Losses 'L'm 'L'm 'L'm 'L'm ----- ------ ----- ------ On hedges at 1 January 2000. . . . . . . . . . . . . . . . . . . . . . 22 (15) --- (18) Arising in previous years included in 2000 profit and loss account . . (21) 15 --- 8 ----- ------ ----- ------ Arising in previous years not included in 2000 profit and loss account 1 --- --- (10) Arising in 2000 not included in 2000 profit and loss account . . . . . 1 (108) 17 (14) ----- ------ ----- ------ On hedges at 31 December 2000. . . . . . . . . . . . . . . . . . . . . 2 (108) 17 (24) ===== ====== ===== ====== Of which: Expected to be included in 2001 profit and loss account . . . . . . . 1 (40) 6 (12) Expected to be included in 2002 profit and loss account or later . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 (68) 11 (12) ===== ====== ===== ======
25. Obligations under leases Future finance lease obligations are:
2000 1999 'L'm 'L'm ---- ---- Repayable: Within one year . . . . . . . . . . . . . . . . . . . . . . . 6 5 Within one to two years . . . . . . . . . . . . . . . . . . . 4 4 Within two to five years . . . . . . . . . . . . . . . . . . 1 4 After five years . . . . . . . . . . . . . . . . . . . . . . 11 10 Less: interest charges allocated to future periods . . . . . . (5) (5) ---- ---- Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 18 ==== ==== Obligations falling due within one year (see note 22). . . . . 5 4 Obligations falling due after more than one year (see note 23) 12 14 ---- ---- Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 18 ==== ====
Annual commitments under operating leases are:
2000 1999 'L'm 'L'm ---- ---- On leases expiring: Within one year. . . . . 4 4 Within two to five years 31 26 After five years . . . . 38 36 ---- ---- Total . . . . . . . . . . 73 66 ==== ====
Of the above annual commitments, 'L'71m relates to land and buildings (1999 'L'62m) and 'L'2m to other leases (1999 'L'4m). 96 26. Provisions for liabilities and charges
Surplus Deferred property taxation Other Total 'L'm 'L'm 'L'm 'L'm -------- -------- ----- ----- At 1 January 2000. . . . . . . . 64 36 13 113 Acquisitions . . . . . . . . . . --- (2) --- (2) Transfers. . . . . . . . . . . . --- 7 --- 7 Provided . . . . . . . . . . . . 16 (5) 1 12 Utilised . . . . . . . . . . . . (1) --- (7) (8) Exchange translation differences 5 1 --- 6 -------- -------- ----- ----- At 31 December 2000. . . . . . . 84 37 7 128 ======== ======== ===== =====
The surplus property provision relates to lease obligations for various periods up to 2012 and represents estimated sub-lease shortfalls in respect of properties which have been, or are in the process of being, vacated. Deferred taxation is analysed as follows:
2000 1999 'L'm 'L'm ---- ---- Deferred taxation liabilities Pension prepayment . . . . . . . . . . . . . . . . 37 36 Revaluation gains. . . . . . . . . . . . . . . . . 42 33 ---- ---- 79 69 Deferred taxation assets Excess of amortisation over related tax allowances (8) (9) Acquisition and related provisions . . . . . . . . (34) (24) ---- ---- (42) (33) ---- ---- Total . . . . . . . . . . . . . . . . . . . . . . . 37 36 ==== ====
27. Contingent liabilities There are contingent liabilities amounting to 'L'10m (1999 'L'23m) in respect of borrowings of former subsidiaries. 97 28. Combined shareholders' funds
Combined Combined share share premium Combined capitals accounts reserves Total 'L'm 'L'm 'L'm 'L'm -------- -------- -------- ----- At 31 December 1997. . . . . . . . . . . . . . . . . . . . . . . . . . 167 328 1,197 1,692 Profit attributable to parent companies' shareholders. . . . . . . . . --- --- 772 772 Ordinary dividends paid and proposed . . . . . . . . . . . . . . . . . --- --- (349) (349) Issue of ordinary shares . . . . . . . . . . . . . . . . . . . . . . . --- 18 --- 18 Exchange translation differences . . . . . . . . . . . . . . . . . . . 1 7 (11) (3) -------- -------- -------- ----- At 31 December 1998. . . . . . . . . . . . . . . . . . . . . . . . . . 168 353 1,609 2,130 Loss attributable to parent companies' shareholders. . . . . . . . . . --- --- (63) (63) Ordinary dividends paid and proposed . . . . . . . . . . . . . . . . . --- --- (234) (234) Issue of ordinary shares, less capital redemptions . . . . . . . . . . (4) 9 --- 5 Exchange translation differences . . . . . . . . . . . . . . . . . . . 4 (21) 34 17 -------- -------- -------- ----- At 31 December 1999. . . . . . . . . . . . . . . . . . . . . . . . . . 168 341 1,346 1,855 Profit attributable to parent companies' shareholders. . . . . . . . . --- --- 33 33 Ordinary dividends paid and proposed . . . . . . . . . . . . . . . . . --- --- (245) (245) Issue of ordinary shares, net of expenses and less capital redemptions 17 1,268 --- 1,285 Exchange translation differences . . . . . . . . . . . . . . . . . . . --- 12 101 113 -------- -------- -------- ----- At 31 December 2000. . . . . . . . . . . . . . . . . . . . . . . . . . 185 1,621 1,235 3,041 ======== ======== ======== =====
On 5 December 2000, following a joint international offering, Reed International issued 113,700,000 new 12.5 pence ordinary shares at 625 pence each and Elsevier issued 66,255,000 new 'E'0.06 ordinary shares at 'E'14.50 each. The purpose of the offering was to finance the proposed acquisition by Reed Elsevier of the Scientific, Technical and Medical business and the Schools Education and Testing businesses of Harcourt General, Inc. (see note 29). Combined share capital excludes the shares of Elsevier held by Reed International. Combined reserves include a 'L'4m (1999 'L'4m; 1998 'L'nil) capital redemption reserve following the redemption of non equity shares in Reed International in 1999. 29. Harcourt acquisition On 8 November 2000, Reed Elsevier plc group launched, through a US subsidiary, Reed Elsevier, Inc., a tender offer for the common stock and Series A cumulative convertible stock of Harcourt General, Inc. ("Harcourt"). The offer was unanimously recommended by the Harcourt board. The Smith family, which owns approximately 28% of the common stock of Harcourt, have undertaken to tender all their shares in the tender offer and to support the offer. Reed Elsevier Inc. has also signed a definitive agreement with The Thomson Corporation to on-sell the Harcourt Higher Education business and the Corporate and Professional Services businesses, other than educational and clinical testing. Following completion of the offer and the on-sale of businesses, Reed Elsevier plc will have acquired Harcourt's Scientific, Technical and Medical business and its Schools Education and Testing businesses for a net cost of US$4.5 billion after taking into account Harcourt's net debt, taxes payable on the on-sale proceeds and the assumption of corporate and other liabilities. In the year to 31 October 2000, these businesses had sales of US$1.7 billion and net assets of US$1.1 billion (including US$0.7 billion of goodwill and intangible assets) before corporate net debt of US$1.2 billion. The acquisition and the on-sale to Thomson are subject to regulatory approvals, which may require some divestment of assets or other behavioural undertakings. 98 30. US accounting information Summary of the principal differences between UK and Dutch GAAP and US GAAP The combined financial statements are prepared in accordance with UK and Dutch GAAP, which differ in certain significant respects from US GAAP. The principal differences that affect net income and combined shareholders' funds are explained below and their approximate effect is shown on F-33. Discontinued operations and sale of businesses Discontinued operations, as separately categorised in the profit and loss account under UK and Dutch GAAP and US GAAP, may relate only to significant business segments. Under UK and Dutch GAAP, such businesses are separately segmented as discontinued only when sale transactions or closures have been completed. Under US GAAP, such businesses are segmented as discontinued once formal commitment to sale or closure is made. Under US GAAP, net income from discontinued operations includes all operating results of the discontinued operations and the gain or loss on sale. Under UK and Dutch GAAP, operating results from discontinued activities are disclosed as a separate element within operating profit and the gain or loss on sale is disclosed as a non operating exceptional item. Goodwill and other intangible assets In the 1998 fiscal year, Reed Elsevier adopted the new UK financial reporting standard FRS 10: Goodwill and Intangible Assets, and changed its accounting policy for goodwill and intangible assets. Under the new policy, goodwill and intangible assets are being amortised through the profit and loss account over their estimated useful lives, up to a maximum of 20 years. In view of this and the consideration given to the determination of appropriate prudent asset lives, the remaining asset lives for US GAAP purposes were reviewed and determined consistently with those adopted for the new UK and Dutch GAAP treatment. This re-evaluation of asset lives under US GAAP, which was effective from 1 January 1998, significantly increased the periodic amortisation charge, as the unamortised value of existing assets, which were previously being amortised over periods up to 40 years, are now amortised over shorter periods. The gross cost under US GAAP, as at 31 December 2000, of goodwill is 'L'3,757m (1999 'L'3,042m; 1998 'L'2,958m) and of other intangible assets including those held in joint ventures is 'L'3,900m (1999 'L'3,285m; 1998 'L'3,161m). Accumulated amortisation under US GAAP, as at 31 December 2000, of goodwill is 'L'1,497m (1999 'L'1,180m; 1998 'L'877m) and of other intangible assets including those held in joint ventures is 'L'1,433m (1999 'L'1,174m; 1998 'L'994m). Deferred taxation The combined businesses provide in full for timing differences using the liability method. Under US GAAP, deferred taxation is provided on all temporary differences under the liability method subject to a valuation allowance on deferred tax assets where applicable, in accordance with SFAS 109, Accounting for Income Taxes. The principal adjustments to apply US GAAP are to provide deferred taxation on temporary differences arising on acquired intangible assets for which amortisation is not deductible for tax purposes, from the amortisation under US GAAP of goodwill and other intangible assets and the recognition of deferred tax assets on timing differences where those assets are not considered recoverable in the short term. Acquisition accounting Under UK and Dutch GAAP, severance and integration costs in relation to acquisitions are only expensed as incurred. Due to their size and incidence, under UK and Dutch GAAP, those costs are disclosed as exceptional items charged to operating profit. Under US GAAP, certain integration costs may be provided as part of purchase accounting adjustments on acquisition. Pensions The combined businesses account for pension costs under the rules set out in SSAP24. Its objectives and principles are broadly in line with SFAS 87, Employers' Accounting for Pensions. However, SSAP24 is less prescriptive in the application of the actuarial methods and assumptions to be applied in the calculation of pension costs. Under US GAAP, plan assets are valued by reference to market-related values at the date of the financial statements. Liabilities are assessed using the rate of return obtainable on fixed or inflation-linked bonds. Under UK GAAP, pension plan assets and liabilities are based on the results of the latest actuarial valuation. Pension assets are valued at the discounted present value determined by expected future income. Liabilities are assessed using the expected rate of return on plan assets. Short term obligations expected to be refinanced Under US GAAP, where it is expected to refinance short term obligations on a long term basis and this is supported by an ability to consummate the refinancing, such short term obligations should be excluded from current liabilities and shown as long term obligations. Under UK and Dutch GAAP, such obligations can only be excluded from current liabilities where, additionally, the debt and facility are under a single agreement or course of dealing with the same lender or group of lenders. Short term obligations at 31 December 2000 of 'L'1,101m (1999 'L'395m; 1998 'L'602m) would thus be excluded from current ities under US GAAP and shown as long term obligations. 99 30. US accounting information -- (continued) Ordinary dividends Under UK and Dutch GAAP, dividends are provided for in the year in respect of which they are proposed by the directors. Under US GAAP, such dividends would not be provided for until they are formally declared by the directors. Exceptional items Exceptional items are material items within the combined businesses' ordinary activities which, under UK and Dutch GAAP, are required to be disclosed separately due to their size or incidence. These items do not qualify as extraordinary under US GAAP and are considered a part of operating results. Adjusted earnings In the combined financial statements adjusted profit and cash flow measures are presented as permitted by UK and Dutch GAAP as an additional performance measures. US GAAP does not permit the presentation of alternative earnings measures. Accordingly, adjusted profit and adjusted cash flow are not regarded as alternative performance measures under US GAAP. Stock based compensation SFAS 123: Accounting for Stock Based Compensation, establishes a fair value based method of computing compensation cost. It encourages the application of this method in the profit and loss account instead of intrinsic value based methods. Where fair value based methods are not applied in the profit and loss account, the proforma effect on net income is disclosed. The disclosure only provisions of SFAS 123 have been adopted. If compensation costs based on fair value at the grant date had been recognised in the profit and loss account, net income under US GAAP would have been reduced by 'L'23m in 2000 (1999 'L'5m; 1998 'L'2m). Recently issued accounting pronouncements SFAS 133: Accounting for Derivative Instruments and Hedging Activities, was issued in June 1998 and, as amended by SFAS 138, is effective for the financial year beginning 1 January 2001. The standard requires all derivative instruments to be valued at fair value on the balance sheet. Changes in fair value are accounted for through the profit and loss account or comprehensive income statement, depending on a derivative's designation and effectiveness as a hedging instrument. On implementation, a cumulative transition adjustment of 'L'1m (loss) to the 2000 US GAAP net income and 'L'86m (loss) in other comprehensive income will be made. Under UK and Dutch GAAP, derivative instruments are recorded at appropriate historical cost amounts, with fair values shown as a disclosure item. FRS17: Retirement Benefits, was issued by the UK Accounting Standards Board in November 2000. As under SFAS 87, plan assets and liabilities are determined by, respectively, market-related values at the date of the financial statements and by discounting plan obligations using a market derived discount factor. Under FRS17, actuarial gains and losses are recognised in full in the balance sheet with movements recognised in the statement of total recognised gains and losses. This will differ from current US GAAP which does not require the full recognition of actuarial gains and losses, and also requires the amortisation of actuarial gains and losses to be recognised in the profit and loss account. The standard is required to be fully implemented in the 2003 financial year, with disclosures of the impact required in from 2001 years. The impact of adopting the standard cannot be reasonably estimated at this time. FRS19: Deferred Tax, was issued by the UK Accounting Standards Board in December 2000. FRS19 requires deferred tax to be provided in full except on timing differences arising where non-monetary assets are revalued and where there is no commitment to sell the asset and on the retained earnings of subsidiaries, joint ventures or associates where there is no commitment to remit such earnings. FRS19 is required to be implemented in the 2002 financial The standard is not expected to have a material impact on implementation. 100 30. US accounting information -- (continued) Effects on net income of material differences between UK and Dutch GAAP and US GAAP
2000 1999 1998 'L'm 'L'm 'L'm ---- ---- ---- Net income/(loss) under UK and Dutch GAAP . . . . . . 33 (63) 772 US GAAP adjustments: Amortisation of goodwill and other intangible assets (78) (83) (477) Deferred taxation. . . . . . . . . . . . . . . . . . 85 67 77 Pensions . . . . . . . . . . . . . . . . . . . . . . 22 6 30 Other items. . . . . . . . . . . . . . . . . . . . . (2) --- (4) ---- ---- ---- Net income/(loss) under US GAAP . . . . . . . . . . . 60 (73) 398 ==== ==== ==== Analysed: Continuing operations. . . . . . . . . . . . . . . . 60 (73) (122) Discontinued operations --- income from operations . . . . . . . . . . . . --- --- (1) --- gain on sales. . . . . . . . . . . . . . . . . --- --- 521 ---- ---- ---- Net income/(loss) under US GAAP . . . . . . . . . . . 60 (73) 398 ==== ==== ==== Effects>on combined shareholders' funds of material differences between UK and Dutch GAAP and US GAAP
2000 1999 'L'm 'L'm ----- ----- Combined shareholders' funds under UK and Dutch GAAP 3,041 1,855 US GAAP adjustments: Goodwill and other intangible assets . . . . . . . 604 553 Deferred taxation . . . . . . . . . . . . . . . . . (203) (180) Pensions . . . . . . . . . . . . . . . . . . . . . 86 63 Other items . . . . . . . . . . . . . . . . . . . . 2 5 Ordinary dividends not declared in the period . . . 177 127 ----- ----- Combined shareholders' funds under US GAAP . . . . . 3,707 2,423 ===== =====
Additional information Cash Flow Information Cash flows under UK and Dutch GAAP in respect of taxation, returns on investment, dividends received from joint ventures and servicing of finance would be included within operating activities under SFAS 95. Under SFAS 95 cash is aggregated for cash flow statements with cash equivalents, being short term investments with original maturities of three months or less. Under US GAAP, the following amounts would be reported:
2000 1999 1998 'L'm 'L'm 'L'm ----- ---- ---- Net cash provided by operating activities (including joint ventures) 605 584 501 Net cash used in investing activities. . . . . . . . . . . . . . . . (899) (286)(478) Net cash provided/(used) in financing activities . . . . . . . . . . 1,531 (341)(428) ----- ---- ---- Net increase/(decrease) in cash and cash equivalents . . . . . . . . 1,237 (43)(405) ===== ==== ==== Reconciliation of cash and cash equivalents: Cash under UK and Dutch GAAP . . . . . . . . . . . . . . . . . . . 85 79 26 Current asset investments with original maturity within 3 months . 1,509 268 394 ----- ---- ---- Cash and cash equivalents under US GAAP. . . . . . . . . . . . . . . 1,594 347 420 ===== ==== ====
101 30. US accounting information -- (continued) Comprehensive Income Information SFAS 130: Reporting Comprehensive Income, requires that all items that are required to be recognised as components of comprehensive income under US accounting standards are reported in a separate financial statement. Under US GAAP, the comprehensive gain for the year ended 31 December 2000 would be 'L'182m (1999 'L'(46)m; 1998 'L'389m). Comprehensive income under US GAAP comprises net income for the financial year, adjustments to the fair value of marketable securities and exchange translation differences. Under US GAAP, the following amounts would be reported:
2000 1999 1998 'L'm 'L'm 'L'm ---- ---- ---- Net income/(loss) under US GAAP . . . . . 60 (73) 398 Unrealised gains on marketable securities --- arising in the year. . . . . . . . . --- 1 11 --- recognised in net income/(loss). . . --- (3) (7) Exchange translation differences. . . . . 122 29 (13) ---- ---- ---- Comprehensive income/(loss) under US GAAP 182 (46) 389 ==== ==== ====
Pensions-- UK Scheme Reed Elsevier operates a number of pension schemes around the world. The major schemes are of a defined benefit type with assets held in separate trustee administered funds. The most significant scheme is the main UK scheme which covers the majority of UK employees. The main UK pension scheme is much more significant than the other Reed Elsevier pension schemes because it includes substantial numbers of pensioners and deferred pensioners retained when the manufacturing business of Reed International were divested in the late 1980s. The scheme is funded to cover future pension liabilities, including expected future earnings and pension increases, in respect of service up to the balance sheet date. The net pension costs/(credits) in respect of this scheme calculated in accordance with SFAS 87 were as follows:
2000 1999 1998 'L'm 'L'm 'L'm ---- ---- ---- Service costs --- benefits earned during the year 36 34 22 Interest cost on projected benefit obligations . 67 66 68 Expected return on plan assets. . . . . . . . . . (103) (99)(102) Net amortisation and deferral . . . . . . . . . . (15) (6) (21) ---- ---- ---- Net periodic pension credits. . . . . . . . . . . (15) (5) (33) ==== ==== ====
The following table sets forth the funded status under SFAS 87 of the main UK scheme:
2000 1999 1998 'L'm 'L'm 'L'm ------ ------ ------ Projected benefit obligation . . . (1,259) (1,301) (1,205) Plan assets at fair value. . . . . 1,747 1,776 1,530 ------ ------ ------ Excess of plan assets. . . . . . . 488 475 325 Unrecognised net gain . . . . . . (272) (269) (120) Unrecognised net transition asset (34) (43) (51) Unrecognised prior service cost . 15 19 23 ------ ------ ------ Prepaid pension cost . . . . . . . 197 182 177 ====== ====== ======
102 30. US accounting information -- (continued)
2000 1999 1998 'L'm 'L'm 'L'm ----- ----- ----- Projected benefit obligation Balance at 1 January. . . . . . . . . . . . . . . . . 1,301 1,205 924 Service cost . . . . . . . . . . . . . . . . . . . . 36 34 22 Interest cost. . . . . . . . . . . . . . . . . . . . 67 66 68 Prior service cost . . . . . . . . . . . . . . . . . 4 --- 20 Plan amendments. . . . . . . . . . . . . . . . . . . --- --- --- Actuarial (gain)/loss. . . . . . . . . . . . . . . . (91) 55 288 Contributions. . . . . . . . . . . . . . . . . . . . --- 3 4 Disbursements. . . . . . . . . . . . . . . . . . . . (58) (62) (46) Settlement and curtailment on disposal of businesses --- --- (75) ----- ----- ----- Balance at 31 December. . . . . . . . . . . . . . . . 1,259 1,301 1,205 ===== ===== =====
2000 1999 1998 'L'm 'L'm 'L'm ----- ----- ----- Fair value of assets Balance at 1 January. . . . . . . . . . . . . . . . . 1,776 1,530 1,462 Actual return. . . . . . . . . . . . . . . . . . . . 25 305 221 Contributions. . . . . . . . . . . . . . . . . . . . 4 3 4 Disbursements. . . . . . . . . . . . . . . . . . . . (58) (62) (46) Settlement and curtailment on disposal of businesses --- --- (111) ----- ----- ----- Balance at 31 December. . . . . . . . . . . . . . . . 1,747 1,776 1,530 ===== ===== =====
2000 1999 1998 'L'm 'L'm 'L'm ---- ---- ---- Prepaid pension cost Balance at 1 January. . . . . . . . . . . . . . . . . 182 177 159 Net periodic credit. . . . . . . . . . . . . . . . . 15 5 33 Settlement and curtailment on disposal of businesses --- --- (15) ---- ---- ---- Balance at 31 December. . . . . . . . . . . . . . . . 197 182 177 ==== ==== ====
The principal assumptions used were:
2000 1999 1998 'L'm 'L'm 'L'm ----- ----- ----- Discount rate . . 5.90% 5.25% 7.00% Salary increases 4.70% 5.00% 5.50% Investment return 6.20% 6.50% 8.00% Pension increases 2.70% 3.00% 3.50%
Plan assets are invested primarily in equities, index-linked securities and liquid assets. Pensions-- US Schemes The main US pension schemes cover approximately 14,000 of the US employees. The benefits are based on years of service and the employees' compensation. The funding policy is to contribute at least the minimum amount required by law. The net pension costs/(credits) in respect of this scheme calculated in accordance with SFAS 87 were as follows:
2000 1999 1998 'L'm 'L'm 'L'm ---- ---- ---- Service costs --- benefits earned during the year 18 18 13 Interest cost on projected benefit obligations . 15 12 11 Expected return on plan assets. . . . . . . . . . (16) (14) (17) Net amortisation and deferral . . . . . . . . . . (1) --- 4 Recognised net actuarial loss . . . . . . . . . . (1) --- --- ---- ---- ---- Net periodic pension cost . . . . . . . . . . . . 15 16 11 ==== ==== ====
103 30. US accounting information -- (continued) The following table sets forth the funded status under SFAS 87 of the principal US schemes including unfunded non-qualifying plans:
2000 1999 1998 'L'm 'L'm 'L'm ---- ---- ---- Projected benefit obligation . . (202) (159) (167) Plan assets at fair value. . . . 184 175 160 ---- ---- ---- (Deficit)/excess of plan assets (18) 16 (7) Unrecognised net actuarial gain (20) (48) (20) Unrecognised prior service cost (8) (9) --- ---- ---- ---- Accrued pension cost . . . . . . (46) (41) (27) ==== ==== ====
2000 1999 1998 'L'm 'L'm 'L'm ---- ---- ---- Projected benefit obligation Balance at 1 January. . . . . . . 159 167 141 Service cost . . . . . . . . . . 18 18 13 Interest cost. . . . . . . . . . 15 12 11 Plan amendments. . . . . . . . . 1 --- (6) Actuarial loss/(gain). . . . . . 13 (29) 15 Divestitures . . . . . . . . . . (7) --- --- Disbursements. . . . . . . . . . (11) (9) (7) Exchange translation adjustments 14 --- --- ---- ---- ---- Balance at 31 December. . . . . . 202 159 167 ==== ==== ====
2000 1999 1998 'L'm 'L'm 'L'm ---- ---- ---- Fair value of assets Balance at 1 January. . . . . . . 175 160 143 Actual return. . . . . . . . . . 1 20 17 Contributions. . . . . . . . . . 12 4 7 Divestitures . . . . . . . . . . (8) --- --- Disbursements. . . . . . . . . . (11) (9) (7) Exchange translation adjustments 15 --- --- ---- ---- ---- Balance at 31 December. . . . . . 184 175 160 ==== ==== ====
2000 1999 1998 'L'm 'L'm 'L'm ---- ---- ---- Accrued pension cost Balance at 1 January. . . . . . . (41) (27) (19) Additional obligations . . . . . --- (2) (4) Net periodic cost. . . . . . . . (15) (16) (11) Contributions. . . . . . . . . . 12 4 7 Exchange translation adjustments (2) --- --- ---- ---- ---- Balance at 31 December. . . . . . (46) (41) (27) ==== ==== ====
The principal assumptions used were:
2000 1999 1998 'L'm 'L'm 'L'm ------------- ------------- ------------- Discount rate . . 7.50% 8.00% 6.75% Salary increases 4.00% to 5.00% 4.50% to 5.00% 4.50% to 5.00% Investment return 9.00% 9.25% 9.50%
Plan assets are invested primarily in listed stocks and US bonds. 104 30. US accounting information -- (continued) Borrowings
2000 1999 'L'm 'L'm ----- ---- Bank loans, overdrafts and commercial paper Drawn under facilities expiring in year to 31 December 2000 . . . . . . . . . . . . . . . . . . . . . . . . --- 65 2001 . . . . . . . . . . . . . . . . . . . . . . . . 165 --- Commercial paper . . . . . . . . . . . . . . . . . . . 1,230 902 ----- ---- Total. . . . . . . . . . . . . . . . . . . . . . . . . 1,395 967 ===== ====
>
Year end interest rates 2000 1999 Currency % 'L'm 'L'm -------- ------------- ---- ---- Other loans and finance leases Private placement 2000 . . . . US dollar 9.71 --- 62 Public notes 2000. . . . . . . US dollar 6.63 --- 93 Private placement 2003 . . . . US dollar 8.50 84 77 Public notes 2005. . . . . . . US dollar 7.00 101 93 Loans Notes 2005 . . . . . . . Sterling 6.05 20 --- Swiss Domestic Bond 2007 . . . US dollar 7.05 201 --- Private placement 2023 . . . . US dollar 6.63 101 93 Public debentures 2025 . . . . US dollar 7.50 101 93 Finance leases . . . . . . . . Various Various 17 18 Miscellaneous. . . . . . . . . Euro Various 7 10 ---- ---- Total. . . . . . . . . . . . . 632 539 ==== ====
Interest rates disclosed above are those on the underlying borrowings and do not take account of net interest on interest rate swaps (see note 24).
Bank loans, overdrafts and Other loans commercial and finance paper leases Total 'L'm 'L'm 'L'm ------------- ---------- ----- Analysis by year of repayment Within 1 year . . . . . . . . 1,395 9 1,404 ------------- ---------- ----- Within 1 to 2 years . . . . . --- 7 7 Within 2 to 3 years . . . . . --- 85 85 Within 3 to 4 years . . . . . --- --- --- Within 4 to 5 years . . . . . --- 121 121 Thereafter. . . . . . . . . . --- 410 410 ------------- ---------- ----- --- 623 623 ------------- ---------- ----- Total . . . . . . . . . . . . 1,395 632 2,027 ============= ========== =====
105 30. US accounting information -- (continued)
Expiring Expiring within 1 year after 1 year Total 'L'm 'L'm 'L'm ------------ ----------- ----- Undrawn bank facilities at 31 December 2000 Overdraft . . . . . . . . . . . . . . . . . 73 --- 73 Uncommitted lines of credit . . . . . . . . 129 --- 129 Undrawn committed facilities. . . . . . . . 2,389 2,108 4,497
Of the 'L'2,108m undrawn committed facilities expiring after one year, 'L'158m was utilised by way of letters of credit which support short term borrowings. Of the undrawn credit facilities at 31 December 2000, 'L'3,154m relates to facilities put in place in anticipation of the acquisition of Harcourt ('L'2,148 expires with one year, 'L'1,007m expires after one year). The committed facilities are subject to covenants which restrict gross borrowings and secured borrowings by reference to Reed Elsevier's combined earnings before exceptional items, interest, tax, depreciation and amortisation. There is also a covenant restricting the ability to dispose of a substantial proportion of assets (except for full consideration) if such disposal materially and adversely affects the Reed Elsevier's combined net assets or combined attributable profit.
2000 1999 'L'm 'L'm ---- ---- Short term loans, overdrafts and commercial paper Weighted average interest rate during year. . . . 6.1% 5.0% Year end weighted average interest rate . . . . . 6.2% 5.7%
The weighted average interest rate for the year was computed by dividing actual interest expense for the year by the average month-end amounts outstanding for short term bank loans and commercial paper. 106 SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
Balance Balance at beginning Cost and Other at end of year expenses movements Deductions of year 'L'm 'L'm 'L'm 'L'm 'L'm ----------- -------- --------- ---------- ------- Year ended 31 December 1998 Allowance for doubtful receivables 39 18 1 (13) 45 Year ended 31 December 1999 Allowance for doubtful receivables 45 14 --- (13) 46 Year ended 31 December 2000 Allowance for doubtful receivables 46 18 2 (19) 47 Year ended 31 December 1998 Provisions against stocks. . . . . 40 9 --- (10) 39 Year ended 31 December 1999 Provisions against stocks. . . . . 39 5 --- (2) 42 Year ended 31 December 2000 Provisions against stocks. . . . . 42 6 --- (5) 43
107 REED INTERNATIONAL P.L.C. CONSOLIDATED FINANCIAL STATEMENTS 108 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of Reed International P.L.C. We have audited the accompanying consolidated balance sheets as of 31 December 2000 and 1999, and the related consolidated profit and loss accounts and statements of total recognised gains and losses, changes in shareholders' funds and cash flows for the three years ended 31 December 2000. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United Kingdom and the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Reed International P.L.C. and its subsidiaries at 31 December 2000 and 1999 and the results of their operations and their cash flows for the three years ended 31 December 2000 in conformity with accounting principles generally accepted in the United Kingdom (which differ in certain material respects from generally accepted accounting principles in the United States of America --- see note 23). DELOITTE & TOUCHE Chartered Accountants & Registered Auditors London, England 21 February 2001 109 REED INTERNATIONAL P.L.C. CONSOLIDATED PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31 DECEMBER 2000
2000 1999 1998 Note 'L'm 'L'm 'L'm ------ ------ ------ Turnover Including share of turnover of joint ventures. . . . . . . 1,994 1,793 1,688 Less: share of turnover of joint ventures. . . . . . . . . (1,994)(1,793) (1,688) ------ ------ ------ --- --- --- ------ ------ ------ Administrative expenses. . . . . . . . . . . . . . . . . . (1) (1) (1) ------ ------ ------ Operating loss (before joint ventures) . . . . . . . . . . 5 (1) (1) (1) ------ ------ ------ Share of operating profit of joint ventures Before amortisation and exceptional items . . . . . . . . 3 414 414 419 Amortisation of goodwill and intangible assets . . . . . (248) (197) (176) Exceptional items . . . . . . . . . . . . . . . . . . . . (60) (126) (42) ------ ------ ------ 106 91 201 ------ ------ ------ Operating profit including joint ventures. . . . . . . . . 105 90 200 ------ ------ ------ Non operating exceptional items. . . . . . . . . . . . . . 5 --- --- (5) Share of non operating exceptional items of joint ventures 3 45 4 366 ------ ------ ------ 45 4 361 ------ ------ ------ Net interest Group . . . . . . . . . . . . . . . . . . . . . . . . . . 8 5 3 5 Share of net interest of joint ventures . . . . . . . . . (59) (46) (26) ------ ------ ------ (54) (43) (21) ------ ------ ------ Profit on ordinary activities before taxation. . . . . . . 96 51 (144) Tax on profit on ordinary activities . . . . . . . . . . . 9 (85) (90) UK corporation tax . . . . . . . . . . . . . . . . . . . (2) 5 (1) Share of tax of joint ventures . . . . . . . . . . . . . (83) (95) (143) ------ ------ ------ Profit/(loss) attributable to ordinary shareholders . . . 11 (39) 396 Ordinary dividends paid and proposed . . . . . . . . . . . 10 (123) (116) (172) ------ ------ ------ Retained (loss)/profit taken to reserves . . . . . . . . . (112) (155) 224 ====== ====== ====== Adjusted figures Profit before tax . . . . . . . . . . . . . . . . . . . . 11 365 376 409 Profit attributable to ordinary shareholders . . . . . . 11 270 279 302 ====== ====== ======
Adjusted figures, which exclude the amortisation of goodwill and intangible assets, exceptional items and related tax effects, are presented as additional performance measures.
