RELX

SEC Form 6-K Summary: Reed International P.L.C. and Elsevier NV

Business Context and Reporting Period

This joint Form 6-K, filed on July 16, 2001, by Reed International P.L.C. and Elsevier NV (collectively "Reed Elsevier"), provides unaudited pro forma financial information. The filing details the financial impact of three simultaneous transactions assumed to have occurred on January 1, 2000, for the income statement and December 31, 2000, for the balance sheet:

• Acquisition of Harcourt General, Inc. for approximately $4.45 billion.
• On-sale of Harcourt's Higher Education and Corporate/Professional Services businesses to The Thomson Corporation for pre-tax proceeds of $2.06 billion.
• Issuance of multi-currency global notes (the "Notes") with aggregate proceeds of $1.4 billion (L940 million) to refinance short-term borrowings.

The pro forma data is prepared under U.K. and Dutch GAAP, with reconciliations to U.S. GAAP provided.

Key Financial Metrics (Pro Forma Year Ended Dec 31, 2000)

The following metrics reflect the combined entity (Reed Elsevier) after the acquisition, on-sale, and debt issuance:

Note: USD figures are convenience translations at $1.4077 to L1.00.

Material Changes and Adjustments

The pro forma statements reflect significant structural changes compared to historical results:

• Revenue Impact: Turnover increased by L1,148 million due to the inclusion of Harcourt's retained businesses (STM and K-12), offset by the removal of the businesses sold to Thomson.
• Profitability: Reported profit attributable to shareholders is L50 million. However, "Adjusted Profit" (excluding goodwill amortization and exceptional items) is L595 million, highlighting the impact of accounting treatments on reported earnings.
• Debt Structure: The transaction significantly increased leverage. Pro forma net debt is L3,233 million. The issuance of L940 million in Notes was used to repay commercial paper and short-term borrowings incurred to fund the acquisition.
• Goodwill Amortization: Under U.K./Dutch GAAP, goodwill and intangible assets from the retained Harcourt businesses are amortized over 40 years, increasing the amortization period from the previous 20-year maximum for Reed Elsevier assets.

Outlook, Risks, and Contingencies

Management Commentary: The filing states that the pro forma information is for illustrative purposes only and does not represent actual results or future performance. It explicitly excludes synergies or integration costs expected from the acquisition.

Accounting Risks:

• GAAP Differences: Significant differences exist between U.K./Dutch GAAP and U.S. GAAP, particularly regarding goodwill amortization (U.S. GAAP SFAS 142 does not amortize goodwill), deferred taxation, and pension accounting. Under U.S. GAAP, pro forma net income would be L90 million versus L50 million under local GAAP.
• Valuation Uncertainty: The allocation of the purchase price to goodwill and intangible assets is preliminary and subject to final appraisal within one year. A L100 million increase in goodwill would increase annual amortization by L2.5 million.
• Interest Rate Sensitivity: A one-eighth percent increase in interest rates would increase interest expense by L0.9 million annually.

Investor Verification Checklist

• Verify the final allocation of the $4.45 billion purchase price, specifically the valuation of goodwill and intangible assets, which is currently preliminary.
• Review the reconciliation to U.S. GAAP to understand the impact of non-amortization of goodwill under SFAS 142 on future earnings.
• Monitor the integration of Harcourt's STM and K-12 businesses to assess if projected synergies are realized.
• Track the refinancing of the L940 million Notes and the resulting blended interest rate, currently estimated to increase by 50 basis points.
• Confirm the final tax implications of the on-sale to The Thomson Corporation, as estimated taxes of $489 million were deducted from proceeds.