RELX

Business Context and Reporting Period

This Form 20-F is the annual report for RELX PLC (operating as Reed Elsevier), a global publisher and information provider, for the fiscal year ended 31 December 2001. The company operates through two parent entities, Reed International P.L.C. (U.K.) and Elsevier NV (Netherlands), which jointly own the operating businesses. The reporting period covers the full year 2001, including the significant acquisition of Harcourt General, Inc.'s Scientific, Technical & Medical (STM) and U.S. Schools Education and Testing businesses in July 2001.

Key Financial Metrics (Year Ended 31 Dec 2001)

Financial data is presented in Pounds Sterling (£) in accordance with U.K. and Dutch GAAP, with U.S. GAAP reconciliations provided.

Note: Adjusted figures exclude amortisation of goodwill/intangibles and exceptional items.

Material Changes vs. Prior Period

• Revenue Growth: Turnover increased 21% to £4.56 billion, driven primarily by the Harcourt acquisition (contributing £658 million) and underlying organic growth of 3% (6% excluding the Business division).
• Profitability: Adjusted operating profit rose 25% to £990 million. Underlying operating profit growth was 5% (10% excluding the Business division). GAAP operating profit increased to £391 million due to higher underlying profits, partially offset by increased amortisation (£501 million) and exceptional charges (£98 million).
• Debt Levels: Net borrowings surged to £3.23 billion from £433 million in 2000, reflecting the financing of the Harcourt acquisition (£3.2 billion net cost) and subsequent refinancing activities.
• Segment Performance:
  • Science & Medical: Turnover up 48% (44% constant currency) and adjusted profit up 37% (34% constant currency) due to Harcourt STM integration.
  • Education: Turnover up 187% (177% constant currency) and adjusted profit up 230% (218% constant currency) driven by Harcourt Education acquisition.
  • Legal: Turnover up 11% (7% constant currency); adjusted profit up 13% (9% constant currency).
  • Business: Turnover down 2% (5% constant currency) and adjusted profit down 6% (8% constant currency) due to a global advertising downturn and portfolio rationalisation.

Guidance, Outlook, and Risks

Management Commentary & Outlook:

• Integration: Management expects to realise $70 million in cost synergies from the Harcourt integration, with the majority realised in 2002. The integration of Harcourt STM and Education businesses is well advanced.
• Investment: Investment levels are expected to be maintained at approximately £260 million, with an additional £40 million stepped up in the Harcourt businesses.
• Dividends: Proposed total dividends for 2001 are 10.5p per Reed International share and €0.30 per Elsevier share, representing a 5% and 7% increase respectively over 2000.
• 2002 Expectations: The Business segment may see slightly lower turnover in 2002, particularly in the first half, but margins are expected to be protected by cost actions. The Education segment expects satisfactory growth despite a potentially duller U.S. market due to the phasing of state adoption cycles.

Risks and Contingencies:

• Advertising Sensitivity: Approximately 19% of revenue is derived from advertising, which is cyclical and sensitive to economic slowdowns.
• Technology & Competition: Rapid technological change and the shift to electronic delivery formats pose risks to traditional print products. Competition is intense in all segments.
• Integration Risk: Failure to successfully integrate Harcourt operations or realise anticipated synergies could adversely affect results.
• Legal Proceedings: The company is a defendant in multidistrict litigation regarding copyright infringement in electronic databases (Tasini case), though it believes it has strong defenses and indemnity agreements.
• Currency: Significant exposure to U.S. dollar and euro fluctuations, though hedging policies are in place.

Key Facts for Investor Verification

• Acquisition Accounting: Verify the treatment of the Harcourt acquisition, specifically the £1.25 billion goodwill and £1.66 billion intangible assets, and the extension of amortisation periods to 40 years for these assets under U.K./Dutch GAAP.
• U.S. GAAP Reconciliation: Note the significant divergence between U.K./Dutch GAAP profit (£126m) and U.S. GAAP net loss (£20m), driven primarily by amortisation differences, deferred taxation, and derivative instrument accounting (SFAS 133).
• Debt Structure: Confirm the maturity profile of the £3.23 billion net debt, noting that 78% is at fixed rates and the weighted average interest coupon is 6.8%.
• Adjusted Metrics: Understand that "Adjusted Operating Profit" is a non-GAAP measure excluding amortisation and exceptional items, which management uses as a primary performance indicator.
• Dividend Equalisation: Verify the mechanism ensuring equivalent economic returns for Reed International and Elsevier shareholders despite different tax jurisdictions (U.K. tax credit equalisation).