2000 1999 1998 Note pence pence pence ----- ----- ----- Earnings per ordinary share (EPS) Basic EPS . . . . . . . . . . . . . . . . . . . . . . . . 12 1.0 (3.4) 34.7 Diluted EPS . . . . . . . . . . . . . . . . . . . . . . . 12 1.0 (3.4) 34.6 EPS based on 52.9% economic interest in the Reed Elsevier combined businesses . . . . . . . . . . . . . . . . . . 12 1.5 (2.9) 35.7 Adjusted EPS. . . . . . . . . . . . . . . . . . . . . . . 12 23.3 24.4 26.4 ===== ===== =====
The above amounts derive from continuing activities. The accompanying notes on pages F-46 to F-56 are an integral part of these consolidated financial statements 110 REED INTERNATIONAL P.L.C. CONSOLIDATED CASH FLOW STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2000
2000 1999 1998 Note 'L'm 'L'm 'L'm ---- ---- ---- Net cash outflow from operating activities . . . . . . . . . 13 (1) (2) (5) Dividends received from Reed Elsevier plc. . . . . . . . . . 97 172 171 ---- ---- ---- Interest received . . . . . . . . . . . . . . . . . . . . . 4 3 5 ---- ---- ---- Returns on investments and servicing of finance. . . . . . . 4 3 5 ---- ---- ---- Taxation . . . . . . . . . . . . . . . . . . . . . . . . . . (1) 7 (1) ---- ---- ---- Ordinary dividends paid. . . . . . . . . . . . . . . . . . . (98) (173)(169) ---- ---- ---- Cash inflow before changes in short term investments and financing . . . . . . . . . . . . . . . . . . . . . . . 1 7 1 (Increase)/decrease in short term investments. . . . . . . . 13 (431) 2 --- Issue of ordinary shares. . . . . . . . . . . . . . . . . . 709 --- 14 Increase in net funding balances to Reed Elsevier plc group 13 (279) (9) (15) ---- ---- ---- Financing. . . . . . . . . . . . . . . . . . . . . . . . . . 430 (9) (1) ---- ---- ---- Change in net cash . . . . . . . . . . . . . . . . . . . . . --- --- --- ==== ==== ====
The accompanying notes on pages F-46 to F-56 are an integral part of these con- solidated financial statements 111 REED INTERNATIONAL P.L.C. CONSOLIDATED STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES FOR THE YEAR ENDED 31 DECEMBER 2000
2000 1999 1998 'L'm 'L'm 'L'm ---- ---- ---- Profit/(loss) attributable to ordinary shareholders 11 (39) 396 Exchange translation differences. . . . . . . . . . 60 9 (2) ---- ---- ---- Total recognised gains and losses for the year. . . 71 (30) 394 ==== ==== ====
Recognised gains and losses include gains of 'L'75m (1999 losses of 'L'37m, 1998 gains of 'L'396m) in respect of joint ventures. RECONCILIATION OF SHAREHOLDERS' FUNDS FOR THE YEAR ENDED 31 DECEMBER 2000
Consolidated ------------------ 2000 1999 1998 'L'm 'L'm 'L'm ----- ----- ----- Profit/(loss) attributable to ordinary shareholders 11 (39) 396 Ordinary dividends paid and proposed. . . . . . . . (123) (116) (172) Issue of ordinary shares, net of expenses . . . . . 708 4 14 Redemption of preference shares . . . . . . . . . . --- (4) --- Exchange translation differences. . . . . . . . . . 60 --- --- Equalisation adjustments. . . . . . . . . . . . . . (28) 9 (6) ----- ----- ----- Net increase/(decrease) in shareholders' funds. . . 628 (146) 232 Shareholders' funds at 1 January. . . . . . . . . . 981 1,127 895 ----- ----- ----- Shareholders' funds at 31 December. . . . . . . . . 1,609 981 1,127 ===== ===== =====
The accompanying notes on pages F-46 to F-56 are an integral part of these con- solidated financial statements 112 REED INTERNATIONAL P.L.C. CONSOLIDATED BALANCE SHEET AS AT 31 DECEMBER 2000
2000 1999 Note 'L'm 'L'm ------ ------ Fixed assets Investment in joint ventures: 14 Share of gross assets . . . . . . . . . . . . . . . . 3,534 2,825 Share of gross liabilities . . . . . . . . . . . . . . (2,733)(1,968) ------ ------ Share of net assets . . . . . . . . . . . . . . . . . 801 857 ------ ------ Current assets Debtors . . . . . . . . . . . . . . . . . . . . . . . . 15 513 233 Short term investments. . . . . . . . . . . . . . . . . 431 --- ------ ------ 944 233 Creditors: amounts falling due within one year. . . . . 16 (100) (73) ------ ------ Net current assets. . . . . . . . . . . . . . . . . . . 844 160 ------ ------ Total assets less current liabilities . . . . . . . . . 1,645 1,017 Creditors: amounts falling due after more than one year 17 (36) (36) ------ ------ Net assets. . . . . . . . . . . . . . . . . . . . . . . 1,609 981 ====== ====== Capital and reserves Called up share capital . . . . . . . . . . . . . . . . 18 158 143 Share premium account . . . . . . . . . . . . . . . . . 20 926 233 Capital redemption reserve. . . . . . . . . . . . . . . 20 4 4 Profit and loss reserve . . . . . . . . . . . . . . . . 20 521 601 ------ ------ Shareholders' funds . . . . . . . . . . . . . . . . . . 1,609 981 ====== ======
The accompanying notes on pages F-46 to F-56 are an integral part of these con- solidated financial statements 113 REED INTERNATIONAL P.L.C. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1. Basis of financial statements On 1 January 1993 Reed International and Elsevier contributed their businesses to two companies, Reed Elsevier plc and Elsevier Reed Finance BV. Reed Elsevier plc, which owns all the publishing and information businesses, is incorporated in England and Elsevier Reed Finance BV, which owns the financing and treasury companies, is incorporated in the Netherlands. Reed International and Elsevier each hold a 50% interest in Reed Elsevier plc. Reed International holds a 39% interest in Elsevier Reed Finance BV with Elsevier holding a 61% interest. Reed International additionally holds an indirect equity interest in Elsevier, reflecting the arrangements entered into between Reed International and Elsevier at the time of the merger, which determined the equalisation ratio whereby one Elsevier ordinary share is, in broad terms, intended to confer equivalent economic interests to 1.538 Reed International ordinary shares. Under the equalisation arrangements Reed International shareholders have a 52.9% economic interest in the Reed Elsevier combined businesses and Elsevier shareholders (other than Reed International) have a 47.1% interest. Holders of ordinary shares in Reed International and Elsevier enjoy substantially equivalent dividend and capital rights with respect to their ordinary shares. 2. Accounting policies Basis of preparation The consolidated financial statements have been prepared under the historical cost convention in accordance with UK GAAP. These principles differ in certain significant respects from US GAAP; see note 23. Amounts in the financial statements are stated in pounds sterling ("'L"'). The accounting policies adopted in the preparation of the combined financial statements are set out in note 2 to the Reed Elsevier combined financial statements. Determination of profit The Reed International share of the Reed Elsevier combined results has been calculated on the basis of the 52.9% economic interest of the Reed International shareholders in the Reed Elsevier combined businesses, after taking account of results arising in Reed International and its subsidiary undertakings. Dividends paid to Reed International and Elsevier shareholders are equalised at the gross level inclusive of the UK tax credit received by certain Reed International shareholders. In the financial statements, an adjustment is required to equalise the benefit of the tax credit between the two sets of shareholders in accordance with the equalisation agreement. This equalisation adjustment arises only on dividends paid by Reed International to its shareholders and reduces the attributable earnings of the company by 47.1% of the total amount of the tax credit. Basis of valuation of assets and liabilities Reed International's 52.9% economic interest in the net assets of the Reed Elsevier combined businesses has been shown on the balance sheet as interests in joint ventures, net of the assets and liabilities reported as part of Reed International and its subsidiary undertakings. Joint ventures are accounted for using the gross equity method. Translation of foreign currencies into sterling Profit and loss items are translated at average exchange rates. In the consolidated balance sheet, assets and liabilities are translated at rates ruling at the balance sheet date or contracted rates where applicable. The gains or losses relating to the retranslation of Reed International's 52.9% economic interest in the net assets of the combined businesses are taken directly to reserves. Taxation Deferred taxation is provided in full for timing differences using the liability method. No provision is made for tax which might become payable on the distribution of retained profits by foreign subsidiaries or joint ventures unless there is an intention to distribute such retained earnings giving rise to a charge. Deferred tax assets are only recognised to the extent that they are recoverable in the short term. Deferred taxation balances are not discounted. 114 3. Income from interests in joint ventures
2000 1999 1998 'L'm 'L'm 'L'm ---- ---- ---- Share of operating profit before amortisation and exceptional items (based on 52.9% economic interest in the Reed Elsevi er combined businesses) . . . . . 419 419 430 Effect of tax credit equalisation on distributed earnings (see note 4). . . . (6) (6) (12) Items consolidated within Reed International group. . . . . . . . . . . . . . 1 1 1 ---- ---- ---- 414 414 419 ==== ==== ==== Share of non operating exceptional items Reed Elsevier combined results (52.9%). . . . . . . . . . . . . . . . . . . . 45 4 361 Items consolidated within Reed International group (see note 5) . . . . . . . --- --- 5 ---- ---- ---- 45 4 366 ==== ==== ====
Segmental analysis of the Reed Elsevier combined results is shown in the Reed Elsevier combined financial statements. 4. Effect of tax credit equalisation on distributed earnings The equalisation adjustment arises only on dividends paid by Reed International to its shareholders and reduces the earnings of the company by 47.1% of the total amount of the tax credit, as set out in the accounting policies on page F-46. 5. Operating loss The operating loss comprises administrative expenses and includes 'L'255,000 (1999 'L'510,000; 1998 'L'388,000) paid in the year to Reed Elsevier plc under a contract for the services of directors and administrative support. The company has no employees (1999 nil; 1998 nil). Exceptional costs of 'L'5m were paid to Reed Elsevier plc in 1998, in respect of professional fees and other expenses relating to the abandoned merger of the Reed International, Elsevier and Wolters Kluwer businesses. 6. Auditors' remuneration Audit fees payable for the group were 'L'22,000 (1999 'L'21,000; 1998 'L'21,000). Non audit fees payable by the company to its auditors in connection with the share offering were 'L'350,000 (1999 'L'nil; 1998 'L'164,000). 7. Directors' emoluments Information on directors' remuneration, share options, longer term incentive plans, pension contributions and entitlements is set out in Item 6: Directors, Senior Management and Employees and forms part of these financial statements. 8. Net interest
2000 1999 1998 'L'm 'L'm 'L'm ---- ---- ---- Interest payable and similar charges On loans from Reed Elsevier plc group --- (4) (4) Interest receivable and similar income On short term investments . . . . . . 2 --- --- On loans to Reed Elsevier plc group . 3 7 9 ---- ---- ---- Net interest income. . . . . . . . . . 5 3 5 ==== ==== ====
115 9. Tax on profit on ordinary activities
2000 1999 1998 'L'm 'L'm 'L'm ---- ---- ---- UK corporation tax . . . . . . . . . . . . 2 (5) 1 Share of tax arising in joint ventures: Before amortisation and exceptional items 94 103 106 On amortisation and exceptional items . . (11) (8) 37 ---- ---- ---- Total. . . . . . . . . . . . . . . . . . . 85 90 144 ==== ==== ====
UK corporation tax has been provided at 30.00% (1999 30.25%; 1998 31.0%). The share of tax arising in joint ventures in 2000 and 1999 is high as a proportion of the share of profit before tax principally due to non-tax deductible amortisation and the non-recognition of potential deferred tax assets. 10. Dividends
2000 1999 1998 'L'm 'L'm 'L'm ----- ----- ----- Interim. . . . . . . . . . . . . . 35 53 52 Final (2000 proposed). . . . . . . 88 63 120 ----- ----- ----- Total. . . . . . . . . . . . . . . 123 116 172 ===== ===== ===== 2000 1999 1998 pence pence pence ----- ----- ----- Ordinary shares of 12.5 pence each Interim . . . . . . . . . . . . . 3.10 4.60 4.60 Final (2000 proposed) . . . . . . 6.90 5.40 10.40 ----- ----- ----- Total. . . . . . . . . . . . . . . 10.00 10.00 15.00 ===== ===== =====
116 11. Adjusted figures
2000 1999 1998 'L'm 'L'm 'L'm ---- ---- ---- Profit before tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96 51 540 Effect of tax credit equalisation on distributed earnings . . . . . . . . . 6 6 12 ---- ---- ---- Profit before tax based on 52.9% economic interest in the Reed Elsevier combined businesses . . . . . . . . . . . . . . . . . . . . . . . . . . . 102 57 552 Adjustments: Amortisation of goodwill and intangible assets . . . . . . . . . . . . . . 248 197 176 Exceptional items . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 122 (319) ---- ---- ---- Adjusted profit before tax. . . . . . . . . . . . . . . . . . . . . . . . . 365 376 409 ==== ==== ==== Profit/(loss) attributable to ordinary shareholders . . . . . . . . . . . . 11 (39) 396 Effect of tax credit equalisation on distributed earnings . . . . . . . . . 6 6 12 ---- ---- ---- Profit/(loss) attributable to ordinary shareholders based on 52.9% economic interest in the Reed Elsevier combined bus inesses . . . . . . . . . . . . 17 (33) 408 Adjustments: Amortisation of goodwill and intangible assets . . . . . . . . . . . . . . 248 197 176 Exceptional items . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 115 (282) ---- ---- ---- Adjusted profit attributable to ordinary shareholders . . . . . . . . . . . 270 279 302 ==== ==== ====
2000 1999 1998 pence pence pence ----- ----- ----- Basic earnings/(loss) per ordinary share . . . . . . . . . . . . . . . 1.0 (3.4) 34.7 Effect of tax credit equalisation on distributed earnings. . . . . . . 0.5 0.5 1.0 ----- ----- ----- Earnings/(loss) per share based on 52.9% economic interest in the Reed Elsevier combined businesses . . . . . . . . . . . . . . . . . . . . 1.5 (2.9) 35.7 Adjustments: Amortisation of goodwill and intangible assets . . . . . . . . . . . 21.4 17.2 15.4 Exceptional items . . . . . . . . . . . . . . . . . . . . . . . . . . 0.4 10.1 (24.7) ----- ----- ----- Adjusted earnings per ordinary share . . . . . . . . . . . . . . . . . 23.3 24.4 26.4 ===== ===== =====
117 12. Earnings per ordinary share (EPS)
2000 ------------------------------ Weighted average number Earnings of shares EPS 'L'm (millions) pence -------- ------------- ----- Basic EPS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 1,156.4 1.0 Diluted EPS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 1,161.2 1.0 EPS based on 52.9% economic interest in the Reed Elsevier combined businesses 17 1,156.4 1.5 Adjusted EPS (see note 11). . . . . . . . . . . . . . . . . . . . . . . . . . 270 1,156.4 23.3 ======== ============= =====
1999 ------------------------------ Weighted average number Earnings of shares EPS 'L'm (millions) pence -------- ------------- ----- Basic EPS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (39) 1,145.1 (3.4) Diluted EPS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (39) 1,145.3 (3.4) EPS based on 52.9% economic interest in the Reed Elsevier combined businesses (33) 1,145.1 (2.9) Adjusted EPS (see note 11). . . . . . . . . . . . . . . . . . . . . . . . . . 279 1,145.1 24.4 ======== ============= =====
1998 ------------------------------ Weighted average number Earnings of shares EPS 'L'm (millions) pence -------- ------------- ----- Basic EPS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 396 1,142.6 34.7 Diluted EPS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 396 1,144.6 34.6 EPS based on 52.9% economic interest in the Reed Elsevier combined businesses 408 1,142.6 35.7 Adjusted EPS (see note 11). . . . . . . . . . . . . . . . . . . . . . . . . . 302 1,142.6 26.4 ======== ============= =====
The diluted EPS figures are calculated after taking account of the effect of share options. 13. Cashflow statement
2000 1999 1998 Reconciliation of operating profit to net cash flow from operating activities 'L'm 'L'm 'L'm ---- ---- ---- Operating loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1) (1) (1) Non operating exceptional items . . . . . . . . . . . . . . . . . . . . . . . --- --- (5) Net movement in debtors and creditors . . . . . . . . . . . . . . . . . . . . --- (1) 1 ---- ---- ---- Net cash outflow from operating activities. . . . . . . . . . . . . . . . . . (1) (2) (5) ==== ==== ====
Net funding Short term balances to Reed investments Elsevier plc group Total 'L'm 'L'm 'L'm ----------- ----------------- ----- Reconciliation of net borrowings At 31 December 1997. . . . . . . 2 173 175 Cash flow. . . . . . . . . . . . o 15 15 ----------- ----------------- ----- At 31 December 1998. . . . . . . 2 188 190 Cash flow. . . . . . . . . . . . (2) 9 7 ----------- ----------------- ----- At 31 December 1999. . . . . . . o 197 197 Cash flow. . . . . . . . . . . . 431 279 710 ----------- ----------------- ----- At 31 December 2000. . . . . . . 431 476 907 =========== ================= =====
118 14. Fixed asset investments
2000 1999 'L'm 'L'm ---- ----- Investment in joint ventures Share of operating profit. . . . . . . . 106 91 Share of non operating exceptional items 45 4 Share of net interest payable. . . . . . (59) (46) ---- ----- Share of profit before tax . . . . . . . 92 49 Share of taxation. . . . . . . . . . . . (83) (95) ---- ----- Share of profit/(loss) after tax . . . . 9 (46) Dividends received . . . . . . . . . . . (97) (172) Exchange translation differences . . . . 60 9 Equalisation adjustments . . . . . . . . (28) --- ---- ----- Net movement in the year . . . . . . . . (56) (209) At 1 January . . . . . . . . . . . . . . 857 1,066 ---- ----- At 31 December . . . . . . . . . . . . . 801 857 ==== =====
The investment in joint ventures comprises the group's share at the following amounts of:
2000 1999 'L'm 'L'm ------ ------ Fixed assets. . . . . . . . . . . . . . . . . . . . . . 2,484 2,066 Current assets. . . . . . . . . . . . . . . . . . . . . 1,050 759 Creditors: amounts falling due within one year. . . . . (2,200) (1,576) Creditors: amounts falling due after more than one year (462) (328) Provisions. . . . . . . . . . . . . . . . . . . . . . . (68) (60) Minority interests. . . . . . . . . . . . . . . . . . . (3) (4) ------ ------ Total . . . . . . . . . . . . . . . . . . . . . . . . . 801 857 ====== ======
Included within share of current assets and creditors are cash and short term investments of 'L'412m (1999 'L'233m) and borrowings of 'L'1,072m (1999 'L'797m) respectively. 15. Debtors
Consolidated ------------ 2000 1999 'L'm 'L'm ----- ----- Amounts owed by Reed Elsevier plc group 512 233 Other debtors . . . . . . . . . . . . . 1 --- ----- ----- Total . . . . . . . . . . . . . . . . . 513 233 ===== =====
Amounts falling due after more than one year are 'L'40m (1999 'L'40m). These amounts are denominated in sterling and earn interest at a fixed rate of 9.8% (1999 9.8%) for a duration of seven years (1999 eight years). At 31 December 2000 these amounts had a fair value of 'L'49m (1999 'L'44m). 16. Creditors: amounts falling due within one year
Consolidated ------------ 2000 1999 'L'm 'L'm ----- ----- Proposed dividend 88 63 Taxation. . . . . 10 9 Other creditors . 2 1 ----- ----- Total . . . . . . 100 73 ===== =====
119 17. Creditors: amounts falling due after more than one year
Consolidated ------------ 2000 1999 'L'm 'L'm ----- ----- Amounts owed to Reed Elsevier plc group 36 36 ===== =====
These amounts are denominated in sterling and earn interest at a fixed rate of 10.5% (1999 10.5%) for a duration of five years (1999 six years). At 31 December 2000 these amounts had a fair value of 'L'43m (1999 'L'44m). 18. Called up share capital
Authorised Issued and fully paid ---------- -------------------- 2000 2000 1999 'L'm 'L'm 'L'm ---------- --------- --------- Ordinary shares of 12.5p each . . 158 158 143 Unclassified shares of 12.5p each 26 --- --- ---------- --------- --------- Total . . . . . . . . . . . . . . 184 158 143 ========== ========= =========
On 5 December 2000, the company issued 113,700,000 new 12.5 pence ordinary shares at 625 pence each following a joint international offering by Reed International and Elsevier. The purpose of the offering was to finance the proposed acquisition by Reed Elsevier of the Scientific, Technical and Medical business and the Schools Education and Testing businesses of Harcourt General, Inc. The nominal value of the shares issued by the company was 'L'14.2m and the net proceeds were 'L'694m. Details of shares issued under share option schemes are set out in note 19. 19. Share option schemes Reed Elsevier plc operates a savings related share option scheme which is open to all UK employees of Reed Elsevier plc and participating companies under its control who are in employment on a predetermined date prior to the date of invitation. The following options have been granted over Reed International ordinary shares, and may be exercised at the end of the savings period at a price equivalent to not less than 80% of the market value of the Reed International ordinary shares at the time of grant. Transactions during the three financial periods ended 31 December 2000 were:
Number of Exercise ordinary price shares (pence) ---------- ----------- Outstanding at 31 December 1997 6,437,483 Granted . . . . . . . . . . . 881,830 499.2 Exercised . . . . . . . . . . (2,032,556) 263.0-499.2 Lapsed . . . . . . . . . . . . (1,339,934) ---------- Outstanding at 31 December 1998 3,946,823 Granted . . . . . . . . . . . 1,251,005 430.0 Exercised . . . . . . . . . . (663,233) 263.0-499.2 Lapsed . . . . . . . . . . . . (755,857) ---------- Outstanding at 31 December 1999 3,778,738 Granted . . . . . . . . . . . 2,542,410 336.2 Exercised . . . . . . . . . . (824,500) 320.6-499.2 Lapsed . . . . . . . . . . . . (1,121,753) ---------- Outstanding at 31 December 2000 4,374,895 ==========
The above options will, upon exercise, be met by the issue of new Reed International ordinary shares. Options outstanding at 31 December 2000 were exercisable by 2006. 79,506 options had vested at 31 December 2000. 120 Reed Elsevier plc operates an executive share option scheme and options are granted to selected full time employees of Reed Elsevier. Options are granted over Reed International ordinary shares, and are normally exercisable after three years and may be exercised up to ten years from the date of grant at a price equivalent to the market value of the Reed International ordinary shares at the time of grant. Transactions under the Reed Elsevier plc Executive Schemes and the Reed International Executive Schemes during the three financial periods ended 31 December 2000 were:
Number of Exercise ordinary price shares (pence) ---------- ----------- Outstanding at 31 December 1997 12,256,000 Granted . . . . . . . . . . . 1,125,400 523.0-611.0 Exercised . . . . . . . . . . (2,067,200) 208.7-585.2 Lapsed . . . . . . . . . . . . (829,200) ---------- Outstanding at 31 December 1998 10,485,000 Granted . . . . . . . . . . . 14,522,906 424.0-537.5 Exercised . . . . . . . . . . (468,900) 201.0-410.2 Lapsed . . . . . . . . . . . . (798,033) ---------- Outstanding at 31 December 1999 23,740,973 Granted . . . . . . . . . . . 3,401,931 436.5-700.0 Exercised . . . . . . . . . . (2,295,145) 188.7-585.2 Lapsed . . . . . . . . . . . . (1,122,384) ---------- Outstanding at 31 December 2000 23,725,375 ========== 121 20. Reserves
Consolidated ------------------------------------------ Share Capital premium redemption Profit and loss account reserve reserve Total 'L'm 'L'm 'L'm 'L'm ------- ---------- -------------- ----- At 1 January 1998. . . . . . . . . . . . . . 215 --- 533 748 Issue of ordinary shares, net of expenses. . 14 --- --- 14 Profit attributable to ordinary shareholders --- --- 396 396 Ordinary dividends paid and proposed . . . . --- --- (172) (172) Exchange translation differences . . . . . . --- --- (6) (6) ------- ---------- -------------- ----- At 31 December 1998. . . . . . . . . . . . . 229 --- 751 980 Issue of ordinary shares, net of expenses. . 4 --- --- 4 Redemption of preference shares. . . . . . . --- 4 (4) --- Loss attributable to ordinary shareholders . --- --- (39) (39) Ordinary dividends paid and proposed . . . . --- --- (116) (116) Exchange translation differences . . . . . . --- --- 9 9 ------- ---------- -------------- ----- At 31 December 1999. . . . . . . . . . . . . 233 4 601 838 Issue of ordinary shares, net of expenses. . 693 --- --- 693 Profit attributable to ordinary shareholders --- --- 11 11 Ordinary dividends paid and proposed . . . . --- --- (123) (123) Exchange translation differences . . . . . . --- --- 60 60 Equalisation adjustments . . . . . . . . . . --- --- (28) (28) ------- ---------- -------------- ----- At 31 December 2000. . . . . . . . . . . . . 926 4 521 1,451 ======= ========== ============== =====
Equalisation adjustments relate to equity accounting effects in respect of the proceeds of the joint international offering (see note 18). Reed International's share of the revenue reserves of the Reed Elsevier combined businesses is 'L'651m (1999 'L'710m). 21. Contingent liabilities There are contingent liabilities in respect of borrowings of the Reed Elsevier plc group and Elsevier Reed Finance BV group guaranteed by Reed International as follows:
2000 1999 'L'm 'L'm ----- ----- Guaranteed jointly and severally with Elsevier 1,827 1,431 Guaranteed solely by Reed International. . . . --- 1 ===== =====
Financial instruments disclosures in respect of the borrowings covered by the above guarantees are given in note 24 to the Reed Elsevier combined financial statements. 22. Capital commitments Details of the capital commitments of the company's joint ventures are disclosed in note 29 to the Reed Elsevier combined financial statements. 122 23. Summary of the principal differences between UK and US GAAP The consolidated financial statements are prepared in accordance with UK GAAP, which differ in certain significant respects from US GAAP. These differences relate principally to the following items and the effect of material differences on net income and shareholders' funds is shown in the following tables. Impact of US GAAP adjustments to combined financial statements Reed International accounts for its 52.9% economic interest in the Reed Elsevier combined businesses, before the effect of tax credit equalisation (see note 4), by the gross equity method in conformity with UK GAAP which is similar to the equity method in US GAAP. Using the equity method to present its net income and shareholders' funds under US GAAP, Reed International reflects its 52.9% share of the effects of differences between UK and US GAAP relating to the combined businesses as a single reconciling item. The most significant differences relate to the capitalisation and amortisation of goodwill and other intangibles, and deferred taxes. A more complete explanation of the accounting policies used by the Reed Elsevier combined businesses and the differences between UK and US GAAP is given in note 30 to the Reed Elsevier combined financial statements. Ordinary dividends Under UK GAAP, dividends are provided for in the year in respect of which they are proposed by the directors. Under US GAAP, such dividends would not be provided for until they are formally declared by the directors. Exceptional items Exceptional items are material items within Reed International's ordinary activities which under UK GAAP are required to be disclosed separately due to their size or incidence. These items do not qualify as extraordinary under US GAAP and are considered a part of operating results. Earnings per share Under UK and US GAAP both basic and fully diluted earnings per share are required to be presented. Diluted earnings per share take account of the effects of additional ordinary shares that would be in issue if outstanding dilutive potential shares had been exercised (see note 12). Stock based compensation SFAS 123: Accounting for Stock Based Compensation, establishes a fair value based method of computing compensation cost. It encourages the application of this method in the profit and loss account instead of intrinsic value based methods. Where fair values are not applied, the proforma effect on net income must be disclosed. The disclosure only provisions of SFAS 123 have been adopted. If Reed International's share of the combined businesses compensation costs based on fair value at the grant dates had been recognised in the profit and loss account, net income under US GAAP would have been reduced by 'L'12m in 2000 (1999 'L'2m). Proforma basic gain/(loss) per share, reflecting this cost, would have been 1.2p (1999 (4.4)p). The fair value of each option grant is estimated on the date of the grant using the Black Scholes option pricing model with the following assumptions for grants:
2000 1999 ------------- ------------- Expected life (years) . 1-4 1-5 Expected dividend yield 1.90%-2.30% 3.00%-3.20% Expected volatility . . 35.66%-44.11% 34.91%-39.67% Risk-free interest rate 5.30%-5.50% 5.25%-5.75%
Effects on net income of material differences between UK GAAP and US GAAP
2000 1999 1998 'L'm 'L'm 'L'm ---- ---- ---- Net income/(loss) under UK GAAP. . . . . . . . . . . . . . . . . 11 (39) 396 Impact of US GAAP adjustments to combined financial statements . 16 (8)(205) ---- ---- ---- Net income/(loss) under US GAAP. . . . . . . . . . . . . . . . . 27 (47) 191 ==== ==== ==== Basic earnings/(loss) per ordinary share under US GAAP (pence) . 2.3p (4.1)p6.7p ==== ==== ==== Diluted earnings/(loss) per ordinary share under US GAAP (pence) 2.3p (4.1)p6.7p ==== ==== ====
123 The basic and diluted (loss)/earnings per ordinary share under US GAAP includes a 52.9% share of the following items: (i) for 2000, 3.5p loss in respect of the costs of a major programme of reorganisation across the Reed Elsevier businesses commenced in 1999 and 3.9p gain in respect of businesses disposed in 2000; (ii) for 1999, 7.3p loss in respect of the costs of a major programme of reorganisation across the Reed Elsevier businesses; and (iii) for 1998, 24.1p in respect of profit on sale (under US GAAP) of discontinued businesses and 12.3p loss in respect of the non-recurring element of the incremental amortisation of goodwill and intangibles arising as a consequence of the re-evaluation of the combined businesses' asset lives. Effects on shareholders' funds of material differences between UK and US GAAP
2000 1999 'L'm 'L'm ----- ----- Shareholders' funds under UK GAAP. . . . . . . . . . . . . . . 1,609 981 Impact of US GAAP adjustments to combined financial statements 264 238 Ordinary dividends not declared in the period. . . . . . . . . 88 63 ----- ----- Shareholders' funds under US GAAP. . . . . . . . . . . . . . . 1,961 1,282 ===== =====
Comprehensive Income Information SFAS 130: Reporting Comprehensive Income, requires that all items that are required to be recognised as components of comprehensive income under US GAAP are reported in a separate financial statement. Under US GAAP comprehensive income for 2000 would be 'L'74m (1999 'L'44m loss; 1998 'L'187m income). Under US GAAP comprehensive income per share for 2000 would be 6.4p (1999 3.9p loss; 1998 16.3p income). Comprehensive income under US GAAP comprises net income for the financial year, share of the comprehensive income items arising in the combined businesses, equalisation and exchange translation differences. 124 ELSEVIER NV FINANCIAL STATEMENTS 125 REPORT OF INDEPENDENT ACCOUNTANTS To the members of the Supervisory and Executive Boards and the Shareholders of Elsevier NV. We have audited the accompanying balance sheets as of 31 December 2000 and 1999, and the related profit and loss accounts and statements of total recognised gains and losses, changes in shareholders' funds and cash flows for the three years ended 31 December 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the Netherlands and the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the financial position of Elsevier NV at 31 December 2000 and 1999 and the results of its operations and its cash flows for the three years ended 31 December 2000 in conformity with accounting principles generally accepted in the Netherlands (which differ in certain material respects from generally accepted accounting principles in the United States of America --- see note 15). DELOITTE & TOUCHE Accountants Amsterdam, The Netherlands 21 February 2001 126 ELSEVIER NV PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31 DECEMBER 2000
2000 1999 1998 Note 'E'm 'E'm 'E'm ------ ------ ------ Turnover Including share of turnover of joint ventures. . . . . . . 3,091 2,577 2,375 Less: share of turnover of joint ventures. . . . . . . . . (3,091)(2,577) (2,375) ------ ------ ------ --- --- --- Administrative expenses. . . . . . . . . . . . . . . . . . (3) (5) (7) ------ ------ ------ Operating loss (before joint ventures) . . . . . . . . . . 3 (3) (5) (7) ------ ------ ------ Share of operating profit of joint ventures Before amortisation and exceptional items . . . . . . . . 654 608 612 Amortisation of goodwill and intangible assets . . . . . (384) (284) (247) Exceptional items . . . . . . . . . . . . . . . . . . . . (95) (182) (59) ------ ------ ------ 175 142 306 ------ ------ ------ Operating profit including joint ventures. . . . . . . . . 172 137 299 ------ ------ ------ Non operating exceptional items. . . . . . . . . . . . . . --- --- (8) Share of non operating exceptional items of joint ventures 70 6 516 ------ ------ ------ 70 6 508 ------ ------ ------ Net interest Group . . . . . . . . . . . . . . . . . . . . . . . . . . 4 7 3 4 Share of net interest of joint ventures . . . . . . . . . (92) (66) (34) ------ ------ ------ (85) (63) (30) ------ ------ ------ Profit on ordinary activities before taxation. . . . . . . 157 80 777 Tax on profit on ordinary activities . . . . . . . . . . . (130) (128) (203) ------ ------ ------ Profit/(loss) attributable to ordinary shareholders . . . 27 (48) 574 Ordinary dividends paid and proposed . . . . . . . . . . . (200) (179) (263) ------ ------ ------ Retained (loss)/profit taken to reserves . . . . . . . . . (173) (227) 311 ====== ====== ====== Adjusted figures Profit before tax . . . . . . . . . . . . . . . . . . . . 5 566 540 575 Profit attributable to ordinary shareholders . . . . . . 5 419 401 425 ====== ====== ======
Adjusted figures, which exclude the amortisation of goodwill and intangible assets, exceptional items and related tax effects, are presented as additional performance measures.
2000 1999 1998 Note 'E' 'E' 'E' ---- ----- ---- Earnings per share (EPS) Basic EPS . . . . . . . 5 0.04 (0.07) 0.81 Diluted EPS . . . . . . 0.03 (0.07) 0.81 Adjusted EPS . . . . . 5 0.59 0.57 0.60 ==== ===== ====
The above amounts derive from continuing activities.
2000 1999 1998 ---- ---- ---- Weighted average number of shares (in millions) Basic . . . . . . . . . . . . . . . . . . . . 715 708 708 Diluted . . . . . . . . . . . . . . . . . . . 716 709 709 ==== ==== ====
The accompanying notes on pages F-62 to F-68 are an integral part of these financial statements. 127 ELSEVIER NV CASH FLOW STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2000
2000 1999 1998 'E'm 'E'm 'E'm ----- ---- ---- Net cash outflow from operating activities . . . . . . . . . . . . . . . . . (2) (5) (12) Dividends received from joint ventures . . . . . . . . . . . . . . . . . . . 623 254 324 ----- ---- ---- Interest received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 3 4 ----- ---- ---- Returns on investments and servicing of finance. . . . . . . . . . . . . . . 4 3 4 ----- ---- ---- Taxation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 --- --- Investment in joint venture . . . . . . . . . . . . . . . . . . . . . . . . (533) --- --- ----- ---- ---- Acquisitions and disposals . . . . . . . . . . . . . . . . . . . . . . . . . (533) --- --- ----- ---- ---- Ordinary dividends paid. . . . . . . . . . . . . . . . . . . . . . . . . . . (160) (255)(288) ----- ---- ---- Cash (outflow)/inflow before changes in short term investments and financing (64) (3) 28 Increase in short term investments . . . . . . . . . . . . . . . . . . . . . (952) (2) --- Issue of ordinary shares . . . . . . . . . . . . . . . . . . . . . . . . . 956 8 5 Net repayment of debenture loans . . . . . . . . . . . . . . . . . . . . . (2) --- --- Increase/(decrease) in funding balances to joint ventures . . . . . . . . . 62 (3)(116) ----- ---- ---- Financing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,016 5 (111) ----- ---- ---- Change in net cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . --- --- (83) ===== ==== ====
The accompanying notes on pages F-62 to F-68 are an integral part of these financial statements. 128 ELSEVIER NV BALANCE SHEET AS AT 31 DECEMBER 2000
2000 1999 Note 'E'm 'E'm ----- ----- Fixed assets. . . . . . . . . . . . . . . . . . . . . . 6 1,674 1,559 ----- ----- Current assets Debtors . . . . . . . . . . . . . . . . . . . . . . . . 7 5 61 Short term investments. . . . . . . . . . . . . . . . . 971 19 ----- ----- 976 80 Creditors: amounts falling due within one year. . . . . 8 (154) (102) ----- ----- Net current assets/(liabilities). . . . . . . . . . . . 822 (22) ----- ----- Total assets less current liabilities . . . . . . . . . 2,496 1,537 Creditors: amounts falling due after more than one year 9 (6) (8) Provisions. . . . . . . . . . . . . . . . . . . . . . . 10 (42) (36) ----- ----- Net assets. . . . . . . . . . . . . . . . . . . . . . . 2,448 1,493 ===== ===== Share capital issued. . . . . . . . . . . . . . . . . . 47 43 Paid-in surplus . . . . . . . . . . . . . . . . . . . . 1,328 385 Legal reserves. . . . . . . . . . . . . . . . . . . . . 432 847 Other reserves. . . . . . . . . . . . . . . . . . . . . 641 218 ----- ----- Shareholders' funds . . . . . . . . . . . . . . . . . . 11 2,448 1,493 ===== =====
The accompanying notes on pages F-62 to F-68 are an integral part of these financial statements. 129 ELSEVIER NV NOTES TO THE FINANCIAL STATEMENTS 1. Basis of financial statements The accompanying financial statements have been prepared in conformity with Dutch GAAP, which differ in certain significant respects from US GAAP; see note 15. Amounts in the financial statements are stated in euro ("'E"'). Certain disclosures required to comply with Dutch statutory reporting requirements have been omitted. 2. Accounting policies The significant accounting policies adopted are as follows: Basis of consolidation As a consequence of the merger of the company's businesses with those of Reed International, the shareholders of Elsevier and Reed International can be regarded as having the interests of a single economic group, enjoying substantially equivalent ordinary dividend and capital rights in the earnings and net assets of the Reed Elsevier combined businesses. Elsevier holds a majority interest in Elsevier Reed Finance BV (61%) and is therefore required to prepare consolidated financial statements. However, management believes that a better insight into the financial position and results of Elsevier is provided by looking at the investment in the combined businesses in aggregate, as presented in the Reed Elsevier combined financial statements. Therefore, the Reed Elsevier combined financial statements form part of the notes to Elsevier's statutory financial statements. Elsevier's investments in the Reed Elsevier combined businesses are accounted for using the gross equity method, as adjusted for the effects of the equalisation arrangement between Reed International and Elsevier. The arrangement lays down the distribution of dividends and net assets in such a way that Elsevier's share in the profit and net assets of the Reed Elsevier combined businesses equals 50%. All settlements accruing to shareholders from the equalisation arrangement are taken directly to reserves. Because the dividend paid to shareholders by Elsevier is equivalent to the Reed International dividend plus the UK tax credit, Elsevier distributes a higher proportion of the combined profit attributable than Reed International. Reed International's share in this difference in dividend distributions is settled with Elsevier and has been credited directly to reserves under equalisation. Elsevier can pay a nominal dividend on its R-shares that is lower than the dividend for the ordinary shares. Reed International will be compensated by direct dividend payments by Reed Elsevier plc. Equally, Elsevier has the possibility to receive dividends directly from Dutch affiliates. The settlements flowing from these arrangements are also taken directly to reserves under equalisation. Basis of valuation of assets and liabilities Goodwill and intangible assets are capitalised on acquisition and amortised over a maximum period of 20 years. Past service liabilities have been fully funded. Other assets and liabilities are stated at face value. Balance sheet amounts expressed in foreign currencies are translated at the exchange rates effective at the balance sheet date. Currency translation differences arising from the conversion of investments in joint ventures, expressed in foreign currencies, are directly credited or charged to shareholders' funds. Tax is calculated on profit from Elsevier's own operations, taking into account profit not subject to tax. The difference between the tax charge and tax payable in the short term is included in the provision for deferred tax. This provision is based upon relevant rates, taking into account tax deductible losses, which can be compensated within the foreseeable future. 130 3. Operating loss Operating loss is stated after the following:
2000 1999 1998 'E'm 'E'm 'E'm ---- ---- ---- Gross remuneration Salaries. . . . . . . --- 5 4 Pension contributions --- --- 1 ---- ---- ---- Total . . . . . . . . --- 5 5 ==== ==== ==== remuneration represents the remuneration for present and former directors of Elsevier in respect of services rendered to Elsevier and the combined businesses. Fees for present and former members of the Supervisory Board of Elsevier of 'E'0.2m (1999 'E'0.5m) are included in gross remuneration. In so far as gross remuneration is related to services rendered to Reed Elsevier plc and Elsevier Reed Finance BV, it is borne by these companies. 4. Net interest
2000 1999 1998 'E'm 'E'm 'E'm ---- ---- ---- Interest on receivables from joint ventures 2 2 3 Other net interest. . . . . . . . . . . . . 5 1 1 ---- ---- ---- Net interest income . . . . . . . . . . . . 7 3 4 ==== ==== ====
5. Adjusted figures
2000 1999 1998 'E'm 'E'm 'E'm ---- ---- ---- Profit before tax . . . . . . . . . . . . . . . . . . 157 80 777 Adjustments: Amortisation of goodwill and intangible assets . . . 384 284 247 Exceptional items . . . . . . . . . . . . . . . . . 25 176 (449) ---- ---- ---- Adjusted profit before tax. . . . . . . . . . . . . . 566 540 575 ==== ==== ==== Profit/(loss) attributable to ordinary shareholders . 27 (48) 574 Adjustments: Amortisation of goodwill and intangible assets . . . 384 284 247 Exceptional items . . . . . . . . . . . . . . . . . 8 165 (396) ---- ---- ---- Adjusted profit attributable to ordinary shareholders 419 401 425 ==== ==== ====
2000 1999 1998 'E' 'E' 'E' ---- ----- ----- Earnings/(loss) per ordinary share. . . . . . . 0.04 (0.07) 0.81 Adjustments: Amortisation of goodwill and intangible assets 0.54 0.40 0.35 Exceptional items. . . . . . . . . . . . . . . 0.01 0.24 (0.56) ---- ----- ----- Adjusted earnings per ordinary share. . . . . . 0.59 0.57 0.60 ==== ===== =====
131 6. Fixed assets
2000 1999 'E'm 'E'm ----- ----- Investment in joint ventures At 1 January . . . . . . . . 1,559 1,661 Investment in joint venture 533 --- Share in profits/(losses). . 24 (48) Dividends received . . . . . (623) (254) Currency translation . . . . 75 202 Equalisation (see note 11) . 106 (2) ----- ----- At 31 December . . . . . . . 1,674 1,559 ===== =====
The investment in joint ventures comprises Elsevier's share at the following amounts of:
2000 1999 'E'm 'E'm ------ ------ Fixed assets. . . . . . . . . . . . . . . . . . . . . . 3,781 3,144 Current assets. . . . . . . . . . . . . . . . . . . . . 1,229 1,021 Creditors: amounts falling due within one year. . . . . (2,572) (2,053) Creditors: amounts falling due after more than one year (697) (491) Provisions. . . . . . . . . . . . . . . . . . . . . . . (61) (55) Minority interests. . . . . . . . . . . . . . . . . . . (6) (7) ------ ------ Total . . . . . . . . . . . . . . . . . . . . . . . . . 1,674 1,559 ====== ======
The principal joint ventures are: --- Reed Elsevier plc, London (50%) --- Elsevier Reed Finance BV, Amsterdam (61%) In addition, Elsevier holds Dfl 0.3m par value in shares with special dividend rights in Reed Elsevier Overseas BV and Reed Elsevier Nederland BV, both with registered offices in Amsterdam. These shares are included in the amount shown under investment in joint ventures above. They enable Elsevier to receive dividends from companies within the same tax jurisdiction. 7. Debtors
2000 1999 'E'm 'E'm ---- ---- Joint ventures. . . . . . --- 57 Other accounts receivable 5 4 ---- ---- Total . . . . . . . . . . 5 61 ==== ====
The accounts receivable from joint ventures bear interest. 8. Creditors: amounts falling due within one year
2000 1999 'E'm 'E'm ---- ---- Proposed dividend. . . . . . . . 140 100 Joint ventures . . . . . . . . . 5 --- Accounts payable and other debts 9 2 ---- ---- Total. . . . . . . . . . . . . . 154 102 ==== ====
132 9. Creditors: amounts falling due after more than one year
2000 1999 'E'm 'E'm ---- ---- Debenture loans 6 8 ==== ====
Debenture loans consist of four convertible personnel debenture loans with a weighted average interest rate of 5.4%. Depending on the conversion terms, the surrender of Dfl1,000 par value debenture loans qualifies for the acquisition of 40--60 Elsevier ordinary shares. 10. Provisions
2000 1999 'E'm 'E'm ---- ---- Deferred taxation 41 35 Pension . . . . . 1 1 ---- ---- Total . . . . . . 42 36 ==== ====
11. Shareholders' funds
Share capital Paid-in Legal Other issued surplus reserves reservesTotal 'E'm 'E'm 'E'm 'E'm 'E'm ------- ------- -------- ------------- Balance as at 31 December 1997 . . . . . . 32 383 783 841,282 Issue of ordinary shares, net of expenses --- 5 --- --- 5 Profit attributable. . . . . . . . . . . . --- --- 576 (2) 574 Ordinary dividends paid and proposed . . . --- --- --- (263)(263) Dividends from joint ventures. . . . . . . --- --- (324) 324 --- Currency translation . . . . . . . . . . . --- --- (98) --- (98) Equalisation . . . . . . . . . . . . . . . --- --- 12 --- 12 ------- ------- -------- ------------- Balance as at 31 December 1998 . . . . . . 32 388 949 1431,512 Redenomination of share capital into euros 11 (11) --- --- --- Issue of ordinary shares, net of expenses --- 8 --- --- 8 Loss attributable. . . . . . . . . . . . . --- --- (48) --- (48) Ordinary dividends paid and proposed . . . --- --- --- (179)(179) Dividends from joint ventures. . . . . . . --- --- (254) 254 --- Currency translation . . . . . . . . . . . --- --- 202 --- 202 Equalisation . . . . . . . . . . . . . . . --- --- (2) --- (2) ------- ------- -------- ------------- Balance as at 31 December 1999 . . . . . . 43 385 847 2181,493 Issue of ordinary shares, net of expenses 4 943 --- --- 947 Profit attributable. . . . . . . . . . . . --- --- 27 --- 27 Ordinary dividends paid and proposed . . . --- --- --- (200)(200) Dividends from joint ventures. . . . . . . --- --- (623) 623 --- Currency translation . . . . . . . . . . . --- --- 75 --- 75 Equalisation . . . . . . . . . . . . . . . --- --- 106 --- 106 ------- ------- -------- ------------- Balance as at 31 December 2000 . . . . . . 47 1,328 432 6412,448 ======= ======= ======== =============
On 5 December 2000, the company issued 66,255,000 new 'E'0.06 ordinary shares at 'E'14.50 each following a joint international offering by Reed International and Elsevier. The purpose of the offering was to finance the proposed acquisition by Reed Elsevier of the Scientific, Technical and Medical business and the Schools Education and Testing businesses of Harcourt General, Inc. The nominal value of the shares issued by the company was 'E'4.0m and the net proceeds were 'E'933m. During 1999, the ordinary shares of Dfl 0.10 par value were redenominated as ordinary shares of 'E'0.06 par value. This resulted in an increase in share capital of 'E'11m which was transferred from the paid-in surplus account. The authorised share capital consists of 2,100m ordinary shares and 30m registered R-shares. As at 31 December 2000, the issued share capital consisted of 735,717,794 (1999 668,251,106; 1998 667,303,771) ordinary shares of 'E'0.06 par value and 4,049,951 (1999 and 1998 4,049,951) R-shares of 'E'0.60 par value. The R-shares are held by a subsidiary company of Reed International. The R-shares are convertible at the election of the holder into ten ordinary shares each. They have otherwise the same rights as the ordinary shares, except that Elsevier may pay a lower dividend on the R-shares. Subject to renewal of the authority to allot shares at the forthcoming Annual General Meeting, the boards of Elsevier intend to allot an additional 629,298 R-shares to Reed Holding BV so as to maintain Reed International's 5.8% indirect equity interest in Elsevier. Within paid-in surplus, an amount of 'E'1,151m (1999 'E'208m: 1998 'E'211) is free of tax. Details of shares issued under share option schemes are set out in note 12. 133 12. Share option scheme Reed Elsevier plc operates an Executive Share Option Scheme and options are granted to selected full time employees of Reed Elsevier. Options granted over Elsevier ordinary shares are normally exercisable after three years and may be exercised up to 10 years from the date of grant at a price equivalent to the market value of the Elsevier ordinary shares at the time of grant. The first grant of options was during 1998. Transactions during the three years ended 31 December 2000 were:
Number of ordinary shares of Exercise 'E'0.06 par price value 'E' ---------- ----------- Outstanding at 31 December 1997 --- Granted . . . . . . . . . . . 1,158,230 15.70 Exercised . . . . . . . . . . --- Lapsed . . . . . . . . . . . . (25,870) ---------- Outstanding at 31 December 1998 1,132,360 Granted . . . . . . . . . . . 9,263,019 10.45-13.55 Exercised . . . . . . . . . . --- Lapsed . . . . . . . . . . . . (152,312) ---------- Outstanding at 31 December 1999 10,243,067 Granted . . . . . . . . . . . 2,396,765 10.73-15.66 Exercised . . . . . . . . . . (301,498)10.45-15.70 Lapsed . . . . . . . . . . . . (548,789) ---------- Outstanding at 31 December 2000 11,789,545 ==========
The above outstanding options will, upon exercise, be met by the issue of new Elsevier ordinary shares. Options outstanding at 31 December 2000 were exercisable by 2010. No options had vested at 31 December 2000. During 2000 a total of 10,059,317 options were granted under the Reed Elsevier plc Senior Executive Long Term Incentive Scheme at prices ranging between 10.73 and 15.66. Such options are exercisable from 1 January 2005 and the options will be met by the issue of new Elsevier ordinary shares. Options over Elsevier ordinary shares were granted until 1999 to senior executives of Reed Elsevier plc under the Elsevier share option scheme. The options are exercisable immediately after granting during a period of 5 to 10 years, after which the options will lapse. The strike price of the options is the market price of the Elsevier ordinary shares at the time the option is granted, except in the case of five year options granted during 1999, where the strike price was 26% above the market price of an Elsevier ordinary share at the time the option was granted. Transactions during the three years ended 31 December 2000 were:
Number of ordinary shares of Exercise 'E'0.06 par price value 'E' ---------- ----------- Outstanding at 31 December 1997 2,395,124 Granted . . . . . . . . . . . 727,050 12.50-15.70 Exercised . . . . . . . . . . (382,300) 6.65-14.11 ---------- Outstanding at 31 December 1998 2,739,874 Granted . . . . . . . . . . . 233,285 13.55 Exercised . . . . . . . . . . (450,580) 6.65-14.11 ---------- Outstanding at 31 December 1999 2,522,579 Granted . . . . . . . . . . . --- Exercised . . . . . . . . . . (562,866)11.93-14.11 Lapsed . . . . . . . . . . . . (64,710) ---------- Outstanding at 31 December 2000 1,895,003 ==========
134 The above options will, upon exercise, be met by the issue of new Elsevier ordinary shares. Options outstanding at 31 December 2000 were exercisable by 2009. All options had vested at 31 December 2000. Excluded from the above are options granted until 1999 under the Reed Elsevier plc Executive Share Option Schemes (No. 2) which, upon exercise, will be met by the Reed Elsevier Employee Benefit Trust (the "EBT") from shares purchased in the market. At 31 December 2000 there were 1,429,428 such options outstanding at exercise prices ranging between 10.45 and 15.7. The EBT will also be used to satisfy nil cost options granted to certain senior executives. At 31 December 2000 there were 365,012 such options outstanding. 13. Contingent liabilities There are contingent liabilities in respect of borrowings of the Reed Elsevier plc group and Elsevier Reed Finance BV group guaranteed by Elsevier as follows:
2000 1999 'E'm 'E'm ----- ----- Guaranteed jointly and severally with Reed International 2,941 2,305 Guaranteed solely by Elsevier. . . . . . . . . . . . . . --- 1 ===== =====
Financial instruments disclosures in respect of borrowings covered by the above guarantees are given in note 24 to the Reed Elsevier combined financial statements. 14. Proposal for allocation of profit
2000 1999 1998 'E'm 'E'm 'E'm ---- ---- ---- Interim dividend on ordinary shares 60 79 87 Final dividend on ordinary shares . 140 100 176 Dividend on R-shares. . . . . . . . --- --- --- Retained (loss)/profit. . . . . . . (173)(227) 311 ---- ---- ---- 27 (48) 574 ==== ==== ====
15. Summary of the principal differences between Dutch and US GAAP The financial statements are prepared in accordance with Dutch GAAP, which differ in certain significant respects from US GAAP. These differences relate principally to the following items and the effect of material differences on net income and shareholders' funds is shown in the following tables. Impact of US GAAP adjustments to combined financial statements Elsevier accounts for its 50% economic interest in the Reed Elsevier combined businesses, before the effect of tax credit equalisation, by the equity method in conformity with Dutch GAAP which is similar to the equity method in US GAAP. Using the equity method to present its net income and shareholders' funds under US GAAP, Elsevier reflects its 50% share of the effects of differences between Dutch and US GAAP relating to the combined businesses as a single reconciling item. The most significant differences relate to the capitalisation and amortisation of goodwill and other intangibles, and deferred taxes. A more complete explanation of the accounting policies used by the Reed Elsevier combined businesses and the differences between Dutch and US GAAP is given in note 30 to the Reed Elsevier combined financial statements. Ordinary dividends Under Dutch GAAP, dividends are provided for in the year in respect of which they are proposed by the directors. Under US GAAP, such dividends would not be provided for until they are formally declared by the directors. Exceptional items Exceptional items are material items within Elsevier's ordinary activities which under Dutch GAAP are required to be disclosed separately due to their size or incidence. These items do not qualify as extraordinary under US GAAP and are considered a part of operating results. Earnings per share Under Dutch and US GAAP both basic and fully diluted earnings per share are presented. Diluted earnings per share take account of the effects of additional ordinary shares that would be in issue if outstanding dilutive potential shares had been exercised (see note 3). 135 Stock based compensation SFAS 123: Accounting for Stock Based Compensation, establishes a fair value based method of computing compensation cost. It encourages the application of this method in the profit and loss account instead of intrinsic value based methods. Where fair values are not applied, the proforma effect on net income must be disclosed. The disclosure only provisions of SFAS 123 have been adopted. If Elsevier's share of the combined businesses compensation costs based on fair value at the grant date had been recognised in the profit and loss account, net income under US GAAP would have been reduced by 'E'19m in 2000 (1999 'E'3m). Proforma basic gain/(loss) per share, reflecting this cost, would have been 'E'0.05 (1999 ('E'0.07)). Effects on net income of material differences between Dutch and US GAAP
2000 1999 1998 'E'm 'E'm 'E'm ---- ----- ---- Net income/(loss) under Dutch GAAP . . . . . . . . . . . . . . 27 (48) 574 Impact of US GAAP adjustments to combined financial statements 31 2 (248) ---- ----- ---- Net income/(loss) under US GAAP. . . . . . . . . . . . . . . . 58 (46) 326 ==== ===== ==== Basic earnings/(loss) per share under US GAAP ('E'). . . . . . 0.08 (0.06)0.46 ==== ===== ==== Diluted earnings/(loss) per share under US GAAP ('E'). . . . . 0.08 (0.06)0.46 ==== ===== ====
The basic and diluted (loss)/earnings per share under US GAAP includes a 50% share of the following items: (i) for 2000, 'E'0.09 loss in respect of the costs of a major programme of reorganisation across the Reed Elsevier businesses commenced in 1999 and 0.10 gain in respect of businesses disposed in 2000; (iifor 1999, 'E'0.18 loss in respect of the costs of a major programme of reorganisation across the Reed Elsevier businesses; and (iii) for 1998, 'E'0.55 in respect of profit on sale (under US GAAP) of discontinued businesses and 'E'0.28 loss in respect of the non-recurring element of the incremental amortisation of goodwill and intangibles arising as a consequence of the re-evaluation of the combined businesses' asset lives. Effects on shareholders' funds of material differences between Dutch and US GAAP
2000 1999 'E'm 'E'm ----- ----- Shareholders' funds under Dutch GAAP . . . . . . . . . . . . . 2,448 1,493 Impact of US GAAP adjustments to combined financial statements 396 358 Ordinary dividends not declared in the period. . . . . . . . . 140 100 ----- ----- Shareholders' funds under US GAAP. . . . . . . . . . . . . . . 2,984 1,951 ===== =====
Comprehensive Income Information SFAS 130: Reporting Comprehensive Income, requires that all items that are required to be recognised as components of comprehensive income under US GAAP are reported in a separate financial statement. Under US GAAP comprehensive income for 2000 would be 'E'238m (1999 'E'186m loss; 1998 'E'193m income). Under US GAAP comprehensive income per share for 2000 would be 'E'0.33 (1999 'E'0.26 loss; 1998 'E'0.27 income). Comprehensive income under US GAAP comprises net income for the financial year, share of the comprehensive income items arising in the combined businesses, equalisation and exchange translation differences. 136 GLOSSARY OF TERMS Terms used in Annual Report and Form 20-F US equivalent or brief description Accruals Accrued expenses Allotted Issued Bank borrowings Payable to banks Called up share capital Issued share capital Capital allowances Tax term equivalent to US tax depreciation allowances Capital and reserves Shareholders' equity Combined businesses Reed International P.L.C., Elsevier NV, Reed Elsevier plc and Elsevier Reed Finance BV and their respective subsidiaries, associates and joint ventures Creditors Liabilities/payables Current instalments of loans Long-term debt due within one year Debtors Receivables and prepaid expenses Finance lease Capital lease Fixed asset investments Non-current investments Freehold Ownership with absolute rights in perpetuity Interest receivable Interest income Interest payable Interest expense Loans Long-term debt Prepayments Prepaid expenses Profit Income Profit and loss account Income statement/statement of income Reed Elsevier Reed International P.L.C., Elsevier NV, Reed Elsevier plc and Elsevier Reed Finance BV and their respective subsidiaries, associates and joint ventures Short term investments Redeemable securities and short- term deposits Shareholders' funds Shareholders' equity Share premium account Premiums paid in excess of par value of ordinary shares Stocks Inventories Tangible fixed assets Property, plant and equipment Turnover/revenues Sales 137 SIGNATURES Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, each of the Registrants certifies that it meets all of the requirements for filing on Form 20-F and has duly caused this annual report to be signed on its behalf by the undersigned, thereto duly authorised, on February 21, 2001. REED INTERNATIONAL P.L.C. ELSEVIER NV Registrant Registrant By: C H L DAVIS By: C H L DAVIS C H L Davis Chief Executive Officer C H L Davis Member, Executive Board & Chief Executive Officer By: M H ARMOUR By: M H ARMOUR M H Armour M H Armour Chief Financial Officer Member, Executive Board & Chief Financial Officer Dated: February 21, 2001 Dated: February 21, 2001 138 LIST OF EXHIBITS 3.1 Memorandum and Articles of Association of Reed International P.L.C. 3.2 Memorandum and Articles of Association of Elsevier NV 3.3 Governing Agreement (as amended) between Reed International P.L.C. and Elsevier NV 23.1 Independent Auditors' Consent --- Reed Elsevier combined financial statements 23.2 Independent Auditors' Consent --- Reed International consolidated financial statements 23.3 Independent Auditors' Consent --- Elsevier financial statements 139 STATEMENT OF DIFFERENCES The British pound sterling sign shall be expressed ast . . . . . . . . . . 'L' The Euro sign is expressed as . . . . . . . . . . . . . . . . . . . . . . 'E' Characters normally expressed as subscript shall be preceded by . . . . . [u] EX-3 2 0002.txt EXHIBIT 3.1 The Companies Acts, 1862 to 1900 AND The Companies Acts 1948 to 1981 AND The Companies Act, 1985 ------------------------------------------- COMPANY LIMITED BY SHARES ------------------------------------------- MEMORANDUM OF ASSOCIATION of REED INTERNATIONAL P.L.C. (as altered by Special Resolutions passed on the 29th day of July, 1970, the 26th day of July, 1988, the 24th day of July, 1990 and the 15th day of April 1999 and by a resolution of the directors passed on the 2nd day of March, 1982) ==================================================================== 1. The name of the Company is "REED INTERNATIONAL P.L.C."* 2. The Company is to be a public company. 3. The registered office of the Company will be situate in England. - -------------------------------------------------------------------------------- * NOTE: The Company was incorporated under the name of "ALBERT E. REED & COMPANY, LIMITED". On 1st August, 1963, the name of the Company was changed to "REED PAPER GROUP LIMITED" pursuant to a SPECIAL RESOLUTION dated 24th July, 1963. On 11th August, 1969, the name of the Company was changed from "REED PAPER GROUP LIMITED" to "REED GROUP LIMITED" pursuant to a SPECIAL RESOLUTION dated 30th July, 1969. On 3rd August, 1970, the name of the Company was changed from "REED INTERNATIONAL LIMITED pursuant to a SPECIAL RESOLUTION dated 29th July, 1970. On 1st April, 1982 the name of the Company was changed from "REED INTERNATIONAL LIMITED" to "REED INTERNATIONAL P.L.C." pursuant to a Directors' resolution dated 2nd March, 1982. 4. The objects for which the Company is established are: (A) To carry on business as a holding company and to acquire and hold shares, stocks, debentures, debenture stocks, bonds, mortgages, obligations and other securities of any kind issued by any company, corporation or undertaking of whatever nature and wherever constituted or carrying on business. (B) To carry on all or any of the businesses of publishers, producers, distributors, proprietors, wholesalers or retailers of books, periodicals, magazines, newspapers, journals, circulars, works of reference, advertising literature and any other forms of publication, in any medium whatsoever: to own, organise, operate and manage exhibitions, trade shows, conferences and seminars and to conduct any related activities: to manage and market information databases held in hard copy or electronically processed from; to act as advertising agents, literary agents and manufacturers and dealers in any materials used in connection with any businesses referred to in this Clause; and to acquire, sell, hold, license and otherwise deal in copyright and any other rights in artistic, literary or musical works of any kind whatsoever. (C) To co-ordinate the administration, policies, management, research, trading and any and all other activities of and to act as financial advisers and consultants to any company or group of companies now or hereafter formed or incorporated or acquired and to perform any services or undertake any duties to or on behalf of and in any other manner assist any such company or group and either without remuneration or on such terms as to remuneration as may be agreed. (D) To carry on any business by means, or through the agency of any subsidiary company or companies, and to enter into any arrangement with any such subsidiary company for taking the profits and bearing the losses of any such business, or for financing any such subsidiary company. (E) To carry on business as importers, exporters, manufacturers and merchants of, dealers in, brokers of and agents for any materials or products manufactured, processed or dealt in in any business carried on by the Company or any of its subsidiary companies or required or used for the purposes of any such business including plant, machinery and tools of all kinds and to carry on the business of general merchants and dealers. Page 2 (F) To carry on business as concessionaires and to undertake, carry on and execute all kinds of financial, commercial, trading, trust, exploitation, agency and other operations, and to advance or provide money with or without security to concessionaires, inventors, patentees and others for the purpose of improving and developing or assisting to improve and develop any concessions, lands or rights or of experimenting in regard to or testing or developing any invention, design or process, industrial or otherwise. (G) To carry on the business of carriers by air, sea, road, railway, canal or otherwise and to own transport facilities of every kind. (H) To act as managing agents for and as management and technical consultants to any business and to execute, carry out, improve, work, develop, administer, maintain, manage or control works and conveniences of all kinds and to contribute or render technical assistance to or assist in the carrying out or establishment, maintenance, improvement, management, working, control or superintendence of any such business. (I) To carry on either in connection with any of the businesses aforesaid or independently thereof any trade or business which may seem to be capable of being conveniently carried on in connection therewith or calculated to enhance the value of or render more profitable any part of the Company's undertaking or property, or to further the objects of the Company. (J) To acquire, construct, carry out, maintain and use railways, tramways, docks, harbours, piers, wharves, canals, reservoirs, embankments and irrigations, reclamations, improvements, sewage, drainage, sanitary, water, gas, electric light, telephonic and electrical power works, warehouses and all other works which may be conducive to the interests of the Company. (K) To purchase or otherwise acquire estates, lands, forests, timber licences, mines, quarries or interests in the same in any part of the world, and to work and develop the same. (L) To purchase or otherwise acquire for any estate or interest any property or assets or any concessions, licences, grants, patents, know-how, trade marks or other exclusive or non-exclusive rights of any kind which may appear to be necessary or convenient for any business of the Company, and to develop and turn to account and deal with the Page 3 same in such manner as may be thought expedient, and to make experiments and tests and to carry on all kinds of research work. (M) To subscribe for, underwrite, purchase or otherwise acquire, and to hold, dispose of and deal with the shares, stock, securities and evidences of indebtedness or of the right to participate in profits or assets or other similar documents issued by any government, authority, corporation or body, or by any company or body of persons, and any options or rights in respect thereof, and to buy and sell foreign exchange. (N) To borrow and raise money and to secure or discharge any debt or obligation of or binding on the Company in such manner as may be thought fit and in particular by mortgages and charges upon the undertaking and all or any of the property and assets (present and future) and the uncalled capital of the Company, or by the creation and issue on such terms and conditions as may be thought expedient of debentures, debenture stock or other securities of any description. (O) To draw, make, accept, endorse, discount, negotiate, execute and issue, and to buy, sell and deal in bills of exchange, promissory notes and other negotiable or transferable instruments. (P) To amalgamate or enter into partnership or any joint purse or profit-sharing arrangement with and to co-operate in any way with or assist or subsidise any company, firm or persons, and to purchase or otherwise acquire and undertake all or any part of the business, property and liabilities of any person, body or company carrying on any business which the Company is authorised to carry on or possessed of any property suitable for the purposes of the Company. (Q) To promote or concur in the promotion of any company, the promotion of which shall be considered desirable. (R) To lend money to and guarantee the performance of the contracts or obligations of any company, firm or person, and the payment and repayment of the capital and principal of, and dividends, interest or premiums payable on, any stock, shares and securities of any company, whether having objects similar to those of the Company or not, and to give all kinds of indemnities. (S) To sell, lease, grant licences, easements and other rights over, and in any other manner deal with or dispose of, the undertaking, property, assets, rights and effects of the Company or any part thereof for such Page 4 consideration as may be thought fit, and in particular for stocks, shares or securities of any other company whether fully or partly paid up. (T) To procure the registration or incorporation of the Company in or under the laws of any place outside England. (U) To subscribe or guarantee money for any national, charitable, benevolent, public, general or useful object or for any exhibition, or for any purpose which may be considered likely directly or indirectly to further the objects of the Company or the interests of its members. (V) To grant pensions or gratuities to any employees or ex-employees and to officers and ex-officers (including Directors and ex-Directors) of the Company or its predecessors in business, or the relations, connections or dependants of any such persons, and to establish or support associations, institutions, clubs, funds and trusts which may be considered calculated to benefit any such persons or otherwise advance the interests of the Company or of its members, and to establish and contribute to any scheme for the purchase by trustees of shares in the Company to be held for the benefit of the Company's employees (including Directors holding a salaried employment or office in the Company or any subsidiary company), and to lend money to the Company's employees (other than Directors) to enable them to purchase shares of the Company and to formulate and carry into effect any scheme for sharing the profits of the Company with its employees or any of them. (W) To do all or any of the things and matters aforesaid in any part of the world, and either as principals, agents, contractors, trustees or otherwise, and by or through trustees, agents or otherwise, and either alone or in conjunction with others. (X) To do all such other things as may be considered to be incidental or conducive to the above objects or any of them. And it is hereby declared that the objects of the Company as specified in each of the foregoing paragraphs of this clause (except only if and so far as otherwise expressly provided in any paragraph) shall be separate and distinct objects of the Company and shall not be in anywise limited by reference to any other paragraph or the order in which the same occur or the name of the Company. 5. The liability of the Members is limited. Page 5 6. The capital of the Company is 'L'183,931,647, divided into 1,471,453,176 shares of 12.5p each. Page 6 We, the several persons whose names and addresses are subscribed, are desirous of being formed into a Company in pursuance of this Memorandum of Association, and we respectively agree to take the number of shares in the capital of the Company set opposite our respective names.
