RELX

Business Context and Reporting Period

This Form 20-F is the Annual Report for Reed Elsevier PLC and Reed Elsevier NV (collectively "Reed Elsevier") for the fiscal year ended December 31, 2002, filed on March 10, 2003. Reed Elsevier operates as a dual-listed company structure with separate legal identities in England and the Netherlands, conducting business through two jointly owned entities: Reed Elsevier Group plc (publishing and information) and Elsevier Reed Finance BV (financing). The company is a leading global publisher and information provider with four primary segments: Science & Medical, Legal, Education, and Business.

Key Financial Metrics (Year Ended Dec 31, 2002)

Note: US GAAP figures differ significantly due to the adoption of SFAS 142 (Goodwill and Other Intangible Assets), which eliminated goodwill amortization for assets acquired after July 1, 2001, and other accounting policy differences.

Material Changes vs. Prior Period

• Revenue Growth: Turnover increased 10% to £5.02 billion (13% at constant currency rates). This growth was driven primarily by the full-year contribution of the Harcourt businesses acquired in July 2001, which added £1.27 billion in revenue.
• Profitability: Reported operating profit rose 30% to £507 million. Adjusted operating profit increased 14% to £1.13 billion. Underlying adjusted operating profit growth was 8% (9% excluding the Business segment).
• Segment Performance:
  • Science & Medical: Turnover up 26% (29% constant currency); Adjusted operating profit up 25%.
  • Legal: Turnover up 1% (5% constant currency); Adjusted operating profit up 7%.
  • Education: Turnover up 72% (78% constant currency) due to Harcourt integration; Adjusted operating profit up 39%.
  • Business: Turnover down 15% (14% constant currency) due to advertising market weakness and prior-year disposals; Adjusted operating profit down 5%.
• Debt Reduction: Net borrowings decreased by £497 million to £2.73 billion, reflecting strong free cash flow and favorable exchange translation effects from a weaker US dollar.
• Exceptional Items: A pre-tax charge of £111 million was recorded, primarily for Harcourt integration costs (£57 million) and restructuring costs related to the global economic slowdown (£42 million).

Guidance, Outlook, and Risks

Management Commentary: Management highlighted that underlying revenue growth was 1% (4% excluding the Business division). The company successfully integrated the Harcourt acquisition, achieving cost synergies that offset margin dilution from the lower-margin acquired businesses. The Business segment faced headwinds from a cyclical downturn in advertising spending, though the rate of decline slowed in the second half of the year.

Outlook: The company expects continued investment in electronic product and platform initiatives. Management noted that the majority of annual operating cash inflows typically arise in the second half of the year due to seasonality in subscriptions and testing contracts.

Key Risks:

• Economic Sensitivity: Approximately 14% of revenue is derived from advertising, which is highly cyclical and sensitive to economic slowdowns.
• Technology Disruption: Rapid technological change and the shift to electronic distribution formats could render some products obsolete.
• Intellectual Property: Risks regarding the protection of content in digital formats and varying international copyright laws.
• Currency Fluctuations: Significant exposure to US dollar/sterling and US dollar/euro exchange rates, which can materially affect reported results.
• Legal Proceedings: Ongoing litigation regarding copyright infringement in electronic databases (e.g., Tasini case implications) and a class action regarding overcharging for legal research services.

Investor Verification Checklist

• Goodwill Amortization Impact: Verify the reconciliation between UK/Dutch GAAP and US GAAP net income, noting the £223 million positive adjustment in 2002 due to the cessation of goodwill amortization under US GAAP (SFAS 142).
• Advertising Exposure: Assess the sensitivity of the Business segment (41% of its revenue from advertising) to continued global economic weakness.
• Harcourt Integration: Review the progress of cost savings and margin improvement in the acquired Harcourt STM and Education businesses against proforma targets.
• Debt Maturity Profile: Confirm the refinancing status of the $2.86 billion in committed bank facilities expiring in December 2003.
• Legal Contingencies: Monitor the status of the Tasini related copyright litigation and potential indemnity claims from content providers.