30 <strong>Reuters</strong> <strong>Group</strong> <strong>PLC</strong> <strong>Annual</strong> <strong>Report</strong> <strong>and</strong> <strong>Form</strong> <strong>20</strong>-F <strong>20</strong>02Operating <strong>and</strong> financial reviewcontinuedBusiness Support Services (BSS) %3 12Corporate %1 Services 51%2 Staff 45%3 Depreciation & Other 4%1 Staff 55%2 Services 45%structured sourcing strategy. The outsourcing project has reducedcosts <strong>and</strong> introduced a more flexible cost model linked to activity levels.Business Support Services (BSS)BSS makes up about 2% of <strong>Reuters</strong> cost base <strong>and</strong> declined by 51% to£49 million in <strong>20</strong>02 compared to a growth of 168% in <strong>20</strong>01. The costdecline reflects a significant reduction in headcount as shared serviceoperations were rolled out <strong>and</strong> the investment in <strong>20</strong>01 in implementingthe shared service programme <strong>and</strong> a new global finance system as partof the business transformation programme.CorporateThe Corporate centre accounts for 1% of <strong>Reuters</strong> costs <strong>and</strong> declinedby 59% in <strong>20</strong>02 to £32 million compared to a decline of 21% in <strong>20</strong>01.Cost reductions have been primarily driven by the headcount reductionprogramme, with further savings coming from a renegotiation ofthe management contract with RVC, an independent fund managerestablished by former <strong>Reuters</strong> employees to manage the Greenhouseventure capital fund. Reductions in professional fees relating to tax<strong>and</strong> legal work have also helped to reduce the overall costs, as wellas beneficial impacts from currency movements.21Restructuring<strong>Reuters</strong> commenced a series of restructuring initiatives in the secondhalf of <strong>20</strong>01. <strong>Reuters</strong> aim is to achieve further cost savings in responseto the continuing weak market conditions by reducing headcountbeyond that resulting from the business transformation <strong>and</strong> otherprogrammes. The combined target from restructuring <strong>and</strong> businesstransformation was a total of 2,250 staff. The restructuring programmeactions resulted in a charge of £82 million in <strong>20</strong>01, augmented by afurther £112 million in <strong>20</strong>02.Business transformation <strong>and</strong> these other restructuring programmes areestimated to have realised benefits in <strong>20</strong>01 of £65 million, £235 millionin <strong>20</strong>02 <strong>and</strong> are expected to yield total savings of £445 million in <strong>20</strong>03.Research <strong>and</strong> development (R&D)R&D expenditure totalled £<strong>20</strong>0 million in <strong>20</strong>02 compared with£294 million in <strong>20</strong>01 <strong>and</strong> £323 million in <strong>20</strong>00. Of the total expenditurein <strong>20</strong>02, £154 million related to <strong>Reuters</strong> (<strong>20</strong>01: £227 million) <strong>and</strong>£46 million to Instinet (<strong>20</strong>01: £67 million).The decline in <strong>Reuters</strong> R&D costs partly reflects the impact ofcost reduction measures across the development organisation.This decline has been offset in part by the full year impact of costsarising from the acquisition of Bridge. Notable areas of spend in <strong>20</strong>02included investment in next generation products <strong>and</strong> capabilities suchas <strong>Reuters</strong> Knowledge, <strong>Reuters</strong> Messaging <strong>and</strong> News2Web, our neweditorial multimedia production system. Part of the decline relatesto the completion of projects related to the business transformationprogramme.InstinetYear to 31 December<strong>20</strong>02 <strong>20</strong>01 <strong>20</strong>00£m £m £mRevenue 592 854 804Normalised operating (loss)/profitbefore restructuring (14) 178 157Restructuring costs (96) (17) –Normalised operating (loss)/profit (110) 161 157