- -------------------------------------------------------------------------------- NAMES, ADDRESSES AND DESCRIPTIONS OF Number of Shares taken by SUBSCRIBERS each Subscriber - -------------------------------------------------------------------------------- Preference Shares ALBERT E. REED Fifty 50, Cannon Street, London EC Paper Manufacturer. HENRY HOLLOWAY, Fifty Victoria Wharf, Belvedere Road, London SE Contractor. WILLIAM A. POSNETT, Fifty 239 Long Lane, London SE Leather Manufacturer. CHARLES L. STEVENS Fifty Tovil Mills, Maidstone (Manager, Paper Mills). STANLEY COUSINS, Fifty 50 Cannon Street, London EC Paper Salesman. FRANK FERGUSON EDWARDS, One 50 Cannon Street, London EC Accountant. ALBERT G. MICKLEBURGH, One 50 Cannon Street, London EC Secretary to Public Company. JAS BOURNE BENSON, 1, Clement's Inn, WC Solicitor - --------------------------------------------------------------------------------
Dated the 26th day of May, 1903. Witness to the signatures of all the above subscribers: Page 7 No. 77536 THE COMPANIES ACTS 1862 TO 1900 and THE COMPANIES ACTS 1948 TO 1981 and THE COMPANIES ACT 1985 ----------------------------------- COMPANY LIMITED BY SHARES ----------------------------------- MEMORANDUM (Altered by Special Resolutions passed on the 29th day of July, 1970, the 26th day of July, 1988, the 24th day of July, 1990 and the 15th day of April 1999 and by a resolution of the directors passed on the 2nd day of March 1982) ARTICLES OF ASSOCIATION (Adopted by Special Resolution passed on the 19th day of April 1995) of REED INTERNATIONAL P.L.C. =========================================== Incorporated the 28th day of May, 1903 =========================================== MEMORANDUM OF ASSOCIATION THE COMPANIES ACT 1985 COMPANY NO. 77536 --------------------------------------------------- PUBLIC COMPANY LIMITED BY SHARES --------------------------------------------------- ARTICLES OF ASSOCIATION of REED INTERNATIONAL P.L.C. (Adopted by special resolution on 16 April 1997, as amended by special resolutions passed on 29 April 1998 and 15 April 1999) --------------------------------------------------- PRELIMINARY Table A 1. The regulations in Table A as in force at the date of the incorporation of the Company shall not apply to the Company. Definitions 2. In these Articles, except where the subject or context otherwise requires: Act means The Companies Act 1985 including any modification or re-enactment thereof for the time being in force; Articles means these articles of association as altered from time to time by special resolution; auditors means the auditors for the time being of the Company; the board means the directors or any of them acting as the board of directors of the Company; certificated share means a share in the capital of the Company that is not an uncertificated share and references in these Articles to a share being held in certificated form shall be construed accordingly; clear days means the period excluding the day when a notice is given or deemed to be given and the day for which it is given or on which it is to take effect; Companies Acts has the meaning ascribed thereto by section 744 of the Act and any enactment passed after those Acts which may, by virtue of that or any other such enactment, be cited together with those Acts as the "Companies Acts" (with or without the addition of an indication of the date of any such enactment); director means a director of the Company; dividend means dividend or bonus; employees' share scheme has the meaning ascribed thereto by section 743 of the Act; holder means, in relation to any shares, the member whose name is entered in the register as the holder of such shares; issuer-instruction shall have the meaning ascribed to it in the Regulations; London Stock Exchange means the London Stock Exchange Limited; member means a member of the Company; Memorandum means the memorandum of association of the Company as amended from time to time; office means the registered office of the Company; Ordinary Share means an ordinary share of 12.5p in the capital of the Company; Operator shall have the meaning ascribed to it in the Regulations; Operator-instruction shall have the meaning ascribed to it in the Regulations; paid means paid or credited as paid; participating security shall have the meaning ascribed to it in the Regulations; recognised person means a recognised clearing house or a nominee of a recognised clearing house or of a recognised investment exchange, each of which terms has the meaning given to it by section 185(4) of the Act; register means the register of members of the Company; Regulations means the Uncertified Securities Regulations 1995; Page 2 relevant system shall have the meaning ascribed to it in the Regulations; seal means the common seal of the Company and includes any official seal kept by the Company by virtue of section 39 or 40 of the Act; secretary means the secretary of the Company and includes a joint, assistant, deputy or temporary secretary and any other person appointed to perform the duties of the secretary; uncertificated share means a share in the capital of the Company which is recorded on the register as being held in uncertificated form and title to which may, by virtue of the Regulations, be transferred by means of a relevant system and references in these Articles to a share being held in uncertificated form shall be construed accordingly; and United Kingdom means Great Britain and Northern Ireland. Construction 3. References to a document being executed include references to its being executed under hand or under seal or by any other method. References to writing include references to any visible substitute for writing and to anything partly in one form and partly in another form. Words denoting the singular number include the plural number and vice versa; words denoting the masculine gender include the feminine gender; and words denoting persons include corporations. Save as aforesaid any words or expressions defined in the Act and the Regulations (but excluding any modification thereof not in force at the date of adoption of these Articles) shall, if not inconsistent with the subject or context, bear the same meaning in these Articles. Subject to the preceding paragraph, references to any provision of any enactment or of any subordinate legislation (as defined by section 21(1) of the Interpretation Act 1978) include any modification or re-enactment of that provision for the time being in force. Headings are inserted for convenience only and do not affect the construction of these Articles. In these Articles, (a) powers of delegation shall not be restrictively construed but the widest interpretation shall be given thereto; (b) the word board in the context of the exercise of any power contained in these Articles includes any committee consisting of one or more directors, any director holding executive office and any local or divisional board, manager or agent of the Company to which or, as the case may be, to Page 3 whom the power in question has been delegated; (c) no power of delegation shall be limited by the existence or, except where expressly provided by the terms of delegation, the exercise of that or any other power of delegation; and (d) except where expressly provided by the terms of delegation, the delegation of a power shall not exclude the concurrent exercise of that power by any other body or person who is for the time being authorised to exercise it under these Articles or under another delegation of the power. SHARE CAPITAL Share Capital 4. The authorised share capital of the Company at the date of the adoption of these Articles is 'L'183,931,647 divided into 1,471,453,176 shares of 12.5p each. Shares with special rights 5. Subject to the provisions of the Companies Acts and without prejudice to any rights attached to any existing shares or class of shares, any share may be issued with such rights or restrictions as the Company may by ordinary resolution determine or, subject to and in default of such determination, as the board shall determine. Uncertificated shares 6.1 Subject to the provisions of the Regulations, the board may permit the holding of shares in any class of shares in uncertificated form and the transfer of title to shares in that class by means of a relevant system and may determine that any class of shares shall cease to be a participating security. Not separate class of shares 6.2 Shares in the capital of the Company that fall within a certain class shall not form a separate class of shares from other shares in that class because any share in that class: (a) is held in uncertificated form; or (b) is permitted in accordance with the Regulations to become a participating security. Exercise of Company's entitlements in respect of uncertificated share 6.3 Where any class of shares is a participating security and the Company is entitled under any provision of the Companies Acts, the Regulations or the Articles to sell, transfer or otherwise dispose of, forfeit, redeem, re-allot, accept the surrender of or otherwise enforce a lien over a share held in uncertificated form, the Company shall be entitled, subject to the provisions of the Companies Acts, the Regulations, the Articles and the facilities and requirements of the relevant system: Page 4 (a) to require the holder of that uncertificated share by notice to change that share into certificated form within the period specified in the notice and to hold that share in certificated form so long as required by the Company; (b) to require the holder of that uncertificated share by notice to give any instructions necessary to transfer title to that share by means of the relevant system within the period specified in the notice; (c) to require the holder of that uncertificated share by notice to appoint any person to take any step, including without limitation the giving of any instructions by means of the relevant system, necessary to transfer that share within the period specified in the notice; and (d) to take any action that the board considers appropriate to achieve the sale, transfer, disposal, forfeiture, re-allotment or surrender of that share or otherwise to enforce a lien in respect of that share. Allotment 7. Subject to the provisions of the Companies Acts relating to authority, pre-emption rights or otherwise and of any resolution of the Company in general meeting passed pursuant thereto, and, in the case of redeemable shares, the provisions of Article 8, all unissued shares for the time being in the capital of the Company shall be at the disposal of the board, and the board may (subject as aforesaid) allot (with or without conferring a right of renunciation), grant options over, or otherwise dispose of them to such persons, on such terms and conditions, and at such times as it thinks fit. Redeemable shares 8. Subject to the provisions of the Companies Acts, and without prejudice to any rights attached to any existing shares or class of shares, shares may be issued which are to be redeemed or are to be liable to be redeemed at the option of the Company or the holder on such terms and in such manner as may be provided by these Articles. Authority to allot relevant securities under Section 80 of the Act 9. The Company may at any time and from time to time pass an ordinary resolution referring to this Article and authorising the directors to allot relevant securities (as defined for the purposes of Section 80 of the Act) and, upon the passing of such ordinary resolution: (a) the directors shall be generally and unconditionally authorised to allot relevant securities provided that the nominal amount of such securities shall not exceed in aggregate the sum specified in such ordinary resolution; and Page 5 (b) any such authority shall expire on the day five years after the passing of such ordinary resolution (or on such earlier day as may be specified in such ordinary resolution), save that the Company shall be entitled before such expiry to make an offer or agreement which would or might require relevant securities to be allotted after such expiry and the directors shall be entitled to allot relevant securities in pursuance of such offer or agreement as if the authority conferred hereby had not expired. Disapplication of pre-emption rights under Section 95 of the Act 10. The Company may resolve by special resolution, referring to this Article, that the directors be empowered to allot equity securities (as defined for the purposes of Sections 89 to 96 inclusive of the Act) for cash and, upon the passing of such special resolution, the directors shall (subject to their being authorised to allot relevant securities in accordance with Section 80 of the Act) be empowered to allot (pursuant to any such authority) equity securities for cash as if Section 89(1) of the Act did not apply provided that such power shall be limited: (a) to the allotment of equity securities in connection with a rights issue in favour of the holders of Ordinary Shares where the equity securities respectively attributable to the interests of all such holders are proportionate (as nearly as may be) to the respective value of the Ordinary Shares held by them but subject to such exclusions or other arrangements as the board may deem necessary or expedient to deal with: (i) fractional entitlements; or (ii) directions from any holders of Ordinary Shares to deal in some other manner with their respective entitlements; or (iii) legal or practical problems arising in any overseas territory or by virtue of shares being represented by American Depositary Shares; or (iv) the requirements of any regulatory body or stock exchange; and (b) to the allotment of equity securities pursuant to the terms of any share scheme for employees approved by the members in general meeting; and (c) to the allotment (otherwise than pursuant to sub-paragraph (a) or (b) above) of equity securities having, in the case of relevant shares (as so defined), a nominal amount or, in the case of other equity Page 6 securities, giving the right to subscribe for or convert into relevant shares having a nominal amount, not exceeding in aggregate the sum specified in such special resolution, and such power shall expire on the date of the annual general meeting of the Company next following the passing of such special resolution, save that the Company shall be entitled before such expiry to make an offer or agreement which would or might require equity securities to be allotted after such expiry and the directors shall be entitled to allot equity securities in pursuance of such offer or agreement as if the power conferred hereby had not expired. Commissions 11. The Company may exercise all powers of paying commissions or brokerage conferred or permitted by the Companies Acts. Subject to the provisions of the Companies Acts, any such commission or brokerage may be satisfied by the payment of cash or by the allotment of fully or partly paid shares or partly in one way and partly in the other or by the grant of an option to call, within a specified time, for a specified number or amount of shares in the Company at a specified price being not less than par. Trusts not recognised 12. Except as required by law, no person shall be recognised by the Company as holding any share upon any trust and (except as otherwise provided by these Articles or by law) the Company shall not be bound by or recognise any interest in any share (or in any fractional part of a share) except an absolute right to the entirety thereof in the holder. Joint holders 13. The Company shall not be bound to register more than four persons as joint holders of any share (except in the case of executors or administrators of a deceased member), and any one of such registered joint holders may give effectual receipts for any dividend or other moneys payable in respect of such share. VARIATION OF RIGHTS Method of varying rights 14.1 Whenever the capital of the Company is divided into different classes of shares, all or any of the special rights or privileges attached to any class may be varied or abrogated, either with the consent in writing of holders of three-fourths in nominal value of the issued shares of that class or with the sanction of an extraordinary resolution passed at a separate general meeting of the holders of the shares of that class (but not otherwise) and may be so varied or abrogated either whilst the Company is a going concern or during or in contemplation of a winding up. To every such separate general meeting all the provisions of these Articles relating Page 7 to general meetings of the Company or to the proceedings thereat shall, mutatis mutandis, apply, except that: (a) the necessary quorum at any such meeting (other than adjourned meeting) shall be two persons holding or representing by proxy not less than one-third in nominal amount of the issued shares of the class; (b) at an adjourned meeting, the necessary quorum shall be one person holding shares of the class or his proxy; (c) the holders of shares of the class shall, on a poll, have one vote in respect of every share of the class held by them respectively; and (d) a poll may be demanded by any one holder of shares of the class whether present in person or by proxy. Separate class of share 14.2 For the purposes of this Article, any particular issue of shares not carrying the same rights (whether as to rate of dividend, redemption or otherwise) as any other shares for the time being in issue shall be deemed to constitute a separate class of share. When rights deemed to be varied 14.3 Unless otherwise expressly provided by the terms of these Articles, the special rights or privileges attached to any class of shares shall be deemed to be varied or abrogated by the creation or issue of further shares ranking pari passu therewith. No variation of rights 14.4 For the purposes of this Article, unless otherwise expressly provided by the rights attached to any share or class of shares, those rights shall not be deemed to be varied by the Company permitting, in accordance with the Regulations, the holding of and transfer of title to shares of that or any other class in uncertificated form by means of a relevant system. SHARE CERTIFICATES Members' rights to certificates 15. Every member, upon becoming the holder of any certificated share (except a recognised person in respect of whom the Company is not required by law to complete and have ready for delivery a certificate), shall be entitled, without payment, to one certificate for all the certificated shares of each class held by him (and, upon transferring a part of his holding of certificated shares of any class, to a certificate for the balance of such holding) or several certificates each for one or more of his certificated shares upon payment for every certificate after the first of such reasonable sum as the board may from time to time determine. Subject to Article 141 Page 8 every certificate shall be sealed with the seal or executed in accordance with Article 143 and shall specify the number, class and distinguishing numbers (if any) of the shares to which it relates and the amount or respective amounts paid up thereon. The Company shall not be bound to issue more than one certificate for certificated shares held jointly by several persons and delivery of a certificate to one joint holder shall be a sufficient delivery to all of them. Shares of different classes may not be included in the same certificate. Replacement certificates 16. Any member holding two or more certificates representing shares of any one class may request the cancellation of such certificates and the Company shall issue a single new certificate for such shares in lieu without charge. If a share certificate is defaced, worn out, lost or destroyed, it may be renewed on such terms (if any) as to evidence and indemnity (with or without security) and payment of any exceptional out-of-pocket expenses reasonably incurred by the Company in investigating evidence and preparing the requisite form of indemnity as the board may determine but otherwise free of charge, and (in the case of defacement or wearing out) on delivery up of the old certificate. LIEN Company to have lien on shares 17. The Company shall have a first and paramount lien on every share (not being a fully paid share) for all moneys payable to the Company (whether presently or not) in respect of that share. The board may at any time (generally or in particular cases) waive any lien or declare any share to be wholly or in part exempt from the provisions of this Article. The Company's lien on a share shall extend to any amount (including dividends) payable in respect of it. Enforcement of lien by sale 18.1 The Company may sell, in such manner as the board determines, any share on which the Company has a lien if a sum in respect of which the lien exists is presently payable and is not paid within fourteen clear days after notice has been given to the holder of the share or to the person entitled to it in consequence of the death or bankruptcy of the holder or otherwise by operation of law, demanding payment and stating that if the notice is not complied with the shares may be sold. Giving effect to sale 18.2 To give effect to any such sale the board may, if the share is a certificated share, authorise some person to execute an instrument of transfer of the shares sold to, or in accordance with the directions of, the purchaser. If the share is an uncertificated share, the board may exercise Page 9 any of the Company's powers under Article 6.3 to effect the sale of the share to, or in accordance with the directions of, the Purchaser. The transferee shall not be bound to see to the application of the purchase money nor shall his title to the shares be affected by any irregularity in or invalidity of the proceedings in relation to the sale and the remedy of any person aggrieved by any such sale shall be in damages only and solely against the Company. Application of proceeds 18.3 The net proceeds of the sale, after payment of the costs, shall be applied in or towards payment or satisfaction of so much of the sum in respect of which the lien exists as is presently payable, and any residue shall (if the share sold is a certificated share), on surrender to the Company for cancellation of the certificate in respect of the share sold and whether the share sold is a certificated or uncertificated share, subject to a like lien for any moneys not presently payable as existed upon the shares before the sale, be paid to the person entitled to the shares at the date of the sale. CALLS ON SHARES Power to make calls 19. Subject to the terms of allotment, the board may from time to time make calls upon the members in respect of any moneys unpaid on their shares (whether in respect of nominal value or premium) and each member shall (subject to receiving at least fourteen days' notice specifying when and where payment is to be made) pay to the Company as required by the notice the amount called on his shares. A call may be required to be paid by instalments. A call may be revoked in whole or part and the time fixed for payment of a call may be postponed in whole or part as the board may determine. A person upon whom a call is made shall remain liable for calls made upon him notwithstanding the subsequent transfer of the shares in respect whereof the call was made. Time when call made 20. A call shall be deemed to have been made at the time when the resolution of the board authorising the call was passed. Liability of joint holders 21. The joint holders of a share shall be jointly and severally liable to pay all calls in respect thereof. Interest payable 22. If a call or any instalment of a call remains unpaid in whole or in part after it has become due and payable the person from whom it is due and payable shall pay interest on the amount unpaid from the day it became due and payable until it is paid, at the rate fixed by the terms of allotment of the shares or in the notice of the call or, if no rate is fixed, such rate, not exceeding 15 per cent. per annum or, if higher, the appropriate rate (as Page 10 defined by the Act), as may be determined by the board, and shall also pay all costs, charges and expenses which the Company may have incurred or become liable for in order to procure payment of or in consequence of the non-payment of such call or instalment, but the board shall be at liberty to waive payment of such interest, costs, charges and expenses wholly or in part. Deemed calls on allotment 23. An amount payable in respect of a share on allotment or at any fixed date, whether in respect of nominal value or premium or as an instalment of a call, shall be deemed to be a call duly made and notified and payable on the date so fixed or in accordance with the terms of the allotment, and if it is not paid the provisions of these Articles shall apply as if that amount had become due and payable by virtue of a call duly made and notified. Differentiation on calls 24. Subject to the terms of allotment, the board may make arrangements on the issue of shares for a difference between the allottees and/or holders in the amounts and times of payment of calls on their shares. Payment of calls in advance 25. The board may, if it thinks fit, receive from any member willing to advance the same all or any part of the moneys uncalled and unpaid upon any shares held by him and such payment in advance of calls shall extinguish pro tanto the liability upon the shares in respect of which it is made, and may pay upon all or any of the moneys so advanced (until the same would but for such advance become presently payable) interest at such rate as may be agreed upon between the directors and such member. The directors may, on giving one month's notice, repay to any member the amount of any such advance payment made by him. Rights suspended if payment in arrears 26. No member shall be entitled to receive any dividend or other moneys, or (save as proxy for another member) to be present or vote at any general meeting, either personally or by proxy, or to exercise any privilege as a member, or be counted in a quorum in respect of any share held by him (whether alone or jointly with any other person), if and so long as he shall have defaulted in payment of any call or other sum for the time being due and payable on such share or any interest or expenses (if any) payable in connection therewith. FORFEITURE AND SURRENDER Notice requiring payment of call 27. If a call or any instalment of a call remains unpaid in whole or in part after it has become due and payable, the board may give to the person from whom it is due not less than fourteen clear days' notice in writing requiring payment of the amount unpaid together with any interest which may have accrued and any costs, charges and expenses incurred by the Page 11 Company by reason of such non-payment. The notice shall name the place where payment is to be made and shall state that if the notice is not complied with the shares in respect of which the call was made will be liable to be forfeited. Forfeiture for non-compliance 28. If any such notice is not complied with, any share in respect of which it was given may, at any time before the payment required by the notice has been made, be forfeited by a resolution of the board and the forfeiture shall include all dividends or other moneys payable in respect of the forfeited shares and not paid before the forfeiture. When any share has been forfeited, notice of the forfeiture shall be served upon the person who was before the forfeiture the holder of the share, and an entry of such notice having been given and of the forfeiture with the date thereof shall forthwith be made in the register opposite the entry of the share; but no forfeiture shall be invalidated by any omission or neglect to give such notice or to make such entries. Sale of forfeited shares 29. Subject to the provisions of the Companies Acts, a forfeited share shall be deemed to belong to the Company and may be sold, re-allotted or otherwise disposed of on such terms and in such manner as the board determines, either to the person who was before the forfeiture the holder or to any other person, and at any time before sale, re-allotment or other disposal the forfeiture may be cancelled on such terms as the board thinks fit. Where for the purposes of its disposal a forfeited share held in certificated form is to be transferred to any person the board may authorise some person to execute an instrument of transfer of the share to that person. Where for the purposes of its disposal a forfeited share held in uncertificated form is to be transferred to any person, the board may exercise any of the Company's powers under Article 6.3. The Company may receive the consideration given for the share on its disposal and may register the transferee as holder of the share. Liability following forfeiture 30. A person any of whose shares have been forfeited shall cease to be a member in respect of them and shall surrender to the Company for cancellation the certificate for the shares forfeited but shall remain liable to the Company for all moneys which at the date of forfeiture were presently payable by him to the Company in respect of those shares with interest thereon at the rate at which interest was payable on those moneys before the forfeiture or, if no interest was so payable, at such rate, not exceeding 15 per cent. per annum or, if higher, the appropriate rate (as defined in the Act) as the board may determine, from the date of forfeiture until payment, but the board may waive payment wholly or in part or enforce payment without any allowance for the value of the shares at the time of forfeiture or for any consideration received on their disposal. Page 12 Surrender 31. The board may accept the surrender of any share which it is in a position to forfeit upon such terms and conditions as may be agreed and, subject to any such terms and conditions, a surrendered share shall be treated as if it had been forfeited. Extinction of rights 32. The forfeiture of a share shall involve the extinction at the time of forfeiture of all interest in and all claims and demands against the Company in respect of the share and all other rights and liabilities incidental to the share as between the person whose share is forfeited and the Company, except only such of those rights and liabilities as are by these Articles expressly saved, or as are by the Companies Acts given or imposed in the case of past members. Evidence of forfeiture or surrender 33. A statutory declaration by a director or the secretary that a share has been duly forfeited or surrendered on a specified date shall be conclusive evidence of the facts stated in it as against all persons claiming to be entitled to the share and the declaration shall (subject to the execution of an instrument of transfer if necessary) constitute a good title to the share and the person to whom the share is disposed of shall not be bound to see to the application of the purchase money, if any, nor shall his title to the share be affected by any irregularity in, or invalidity of, the proceedings in reference to the forfeiture, surrender, sale, re-allotment or disposal of the share. Power to annul forfeiture or surrender 34. Notwithstanding any such forfeiture as aforesaid, the directors may, at any time before the forfeited or surrendered share has been sold, re-allotted or otherwise disposed of, annul the forfeiture or surrender upon payment of all calls and interest due on, and costs, charges and expenses incurred in respect of, the share, and on such further conditions (if any) as they may think fit. TRANSFER OF SHARES Form and execution of transfer of certificated shares 35. The instrument of transfer of a certificated share may be in any usual form or in any other form which the board may approve and shall be signed by or on behalf of the transferor and, unless the share is fully paid, by or on behalf of the transferee. An instrument of transfer need not be under seal. Form and execution of transfer of uncertificated shares 36.1 All transfers of uncertificated shares shall be made in accordance with and be subject to the Regulations and the facilities and requirements of the relevant system concerned. Transfers of partly paid shares 36.2 The board may in its absolute discretion, and without giving any reason, refuse to register the transfer of a share which is not fully paid Page 13 provided that such refusal does not prevent dealings in the share from taking place on an open and proper basis. Invalid transfers of certificated shares 37.1 The board may refuse to register the transfer of a certificated share unless the instrument of transfer: (a) is lodged, duly stamped, at the office or at such other place as the board may appoint accompanied by the certificate for the shares to which it relates and such other evidence as the board may reasonably require to show the right of the transferor to make the transfer; (b) is in respect of only one class of shares; and (c) is in favour of not more than four transferees. Transfers by recognised persons 37.2 In the case of a transfer of a certificated share by a recognised person, the lodgement of share certificates will only be necessary if and to the extent that certificates have been issued in respect of the shares in question. Notice of refusal to register 38. If the board refuses to register the transfer, it shall send to the transferee notice of the refusal within two months after the date on which the instrument of transfer was lodged with the Company or the Operator-instruction was received, as the case may be. Suspension of registration 39. The registration of transfers of shares or of transfers of any class of shares may be suspended at such times and for such periods (not exceeding thirty days in any year) as the board may determine, except that the board may not suspend the registration of transfers of any participating security without the consent of the Operator of the relevant system. No fee payable on registration 40. No fee shall be charged for the registration of any instrument of transfer or other document relating to or affecting the title to any share. Retention of transfers 41. The Company shall be entitled to retain any instrument of transfer which is registered, but any instrument of transfer which the board refuses to register shall be returned to the person lodging it when notice of the refusal is given. TRANSMISSION OF SHARES Transmission 42. If a member dies the survivor or survivors where he was a joint holder, and his personal representatives where he was a sole holder or the only survivor of joint holders, shall be the only persons recognised by the Company as having any title to his interest; but nothing herein contained Page 14 shall release the estate of a deceased member (whether a sole or joint holder) from any liability in respect of any share held by him. Elections permitted/required 43.1 A person becoming entitled to a share in consequence of the death or bankruptcy of a member or otherwise by operation of law may, upon such evidence being produced as the board may properly require as to his entitlement (and, in the case of uncertificated shares, subject to compliance with such other procedures consistent with the facilities and requirements of the relevant system concerned), elect either to become the holder of the share or to have some person nominated by him registered as the transferee. If he elects to become the holder he shall give notice to the Company to that effect. If he elects to have another person registered, he shall execute an instrument of transfer of the share to that person. All the provisions of these Articles relating to the transfer of shares shall apply to any such notice or instrument of transfer as if it were an instrument of transfer executed by the member and the death or bankruptcy of the member or other event giving rise to the transmission had not occurred. Withholding of dividends 43.2 The board may at any time give notice requiring any such person to elect either to be registered himself (and, in the case of uncertificated shares, subject to compliance with such other procedures consistent with the facilities and requirements of the relevant system concerned) or to transfer the share and if the notice is not complied with within sixty days the board may thereafter withhold payment of all dividends or other moneys payable in respect of the share until the requirements of the notice have been complied with. Rights of persons entitled by transmission 44. A person becoming entitled to a share in consequence of the death or bankruptcy of a member or otherwise by operation of law shall, upon such evidence being produced as the board may properly require as to his entitlement and subject to the requirements of Article 43.1, have the same rights in relation to the share as he would have had if he were the holder of the share, and may give a discharge for all dividends and other moneys payable in respect of the share, but he shall not, before being registered as the holder of the share, be entitled in respect of it to receive notice of or to attend or vote at any meeting of the Company or to receive notice of or to attend or vote at any separate meeting of the holders of any class of shares in the Company. ALTERATION OF SHARE CAPITAL Alterations by ordinary resolution 45. The Company may by ordinary resolution: Page 15 (a) increase its share capital by such sum to be divided into shares of such amount as the resolution prescribes; (b) consolidate and divide all or any of its share capital into shares of larger amount than its existing shares; (c) subject to the provisions of the Companies Acts, sub-divide its shares, or any of them, into shares of smaller amount than is fixed by the Memorandum and the resolution may determine that, as between the shares resulting from the sub-division, any of them may have any preference or advantage as compared with the others; and (d) cancel shares which, at the date of the passing of the resolution, have not been taken or agreed to be taken by any person and diminish the amount of its share capital by the amount of the shares so cancelled. New shares subject to these Articles 46. All new shares shall be subject to the provisions of these Articles with reference to payment of calls, lien, forfeiture, transfer, transmission and otherwise, and, unless otherwise provided by these Articles, by the resolution creating the new shares or by the conditions of issue, the new shares shall be unclassified shares. Consolidation and fractions arising 47. Whenever as a result of a consolidation or sub-division of shares any fractions, or other difficulties, arise, the board may settle the matter in any manner it deems fit and, in particular, may sell to any person (including, subject to the provisions of the Companies Acts, the Company) shares representing fractions to which any members would otherwise become entitled and, as between the holders of shares which are consolidated, may determine which shares are consolidated into each consolidated share and, where shares registered in the name of different holders are consolidated, may make such arrangements for the allocation, acceptance or sale of the consolidated share and, in each case, distribute the net proceeds of sale in due proportion among those members or those holders or determine that the net proceeds of sale be retained for the benefit of the Company. Where the shares to be sold are held in certificated form, the board may authorise some person to execute an instrument of transfer of the shares to, or in accordance with the directions of, the purchaser. Where the shares to be sold are held in uncertificated form, the board may do all acts and things it considers necessary or expedient to effect the transfer of the shares to, or in accordance with the directions of, the purchaser. The transferee shall not be bound to see to the application of the purchase moneys nor shall his title to the shares be Page 16 affected by any irregularity in or invalidity of the proceedings in relation to the sale. Power to reduce capital 48. Subject to the provisions of the Companies Acts, the Company may by special resolution reduce its share capital, any capital redemption reserve and any share premium account in any way. PURCHASE OF OWN SHARES Power to purchase own shares 49. Subject to and in accordance with the provisions of the Companies Acts and without prejudice to any relevant special rights attached to any class of shares, the Company may purchase any of its own shares of any class (including redeemable shares) at any price (whether at par or above or below par), and so that any shares to be so purchased may be selected in any manner whatsoever. Every contract for the purchase of, or under which the Company may become entitled or obliged to purchase, shares in the Company shall be authorised by such resolution of the Company as may be required by the Companies Acts and by an extraordinary resolution passed at a separate general meeting of the holders of each class of shares (if any) which, at the date on which the contract is authorised by the Company in general meeting, entitle them, either immediately or at any time later on, to convert all or any of the shares of that class held by them into equity share capital of the Company. CONVERSION OF SHARES INTO STOCK Power to convert into stock 50. The Company may from time to time by ordinary resolution convert all or any of its paid-up shares into stock, and may from time to time in like manner re-convert such stock into paid-up shares of any denomination. Transfer of stock 51. When any shares have been converted into stock, the several stockholders may transfer their respective interests therein, or any part of such interests, in the same manner and subject to the same regulations and restrictions as would have applied to the shares from which the stock arose if they had not been converted, or as near thereto as circumstances will permit. The directors may, from time to time, if they think fit, fix the minimum amount of stock transferable, provided that such minimum shall not exceed the nominal amount of the shares from which the stock arose. Rights of stockholders 52. A stockholder shall, according to the amount of stock held by him, have the same rights, privileges and advantages in all respects as if he was the holder of the shares from which the stock arose, but so that no such right, privilege or advantage (except participation in the dividends and profits of the Company and in the assets on a winding up) shall be conferred by an amount of stock which, if existing in shares, would not Page 17 have conferred such right, privilege or advantage. No such conversion shall affect or prejudice any preferential or special right or restriction. GENERAL MEETINGS Types of general meeting 53. All general meetings of the Company other than annual general meetings shall be called extraordinary general meetings. The board shall convene and the Company shall hold general meetings as annual general meetings in accordance with the requirements of the Act. Class meetings 54. All provisions of these Articles relating to general meetings of the Company shall, mutatis mutandis, apply to every separate general meeting of the holders of any class of shares in the capital of the Company, except that: (a) the necessary quorum shall be two persons holding or representing by proxy at least one-third in nominal value of the issued shares of the class or, at any adjourned meeting of such holders, one holder present in person or by proxy, whatever the amount of his holding, who shall be deemed to constitute a meeting; and (b) any holder of shares of the class present in person or by proxy may demand a poll; and (c) each holder of shares of the class shall, on a poll, have one vote in respect of every share of the class held by him. Convening general meetings 55. Subject to the provisions of Article 53, the board may call general meetings whenever and at such times and places as it shall determine and, on the requisition of members pursuant to the provisions of the Companies Acts, shall forthwith proceed to convene an extraordinary general meeting and, if the board fails to comply with such requisition, the requisitionists may call an extraordinary general meeting in accordance with the Companies Acts. If there are not within the United Kingdom sufficient directors to call a general meeting, any director of the Company may call a general meeting. General meetings may also be convened in accordance with Article 130. NOTICE OF GENERAL MEETINGS Period of notice 56.1 An annual general meeting and an extraordinary general meeting called for the passing of a special resolution or a resolution appointing a person as a director shall be called by at least twenty-one clear days' notice. All other extraordinary general meetings shall be called by at least fourteen clear days' notice. Page 18 To whom notice shall be given 56.2 Subject to the provisions of these Articles and to any restrictions imposed on any shares, the notice shall be given to all the members, to each of the directors and to the auditors for the time being of the Company, save that no notice need be given to members whose shares the Company is entitled to sell pursuant to Article 168. Setting of record date 56.3 For the purposes of giving notice to members of any general meeting, the board may determine that the members entitled to receive such notices are those persons entered on the register at the close of business on a day determined by the board, such day not being more than twenty-one days before the day that the notice of the general meeting is despatched. Uncontactable shareholders 57. Subject to the provisions of the Act, if on two consecutive occasions notices or any other documents have been sent by post to a member at his registered address but have been returned undelivered, then the member shall not be entitled to receive any subsequent notice or other documents until he has given to the Company a new registered address or has notified the Company in writing that such notices or other documents should continue to be sent to his registered address. For the purposes of this Article references to registered address mean, in the case of a member whose registered address is not within the United Kingdom, any address within the United Kingdom given by him to the Company for the service of notices or other documents. References to other documents do not include references to dividend warrants or cheques, which the Company shall be entitled to cease sending in accordance with the provisions of Article 156. Contents of notice 58. The notice shall specify the time and place of the meeting and, in the case of special business, the general nature of such business. All business shall be deemed special that is transacted at an extraordinary general meeting and also all business that is transacted at an annual general meeting with the exception of: (a) the declaration of dividends; (b) the consideration and adoption of the accounts and balance sheet and the reports of the directors and auditors and other documents required to be annexed to the accounts; (c) the appointment and re-appointment of directors where special notice of the resolution for such appointment or re-appointment is not required by the Companies Acts; (d) the appointment of auditors where special notice of the resolution for such appointment is not required by the Companies Acts; and Page 19 (e) the fixing of, or the determining of the method of fixing, the remuneration of the directors and/or auditors. The notice shall, in the case of an annual general meeting, specify the meeting as such, and, in the case of a meeting to pass a special or extraordinary resolution, specify the intention to propose the resolution as a special or extraordinary resolution, as the case may be. General meetings at more than one place 59.1 The provisions of this Article shall apply if any general meeting is convened at or adjourned to more than one place. Notice and conditions for holding 59.2 The notice of the meeting or adjourned meeting shall specify the place at which the chairman of the meeting shall preside (the Specified Place) and the directors shall make arrangements for simultaneous attendance and participation at other places (whether adjoining the Specified Place or in a different and separate place or places altogether or otherwise) by members, provided that persons attending at any particular place shall be able to see and hear and be seen and heard (whether by audio-visual links or otherwise) by persons attending at the other places at which the meeting is convened. Controlling level of attendance 59.3 The directors may from time to time make such arrangements for the purpose of controlling the level of attendance at any such place (whether involving the issue of tickets or the imposition of some means of selection or otherwise) as they shall in their absolute discretion consider appropriate, and may from time to time vary any such arrangements or make new arrangements in place of them, provided that a member who is not entitled to attend, in person or by proxy, at any particular place shall be entitled so to attend at one of the other places; and the entitlement of any member so to attend the meeting or adjourned meeting at such place shall be subject to any such arrangements as may be for the time being in force and by the notice of meeting or adjourned meeting stated to apply to the meeting. Place of meeting 59.4 For the purposes of all other provisions of these Articles any such meeting shall be treated as being held at the Specified Place. Adjournment to more than one place 59.5 If a meeting is adjourned to more than one place, notice of the adjourned meeting shall be given notwithstanding any other provision of these Articles. Accidental omission to give notice 60. The accidental omission to give notice of a meeting, or to send a form of proxy with a notice where required by these Articles, to any person entitled to receive the same, or the non-receipt of a notice of Page 20 meeting or form of proxy by any such person, shall not invalidate the proceedings at that meeting. PROCEEDINGS AT GENERAL MEETINGS Quorum 61. No business shall be transacted at any general meeting unless a quorum is present, but the absence of a quorum shall not preclude the choice or appointment of a chairman, which shall not be treated as part of the business of the meeting. Save as otherwise provided by these Articles, two persons present in person or by proxy and entitled to vote upon the business to be transacted shall be a quorum. If quorum not present 62. If such a quorum is not present within five minutes (or such longer time not exceeding thirty minutes as the chairman of the meeting may decide to wait) from the time appointed for the meeting, or if during a meeting such a quorum ceases to be present, the meeting, if convened on the requisition of members, shall be dissolved, and in any other case shall stand adjourned to such time and place as the chairman of the meeting may determine. If at the adjourned meeting a quorum is not present within fifteen minutes after the time appointed for holding the meeting, the meeting shall be dissolved. Chairman 63. The chairman, if any, of the board or, in his absence, any deputy chairman of the board or, in his absence, some other director nominated by the board shall preside as chairman of the meeting, but if neither the chairman, deputy chairman nor such other director (if any) is present within five minutes after the time appointed for holding the meeting or is not willing to act as chairman, the directors present shall elect one of their number to be chairman. If there is only one director present and willing to act, he shall be chairman. If no director is willing to act as chairman, or if no director is present within five minutes after the time appointed for holding the meeting, the members present and entitled to vote shall choose one of their number to be chairman. Directors entitled to speak 64. A director shall, notwithstanding that he is not a member, be entitled to attend and speak at any general meeting and at any separate meeting of the holders of any class of shares in the Company. Adjournments 65.1 The chairman may, with the consent of a meeting at which a quorum is present (and shall if so directed by the meeting), adjourn the meeting from time to time and from place to place, but no business shall be transacted at an adjourned meeting other than business which might properly have been transacted at the meeting had the adjournment not taken place. In addition, the chairman may adjourn the meeting to another Page 21 time and place without such consent if it appears to him that it is likely to be impracticable to hold or continue that meeting because of the number of members wishing to attend who are not present. When a meeting is adjourned for thirty days or more or for an indefinite period, at least seven clear days' notice shall be given specifying the time and place of the adjourned meeting and the general nature of the business to be transacted. Otherwise it shall not be necessary to give any notice of an adjournment or of the business to be transacted at an adjourned meeting. Validity of proxy at adjourned meeting 65.2 Any member who, by reason of an adjournment, is unable to be present at the adjourned meeting may nevertheless execute a form of proxy for the adjourned meeting which, if delivered by him to the chairman or the secretary, shall be valid even though it is given at less notice than would otherwise be required by these Articles. Amendments to resolutions 66. If an amendment shall be proposed to any resolution under consideration but shall in good faith be ruled out of order by the chairman of the meeting, the proceedings on the substantive resolution shall not be invalidated by any error in such ruling. With the consent of the chairman of the meeting, an amendment may be withdrawn by its proposer before it is voted upon. In the case of a resolution duly proposed as a special or extraordinary resolution, no amendment thereto (other than a mere clerical amendment to correct a patent error) may in any event be considered or voted upon. Methods of voting 67. A resolution put to the vote of a general meeting shall be decided on a show of hands unless, before or on the declaration of the result of a vote on the show of hands or on the withdrawal of any other demand for a poll, a poll is duly demanded. Subject to the provisions of the Companies Acts, a poll may be demanded by: (a) the chairman of the meeting or any director present at the meeting; or (b) at least five members present in person or by proxy having the right to vote on the resolution; or (c) any member or members present in person or by proxy representing not less than one-tenth of the total voting rights of all the members having the right to vote on the resolution; or (d) any member or members present in person or by proxy holding shares conferring a right to vote on the resolution being shares on which an aggregate sum has been paid up equal to not less than one-tenth of the total sum paid up on all the shares conferring that right, Page 22 and a demand by a person as proxy for a member shall be the same as a demand by the member provided that no poll shall be demanded on the election of a chairman of the meeting. Declaration of result 68. Unless a poll is duly demanded a declaration by the chairman that a resolution has been carried or carried unanimously, or by a particular majority, or lost, or not carried by a particular majority, and an entry to that effect in the minutes of the meeting, shall be conclusive evidence of the fact without proof of the number or proportion of the votes recorded in favour of or against the resolution. Withdrawal of demand for poll 69. The demand for a poll may, before the poll is taken, be withdrawn but only with the consent of the chairman and a demand so withdrawn shall not be taken to have invalidated the result of a show of hands declared before the demand was made. If the demand for a poll is withdrawn, the chairman or any other member entitled may demand a poll. Conduct of poll 70. A poll shall be taken as the chairman directs and he may appoint scrutineers (who need not be members) and fix a time and place for declaring the result of the poll. The result of the poll shall be deemed to be the resolution of the meeting at which the poll was demanded. Chairman's casting vote 71. In the case of an equality of votes, whether on a show of hands or on a poll, the chairman shall be entitled to a casting vote in addition to any other vote he may have. When poll to be taken 72. A poll demanded on a question of adjournment shall be taken forthwith. A poll demanded on any other question shall be taken either forthwith or at such time and place as the chairman directs not being more than thirty days after the poll is demanded. The demand for a poll shall not prevent the continuance of a meeting for the transaction of any business other than the question on which the poll was demanded. If a poll is demanded before the declaration of the result of a show of hands and the demand is duly withdrawn, the meeting shall continue as if the demand had not been made. Notice of poll 73. No notice need be given of a poll not taken forthwith if the time and place at which it is to be taken are announced at the meeting at which it is demanded. In any other case at least seven clear days' notice shall be given specifying the time and place at which the poll is to be taken. Effectiveness of special and extraordinary resolutions 74. Where for any purpose an ordinary resolution of the Company is required, a special or extraordinary resolution shall also be effective and where for any purpose an extraordinary resolution is required a special resolution shall also be effective. Page 23 Resolutions in writing 75. A resolution in writing executed by or on behalf of each member who would have been entitled to vote upon it if it had been proposed at a general meeting at which he was present shall be as effectual as if it had been passed at a general meeting properly convened and held and may consist of several instruments in the like form each executed by or on behalf of one or more of the members. VOTES OF MEMBERS Right to vote 76. Subject to any rights or restrictions attached to any shares, on a show of hands every member who is present in person shall have one vote and on a poll every member present in person or by proxy shall have one vote for every share of which he is the holder. Setting of record time 77. For the purposes of determining which persons are entitled to attend and vote at a general meeting, the board may specify in the notice of the meeting a time, not more than 48 hours before the time fixed for the meeting, by which a person must be entered on the register in order to have the right to attend or vote at the meeting. Votes of joint holders 78. In the case of joint holders of a share the vote of the senior who tenders a vote, whether in person or by proxy, shall be accepted to the exclusion of the votes of the other joint holders and for this purpose seniority shall be determined by the order in which the names of the holders stand in the register. Member under incapacity 79. A member in respect of whom an order has been made by any court or official having jurisdiction (whether in the United Kingdom or elsewhere) in matters concerning mental disorder may vote, whether on a show of hands or on a poll, by his receiver, curator bonis or other person authorised in that behalf appointed by that court or official, and any such receiver, curator bonis or other person may, on a poll, vote by proxy. Evidence to