## Directors’ report 

The directors present their report, together with the financial statements of the company, for the year ended 31 December 2003. 

As a consequence of the merger of the company’s businesses with those of Reed Elsevier NV in 1993, described on page 22, the shareholders of Reed Elsevier PLC and Reed Elsevier NV can be regarded as having the interests of a single economic group. The Reed Elsevier combined financial statements represent the combined interests of both sets of shareholders and encompass the businesses of Reed Elsevier Group plc, Elsevier Reed Finance BV and their respective subsidiaries, associates and joint ventures, together with the parent companies, Reed Elsevier PLC and Reed Elsevier NV (“the combined businesses” or “Reed Elsevier”). This directors’ report and the financial statements of the company should be read in conjunction with the combined financial statements and other reports set out on pages 3 to 69, as well as the Report of the Chairman and the Chief Executive Officer in the Annual Review and Summary Financial Statements. 

## Principal activities 

The company is a holding company and its principal investments are its direct 50% shareholding in Reed Elsevier Group plc and its 39% shareholding in Elsevier Reed Finance BV, which are engaged in publishing and information activities and financing activities, respectively. The remaining shareholdings in these two companies are held by Reed Elsevier NV. Reed Elsevier PLC also has an indirect equity interest in Reed Elsevier NV. Reed Elsevier PLC and Reed Elsevier NV have retained their separate legal identities and are publicly held companies. Reed Elsevier PLC’s securities are listed in London and New York and Reed Elsevier NV’s securities are listed in Amsterdam and New York. 

## Financial statement presentation 

The consolidated financial statements of Reed Elsevier PLC include the 52.9% economic interest that shareholders have under the equalisation arrangements in the Reed Elsevier combined businesses, accounted for on a gross equity basis. 

Under the terms of the merger agreement, dividends paid to Reed Elsevier PLC and Reed Elsevier NV shareholders are equalised at the gross level inclusive of the UK tax credit received by certain Reed Elsevier PLC shareholders. Because of the tax credit, Reed Elsevier PLC normally requires less cash to fund its net dividend than Reed Elsevier NV does to fund its gross dividend. An adjustment is, therefore, required in the statutory profit and loss account of Reed Elsevier PLC to share this tax benefit between the two sets of shareholders in accordance with 

the equalisation agreement. The equalisation adjustment arises on dividends paid by Reed Elsevier PLC to its shareholders and it reduces the statutory attributable earnings of the company by 47.1% of the total amount of the tax credit, which in 2003 was £8m (2002: £7m). 

In addition to the reported figures, adjusted profit figures are presented as additional performance measures. These exclude the tax credit equalisation adjustment, the amortisation of goodwill and intangible assets and exceptional items and provide a basis for performance comparison that is not dependent on the choice of method of adoption of FRS10 in accounting for goodwill and intangible assets. 

## Profit and loss account 

The company’s share of the operating profits of Reed Elsevier was £343m, up from £262m in 2002. The science & medical business performed well with strong publishing and new electronic products driving above market revenue growth. The legal business also continued to outperform its markets with consistent improvements in product performance and expansion of its online services. The education business had a mixed performance in weak markets, affected by the low level of textbook adoption opportunities compounded by state budget pressures. The business division continued to show impressive resilience in depressed markets. Underlying operating margins in all four divisions improved despite the high levels of investment, due to cost efficiency. Strong cash flows reinforced the quality of the financial result. 

The company’s share of the charge for amortisation of goodwill and intangible assets was £235m, down £44m from 2002, reflecting translation effects and some past acquisitions becoming fully amortised. The company’s share of the operating exceptional items was £38m (2002: £52m), principally comprising its share of integration and rationalisation costs relating to Harcourt and other acquisitions and other restructuring costs. 

The profit for the year also includes a £14m share of the gain (2002: loss £6m) on disposals of businesses and fixed asset investments. The reported attributable profit for Reed Elsevier PLC was £169m (2002: £89m). The adjusted profit attributable to shareholders – before the amortisation of goodwill and intangible assets and exceptional items – was £394m (2002: £361m). 

Adjusted earnings per share increased 9% to 31.2p (2002: 28.5p). Including the effect of the tax credit equalisation as well as the amortisation of goodwill and intangible assets and exceptional items and related tax effects, the basic earnings per share was 13.4p (2002: 7.0p). 

