Reuters Group PLC Annual Report and Form 20 ... - Thomson Reuters

34 Reuters Group PLC Annual Report and Form 20-F 2002Operating and financial reviewcontinuedUS GAAPA reconciliation of net income under UK and US GAAP is set out onpage 67. A discussion of the relevant US accounting policies whichdiffer materially from UK GAAP is given on pages 65-66. Details ofrecent US GAAP accounting pronouncements are given on page 70.8. Risk factorsForward-looking statementsThis document contains certain forward-looking statements withinthe meaning of the United States Private Securities Litigation ReformAct of 1995 with respect to the Group’s financial condition, resultsof operations and business and management’s strategy, plans andobjectives. In particular, all statements that express forecasts,expectations and projections with respect to certain matters, includingtrends in results of operations, margins, growth rates, overall financialmarket trends, the impact of interest rates or exchange rates,anticipated cost savings and synergies and the completion of strategictransactions or restructuring programmes are all forward-lookingstatements. These statements involve risk and uncertainty becausethey relate to events and depend on circumstances that may occurin the future. There are a number of factors that could cause actualresults and developments to differ materially from those expressedor implied by these forward-looking statements. These factors include,but are not limited to, the risk factors discussed below. Anyforward-looking statements made by the Group or on its behalf speakonly as of the date they are made. Reuters Group does not undertaketo update any forward-looking statements.Reuters may not be able to realise the anticipated benefits of itsFast Forward transformation planOn 18 February 2003 Reuters announced it was accelerating itsstrategy to become a more focused information company. The FastForward plan includes investing in new information, streamlining theway information is delivered, offering a more simple and segmentedproduct line, rationalising the non-core elements of the business andreshaping the cost base. While it is expected that these measures willproduce significant competitive advantages, cost savings and eventualrevenue growth, there can be no assurance of the extent to whichthese benefits will be realised.Continued or worsened unfavourable conditions in financial marketsmay have a significant adverse effect on the Group’s businessThe Group’s business is dependent upon the health of the financialmarkets and the participants in those markets. The Group’s dealingproducts are dependent on the level of activity in the foreign exchangemarket. Similarly, the businesses of BTC and Instinet are dependentupon the level of activity in the equity markets. Reuters results werenegatively impacted by the continuing economic downturn in 2002.If these conditions continue or get worse or in the event of significanttrading market disruptions or suspensions there could be furtheradverse effects on the Group’s business. In addition, the Group’sbusiness could be adversely affected by further consolidations amongclients and competitors.Currency fluctuations and interest rate fluctuations may have anegative impact on the Group’s reported revenue and earningsReuters Group reports results in UK pounds sterling but receivesrevenue and incurs expenses in more than 60 currencies and is therebyexposed to the impact of fluctuations in currency rates. Currencymovements had a broadly neutral impact on operating profit in 2002.A strengthening of sterling from current levels, especially in relationto other currencies in which Reuters Group derives significant revenuesor holds significant assets such as the euro or the US dollar, couldadversely affect results in future periods. To the extent that thesecurrency exposures are not hedged, exchange rate movements maycause fluctuations in the Group’s consolidated financial statements.In addition, an increase in interest rates from current levels couldadversely affect the Group’s results in future periods.Reuters is exposed to a decline in the valuation of companies inwhich it has invested and does not have management control overall of themReuters has entered into joint ventures with, and made strategicinvestments in, a number of companies and also has significant interestsin companies and joint ventures such as Instinet, TSI, Radianz and Factiva.The value of a number of these companies fluctuated widely andgenerally decreased significantly from 2001 through 2002, in part as aresult of external market factors. The value of Reuters interests in thesecompanies is dependent on, among other things, the performance ofthese companies generally, whether such performance meets investors’expectations, and external market and economic conditions.The Group may experience difficulties or delays in developing orresponding to new customer demands or launching new productsThe Group’s business environment is characterised by rapidtechnological change, changing and increasingly sophisticatedcustomer demands and evolving industry standards. If the Groupis unable to anticipate and respond to the demand for new services,products and technologies on a timely and cost-effective basis andto respond and adapt to technological advancements and changingstandards, its business may be adversely affected. In addition, ReutersGroup may fail to launch new products and its existing products andservices may cease to be attractive to customers and new productsand services that the Group may develop and introduce may notachieve market acceptance.Reuters Group is dependent on third parties for the provisionof certain network and other servicesThe Group has outsourced the day-to-day operation of most ofits networks to Radianz, the joint venture with Equant. Radianz willsource the majority of its requirements from Equant and will seek toprovide network services to companies in addition to Reuters Group.Reuters and Equant are equally represented on the Radianz Board withneither party having control. Accordingly, Reuters ability to affect theperformance of Radianz may be limited and our business could beadversely affected as a result.In connection with the Bridge acquisition, Reuters entered intoa network services agreement with Savvis which was the primaryprovider of network services to Bridge. Reuters currently holds Savvispreferred stock that votes as, and is convertible into, an approximately15% common stock interest in Savvis share capital, and has anobserver on Savvis’ board. Reuters has very limited, if any, ability toaffect the performance of Savvis. Should Savvis fail, or be unable toprovide network services necessary to the continued conduct of theBridge businesses Reuters acquired before Reuters is able to migratethese services to Radianz or make other alternative arrangements, theGroup’s business would be adversely affected.The Group’s business may be adversely affected if our networksor systems experience any significant failures or interruptions orcannot accommodate increased trafficReuters Group’s business is dependent on the ability to handlespeedily substantial quantities of data and transactions on itscomputer-based networks and systems and those of Radianz, Savvisand others. Any significant failure or interruption of such systems dueto factors beyond the Group’s control, including terrorist activities,could have a material adverse effect on its business and results ofoperations. The continuing increase in the update rates of marketdata may impact product and network performance from time to time.Factors that have significantly increased the market data update ratesinclude: the emergence of Nasdaq’s SuperMontage and proprietarydata feeds from other markets; high market volatility; decimalisation;and the multiple listing of options. While the Group has implementeda number of capacity management initiatives, there can be noassurance that the Group and its network providers will be able tosuccessfully accommodate accelerated growth of peak traffic volumes.Changes in the regulatory or competitive environment could havean adverse effect on Instinet’s businessNeither the Instinet alternative trading system (ATS) nor the Island ATSis currently required to register as a US national securities exchange.However, as the Island and Instinet ATSs are integrated over time, theSEC could determine that exchange registration is necessary resultingin substantial additional regulation of Instinet, which could reduce itsoperational flexibility in ways that could have a material adverse effecton its business. The Instinet ATS and the Island ATS are also subject toRegulation ATS, which requires ATSs meeting certain trading volumecriteria to provide quotation data to an SRO and to provide otherbroker-dealers execution access to such quotes. Compliance withRegulation ATS could have a significant negative impact on Instinet’strading volumes. In July 2002, the SEC also took action that resulted