the satisfaction of the board of the authority of the person claiming to exercise the right to vote shall be deposited at the office, or at such other place as is specified in accordance with these Articles for the deposit of instruments of proxy, not less than 48 hours before the time appointed for holding the meeting or adjourned meeting at which the right to vote is to be exercised and in default the right to vote shall not be exercisable. Calls in arrears 80. No member shall be entitled to vote at any general meeting or at any separate meeting of the holders of any class of shares in the Company, either in person or by proxy, in respect of any share held by him unless all moneys presently payable by him in respect of that share have been paid. Page 24 Section 212 of the Act, restrictions if in default 81.1 If at any time the board is satisfied that any member, or any other person appearing to be interested in shares held by such member, has been duly served with a notice under section 212 of the Act (a section 212 notice) and is in default for the prescribed period in supplying to the Company the information thereby required, or, in purported compliance with such a notice, has made a statement which is false or inadequate in a material particular, then the board may, in its absolute discretion at any time thereafter by notice (a direction notice) to such member direct that: (a) in respect of the shares in relation to which the default occurred (the default shares, which expression includes any shares issued after the date of the section 212 notice in respect of those shares) the member shall not be entitled to vote at a general meeting or at a separate meeting of the holders of that class of shares either personally or by proxy; (b) where the default shares represent at least 0.25 per cent. in nominal value of the issued shares of their class, then the direction notice may additionally direct that in respect of the default shares, no payment shall be made by way of dividend. Copy of notice to interested persons 81.2 The Company shall send to each other person appearing to be interested in the shares the subject of any direction notice a copy of the notice, but the failure or omission by the Company to do so shall not invalidate such notice. When restrictions cease to have effect 81.3 Any direction notice shall cease to have effect when the board is satisfied that such member and any other person appearing to be interested in shares held by such member, has given to the Company the information required by the relevant section 212 notice. Board may cancel restrictions 81.4 The board may at any time give notice cancelling a direction notice. Provisions supplementary to Article 81 82.1 For the purposes of Article 81: (a) a person shall be treated as appearing to be interested in any shares if the member holding such shares has given to the Company a notification under the said section 212 which either (i) names such person as being so interested or (ii) fails to establish the identities of all those interested in the shares and (after taking into account the said notification and any other relevant section 212 notification) the Company knows or has reasonable cause to believe that the person in question is or may be interested in the shares; Page 25 (b) the prescribed period is 14 days from the date of service of the section 212 notice. Section 216 of the Act 82.2 Nothing contained in Article 81 shall limit the power of the Company under section 216 of the Act. Errors in voting 83. If any votes are counted which ought not to have been counted, or might have been rejected, the error shall not vitiate the result of the voting unless it is pointed out at the same meeting, or at any adjournment thereof, and it is in the opinion of the Chairman of the meeting of sufficient magnitude to vitiate the result of the voting. Objection to voting 84. No objection shall be raised to the qualification of any voter except at the meeting or adjourned meeting or poll at which the vote objected to is tendered, and every vote not disallowed at such meeting shall be valid and every vote not counted which ought to have been counted shall be disregarded. Any objection made in due time shall be referred to the chairman whose decision shall be final and conclusive. Supplementary provisions on voting 85. On a poll votes may be given either personally or by proxy. A member entitled to more than one vote need not, if he votes, use all his votes or cast all the votes he uses in the same way. PROXIES AND CORPORATE REPRESENTATIVES Appointment of proxy 86. An instrument appointing a proxy shall be in writing under the hand of the appointor or his attorney or, if the appointor is a corporation, either under its common seal or the hand of a duly authorised officer, attorney or other person authorised to sign it. Form of proxy 87. Instruments of proxy shall be in any usual form or in any other form which the board may approve (which shall include provision for two-way voting) and the board may, if it thinks fit, but subject to the provisions of the Act, at the Company's expense send out with the notice of any meeting forms of instrument of proxy for use at the meeting. Delivery of an instrument appointing a proxy shall not preclude a member from attending and voting in person at the meeting or poll concerned. A member may appoint more than one proxy to attend on the same occasion. Delivery of form of proxy 88. The instrument appointing a proxy and any power of attorney or other written authority under which it is executed or an office or notarially certified copy or a copy certified in accordance with the Powers of Attorney Act 1971 of such power or written authority shall: Page 26 (a) be deposited by personal delivery or post at the office or at such other place within the United Kingdom as is specified in the notice convening the meeting or in any instrument of proxy sent out by the Company in relation to the meeting not less than 48 hours before the time appointed for holding the meeting or adjourned meeting at which the person named in the instrument proposes to vote; or (b) in the case of a poll taken more than 48 hours after it is demanded, be deposited as aforesaid after the poll has been demanded and not less than 24 hours before the time appointed for the taking of the poll; or (c) where the poll is not taken at the meeting at which it was demanded but is taken not more than 48 hours after it was demanded, be delivered at the meeting at which the poll was demanded to the chairman or to the secretary or to any director; and an instrument of proxy which is not deposited or delivered in a manner so permitted shall be invalid. No instrument of proxy shall be valid after the expiration of twelve months from the date stated in it as the date of its execution. When two or more valid instruments of proxy are delivered in respect of the same share for use at the same meeting, the one which was executed last shall be treated as replacing and revoking the others as regards that share; if the Company is unable to determine which was executed last, none of them shall be treated as valid in respect of that share. Power of members abroad to appoint attorney 89. Any member residing out of or absent from the united Kingdom may, by power of attorney, appoint any person to be his attorney for the purpose of voting at any meeting, and such power may be a special power limited to any particular meeting, or a general power extending to all meetings at which such member is entitled to vote. Every such power shall be produced at the Office and left there for at least forty-eight hours before being acted upon. Validity of form of proxy 90. The instrument of proxy shall be deemed to confer authority to vote on any amendment of a resolution put to the meeting for which it is given as the proxy thinks fit. The instrument of proxy shall, unless the contrary is stated therein, be valid as well for any adjournment of the meeting as for the meeting to which it relates. Corporate representatives 91. Any corporation or corporation sole which is a member of the Company may (in the case of a corporation, by resolution of its directors or other governing body or by authority to be given under seal or under the Page 27 hand of an officer duly authorised by it) authorise such person as it thinks fit to act as its representative at any meeting of the Company or at any separate meeting of the holders of any class of shares. A person so authorised shall be entitled to exercise the same power on behalf of the grantor of the authority as the grantor could exercise if it were an individual member of the Company and the grantor shall for the purposes of these Articles be deemed to be present in person at any such meeting if a person so authorised is present at it. Revocation of authority 92. A vote given or poll demanded by proxy or by the duly authorised representative of a corporation shall be valid notwithstanding the previous determination of the authority of the person voting or demanding a poll unless notice of the determination was received by the Company at the office or at such other place at which the instrument of proxy was duly deposited at least 6 hours before the commencement of the meeting or adjourned meeting at which the vote is given or the poll demanded or (in the case of a poll taken otherwise than on the same day as the meeting or adjourned meeting) the time appointed for taking the poll. NUMBER OF DIRECTORS Limits on number of directors 93. Unless otherwise determined by ordinary resolution, the number of directors (other than alternate directors) shall be not less than five nor more than twenty in number. APPOINTMENT AND RETIREMENT OF DIRECTORS Number of directors to retire 94. At every annual general meeting one-third of the directors or, if their number is not three or a multiple of three, the number nearest to one-third shall retire from office; but: (a) if any director has at the start of the annual general meeting been in office for more than three years since his last appointment or re-appointment, he shall retire; and (b) if there is only one director who is subject to retirement by rotation, he shall retire. Which directors to retire 95. Subject to the provisions of the Companies Acts and these Articles, the directors to retire by rotation shall be those who have been longest in office since their last appointment or re-appointment, but as between persons who became or were last re-appointed directors on the same day those to retire shall (unless they otherwise agree among themselves) be determined by lot. The directors to retire on each occasion (both as to number and identity) shall be determined by the composition of the board Page 28 at the date of the notice convening the annual general meeting and no director shall be required to retire or be relieved from retiring or be retired by reason of any change in the number or identity of the directors after the date of the notice but before the close of the meeting. When director deemed to be re-appointed 96. If the Company, at the meeting at which a director retires by rotation or otherwise, does not fill the vacancy, the retiring director shall, if willing to act, be deemed to have been re-appointed unless at the meeting it is resolved not to fill the vacancy or unless a resolution for the re-appointment of the director is put to the meeting and lost. Eligibility for election 97. No person other than a director retiring by rotation shall be appointed a director at any general meeting unless: (a) he is recommended by the board; or (b) not less than ten nor more than 42 clear days before the date appointed for the meeting, notice executed by a member qualified to vote at the meeting (not being the person to be proposed) has been given to the Company of the intention to propose that person for appointment stating the particulars which would, if he were so appointed, be required to be included in the Company's register of directors, together with notice executed by that person of his willingness to be appointed. Separate resolutions on appointment 98. Except as otherwise authorised by the Companies Acts, the appointment of any person proposed as a director shall be effected by a separate resolution. Additional powers of the Company 99. Subject as aforesaid, the Company may by ordinary resolution appoint a person who is willing to act to be a director either to fill a vacancy or as an additional director and may also determine the rotation in which any additional directors are to retire. The appointment of a person to fill a vacancy or as an additional director shall take effect from the end of the meeting. Appointment by board 100. The board may appoint a person who is willing to act to be a director, either to fill a vacancy or as an additional director and in either case whether or not for a fixed term, provided that the appointment does not cause the number of directors to exceed the number fixed by or in accordance with these Articles as the maximum number of directors. Irrespective of the terms of his appointment, a director so appointed shall hold office only until the next following general meeting and shall not be taken into account in determining the directors who are to retire by rotation Page 29 at the meeting. If not re-appointed at such general meeting, he shall vacate office at its conclusion. Position of retiring directors 101. A director who retires at an annual general meeting may, if willing to act, be re-appointed. If he is not re-appointed, he shall retain office until the meeting appoints someone in his place, or if it does not do so, until the end of the meeting. Age limit 102. No person shall be disqualified from being appointed or re-appointed a director, and no director shall be required to vacate that office, by reason only of the fact that he has attained the age of seventy years or any other age nor shall it be necessary by reason of his age to give special notice under the Companies Acts of any resolution. Where the board convenes any general meeting of the Company at which (to the knowledge of the board) a director will be proposed for appointment or re-appointment who at the date for which the meeting is convened will have attained the age of seventy years or more, the board shall give notice of his age in years in the notice convening the meeting or in any document accompanying the notice, but the accidental omission to do so shall not invalidate any proceedings, or any appointment or re-appointment of that director, at that meeting. No share qualification 103. A director shall not be required to hold any shares of the Company by way of qualification. ALTERNATE DIRECTORS Power to appoint alternates 104. Any director (other than an alternate director) may appoint any other director, or any other person approved by resolution of the board and willing to act, to be an alternate director and may remove from office an alternate director so appointed by him. Alternates entitled to receive notice 105. An alternate director shall be entitled to receive notice of all meetings of the board and of all meetings of committees of the board of which his appointor is a member, to attend and vote at any such meeting at which his appointor is not personally present, and generally to perform all the functions of his appointor (except as regards power to appoint an alternate) as a director in his absence. It shall not be necessary to give notice of such a meeting to an alternate director who is absent from the United Kingdom. Alternates representing more than one director 106. A director or any other person may act as alternate director to represent more than one director, and an alternate director shall be entitled at meetings of the board or any committee of the board to one vote for every director whom he represents (and who is not present) in addition to Page 30 his own vote (if any) as a director, but he shall count as only one for the purpose of determining whether a quorum is present, save when such quorum exceeds two when he shall count one for himself and one for each director whom he represents. Expenses and remuneration of alternates 107. An alternate director may be repaid by the Company such expenses as might properly have been repaid to him if he had been a director but shall not in respect of his services as an alternate director be entitled to receive any remuneration from the Company except such part (if any) of the remuneration otherwise payable to his appointor as such appointor may by notice in writing to the Company from time to time direct. An alternate director shall be entitled to be indemnified by the Company to the same extent as if he were a director. Termination of appointment 108. An alternate director shall cease to be an alternate director: (a) if his appointor ceases to be a director; but, if a director retires by rotation or otherwise but is re-appointed or deemed to have been re-appointed at the meeting at which he retires, any appointment of an alternate director made by him which was in force immediately prior to his retirement shall continue after his re-appointment; (b) on the happening of any event which, if he were a director, would cause him to vacate his office as director; or (c) if he resigns his office by notice to the Company. Method of appointment and revocation 109. Any appointment or removal of an alternate director shall be by notice to the Company signed by the director making or revoking the appointment and shall take effect in accordance with the terms of the notice (subject to any approval required by Article 104) upon receipt of such notice at the office. Alternate not an agent of appointor 110. Save as otherwise expressly provided in these Articles, an alternate director shall be deemed for all purposes to be a director and, accordingly, except where the context otherwise requires, references to a director shall be deemed to include a reference to an alternate director. An alternate director shall alone be responsible for his own acts and defaults and he shall not be deemed to be the agent of the director appointing him. POWERS OF THE BOARD Business to be managed by board 111. Subject to the provisions of the Companies Acts, the Memorandum and these Articles and to any directions given by special resolution, the business of the Company shall be managed by the board which may Page 31 exercise all the powers of the Company, including the power to dispose of all or any part of the undertaking of the Company. No alteration of the Memorandum or Articles and no such direction shall invalidate any prior act of the board which would have been valid if that alteration had not been made or that direction had not been given. The powers given by this Article shall not be limited by any special power given to the board by these Articles and a meeting of the board at which a quorum is present may exercise all powers exercisable by the board. DELEGATION OF POWERS OF THE BOARD Committees of the board 112. The board may delegate any of its powers to any committee consisting of one or more directors. The board may also delegate to any director holding any executive office such of its powers as the board considers desirable to be exercised by him. Any such delegation shall, in the absence of express provision to the contrary in the terms of delegation, be deemed to include authority to sub-delegate to one or more directors (whether or not acting as a committee) or to any employee or agent of the Company all or any of the powers delegated and may be made subject to such conditions as the board may specify, and may be revoked or altered. The board may co-opt on to any such committee persons other than directors, who may enjoy voting rights in the committee (co-opted members) provided that the co-opted members shall not exceed in number those members who are directors and that no resolution of any committee shall be effective unless when it was passed the co-opted members present did not exceed in number those members present who were directors. Subject to any conditions imposed by the board, the proceedings of a committee with two or more members shall be governed by these Articles regulating the proceedings of directors so far as they are capable of applying. Local boards, etc. 113. The board may establish local or divisional boards or agencies for managing any of the affairs of the Company, either in the United Kingdom or elsewhere, and may appoint any persons to be members of the local or divisional boards, or any managers or agents, and may fix their remuneration. The board may delegate to any local or divisional board, manager or agent any of the powers, authorities and discretions vested in or exercisable by the board (other than their power to make calls, forfeit shares, borrow money or issue debentures, shares or other securities), with power to sub-delegate, and may authorise the members of any local or divisional board, or any of them, to fill any vacancies and to act notwithstanding vacancies. Any appointment or delegation made pursuant to this Article may be made upon such terms and subject to such conditions as the board may decide and the board may remove any person so Page 32 appointed and may revoke or vary the delegation but no person dealing in good faith and without notice of the revocation or variation shall be affected by it. Agents 114. The board may, by power of attorney or otherwise, appoint any person or persons to be the agent or agents of the Company for such purposes, with such powers, authorities and discretions (not exceeding those vested in the board) and on such conditions as the board determines, including authority for the agent or agents to delegate all or any of his or their powers, authorities and discretions, and may revoke or vary such delegation. BORROWING POWERS Power to borrow 115.(1) Subject as hereinafter provided, the board may exercise all the powers of the Company to borrow money, and to mortgage or charge the whole or any part of its undertaking, property and assets (both present and future) and uncalled capital and (subject, to the extent applicable, to the provisions of the Companies Acts) to issue debentures and other securities, whether outright or as collateral security for any debt, liability or obligation of the Company or of any third party. (2) The board shall, in relation to the borrowings of the Company and its subsidiaries for the time being (in this Article called the Group), restrict the borrowings of the Company and exercise all voting and other rights or powers of control exercisable by the Company in relation to its subsidiaries (if any) so as to secure (as regards subsidiaries so far as by such exercise they can secure) that the aggregate nominal or principal amount (together with any fixed or minimum premium payable on final repayment) for the time being owing by the Group in respect of moneys borrowed (exclusive of moneys borrowed by the Company from and for the time being owing to any of its subsidiaries or by any such subsidiary from and for the time being owing to the Company or another such subsidiary of the Company) less cash deposits shall not without the previous sanction of an ordinary resolution exceed an amount equal to the higher of (i) five thousand million pounds; and (ii) two and a half times the adjusted total of capital and reserves. (3) For the purpose of this Article: (a) the expression "the adjusted total of capital and reserves" means the aggregate of: (i) the amount for the time being paid up on the issued share capital of the Company; and Page 33 (ii) the amounts standing to the credit of the consolidated reserves of the Group (including the balances standing to the credit of profit and loss account and share premium account, including the Company's appropriate share of the reserves of its associated undertakings) as shown in the last audited consolidated balance sheet of the Group and of the Company's equity interest in associated undertakings after making such adjustments as in the opinion of the Auditors may be appropriate, including adjustments to take account of any alterations to such reserves resulting from any distributions or any issues of share capital whether for cash or other consideration (including any transfers to share premium account in connection therewith) or any payments up by capitalisation from reserves of share capital theretofore not paid up or any reductions of paid up share capital or share premium account which may have taken place since the date of such balance sheet, less any amounts included in the reserves and appearing on such consolidation as being reserved or set aside for future taxation assessable by reference to profits earned down to the date to which such balance sheets are made up and after adding back an appropriate proportion of the amount of goodwill arising on acquisitions, made since 31 March 1989, of companies and businesses remaining within the Group or associated undertakings of the Company which, as at the date of the last such audited consolidated balance sheet, has been written off against reserves in accordance with United Kingdom accounting practices, the appropriate proportion of an amount of goodwill arising on any such acquisition being such amount thereof as would not have been amortised by such date if such goodwill were to be amortised over forty years; (b) the expression cash deposits means all cash deposits (otherwise than on current account) with banks (not being the Company or any subsidiary of the Company), certificates of deposit and securities of governments and companies and similar instruments owned by the Company and/or any subsidiary of the Company which are or represent amounts Page 34 available (or which will become available) for repayment of any moneys borrowed; (c) the nominal or principal amount of any share capital, debentures or moneys borrowed from any person or body, the beneficial interest in which or the right to payment or repayment of which is not for the time being owned by and the repayment of which is guaranteed or secured by or is the subject of an indemnity given or assumed by the Company or any of its subsidiaries (but in the case of a subsidiary only that proportion thereof as the equity share capital of such subsidiary which is beneficially owned directly or indirectly by the Company bears to the total equity share capital of such subsidiary) shall be deemed to be moneys borrowed by the Company. (4) For the purpose of this Article capital allotted shall be treated as issued and any capital already called up or payable at any fixed future date shall be treated as already paid up. (5) Moneys borrowed for the purpose and within four months applied in repaying other borrowed moneys falling to be taken into account shall not themselves be taken into account until such application. (6) For the purpose of sub-paragraph (2) above there shall be included in the meanings of moneys borrowed and cash deposits such proportion of the money borrowed by, or cash deposits of, a subsidiary company as the equity share capital of such subsidiary which is beneficially owned directly or indirectly by the Company bears to the total equity share capital of such subsidiary and the remainder of the money borrowed by, and the cash deposits of, such subsidiary shall be excluded. (7) A certificate or report by the auditors for the time being of the Company as to the amount of the adjusted total of capital and reserves or the amount of any moneys borrowed or to the effect that the limit imposed by this Article has not been or will not be exceeded at any particular time or times shall be conclusive evidence of such amount or fact for the purposes of this Article. (8) No person dealing with the Company or any of its subsidiaries shall by reason of the foregoing provision be concerned to see or enquire whether this limit is observed and no debt incurred or security given in excess of such limit shall be invalid or ineffectual unless the lender or the recipient of the security had at the time when the debt was incurred or Page 35 security given express notice that the limit hereby imposed had been or would thereby be exceeded. DISQUALIFICATION AND REMOVAL OF DIRECTORS Disqualification of a director 116. The office of a director shall be vacated if: (a) he ceases to be a director by virtue of any provisions of the Companies Acts or these Articles or he becomes prohibited by law from being a director; or (b) he becomes bankrupt or makes any arrangement or composition with his creditors generally or shall apply to the court for an interim order under section 253 of the Insolvency Act 1986 in connection with a voluntary arrangement under that Act; or (c) he is, or may be, suffering from mental disorder and either: (i) he is admitted to hospital in pursuance of an application for admission for treatment under the Mental Health Act 1983 or, in Scotland, an application for admission under the Mental Health (Scotland) Act 1984; or (ii) an order is made by a court having jurisdiction (whether in the United Kingdom or elsewhere) in matters concerning mental disorder for his detention or for the appointment of a receiver, curator bonis or other person to exercise powers with respect to his property or affairs; or (d) he resigns his office by notice to the Company or, having been appointed for a fixed term, the term expires or his office as a director is vacated pursuant to Article 100; or (e) he shall for more than six consecutive months have been absent without permission of the board from meetings of the board held during that period and his alternate director (if any) shall not during such period have attended in his stead and the board resolves that his office be vacated; (f) he is requested to resign in writing by all his co-directors. In calculating the number of directors who are required to make such a request to the director, (i) there shall be excluded any alternate director appointed by him acting in his capacity as such; and (ii) a director and any alternate director appointed by him and acting in Page 36 his capacity as such shall constitute a single director for this purpose, so that the signature of either shall be sufficient. Power of Company to remove director 117. The Company may, in accordance with and subject to the provisions of the Companies Acts, by ordinary resolution of which special notice has been given, remove any director from office (notwithstanding any provision of these Articles or of any agreement between the Company and such director, but without prejudice to any claim he may have for damages for breach of any such agreement) and, by ordinary resolution, appoint another person in place of a director so removed from office and any person so appointed shall be treated for the purpose of determining the time at which he or any other director is to retire by rotation as if he had become a director on the day on which the director in whose place he is appointed was last elected a director. In default of such appointment the vacancy arising upon the removal of a director from office may be filled as a casual vacancy. REMUNERATION OF NON-EXECUTIVE DIRECTORS Remuneration of directors 118. The ordinary remuneration of the directors who do not hold executive office for their services (excluding amounts payable under any other provision of these Articles) shall not exceed in aggregate 'L'250,000 per annum or such higher amount as the Company may from time to time by ordinary resolution determine. Subject thereto, each such director shall be paid a fee (which shall be deemed to accrue from day to day) at such rate as may from time to time be determined by the board. Additional remuneration for special services 119. The directors may grant special remuneration to any director who, being called upon, shall perform any special or extra services to or at the request of the Company. Such special remuneration may be made payable to such director in addition to or in substitution for his ordinary remuneration (if any) as a director, and may, without prejudice to the provisions of Article 118, be made payable by a lump sum or by way of salary or commission on the dividends or profits of the Company or of any other company in which the Company is interested or other participation in any such profits or otherwise, or by any or all or partly by one and partly by another or other of those modes. DIRECTORS' EXPENSES Directors may be paid expenses 120. The directors may be paid all travelling, hotel, and other expenses properly incurred by them in connection with their attendance at meetings of the board or committees of the board or general meetings or separate Page 37 meetings of the holders of any class of shares or of debentures of the Company or otherwise in connection with the discharge of their duties. EXECUTIVE DIRECTORS Appointment to executive office 121. Subject to the provisions of the Companies Acts, the board may appoint one or more of its body to be the holder of any executive office (except that of auditor) under the Company and may enter into an agreement or arrangement with any director for his employment by the Company or for the provision by him of any services outside the scope of the ordinary duties of a director. Any such appointment, agreement or arrangement may be made upon such terms, including terms as to remuneration, as the board determines. The board may revoke or vary any such appointment but without prejudice to any rights or claims which the person whose appointment is revoked or varied may have against the Company by reason thereof. Termination of appointment to executive office 122. Any appointment of a director to an executive office shall terminate if he ceases to be a director but without prejudice to any rights or claims which he may have against the Company by reason of such cesser. A director appointed to an executive office shall not ipso facto cease to be a director if his appointment to such executive office terminates. Emoluments to be determined by the board 123. The emoluments of any director holding executive office for his services as such shall be determined by the board, and may be of any description, and (without limiting the generality of the foregoing) may include admission to or continuance of membership of any scheme (including any share acquisition scheme) or fund instituted or established or financed or contributed to by the Company for the provision of pensions, life assurance or other benefits for employees or their dependants, or the payment of a pension or other benefits to him or his dependants on or after retirement or death, apart from membership of any such scheme or fund. DIRECTORS' INTERESTS Directors may contract with the Company 124.1 Subject to the provisions of the Companies Acts, and provided that he has disclosed to the board the nature and extent of any material interest of his, a director notwithstanding his office: (a) may be a party to, or otherwise interested in, any transaction or arrangement with the Company or in which the Company is otherwise interested; Page 38 (b) may act by himself or his firm in a professional capacity for the Company (otherwise than as auditor) and he or his firm shall be entitled to remuneration for professional services as if he were not a director; (c) may be a director or other officer of, or employed by, or a party to any transaction or arrangement with, or otherwise interested in, any body corporate promoted by the Company or in which the Company is otherwise interested; and (d) shall not, by reason of his office, be accountable to the Company for any benefit which he derives from any such office or employment or from any such transaction or arrangement or from any interest in any such body corporate and no such transaction or arrangement shall be liable to be avoided on the ground of any such interest or benefit. Notification of interests 124.2 For the purposes of this Article: (1) a general notice given to the board that a director is to be regarded as having an interest of the nature and extent specified in the notice in any transaction or arrangement in which a specified person or class of persons is interested shall be deemed to be a disclosure that the director has an interest in any such transaction of the nature and extent so specified; and (2) an interest of which a director has no knowledge and of which it is unreasonable to expect him to have knowledge shall not be treated as an interest of his. Exercise by Company of voting rights 125. The board may exercise the voting power conferred by the shares in any body corporate held or owned by the Company in such manner in all respects as it thinks fit (including the exercise thereof in favour of any resolution appointing its members or any of them directors of such body corporate, or voting or providing for the payment of remuneration to the directors of such body corporate). GRATUITIES, PENSIONS AND INSURANCE Gratuities and pensions 126.1 The board may (by establishment or maintenance of schemes or otherwise) provide benefits, whether by the payment of gratuities or pensions or by insurance or otherwise, for any past or present director or employee of the Company or any of its subsidiaries or any body corporate associated with, or any business acquired by, any of them, and for any member of his family (including a spouse and a former spouse) or any Page 39 person who is or was dependent on him, and may (as well before as after he ceases to hold such office or employment) contribute to any fund and pay premiums for the purchase or provision of any such benefit. Insurance 126.2 Without prejudice to the provisions of Article 177, the board shall have the power to purchase and maintain insurance for or for the benefit of any persons who are or were at any time directors, officers, or employees of the Company, or of any other company which is its holding company or in which the Company or such holding company has any interest whether direct or indirect or which is in any way allied to or associated with the Company, or of any subsidiary undertaking of the Company or any such other company, or who are or were at any time trustees of any pension fund in which employees of the Company or any such other company or subsidiary undertaking are interested, including (without prejudice to the generality of the foregoing) insurance against any liability incurred by such persons in respect of any act or omission in the actual or purported execution or discharge of their duties or in the exercise or purported exercise of their powers or otherwise in relation to their duties, powers or offices in relation to the Company or any such other company, subsidiary undertaking or pension fund. Directors not liable to account 126.3 No director or former director shall be accountable to the Company or the members for any benefit provided pursuant to this Article and the receipt of any such benefit shall not disqualify any person from being or becoming a director of the Company. Section 719 of the Act 127. Pursuant to section 719 of the Act, the board is hereby authorised to make such provision as may seem appropriate for the benefit of any persons employed or formerly employed by the Company or any of its subsidiaries in connection with the cessation or the transfer of the whole or part of the undertaking of the Company or any subsidiary. Any such provision shall be made by a resolution of the board in accordance with the said section. PROCEEDINGS OF DIRECTORS Convening meetings 128. Subject to the provisions of these Articles, the board may regulate its proceedings as it thinks fit. A director may, and the secretary at the request of a director shall, call a meeting of the board. Notice of a board meeting shall be deemed to be properly given to a director if it is given to him personally or by word of mouth or sent in writing or by such other electronic or voice-related means to him at his last known address or any other address given by him to the Company for this purpose. It shall not be necessary to give notice of a board meeting to any director who is for Page 40 the time being absent from the United Kingdom. No account is to be taken of directors absent from the United Kingdom when considering the adequacy of the period of notice of the meeting. Questions arising at a meeting shall be decided by a majority of votes. In the case of an equality of votes, the chairman shall have a second or casting vote. Any director may waive notice of a meeting and any such waiver may be retrospective. Quorum 129. The quorum for the transaction of the business of the board may be fixed by the board and unless so fixed at any other number shall be two. A person who holds office only as an alternate director shall, if his appointor is not present, be counted in the quorum. Any director who ceases to be a director at a board meeting may continue to be present and to act as a director and be counted in the quorum until the termination of the board meeting if no director objects. Powers of directors if number falls below minimum 130. The continuing directors or a sole continuing director may act notwithstanding any vacancies in their number, but, if the number of directors is less than the number fixed as the quorum, the continuing directors or director may act only for the purpose of filling vacancies or of calling a general meeting. If there is no director able or willing to act, then any two members may call a general meeting for the purpose of appointing directors. Chairman and deputy chairman 131. The board may appoint one of their number to be the chairman, and one of their number to be the deputy chairman, of the board and may at any time remove either of them from such office. Unless he is unwilling to do so, the director appointed as chairman, or in his stead the director appointed as deputy chairman, shall preside at every meeting of the board at which he is present. If there is no director holding either of those offices, or if neither the chairman nor the deputy chairman is willing to preside or neither of them is present within five minutes after the time appointed for the meeting, the directors present may appoint one of their number to be chairman of the meeting. Validity of acts of the board 132. All acts bona fide done by a meeting of the board, or of a committee of the board, or by a person acting as a director or alternate director, shall, notwithstanding that it be afterwards discovered that there was a defect in the appointment of any director or any member of the committee or alternate director or that any of them were disqualified from holding office, or had vacated office, or were not entitled to vote, be as valid as if every such person had been duly appointed and was qualified and had continued to be a director or, as the case may be, an alternate director and had been entitled to vote. Page 41 Resolutions in writing 133. A resolution in writing signed by all the directors entitled to receive notice of a meeting of the board or of a committee of the board (not being less than the number of directors required to form a quorum of the board) shall be as valid and effectual as if it had been passed at a meeting of the board or (as the case may be) a committee of the board duly convened and held, and for this purpose: (a) a resolution may consist of several documents to the same effect each signed by one or more directors; (b) a resolution signed by an alternate director need not also be signed by his appointor; and (c) a resolution signed by a director who has appointed an alternate director need not also be signed by the alternate director in that capacity. Meetings by telephone, etc. 134. Without prejudice to the first sentence of Article 128, a meeting of the board or of a committee of the board may consist of a conference between directors and (in accordance with Article 112), co-opted members who are not all in one place, but of whom each is able (directly or by video conferencing, telephonic or other similar communication) to speak to each of the others, and to be heard by each of the others simultaneously. A director or co-opted member as the case may be taking part in such a conference shall be deemed to be present in person at the meeting and shall be entitled to vote or be counted in a quorum accordingly. Such a meeting shall be deemed to take place where the largest group of those participating in the conference is assembled, or, if there is no such group, where the chairman of the meeting then is. The word meeting in these Articles shall be construed accordingly. Directors' power to vote on contracts in which they are interested 135.1 Except as otherwise provided by these Articles, a director shall not vote at a meeting of the board or a committee of the board on any resolution of the board concerning a matter in which he has an interest (other than by virtue of his interests in shares or debentures or other securities of, or otherwise in or through, the Company) which (together with any interest of any person connected with him) is to his knowledge material unless his interest arises only because the resolution concerns one or more of the following matters: (a) the giving of a guarantee, security or indemnity in respect of money lent or obligations incurred by him or any other person at the request of, or for the benefit of, the Company or any of its subsidiary undertakings; Page 42 (b) the giving of a guarantee, security or indemnity in respect of a debt or obligation of the Company or any of its subsidiary undertakings for which the director has assumed responsibility (in whole or part and whether alone or jointly with others) under a guarantee or indemnity or by the giving of security; (c) a contract, arrangement, transaction or proposal concerning an offer of shares, debentures or other securities of the Company or any of its subsidiary undertakings for subscription or purchase, in which offer he is or may be entitled to participate as a holder of securities or in the underwriting or sub-underwriting of which he is to participate; (e) a contract, arrangement, transaction or proposal concerning any other body corporate in which he or any person connected with him is interested, directly or indirectly, and whether as an officer, shareholder, creditor or otherwise, if he and any persons connected with him do not to his knowledge hold an interest (as that term is used in sections 198 to 211 of the Act) representing one per cent. or more of either any class of the equity share capital of such body corporate (or any other body corporate through which his interest is derived) or of the voting rights available to members of the relevant body corporate (any such interest being deemed for the purpose of this Article to be a material interest in all circumstances); (f) a contract, arrangement, transaction or proposal for the benefit of employees of the Company or of any of its subsidiary undertakings which does not award him any privilege or benefit not generally accorded to the employees to whom the arrangement relates; and (g) a contract, arrangement, transaction or proposal concerning any insurance which the Company is empowered to purchase or maintain for or, for the benefit of, any directors of the Company or for persons who include directors of the Company. Interests of connected person and alternate director 135.2 For the purpose of determining whether a proposal concerns a body corporate in which a director is interested, there shall be disregarded any shares held by a director as bare or custodian trustee and in which he has no beneficial interest, any shares comprised in a trust in which the director's interest is in reversion or remainder if and so long as some other person is entitled to receive the income thereof, and any shares comprised in an authorised unit trust in which the director is only interested as a unit holder. For the purposes of this Article, an interest of a person who is, for any purpose of the Companies Acts (excluding any statutory modification Page 43 thereof not in force when this Article becomes binding on the Company), connected with a director shall be treated as an interest of the director and, in relation to an alternate director, an interest of his appointor shall be treated as an interest of the alternate director without prejudice to any interest which the alternate director has otherwise. Exclusion of director from quorum 136. A director shall not be counted in the quorum present at a meeting in relation to a resolution on which he is not entitled to vote. Decision of chairman final and conclusive 137. If a question arises at a meeting of the board or of a committee of the board as to the entitlement of a director to vote or be counted in a quorum, the question may, before the conclusion of the meeting, be referred to the chairman of the meeting and his ruling in relation to any director other than himself shall be final and conclusive except in a case where the nature or extent of the interests of the director concerned have not been fairly disclosed. If any such question arises in respect of the chairman of the meeting, it shall be decided by resolution of the board (on which the chairman shall not vote) and such resolution will be final and conclusive except in a case where the nature and extent of the interests of the chairman have not been fairly disclosed. SECRETARY Appointment and removal of secretary 138. Subject to the provisions of the Companies Acts, the secretary shall be appointed by the board for such term, at such remuneration and upon such conditions as it may think fit. The board may, in addition, and at any time and from time to time appoint any person to be assistant or deputy secretary and anything required or authorised to be done by or to the secretary may be done by or to any assistant or deputy secretary so appointed and any secretary or assistant or deputy secretary so appointed may be removed by the board, but without prejudice to any claim for damages for breach of any contract of service between him and the Company. MINUTES Minutes required to be kept 139. The board shall cause minutes to be made in books kept for the purpose: (a) of all appointments of officers made by the board; and (b) of all proceedings at meetings of the Company, of the holders of any class of shares in the Company, of the board, and of committees of the board, including the names of the directors present at each such meeting. Page 44 Any such minutes, if purporting to be signed by the chairman of the meeting to which they relate or of the meeting at which they are read, shall be sufficient evidence without any further proof of the facts therein stated. THE SEAL Authority required for use of seal 140. The seal shall only be used by the authority of a resolution of the board or of a committee of the board. The board may determine who shall sign any instrument to which the seal is affixed and unless otherwise so determined it shall be signed by at least one director and the secretary or by at least two directors. Any document may be executed under the seal by impressing the seal by mechanical means or by printing the seal or a facsimile of it by any other means to the document. Certificates for shares and debentures 141. The board may by resolution determine either generally or in any particular case that any certificates for shares or debentures or representing any other form of security may, in accordance with the Act, have the seal and signatures affixed to them by some mechanical means, or printed thereon or that such certificates need not bear any signature. Official seal for use abroad 142. The Company may exercise the powers conferred by section 39 of the Act with regard to having an official seal for use abroad. Execution of instrument as a deed under hand 143. Where the Act so permits, any instrument signed, with the authority of a resolution of the board or of a committee of the board, by one director and the secretary or by two directors and expressed (in whatever form of words) to be executed by the Company shall have the same effect as if executed under the seal, provided that no instrument which makes it clear on its face that it is intended by the persons making it to have effect as a deed shall be signed without the authority of the board. Delivery of deeds 144. A document which is executed by the Company as a deed shall not be deemed to be delivered by the Company solely as a result of its having been executed by the Company. REGISTERS Overseas and local registers 145. Subject to the provisions of the Companies Acts, the Company may keep an overseas or local or other register in any place, and the board may make, amend and revoke any such regulations as it may think fit respecting the keeping of the register. Certified copies 146. Any director or the secretary or any person appointed by the board for the purpose shall have power to authenticate any documents affecting the constitution of the Company and any resolutions passed by the Page 45 Company or the holders of any class of shares of the Company or the board or any committee of the board and any books, records, documents and accounts relating to the business of the Company, and to certify copies thereof or extracts therefrom as true copies or extracts. A document purporting to be a copy of a resolution, or the minutes of or an extract from the minutes of a meeting of the Company or the holders of any class of shares of the Company or of the board or any committee of the board that is certified as aforesaid shall be conclusive evidence in favour of all persons dealing with the Company upon the faith thereof that such resolution has been duly passed or, as the case may be, that such minutes or extract are a true and accurate record of proceedings at a duly constituted meeting. CHEQUES Signature of cheques and bills 147. All cheques, promissory notes, drafts, bills of exchange, and other negotiable or transferable instruments, and all receipts for moneys paid to the Company, shall be signed, drawn, accepted, endorsed, or otherwise executed, as the case may be, in such manner as the directors shall from time to time by resolution determine. DIVIDENDS Declaration of dividends 148. Subject to the provisions of the Companies Acts, the Company may by ordinary resolution declare dividends in accordance with the respective rights of the members, but no dividend shall exceed the amount recommended by the board. Fixed and interim dividends 149. Subject to the provisions of the Companies Acts, the board may pay fixed dividends on any class of shares carrying an entitlement to fixed dividends, expressed to be payable on fixed dates, on the dates prescribed and, subject thereto, may pay interim dividends if it appears to the board that they are justified by the profits of the Company available for distribution. If the share capital is divided into different classes, the board may pay interim dividends on shares which confer deferred or non-preferred rights with regard to dividend as well as on shares which confer preferential rights with regard to dividend, but no interim dividend shall be paid on shares carrying deferred or non-preferred rights if, at the time of payment, any preferential dividend is in arrear. The board may also pay at intervals settled by it any dividend payable at a fixed rate if it appears to the board that the profits available for distribution justify the payment. Provided the board acts in good faith it shall not incur any liability to the holders of shares conferring preferred rights for any loss they may suffer Page 46 by the lawful payment of an interim dividend on any shares having deferred or non-preferred rights. Apportionment of dividends 150. Except as otherwise provided by the rights attached to shares, all dividends shall be declared and paid according to the amounts paid up on the shares on which the dividend is paid; but no amount paid on a share in advance of the date on which a call is payable shall be treated for the purposes of this Article as paid on the share. All dividends shall be apportioned and paid proportionately to the amounts paid up on the shares during any portion or portions of the period in respect of which the dividend is paid; but, if any share is issued on terms providing that it shall rank for dividend as from a particular date, that share shall rank for dividend accordingly. Dividends in specie 151. A general meeting declaring a dividend may, upon the recommendation of the board, by ordinary resolution direct that it shall be satisfied wholly or partly by the distribution of assets, and in particular of paid up shares or debentures of any other body corporate. Where any difficulty arises in regard to the distribution, the board may settle the same as it thinks fit and, in particular, may fix the value for distribution of any assets and may determine that cash shall be paid to any member upon the footing of the value so fixed in order to adjust the rights of members and may vest any assets in trustees. Scrip dividends 152. The directors may, if authorised by an ordinary resolution of the Company, offer any holders of shares the right to elect to receive shares, credited as fully paid, instead of cash in respect of the whole (or some part, to be determined by the directors) of all or any dividends specified by the ordinary resolution. The following provisions shall apply: (a) An ordinary resolution may specify a particular dividend, or may specify all or any dividends declared within a specified period. (b) The entitlement of each holder of shares to new shares shall be such that the relevant value of the entitlement (calculated by reference to the average quotation) shall not be less than and may (with the sanction of a special resolution of the Company) exceed the cash amount (disregarding any tax credit) of the dividend that such holder elects to forego. For this purpose the average quotation of a share shall be the average of the middle market quotations for those shares on The London Stock Exchange, as derived from the Daily Official List, on the day on which the shares are first quoted "ex" the relevant dividend and the four subsequent dealing days, or in such other manner as may be determined by or in accordance with the Page 47 ordinary resolution, but shall never be less than the par value of the share. A certificate or report by the auditors as to the amount of the relevant value in respect of any dividend shall be conclusive evidence of that amount. (c) On or as soon as practicable after announcing that any dividend is to be declared or recommended, the directors, if they intend to offer an election in respect of that dividend, shall also announce that intention. If, after determining the basis of allotment, the directors decide to proceed with the offer, they shall notify the holders of shares in writing of the terms and conditions of the right of election offered to them, specifying the procedure to be followed and place at which, and the latest time by which, elections or notices amending or terminating existing elections must be lodged in order to be effective. (d) The directors shall not proceed with any election unless the Company has sufficient unissued shares authorised for issue and sufficient reserves or funds that may be appropriated to give effect to it after the basis of allotment is determined. (e) The directors may exclude from any offer any holders of shares where the directors believe the making of the offer to them would or might involve contravention of the laws of any territory or that for any other reason the offer should not be made to them. (f) The dividend (or that part of the dividend in respect of which a right of election has been offered) shall not be payable in cash on shares in respect of which an election has been made (the elected shares) and instead additional