<strong>Reuters</strong> <strong>Group</strong> <strong>PLC</strong> <strong>Annual</strong> <strong>Report</strong> <strong>and</strong> <strong>Form</strong> <strong>20</strong>-F <strong>20</strong>02 31Instinet has been operating in a very challenging market environment.Instinet’s business is dependent on trading volumes in global equitymarkets <strong>and</strong> particularly the Nasdaq over-the-counter market in theUSA. Trading volumes have been under continuous pressure throughout<strong>20</strong>02. This, coupled with a substantial reduction in price, partly offset byimproved Nasdaq market share, has resulted in a 31% decline in revenueto £592 million (<strong>20</strong>01: 6% increase). Operating losses, excludingrestructuring, were £14 million as compared to a profit of £178 millionin <strong>20</strong>01 <strong>and</strong> a profit of £157 million in <strong>20</strong>00. Following the acquisitionof Isl<strong>and</strong> in September <strong>20</strong>02, a goodwill impairment charge totalling£<strong>20</strong>8 million was recorded. As part of that transaction Instinet paid adividend of US$249 million, of which <strong>Reuters</strong> received US$<strong>20</strong>7 million.Nasdaq market volume per day in the fourth quarter of <strong>20</strong>02 was12% down from the fourth quarter of <strong>20</strong>01 <strong>and</strong> 8% down for the fullyear <strong>20</strong>02 versus <strong>20</strong>01. Instinet’s share of the Nasdaq traded volumein the last quarter of <strong>20</strong>02 was 29.7% against 11.8% at the end of <strong>20</strong>01(<strong>20</strong>00: 13.9%) due to the addition of Isl<strong>and</strong>, market share gains fromnew products <strong>and</strong> price reductions earlier in the year. Instinet doesnot believe that the introduction of Nasdaq’s SuperMontage systemhas had a material effect on its trading performance.During <strong>20</strong>02 a series of measures were implemented to increasethe competitiveness of Instinet, including the acquisition of Isl<strong>and</strong>, anew management team under the leadership of Ed Nicoll, significantreductions in the fixed cost base <strong>and</strong> the rollout of new productsincluding Instinet Trading Portal, a front-end trading application,<strong>and</strong> Newport, a global portfolio-trading <strong>and</strong> execution managementsolution. In addition, <strong>Reuters</strong> <strong>and</strong> Instinet began to work together ona series of initiatives including the ability to reach Instinet’s liquiditypool from <strong>Reuters</strong> screens.A £21 million decline in Instinet’s R&D costs in <strong>20</strong>02 principally reflectsa reduction in Research <strong>and</strong> Analytics investment <strong>and</strong> the terminationof expenditure in the Fixed Income business, which ceased tradingearly in <strong>20</strong>02.5. Financing needs <strong>and</strong> capital structureCash flow movement in <strong>20</strong>02<strong>Reuters</strong> Instinet Total£m £m £mNormalised operating profit/(loss)(pre-restructuring) 393 (14) 379Depreciation 179 42 221Capex (140) (28) (168)Working capital (9) (90) (99)Operating cash flow (pre-restructuring) 423 (90) 333Restructuring (117) (34) (151)Taxation, interest, other (92) (50) (142)Free cash flow 214 (174) 40<strong>Reuters</strong> dividend (139) – (139)Instinet dividend 134 (161) (27)Net acquisitions (including ESOTs) (91) 13 (78)Movements 118 (322) (<strong>20</strong>4)Net (debt)/funds (584) 518 (66)Cash conversion (pre-restructuring) 108% n/a n/aSpending on tangible fixed assets was £168 million in <strong>20</strong>02 comparedto £276 million in <strong>20</strong>01 <strong>and</strong> £274 million in <strong>20</strong>00. The reduction inexpenditure reflects lower property-related expense <strong>and</strong> reducedspend on subscriber <strong>and</strong> administration equipment.<strong>Reuters</strong> continues to be strongly cash generative, generating£423 million of operating cash flow before restructuring costs,representing cash conversion of 108% (109% on a post-restructuringbasis). Instinet had a net operating cash outflow of £90 million, dueprincipally to the movement in net counterparty debtors <strong>and</strong> creditors.Free cash flow was £40 million (<strong>20</strong>01: £443 million) for the <strong>Group</strong>,with <strong>Reuters</strong> generating £214 million, largely offset by an outflowat Instinet of £174 million.<strong>Reuters</strong> paid dividends of £139 million in <strong>20</strong>02 compared to £227 millionin <strong>20</strong>01 <strong>and</strong> £<strong>20</strong>5 million in <strong>20</strong>00. Instinet paid a dividend of £161 millionduring <strong>20</strong>02, of which £27 million was paid to shareholders outside the<strong>Reuters</strong> <strong>Group</strong>.