shares shall be allotted to the holders of the elected shares on the basis stated in (b) above. For such purpose the directors shall appropriate out of any amount for the time being standing to the credit of any reserve or fund (including the profit and loss account), whether or not the same is available for distribution as the directors may determine, a sum equal to the aggregate nominal amount of the additional shares to be allotted and apply it in paying up in full the appropriate number of unissued shares for allotment and distribution to the holders of the elected shares on the basis stated in (b) above. (g) The additional shares when allotted shall rank pari passu in all respects with the fully paid shares of the same class then in issue Page 48 except that they will not be entitled to participation in the relevant dividend. (h) No fraction of a share shall be allotted. The directors may make such provision as they think fit for any fractional entitlements including provision whereby, in whole or in part, the benefit thereof accrues to the Company and/or under which fractional entitlements are accrued and/or retained and in each case accumulated on behalf of any holder and such accruals or retentions are applied to the allotment of fully paid shares to such holder and/or provision whereby cash payments may be made to holders in respect of their fractional entitlements. (i) The directors may do all acts and things considered necessary or expedient to give effect to the allotment and issue of any shares pursuant to this Article or otherwise in connection with any offer made pursuant to this Article and may authorise any person, acting on behalf of the holders concerned, to enter into an agreement with the Company providing for such allotment and incidental matters and any agreement made under such authority shall be effective and binding on all concerned. (j) The directors may, in their discretion, amend, suspend or terminate any offer which is in operation. Where the Ordinary Shares constitute authorised investments for the purposes of the Trustee Investments Act 1961, the directors shall not, in any event (unless otherwise decided by the Company in general meeting), enable holders to forego, under this Article, a nominal amount (being such amount as the directors may decide) of dividend payable on each Ordinary Share in any calendar year. Permitted deductions 153. The board may deduct from any dividend, or other moneys payable to any member in respect of a share, any moneys presently payable by him to the Company in respect of that share. Where a person is entitled by transmission to a share, the board may retain any dividend payable in respect of that share until that person (or that person's transferee) becomes the holder of that share. Procedure for payment 154.1 Any dividend or other moneys payable in respect of a share may be paid: (a) in cash; or Page 49 (b) by cheque or warrant made payable to or to the order of the holder or person entitled to payment; or (c) by any direct debit, bank or other funds transfer system to the holder or person entitled to payment or, if practicable, to a person designated in writing by the holder or person entitled to payment; or (d) by any other method approved by the board and agreed (in such form as the Company thinks appropriate) by the holder or person entitled to payment, including (without limitation) in respect of an uncertificated share, by means of the relevant system (subject to the facilities and requirements of the relevant system). Joint entitlement 154.2 If two or more persons are registered as joint holders of any share, or are entitled by transmission jointly to a share, the Company may: (a) pay any dividend or other moneys payable in respect of the share to any one of them and any one of them may give effectual receipt for that payment; and (b) for the purposes of Article 154.1, rely in relation to the share on the written direction, designation or agreement of any one of them. Payment by post 154.3 A cheque or warrant may be sent by post: (a) where a share is held by a sole holder, to the registered address of the holder of the share; or (b) if two or more persons are the holders, to the registered address of the person who is first named in the register; or (c) if a person is entitled by transmission to the share, as if it were a notice to be given under Article 163; or (d) in any case, to such person and to such address as the person entitled to payment may in writing direct. Discharge to Company and risk 154.4 Payment of a cheque or warrant by the bank on which it was drawn or the transfer of funds by the bank instructed to make the transfer or, in respect of an uncertificated share, the making of payment in accordance with the facilities and requirements of the relevant system (which, if the relevant system is CREST, shall be the creation of an assured payment obligation in respect of the dividend or other moneys payable in favour of the settlement bank of the member or other person concerned) shall be a good discharge to the Company. Every cheque or warrant sent in accordance with these Articles shall be at the risk of the holder or person Page 50 entitled. The Company shall have no responsibility for any sums lost or delayed in the course of payment by any other method used by the Company in accordance with Article 154.1. Interest not payable 155. No dividend or other moneys payable in respect of a share shall bear interest against the Company unless otherwise provided by the rights attached to the share. Forfeiture of unclaimed dividends 156. Any dividend which has remained unclaimed for twelve years from the date when it was declared or became due for payment shall, if the board so resolves, be forfeited and cease to remain owing by the Company. The payment by the board of any unclaimed dividend or other moneys payable in respect of a share into a separate account shall not constitute the Company a trustee thereof. The Company shall be entitled to cease sending dividend warrants or cheques by post or otherwise in respect of any dividend or other moneys payable on a share if such instruments, sent in accordance with Article 154 above, in respect of that share have been returned to the Company undelivered or left uncashed on at least two consecutive occasions. The entitlement conferred on the Company by this Article in respect of any share shall cease if the holder of that share or person entitled thereto claims a dividend or cashes a dividend warrant or cheque. CAPITALISATION OF PROFITS AND RESERVES Power to capitalise 157. The board may with the authority of an ordinary resolution of the Company: (a) subject as hereinafter provided, resolve to capitalise any undistributed profits of the Company not required for paying any preferential dividend (whether or not they are available for distribution) or any sum standing to the credit of any reserve or other fund, including the Company's share premium account and capital redemption reserve, if any; (b) on the record date specified in the relevant resolution, appropriate the sum resolved to be capitalised to the members or any class of members who would have been entitled to it if it were distributed by way of dividend and in the same proportions and apply such sum on their behalf either in or towards paying up the amounts, if any, for the time being unpaid on any shares held by them respectively, or in paying up in full unissued shares, debentures or other obligations of the Company of a nominal amount equal to that sum, and allot the shares, debentures or other obligations credited as fully paid to Page 51 those members, or as they may direct, in those proportions, or partly in one way and partly in the other; but the share premium account, the capital redemption reserve, and any profits which are not available for distribution may, for the purposes of this Article, only be applied in paying up unissued shares to be allotted to members credited as fully paid; (c) where shares or debentures become, or would otherwise become, distributable under this Article in fractions, make such provision by authorising the sale and transfer to any person of fractions to which any members would become entitled or resolve that the distribution be made as nearly as practicable in the correct proportion but not exactly so or may ignore fractions altogether or resolve that cash payments be made to any members in order to adjust the rights of all parties or otherwise as (in each case) the board determines; (d) authorise any person to enter on behalf of all the members concerned into an agreement with the Company providing for either: (i) the allotment to such members respectively, credited as fully paid, of any shares, debentures or other obligations to which they are entitled upon such capitalisation; or (ii) the payment up by the Company on behalf of such members (by the application thereto of their respective proportions of the profits resolved to be capitalised) of the amounts, or any part of the amounts, remaining unpaid on their existing shares, and any agreement made under such authority shall be binding on all such members; and (e) generally do all acts and things required to give effect to such resolution as aforesaid. RECORD DATES Record dates for dividends, etc. 158. Notwithstanding any other provision of these Articles, the Company or the board may fix any date as the record date for any dividend, distribution, allotment or issue, and such record date may be on or at any time before or after any date on which the dividend, distribution, allotment or issue is declared, paid or made. Page 52 ACCOUNTS Rights to inspect records 159. No member shall (as such) have any right of inspecting any accounting records or other book or document of the Company except as conferred by statute or authorised by the board or by ordinary resolution of the Company or order of a court of competent jurisdiction. Delivery of balance sheets and profit and loss accounts 160. A copy of every balance sheet (which shall be signed by two directors) and profit and loss account (including any documents required by law to be annexed thereto) which is to be laid before the Company in general meeting and of the directors' and auditors' reports shall, at least twenty-one days previous to the meeting, be delivered or sent by post to every member and to every debenture holder of the Company of whose address the Company is aware, and to every other person who is entitled to receive notice of meetings from the Company under the provisions of the Companies Acts or of these Articles or, in the case of joint holders of any share or debenture, to one of the joint holders, provided that the requirements of this Article shall be deemed satisfied in relation to any member by sending to such member, where permitted by the Companies Acts and instead of such copies, a summary financial statement derived from the Company's annual accounts and the report of the directors and prepared in the form and containing the information prescribed by the Companies Acts and any regulations made thereunder. NOTICES When notice required to be in writing 161.1 Any notice to be given to or by any person pursuant to these Articles shall be in writing except that a notice calling a meeting of the board need not be in writing. Method of giving notice 162.1 The Company may serve or deliver any notice or other document on or to a member either personally or by sending it by post in a prepaid envelope addressed to the member at his registered address or by leaving it at that address. In the case of joint holders of a share, all notices or other documents shall be served on or delivered to the joint holder whose name stands first in the register in respect of the joint holding and any notice or other document so served or delivered shall be deemed for all purposes sufficient service on or delivery to all the joint holders. A member whose registered address is not within the United Kingdom and who gives to the Company an address within the United Kingdom at which notices may be given to him shall be entitled to have notices given to him at that address, but otherwise: Page 53 (a) no such members shall be entitled to receive any notice from the Company; and (b) without prejudice to the generality of the foregoing, any notice of a general meeting of the Company which is in fact given or purports to be given to such members shall be ignored for the purpose of determining the validity of the proceedings at such general meeting. Any notice or other document required to be sent to or served upon the Company, or upon any officer of the Company, may be sent or served by leaving the same or sending it prepaid through the post addressed to the Company or to such officer at the office. Deemed receipt of notice 162.2 A member present, either in person or by proxy, at any meeting of the Company or of the holders of any class of shares in the Company shall be deemed to have received notice of the meeting and, where requisite, of the purposes for which it was called. Notice to persons entitled by transmission 163. A notice or other document may be served or delivered by the Company on or to the persons entitled by transmission to a share, whether in consequence of the death or bankruptcy of a member or otherwise by sending or delivering it, in any manner authorised by these Articles for the service or delivery of a notice or other document on or to a member, addressed to them by name, or by the title of representatives of the deceased, or trustee of the bankrupt or by any like description at the address, if any, within the United Kingdom supplied for that purpose by the persons claiming to be so entitled. Until such an address has been supplied, a notice or other document may be served or delivered in any manner in which it might have been served or delivered if the death or bankruptcy or other event giving rise to the transmission had not occurred. Transferees etc. bound by prior notice 164. Every person who becomes entitled to a share shall be bound by any notice in respect of that share which, before his name is entered in the register, has been duly given to a person from whom he derives his title, provided that no person who becomes entitled by transmission to a share shall be bound by any direction notice issued under Article 81 to a person from whom he derives his title. When notices by post deemed served 165. Proof that an envelope containing a notice was properly addressed, prepaid and posted shall be conclusive evidence that the notice was given. A notice sent by post shall be deemed to be given: (a) if sent by first class post from an address in the United Kingdom or another country to another address in the United Kingdom or, as the Page 54 case may be, that other country, on the day following that on which the envelope containing it was posted; (b) if sent by airmail from an address in the United Kingdom to an address outside the United Kingdom, on the day following that on which the envelope containing it was posted; and (c) in any other case, on the second day following that on which the envelope containing it was posted. Notice during disruption of postal services 166. If at any time the Company is unable effectively to convene a general meeting by notices sent through the post in the United Kingdom as a result of the suspension or curtailment of postal services, notice of such general meeting may be sufficiently given by advertisement in the United Kingdom. Any notice given by advertisement for the purpose of this Article shall be advertised on the same date in at least two daily newspapers having a national circulation and such notice shall be deemed to have been served on all persons who are entitled to have notice of meetings served on them at noon on the day when the advertisement appears. In any such case the Company shall send confirmatory copies of the notice by post if at least seven days prior to the meeting the posting of notices to addresses throughout the United Kingdom again becomes practicable. DESTRUCTION OF DOCUMENTS Power of Company to destroy documents 167.1 The Company shall be entitled to destroy all instruments of transfer of shares which have been registered, and all other documents on the basis of which any entry is made in the register, at any time after the expiration of six years from the date of registration thereof, and all dividend mandates or variations or cancellations thereof and notifications of change of address at any time after the expiration of two years from the date of recording thereof and all share certificates which have been cancelled at any time after the expiration of one year from the date of the cancellation thereof and all paid dividend warrants and cheques at any time after the expiration of one year from the date of actual payment thereof and all instruments of proxy which have been used for the purpose of a poll at any time after the expiration of one year from the date of such use and all instruments of proxy which have not been used for the purpose of a poll at any time after one month from the end of the meeting to which the instrument of proxy relates and at which no poll was demanded. It shall conclusively be presumed in favour of the Company that every entry in the register purporting to have been made on the basis of an instrument of transfer or other document so destroyed was duly and properly made, that Page 55 every instrument of transfer so destroyed was a valid and effective instrument duly and properly registered, that every share certificate so destroyed was a valid and effective certificate duly and properly cancelled and that every other document hereinbefore mentioned so destroyed was a valid and effective document in accordance with the recorded particulars thereof in the books or records of the Company, provided always that: (a) the provisions aforesaid shall apply only to the destruction of a document in good faith and without notice of any claim (regardless of the parties thereto) to which the document might be relevant; (b) nothing herein contained shall be construed as imposing upon the Company any liability in respect of the destruction of any such document earlier than as aforesaid or in any other circumstances which would not attach to the Company in the absence of this Article; and (c) references herein to the destruction of any document include references to the disposal thereof in any manner. Early destruction 167.2 Any document referred to in this Article may be destroyed earlier than the relevant date authorised by this Article, provided that a permanent record of the document is made which record is not destroyed before that date. UNTRACED SHAREHOLDERS Power to dispose of shares of untraced shareholders 168.1 The Company shall be entitled to sell, at the best price reasonably obtainable, the shares of a member or the shares to which a person is entitled by virtue of transmission on death, bankruptcy, or otherwise by operation of law if and provided that: (a) during the period of twelve years prior to the date of the publication of the advertisements referred to in paragraph (b) below (or, if published on different dates, the first thereof) at least three dividends in respect of the shares in question have been declared and all dividend warrants and cheques which have been sent in the manner authorised by these Articles in respect of the shares in question have remained uncashed; and (b) the Company shall as soon as practicable after expiry of the said period of twelve years have inserted advertisements both in a national daily newspaper and in a newspaper circulating in the area of the last known address of such member or other person giving notice of its intention to sell the shares; and Page 56 (c) during the said period of twelve years and the period of three months following the publication of the said advertisements the Company shall have received no indication either of the whereabouts or of the existence of such member or person; and (d) if the shares are listed on The London Stock Exchange, notice shall have been given to the Listing Department of The London Stock Exchange of the Company's intention to make such sale prior to the publication of advertisements. 168.2 If during any twelve year period referred to in paragraph (a) above, further shares have been issued in right of those held at the beginning of such period or of any previously issued during such period and all the other requirements of this Article (other than the requirement that they be in issue for twelve years) have been satisfied in regard to the further shares, the Company may also sell the further shares. Transfer on sale 169. To give effect to any such sale, the board may: (a) where the shares are held in certificated form, authorise any person to execute an instrument of transfer of the shares sold to, or in accordance with the directions of, the purchaser; or (b) where the shares are held in uncertificated form, do all acts and things it considers necessary or expedient to effect the transfer of the shares to, or in accordance with the directions of, the buyer. Effectiveness of transfer 170.1 An instrument of transfer executed by that person in accordance with Article 169(a) shall be as effective as if it had been executed by the holder of, or person entitled by transmission to, the shares. An exercise by the Company of its powers in accordance with Article 169(b) shall be as effective as if exercised by the registered holder of or person entitled by transmission to the shares. The transferee shall not be bound to see to the application of the purchase money, and his title to the shares shall not be affected by any irregularity in, or invalidity of, the proceedings in reference to the sale. Proceeds of sale 170.2 The net proceeds of sale shall belong to the Company which shall be obliged to account to the former member or other person previously entitled as aforesaid for an amount equal to such proceeds and shall enter the name of such former member or other person in the books of the Company as a creditor for such amount. No trust shall be created in respect of the debt, no interest shall be payable in respect of the same and the Company shall not be required to account for any money earned on the Page 57 net proceeds, which may be employed in the business of the Company or invested in such investments as the board from time to time thinks fit. WINDING UP Liquidator may distribute in specie 171. If the Company is wound up, the liquidator may, with the sanction of an extraordinary resolution of the Company and any other sanction required by the Insolvency Act 1986, divide among the members in specie the whole or any part of the assets of the Company and may, for that purpose, value any assets and determine how the division shall be carried out as between the members or different classes of members. The liquidator may, with the like sanction, vest the whole or any part of the assets in trustees upon such trusts for the benefit of the members as he with the like sanction determines, but no member shall be compelled to accept any assets upon which there is a liability. Disposal of assets by liquidator 172. The power of sale of a liquidator shall include a power to sell wholly or partially for shares or debentures or other obligations of another body corporate, either then already constituted or about to be constituted for the purpose of carrying out the sale. Members abroad to give address for service 173. If the Company is wound up, every member of the Company who is not for the time being in the United Kingdom shall be bound, within fourteen days after the passing of an effective resolution to wind up the Company voluntarily, or within the like period after the making of an order for the winding up of the Company, to serve notice on the Company appointing some person resident in London upon whom all processes in relation to or under the winding up of the Company may be served, and in default of such nomination the liquidator of the Company shall be at liberty on behalf of such member to appoint some such person, and service upon any such appointee shall be deemed to be a good personal service on such member for all purposes, and where the liquidator makes any such appointment he shall, with all convenient speed, give notice thereof to such member by advertisement in The Times or any other leading London daily newspaper, or by a letter sent by registered or recorded delivery post and addressed to such member at his address as appearing in the Register, and such notice shall be deemed to be served on the day following that on which the advertisement appears or the letter is posted. SHARE WARRANTS Company may issue warrants 174. Subject to any statutory restrictions for the time being in force, the Company, with respect to fully paid up shares, may issue warrants (hereinafter called share warrants) stating that the bearer of the warrant is Page 58 entitled to the shares therein specified and may provide, by coupons or otherwise, for the payment of future dividends on the shares included in such share warrants. Board may determine conditions 175. The directors may determine and, from time to time, vary the conditions on which share warrants shall be issued and, in particular, upon which a new share warrant or coupon will be issued in place of one worn out, lost, defaced or destroyed, upon which the bearer of the share warrant shall be entitled to attend and vote at general meetings, and upon which a share warrant may be surrendered, and the name of the holder entered in the register in respect of the shares therein specified. No share warrant or coupon may be issued to replace one that has been lost unless the directors are satisfied beyond reasonable doubt that the original has been destroyed. Subject to such conditions and to these Articles, the bearer of a share warrant shall be a member to the full extent. The holder of a share warrant shall be subject to the conditions for the time being in force, whether made before or after the issue of such warrant. The directors may by resolution determine that signatures on share warrants sealed by the Company may be dispensed with or affixed by means of some method or system of mechanical signature and that signatures on share warrants signed on behalf of the Company may be affixed by means of some method or system of mechanical signature or shall be printed in facsimile. Notice to warrant holders 176. Any notice required to be given by the Company to the holders of share warrants shall be sufficiently given if given by advertisement made once in at least one national newspaper and shall be taken as given on the day on which such advertisement appears. A holder of a share warrant shall be entitled in respect thereof to notice of a general meeting only by advertisements as herein provided. A notice to be given by advertisement shall be deemed to have been served on the day on which the advertisement appears. INDEMNITY Indemnity to directors, officers, etc. 177. Subject to the provisions of the Companies Acts but without prejudice to any indemnity to which a director may otherwise be entitled, every director or other officer or auditor of the Company shall be indemnified out of the assets of the Company against all costs, charges, losses, expenses and liabilities incurred by him in the execution or discharge of his duties or the exercise of his powers or otherwise in relation thereto, including (but without limitation) any liability incurred by him in defending any proceedings, whether civil or criminal, in which judgment is given in his favour (or the proceedings are otherwise disposed of without any finding or admission of any material breach of duty on his Page 59 part) or in which he is acquitted or in connection with any application in which relief is granted to him by the court from liability for negligence, default, breach of duty or breach of trust in relation to the affairs of the Company. Page 60 ARTICLES OF ASSOCIATION OF REED INTERNATIONAL P.L.C. (Adopted by special resolution on 16 April 1997, as amended by special resolutions passed on 29 April 1998 and 15 April 1999) CONTENTS
Clause Page ARTICLES OF ASSOCIATION..........................................................1 PRELIMINARY......................................................................1 Table A....................................................................1 Definitions................................................................1 Construction...............................................................3 SHARE CAPITAL....................................................................4 Share Capital..............................................................4 Shares with special rights.................................................4 Uncertificated shares......................................................4 Not separate class of shares...............................................4 Exercise of Company's entitlements in respect of uncertificated share......4 Allotment..................................................................5 Redeemable shares.........................................................5 Authority to allot relevant securities under Section 80 of the Act.........5 Disapplication of pre-emption rights under Section 95 of the Act...........6 Commissions................................................................7 Trusts not recognised......................................................7 Joint holders..............................................................7 VARIATION OF RIGHTS..............................................................7 Method of varying rights...................................................7 Separate class of share....................................................8 When rights deemed to be varied............................................8 No variation of rights.....................................................8 SHARE CERTIFICATES...............................................................8 Members' rights to certificates............................................8 Replacement certificates...................................................9 LIEN.............................................................................9 Company to have lien on shares.............................................9 Enforcement of lien by sale................................................9 Giving effect to sale......................................................9 Application of proceeds....................................................10 CALLS ON SHARES..................................................................10 Power to make calls........................................................10
Time when call made......................................................10 Liability of joint holders................................................10 Interest payable..........................................................10 Deemed calls on allotment.................................................11 Differentiation on calls..................................................11 Payment of calls in advance...............................................11 Rights suspended if payment in arrears....................................11 FORFEITURE AND SURRENDER........................................................11 Notice requiring payment of call..........................................11 Forfeiture for non-compliance.............................................12 Sale of forfeited shares..................................................12 Liability following forfeiture............................................12 Surrender.................................................................13 Extinction of rights......................................................13 Evidence of forfeiture or surrender.......................................13 Power to annul forfeiture or surrender....................................13 TRANSFER OF SHARES..............................................................13 Form and execution of transfer of certificated shares.....................13 Form and execution of transfer of uncertificated shares...................13 Transfers of partly paid shares...........................................13 Invalid transfers of certificated shares..................................14 Transfers by recognised persons...........................................14 Notice of refusal to register.............................................14 Suspension of registration................................................14 No fee payable on registration............................................14 Retention of transfers....................................................14 TRANSMISSION OF SHARES..........................................................14 Transmission..............................................................14 Elections permitted/required..............................................15 Withholding of dividends..................................................15 Rights of persons entitled by transmission................................15 ALTERATION OF SHARE CAPITAL.....................................................15 Alterations by ordinary resolution........................................15 New shares subject to these Articles......................................16 Consolidation and fractions arising.......................................16 Power to reduce capital...................................................17 PURCHASE OF OWN SHARES..........................................................17 Power to purchase own shares..............................................17
II CONVERSION OF SHARES INTO STOCK.................................................17 Power to convert into stock...............................................17 Transfer of stock.........................................................17 Rights of stockholders....................................................17 GENERAL MEETINGS................................................................18 Types of general meeting..................................................18 Class meetings............................................................18 Convening general meetings................................................18 NOTICE OF GENERAL MEETINGS......................................................18 Period of notice..........................................................18 To whom notice shall be given.............................................19 Setting of record date....................................................19 Uncontactable shareholders................................................19 Contents of notice........................................................19 General meetings at more than one place...................................20 Notice and conditions for holding....................................20 Controlling level of attendance......................................20 Place of meeting.....................................................20 Adjournment to more than one place...................................20 Accidental omission to give notice........................................20 PROCEEDINGS AT GENERAL MEETINGS.................................................21 Quorum....................................................................21 If quorum not present.....................................................21 Chairman..................................................................21 Directors entitled to speak...............................................21 Adjournments..............................................................21 Validity of proxy at adjourned meeting....................................22 Amendments to resolutions.................................................22 Methods of voting.........................................................22 Declaration of result.....................................................23 Withdrawal of demand for poll............................................23 Conduct of poll...........................................................23 Chairman's casting vote...................................................23 When poll to be taken.....................................................23 Notice of poll............................................................23 Effectiveness of special and extraordinary resolutions....................23 Resolutions in writing....................................................24 VOTES OF MEMBERS................................................................24 Right to vote.............................................................24 Setting of record time....................................................24
III Votes of joint holders....................................................24 Member under incapacity...................................................24 Calls in arrears..........................................................24 Section 212 of the Act, restrictions if in default........................25 Copy of notice to interested persons.................................25 When restrictions cease to have effect...............................25 Board may cancel restrictions........................................25 Provisions supplementary to Article 81...............................25 Section 216 of the Act...............................................26 Errors in voting..........................................................26 Objection to voting.......................................................26 Supplementary provisions on voting........................................26 PROXIES AND CORPORATE REPRESENTATIVES...........................................26 Appointment of proxy......................................................26 Form of proxy.............................................................26 Delivery of form of proxy.................................................26 Power of members abroad to appoint attorney...............................27 Validity of form of proxy.................................................27 Corporate representatives.................................................27 Revocation of authority...................................................28 NUMBER OF DIRECTORS.............................................................28 Limits on number of directors.............................................28 APPOINTMENT AND RETIREMENT OF DIRECTORS.........................................28 Number of directors to retire.............................................28 Which directors to retire.................................................28 When director deemed to be re-appointed...................................29 Eligibility for election..................................................29 Separate resolutions on appointment.......................................29 Additional powers of the Company..........................................29 Appointment by board......................................................29 Position of retiring directors............................................30 Age limit.................................................................30 No share qualification....................................................30 ALTERNATE DIRECTORS.............................................................30 Power to appoint alternates...............................................30 Alternates entitled to receive notice.....................................30 Alternates representing more than one director............................30 Expenses and remuneration of alternates...................................31 Termination of appointment................................................31 Method of appointment and revocation......................................31
IV Alternate not an agent of appointor.......................................31 POWERS OF THE BOARD.............................................................31 Business to be managed by board...........................................31 DELEGATION OF POWERS OF THE BOARD...............................................32 Committees of the board...................................................32 Local boards, etc.........................................................32 Agents....................................................................33 BORROWING POWERS................................................................33 Power to borrow...........................................................33 DISQUALIFICATION AND REMOVAL OF DIRECTORS.......................................36 Disqualification of a director............................................36 Power of Company to remove director.......................................37 REMUNERATION OF NON-EXECUTIVE DIRECTORS.........................................37 Remuneration of directors.................................................37 Additional remuneration for special services..............................37 DIRECTORS' EXPENSES.............................................................37 Directors may be paid expenses............................................37 EXECUTIVE DIRECTORS.............................................................38 Appointment to executive office...........................................38 Termination of appointment to executive office............................38 Emoluments to be determined by the board..................................38 DIRECTORS' INTERESTS............................................................38 Directors may contract with the Company...................................38 Notification of interests.................................................39 Exercise by Company of voting rights......................................39 GRATUITIES, PENSIONS AND INSURANCE..............................................39 Gratuities and pensions...................................................39 Insurance.................................................................40 Directors not liable to account...........................................40 Section 719 of the Act....................................................40 PROCEEDINGS OF DIRECTORS........................................................40 Convening meetings........................................................40 Quorum....................................................................41 Powers of directors if number falls below minimum.........................41 Chairman and deputy chairman..............................................41
V Validity of acts of the board.............................................41 Resolutions in writing....................................................42 Meetings by telephone, etc................................................42 Directors' power to vote on contracts in which they are interested........42 Interests of connected person and alternate director......................43 Exclusion of director from quorum.........................................44 Decision of chairman final and conclusive.................................44 SECRETARY.......................................................................44 Appointment and removal of secretary......................................44 MINUTES.........................................................................44 Minutes required to be kept...............................................44 THE SEAL........................................................................45 Authority required for use of seal........................................45 Certificates for shares and debentures....................................45 Official seal for use abroad..............................................45 Execution of instrument as a deed under hand..............................45 Delivery of deeds.........................................................45 REGISTERS.......................................................................45 Overseas and local registers..............................................45 Certified copies..........................................................45 CHEQUES.........................................................................46 Signature of cheques and bills............................................46 DIVIDENDS.......................................................................46 Declaration of dividends..................................................46 Fixed and interim dividends...............................................46 Apportionment of dividends................................................47 Dividends in specie.......................................................47 Scrip dividends...........................................................47 Permitted deductions......................................................49 Procedure for payment.....................................................49 Joint entitlement.........................................................50 Payment by post...........................................................50 Discharge to Company and risk.............................................50 Interest not payable......................................................51 Forfeiture of unclaimed dividends.........................................51 CAPITALISATION OF PROFITS AND RESERVES..........................................51 Power to capitalise.......................................................51
VI RECORD DATES....................................................................52 Record dates for dividends, etc...........................................52 ACCOUNTS........................................................................53 Rights to inspect records.................................................53 Delivery of balance sheets and profit and loss accounts...................53 NOTICES.........................................................................53 When notice required to be in writing.....................................53 Method of giving notice...................................................53 Deemed receipt of notice..................................................54 Notice to persons entitled by transmission................................54 Transferees etc. bound by prior notice....................................54 When notices by post deemed served........................................54 Notice during disruption of postal services...............................55 DESTRUCTION OF DOCUMENTS........................................................55 Power of Company to destroy documents.....................................55 Early destruction.........................................................56 UNTRACED SHAREHOLDERS...........................................................56 Power to dispose of shares of untraced shareholders.......................56 Transfer on sale..........................................................57 Effectiveness of transfer.................................................57 Proceeds of sale..........................................................57 WINDING UP......................................................................58 Liquidator may distribute in specie.......................................58 Disposal of assets by liquidator..........................................58 Members abroad to give address for service................................58 SHARE WARRANTS..................................................................58 Company may issue warrants................................................58 Board may determine conditions............................................59 Notice to warrant holders.................................................59 INDEMNITY.......................................................................59 Indemnity to directors, officers, etc.....................................59
VII INDEX ACCOUNTS.........................................................................48 Rights to inspect records...................................................48 Delivery of balance sheets and profit and loss accounts.....................49 ALTERATION OF SHARE CAPITAL......................................................14 Alterations by ordinary resolution..........................................14 New shares subject to these Articles........................................15 Consolidation and fractions arising.........................................15 Power to reduce capital.....................................................15 ALTERNATE DIRECTORS..............................................................28 Power to appoint alternates.................................................28 Alternates entitled to receive notice.......................................28 Alternates representing more than one director..............................28 Expenses and remuneration of alternates.....................................28 Termination of appointment..................................................28 Method of appointment and revocation........................................29 Alternate not an agent of appointor.........................................29 APPOINTMENT AND RETIREMENT OF DIRECTORS..........................................26 Number of directors to retire...............................................26 Which directors to retire...................................................26 When director deemed to be re-appointed.....................................26 Eligibility for election....................................................27 Separate resolutions on appointment.........................................27 Additional powers of the Company............................................27 Appointment by board........................................................27 Position of retiring directors..............................................27 Age limit...................................................................27 No share qualification......................................................28 BOARD MEETING..................................see `Proceedings of Directors' below BORROWING POWERS.................................................................30 Power to borrow.............................................................30 CALLS ON SHARES...................................................................9 Power to make calls..........................................................9 Time when call made.........................................................10 Liability of joint holders..................................................10 Interest payable............................................................10 Deemed calls on allotment...................................................10
Differentiation on calls....................................................10 Payment of calls in advance.................................................10 Rights suspended if payment in arrears......................................10 CAPITALISATION OF PROFITS AND RESERVES...........................................47 Power to capitalise.........................................................47 CHEQUES..........................................................................42 Signature of cheques and bills..............................................42 CONVERSION OF SHARES INTO STOCK..................................................16 Power to convert into stock.................................................16 Transfer of stock...........................................................16 Rights of stockholders......................................................16 DEFINITIONS.......................................................................1 DELEGATION OF POWERS OF THE BOARD................................................29 Committees of the board.....................................................29 Local boards, etc...........................................................30 Agents......................................................................30 DESTRUCTION OF DOCUMENTS.........................................................51 Power of Company to destroy documents.......................................51 Early destruction...........................................................52 DIRECTORS' EXPENSES..............................................................35 Directors may be paid expenses..............................................35 DIRECTORS' INTERESTS.............................................................35 Directors may contract with the Company.....................................35 Notification of interests...................................................36 Exercise by Company of voting rights........................................36 DISQUALIFICATION AND REMOVAL OF DIRECTORS........................................33 Disqualification of a director..............................................33 Power of Company to remove director.........................................34 DIVIDENDS........................................................................43 Declaration of dividends....................................................43 Fixed and interim dividends.................................................43 Apportionment of dividends..................................................43 Dividends in specie.........................................................43 Scrip dividends.............................................................43 Permitted deductions........................................................45 Procedure for payment.......................................................46
II Joint entitlement...........................................................46 Payment by post.............................................................46 Discharge to Company and risk...............................................46 Interest not payable........................................................47 Forfeiture of unclaimed dividends...........................................47 EXECUTIVE DIRECTORS..............................................................35 Appointment to executive office.............................................35 Termination of appointment to executive office..............................35 Emoluments to be determined by the board....................................35 FORFEITURE AND SURRENDER.........................................................11 Notice requiring payment of call............................................11 Forfeiture for non-compliance...............................................11 Sale of forfeited shares....................................................11 Liability following forfeiture..............................................11 Surrender...................................................................12 Extinction of rights........................................................12 Evidence of forfeiture or surrender.........................................12 Power to annul forfeiture or surrender......................................12 GENERAL MEETINGS.................................................................16 Types of general meeting....................................................16 Class meetings..............................................................16 Convening general meetings..................................................17 Notice of general meeting................................................below Proceedings at general meetings..........................................below GRATUITIES, PENSIONS AND INSURANCE...............................................36 Gratuities and pensions.....................................................36 Insurance...................................................................37 Directors not liable to account.............................................37 Section 719 of the Act......................................................37 INDEMNITY........................................................................55 Indemnity to directors, officers, etc.......................................55 LIEN..............................................................................8 Company to have lien on shares...............................................8 Enforcement of lien by sale..................................................9 Giving effect to sale........................................................9 Application of proceeds......................................................9 MINUTES..........................................................................41 Minutes required to be kept.................................................41
III NOTICE OF GENERAL MEETINGS.......................................................17 Period of notice............................................................17 To whom notice shall be given...............................................17 Setting of record date......................................................17 Uncontactable shareholders..................................................17 Contents of notice..........................................................18 General meetings at more than one place.....................................18 Notice and conditions for holding.......................................18 Controlling level of attendance.........................................18 Place of meeting........................................................19 Adjournment to more than one place......................................19 Accidental omission to give notice..........................................19 NOTICES..........................................................................49 When notice required to be in writing.......................................49 Method of giving notice.....................................................49 Deemed receipt of notice....................................................50 Notice to persons entitled by transmission..................................50 Transferees etc. bound by prior notice......................................50 When notices by post deemed served..........................................50 Notice during disruption of postal services.................................50 NUMBER OF DIRECTORS..............................................................26 Limits on number of directors...............................................26 POWERS OF THE BOARD..............................................................29 Business to be managed by board.............................................29 PRELIMINARY.......................................................................1 Table A......................................................................1 Definitions..................................................................1 Construction.................................................................3 PROCEEDINGS AT GENERAL MEETINGS..................................................19 Quorum......................................................................19 If quorum not present.......................................................19 Chairman....................................................................19 Directors entitled to speak.................................................20 Adjournments................................................................20 Validity of proxy at adjourned meeting......................................20 Amendments to resolutions...................................................20 Methods of voting...........................................................20 Declaration of result.......................................................21 Withdrawal of demand for poll...............................................21
IV Conduct of poll.............................................................21 Chairman's casting vote.....................................................21 When poll to be taken.......................................................21 Notice of poll..............................................................21 Effectiveness of special and extraordinary resolutions......................22 Resolutions in writing......................................................22 PROCEEDINGS OF DIRECTORS.........................................................37 Convening meetings..........................................................37 Quorum......................................................................38 Powers of directors if number falls below minimum...........................38 Chairman and deputy chairman................................................38 Validity of acts of the board...............................................38 Resolutions in writing......................................................38 Meetings by telephone, etc..................................................39 Directors' power to vote on contracts in which they are interested..........39 Interests of connected person and alternate director........................40 Exclusion of director from quorum...........................................40 Decision of chairman final and conclusive...................................40 PROXIES AND CORPORATE REPRESENTATIVES............................................24 Appointment of proxy........................................................24 Form of proxy...............................................................24 Delivery of form of proxy...................................................24 Power of members abroad to appoint attorney.................................25 Validity of form of proxy...................................................25 Corporate representatives...................................................25 Revocation of authority.....................................................26 PURCHASE OF OWN SHARES...........................................................15 Power to purchase own shares................................................15 RECORD DATES.....................................................................48 Record dates for dividends, etc.............................................48 REGISTERS........................................................................42 Overseas and local registers................................................42 Certified copies............................................................42 REMUNERATION OF NON-EXECUTIVE DIRECTORS..........................................34 Remuneration of directors...................................................34 Additional remuneration for special services................................34 SEAL.............................................................................41 Authority required for use of seal..........................................41
V Certificates for shares and debentures......................................41 Official seal for use abroad................................................42 Execution of instrument as a deed under hand................................42 Delivery of deeds...........................................................42 SECRETARY........................................................................41 Appointment and removal of secretary........................................41 SHARE CAPITAL.....................................................................4 Share Capital................................................................4 Shares with special rights...................................................4 Uncertificated shares........................................................4 Not separate class of shares.................................................4 Exercise of Company's entitlements in respect of uncertificated share........4 Allotment....................................................................5 Redeemable shares............................................................5 Authority to allot relevant securities under Section 80 of the Act...........5 Disapplication of pre-emption rights under Section 95 of the Act.............5 Commissions..................................................................6 Trusts not recognised........................................................7 Joint holders................................................................7 Variation of rights..................................................see below Votes of members.....................................................see below SHARE CERTIFICATES................................................................8 Members' rights to certificates..............................................8 Replacement certificates.....................................................8 SHARE WARRANTS...................................................................54 Company may issue warrants..................................................54 Board may determine conditions..............................................54 Notice to warrant holders...................................................54 TRANSFER OF SHARES...............................................................12 Form and execution of transfer of certificated shares.......................12 Form and execution of transfer of uncertificated shares.....................12 Transfers of partly paid shares.............................................12 Invalid transfers of certificated shares....................................13 Transfers by recognised persons.............................................13 Notice of refusal to register...............................................13 Suspension of registration..................................................13 No fee payable on registration..............................................13 Retention of transfers......................................................13 TRANSMISSION OF SHARES...........................................................13
VI Transmission................................................................13 Elections permitted/required................................................13 Withholding of dividends....................................................14 Rights of persons entitled by transmission..................................14 UNTRACED SHAREHOLDERS............................................................52 Power to dispose of shares of untraced shareholders.........................52 Transfer on sale............................................................52 Effectiveness of transfer...................................................53 Proceeds of sale............................................................53 VARIATION OF RIGHTS...............................................................7 Method of varying rights.....................................................7 Separate class of share......................................................7 When rights deemed to be varied..............................................7 No variation of rights.......................................................8 VOTES OF MEMBERS.................................................................22 Right to vote...............................................................22 Setting of record time......................................................22 Votes of joint holders......................................................22 Member under incapacity.....................................................22 Calls in arrears............................................................23 Section 212 of the Act, restrictions if in default..........................23 Copy of notice to interested persons....................................23 When restrictions cease to have effect..................................23 Board may cancel restrictions...........................................23 Provisions supplementary to Article 81..................................23 Section 216 of the Act..................................................24 Errors in voting............................................................24 Objection to voting.........................................................24 Supplementary provisions on voting..........................................24 WINDING UP.......................................................................53 Liquidator may distribute in specie.........................................53 Disposal of assets by liquidator............................................53 Members abroad to give address for service..................................53
VII EX-3 3 0003.txt EXHIBIT 3.2 Elsevier/NV/Statwijz/1999/Stw ENG 1999 991.0039 CMS/hv DEED OF AMENDMENT OF THE ARTICLES OF ASSOCIATION OF ELSEVIER N.V. This fifteenth day of April nineteen hundred and ninety-nine, there appeared before me, Christiaan Maria Stokkermans, civil law notary in Amsterdam: Mr. Paul Jacob Arjan Goedvolk, civil lawyer, living at Stuurmankade 192, 1019 WC Amsterdam, born in Rotterdam on the twenty-fifth day of October nineteen hundred and seventy-one, unmarried and not registered as non-marital partner under Dutch law, identified by his passport with number: N16281202. The person appearing declared the following: At the general meeting of shareholders of the Company (as defined hereinafter), held on the fourteenth day of April nineteen hundred and ninety-nine, it was resolved to amend and completely readopt the Articles of Association of Elsevier N.V., a public company under Dutch law ('naamloze vennootschap'), having its official seat in Amsterdam and its office address at Van de Sande Bakhuijzenstraat 4, 1061 AG Amsterdam (the "Company"), as well as to authorize each Executive Board member, with the right of substitution, to have this deed executed. The adoption of such resolutions is evidenced by a notarial statement attached to this deed (Annex). By virtue of the aforementioned substitution the appearer is authorized to execute this deed, which appears from a written power of attorney, annexed to this deed (Annex). Adequate proof of the existence of the proxy has been presented to me, civil law notary. The Articles of Association of the Company were last amended by a deed, executed on the nineteenth day of June nineteen hundred and ninety-seven before a deputy of Albertus Gerardus van Solinge, former civil law notary in Amsterdam, with respect to which a ministerial Statement of No Objections was granted on the 2 thirteenth day of June nineteen hundred and ninety-seven, under number N.V. 208.889. In implementing the aforementioned resolution, the Articles of Association of the Company are hereby amended and completely readopted as follows. CHAPTER I. Article 1. Definitions. In these Articles of Association the following words shall have the following meanings: a. a "Share": a Share in the capital of the Company; unless the contrary is apparent, this shall include each ordinary Share and each class R Share; b. a "Shareholder": a holder of one or more Shares; unless the contrary is apparent, this shall include each holder of ordinary Shares and each holder of class R Shares; c. the "Shareholders' Body": the body of the Company consisting of Shareholders entitled to vote, together with pledgees and usufructuaries to whom the voting rights attributable to Shares accrue; d. a "General Meeting of Shareholders": a meeting of Shareholders and other persons entitled to attend meetings of Shareholders which is convened in accordance with the relevant provisions of these Articles of Association; e. a "Subsidiary": a subsidiary of the Company as referred to in Section 2:24a of the Dutch Civil Code; f. the "Combined Board": the body of the Company consisting of all Supervisory Board members in office and all Executive Board members in office; g. a "Group Company": a group company of the Company as referred to in Section 2:24b of the Dutch Civil Code; h. the "Supervisory Board": 3 the supervisory board of the Company; i. the "Executive Board": the executive board of the Company; j. "in writing": by letter, by telecopier, by e-mail or by message which is transmitted via any other current means of communication and which can be received in the written form; k. the "Company Secretary": the person referred to as such in Article 23 of these Articles of Association (including his deputy, designated in accordance with the provisions of Article 23.4 of these Articles of Association). CHAPTER II. NAME, OFFICIAL SEAT AND OBJECTS. Article 2. Name and Official Seat. 2.1 The Company's name is: Elsevier N.V. 2.2 The official seat of the Company is in Amsterdam. Article 3. Objects. The objects of the Company are to participate in and to administer, manage and finance companies, as well as to render services to enterprises, in particular insofar as these enterprises are carried out by Reed Elsevier P.L.C. and Elsevier Reed Finance B.V. and by companies with which these companies form a group, as well as the performance of obligations deriving from the Governing Agreement entered into between Reed International P.L.C., having its registered office in London, and the Company, which first came into effect on the first day of January nineteen hundred and ninety-three and which was amended in april nineteen hundred and ninety-nine, with due observance of all changes which, since the last mentioned date, have been or will be made thereto, and from all agreements relating thereto and to which Reed International P.L.C. and the Company are parties, or shall, from time to time, be parties. CHAPTER III. AUTHORIZED CAPITAL, SHARES, SHARE CERTIFICATES AND REGISTER OF SHAREHOLDERS. 4 Article 4. Authorized Capital and Shares. 4.1 The authorized capital of the Company is one hundred and forty-four million euro (EUR 144,000,000). 4.2 It is divided into two billion one hundred million (2,100,000,000) ordinary Shares with a nominal value of six eurocent (EUR 0.06) each and thirty million (30,000,000) class R Shares with a nominal value of sixty eurocent (EUR 0.60) each, provided that at each time one or more class R Shares are, in accordance with the provisions of Article 4.4 of these Articles of Association, converted into ordinary Shares, the number of ordinary Shares of the authorized capital shall be increased by ten times the number of converted class R Shares, decreasing at the same time the number of class R Shares of the authorized capital by such number of class R Shares as are converted. An alteration of the number of each class of Shares in which the authorized capital is divided shall be notified to the Commercial Register within eight days. 4.3 The ordinary Shares shall, at the option of the Shareholder, be registered or made out to bearer. All class R Shares are registered in the name of the holders. No share certificates shall be issued for registered Shares. 4.4 Each class R Share may at the option of the holder thereof be converted into ten ordinary Shares. The holder of a class R Share wishing to convert one or more of his class R Shares into ordinary Shares shall notify the Executive Board in writing of his wish to do so. Such written notice shall state the number of class R Shares involved, whether the ordinary Shares shall be registered or made out to bearer and the date per which the conversion is to become effective, being a date not earlier than seven business days after the date on which the written notice is received by the Executive Board. At the request of the Shareholder concerned, the Executive Board shall immediately acknowledge receipt of the written notice. The conversion of the class R Shares referred to in the written notice into ordinary Shares shall be effective by operation of law, as of the date 5 specified in the written notice. As from the time of conversion, the ordinary Share into which the class R Shares are converted shall attribute the same rights as the other ordinary Shares. Article 5. Share Certificates. 5.1 Share certificates shall be issued for bearer Shares. They shall be numbered in the manner to be determined by the Executive Board. 5.2 Apart from single share certificates, the Company may issue multiple share certificates. At the request of the person entitled thereto, multiple share certificates shall be issued for such number of ordinary Shares as the Executive Board shall decide. 5.3 The share certificates shall be signed by a member of the Supervisory Board and a member of the Executive Board and such signatures will be valid if reproduced on the certificates in print. One or both of these signatures may also be replaced by a distinctive company stamp, provided by the Company or under its supervision. If there is at least one original signature, no company stamp as described hereinabove is required. The Executive Board may decide that share certificates must be co-signed by one or more persons to be designated by the Executive Board. 5.4 Each share certificate shall be provided with a simplified dividend sheet, without dividend coupons and talon. Such share certificates shall be referred to hereinafter as CF-certificates. 5.5 A simplified dividend sheet (hereinafter referred to as a CF-dividend sheet) may only be issued by the Company to a custodian to be designated by the Shareholder. This custodian may only be designated from a group of custodians which are accepted as such by the Company and who provide for the custody of the CF-dividend sheets to be administered by an organisation independent of the Company but accepted by it. These custodians shall undertake not to hand-over the CF-dividend sheets in their custody to any persons other than custodians accepted by the Company or the Company itself. 6 5.6 The Company shall not charge any fee for the issuance of share certificates. 5.7 The Company has the right to set further rules with respect to the issuance of CF-certificates. Article 6. Conversion of Shares; Exchange of Share Certificates. 6.1 At the Shareholder's request, bearer ordinary Shares may be converted into registered ordinary Shares and vice versa. 6.2 Conversion of bearer ordinary Shares into registered ordinary Shares shall be effected by the surrendering of share certificates and simultaneous entry in the Company's register of Shareholders. The dividend sheets belonging thereto must also be surrendered. 6.3 Conversion of registered ordinary Shares into bearer ordinary Shares shall be effected at the written request of the Shareholder. If a usufruct or a right of pledge is created in a Share, the cooperation of the usufructuary or pledgee shall be required. At the issuance of share certificates the entry in the register of Shareholders shall be deleted. 6.4 At the request of the Shareholder, single share certificates may be exchanged for multiple share certificates, and vice versa, each time up to the same nominal value, with due observance of the provisions of Article 5.2 of these Articles of Association. 6.5 The Company shall not charge any fee for conversion of Shares or exchange of share certificates. 6.6 The Executive Board may provide that a request as referred to above in this Article 6 must be made by filling in and signing a form to be made available for that purpose by the Company. Article 7. Duplicates of Share Certificates and Dividend Sheets. 7.1 If one or more share certificates or dividend sheets are lost or have been damaged, stolen or destroyed, the Executive Board may, on conditions to be stipulated by it, issue duplicates of share certificates or dividend sheets to the owner. 7.2 The issue of such duplicates shall render the corresponding original documents null and void in respect of the Company. 7 Article 8. Register of Shareholders. 8.1 The Executive Board shall keep a register of Shareholders in which the names and addresses of all holders of registered Shares shall be recorded, indicating the class of Shares. The names and addresses of usufructuaries and pledgees of registered Shares shall also be entered in the register, specifying which of the rights attributable to the Shares accrue to them in accordance with Article 17.2 of these Articles of Association. The register shall be accurately kept and maintained on a regular basis. 8.2 Each holder of registered Shares, each usufructuary and each pledgee of registered Shares shall be obliged to notify his address to the Company in writing. 8.3 The Executive Board shall set rules with respect to the signing of registrations and entries in the register of Shareholders. 8.4 On application by a Shareholder, a usufructuary or a pledgee, the Executive Board shall furnish an extract from the register free of charge, in so far as it relates to his right to a registered Share. If a usufruct has been created in the Share or if the Share is pledged, the extract shall state who has the rights referred to in Article 17.2 of these Articles of Association. 8.5 The Executive Board shall make the register available in the Company's office for the inspection of the Shareholders and the usufructuaries and pledgees of Shares to whom the voting rights accrue. The preceding sentence shall not apply to that part of the register which is kept outside the Netherlands in compliance with applicable legislation or pursuant to the rules of a stock exchange. CHAPTER IV. ISSUANCE OF SHARES. Article 9. Resolution to Issue; Conditions of Issuance. 9.1 Shares may be issued pursuant to a resolution of the Shareholders' Body. This competence shall concern all non-issued Shares of the Company's authorized capital, except insofar the competence to issue Shares accrues to the Combined Board in accordance with Article 9.2 hereof. 8 9.2 Shares may be issued pursuant to a resolution of the Combined Board, if and insofar as that board is designated competent to do so by the Shareholders' Body. Such designation can be made each time for a maximum period of five years and can be extended each time for a maximum period of five years. A resolution to make such designation must stipulate the aggregate nominal value up to which Shares may be issued pursuant to a resolution of the Combined Board; this aggregate nominal value cannot exceed one-third of the sum of (i) the Company's issued capital at the time the resolution to make the designation is adopted and (ii) the aggregate nominal value of rights, outstanding at such time, granted by the Company to subscribe for Shares. A resolution of the Shareholders' Body to designate the Combined Board as a body of the Company competent to issue Shares cannot be withdrawn, unless provided otherwise in the resolution to make the designation. 9.3 A resolution of the Shareholders' Body to issue Shares or to designate another body of the Company competent to do so can only be adopted at the proposal of the Combined Board. 9.4 Within eight days after a resolution of the Shareholders' Body to issue Shares or to designate another body of the Company competent to issue Shares, the complete text of the resolution concerned shall be deposited at the office of the Commercial Register. Each change to or withdrawal of the designation shall be notified to the Commercial Register. 9.5 Within eight days after each issuance of Shares, notification thereof shall be submitted to the office of the Commercial Register specifying the number and class of the Shares issued. 9.6 The foregoing provisions of this Article 9 shall apply by analogy to the granting of rights to subscribe for Shares, but shall not apply (with the exception of Article 9.4) to the issuance of Shares to a person exercising a right to subscribe for Shares previously granted. 9 9.7 The body of the Company resolving to issue Shares shall stipulate the issue price and the other conditions of issuance in the resolution to issue. 9.8 If the aggregate nominal value of the Shares to be issued has been announced and subscriptions are made for a lower aggregate nominal value, issuance for such lower aggregate nominal value shall only be effected if the conditions of issuance expressly allow so. Article 10. Pre-emptive Rights. 10.1 Upon the issuance of Shares, each holder of ordinary Shares and each holder of class R Shares shall have pre-emptive rights in proportion to the aggregate nominal value of his Shares. Shares issued to holders of ordinary Shares shall be ordinary Shares; Shares issued to holders of class R Shares shall be class R Shares. Insofar as holders of class R Shares do not make use of their pre-emptive rights, no class R Shares shall be issued. A Shareholder shall not have a pre-emptive right in respect of Shares issued against a non-cash contribution. He shall also not have a pre-emptive right in respect of Shares issued to employees of the Company or of a Group Company. 10.2 The issuance of Shares with pre-emptive rights and the period during which such rights can be exercised shall be announced in the Dutch State Gazette and in a nationally distributed daily newspaper. 10.3 Pre-emptive rights can be exercised during a period of at least two weeks from the day of announcement in the Dutch State Gazette. 10.4 Prior to each single issuance, the pre-emptive rights may be restricted or excluded by a resolution of the Shareholders' Body. However, with respect to an issue of Shares pursuant to a resolution of the Combined Board, the pre-emptive rights can be restricted or excluded pursuant to a resolution of the Combined Board if and insofar as that board is designated competent to do so by the Shareholders' Body. The provisions of Articles 9.1, 9.2 and 9.3 of these Articles of Association shall 10 apply by analogy. Such competence of the Combined Board shall end on the date on which its competence to issue Shares ends, whatever the circumstances. 10.5 A resolution of the Shareholders' Body to restrict or exclude the pre-emptive rights or to designate another body of the Company competent to do so can only be adopted at the proposal of the Combined Board. 10.6 If a proposal is made to the Shareholders' Body to restrict or exclude the pre-emptive rights, the reason for the proposal and the choice of the intended issue price must be set forth in the proposal in writing. 10.7 A resolution of the Shareholders' Body to restrict or to exclude the pre-emptive rights or to designate another body of the Company competent to do so shall require a majority of not less than two-thirds of the votes cast, if less than one-half of the Company's issued capital is represented at the meeting. Within eight days after adoption of the resolution, the complete text thereof must be deposited at the office of the Commercial Register. 10.8 When rights are granted to subscribe for Shares, the Shareholders shall have pre-emptive rights in respect thereof; the foregoing provisions of this Article 10 shall apply by analogy. Shareholders shall have no pre-emptive rights in respect of Shares issued to a person exercising a right to subscribe for Shares previously granted. Article 11. Payment on Shares. 11.1 Upon issuance of a Share, the full nominal value thereof must be paid-up, as well as the difference between the two amounts if the Share is subscribed for at a higher price, without prejudice to the provisions of Section 2:80, subsection 2, of the Dutch Civil Code. 11.2 Payment for a Share must be made in cash insofar as no non-cash contribution has been agreed on. 11.3 The Executive Board shall be allowed to enter into legal acts relating to non-cash contributions and the other legal acts 11 referred to in Section 2:94 of the Dutch Civil Code without the prior approval of the Shareholders' Body, but only pursuant to a resolution of the Combined Board. 11.4 Payments for Shares and non-cash contributions shall furthermore be subject to the provisions of Sections 2:80, 2:80a, 2:80b and 2:94b of the Dutch Civil Code. CHAPTER V. OWN SHARES; REDUCTION OF THE ISSUED CAPITAL. Article 12. Own Shares. 12.1 When issuing Shares, the Company may not subscribe for its own Shares. 12.2 The Company shall be entitled to acquire its own fully paid-up Shares or depositary receipts thereof, provided that either no valuable consideration is given or that: a. the Company's equity after the deduction of the acquisition price, is not less than the sum of the paid-up and called-up part of the issued capital and the reserves which must be maintained by virtue of the law, and b. the nominal value of the Shares which the Company acquires, holds, holds in pledge or which are held by a Subsidiary, does not exceed one-tenth of the Company's issued capital. For the purpose of applying the provision under a., the amount of equity shown in the last adopted balance sheet, reduced by the acquisition price of Shares or depositary receipts thereof and further reduced by distributions of profits or at the expense of reserves to others, which have become due from the Company and its Subsidiaries after the balance sheet date, shall be decisive. An acquisition in accordance with this Article 12.2 shall not be permitted, if more than six months have elapsed after the end of a financial year without the annual accounts having been adopted. 12.3 Acquisition for valuable consideration shall be permitted only if the Shareholders' Body has authorized the Executive Board to do so. Such authorization shall be valid for a period not exceeding eighteen months. The Shareholders' Body shall 12 stipulate in the authorization the number of Shares or depositary receipts thereof which may be acquired, the manner in which they may be acquired and the limits within which the price must be set. Furthermore, the approval of the Combined Board shall be required for such acquisition. 12.4 The Company may, without authorization by the Shareholders' Body, acquire its own Shares or depositary receipts thereof for the purpose of transferring such Shares or depositary receipts to employees of the Company or of a Group Company under a scheme applicable to such employees, provided such Shares or depositary receipts thereof are quoted on the price list of a stock exchange. 12.5 Articles 12.2 and 12.3 hereof do not apply to Shares or depositary receipts thereof which the Company acquires by universal succession in title. 12.6 In the Shareholders' Body no voting rights may be exercised for any Share held by the Company or by a Subsidiary, nor for any Share for which the Company or a Subsidiary holds the depositary receipts. However, usufructuaries and pledgees of Shares owned by the Company or a Subsidiary are not excluded from exercising the voting rights, if the usufruct or pledge was created before the Share was owned by the Company or a Subsidiary. The Company or a Subsidiary may not exercise voting rights for Shares in respect of which it holds a usufruct or pledge. 12.7 The Executive Board shall be authorized to alienate Shares held by the Company or depositary receipts thereof, but only with the approval of the Combined Board. 12.8 Own Shares and depositary receipts thereof shall furthermore be subject to the provisions of Sections 2:89a, 2:95, 2:98, 2:98a, 2:98b, 2:98c, 2:98d and 2:118 of the Dutch Civil Code. Article 13. Financial Assistance. The Company may not give loans, give security, guarantee the price, or in any other way answer to or bind itself either severally or jointly for or on behalf of third parties, with a view to a subscription 13 for or an acquisition of Shares or depositary receipts thereof by others. This prohibition shall not apply if the Shares or depositary receipts thereof are subscribed for or acquired by or for employees of the Company or of a Group Company. The prohibition and exception provided for in this Article 13 shall also apply to Subsidiaries. Article 14. Reduction of the Issued Capital. 14.1 The Shareholders' Body may, but only at the proposal of the Combined Board, resolve to reduce the Company's issued capital: a. by cancellation of Shares; or b. by reducing the nominal value of Shares by amendment of the Articles of Association, provided that the issued capital or the paid-up part of it will not drop below the amount prescribed by Section 2:67 of the Dutch Civil Code. The Shares in respect of which such resolution is passed must be designated therein and provisions for the implementation of such resolution must be made therein. 14.2 A resolution to cancel may only relate to Shares held by the Company itself or for which it holds the depositary receipts. 14.3 A reduction of the nominal value of Shares without repayment must be effected in proportion to all Shares of the same class. This principle may be deviated from with the consent of all Shareholders concerned. 14.4 A partial repayment on Shares shall be possible only on the implementation of a resolution to reduce the nominal value of such Shares. Such repayment must be effected in proportion to all Shares. This principle may be deviated from with the consent of all Shareholders concerned. 14.5 A resolution of the Shareholders' Body to reduce the Company's issued capital requires a prior or simultaneous resolution of approval by each group of Shareholders of the same class whose rights are prejudiced. 14 14.6 For a resolution of the Shareholders' Body to reduce the Company's issued capital, a majority of at least two-thirds of the votes cast shall be required if less than one-half of the Company's issued capital is represented at the meeting. This provision shall apply by analogy to a resolution of approval as referred to in Article 14.5 hereof. 14.7 The notice convening a General Meeting of Shareholders at which a resolution referred to in this Article 14 will be passed shall state the object of the reduction of capital and the manner of implementation. The persons giving notice of such meeting must simultaneously deposit at the office of the Company and in Amsterdam at a place to be determined in the notice, a copy of such proposal, containing the complete text of the proposed reduction of capital for the inspection of each Shareholder until the end of the meeting. Each Shareholder as well as each usufructuary and each pledgee of Shares to whom the voting rights accrue may obtain a copy of this proposal free of charge. 14.8 A reduction of the issued capital of the Company shall furthermore be subject to the provisions of Sections 2:99 and 2:100 of the Dutch Civil Code. Article 15. Shares Belonging to a Community of Property. When a Share belongs to a community of property, the Company shall allow only one person, designated by the persons concerned, to exercise the rights attributable to such Share. CHAPTER VI. TRANSFER OF REGISTERED SHARES; USUFRUCT IN SHARES AND PLEDGING OF SHARES; DEPOSITARY RECEIPTS FOR SHARES. Article 16. Transfer of Registered Shares. 16.1 The transfer of a registered Share shall require an instrument intended for such purpose and, save when the Company itself is a party to such legal act, the written acknowledgement by the Company of the transfer. The acknowledgement shall be made in the instrument or by a dated statement of acknowledgement on the instrument or on a copy or extract thereof signed as a true copy by a civil law notary or the 15 transferor. Official service of such instrument or such copy or extract on the Company shall be considered to have the same effect as an acknowledgement. 16.2 The provisions of Article 16.1 hereof also apply to the transfer of a registered Share in the event of an execution as well as to the transfer of a registered Share in consequence of the partition of a community of property. Article 17. Usufruct in Shares and Pledging of Shares; Depositary Receipts for Shares. 17.1 The provisions of Article 16.1 of these Articles of Association shall apply by analogy to the creation or transfer of a usufruct and to the pledging of registered Shares. Registered Shares may also be pledged without acknowledgement by or service on the Company. In such case, Section 3:239 of the Dutch Civil Code shall apply by analogy, substituting acknowledgement by or service on the Company for the notification referred to in subsection 3 of said statutory provision. 17.2 The Shareholder shall be entitled to exercise the voting rights attributable to Shares in which a usufruct has been created or which have been pledged. However, the voting rights shall accrue to the usufructuary or pledgee if this has been stipulated at the creation of the usufruct or pledge. The Shareholder who has no voting rights and the usufructuary or pledgee who does have the voting rights shall have the rights which the law confers upon holders of depositary receipts issued for Shares with the Company's co-operation. The rights referred to in the foregoing sentence shall not accrue to the usufructuary or pledgee of Shares who has no voting rights. 17.3 The usufructuary shall have the rights inherent in the Share relating to the acquisition of Shares, it being understood that he shall have to compensate the Shareholder for the value of these rights insofar as the usufructuary is not entitled thereto by virtue of his right of usufruct. 17.4 The Company may cooperate in the issuance of depositary receipts for ordinary Shares, but shall not cooperate in the 16 issuance of depositary receipts for class R Shares. Holders of depositary receipts issued for ordinary Shares with the Company's cooperation, shall have the rights conferred to them by law, also to the extent such rights are not expressly referred to in these Articles of Association. CHAPTER VII. THE EXECUTIVE BOARD. Article 18. Executive Board Members. 18.1 The Executive Board shall consist of at most five members. The number of Executive Board members shall be determined by the Combined Board with due observance of this maximum. 18.2 Executive Board members shall be appointed by the Shareholders' Body. For each seat on the Executive Board to be filled, the Combined Board shall make one or more proposals. A resolution of the Shareholders' Body to appoint an Executive Board member other than in accordance with a proposal of the Combined Board shall require a majority of at least two-thirds of the votes cast if less than one-half of the Company's issued capital is represented at the meeting. At a General Meeting of Shareholders, votes can only be taken on candidates whose names are stated for that purpose in the agenda of the meeting. At the same time notice of the meeting is given, the particulars referred to in Article 18.3 hereof shall be deposited at the Company's office for inspection by Shareholders as well as usufructuaries and pledgees of Shares to whom the voting rights accrue, until the end of the meeting, and this shall be stated in the notice. 18.3 When a proposal or recommendation for appointment of a person as an Executive Board member is made, the following particulars shall be stated: his age and the position he holds or has held, insofar as these are relevant for the performance of the duties of an Executive Board member. The proposal or recommendation must state the reasons on which it is based. 18.4 Each member of the Executive Board may be suspended or dismissed at any time by the Shareholders' Body. 17 18.5 Each member of the Executive Board can, at any time, be suspended by the Supervisory Board. Such suspension may be discontinued by the Shareholders' Body at any time. 18.6 Any suspension may be extended one or more times, but may not last longer than three months in the aggregate. If at the end of that period no decision has been taken on termination of the suspension, or on dismissal, the suspension shall end. 18.7 An Executive Board member shall retire not later than on the day on which the first General Meeting of Shareholders is held following the lapse of three years since his appointment. The Executive Board members shall retire periodically in accordance with a rotation plan to be drawn up by the Combined Board. 18.8 The Supervisory Board shall establish the remuneration and further conditions of employment for each Executive Board member. Article 19. Duties, Chairperson, Secretary, Allocation of Duties and Decision-making Process. 19.1 The Executive Board shall be entrusted with the management of the Company. 19.2 The Combined Board shall appoint one of the Executive Board members as chairperson of the Executive Board and one or more other Executive Board members as deputy chairpersons. 19.3 The Company Secretary shall as such also act as the secretary of the Executive Board. 19.4 The Combined Board may establish rules regarding the decision-making process and working methods of the Executive Board in addition to the relevant provisions of these Articles of Association. In this context, the Combined Board may also determine the duties for which each Executive Board member in particular shall be responsible. Such rules and allocation of duties, if established by the Combined Board, must be put in writing. 19.5 Executive Board resolutions may at all times be adopted in a manner other than at a meeting, in writing or otherwise, 18 provided the proposal concerned is submitted to all Executive Board members then in office and none of them objects to the relevant manner of adopting resolutions. Adoption of resolutions in writing shall be effected by written statements from all Executive Board members then in office. 19.6 A resolution of the Executive Board may at all times be evidenced by a written statement to that effect by the president of the Executive Board or by the Company Secretary. Article 20. Approval of Executive Board Resolutions. 20.1 The Combined Board may require Executive Board resolutions to be subject to its approval or to the approval of the Supervisory Board. The Executive Board shall be notified in writing of such resolutions, which shall be clearly specified. 20.2 The absence of approval by the Combined Board or by the Supervisory Board, respectively, of a resolution as referred to in Article 20.1 hereof shall not affect the authority of the Executive Board or its members to represent the Company. Article 21. Representation; Conflicts of Interest. 21.1 The Executive Board shall be authorized to represent the Company. Each member of the Executive Board shall also be authorized to represent the Company. 21.2 In the event of a conflict of interest between the Company and an Executive Board member, the Supervisory Board shall designate an Executive Board member or a Supervisory Board member to represent the Company. The Shareholders' Body shall be competent at all times to designate one or more other persons for this purpose. Article 22. Vacancy or Inability to Act. 22.1 If a seat is vacant on the Executive Board ('ontstentenis') or an Executive Board member is unable to perform his duties ('belet'), the remaining member or members of the Executive Board shall be temporarily entrusted with the management of the Company. 19 22.2 If all seats in the Executive Board are vacant or all Executive Board members are unable to perform their duties, the management of the Company shall be temporarily entrusted to the Supervisory Board, with the authority to temporarily entrust the management of the Company to one or more Supervisory Board members and/or one or more other persons. Article 23. The Company Secretary. 23.1 The Company shall have a secretary, to be referred to as the Company Secretary. The Company Secretary shall not be a member of the Executive Board or of the Supervisory Board. The Company Secretary shall be appointed by resolution of the Combined Board. A resolution to appoint a person as Company Secretary can only be adopted if both the majority of the Executive Board members then in office and the majority of the Supervisory Board members then in office express their support for such resolution. 23.2 The Company Secretary may be dismissed at any time by resolution of the Combined Board. The Company Secretary may also be dismissed by resolution of the Supervisory Board or by resolution of the Executive Board. 23.3 The Company Secretary shall have the duties and powers expressly conferred upon him by these Articles of Association. In addition, the duties and powers of the Company Secretary shall be determined by the Combined Board. 23.4 If the Company Secretary is absent, his duties and powers shall be assumed by his deputy, to be designated by the Combined Board. CHAPTER VIII. THE SUPERVISORY BOARD. Article 24. Supervisory Board Members. 24.1 The Company shall have a Supervisory Board, consisting of at least six and at most eight persons. The number of Supervisory Board members shall be determined by the Combined Board, with due observance of this minimum and this maximum. 24.2 If fewer than six Supervisory Board members are in office, the Supervisory Board shall remain competent, but the Combined 20 Board shall proceed to supplement the number of members of the Supervisory Board as soon as reasonably possible. 24.3 Supervisory Board members shall be appointed by the Shareholders' Body. A resolution of the Shareholders' Body to appoint a Supervisory Board member other than in accordance with a proposal of the Combined Board shall require a majority of at least two-thirds of the votes cast if less than one-half of the Company's issued capital is represented at the meeting. At a General Meeting of Shareholders, votes can only be taken on candidates whose names are stated for that purpose in the agenda of the meeting. At the same time notice of the meeting is given, the particulars referred to in Article 24.5 hereof shall be deposited at the Company's office for inspection by Shareholders as well as usufructuaries and pledgees of Shares to whom the voting rights accrue, until the end of the meeting, and this shall be stated in the notice. 24.4 Persons aged seventy-two years or more may not be appointed as a Supervisory Board member. 24.5 When a proposal or recommendation for appointment of a person as a Supervisory Board member is made, the following particulars shall be stated: his age, his profession, the number of Shares he holds and the positions he holds or has held, insofar as these are relevant for the performance of the duties of a Supervisory Board member. Furthermore, the names of the legal entities of which he is already a supervisory board member shall be indicated; if those include legal entities which belong to the same group, a reference of that group will be sufficient. The proposal or recommendation must state the reasons on which it is based. 24.6 Each Supervisory Board member may be suspended or dismissed by the Shareholders' Body at any time. 24.7 Any suspension may be extended one or more times, but may not last longer than three months in the aggregate. If at the end of that period no decision has been taken on termination of the suspension, or on dismissal, the suspension shall cease. 21 24.8 A Supervisory Board member shall retire not later than on the day on which the first General Meeting of Shareholders is held following the lapse of three years since his appointment. The Supervisory Board members shall retire periodically in accordance with a rotation plan to be drawn up by the Combined Board. A Supervisory Board member retiring pursuant to this Article 24.8 may be re-appointed as long as he has not reached the age limit. 24.9 A Supervisory Board member shall retire not later than on the day on which the annual General Meeting of Shareholders is held in the financial year in which he reaches the age of seventy-two. 24.10 The Combined Board shall establish the remuneration for each Supervisory Board member. Article 25. Duties and Powers. 25.1 It shall be the duty of the Supervisory Board to supervise the management of the Executive Board and the general course of affairs in the Company and the business connected with it. The Supervisory Board shall assist the Executive Board by giving advice. In performing their duties the Supervisory Board members shall act in accordance with the interests of the Company and the business connected with it. 25.2 The Executive Board shall supply the Supervisory Board in due time with the information required for the performance of its duties. 25.3 The Supervisory Board may request assistance from experts. The costs of such assistance shall be for the account of the Company. 25.4 The Supervisory Board may decide that one or more of its members and/or experts shall have access to the office and the other buildings and premises of the Company and that such persons shall be authorized to inspect the books and records of the Company. 22 25.5 The Supervisory Board may establish rules regarding its decision-making process and working methods, in addition to the relevant provisions of these Articles of Association. Article 26. Chairperson and Secretary. 26.1 The Supervisory Board shall appoint one of the Supervisory Board members as chairperson of the Supervisory Board. Furthermore, the Supervisory Board may appoint one or more deputy chairpersons from among its midst. 26.2 The Company Secretary shall as such also act as the secretary of the Supervisory Board. Article 27. Meetings. 27.1 The Supervisory Board shall meet together with the Executive Board unless the Supervisory Board wishes to meet without the members of the Executive Board being present. 27.2 The Supervisory Board shall meet whenever its chairperson, two or more other Supervisory Board members or two or more Executive Board members deem such to be necessary. 27.3 A Supervisory Board member may be represented at a meeting by another Supervisory Board member authorized in writing. 27.4 The meetings of the Supervisory Board shall be presided over by the chairperson or a deputy chairperson of the Supervisory Board. In their absence, the chairperson of the meeting shall be appointed by a majority of the votes cast by the Supervisory Board members present at the meeting. 27.5 Minutes of the meeting shall be kept by the Company Secretary. In his absence, the chairperson of the meeting shall appoint another secretary of the meeting. 27.6 The minutes shall be adopted by the Supervisory Board, in the same meeting or the next. Evidencing their adoption, the minutes shall be signed by the chairperson and the secretary of the meeting in which the minutes are adopted. Article 28. Decision-making Process. 28.1 When making Supervisory Board resolutions, each Supervisory Board member may cast one vote. 23 28.2 All resolutions of the Supervisory Board shall be adopted by a majority of the votes cast. 28.3 At a meeting, the Supervisory Board may only pass valid resolutions if the majority of the Supervisory Board members then in office are present or represented. 28.4 Supervisory Board resolutions may also be adopted in a manner other than at a meeting, in writing or otherwise, provided the proposal concerned is submitted to all Supervisory Board members then in office and none object to the relevant manner of adopting resolutions. Adoption of resolutions in writing shall be effected by written statements from all Supervisory Board members then in office. 28.5 A resolution of the Supervisory Board may at all times be evidenced by a written statement to that effect by the chairperson of the Supervisory Board or by the Company Secretary. CHAPTER IX. THE COMBINED BOARD. Article 29. Members of the Combined Board. 29.1 The Company shall have a Combined Board, consisting of all Supervisory Board members in office and all Executive Board members in office. 29.2 The chairperson and the deputy chairpersons of the Supervisory Board shall as such also act as chairperson and deputy chairpersons, respectively, of the Combined Board. 29.3 The Company Secretary shall as such also act as the secretary of the Combined Board. Article 30. Duties and Powers. 30.1 The Combined Board shall have the duties and powers conferred upon it by or pursuant to these Articles of Association as well as the duties and powers conferred upon it by or pursuant to the Governing Agreement referred to in Article 3 of these Articles of Association. 30.2 The Combined Board may establish rules regarding its decision-making process and working methods, in addition to the relevant provisions of these Articles of Association. 24 Article 31. Meetings. 31.1 The Combined Board shall meet whenever its chairperson or two or more other members of the Combined Board deem such to be necessary. A meeting of the Supervisory Board together with the Executive Board shall also count as a meeting of the Combined Board. 31.2 In a meeting of the Combined Board a Supervisory Board member may be represented by another Supervisory Board member authorized in writing and an Executive Board member may be represented by another Executive Board member authorized in writing. 31.3 The meetings of the Combined Board shall be presided over by the chairperson or a deputy chairperson of the Combined Board. In their absence, the chairperson of the meeting shall be appointed by a majority of the votes cast by the Supervisory Board members present at the meeting. 31.4 Minutes of the meeting shall be kept by the Company Secretary. In his absence, the chairperson of the meeting shall appoint another secretary of the meeting. 31.5 The minutes shall be adopted by the Combined Board, in the same meeting or the next. Evidencing their adoption, the minutes shall be signed by the chairperson and the secretary of the meeting in which the minutes are adopted. Article 32. Decision-making Process. 32.1 When making Combined Board resolutions, each Combined Board member may cast one vote. However, if the number of Executive Board members in office exceeds the number of Supervisory Board members in office, each Executive Board member shall have a number of votes equal to the number of Supervisory Board members, and vice versa. 32.2 All resolutions of the Combined Board shall be adopted by a majority of the votes cast, without prejudice to the provisions of Article 23.1 of these Articles of Association. If there is a tie, the issue shall be decided by the chairperson of the Combined Board. 25 32.3 At a meeting, the Combined Board may only pass valid resolutions if the majority of the Supervisory Board members then in office are present or represented. 32.4 Combined Board resolutions may also be adopted in a manner other than at a meeting, in writing or otherwise, provided the proposal concerned is submitted to all Combined Board members then in office and none of them objects to the relevant manner of adopting resolutions. Adoption of resolutions in writing shall be effected by written statements from all Combined Board members then in office. 32.5 A resolution of the Combined Board may at all times be evidenced by a written statement to that effect by the chairperson of the Combined Board or by the Company Secretary. CHAPTER X. FINANCIAL YEAR AND ANNUAL ACCOUNTS; PROFITS AND DISTRIBUTIONS. Article 33. Financial Year and Annual Accounts. 33.1 The Company's financial year shall be the calendar year. 33.2 Annually, not later than five months after the end of the financial year, unless by reason of special circumstances this period is extended by the Shareholders' Body by not more than six months, the Executive Board shall prepare annual accounts, and shall deposit the same for inspection by the Shareholders at the Company's office. Within the same period, the Executive Board shall also deposit the annual report for inspection by the Shareholders. 33.3 The annual accounts shall consist of a balance sheet, a profit and loss account and explanatory notes. 33.4 The annual accounts shall be signed by the Executive Board members and the Supervisory Board members. If the signature of one or more of them is missing, this shall be stated and reasons for this omission shall be given. 33.5 Annually, the Supervisory Board shall prepare a report, which shall be enclosed with the annual accounts and the annual report. 26 33.6 Annually, the Company shall appoint a registered accountant or an organization in which registered accountants work together (hereafter in this Article 33: an "Accountant") to examine the annual accounts. The Shareholders' Body shall be authorized to make such appointment. If the Shareholders' Body fails to make such appointment, the Supervisory Board shall be competent to make the appointment or, if the Supervisory Board fails to make the appointment, the Executive Board. The appointment of an Accountant shall not be restricted by any nomination; the appointment can at any time be withdrawn by the Shareholders' Body or by those who have made the appointment; in addition, an appointment made by the Executive Board may be withdrawn by the Supervisory Board. 33.7 The Accountant shall report on his examination to the Supervisory Board and the Executive Board. 33.8 The Accountant shall issue a statement on the outcome of his examination. 33.9 The Company shall ensure that the annual accounts, the annual report, the report of the Supervisory Board and the information to be added by virtue of the law are kept at its office as from the day on which notice of the annual General Meeting of Shareholders is given. Shareholders as well as usufructuaries and pledgees of Shares to whom the voting rights accrue may inspect the documents at that place and obtain a copy free of charge. 33.10 The annual accounts, the annual report and the information to be added by virtue of the law shall furthermore be subject to the provisions of Book 2, Title 9, of the Dutch Civil Code. Article 34. Adoption of the Annual Accounts and Discharge. 34.1 The Shareholders' Body shall adopt the annual accounts. The annual accounts cannot be adopted if the Shareholders' Body has been unable to take cognizance of the accountant's 27 statement referred to in Article 33.8 of these Articles of Association. 34.2 At the General Meeting of Shareholders at which it is resolved to adopt the annual accounts, it shall be separately proposed to discharge the Executive Board members and the Supervisory Board members for the management pursued and the supervision thereof, respectively, insofar as such management is reflected in the annual accounts and/or the annual report. Article 35. Publication of the Annual Accounts; Half Yearly and Quarterly Figures. 35.1 The Company shall publish the annual accounts. Publication must take place within eight days after the adoption, subject to the provisions of Section 2:394, subsections 2 and 3, of the Dutch Civil Code. Publication shall take place by deposit of a copy entirely in the Dutch language at the office of the Commercial Register, with a note thereon of the date of adoption. 35.2 A copy of the annual report in the Dutch language and of the other documents referred to in Section 2:392 of the Dutch Civil Code, shall be published simultaneously with the annual accounts and in the same manner. With the exception of the information referred to in said Section 2:392, subsection 1 under a., c., f. and g., the foregoing shall not apply if the documents are made available for public inspection at the Company's office, and if a full or partial copy thereof is supplied at not more than the cost price; the Company shall state this for entry in the Commercial Register. 35.3 The Company shall publish its half yearly figures as soon as they are available to the extent required by law and, for as long as Shares or depositary receipts thereof are quoted on the AEX Stock Exchange or another stock exchange, to the extent the Stock Exchange Regulations of Amsterdam Exchanges N.V. or applicable regulations of such other stock exchange or exchanges respectively, shall require. Article 36. Profits, Distributions and Losses. 28 36.1 Each year, the Combined Board shall determine which part of the profits shown in the adopted profit and loss account shall be reserved. 36.2 The profits remaining after allocation to reserves pursuant to Article 36.1 hereof shall be paid on the ordinary Shares and the class R Shares in proportion to the nominal value of each Share. In contravention of the provision of the preceding sentence, the Combined Board may resolve that the dividend to be paid on each class R Share shall be lower than the dividend to be paid on each ordinary Share, resolving at the same time what amount of dividend shall be paid on each ordinary Share and each class R Share, respectively, subject to the proviso that the dividend to be paid out of the annual profits on each class R Share shall, in that case, not be less than one per cent (1%) of the nominal value of each class R Share. 