<strong>Reuters</strong> <strong>Group</strong> spent £78 million in <strong>20</strong>02 on acquisitions net of disposals(including ESOTs), compared to £43 million in <strong>20</strong>01 <strong>and</strong> £318 millionin <strong>20</strong>00. In <strong>20</strong>02, £65 million was spent on <strong>Reuters</strong> shares acquired bythe ESOTs compared with £48 million in <strong>20</strong>01 <strong>and</strong> £40 million in <strong>20</strong>00.Proceeds from the sale of fixed asset investments, principally relatingto Greenhouse portfolio disposals, were £22 million compared to£68 million in <strong>20</strong>01 <strong>and</strong> £80 million in <strong>20</strong>00.On 18 February <strong>20</strong>03 <strong>Reuters</strong> announced it had entered into adefinitive agreement to acquire Multex for total consideration of£121 million. <strong>Reuters</strong> currently anticipates that the acquisition will becompleted by the end of March <strong>20</strong>03. Multex reported <strong>20</strong>02 revenueof US$92 million (£57 million), EBITDA of US$11 million (£7 million) <strong>and</strong>a net loss of US$7 million (£4 million), in accordance with US GAAP.The acquisition covers net assets with a book value at 31 December <strong>20</strong>02of US$109 million (£68 million), including US$50 million (£31 million)of cash. <strong>Reuters</strong> expects the acquisition to reduce normalised profitbefore tax by approximately £10 million (US$16 million) in <strong>20</strong>03 as aresult of integration <strong>and</strong> financing costs. The acquisition is expectedto have a positive impact thereafter.Net debt for the <strong>Group</strong> at 31 December <strong>20</strong>02 amounted to £66 million,compared with net funds of £138 million at 31 December <strong>20</strong>01 <strong>and</strong>net debt of £34 million at 31 December <strong>20</strong>00. Net debt increased by£<strong>20</strong>4 million, reflecting a £322 million decrease in Instinet offset by£118 million of debt repayment in <strong>Reuters</strong>. Net debt at 31 December<strong>20</strong>02 comprised gross debt of £794 million offset by cash <strong>and</strong> shortterminvestments of £728 million.<strong>Reuters</strong> finances its operations by a mixture of cash flows fromoperations, short-term borrowings from banks <strong>and</strong> commercial papermarkets, backed up as required by committed bank facilities <strong>and</strong>finance from capital markets. <strong>Reuters</strong> manages its net debt position<strong>and</strong> interest costs to support its continued access to the full range ofdebt capital markets. <strong>Reuters</strong> expects to be able to finance its currentbusiness plans from ongoing operations <strong>and</strong> its external facilities.At 31 December <strong>20</strong>02 <strong>Reuters</strong> had available a committed syndicatedloan facility of £500 million which expires in December <strong>20</strong>06, allundrawn at 31 December <strong>20</strong>02. The facility contains one financialcovenant that consolidated profits before interest, tax <strong>and</strong> amortisation(subject to certain adjustments) should be greater than 2.75 timesconsolidated net finance charges. As at 31 December <strong>20</strong>02 <strong>Reuters</strong>complied with the covenant.In February <strong>20</strong>03 <strong>Reuters</strong> began the process of replacing its £500 millionbank facility with a new facility of £1.25 billion. The facility is beingsyndicated to a group of international banks. The facility is structuredwith £800 million of the facility available for drawing <strong>and</strong> redrawinguntil <strong>20</strong>08. The remaining £450 million will be available until <strong>20</strong>04,with the ability to extend the maturity in whole or part in certaincircumstances.A £1.5 billion Euro Commercial Paper Programme was established in1998. At 31 December <strong>20</strong>02, <strong>Reuters</strong> had outst<strong>and</strong>ing obligations of£176 million under this programme, repayable at various dates up toMarch <strong>20</strong>03. The minimum outst<strong>and</strong>ing during <strong>20</strong>02 was £127 million<strong>and</strong> the maximum was £549 million.In 1998 <strong>Reuters</strong> also established a £1 billion Euro Medium TermNote Programme. At 31 December <strong>20</strong>02, <strong>Reuters</strong> had outst<strong>and</strong>ing£588 million under this programme, repayable at various dates up toJanuary <strong>20</strong>06. The minimum outst<strong>and</strong>ing during <strong>20</strong>02 was £405 million<strong>and</strong> the maximum was £614 million.
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