36.3 Distributions may be made only insofar as the Company's equity exceeds the amount of the paid in and called up part of the issued capital, increased by the reserves which must be kept by virtue of the law. 36.4 If a loss has been suffered during any one year, the Combined Board may resolve to offset such loss by writing it off against a reserve which the Company is not required to keep by virtue of the law. 36.5 Dividends shall be paid after adoption of the annual accounts showing that payment of dividends is permitted. 36.6 The Combined Board may, applying the provisions of Article 36.2 hereof, resolve to make an interim distribution, provided the requirement of Article 36.3 hereof has been complied with, as shown by interim accounts. Such interim accounts shall show the financial position of the Company not earlier than on the first day of the third month before the month in which the resolution to make the interim distribution is announced. They shall be prepared in accordance with generally accepted accounting principles. The interim accounts shall include the amounts which must be reserved by virtue of the law. They shall 29 be signed by the members of the Executive Board. If the signature of one or more of them is missing, this shall be stated and reasons for this omission shall be given. The interim accounts shall be deposited in the office of the Commercial Register within eight days after the day on which the resolution to make the interim distribution has been announced. 36.7 At the proposal of the Combined Board, the Shareholders' Body may resolve to make a distribution on Shares wholly or partly not in cash but in Shares. 36.8 The Combined Board may, applying the provisions of Article 36.2 hereof by analogy, resolve that distributions to holders of Shares shall be made out of one or more reserves, provided that the amount to be paid on each class R Share shall, in that case, not be less than one per cent (1%) of the nominal value of each class R Share. The provision of Article 36.7 hereof shall apply by analogy. 36.9 The date on which dividends and other distributions become payable shall be announced in accordance with Article 46 of these Articles of Association. 36.10 For all dividends and other distributions relating to a Share for which a CF-certificate has been issued, the Company shall be discharged from all obligations towards the person entitled thereto by placing those dividends or other distributions at the disposal of, or at the instruction of, the independent organisation referred to in Article 5.6 of these Articles of Association. 36.11 A claim of a Shareholder for payment of a distribution shall be barred after five years have elapsed. CHAPTER XI. THE SHAREHOLDERS' BODY. Article 37. Annual General Meeting of Shareholders. 37.1 Each year, though not later than in the month of June, a General Meeting of Shareholders shall be held. 37.2 The agenda of such meeting shall contain, inter alia, the following subjects for discussion: a. discussion of the annual report; 30 b. discussion and adoption of the annual accounts; c. discharge of the Executive Board members and of the Supervisory Board members; d. appointment of an accountant; e. other subjects presented for discussion by the Supervisory Board, the Executive Board or the Combined Board and announced with due observance of the provisions of these Articles of Association, as for instance with respect to the designation of a body of the Company competent to issue Shares and with respect to the authority of the Executive Board to make the Company acquire own Shares or depositary receipts thereof. 37.3 Requests to add subjects to the agenda of the annual General Meeting of Shareholders made by Shareholders shall be honoured, if (i) such requests are lodged in writing at the Company's office not later than in the month of February preceding the meeting concerned and (ii) the applicant or applicants provide evidence, satisfactory to the Executive Board, to represent, severally or jointly, at least one percent of the Company's issued capital at the time the request is made, unless in the opinion of the Supervisory Board and the Executive Board weighty Company interests would prevent this. Article 38. Other General Meetings of Shareholders. Other General Meetings of Shareholders shall be held whenever the Supervisory Board, the Executive Board, or the Combined Board deems such to be necessary, without prejudice to the provisions of Sections 2:108a, 2:110, 2:111 and 2:112 of the Dutch Civil Code. Article 39. Notice and Agenda of Meetings. 39.1 Notice of General Meetings of Shareholders shall be given by the Supervisory Board, the Executive Board or the Combined Board. 39.2 Notice of the meeting shall be given not later than on the fifteenth day prior to the day of the meeting. 31 39.3 The notice shall specify the subjects to be discussed or shall state that the Shareholders may have access to more information at the Company's office, without prejudice to the provisions of Article 14.7 and Article 47.6 of these Articles of Association. The agenda shall be made available to Shareholders free of charge at the Company's office and in Amsterdam at the place to be stated in the notice. The term "Shareholders" in this Article 39.3 shall include usufructuaries and pledgees of Shares to whom the voting rights accrue. 39.4 The notice shall state the requirements for admittance to the meeting as described in Articles 43.1 and 43.2 of these Articles of Association. 39.5 The notice shall be given in the manner stated in Article 46 of these Articles of Association. Article 40. Venue of Meetings. General Meetings of Shareholders shall be held in Amsterdam or Rotterdam. Article 41. Chairperson of the Meeting. 41.1 The General Meetings of Shareholders shall be presided over by the chairperson of the Supervisory Board or, if he is absent, by one of the deputy chairpersons of the Supervisory Board, or, if the latter are also absent, by another member of the Supervisory Board, appointed for that purpose by the Supervisory Board members present at the meeting. However, the Supervisory Board may also appoint another chairperson to preside over the meeting. 41.2 If the chairmanship of the meeting is not provided for in accordance with Article 41.1 hereof, the meeting shall itself elect a chairperson, with the proviso that so long as such election has not taken place, the chairmanship shall be held by a member of the Executive Board designated for that purpose by the members of the Executive Board present at the meeting. Article 42. Minutes. 32 42.1 Minutes shall be kept of the proceedings at the General Meeting of Shareholders by a secretary to be appointed by the chairperson, which minutes shall be adopted by the chairperson and the secretary and as evidence thereof shall be signed by them. 42.2 However, the chairperson may determine that notarial minutes shall be prepared of the proceedings of the meeting. In that case the co-signature of the chairperson shall be sufficient. Article 43. Rights at Meetings and Admittance. 43.1 Each Shareholder entitled to vote and each usufructuary or pledgee of Shares to whom the voting rights accrue shall be entitled to attend the General Meetings of Shareholders, to address such meetings and to exercise his voting rights. Where it concerns registered Shares, the Executive Board must be notified in writing of the intention to attend the meeting. Such notice must be received by the Executive Board not later than on the date mentioned in the notice of the meeting. The right to attend General Meetings of Shareholders and voting rights attributable to a registered Share can only be exercised, if such Share is recorded in the Company's register of Shareholders in the name of the Shareholder concerned, both on the date of the aforementioned notice and on the date of the meeting. Where it concerns bearer Shares the share certificates must be lodged not later than on the date mentioned in the notice of the meeting, at the place mentioned therein. 43.2 The right to take part in the meeting in accordance with Article 43.1 hereof may be exercised by a proxy authorized in writing, provided that the power of attorney has been received by the Executive Board not later than on the date mentioned in the notice of the meeting. 43.3 The date mentioned in the notice of the meeting, referred to in Articles 43.1 and 43.2 hereof, cannot be earlier than the seventh day prior to the date of the meeting. 33 43.4 If the voting rights attributable to a Share accrue to the usufructuary or pledgee, instead of to the Shareholder, the Shareholder shall also be authorized to attend the General Meetings of Shareholders and to address such meetings, provided that, where it concerns registered Shares, the Executive Board has been notified of the intention to attend the meeting in accordance with Article 43.1 hereof, and, where it concerns bearer Shares, the lodging as prescribed by Article 43.1 hereof has taken place. Article 43.2 hereof shall apply by analogy. 43.5 The foregoing provisions of this Article 43 with respect to the exercise of rights at meetings by holders of bearer Shares and holders of registered Shares, and their proxies, shall, to the extent possible, apply by analogy to holders of bearer depositary receipts or registered depositary receipts, respectively, issued for ordinary Shares with the Company's cooperation, and their proxies. 43.6 Each ordinary Share confers the right to cast one vote; each class R Share confers the right to cast ten votes. Holders of depositary receipts issued for ordinary Shares with the Company's co-operation, or their proxies, have no voting rights. 43.7 Each person entitled to vote or his proxy must sign the attendance list. The chairperson of the meeting may decide that the attendance list must also be signed by other persons present at the meeting. 43.8 The members of the Supervisory Board and the members of the Executive Board shall, as such, have the right to give advice in the General Meetings of Shareholders. 43.9 The chairperson of the meeting shall decide whether persons other than those mentioned above in this Article 43 shall be admitted. Article 44. Adoption of Resolutions. 44.1 Valid resolutions of the Shareholders' Body can only be adopted at a General Meeting of Shareholders for which notice is given and which is held in accordance with the 34 relevant provisions of the law and of these Articles of Association. 44.2 Unless the law or these Articles of Association provide for a greater majority, all resolutions of the Shareholders' Body shall be adopted by an absolute majority of the votes cast. 44.3 If a majority of the votes cast is not obtained in an election of persons, a second free vote shall be taken. If a majority is not obtained again, further votes shall be taken until either one person obtains a majority of the votes cast or the election is between two persons only, both of whom receive an equal number of votes. In the event of such further elections (not including the second free vote), each election shall be between the candidates in the preceding election, with the exclusion of the person who received the smallest number of votes in such preceding election. If in the preceding election more than one person have received the smallest number of votes, it shall be decided which candidate should not participate in the new election by randomly choosing a name. If votes are equal in an election between two persons, it shall be decided who is elected by randomly choosing a name. 44.4 If the votes are equal with regard to resolutions not concerning an election of persons, the proposal shall be deemed to have been rejected. 44.5 All voting shall take place orally. The chairperson is, however, entitled to decide that votes be cast by a secret ballot. If it concerns the holding of a vote on persons, anyone present at the meeting with voting rights may demand a vote by secret ballot. Votes by secret ballot shall be cast by means of secret, unsigned ballot papers. Blank and invalid votes shall not be counted as votes. Resolutions may be adopted by acclamation if none of the persons with voting rights present at the meeting objects. 44.6 When determining how many votes are cast, how many Shareholders are present or represented or which part of the 35 Company's issued capital is represented, no account shall be taken of Shares for which no vote can be cast. 44.7 The chairperson's decision at the meeting on the result of a vote shall be final and conclusive. The same shall apply to the contents of an adopted resolution if a vote is taken on an unwritten proposal. However, if the correctness of such decision is challenged immediately after it is pronounced, a new vote shall be taken if either the majority of the persons with voting rights present at the meeting or, where the original vote was not taken by roll call or in writing, any person with voting rights present at the meeting, so demands. The legal consequences of the original vote shall be made null and void by the new vote. Article 45. Meetings of Holders of Shares of a Specific Class. 45.1 Meetings of holders of ordinary Shares shall be convened by the Executive Board, the Supervisory Board or the Combined Board. Articles 38 through 44 of these Articles of Association shall apply to such meetings by analogy. 45.2 Meetings of holders of class R Shares shall be convened by the Executive Board, the Supervisory Board, the Combined Board or by a holder of one or more class R Shares. Articles 45.3 through 45.10 hereof shall apply to such meetings. 45.3 Notice of a meeting of holders of class R Shares shall be given not later than on the fifth day prior to the day of the meeting. In urgent cases, such to be determined by the persons convening the meeting, this term can be reduced to the second day prior to the day of the meeting. 45.4 The notice shall be given in writing and shall be mailed to the addresses of the holders of class R Shares as well as of the usufructuaries and pledgees of class R Shares to whom the voting rights accrue as recorded in the register. The notice shall specify the venue of the meeting and the subjects to be discussed. 45.5 Each class R Share confers the right to cast one vote. 36 45.6 Each holder of one or more class R Shares, as well as each usufructuary and each pledgee of class R Shares to whom the voting rights accrue may, either in person or by proxy authorized in writing, attend the meetings of holders of class R Shares and address the meeting. 45.7 The meeting may be attended by the holders of class R Shares, or their proxies, as well as by the usufructuaries and pledgees of class R Shares to whom the voting rights accrue, or their proxies, the members of the Executive Board and the members of the Supervisory Board. The chairperson shall decide whether persons other than the aforementioned shall be admitted. 45.8 As long as all issued class R Shares are represented at a meeting, valid resolutions can be adopted on all subjects coming up for discussion, provided they are adopted unanimously, even if the requirements for the convening and holding of meetings have not been observed. 45.9 The resolutions of the meeting of the holders of class R Shares may, unless there are usufructuaries and pledgees of class R Shares to whom the voting rights accrue, also be adopted in writing instead of at a meeting provided they are adopted by the unanimous vote of all holders of class R Shares entitled to vote. 45.10 Articles 41, 42, 43,7, 43.8 and 44 of these Articles of Association shall apply by analogy to the meetings of holders of class R Shares. Article 46. Notices and Announcements. All notices of General Meetings of Shareholders and all announcements to Shareholders and to usufructuaries and pledgees of Shares to whom the voting rights accrue, shall be made by advertisement in one or more nationally distributed daily newspapers and in the Official Price List of Amsterdam Exchanges N.V. Article 47. Amendment of Articles of Association and Dissolution. 37 47.1 A resolution to alter Articles 4.4, 18, 20, 24, 34, 36 and 47 of these Articles of Association or to dissolve the Company can be adopted only at the proposal of the Combined Board. 47.2 A resolution to amend these Articles of Association shall require an absolute majority of the votes cast, provided such resolution is passed at the proposal of the Combined Board. 47.3 For the adoption of a resolution to amend these Articles of Association, a majority of two thirds of the votes cast is required if the resolution is not passed at the proposal of the Combined Board. 47.4 For the adoption of a resolution as referred to in Article 47.3 hereof it shall also be required that at least one-half of the Company's issued capital be represented at the meeting at which the proposal concerned is dealt with. If it turns out that the requirement mentioned in the previous full sentence has not been satisfied, no second meeting shall be convened in which that requirement is not applicable. 47.5 A resolution to dissolve the Company requires an absolute majority of the votes cast. 47.6 When a proposal is to be made to the General Meeting of Shareholders to alter the Articles of Association or to dissolve the Company, it must always be stated in the notice of the meeting. When it concerns an amendment of the Articles of Association, a copy of the proposal in which the proposed alteration is quoted in full, must at the same time be filed for inspection in the Company's office and in Amsterdam in the place to be stated in the notice, until the end of that meeting, and be made available, free of charge, to the Shareholders and to the usufructuaries and pledgees of Shares to whom the voting rights accrue. Article 48. Liquidation. 48.1 If the Company is dissolved by a resolution of the Shareholders' Body, the members of the Executive Board shall be charged with the liquidation of the Company and the Supervisory Board 38 with the supervision thereof, subject to the relevant provisions of Book 2 of the Dutch Civil Code. 48.2 During the liquidation the provisions of these Articles of Association shall remain in force to the extent possible. 48.3 Assets which remain after payment of the debts shall be transferred to the holders of ordinary Shares and the holders of class R Shares in proportion to the nominal value of their shareholdings. Article 49. Transitory Provisions. 49.1 At the time this amendment of the Articles of Association takes effect, the nominal value of each ordinary share - until such time ten cents of a Dutch guilder (NLG 0.10) - shall be changed into six eurocents (EUR 0.06) and the nominal value of each class R Share - until such time one Dutch guilder (NLG 1) - shall be changed into sixty eurocents (EUR 0.60). As a result hereof, the Company's issued capital shall increase; the amount of this increase shall be charged to the Company's share premium reserve fiscally acknowledged. 49.2 Holders of K-certificates issued for bearer ordinary Shares may surrender such K-certificates at a place designated and published for that purpose by the Executive Board, against either issuance of CF-certificates or conversion into registered ordinary Shares, in both cases for an equal number of ordinary Shares as represented by the K-certificates surrendered. To the extent this Article 49.2 does not provide otherwise, the provisions of Article 6 of these Articles of Association shall apply by analogy to the extent possible. CF-certificates shall only be issued and conversion into registered ordinary Shares shall only be effected if the K-certificates surrendered are provided with all uncalled dividend coupons and talons. As from the first day of January two thousand, rights to dividends and other distributions as well as the right to attend General Meetings of Shareholders and voting rights attributable to bearer ordinary Shares represented by K-certificates can only be exercised if 39 the relevant K-certificates are first surrendered in accordance with the foregoing provisions of this Article 49.2. Statement Of No Objections. With respect to the foregoing amendment of the Articles of Association, a ministerial Statement of No Objections was granted on the fifteenth day of April nineteenhundred and ninety-nine, under number B.V. 208.889, which is evidenced by a written statement from the Dutch Ministry of Justice attached to this deed (Annex). Close. The person appearing is known to me, civil law notary. This deed, drawn up to be kept in the civil law notary's custody, was executed in Amsterdam on the date first above written. Before reading out, a concise summary of the contents of this deed was given to the person appearing. He then declared that he had taken note of the contents thereof and did not want to have the complete deed read to him. Thereupon, after limited reading, this deed was signed by the person appearing and by me, civil law notary. EX-3 4 0004.txt EXHIBIT 3.3 THIS GOVERNING AGREEMENT is made on 15 April 1999 BETWEEN REED INTERNATIONAL P.L.C. a company incorporated in England with registered number 77536 and having its registered office at 25 Victoria Street, London SW1H OEX (Reed); ELSEVIER NV a company incorporated in The Netherlands with Chamber of Commerce file number 33155037, and having its principal office at Van de Sande Bakhuyzenstraat 4, PO Box 470, 1000 AL Amsterdam, The Netherlands (Elsevier). WHEREAS (A) Reed and Elsevier announced on 17 September 1992 that they had agreed in principle to merge their businesses. (B) The parties entered into an Implementation Agreement on 30 October 1992 which was amended subsequently (the Implementation Agreement) pursuant to which the parties entered into a Governing Agreement dated 1 January 1993 which was amended subsequently (the Original Governing Agreement). (C) Subject to requisite shareholder approvals at the 1999 annual general meetings of Reed and Elsevier, the parties have agreed to make certain amendments to the Original Governing Agreement, to provide for a more unified management structure for Reed, Elsevier and Reed Elsevier. Those amendments, together with all the surviving provisions of the Original Governing Agreement are set out in this Governing Agreement and shall be effective from the later of such approvals. (D) (1) Reed holds 10,000 "R" shares and 100,000 "G" shares in the capital of Reed Elsevier and 101 R shares in the capital of Elsevier Reed Finance; (2) Elsevier holds 10,000 "E" shares in the capital of Reed Elsevier, 119 E shares in the capital of Elsevier Reed Finance, 250 E shares in the capital of Reed Elsevier Nederland BV and 5 E shares in the capital of Reed Elsevier Overseas BV; (3) RHBV, a wholly-owned subsidiary of Reed, holds 4,049,951 Exchange shares in Elsevier; and (4) Reed Elsevier Holdings BV, a wholly-owned subsidiary of Reed Elsevier, holds the remaining issued capital of Reed Elsevier Nederland BV and Reed Elsevier Overseas BV. (E) This Agreement sets out the terms of the continuing relationship of Reed and Elsevier including their relationship as shareholders in Reed Elsevier and Elsevier Reed Finance, and the basis on which the parties will work together in good faith to give effect to the intention of the directors of Reed and Elsevier to make distributions in accordance with schedule 1 to this Agreement. 1. INTERPRETATION 1.1 In this Agreement and the recitals hereto, unless the context otherwise requires or provides: Amended Reed Elsevier Articles means the articles of association of Reed Elsevier, adopted conditional on the passing of the shareholder resolutions at the annual general meeting of Reed and Elsevier as described in Recital (C) as amended, in the form attached hereto and initialled by or on behalf of each of the parties hereto for the purposes of identification; Board of Elsevier means: (a) in the case of an executive director, the Elsevier Executive Board; and (b) in the case of a non-executive director, the Elsevier Supervisory Board. Board of Reed means the board of directors of Reed (or a duly appointed committee of that board); Board of Reed Elsevier means the board of directors of Reed Elsevier; Chairman means, in the case of Elsevier, Chairman of the Supervisory Board; Chief Executive means, in the case of Elsevier, the Chairman of the Elsevier Executive Board; Code means the City Code on Takeovers and Mergers, as in force at the date of this Agreement; Elsevier Combined Board means a combined meeting of the members of the Elsevier Supervisory Board and the Elsevier Executive Board, referred to in the articles of association of Elsevier as the combined board; Elsevier Executive Board means the executive or management board (`Raad van Bestuur') of Elsevier; Page 2 Elsevier Reed Finance means Elsevier Reed Finance BV, a company incorporated in The Netherlands with file number 33145842 at the Amsterdam Chamber of Commerce; Elsevier Supervisory Board means the supervisory board (`Raad van Commissarissen') of Elsevier; Exchange shares means shares of the series R in the capital of Elsevier; Finance Group means Elsevier Reed Finance and its subsidiaries from time to time; holding company, subsidiary and wholly-owned subsidiary shall be construed in accordance with section 736 of the Companies Act 1985 as in force at the date of this Agreement; Nominations Committee means the joint nominations committee formed by Reed and Elsevier; person includes individuals, bodies corporate (wherever incorporated), unincorporated associations, partnerships and other unincorporated bodies (in each case, wherever resident and for whatever purpose); Reed Elsevier means Reed Elsevier plc, a company incorporated in England with registered number 2746616; Reed Elsevier Group means Reed Elsevier and its subsidiaries from time to time; Reed Elsevier Holdings BV means the company incorporated in The Netherlands with file number 33201111 at the Amsterdam Chamber of Commerce; Reed Elsevier Nederland BV means the company incorporated in The Netherlands with file number 33156677 at the Amsterdam Chamber of Commerce; Reed Elsevier Overseas BV means the company incorporated in The Netherlands with file number 33241720 at the Amsterdam Chamber of Commerce; RHBV means Reed Holding BV, a company incorporated in The Netherlands with file number 33241739 at the Amsterdam Chamber of Commerce; Page 3 Security Interest means any mortgage, charge, pledge or lien, or any security interest whatsoever, howsoever created or arising. 1.2 The schedules to this Agreement form part of this Agreement and shall have effect as if set out in full in it. References to this Agreement shall include reference to the schedules. 1.3 A reference to a director of a company is: (a) in the case of a company incorporated in England, a reference to a person who has been appointed as a member of the board of that company; and (b) in the case of a company incorporated in The Netherlands, a person who has been appointed as a member of that company's executive or management board or supervisory board. 1.4 Except where the context otherwise requires, references to clauses or schedules are to clauses of or schedules to this Agreement; references to sub-clauses are to sub-clauses of the clause in which the reference appears; and references in a schedule to paragraphs are references to the paragraph of the schedule in which the reference appears. 1.5 The headings are inserted for convenience only and shall not affect the construction of this Agreement. 2. PURPOSE AND EFFECTIVE DATE 2.1 The parties have merged their businesses with a view to achieving the objectives described in the circular dated 30 October 1992 to the holders of shares and bearer depository receipts in Elsevier and to the holders of shares in Reed. The Original Governing Agreement governs aspects of the relations between them following the merger. 2.2 This Agreement will become effective on resolutions approving the execution and performance of this Agreement by each party being passed by each party's shareholders in annual general meeting. 2.3 The provisions of this Agreement shall supersede the provisions of the Original Governing Agreement with effect from the date on which the last of the resolutions referred to in clause 2.2 is passed but this shall be without prejudice to the accrued (whether or not asserted) rights of either of the parties under the Original Governing Agreement. 2.4 Reed and Elsevier acting in good faith shall each do or procure to be done all such acts and things as may be necessary or desirable, to ensure so Page 4 far as practicable the complete and punctual fulfilment, observance and performance of the provisions of this Agreement, and shall each exercise all voting rights and powers, direct or indirect, available to it in relation to any of its subsidiaries or to any member of the Reed Elsevier Group or the Finance Group, to ensure so far as practicable that members of the Reed Elsevier Group and the Finance Group perform all obligations owed to Reed or Elsevier and generally that full effect is given to this Agreement. 3. MANAGEMENT Board Composition 3.1. Reed and Elsevier agree that: (a) subject to (c) and (d) below and clause 3.2, the Boards of each of Reed, Elsevier and Reed Elsevier will comprise the same people; (b) subject to (d) below, Reed, Elsevier and Reed Elsevier will have the same Chairman and Chief Executive and, for the purposes of this Agreement, if a person's appointment to the Board of Elsevier is pending that person shall, from the moment he has been appointed the Chairman or the Chief Executive of Reed and Reed Elsevier, be treated as if he were the Chairman or Chief Executive (as appropriate) of Elsevier; (c) without prejudice to the operation of clause 3.2, up to two additional members of the Elsevier Supervisory Board may be appointed who are not directors of Reed or Reed Elsevier; (d) a person may be appointed and serve as a director of Reed and of Reed Elsevier pending his or her appointment to the Board of Elsevier and such person shall be counted as a director for the purposes of clause 3.1(e) below; and (e) other than in circumstances where the parties agree in writing that for the time being it is not practicable or possible and subject to clause 3.2: (i) there shall be no less than three and no more than five executive directors (including the Chief Executive and the Chief Financial Officer) on the Board of Reed, the Elsevier Executive Board and the Board of Reed Elsevier; and (ii) there shall be six non-executive directors on the Board of Reed and the Board of Reed Elsevier and no less than six and no Page 5 more than eight non-executive directors on the Elsevier Supervisory Board. 3.2 Reed and Elsevier agree that if a person is elected as a director of Reed or Elsevier by a resolution passed by its shareholders in general meeting which was proposed by one or more of that company's shareholders and was not proposed or recommended for approval by that company's directors, then sub-clauses 3.1(a), (c), and (e): (a) will not apply in respect of that person; and (b) will continue to apply, other than in respect of that person. Nominations Committee 3.3 Reed and Elsevier shall, by separate board resolutions, create a joint committee (the Nominations Committee) and delegate to that committee sole responsibility for nominating persons for appointment as directors of each of Reed, Elsevier and Reed Elsevier. The Nominations Committee shall be comprised of the following persons: (a) the Chairman of Reed and Elsevier from time to time; (b) the Chief Executive of Reed and Elsevier from time to time; (c) a representative appointed by the Board of Reed, being a non-executive director of Reed as well as a member of the Elsevier Supervisory Board; and (d) a representative appointed by the Elsevier Combined Board, being a member of the Elsevier Supervisory Board (as well as a non-executive director of Reed). 3.4 Each of Reed and Elsevier shall appoint and remove its representative on the Nominations Committee by giving to the other and the Chairman of the Nominations Committee at the time, notice in writing. If Reed or Elsevier gives notice that a person is to be appointed or removed as its representative on the Nominations Committee, then the other must take any action which is necessary to ensure that the representative is so appointed or removed. 3.5 From time to time and as required, the Nominations Committee shall nominate persons for appointment: (a) to the Board of Reed, the Board of Elsevier and the Board of Reed Elsevier; or Page 6 (b) in respect of the two additional members referred to in clause 3.1(c), solely to the Elsevier Supervisory Board. None of the Board of Reed, the Board of Elsevier or the Board of Reed Elsevier may appoint or propose or recommend the appointment of a person as a director who has not first been nominated for that appointment by the Nominations Committee. Board appointments - Reed and Reed Elsevier 3.6. A person may only be appointed by the Board of Reed as a director of Reed and by the shareholders or Board of Reed Elsevier as a director of Reed Elsevier, provided that: (a) the person has been nominated for that appointment by the Nominations Committee; (b) in the case of an appointment to the Board of Reed, the Board of Reed Elsevier has also resolved to appoint the person as a director of Reed Elsevier; (c) in the case of an appointment to the Board of Reed Elsevier, the Board of Reed has also resolved to appoint the person as a director of Reed; (d) the Elsevier Combined Board has resolved to recommend the appointment of that person at the next Annual General Meeting of Elsevier; and (e) the person has executed the Deed of Undertaking contained in Schedule 2. That person may be recommended for re-election at the next appropriate general meeting of Reed or Reed Elsevier provided that the person: (i) is, at the time, a director of Reed and of Reed Elsevier and of Elsevier (or the Elsevier Combined Board has resolved to recommend the person for appointment to the Board of Elsevier); and (ii) is willing to stand for re-election, without prejudice, however, to the obligations of the Board of Reed and the Board of Reed Elsevier to express to their shareholders an opinion as to whether a person is suitable for appointment as a director. Page 7 3.7. If the Board of Reed resolves not to appoint a person nominated by the Nominations Committee as a director, then the Nominations Committee may be directed by the Board of Reed to nominate an alternative person for appointment as a director of Reed, Elsevier and Reed Elsevier. Board appointments - Elsevier 3.8. A person may: (a) only be recommended for election to the Board of Elsevier at the earlier of the next Annual General Meeting or the next Extraordinary General Meeting of Elsevier; and (b) until that general meeting, be entitled to attend meetings of the Elsevier Combined Board, the Elsevier Executive Board or the Elsevier Supervisory Board (as the case may be) as an observer, provided that: (i) the person has been nominated for that appointment by the Nominations Committee; (ii) (other than where the person has only been nominated for appointment to the Elsevier Supervisory Board) the Board of Reed and the Board of Reed Elsevier have both resolved to appoint the person as a director; and (iii) the person has executed the Deed of Undertaking contained in Schedule 2, without prejudice to the obligations of the Elsevier Combined Board to express to Elsevier shareholders an opinion as to whether a person is suitable for appointment as a director. 3.9 If the Elsevier Combined Board resolves not to recommend a person nominated by the Nominations Committee for election by Elsevier shareholders as a director, then the Nominations Committee may be directed by the Elsevier Combined Board to nominate an alternative person for appointment as a director of Reed, Elsevier and Reed Elsevier. Appointment of Chairman and Chief Executive 3.10 If the Nominations Committee nominates a person for appointment as Chairman or Chief Executive: Page 8 (a) subject to the person being or becoming a member of the Board of Reed and the Board of Reed Elsevier, the Board of Reed and the Board of Reed Elsevier shall promptly appoint that person to that position in Reed and Reed Elsevier respectively; and (b) subject to paragraph (a) being satisfied and the person being or becoming a member of the Board of Elsevier, the person shall promptly be appointed to that position in Elsevier. Retirement of directors 3.11 Reed and Elsevier shall ensure that each director of Reed, Elsevier and Reed Elsevier (other than in respect of paragraphs (b) and (c), a person who is only a director of the Elsevier Supervisory Board): (a) retires from the Boards of Reed and Elsevier at least every three years; (b) if retiring, retires from the Board of Reed and the Board of Elsevier at the Annual General Meeting in the same year; and (c) if being proposed for re-election, is proposed for re-election to the Board of Reed and the Board of Elsevier at the relevant Annual General Meeting in the same year; and (subject to Reed's and Elsevier's obligations under paragraph (c) being without prejudice to the obligations of the Board of Reed and Elsevier to express to their respective shareholders an opinion as to whether a person is suitable for appointment as a director). Removal of director 3.12 The Board of Reed and the Elsevier Combined Board shall each, so far as it is able, ensure that a director retires or resigns or is removed forthwith from its Board and from the Board of Reed Elsevier if: (a) the appointment or re-election of that person is not also approved by the requisite majority of shareholders of Reed or Elsevier in general meeting; (b) that director ceases to be a director of Reed, Elsevier or Reed Elsevier whether pursuant to a board resolution, a resolution of shareholders or any other provision of the relevant articles of association; (c) that director resigns as a director of one or more of Reed, Elsevier and Reed Elsevier; or Page 9 (d) that director otherwise ceases, for whatever reason, to be a director of Reed, Elsevier or Reed Elsevier. Remuneration committee 3.13 The Board of Reed Elsevier shall establish a remuneration committee with responsibility for (a) recommending the remuneration arrangements for the company's executive directors and (b) such other matters as may be delegated to it. Remuneration of directors by Reed and Elsevier 3.14 The Reed Elsevier remuneration committee shall not make recommendations in relation to the fees or remuneration payable to a person in that person's capacity as a director of Reed or as a member of the Elsevier Supervisory Board or the Elsevier Executive Board. Proposals and recommendations relating to the fees to be paid to a person in such capacity shall be made by the Chairman and Chief Executive of Reed and Elsevier from time to time but shall not be effected without the prior approval of each of the Board of Reed and the Elsevier Combined Board. Audit committee 3.15 The Board of Reed Elsevier shall establish an audit committee with responsibility for (a) reviewing and advising the directors of Reed Elsevier on matters relating to the audit of Reed Elsevier and its subsidiaries, the effectiveness of internal controls over financial and management information, and the half-year and annual financial statements and (b) such other matters as may be delegated to it. Elsevier Reed Finance 3.16 Reed and Elsevier may each: (a) nominate persons to be appointed members of the management or the supervisory board of Elsevier Reed Finance; and (b) propose the suspension or dismissal of a person appointed a member of the management or the supervisory board of Elsevier Reed Finance pursuant to its nomination, subject to not more than half the maximum number of directors fixed from time to time pursuant to the articles of association of Elsevier Reed Finance being persons nominated for appointment by Reed, and not more than half being persons so nominated by Elsevier. Reed and Elsevier shall not nominate a person for appointment as a member of the management or the Page 10 supervisory board of Elsevier Reed Finance without the prior approval of the other, which approval shall not be withheld or delayed unreasonably. 3.17 The majority of directors of Elsevier Reed Finance shall at all times be persons not resident in the UK. 3.18 Upon a nomination, or a proposal for suspension or dismissal, being made in accordance with sub-clause 3.16 Reed and Elsevier shall each sign forthwith, a resolution in writing in accordance with article 34 paragraph 1 of the articles of association of Elsevier Reed Finance to appoint the person so nominated or to dismiss or suspend the person whose proposal or dismissal has been so proposed. If Reed and Elsevier are not able to ensure that such a resolution in writing is adopted forthwith, they will take all necessary measures to have a similar resolution adopted as soon as possible in a general meeting of shareholders of Elsevier Reed Finance. 4. GENERAL UNDERTAKINGS Shareholder approval 4.1 If: (a) whether by reason of law, the rules or regulations of any stock exchange or any other applicable regulatory requirement, it is proposed to convene a general meeting of shareholders to consider and, if thought fit, to pass a resolution (the Principal Shareholders' Resolution); or (b) the Board of Reed, the Elsevier Supervisory Board, the Elsevier Executive Board or the Elsevier Combined Board proposes to pass a resolution in relation to a matter concerning its company which would, whether by reason of law, the rules or regulations of any stock exchange or any other applicable regulatory requirement, be required to be approved or effected by a resolution approved at a general meeting of shareholders of the other party if the matter concerned that other party (the Principal Board Resolution), the Board of Reed, the Elsevier Supervisory Board, the Elsevier Executive Board or the Elsevier Combined Board, as the case may be (the Proposing Board), shall give notice, in the case of the Board of Reed, to the Elsevier Combined Board, and, in the case of the Elsevier Supervisory Board, the Elsevier Executive Board or the Elsevier Combined Board, to the Board of Reed (each recipient of such notice being the Second Board) that it proposes to convene a meeting to consider and, if thought fit, to pass the Principal Shareholders' Resolution or, as the case may be, that it proposes to pass the Page 11 Principal Board Resolution. If the Second Board gives notice (the Second Board's Notice) to the Proposing Board within seven days that it considers the Principal Shareholders' Resolution or the Principal Board Resolution to be of such importance to its shareholders that it is appropriate to convene a general meeting to consider and, if thought fit, to pass a resolution of similar effect to the Principal Shareholders' Resolution or the Principal Board Resolution (a Confirmatory Resolution), the Proposing Board shall take such action as it considers necessary to ensure that the action to which the Principal Shareholders' Resolution or the Principal Board Resolution relates does not take effect until the Confirmatory Resolution has been duly passed (if necessary by expressing the Principal Shareholders' Resolution or the Principal Board Resolution to be conditional on a Confirmatory Resolution being duly passed). The Second Board shall ensure that a Confirmatory Resolution is proposed in terms such that it will be passed if passed by a simple majority, shall convene a general meeting as soon as practicable to consider the Confirmatory Resolution and shall take such other action as it can reasonably take to ensure that such resolution is considered and voted upon by those currently entitled to be present and to vote at a general meeting as soon as is reasonably practicable and in any event, unless some other period is agreed by the Proposing Board, within 30 days of the date on which the Second Board's Notice was given. Without prejudice to any other provisions of this Agreement, the requirements of this sub-clause shall not apply: (a) to the extent that it would involve directors taking action which is prohibited by law or applicable regulatory requirements or their being in breach of a duty owed by them to the company in question; (b) if notice in the form set out above is not given by the Second Board within the period of 7 days; and (c) in relation to a Principal Shareholders' Resolution concerning the approval of accounts, the appointment or re-appointment of directors, the appointment or re-appointment of auditors, an increase in authorised capital, the grant to directors of Reed of authority to allot or issue shares, the extension of the competence of the Elsevier Combined Board to issue shares, the disapplication of pre-emption rights, the grant of authority to purchase own shares, the approval of employee share option schemes and the approval of arrangements for the issue of shares in lieu of a cash dividend. When determining whether it is appropriate to convene a general meeting to consider and, if thought fit, to pass a Confirmatory Resolution, the Second Page 12 Board shall have regard inter alia (but without limitation) to the implications of any delay which might arise as a result of holding such a general meeting and to any particular circumstances which would suggest that, in the context of that company and/or the subject matter of the Principal Shareholders' Resolution or the Principal Board Resolution, it would not be appropriate for the Second Board to seek the approval of its shareholders. Controls on the Reed Elsevier Group and the Finance Group 4.2 Reed and Elsevier shall each, so far as it is able, ensure that Reed Elsevier, Elsevier Reed Finance and their respective subsidiaries do not authorise, approve, execute or do any document, deed, act or thing: (a) without the prior approval of the Board of Reed and of the Elsevier Combined Board if: (i) by reason of law, regulation or the rules or regulations of any stock exchange or regulatory authority a resolution would first be required to be passed by the shareholders of Reed or Elsevier (including for this purpose circumstances where, on the basis that, as confirmed by the London Stock Exchange, the continuing obligations set out in its "Admission of Securities to Listing" apply to Reed, Reed would be obliged by such obligations to obtain its shareholders' approval); or (ii) by reason of law, regulation or the rules of any regulatory authority (other than a stock exchange), Reed or Elsevier would first be required to make any filing with or notification to, or to obtain any consent or authorisation from any regulatory or governmental authority (other than a stock exchange); or (b) without the prior approval of the Board of Reed and of the Elsevier Combined Board if the event in question would cause Reed or Elsevier or their directors to be in breach of any contract to which Reed or Elsevier is a party, or to be in breach of any restriction contained in the articles of association of Reed or Elsevier, provided that the contract is one to which Reed or, as the case may be, Elsevier is permitted by this Agreement to be party or the restriction in the articles of association was contained in the articles of association at the date of this Agreement or was adopted after that date in accordance with this Agreement. Share capital 4.3 Reed and Elsevier shall not, without the prior approval of the other: Page 13 (a) grant any right to subscribe, exchange for or convert into any share in its capital; (b) except on exercise of rights which were outstanding at the date the Original Governing Agreement became effective, allot or issue any share in its capital; (c) consolidate, sub-divide, convert or alter the rights attaching to any class of shares; (d) purchase its own shares, redeem any shares or reduce its share capital in any way whatsoever, except, in the case of Reed, if the Board of Reed is required to give notice to redeem shares which were issued on terms that they were redeemable; or (e) amend its articles of association or adopt new articles of association. Limitation of activities of Reed and Elsevier 4.4 Reed and Elsevier shall not, and shall each, so far as it is able, ensure that its subsidiaries do not, without the prior approval of the other: (a) borrow any money, or incur any liability in the nature of borrowings; (b) guarantee the obligations of any person, grant an indemnity to any person against loss, damage or expense of whatsoever nature, or mortgage or charge its undertaking, property or uncalled capital; (c) carry on or be interested in any business other than (i) the ownership of assets held at the date of the Original Governing Agreement as envisaged by the Implementation Agreement or acquired after that date with the prior approval of the other, (ii) subject to the other provisions of this sub-clause, the exercise of rights relating to such assets, and (iii) giving effect to such arrangements with members of the Reed Elsevier Group or the Finance Group as may be agreed from time to time; (d) lend any moneys to, or deposit any moneys with, any person other than with the approval of the Board of Reed Elsevier to or with a member of the Reed Elsevier Group or the Finance Group; (e) dispose of, or grant any Security Interest over, any share in the capital of any body corporate including, without limitation, any share in the capital of a subsidiary of it, a member of the Reed Elsevier Group or a member of the Finance Group, or any interest in a share in a body corporate and in particular shall not surrender to any other person the Page 14 power to exercise the voting rights attaching to any share in a body corporate; (f) sell, transfer or assign, other than with the approval of the Board of Reed Elsevier to a member of the Reed Elsevier Group or the Finance Group, the benefit of any obligation owed by a subsidiary of it, by a member of the Reed Elsevier Group or by a member of the Finance Group, or any interest in such an obligation; (g) dispose of any asset not falling within (e) or (f), or any interest in such an asset, except with the approval of the Board of Reed Elsevier on terms which are at arm's length, or (with such approval) to a member of the Reed Elsevier Group or the Finance Group; (h) acquire any asset of any nature whatsoever from any person who is not a member of the Reed Elsevier Group or the Finance Group, other than in the course of a business falling within (c); (i) incur any liability of any nature other than: (i) liabilities which are incidental to or which arise out of the businesses mentioned in paragraph (c) above (save that paragraph (c)(ii) shall not authorise the voluntary assumption of any liability of a pecuniary nature); (ii) liabilities which arise by virtue of or are connected with the existence or nature of the relevant company or the need properly to conduct its affairs or maintain corporate records or which are otherwise of a corporate housekeeping nature (including reasonable remuneration or fees for directors and other officers and reasonable registrars, auditors' and advisors' fees); (iii) liabilities which are connected with or arise out of the listing or quotation of the relevant company's shares or other securities on any stock exchange; (iv) taxation or similar liabilities arising out of any action which the relevant company is or was permitted to take pursuant to this Agreement or the Original Governing Agreement; (v) liabilities which arise out of or are connected with borrowings or other commitments of the relevant company which existed at the date of the Original Governing Agreement (save that this Page 15 shall not authorise the voluntary assumption of any liability of a pecuniary nature). Business of Reed and Elsevier 4.5 Reed and Elsevier shall continue to manage their affairs with a view to the nature of their respective businesses being limited to dealings with members of the Reed Elsevier Group and the Finance Group, the holding of shares in members of the Reed Elsevier Group and shares in Elsevier Reed Finance, in the case of Reed, holding shares in RHBV and holding Exchange shares directly or indirectly, and such other matters as may be agreed from time to time by the parties. Application of cash 4.6 Reed and Elsevier shall each lend or otherwise make available surplus cash to the Reed Elsevier Group or the Finance Group on such terms as they may respectively agree from time to time with Reed Elsevier and, if appropriate, the board of any member of the Reed Elsevier Group or the Finance Group which may be party to such arrangements. Reed and Elsevier liquidity 4.7 Reed and Elsevier agree that they may each require loan facilities from time to time to meet Permitted Liabilities (as defined in article 105.1 of the articles of association of Reed Elsevier). Upon the request of either of them, they shall both use all reasonable endeavours to ensure that a member of the Finance Group or the Reed Elsevier Group provides or procures the provision of an appropriate loan facility to the party making the request for the purpose of meeting Permitted Liabilities. 5. GUARANTEES AND INDEMNITIES 5. Reed and Elsevier agree, without prejudice to sub-clause 4.4(b), that any guarantees or indemnities which are given by them shall normally be given on a joint and several basis. Reed and Elsevier shall not be required to give any guarantee or indemnity at the request of the other or at the request of any member of the Reed Elsevier Group or the Finance Group. 6. EXCHANGE SHARES/SHARES IN RHBV Exchange shares 6.1 Reed undertakes to Elsevier that it will continue, so far as it is able, to ensure that RHBV performs the obligations assumed by it in the agreement Page 16 between RHBV and Elsevier of even date with the Original Governing Agreement. Shares in RHBV 6.2 Reed undertakes to Elsevier to ensure that, unless Elsevier agrees otherwise, RHBV will at all times be the wholly-owned subsidiary of Reed. Listing 6.3 Elsevier undertakes to Reed, for its own benefit and that of RHBV, that, upon conversion of Exchange shares into ordinary shares in the capital of Elsevier, it will use all reasonable endeavours to ensure the admission to listing or quotation, on all stock exchanges on which ordinary shares in the capital of Elsevier are for the time being listed or quoted, of the ordinary shares arising on such conversion. 7. EQUALISATION 7.1 The parties shall give effect to the provisions of schedule 1. 8. STANDSTILL 8.1 Reed and Elsevier shall each not, and shall, so far as it is able, ensure that persons acting in concert with it in relation to the other do not, without the prior approval of the other: (a) acquire or dispose of any interest in the share capital of the other; (b) announce or make any offer (including a partial or tender offer) for shares in the capital of the other or take any step which might give rise to an obligation (under the City Code on Takeovers and Mergers or otherwise) to announce or make such an offer; (c) exercise any right to require a general meeting of the other to be convened or otherwise to require the other to arrange for a resolution to be considered by all or some of the members of the other; or (d) solicit or encourage any other person, or enter into any agreement or arrangement with any other person for that other person, to do any of the foregoing or any other act or thing which could result in that or any other person acquiring control of either Reed or Elsevier. 8.2 For the purposes of this clause and clause 9, interest in shares shall have the meaning conferred by section 212(5) Companies Act 1985 and persons acting in concert shall have the meaning conferred by the Code. Page 17 For the purposes of this clause, control shall have the meaning conferred by the Code. 9. CHANGE OF CONTROL 9.1 If a person (together with persons acting in concert with him) (the Acquirer) acquires shares, or control of the voting rights attaching to shares, carrying more than 50 per cent. of the votes ordinarily exercisable at general meetings of Reed or Elsevier (control) and has not made a Comparable Takeover Offer (as defined below), the party in which control has not been obtained (the Party giving Notice) may, at any time while such circumstances persist (and from time to time), give notice suspending or modifying the operation of certain provisions of this Agreement, withdraw such a notice, and give further notices varying the effect of any previous notice (all such notices having effect from time to time constituting a Notice of Suspension). A Notice of Suspension shall state which of the following provisions of this Agreement are to be of no effect while the Notice of Suspension is operative: (a) sub-clause 3.1; (b) sub-clause 3.2; (c) sub-clause 3.3; (d) sub-clause 3.4; (e) sub-clause 3.5; (f) sub-clause 3.6; (g) sub-clause 3.7; (h) sub-clause 3.8; (i) sub-clause 3.9; (j) sub-clause 3.10; (k) sub-clause 3.11; (l) sub-clause 3.12; (l) sub-clause 4.1, insofar as it imposes obligations on the Party giving Notice; Page 18 (m) sub-clause 6.2; (n) sub-clause 8.1, insofar as it imposes obligations on the Party giving Notice. A Notice of Suspension shall also state whether, for the purposes only of the obligations imposed by them on the Party giving Notice: (1) sub-clause 3.16 is to be modified by the substitution of the phrase "without the prior approval of the other, which approval shall not be withheld or delayed unreasonably" with the phrase "without the prior approval of the Party giving Notice"; (2) sub-clause 4.2 is to be modified so as to require the prior approval of the Board of Reed Elsevier (A) instead of Reed or the Board of Reed if the Party giving notice is Elsevier or (B) instead of the Elsevier Combined Board, if the Party giving notice is Reed; (3) sub-clause 4.3 and/or 4.4 are to be modified by the substitution of the phrase "without the prior approval of the other" with the phrase "without the prior approval of the Board of Reed Elsevier"; and/or (4) sub-clause 4.5 is to be modified by the substitution of the phrase "as may be agreed from time to time by the parties" with the phrase "as the Board of Reed Elsevier may approve". 9.2 A Notice of Suspension shall cease to have effect if the parties agree or if: (a) the other party provides evidence to the Party giving Notice which satisfies the Party giving Notice acting in good faith that there is no person who, with persons acting in concert with him, controls that other party; or (b) within 90 days of the acquisition of control a Comparable Takeover Offer has been made. Unless otherwise agreed by the parties, upon a Notice of Suspension ceasing to have effect all provisions of this Agreement shall again be in full force and effect without modification, but the Party giving Notice shall not be required to take any action to restore the position to that which would have prevailed had provisions of this Agreement not been affected by a Notice of Suspension. Page 19 9.3 Comparable Takeover Offer means offers to acquire: (a) all the shares other than those which, as respects dividends and capital, carry a right to participate only up to a specified amount in a distribution (equity securities); and (b) all the securities which are convertible into equity securities; in the capital of the Party giving Notice, other than shares held by it, which: (1) are unconditional save for an acceptance condition of the kind permitted by Rule 9.3 and a condition reflecting terms of the kind permitted by Rule 9.4; (2) are cash offers (in sterling, if the Party giving Notice is Reed, or in euros, if the Party giving Notice is Elsevier) at a price not lower than the Required Price; (3) are communicated to the offerees in the manner required by the Code or, if that is impracticable, in such other manner as the Party giving Notice may reasonably specify; (4) are open for acceptance for not less than the period required by Rule 31; (5) comply with the General Principles and Rules; (6) has become unconditional in all respects or, if it has lapsed without becoming unconditional in all respects, has lapsed solely as a result of failure to obtain sufficient acceptances of the offer to satisfy any condition as to acceptances which is permitted by this clause, in each case on the basis that the Code applies to the offers; provided that, if any such offer would, at the time it would be required to be made, be illegal or contravene any applicable regulatory requirement (including any successor to the Code) in either the United Kingdom or The Netherlands then the expression Comparable Takeover Offer shall mean offers which satisfy the above requirements as nearly as is possible having regard to applicable law and regulatory requirements in such jurisdictions. 9.4 For the purpose of this clause: General Principles means the General Principles of the Code; Required Price means whichever shall be the higher of: Page 20 (a) the highest price paid for securities of the relevant class by the person who shall have obtained control or any person acting in concert with that person during whichever shall be the longer of the following periods: (i) the 12 months preceding the acquisition of control and the period since such acquisition; and (ii) the period since that person (together with persons acting in concert with that person) shall have become interested in shares carrying more than 30 per cent. of the votes ordinarily exercisable at general meetings of Reed or, as the case may be, Elsevier; and (b) the price which would be required by Rules 14 and 15 having regard to the price required to be offered for the relevant ordinary shares; and, for this purpose: (1) if the Party giving Notice is Reed, ordinary shares in Elsevier acquired by any relevant person shall be deemed to be ordinary shares in Reed and to have been acquired at a price calculated by dividing the price at which they were in fact acquired by the Equalisation Factor and, if necessary, converting that price into sterling at the closing mid-point euro-sterling exchange rate for the date of the acquisition as shown in the London edition of the Financial Times (or such other point of reference as the parties shall agree); (2) if the Party giving Notice is Elsevier, ordinary shares in Reed acquired by any relevant person shall be deemed to be ordinary shares in Elsevier and to have been acquired at a price calculated by multiplying the price at which they were in fact acquired by the Equalisation Factor and, if necessary, converting that price into euros at the exchange rate referred to in (1) above, where Equalisation Factor means the larger number in the Equalisation Ratio (as defined in schedule 1) at the time the shares in question were acquired divided by the smaller number in the Equalisation Ratio at that time; and references to Rules are to Rules of the Code. Page 21 10. INTELLECTUAL PROPERTY RIGHTS 10. Reed and Elsevier shall each, to the extent it has the right to do so, permit members of the Reed Elsevier Group and members of the Finance Group to use, in the course of their respective businesses, the names "Reed", "Elsevier", their respective logos, any associated names which Reed, Elsevier or the subsidiaries of either of them are entitled to use in the course of their respective businesses and the Reed trademarks detailed in schedule 3 of the Implementation Agreement (the Names). Any such permission shall be on such terms as may reasonably be required to protect the intellectual property rights subsisting in the Names. 11. ACCOUNTING MATTERS, CORPORATE GOVERNANCE AND DISCLOSURE OBLIGATIONS Accounting reference date 11.1 The financial year of Reed and Elsevier shall end on 31 December until they agree otherwise. Audit committees 11.2 The audit committees of the Boards of Reed and Elsevier will continue. Accounting policies and practices 11.3 Reed and Elsevier shall so far as practicable adopt the same accounting policies and apply the same accounting practices. These will be developed by the Chief Financial Officer of Reed Elsevier and his team and will be approved by the Reed Elsevier audit committee with input as appropriate from the Reed audit committee and the Elsevier audit committee. Corporate Governance and disclosure standards 11.4 Each of Reed, Elsevier and Reed Elsevier will comply with the highest standards of corporate governance and disclosure policies applying in the UK and Netherlands with the effect that a mandatory obligation applying to one of Reed or Elsevier will be observed by the other and Reed Elsevier (except to the extent that the observance of that obligation would place a party in breach of a mandatory obligation applying directly to it). Page 22 12. INFORMATION The Operating Group and the Finance Group 12.1 Reed and Elsevier shall each be entitled to have and shall each ensure that the other has reasonable access to the separate books, records and accounts kept from time to time by members of the Reed Elsevier Group and the Finance Group and to be supplied by those companies with such information as they each may reasonably require from time to time to keep themselves properly informed about the business and affairs of those companies and generally to protect their respective interests. Reed and Elsevier 12.2 Reed and Elsevier shall provide the other with such information as is reasonably required by the other in connection with the exercise of rights or the performance of obligations under this Agreement or otherwise in relation to matters arising out of it. Confidentiality 12.3 A party receiving information under this clause which is confidential to the company from which it is acquired shall not divulge that information to any other person without the prior approval of that company, which shall not be withheld unreasonably. 13. STOCK EXCHANGE OBLIGATIONS 13. The parties shall co-operate, and shall each, so far as it is able, ensure that members of the Reed Elsevier Group and members of the Finance Group co-operate, to ensure that Reed and Elsevier are in a position to comply with obligations imposed on them by stock exchanges on which their shares are from time to time listed, quoted or traded. In particular, Reed and Elsevier shall use all reasonable endeavours to ensure, as far as practicable, that they co-ordinate the content and timing of release of announcements required by each such stock exchange. Whenever practicable, the parties shall endeavour to secure the approval of any such announcement by the Reed Elsevier Board, to the extent it relates to the business or results of the Reed Elsevier Group. 14. RELATIONSHIP TO ARTICLES OF ASSOCIATION 14. In the event of any conflict between the provisions of this Agreement and the memorandum or articles of association or other constitutional document of any member of the Reed Elsevier Group or of the Finance Page 23 Group, the provisions of this Agreement shall prevail as between the parties. The parties shall exercise all voting and other rights and powers available to them so as to give effect to the provisions of this Agreement and shall further (if necessary) ensure any required amendment to the memorandum or articles of association or other constitutional document of any member of the Reed Elsevier Group or of the Finance Group as may be necessary to give effect to the intent and purpose of this Agreement. 15. NOTICES Form of Notice 15.1 Any communication or document, including process in any legal action or proceedings (a Communication) which either party may desire to give or deliver in connection with this Agreement shall be: (a) in writing; (b) delivered by hand or sent by prepaid first class post (in the case of communications within the same country) or by airmail post (in the case of communications being sent from one country to another) or by fax to the addressee at its address or fax number set out in sub-clause 15.3; and (c) marked in the manner described in sub-clause 15.3. Time of Service 15.2 A Communication shall be deemed to have been given, if delivered by hand, at the time of delivery, if sent by post, on the second business day after the envelope or package containing the same shall have been put into the post or, if sent by fax, on the business day on which the same shall have been transmitted and receipt has been confirmed. In this clause, business day means a day, other than a Saturday or Sunday, on which banks are generally open for business (a) in the case of delivery by hand or transmission by facsimile, in the country of the recipient, and (b) in the case of postal delivery, also in the country where the envelope containing the notice was posted. Addresses 15.3 The current addresses and fax numbers of, and exterior markings required by, the parties for the purposes of Communications are as follows: Elsevier Page 24 Address: Van de Sande Bakhuyzenstraat 4, PO Box 470 1000 Al Amsterdam, The Netherlands Fax number: 3120 515 9251 Requisite Marking: "Urgent - For the attention of the Company Secretary" Reed Address: 25 Victoria Street, London, SW1H 0EX Fax number: 0171 227 5651 Requisite Marking: "Urgent - For the attention of the Company Secretary" The parties may change their address, fax number or the requisite marking for the purpose of receipt of communication by serving notice on the other party in accordance with this clause. Proof of service 15.4 In proving service of a Communication, it shall be sufficient to prove that the envelope containing the Communication was properly addressed and delivered either to the address shown thereon or into the custody of the postal authorities as a prepaid first class or airmail letter, or that facsimile transmission of the Communication was made after obtaining in person or by telephone appropriate evidence of the capacity of the addressee to receive the same, as the case may be. 16. MISCELLANEOUS Regulatory 16.1 The parties shall respectively co-operate with each other from time to time to ensure that all information necessary or desirable for the making of (or responding to any requests for further information consequent upon) any notifications or filings made in respect of this Agreement, or the transactions contemplated hereunder, is supplied to the party dealing with such Page 25 notification and filings and that they are properly, accurately and promptly made. No assignment 16.2 Neither of the parties may assign any of its rights or obligations under this Agreement in whole or in part without the approval of the other. No waiver 16.3 No waiver by a party of a failure or failures by any of the other parties to perform any provision of this Agreement shall operate or be construed as a waiver in respect of any other or further failure whether of a like or different character. Amendment 16.4 Except where specifically provided, this Agreement may be amended only by an instrument in writing signed by duly authorised representatives of each of the parties. No partnership or agency 16.5 Nothing in this Agreement (or in any of the arrangements contemplated hereby) shall be deemed to constitute a partnership between the parties or any of them, nor constitute any party the agent of any other party for any purpose. Severance 16.6 If any of the provisions of this Agreement is or becomes invalid, illegal or unenforceable, the validity, legality or enforceability of the remaining provisions shall not in any way be affected or impaired. Notwithstanding the foregoing, the parties shall thereupon negotiate in good faith in order to agree the terms of a mutually satisfactory provision, achieving as nearly as possible the same commercial effect, to be substituted for the provision found to be invalid, illegal or unenforceable. 17. TERMINATION 17. This Agreement may not be terminated without the agreement of both parties. Page 26 18. COUNTERPARTS 18. This Agreement may be entered into in any number of counterparts and by the parties to them on separate counterparts, each of which when executed by one or more parties shall be an original, but all the counterparts shall together constitute one and the same instrument. 19. JURISDICTION 19.1 Subject to articles 21 and 22 of the Convention on Jurisdiction and the Enforcement of Judgments in Civil and Commercial Matters signed on 27 September 1968 (as in force from time to time), the parties hereby irrevocably agree to submit to the exclusive jurisdiction of the Courts of England and The Netherlands in respect of any dispute which may arise in connection with the validity, effect, interpretation or performance of, or the legal relationships established by, this Agreement or otherwise arising in connection with this Agreement. 19.2 Neither party shall seek to recover, pursue any claim for, or enforce any judgment for, damages against the other in respect of any dispute arising out of or in connection with this Agreement or the Original Governing Agreement, provided that this sub-clause shall not prevent either party from: (a) exercising or enforcing any rights or obligations arising under this Agreement or the Original Governing Agreement; or (b) seeking or pursuing such other remedies (including, but not limited to, specific performance and injunctive or declaratory relief) as may be available in respect of any such dispute. 20. FORUM NON CONVENIENS 20. The parties hereby irrevocably waive any objections on the grounds of venue or forum non conveniens to the jurisdiction of the Courts of England or The Netherlands in the event that any proceedings are brought in either jurisdiction in accordance with clause 19. 21. AGENT FOR PROCESS 21.1 Elsevier shall at all times maintain an agent for service of process and any other documents in proceedings in England. Such agent shall be Hackwood Secretaries Limited of 1 Silk Street, London EC2Y 8HQ and any writ, judgment or other notice of legal process shall be sufficiently served on Elsevier if delivered to such agent at its address for the time being. Elsevier irrevocably undertakes not to revoke the authority of the said agent and if, Page 27 for any reason, Reed requests Elsevier to do so, Elsevier shall promptly appoint another such agent with an address in England and shall advise Reed. If, following such a request, Elsevier fails to appoint another agent, Reed shall be entitled to appoint one on behalf of Elsevier. 21.2 Reed shall at all times maintain an agent for service of process and any other documents in proceedings in The Netherlands. Such agent shall be Nauta Dutilh, Weena 750, 3014 DA, 1110 3000 BC, Rotterdam, The Netherlands, marked for the attention of Mr Willem Calkoen and any writ, judgment or other notice of legal process shall be sufficiently served on Reed if delivered to such agent at its address for the time being. Reed irrevocably undertakes not to revoke the authority of the said agent and if, for any reason, Elsevier requests Reed to do so, Reed shall promptly appoint another such agent with an address in The Netherlands and shall advise Elsevier. If, following such a request, Reed fails to appoint another agent, Elsevier shall be entitled to appoint one on behalf of Reed. 21.3 Nothing contained in this Agreement shall affect the right to serve process in England or The Netherlands in any other manner permitted by law or the right to bring proceedings in any other jurisdiction for the purposes of the enforcement or execution of any judgment of, or other settlement in proceedings before, the Courts of England or The Netherlands or other settlement in any other courts. 22. GOVERNING LAW 22. This Agreement shall be governed by and construed in accordance with English law. AS WITNESS this Agreement has been signed by the duly authorised representatives of the parties the day and year first before written. Page 28 SCHEDULES SCHEDULE 1 FIRST EQUALISATION Equalisation INTERPRETATION 1.1 In this schedule, unless the context otherwise requires or provides: Applicable Exchange Rate means in relation to any proposed dividend payment by Reed or Elsevier, the average of the closing mid-point spot euro-sterling exchange rates for the five consecutive Business Days commencing with the tenth Business Day before the Dividend Determination Date relating to the Reed Elsevier dividend which is intended to enable Reed and Elsevier to fund those proposed dividend payments, as shown in the London edition of the Financial Times (or such other point of reference as the parties shall agree); Business Day means a day on which banks are generally open for business in both the City of London and Amsterdam; Capital Distribution means the aggregate cash amount which would be paid by Reed or Elsevier (respectively) to a holder of one Reed Ordinary share or of one Elsevier Ordinary share on a liquidation of the paying company before reduction by the amount of any tax (other than, for the avoidance of doubt, any tax on the paying company's income, profits or gains) which would be required to be deducted or withheld from the payments in the liquidation of the paying company; Dividend Determination Date means the date on which the directors of Reed Elsevier resolve to pay or recommend any dividend; Elsevier Ordinary shares means, subject to paragraph 8.4 below, Ordinary shares of DFl 1 each in the capital of Elsevier; Equalisation Ratio means the ratio of 1.538:1, subject to adjustment in accordance with paragraphs 8 and 9 and subject to such further adjustments as Reed and Elsevier may from time to time agree; Financial Period means a financial year of either Reed or Elsevier or any other period for which the accounts of either of them may by mutual agreement be made up; Page 29 Reed International Group means Reed and its subsidiaries from time to time; Reed Ordinary shares means, subject to paragraph 8.4 below, Ordinary shares of 25 pence each in the capital of Reed. 1.2 Words and expressions defined in or for the purposes of articles 105 (Income Rights) and 106 (Capital Rights) of the articles of association of Reed Elsevier have the same meaning when used in this schedule. PRINCIPLES OF EQUALISATION Income 2.1 Reed and Elsevier propose, except in relation to their 1992 final dividends and, in the case of Reed, its 1992 interim dividend and except in the further circumstances described in this schedule, to pay dividends on their ordinary shares on the basis that the ratio of the Gross Dividend Amount on one Elsevier Ordinary share to the Gross Dividend Amount on one Reed Ordinary share, translated using the Applicable Exchange Rate, will be the Equalisation Ratio. Capital 2.2 Reed and Elsevier propose, on the bases and assumptions set out or referred to in this schedule, that the interests of their respective shareholders in the underlying capital of the Reed Elsevier Group, having regard to their interests in the Finance Group, should reflect the Equalisation Ratio. Liabilities etc 2.3 Having regard to the principles set out above, the parties intend to agree the amounts of all dividends to their respective shareholders and to ensure that dividends paid to Reed and Elsevier from companies within the Reed Elsevier Group and the Finance Group are sufficient to fund those dividends to the shareholders having regard to available assets and liabilities of Reed and Elsevier respectively and any deficiencies in distributable reserves which may from time to time arise. However, it is further intended that any expenditure or liability of Reed or Elsevier (a) directly or indirectly constituting, or resulting from or arising out of, any act of omission by or matter concerning the relevant party which has constituted a breach of this Agreement or the Original Governing Agreement or which would not have existed had clause 4.2 of the Implementation Agreement been observed by that party or (b) incurred in Page 30 discharge of a liability, or being a liability, to pay to the other party damages or any other amount by way of compensation for breach of contract or other wrongful act or incurred in settlement of any claim by the other party (whether or not liability is admitted) or in discharge of expenses incurred in the settlement of such a claim, shall be left out of account in determining their dividend entitlements from the Reed Elsevier Group and/or the Finance Group in such a way that such expenditure or liability may result in dividend payments by Reed and Elsevier not reflecting the Equalisation Ratio. Operation of principles 2.4 Reed and Elsevier will keep under review (and agree to amend where necessary) the detailed arrangements for equalisation embodied in this schedule and in the articles of association of Reed Elsevier, with a view to ensuring that those arrangements work in conformity with the principles stated above. DIVIDEND CALENDAR 3.1 Reed and Elsevier shall co-operate with a view to announcing their interim and final dividends respectively at the same time and on the same day. 3.2 All dividends on Reed Ordinary shares and Elsevier Ordinary shares shall become payable to shareholders (or, in the case of bearer shares, to paying agents for collection by shareholders) on the same date. 3.3 Reed and Elsevier shall co-operate so far as practicable in co-ordinating the timing of all other aspects of dividend payment. EQUALISATION OF GROSS DIVIDEND AMOUNTS 4.1.1 In relation to each proposed dividend payment to their shareholders, the Board of Reed and the Elsevier Combined Board shall agree from time to time the Gross Dividend Amounts in respect of dividends to be declared, paid or, where appropriate, recommended for payment by them respectively. The amounts so agreed shall, subject as provided in paragraph 4.5 below, form the basis for calculation of the E Target Dividend and the R Target Dividend respectively for the purposes of article 105 (Income Rights) of the articles of association of Reed Elsevier. 4.1.2 Subject to the provisions of this schedule, the Board of Reed and the Elsevier Combined Board shall declare, pay or recommend dividends of such an amount that, in relation to any proposed dividend payment, the ratio of the Gross Dividend Amount in respect of the proposed dividend payment on Page 31 one Elsevier Ordinary share to the Gross Dividend Amount in respect of the proposed dividend payment on one Reed Ordinary share, calculated using the Applicable Exchange Rate, is the Equalisation Ratio. 4.2.1 Notwithstanding the provisions of sub-paragraph 4.1.2, either the Board of Reed or the Elsevier Combined Board may decide, with the consent of the other party, to declare, pay or recommend a dividend which is lower than the amount that would be implied by the Equalisation Ratio if it considers that payment of a dividend by Reed or Elsevier, as appropriate, according to the Equalisation Ratio: (a) would result in the payment of a dividend which it would be unlawful to pay, whether by reason of (i) the inadequacy of distributable reserves or the amounts payable to it pursuant to paragraphs (a) to (e) of article 105.2 of the articles of association of Reed Elsevier being insufficient to enable it to discharge its liabilities and to pay all preferential dividends or the existence of Excluded Shares or (ii) otherwise; or (b) would, because of movements in the euro-sterling exchange rate, result in it declaring, paying or recommending a dividend of an amount which it would be unreasonable to pay having regard in particular to (i) the level of the corresponding interim or final dividend in respect of the last preceding Financial Period and/or (ii) the development of the level of earnings of the Reed Elsevier Group and the Finance Group, expressed respectively in sterling and euro, and/or (iii) any special circumstances in the country of incorporation of Reed or Elsevier, as appropriate, relevant to the decision as to the level of dividend which would be reasonable. 4.2.2 In addition, the parties acknowledge that, in relation to any proposed dividend payment, the amounts declared, paid or recommended by the Board of Reed or the Elsevier Combined Board may not reflect the Equalisation Ratio: (a) where, as a result of the matters mentioned in the second paragraph of paragraph 2.3 above, the dividend which that party receives under article 105 (Income Rights) of the articles of association of Reed Elsevier is insufficient to enable it to make onward payment of the R Target Dividend or the E Target Dividend, as appropriate; or (b) where, following the reduction by one party of its dividend payment to shareholders in accordance with sub-paragraphs 4.2.1(a)(ii) or 4.2.1(b) above, subsequent compensatory payments are to be made to Page 32 the relevant shareholders as contemplated in sub-paragraph 4.3.1, 4.3.2 and 4.4 below; or (c) where, following a disposal by Reed of all or part of its indirect interest in the Exchange shares, it makes a distribution to its shareholders from the proceeds of disposal. 4.2.3 Where, for any of the reasons stated in sub-paragraphs 4.2.1 or 4.2.2 above either the Board of Reed or the Elsevier Combined Board decides not to declare, pay or recommend a dividend according to the Equalisation Ratio, Reed and Elsevier shall make available to their shareholders, together with and in the same manner as the announcement of the dividend, a statement explaining why dividends have been or will be declared, paid or recommended which are not in accordance with the Equalisation Ratio and the implications of that fact for future dividends (insofar as they are known). 4.3.1 Where, in accordance with sub-paragraph 4.2.1(a)(ii), the Board of Reed or the Elsevier Combined Board has resolved to declare, pay or recommend a dividend lower than the amount that would be implied by the Equalisation Ratio, the parties shall discuss how to give effect to the principle that the body of shareholders receiving the lower dividend should, as soon as practicable after it becomes possible as a matter of law and over such period as the parties agree to be reasonable, be compensated for the amount foregone (though this will not necessarily involve any payment of interest or any other form of additional compensation to reflect the delay in receipt). Any future compensatory dividends shall be paid at the same time as routine dividend payments by Reed and Elsevier. 4.3.2 The arrangements which the parties consider appropriate to give effect to the principle referred to in sub-paragraph 4.3.1 may include, without limitation, either: (a) provision for the amount that would otherwise be payable in respect of the Target Dividend Amount of the party affected in relation to the relevant dividend payment to be reduced, with the amount of the reduction being credited to a separate reserve denominated in sterling in the books of Reed Elsevier and being preserved by Reed Elsevier (so far as reasonably possible) so as to be available for payment to the affected party (together with any notional interest or other compensation to reflect the delay in receipt, if the parties have so agreed) when circumstances permit its onward distribution to shareholders of that party (and, in this event, the rights of the parties to capital on a winding-up of Reed Elsevier shall also take account of the amount remaining credited at the Commencement Date to such Page 33 separate reserve) and the parties shall agree arrangements to protect their respective shareholders against significant prejudice caused by currency fluctuations affecting the value of the separate reserve measured in terms of the currency in which payment of the compensatory dividend will be made; or (b) provision for a reserve on similar terms to be set up in the books of Elsevier Reed Finance (but no reserve shall be established or maintained in favour of Reed in Elsevier Reed Finance unless there is at all relevant times also a corresponding reserve, of an equal or higher amount, in favour of Elsevier); or (c) provision for the whole of the relevant Target Dividend Amount to be paid to the affected party in full ignoring the fact that the affected party will pay a lesser amount by way of dividends to its shareholders, in which event the affected party shall establish a reserve in its own books of the amount so received which it is unable to pay on to its shareholders (translated into euros, in the case of Elsevier) and the rights of the affected party, whether to income or capital, from Reed Elsevier shall have regard to the purpose for which that reserve is maintained. 4.3.3 The arrangements to give effect to the principle in sub-paragraph 4.3.1 may also include arrangements to deal with (a) changes in the share capital of the relevant party and (b) changes in the taxation regime or rates of tax or tax credit applicable to the relevant party or to the payment of dividends to or by it, in either case prior to the relevant compensatory dividends having been paid. 4.4 Where, in accordance with sub-paragraph 4.2.1(b), the Board of Reed or the Elsevier Combined Board has resolved to declare, pay or recommend a dividend which is lower than the amount that would be implied by the Equalisation Ratio, the parties acknowledge that it will not normally be appropriate for the body of shareholders receiving the lower dividend to be compensated for the amount foregone. If the parties agree otherwise, they shall also agree the arrangements necessary to permit such compensatory payments, having regard to the provisions of sub-paragraph 4.3 above. 4.5 For the purposes of article 105 (Income Rights) of the articles of association of Reed Elsevier, Gross Dividend Amounts and Target Dividend Amounts shall be calculated ignoring any requirement or the possibility of any decision to pay a different amount by reason of any of the circumstances described in paragraph 4.2 above. Page 34 4.6 For the avoidance of doubt, where either party pays a dividend lower than the amount implied by the Equalisation Ratio by reason of the circumstances described in sub-paragraph 4.2.1(a)(i) or in sub-paragraph 4.2.2(a), the parties do not envisage that any arrangements shall be made to enable any future compensatory payments to be made in respect of the amounts foregone. DIVIDEND PROCEDURE 5.1 In the period prior to any Dividend Determination Date, the parties shall consult with a view to agreeing, as envisaged by sub-paragraph 4.1.1, the Gross Dividend Amount to be declared, paid or recommended for payment by each of them (subject to final determination of the Applicable Exchange Rate) and hence the Target Dividend which each proposes to notify to Reed Elsevier on the Dividend Determination Date pursuant to article 105 (Income Rights) of the articles of association of Reed Elsevier. 5.2 The parties shall also, prior to each Notification Time, provide to each other (and to Reed Elsevier) information as to the amounts which they intend to notify to Reed Elsevier prior to the relevant Notification Time in accordance with article 105 (Income Rights) of the articles of association of Reed Elsevier as to, respectively, their: (a) Cash Requirements, Relevant Cash and Permitted Liabilities; (b) Deficit Amounts; (c) Preference Share Amounts; and (d) Target Dividend Amounts. Each party shall supply to the other such further information as the other may reasonably request as to the bases of, and assumptions underlying, the calculation of any such figures. The parties shall procure that Reed Elsevier supplies them with the information as to the timing of future dividend declaration and payments which they require for the purpose of calculating the relevant amounts. 5.3 The parties envisage that, on each Dividend Determination Date, the following events will, so far as practicable, occur in the sequence set out below: (a) by the passing of shareholder resolutions, Reed Elsevier Nederland BV and Reed Elsevier Overseas BV declare the dividends, Page 35 if any, payable by them respectively on the shares in their respective capital held by Elsevier; (b) by the passing of a shareholder resolution, Elsevier Reed Finance declares the dividends, if any, payable on the shares held by Reed and the shares held by Elsevier respectively; (c) Reed and Elsevier give to Reed Elsevier the formal notifications required by article 105 (Income Rights) of the articles of association of Reed Elsevier as to their respective Cash Requirements, Relevant Cash, Permitted Liabilities, Deficit Amounts, Preference Share Amounts, Target Dividends and Target Dividend Amounts; (d) the Board of Reed Elsevier resolves to declare, pay or recommend for payment dividends in accordance with article 105 (Income Rights) of the articles of association of Reed Elsevier; (e) meetings of the Boards of Reed and Elsevier respectively take place to approve announcements or make declarations or recommendations of their dividends to shareholders, with a view to simultaneous public announcements being made. 5.4 The parties acknowledge that it is their intention that Reed Elsevier pay all dividends by way of interim dividend, rather than by payment of a final dividend requiring approval by the shareholders of Reed Elsevier. If final dividends are recommended for payment by the Board of Reed Elsevier, Reed and Elsevier undertake to exercise their votes as shareholders to ensure that the resolution to approve the dividend recommended by the Board is passed. 5.5 Neither party shall, without the consent of the other, declare or pay any dividend other than: (a) dividends not exceeding the R Target Dividend or the E Target Dividend, as the case may be, from time to time notified to Reed Elsevier; (b) dividends by Reed of the proceeds of sale of all or part of its indirect interest in the Exchange shares; (c) dividends of amounts reflecting the release of any reserve maintained pursuant to sub-paragraph 4.3.2 or paragraph 4.4 above; or Page 36 (d) dividends of amounts paid to the relevant party pursuant to paragraph (g) of article 105.2 of the articles of association of Reed Elsevier. 5.6 Elsevier shall pay to the holders of its Exchange shares any amount which it has, in notifying the E Target Dividend and Target Dividend Amount, indicated that it intends to pay in respect of those shares. 5.7 The parties agree to consider, in relation to each dividend payment, the arrangements which should be effected with a view to ensuring that changes in currency exchange rates after the Dividend Determination Date do not prejudice the ability of either party to discharge its liabilities or pay its Target Dividend. 5.8 The parties shall comply with their obligations under the provisions of article 105.6 and 105.10 of the articles of association of Reed Elsevier. DISTRIBUTIONS IN SPECIE 6. Reed and Elsevier shall not make any distribution in specie. CAPITAL RIGHTS 7.1.1 In the event of a winding-up of Reed Elsevier, the intention of the parties is that, on the basis of the Assumptions set out in article 106 (Capital Rights) of the articles of association of Reed Elsevier and subject to Reed and Elsevier having complied with their respective obligations under the Implementation Agreement, the Original Governing Agreement and the Governing Agreement and to the application of paragraphs 4.3 and 4.4 above or 9.2 below, the sums paid up to Elsevier and Reed respectively in the winding-up should be such that the ratio of the Capital Distribution which Elsevier would be able to make on one Elsevier Ordinary share to the Capital Distribution which Reed would be able to make on one Reed Ordinary share (assuming full distribution as capital of the aggregate amounts available in each of Reed and Elsevier on the basis of the Assumptions) would be the Equalisation Ratio. On the occasion of each successive interim or final distribution of capital by Reed Elsevier, the exchange rate to be used in applying the Equalisation Ratio shall be the average euro sterling exchange rate over the period of 365 days ending on the fifth Business Day before the date on which the relevant Proposed Distribution is notified by the Liquidator pursuant to paragraph (a) of article 106.3 of the articles of association of Reed Elsevier (the Notification Date) (determined by reference to the closing spot mid point rates for each Business Day in such period of 365 days as shown in the London edition of the Financial Times or such other point of reference as the parties shall agree). Page 37 7.1.2 Sums to be distributed to Reed and Elsevier in accordance with the principle in sub-paragraph 7.1.1 and as an interim or final distribution pursuant to paragraph (e) of article 106.2 of the articles of association of Reed Elsevier will be calculated by reference to the following formulae: R + E + D (R + E S ) (P ) (D S ) R R R ( E E B) ( E) ( E A) ER X ____________ = (________ X __) + (__)_ + (___ X____) N ( N S ) (N ) (N S ) R ( E N) ( E) ( E M) A = D + D R E where: R = the aggregate of: R (a) the amount (if any) by which the R Available Assets exceed the sum of R Permitted Liquidation Liabilities and the R Preference Capital Amount; (b) the aggregate of the amounts which would be received by Reed (directly or indirectly, but taking account of tax costs in RHBV, except to the extent such tax costs would not arise but for, or are increased by, a breach of the terms of clause 4.2 of the Implementation Agreement, or of the Original Governing Agreement or of this Agreement or of the agreement referred to in sub-clause 6.1 of this Agreement) in the liquidation of Elsevier if (i) the Assumptions were fulfilled and (ii) Elsevier were to distribute in sterling: (A) the amount (if any) by which its Available Assets exceed the sum of its Permitted Liquidation Liabilities and Preference Capital Amount, to the extent such amount would in fact be capable of distribution by the E shareholder having regard, amongst other things, to liabilities of the E shareholder which are not Permitted Liquidation Liabilities, plus the Excess Amount of Elsevier, all multiplied by X; and (B) the aggregate of all amounts received by Elsevier pursuant to paragraph (e) of article 106.2 of the articles of association of Reed Elsevier (but for this purpose the Excess Amount of Elsevier shall not be deemed to have been so received), each such amount being multiplied by Y; Page 38 (c) the cash amount of all previous distributions made to the R shareholder pursuant to paragraph (e) of article 106.2 of the articles of association of Reed Elsevier; E = the Excess Amount of Reed in relation to the relevant Proposed R Distribution; D = the cash amount to be paid to Reed; R N = the number of R Ordinary shares (excluding any Excluded Shares) R in issue at the Commencement Date; ER= the Equalisation Ratio; R = the amount (if any) by which the E Available Assets exceed the sum of the E E Permitted Liquidation Liabilities and the E Preference Capital Amount; P the cash amount of all previous distributions made to the E shareholder E pursuant to paragraph (e) of article 106.2 of the articles of association of Reed Elsevier, multiplied by the amount of S[u]A and divided by S[u]M in each case, as applicable to the Proposed Distribution which resulted in the relevant distribution; E = the Excess Amount of Elsevier in relation to the relevant Proposed E Distribution; D = the cash amount to be paid to Elsevier; E N = the number of E Ordinary shares (excluding any Excluded Shares) in issue at E the Commencement Date plus the number of Exchange shares in issue to the extent that they would be entitled to rank pari passu with the E Ordinary shares in any liquidation of Elsevier; A = the Residual Amount in relation to the relevant Proposed Distribution; S = the average number of euros per pound sterling which would have been A obtained had an amount in sterling approximately equal to half the Residual Amount in relation to the relevant Proposed Distribution been converted into euros at an exchange rate equal to the average of the closing rates for the sale of euros for sterling for the five consecutive Business Days commencing with the tenth Business Day prior to the Notification Date as quoted by Barclays Bank PLC (or such other point of reference as the parties shall agree) and after deducting commission and other costs associated with the exchange; Page 39 S = the amount of S[u]A in relation to the first Proposed Distribution; B S = the average of the closing mid-point spot euro-sterling exchange rates M (expressed as a number of euros per pound sterling) over the period of 365 days ending on the fifth Business Day before the Notification Date as shown in the London edition of the Financial Times (or such other point of reference as the parties shall agree); S = the amount of S[u]M in relation to the first Proposed Distribution; N S = the average of the closing mid-point euro-sterling exchange rates O (expressed as a number of euros per pound sterling) over the five days referred to in the definition of S[u]A as shown in the London edition of the Financial Times (or such other point of reference as the parties shall agree); S = the amount of S[u]O in relation to the first Proposed Distribution; P 2 (S ) S = ( B) ; ---- (S ) ( P) Y = (in relation to each amount referred to in (b) in the definition of R[u]R above), 2 (S ) ( A), S[u]A, and S[u]O being in each case the figures applicable to the ---- (S ) Proposed Distribution which resulted in the relevant ( O) distribution to Elsevier; provided that if, pursuant to the above formula, either D[u]R or D[u]E would be less than zero, the amount required to be paid to the relevant shareholder shall be nil and the amount required to be paid to the other shareholder shall equal the Residual Amount. For the purpose of this paragraph, Excess Amount means, in relation to either Reed or Elsevier and any Proposed Distribution, the amount (if any) by which the amount paid (or deemed by virtue of the proviso to paragraph (b) of article 106.9 of the articles of association of Reed Elsevier to have been paid) to the relevant party pursuant to paragraph (d) of article 106.2 of the articles of association of Reed Elsevier exceeds the Preference Capital Amount of that party. 7.2 In the event of a liquidation of Reed Elsevier the parties shall comply with their obligations under article 106 of the articles of association of Reed Elsevier and shall co-operate with each other and with the Liquidator with a view to agreeing all matters necessary in connection with that liquidation. In Page 40 particular, the parties shall supply to each other and to the Liquidator such information as shall reasonably be requested for the purpose of determining either party's Available Assets, Permitted Liquidation Liabilities, Residual Value (and, in the case of Reed, the RHBV Residual Value), Excess Liabilities Requirement, Preference Capital Amount and Target Capital Distribution Amount or understanding the bases and assumptions underlying those figures. 7.3 Reed and Elsevier acknowledge that changes in the taxation regime applicable to, or to the payment of dividends or capital distributions by or to, either of them or Reed Elsevier may result in the rights attaching to the shares in Reed Elsevier not having, or potentially not having, the economic effect contemplated by the parties at the date of the Original Governing Agreement. In particular, Reed and Elsevier acknowledge that, if any imputation or similar system were introduced in respect of the taxation of distributions of capital in liquidations of English or Dutch companies, this might result in the relative effective economic values which their shareholders enjoy, in terms of capital rights, in relation to the Reed Elsevier Group and the Finance Group ceasing to reflect the Equalisation Ratio. In these circumstances, the parties agree that they will discuss in good faith the appropriate revisions to the rights attaching to their holdings in the Reed Elsevier Group and the Finance Group in order to redress any disadvantage or potential disadvantage so arising, taking full account of the accounting and other implications of such revisions. FURTHER SHARE ISSUES AND THE EQUALISATION RATIO Existing Commitments 8.1 No adjustment shall be made or required to the Equalisation Ratio to reflect the exercise, or lapse, of any right which any person may have held at the date the Original Governing Agreement became effective to subscribe, exchange for or convert into any share in the capital of either Reed or Elsevier. To the extent any rights outstanding at the date of the Original Governing Agreement lapse in future, the parties shall consider whether it is appropriate to take steps (for example by the placing of new shares in one party or by the purchase by one party of its own shares) to restore the ratio of their respective issued share capitals to the ratio that would have applied had all such outstanding rights been exercised in full. Grant of new options to subscribe 8.2 It is contemplated that issues of shares by either party pursuant to any agreed employee share option arrangements implemented after the date the Page 41 Original Governing Agreement became effective have been or will be on terms which enable the Equalisation Ratio to continue without adjustment, without unfairness to the ordinary shareholders of either Reed or Elsevier. It is not contemplated that issues of this nature will be such as, by themselves, result in significant long-term imbalances to the ratio of the aggregate dividends paid by the Reed Elsevier Group and the Finance Group to Reed and Elsevier respectively. Scrip or Stock Dividends 8.3 Neither party shall make available to its shareholders any scrip or stock dividend or equivalent facility without the consent of the other. In principle, however, if either party does introduce such a facility for its shareholders, with the consent of the other party, no adjustment shall be made or required to the Equalisation Ratio unless the relevant new shares are issued at below the prevailing market price of the relevant Company's shares at the date of issue. It is not contemplated that issues of this nature will be such as by themselves result in significant long-term imbalances to the ratio of the aggregate dividends paid by the Reed Elsevier Group and the Finance Group to Reed and Elsevier respectively. Consolidation and sub-division 8.4 If, with the consent of the other party, either Reed or Elsevier shall give effect to a consolidation or sub-division of its share capital, the appropriate arithmetical adjustment shall be made to the Equalisation Ratio and in the values of N[u]R or, as appropriate, N[u]E in paragraph 9.2 below (and the definition in this schedule of "Elsevier Ordinary shares" or "Reed Ordinary shares", as appropriate, shall be construed accordingly). Capitalisation issues 8.5 If, with the consent of the other party, either Reed or Elsevier shall make an issue of ordinary shares (except an issue made in lieu of the payment of cash dividends) by way of capitalisation of profits or reserves, the appropriate arithmetical adjustment shall be made to the Equalisation Ratio and in the values of N[u]R or, as appropriate, N[u]E in paragraph 9.2 below . Issues for non-cash consideration 8.6 Where the parties agree, shares or other securities of either Reed or Elsevier (or both) may be issued as consideration for the acquisition of shares or other assets by Reed and/or Elsevier (or Reed Elsevier), as appropriate, on terms that there shall be no adjustment to the Equalisation Page 42 Ratio provided that satisfactory arrangements are put in place to ensure that the ultimate benefit of, and the ultimate burden of any liability resulting from, such acquisition are shared by the shareholders of Reed and Elsevier in a manner consistent with the Equalisation Ratio. Non-pre-emptive issues for cash 8.7 Where the parties agree, shares or other securities of either Reed or Elsevier may be issued on a non-pre-emptive basis for a cash consideration on terms that there shall be no adjustment to the Equalisation Ratio provided that satisfactory arrangements are put in place to ensure that the ultimate benefit of, and the ultimate burden of any liability resulting from, such an issue are shared by the shareholders of Reed and Elsevier in a manner consistent with the Equalisation Ratio. Rights issues and rights offers 8.8.1 Where the parties agree, either Reed or Elsevier (or both) may offer (or procure another person to offer) their respective shares or other securities to their respective shareholders by way of rights. 8.8.2 Subject to sub-paragraph 8.8.3 below, no adjustment to the Equalisation Ratio shall be required provided satisfactory arrangements are put in place to ensure that the ultimate benefit of the proceeds of, and the ultimate burden of any liability resulting from, such an offer by way of rights are shared by the shareholders of Reed and Elsevier in a manner consistent with the Equalisation Ratio. 8.8.3 Where, however, the effect of: (a) the price at which shares or other securities are offered to shareholders, relative to the prevailing market price; (b) the number of shares or other securities offered by Reed and Elsevier respectively (or the fact that such shares or other securities are offered by one party alone); and (c) any other relevant circumstances, is such that the shareholders of either Reed or Elsevier benefit in a manner that is not consistent with the Equalisation Ratio, the parties envisage that an adjustment to the Equalisation Ratio may be required. Page 43 EXCHANGE SHARES IN ELSEVIER 9.1 If any of the Exchange shares or any of the Elsevier Ordinary shares into which they are converted are disposed of with the agreement of Elsevier by RHBV (or any other member of the Reed International Group which from time to time holds those shares with the agreement of Elsevier) and all or part of the proceeds of sale are distributed (in whatever manner) to shareholders of Reed, the Equalisation Ratio shall be adjusted in such manner as the parties shall agree to be appropriate to reflect that distribution. 9.2 If any of the Exchange shares or any of the Elsevier Ordinary shares into which they are converted are disposed of (a) in circumstances in which the agreement of Elsevier is not required or (b) in breach of the Original Governing Agreement, this Agreement or the agreement referred to in sub-clause 6.1 of this Agreement, then whether or not any of the proceeds of sale are distributed to shareholders of Reed, unless the parties otherwise agree, such proceeds shall be held by Reed on terms that enable the shareholders of Reed alone to benefit, to the extent they are not so distributed, and the Equalisation Ratio shall be adjusted in accordance with the following formula: N R ER = _________ 2 N + 2 N E X where: ER = the new Equalisation Ratio; 2 N = subject to paragraphs 8.4 and 8.5 above, 568,403,622 (being the number of R Reed Ordinary shares in issue at the date on which the Implementation Agreement was signed, plus the number of unissued Reed Ordinary shares over which there then subsisted options, conversion rights or other rights to subscribe); N = subject to paragraphs 8.4 and 8.5 above, 65,814,744, (being the number of E Elsevier Ordinary shares in issue at the date on which the Implementation Agreement was signed, plus the number of unissued Elsevier Ordinary shares over which there then subsisted options, conversion rights or other rights to subscribe), plus the number of Exchange shares (or, if larger, the number of Elsevier Ordinary shares into which they are convertible) or Elsevier Ordinary shares deriving therefrom, disposed of by members of the Reed International Group in the relevant disposal; and Page 44 N = subject to paragraphs 8.4 and 8.5 above, the number of Exchange shares, and X any Elsevier Ordinary shares resulting from conversion of Exchange shares, held by members of the Reed International Group after the relevant disposal. The parties acknowledge that the numbers set out for N[u]R and N[u]E above may require adjustment to reflect adjustments to the Equalisation Ratio in the various circumstances described in paragraph 8 above. 9.3 Except as mentioned above, a sale of the Exchange shares or any of the Elsevier Ordinary shares into which they are converted shall not result in an adjustment to the Equalisation Ratio. 9.4 If any shares in any company which holds Exchange shares or any Elsevier Ordinary shares into which they are converted, or in any holding company of any such companies, are disposed of by Reed or by any of its subsidiaries, the foregoing provisions of this paragraph 9 shall apply mutatis mutandis. ADJUSTMENTS TO THE EQUALISATION RATIO 10. Upon any adjustment to the Equalisation Ratio, the parties shall: (a) make such public announcements as are appropriate, having regard to the regulatory requirements to which they are respectively subject; and (b) notify Reed Elsevier in writing of the adjustment. Page 45 SCHEDULE 2 Deed of undertaking for directors THIS DEED OF UNDERTAKING is made by me, [name of director] of [address] on [date]. I hereby undertake to Reed Elsevier plc a company registered in England with number 2746616 (Reed Elsevier), Reed International P.L.C., a company registered in England with number 77536 (Reed) and to Elsevier NV, a company incorporated in The Netherlands whose principal office is at [address at the time of making the deed] (Elsevier) that if: (a) at a general meeting, a resolution proposing my appointment or re-election as a director of Reed or Elsevier is not passed by the requisite majority; or (b) I am removed or resign from the board, or otherwise cease for any reason to be a director, of any of Reed, Elsevier or Reed Elsevier, then, to the extent that I hold such a position at that time, I shall immediately resign from the position of director of any and all of Reed, Elsevier or Reed Elsevier except in circumstances where a Notice of Suspension has been given under clause 9 of the Governing Agreement between Reed and Elsevier. If a Notice of Suspension has been given, I may continue as a director of each of Reed, Elsevier and Reed Elsevier unless: (i) I am removed from any of those companies in accordance with their respective articles of association, in which case I shall cease to be a director of that company; or (ii) in circumstances where I am a director of a `Party giving Notice' (as defined in clause 9 of the Governing Agreement): (A) I am removed as a director in accordance with a resolution of the shareholders of that party; or (B) after retiring and being proposed for re-election, I fail to be re-elected as a director by the shareholders of that party, in which case I shall also immediately resign from my position as a director of Reed Elsevier. This deed of undertaking shall be governed by and construed in accordance with English law. Page 46 SIGNED as a deed and delivered by ............................. [Director] in the presence of: [Witness Occupation Address] SIGNED as a deed and delivered by ............................. [Director] in the presence of [Witness Occupation Address] Page 47 SIGNED by NIGEL STAPLETON ) for and on behalf of ) REED INTERNATIONAL P.L.C. ) in the presence of Leslie Dixon ) SIGNED by HERMAN BRUGGINK ) for and on behalf of ELSEVIER NV ) in the presence of Erik Ekker ) SIGNED by ) MORRIS TABAKSBLAT ) Chairman of the Supervisory Board of ) ELSEVIER NV in the presence of ) Erik Ekker ) Page 48 DATED 15 APRIL 1999 REED INTERNATIONAL P.L.C. ELSEVIER NV ======================== GOVERNING AGREEMENT (Conformed copy) ========================= CONTENTS
Clause Page 1. Interpretation 2 2. Purpose and effective date 4 3. Management 5 Board Composition 5 Nominations Committee 6 Board appointments - Reed and Reed Elsevier 7 Board appointments - Elsevier 8 Appointment of Chairman and Chief Executive 8 Retirement of directors 9 Removal of director 9 Remuneration committee 10 Remuneration of directors by Reed and Elsevier 10 Audit committee 10 Elsevier Reed Finance 10 4. General undertakings 11 Shareholder approval 11 Controls on the Reed Elsevier Group and the Finance Group 13 Share capital 13 Limitation of activities of Reed and Elsevier 14 Business of Reed and Elsevier 16 Application of cash 16 Reed and Elsevier liquidity 16 5. Guarantees and indemnities 16 6. Exchange shares/shares in RHBV 16 Exchange shares 16 Shares in RHBV 17 Listing 17 7. Equalisation 17 8. Standstill 17 9. Change of control 18 10. Intellectual property rights 22 11. Accounting matters, corporate governance and disclosure obligations 22 Accounting reference date 22 Audit committees 22 Accounting policies and practices 22 Corporate Governance and disclosure standards 22 12. Information 23 The Operating Group and the Finance Group 23 Reed and Elsevier 23 Page I
Clause Page Confidentiality 23 13. Stock exchange obligations 23 14. Relationship to articles of association 23 15. Notices 24 Form of Notice 24 Time of Service 24 Addresses 24 Proof of service 25 16. Miscellaneous 25 Regulatory 25 No assignment 26 No waiver 26 Amendment 26 No partnership or agency 26 Severance 26 17. Termination 26 18. Counterparts 27 19. Jurisdiction 27 20. Forum non conveniens 27 21. Agent for process 27 22. Governing law 28 SCHEDULES 29 Page II
EX-23 5 0005.txt EXHIBIT 23.1 Printed by greenaways, a member of the ormolu group London, Edinburgh, Leeds, Manchester, New York, Paris, Hong Kong, Singapore, Tokyo. S129734 EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement Nos. 333-08542 and 333-12666 of Reed International P.L.C. and Elsevier NV on Form S-8 and in the Post-Effective Amendment No. 1 to Registration Statement No. 333-6710-02 of Reed International P.L.C. and Elsevier NV on Form F-3 of our report dated February 21, 2001, relating to the combined financial statements of Reed Elsevier, appearing in the Annual Report of Reed International P.L.C., Elsevier NV, Reed Elsevier plc and Elsevier Reed Finance BV and their respective subsidiaries on Form 20-F for the year ended December 31, 2000. Deloitte & Touche Chartered Accountants London, England 13 March 2001 Deloitte & Touche Accountants Amsterdam, The Netherlands 13 March 2001 EX-23 6 0006.txt EXHIBIT 23.2 EXHIBIT 23.2 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement Nos. 333-08542 and 333-12666 of Reed International P.L.C. and Elsevier NV on Form S-8 and in the Post-Effective Amendment No. 1 to Registration Statement No. 333-6710-02 of Reed International P.L.C. and Elsevier NV on Form F-3 of our report dated February 21, 2001, relating to the consolidated financial statements of Reed International P.L.C., appearing in the Annual Report of Reed International P.L.C., Elsevier NV, Reed Elsevier plc and Elsevier Reed Finance BV and their respective subsidiaries on Form 20-F for the year ended December 31, 2000. Deloitte & Touche Chartered Accountants London, England 13 March 2001 EX-23 7 0007.txt EXHIBIT 23.3 EXHIBIT 23.3 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement Nos. 333-08542 and 333-12666 of Reed International P.L.C. and Elsevier NV on Form S-8 and in the Post-Effective Amendment No. 1 to Registration Statement No. 333-6710-02 of Reed International P.L.C. and Elsevier NV on Form F-3 of our report dated February 21, 2001, relating to the consolidated financial statements of Elsevier NV, appearing in the Annual Report of Reed International P.L.C., Elsevier NV, Reed Elsevier plc and Elsevier Reed Finance BV and their respective subsidiaries on Form 20-F for the year ended December 31, 2000. Deloitte & Touche Accountants Amsterdam, The Netherlands 13 March 2001 -----END PRIVACY-ENHANCED MESSAGE-----